UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~May 31, 2021~~February 28, 2022

☐	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~~ ☒No ☐

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


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

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

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

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


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

the latest practicable date: 23,958,522 shares of 1/3 of $.01 par value common stock as of April 7, 2022.

Table of Contents

PURE CYCLE CORPORATION

INDEX TO ~~MAY 31, 2021~~FEBRUARY 28, 2022 FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION		14

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

	~~Condensed~~ Consolidated Balance Sheets: ~~May 31, 2021~~February 28, 2022 (unaudited) and August 31, ~~2020~~2021	14

	~~Condensed~~ Consolidated Statements of Operations ~~and Comprehensive Income~~ (unaudited): For the three and ~~nine~~six months ended ~~May 31,~~February 28, 2022 and 2021 ~~and 2020~~	2

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

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

	Consolidated Statements of Shareholders’ Equity (unaudited): For the three and six months ended February 28, 2022 and 2021	6

	Consolidated Statements of Cash Flows (unaudited): For the six months ended February 28, 2022 and 2021	8
	Notes to Condensed Consolidated Financial Statements	6 9

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2220

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	3431

	Item 4. Controls and Procedures	3432

PART II. OTHER INFORMATION		3633

	Item 6. Exhibits	3633

SIGNATURES		3734

Table of Contents

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 and sale 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;

●

estimated tap fees to be generated from the development of the various phases of Sky Ranch;

●

anticipated expansion and rental dates for our single-family rental units;

●

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

●

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 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;

●

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

Table of Contents

●

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;

●

the recoverability of water and wastewater service costs from rates;

●

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;

●

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, and the related impacts to the general economy;

●

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

●

our ability to successfully expand our single-family home rental business 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;

●

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;

●

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;

Table of Contents

●

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 shares)	February 28, 2022		August 31, 2021
ASSETS:	(unaudited)
Current assets:
Cash and cash equivalents	$	5,215	$	20,117
Trade accounts receivable, net		2,038		1,532
Prepaid expenses and other assets		975		458
Land under development		1,080		608
Notes receivable - reimbursable public improvements - related party		16,000		16,000
Total current assets		25,308		38,715
Restricted cash		2,328		2,327
Investments in water and water systems, net		53,250		53,786
Construction in progress		2,731		3,304
Single-family rental units		997		—
Land and mineral rights:
Held for development		7,872		5,924
Held for investment purposes		451		451
Other assets		2,494		2,591
Notes receivable – related parties, including accrued interest:
Reimbursable public improvements		16,963		8,794
Other		884		1,163
Operating leases - right of use assets, less current portion		83		122
Total assets	$	113,361	$	117,177

LIABILITIES:
Current liabilities:
Accounts payable	$	873	$	1,787
Accrued liabilities		1,005		1,224
Accrued liabilities – related parties		668		2,881
Income taxes payable		87		4,163
Deferred lot sale revenues		1,203		1,995
Deferred water sales revenues		439		410
Debt, current portion		12		—
Total current liabilities		4,287		12,460
Participating interests in export water supply		324		325
Debt, less current portion		988		—
Deferred tax liability, net		1,410		1,615
Lease obligations - operating leases, less current portion		—		37
Total liabilities		7,009		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, 40.0 million authorized; 23,958,522 and 23,916,633 outstanding, respectively		80		80
Additional paid-in capital		173,918		173,513
Accumulated deficit		(67,646)		(70,853)
Total shareholders’ equity		106,352		102,740
Total liabilities and shareholders’ equity	$	113,361	$	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

May 31,

May 31,

May 31,

May 31,


2021

2020

2021

2020

(In thousands, except per share amounts)
Revenues:








Metered water usage from:

Municipal customers

$
188

$
98

$
429

$
238
Oil and gas operations

22

15

1,804

72
Wastewater treatment fees

51

22

144

62
Water and wastewater tap fees

1,856

1,005

4,522

3,850
Lot sales

445

696

3,316

11,503
Project management fees - recognized

23

0

1,571

0
Special facility projects and other

81

14

487

104
Total revenues

2,666

1,850

12,273

15,829

Expenses:

Water service operations

(316)

(95)

(1,074)

(556)
Wastewater service operations

(102)

(62)

(258)

(126)
Land development construction costs

(99)

(556)

(2,087)

(10,436)
Depletion and depreciation

(358)

(386)

(1,077)

(988)
Other

(65)

(7)

(453)

(34)
Total cost of revenues

(940)

(1,106)

(4,949)

(12,140)
Gross profit

1,726

744

7,324

3,689

General and administrative expenses

(1,325)

(801)

(3,753)

(2,639)
Depreciation

(73)

(86)

(233)

(266)
Operating income (loss)

328

(143)

3,338

784

Other income:

Recognition of public improvement reimbursables including interest income - related party

284

—

19,888

—
Oil and gas royalty income, net

97

74

248

613
Oil and gas lease income, net

48

62

148

185
Interest income from investments

15

24

45

162
Other

10

19

30

19
Reimbursement of construction costs - related party

0

0

485

6,276
Income from operations before income taxes

782

36

24,182

8,039
Income tax expense

(158)

(9)

(5,906)

(1,975)
Net income

$
624

$
27

$
18,276

$
6,064
Unrealized holding losses

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
Weighted average common shares outstanding:

Basic

23,907

23,853

23,885

23,842
Diluted

24,184

24,053

24,104

24,071


	Three Months Ended				Six Months Ended
(In thousands, except share information)	February 28, 2022		February 28, 2021		February 28, 2022		February 28, 2021
Revenues:
Metered water usage from:
Municipal customers	$	83	$	74	$	404	$	241
Commercial customers		1,527		583		1,913		1,782
Wastewater treatment fees		64		51		119		93
Water and wastewater tap fees		913		1,583		1,174		2,666
Lot sales		1,629		515		4,574		2,871
Project management fees		200		1,548		448		1,548
Single-family rentals		26		—		34		—
Special facility projects and other		222		385		270		406
Total revenues		4,664		4,739		8,936		9,607

Expenses:
Water service operations		570		213		859		758
Wastewater service operations		99		64		228		156
Land development construction costs		295		269		826		1,988
Project management costs		46		—		46		—
Single-family rental costs		4		—		7		—
Depletion and depreciation		352		354		706		719
Other		141		363		219		387
Total cost of revenues		1,507		1,263		2,891		4,008

General and administrative expenses		1,552		1,342		2,876		2,428
Depreciation		97		76		182		160
Operating income		1,508		2,058		2,987		3,011

Other income:
Interest income - related party		525		1,448		888		1,463
Recognition of public improvement reimbursables - related party		—		18,894		—		18,894
Reimbursement of construction costs - related party		—		485		—		485
Oil and gas royalty income, net		110		76		207		151
Oil and gas lease income, net		48		48		96		100
Other, net		14		10		25		20
Interest expense, net		(11)		—		(18)		—
Income from operations before income taxes		2,194		23,019		4,185		24,124
Income tax expense		501		5,667		978		5,927
Net income	$	1,693	$	17,352	$	3,207	$	18,197

Earnings per common share - basic and diluted
Basic	$	0.07	$	0.73	$	0.13	$	0.76
Diluted	$	0.07	$	0.72	$	0.13	$	0.76
Weighted average common shares outstanding:
Basic		23,944,141		23,881,655		23,931,307		23,874,198
Diluted		24,184,161		24,092,349		24,194,579		24,064,414

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

Table of Contents

PURE CYCLE CORPORATION

~~CONDENSED~~ CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)

Three Months Ended May 31, 2021

Accumulated



Additional

Other

Preferred Stock

Common Stock

Paid-in

Comprehensive

Accumulated


Shares

Amount

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(In thousands)
February 28, 2021 balance:

433

$
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 May 31, 2020

Accumulated



Additional

Other

Preferred Stock

Common Stock

Paid-in

Comprehensive

Accumulated


Shares

Amount

Shares

Amount

Capital

Income (Loss)

Deficit

Total

(In thousands)
February 29, 2020 balance:

433

$
0

23,852

$
79

$
172,749

$
0

$
(91,676)

$
81,152
Stock option exercises

0

0

2

0

4

0

0

4
Stock granted for services

0

0

0

0

0

0

0

0
Share-based compensation

0

0

0

0

82

0

0

82
Net income

0

0

0

0

0

0

27

27
May 31, 2020 balance:

433

$
0

23,854

$
79

$
172,835

$
0

$
(91,649)

$
81,265


	Three Months Ended February 28, 2022
	Preferred Stock			Common Stock			Additional		Accumulated
(in thousands, except shares)	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Total
Balance at November 30, 2021	432,513	$	—	23,923,100	$	80	$	173,625	$	(69,339)	$	104,366
Stock option exercises	—		—	23,422		—		34		—		34
Stock granted for services	—		—	12,000		—		159		—		159
Share-based compensation	—		—	—		—		100		—		100
Net income	—		—	—		—		—		1,693		1,693
Balance at February 28, 2022	432,513	$	—	23,958,522	$	80	$	173,918	$	(67,646)	$	106,352


	Three Months Ended February 28, 2021
	Preferred Stock			Common Stock			Additional		Accumulated
(in thousands, except shares)	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Total
Balance at November 30, 2020	432,513	$	—	23,868,216	$	80	$	173,013	$	(90,118)	$	82,975
Stock option exercises	—		—	8,159		—		14		—		14
Stock granted for services	—		—	12,000		—		136		—		136
Share-based compensation	—		—	—		—		91		—		91
Net income	—		—	—		—		—		17,352		17,352
Balance at February 28, 2021	432,513	$	—	23,888,375	$	80	$	173,254	$	(72,766)	$	100,568

