UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 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 No.)

34501 E. Quincy Avenue, Bldg. 65, Suite A, Watkins, CO		80137
(Address of principal executive offices)		(Zip Code)

(303) 292 – 3456

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Common Stock 1/3 of $.01 par value	PCYO	The NASDAQ Stock Market
(Title of each class)	(Trading Symbol(s))	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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


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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 23,986,645 shares of 1/3 of $.01 par value common stock as of January 5, 2023.

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FORWARD-LOOKING STATEMENTS

Statements that are not historical facts contained in 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 (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (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 revenue from our commercial water sales;

●	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;

●	demand for single-family rental homes;

●	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, including anticipated increases in customers and revenue, 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” (as defined herein) 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 phases concurrently with the second phase 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;

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●	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;

●	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 have exceeded market expectations with the delivery of our lots at Sky Ranch;

●	the impact of future cyberattacks on our business, financial condition, operating results and reputation;

●	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;

●	our belief that several long-term land development and housing factors remain positive;

●	the future impacts of COVID-19 on our business;

●	our belief that Sky Ranch is better positioned to navigate the changing market then competitors;

●	the impact of the downturn in the homebuilding market and increased interest rates on our business and financial condition;

●	the impact of supply chain disruptions and volatile raw material prices;

●	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;

●	the anticipated development of the Sky Ranch Academy;

●	service life of constructed facilities;

●	accounting estimates and the impact of new accounting pronouncements; and

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

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:

●	further deterioration in the homebuilding industry or downward changes in general economic or other business conditions;

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

●	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;

●	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 and rising interest rates;

●	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 impact 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;

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PURE CYCLE CORPORATION

CONSOLIDATED BALANCE SHEETS


(In thousands, except shares)	November 30, 2022		August 31, 2022
ASSETS:		(unaudited)
Current assets:
Cash and cash equivalents	$	16,843	$	34,894
Investments in U.S. Treasury Bills		15,113		—
Trade accounts receivable, net		1,240		2,425
Prepaid expenses and other assets		314		467
Total current assets		33,510		37,786
Restricted cash		2,328		2,328
Investments in water and water systems, net		58,711		58,763
Construction in progress		2,484		1,224
Single-family rental units		963		975
Land and mineral rights:
Held for development		7,287		6,773
Held for investment purposes		451		451
Other assets		2,454		2,463
Notes receivable – related parties, including accrued interest
Reimbursable public improvements		18,487		17,208
Other		1,242		1,120
Operating leases - right of use assets		120		138
Total assets	$	128,037	$	129,229

LIABILITIES:
Current liabilities:
Accounts payable	$	1,039	$	849
Accrued liabilities		920		2,029
Accrued liabilities – related parties		653		560
Income taxes payable		2,494		2,530
Deferred lot sale revenues		3,889		4,275
Deferred water sales revenues		552		570
Debt, current portion		10		10
Total current liabilities		9,557		10,823
Participating interests in export water supply		—		323
Debt, less current portion		3,947		3,950
Deferred tax liability, net		1,241		1,075
Lease obligations - operating leases, less current portion		44		62
Total liabilities		14,789		16,233
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; 23,986,645 and 23,980,645 outstanding, respectively		80		80
Additional paid-in capital		174,243		174,150
Accumulated deficit		(61,075)		(61,234)
Total shareholders’ equity		113,248		112,996
Total liabilities and shareholders’ equity	$	128,037	$	129,229

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)


	Three Months Ended
(In thousands, except share information)	November 30, 2022		November 30, 2021
Revenues:
Metered water usage from:
Municipal customers	$	121	$	147
Commercial customers		392		560
Wastewater treatment fees		63		55
Water and wastewater tap fees		150		261
Lot sales		513		2,945
Project management fees		8		248
Single-family rentals		25		8
Special facility projects and other		68		49
Total revenues		1,340		4,273

Expenses:
Water service operations		479		289
Wastewater service operations		138		129
Land development construction costs		143		531
Project management costs		72		—
Single-family rental costs		10		3
Depletion and depreciation		378		354
Other		106		77
Total cost of revenues		1,326		1,383

General and administrative expenses		1,388		1,325
Depreciation		115		85
Operating (loss) income		(1,489)		1,480

