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,~~November 30, 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:~~January 7, 2022:


Common stock, 1/3 of $.01 par value		~~23,910,133~~23,941,968
(Class)		(Number of Shares)

Table of Contents

PURE CYCLE CORPORATION

INDEX TO ~~MAY 31,~~NOVEMBER 30, 2021 FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION		14

	Item 1. ~~Condensed~~ Consolidated Financial Statements	14

	~~Condensed~~ Consolidated Balance Sheets: ~~May 31,~~November 30, 2021 (unaudited) and August 31, ~~2020~~2021	14

	~~Condensed~~ Consolidated Statements of Operations ~~and Comprehensive Income~~ (unaudited): For the three ~~and nine~~ months ended ~~May 31,~~November 30, 2021 and 2020	25

	~~Condensed~~ Consolidated Statements of Shareholders’ Equity (unaudited): For the three ~~and nine~~ months ended ~~May 31,~~November 30, 2021 and 2020	36

	~~Condensed~~ Consolidated Statements of Cash Flows (unaudited): For the ~~nine~~three months ended ~~May 31,~~November 30, 2021 and 2020	57

	Notes to Condensed Consolidated Financial Statements	68

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2218

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	3425

	Item 4. Controls and Procedures	3425

PART II. OTHER INFORMATION		3627

	Item 6. Exhibits	3627

SIGNATURES		3728

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FORWARD-LOOKING STATEMENTS

Statements that are not historical facts contained in this Quarterly Report on Form 10-Q, or incorporated by reference into the most recent Annual Report on Form 10-K, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The words “anticipate,” “seek,” “project,” “future,” “likely,” “believe,” “may,” “should,” “could,” “will,” “estimate,” “expect,” “plan,” “intend” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements include statements relating to, among other things:

●

future water supply needs in Colorado and how such needs will be met;

●

anticipated increases in residential and commercial demand for water services and competition for these services;

●

estimated population increases in the Denver metropolitan area and the South Platte River basin;

●

plans for, and the efficiency of, development of our Sky Ranch property;

●

our competitive advantage;

●

the impact of individual housing and economic cycles on the number of connections we can serve with our water;

●

the number of new water connections needed to recover the costs of our water supplies;

●

the number of units planned for development at Sky Ranch;

●

the timing of the completion of construction of finished lots at Sky Ranch;

●

the number of lots expected to be delivered in a fiscal period;

●

anticipated financial results from development of our Sky Ranch property;

●

anticipated rental dates for our single-family rental units;

●

anticipated revenues and cash flows from our single-family rental units;

●

our ability to perform on various construction contracts and not require the use of the performance letters of credit;

●

timing of and interpretation of royalties to the State Board of Land Commissioners;

●

participation in regional water projects, including “WISE” and the timing and availability of water from, and projected costs related to, WISE;

●

increases in future water or wastewater tap fees;

●

our ability to collect fees and charges from customers and other users;

●

the estimated amount of reimbursable costs for Sky Ranch and the collectability of reimbursables;

●

anticipated timing and amount of, and sources of funding for, (i) capital expenditures to construct infrastructure and increase production capacities, (ii) compliance with water, environmental and other regulations, and (iii) operations, including delivery and treatment of water and wastewater;

●

capital required and costs to develop Sky Ranch;

●

anticipated development of other filings concurrently with the second filing of Sky Ranch;

●

plans to provide water for drilling and hydraulic fracturing of oil and gas wells;

●

changes in oil and gas drilling activity on our property, on the Lowry Range, or in the surrounding areas;

●

estimated costs of earthwork, erosion control, streets, drainage and landscaping at Sky Ranch;

●

the anticipated revenues from customers in the Rangeview District, Sky Ranch Districts, and Elbert & Highway 86 District;

●

plans with respect to mineral interests;

●

plans for the use and development of our water assets and potential delays;

●

estimated number of connections we can serve with our existing water rights;

●

factors affecting demand for water;

●

our ability to meet customer demands in a sustainable and environmentally friendly way;

●

our ability to reduce the amount of up-front construction costs for water and wastewater systems;

●

costs and plans for treatment of water and wastewater;

●

anticipated number of deep-water wells required to continue expanding and developing our Rangeview Water Supply;

●

expenditures for expenses and capital needs of the Rangeview District;

●

regional cooperation among area water providers in the development of new water supplies and water storage, transmission and distribution systems as the most cost-effective way to expand and enhance service capacities;

●

plans to drill water walls into aquifers located beneath the Lowry Range and the timing and estimated costs of such a build out;

●

sufficiency of tap fees to fund infrastructure costs of the Rangeview District;

●

our ability to assist Colorado “Front Range” water providers in meeting current and future water needs;

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●

plans to use raw water, effluent water or reclaimed water for agricultural and irrigation uses;

●

factors that may impact labor and material costs;

●

use of third parties to construct water and wastewater facilities and Sky Ranch lot improvements;

●

plans to utilize fixed-price contracts;

●

estimated supply capacity of our water assets;

●

our belief that we will continue to exceed, market expectations with the delivery of our lots at Sky Ranch;

●

our ability to comply with permit requirements and environmental regulations and the cost of such compliance;

●

the impact of water quality, solid waste disposal and environmental regulations on our financial condition and results of operations;

●

negotiation of payment terms for fees;

●

the future impacts of COVID-19 on our business;

●

the impact of any downturn in the homebuilding and credit markets on our business and financial condition;

●

future fluctuations in the price and trading volume of our common stock;

●

loss of key employees and hiring additional personnel for our operations;

●

the recoverability of water and wastewater service costs from rates;

●

our belief that we are not a public utility under Colorado law;

●

the adequacy of the provisions in the “Lease” for the Lowry Range to cover present and future circumstances;

●

our ability to successfully maintain our “conditional decrees” and continue to develop our Lowry Range surface rights;

●

environmental clean-up at the Lowry Range by the U.S. Army Corps of Engineers;

●

plans to retain earnings and not pay dividends;

●

forfeitures of option grants, vesting of non-vested options and the fair value of option awards;

●

the sufficiency of our working capital and financing sources to fund our operations;

●

estimated costs of public improvements to be funded by Pure Cycle and constructed on behalf of the Sky Ranch Community Authority Board;

●

changes in unrecognized tax positions;

●

service life of constructed facilities.

●

accounting estimates and the impact of new accounting pronouncements;

●

the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting; and

●

our belief that we will remediate our material weakness.

Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions. There are no assurances that any of our expectations will be realized and actual results could differ materially from those in such statements. Factors that could cause actual results to differ from those contemplated by such forward-looking statements include, without limitation:

●

outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade and business operations;

●

political and economic instability, whether resulting from natural disasters, wars, terrorism, pandemics or other sources;

●

our ability to successfully enter the single-family home rental market and rent our single-family homes at rates sufficient to cover our costs;

●

the timing of new home construction and other development in the areas where we may sell our water, which in turn may be impacted by credit availability;

●

population growth;

●

changes in employment levels, job and personal income growth and household debt-to-income levels;

●

changes in consumer confidence generally and confidence of potential home buyers in particular;

●

the ability of existing homeowners to sell their existing homes at prices that are acceptable to them;

●

declines in property values which impacts tax revenue to the Sky Ranch Community Authority Board which would impact their ability to repay us;

●

changes in the supply of available new or existing homes and other housing alternatives, such as apartments and other residential rental property;

●

timing of oil and gas development in the areas where we sell our water;

●

general economic conditions, including the continued impact of COVID-19;

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●

the market price of homes, rental rates, and water, oil and gas prices;

●

changes in customer consumption patterns;

●

changes in applicable statutory and regulatory requirements;

●

changes in governmental policies and procedures, including with respect to land use and environmental and tax matters;

●

changes in interest rates;

●

changes in private and federal mortgage financing programs and lending practices;

●

uncertainties in the estimation of water available under decrees;

●

uncertainties in the estimation of number of connections we can service with our existing water supplies;

●

uncertainties in the estimation of costs of delivery of water and treatment of wastewater;

●

uncertainties in the estimation of the service life of our systems;

●

uncertainties in the estimation of costs of construction projects;

●

uncertainties in the amount of reimbursable costs we may ultimately collect;

●

the strength and financial resources of our competitors;

●

our ability to find and retain skilled personnel;

●

climatic and weather conditions, including floods, droughts and freezing conditions;

●

turnover of elected and appointed officials and delays caused by political concerns and government procedures;

●

availability and cost of labor, material and equipment;

●

engineering and geological problems;

●

environmental risks and regulations;

●

our ability to raise capital;

●

changes in corporate tax rates;

●

our ability to negotiate contracts with customers;

●

uncertainties in water court rulings;

●

security and cyberattacks, including unauthorized access to confidential information on our information technology systems; and

●

the factors described under “Risk Factors” in Part II Item 1A of the Company’s most recent Annual Report on Form 10-K.

We undertake no obligation, and disclaim any obligation, to publicly update or revise any forward-looking statements, whether because of new information, future events or otherwise. All forward-looking statements are expressly qualified by this cautionary statement.

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

0

481

Land development - Phase 2

172

0

Public improvement reimbursables - Phase 2

444

0

Income taxes receivable

0

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

0

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

0

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

—

0

Accumulated deficit

(72,687)

(90,963)

Total shareholders’ equity

100,786

82,044

Total liabilities and shareholders’ equity

$
109,110

$
89,761


(In thousands, except share and per share amounts)	November 30, 2021		August 31, 2021
ASSETS:	(unaudited)
Current assets:
Cash and cash equivalents	$	12,914	$	20,117
Trade accounts receivable, net		1,217		1,532
Prepaid expenses and other assets		289		458
Land under development		1,030		608
Notes receivable - reimbursable public improvements - related party		16,000		16,000
Total current assets		31,450		38,715
Restricted cash		2,328		2,327
Investments in water and water systems, net		53,506		53,786
Construction in progress		3,016		3,304
Single-family rental units		1,008		—
Land and mineral rights:
Held for development		7,343		5,924
Held for investment purposes		451		451
Other assets		2,569		2,591
Notes receivable – related parties, including accrued interest:
Reimbursable public improvements		13,517		8,794
Other		1,061		1,163
Operating leases - right of use assets, less current portion		102		122
Total assets	$	116,351	$	117,177

LIABILITIES:
Current liabilities:
Accounts payable	$	2,019	$	1,787
Accrued liabilities		669		1,224
Accrued liabilities – related parties		2,049		2,881
Income taxes payable		1,185		4,163
Deferred lot sale revenues		2,831		1,995
Deferred oil and gas lease payment and water sales payment		271		410
Debt		7		—
Total current liabilities		9,031		12,460
Participating interests in export water supply		325		325
Debt, less current portion		993		—
Deferred tax liability, net		1,621		1,615
Lease obligations - operating leases, less current portion		15		37
Total liabilities		11,985		14,437
Commitments and contingencies
SHAREHOLDERS’ EQUITY:
Series B preferred shares par value $0.001 per share, 25 million authorized; 432,513 issued and outstanding (liquidation preference of $432,513)		—		—
Common shares par value 1/3 of $.01 per share, 40 million authorized; 23,923,100 and 23,916,633 outstanding, respectively		80		80
Additional paid-in capital		173,625		173,513
Accumulated deficit		(69,339)		(70,853)
Total shareholders’ equity		104,366		102,740
Total liabilities and shareholders’ equity	$	116,351	$	117,177

See accompanying Notes to ~~Condensed~~the Consolidated Financial Statements

Table of Contents

PURE CYCLE CORPORATION

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF OPERATIONS ~~AND COMPREHENSIVE INCOME~~
(unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended
	May 31,		May 31,		May 31,		May 31,		November 30,		November 30,
	2021		2020		2021		2020

	(In thousands, except per share amounts)
(In thousands, except per share amounts)									2021		2020
Revenues:
Metered water usage from:
Municipal customers	$	188	$	98	$	429	$	238	$	321	$	167
Oil and gas operations		22		15		1,804		72		386		1,199
Wastewater treatment fees		51		22		144		62		55		42
Water and wastewater tap fees		1,856		1,005		4,522		3,850		261		1,083
Lot sales		445		696		3,316		11,503		2,945		2,356
Project management fees - recognized		23		0		1,571		0
Project management fees										248		—
Single-family rentals										8		—
Special facility projects and other		81		14		487		104		49		21
Total revenues		2,666		1,850		12,273		15,829		4,273		4,868

Expenses:
Water service operations		(316)		(95)		(1,074)		(556)		(289)		(545)
Wastewater service operations		(102)		(62)		(258)		(126)		(129)		(92)
Land development construction costs		(99)		(556)		(2,087)		(10,436)		(531)		(1,719)
Single-Family rental costs										(3)		—
Depletion and depreciation		(358)		(386)		(1,077)		(988)		(354)		(365)
Other		(65)		(7)		(453)		(34)		(77)		(24)
Total cost of revenues		(940)		(1,106)		(4,949)		(12,140)		(1,383)		(2,745)
Gross profit		1,726		744		7,324		3,689

General and administrative expenses		(1,325)		(801)		(3,753)		(2,639)		(1,325)		(1,086)
Depreciation		(73)		(86)		(233)		(266)		(85)		(84)
Operating income (loss)		328		(143)		3,338		784
Operating income										1,480		953

Other income:
Recognition of public improvement reimbursables including interest income - related party		284		—		19,888		—
Interest income - related party										362		15
Oil and gas royalty income, net		97		74		248		613		97		75
Oil and gas lease income, net		48		62		148		185		48		52
Interest income from investments		15		24		45		162
Other		10		19		30		19		11		10
Reimbursement of construction costs - related party		0		0		485		6,276
Interest expense, net										(7)		—
Income from operations before income taxes		782		36		24,182		8,039		1,991		1,105
Income tax expense		(158)		(9)		(5,906)		(1,975)		(477)		(260)
Net income	$	624	$	27	$	18,276	$	6,064	$	1,514	$	845
Unrealized holding losses		0		0		0		(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

Earnings per common share - basic and diluted									$	0.06	$	0.04
Weighted average common shares outstanding:
Basic		23,907		23,853		23,885		23,842		23,918		23,867
Diluted		24,184		24,053		24,104		24,071		24,219		24,036

See accompanying Notes to ~~Condensed~~the 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

$
0

23,888

$
80

$
173,254

$
0

$
(72,766)

$
100,568
Prior period adjustment

—

—

—

—

—

—

(545)

(545)
Stock option exercises

0

0

22

0

48

0

0

48
Stock granted for services

0

0

0

0

0

0

0

0
Share-based compensation

0

0

0

0

91

0

0

91
Net income

0

0

0

0

0

0

624

624
May 31, 2021 balance:

433

$
0

23,910

$
80

$
173,393

$
0

$
(72,687)

$
100,786


	Three Months Ended November 30, 2021

							Additional
	Preferred Stock			Common Stock			Paid-in		Accumulated
	Shares	Amount		Shares	Amount		Capital		Deficit		Total

	(In thousands)
Balance at August 31, 2021	432,513	$	—	23,916,633	$	80	$	173,513	$	(70,853)	$	102,740
Stock option exercises	—		—	6,467		—		—		—		—
Share-based compensation	—		—	—		—		112		—		112
Net income	—		—	—		—		—		1,514		1,514
Balance at November 30, 2021	432,513	$	—	23,923,100	$	80	$	173,625	$	(69,339)	$	104,366


	Three Months Ended May 31, 2020														Three Months Ended November 30, 2020
									Accumulated
							Additional		Other												Additional
	Preferred Stock			Common Stock			Paid-in		Comprehensive		Accumulated				Preferred Stock			Common Stock			Paid-in		Accumulated
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit		Total		Shares	Amount		Shares	Amount		Capital		Deficit		Total