See accompanying Notes to the Consolidated Financial Statements

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


	Six Months Ended February 28, 2022
	Preferred Stock			Common Stock			Additional		Accumulated
(in thousands, except shares)	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Total
Balance at August 31, 2021	432,513	$	—	23,916,633	$	80	$	173,513	$	(70,853)	$	102,740
Stock option exercises	—		—	29,889		—		34		—		34
Stock granted for services	—		—	12,000		—		159		—		159
Share-based compensation	—		—	—		—		212		—		212
Net income	—		—	—		—		—		3,207		3,207
Balance at February 28, 2022	432,513	$	—	23,958,522	$	80	$	173,918	$	(67,646)	$	106,352


	Six Months Ended February 28, 2021
	Preferred Stock			Common Stock			Additional		Accumulated
(in thousands, except shares)	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Total
Balance at August 31, 2020	432,513	$	—	23,856,098	$	80	$	172,927	$	(90,963)	$	82,044
Stock option exercises	—		—	20,277		—		14		—		14
Stock granted for services	—		—	12,000		—		136		—		136
Share-based compensation	—		—	—		—		177		—		177
Net income	—		—	—		—		—		18,197		18,197
Balance at February 28, 2021	432,513	$	—	23,888,375	$	80	$	173,254	$	(72,766)	$	100,568

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

May 31,

May 31,


2021

2020

(In thousands)
Cash flows from operating activities:




Net income

$
18,276

$
6,064
Adjustments to reconcile net income to net cash (used) provided by operating activities:

Depreciation and depletion

1,310

1,254
Share-based compensation expense

404

435
Deferred income taxes

623

710
Interest added to receivable from related parties

(34)

(34)
Proceeds from CAB reimbursement applied to land development inventories

0

4,230
Changes in operating assets and liabilities:

Trade accounts receivable

(810)

454
Prepaid expenses

(13)

(47)
Land development inventories

(131)

2,576
Taxes receivable

—

(40)
Recognition of public improvement reimbursables, including interest

(21,316)

—
Taxes payable net of taxes receivable

5,283

—
Accounts payable and accrued liabilities

(562)

(383)
Deferred revenues

(2,778)

(61)
Other assets and liabilities

(59)

46
Net cash provided by operating activities

193

15,204

Cash flows from investing activities:

Investments in water, water systems and land

(2,152)

(7,302)
Purchase of property and equipment

(101)

(526)
Sale and maturities of short-term investments

0

6,905
Purchase of short-term investments

0

(1,720)
Net cash used by investing activities

(2,253)

(2,643)

Cash flows from financing activities:

Proceeds from exercise of options

62

40
Payments to contingent liability holders

(3)

(4)
Net cash provided by financing activities

59

36
Net change in cash, cash equivalents and restricted cash

(2,001)

12,597
Cash, cash equivalents and restricted cash – beginning of period

21,797

4,478
Cash, cash equivalents and restricted cash – end of period

$
19,796

$
17,075
Cash and cash equivalents

$
19,514

$
17,075
Restricted cash

282

—
Total cash, cash equivalents and restricted cash

$
19,796

$
17,075

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES

Transfer of land development costs to other assets

$
484

$
—
Transfer of land development costs to inventory

$
467

$
—
Changes in Land development inventories included in accounts payable and accrued liabilities

$
613

$
912
Changes in Investments in water, water systems and land included in accounts payable and accrued liabilities

$
298

$
(898)
Income taxes paid

$
0

$
1,305


	Six Months Ended
(In thousands)	February 28, 2022		February 28, 2021
Cash flows from operating activities:
Net income	$	3,207	$	18,197
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and depletion		888		879
Share-based compensation expense		371		313
Deferred water sales revenue		29		(2,346)
Interest added to note receivable - related party, other		(25)		—
Deferred income taxes		(205)		71
Land under development		(472)		108
Trade accounts receivable		(506)		(261)
Prepaid expenses		(596)		72
Deferred lot sale revenues		(792)		—
Accounts payable and accrued liabilities		(3,341)		(1,432)
Taxes payable net of taxes receivable		(4,076)		5,855
Change in note receivable from Sky Ranch CAB		(8,169)		(21)
Other assets and liabilities		2		(56)
Recognition of public improvement reimbursables		—		(21,466)
Net cash used by operating activities		(13,685)		(87)

Cash flows from investing activities:
Net payments received on note receivable - related party, other		304		—
Investments in land held for development		(1,948)		—
Investments in water and water systems		(463)		(880)
Construction costs of single-family rentals		(142)		—
Purchase of property and equipment		—		(79)
Net cash used by investing activities		(2,249)		(959)

Cash flows from financing activities:
Proceeds from notes payable		1,000		—
Proceeds from option exercises		34		14
Payments to contingent liability holders		(1)		(2)
Net cash provided by financing activities		1,033		12
Net change in cash, cash equivalents and restricted cash		(14,901)		(1,034)
Cash, cash equivalents and restricted cash – beginning of period		22,444		21,797
Cash, cash equivalents and restricted cash – end of period	$	7,543	$	20,763
Cash and cash equivalents	$	5,215	$	20,482
Restricted cash		2,328		281
Total cash, cash equivalents and restricted cash	$	7,543	$	20,763

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES
Income taxes paid	$	5,260	$	—
Change in reimbursable public improvements included in accounts payable and accrued liabilities	$	668	$	—
Transfer of land development costs to other assets	$	—	$	484
Transfer of land development costs to land under development	$	—	$	467
Change in land under development included in accounts payable and accrued liabilities	$	—	$	374
Change in investments in water and water systems included in accounts payable and accrued liabilities	$	—	$	90

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

Table of Contents

PURE CYCLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~MAY 31, 2021~~FEBRUARY 28, 2022

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 and six months ended February 28, 2022 and 2021. 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.

Coronavirus (COVID-19)

Since January 2020, the COVID-19 pandemic has caused substantial disruption in international and U.S. economies and markets. The ~~August 31, 2020 balance sheet was derived from~~impacts of the ~~Company’s audited consolidated financial statements.~~

~~Coronavirus Aid, Relief,~~pandemic are continuing but have lessened as vaccines have become widely available in the U.S, although there have been periodic increases in the number of cases in the U.S. due to the spread of COVID-19 variants. The pandemic has resulted in government restrictions of various degrees and ~~Economic Security Act (“CARES Act”)~~

~~On March 27, 2020, Congress enacted~~effective at various times, including stay-at-home orders, bans on travel, limitations on the ~~CARES Act~~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 ~~provide certain relief because of~~ the ~~recent~~ outbreak of ~~a novel strain of the coronavirus (“COVID-19”)~~ ~~pandemic. The CARES Act provides numerous tax provisions~~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.~~environment.

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 ~~are reasonably assured~~community being developed by the Company were probable of ~~payment.~~collectability. 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, increases in housing values in Colorado, 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.

Table of Contents

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~~2021 Annual Report. The Company has advanced funds to the Sky Ranch CAB for the cost of ~~Operations~~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 ~~Comprehensive Income~~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 and six months ended February 28, 2022, the Company spent $2.7 million and $6.8 million on public improvements which are payable by the Sky Ranch CAB to the Company and added to the note receivable from the Sky Ranch CAB. Additionally, for the three and six months ended February 28, ~~2021~~2022, project management fees owed to the Company of $0.2 million and $0.4 million, and interest income on the outstanding note receivable of $0.5 million and $0.9 million were also added to the note receivable.

Public improvements which are not probable of reimbursement at the time of being incurred are considered contract fulfillment costs and are expensed as ~~follows:~~land development construction costs as incurred. If public improvement costs are deemed probable of collection, the costs are recognized as 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 fund 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 six months ended February 28, 2022		Amounts payable by the Sky Ranch CAB at February 28, 2022
Phase 1
Reimbursable public improvements and other	$	17,645	$	335	$	17,980
Accrued interest		2,526		676		3,202
Project management services		1,570		16		1,586
Phase 1 reimbursable costs	$	21,741	$	1,027	$	22,768

Phase 2
Reimbursable public improvements and other	$	2,935	$	6,498	$	9,433
Accrued interest		33		212		245
Project management services		85		432		517
Phase 2 reimbursable costs	$	3,053	$	7,142	$	10,195

Total reimbursable costs	$	24,794	$	8,169	$	32,963

Total reimbursable costs	$	24,794	$	8,169	$	32,963
Less current portion		16,000		0		16,000
Non-current reimbursable costs	$	8,794	$	8,169	$	16,963

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

810

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~~REVENUES, FEES AND OTHER INCOME ITEMS

Water, wastewater and land development 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~~taps, 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~~metered water and wastewater ~~resource development segment provides wholesale municipal water and wastewater services, through~~usage. Detailed descriptions of the ~~Rangeview Metropolitan District (the “Rangeview District”) and Elbert and Highway 86 Commercial Metropolitan District (the “Elbert 86 District”)~~policies related 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 subdivisionrevenue recognition are included in ~~Elizabeth, Colorado.~~

~~Monthly water usage and wastewater treatment fees~~ – The Company provides water 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 that are comprised of a base charge and a usage charge based on actual amounts of water deliveredNote 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 and ~~wastewater tap fees~~ ~~– A tap constitutes a right to connect a residential or commercial building or property to the Company’s water~~six months ended February 28, 2022 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~~2021.

Sale of finished lots – For the three months ended February 28, 2022 and 2021, the Company recognized $1.6 million and $0.5 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. For the six months ended February 28, 2022 and 2021, the Company recognized $4.6 million and $2.9 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 February 28, 2022, the first phase is 99.9% complete and the first subphase of the second development phase is 57.5% 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~~ For the ~~sale of a finished lot pursuant to a lot development agreement with builders, whereby~~three months ended February 28, 2022 and 2021, the Company ~~receives payments in stages that include: (i) payment upon~~recognized 0 revenue from ready-to-build finished lots. For the ~~delivery of a platted lot (which requires~~six months ended February 28, 2022 and 2021, the Company ~~to deliver deeded title to individual lots), (ii) a second payment upon~~recognized $0 and $1.6 million from ready-to-build finished lots.

