UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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.
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PURE CYCLE CORPORATION
INDEX TO MAY 31, 2023 FORM 10-Q
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 words, as they relate to us, are intended to identify forward-looking statements and 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 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; |
● | 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; |
● | 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; |
● | costs and plans for treatment of water and wastewater; |
● | anticipated number of deep-water wells required to continue expanding and developing our Rangeview Water Supply; |
● | expenditures for expenses and capital needs of the Rangeview District; |
● | regional cooperation among area water providers in the development of new water supplies and water storage, transmission and distribution systems as the most cost-effective way to expand and enhance service capacities; |
● | plans to drill water walls into aquifers located beneath the Lowry Range and the timing and estimated costs of such a build out; |
● | sufficiency of tap fees to fund infrastructure costs of the Rangeview District; |
● | our ability to assist Colorado “Front Range” water providers in meeting current and future water needs; |
● | plans to use raw water, effluent water or reclaimed water for agricultural and irrigation uses; |
● | factors that may impact labor and material costs; |
● | use of third parties to construct water and wastewater facilities and Sky Ranch lot improvements; |
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● | 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; |
● | 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; |
● | 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 our statements. Factors that could cause actual results to differ from those contemplated by such forward-looking statements include, without limitation:
● | 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 COVID-19 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; |
● | 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; |
2
● | 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.
3
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
PURE CYCLE CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except shares) | May 31, 2023 |
| August 31, 2022 | ||||
ASSETS: | (unaudited) | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | |||
Trade accounts receivable, net |
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Land under development | | — | |||||
Income taxes receivable | | — | |||||
Prepaid expenses and other assets |
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Total current assets |
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Restricted cash | | | |||||
Investments in water and water systems, net |
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Construction in progress | | | |||||
Single-family rental units | | | |||||
Land and mineral rights: |
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Held for development | |
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Held for investment purposes | |
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Other assets |
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Notes receivable – related parties, including accrued interest |
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Reimbursable public improvements and project management fees | | | |||||
Other | | | |||||
Operating leases - right of use assets |
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Total assets | $ | | $ | | |||
LIABILITIES: | |||||||
Current liabilities: | |||||||
Accounts payable | $ | | $ | | |||
Accrued liabilities | | | |||||
Accrued liabilities – related parties |
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Income taxes payable | — | | |||||
Deferred lot sale revenues |
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Deferred water sales revenues |
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Debt, current portion | | | |||||
Total current liabilities |
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Participating interests in export water supply |
| — |
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Debt, less current portion | |
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Deferred tax liability, net |
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Lease obligations - operating leases, less current portion |
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Total liabilities |
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Commitments and contingencies | |||||||
SHAREHOLDERS’ EQUITY: | |||||||
Series B preferred shares: par value $ |
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Common shares: par value 1/3 of $.01 per share, |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
| ( | |||
Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | |
See accompanying Notes to the Consolidated Financial Statements
4
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Ended | Nine Months Ended | |||||||||||
(In thousands, except share information) |
| May 31, 2023 |
| May 31, 2022 | May 31, 2023 |
| May 31, 2022 | |||||
Revenues: |
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Metered water usage from: | ||||||||||||
Municipal customers | $ | | $ | | $ | | $ | | ||||
Commercial customers |