	(In thousands)														(In thousands)
February 29, 2020 balance:	433	$	0	23,852	$	79	$	172,749	$	0	$	(91,676)	$	81,152
Balance at August 31, 2020															432,513	$	0	23,856,098	$	80	$	172,927	$	(90,963)	$	82,044
Stock option exercises	0		0	2		0		4		0		0		4	0		0	12,118		0		0		0		0
Stock granted for services	0		0	0		0		0		0		0		0
Share-based compensation	0		0	0		0		82		0		0		82	0		0	0		0		86		0		86
Net income	0		0	0		0		0		0		27		27	0		0	0		0		0		845		845
May 31, 2020 balance:	433	$	0	23,854	$	79	$	172,835	$	0	$	(91,649)	$	81,265
Balance at November 30, 2020															432,513	$	0	23,868,216	$	80	$	173,013	$	(90,118)	$	82,975

~~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

$
0

23,856

$
80

$
172,927

$
0

$
(90,963)

$
82,044
Stock option exercises

0

0

42

0

62

0

0

62
Stock granted for services

0

0

12

0

136

0

0

136
Share-based compensation

0

0

0

0

268

0

0

268
Net income

0

0

0

0

0

0

18,276

18,276
May 31, 2021 balance:

433

$
0

23,910

$
80

$
173,393

$
0

$
(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

$
0

23,827

$
79

$
172,361

$
4

$
(97,713)

$
74,731
Stock option exercises

0

0

15

0

39

0

0

39
Stock granted for services

0

0

12

0

149

0

0

149
Share-based compensation

0

0

0

0

286

0

0

286
Net income

0

0

0

0

0

0

6,064

6,064
Unrealized holding loss on investments

0

0

0

0

0

(4)

0

(4)
May 31, 2020 balance:

433

$
0

23,854

$
79

$
172,835

$
0

$
(91,649)

$
81,265

See accompanying Notes to ~~Condensed~~the Consolidated Financial Statements

Table of Contents

PURE CYCLE CORPORATION

~~CONDENSED~~ CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Nine Months Ended				Three Months Ended
	May 31,		May 31,		November 30,		November 30,
	2021		2020

	(In thousands)
(In thousands)					2021		2020
Cash flows from operating activities:
Net income	$	18,276	$	6,064	$	1,514	$	845
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred lot sale revenues						836		(1,425)
Depreciation and depletion		1,310		1,254		439		449
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		0		4,230
Changes in operating assets and liabilities:
Trade accounts receivable		(810)		454		315		411
Prepaid expenses		(13)		(47)		141		(370)
Land development inventories		(131)		2,576
Taxes receivable		—		(40)
Recognition of public improvement reimbursables, including interest		(21,316)		—
Share-based compensation expense						112		86
Change in note receivable from Rangeview Metropolitan, net						102		(11)
Deferred income taxes						6		126
Other assets and liabilities						(1)		134
Deferred income – oil and gas lease and water sales payment						(139)
Land under development						(422)		(413)
Accounts payable and accrued liabilities						(1,156)		174
Taxes payable net of taxes receivable		5,283		—		(2,978)		—
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
Change in note receivable from Sky Ranch CAB						(4,723)		—
Net cash (used) provided by operating activities						(5,954)		6

Cash flows from investing activities:
Investments in water, water systems and land		(2,152)		(7,302)
Investments in water and water systems						(652)		(468)
Investments in land under development						(1,419)
Construction costs of single-family rentals						(142)		—
Purchase of property and equipment		(101)		(526)		(35)		(31)
Sale and maturities of short-term investments		0		6,905
Purchase of short-term investments		0		(1,720)
Net cash used by investing activities		(2,253)		(2,643)		(2,248)		(499)

Cash flows from financing activities:
Proceeds from exercise of options		62		40
Proceeds from notes payable						1,000		—
Payments to contingent liability holders		(3)		(4)		—		(1)
Net cash provided by financing activities		59		36
Net cash provided (used) by financing activities						1,000		(1)
Net change in cash, cash equivalents and restricted cash		(2,001)		12,597		(7,202)		(494)
Cash, cash equivalents and restricted cash – beginning of period		21,797		4,478		22,444		21,797
Cash, cash equivalents and restricted cash – end of period	$	19,796	$	17,075	$	15,242	$	21,303
Cash and cash equivalents	$	19,514	$	17,075	$	12,914	$	21,303
Restricted cash		282		—		2,328		—
Total cash, cash equivalents and restricted cash	$	19,796	$	17,075	$	15,242	$	21,303

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	$	0	$	1,305	$	3,450	$	—
Change in reimbursable public improvements included in accounts payable and accrued liabilities					$	2,049	$	—
Change in land under development costs included in accounts payable and accrued liabilities					$	—	$	894
Change in investments in water and water systems included in accounts payable and accrued liabilities					$	—	$	297

See accompanying Notes to ~~Condensed~~the Consolidated Financial Statements

Table of Contents

PURE CYCLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MAY 31,~~NOVEMBER 30, 2021

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The ~~May 31, 2021 condensed~~accompanying unaudited consolidated ~~balance sheet, the condensed consolidated~~financial 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”)~~(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~~of the Company as of and for the three months ended November 30, 2021 and 2020. The August 31, 2021 ~~and for all periods presented.~~balance sheet was derived from the Company’s audited consolidated financial statements.

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”)~~(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~~2021 (2021 Annual ~~Report”)~~Report) filed with the Securities and Exchange Commission ~~(the “SEC”)~~(SEC) on November 10, ~~2020.~~2021. 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”)~~(CARES Act)

~~On March 27,~~Since January 2020, ~~Congress enacted~~ the ~~CARES Act~~COVID-19 pandemic has caused substantial disruption in international and U.S. economies and markets. The impacts of the pandemic are continuing in 2021 but began to ~~provide certain relief because~~lessen as vaccines became widely available in the U.S, although there have been periodic increases in the number of cases in the ~~recent~~U.S. due to vaccine hesitancy and the spread of COVID-19 variants. The pandemic has resulted in government restrictions of various degrees and effective at various times, including stay-at-home orders, bans on travel, limitations on the size of gatherings, limitations on the operations of businesses deemed non-essential, closures of work facilities, schools, public buildings and businesses, cancellation of events (including entertainment events, conferences, and meetings), quarantines, mask mandates and social distancing measures. Due to the outbreak of ~~a novel strain of the coronavirus (“COVID-19”)~~ ~~pandemic. The CARES Act provides numerous tax provisions~~COVID-19 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 delayedrelated restrictions, the second development phase of ~~the~~ Sky Ranch ~~development revenue recognition~~was delayed 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.county government.

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 useful lives and recoverability of long-lived assets. Actual results ~~and outcomes may~~could differ from ~~management’s~~those 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,~~fiscal 2021, the Company ~~revised its estimates to conclude that~~determined the reimbursable public improvements, project management ~~revenue~~fees and interest income related to the ~~first development phase at~~ Sky Ranch community being developed by the Company are ~~reasonably assured~~probable of payment. Historically, due to a lack of tax base and no operating history for the Sky Ranch Community Authority Board ~~(the “Sky~~(Sky Ranch ~~CAB”)~~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.~~received. As a result of an established and growing tax base resulting from the success of the initial ~~filing,~~development, 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.~~probable. 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~~

Reclassifications

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-lookinghas reclassified certain prior year information to ~~better inform their credit loss estimates. ASU 2016-13 was set~~conform 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.~~year presentation.

~~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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NOTE 2 – REIMBURSABLE PUBLIC IMPROVEMENTS AND NOTE RECEIVABLE FROM THE SKY RANCH CAB

The ~~effect~~Note receivable from the Sky Ranch CAB reports the balances owed by the Sky Ranch CAB to the Company for reimbursable public improvements, project management fees, and interest accrued on the unpaid balances related to the ongoing development of the ~~errors~~Sky Ranch master planned community, which is described in greater detail in Note 1 and Note 14 to the Company’s ~~consolidated Statements of Operations and Comprehensive Income~~2021 Annual Report. The Company has paid for the ~~three~~cost of public improvements at Sky Ranch which are the ultimate responsibility of the Sky Ranch CAB. During the second quarter of fiscal 2021, the Company determined that the Sky Ranch CAB would be able to repay the company for those improvements, along with the project management fees and ~~six~~interest on these expenses. Upon that determination, the Company began recording the reimbursable public improvements as a receivable from the Sky Ranch CAB (as opposed to the costs being initially capitalized as land under development and subsequently expensed as land development construction costs) and began recognizing project management fee revenue and interest income on the entire note receivable from the Sky Ranch CAB. Prior to that date, payment was not deemed to be probable; therefore, the Company capitalized those costs as land under development and subsequently expensed the reimbursable public improvements and did not recognize any project management fees or interest income due to the uncertainty of collectability. During the three months ended ~~February 28,~~November 30, 2021, ~~were~~the note receivable – related party related to reimbursable public improvement costs the Company incurred on behalf of the Sky Ranch CAB of $4.1 million, project management fees owed to the Company of $0.2 million, and interest income on the outstanding amounts of $0.4 million which increased the note receivable balance by $4.7 million.

Public improvements which are not probable of reimbursement at the time of being incurred are considered contract fulfillment costs and will be recognized in separate land under development accounts as ~~follows:~~funds are expended. Once collectability is deemed to be probable, the reimbursable public improvement costs will be reclassified from the land under development account and into notes receivable - related party. The Company assesses the collectability of the note receivable from the Sky Ranch CAB, which includes reimbursable public improvements, project management fees and the related interest income, when events or circumstances indicate the amounts may not be recoverable. The Sky Ranch CAB has an obligation to repay the Company, but the ability of the Sky Ranch CAB to do so before the contractual termination dates is dependent upon the establishment of a tax base or other fee generating activities sufficient to recover reimbursable costs incurred.

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)

$
19,604

Income tax expense

$
(5,927)

$
178

$
(5,749)

Net Income

$
18,197

$
(545)

$
17,652

Earnings per common share - Diluted

$
0.76

$
(0.02)

$
0.74

Weighted average common shares outstanding - Diluted

24,064

24,064

24,064

The following table summarizes the activity and balances associated with the reimbursable public improvements, project management fees, and accrued interest, all of which are included in the note receivable from the Sky Ranch CAB:



(In thousands)	Balances at August 31, 2021		Activity during the three months ended November 30, 2021		Amounts payable by the Sky Ranch CAB at November 30, 2021
Phase 1
Reimbursable public improvements and other	$	17,645	$	248	$	17,893
Accrued interest		2,526		305		2,831
Project management services		1,570		10		1,580
Phase 1 reimbursable costs	$	21,741	$	563	$	22,304

Phase 2
Public improvements	$	2,935	$	3,877	$	6,812
Accrued interest		33		45		78
Project management services		85		238		323
Phase 2 reimbursable costs	$	3,053	$	4,160	$	7,213

Total reimbursable costs	$	24,794	$	4,723	$	29,517

The note receivable from the Sky Ranch CAB accrues interest at 6% per annum.

Table of Contents

~~The effect of the errors to the Company’s consolidated Balance Sheet as of February 28, 2021, were as follows:~~

As of February 28, 2021

Balance


As Reported

Adjustments

As Adjusted

(In thousands)
Balance Sheet

Assets

Public improvement reimbursables - Phase 1

$
21,466

$
(723)

$
20,743
Liabilities

Income taxes payable

$
4,267

$
(178)

$
4,089
Equity

Accumulated deficit

$
(72,766)

$
(545)

$
(73,311)

NOTE 3 – ~~RESTRICTED CASH~~REVENUE

The Company has entered into a cash-secured performance standby letter of credit agreement with its primary bank to maintain a letter of credit related to the Company’s performance obligations in the ordinary course of business. As of May 31, 2021, the Company had a letter of credit outstanding of $0.3 million and has restricted cash in the ~~same amount~~.

~~NOTE 4 – REVENUE RECOGNITION AND REIMBURSABLE COSTS~~

The Company disaggregates revenue by major product line as reported on the condensed consolidated statement of operations and comprehensive income, which the Company believes best depicts the nature, timing, and uncertainty of the Company’s revenue ~~and cash flows.~~

~~The Company~~is primarily ~~generates revenues through 2 lines~~generated from the sale of ~~business, its~~lots to homebuilders, sales of water and wastewater ~~resource development business and through the sale of finished lots in its land development business, both of which are described below.~~

~~Water and Wastewater Resource Development Segment~~

~~The Company’s~~taps, metered water and wastewater resource development segment provides wholesale municipal water and wastewater services, through the Rangeview Metropolitan District (the “Rangeview District”) and Elbert and Highway 86 Commercial Metropolitan District (the “Elbert 86 District”) to end use customers for fees, described below. The Rangeview District services Sky Ranch and other customers on the Lowry Range. Rangeview also operates and maintains the Elbert 86 District’s water system servicing Wild Pointe, a subdivision in Elizabeth, Colorado.

~~Monthly water~~ usage, and ~~wastewater treatment fees~~ ~~– The Company provides water~~beginning in November 2021, from renting single-family homes. Detailed descriptions of the policies related to customers, collects wastewater from those customers and treats that wastewater which is reused for irrigation and industrial demands. For these services, the Company charges customers monthly potable and reuse water fees thatrevenue recognition are ~~comprised of a base charge and a usage charge based on actual amounts of water delivered~~included in Note 2 to the ~~customer using a tiered structure that results in higher fees~~2021 Annual Report. The following describes significant components of revenue for ~~higher usage. Wastewater treatment services incur flat monthly fees. The Company recognizes these revenues at a point in time upon delivering water to~~ the ~~end use customers.~~

~~Water~~three months ended November 30, 2021 and ~~wastewater tap fees~~ – A tap constitutes a right to connect a residential or commercial building or property to the Company’s water and wastewater systems. Once granted, the customer may make a physical tap into the service line(s) to connect its property to the Company’s systems to obtain water and/or wastewater service. The right stays with the property. The Company has no obligation to physically connect the property to the lines, which is typically done by the home builder or commercial owner. Once connected to the water and/or wastewater systems, the customer has live service to receive metered water deliveries from the Company’s system and send wastewater to the Company. Thus, the customer has full control of the connection right as it can obtain all the benefits from this right. As such, tap fees are deemed separate and distinct performance obligations that are recognized as revenue at a point in time.

~~Table of Contents~~

~~Land Development Segment~~2020.

Sale of finished lots – For the three months ended November 30, 2021 and 2020, the Company recognized $2.9 million and $0.8 million of lot sale revenue, which was recognized using the percent-of-completion method for development costs incurred on contracts that are satisfied over time and are ongoing at Sky Ranch. As of November 30, 2021, the first phase is 99.5% complete and the first subphase of the second development phase is 43.4% complete.

The Company ~~sells lots at its Master Planned Community, Sky Ranch, pursuant to distinct agreements with each home builder. These agreements follow one of 2 formats. One format is~~also recognizes revenue from the sale of a finished ~~lot,~~lots, whereby the home builder pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon completion of the finished lot that is permit ready. The Company recognizes revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete and the Company has no further obligations for the lot.

The second format is the sale of a finished lot pursuant to a lot development agreement with builders, whereby the Company receives payments in stages that include: (i) payment upon the delivery of a platted lot (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. Ownership and control of the platted lot passes to the builder once the Company closes the sale of the platted lots. Because the builder takes control and legal ownership of the lot at the first closing, and subsequent improvements made by the Company improve the builder’s lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs. Any revenue in excess of amounts entitled to be billed is reflected on the balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue.

~~Reimbursable public improvement costs~~ – The Sky Ranch CAB is obligated to construct certain public improvements at Sky Ranch. Public improvements are items that are not associated with an individual lot or home, but can be used by the public, whether living in Sky Ranch or not. Public improvements include items such as roads, curbs, sidewalks, landscaping, and parks but also includes items such as water distribution systems, sewer collection systems, storm water systems, and drainage improvements. These public improvements are constructed pursuant to design standards specified by local governmental jurisdictions including the Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (collectively, the “Sky Ranch Districts”), the Sky Ranch CAB, Arapahoe County, and the local stormwater authority and, after inspection and acceptance, are turned over to the applicable governmental entity to own, operate and maintain.