Water and wastewater tap fees – During the ~~completion of certain infrastructure milestones,~~three months ended February 28, 2022 and ~~(iii) final payment upon the delivery of the finished lot. Ownership and control of the platted lot passes to the builder once~~2021, the Company ~~closes~~sold a total of 27 and 51 water and wastewater taps generating $0.9 million and $1.6 million in tap fee revenues. During the ~~sale of the platted lots. Because the builder takes control~~six months ended February 28, 2022 and ~~legal ownership of the lot at the first closing, and subsequent improvements made by~~2021, the Company ~~improve~~sold a total of 36 and 87 water and wastewater taps generating $1.2 million and $2.7 million in tap fee revenues. These taps were all sold at Sky Ranch and Wild Pointe.

Project management services – During the ~~builder’s lot as construction progresses,~~three months ended February 28, 2022 and 2021, the Company ~~accounts~~recognized $0.2 million and $1.5 million of project management revenue 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 includingmanaging the Sky Ranch ~~Metropolitan District Nos. 1, 3, 4~~development process. During the six months ended February 28, 2022 and ~~5 (collectively,~~2021, the ~~“Sky~~Company recognized $0.4 million and $1.5 million of project management revenue for managing the Sky Ranch ~~Districts”),~~development process. During the second quarter of fiscal 2021, the Company determined the Sky Ranch CAB would be able to pay the Company for project management services and began recognizing this revenue. Prior to that date, payment was not deemed to be probable; therefore, the Company had deferred recognition of the project management fees income it had earned.

Single-family rental income

In November 2021, the Company began renting single-family homes and began recognizing lease income related to these rental units. The Company generally rents its single-family properties under non-cancelable lease agreements with a term of one year. Rental and other property revenues represented less than 1.0% of our total revenue for the three and six months ended February 28, 2022. The Company has begun construction on a fourth house and reserved an additional 46 lots in the second development phase of Sky Ranch for rental units; therefore, the Company believes this could become a reportable operating segment in the future once its operations become material.

Undeveloped land sale and cash-in-lieu to school district

During the six months ended February 28, 2022, the Company entered various agreements to sell approximately 32 acres of undeveloped land in Sky Ranch for $1.6 million to a charter school operator for the purpose of constructing and operating a charter school. Simultaneously, pursuant to dedication standards issued by 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~~(the county where Sky Ranch ~~CAB (see Note 9 –~~ ~~Related Party Transactions~~)is located), the Company ~~is obligated~~agreed to ~~provide advance funding~~a $1.6 million cash-in-lieu payment to the Bennett School District to assist the school district with providing education facilities to the Sky Ranch ~~CAB related~~Master Planned Community. The land sale agreements include requirements for the Company to construct, or have constructed, certain improvements leading to the ~~construction~~school site such as roads, sidewalks, and landscaping, all 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 million to the Note receivable – related party related to Project management revenue, Other income and Interest Income - related party during the three months ended May 31, 2021, for a total outstanding receivable balance of $21.3 million. This receivable is reviewed each reporting period for impairment.

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. 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 anwere already planned

1011

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

~~Project management services~~ – Pursuant to 2 Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB, the Company acts as the project manager 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, 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 the public improvements when collectability is deemed to be reasonably assured. The $1.6 million was recognized as a component of 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 to the Sky Ranch CAB upon completion and will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

~~The following table summarizes the amounts the Company paid, what was repaid by the Sky Ranch CAB and amounts still owed to the Company by the Sky Ranch CAB:~~

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

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Public improvements and construction support activities accrue interest of 6% per annum, which was not previously recognized 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~~constructed as ~~a portion~~part of the ~~recognition~~overall master development of ~~$21.3 million of reimbursable costs as collection is deemed probable.~~Sky Ranch. The Company ~~expects to incur an additional $0.5 million through~~determined the ~~end~~transaction was consummated in February 2022, when all pre-closing conditions were satisfied, and proceeds were received.

Deferred revenue

Changes and balances of the ~~calendar year 2021, with an estimated $0.4 million~~Company’s deferred revenue accounts by segment are as follows:


		Water and Wastewater Resource Development		Land Development		Total

(In thousands)		Three Months Ended February 28, 2022
Balance at November 30, 2021		$	271	$	2,831	$	3,102
Revenue recognized			(202)		(1,628)		(1,830)
Revenue deferred			370		-		370
Balance at February 28, 2022		$	439	$	1,203	$	1,642

		Three Months Ended February 28, 2021
Balance at November 30, 2020		$	713	$	1,462	$	2,175
Revenue recognized			(453)		(2,698)		(3,151)
Revenue deferred			-		2,231		2,231
Balance at February 28, 2021		$	260	$	995	$	1,255


		Water and Wastewater Resource Development		Land Development		Total

(In thousands)	��	Six Months Ended February 28, 2022
Balance at August 31, 2021		$	410	$	1,995	$	2,405
Revenue recognized			(341)		(4,575)		(4,916)
Revenue deferred			370		3,783		4,153
Balance at February 28, 2022		$	439	$	1,203	$	1,642


		Six Months Ended February 28, 2021
Balance at August 31, 2020		$	1,965	$	1,635	$	3,600
Revenue recognized			(1,705)		(2,871)		(4,576)
Revenue deferred			-		2,231		2,231
Balance at February 28, 2021		$	260	$	995	$	1,255

The Company receives deposits or pre-payments from oil and gas operators to reserve water for ~~construction costs related to public improvements to complete~~use in future well drilling operations. When the ~~first development phase of~~operators use the ~~initial 506 lots and expects that amount to be reimbursed to~~water, the Company ~~along with~~recognizes the ~~amounts noted~~revenue for these payments in the ~~table above as~~metered water usage from the ~~Sky Ranch CAB issues bonds, collects fees, or property tax assessments support collectability being reasonably assured.~~commercial customers line on the statement of operations.

~~Deferred Revenue~~

~~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~~may receive milestone payments before revenue 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 compared to total ~~expected~~estimated 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.

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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 February 28, 2022, the Company has 1 Level 2 liability, the SFR Note (defined in Note 6) entered 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. As of August 31, 2021, the Company had no Level 2 assets or liabilities.

There were 0 transfers between Level 1, 2 or 3 categories during the three or six months ended February 28, 2022 or 2021.

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				February 28, 2022				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									$	17,640	$	(1,779)	$	17,526	$	(1,470)
Rangeview water supply	$	14,586	$	(16)	$	14,570	$	(15)		14,675		(17)		14,622		(17)
Water supply – Other										7,566		(1,594)		7,569		(1,433)
Sky Ranch water rights and other costs		7,371		(1,042)		7,499		(981)		7,327		(1,179)		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		(889)		5,727		(793)
Lost Creek water supply		3,374		0		3,372		0		3,374		0		3,374		0
Construction in progress		1,021		0		1,339		0
Fairgrounds water and water system										2,900		(1,371)		2,900		(1,327)
Wild Pointe service rights										1,632		(775)		1,632		(775)
Totals		61,659		(6,519)		60,537		(5,450)		60,854		(7,604)		60,688		(6,902)
Net investments in water and water systems	$	55,140			$	55,087			$	53,250			$	53,786

Construction in Progress

Construction in progress represents costs incurred on various construction projects currently underway, that as of the balance sheet date have not been completed and placed into service. The construction in progress account consists primarily ~~consists~~ of ~~additional~~ water facilities ~~at Sky Ranch and~~being constructed which the ~~Build-to-Rent houses. The~~ Company anticipates ~~the additional facilities and houses~~ will be placed in service during ~~calendar 2021.~~the next twelve months. During the six months ended February 28, 2022, the Company incurred (1) $0.5 million of costs related to its construction projects and (2) completed the 3 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 rental units.

~~NOTE 7 – LONG-TERM OBLIGATIONS AND OPERATING LEASE~~Single-Family Rental Homes

~~The Participating interests in export water supply is an obligation~~During the six months ended February 28, 2022, the Company completed construction of the ~~Company that has no scheduled maturity date. Therefore, maturity~~first 3 houses in its single-family rental business. The costs of ~~this liability~~the homes are capitalized and when applicable are depreciated over periods not exceeding thirty-years, which is ~~not disclosed~~dependent on the asset type. All 3 houses were placed in ~~tabular form but is described below.~~service and leased effective November 1, 2021. During the six months

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~~Participating Interests in Export Water Supply~~

~~The acquisition~~ended February 28, 2022, the Company contracted for construction of the ~~Rangeview Water Supply was finalized with~~fourth house to be used in the ~~signing of the Comprehensive Amendment Agreement (the “CAA”)~~rental business. This fourth house is also located 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, have not been modified since signing.

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 the Company does not sell the Export Water, the holders of the Series B Preferred Stock are not entitled to payment of any dividend and have no contractual recourse against the Company.

As the proceeds from the sale of Export Water are received, they are either retained by the Company or remitted to various parties pursuant to the CAA. As of May 31, 2021, the recorded obligation of the CAA 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 in order of their priority. This means that~~ the first ~~payees receive their full payment before~~development phase of Sky Ranch and construction is beginning in March 2022 with an estimated completion near the ~~next priority level receives any payment and so on until full repayment. Of the next $6.3 million~~start 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 2023.

The Company has ~~determined that~~reserved 46 lots in the ~~contingent portion~~second development phase of Sky Ranch to build additional rental units. As of February 28, 2022, the Company had not started construction on any of the ~~CAA does~~units in the second development phase.

NOTE 6 – DEBT AND OTHER LONG-TERM OBLIGATIONS

Single-Family Rental Home Note Payable

On November 29, 2021, PCY Holdings, LLC, a wholly owned subsidiary of the Company, entered a Promissory Note (SFR Note) with its primary bank 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 February 28, 2022), 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.

