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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended November 30, 2023

or

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

Graphic

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: 24,080,698 shares of 1/3 of $.01 par value common stock as of January 5, 2024.

Table of Contents

PURE CYCLE CORPORATION

INDEX TO NOVEMBER 30, 2023 FORM 10-Q

Page

PART I. FINANCIAL INFORMATION

4

Item 1. Consolidated Financial Statements

4

Consolidated Balance Sheets: November 30, 2023 (unaudited) and August 31, 2023

4

Consolidated Statements of Income (unaudited): For the three months ended November 30, 2023 and 2022

5

Consolidated Statements of Shareholders’ Equity (unaudited): For the three months ended November 30, 2023 and 2022

6

Consolidated Statements of Cash Flows (unaudited): For the three months ended November 30, 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

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk

26

Item 4. Controls and Procedures

26

PART II. OTHER INFORMATION

27

Item 2. Issuer Purchases of Equity Securities

27

Item 6. Exhibits

27

SIGNATURES

28

Table of Contents

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;
increased demand for single-family rental homes;
plans for, and the efficiency of, development of our Sky Ranch property;
our competitive advantage;
the impact of individual housing and economic cycles on the number of connections we can serve with our water;
the number of new water connections needed to recover the costs of our water supplies;
the number of units planned for development at Sky Ranch;
the timing of the completion of construction and sale of finished lots at Sky Ranch;
the number of lots expected to be delivered in a fiscal period;
anticipated financial results, including anticipated increases in customers and revenue, from development of our Sky Ranch property;
estimated tap fees to be generated from the development of the various phases of Sky Ranch;
anticipated expansion and rental dates for our single-family rental homes;
anticipated revenues and cash flows from our single-family rental homes;
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 Ranch, 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 Ranch 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;
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 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 and the timing of enrollment of upper grades;
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:

outbreaks of disease, such as 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;
political and economic instability, whether resulting from natural disasters, wars, terrorism, pandemics or other sources;
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 inflation and 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;

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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)

November 30, 2023

    

August 31, 2023

ASSETS:

(unaudited)

Current assets:

 

  

 

  

Cash and cash equivalents

$

21,784

$

26,012

Short term investments

167

Trade accounts receivable, net

 

4,778

 

1,092

Land under development

2,164

1,726

Income taxes receivable

551

Prepaid expenses and other assets

 

249

 

346

Total current assets

 

29,142

 

29,727

Restricted cash

2,880

2,475

Investments in water and water systems, net

 

57,698

 

57,798

Construction in progress

5,865

5,457

Single-family rental units

5,227

4,490

Land and mineral rights:

 

Held for development

4,871

 

4,652

Held for investment purposes

451

 

451

Other assets

 

1,234

 

1,359

Notes receivable – related parties, including accrued interest

 

 

Reimbursable public improvements and project management fees

28,270

24,999

Other

1,481

1,451

Operating leases - right of use assets

 

210

 

357

Total assets

$

137,329

$

133,216

LIABILITIES:

Current liabilities:

Accounts payable

$

2,783

$

1,960

Accrued liabilities

1,015

1,761

Accrued liabilities – related parties

 

906

 

1,021

Income taxes payable

200

Deferred lot sale revenues

 

3,791

 

1,661

Deferred water sales revenues

 

50

 

69

Debt, current portion

34

31

Total current liabilities

 

8,779

 

6,503

Debt, less current portion

6,874

 

6,885

Deferred tax liability, net

 

1,352

 

1,352

Lease obligations - operating leases, less current portion

 

142

 

242

Total liabilities

 

17,147

 

14,982

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;
24,066,720 and 24,078,720 outstanding, respectively

 

80

 

80

Additional paid-in capital

 

174,770

 

174,689

Accumulated deficit

 

(54,668)

 

(56,535)

Total shareholders’ equity

 

120,182

 

118,234

Total liabilities and shareholders’ equity

$

137,329

$

133,216

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

Three Months Ended

(In thousands, except share information)

    

November 30, 2023

    

November 30, 2022

Revenues:

 

  

 

  

Metered water usage from:

Municipal customers

$

202

$

121

Commercial customers

 

2,132

 

392

Wastewater treatment fees

 

86

 

63

Water and wastewater tap fees

 

581

 

150

Lot sales

 

1,896

 

513

Project management fees

100

8

Single-family rentals

109

25

Special facility projects and other

 

