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 February 28, 2023

☐	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: 24,054,843 shares of 1/3 of $.01 par value common stock as of April 11, 2023.

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PURE CYCLE CORPORATION

INDEX TO FEBRUARY 28, 2023 FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION		4

	Item 1. Consolidated Financial Statements	4

	Consolidated Balance Sheets: February 28, 2023 (unaudited) and August 31, 2022	4

	Consolidated Statements of Operations (unaudited): For the three and six months ended February 28, 2023 and 2022	5

	Consolidated Statements of Shareholders’ Equity (unaudited): For the three and six months ended February 28, 2023 and 2022	6

	Consolidated Statements of Cash Flows (unaudited): For the six months ended February 28, 2023 and 2022	7
	Notes to Condensed Consolidated Financial Statements	8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	30

	Item 4. Controls and Procedures	30

PART II. OTHER INFORMATION		31

	Item 6. Exhibits	31

SIGNATURES		32

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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 housing, including 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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●	changes in private and federal mortgage financing programs and lending practices;

●	uncertainties in the estimation of water available under decrees;

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

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

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

●	uncertainties in the estimation of costs of construction projects;

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

●	the strength and financial resources of our competitors;

●	our ability to find and retain skilled personnel;

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

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

●	availability and cost of labor, material and equipment;

●	engineering and geological problems;

●	environmental risks and regulations;

●	our ability to raise capital;

●	changes in corporate tax rates;

●	our ability to negotiate contracts with customers;

●	uncertainties in water court rulings;

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

●	the factors described under “Risk Factors” in Part I Item IA of our most recent Annual Report on Form 10-K.

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PURE CYCLE CORPORATION

CONSOLIDATED BALANCE SHEETS


(In thousands, except shares)	February 28, 2023		August 31, 2022
ASSETS:		(unaudited)
Current assets:
Cash and cash equivalents	$	7,224	$	34,894
Investments in U.S. Treasury Bills		15,245		—
Trade accounts receivable, net		2,121		2,425
Income taxes receivable		1,610		—
Prepaid expenses and other assets		603		467
Total current assets		26,803		37,786
Restricted cash		2,331		2,328
Investments in water and water systems, net		58,368		58,763
Construction in progress		3,383		1,224
Single-family rental units		1,500		975
Land and mineral rights:
Held for development		8,082		6,773
Held for investment purposes		451		451
Other assets		2,485		2,463
Notes receivable – related parties, including accrued interest
Reimbursable public improvements and project management fees		20,609		17,208
Other		1,299		1,120
Operating leases - right of use assets		103		138
Total assets	$	125,414	$	129,229

LIABILITIES:
Current liabilities:
Accounts payable	$	656	$	849
Accrued liabilities		1,201		2,029
Accrued liabilities – related parties		596		560
Income taxes payable		—		2,530
Deferred lot sale revenues		3,473		4,275
Deferred water sales revenues		533		570
Debt, current portion		10		10
Total current liabilities		6,469		10,823
Participating interests in export water supply		—		323
Debt, less current portion		3,945		3,950
Deferred tax liability, net		1,170		1,075
Lease obligations - operating leases, less current portion		25		62
Total liabilities		11,609		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; 24,054,843 and 23,980,645 outstanding, respectively		80		80
Additional paid-in capital		174,611		174,150
Accumulated deficit		(60,886)		(61,234)
Total shareholders’ equity		113,805		112,996
Total liabilities and shareholders’ equity	$	125,414	$	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				Six Months Ended
(In thousands, except share information)	February 28, 2023		February 28, 2022		February 28, 2023		February 28, 2022
Revenues:
Metered water usage from:
Municipal customers	$	83	$	69	$	204	$	180
Commercial customers		59		1,541		451		2,137
Wastewater treatment fees		78		64		141		119
Water and wastewater tap fees		994		913		1,144		1,174
Lot sales		1,391		1,629		1,904		4,574
Project management fees		123		200		131		448
Single-family rentals		31		26		56		34
Special facility projects and other		231		222		299		270
Total revenues		2,990		4,664		4,330		8,936

Expenses:
Water service operations		402		570		881		859
Wastewater service operations		116		99		254		228
Land development construction costs		188		295		331		826
Project management costs		74		46		146		46
Single-family rental costs		19		4		29		7
Depletion and depreciation		461		352		839		706
Other		141		141		247		219
Total cost of revenues		1,401		1,507		2,727		2,891

General and administrative expenses		1,707		1,552		3,095		2,876
Depreciation		122		97		237		182
Operating (loss) income		(240)		1,508		(1,729)		2,987

Other income (expense):
Interest income - related party		263		525		510		888
Interest income - Investments		218		2		446		3
Oil and gas royalty income, net		67		110		183		207
Oil and gas lease income, net		19		48		38		96
Other, net		(1)		14		1,217		25
Interest expense, net		(47)		(13)		(97)		(21)
Income from operations before income taxes		279		2,194		568		4,185
Income tax expense		90		501		220		978
Net income	$	189	$	1,693	$	348	$	3,207

