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 May 31, 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 July 13, 2023.

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PURE CYCLE CORPORATION

INDEX TO MAY 31, 2023 FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION		4

	Item 1. Consolidated Financial Statements	4

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

	Consolidated Statements of Operations (unaudited): For the three and nine months ended May 31, 2023 and 2022	5

	Consolidated Statements of Shareholders’ Equity (unaudited): For the three and nine months ended May 31, 2023 and 2022	6

	Consolidated Statements of Cash Flows (unaudited): For the nine months ended May 31, 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 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;

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●	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)	May 31, 2023		August 31, 2022
ASSETS:		(unaudited)
Current assets:
Cash and cash equivalents	$	26,000	$	34,894
Trade accounts receivable, net		2,671		2,425
Land under development		721		—
Income taxes receivable		190		—
Prepaid expenses and other assets		392		467
Total current assets		29,974		37,786
Restricted cash		2,332		2,328
Investments in water and water systems, net		58,146		58,763
Construction in progress		4,929		1,224
Single-family rental units		1,395		975
Land and mineral rights:
Held for development		4,996		6,773
Held for investment purposes		451		451
Other assets		1,343		2,463
Notes receivable – related parties, including accrued interest
Reimbursable public improvements and project management fees		23,118		17,208
Other		1,397		1,120
Operating leases - right of use assets		84		138
Total assets	$	128,165	$	129,229

LIABILITIES:
Current liabilities:
Accounts payable	$	905	$	849
Accrued liabilities		1,174		2,029
Accrued liabilities – related parties		569		560
Income taxes payable		—		2,530
Deferred lot sale revenues		3,475		4,275
Deferred water sales revenues		13		570
Debt, current portion		10		10
Total current liabilities		6,146		10,823
Participating interests in export water supply		—		323
Debt, less current portion		3,942		3,950
Deferred tax liability, net		873		1,075
Lease obligations - operating leases, less current portion		6		62
Total liabilities		10,967		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		174,709		174,150
Accumulated deficit		(57,591)		(61,234)
Total shareholders’ equity		117,198		112,996
Total liabilities and shareholders’ equity	$	128,165	$	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				Nine Months Ended
(In thousands, except share information)	May 31, 2023		May 31, 2022		May 31, 2023		May 31, 2022
Revenues:
Metered water usage from:
Municipal customers	$	145	$	94	$	349	$	274
Commercial customers		2,145		549		2,596		2,686
Wastewater treatment fees		75		66		216		185
Water and wastewater tap fees		1,256		1,273		2,400		2,447
Lot sales		3,160		1,070		5,064		5,644
Project management fees		42		81		173		529
Single-family rentals		34		25		90		59
Special facility projects and other		22		29		321		299
Total revenues		6,879		3,187		11,209		12,123

Expenses:
Water service operations		576		560		1,457		1,419
Wastewater service operations		96		109		350		337
Land development construction costs		951		222		1,282		1,048
Project management costs		81		66		227		112
Single-family rental costs		24		9		53		16
Depletion and depreciation		407		349		1,246		1,055
Other		71		79		318		298
Total cost of revenues		2,206		1,394		4,933		4,285

General and administrative expenses		805		1,074		3,900		3,950
Depreciation		111		95		348		277
Operating (loss) income		3,757		624		2,028		3,611

Other income (expense):
Interest income - related party		331		305		841		1,196
Interest income - Investments		281		5		727		8
Oil and gas royalty income, net		44		123		227		330
Oil and gas lease income, net		18		47		56		143
Other, net		40		10		1,257		32
Interest expense, net		(52)		(31)		(149)		(52)
Income from operations before income taxes		4,419		1,083		4,987		5,268
Income tax expense		1,124		246		1,344		1,224
Net income	$	3,295	$	837	$	3,643	$	4,044

Earnings per common share - basic and diluted
Basic	$	0.14	$	0.03	$	0.15	$	0.17
Diluted	$	0.14	$	0.03	$	0.15	$	0.17
Weighted average common shares outstanding:
Basic		24,054,843		23,970,290		24,021,582		23,944,394
Diluted		24,166,344		24,124,586		24,131,621		24,183,500