Other income (expense):
Interest income - related party		247		361
Interest income - Investments		228		1
Oil and gas royalty income, net		116		97
Oil and gas lease income, net		19		48
Other, net		1,218		11
Interest expense, net		(50)		(7)
Income from operations before income taxes		289		1,991
Income tax expense		130		477
Net income	$	159	$	1,514

Earnings per common share - basic and diluted
Basic	$	0.01	$	0.06
Diluted	$	0.01	$	0.06
Weighted average common shares outstanding:
Basic		23,985,788		23,917,908
Diluted		24,087,893		24,219,236

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)


	Three Months Ended November 30, 2022
	Preferred Stock			Common Stock			Additional		Accumulated
(in thousands, except shares)	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Total
Balance at August 31, 2022	432,513	$	—	23,980,645	$	80	$	174,150	$	(61,234)	$	112,996
Restricted stock grants	—		—	6,000		—		15		—		15
Share-based compensation	—		—	—		—		78		—		78
Net income	—		—	—		—		—		159		159
Balance at November 30, 2022	432,513	$	—	23,986,645	$	80	$	174,243	$	(61,075)	$	113,248



	Three Months Ended November 30, 2021
	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	—		—	6,467		—		—		—		—
Share-based compensation	—		—	—		—		112		—		112
Net income	—		—	—		—		—		1,514		1,514
Balance at November 30, 2021	432,513	$	—	23,923,100	$	80	$	173,625	$	(69,339)	$	104,366

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Months Ended
(In thousands)	November 30, 2022		November 30, 2021
Cash flows from operating activities:
Net income	$	159	$	1,514
Adjustments to reconcile net income to net cash used by operating activities:
Trade accounts receivable		1,185		315
Depreciation and depletion		493		439
Prepaid expenses		153		141
Taxes payable		(36)		(2,978)
Share-based compensation expense		93		112
Deferred income taxes		166		6
Deferred water sales revenue		(18)		(139)
Amortized discount on U.S. Treasury Bills		(113)		—
Net activity for notes receivable - related party, other		(122)		102
Other assets and liabilities		(149)		(1)
Deferred lot sale revenues		(386)		836
Accounts payable and accrued liabilities		(904)		(1,156)
Net activity for note receivable - related party, reimbursable public improvements		(1,279)		(4,723)
Land under development		—		(422)
Net cash used by operating activities		(758)		(5,954)
Cash flows from investing activities:
Purchase of U.S. Treasury Bills		(15,000)		—
Construction costs of single-family rentals		(1,026)		(142)
Investments in water and water systems		(563)		(652)
Investments in future development phases at Sky Ranch		(514)		(1,419)
Purchase of property and equipment		(76)		(35)
Net cash used by investing activities		(17,179)		(2,248)
Cash flows from financing activities:
Payments to contingent liability holders		(111)		—
Payments on notes payable		(3)		—
Proceeds from notes payable		—		1,000
Net cash (used) provided by financing activities		(114)		1,000
Net change in cash, cash equivalents and restricted cash		(18,051)		(7,202)
Cash, cash equivalents and restricted cash – beginning of period		37,222		22,444
Cash, cash equivalents and restricted cash – end of period	$	19,171	$	15,242
Cash and cash equivalents	$	16,843	$	12,914
Restricted cash		2,328		2,328
Total cash, cash equivalents and restricted cash	$	19,171	$	15,242

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	—	$	3,450
Cash paid for interest	$	48	$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in reimbursable public improvements included in accounts payable and accrued liabilities	$	104	$	2,049
Issuance of stock for compensation	$	12	$	—

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOVEMBER 30, 2022

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The accompanying unaudited consolidated financial statements have been prepared by Pure Cycle Corporation (Company) and include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company as of and for the three months ended November 30, 2022 and 2021. The August 31, 2022 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) have been condensed or omitted. It is suggested the accompanying 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 year ended August 31, 2022 (2022 Annual Report) filed with the Securities and Exchange Commission (SEC) on November 14, 2022. The results of operations for interim periods presented are not necessarily indicative of the operating results expected for the full fiscal year.

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, dollar amount of reimbursable costs and collectability of reimbursable costs, costs of revenue for lot sales, share-based compensation, and the useful lives and recoverability of long-lived assets. Actual results could differ from those estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment.

Reclassifications

The Company has reclassified certain prior year information to conform to the current year presentation.

NOTE 2 – INVESTMENTS

Management determines the appropriate classification of its investments in U.S. Treasury debt securities at the time of purchase and re-evaluates such determinations each reporting period.

