Quarterly report pursuant to Section 13 or 15(d)

REVENUE RECOGNITION AND REIMBURSABLE COSTS

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REVENUE RECOGNITION AND REIMBURSABLE COSTS
 3 Months Ended
Nov. 30, 2020
REVENUE RECOGNITION AND REIMBURSABLE COSTS [Abstract]  
REVENUE RECOGNITION AND REIMBURSABLE COSTS
NOTE 2 – 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 primarily generates revenues through two lines of business, its water and wastewater resource development business and through the sale of finished lots in its land development business, both of which are described below.

Water and Wastewater Resource Development Segment

The Company’s water and wastewater resource development segment provides municipal water and wastewater services, through the Rangeview Metropolitan District (the “Rangeview District”) and Elbert and Highway 86 Metropolitan District (the “Elbert 86 District”) to end use customers for fees, described below. The Rangeview District services Sky Ranch and the other customers on the Lowry Range. The Elbert 86 District services Wild Pointe.

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 purposes. For these services, the Company charges customers monthly fees. Potable and reuse water fees are comprised of a base charge and a usage charge based on actual amounts of water delivered to the customer using a tiered structure that results in higher fees 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 and wastewater tap fees – A tap constitutes a right to connect a residential or commercial building or property to the Company’s water and wastewater systems. Once granted, the customer may make a physical tap into the service line(s) to connect its property to the Company’s systems to obtain water and/or wastewater service. The right stays with the property. The Company has no obligation to physically connect the property to the lines. 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.

Land Development Segment

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

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

Reimbursable Public Improvement Costs  –  The Sky Ranch Community Authority Board (the “Sky Ranch CAB”) is obligated to construct certain public improvements at Sky Ranch. Public improvements are items that are not associated with one lot or one 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. Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 7 – Related Party Transactions), the Company is obligated to provide funding to the Sky Ranch CAB related to the construction of these public improvements. 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 $31.6 million to build these public improvements, including accrued interest, project management fees, and construction support activities, which the Company provided the funding for. In November 2019, the Sky Ranch CAB issued $13.2 million of bonds to recover a portion of the $31.6 million of 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. The Sky Ranch CAB fully intends to issue additional bonds at some time in the future to recover the remaining $21.1 million of total reimbursable costs not included in the initial bond offering, which pursuant to the funding agreement between the Company and the Sky Ranch CAB would be payable to the Company since the Company provided the initial funding. Even if the Sky Ranch CAB does not issue bonds to repay the remaining $21.1 million, the Sky Ranch CAB will receive property tax assessments which could be used to repay the amounts owed to the Company for the public improvements. This filing represented the Company’s and the Sky Ranch CAB’s first land development activities, as such there was no assurance the property taxes or bond issuances would occur in a timely manner or in an amount sufficient to cover the costs of the public improvements. Because the amount and timing were contingent, the Company did not estimate or record any potential reimbursements until the cash was received. Of the $10.5 million received by the Company, $6.3 million was recognized as Income from reimbursement of construction costs (related party) in other income and the remaining $4.2 million partially reduced the remaining capitalized costs in Land development inventories. The agreements between the Company and the Sky Ranch CAB allow for interest to be accrued on amounts funded by the Company to the Sky Ranch CAB. Due to the uncertainty of collecting the interest (because this was the Company’s first development, it had no basis to support estimated payments, and payment is contingent on tax receipts or the issuance of bonds), interest income is not recognized on the amounts owed by the Sky Ranch CAB related to the initial development until it is received.

These public improvements are constructed pursuant to design standards specified by local governmental jurisdictions including the Sky Ranch Districts, the Sky Ranch CAB and Arapahoe County, and, after inspection and acceptance, are turned over to the applicable governmental entity to operate and maintain.

Project management services – Pursuant to two 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 to be paid to the Company qualifies as a reimbursable cost to the Company. 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. Because payment is contingent on receipt of tax dollars or the issuance of bonds, project management fees are deferred and not recognized until they are received.

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 upon completion and are included in Land development inventories and subsequently expensed through Land development construction costs unless or until reimbursement occurs.

As noted above, pursuant to the funding agreements between the Company and the Sky Ranch CAB, the Company is owed amounts it funded or that the Sky Ranch CAB was unable to pay at the time of construction. 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 November 30, 2020
  
   
Costs incurred to date
    
Payments repaid by
Sky Ranch CAB
    
Amounts payable to Pure
Cycle by the Sky Ranch
CAB
  
   
(In thousands)
  
Public Improvements
  
$
28,008
    
$
10,505
    
$
17,503
  
Accrued interest
    
1,456
      
—
      
1,456
  
Project management services
    
1,496
      
—
      
1,496
  
Construction support activities
    
683
      
—
      
683
  
Total reimbursable costs
  
$
31,643
    
$
10,505
    
$
21,138
  

As noted above, the project management services and construction support activities amounts do not include interest since payment of that interest is deemed too contingent. The Company expects to incur an additional $1.3 million through the end of the calendar year 2021 for construction costs related to public improvements to complete its initial 506 lots and expects that amount to be reimbursed to the Company along with the amounts noted in the table above as the Sky Ranch CAB issues bonds or collects property tax assessments.

Deferred Revenue

As noted above, the Company recognizes some 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 receive milestone payments before revenue can be recognized (i.e. prior to the Company completing the construction milestones which produced the revenue) which results in the Company recording deferred revenue. The Company will recognize this revenue into income as construction activities progress.

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 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 not expected to be used by the operator. The customer may take up to one year from the invoice date to use such water. If the customer uses water, the Company recognizes the amount of water used as revenue in the period the water is delivered. If the customer does not use the water in the contract period, such water is forfeited by the customer. The Company evaluates the likelihood that the customer will use the water each reporting period and estimates and recognizes any amounts not anticipated to be used by the customer as revenue in the period the Company determines it is remote the customer will use all the remaining prepaid water volume during the remaining contract period.

Deferred revenue by segment is as follows:

   
November 30, 2020
    
August 31, 2020
  
   
(In thousands)
  
Land development segment
  
$
1,462
    
$
1,636
  
Water and wastewater resource development segment
    
713
      
1,965
  
Balance, end of period
  
$
2,175
    
$
3,601
  

Changes in deferred revenue were as follows:

   
November 30, 2020
  
   
(In thousands)
  
Balance, August 31, 2020
  
$
3,601
  
Deferral of revenue
    
2,182
  
Recognition of unearned revenue
    
(3,608
)
Balance, November 30, 2020
  
$
2,175
  

For the three months ended November 30, 2020 and 2019, we recognized deferred land development revenues of $2.4 million and $8.5 million, and recognized deferred oil and gas leases and water sales revenues of $1.2 million and $1.9 million.

Revenue allocated to remaining performance obligations 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 the three months ended November 30, 2020, the Company received the final payment of $2.2 million, including $1.6 million for outstanding open contracts in the first development filing at Sky Ranch, which represents the final lot sales in the first filing at Sky Ranch, and $0.6 million for neighborhood amenities.