UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2021

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 000-08814

PURE CYCLE CORPORATION

(Exact name of registrant as specified in its charter)


Colorado		84-0705083
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

34501 E. Quincy Avenue, Bldg. 34, Watkins, CO		80137
(Address of principal executive offices)		(Zip Code)

(303) 292 – 3456

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Common Stock 1/3 of $.01 par value	PCYO	The NASDAQ Stock Market
(Title of each class)	(Trading Symbol(s))	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 1, 2021:


Common stock, 1/3 of $.01 par value		23,910,133
(Class)		(Number of Shares)

Table of Contents

PURE CYCLE CORPORATION

INDEX TO MAY 31, 2021 FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION		1

	Item 1. Condensed Consolidated Financial Statements	1

	Condensed Consolidated Balance Sheets: May 31, 2021 (unaudited) and August 31, 2020	1

	Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited): For the three and nine months ended May 31, 2021 and 2020	2

	Condensed Consolidated Statements of Shareholders’ Equity (unaudited): For the three and nine months ended May 31, 2021 and 2020	3

	Condensed Consolidated Statements of Cash Flows (unaudited): For the nine months ended May 31, 2021 and 2020	5

	Notes to Condensed Consolidated Financial Statements	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	34

	Item 4. Controls and Procedures	34

PART II. OTHER INFORMATION		36

	Item 6. Exhibits	36

SIGNATURES		37

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS


	May 31, 2021
	(unaudited)		August 31, 2020

	(In thousands, except share and
	per share amounts)
ASSETS:
Current assets:
Cash, cash equivalents and restricted cash	$	19,796	$	21,797
Trade accounts receivable, net		1,933		1,124
Prepaid expenses and other assets		528		1,001
Land development inventories:
Land development - Phase 1		—		481
Land development - Phase 2		172		—
Public improvement reimbursables - Phase 2		444		—
Income taxes receivable		—		1,588
Total current assets		22,873		25,991

Investments in water and water systems, net		55,140		55,087
Land and mineral interests		5,625		4,915
Other assets		2,390		2,042
Notes receivable – related parties, including accrued interest:
Public improvement reimbursables - Phase 1		21,316		—
Other		1,174		1,079
Long-term land investment		451		451
Operating leases - right of use assets, less current portion		141		196
Total assets	$	109,110	$	89,761

LIABILITIES:
Current liabilities:
Accounts payable	$	208	$	180
Accrued liabilities		1,070		1,391
Accrued liabilities - related parties		634		1,212
Income taxes payable		3,695		—
Deferred lot sale revenues		550		1,635
Deferred oil and gas lease payment and water sales payment		253		1,800
Total current liabilities		6,410		6,218

Deferred oil and gas lease payment and water sales payment, less current portion		22		165
Participating interests in export water supply		325		328
Deferred tax liability		1,509		886
Lease obligations - operating leases, less current portion		58		120
Total liabilities		8,324		7,717

Commitments and contingencies

SHAREHOLDERS’ EQUITY:
Preferred stock:
Series B – par value $0.001 per share, 25 million shares authorized; 432,513 shares issued and outstanding (liquidation preference of $432,513)		—		—
Common stock:
Par value 1/3 of $.01 per share, 40 million shares authorized; 23,910,133 and 23,856,098 shares outstanding, respectively		80		80
Additional paid-in capital		173,393		172,927
Accumulated other comprehensive income		—		—
Accumulated deficit		(72,687)		(90,963)
Total shareholders’ equity		100,786		82,044
Total liabilities and shareholders’ equity	$	109,110	$	89,761

See accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(unaudited)


	Three Months Ended				Nine Months Ended
	May 31,		May 31,		May 31,		May 31,
	2021		2020		2021		2020