The scheduled maturities of the SFR Note for each of the twelve-month periods ending February 28 are as follows (in thousands):


(In thousands)		Scheduled principal payments
Within 1 year	$	12
Year 2		19
Year 3		19
Year 4		20
Year 5		930
Thereafter		-
	$	1,000

Working Capital Line of Credit

On January 31, 2022, the Company entered into a Business Loan Agreement (Working Capital LOC) with its primary bank to provide a $5.0 million operating line of credit. The Working Capital LOC has a two-year maturity, monthly interest only payments if the line is drawn upon with unpaid principal and interest due at maturity, and a floating per annum interest rate equal to the Wall Street Journal Prime Rate plus 0.5% (3.75% as of February 28, 2022), which has a floor of 3.75%. In the event of default, the interest rate on the Working Capital LOC would be increased by adding an additional 2.0%. As of February 28, 2022, the Company has not ~~have a determinable fair value.~~drawn on the Working Capital LOC.

~~Sky Ranch~~

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~~sub-phases,

Table 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, Contents

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 began construction on the first subphase of 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 219 of which are sold under contracts to the 4 homebuilders listed above. As of February 28, 2022, the Company received plats for all 229 lots and had substantially completed grading and all wet utilities, with construction of streets, sidewalks, and dry utilities underway. The Company expects to deliver the first 219 completed lots to the homebuilders during the summer of 2022. From the start of the second development phase through February 28, 2022, the ~~Rangeview District, received metered water deliveries~~Company has spent $11.8 million on construction activities in the second development phase, of ~~100~~which $9.4 million was for public improvements which the Company believes it will be reimbursed by the Sky Ranch CAB. In the next eighteen months the Company anticipates spending an additional $8.7 million to complete the 229 finished lots, including the 10 lots for the single-family rental business, in the first subphase of the second development phase, of which $7.1 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 ~~300 acre-feet~~sell the 804 finished lots and complete 46 lots for the Company’s single family rental business depending on the market conditions and permitting process.

As described in Note 3 above, the Company entered into a development agreement with a charter school operator, which includes requirements to construct, or have constructed, various defined off-site improvements, which will provide access and drainage to the school and the overall Sky Ranch development. The Company, as part of ~~WISE water, paying $0.2 and $0.6~~its overall master development plan for Sky Ranch, expected to build this infrastructure whether the school site was located at this location or not, so this does not change its overall cost projections for the master planned community. The Company believes it will spend $4.0 million for ~~this water. During~~ the ~~three~~infrastructure defined in the development agreement, which it believes will qualify as public improvements and ~~nine months ended May 31, 2020,~~be reimbursable by the ~~Company through the Rangeview District received metered water deliveries of 0 and 400 acre-feet of WISE water, paying $0 and $0.6 million for this water. See further discussion in Note 9 –~~ ~~Related Party Transactions.~~Sky Ranch CAB.

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~~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~~February 28, 2022 and August 31, 2021, ~~and August 30, 2020,~~ there were ~~974,965~~889,576 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~~Plan.

The following table summarizes the ~~terms of~~combined stock option activity for the 2004 Incentive ~~Plan.~~Plan and 2014 Equity Plan for the three months ended February 28, 2022:


	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Approximate Aggregate Intrinsic Value (in thousands)
Outstanding at August 31, 2021	714,500	$	7.80	6.1	$	5,107
Granted	105,000	$	13.37
Exercised	(58,167)	$	7.67
Forfeited / Expired	(3,333)	$	10.45
Outstanding at February 28, 2022	758,000	$	8.58	5.1	$	2,639

Options exercisable at February 28, 2022	525,002	$	7.41	4.9	$	2,330

On January 12, 2022, the Company’s 6 non-employee Board members were each granted 2,000 shares of unrestricted 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 $13.23. There is no vesting requirement for the unrestricted stock grants and the Company recognized the full expense of $0.2 million during the three months ended February 28, 2022.

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~~The following table summarizes~~During the ~~combined~~three and six months ended February 28, 2022, the Company had net settlement exercises of stock ~~option activity~~options, whereby the optionee did not pay cash for the ~~2004 Incentive Plan~~options exercised but instead received the number of shares equal to the difference between the exercise price and ~~2014 Equity Plan for~~ the ~~nine~~market price on the date of exercise. During the three months ended ~~May 31, 2021:~~February 28, 2022, net settlement exercises resulted in 17,422 shares being issued and 21,578 options being cancelled in settlement of the shares issued. During the six months ended February 28, 2022, net settlement exercises resulted in 23,889 shares being issued and 28,278 options being cancelled in settlement of shares issued. During the three and six months ended February 28, 2022, the Company issued 6,000 shares of common stock upon the exercise of stock options, with an exercise price of $5.66, where the option holder used cash to exercise the options.

Approximate

Weighted Average

Aggregate

Number

Weighted Average

Remaining

Intrinsic Value


of Options

Exercise Price

Contractual Term

(in thousands)
Outstanding at August 31, 2020

661,500

$
7.23

6.17

$
1,831
Granted

115,000

$
9.00




Exercised

(18,000)

$
3.41




Net settlement exercised

(37,500)

$
3.99




Outstanding at May 31, 2021

721,000

$
7.77

6.30

$
4,592








Options exercisable at May 31, 2021

502,667

$
6.92

5.22

$
3,627

On January 13, 2021, the Company’s 6 non-employee Board members were each granted 2,000 ~~unrestricted~~ shares of unrestricted stock. The fair market value of the unrestricted shares for share-based compensation expense is equal to the closing price of the ~~Company’s~~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 induring the ~~month granted.~~three months ended February 28, 2021.

During the ~~nine~~three and six months ended ~~May 31,~~February 28, 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~~During the three months ended ~~May 31,~~February 28, 2021, net settlement exercises resulted in ~~8,758~~3,159 shares being issued and ~~4,242~~3,341 options being cancelled in settlement of shares issued. ~~Net~~During the six months ended February 28, 2021, net settlement exercises ~~during the nine months ended May 31, 2021~~ resulted in ~~24,035~~15,277 shares being issued and ~~13,465~~9,223 options being cancelled in settlement of shares issued. ~~There were 0 net settlement exercises during the three or nine months ended May 31, 2020.~~

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, 2021:~~February 28, 2022:


		Weighted Average		Number of Options	Weighted Average Grant Date Fair Value
	Number	Grant Date
	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
Forfeited				(3,333)	$	4.21
Non-vested options outstanding at February 28, 2022				232,998	$	4.47

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

For the three months ended ~~May 31,~~February 28, 2022 and 2021, ~~and 2020,~~ the Company recorded ~~$0.1~~$0.3 million and $0.2 million of stock-based compensation ~~expense.~~expense, which includes the amounts expensed related to the unrestricted stock granted to the Company’s Board members. For the ~~nine~~six months ended ~~May 31,~~February 28, 2022 and 2021, ~~and 2020,~~ the Company recorded $0.4 million and $0.3 million of stock-based compensation ~~expense.~~expense, which includes the amounts expensed related to the unrestricted stock granted to the Company’s Board members.

At ~~May 31, 2021,~~February 28, 2022, the Company had unrecognized compensation expenses totaling ~~$0.6~~$0.8 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

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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~~“Wise Partnership.” The WISE Partnership and capitalized terms related to WISE not defined herein are defined in Note 7 to the ~~WISE partnership.~~ 2021 Annual Report.

During the three ~~and nine~~ months ended ~~May 31,~~February 28, 2022 and 2021, the Company, through the Rangeview District, received metered water deliveries of ~~100~~245 acre-feet and ~~300~~35 acre-feet of WISE water, paying ~~$0.2~~$0.5 million and ~~$0.6~~less than $0.1 million for this water. During the ~~three and nine~~six months ended ~~May 31, 2020,~~February 28, 2022 and 2021, the Company, through the Rangeview District, received metered water deliveries of 0250 acre-feet and ~~400~~172 acre-feet of WISE water, paying $0$0.5 million and ~~$0.6~~$0.3 million for this water. The cost of ~~the~~WISE 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,~~2022, WISE water was ~~$5.77~~$6.13 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 WISE water each year or a member needs additional water, the members can trade and/or buy and sell water amongst themselves.2022.

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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, 2021,~~February 28, 2022, 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, 2021)~~February 28, 2022). The maturity date of the loan is December 31, ~~2020,~~2022, 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 February 28, 2022, the ~~May~~principal and interest on both loan agreements totaled $0.9 million ($0.8 million of principal and $0.1 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 six months ended February 28, 2022, the Company received interest and principal payments totaling $0.5 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.~~Ranch. 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 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 the first phase and December 31, 2060 for the second phase, shall be deemed forever discharged and satisfied in full.

As of ~~May 31, 2021,~~February 28, 2022, 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~~total $33.0 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 additional funding of approximately $4.0 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~~during the remainder of 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~~reimburse the Company $0.5 million ~~for the reimbursement~~ of construction costs ~~from~~incurred in connection with public improvements for the ~~South~~Southeast Metropolitan ~~Water~~Stormwater Supply Authority ~~(“SMWSA”)~~(SEMSWA). ~~These costs will be distributed~~This was repaid to the Company in March 2022.