U.S. Treasury debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. On November 30, 2022, the Company had $15.1 million of investments classified as held-to-maturity, which are comprised entirely of Treasury Bills with maturity dates in March 2023. On November 30, 2022, the Company had just over $0.1 million in unamortized discount on Treasury Bills. Investments are being carried at amortized cost.

NOTE 3 – REIMBURSABLE PUBLIC IMPROVEMENTS AND NOTE RECEIVABLE FROM THE SKY RANCH CAB

The Sky Ranch Community Authority Board (Sky Ranch CAB) and the Company’s agreements with the Sky Ranch CAB are described in greater detail in Notes 5 and 15 to the 2022 Annual Report.

The note receivable from the Sky Ranch CAB reports the balances owed by the Sky Ranch CAB to the Company for public improvements paid for by the Company which are reimbursable from the Sky Ranch CAB, project management fees, and interest accrued on the unpaid balances related to the ongoing development of the Sky Ranch master planned community. The Company has advanced funds to the Sky Ranch CAB for the cost of public improvements at Sky Ranch which are the ultimate responsibility of the Sky Ranch CAB. During the second quarter of fiscal 2021, the Company determined that repayment of those improvements was probable, along with the project management fees and interest on these costs. 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 expensed as land

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development construction costs) and began recognizing project management fee revenue and interest income on the entire note receivable from the Sky Ranch CAB. Prior to that date, payment was not deemed to be probable; therefore, the Company capitalized those costs as land under development and subsequently expensed the reimbursable public improvements and did not recognize any project management fees or interest income due to the uncertainty of collectability. During the three months ended November 30, 2022, the Company spent $1.0 million on public improvements which are payable by the Sky Ranch CAB to the Company. Since the Company believes the amounts are probable of collection, they have been added to the note receivable from the Sky Ranch CAB. Additionally, for the three months ended November 30, 2022, project management fees owed to the Company of less than $0.1 million and interest income on the outstanding note receivable of $0.2 million were also added to the note receivable. No payments were made on the note receivable during the three months ended November 30, 2022 and 2021. Pursuant to the agreements with the Sky Ranch CAB, any payments received are initially applied to interest.

The following table summarizes the activity and balances associated with the note receivable from the Sky Ranch CAB:


		Three Months Ended
		November 30, 2022		November 30, 2021
Beginning balance	$	17,208	$	24,794
Additions		1,279		4,723
Payments received		—		—
Ending balance	$	18,487	$	$ 29,517

The note receivable from the Sky Ranch CAB accrues interest at 6% per annum. Public improvements which are not probable of reimbursement at the time of being incurred are considered contract fulfillment costs and are recorded as 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.

NOTE 4 – REVENUES, FEES AND OTHER INCOME ITEMS

Metered water usage, wastewater treatment fees, water and wastewater tap fees, lot sales, and project management revenue

The Company’s revenue is primarily generated from the sale of lots to homebuilders, sales of water and wastewater taps, and metered water and wastewater usage. Detailed descriptions of the policies related to revenue recognition are included in Note 2 to the 2022 Annual Report.

The following describes significant components of revenue for the three months ended November 30, 2022 and 2021.

Water and wastewater tap fees – During the three months ended November 30, 2022 and 2021, the Company sold a total of four and nine water and wastewater taps generating $0.2 million and $0.3 million in tap fee revenues. These taps were all sold at Sky Ranch and Wild Pointe.

Sale of finished lots – For the three months ended November 30, 2022 and 2021, the Company recognized $0.5 million and $2.9 million of lot sale revenue, which was recognized using the percent-of-completion method for the Company’s land development activities at the Sky Ranch master planned community. As of November 30, 2022, the first development phase is complete and the second development phase is being developed in four subphases, referred to as Phase 2A, Phase 2B, Phase 2C and Phase 2D. As of the date of this filing, only Phase 2A is being actively developed, and it is just under 80% complete.

Project management services – During the three months ended November 30, 2022 and 2021, the Company recognized less than $0.1 million and $0.2 million of project management revenue from the related party (Sky Ranch CAB) for managing the Sky Ranch development process.

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Single-family rental revenue

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. For both of the three-month periods ended November 30, 2022 and 2021, the Company reported less than $0.1 million of rental property revenues. The Company has begun construction on 11 additional rental homes, which the Company believes will be available for rent at various dates throughout fiscal 2023, and reserved an additional 36 lots in Phases 2B, 2C and 2D 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.