Earnings per common share - basic and diluted
Basic	$	0.01	$	0.07	$	0.01	$	0.13
Diluted	$	0.01	$	0.07	$	0.01	$	0.13
Weighted average common shares outstanding:
Basic		24,023,775		23,944,141		24,004,677		23,931,307
Diluted		24,142,300		24,184,161		24,114,089		24,194,579

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)


	Three Months Ended February 28, 2023
	Preferred Stock			Common Stock			Additional		Accumulated
(in thousands, except shares)	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Total
Balance at November 30, 2022	432,513	$	—	23,986,645	$	80	$	174,243	$	(61,075)	$	113,248
Restricted stock grants	—		—	50,000		—		99		—		99
Stock granted for services	—		—	18,198		—		180		—		180
Share-based compensation	—		—	—		—		89		—		89
Net income	—		—	—		—		—		189		189
Balance at February 28, 2023	432,513	$	—	24,054,843	$	80	$	174,611	$	(60,886)	$	113,805


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


	Six Months Ended February 28, 2023
	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	—		—	56,000		—		111		—		111
Stock granted for services	—		—	18,198		—		180		—		180
Share-based compensation	—		—	—		—		170		—		170
Net income	—		—	—		—		—		348		348
Balance at February 28, 2023	432,513	$	—	24,054,843	$	80	$	174,611	$	(60,886)	$	113,805



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

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Six Months Ended
(In thousands)	February 28, 2023		February 28, 2022
Cash flows from operating activities:
Net income	$	348	$	3,207
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and depletion		1,076		888
Share-based compensation expense		461		371
Trade accounts receivable		304		(506)
Deferred income taxes		95		(205)
Deferred water sales revenue		(37)		29
Prepaid expenses		(136)		(596)
Other assets and liabilities		(137)		2
Net activity for notes receivable - related party, other		(179)		(25)
Amortized discount on U.S. Treasury Bills		(245)		—
Deferred lot sale revenues		(802)		(792)
Accounts payable and accrued liabilities		(1,063)		(3,341)
Taxes payable / receivable		(4,140)		(4,076)
Additions to note receivable - related party, reimbursable public improvements		(3,401)		(8,169)
Land under development		—		(472)
Net cash used by operating activities		(7,856)		(13,685)
Cash flows from investing activities:
Purchase of U.S. Treasury Bills		(15,000)		—
Construction costs of single-family rentals		(1,579)		(142)
Investments in water and water systems		(1,613)		(463)
Investments in future development phases at Sky Ranch		(1,309)		(1,948)
Payments received on note receivable - related party, other		—		304
Purchase of property and equipment		(194)		—
Net cash used by investing activities		(19,695)		(2,249)
Cash flows from financing activities:
Payments to contingent liability holders		(111)		(1)
Payments on notes payable		(5)		—
Proceeds from option exercises		—		34
Proceeds from notes payable		—		1,000
Net cash (used) provided by financing activities		(116)		1,033
Net change in cash, cash equivalents and restricted cash		(27,667)		(14,901)
Cash, cash equivalents and restricted cash – beginning of period		37,222		22,444
Cash, cash equivalents and restricted cash – end of period	$	9,555	$	7,543
Cash and cash equivalents	$	7,224	$	5,215
Restricted cash		2,331		2,328
Total cash, cash equivalents and restricted cash	$	9,555	$	7,543

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	4,265	$	5,260
Cash paid for interest	$	98	$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in reimbursable public improvements included in accounts payable and accrued liabilities	$	586	$	668
Issuance of stock for compensation	$	111	$	—

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

FEBRUARY 28, 2023

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The accompanying unaudited consolidated financial statements have been prepared by Pure Cycle Corporation (Company or Pure Cycle) 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 and six months ended February 28, 2023 and 2022. 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 February 28, 2023, the Company had $15.2 million of investments classified as held-to-maturity, which are comprised entirely of Treasury Bills with maturity dates in March 2023. On February 28, 2023, the Company had under $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 notes receivable – related party, reimbursable public improvements is due to the Company from the Sky Ranch CAB and reports the balances owed by the Sky Ranch CAB to Pure Cycle for public improvements paid for by Pure Cycle which are reimbursable from the Sky Ranch CAB, project management fees related to the Company’s management of the construction of the public improvements, and interest accrued on the unpaid balances related to the ongoing development of the Sky Ranch master planned community. Pure Cycle 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 those costs. Upon that determination, Pure Cycle began recording the

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reimbursable public improvements as a receivable from the Sky Ranch CAB (as opposed to the costs being expensed as land development construction costs) and began recognizing project management fee revenue and interest income on the entire note receivable from the Sky Ranch CAB. Prior to that date, payment was not deemed to be probable; therefore, Pure Cycle capitalized those costs as land under development and subsequently expensed the reimbursable public improvements and did not recognize any project management fees or interest income due to the uncertainty of collectability. During the three and six months ended February 28, 2023, Pure Cycle spent $1.7 million and $2.8 million on public improvements which are payable by the Sky Ranch CAB to Pure Cycle. Since Pure Cycle believes the amounts are probable of collection, they have been added to the note receivable from the Sky Ranch CAB. Additionally, for the three and six months ended February 28, 2023, project management fees of $0.1 million and $0.1 million and interest income on the outstanding note receivable of $0.3 million and $0.5 million were also added to the note receivable. No payments were made on the note receivable during the three and six months ended February 28, 2023 and 2022. Pursuant to the agreements with the Sky Ranch CAB, any payments received are initially applied to interest.

