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, 2024

☐	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: 24,075,342 shares of 1/3 of $.01 par value common stock as of July 5, 2024.

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PURE CYCLE CORPORATION

INDEX TO May 31, 2024 FORM 10-Q


		Page

PART I. FINANCIAL INFORMATION		4

	Item 1. Consolidated Financial Statements	4

	Consolidated Balance Sheets: May 31, 2024 (unaudited) and August 31, 2023	4

	Consolidated Statements of Income (unaudited): For the three and nine months ended May 31, 2024 and 2023	5

	Consolidated Statements of Shareholders’ Equity (unaudited): For the three and nine months ended May 31, 2024 and 2023	6

	Consolidated Statements of Cash Flows (unaudited): For the three and nine months ended May 31, 2024 and 2023	7
	Notes to 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	31

PART II. OTHER INFORMATION		31

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	31

	Item 6. Exhibits	32

SIGNATURES		32

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FORWARD-LOOKING STATEMENTS

Statements that are not historical facts contained in this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). The words “anticipate,” “seek,” “project,” “future,” “likely,” “believe,” “may,” “should,” “could,” “will,” “estimate,” “expect,” “plan,” “intend” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements include statements relating to, among other things:

●	future water supply needs in Colorado and how such needs will be met;

●	anticipated revenue from our commercial water sales;

●	anticipated increases in residential and commercial demand for water services and competition for these services;

●	estimated population increases in the Denver metropolitan area and the South Platte River basin;

●	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 wells 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 tenant relief laws, including laws regulating evictions, rent control laws, and other regulations that limit our ability to increase rental rates may negatively impact our rental income and profitability from our single-family rentals;

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

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●	uncertainties in the estimation of water available under decrees;

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

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

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

●	uncertainties in the estimation of costs of construction projects;

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

●	the strength and financial resources of our competitors;

●	our ability to find and retain skilled personnel;

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

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

●	availability and cost of labor, material and equipment;

●	engineering and geological problems;

●	environmental risks and regulations;

●	our ability to raise capital;

●	changes in corporate tax rates;

●	our ability to negotiate contracts with customers;

●	uncertainties in water court rulings;

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

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

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

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PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

PURE CYCLE CORPORATION

CONSOLIDATED BALANCE SHEETS


(In thousands, except shares)	May 31, 2024		August 31, 2023
ASSETS:		(unaudited)
Current assets:
Cash and cash equivalents	$	20,360	$	26,012
Short term investments		171		—
Trade accounts receivable, net		2,303		1,092
Land under development		5,183		1,726
Income taxes receivable		—		551
Prepaid expenses and other assets		580		346
Total current assets		28,597		29,727
Restricted cash		2,881		2,475
Investments in water and water systems, net		59,078		57,798
Construction in progress		4,243		5,457
Single-family rental units		5,115		4,490
Land and mineral rights:
Held for development		3,714		4,652
Held for investment purposes		451		451
Other assets		1,167		1,359
Notes receivable – related parties, including accrued interest
Reimbursable public improvements and project management fees		33,541		24,999
Other		1,441		1,451
Operating leases - right of use assets		176		357
Total assets	$	140,404	$	133,216

LIABILITIES:
Current liabilities:
Accounts payable	$	3,311	$	1,960
Accrued liabilities		1,380		1,761
Accrued liabilities – related parties		1,357		1,021
Income taxes payable		1,383		—
Deferred lot sales revenues		1,548		1,661
Deferred water sales revenues		13		69
Debt, current portion		34		31
Total current liabilities		9,026		6,503
Debt, less current portion		6,859		6,885
Deferred tax liability, net		1,230		1,352
Lease obligations - operating leases, less current portion		106		242
Total liabilities		17,221		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; 24,075,342 and 24,078,720 outstanding, respectively		80		80
Additional paid-in capital		175,069		174,689
Accumulated deficit		(51,966)		(56,535)
Total shareholders’ equity		123,183		118,234
Total liabilities and shareholders’ equity	$	140,404	$	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				Nine Months Ended
(In thousands, except share information)	May 31, 2024		May 31, 2023		May 31, 2024		May 31, 2023
Revenues:
Metered water usage from:
Municipal customers	$	145	$	145	$	458	$	349
Commercial customers		1,432		2,145		5,045		2,596
Wastewater treatment fees		85		75		258		216
Water and wastewater tap fees		581		1,256		1,162		2,400
Lot sales		4,795		3,160		7,906		5,064
Project management fees		221		42		362		173
Single-family rentals		123		34		357		90
Special facility projects and other		222		22		639		330
Total revenues		7,604		6,879		16,187		11,218