~~Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 9 –~~ ~~Related Party Transactions~~), the Company is obligated to provide advance funding to the Sky Ranch CAB related to the construction of these public improvements pursuant to a note. Because public improvements are utilized by more than just a single home, the costs are typically reimbursed through property tax assessments. During the initial development filing at Sky Ranch, the Sky Ranch CAB expended $32.2 million to build these public improvements, including construction support activities totaling $29.6 million and accrued interest of $2.6 million, for which the Company provided the funding. Pursuant to the funding agreement between the Company and the Sky Ranch CAB, the expended $32.2 million along with the accrued interest income and project management fees are payable to the Company since the Company provided the initial funding. In November 2019, the Sky Ranch CAB issued $13.2 million of bonds to recover a portion of the total $32.2 million expected to be received related to the public improvements constructed for the initial filing at Sky Ranch. Upon the issuance of the bonds, the Company received $10.5 million as partial reimbursement for advances the Company made to the Sky Ranch CAB to fund the construction of these public improvements. Additionally, in January 2021 the Sky Ranch CAB paid the Company $0.4 million as a result of unencumbered funds from a 2020 budget surplus. With the first filing nearing completion, the Sky Ranch CAB has established a tax base with revenue generation from the expected tax receipts. Historically, the recognition of these costs was contingent upon the Sky Ranch CAB issuing bonds but as the tax base and subsequent revenues have grown, the Sky Ranch CAB has more funds and ability with which to repay the Company. The Company has determined the reimbursement of public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection due to the established and growing tax base, and as such, has recognized the reimbursable public improvements costs incurred to date at Sky Ranch. The Company recognized ~~an increase of $0.6~~$0 and $1.6 million ~~to the Note receivable – related party related to Project management revenue, Other income and Interest Income - related party during~~from ready-to-build finished lots for the three months ended ~~May 31,~~November 30, 2021 ~~for~~and 2020.

Water and wastewater tap fees – During the three months ended November 30, 2021 and 2020, the Company sold a total ~~outstanding receivable balance~~ of ~~$21.3 million. This receivable is reviewed each reporting period for impairment.~~

~~For~~9 and 36 water and wastewater taps generating $0.3 million and $1.1 million in tap fee revenues. These taps were all sold in the ~~second~~first development phase ~~and beyond, the Company will continue to assess the collectability of reimbursable public improvement expenditures. The~~at Sky Ranch CAB has an obligation to repay the Company but the ability of the Sky Ranch CAB to repay the Company before the contractual termination of December 31, 2060, is dependent upon the establishment of a tax base or other fee generating activities sufficient to recover reimbursable costs incurred. Public improvements are considered contract fulfillment costs and will be recognized in a separate Land development inventories account as funds are expended. Once collectability is deemed to be reasonably assured, the public reimbursable expenditures will be reclassified out of Land development inventories and into Notes receivable - related party. The Company will evaluate any balance in Notes receivable - related party for impairment each reporting period and an

~~Table of Contents~~

~~impairment charge will be incurred for any amounts deemed uncollectible. The reimbursable public improvement costs bear an interest rate of 6% per annum.~~Wild Pointe.

Project management services – ~~Pursuant to 2 Service Agreements for Project Management Services (the “Project Management Agreements”) with~~During the ~~Sky Ranch CAB,~~three months ended November 30, 2021 and 2020, the Company ~~acts as the project manager~~recognized $0.2 million and provides the services required to deliver the Sky Ranch CAB-eligible public improvements (see discussion of reimbursable public improvements above), including but not limited to Sky Ranch CAB compliance; planning design and approvals; project administration; contractor agreements; and construction management and administration. The Company is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing. The Company receives a project management fee of five percent (5%) of actual construction costs of Sky Ranch CAB-eligible public improvements. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible public improvements are not included in the calculation of the project management fee. Soft costs and other costs incurred by the Company that are not directly related to the construction of Sky Ranch CAB-eligible public improvements are included in Land development inventories and accounted for in the same manner as construction support activities as described below. Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided, or expenses incurred for construction of public improvements that qualify as reimbursable expenses. Historically, the recognition of project management revenue was deferred as the payment was deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. With the first phase nearing completion, the Sky Ranch CAB has an established tax base, with which Management believes provides reasonable assurance the Sky Ranch CAB can repay the Company for qualifying expenditures. The Company has determined that payment from the Sky Ranch CAB is probable and as such, the Company has recognized $23,000 and $1.6 million for the three and nine months ended May 31, 2021,$0 of project management revenue for ~~all reimbursable construction costs incurred to date and will recognize future project management revenue each period based on actual construction costs related to~~managing the ~~public improvements when collectability is deemed to be reasonably assured. The $1.6 million was recognized as a component~~Sky Ranch development process. During the second quarter of fiscal 2021, the Notes receivable - related party and accrues interest at 6% per annum. Future amounts will be added to Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

~~Construction support activities~~ ~~– The~~ Company performs certain construction activities at Sky Ranch. The activities performed include construction and maintenance of the grading erosion and sediment control best management practices and other construction-related services. These activities are invoiced todetermined the Sky Ranch CAB ~~upon completion~~would be able to pay the Company for project management services and ~~will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is~~began recognizing this revenue. Prior to that date, payment was not deemed to be ~~reasonably assured.~~

~~The following table summarizes the amounts~~probable; therefore, the Company ~~paid, what was repaid by~~had deferred recognition of the project management fees income it had earned.

Single-family rental fees – Effective November 1, 2021, the Company began leasing 3 single-family homes it had constructed at Sky Ranch. Each home is rented pursuant to a separate twelve-month lease agreement that requires monthly payments during the term of the lease. The Company has begun construction on a fourth house and reserved 46 lots in the second development phase of Sky Ranch ~~CAB and amounts still owed to~~for rental units; therefore, the Company believes this could become a reportable operating segment in the future once its operations become material.

Deferred Revenue

Deferred revenue by ~~the Sky Ranch CAB:~~segment is as follows:

As of May 31, 2021

Amounts payable to Pure

Payments repaid by

Cycle by the Sky Ranch


Costs incurred to date

Sky Ranch CAB

CAB

(In thousands)
Phase 1

Public improvements

$
27,205

$
10,505

$
16,700
Accrued interest

2,626

400

2,226
Project management services

1,556

0

1,556
Construction support activities

834

0

834
Phase 1 reimbursable costs

$
32,221

$
10,905

$
21,316

Phase 2

Public improvements

$
444

$
0

$
444
Phase 2 reimbursable costs

$
444

$
0

$
444


(In thousands)	November 30, 2021		August 31, 2021
Land development segment	$	2,831	$	1,995
Water and wastewater resource development segment		271		410
Balance, end of period	$	3,102	$	2,405

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~~Public improvements and construction support activities accrue interest of 6% per annum, which was not previously recognized~~Changes in deferred revenue were as the interest payments were deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. This interest was recognized as a portion of the recognition of $21.3 million of reimbursable costs as collection is deemed probable. The Company expects to incur an additional $0.5 million through the end of the calendar year 2021, with an estimated $0.4 million for construction costs related to public improvements to complete the first development phase of the initial 506 lots and expects that amount to be reimbursed to the Company along with the amounts noted in the table above as the Sky Ranch CAB issues bonds, collects fees, or property tax assessments support collectability being reasonably assured.follows:

~~Deferred Revenue~~


(In thousands)	November 30, 2021		August 31, 2021
Balance at August 31, 2021	$	2,405	$	3,600
Deferral of revenue		3,783		6,884
Recognition of unearned revenue		(3,086)		(8,079)
Balance at November 30, 2021	$	3,102	$	2,405

~~As noted above, the~~The Company recognizes certain lot sales over time as construction activities progress for lots sold pursuant to lot development agreements and not when payment is received. ~~Based on this,~~For example, the Company will frequently receive milestone payments before revenue

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can be recognized (i.e. prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company recording deferred revenue. The Company recognizes this revenue into income as construction activities progress, measured based on costs incurred to total expected costs of the project, which management believes is a faithful representation of the transfer of goods and services to the customer.

In fiscal 2018 and 2019, the Company received up-front payments for certain oil and gas leases which permitted an oil and gas operator priority rights to water deliveries over a specified period of time. As the Company was not required to perform on its delivery obligations when the payments were received, recognition of revenue was deferred and is being recognized on a straight-line basis over the agreement term. The 2018 payment has been fully recognized as of the first quarter of fiscal 2021.

The Company also received an up-front payment from an oil and gas industrial customer to reserve priority water for their operations, which the Company is recognizing this revenue based either on actual usage each reporting period or based on amounts which have expired pursuant to the agreement. The customer had up to one year from the invoice date to use such water. The customer did not use the water in the contract period which ended in January 2021, and such water was forfeited by the customer resulting in the Company recognizing revenue of $0.4 million.

~~Deferred revenue by segment is as follows:~~

May 31, 2021

August 31, 2020

(In thousands)
Land development segment

$
550

$
1,636
Water and wastewater resource development segment

275

1,965
Balance, end of period

$
825

$
3,601

~~Changes in deferred revenue were as follows:~~

May 31, 2021

(In thousands)
Balance, August 31, 2020

$
3,601
Deferral of revenue

2,293
Recognition of unearned revenue

(5,069)
Balance, May 31, 2021

$
825

Revenue allocated to remaining performance obligations such as described above represents contracted revenue that has not yet been recognized, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. During November ~~2020,~~2021, the Company received ~~the final~~a milestone payment of ~~$2.2 million, including $1.6~~$3.8 million for outstanding open contracts ~~in the first development filing at Sky Ranch, which represents the final~~related to lot sales in the first ~~filing~~subphase of the second development phase at Sky ~~Ranch, and $0.6 million for neighborhood amenities.~~Ranch. This revenue is being recognized over time.

NOTE 54 – FAIR VALUE MEASUREMENTS

Fair value ~~is defined as~~accounting guidance includes a hierarchy that prioritizes the ~~price that would be received~~inputs to ~~sell an asset or paid~~valuation techniques used to ~~transfer a liability in an orderly transaction between market participants at~~measure fair value. The hierarchy gives the ~~measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy~~

~~Table of Contents~~

~~that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant input~~highest priority to ~~determine fair value.~~

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the NASDAQ Stock Market. The Company had 0 Level 1 assets or liabilities as of May 31, 2021 or August 31, 2020.

Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities which include observable inputs but are not based on observableunadjusted quoted prices in active markets ~~at the measurement date~~ for ~~the asset or liability. The Company had 0 Level 2~~identical assets or liabilities ~~as of May 31, 2021 or August 31, 2020.~~

~~Level~~(Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

inputs). The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.

The carrying value for certain of the Company’s financial instruments (i.e., cash and cash equivalents, restricted cash, accounts receivable, accounts payable and accrued liabilities) approximates fair value because of their short-term nature and generally negligible credit losses.

As of November 30, 2021, the Company has 1 Level 2 liability, the SFR Note (defined in Note 6) entered into in November 2021, for which the Company has determined the valuation of the liability can be obtained from readily available pricing sources via independent providers for market transactions involving similar liabilities.

There were 0 transfers between Level 1, 2 or 3 categories during the three months ended November 30, 2021 or 2020.

NOTE 65 – WATER, LAND AND ~~LAND~~OTHER FIXED ASSETS

The Company’s water rights and current water and wastewater service agreements, including capitalized terms not defined herein, are more fully described in Note 4 – ~~Water and Land Assets~~ ~~in Part II, Item 8 of~~to the ~~2020~~2021 Annual Report.

Investment in Water and Water Systems

The Company’s Investments in water and water systems consist of the following costs and accumulated depreciation and ~~depletion at May 31, 2021 and August 31, 2020:~~depletion:


	May 31, 2021				August 31, 2020				November 30, 2021				August 31, 2021
			Accumulated				Accumulated				Accumulated				Accumulated
			Depreciation				Depreciation				Depreciation				Depreciation
	Costs		and Depletion		Costs		and Depletion

	(In thousands)
(In thousands)									Costs		and Depletion		Costs		and Depletion
Rangeview water system									$	17,572	$	(1,624)	$	17,526	$	(1,470)
Rangeview water supply	$	14,586	$	(16)	$	14,570	$	(15)		14,645		(17)		14,622		(17)
Water supply – Other										7,504		(1,513)		7,569		(1,433)
Sky Ranch water rights and other costs		7,371		(1,042)		7,499		(981)		7,377		(1,133)		7,338		(1,087)
Fairgrounds water and water system		2,900		(1,305)		2,900		(1,239)
Rangeview water system		17,496		(1,317)		15,948		(789)
Water supply – Other		7,552		(1,353)		7,550		(1,116)
Wild Pointe service rights		1,632		(741)		1,632		(708)
Sky Ranch pipeline		5,727		(745)		5,727		(602)		5,740		(841)		5,727		(793)
Lost Creek water supply		3,374		0		3,372		0		3,388		0		3,374		0
Construction in progress		1,021		0		1,339		0
Fairgrounds water and water system										2,900		(1,349)		2,900		(1,327)
Wild Pointe service rights										1,632		(775)		1,632		(775)
Totals		61,659		(6,519)		60,537		(5,450)		60,758		(7,252)		60,688		(6,902)
Net investments in water and water systems	$	55,140			$	55,087			$	53,506			$	53,786

Construction in progress primarily consists of additional water facilities at Sky Ranch and the Build-to-Rent houses. The Company anticipates the additional facilities and houses will be placed in service during calendar 2021.

~~NOTE 7 – LONG-TERM OBLIGATIONS AND OPERATING LEASE~~

The Participating interests in export water supply is an obligation of the Company that has no scheduled maturity date. Therefore, maturity of this liability is not disclosed in tabular form but is described below.

1311

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~~Participating Interests~~Construction in ~~Export Water Supply~~Progress

~~The acquisition~~Construction in progress represents costs incurred on various construction projects currently underway, that as of the Rangeview Water Supply was finalized with the signing of the Comprehensive Amendment Agreement (the “CAA”) in 1996. The CAA is explained in greater detail in Note 5 to the 2020 Annual Report. The terms and conditions of the CAA, other than whom the amounts are payable too,balance sheet date have not been ~~modified since signing.~~

completed and placed into service. The ~~CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. Additionally, if~~construction in progress account consists primarily of water facilities being constructed that the Company ~~does not sell~~anticipates will be placed in service during calendar year 2022. During the ~~Export Water,~~three months ended November 30, 2021, the ~~holders~~Company incurred (1) $0.5 million of costs related to its construction projects and (2) completed the single-family rental units resulting in the transfer of $1.0 million of costs to a separate account for tracking the capitalized costs of the ~~Series B Preferred Stock are not entitled to payment of any dividend and have no contractual recourse against~~rental units.

Single-Family Rental Homes

During the ~~Company.~~

~~As the proceeds from the sale of Export Water are received, they are either retained by~~three months ended November 30, 2021, the Company ~~or remitted~~completed construction of the first 3 houses in its single-family rental business. The costs of constructing the homes and landscaping are capitalized and being depreciated over five to ~~various parties pursuant to~~thirty-years depending on the ~~CAA. As of May 31,~~asset type. All 3 houses were placed in service and leased effective November 1, 2021. During the three months ended November 30, 2021, the ~~recorded obligation~~Company contracted for construction of the ~~CAA~~fourth house, which is ~~$0.3 million, and the contingent off-balance sheet portion is $0.6 million.~~

~~The CAA includes contractually established priorities which call for payments to CAA holders~~also located in ~~order of their priority. This means that~~ the first ~~payees receive their full payment before~~development phase of Sky Ranch, with construction expected to begin during the ~~next priority level receives any payment~~second quarter of fiscal 2022 and ~~so on until full repayment. Of~~an estimated completion near the ~~next $6.3 million~~end of Export Water payouts, which based on current payout levels would occur over several years, the Company will receive $5.6 million of revenue. Thereafter, the Company will be entitled to all but $0.2 million of the proceeds from the sale of Export Water after deduction of the State Land Board royalty.fiscal 2022.

The Company has ~~determined that~~reserved 46 lots in the ~~contingent portion~~second development phase of Sky Ranch to build additional rental units, but as of November 30, 2021, the Company has not started construction on any of these units.

