| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its two wholly-owned and controlled subsidiaries, PCY Holdings, LLC and PCYO Home Rentals, LLC. Intercompany accounts and transactions have been eliminated in consolidation. Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) In March 2020, Congress enacted the CARES Act to provide certain relief because of the outbreak of a novel strain of the coronavirus (“COVID-19”) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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, reimbursable costs and expenses, costs of revenue for lot sales, share-based compensation, deferred tax asset valuation, and the useful lives and recoverability of long-lived assets. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company had no cash equivalents as of August 31, 2021 or 2020. At various times during the fiscal year ended August 31, 2021, the Company’s main operating account exceeded federally insured limits. To date, the Company has never suffered a loss due to such excess balance. Contract Asset Contract assets reflect revenue which has been earned but not yet invoiced. Contract assets are transferred to receivables when the Company has the right to bill such amounts and they are invoiced. Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer’s financial condition and collateral is not required. At August 31, 2021, August 31, 2020, and September 1, 2019, the Company had no contract assets. Land Development Inventories Land development inventories primarily includes land, stated at cost, the Company is developing with plans to sell. The Company began developing its Sky Ranch property in 2018. The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development of finished lots at Sky Ranch that meet the Company’s capitalization criteria for improvements to a lot. These costs are capitalized as incurred. The Company uses the specific identification method for purposes of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sold. Costs included in Land Development Inventories The Company measures land development inventories held for sale at the lower of the carrying value or net realizable value. In determining net realizable value, the Company primarily relies upon the most recent comparable sales prices. If recent sales prices are not available, the Company will consider several factors, including, but not limited to, current market conditions, nearby recent sales transactions, and market analysis studies. If the net realizable value is lower than the current carrying value, the land is written down to its net realizable value. Notes Receivable – Sky Ranch CAB As noted above and described in greater detail in Note 14 – Related Party Transactions Concentration of Credit Risk and Fair Value Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. From time to time, the Company places its cash in money market instruments, certificates of deposit and U.S. government treasury obligations. To date, the Company has not experienced significant losses on any of these investments. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant input to determine where within the fair value hierarchy the measurement falls. The estimated fair value measurements in Note 2 – Fair Value Measurements Cash and Cash Equivalents – Trade Accounts Receivable – Restricted Cash – Accounts Payable – Long-Term Financial Liabilities – Water and Land Assets Water and Land Assets Participating Interests in Export Water Notes Receivable – Related Parties – Notes receivable – related parties Off-Balance Sheet Instruments – Participating Interests in Export Water Trade Accounts Receivable The Company records accounts receivable net of allowances for uncollectible accounts. The Company has recorded an allowance for uncollectible accounts in receivables from continuing operations totaling less than $0.1 million and $0.2 million for the periods ended August 31, 2021 and 2020. The allowance for uncollectible accounts was determined based on a specific review of all past due accounts. Recoverability of Long-Lived Assets The Company evaluates its long-lived assets for impairment if the Company determines events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Estimates of future cash flows and timing of events for evaluating long-lived assets for impairment are based upon management’s assumptions and market conditions. If any of its long-lived assets are deemed to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the year ended August 31, 2021 the Company did not identify any indications of impairment loss. The impairment testing of long-lived assets during fiscal 2020 resulted in $1.4 million impairment charge for the Arkansas Valley mineral rights, as described below. As of August 31, 2020, the Company assessed the recoverability of its Arkansas Valley mineral rights. The Company determined the carrying value of these mineral rights is not recoverable. As a result, the Company recorded an impairment charge of $1.4 million. The charge was recorded in Non-cash mineral asset impairment charge Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, if applicable, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. The Company depletes its water assets that are being utilized based on units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees. Revenue Recognition The Company disaggregates revenue by major product line as reported on the consolidated statements of operations and comprehensive income. The Company currently generates revenues through its two business segments. Revenues are derived through its wholesale water and wastewater business and through the sale of developed land primarily for residential lots, both of which businesses are described below. Water and Wastewater Resource Development Segment Revenues The Company generates revenues through its wholesale water and wastewater business predominantly from the items described below. Because these items are separately delivered and distinct, the Company accounts for each of the items separately. Monthly water usage and wastewater treatment fees – Water and Land Assets The Company also sells raw water for industrial uses, mainly to oil and gas companies for use in the drilling processes (referred to as “O&G operations”). O&G operations revenues are recognized at a point in time upon delivering water to the customer, unless other special arrangements are made. During the years ended August 31, 2021 and 2020, the Company delivered 257.8 million and 76.2 million gallons of water to customers. Of this, 60% and 1% was used for O&G operations. The Company recognizes wastewater treatment