Cost of revenues:
Water service operations		564		576		1,628		1,457
Wastewater service operations		173		96		513		350
Land development construction costs		1,192		951		1,961		1,291
Project management costs		154		81		401		227
Single-family rental costs		71		24		161		53
Depletion and depreciation		410		407		1,132		1,246
Other		174		71		406		318
Total cost of revenues		2,738		2,206		6,202		4,942

General and administrative expenses		1,647		805		5,082		3,900
Depreciation		151		111		447		348
Operating income		3,068		3,757		4,456		2,028

Other income (expense):
Interest income - related party		217		331		1,156		841
Interest income - Investments		279		281		873		727
Oil and gas royalty income, net		392		44		479		227
Oil and gas lease income, net		18		18		56		56
Other, net		(13)		40		121		1,257
Interest expense, net		(109)		(52)		(328)		(149)
Income from operations before income taxes		3,852		4,419		6,813		4,987
Income tax expense		(1,027)		(1,124)		(1,805)		(1,344)
Net income	$	2,825	$	3,295	$	5,008	$	3,643

Earnings per common share - basic and diluted
Basic	$	0.12	$	0.14	$	0.21	$	0.15
Diluted	$	0.12	$	0.14	$	0.21	$	0.15
Weighted average common shares outstanding:
Basic		24,087,170		24,054,843		24,085,578		24,021,582
Diluted		24,143,039		24,166,344		24,146,361		24,131,621

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(unaudited)


	Three Months Ended May 31, 2024
	Preferred Stock			Common Stock			Additional		Accumulated
(in thousands, except shares)	Shares	Amount		Shares	Amount		Paid-in Capital		Deficit		Total
Balance at February 29, 2024	432,513	$	—	24,088,734	$	80	$	175,014	$	(54,650)	$	120,444
Restricted stock grants	—		—	—		—		—		—		—
Stock options exercised	—		—	—		—		—		—		—
Stock granted for services	—		—	1,608		—		15		—		15
Share-based compensation	—		—	—		—		40		—		40
Repurchases of common stock	—		—	(15,000)		—		—		(141)		(141)
Net income	—		—	—		—		—		2,825		2,825
Balance at May 31, 2024	432,513	$	—	24,075,342	$	80	$	175,069	$	(51,966)	$	123,183


	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


	Nine Months Ended May 31, 2024
	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		—		37		—		37
Stock options exercised	—		—	13,978		—		—		—		—
Stock granted for services	—		—	19,644		—		195		—		195
Share-based compensation	—		—	—		—		148		—		148
Repurchases of common stock	—		—	(45,000)		—		—		(439)		(439)
Net income	—		—	—		—		—		5,008		5,008
Balance at May 31, 2024	432,513	$	—	24,075,342	$	80	$	175,069	$	(51,966)	$	123,183



	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

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, 2024		May 31, 2023
Cash flows from operating activities:
Net income	$	5,008	$	3,643
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and depletion		1,579		1,594
Trade accounts receivable		(1,211)		(246)
Accounts payable and accrued liabilities		1,353		(788)
Other assets and liabilities		315		922
Share-based compensation expense		380		559
Deferred income taxes		(122)		(202)
Prepaid expenses		(234)		75
Amortized discount on U.S. Treasury Bills		—		(256)
Net activity for notes receivable - related party, other		(90)		(277)
Deferred water sales revenue		(56)		(557)
Land under development		(6,550)		(249)
Deferred lot sale revenues		(113)		(800)
Taxes payable / receivable		1,934		(2,720)
Net activity on note receivable - related party, reimbursable public improvements		(2,986)		(3,668)
Net cash used by operating activities		(793)		(2,970)
Cash flows from investing activities:
Maturity of held-to-maturity investments in U.S. Treasury Bills		—		15,256
Purchase of property and equipment		(409)		(275)
Investments in future development phases at Sky Ranch		(1,994)		(937)
Construction costs of single-family rentals		(291)		(3,471)
Investments in water and water systems		(1,226)		(1,374)
Payments on note receivable - related party, other		100		-
Purchase of held-to-maturity investments in U.S. Treasury Bills		(171)		(15,000)
Net cash used in investing activities		(3,991)		(5,801)
Cash flows from financing activities:
Payments on notes payable		(23)		(8)
Repurchases of common stock		(439)		—
Payments to contingent liability holders		—		(111)
Net cash used in financing activities		(462)		(119)
Net change in cash, cash equivalents and restricted cash		(5,246)		(8,890)
Cash, cash equivalents and restricted cash – beginning of period		28,487		37,222
Cash, cash equivalents and restricted cash – end of period	$	23,241	$	28,332
Cash and cash equivalents	$	20,360	$	26,000
Restricted cash		2,881		2,332
Total cash, cash equivalents and restricted cash	$	23,241	$	28,332