NOTE 6 – DEBT ASSOCIATED WITH THE SINGLE-FAMILY RENTAL HOME NOTE PAYABLE AND OTHER LONG-TERM OBLIGATIONS

Single-Family Rental Home Note Payable

On November 29, 2021, PCY Holdings, LLC a wholly owned subsidiary of the ~~CAA does not have~~Company entered a ~~determinable fair value.~~Promissory Note (SFR Note) to reimburse amounts expended for the construction of the first 3 single-family rental units. The SFR note has the following terms:

●

Initial principal amount of $1.0 million

●

Floating per annum interest rate equal to the Western Edition of the “Wall Street Journal” Prime Rate plus 0.5% (3.75% as of November 30, 2021), which has a floor of 3.75% and a ceiling of 4.25%. In the event of default, the interest rate on the SFR Note would be increased by adding an additional 2.0%

●

Maturity date of December 1, 2026

●

NaN interest only payments beginning January 1, 2022

●

NaN principal and interest payments each month beginning July 1, 2022 in the amount of $4,633.05 each

●

Estimated final principal and interest balloon payment of $916,239.49 payable on December 1, 2026

●

Secured by the 3 single-family rental homes

●

Required minimum debt service coverage ratio of 1.10, measured annually based on audited financial statements, calculated as net operating income less distributions divided by required principal and interest payments, with net operating income defined as net income plus interest, depreciation, and amortization.

~~Sky Ranch~~The scheduled maturities of the SFR Note for each of the twelve-month periods ending November 30 are as follows (in thousands):


		Scheduled principal payments
2022	$	7
2023		19
2024		19
2025		20
2026		19
Thereafter		916
	$	1,000

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Lot Construction Obligations

In October 2020, November 2020, and February 2021, the Company entered ~~into~~ separate contracts with KB Home, Melody (a DR Horton Company), Challenger Homes, and Lennar Colorado, LLC to sell ~~789~~804 single-family attached and detached residential lots at Sky Ranch. This is the ~~Sky Ranch property. This next~~second development phase of Sky Ranch ~~will incorporate~~which incorporates approximately 250 acres, ~~and is planned to~~will be completed in 4 sub-phases. Due to the Company’s strong performance in the first phase of the Sky Ranch project, the Company was able to realize an approximate 30% increase in lot prices from $75,000 for a 50’ lot in phase one to $97,000 for the same 50’ lot in the first subphase of the second phase. The timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements,sub-phases, and ~~final completion of lot deliveries. The Company began construction in February 2021 on the second phase at Sky Ranch, which~~ is ~~expected~~platted to include ~~895~~a total of 850 residential lots. The ~~106~~46 lots not currently under contract to home builders are being retained for use ~~as long-term Build-to-Rent~~in the Company’s single-family rental ~~properties.~~

~~WISE Partnership~~

The South Metro WISE Authority (“SMWA”) is a group of 10 governmental or quasi-governmental water providers including the Rangeview District, that was formed to enable its members to participate in a regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the “WISE Partnership Agreement,” defined below. Each member of SMWA controls a contractually defined share of WISE and the members’ rights and obligations with respect to WISE. The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, and to “Denver Water” and “Aurora Water,” both defined below. Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years. In December 2014, the Company, through the Rangeview District, consentedbusiness. Pursuant to the ~~waiver of all contingencies set forth in~~contracts with the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its utility enterprise (“Aurora Water”).

~~In December 2014,~~homebuilders, the Company and the ~~Rangeview District entered~~Sky Ranch CAB are obligated to complete all construction activities required to deliver finished lots (i.e. lots ready for home construction) to the ~~Rangeview/Pure Cycle WISE Project Financing~~builders, including but not limited to grading, construction of wet and ~~Service Agreement (the “WISE Financing Agreement”), which requires the Company to fund the Rangeview District’s participation in WISE. During the three~~dry utilities, streets, curbs, and ~~nine months ended May 31,~~landscaping.

In February 2021, the Company ~~through~~began construction on the ~~Rangeview District, received metered water deliveries~~first subphase of ~~100~~the second development phase, which includes a total of 229 lots, 10 of which are being retained for use in the single-family rental business, and ~~300 acre-feet~~219 of ~~WISE water, paying $0.2 and $0.6 million for this water. During~~which are sold under contracts to the ~~three and nine months ended May 31, 2020,~~4 homebuilders listed above. As of November 30, 2021, the Company received plats for all 229 lots and has substantially completed grading and all wet utilities, with construction of streets, sidewalks, and dry utilities underway. We expect to deliver the first 219 completed lots to the homebuilders during the summer of 2022. From the start of the second development phase through November 30, 2021, the ~~Rangeview District received metered water deliveries~~Company has spent $8.8 million on construction activities in the second development phase, of 0which $6.8 million was for public improvements which the Company expects to be reimbursed by the Sky Ranch CAB. In the next eighteen months the Company anticipates spending an additional $11.7 million to complete 229 finished lots, including the 10 lots for the single-family rental business, in the first subphase of the second development phase, of which $10.4 million is estimated to be for public improvements which the Company believes will be reimbursed by the Sky Ranch CAB.

The Company believes it will take three years to complete construction for all 850 lots included in the 4 subphases of the second development phase and ~~400 acre-feet of WISE water, paying $0~~sell the 804 finished lots depending on the market conditions and ~~$0.6 million for this water. See further discussion in Note 9 –~~ ~~Related Party Transactions.~~permitting process.

~~Table of Contents~~

~~Lease Commitments~~

In February 2018, the Company entered into an operating lease for 11,393 square feet of office and warehouse space in Watkins, Colorado. The lease has a three-year term with payments of $6,600 per month and an option to extend the primary lease term for a two-year period at a rate equal to a 12.5% increase over the primary base payments.

For the nine months ended May 31, 2021 and 2020, the Company recorded less than $0.1 million of rent expense related to its office lease. During the nine months ended May 31, 2021 and 2020, the Company paid less than $0.1 million against the ~~Lease obligations — operating leases~~.

Operating lease expense is generally recognized evenly over the term of the lease. Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. For lease agreements entered into or reassessed in the future, the Company will be required to combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets.

The Company’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate of 6% on August 31, 2019, for all leases that commenced prior to that date. The Company elected the hindsight practical expedient to determine the lease term for existing leases, which resulted in the lengthening of the lease term related to the Company’s office lease.

~~ROU lease assets and lease liabilities for the Company’s operating leases were recorded in the condensed consolidated balance sheet as follows:~~

As of May 31, 2021

As of August 31, 2020

(In thousands)

Operating leases - right of use assets

$
141


$
196

Accrued liabilities

$
82

$
74

Lease obligations - operating leases, net of current portion

58

120

Total lease liability

$
140

$
194

Weighted average remaining lease term (in years)

1.7

2.4

Weighted average discount rate

6
%

6
%

NOTE 87 – SHAREHOLDERS’ EQUITY

The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective on April 12, 2014. Executives, eligible employees, consultants, and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase shares of stock and stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the board of directors. The Company has reserved 1.6 million shares of common stock for issuance ~~under~~to employees and directors pursuant to the Company’s 2014 Equity ~~Plan.~~Incentive Plan (2014 Equity Plan). As of ~~May 31,~~November 30, 2021 and August ~~30, 2020,~~31, 2021, there were ~~974,965~~876,665 and ~~1,088,500~~974,965 shares available for grant under the 2014 Equity Plan. ~~The Company began awarding options and stock awards under the 2014 Equity Plan in January 2015.~~ Prior to the effective date of the 2014 Equity Plan, the Company granted options and stock awards to eligible participants under its 2004 Incentive Plan ~~(the “2004~~(2004 Incentive ~~Plan”)~~Plan), which expired on April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive ~~Plan; however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive~~ Plan.

~~Table of Contents~~

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the ~~nine~~three months ended ~~May 31,~~November 30, 2021:


					Approximate						Approximate
				Weighted Average	Aggregate					Weighted Average	Aggregate
	Number	Weighted Average		Remaining	Intrinsic Value		Number	Weighted Average		Remaining	Intrinsic Value
	of Options	Exercise Price		Contractual Term	(in thousands)		of Options	Exercise Price		Contractual Term	(in thousands)
Outstanding at August 31, 2020	661,500	$	7.23	6.17	$	1,831
Outstanding at August 31, 2021							714,500	$	7.80	6.06	$	5,107
Granted	115,000	$	9.00				105,000	$	13.37
Exercised	(18,000)	$	3.41
Net settlement exercised	(37,500)	$	3.99				(13,167)	$	7.81
Outstanding at May 31, 2021	721,000	$	7.77	6.30	$	4,592
Outstanding at November 30, 2021							806,333	$	8.53	6.32	$	4,864

Options exercisable at May 31, 2021	502,667	$	6.92	5.22	$	3,627
Options exercisable at November 30, 2021							570,002	$	7.42	5.18	$	4,070

On January 13, 2021, the 6 non-employee Board members were each granted 2,000 unrestricted shares of stock. The fair market value of the unrestricted shares for share-based compensation expense is equal to the closing price of the Company’s common stock on the date of grant of $11.33. There is no vesting requirement for the unrestricted stock grants and the Company recognized the full expense of $0.1 million in the month granted.

During the ~~nine~~three months ended ~~May 31,~~November 30, 2021, the Company had net settlement exercises of stock options, whereby the optionee did not pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market price on the date of exercise. Net settlement exercises during the three months ended ~~May 31,~~November 30, 2021 resulted in ~~8,758~~6,467 shares issued and ~~4,242~~6,700 options cancelled in settlement of shares issued. ~~Net settlement exercises during the nine months ended May 31, 2021 resulted in 24,035 shares issued and 13,465 options cancelled in settlement~~

Table of ~~shares issued. There were 0 net settlement exercises during the three or nine months ended May 31, 2020.~~Contents

The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as ~~of and~~ for the ~~nine~~three months ended ~~May 31,~~November 30, 2021:


		Weighted Average			Weighted Average
	Number	Grant Date		Number	Grant Date
	of Options	Fair Value		of Options	Fair Value
Non-vested options outstanding at August 31, 2020	179,999	$	4.31
Non-vested options outstanding at August 31, 2021				218,333	$	4.04
Granted	115,000	$	3.78	105,000	$	5.16
Vested	(76,666)	$	4.27	(87,002)	$	4.21
Forfeited (a)	0	$	0
Non-vested options outstanding at May 31, 2021	218,333	$	4.04
Non-vested options outstanding at November 30, 2021 (a)				236,331	$	4.48

(a)	All non-vested options are expected to vest.

For each of the three months ended ~~May 31,~~November 30, 2021 and 2020, the Company recorded $0.1 million of stock-based compensation expense. ~~For the nine months ended May 31, 2021 and 2020, the Company recorded $0.4 million of stock-based compensation expense.~~

At ~~May 31,~~November 30, 2021, the Company had unrecognized compensation expenses totaling ~~$0.6~~$1.0 million relating to non-vested options that are expected to vest. The weighted-average period over which these options are expected to vest is approximately two and a half years.

NOTE 98 – RELATED PARTY TRANSACTIONS

The Rangeview District

The Rangeview District ~~is a quasi-municipal corporation~~ and ~~political subdivision of Colorado formed in 1986 for~~ the purpose of providing water and wastewater service to the Lowry Range and other approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property

~~Table of Contents~~

within the boundaries of the Rangeview District. The Company owns certain rights and real property interests which encompass the current boundaries of the Rangeview District. On December 16, 2009, the Company entered into a Participation AgreementCompany’s agreements with the Rangeview District ~~whereby~~are described in greater detail in Note 14 to the 2021 Annual Report. Pursuant to these agreements, the Company ~~agreed to provide~~provides funding to the Rangeview District ~~in connection with the Rangeview District joining the South Metro Water Supply Authority (“SMWSA”). The Company provides funding pursuant to the Participation Agreement annually, which~~ for ~~fiscal 2021~~operations, construction and ~~2020 is an immaterial amount.~~

~~Through the WISE Financing Agreement, the Company agreed to fund~~ the Rangeview District’s ~~cost of participating~~participation in the ~~regional water supply project known as the WISE partnership.~~ “Wise Partnership.”

During the three ~~and nine~~ months ended ~~May 31,~~November 30, 2021 ~~the Company through the Rangeview District, received metered water deliveries of 100~~ and ~~300 acre-feet of WISE water, paying $0.2 and $0.6 million for this water. During the three and nine months ended May 31,~~ 2020, the Company, through the Rangeview District, received metered water deliveries of 011 and ~~400~~166 acre-feet of WISE water, paying $0less than $0.1 million and ~~$0.6~~$0.3 million for this water. The cost of the water to the members is based on the water rates charged by Aurora Water and can be adjusted each January 1. As of January 1, 2021, WISE water was ~~$5.77~~$5.98 per thousand gallons and such rate will remain in effect through calendar 2021. ~~In addition, the Company pays certain system operational and construction costs. If a WISE member, including the Rangeview District, does not need its~~Effective, January 1, 2022, WISE water ~~each year or a member needs additional water, the members can trade and/or buy and sell water amongst themselves.~~is expected to increase to $6.13 per thousand gallons.

To date, the Company has capitalized the construction funding pursuant to the WISE Financing Agreement because the funding has been provided to build assets which provide capacity in the WISE infrastructure. The Company’s total investment in the WISE infrastructure as of ~~May 31,~~November 30, 2021, is $6.3 million.

~~Additionally,~~As detailed in Note 14 to the 2021 Annual Report, the Rangeview District ~~has~~and the Company have entered into an agreement with WISE to construct a special facility during fiscal 2021. Pure Cycle will fund the construction of the special facility and Rangeview will remit 100% of the reimbursement revenue to Pure Cycle.

~~In 1995, the Company extended a~~2 loan ~~to the Rangeview District.~~agreements. The first loan provided for borrowings of up to $250,000, is unsecured, and bears interest based on the prevailing prime rate plus 2% (5.25% at ~~May 31,~~November 30, 2021). The maturity date of the loan is December 31, ~~2020,~~2021, at which time it will automatically renew for another 12-month term. ~~In January 2014, the Rangeview District and the Company entered into a funding agreement that~~The second loan allows the Company to continue to provide funding to the Rangeview District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the 2014 Amended and Restated Lease Agreement remains in effect. OfAs of November 30, 2021, the ~~May~~principal and interest on both loan agreements totaled $1.1 million ($0.7 million of principal and $0.4 million of accrued interest). As of August 31, 2021, ~~balance in~~ ~~Notes receivable - related parties,~~ ~~$1.1~~the principal and interest on both loan agreements totaled $1.2 million ~~includes borrowings by~~($0.7 million of principal and $0.5 million of accrued interest). During the three months ended November 30, 2021, the Company received an interest payment of $0.1 million from the Rangeview ~~District of $0.7 million and accrued interest of $0.4 million. Of the August 31, 2020 balance in~~ ~~Notes receivable - related parties,~~ ~~$1.1 million includes borrowings by the Rangeview District of $0.6 million and accrued interest of $0.5 million.~~District.

Sky Ranch Community Authority Board

The Sky Ranch Districts and the Sky Ranch CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The ~~current members of the board of directors of each of the Rangeview District, the Sky Ranch Districts and the~~ Sky Ranch CAB consist of 4 employees of the Company and 1 independent board member. Pursuant to that certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District Nos. 1 and 5was formed ~~the Sky Ranch CAB~~ to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. ~~In order for~~For the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and

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maintenance expenses related to the provision of services that benefit the property.

~~The~~ To fund these improvements, the Company and the Sky Ranch CAB entered ~~into a Facilities Funding and Acquisition Agreement (the “FFAA”) effective November 2017,~~various funding agreements obligating the ~~company~~Company to advance funding to the Sky Ranch CAB for specified public improvements constructed from 2018 to 2023. All amounts owed under the ~~FFAA~~agreements bear interest at a rate of 6% per annum. Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058 for first phase and December 31, 2060 for the second phase, shall be deemed forever discharged and satisfied in full.