See accompanying Notes to the Consolidated Financial Statements

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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	432,513	$	—	24,054,843	$	80	$	174,611	$	(60,886)	$	113,805
Share-based compensation	—		—	—		—		98		—		98
Net income	—		—	—		—		—		3,295		3,295
Balance at May 31, 2023	432,513	$	—	24,054,843	$	80	$	174,709	$	(57,591)	$	117,198


	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	432,513	$	—	23,958,522	$	80	$	173,918	$	(67,646)	$	106,352
Stock option exercises	—		—	22,123		—		—		—		—
Share-based compensation	—		—	—		—		120		—		120
Net income	—		—	—		—		—		837		837
Balance at May 31, 2022	432,513	$	—	23,980,645	$	80	$	174,038	$	(66,809)	$	107,309


	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	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	—		—	—		—		268		—		268
Net income	—		—	—		—		—		3,643		3,643
Balance at May 31, 2023	432,513	$	—	24,054,843	$	80	$	174,709	$	(57,591)	$	117,198



	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	432,513	$	—	23,916,633	$	80	$	173,513	$	(70,853)	$	102,740
Stock options exercised	—		—	52,012		—		34		—		34
Stock granted for services	—		—	12,000		—		159		—		159
Share-based compensation	—		—	—		—		332		—		332
Net income	—		—	—		—		—		4,044		4,044
Balance at May 31, 2022	432,513	$	—	23,980,645	$	80	$	174,038	$	(66,809)	$	107,309

See accompanying Notes to the Consolidated Financial Statements

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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:
Net income	$	3,643	$	4,044
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and depletion		1,594		1,332
Other assets and liabilities		922		(57)
Share-based compensation expense		559		491
Prepaid expenses		75		(311)
Deferred income taxes		(202)		(187)
Trade accounts receivable		(246)		333
Land under development		(249)		(44)
Amortized discount on U.S. Treasury Bills		(256)		—
Net activity for notes receivable - related party, other		(277)		101
Deferred water sales revenue		(557)		(18)
Accounts payable and accrued liabilities		(788)		(2,136)
Deferred lot sale revenues		(800)		(1,106)
Taxes payable / receivable		(2,720)		(3,849)
Net activity on note receivable - related party, reimbursable public improvements		(3,668)		(10,526)
Net cash used by operating activities		(2,970)		(11,933)
Cash flows from investing activities:
Maturity of held-to-maturity investments in U.S. Treasury Bills		15,256		—
Purchase of property and equipment		(275)		—
Investments in future development phases at Sky Ranch		(937)		(2,417)
Investments in water and water systems		(1,374)		(1,235)
Construction costs of single-family rentals		(3,471)		(142)
Purchase of held-to-maturity investments in U.S. Treasury Bills		(15,000)		—
Net cash used by investing activities		(5,801)		(3,794)
Cash flows from financing activities:
Payments on notes payable		(8)		—
Payments to contingent liability holders		(111)		(1)
Proceeds from option exercises		—		34
Proceeds from notes payable		—		1,000
Net cash (used) provided by financing activities		(119)		1,033
Net change in cash, cash equivalents and restricted cash		(8,890)		(14,694)
Cash, cash equivalents and restricted cash – beginning of period		37,222		22,444
Cash, cash equivalents and restricted cash – end of period	$	28,332	$	7,750
Cash and cash equivalents	$	26,000	$	5,422
Restricted cash		2,332		2,328
Total cash, cash equivalents and restricted cash	$	28,332	$	7,750

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	4,265	$	5,260
Cash paid for interest	$	142	$	—
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in reimbursable public improvements included in accounts payable and accrued liabilities	$	569	$	445
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)

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 $2.6 million and $5.4 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 nine months ended May 31, 2023, project management fees of less than $0.1 million and $0.2 million and interest income on the outstanding note receivable of $0.3 million and $0.8 million were also added to the note receivable. During the three months ended May 31, 2023 and 2022, the Sky Ranch CAB paid Pure Cycle $0.5 million and $0.1 million pursuant to the note.

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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 $0.5 million and $0.1 million pursuant to the note. After May 31, 2023, but prior to the issuance of this Form 10-Q, the Sky Ranch CAB paid Pure Cycle $0.4 million pursuant to the note.