280

 

68

Total revenues

 

5,386

 

1,340

Expenses:

Water service operations

 

553

 

479

Wastewater service operations

 

159

 

138

Land development construction costs

 

688

 

143

Project management costs

 

79

 

72

Single-family rental costs

 

57

 

10

Depletion and depreciation

 

362

 

378

Other

 

146

 

106

Total cost of revenues

 

2,044

 

1,326

General and administrative expenses

 

1,438

 

1,388

Depreciation

 

148

 

115

Operating (loss) income

 

1,756

 

(1,489)

Other income (expense):

Interest income - related party

724

247

Interest income - Investments

308

228

Oil and gas royalty income, net

34

116

Oil and gas lease income, net

18

19

Other, net

70

1,218

Interest expense, net

(108)

(50)

Income from operations before income taxes

 

2,802

 

289

Income tax expense

 

737

 

130

Net income

$

2,065

$

159

Earnings per common share - basic and diluted

Basic

$

0.09

$

0.01

Diluted

$

0.09

$

0.01

Weighted average common shares outstanding:

Basic

 

24,078,544

23,985,788

Diluted

 

24,153,662

24,087,893

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(unaudited)

Three Months Ended November 30, 2023

Preferred Stock

Common Stock

Additional

Accumulated

(in thousands, except shares)

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

Total

Balance at August 31, 2023

 

432,513

$

 

24,078,720

$

80

$

174,689

$

(56,535)

$

118,234

Restricted stock grants

8,000

23

23

Share-based compensation

 

 

 

 

 

58

 

 

58

Repurchases of common stock

 

 

(20,000)

 

 

 

(198)

 

(198)

Net income

 

 

 

 

 

 

2,065

 

2,065

Balance at November 30, 2023

 

432,513

$

 

24,066,720

$

80

$

174,770

$

(54,668)

$

120,182

Three Months Ended November 30, 2022

Preferred Stock

Common Stock

Additional

Accumulated

(in thousands, except shares)

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-in Capital

    

Deficit

Total

Balance at August 31, 2022

 

432,513

$

 

23,980,645

$

80

$

174,150

$

(61,234)

$

112,996

Restricted stock grants

 

 

 

6,000

 

 

15

 

 

15

Share-based compensation

 

 

 

 

 

78

 

 

78

Net income

 

159

159

Balance at November 30, 2022

 

432,513

$

 

23,986,645

$

80

$

174,243

$

(61,075)

$

113,248

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

Three Months Ended

(In thousands)

    

November 30, 2023

    

November 30, 2022

Cash flows from operating activities:

 

  

 

  

Net income

$

2,065

$

159

Adjustments to reconcile net income to net cash used by operating activities:

Depreciation and depletion

486

493

Trade accounts receivable

 

(3,686)

 

1,185

Accounts payable and accrued liabilities

 

12

 

(904)

Other assets and liabilities

 

26

(149)

Share-based compensation expense

 

81

 

93

Deferred income taxes

 

 

166

Prepaid expenses

 

97

 

153

Amortized discount on U.S. Treasury Bills

(113)

Net activity for notes receivable - related party, other

(30)

(122)

Deferred water sales revenue

 

(19)

(18)

Land under development

 

(1,562)

 

Deferred lot sale revenues

 

2,130

 

(386)

Taxes payable / receivable

751

(36)

Net activity on note receivable - related party, reimbursable public improvements

(1,579)

 

(1,279)

Net cash used by operating activities

 

(1,228)

 

(758)

Cash flows from investing activities:

Purchase of property and equipment

 

-

 

(76)

Investments in future development phases at Sky Ranch

(1,225)

(514)

Construction costs of single-family rentals

(176)

(1,026)

Investments in water and water systems

 

(821)

 

(563)

Purchase of held-to-maturity investments in U.S. Treasury Bills

(167)

(15,000)

Net cash used in investing activities

 

(2,389)

 

(17,179)

Cash flows from financing activities:

Payments on notes payable

(8)

(3)

Repurchases of common stock

 

(198)

 

Payments to contingent liability holders

 

 

(111)

Net cash used in financing activities

 

(206)

 

(114)

Net change in cash, cash equivalents and restricted cash

 

(3,823)

 

(18,051)

Cash, cash equivalents and restricted cash – beginning of period

 

28,487

 