As of ~~May 31,~~November 30, 2021, the balance of the Company’s advances to the Sky Ranch CAB for improvements, including interest, net of reimbursements from the Sky Ranch CAB ~~to the Sky Ranch CAB~~ totaled ~~$21.3~~$29.5 million. The advances have been used by the Sky Ranch CAB to pay for construction of public improvements. The Company submits specific costs for reimbursement to the Sky Ranch CAB ~~which~~that have been certified by

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an independent third-party. ~~Previously, the reimbursable expenditures funded by the~~The Company ~~were expensed through Land development~~anticipates providing funding of $10.4 million for construction ~~costs and project management revenue and interest income were not recognized as the reimbursement was deemed contingent on a sufficient tax base and or the issuance~~ of ~~municipal bonds for collectability~~public improvements to ~~be reasonable assured. Additionally,~~ the Sky Ranch CAB ~~is contractually obligated~~in fiscal 2022 related to utilize any available funds not otherwise pledged to payment of previously issued bonds, used for operation and maintenance expenses, or otherwise encumbered, to reimburse the Company. As the collectability of reimbursable expenditures incurred to date for the first subphase of the second development phase ofat Sky Ranch is determined to be probable, the Company has recognized the remaining reimbursable costs, project management fees, and interest. The Company recognized an increase of $0.6 million to the Note receivable – related party with the offsetting entry being to Project management revenue and other income during the three months ended May 31, 2021, for a note receivable balance of $21.3 million. For the second phase and beyond, the Company will continue to assess the collectability of reimbursable public improvement expenditures. The Sky Ranch CAB has an obligation to repay the Company but the ability of the Sky Ranch CAB to repay the Company before the contractual termination of December 31, 2060 is dependent upon the establishment of a tax base or other fee generating activities sufficient to recover reimbursable costs incurred. Costs incurred will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured. Ranch.

In addition to the note receivable, ~~balance of $21.3 million,~~ the Sky Ranch CAB is obligated to refund the Company $0.5 million for the reimbursement of construction costs from the ~~South~~Southeast Metropolitan ~~Water~~Stormwater Supply Authority ~~(“SMWSA”)~~(SEMSWA). These costs will be distributed to the Sky Ranch CAB upon the acceptance of the stormwater infrastructure by ~~SMWSA~~SEMSWA in calendar year ~~2021.~~2022. The Company records this reimbursable cost in Trade accounts receivable, net.

~~Refer to Note 4 -~~ ~~Revenue Recognition~~Nelson Pipeline Constructors LLC ~~for~~

Through a ~~summary of reimbursable costs incurred to date, payments made from~~competitive bidding process the Sky Ranch CAB ~~and any outstanding reimbursable amounts.~~

~~In September 2018, effective as~~awarded Nelson Pipeline Constructors, LLC (Nelson) a contract to construct the wet utility pipelines in the second development phase of ~~November 13, 2017, the Company entered into an Operation Funding Agreement with the~~ Sky ~~Ranch CAB obligating the Company to advance funding to the Sky Ranch CAB for operation and maintenance expenses for the 2018 and 2019 calendar years. All payments are subject to annual appropriations~~Ranch. Nelson is a wholly-owned subsidiary of Nelson Infrastructure Services LLC, which is majority owned by the ~~Sky Ranch CAB in its absolute discretion. The advances by the Company accrue interest at the rate of 6% per annum from the date~~chairman of the ~~advance. As~~Company’s board of ~~the May 31, 2021 and August 31, 2020, the balances included in Notes receivable – related parties~~, ~~related to the Operation Funding Agreement are immaterial.~~directors.

NOTE 109 – SIGNIFICANT CUSTOMERS

The Company has significant customers in its operations. For the water and wastewater resource development segment, the Company primarily provides water and wastewater services on behalf of Rangeview ~~Metropolitan~~ District. The significant end users include all Sky Ranch homes in aggregate ~~Crestone Peak Resources (oil~~(21%) and 1 oil & gas ~~operations) and the WISE partnership related to a special facilities construction project.~~operator (50%). For the land development segment and water and wastewater tap fees, which are reported within the water and wastewater resource development segment, significant customers include ~~Taylor Morrison,~~Lennar (30%), Challenger (28%) and KB Home ~~and Richmond Homes.~~(20%).

NOTE 1110 – ACCRUED LIABILITIES


	May 31, 2021		August 31, 2020

	(In thousands)
Due to the Sky Ranch CAB - related party	$	514	$	1,169
(In thousands)					November 30, 2021		August 31, 2021
Land development costs due to the Sky Ranch CAB - related party					$	2,049	$	2,243
Accrued compensation		464		767		329		729
Other operating payables		320		353		154		248
WISE water		115		69		15		62
Land development - warranty and other - related party		120		0
Operating lease obligations		82		74		85		84
Property taxes		43		72		57		50
Professional fees		46		56		20		51
Rental deposits						9		—
Due to Rangeview - related party		0		43		—		638
Total	$	1,704	$	2,603	$	2,718	$	4,105

~~NOTE 12 – COMMITMENTS AND CONTINGENCIES~~

The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a material loss contingency when its occurrence is probable and damages can be

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reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and experience in contesting, litigating and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows. The Company is involved in certain legal proceedings as in the ordinary course of adjudicating and protecting its water and water rights. The Company had no contingencies where the risk of material loss was reasonably possible as of May 31, 2021, or August 31, 2020.

NOTE 1311 – SEGMENT INFORMATION

~~Based on the methods used by the Chief Operating Decision Maker (the “CODM”)~~The Company is required to ~~allocate resources, the Company has identified~~report 2 operating segments which meet GAAP segment disclosure requirements, namely the water and wastewater resource development segment and the land development segment. A potential third segment, ~~Build-to-Rent (“BTR”), will be presented once~~the single-family rentals, although not currently material to ~~operations.~~operations is presented within the operating segment for informational purposes.

The water and wastewater resource development business includes selling water services to customers, which water is provided by the Company using water rights owned or controlled by the Company, and developing infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater. The land development segment includes all the activities necessary to develop and sell finished lots, which as of and for the nine months ended May 31, 2021 and 2020, was done exclusively at the Company’s Sky Ranch Master Planned Community.

Oil and gas operations, although material in certain years, are deemed a passive activity as the CODM does not actively allocate resources to these projects; therefore, this is not classified as a reportable segment.

~~The tables below present the measure of profit and assets the CODM uses to assess the performance of the segment for the periods presented:~~

Three Months Ended May 31, 2021

Water and


wastewater

resource


development

Land development

    Corporate

    Total

(In thousands)
Total revenue

$
2,198

$
468

$
0

$
2,666
Cost of revenue

(483)

(99)

0

(582)
Depreciation and depletion

(358)

0

0

(358)
Total cost of revenue

(841)

(99)

0

(940)
Gross profit

$
1,357

$
369

$
0

$
1,726

Three Months Ended May 31, 2020


Water and


wastewater

resource


development

Land development

Corporate

Total

(In thousands)
Total revenue

$
1,154

$
696

$
0

$
1,850
Cost of revenue

(164)

(556)

0

(720)
Depreciation and depletion

(386)

0

0

(386)
Total cost of revenue

(550)

(556)

0

(1,106)
Gross profit

$
604

$
140

$
0

$
744

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Nine Months Ended May 31, 2021

Water and


wastewater

resource


development

Land development

    Corporate

    Total

(In thousands)
Total revenue

$
7,386

$
4,887

$
0

$
12,273
Cost of revenue

(1,785)

(2,087)

0

(3,872)
Depreciation and depletion

(1,077)

0

0

(1,077)
Total cost of revenue

(2,862)

(2,087)

0

(4,949)
Gross profit

$
4,524

$
2,800

$
0

$
7,324

Nine Months Ended May 31, 2020


Water and


wastewater

resource


development

Land development

Corporate

Total

(In thousands)
Total revenue

$
4,326

$
11,503

$
0

$
15,829
Cost of revenue

(716)

(10,436)

0

(11,152)
Depreciation and depletion

(988)

0

0

(988)
Total cost of revenue

(1,704)

(10,436)

0

(12,140)
Gross profit

$
2,622

$
1,067

$
0

$
3,689

The following table summarizes total assets for the Company’s water and wastewater resource development business and land development business by segment. The assets consist of water rights and water and wastewater systems in the Company’s water and wastewater resource development segment and land, inventories and deposits in the Company’s land development segment. The Company’s other assets (“Corporate”) primarily consist of cash, cash equivalents and restricted cash, equipment, and related party notes receivables.

May 31, 2021

August 31, 2020

(In thousands)
Water and wastewater resource development

$
55,832

$
56,267
Land development

28,897

6,975
Corporate

24,381

26,519
Total assets

$
109,110

$
89,761

~~NOTE 14 – INCOME TAXES~~

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items. As of May 31, 2021 the Company is estimating an annual effective tax rate of approximately 25%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.

2015

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and collect, treat and reuse reclaimed wastewater. The ~~provision for income taxes is recorded at~~land development segment includes all the ~~end~~activities necessary to develop and sell finished lots, which as of ~~each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year. Income tax information~~and for the three ~~and nine~~ months ended ~~May 31,~~November 30, 2021 and 2020, ~~are as follows:~~was done exclusively at the Company’s Sky Ranch Master Planned Community.

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,


2021

2020


2021

2020


  (In thousands)

Effective income tax rate

24.7
%

24.8
%

24.7
%

24.6
%
Income tax expense (benefit):

Current

$
(394)

$
21

$
5,283

$
1,265

Deferred

552

(12)

623

710

Total

$
158

$
9

$
5,906

$
1,975

Income taxes paid:

Federal

$
0

$
212

$
0

$
1,089

State

0

22

0

216

Total

$
—

$
234

$
—

$
1,305

The tables below present the measure of profit and assets used to assess the performance of the segment for the periods presented:


	Three Months Ended November 30, 2021
	Water and
	wastewater
	resource
(In thousands)	development		Land development		Single-family rental		Total
Total revenue	$	1,072	$	3,193	$	8	$	4,273
Cost of revenue		(495)		(531)		(3)		(1,029)
Depreciation and depletion		(354)		—		—		(354)
Total cost of revenue		(849)		(531)		(3)		(1,383)
Gross profit	$	223	$	2,662	$	5	$	2,890


	Three Months Ended November 30, 2020
	Water and
	wastewater
	resource
(In thousands)	development		Land development		Single-family rentals		Total
Total revenue	$	2,512	$	2,356	$	—	$	4,868
Cost of revenue		(661)		(1,719)		—		(2,380)
Depreciation and depletion		(365)		—		—		(365)
Total cost of revenue		(1,026)		(1,719)		—		(2,745)
Gross profit	$	1,486	$	637	$	—	$	2,123

~~Deferred income taxes reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of~~The following table summarizes total assets ~~and liabilities~~ for ~~financial reporting purposes and the amounts used for income tax purposes. Significant components of~~ the Company’s ~~deferred tax liability as~~water and wastewater resource development business and land development business by segment. The assets consist of ~~May 31, 2021~~water rights and ~~August 31, 2020 are as follows:~~water and wastewater systems in the Company’s water and wastewater resource development segment and land, inventories and deposits in the Company’s land development segment. The Company’s other assets (“Corporate”) primarily consist of cash, cash equivalents, restricted cash, equipment, and related party notes receivables.

May 31, 2021

August 31, 2020

(In thousands)
Deferred tax assets (liabilities):






Depreciation and depletion

(2,244)

(1,701)
Non-qualified stock options

528

491
Accrued compensation

98

167
Deferred revenues

52

89
Other

57

45
Net operating loss carryforwards

$
0

$
23
Net deferred tax liability

$
(1,509)

$
(886)


(In thousands)	November 30, 2021		August 31, 2021
Water and wastewater resource development	$	57,158	$	57,791
Land development		39,363		32,844
Single-family rental		1,008		—
Corporate		18,822		26,542
Total assets	$	116,351	$	117,177

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NOTE 1512 – EARNINGS PER SHARE

The Company’s earnings per share (EPS) was calculated by dividing net income attributable to common shareholders by the weighted-average shares of common stock outstanding during the period. Certain outstanding options are excluded from the diluted ~~earnings per share~~EPS calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than decrease ~~earnings per share)~~EPS). ~~NaN options were excluded for~~For the three ~~and nine~~ months ended ~~May 31, 2021. The~~November 30, 2021 and 2020, the Company excluded 0 and 180,000 options ~~totaled 180,000 and 0 for~~as the ~~three and nine months ended May 31, 2020.~~impact was anti-dilutive.


	Three Months Ended				Nine Months Ended				Three Months Ended
	May 31,		May 31,		May 31,		May 31,		November 30,		November 30,
(In thousands, except share and per share amounts)									2021		2020
Net income									$	1,514	$	845
	2021		2020		2021		2020

	(In thousands, except share and per share amounts)
Net income	$	624	$	27	$	18,276	$	6,064
Basic weighted average common shares		23,907,140		23,852,765		23,885,179		23,841,876		23,917,908		23,866,740
Effect of dilutive securities		277,255		200,055		219,229		229,142		301,328		169,739
Weighted average shares applicable to diluted earnings per share		24,184,395		24,052,820		24,104,408		24,071,018		24,219,236		24,036,479
Earnings per share - basic	$	0.03	$	0.00	$	0.77	$	0.25
Earnings per share - diluted	$	0.03	$	0.00	$	0.76	$	0.25

Earnings per share - basic and diluted									$	0.06	$	0.04

NOTE 13 – INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items. As of November 30, 2021, the Company is estimating an annual effective tax rate of approximately 25%. Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.

The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year taking into account any items requiring discrete recognition. Income tax information for the three months ended November 30, 2021 and 2020 are as follows:


	Three Months Ended
	November 30,			November 30,
(In thousands)	2021			2020
Effective income tax rate		24.0	%		24.6	%
Income tax expense (benefit):
Current	$	471		$	134
Deferred		6			126
Total	$	477		$	260
Income taxes paid:
Federal	$	3,450		$	—
State		—			—
Total	$	3,450		$	—

Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax liability as of November 30, 2021 and August 31, 2021 are as follows:


(In thousands)	November 30, 2021		August 31, 2021
Deferred tax assets (liabilities):
Depreciation and depletion	$	(2,282)	$	(2,360)
Non-qualified stock options		561		547
Accrued compensation		56		141
Deferred revenues		29		41
Other		15		16
Net deferred tax liability	$	(1,621)	$	(1,615)

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

~~OVERVIEW~~

~~The~~In Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), “we,” “us,” “our” and "Pure Cycle" refer to Pure Cycle Corporation and all entities owned or controlled by Pure Cycle Corporation. You should read the following discussion in conjunction with our consolidated financial statements and ~~analysis below includes certain forward-looking statements that are subject to risks, uncertainties~~accompanying notes, related MD&A and ~~other factors, as described~~discussion of our business included in ~~“Risk Factors” in the 2020~~our Annual Report ~~that could cause our actual growth,~~on Form 10-K for the year ended August 31, 2021 (“2021 Annual Report”) filed with the United States (U.S.) Securities and Exchange Commission (SEC) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q. The results of operations ~~performance, financial position~~reported and ~~business prospects~~summarized below are not necessarily indicative of future operating results, and ~~opportunities for this fiscal year and periods that follow to~~future results could differ materially from those ~~expressed~~anticipated in ~~or implied by those forward-looking statements. Readers are cautioned that~~ forward-looking statements ~~contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading~~(refer to “Disclosure Regarding Forward-Looking Statements” ~~below.~~

~~The following Management’s Discussion~~in this Form 10-Q; Part II, Item 1A. "Risk Factors" in this Form 10-Q; and ~~Analysis (“MD&A”) is intended to help the reader understand~~Part I, Item 1A. “Risk Factors” in our results of operations and financial condition and should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in the 20202021 Annual ~~Report.~~

~~Our Business~~Report for further discussion).

We are a diversified water resource and land development company. At our core, we are ~~an innovative and vertically integrated~~a wholesale water and wastewater service provider, ~~which also develops~~and we develop land we own into master planned ~~communities, to which we will continue to provide~~communities. Our newest business is the development of single-family homes held for rental purposes. Both the land development and single-family home rental lines of business generate customers and usage fees for our water and wastewater ~~services as well as operate long-term build-to-rent properties. We~~development business.