Special facility projects and other revenue

Pure Cycle receives fees from customers including municipalities and area water providers for contract operations services. These fees are recognized as earned, typically monthly, plus charges for additional work performed. Additionally, the Company performs certain construction activities at Sky Ranch. The activities performed include construction and maintenance services. The revenue for both types of services are invoiced and recognized as special facility projects revenue. For both of the three-month periods ended November 30, 2022 and 2021, the Company recognized less than $0.1 million of special facility projects and other revenue, an immaterial amount of which is from work performed for the Sky Ranch CAB, a related party.

Deferred revenue

Changes and balances of the Company’s deferred revenue accounts by segment are as follows:


	Three Months Ended November 30, 2022
(In thousands)	Water and Wastewater Resource Development		Land Development		Total
Balance at August 31, 2022	$	570	$	4,275	$	4,845
Revenue recognized		(18)		(513)		(531)
Revenue deferred		-		127		127
Balance at November 30, 2022	$	552	$	3,889	$	4,441


	Three Months Ended November 30, 2021
(In thousands)	Water and Wastewater Resource Development		Land Development		Total
Balance at August 31, 2021	$	410	$	1,995	$	2,405
Revenue recognized		(139)		(2,945)		(3,084)
Revenue deferred		-		3,781		3,781
Balance at November 30, 2021	$	271	$	2,831	$	3,102

The Company receives deposits or pre-payments from oil and gas operators to reserve water for use in future well drilling operations. When the operators use the water, the Company recognizes the revenue for these payments in the metered water usage from the commercial customers line on the statement of operations.

The Company recognizes lot sales over time as construction activities progress and not necessarily when payment is received. For example, the Company 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 estimated costs of the project, which management believes is a faithful representation of the transfer of goods and services to the customer.

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.

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NOTE 5 – FAIR VALUE MEASUREMENTS

Fair value accounting guidance includes a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).

The carrying value for certain of the Company’s financial instruments (i.e., cash and cash equivalents, investments in U.S. Treasury Bills, restricted cash, accounts receivable, notes receivable from related parties, accounts payable, accrued liabilities, the SFR Note and the Lost Creek Note) materially approximate their fair value because of their short-term nature and generally negligible credit losses.

As of November 30, 2022 and August 31, 2022, the Company had no assets or liabilities measured at fair value on a recurring basis. As of August 31, 2022, the Company had one Level 3 liability, which is the contingent portion of the CAA.

There were no transfers between Level 1, 2 or 3 categories during the three months ended November 30, 2022 or 2021.

NOTE 6 – WATER, LAND AND 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 to the 2022 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:


	November 30, 2022				August 31, 2022
			Accumulated				Accumulated
			Depreciation				Depreciation
(In thousands)	Costs		and Depletion		Costs		and Depletion
Rangeview water system	$	19,884	$	(2,275)	$	19,881	$	(2,099)
Rangeview water supply		14,859		(17)		14,809		(17)
Water supply – Other		7,612		(1,820)		7,612		(1,739)
Sky Ranch water rights and other costs		7,764		(1,334)		7,764		(1,280)
Sky Ranch pipeline		5,740		(1,032)		5,740		(984)
Lost Creek water supply		7,317		—		7,041		—
Fairgrounds water and water system		2,900		(1,437)		2,900		(1,415)
Wild Pointe service rights		1,632		(1,082)		1,632		(1,082)
Totals		67,708		(8,997)		67,379		(8,616)
Net investments in water and water systems	$	58,711			$	58,763

During the three months ended November 30, 2022, the Company acquired three deep water wells in the Lost Creek Designated Groundwater Basin for $0.3 million.

Construction in Progress

The construction in progress account 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 of costs incurred related to the construction of 11 homes to be used in the Company’s single-family rental business and water facilities being constructed, which the Company anticipates will be placed in service during the next 12 months. During the three months ended November 30, 2022, the Company incurred $1.0 million of costs related to construction of single-family rental units and $0.2 million related to water and wastewater construction projects.

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Single-Family Rental Homes

During the three months ended November 30, 2021, the Company completed construction of the first three units being utilized in its single-family rental business. The costs of the units are capitalized and when applicable are depreciated over periods not exceeding thirty-years, which is dependent on the asset type. All three units were placed in service and leased effective November 1, 2021.