37,222

Cash, cash equivalents and restricted cash – end of period

$

24,664

$

19,171

Cash and cash equivalents

$

21,784

$

16,843

Restricted cash

2,880

2,328

Total cash, cash equivalents and restricted cash

$

24,664

$

19,171

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for income taxes

$

947

$

Cash paid for interest

$

105

$

48

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Change in reimbursable public improvements included in accounts payable and accrued liabilities

$

275

$

104

Change in investments in water and water systems included in accounts payable and accrued liabilities

$

71

$

120

Issuance of stock for compensation

$

16

$

12

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

NOVEMBER 30, 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 of a normal recurring nature and are in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows of the Company as of and for the three months ended November 30, 2023 and 2022. The August 31, 2023 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, 2023 (2023 Annual Report) filed with the Securities and Exchange Commission (SEC) on November 15, 2023. 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.

Recently Issued Accounting Pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses: Measurement of Credit Losses on Financial Instruments, which changes the impairment model for most financial assets.  The ASU introduces a new credit loss methodology, Current Expected Credit Losses (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. Since its original issuance in 2016, the FASB has issued several updates to the original ASU.  The CECL framework utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. The methodology replaces the multiple existing impairment methods, which generally require that a loss be incurred before it is recognized.

On September 1, 2023, the Company adopted the guidance on a modified retrospective basis. The Company has not restated comparative information for the three months ended November 30, 2022, and, therefore, the comparative information for the three months ended November 30, 2022, is reported under previous guidance and is not comparable to the information presented for the year ended November 30, 2023. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

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 2023 Annual Report.

The notes receivable – related party, reimbursable public improvements and project management fees are 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

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Ranch which are the ultimate responsibility of the Sky Ranch CAB. During the three months ended November 30, 2023, Pure Cycle spent $2.5 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 months ended November 30, 2023, project management fees of less than $0.1 million and interest income on the outstanding note receivable of $0.7 million were also added to the note receivable. No payments were made on the note receivable during the three months ended November 30, 2023 and 2022. Pursuant to the agreements with the Sky Ranch CAB, any payments received are initially applied to interest.

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

Three Months Ended

November 30, 2023

    

November 30, 2022

Beginning balance

$

24,999

$

17,208

Additions

3,271

1,279

Payments received

Ending balance

$

28,270

$

18,487

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 2023 Annual Report.

The following describes significant components of revenue for the three months ended November 30, 2023 and 2022.

Water and wastewater tap fees – During the three months ended November 30, 2023 and 2022, the Company sold a total of 15 and 4 water and wastewater taps generating $0.6 million and $0.2 million in tap fee revenues. These taps were all sold at Sky Ranch.

Metered water and wastewater usage fees – During the three months ended November 30, 2023 and 2022, the Company sold a total of 623 and 207 acre-feet of water generating $2.4 million and $0.6 million in metered water and wastewater treatment fees revenue. 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 royalties as described in the 2023 Annual Report. The Company also sells 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 November 30, 2023 and 2022, the Company recognized $1.9 million and $0.5 million of lot sale revenue, which was recognized using the percent-of-completion method for the Company’s land development activities at the Sky Ranch master planned community. As of November 30, 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 November 30, 2023, Phase 2A is approximately 95% complete and Phase 2B is approximately

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43% complete. Phase 2A is substantially completed with some landscaping items remaining, and Phase 2B is expected to be complete by the end of Pure Cycle’s fiscal 2024. Phase 2C is scheduled to begin during Pure Cycle’s fiscal 2024 second quarter.

Project management services – During each of the three-month periods ended November 30, 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.

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 November 30, 2023, Pure Cycle has 14 single-family detached homes rented under separate lease agreements. For each of the three-month periods ended November 30, 2023 and 2022, the Company reported $0.1 million and less than $0.1 million of rental property revenues.

Pure Cycle will begin construction on 17 additional rental homes in Phase 2B, all of which the Company believes will be available for rent before December 31, 2024. As of November 30, 2023, the Company had reserved 81 lots in Phases 2B, 2C and 2D of Sky Ranch for future rental units. When combined with the 14 units already built and rented, these additions will bring the total single-family rentals to 95. 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 November 30, 2023 and 2022, the Company recognized $0.3 million and less than $0.1 million of special facility projects and other revenue, an immaterial amount of which is from work performed for the Sky Ranch CAB, a related party.