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Wastewater treatment fees |
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Water and wastewater tap fees |
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Lot sales |
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Project management fees | | | | | ||||||||
Single-family rentals | | | | | ||||||||
Special facility projects and other |
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Total revenues |
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Expenses: | ||||||||||||
Water service operations |
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Wastewater service operations |
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Land development construction costs |
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Project management costs | |
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Single-family rental costs | |
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Depletion and depreciation |
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Other |
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Total cost of revenues |
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General and administrative expenses |
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Depreciation |
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Operating (loss) income |
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Other income (expense): | ||||||||||||
Interest income - related party | | | | | ||||||||
Interest income - Investments | | | | | ||||||||
Oil and gas royalty income, net |
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Oil and gas lease income, net |
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Other, net |
| | | | | |||||||
Interest expense, net | ( | ( | ( | ( | ||||||||
Income from operations before income taxes |
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Income tax expense |
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Net income | $ | | $ | | $ | | $ | | ||||
Earnings per common share - basic and diluted | ||||||||||||
Basic | $ | | $ | | $ | | $ | | ||||
Diluted | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding: | ||||||||||||
Basic |
| | |
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Diluted |
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See accompanying Notes to the Consolidated Financial Statements
5
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)
Three Months Ended May 31, 2023 | |||||||||||||||||||
Preferred Stock | Common Stock | Additional | Accumulated | ||||||||||||||||
(in thousands, except shares) |
| Shares |
| Amount |
| Shares |
| Amount |
| Paid-in Capital |
| Deficit | Total | ||||||
Balance at February 28, 2023 |
| |
| $ | — |
| |
| $ | |
| $ | |
| $ | ( |
| $ | |
Share-based compensation |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Net income |
| — |
| — |
| — |
| — |
| — |
| |
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Balance at May 31, 2023 |
| | $ | — |
| | $ | | $ | | $ | ( | $ | | |||||
Three Months Ended May 31, 2022 | |||||||||||||||||||
Preferred Stock | Common Stock | Additional | Accumulated | ||||||||||||||||
(in thousands, except shares) |
| Shares |
| Amount |
| Shares |
| Amount |
| Paid-in Capital |
| Deficit | Total | ||||||
Balance at February 28, 2022 |
| |
| $ | — |
| |
| $ | |
| $ | |
| $ | ( |
| $ | |
Stock option exercises | — | — | | — | — | — | — | ||||||||||||
Share-based compensation |
| — |
| — |
| — |
| — |
| |
| — |
| | |||||
Net income |
| — | — | — | — | — | | | |||||||||||
Balance at May 31, 2022 |
| | $ | — |
| | $ | | $ | | $ | ( | $ | |
Nine Months Ended May 31, 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 |
| |
| $ | — |
| |
| $ | |
| $ | |
| $ | ( |
| $ | |
Restricted stock grants | — | — | | — | | — | | ||||||||||||
Stock granted for services | — |
| — |
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| — |
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| — |
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Share-based compensation |
| — |
| — |
| — |
| — |
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| — |
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Net income |
| — |
| — |
| — |
| — |
| — |
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Balance at May 31, 2023 |
| | $ | — |
| | $ | | $ | | $ | ( | $ | | |||||
Nine Months Ended May 31, 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 |
| |
| $ | — |
| |
| $ | |
| $ | |
| $ | ( |
| $ | |
Stock options exercised | — | — | | — | | — | | ||||||||||||
Stock granted for services | — |
| — |
| |
| — |
| |
| — |
| | ||||||
Share-based compensation |
| — |
| — |
| — |
| — |
| |
| — |
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Net income | — | — | — | — | — | | | ||||||||||||
Balance at May 31, 2022 |
| | $ | — |
| | $ | | $ | | $ | ( | $ | | |||||
See accompanying Notes to the Consolidated Financial Statements
6
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended | ||||||
(In thousands) |
| May 31, 2023 |
| May 31, 2022 | ||
Cash flows from operating activities: |
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Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash used by operating activities: | ||||||
Depreciation and depletion | | | ||||
Other assets and liabilities |
| | ( | |||
Share-based compensation expense |
| |
| | ||
Prepaid expenses |
| |
| ( | ||
Deferred income taxes |
| ( |
| ( | ||
Trade accounts receivable |
| ( |
| | ||