Our Business Strategy

Over the past 30+ years, we have accumulated a large portfolio of valuable water rights and land interests ~~over the past 30 years and~~in Colorado. We have ~~developed~~added an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial, and industrial customers in the eastern Denver metropolitan region. Our primary land asset, Sky Ranch, is ~~located~~ in one of the most active development areas in the Denver metropolitan region along the ~~quickly~~rapidly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses. We also have launched a single-family rental business where we are renting homes in Sky Ranch to families under annual lease agreements. We plan to expand this new line of business to more than 200 rental units over the next several years.

Although we currently report our results of operations in two segments, our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable, and value-added business enterprise. ~~We will separately present the Build-to-Rent segment once material.~~As our single-family rental business grows and becomes material, it could likely become our third reportable business segment.

Water and Wastewater

Water resources throughout the western United States and more prominently in Colorado are a scarce and valuable resource. Our portfolio of 29,500 acre-feet is comprised of groundwater and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, multiple water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services.

We provide wholesale water and wastewater service to local governments, including the Rangeview Metropolitan District ~~(the “Rangeview District”)~~(Rangeview District), Arapahoe County, the Sky Ranch Community Authority Board ~~(the “Sky~~(Sky Ranch ~~CAB”)~~CAB), and the Elbert and Highway 86 Commercial Metropolitan District ~~(the “Elbert~~(Elbert 86 ~~District”)~~District). Our mission is to provide sustainable, reliable, ~~high quality~~high-quality water to our customers and collect, treat, and reuse wastewater using advance water treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we proactively manage our valuable water rights in the water-scarce Denver, Colorado ~~region.~~region which dramatically reduces the environmental impact of our water resource operations. We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate on behalf of governmental entities. We also design, permit, construct, operate, and maintain retail distribution and collection systems that we own or operate on behalf of our governmental customers. Additionally, we handle administrative functions, including meter reading, billing and collection of monthly water and wastewater revenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to the Colorado Department of Public Health and Environment.

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Revenues for our water operations are dependent on us growing the number of customers we serve. If we are unable to add customers to our systems and sell taps to builders, our revenues could be negatively impacted. We currently are the developer of the Sky Ranch community which is the main driver of our tap sales. Additionally, prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping parks irrigated. Conversely, prolonged periods of dry weather could lead to drought restrictions and limited water availability. Despite our substantial water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact metered usage revenues. We have addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions.

Land Development

Our Land Development segment is primarily focused on ~~actively~~the developing the Sky Ranch Master Planned Community located along the booming I-70 corridor to provide residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,400 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is zoned to include over two million square feet of retail, commercial, and light industrial space, which is the equivalent of approximately 1,600 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units. Our land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver “ready to build” finished lots to home builders and commercial customers. Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots. Additionally, pursuant to certain agreements with the Sky Ranch CAB and its related metropolitan districts, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., the costs of which ~~costs~~ are reimbursed to us by the Sky Ranch CAB through funds generated ~~by the Sky Ranch districts through~~from property taxes, fees or the issuance of municipal bonds.

Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments efficiently and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments.

We have been developing the Sky Ranch community since 2017. We are developing it in phases, which is anticipated to take at least ten years until its fully built out. In ~~June~~ 2017, we began the initial development phase of Sky Ranch when we entered into separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we ~~agreed to sell 506~~sold 505 total single-family, detached residential lots at ~~the~~ Sky ~~Ranch property. We are obligated, pursuant~~Ranch. Pursuant to these ~~contracts,~~agreements, we were obligated to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities).

, all of which are substantially complete as of November 30, 2021. As of ~~May 31,~~November 30, 2021, we have incurred ~~$35.3~~$35.8 million of the total estimated ~~$35.8~~$35.9 million in costs related to the development of the first phase of Sky Ranch. We anticipate ~~the majority of~~all the remaining ~~$0.5 million, of which $0.4 million is~~ estimated ~~to be reimbursable,~~costs will be incurred during ~~our remaining~~ fiscal 2021. These amounts include estimated reimbursable costs of $32.2 million, for which we received a partial reimbursement of $10.5 million through proceeds from municipal bonds and an additional payment of $0.4 million of unencumbered funds resulting from a budget surplus in 2020.2022. We believe most of the ~~outstanding $21.3 million of~~ remaining ~~reimbursables~~costs will be reimbursable to us from the Sky Ranch CAB as described in greater detail below. The total cost of the initial development phase included $32.2 million of estimated public improvements which are reimbursable to us from the Sky Ranch CAB. Of this amount, as of November 30, 2021, we have received a total of $10.9 million in reimbursements from the Sky Ranch CAB. We believe remaining reimbursables, and associated interest, will be ~~paid~~repaid to us from future fees, property taxes, and municipal bonds generated by the Sky Ranch CAB as the project continues to grow its assessed value and tax base. As homes at Sky Ranch have sold faster than anticipated (as of ~~May 31,~~November 30, 2021, there are approximately ~~330~~435 homes sold and occupied in the first development phase), and assessed values have exceeded early estimates, the Sky Ranch CAB has developed an established tax basis, ~~and has~~which we believe supports the intent and ability ~~to issue municipal bonds. As such, the collectability~~ of these reimbursables is deemed probable. The Company recognized an increase of $0.3 million to the Note receivable – related party with the offsetting entry recorded to Project management revenue and other income during the three months ended May 31, 2021, for a note receivable balance of $21.3 million. As of May 31, 2021, we have recognized $36.3 million of the sales price contracted for with the home builders and the remaining $0.5 million is expected to be recognized as revenue in our remaining fiscal 2021. In addition, from the start of development at Sky Ranch through May 31, 2021, the Sky Ranch ~~development produced $13.3 million~~CAB to repay us being probable of ~~water and wastewater tap fees, and we expect that an additional $1.5 million~~occurrence. We also believe a substantial portion of ~~tap fees~~the amounts owed to us by the Sky Ranch CAB will be ~~received~~repaid when the Sky Ranch CAB issues municipal bonds. We anticipate the next bond offering will be during ~~calendar 2021.~~our fiscal 2022.

~~In November 2020 and February~~During our fiscal 2021, we began construction on the second development phase at Sky Ranch. For this phase we entered into separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company) and Challenger Homes to sell ~~789~~804 single-family attached and detached residential lots at ~~the~~ Sky ~~Ranch property. This next~~Ranch. The second development phase ~~of Sky Ranch~~ will incorporate approximately 250 acres and is planned to be completed in four sub-phases. Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an

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approximate ~~30%~~40% increase in our average lot prices. For example, we increased our sales price ~~from $75,000~~ for a 50’ foot lot ~~in phase one~~from $75,000 to ~~$97,000 for~~$108,000 and added an escalation clause that increases the ~~same 50’ lot in the first subphase~~prices depending on timing of ~~the second phase.~~payments. The timing of cash flows ~~will include~~includes certain milestone deliveries ~~including, but not limited to,~~such as the completion of governmental approvals for final plats, installation of wet ~~utility public improvements,~~utilities, and final completion of lot deliveries.

In February 2021, we began construction on the first subphase of the second development phase at Sky Ranch, which is ~~expected to include nearly 900~~platted for 229 residential lots. We have retained ten of these lots for use in our single-family rental business. As of November 30, 2021, we have received plats and substantially completed the grading and wet utilities installation for the first subphase. Contracts with three of the four homebuilders include milestone payments as construction progresses. We recognize the revenue earned under these contracts over time using the percentage of completion method to measure progress. As a result of the construction activities completed on this first subphase of the second development phase, we have received a total of $7.7 million in milestone payments. We estimate the first subphase is just over 43% complete, which resulted in the recognition of $2.7 million of lot sale revenue during the three months ended November 30, 2021. The final milestone payments of $3.6 million from these three builders will be due when we complete the lots, which is anticipated to be in fiscal 2022. The remaining $6.4 million of revenue will be recognized over time as the first subphase of construction is completed, which we expect ~~delivery~~to be substantially done with this first subphase within twelve-months. The fourth builder contract is a finished lot contract recognized at the point-in-time control transfers to the builder, which means when we complete their 64 first subphase lots, anticipated to be in June 2022. We will receive $7.0 million in cash as control of ~~platted~~the completed lots is transferred to that builder.

Payments for lot sales and the related revenue for the remaining three subphases of the second development phase will occur as construction of those phases occurs. We believe the next subphase construction will begin in the ~~fourth quarter~~fall of 2022. We further believe it will take three years to complete construction and sell the finished lots in all four subphases of the second development phase, depending on the market conditions and permitting process.

In addition to the lot sales and reimbursables described above, from the start of development at Sky Ranch through November 30, 2021, we have received $14.2 million of water and wastewater tap fees from the three homebuilders, and we expect an additional $1.0 million of tap fees will be received during fiscal ~~2021 and continue steadily over~~2022 related to the ~~next several years. The 100+~~first development phase. Timing of tap sales on the second development phase is dependent on when homebuilders begin requesting building permits. Total tap revenue from the 219 lots ~~not currently~~ under contract ~~to home builders~~with the homebuilders are ~~being retained for~~dependent on lot sizes and average water use ~~as build-to-rent long-term rental properties, as described below.~~

~~Table~~across a broad range of ~~Contents~~housing product types including duplexes and townhomes, which we estimate will exceed $4.0 million.

~~Build-to-Rent~~Single-Family Rentals

~~As announced in March~~During our fiscal 2021, we launched a new line of business ~~which will be referred~~we are referring to as our ~~Build-to-Rent (“BTR”) line of~~single-family rental business. During our initial development phase of Sky Ranch, we retained ownership of ~~three~~four residential lots ~~on which~~for use in this business. As of November 30, 2021, we have ~~begun~~finished building three ~~single family~~single-family homes which we ~~will~~ own, maintain, and ~~rent~~have leased to qualified ~~renters. We have contracted for~~renters under one-year lease terms. The fourth home is in the ~~construction of the homes with a reputable construction company~~planning and permitting stage, and we expect ~~these three homes~~ to ~~be completed and ready for renters in~~begin construction before the ~~fall~~end of ~~2021. Foundations and framing~~our second quarter of ~~the homes are complete and construction is progressing, on schedule and on budget.~~

~~After the successful completion of the three houses in the first phase, we~~fiscal 2022. We intend to expand ~~this BTR line~~our single-family rentals in our second development phase of Sky Ranch by building and renting homes on the ~~100+~~46 lots we did not sell to our home builder partners. ~~Grading~~

We capitalize the costs of the homes and amortize the costs over five to thirty-years depending on the ~~second phase of Sky Ranch has begun, and once complete we will look to partner with certain builders to construct our BTR~~asset class. Lease income is recorded monthly as earned. We began recognizing monthly lease income for the first three rental units ~~as the second development phase of Sky Ranch is completed.~~on November 1, 2021.

~~Recent Developments~~COVID-19

As the ~~coronavirus (“COVID-19”)~~COVID-19 pandemic continues, we have continued to enforce many safety measures enacted to protect the health and well-being of our employees, customers, business partners, and their families. While state and local mandates have been eased, we continue to encourage voluntary vaccinations and healthy practices such as hand washing, disinfecting, social distancing, and face coverings when necessary. We have been able to maintain our level of efficiency with the use of video conferencing and electronic data sharing platforms. We were informed that our builder customers also took precautionary measures to ensure the safety of their employees, customers, business partners, and their families. These measures varied by builder. As a result, some of our builder customers reported material net housing order declines in ~~2020.~~2021. However, they are also reporting material increases in orders since the stay-at-home orders have been reduced. We had been expecting to accelerate deliveries of the remaining finished lots at Sky Ranch into fiscal 2020; however, because of the COVID-19 precautionary measures and stay-at-home orders, we delivered the remaining lots during the first quarter of fiscal 2021. These deliveries were still ahead of the original delivery dates set forth in our contracts with the home builders by nearly two years. The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring governmental agencies due to expansive work restrictions imposed on their operations. We expect COVID-19 to continue to play a role

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in potential delays related to the second filing at Sky Ranch due to rapidly changing governmental orders, city and country shutdowns, and public health concerns. Mainly, we have experienced delays in the permitting process through the county which has delayed the ~~revenue recognition~~construction progress of the Phase two of the Sky Ranch development. All our operations are located in Colorado and travel and related restrictions have not impacted our operations. Like many other businesses, our contractors have experienced delays in receiving materials and parts, but we have been able to adjust our purchases and operations enough to reduce the impact this has had on our construction and other activities.

Results of Operations

Executive Summary

For the first quarter of fiscal 2022 we generated net income of $1.5 million or $0.06 per common share. This is an increase of 79.2% over the first quarter of fiscal 2021 net income of $0.8 million or $0.04 per common share. The growth in net income was positively impacted by increased lot sales due to construction of the second phase progressing, for which our margins increased substantially as a we are no longer recognizing reimbursable public improvements as part of the cost of development. Instead, they are now recorded as receivable from the Sky Ranch CAB. Additionally, we recognized interest income on the note receivable from the Sky Ranch CAB. These increases were partially offset by declines in water usage revenues from oil and gas sales, declines in tap sales and increases in general and administrative expenses.

Consolidated Results of Operations



	Three Months Ended
	November 30,		November 30,
(In thousands, except for water and lot deliveries and taps sold)	2021		2020		$ Change		% Change
Water and wastewater resource development revenue	$	1,072	$	2,512	$	(1,440)	(57)	%
Land development revenue		3,193		2,356		837	36	%
Single-family rental		8		—		8	—	%
Total revenue		4,273		4,868		(595)	(12)	%

Water and wastewater development cost of revenue		(849)		(1,026)		(177)	(17)	%
Land development cost of revenue		(531)		(1,719)		(1,188)	(69)	%
Single-family rental cost of revenue		(3)		—		3	—	%
Total cost of revenue		(1,383)		(2,745)		(1,362)	(50)	%

General and administrative expense		(1,410)		(1,170)		240	21	%
Other income, net		511		152		359	236	%
Income taxes		(477)		(260)		217	83	%
Net income	$	1,514	$	845	$	669	79	%

Basic EPS	$	0.06	$	0.04	$	0.02	50	%
Diluted EPS	$	0.06	$	0.04	$	0.02	50	%

Water delivered (thousands of gallons)		77,254		103,893		(26,639)	(26)	%
Water and wastewater taps sold		9		36		(27)	(75)	%

Total revenue decreased in the first quarter of fiscal 2022 as compared to 2021, primarily due to declines in water and wastewater tap sales and water used for oil and gas operations. Tap sales declined as the initial development phase at Sky Ranch is nearing completion and no taps have been sold in the second development phase as of November 30, 2021. Oil and gas operations declined due mainly to the first quarter of fiscal 2021 being positively impacted by a prepaid water purchase contract expiring unused resulting in recognition of revenue during that period that did not recur in fiscal 2022. The declines were offset partially by increased municipal water usage revenue due to the continued development of Sky Ranch and increased lot sales recorded as construction progresses on the second development phase.