Deferred revenue

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

Three Months Ended November 30, 2023

(In thousands)

Water and Wastewater Resource Development

Land Development

Total

Balance at August 31, 2023

$

69

$

1,661

$

1,730

Revenue recognized

(127)

(1,963)

(2,090)

Revenue deferred

108

4,093

4,201

Balance at November 30, 2023

$

50

$

3,791

$

3,841

Three Months Ended November 30, 2022

(In thousands)

Water and Wastewater Resource Development

Land Development

Total

Balance at August 31, 2022

$

570

$

4,275

$

4,845

Revenue recognized

(18)

(513)

(531)

Revenue deferred

-

127

127

Balance at November 30, 2022

$

552

$

3,889

$

4,441

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

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The Company recognizes lot sales over time as construction activities progress and not necessarily when payment is received. For example, the Company may receive milestone payments before revenue can be recognized (i.e., prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company recording deferred revenue. The Company recognizes this revenue into income as construction activities progress, measured based on costs incurred compared to total estimated costs of the project, which management believes is a faithful representation of the transfer of goods and services to the customer.

Revenue allocated to remaining performance obligations such as described above represents contracted revenue that has not yet been recognized, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods.

NOTE 4 – FAIR VALUE MEASUREMENTS

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

The carrying value for certain of the Company’s financial instruments (i.e., cash, restricted cash, short term investments, accounts receivable, accounts payable, accrued liabilities, the SFR Notes and the Lost Creek Note, each as defined in Note 6 below) materially approximate their fair value because of their short-term nature and generally negligible credit losses.

As of November 30, 2023 and August 31, 2023, the Company had no assets or liabilities measured at fair value on a recurring basis. As of August 31, 2023, the Company had one Level 3 liability, which was the contingent portion of the CAA.

There were no transfers between Level 1, 2 or 3 categories during the three months ended November 30, 2023 or 2022.

NOTE 5 – WATER, LAND AND OTHER FIXED ASSETS

The Company’s water rights and current water and wastewater service agreements, including capitalized terms not defined herein, are more fully described in Note 4 to the 2023 Annual Report.

Investment in Water and Water Systems

The Company’s Investments in water and water systems consist of the following costs and accumulated depreciation and depletion:

November 30, 2023

August 31, 2023

Accumulated

Accumulated

Depreciation

Depreciation

(In thousands)

    

Costs

    

and Depletion

    

Costs

    

and Depletion

Rangeview water system

$

20,149

$

(2,996)

$

20,020

$

(2,813)

Rangeview water supply

15,192

(19)

15,084

(18)

Water supply – Other

 

7,588

 

(2,110)

 

7,612

 

(2,064)

Sky Ranch water rights and other costs

 

7,764

 

(1,529)

 

7,764

 

(1,487)

Sky Ranch pipeline

 

5,740

 

(1,223)

 

5,740

 

(1,175)

Lost Creek water supply

 

7,357

 

 

7,328

 

Fairgrounds water and water system

 

2,900

 

(1,525)

 

2,900

 

(1,503)

Wild Pointe service rights

 

1,632

 

(1,222)

 

1,632

 

(1,222)

Totals

 

68,322

 

(10,624)

 

68,080

 

(10,282)

Net investments in water and water systems

$

57,698

$

57,798

Construction in Progress

The construction in progress account represents costs incurred on various construction projects currently underway that as of the balance sheet date have not been completed and placed into service. The construction in progress account consists primarily of costs incurred relating to water facilities being constructed, which Pure Cycle anticipates will be placed in service during the next 12 months. During the three months ended November 30, 2023, the Company incurred $1.7 million of costs related to construction in Sky Ranch and water

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and wastewater construction projects. The Company capitalized $1.3 million of costs as projects were completed and placed into service during the three months ended November 30, 2023.

Single-Family Rental Homes

During the year ended August 31, 2023, the Company completed 11 additional rental homes to be used in the rental business. The Company began construction on one single-family detached unit in March 2022 which was completed in December 2022 and rented effective December 15, 2022. For the remaining 10 units, comprised of single-family detached houses and paired homes, construction began in the summer of 2022 and was completed during the fourth quarter of fiscal 2023.

At November 30, 2023, the Company has reserved a total of 91 lots in Phase 2 of Sky Ranch (10 of which are in Phase 2A and completed) to build additional rental units.