	(In thousands, except per share amounts)
Revenues:
Metered water usage from:
Municipal customers	$	188	$	98	$	429	$	238
Oil and gas operations		22		15		1,804		72
Wastewater treatment fees		51		22		144		62
Water and wastewater tap fees		1,856		1,005		4,522		3,850
Lot sales		445		696		3,316		11,503
Project management fees - recognized		23		—		1,571		—
Special facility projects and other		81		14		487		104
Total revenues		2,666		1,850		12,273		15,829

Expenses:
Water service operations		(316)		(95)		(1,074)		(556)
Wastewater service operations		(102)		(62)		(258)		(126)
Land development construction costs		(99)		(556)		(2,087)		(10,436)
Depletion and depreciation		(358)		(386)		(1,077)		(988)
Other		(65)		(7)		(453)		(34)
Total cost of revenues		(940)		(1,106)		(4,949)		(12,140)
Gross profit		1,726		744		7,324		3,689

General and administrative expenses		(1,325)		(801)		(3,753)		(2,639)
Depreciation		(73)		(86)		(233)		(266)
Operating income (loss)		328		(143)		3,338		784

Other income:
Recognition of public improvement reimbursables including interest income - related party		284		—		19,888		—
Oil and gas royalty income, net		97		74		248		613
Oil and gas lease income, net		48		62		148		185
Interest income from investments		15		24		45		162
Other		10		19		30		19
Reimbursement of construction costs - related party		—		—		485		6,276
Income from operations before income taxes		782		36		24,182		8,039
Income tax expense		(158)		(9)		(5,906)		(1,975)
Net income	$	624	$	27	$	18,276	$	6,064
Unrealized holding losses		—		—		—		(4)
Total comprehensive income	$	624	$	27	$	18,276	$	6,060
Earnings per common share:
Basic	$	0.03	$	—	$	0.77	$	0.25
Diluted	$	0.03	$	—	$	0.76	$	0.25
Weighted average common shares outstanding:
Basic		23,907		23,853		23,885		23,842
Diluted		24,184		24,053		24,104		24,071

See accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)


	Three Months Ended May 31, 2021
									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid-in		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit		Total

	(In thousands)
February 28, 2021 balance:	433	$	—	23,888	$	80	$	173,254	$	—	$	(72,766)	$	100,568
Prior period adjustment	—		—	—		—		—		—		(545)		(545)
Stock option exercises	—		—	22		—		48		—		—		48
Stock granted for services	—		—	—		—		—		—		—		—
Share-based compensation	—		—	—		—		91		—		—		91
Net income	—		—	—		—		—		—		624		624
May 31, 2021 balance:	433	$	—	23,910	$	80	$	173,393	$	—	$	(72,687)	$	100,786


	Three Months Ended May 31, 2020
									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid-in		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit		Total

	(In thousands)
February 29, 2020 balance:	433	$	—	23,852	$	79	$	172,749	$	—	$	(91,676)	$	81,152
Stock option exercises	—		—	2		—		4		—		—		4
Stock granted for services	—		—	—		—		—		—		—		—
Share-based compensation	—		—	—		—		82		—		—		82
Net income	—		—	—		—		—		—		27		27
May 31, 2020 balance:	433	$	—	23,854	$	79	$	172,835	$	—	$	(91,649)	$	81,265

Table of Contents

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)


	Nine Months Ended May 31, 2021
									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid-in		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit		Total

	(In thousands)
August 31, 2020 balance:	433	$	—	23,856	$	80	$	172,927	$	—	$	(90,963)	$	82,044
Stock option exercises	—		—	42		—		62		—		—		62
Stock granted for services	—		—	12		—		136		—		—		136
Share-based compensation	—		—	—		—		268		—		—		268
Net income	—		—	—		—		—		—		18,276		18,276
May 31, 2021 balance:	433	$	—	23,910	$	80	$	173,393	$	—	$	(72,687)	$	100,786


	Nine Months Ended May 31, 2020
									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid-in		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit		Total