2421

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~~Results of Operations~~

~~Executive Summary~~

~~The results of our operations for the three and nine months ended May 31, 2021 and 2020 are as follows:~~

~~Consolidated Results of Operations~~

Three Months Ended

$ Change

May 31,

May 31,

Increase/


2021

2020

(Decrease)

% Change

(In thousands, except for water and lot deliveries and taps sold)

Water and wastewater resource development revenue

$
2,198

$
1,154

$
1,044

90
%
Land development revenue

468

696

(228)

(33)
%
Total revenue

2,666

1,850

816

44
%

Water and wastewater development cost of revenue

(841)

(550)

291

53
%
Land development cost of revenue

(99)

(556)

(457)

(82)
%
Total cost of revenue

(940)

(1,106)

(166)

(15)
%

General and administrative expense

(1,398)

(887)

511

58
%
Other income, net

454

179

275

154
%
Income taxes

(158)

(9)

149

1,656
%
Net income

$
624

$
27

$
597

2,211
%

Basic EPS

$
0.03

$
—

$
0.03

—
%
Diluted EPS

$
0.03

$
—

$
0.03

—
%

Water delivered (thousands of gallons)

16,541

12,205

4,336

36
%
Water and wastewater taps sold

59

36

23

64
%

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Nine Months Ended

$ Change

May 31,

May 31,

Increase/


2021

2020

(Decrease)

% Change

(In thousands, except for water and lot deliveries and taps sold)

Water and wastewater resource revenue

$
7,386

$
4,326

$
3,060

71
%
Land development revenue

4,887

11,503

(6,616)

(58)
%
Total revenue

12,273

15,829

(3,556)

(22)
%

Water and wastewater resource cost of revenue

(2,862)

(1,704)

1,158

68
%
Land development cost of revenue

(2,087)

(10,436)

(8,349)

(80)
%
Total cost of revenue

(4,949)

(12,140)

(7,191)

(59)
%

General and administrative expense

(3,986)

(2,905)

1,081

37
%
Other income, net

20,844

7,255

13,589

187
%
Income taxes

(5,906)

(1,975)

3,931

199
%
Net income

$
18,276

$
6,064

$
12,212

201
%

Basic EPS

$
0.77

$
0.25

$
0.52

208
%
Diluted EPS

$
0.76

$
0.25

$
0.51

204
%

Water delivered (thousands of gallons)

126,253

32,394

93,859

290
%
Water and wastewater taps sold

146

139

7

5
%
Lots delivered

22

136

(114)

(84)
%

~~Three months ended May 31, 2021 vs. Three months ended May 31, 2020~~

~~Revenue –~~ Total revenue increased in 2021 as compared to 2020, primarily due to increased water and wastewater tap sales, increased municipal water usage, and a special facility construction project for WISE. These increases were partially offset by decreased land development sales due to phase one being nearly complete almost two years ahead of schedule and phase two not yet recognizing revenue until platted lots are delivered, which is expected in the fourth fiscal quarter of 2021.

~~Cost of revenue –~~ Costs of revenue decreased in ~~2021~~the first quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to decreases in land development costs due to phase one being nearly complete. ~~Phase two costs~~Additionally, we are ~~currently~~now recording the reimbursable public improvements as a receivable from the Sky Ranch CAB resulting in lower cost of sales being ~~capitalized as inventories until revenue recognition begins. These decreases were partially offset by increased water and wastewater service costs primarily due to additional WISE water purchases.~~recorded for land development activities at Sky Ranch.

~~General and administrative expense –~~ General and administrative expense increased in ~~2021~~the first quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to increased head count ~~of five full time employees~~and increases in ~~2020 and increased~~certain legal and professional fees due to the second development phase at Sky Ranch.

~~Other~~Net other income ~~net –~~ ~~Other income, net~~ increased in ~~2021~~the first quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to interest income recognized on the outstanding note receivable related to reimbursable ~~costs.~~public improvements.

~~Income tax expense –~~ Income tax expense increased in ~~2021~~the first quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to higher pre-tax net income during the quarter.

Water deliveries declined for the first quarter of fiscal 2022 as compared to 2021 primarily due to a decline in water sold to oil and gas operators.

Water and wastewater tap sales declined in the first quarter of fiscal 2022 as compared to 2021 due to timing of closings at Sky Ranch. Tap sales are driven by builders obtaining building permits in anticipation of home closings. No permits have been issued for the second development phase as of November 30, 2021, and two of the three builders are sold out in the first phase.

Water and Wastewater Resource Development Results of Operations



	Three Months Ended
	November 30,		November 30,
(In thousands, except for water deliveries)	2021		2020		$ Change		% Change
Metered water usage from:
Municipal water usage	$	321	$	167	$	154	92	%
Oil and gas operations usage		386		1,199		(813)	(68)	%
Wastewater treatment fees		55		42		13	31	%
Water and wastewater tap fees		261		1,083		(822)	(76)	%
Other revenue		49		21		28	133	%
Total segment revenue		1,072		2,512		(1,440)	(57)	%

Water service costs		(289)		(545)		(256)	(47)	%
Wastewater service costs		(129)		(92)		37	40	%
Depreciation		(354)		(365)		(11)	(3)	%
Other		(77)		(24)		53	221	%
Total expenses		(849)		(1,026)		(177)	(17)	%

Segment operating income	$	223	$	1,486	$	(1,263)	(85)	%

Water deliveries (thousands of gallons)
On Site		19,984		2,642		17,342	656	%
Export - Commercial		6,106		2,353		3,753	159	%
Sky Ranch		17,372		12,298		5,074	41	%
Wild Pointe		6,942		6,496		446	7	%
O&G operations		26,850		80,104		(53,254)	(66)	%
Total water deliveries		77,254		103,893		(26,639)	(26)	%

Municipal water usage increased in the first quarter of fiscal 2022 as compared to 2021 primarily due to new Sky Ranch customers in our water and wastewater resource development segment as well as increased water usage due to landscaping and irrigation usage.

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Wastewater treatment fees increased in the first quarter of fiscal 2022 as compared to 2021 primarily due to new Sky Ranch customers in our water and wastewater resource development segment.

Water and wastewater tap sales declined in the first quarter of fiscal 2022 as compared to 2021 due to timing of closings at Sky Ranch. Tap sales are driven by building permit applications and are not contractually established with the builders, and no permits have been issued for the second development phase as of November 30, 2021, and two of the three builders are sold out in the first phase. During the three months ended November 30, 2021, the average price of a Sky Ranch water and wastewater tap was $34,000 per tap, compared to $31,000 per tap for the three months ended November 30, 2020.

Water service costs decreased during the first quarter of fiscal 2022 as compared to 2021 primarily due to the ~~recognition~~reduced purchase of ~~reimbursable~~WISE water for oil and gas operations.

Wastewater service costs ~~due from~~increased during the ~~Sky Ranch CAB.~~

~~Water delivered –~~ ~~Water deliveries increased in 2021~~first quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to the new Sky Ranch water reclamation facility being online for the entire quarter and requiring more staff to run.

Other costs of revenue increased during the first quarter of fiscal 2022 as compared to 2021 primarily due to costs to construct a special facility for WISE.

Water deliveries decreased during the first quarter of fiscal 2022 as compared to 2021 primarily due to the reduced water used in oil and gas operations offset by increased Export water usage, related to increased irrigation water usage, new Sky Ranch and Wild Pointe customers and increased landscaping and irrigation water usage in these neighborhoods.

~~Water and wastewater tap~~Land Development Results of Operations

Three Months Ended

November 30,

November 30,

(In thousands, except for lots delivered)

2021

2020

$ Change

% Change

Lot sales

$
2,945

$
2,356

$
589

25
%
Project management revenue

248

—

248

—

Total revenue

3,193

2,356

837

36
%

Land development construction

(528)

(1,669)

(1,141)

(68)
%
Sky Ranch property tax

(3)

(50)

(47)

(94)
%
Total costs of revenue

(531)

(1,719)

(1,188)

(69)
%

Segment operating income

$
2,662

$
637

$
2,025

318
%

Lots delivered

—

—

—

—
%

Lot sales – ~~Water and wastewater tap sales~~revenue increased in ~~2021~~first quarter of fiscal 2022 as compared to ~~2020~~2021 due to the progress made on the second development phase at Sky Ranch. Additionally, the price per lot for delivered lots in the second development phase increased on average 40% over the first development, but the entire second phase per lot revenue will remain consistent. Revenue for three of the four builder contracts in the second development phase are recognized over time with progress measured under the percent of completion method. Therefore, revenue will fluctuate due to timing of ~~closings at Sky Ranch. Tap sales are driven by home closings and are not contractually established with~~construction activities throughout the ~~builders.~~

~~Table of Contents~~

~~Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020~~second phase.

~~Revenue –~~ Revenue decreased in 2021 as compared to 2020, primarily due to decreased land development sales due to phase one being nearly complete and phase two not yet recognizing revenue until platted lots are delivered, which is expected in the fourth fiscal quarter. This decrease is partially offset by increased metered water usage from oil and gas operations, recognition of project management revenue from the first phase at Sky Ranch, recognition of a forfeited water reserve agreement, and a special facility construction project for WISE.

~~Cost of revenue –~~ Costs of revenue decreased in 2021 as compared to 2020, primarily due to a decrease in land development costs due to phase one being nearly complete and phase two costs are currently being capitalized until revenue recognition begins. The decreases were partially offset by costs attributable to the special facility construction project for WISE and increased water usage related to oil and gas operations.

~~General and administrative expense –~~ ~~General and administrative expense increased in 2021 as compared to 2020, primarily due to increased head count in 2021 as operations and development continue to expand.~~

~~Other income, net –~~ ~~Other income, net increased in 2021 as compared to 2020, primarily due to the recognition of outstanding reimbursable costs.~~

~~Income tax expense –~~ ~~Income tax expense increased in 2021 as compared to 2020, primarily due to the recognition of reimbursable costs due from the Sky Ranch CAB.~~

~~Water delivered –~~ ~~Water deliveries increased in 2021 as compared to 2020, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage.~~

~~Water and wastewater tap sales –~~ Water and wastewater tap sales increased in 2021 as compared to 2020 due to the timing of closings at Sky Ranch. Tap sales are driven by building permits and are not contractually established with the builders.

~~Lots delivered –~~ ~~Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of~~In the first quarter of fiscal ~~2021. We have broken ground on the second phase and expect lot deliveries to begin this fall.~~

~~Table of Contents~~

~~Water and Wastewater Resource Development Results of Operations~~

Three Months Ended

$ Change

May 31,

May 31,

Increase/


2021

2020

(Decrease)

% Change

(In thousands, except for water deliveries)

Metered water usage from:

Municipal water usage

$
188

$
98

$
90

92
%
Oil and gas operations usage

22

15

7

47
%
Wastewater treatment fees

51

22

29

132
%
Water and wastewater tap fees

1,856

1,005

851

85
%
Other revenue

81

14

67

479
%
Total segment revenue

2,198

1,154

1,044

90
%

Water service costs

(316)

(95)

221

233
%
Wastewater service costs

(102)

(62)

40

65
%
Depreciation

(358)

(386)

(28)

(7)
%
Other

(65)

(7)

58

829
%
Total expenses

(841)

(550)

291

53
%

Segment operating income

$
1,357

$
604

$
753

125
%

Water deliveries (thousands of gallons)

On Site

475

1,702

(1,227)

(72)
%
Export - Commercial

4,827

583

4,244

728
%
Sky Ranch

7,389

5,549

1,840

33
%
Wild Pointe

3,850

4,371

(521)

(12)
%
O&G operations

—

—

—

—
%
Total water deliveries

16,541

12,205

4,336

36
%

~~Table of Contents~~

Nine Months Ended

$ Change

May 31,

May 31,

Increase/


2021

2020

(Decrease)

% Change

(In thousands, except for water deliveries)

Metered water usage from:

Municipal water usage

$
429

$
238

$
191

80
%
Oil and gas operations usage

1,804

72

1,732

2,406
%
Wastewater treatment fees

144

62

82

132
%
Water and wastewater tap fees

4,522

3,850

672

17
%
Other revenue

487

104

383

368
%
Total segment revenue

7,386

4,326

3,060

71
%

Water service costs

(1,074)

(556)

518

93
%
Wastewater service costs

(258)

(126)

132

105
%
Depreciation

(1,077)

(988)

89

9
%
Other

(453)

(34)

419

1,232
%
Total expenses

(2,862)

(1,704)

1,158

68
%

Segment operating income

$
4,524

$
2,622

$
1,902

73
%

Water deliveries (thousands of gallons)

On Site

3,715

8,416

(4,701)

(56)
%
Export - Commercial

7,276

2,619

4,657

178
%
Sky Ranch

22,044

6,271

15,773

252
%
Wild Pointe

13,052

14,160

(1,108)

(8)
%
O&G operations

80,166

928

79,238

8,539
%
Total water deliveries

126,253

32,394

93,859

290
%

~~Three months ended May 31, 2021 vs. Three months ended May 31, 2020~~

~~Municipal water usage –~~ Municipal water usage increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment as well as increased water usage due to landscaping and irrigation usage.

~~Wastewater treatment fees –~~ ~~Wastewater treatment fees increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment.~~

~~Water and wastewater tap fees –~~Water and wastewater tap fees increased in 2021 as compared to 2020, primarily due to increased taps sold and increased prices, on average, of water and wastewater taps. During the three months ended May 31, 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the three months ended May 31, 2020. During the third quarter of fiscal 2021 we ~~sold 59 water and wastewater taps. During the third quarter of fiscal 2020, we sold 36 water and wastewater taps.~~

~~Other revenue –~~ Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, which is recognizing revenue on a percent of completion basis and increased consulting revenues.

~~Water service costs –~~ ~~Wastewater service costs increased in 2021 as compared to 2020, primarily due to the purchase of additional WISE water.~~

~~Wastewater service costs –~~ ~~Wastewater service costs increased in 2021 as compared to 2020, primarily due to the new Sky Ranch water reclamation facility being online for the entire quarter and requiring more staff to run.~~

~~Table of Contents~~

~~Other costs of revenue –~~ ~~Other costs of revenue increased in 2021 as compared to 2020, primarily due to costs to construct a special facility for WISE.~~

~~Water delivered –~~ Water deliveries increased in 2021 as compared to 2020, primarily due to increased Export water usage, related to increased irrigation water usage, new Sky Ranch and Wild Pointe customers and increased landscaping and irrigation water usage in these neighborhoods.

~~Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020~~

~~Oil and gas operations –~~ Oil and gas operations increased in 2021 as compared to 2020, primarily due to increased oil and gas prices and new fracking permits obtained by our oil and gas customers and recognition of a forfeited water reserve agreement totaling $0.4 million.

~~Water and wastewater tap fees –~~Water and wastewater tap fees increased in 2021 as compared to 2020, primarily due to an increase in the number of taps sold and increased price, on average, of water and wastewater taps. During the nine months ended May 31, 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the nine months ended May 31, 2020. During the nine months ended May 31, 2021, we sold 146 water and wastewater taps. During the same nine months ended May 31, 2020, we sold 139 water and wastewater taps.

~~Other revenue –~~ ~~Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, for which $0.4 million of revenue was recognized. The~~did not recognize project ~~is recognizing revenue on a percent of completion basis.~~

~~Water service costs –~~ ~~Wastewater service costs increased in 2021 as compared to 2020, primarily due to increased water usage associated with our oil and gas customers and additional purchases of WISE water.~~

~~Wastewater service costs –~~ Wastewater service costs increased in 2021 as compared to 2020, primarily due to the new Sky Ranch water reclamation facility being online for the entire fiscal year to date and requiring more staff to run.

~~Other costs of revenue –~~ ~~Other costs of revenue increased in 2021 as compared to 2020, primarily due to costs to construct a special facility for WISE.~~

~~Table of Contents~~

~~Land Development Results of Operations~~

Three Months Ended

$ Change

May 31,

May 31,

Increase/


2021

2020

(Decrease)

% Change

(In thousands, except for lots delivered)

Lot sales

$
445

$
696

$
(251)

(36)
%
Project management revenue

23

—

23

—

Total revenue

468

696

(228)

(33)
%

Land development construction

(97)

(506)

(409)

(81)
%
Sky Ranch property tax

(2)

(50)

(48)

(96)
%
Total costs of revenue

(99)

(556)

(457)

(82)
%

Segment operating income

$
369

$
140

$
229

164
%

Lots delivered

—

—

—

—
%

Nine Months Ended

$ Change

May 31,

May 31,

Increase/


2021

2020

(Decrease)

% Change

(In thousands, except for lots delivered)

Lot sales

$
3,316

$
11,503

$
(8,187)

(71)
%
Project management revenue

1,571

—

1,571

—

Total revenue

4,887

11,503

(6,616)

(58)
%

Land development construction

(2,074)

(10,190)

(8,116)

(80)
%
Sky Ranch property tax

(13)

(246)

(233)

(95)
%
Total costs of revenue

(2,087)

(10,436)

(8,349)

(80)
%

Segment operating income

$
2,800

$
1,067

$
1,733

162
%

Lots delivered

22

136

(114)

(84)
%

~~Three months ended May 31, 2021 vs. Three months ended May 31, 2020~~

~~Lot sales –~~ Lot sales decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates due to the timing of revenue recognition as lots are delivered over time. Revenues recognized in the third quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase. The second development phase will not begin recognizing revenue until platted lots are delivered to the home builders, which is expected to begin in the fourth fiscal quarter of 2021.