revenues monthly based on a flat monthly fee and actual usage charges. The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview District. Costs of delivering water and providing wastewater service to customers are recognized as incurred. Water and wastewater tap fees and construction fees/special facility funding the water and/or wastewater systems, the customer has live service and the ability to receive metered water deliveries from the Company’s system and send wastewater into the Company’s system. Thus, the customer has full control of the connection right as it can obtain all the benefits from this right. As such, management has determined that tap fees are separate and distinct performance obligations that are recognized at a point in time. The Company recognizes water and wastewater tap fee revenues at the time the Company grants a right for the customer to connect to the water or wastewater service line to obtain service, and the customer pays the tap fee. During the years ended August 31, 2021 and 2020, the Company recognized $4.4 million and $4.8 million of water tap fee revenues. The water tap fees recognized are based on the amounts billed by the Rangeview District to customers, after deduction of royalties due to the Land Board for water taps, if applicable, and net of amounts paid to third parties pursuant to the CAA as further described in Note 7 – Long-Term Obligations and Operating Lease During the years ended August 31, 2021 and 2020, the Company recognized $0.8 million and $0.9 million of wastewater tap fee revenues. The Company recognizes construction fees, including fees received to construct “special facilities,” over time as the construction is completed because the customer is generally able to use the property improvement to enhance the value of other assets during the construction period. Special facilities are facilities that enable water to be delivered to a single customer and are not otherwise classified as a typical wholesale facility or retail facility. Temporary infrastructure required prior to construction of permanent water and wastewater systems or transmission pipelines to transfer water from one location to another are examples of special facilities. Management has determined that special facilities are separate and distinct performance obligations because these projects are contracted to construct a specific water and wastewater system or transmission pipeline and typically do not include multiple performance obligations in a contract with a customer. For the years ended August 31, 2021 and 2020, the Company recognized $0.4 million and $0 of special facilities revenue. As of August 31, 2021 and 2020, the Company had no contract liabilities related to water tap and construction fee/special facility funding revenue. Consulting fees Special facility projects and other income Land Development Segment Revenues The Company generates revenues through its land development business predominantly from the sources described below. Because these items are separately delivered and distinct, the Company accounts for each of the items separately. Sale of finished lots The timing of cash flows from the second development phase, consistent with the first development phase, include certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries. The Company sells lots at Sky Ranch pursuant to distinct agreements with each home builder. These agreements follow one of two formats: (1) The sale of a finished lot, whereby the homebuilder 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 homebuilder as the transaction cycle is then complete and the Company has no further obligations on the lot. a. For the years ended August 31, 2021 and 2020, the Company received payment and recognized revenue of $1.6 million and $4.9 million from one homebuilder from the sale of 22 and 70 finished lots. (2) The sale of finished lots pursuant to a lot development agreement with builders, whereby the Company receives payments in stages that include: (i) payment upon the delivery of platted lots (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. Ownership and control of the platted lots pass to the builders once the Company closes the sale of the platted lots. Because the builder (i.e., the customer) takes control of the lot at the first closing and subsequent improvements made by the Company improve the builder’s lot as construction progresses, the Company accounts for revenue under this delivery agreement 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. a. For the years ended August 31, 2021 and 2020, the Company recognized $4.2 million and $14.0 million of lot sale revenue over time related to the first and second development phases at Sky Ranch pursuant to lot development agreements. As of August 31, 2021, the Company had received cumulative payments of $26.2 million related to the agreements with home builders in the first development phase relating to 356 lots from two home builders, and $3.9 million from three home builders in the second development phase. Of the amounts received in the first development phase, $26.0 million was recognized as revenue over time based on the costs incurred to date compared to total expected costs for full completion of the 356 lots. Of the amounts received in the second development phase, $2.2 million was recognized as revenue over time based on the costs incurred to date compared to total expected costs for full completion of the 152 lots sold pursuant to lot development agreement. b. The Company does not have any material significant payment terms as all payments from the homebuilders are expected to be received within 12 months after the delivery of the platted lot. The Company adopted the practical expedient for financing components and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year . Reimbursable Costs for Public Improvements Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 14 – Related Party Transactions 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. 