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Table of Contents

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

or

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

Graphic

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

1

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

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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

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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

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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

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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.

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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.

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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)

$