Nelson Pipeline Constructors LLC

Through a competitive bidding process, the Sky Ranch CAB ~~upon~~awarded Nelson Pipeline Constructors, LLC (Nelson) a contract to construct the ~~acceptance~~wet utility pipelines in the second development phase of Sky Ranch. During the ~~stormwater infrastructure by SMWSA in calendar year 2021. The Company records this reimbursable cost in Trade accounts receivable, net.~~

~~Refer to Note 4 -~~ ~~Revenue Recognition~~ ~~for a summary of reimbursable costs incurred to date, payments made from~~six months ended February 28, 2022, the Sky Ranch CAB ~~and any outstanding reimbursable amounts.~~

~~In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the Sky Ranch CAB obligating the Company~~paid Nelson $8.1 million related 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~~this contract. Nelson 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. The percentages presented below represent the reported customers percentage of the Company’s total revenue for the six months ended February 28, 2022. For ~~the~~ water and wastewater ~~resource development segment,~~customers, the Company primarily provides ~~water and wastewater~~ services on behalf of the Rangeview ~~Metropolitan~~ District. The significant end users include all Sky Ranch homes in the aggregate ~~Crestone Peak Resources (oil~~and the Sky Ranch CAB (8%) and 1 oil & gas ~~operations) and the WISE partnership related to a special facilities construction project. For the land development segment and~~operator (17%). The home builders at Sky Ranch account for lot purchase revenue but also for water and wastewater tap fees ~~which are reported within~~revenues. Those home builders provide a significant amount of revenue to the ~~water~~Company and ~~wastewater resource development segment, significant customers~~ include ~~Taylor Morrison,~~Lennar (19%), Challenger (18%), KB Home (12%) and Richmond ~~Homes.~~(12%).

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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)					February 28, 2022		August 31, 2021
Accrued compensation		464		767	$	514	$	729
Other operating payables		320		353		245		248
WISE water		115		69		115		62
Land development - warranty and other - related party		120		0
Operating lease obligations		82		74		79		84
Property taxes		43		72		20		50
Professional fees		46		56		23		51
Due to Rangeview - related party		0		43
Total	$	1,704	$	2,603
Rental deposits						9		—
Total accrued liabilities					$	1,005	$	1,224

Land development costs due to the Sky Ranch CAB					$	668	$	2,243
Due to Rangeview Metropolitan District						—		638
Total accrued liabilities - related parties					$	668	$	2,881

~~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”) to allocate resources, the~~The Company ~~has identified~~reports 2 operating segments which meet GAAP segment disclosure requirements, namely the water and wastewater resource development segment and the land development segment. ~~A third segment, Build-to-Rent (“BTR”), will be presented once~~The single-family rental operations, although not currently material to ~~operations.~~operations and not a required segment disclosure, is presented within the operating segment information below for informational purposes.

The water and wastewater resource development ~~business~~segment includes ~~selling~~providing water and wastewater 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 reclaimed wastewater. The land development segment includes all the activities necessary to develop and sell finished lots, which as of and for the ~~nine~~six months ended ~~May 31,~~February 28, 2022 and 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 single-family rental business includes the ~~CODM does not actively allocate resources to these projects; therefore, this is not classified as a reportable segment.~~monthly rental fees received from the renters under the non-cancellable annual leases.

The tables below present the measure of profit and assets ~~the CODM uses~~used 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


	Three Months Ended February 28, 2022
(In thousands)	Water and wastewater resource development		Land development		Single-family rental		Total
Total revenue	$	2,809	$	1,829	$	26	$	4,664

Cost of revenue		810		341		4		1,155
Depreciation and depletion		352		—		—		352
Total cost of revenue		1,162		341		4		1,507

Segment profit	$	1,647	$	1,488	$	22	$	3,157


	Three Months Ended February 28, 2021
(In thousands)	Water and wastewater resource development		Land development		Single-family rental		Total
Total revenue	$	2,676	$	2,063	$	—	$	4,739

Cost of revenue		640		269		—		909
Depreciation and depletion		354		—		—		354
Total cost of revenue		994		269		—		1,263

Segment profit	$	1,682	$	1,794	$	—	$	3,476

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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.

2018

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	Six Months Ended February 28, 2022
(In thousands)	Water and wastewater resource development		Land development		Single-family rental		Total
Total revenue	$	3,880	$	5,022	$	34	$	8,936

Cost of revenue		1,306		872		7		2,185
Depreciation and depletion		706		—		—		706
Total cost of revenue		2,012		872		7		2,891

Segment profit	$	1,868	$	4,150	$	27	$	6,045


	Six Months Ended February 28, 2021
(In thousands)	Water and wastewater resource development		Land development		Single-family rental		Total
Total revenue	$	5,188	$	4,419	$	—	$	9,607

Cost of revenue		1,301		1,988		—		3,289
Depreciation and depletion		719		—		—		719
Total cost of revenue		2,020		1,988		—		4,008

Segment profit	$	3,168	$	2,431	$	—	$	5,599

The ~~provision for income taxes is recorded at the end of each interim period based on~~following table summarizes the Company’s ~~best estimate~~total assets by segment. The assets consist of ~~its effective income tax rate expected to be applicable for~~water rights and water and wastewater systems in the ~~full fiscal year. Income tax information for~~Company’s water and wastewater resource development segment; land, land development costs and deposits in the ~~three~~Company’s land development segment; and ~~nine months ended May 31, 2021~~the cost of the homes in the single-family rental line. The Company’s other assets (“Corporate”) primarily consist of cash, cash equivalents, restricted cash, equipment, and ~~2020 are as follows:~~related party notes receivables.

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


(In thousands)	February 28, 2022		August 31, 2021
Water and wastewater resource development	$	57,470	$	57,791
Land development		44,159		32,844
Single-family rental		1,546		—
Corporate		10,186		26,542
Total assets	$	113,361	$	117,177

Deferred income taxes reflect the tax effects of net operating loss carryforwards and 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 May 31, 2021 and August 31, 2020 are as follows:

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)

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~~February 28, 2022 and 2021, the Company excluded 105,000 options ~~totaled 180,000~~ and 0 ~~for~~options because their impact was anti-dilutive. For the ~~three and nine~~six months ended ~~May 31, 2020.~~February 28, 2022 and 2021, the Company did not have any anti-dilutive options.

Three Months Ended

Nine Months Ended

May 31,

May 31,

May 31,

May 31,


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
Effect of dilutive securities

277,255

200,055

219,229

229,142
Weighted average shares applicable to diluted earnings per share

24,184,395

24,052,820

24,104,408

24,071,018
Earnings per share - basic

$
0.03

$
0.00

$
0.77

$
0.25
Earnings per share - diluted

$
0.03

$
0.00

$
0.76

$
0.25

								��
	Three Months Ended				Six Months Ended
(In thousands, except share and per share amounts)	February 28, 2022		February 28, 2021		February 28, 2022		February 28, 2021

Net income	$	1,693	$	17,352	$	3,207	$	18,197

Basic weighted average common shares		23,944,141		23,881,655		23,931,307		23,874,198
Effect of dilutive securities		240,020		210,694		263,272		190,216
Weighted average shares applicable to diluted earnings per share		24,184,161		24,092,349		24,194,579		24,064,414

Earnings per share - basic	$	0.07	$	0.73	$	0.13	$	0.76
Earnings per share - diluted	$	0.07	$	0.72	$	0.13	$	0.76

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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 February 28, 2022, 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 and six months ended February 28, 2022 and 2021 is as follows:


	Three Months Ended						Six Months Ended
(In thousands)	February 28, 2022			February 28, 2021			February 28, 2022			February 28, 2021
Effective income tax rate		22.8	%		24.6	%		23.4	%		24.6	%
Income tax expense (benefit):
Current	$	712		$	5,723		$	1,183		$	5,856
Deferred		(211)			(56)			(205)			71
Total	$	501		$	5,667		$	978		$	5,927
Income taxes paid:
Federal	$	910		$	—		$	4,360		$	—
State		900			—			900			—
Total	$	1,810		$	—		$	5,260		$	—

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 February 28, 2022 and August 31, 2021 are as follows:


(In thousands)	February 28, 2022		August 31, 2021
Deferred tax assets (liabilities):
Depreciation and depletion	$	(2,178)	$	(2,360)
Non-qualified stock options		546		547
Deferred revenues		108		41
Accrued compensation		87		141
Other		27		16
Net deferred tax liability	$	(1,410)	$	(1,615)

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~~resource development business.

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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,~~through our water and wastewater resource development segment and our land development ~~segment,~~segment. Although discussed separately, 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.~~

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 exclusively 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.

~~Table~~Revenues for our water operations are dependent on us growing the number of ~~Contents~~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 Master Planned 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~~ 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

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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 approximately ten years until it is 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 February 28, 2022. As of ~~May 31, 2021,~~February 28, 2022, 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 February 28, 2022, 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, 2021~~February 28, 2022, there are ~~approximately 330~~more than 430 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 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 ~~expect delivery~~have retained ten of ~~platted~~these lots ~~to begin in the fourth quarter of fiscal 2021 and continue steadily over the next several years. The 100+ lots not currently under contract to home builders are being retained~~ for use in our single-family rental business. As of February 28, 2022, 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 ~~build-to-rent long-term rental properties,~~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. 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. We estimate the first subphase is just over 57% complete. During the three and six months ended February 28, 2022, due to the construction progress, we recognized $1.6 million and $4.3 million of lot sale revenue related to the first subphase of the second development phase. The remaining $4.8 million of revenue will be recognized over time as ~~described below.~~the first subphase of construction is completed, which we expect will be substantially complete 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 when control of the completed lots is transferred to that builder.

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~~Build-to-Rent~~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 construction of the next subphase will begin in the fall of 2022. We further believe it will take approximately 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.

~~As announced~~In addition to the lot sales and reimbursable costs described above, from the start of development at Sky Ranch through February 28, 2022, we have received $15.1 million of water and wastewater tap fees from the homebuilders, which includes $14.6 from the first development phase and $0.5 from the second development phase. Timing of tap sales is dependent on when homebuilders begin requesting building permits. Fees charged per water tap are dependent on lot sizes and average water usage across a broad range of housing product types including duplexes and townhomes. For the first subphase of the second development phase at Sky Ranch, we estimate water and wastewater tap fees will exceed $4.0 million.