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 development phase nearing completion, 804 lots under contract in the second development phase sold (with 152 in the first subphase sold), the Sky Ranch CAB has established a tax base with revenue and fee generation from expected tax collections. Historically, the recognition of these costs was contingent upon the Sky Ranch CAB repaying the Company, but as a mill levy increase was approved due to the remaining development phases at Sky Ranch being in a different taxing district, higher than projected assessed values on completed homes, and the growing lots paying taxes, the Sky Ranch CAB has established a revenue base which the Company has determined provides the Sky Ranch CAB the ability to repay the Company. The Company has determined the reimbursement of these public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection due, as such, the Company has recognized the reimbursable public improvements costs incurred to date at Sky Ranch. During the year ended August 31, 2021, the Company recognized an initial $21.7 million related to the Note receivable – related party related which was recorded to Project management revenue, Other income, and Interest Income - related party. For the second development 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 continued establishment of a sufficient tax base or other fee generating activities sufficient to recover reimbursable costs incurred. Public improvements are considered contract fulfillment costs of the Sky Ranch CAB which are payable to the Company, for which the Company has determined collectability is deemed to be probable and the public reimbursable expenditures incurred related to the second development phase are; therefore, reflected as Notes receivable - related party. During the year ended August 31, 2021, the Company recognized $3.1 million of project management revenue, other income, and interest income related to the amounts owed to the Company by the Sky Ranch CAB related to both development phases. The Company will evaluate the Notes receivable - related party for indicators of impairment each reporting period and an impairment charge will be incurred for any amounts deemed uncollectible. The note receivable from the Sky Ranch CAB bears an interest rate of six percent (6%) per annum until paid. Project management services Construction support activities 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 August 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 $ 27,199 $ 10,505 $ 16,694 Accrued interest 2,926 400 2,526 Project management services 1,570 — 1,570 Construction support activities 951 — 951 Phase 1 reimbursable costs $ 32,646 $ 10,905 $ 21,741 Phase 2 Public improvements $ 2,935 $ — $ 2,935 Accrued interest 33 — 33 Project management services 85 — 85 Phase 2 reimbursable costs $ 3,053 $ — $ 3,053 Total reimbursable costs $ 35,699 $ 10,905 $ 24,794 The Company believes it will incur an additional $0.2 million before the end of its second quarter of fiscal 2022, to complete the construction related to public improvements in the first development phase at Sky Ranch, and $14.2 million related to the first subphase of the second development phase through the end of its fiscal 2022. Deferred Revenue As noted above, 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, the Company will frequently 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 to total expected costs of the project which management believes is a faithful representation of the transfer of goods and services to the customer. Prior to fiscal 2020, 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 was recognized on a straight-line basis over the agreement term. All up-front payments have 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 $1.2 million. As of August 31, 2021 and 2020, the Company’s deferred revenues along with the changes in the deferred revenues are as follows: August 31, 2021 August 31, 2020 (In thousands) Land development segment $ 1,995 $ 1,635 Water and wastewater resource development segment 410 1,965 Balance, end of period $ 2,405 $ 3,600 August 31, 2021 August 31, 2020 (In thousands) (In thousands) Balance, August 31, 2020 $ 3,600 $ 5,059 Deferral of revenue 6,884 24,643 Recognition of unearned revenue (8,079) (26,102) Balance, August 31, 2021 $ 2,405 $ 3,600 When recognized, the amounts reflected as unearned revenue will be recorded in lot sales metered water usage from oil and gas operations Other income oil and gas lease income, net Royalty and Other Obligations Revenues from the sale of Export Water are shown gross of royalties payable to the Land Board. Revenues from the sale of water on the Lowry Range are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to the Company by the Rangeview District. Water revenue from such sales are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District. Oil and Gas Lease Payments As further described in Note 4 – Water and Land Assets Other income Share-based Compensation The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company recognizes share-based compensation costs as expenses over the applicable vesting period of the stock award using the straight-line method. The compensation costs to be expensed are measured at the grant date based on the fair value of the award. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation. The impact on the income tax provision for the granting and exercise of stock options during each of the years ended August 31, 2021 and 2020, was immaterial. During the years ended August 31, 2021 and 2020, the Company recognized $0.5 million and $0.5 million of share-based compensation expense. Income Taxes The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company does not have any significant unrecognized tax benefits as of August 31, 2021. The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating losses and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal 2016 through fiscal 2020. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense. At August 31, 2021, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year ended August 31, 2020. Earnings per Common Share Basic earnings per common share is computed by dividing net income by the weighted-average number of shares outstanding during each period. Diluted earnings per share is computed similarly but reflects the potential dilution that would occur if dilutive options were exercised and all unvested share-based payment awards were vested. Certain outstanding options are excluded from the diluted earnings per share calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than decrease earnings per share). Recently Issued Accounting Pronouncements The Company continually assesses any 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 consequence 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 continues to monitor economic implications of the COVID-19 pandemic and is analyzing how the adoption of ASU 2016-13 might impact its notes receivable from the Sky Ranch CAB and the Rangeview District, but the Company does not anticipate ASU 2016-12 having a material impact on the Company’s consolidated financial statements. Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures. |