During the three and six months ended February 28, 2022, the Company spent $2.7 million and $6.8 million on public improvements which are payable by the Sky Ranch CAB to the Company and added to the note receivable from the Sky Ranch CAB. Additionally, for the three and six months ended February 28, 2022, project management fees owed to the Company of $0.2 million and $0.4 million, and interest income on the outstanding note receivable of $0.5 million and $0.9 million were also added to the note receivable.

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


	Three Months Ended
	February 28, 2023		February 28, 2022
Beginning balance	$	18,487	$	29,517
Additions		2,122		3,446
Payments received		—		—
Ending balance	$	20,609	$	32,963

	Six Months Ended
	February 28, 2023		February 28, 2022
Beginning balance	$	17,208	$	24,794
Additions		3,401		8,169
Payments received		—		—
Ending balance	$	20,609	$	32,963

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, at each reporting period. 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

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

The Company’s revenue is primarily generated from sales of water and wastewater taps, metered water and wastewater usage, and the sale of lots to homebuilders. 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 and six months ended February 28, 2023 and 2022.

Water and wastewater tap fees – During the three months ended February 28, 2023 and 2022, the Company sold a total of 35 and 27 water taps generating more than $0.8 million and less than $0.8 million in tap fee revenues. During the three months ended February 28, 2023 and 2022, the Company sold a total of 32 and 27 wastewater taps generating $0.2 million and $0.1 million in tap fee revenues.

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During the six months ended February 28, 2023 and 2022, the Company sold a total of 39 and 36 water taps generating $1.0 million and just under $1.0 million in tap fee revenues. During the six months ended February 28, 2023 and 2022, the Company sold a total of 36 and 36 wastewater taps generating $0.2 million and $0.2 million in tap fee revenues. The water taps were all sold at Sky Ranch and Wild Pointe, and the wastewater taps were all sold at Sky Ranch.

Sale of finished lots – For the three months ended February 28, 2023 and 2022, the Company recognized $1.4 million and $1.6 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. For the six months ended February 28, 2023 and 2022, the Company recognized $1.9 million and $4.6 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 February 28, 2023, the first development phase (509 lots) is complete and the second development phase (850 lots) is being developed in four subphases, referred to as Phase 2A (229 lots), Phase 2B (211 lots), Phase 2C (204 lots) and Phase 2D (206 lots). As of February 28, 2023, Phase 2A is approximately 87% complete. After February 28, 2023, but before the filing of this Form 10Q, Pure Cycle began construction on Phase 2B, which is expected to take approximately one year to complete. Additionally, on March 8, 2023, and March 16, 2023, Pure Cycle and two of our homebuilding partners amended future lot sale agreements to increase the price of future Phase 2 lots and to reduce the number of lots being sold to those builders by a total of 19 lots which Pure Cycle will use in its single-family rental business.

Project management services – During the three months ended February 28, 2023 and 2022, the Company recognized $0.1 million and $0.2 million of project management revenue from the Sky Ranch CAB, a related party, for managing the Sky Ranch development project. During the six months ended February 28, 2023 and 2022, the Company recognized $0.1 million and $0.4 million of project management revenue from the Sky Ranch CAB, a related party, for managing the Sky Ranch development project.

Single-family rental revenue

In November 2021, the Company began renting single-family homes from lots it retained and constructed homes on, 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. As of February 28, 2023, Pure Cycle has four single-family detached homes being rented. For the three months ended February 28, 2023 and 2022, the Company reported less than $0.1 million and less than $0.1 million of rental property revenues. For the six months ended February 28, 2023 and 2022, the Company reported less than $0.1 million and $0.1 million of rental property revenues. The Company has begun construction on 10 additional rental homes in Phase 2A, which the Company believes will be available for rent at various dates throughout fiscal 2023. At February 28, 2023, the Company had reserved 36 lots in Phases 2B, 2C and 2D of Sky Ranch for future rental units. On March 8, 2023, and March 16, 2023, Pure Cycle amended two homebuilder agreements to reserve an additional 19 lots in Phases 2B-D for use in its single-family rental segment. These additional units bring the total lots reserved for future rental use to 55, which when combined with the units already built and rented and the ten currently under construction will bring the total single-family rentals to 69 . The Company expects to take three to five years to build and rent all these units. Based on these projections 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 the three months ended February 28, 2023 and 2022, the Company recognized $0.2 million and $0.2 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. For the six months ended February 28, 2023 and 2022, the Company recognized $0.3 million and $0.3 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.

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Deferred revenue

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


	Three Months Ended February 28, 2023
(In thousands)	Water and Wastewater Resource Development		Land Development		Total
Balance at November 30, 2022	$	552	$	3,889	$	4,441
Revenue recognized		(19)		(1,492)		(1,511)
Revenue deferred		-		1,076