During the six months ended February 28, 2022, we entered various agreements to sell approximately 32 acres of undeveloped land in ~~March~~Sky Ranch for $1.6 million to a charter school operator for the purpose of constructing and operating a charter school. Simultaneously, we agreed to a $1.6 million cash-in-lieu payment to the Bennett School District to assist the school district with providing education facilities to the Sky Ranch Master Planned Community. The land sale agreements include requirements for us to construct, or have constructed, certain improvements leading to the school site such as roads, sidewalks, and landscaping, all of which were already planned to be constructed as part of the overall master development for Sky Ranch.

Single-Family Rentals

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 February 28, 2022, 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 the construction~~renters under one-year lease terms. Construction of the ~~homes with a reputable construction company~~fourth home began after February 28, 2022, prior to the filing of this Form 10-Q, and we expect ~~these three homes~~it to be completed ~~and ready for renters~~ in the fall of ~~2021. Foundations and framing 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~~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 when applicable amortize the costs over periods not exceeding thirty-years. Lease income is recorded monthly as earned. We began recognizing monthly lease income for the first three rental units on ~~the second phase of Sky Ranch has begun, and once complete we will look to partner with certain builders to construct our BTR units as the second development phase of Sky Ranch is completed.~~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 early in ~~2020. However,~~the pandemic; 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 the involvement of governmental agencies due to ~~expansive work~~pandemic-related restrictions imposed on their operations. We expect COVID-19 to continue to play a role in potential delays related to the second ~~filing~~development phase at Sky Ranch due to rapidly changing governmental orders, city and country shutdowns, and public health concerns. ~~Mainly, we~~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 ~~permitting process through the county which~~impact this has ~~delayed the revenue recognition of the Phase two of the Sky Ranch development.~~had on our construction and other activities.

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Results of Operations

Consolidated Results of Operations – Three Months Ended February 28, 2022 and 2021

Executive Summary

For the three months ended February 28, 2022, we generated operating income of $1.5 million. This represented a decline from the comparable period in 2021; however, during the three months ended February 28, 2021, we recognized $1.5 million of project management income related to the management of the construction activities at the Sky Ranch Master Planned Community, which is owed to us by the Sky Ranch CAB. We previously deemed collection of the project management fees to be contingent; therefore, we did not recognize this revenue in our statement of operations until the contingency was resolved. During the three months ended February 28, 2021, as described in greater detail below, we recorded the $1.5 million as revenue because the contingency was resolved, and collection was deemed assured. The second quarter fiscal 2022 net income was positively impacted by increased water usage revenues, primarily from sales to oil and gas operators for drilling wells, increased recognition of lot sale revenues under the percentage-of-completion method, the addition of our single-family rental units, and the recognized interest income on the note receivable from the Sky Ranch CAB. These increases were partially offset by increased general and administrative expenses as well as the costs associated with increased water sales and lot development costs. The table below presents the summarized consolidated financial results.



	Three Months Ended
(In thousands, except for water deliveries and taps sold)	February 28, 2022		February 28, 2021		$ Change		% Change
Water and wastewater resource development revenue	$	2,809	$	2,676	$	133	5	%
Land development revenue:
Lot sales		1,629		515		1,114	216	%
Project management fees		200		1,548		(1,348)	(87)	%
Single-family rental		26		—		26	—	%
Total revenue		4,664		4,739		(75)	(2)	%

Water and wastewater development cost of revenue		1,162		994		168	17	%
Land development cost of revenue		341		269		72	27	%
Single-family rental cost of revenue		4		—		4	—	%
Total cost of revenue		1,507		1,263		244	19	%

General and administrative expense and depreciation		1,649		1,418		231	16	%
Operating income		1,508		2,058		(550)	(27)	%

Other income, net		686		20,961		(20,275)	(97)	%
Income taxes		(501)		(5,667)		(5,166)	(91)	%
Net income	$	1,693	$	17,352	$	(15,659)	(90)	%

Basic EPS	$	0.07	$	0.73	$	(0.66)	(90)	%
Diluted EPS	$	0.07	$	0.72	$	(0.65)	(90)	%

Water delivered (thousands of gallons)		137,898		5,820		132,078	2,269	%
Water and wastewater taps sold		27		51		(24)	(47)	%

Total revenue decreased in the second quarter of fiscal 2022 as compared to 2021, primarily due to the 2021 recognition of the $1.5 million of project management fees. A line-by-line review of revenue shows that lot sale revenue in 2022 increased as the second development phase is underway, and higher water usage fees due mainly to more water sales to oil and gas operators for use in drilling and fracking wells.

Costs of revenue increased in the second quarter of fiscal 2022 as compared to 2021 primarily due to increased costs related to the sale of water to oil and gas operators for drilling purposes as well as increased lot construction costs as the first subphase of the second development phase progresses. As detailed further below (in the Land Development results of operations section), we are now recording the reimbursable public improvements as a receivable from the Sky Ranch CAB resulting in lower cost of sales being recorded for land development activities at Sky Ranch.

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General and administrative expense increased in the second quarter of fiscal 2022 as compared to 2021 primarily due to increased head count and increases in certain legal and professional fees due to the second development phase at Sky Ranch. As development continues and our ~~operations~~single-family rental business increases, we expect to see continued increases in headcount and general corporate overhead.

Other income, net in the second quarter of fiscal 2022 is comprised mainly of interest income recognized on the note receivable from the Sky Ranch CAB. The second quarter of fiscal 2021 included the recognition of $20.8 million of public improvements and interest income recognized on the outstanding note receivable related to reimbursable public improvements.

Water deliveries increased substantially in the second quarter of fiscal 2022 as compared to 2021 primarily due to increased water sales to oil and gas operators for drilling purposes.

Water and wastewater tap sales declined in the second 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 February 28, 2022, and two of the three ~~and nine months ended May 31, 2021 and 2020~~builders are ~~as follows:~~sold out in the first phase. As construction nears completion on the first subphase of the second development phase, we anticipate tap sales to increase.

Consolidated Results of Operations – Six Months Ended February 28, 2022 and 2021

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
%

Executive Summary

For the six months ended February 28, 2022, we generated operating income of $3.0 million. This represented a decline from the comparable period in 2021; however, during the six months ended February 28, 2021, we recognized $1.5 million of project management income related to the management of the construction activities at the Sky Ranch Master Planned Community, which is owed to us by the Sky Ranch CAB. We previously deemed collection of the project management fees to be contingent; therefore, we did not recognize this revenue in our statement of operations until the contingency was resolved. During the six months ended February 28, 2021, as described in greater detail below, we recorded the $1.5 million as revenue because the contingency was resolved, and collection was deemed assured. The six months ended February 28, 2022 net income was positively impacted by increased water usage revenues, primarily from sales to oil and gas operators for drilling wells, increased recognition of lot sale revenues under the percentage-of-completion method, the addition of our single-family rental units, and the recognized interest income on the note receivable from the Sky Ranch CAB. These increases were partially offset by increased general and administrative expenses as well as the costs associated with increased water sales and lot development costs.

Table of Contents

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)
%

The table below presents the summarized consolidated financial results.


	Six Months Ended
(In thousands, except for water deliveries and taps sold)	February 28, 2022			February 28, 2021		$ Change		% Change
Water and wastewater resource revenue	$	3,880		$	5,188	$	(1,308)	(25)	%
Land development revenue
Lot sales		4,574			2,871		1,703	59	%
Project management fees		448			1,548		(1,100)	(71)	%
Single-family rental		34			—		34	—	%
Total revenue		8,936			9,607		(671)	(7)	%

Water and wastewater resource cost of revenue		2,012			2,020		(8)	(0)	%
Land development cost of revenue		872			1,988		(1,116)	(56)	%
Single-family rental cost of revenue		7			—		7	—	%
Total cost of revenue		2,891			4,008		(1,117)	(28)	%

General and administrative expense and depreciation		3,058			2,588		470	18	%
Operating income		2,987			3,011		(24)	(1)	%

Other income, net		1,198			21,113		(19,915)	(94)	%
Income taxes		(978)	��		(5,927)		(4,949)	(83)	%
Net income	$	3,207		$	18,197	$	(14,990)	(82)	%

Basic EPS	$	0.13		$	0.76	$	(0.63)	(83)	%
Diluted EPS	$	0.13		$	0.76	$	(0.63)	(83)	%

Water delivered (thousands of gallons)		215,152			109,711		105,441	96	%
Water and wastewater taps sold		36			87		(51)	(59)	%

~~Three~~For the six months ended ~~May 31, 2021 vs. Three months ended May 31, 2020~~

~~Revenue –~~ ~~Total~~February 28, 2022, total revenue ~~increased in 2021~~decreased as compared to ~~2020,~~2021, primarily due to ~~increased~~the prior results including $1.5 million of project management fees recognized because of the removal of the collection contingency on these revenues and we had less water revenue from oil and ~~wastewater tap sales, increased municipal water usage, and a special facility construction project for WISE. These increases were~~gas operators, which was 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 inincreased lot sales.

For the ~~fourth fiscal quarter of 2021.~~

~~Cost of revenue –~~ ~~Costs~~six months ended February 28, 2022, costs of revenue decreased ~~in 2021~~ as compared to ~~2020,~~2021, primarily due to ~~decreases~~decreased lot construction costs. Although the first subphase of the second development phase is progressing, which increased revenues, due to the reduction in land development costs ~~due~~associated with reimbursable public improvements as described in Note 2 to ~~phase one being nearly complete. Phase two costs are currently being capitalized~~the 2021 Annual Report, our cost of lot sales as ~~inventories until~~a percentage of revenue ~~recognition begins. These decreases were partially offset by increased water and wastewater service costs primarily due to additional WISE water purchases.~~have dropped significantly resulting in better margins on the second phase.