During the three and nine months ended May 31, 2022, Pure Cycle spent $1.9 million and $8.8 million on public improvements which are payable by the Sky Ranch CAB to the Company and were added to the note receivable from the Sky Ranch CAB. Additionally, for the three and nine months ended May 31, 2022, project management fees owed to the Company of $0.1 million and $0.5 million, and interest income on the outstanding note receivable of $0.3 million and $1.2 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
	May 31, 2023		May 31, 2022
Beginning balance	$	20,609	$	32,963
Additions		2,996		2,457
Payments received		(487)		(100)
Ending balance	$	23,118	$	35,320

	Nine Months Ended
	May 31, 2023		May 31, 2022
Beginning balance	$	17,208	$	24,794
Additions		6,397		10,626
Payments received		(487)		(100)
Ending balance	$	23,118	$	35,320

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 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 44 and 45 water taps generating $1.1 million and $1.1 million in tap fee revenues. During the three months ended May 31, 2023 and 2022, the Company sold a total of 43 and 45 wastewater taps generating $0.2 million and $0.2 million in tap fee revenues. During the nine months ended May 31, 2023 and 2022, the Company sold a total of 85 and 81 water taps generating $2.0 million and $2.0 million in tap fee revenues. During the nine months ended May 31, 2023 and 2022, the Company sold a total of 79 and 81 wastewater taps generating $0.4 million and $0.4 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.

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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 four persons living in a single-family house on a standard-sized lot. Water usage pricing is based on a tiered pricing structure, and certain usage revenues are subject to roayalties as described in the 2022 Annual Report. The Company also sells raw water for industrial uses, mainly to oil and gas companies for use in the drilling processes.

Sale of finished lots – For the three months ended May 31, 2023 and 2022, the Company recognized $3.2 million and $1.0 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 nine months ended May 31, 2023 and 2022, the Company recognized $5.1 million and $5.6 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 May 31, 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 May 31, 2023, Phase 2A is approximately 90% complete and Phase 2B is approximately 21% complete. Phase 2A should be substantially complete by the end of Pure Cycle’s fiscal 2023, and Phase 2B is expected to be complete by the end of Pure Cycle’s fiscal 2024.

Project management services – During each of the three-month periods ended May 31, 2023 and 2022, the Company recognized less than $0.1 million of project management revenue from the Sky Ranch CAB, a related party, for managing the Sky Ranch development project. During the nine months ended May 31, 2023 and 2022, the Company recognized $0.2 million and $0.5 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, 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 one year. As of May 31, 2023, Pure Cycle has four single-family detached homes rented under separate lease agreements. For all periods presented in this Form 10-Q, the Company reported less than $0.1 million of rental property revenues.

Pure Cycle has begun construction on 10 additional rental homes in Phase 2A, five of which were rented after May 31, 2023, but before the issuance of this Form 10-Q, and the remainder of which the Company believes will be available for rent before August 31, 2023. As of May 31, 2023, the Company had reserved 55 lots in Phases 2B, 2C and 2D of Sky Ranch for future rental units. When combined with the four units already built and rented and the 10 currently under construction, these additions 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 each of the three-month periods ended May 31, 2023 and 2022, 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. For each of the nine-month periods ended May 31, 2023 and 2022, the Company recognized $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.

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 32 acres of undeveloped land in Sky Ranch for $1.6 million to a charter school operator for the purpose of constructing and operating a charter school. Pursuant to Arapahoe County land development regulations (the county where Sky Ranch is located), all land developments must dedicate land or make a cash-in-lieu payment to the school district in which the development is located. The amount to be paid is calculated pursuant to the County’s

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standards. Simultaneously with the sale of land to the charter school operator, the Company paid the Bennett School District $1.6 million as a cash-in-lieu payment, which is the calculated amount of the Sky Ranch cash-in-lieu requirement to the school district. The land sale agreements include requirements for the Company to construct, or have constructed, certain improvements leading to the school site such as roads, sidewalks, and landscaping, all of which were already planned to be constructed as part of the overall master development of Sky Ranch. The Company determined the transaction was consummated in February 2022, when all pre-closing conditions were satisfied and proceeds were received by all parties. The cash-in-lieu payment and land sale were accounted for in other income, net.

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	$	533	$	3,473	$	4,006
Revenue recognized		(520)		(3,160)		(3,680)
Revenue deferred		-		3,162		3,162
Balance at May 31, 2023	$	13	$	3,475	$	3,488