During the year ended August 31, 2022, the Company contracted for construction of 11 additional rental units to be used in the rental business. The Company began construction on one single-family detached unit in March 2022 with an estimated completion in December 2022, with the remaining ten units, comprised of single-family detached houses, townhomes, and paired homes beginning, construction in the summer of 2022 with estimated completion dates in the third and fourth quarter of fiscal 2023. During the three months ended November 30, 2022, the Company incurred costs of $1.0 million related to the construction of these 11 units, which costs are included in the construction in progress account as of November 30, 2022.

The Company has reserved a total of 46 lots in Phase 2 (ten of which are in Phase 2A and under construction as of November 30, 2022) of Sky Ranch to build additional rental units.

NOTE 7 – DEBT AND OTHER LONG-TERM OBLIGATIONS

As of November 30, 2022, the debt balances and scheduled maturities of the Company’s loans for each of the twelve months ending November 30 are as follows, with each loan described below the table:


(In thousands)	Scheduled principal payments
Within 1 year	$	14
Year 2		14
Year 3		166
Year 4		391
Year 5		1,277
Thereafter		2,132
		3,994
Deferred financing costs		(37)
Net		3,957
Less current maturities		(10)
Debt, less current portion	$	3,947

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 three single-family rental units. The SFR Note has the following terms:

●

Floating per annum interest rate equal to the Western Edition of the “Wall Street Journal” Prime Rate plus 0.5% (4.25% as of November 30, 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

●

Six interest only payments which began January 1, 2022

●

Fifty-three principal and interest payments each month which began July 1, 2022 in the amount of $4,600 each

●

Estimated final principal and interest balloon payment of $0.9 million payable on December 1, 2026

●

Secured by three single-family rental homes

●

Required minimum debt service coverage ratio of 1.10, measured annually based on audited financial statements (which the Company satisfied as of August 31, 2022), 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 Company is working with its primary bank to provide similar financing for the rental units currently under construction. As of November 30, 2022, these loans have not been finalized.

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Lost Creek Note

On June 28, 2022, the Company entered a loan with its bank to fund the acquisition of 370 acre-feet of water rights the Company acquired on June 27, 2022, in the Lost Creek Designated Groundwater Basin area of Colorado (Lost Creek Note). The Lost Creek Note has a principal balance of $3.0 million, a ten-year maturity, monthly interest only payments averaging $12,000 per month for thirty-six months which began on July 28, 2022, twenty-four monthly principal and interest payments of $42,000 beginning on July 28, 2025, fifty-nine monthly principal and interest payments of $32,000 beginning on July 28, 2027, and a balloon payment of less than $0.8 million plus unpaid and accrued interest due on June 28, 2032. The Lost Creek Note has a thirty-year amortization period and a fixed per annum interest rate equal to 4.90% with no fee on the unused portion. The Lost Creek Note is secured by the Lost Creek Water rights acquired with the note and any fees derived from the use of the Lost Creek Water rights. The Lost Creek Note does not contain any financial covenants.

Working Capital Line of Credit

On January 31, 2022, the Company entered a Business Loan Agreement (Working Capital LOC) with its 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% (7.5% as of November 30, 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 an additional 2.0%. As of November 30, 2022, the Company has not drawn on the Working Capital LOC.

Letters of Credit

At November 30, 2022, the Company has four Irrevocable Letters of Credit (LOCs) outstanding. The LOCs are to guarantee the Company’s performance related to certain construction projects at Sky Ranch. As long as the Company performs on the contracts, which the Company has the full intent and ability to perform on the contracts, the LOC’s will expire at various dates from December 2023 through July 2024. As of November 30, 2022, these four LOCs totaled $2.3 million, which are secured by cash balances maintained in restricted cash accounts at the Company’s bank, renew annually at various dates and have a 1% annual fee.

Participating Interest in Export Water

Refer to Note 6 in the 2022 Annual Report for additional details regarding the “CAA.” The CAA, which was used to acquire the Company’s Rangeview Water Supply, included contractual payments when the Company sells “Export Water.” To reduce the long-term impacts of the CAA, in the past the Company has acquired portions of the obligation from the third-party holders. During the three months ended November 30, 2022, the Company acquired the remaining $0.9 million of total CAA interests (of which $0.3 million was reflected on the Company’s balance sheet and the remaining was deemed contingent and not reflected on the balance sheet) for $0.1 million in cash. The Company recorded a gain of $0.2 million on the acquisition which is included in other income.