~~General and administrative expense –~~ ~~General~~For the six months ended February 28, 2022, general and administrative expense increased ~~in 2021~~ 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~~For the six months ended February 28, 2022, other income, net, – ~~Other~~is comprised mainly of interest income ~~net increased in~~on the Sky Ranch CAB note. The second quarter of fiscal 2021 ~~as compared to 2020, primarily due to~~included $20.8 million of public improvements and interest income recognized on the outstanding note receivable related to reimbursable ~~costs.~~public improvements.

~~Income tax expense –~~ ~~Income tax expense~~For the six months ended February 28, 2022, water deliveries 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 ~~Export~~ water ~~usage, related~~sales to ~~increased irrigation~~oil and gas operators.

For the six months ended February 28, 2022, water ~~usage, new Sky Ranch and Wild Pointe customers and increased landscaping and irrigation water usage in these neighborhoods.~~

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

~~Table of Contents~~

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

~~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~~builders obtaining building permits in anticipation of home closings. No permits have been issued for the second development phase as of February 28, 2022, and two of the three builders are ~~not contractually established with the builders.~~

~~Lots delivered –~~ ~~Lot deliveries decreased in 2021 as compared to 2020 due to all lots~~sold out in the first phase ~~of Sky Ranch having been delivered as~~so tap sales will be constrained until we deliver more lots to our builders. As construction nears completion on the first subphase of the ~~first quarter of fiscal 2021. We have broken ground on the~~ second development phase, ~~and expect lot deliveries~~we anticipate tap sales to ~~begin this fall.~~increase.

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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				Three Months Ended
	May 31,		May 31,		Increase/
	2021		2020		(Decrease)		% Change

	(In thousands, except for water deliveries)
(In thousands, except for water deliveries)									February 28, 2022		February 28, 2021		$ Change		% Change
Metered water usage from:
Municipal water usage	$	429	$	238	$	191	80	%	$	83	$	74	$	9	12	%
Oil and gas operations usage		1,804		72		1,732	2,406	%
Commercial water usage										1,527		583		944	162	%
Wastewater treatment fees		144		62		82	132	%		64		51		13	25	%
Water and wastewater tap fees		4,522		3,850		672	17	%		913		1,583		(670)	(42)	%
Other revenue		487		104		383	368	%		222		385		(163)	(42)	%
Total segment revenue		7,386		4,326		3,060	71	%		2,809		2,676		133	5	%

Water service costs		(1,074)		(556)		518	93	%		570		213		357	168	%
Wastewater service costs		(258)		(126)		132	105	%		99		64		35	55	%
Depreciation		(1,077)		(988)		89	9	%		352		354		(2)	(1)	%
Other		(453)		(34)		419	1,232	%		141		363		(222)	(61)	%
Total expenses		(2,862)		(1,704)		1,158	68	%		1,162		994		168	17	%

Segment operating income	$	4,524	$	2,622	$	1,902	73	%	$	1,647	$	1,682	$	(35)	(2)	%

Water deliveries (thousands of gallons)
On Site		3,715		8,416		(4,701)	(56)	%		4,213		599		3,614	603	%
Export - Commercial		7,276		2,619		4,657	178	%		2,611		95		2,516	2,648	%
Sky Ranch		22,044		6,271		15,773	252	%		4,209		2,357		1,852	79	%
Wild Pointe		13,052		14,160		(1,108)	(8)	%		2,774		2,707		67	2	%
O&G operations		80,166		928		79,238	8,539	%		124,091		62		124,029	200,047	%
Total water deliveries		126,253		32,394		93,859	290	%		137,898		5,820		132,078	2,269	%

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

~~Municipal water usage –~~ Municipal water usage increased in ~~2021~~the second quarter of fiscal 2022 as compared to ~~2020,~~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. Commercial water usage increased in the second quarter of fiscal 2022 as compared to 2021 due to increased water sales to oil and gas operators for drilling.

~~Wastewater treatment fees –~~ Wastewater treatment fees increased in ~~2021~~the second quarter of fiscal 2022 as compared to ~~2020,~~2021 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~~sales declined in ~~2021~~the second quarter of fiscal 2022 as compared to ~~2020, primarily~~2021 due to ~~increased taps~~timing of closings at Sky Ranch. Tap sales are driven by building permit applications and are not contractually established with the builders. No permits have been issued for the second development phase as of February 28, 2022, and two of the three builders are sold ~~and increased prices, on average, of water and wastewater taps.~~out in the first phase. During the three months ended ~~May 31, 2021,~~February 28, 2022, the average price of a Sky Ranch water and wastewater tap was ~~$31,000~~$34,000 per tap, compared to ~~$29,000~~$31,000 per tap for the three months ended ~~May 31, 2020. During~~February 28, 2021.

Water service costs increased during the ~~third~~second quarter of fiscal 2022 as compared to 2021 ~~we sold 59~~primarily due to the purchase of WISE water for oil and ~~wastewater taps. During~~gas operations.

Wastewater service costs increased during the ~~third~~second quarter of fiscal ~~2020, we sold 36 water and wastewater taps.~~

~~Other revenue –~~ ~~Other revenue increased in 2021~~2022 as compared to ~~2020,~~2021 primarily due to aincreased customers served at Sky Ranch requiring more staff and materials.

Other costs of revenue decreased during the second quarter of fiscal 2022 as compared to 2021 ~~agreement~~primarily due to 2021 including costs to construct a special facility for WISE, which ~~is recognizing revenue on a percent~~was substantially completed before fiscal 2022.

Water deliveries increased during the second quarter of ~~completion basis and increased consulting revenues.~~

~~Water service costs –~~ ~~Wastewater service costs increased in 2021~~fiscal 2022 as compared to ~~2020,~~2021 primarily due to the ~~purchase~~sale of ~~additional WISE water.~~

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

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Table of Contents

	Six Months Ended
(In thousands, except for water deliveries)	February 28, 2022		February 28, 2021		$ Change		% Change
Metered water usage from:
Municipal water usage	$	404	$	241	$	163	68	%
Commercial water usage		1,913		1,782		131	7	%
Wastewater treatment fees		119		93		26	28	%
Water and wastewater tap fees		1,174		2,666		(1,492)	(56)	%
Other revenue		270		406		(136)	(33)	%
Total segment revenue		3,880		5,188		(1,308)	(25)	%

Water service costs		859		758		101	13	%
Wastewater service costs		228		156		72	46	%
Depreciation		706		719		(13)	(2)	%
Other		219		387		(168)	(43)	%
Total expenses		2,012		2,020		(8)	(0)	%

Segment operating income	$	1,868	$	3,168	$	(1,300)	(41)	%

Water deliveries (thousands of gallons)
On Site		24,197		3,240		20,957	647	%
Export - Commercial		8,717		2,448		6,269	256	%
Sky Ranch		21,581		14,655		6,926	47	%
Wild Pointe		9,716		9,202		514	6	%
O&G operations		150,941		80,166		70,775	88	%
Total water deliveries		215,152		109,711		105,441	96	%

~~Other costs of revenue –~~ ~~Other costs of revenue~~

For the six months ended February 28, 2022, municipal water usage 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~~

~~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.

~~Oil and gas operations –~~ ~~Oil and gas operations~~ For the six months ended February 28, 2022, commercial water usage increased ~~in 2021~~ as compared to ~~2020, primarily~~2021 due to increased water sales to 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.~~operators for drilling.

~~Wastewater treatment fees –~~ ~~Wastewater~~For the six months ended February 28, 2022, wastewater treatment fees increased ~~in 2021~~ as compared to ~~2020,~~2021 primarily due to new Sky Ranch customers in our water and wastewater resource development segment.

~~Water~~For the six months ended February 28, 2022, water and wastewater tap ~~fees –~~~~Water and wastewater tap fees increased in 2021~~sales declined as compared to ~~2020, primarily~~2021 due to ~~an increase~~timing of closings at Sky Ranch. Tap sales are driven by building permit applications and are not contractually established with the builders. No permits have been issued for the second development phase as of February 28, 2022, and two of the three builders are sold out in the ~~number of taps sold and increased price, on average, of water and wastewater taps.~~first phase. During the ~~nine~~three months ended ~~May 31, 2021,~~February 28, 2022, the average price of a Sky Ranch water and wastewater tap was ~~$31,000~~$34,000 per tap, compared to ~~$29,000~~$31,000 per tap for the ~~nine~~three months ended ~~May 31, 2020. During~~February 28, 2021.

For the ~~nine~~six months ended ~~May 31, 2021, we sold 146~~February 28, 2022, water ~~and wastewater taps. During the same nine months ended May 31, 2020, we sold 139 water and wastewater taps.~~

~~Other revenue –~~ ~~Other revenue~~service costs increased ~~in 2021~~ as compared to ~~2020,~~2021 primarily due to athe purchase of WISE water for oil and gas operations.

For the six months ended February 28, 2022, wastewater service costs increased as compared to 2021 ~~agreement~~primarily due to new Sky Ranch customers being added to the wastewater system requiring additional staff to provide required services.

For the six months ended February 28, 2022, other costs of revenue decreased as compared to 2021 primarily due to 2021 including costs to construct a special facility for WISE, ~~for~~ which ~~$0.4 million of revenue~~ was ~~recognized. The project is recognizing revenue on a percent of completion basis.~~substantially completed before fiscal 2022.