Land under development |
| ( |
| ( | ||
Amortized discount on U.S. Treasury Bills | ( | — | ||||
Net activity for notes receivable - related party, other | ( | | ||||
Deferred water sales revenue |
| ( | ( | |||
Accounts payable and accrued liabilities |
| ( |
| ( | ||
Deferred lot sale revenues |
| ( |
| ( | ||
Taxes payable / receivable | ( | ( | ||||
Net activity on note receivable - related party, reimbursable public improvements | ( |
| ( | |||
Net cash used by operating activities |
| ( |
| ( | ||
Cash flows from investing activities: | ||||||
Maturity of held-to-maturity investments in U.S. Treasury Bills | | — | ||||
Purchase of property and equipment |
| ( |
| — | ||
Investments in future development phases at Sky Ranch | ( | ( | ||||
Investments in water and water systems |
| ( |
| ( | ||
Construction costs of single-family rentals | ( | ( | ||||
Purchase of held-to-maturity investments in U.S. Treasury Bills | ( | — | ||||
Net cash used by investing activities |
| ( |
| ( | ||
Cash flows from financing activities: | ||||||
Payments on notes payable | ( | — | ||||
Payments to contingent liability holders |
| ( |
| ( | ||
Proceeds from option exercises | — | | ||||
Proceeds from notes payable |
| — |
| | ||
Net cash (used) provided by financing activities |
| ( |
| | ||
Net change in cash, cash equivalents and restricted cash |
| ( |
| ( | ||
Cash, cash equivalents and restricted cash – beginning of period |
| |
| | ||
Cash, cash equivalents and restricted cash – end of period | $ | | $ | | ||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash | | | ||||
Total cash, cash equivalents and restricted cash | $ | | $ | | ||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||
Cash paid for income taxes | $ | | $ | | ||
Cash paid for interest | $ | | $ | — | ||
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: | ||||||
Change in reimbursable public improvements included in accounts payable and accrued liabilities | $ | | $ | | ||
Issuance of stock for compensation | $ | | $ | — |
See accompanying Notes to the Consolidated Financial Statements
7
PURE CYCLE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
MAY 31, 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 nine months ended May 31, 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 – 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 (Sky Ranch). 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 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 nine months ended May 31, 2023, Pure Cycle spent $
8
Pursuant to the agreements with the Sky Ranch CAB, any payments received are initially applied to interest. During the nine months ended May 31, 2023 and 2022, the Sky Ranch CAB paid Pure Cycle $
During the three and nine months ended May 31, 2022, Pure Cycle spent $
The following table summarizes the activity and balances associated with the note receivable from the Sky Ranch CAB:
Three Months Ended | ||||||
May 31, 2023 |
| May 31, 2022 | ||||
Beginning balance | $ | | $ | | ||
Additions | | | ||||
Payments received | ( | ( | ||||
Ending balance | $ | | $ | | ||
Nine Months Ended | ||||||
May 31, 2023 |
| May 31, 2022 | ||||
Beginning balance | $ | | $ | | ||
Additions | | | ||||
Payments received | ( | ( | ||||
Ending balance | $ | | $ | | ||
The note receivable from the Sky Ranch CAB accrues interest at
NOTE 3 – 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 nine months ended May 31, 2023 and 2022.
Water and wastewater tap fees – During the three months ended May 31, 2023 and 2022, the Company sold a total of
9
Metered water and wastewater usage fees – The Company provides water and wastewater services to customers, for which the customers are charged monthly usage fees. Water usage fees are assessed to customers based on actual metered usage each month plus a base monthly service fee assessed per single family equivalent (SFE) unit served. One SFE is a customer, whether residential, commercial or industrial, that imparts a demand on the Company’s water or wastewater systems similar to the demand of a family of
Sale of finished lots – For the three months ended May 31, 2023 and 2022, the Company recognized $
Project management services – During each of the three-month periods ended May 31, 2023 and 2022, the Company recognized less than $
Single-family rental revenue
In November 2021, Pure Cycle began renting single-family homes on lots it retained at Sky Ranch. Pure Cycle began recognizing lease income related to these rental units in November 2021. Pure Cycle generally rents its single-family properties under non-cancelable lease agreements with a term of
Pure Cycle has begun construction on
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 each of the three-month periods ended May 31, 2023 and 2022, the Company recognized less than $
Undeveloped land sale and cash-in-lieu to school district
During the nine months ended May 31, 2022, Pure Cycle entered various agreements to sell
10
standards. Simultaneously with the sale of land to the charter school operator, the Company paid the Bennett School District $
Deferred revenue
Changes and balances of the Company’s deferred revenue accounts by segment are as follows:
Three Months Ended May 31, 2023 | |||||||||
(In thousands) | Water and Wastewater Resource Development | Land Development | Total | ||||||
Balance at February 28, 2023 | $ | | $ | | $ | | |||
Revenue recognized | ( | ( | ( | ||||||
Revenue deferred | - | | | ||||||
Balance at May 31, 2023 | $ | | $ | | $ | | |||