	(In thousands)
August 31, 2019 balance:	433	$	—	23,827	$	79	$	172,361	$	4	$	(97,713)	$	74,731
Stock option exercises	—		—	15		—		39		—		—		39
Stock granted for services	—		—	12		—		149		—		—		149
Share-based compensation	—		—	—		—		286		—		—		286
Net income	—		—	—		—		—		—		6,064		6,064
Unrealized holding loss on investments	—		—	—		—		—		(4)		—		(4)
May 31, 2020 balance:	433	$	—	23,854	$	79	$	172,835	$	—	$	(91,649)	$	81,265

See accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

PURE CYCLE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended
	May 31,		May 31,
	2021		2020

	(In thousands)
Cash flows from operating activities:
Net income	$	18,276	$	6,064
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Depreciation and depletion		1,310		1,254
Share-based compensation expense		404		435
Deferred income taxes		623		710
Interest added to receivable from related parties		(34)		(34)
Proceeds from CAB reimbursement applied to land development inventories		—		4,230
Changes in operating assets and liabilities:
Trade accounts receivable		(810)		454
Prepaid expenses		(13)		(47)
Land development inventories		(131)		2,576
Taxes receivable		—		(40)
Recognition of public improvement reimbursables, including interest		(21,316)		—
Taxes payable net of taxes receivable		5,283		—
Accounts payable and accrued liabilities		(562)		(383)
Deferred revenues		(2,778)		(61)
Other assets and liabilities		(59)		46
Net cash provided by operating activities		193		15,204

Cash flows from investing activities:
Investments in water, water systems and land		(2,152)		(7,302)
Purchase of property and equipment		(101)		(526)
Sale and maturities of short-term investments		—		6,905
Purchase of short-term investments		—		(1,720)
Net cash used by investing activities		(2,253)		(2,643)

Cash flows from financing activities:
Proceeds from exercise of options		62		40
Payments to contingent liability holders		(3)		(4)
Net cash provided by financing activities		59		36
Net change in cash, cash equivalents and restricted cash		(2,001)		12,597
Cash, cash equivalents and restricted cash – beginning of period		21,797		4,478
Cash, cash equivalents and restricted cash – end of period	$	19,796	$	17,075
Cash and cash equivalents	$	19,514	$	17,075
Restricted cash		282		—
Total cash, cash equivalents and restricted cash	$	19,796	$	17,075

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES
Transfer of land development costs to other assets	$	484	$	—
Transfer of land development costs to inventory	$	467	$	—
Changes in Land development inventories included in accounts payable and accrued liabilities	$	613	$	912
Changes in Investments in water, water systems and land included in accounts payable and accrued liabilities	$	298	$	(898)
Income taxes paid	$	—	$	1,305

See accompanying Notes to Condensed Consolidated Financial Statements

Table of Contents

PURE CYCLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

MAY 31, 2021

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The May 31, 2021 condensed consolidated balance sheet, the condensed consolidated statements of operations and comprehensive income for the three and nine months ended May 31, 2021 and 2020, the condensed consolidated statements of shareholders’ equity for the three and nine months ended May 31, 2021 and 2020, and the condensed consolidated statements of cash flows for the nine months ended May 31, 2021 and 2020 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited. The unaudited condensed consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at May 31, 2021, and for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that the accompanying condensed consolidated financial statements and notes be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2020 (the “2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 10, 2020. The results of operations for interim periods presented are not necessarily indicative of the operating results expected for the full fiscal year. The August 31, 2020 balance sheet was derived from the Company’s audited consolidated financial statements.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

On March 27, 2020, Congress enacted the CARES Act to provide certain relief because of the recent outbreak of a novel strain of the coronavirus (“COVID-19”) pandemic. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. COVID-19 has delayed the second phase of the Sky Ranch development revenue recognition due to the extended time taken to approve the platted lots through the County Government. Other than the delay of the approval of the platted lots, there has not been a material impact to the Company’s condensed consolidated financial statements as a result of the CARES Act.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for certain items such as revenue recognition, timing and amount of reimbursable costs and expenses and the associated repayment, costs of revenue for lot sales, share-based compensation, deferred tax asset and liability valuation, depreciation, and the recoverability of long-lived assets. Actual results and outcomes may differ from management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.