NOTE 6 – DEBT AND OTHER LONG-TERM OBLIGATIONS

As of November 30, 2023, the outstanding principal and deferred financing costs of the Company’s loans are as follows:

(In thousands)

November 30, 2023

Single-Family Rental Home Note Payable

$

3,974

Lost Creek Note Payable

3,000

Total outstanding principal

6,974

Deferred financing costs

(66)

Less current maturities, net of current deferred financing costs

(34)

Debt, less current portion

$

6,874

As of November 30, 2023, the scheduled maturities (i.e. principal payments) of the Company’s loans are as follows:

(In thousands)

Scheduled principal payments

Within 1 year

$

42

Year 2

196

Year 3

424

Year 4

1,312

Year 5

3,146

Thereafter

1,854

Total principal payments

$

6,974

SFR Note 1

On November 29, 2021, PCY Holdings, LLC, a wholly owned subsidiary of the Company, entered a Promissory Note (SFR Note 1) with its primary bank to reimburse amounts expended for the construction of the first three single-family rental units. The SFR Note 1 has the following terms:

Floating per annum interest rate equal to the Western Edition of the “Wall Street Journal” Prime Rate plus 0.5%, which has a floor of 3.75% and a ceiling of 4.25% (4.25% as of November 30, 2023). In the event of default, the interest rate on the SFR Note would be increased by adding an additional 2.0%
Maturity date of December 1, 2026
Six interest only payments from January 1, 2022 through June 1, 2022
Fifty-three principal and interest payments each month which began July 1, 2022 in the amount of $4,600 each
Estimated final principal and interest balloon payment of $0.9 million payable on December 1, 2026
Secured by three single-family rental homes
Required minimum debt service coverage ratio of 1.10, measured annually based on audited financial statements (which the Company satisfied as of August 31, 2023), calculated as net operating income less distributions divided by required principal and interest payments, with net operating income defined as net income plus interest, depreciation, and amortization.

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SFR Note 2

On August 30, 2023, PCY Holdings, LLC, a wholly owned subsidiary of the Company, entered a Promissory Note (SFR Note 2) with its primary bank to reimburse amounts expended for the construction of the next 11 single-family rental homes. The SFR Note 2 has the following terms:

Initial principal amount of $3.0 million
An interest rate of 7.51%. In the event of default, the interest rate on the SFR Note 2 would be increased by adding an additional 5.0%
Maturity date of August 30, 2028
Fifty-nine principal and interest payments each month beginning September 30, 2023 in the amount of $21,200 each
Estimated final principal and interest balloon payment of $2.9 million payable on August 30, 2028
Secured by 11 single-family rental homes
Required minimum EBITDA of $3.0 million, measured annually at each fiscal year end (which the Company satisfied as of August 31, 2023).

Lost Creek Note

On June 28, 2022, the Company entered a loan with its primary bank to fund the acquisition of 370 acre-feet of water rights the Company acquired on June 27, 2022, in the Lost Creek Designated Groundwater Basin area of Colorado (Lost Creek Note). The Lost Creek Note has an original principal balance of $3.0 million, a ten-year maturity, monthly interest only payments averaging $12,000 per month for thirty-six months which began on July 28, 2022, twenty-four monthly principal and interest payments of $42,000 beginning on July 28, 2025, fifty-nine monthly principal and interest payments of $32,000 beginning on July 28, 2027, and a balloon payment of less than $0.8 million plus unpaid and accrued interest due on June 28, 2032. The Lost Creek Note has a thirty-year amortization period and a fixed per annum interest rate equal to 4.90%. The Lost Creek Note is secured by the Lost Creek Water rights acquired with the note and any fees derived from the use of the Lost Creek Water rights. The Lost Creek Note does not contain any financial covenants.

Working Capital Line of Credit

On January 31, 2022, the Company entered a Business Loan Agreement (Working Capital LOC) with its primary bank to provide a $5.0 million operating line of credit. The Working Capital LOC has a two-year maturity, monthly interest only payments if the line is drawn upon with unpaid principal and interest due at maturity, and a floating per annum interest rate equal to the Wall Street Journal Prime Rate plus 0.5% (9.0% as of November 30, 2023), which has a floor of 3.75%. In the event of default, the interest rate on the Working Capital LOC would be increased by an additional 2.0%. As of November 30, 2023, the Company has not drawn on the Working Capital LOC.