~~Water service costs –~~ ~~Wastewater service costs~~For the six months ended February 28, 2022, water deliveries 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~~sale of 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.~~

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

3028

Table of Contents

Land Development Results of Operations


	Three Months Ended
					$ Change				Three Months Ended
	May 31,		May 31,		Increase/
	2021		2020		(Decrease)		% Change

	(In thousands, except for lots delivered)
(In thousands)									February 28, 2022		February 28, 2021		$ Change		% Change
Lot sales	$	445	$	696	$	(251)	(36)	%	$	1,629	$	515	$	1,114	216	%
Project management revenue		23		—		23	—			200		1,548		(1,348)	(87)
Total revenue		468		696		(228)	(33)	%		1,829		2,063		(234)	(11)	%

Land development construction		(97)		(506)		(409)	(81)	%
Sky Ranch property tax		(2)		(50)		(48)	(96)	%
Total costs of revenue		(99)		(556)		(457)	(82)	%
Land development construction and project management costs										341		269		72	27	%

Segment operating income	$	369	$	140	$	229	164	%	$	1,488	$	1,794	$	(306)	(17)	%

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~~revenue increased in ~~2021~~second quarter of fiscal 2022 as compared to ~~2020, primarily~~2021 due to the progress made on the second development phase ~~one being nearly complete. Sales~~at Sky Ranch. Additionally, the 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 increased on average 40% over the first development. Per lot revenue will ~~not begin recognizing revenue until platted lots are delivered to~~remain consistent for all four subphases of the ~~home builders, which is expected to begin~~second development phase. Revenue for three of the four builder contracts in the ~~fourth fiscal~~second development phase are recognized over time with progress measured under the percent of completion method. Therefore, revenue will fluctuate due to timing of construction activities throughout the second phase.

In the second quarter of ~~2021.~~

~~Project~~fiscal 2021, we recognized a significant amount of project management revenues – ~~Project management revenues increased in 2021 as compared~~related to ~~2020~~prior periods 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 prior to that period. 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~~increased in ~~2021~~the second quarter of fiscal 2022 as compared to ~~2020,~~2021 primarily due to phase one being nearly ~~complete. Phase~~complete in the second quarter of fiscal 2021 and phase two ~~costs~~of the development progressing in 2022, which are ~~currently~~offset by reimbursable public improvements being ~~capitalized~~reflected as ~~inventories until revenue recognition begins.~~

a receivable from the Sky Ranch ~~property taxes –~~~~Sky Ranch property taxes decreased in 2021~~CAB instead of as a cost of land development.



		Six Months Ended
(In thousands)	February 28, 2022		February 28, 2021		$ Change		% Change
Lot sales	$	4,574	$	2,871	$	1,703	59	%
Project management revenue		448		1,548		(1,100)	(71)
Total revenue		5,022		4,419		603	14	%

Land development construction and project management costs		872		1,988		(1,116)	(56)	%

Segment operating income	$	4,150	$	2,431	$	1,719	71	%

For the six months ended February 28, 2022, lot sales revenue increased as compared to ~~2020, primarily~~2021 due to the ~~improved lots being sold to~~progress made on the ~~homebuilders. Our current basis in~~second development phase at Sky Ranch. Additionally, the ~~Sky Ranch land is low as the land is not yet improved for residential and commercial use. All 506 of the initial lots have been sold to home builders.~~

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

~~Lot 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 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~~in the second development phase increased on average 40% over the first development. Per lot revenue will remain consistent for all four subphases of the second development ~~has not increased but~~phase. 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 ~~per delivered lot fluctuates~~will fluctuate due to ~~the~~ timing of ~~revenue recognition as lots are delivered over time. Revenues~~construction activities throughout the second phase.

In the second quarter of fiscal 2021, we 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.~~

~~Project~~$1.5 million of project management revenues – ~~Project management revenues increased in 2021 as compared~~related to ~~2020~~prior periods 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 prior to that period. 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~~For the six months ended February 28, 2022, land development construction costs decreased ~~in 2021~~ as compared to ~~2020,~~2021 primarily due to phase one being nearly ~~complete. Phase two~~complete and lower per lot 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~~reimbursable public improvements being ~~sold to the homebuilders. Our current basis in~~reflected as a receivable from the Sky Ranch CAB instead of as a cost of land ~~is low~~development. These declines were partially offset by the costs recognized as the ~~land is not yet improved for residential~~second development phase progresses.

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Single-Family Rental Results of Operations

In fiscal 2021 we began construction on three homes that were completed and ~~commercial use.~~

~~Lots delivered –~~ ~~Lot deliveries decreased in~~put into service on November 1, 2021. All three homes were rented effective November 1, 2021, ~~as compared to 2020 due to all lots~~under one year lease agreements. For the three and six months ended February 28, 2022, the revenue presented in the ~~first phase~~statement of operations is the amounts received since November 1, 2021, for each respective period presented. The costs reflected as cost of sales for the rental units include a pro-rata share of the annual property taxes and insurance related specifically to the rental units as well as immaterial fees related to the operations and maintenance assessments from the Sky Ranch ~~having been delivered as of~~CAB that are assessed to every home in Sky Ranch. Our tenants are responsible for all other utilities including water and wastewater services. 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 in the beginning of our fiscal 2023.

Liquidity, Capital Resources and Financial Position

As of ~~May 31, 2021,~~February 28, 2022, our working capital, defined as current assets less current liabilities, was ~~$16.5~~$21.0 million, which included ~~$19.8~~$5.2 million in cash and cash ~~equivalents, of which, $0.3 million is restricted.~~equivalents. We believe that as of ~~May 31, 2021~~February 28, 2022 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~~$0.1 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 infrastructure (including public improvements) for the 850 lots in the second phase of Sky Ranch to be ~~$65~~$65.0 million. Of this, we anticipate spending ~~approximately $21~~$18.8 million in the next twelve months, and we anticipate receiving ~~approximately $22.5~~$18.8 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 three or four months both from unencumbered funds at the Sky Ranch CAB due to recurring tax payments received by the Sky Ranch CAB and 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 three or four 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.

Construction of Public Improvements at School Site

During the six months ended February 28, 2022, we entered into various contracts related to the sale of land in Sky Ranch to a charter school operator. These agreements included a development agreement whereby we agreed to build or have built various public

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improvements (mainly roads, sidewalks and landscaping) leading to the school site. The agreements require us to build two roads and related items by defined dates. In addition, the charter school operator is required to construct one road with related items for which we will pay 50% of the costs. All construction items are required to be completed pursuant to defined dates and if not completed we could owe the charter school up to $4.0 million in liquidated damages. We have already begun construction and currently anticipate the construction will be completed in a timely manner. The roads and related items represent public improvements and are reimbursable by the Sky Ranch CAB. We estimate we will spend $4.0 million over the next eighteen months completing these items, which are for public improvements; therefore, we believe these costs will be reimbursed by the Sky Ranch CAB.

Summary Cash Flows Table


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

	(In thousands)
(In thousands)									February 28, 2022		February 28, 2021		$ Change		% Change
Cash (used) provided by:
Operating activities	$	193	$	15,204	$	(15,011)	(99)	%	$	(13,685)	$	(87)	$	(13,598)	(15,630)	%
Investing activities	$	(2,253)	$	(2,643)	$	(390)	(15)	%		(2,249)		(959)		(1,290)	(135)	%
Financing activities	$	59	$	36	$	23	64	%		1,033		12		1,021	8,508	%

Net Change in cash									$	(14,901)	$	(1,034)	$	(13,867)	(1,341)	%

~~Changes~~For the six months ended February 28, 2022, operating activities used a net $13.7 million of cash, which is due to positive net income being offset by income tax payments, use of cash to fund construction activities (include the public improvements) at Sky Ranch, and timing of when payments are remitted to vendors. We anticipate continuing to spend cash for the construction activities at Sky Ranch for the foreseeable future.

For the six months ended February 28, 2022, investing activities used $2.3 million in ~~Operating Activities –~~ ~~Operating~~cash. The majority of this was related to the land development activities ~~include revenues produced by our segments less costs incurred~~ in the ~~delivery~~second phase of ~~those services and G&A expenses.~~Sky Ranch.

~~Cash provided by operations decreased in~~For the ~~nine~~six months ended ~~May 31, 2021 compared to 2020, primarily due to the bond payment~~February 28, 2022, financing activities produced $1.0 million of ~~$10.5 million we received as partial reimbursement of public improvement expenditures~~cash, mainly from the ~~Sky Ranch CAB~~receipt of $1.0 million in ~~fiscal 2020 and decreased lot sales in~~proceeds from a loan to fund construction of 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. With the exception of updates to significant accounting policies discussed in Note 1 of this Quarterly Report on Form 10-Q, the~~Report. The accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three ~~and nine~~ months ended ~~May 31, 2021~~February 28, 2022 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~~three or six months ended ~~May 31, 2021.~~February 28, 2022. 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.~~

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~~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.

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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, 2021,~~February 28, 2022, pursuant to Rule 13a-15(b) under the Exchange Act. Based on ~~that~~the fiscal 2021 evaluation, the President and the Chief Financial Officer each concluded that, during ~~the period covered by this report,~~fiscal 2021 and as of February 28, 2022, 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 orin addition to considering 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.

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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.

3532

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PART II. OTHER INFORMATION

~~PART II – OTHER INFORMATION~~

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.

3633

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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~~April 11, 2022

3734


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

	(In thousands)
February 29, 2020 balance:	433	$	0	23,852	$	79	$	172,749	$	0	$	(91,676)	$	81,152
Stock option exercises	0		0	2		0		4		0		0		4
Stock granted for services	0		0	0		0		0		0		0		0
Share-based compensation	0		0	0		0		82		0		0		82
Net income	0		0	0		0		0		0		27		27
May 31, 2020 balance:	433	$	0	23,854	$	79	$	172,835	$	0	$	(91,649)	$	81,265


	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	%


					Approximate
				Weighted Average	Aggregate
	Number	Weighted Average		Remaining	Intrinsic Value
	of Options	Exercise Price		Contractual Term	(in thousands)
Outstanding at August 31, 2020	661,500	$	7.23	6.17	$	1,831
Granted	115,000	$	9.00
Exercised	(18,000)	$	3.41
Net settlement exercised	(37,500)	$	3.99
Outstanding at May 31, 2021	721,000	$	7.77	6.30	$	4,592

Options exercisable at May 31, 2021	502,667	$	6.92	5.22	$	3,627


	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