During the nine months ended May 31, 2021, the Company revised its estimates to conclude that the reimbursable public improvements, project management revenue and interest income related to the first development phase at Sky Ranch are reasonably assured of payment. Historically, due to a lack of tax base and no operating history for the Sky Ranch Community Authority Board (the “Sky Ranch CAB”), the Company was unable to estimate when or if it would receive payment for these items and deferred recognition of them until the cash was received from the Sky Ranch CAB. As a result of an established and growing tax base resulting from the success of the initial filing, added mill levies, and additional unencumbered fees received by the Sky Ranch CAB, the Company believes repayment of the public improvements, payment of the project management fees, and interest income are deemed reasonably assured. Based on this, the Company has recognized these items in the Company’s consolidated financial statements. The timing and amount of these potential payments have been estimated by the Company based on sales and growth trends utilizing current assessed home values and historic growth rates which have been projected to the current and contracted for lot sales through the contractual obligation period.

Table of Contents

Recently Issued Accounting Pronouncements

The Company continually assesses new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequences of the change to its consolidated financial statements and to ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 was set to be effective for public companies on January 1, 2020; however, the FASB delayed the effective date for smaller reporting companies, which for the Company the effective date is September 1, 2023. The Company continues to monitor economic implications of the COVID-19 pandemic; however, based on current market conditions, the Company does not expect the adoption of ASU 2016-13 to have a material impact on the Company’s consolidated financial statements.

NOTE 2 – PRIOR PERIOD ADJUSTMENT

The Company discovered certain errors in the amounts previously reported for the three and six months ended February 28, 2021, which if these errors though immaterial in the given periods, were corrected in the three months ended May 31, 2021, management believes these corrections would have a material impact on the current reported three month consolidated statement of operations, specifically the recognition of Public improvement reimbursables including interest income - related party. The Company’s President and the Chief Financial Officer evaluated the effects of the errors on the consolidated financial statements for the three and six months ended February 28, 2021, which each concluded that the errors were not material to those presented results. Based on this evaluation, the errors did not rise to the level of requiring a restatement of the financial information for the three and six months ended February 28, 2021, contained in the Form 10-Q as previously filed. Accordingly, management has corrected these errors by adjusting opening accumulated deficit for the three month period ended May 31, 2021 and has retrospectively adjusted the cumulative periods for the impact of such errors in the financial statements presented for the three and nine months ended May 31, 2021. The errors were a result of ineffective controls related to management’s preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record the transactions related to the recording and tracking of the public improvement reimbursable amounts. Please see Item 4 in this Quarterly Report on Form 10-Q for our remediation plans.

Table of Contents

The effect of the errors to the Company’s consolidated Statements of Operations and Comprehensive Income for the three and six months ended February 28, 2021 were as follows:


	For the Three Months Ended February 28, 2021


	As Reported		Adjustments		As Adjusted

	(In thousands)
Statement of Operations
Other Income
Recognition of public improvement reimbursables including interest income - related party	$	20,327	$	(723)	$	19,604

Income tax expense	$	(5,667)	$	178	$	(5,489)

Net Income	$	17,352	$	(545)	$	16,807

Earnings per common share - Diluted	$	0.72	$	(0.02)	$	0.70

Weighted average common shares outstanding - Diluted		24,092		24,092		24,092

	For the Six Months Ended February 28, 2021


	As Reported		Adjustments		As Adjusted

	(In thousands)
Statement of Operations
Other Income
Recognition of public improvement reimbursables including interest income - related party	$	20,327	$	(723)	$