Letters of Credit

At November 30, 2023, the Company has seven Irrevocable Letters of Credit (LOCs) outstanding. The LOCs are to guarantee the Company’s performance related to certain construction projects at Sky Ranch. The Company has the full intent and ability to perform on the contracts, after which, the LOC’s will expire at various dates from June 2024 through November 2024. As of November 30, 2023, the LOCs totaled $2.9 million, which are secured by cash balances maintained in restricted cash accounts at the Company’s bank, renew annually at various dates and have a 1% annual fee.

NOTE 7 – EMPLOYEE STOCK PLANS

The Company reserved 1.6 million shares of common stock for issuance to employees and directors pursuant to the Company’s 2014 Equity Incentive Plan (2014 Equity Plan). As of November 30, 2023 and August 31, 2023, there were 956,378 shares and 964,378 shares available for grant under the 2014 Equity Plan.

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The following table summarizes the combined stock option activity for the 2014 Equity Plan for the periods noted:

    

Number of Options

    

Weighted Average Exercise Price

    

Weighted Average Remaining Contractual Term

    

Approximate Aggregate Intrinsic Value
(in thousands)

Outstanding at August 31, 2023

563,000

$

9.15

5.5

$

1,221

Granted

 

$

Exercised

 

$

Forfeited / Expired

$

Outstanding at November 30, 2023

 

563,000

$

9.15

5.2

$

1,221

Options exercisable at November 30, 2023

 

504,000

$

8.95

5.1

$

1,100

Outstanding at August 31, 2022

 

712,500

$

8.75

5.7

$

1,489

Granted

 

$

Net settlement exercised

 

$

Forfeited / Expired

$

Outstanding at November 30, 2022

 

712,500

$

8.75

5.5

$

1,640

There were no options exercised or issued during the three months ended November 30, 2023.

The following table summarizes the activity and value of non-vested options under the 2014 Incentive Plan for the periods presented:

    

Number of Options

    

Weighted Average Grant Date Fair Value

Non-vested options outstanding at August 31, 2023

111,000

$

4.47

Granted

 

$

Vested

 

(52,000)

$

4.41

Forfeited / Expired

 

$

Non-vested options outstanding at November 30, 2023

 

59,000

$

4.45

Non-vested options outstanding at August 31, 2022

 

232,998

$

4.47

Granted

 

$

Vested

 

(101,998)

$

4.40

Forfeited

$

Non-vested options outstanding at November 30, 2022

 

131,000

$

4.54

All non-vested options are expected to vest.

On September 19, 2023, the Company issued certain employees 8,000 shares of restricted stock. These shares vested 20% at the September 19, 2023 grant date, and 20% vest each anniversary of the grant date for four years. The shares are eligible to vote and participate in any dividend or stock splits approved by the Company.

On January 11, 2023, the Company’s six non-employee Board members were each granted 3,033 shares of unrestricted stock. The fair market value of the unrestricted shares for share-based compensation expense is equal to the closing price of the Company's common stock on the date of grant of $9.89. There is no vesting requirement for the unrestricted stock grants. Additionally, on January 11, 2023, the Company’s board awarded an executive officer 50,000 shares of restricted stock. Of which 10,000 shares fully vested in fiscal 2023 and the remaining 40,000 restricted stock unit awards were forfeited upon the executive officer’s departure. The shares are eligible to vote and participate in any dividend or stock splits approved by the Company.

On September 14, 2022, the Company issued certain employees 6,000 shares of restricted stock. These shares vested 20% at the September 14, 2022 grant date, and 20% vest each anniversary of the grant date for four years. The shares are eligible to vote and participate in any dividend or stock splits approved by the Company.

For the three months ended November 30, 2023 and 2022, the Company recognized $0.1 million of stock-based compensation expense.

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At November 30, 2023, the Company had unrecognized compensation expenses totaling $0.3 million relating to non-vested options and restricted stock that are expected to vest. The weighted-average period over which these options are expected to vest is approximately two years.

NOTE 8 – RELATED PARTY TRANSACTIONS

The Rangeview Metropolitan District

The Rangeview Metropolitan District (Rangeview District) and the Company’s agreements with the Rangeview District are described in greater detail in Note 15 to the 2023 Annual Report.