NOTE 8 – EMPLOYEE STOCK PLANS

The Company reserved 1.6 million shares of common stock for issuance to employees and directors pursuant to the Company’s 2014 Equity Incentive Plan (2014 Equity Plan). As of November 30, 2022 and August 31, 2022, there were 909,620 shares and 912,953 shares available for grant under the 2014 Equity Plan. 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 (2004 Incentive Plan), which expired on April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan.

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The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the three months ended November 30, 2022:


	Number of Options	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Approximate Aggregate Intrinsic Value (in thousands)
Outstanding at August 31, 2022	712,500	$	8.75	5.7		1,489
Granted	—	$	—
Exercised	—	$	—
Forfeited / Expired	—	$	—
Outstanding at November 30, 2022	712,500	$	8.75	5.5	$	1,640

Options exercisable at November 30, 2022	581,500	$	8.17	4.9	$	1,542

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

The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as for the three months ended November 30, 2022:


	Number of Options	Weighted Average Grant Date Fair Value
Non-vested options outstanding at August 31, 2022	232,998	$	4.47
Granted	—	$	—
Vested	(101,998)	$	4.40
Forfeited	—	$	—
Non-vested options outstanding at November 30, 2022	131,000	$	4.54

All non-vested options are expected to vest.

During the three months ended November 30, 2022, the Company issued certain employees 6,000 shares of restricted stock (Restricted Shares). The Restricted Shares vested 20% at the September 14, 2022 grant date, and 20% each anniversary of the grant date for four years. The Restricted Shares are eligible to vote and participate in any dividend or stock splits approved by the Company. The Company recognized less than $0.1 million of stock-based compensation expense related to the issuance of the Restricted Shares.

For each of the three-month periods ended November 30, 2022 and 2021, the Company recorded less than $0.1 million of stock-based compensation expense.

At November 30, 2022, the Company had unrecognized compensation expenses totaling $0.3 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 years.

NOTE 9 – RELATED PARTY TRANSACTIONS

The Rangeview Metropolitan District

The Rangeview Metropolitan District (Rangeview District) and the Company’s agreements with the Rangeview District are described in greater detail in Note 15 to the 2022 Annual Report.

The Rangeview District and the Company have entered into two loan agreements. In 1995, the Company extended a loan to the Rangeview District for borrowings of up to $0.25 million, which is unsecured, and bears interest based on the prevailing prime rate plus 2% (8.25% at November 30, 2022). The maturity date of the loan is December 31, 2022, at which time it automatically renews through December 31, 2023. Beginning in January 2014, the Rangeview District and the Company entered into a funding agreement that 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

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Agreement among the Rangeview District, the Company, and the State Board of Land Commissioners remains in effect. The November 30, 2022, balance in notes receivable - related parties, other totaled $1.2 million, which included borrowings of just under $1.2 million and accrued interest of less than $0.1 million. As of August 31, 2022, the principal and interest on both loan agreements totaled $1.1 million, which included just under $1.1 million of borrowings and less than $0.1 million of accrued interest. During the three months ended November 30, 2022 and 2021, the Company did not receive any interest or principal payments from the Rangeview District.

Additionally, the Company provides funding to the Rangeview District for the Rangeview District’s participation in the “Wise Partnership.” The WISE Partnership and capitalized terms related to WISE not defined herein are defined in the 2022 Annual Report. During the three months ended November 30, 2022 and 2021, the Company, through the Rangeview District, received metered water deliveries of 55 acre-feet and 11 acre-feet of WISE water, paying $0.1 million and less than $0.1 million for this water. The cost of 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, 2022, WISE water was approximately $6.13 per thousand gallons and such rate will remain in effect through calendar 2022. As of November 30, 2022, the rate that goes into effect January 1, 2023, had not been released.

Sky Ranch Community Authority Board

The Sky Ranch CAB and the Company’s agreements with the Sky Ranch CAB are described in greater detail in Note 15 to the 2022 Annual Report.