~~Project~~ management revenues – ~~Project management revenues increased in 2021 as compared to 2020~~ due to the determination that reimbursable costs due from the Sky Ranch CAB ~~are~~were not deemed ~~collectable based on Sky Ranch having a sufficient tax base.~~probable of collection. In the second quarter of fiscal 2021, we determined collection of project management fees was probable and after that point began recognizing project management fees as revenue.

~~Land development construction costs –~~ Land development construction costs decreased in ~~2021~~the first quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to phase one being nearly ~~complete. Phase two costs are currently~~complete, and reimbursable public improvements being ~~capitalized~~reflected as ~~inventories until revenue recognition begins.~~

a receivable from the Sky Ranch ~~property taxes –~~CAB instead of as a cost of land development.

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Sky Ranch property taxes decreased in ~~2021~~the first quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to the improved lots being sold to the homebuilders. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use. All ~~506~~505 of the initial lots have been sold to home builders.

~~Table~~Single-Family Rental Results of ~~Contents~~Operations

~~Nine months ended May 31,~~In fiscal 2021 ~~vs. Nine months ended May 31, 2020~~

~~Lot~~we began construction on three homes that were completed and put into service on November 1, 2021. All three homes were rented effective November 1, 2021, under one year lease agreements. The revenues presented in the consolidated financial statements are for the first month of rent on all three homes, which will be recorded monthly throughout the terms of the leases. The costs reflected as cost of sales – ~~Lot sales decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. We will not begin recognizing revenue on phase two until platted lots are delivered~~for the rental units include a pro-rata share of the annual property taxes and insurance related specifically to the home builders, which is expected to begin in the fourth fiscal quarter of 2021. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates duerental units as well as immaterial fees related to the ~~timing of revenue recognition as lots are delivered over time. Revenues recognized in the third quarter~~operations and ~~remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase.~~

~~Project management revenues –~~ ~~Project management revenues increased in 2021 as compared to 2020 due to the determination that reimbursable costs due~~maintenance assessments from the Sky Ranch CAB which are ~~deemed collectable based on Sky Ranch having a sufficient tax base.~~

~~Land development construction costs –~~ Land development construction costs decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. Phase two costs are currently being capitalized until revenue recognition begins.

~~Sky Ranch property taxes –~~Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily due to the improved lots being sold to the homebuilders. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use.

~~Lots delivered –~~ ~~Lot deliveries decreased in 2021 as compared to 2020 due~~assessed to all ~~lots~~homes in ~~the first phase of~~ Sky ~~Ranch having been delivered as of~~Ranch. In the first quarter of fiscal ~~2021. We have broken ground on~~2022, we contracted for the ~~second phase~~construction of the fourth rental home, which we anticipate being completed and ~~expect lot deliveries to begin this fall.~~ready for rental near the end of our fiscal 2022.

Liquidity, Capital Resources and Financial Position

As of ~~May 31,~~November 30, 2021, our working capital, defined as current assets less current liabilities, was ~~$16.5~~$22.4 million, which included ~~$19.8~~$12.9 million in cash and cash ~~equivalents, of which, $0.3 million is restricted.~~equivalents. We believe that as of ~~May 31,~~November 30, 2021 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next twelve months. Our expected obligations ~~of $22.6 million~~ for the next twelve months are described below.

Sky Ranch Development

The first development phase at Sky Ranch is ~~nearing completion,~~substantially complete, with approximately ~~$0.5~~$0.2 million remaining to be spent. We ~~broke ground on~~began construction of the second development phase in February 2021. We estimate total costs to complete the 850 lots in the second phase of Sky Ranch to be ~~$65~~$65.0 million. Of this, we anticipate spending ~~approximately $21~~$20.5 million in the next twelve months, and we anticipate receiving ~~approximately $22.5~~$17.9 million in milestone and completed lot payments from the home builders over the same period. We also believe we will receive payments from the Sky Ranch CAB against the note receivable in the next twelve months either from unencumbered funds at the Sky Ranch CAB due to recurring tax payments received by the Sky Ranch CAB or from one or more bond issuances. There are no assurances the Sky Ranch CAB will be able to issue bonds during this period; however, based on discussions with the Sky Ranch CAB board, we believe the Sky Ranch CAB will complete one or more bond offerings for at least $16.0 million in the next twelve months. We believe future revenues from water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.

ECCV Capacity Operating System

The Rangeview District may purchase water produced from East Cherry Creek Valley Water and Sanitation District’s ~~(“ECCV”) Land Board system. ECCV’s~~(ECCV) Land Board system, ~~is comprised of eight wells and more than 10 miles of buried water pipeline located on~~which we would pay for pursuant to our funding agreements with the Lowry Range. In May 2012, we entered into an agreement to operate and maintain the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing of oil and gas wells.Rangeview District. Our costs associated with the use of the ECCV system ~~are~~were a flat fee of eight thousand dollars per month from January 1, 2013 through December 31, ~~2020, and~~2021. From January 1, 2021 through April 2032, the fee decreased to three thousand dollars per ~~month effective January 1, 2021 through April 2032.~~month. Additionally, we pay a fee per 1,000 gallons of water produced from the ~~ECCV’s~~ECCV system, which is included in the water usage fees charged to customers. The ECCV system is anticipated to continue to cost us approximately ten thousand dollars per month to maintain going forward.

South Metropolitan Water Supply Authority ~~(“SMWSA”)~~(SMWSA) and the Water Infrastructure Supply Efficiency Partnership ~~(“WISE”)~~(WISE)

We have entered into a financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE. We anticipate ~~that we will be~~ investing ~~$1.1~~$1.7 million in ~~2021~~2022 and ~~$7.5~~$5.8 million in total for the fiscal years ~~2022~~2023 through 2025 to fund the

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Rangeview District’s obligation to purchase water and infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding the Rangeview District’s obligations in WISE, we ~~will~~ have the sole right to use and reuse the Rangeview District’s 9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue from such service. Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and 900 acre feet per year of water.

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Summary Cash Flows Table


	Nine Months Ended								Three Months Ended
	May 31, 2021		May 31, 2020		$ Change		% Change

	(In thousands)
(In thousands)									November 30, 2021		November 30, 2020		$ Change		% Change
Cash (used) provided by:
Operating activities	$	193	$	15,204	$	(15,011)	(99)	%	$	(5,954)	$	6	$	5,948	99,141	%
Investing activities	$	(2,253)	$	(2,643)	$	(390)	(15)	%	$	(2,248)	$	(499)	$	1,749	350	%
Financing activities	$	59	$	36	$	23	64	%	$	1,000	$	(1)	$	999	99,900	%

~~Changes in Operating Activities –~~ Operating activities ~~include revenues produced~~during the first quarter of fiscal 2022 used a net $5.9 million of cash, which is due to positive net income for the quarter being offset by ~~our segments less costs incurred~~income tax payments, use of cash to fund public improvements at Sky Ranch, and timing of when we remitted payables to vendors.

Investing activities during the first quarter of fiscal 2022 used $2.2 million in cash. The majority of this was related to the land development activities in the ~~delivery~~second phase of ~~those services and G&A expenses.~~Sky Ranch.

~~Cash provided by operations decreased~~Financing activities during the first quarter of fiscal 2022 produced $1.0 million of cash, mainly from us receiving $1.0 million in proceeds from a loan to fund construction of the nine months ended May 31, 2021 compared to 2020, primarily due to the bond payment of $10.5 million we received as partial reimbursement of public improvement expenditures from the Sky Ranch CAB in fiscal 2020 and decreased lot sales in the nine months ended May 31, 2021 as compared to May 31, 2020.new single-family rental units.

~~Changes in Investing Activities~~ – During the nine months ended May 31, 2021, investing activities decreased due to decreased investments in water, water systems, and land as compared to the nine months ended May 31, 2020, partially offset by net sales of short-term investments in fiscal 2020.

~~Changes in Financing Activities~~ – ~~Cash provided by financing activities increased in 2021 from 2020, due to increased stock option exercises.~~

Off-Balance Sheet Arrangements

Our only off-balance sheet ~~arrangements consist entirely~~arrangement consists of the contingent portion of the CAA as described in Note 7 – ~~Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply~~to the accompanying condensed consolidated financial statements. The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of Export Water, the amounts and timing of which are not reasonably determinable.2021 Annual Report.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies and estimates are described in “Critical Accounting Policies and Estimates” within Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” ~~included in our Annual Report on Form 10-K for the year ended August 31, 2020~~ and Note 2 of the Notes to Consolidated Financial Statements in “Financial Statements and Supplementary Data” included ~~as Item 8~~ in our 2021 Annual ~~Report on Form 10-K for the year ended August 31, 2020.~~Report. With the exception of updates to significant accounting policies discussed in Note 1 of this Quarterly Report on Form 10-Q, the accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three ~~and nine~~ months ended ~~May 31,~~November 30, 2021 are the same as those described in our 2021 Annual ~~Report on Form 10-K for the year ended August 31, 2020.~~Report. There have been no changes to our critical accounting policies during the quarter ended ~~May 31,~~November 30, 2021. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our 2021 Annual ~~Report on Form 10-K for the year ended August 31, 2020.~~

~~Table of Contents~~

~~Recently Adopted and Issued Accounting Pronouncements~~

~~See Note 1 –~~ ~~Presentation of Interim Information~~ ~~to the accompanying condensed consolidated financial statements for recently adopted and issued accounting pronouncements.~~

~~Disclosure Regarding Forward-Looking Statements~~

Statements that are not historical facts contained in or incorporated by reference into this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Forward-Looking Statements” and “Risk Factors” in Part II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.Report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

The President and the Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures during our fiscal 2021, as well as of ~~May 31,~~November 30, 2021, pursuant to Rule 13a-15(b) under the Exchange Act. Based on ~~that~~the fiscal 2021 evaluation, the President

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and the Chief Financial Officer each concluded that, during ~~the period covered by this report,~~fiscal 2021 and as of November 30, 2021, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were not effective due to a material weakness in internal controls over financial reporting resulting from ineffective controls related to ~~the management~~management’s preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record transactions related to the public improvement reimbursable amounts and related interest income.

To address this material weakness, management ~~has~~ devoted, and plans to continue to devote, significant effort and resources to the remediation and improvement of its internal control over financial reporting by implementing additional steps in the review process of various complex schedules that support accounting entries on a monthly and quarterly basis or moving these manual tracking and reconciliation processes to a more automated process through the purchase of a software system. Management will continue to assess the new controls and procedures throughout fiscal 2022 before it is able to conclude the material weakness over internal controls is fully remediated.

~~Table of Contents~~

Changes in Internal Control Over Financial Reporting

No significant changes were made to our internal control over financial reporting during our most recently completed fiscal ~~quarter. However, subsequent to~~quarter outside of those activities described under the ~~quarter ended May 31, 2021, based on the discovery~~Evaluation of ~~the control weakness noted above, we added additional review procedures~~Disclosure Controls and ~~additional check balances to all complicated and infrequently updated schedules to ensure all calculations and formulas are prepared and reviewed appropriately.~~Procedures. The Company is continuing to assess additional modifications to its internal controls required to remediate the material weakness noted above and ensure other spreadsheet controls are properly ~~utilized.~~designed and operating effectively.

3526

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PART II – OTHER INFORMATION

Item 1A. Risk Factors

As of the date of this filing, the Company and its operations continue to be subject to the risk factors previously disclosed in "Part I. Item 1A. Risk Factors" of our 2021 Annual Report.

Item 6. Exhibits


Exhibit Number		Description

~~3.1~~		~~Articles of Incorporation of the Company. Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on December 14, 2007~~.

~~3.2~~		~~Bylaws of the Company. Incorporated by reference to Appendix C to the Proxy Statement on Schedule 14A filed on December 14, 2007.~~

31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1		Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

32.2		Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

101.INS		Inline XBRL Instance Document. *

101.SCH		Inline XBRL Taxonomy Extension Schema Document. *

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document. *

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document. *

104		Cover page formatted as inline XBRL and contained in Exhibit 101

*	Filed herewith.

**	Furnished herewith.

3627

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

PURE CYCLE CORPORATION


/s/ Kevin B. McNeill
Kevin B. McNeill
Vice President and Chief Financial Officer

~~July 9, 2021~~January 10, 2022

3728


	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	$	0	23,888	$	80	$	173,254	$	0	$	(72,766)	$	100,568
Prior period adjustment	—		—	—		—		—		—		(545)		(545)
Stock option exercises	0		0	22		0		48		0		0		48
Stock granted for services	0		0	0		0		0		0		0		0
Share-based compensation	0		0	0		0		91		0		0		91
Net income	0		0	0		0		0		0		624		624
May 31, 2021 balance:	433	$	0	23,910	$	80	$	173,393	$	0	$	(72,687)	$	100,786


	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	$	0	23,856	$	80	$	172,927	$	0	$	(90,963)	$	82,044
Stock option exercises	0		0	42		0		62		0		0		62
Stock granted for services	0		0	12		0		136		0		0		136
Share-based compensation	0		0	0		0		268		0		0		268
Net income	0		0	0		0		0		0		18,276		18,276
May 31, 2021 balance:	433	$	0	23,910	$	80	$	173,393	$	0	$	(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	$	0	23,827	$	79	$	172,361	$	4	$	(97,713)	$	74,731
Stock option exercises	0		0	15		0		39		0		0		39
Stock granted for services	0		0	12		0		149		0		0		149
Share-based compensation	0		0	0		0		286		0		0		286
Net income	0		0	0		0		0		0		6,064		6,064
Unrealized holding loss on investments	0		0	0		0		0		(4)		0		(4)
May 31, 2020 balance:	433	$	0	23,854	$	79	$	172,835	$	0	$	(91,649)	$	81,265


	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)	$	19,604

Income tax expense	$	(5,927)	$	178	$	(5,749)

Net Income	$	18,197	$	(545)	$	17,652

Earnings per common share - Diluted	$	0.76	$	(0.02)	$	0.74

Weighted average common shares outstanding - Diluted		24,064		24,064		24,064


	As of February 28, 2021

	Balance
	As Reported		Adjustments		As Adjusted

	(In thousands)
Balance Sheet
Assets
Public improvement reimbursables - Phase 1	$	21,466	$	(723)	$	20,743
Liabilities
Income taxes payable	$	4,267	$	(178)	$	4,089
Equity
Accumulated deficit	$	(72,766)	$	(545)	$	(73,311)


	As of May 31, 2021
					Amounts payable to Pure
			Payments repaid by		Cycle by the Sky Ranch
	Costs incurred to date		Sky Ranch CAB		CAB

	(In thousands)
Phase 1
Public improvements	$	27,205	$	10,505	$	16,700
Accrued interest		2,626		400		2,226
Project management services		1,556		0		1,556
Construction support activities		834		0		834
Phase 1 reimbursable costs	$	32,221	$	10,905	$	21,316

Phase 2
Public improvements	$	444	$	0	$	444
Phase 2 reimbursable costs	$	444	$	0	$	444


	May 31, 2021
	(In thousands)
Balance, August 31, 2020	$	3,601
Deferral of revenue		2,293
Recognition of unearned revenue		(5,069)
Balance, May 31, 2021	$	825


	As of May 31, 2021			As of August 31, 2020

	(In thousands)
Operating leases - right of use assets	$	141		$	196

Accrued liabilities	$	82		$	74
Lease obligations - operating leases, net of current portion		58			120
Total lease liability	$	140		$	194

Weighted average remaining lease term (in years)		1.7			2.4
Weighted average discount rate		6	%		6	%