The Rangeview District and the Company have entered into two loan agreements. In 1995, the Company extended a loan to the Rangeview District for borrowings of up to $0.25 million, which is unsecured, and bears interest based on the prevailing prime rate plus 2% (10.5% at November 30, 2023). The maturity date of the loan is December 31, 2023, at which time it automatically renews through December 31, 2024. Beginning in January 2014, the Rangeview District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the Rangeview District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the 2014 Amended and Restated Lease Agreement among the Rangeview District, the Company, and the State Board of Land Commissioners remains in effect. The November 30, 2023, balance in notes receivable - related parties, other totaled $1.5 million, which included borrowings of $1.4 million and accrued interest of $0.1 million. As of August 31, 2023, the principal and interest on both loan agreements totaled $1.5 million, which included $1.4 million of borrowings and less than $0.1 million of accrued interest. During the three months ended November 30, 2023 and 2022, the Company did not receive any interest or principal payments from the Rangeview District.

Additionally, the Company provides funding to the Rangeview District for the Rangeview District’s participation in the “Wise Partnership.” The WISE Partnership and capitalized terms related to WISE not defined herein are defined in Note 8 to the 2023 Annual Report. During the three months ended November 2023 and 2022, the Company, through the Rangeview District, received metered water deliveries of 65 acre-feet and 55 acre-feet of WISE water, paying $0.1 million and $0.1 million for this water. The cost of WISE water to the members is based on the water rates charged by Aurora Water and can be adjusted each January 1. As of January 1, 2023, WISE water was approximately $6.48 per thousand gallons and such rate will remain in effect through calendar 2023.

Sky Ranch Community Authority Board

The Sky Ranch CAB and the Company’s agreements with the Sky Ranch CAB are described in greater detail in Note 15 to the 2023 Annual Report.

The Sky Ranch Districts and the Sky Ranch CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to Sky Ranch. The Sky Ranch CAB was formed to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. For the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property. To fund these improvements, the Company and the Sky Ranch CAB entered into various funding agreements obligating the Company to advance funds to the Sky Ranch CAB for specified public improvements constructed from 2018 to 2023. All amounts owed under the agreements bear interest at a rate of 6% per annum. Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058 for the first phase and December 31, 2060 for the second phase shall be deemed forever discharged and satisfied in full.  The Company has received cumulative, project-to-date payments of $35.5 million from the Sky Ranch CAB for payments on the note receivable including both principal and interest payments.

As of November 30, 2023, the balance of the Company’s advances to the Sky Ranch CAB for improvements, including interest, net of reimbursements from the Sky Ranch CAB total $28.3 million. The advances have been used by the Sky Ranch CAB to pay for construction of public improvements. The Company submits specific costs for reimbursement to the Sky Ranch CAB that have been certified by an independent third-party. The Company anticipates providing additional funding of approximately $15.5 million for construction of public improvements to the Sky Ranch CAB during the remainder of fiscal 2024 related to Phase 2A, Phase 2B and Phase 2C of the Sky Ranch development.  Payments from Sky Ranch CAB are made based on available cashflow from operations or from proceeds from the issuance of bonds.

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In fiscal 2022, through a competitive bidding process, the Sky Ranch CAB awarded the Company a contract to construct fencing around Phase 2A of the Sky Ranch Master Planned Community. The contracted bid price is $0.4 million, which is being recognized as revenue as the construction of the fence progresses. During the three months ended November 30, 2023 and 2022, the Company recognized less than $0.1 million of revenue related to this contract.

Nelson Pipeline Constructors LLC

Through a competitive bidding process, the Sky Ranch CAB awarded Nelson Pipeline Constructors, LLC (Nelson), a contract to construct the wet utility pipelines in Phase 2A of Sky Ranch. During the three months ended November 30, 2023 and 2022, the Sky Ranch CAB paid Nelson $0.1 million and $0.2 million related to this contract. Nelson is majority owned by the chair of the Company’s board of directors.

NOTE 9 – SIGNIFICANT CUSTOMERS

The Company has significant customers in its operations. The table below presents the percentage of total revenue for the reported customers for the three months ended November 30, 2023 and 2022. For water and wastewater customers, the Company provides services on behalf of the Rangeview District for which the significant end users include Sky Ranch CAB and two oil & gas operators. The home builders at Sky Ranch account for lot purchase revenue but also for water and wastewater tap fee revenues.