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 Sky Ranch. The Sky Ranch CAB was formed 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. 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. To fund these improvements, the Company and the Sky Ranch CAB entered into various funding agreements obligating the Company to advance funding to the Sky Ranch CAB for specified public improvements constructed from 2018 to 2023. All amounts owed under the 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 November 30, 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 total $18.5 million. The advances have been used by the Sky Ranch CAB to pay for construction of public improvements. The Company submits specific costs for reimbursement to the Sky Ranch CAB that have been certified by an independent third-party. The Company anticipates providing additional funding of approximately $4.3 million for construction of public improvements to the Sky Ranch CAB during the remainder of fiscal 2023 related to Phase 2A of the Sky Ranch development.

In fiscal 2022, through a competitive bidding process, the Sky Ranch CAB awarded the Company a contract to construct fencing around Phase 2A of the Sky Ranch Master Planned Community. The contracted bid price is $0.3 million, which will be recognized as revenue as the construction of the fence progresses. During the three months ended November 30, 2022, the Company recognized less than $0.1 million of revenue related to this contract.

Nelson Pipeline Constructors LLC

Through a competitive bidding process, the Sky Ranch CAB awarded Nelson Pipeline Constructors, LLC (Nelson), a contract to construct the wet utility pipelines in Phase 2A of Sky Ranch. During the three months ended November 30, 2022 and 2021, the Sky Ranch CAB paid Nelson $0.2 million and $3.5 million related to this contract. Nelson is majority owned by the chair of the Company’s board of directors.

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NOTE 10 – SIGNIFICANT CUSTOMERS

The Company has significant customers in its operations. The table below presents the percentage of total revenue for the reported customers for the three months ended November 30, 2022 and 2021. For water and wastewater customers, the Company primarily provides services on behalf of the Rangeview District for which the significant end users include all Sky Ranch homes in the aggregate combined with the Sky Ranch CAB and two oil & gas operators. The home builders at Sky Ranch account for lot purchase revenue but also for water and wastewater tap fee revenues.


	Three Months Ended
% of Total Revenue Generated From:	November 30, 2022		November 30, 2021
Sky Ranch homes and Sky Ranch CAB in the aggregate	19	%	12	%
Two oil & gas operators	15	%	10	%
KB Home	13	%	16	%
Lennar	9	%	25	%
Challenger	9	%	23	%
Taylor Morrison	—	%	7	%

NOTE 11 – ACCRUED LIABILITIES


(In thousands)	November 30, 2022		August 31, 2022
Accrued compensation	$	390	$	1,325
Other operating payables		73		308
WISE water		93		32
Operating lease obligation, current		77		76
Property taxes		225		164
Professional fees		55		115
Rental deposits		7		9
Total accrued liabilities	$	920	$	2,029

Land development costs due to the Sky Ranch CAB	$	640	$	536
Due to Rangeview Metropolitan District		13		24
Total accrued liabilities - related parties	$	653	$	560

NOTE 12 – SEGMENT INFORMATION

The Company reports two operating segments which meet segment disclosure requirements, the water and wastewater resource development segment and the land development segment. The single-family rentals, although not currently material to operations and not a required segment disclosure, is presented within the operating segment information below for informational purposes.

The water and wastewater resource development segment includes 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 three months ended November 30, 2022 and 2021, was done exclusively at the Company’s Sky Ranch Master Planned Community. The single-family rental business includes the monthly rental fees received from the renters under the non-cancellable annual leases.

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


	Three Months Ended November 30, 2022
(In thousands)	Water and wastewater resource development		Land development		Single-family rental		Total
Total revenue	$	794	$	521	$	25	$	1,340

Cost of revenue		723		215		10		948
Depreciation and depletion		378		—		—		378
Total cost of revenue		1,101		215		10		1,326

Segment (loss) profit	$	(307)	$	306	$	15	$	14


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PART I. FINANCIAL INFORMATION		4

	Item 1. Consolidated Financial Statements	4

	Consolidated Balance Sheets: November 30, 2022 (unaudited) and August 31, 2022	4

	Consolidated Statements of Operations (unaudited): For the three months ended November 30, 2022 and 2021	5

	Consolidated Statements of Shareholders’ Equity (unaudited): For the three months ended November 30, 2022 and 2021	5

	Consolidated Statements of Cash Flows (unaudited): For the three months ended November 30, 2022 and 2021	7
	Notes to Condensed Consolidated Financial Statements	8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	27

	Item 4. Controls and Procedures	27

PART II. OTHER INFORMATION		28

	Item 6. Exhibits	28

SIGNATURES		29