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes	$	65	$	4,265
Cash paid for interest	$	312	$	142
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Change in reimbursable public improvements included in accounts payable and accrued liabilities	$	205	$	569
Change in investments in water and water systems included in accounts payable and accrued liabilities	$	84	$	85
Issuance of stock for compensation	$	211	$	111

See accompanying Notes to the Consolidated Financial Statements

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PURE CYCLE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

May 31, 2024

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The accompanying unaudited consolidated financial statements have been prepared by Pure Cycle Corporation (the “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 and nine months ended May 31, 2024 and 2023. 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 and nine months ended May 31, 2023, and, therefore, the comparative information for the three and nine months ended May 31, 2023, is reported under previous guidance and is not comparable to the information presented for the three and nine months ended May 31, 2024. The adoption of this standard did not have a material impact on the Company's consolidated financial statements.

Reclassifications

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

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NOTE 2 – REIMBURSABLE PUBLIC IMPROVEMENTS AND NOTE RECEIVABLE FROM THE SKY RANCH COMMUNITY AUTHORITY BOARD

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 and include 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 constructing certain public improvements at Sky Ranch which are the ultimate responsibility of the Sky Ranch CAB. During the three and nine months ended May 31, 2024, Pure Cycle spent $4.1 million and $7.6 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, 2024, project management fees of $0.2 million and $0.4 million and interest income on the outstanding note receivable of $0.2 million and $1.2 million were also added to the note receivable. During the three and nine months ended May 31, 2024, the Sky Ranch CAB paid Pure Cycle $0 and $0.3 million pursuant to the note. Pursuant to the agreements with the Sky Ranch CAB, any payments received are initially applied to interest.

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 and nine months ended May 31, 2023, the Sky Ranch CAB paid Pure Cycle $0.5 million and $0.5 million, respectively. 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
	May 31, 2024		May 31, 2023
Beginning balance	$	28,915	$	20,609
Additions		4,626		2,996
Payments received		—		(487)
Ending balance	$	33,541	$	23,118

	Nine Months Ended
	May 31, 2024		May 31, 2023
Beginning balance	$	24,999	$	17,208
Additions		8,828		6,397
Payments received		(286)		(487)
Ending balance	$	33,541	$	23,118

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.

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NOTE 3 – REVENUES, FEES AND OTHER INCOME ITEMS

The Company’s revenue is primarily generated from sales of water and wastewater taps, metered water and wastewater usage, the sale of lots to homebuilders, and rent collected from its single-family homes. 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 and nine months ended May 31, 2024 and 2023.

Water and wastewater tap fees – During the three months ended May 31, 2024 and 2023, the Company sold a total of 20 and 44 water taps generating $0.5 million and $1.1 million in tap fee revenues. During the three months ended May 31, 2024 and 2023, the Company sold a total of 18 and 43 wastewater taps generating $0.1 million and $0.2 million in tap fee revenues. During the nine months ended May 31, 2024 and 2023, the Company sold a total of 35 and 85 water taps generating $0.9 million and $2.0 million in tap fee revenues. During the nine months ended May 31, 2024 and 2023, the Company sold a total of 33 and 79 wastewater taps generating $0.2 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.

Metered water and wastewater usage fees – During the three months ended May 31, 2024 and 2023, the Company sold a total of 394 and 564 acre-feet of water generating $1.7 million and $2.4 million in metered water and wastewater treatment fees revenue. During the nine months ended May 31, 2024 and 2023, the Company sold a total of 1,422 and 806 acre-feet of water generating $5.8 million and $3.2 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 and hydraulic fracking processes.

Sale of finished lots – For the three months ended May 31, 2024 and 2023, the Company recognized $4.8 million and $3.2 million of lot sales 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, 2024 and 2023, the Company recognized $7.9 million and $5.1 million of lot sales 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, 2024, the first development phase (509 lots) is complete and the second development phase (874 lots) is being developed in four subphases, referred to as Phase 2A (229 lots), Phase 2B (211 lots), Phase 2C (228 lots) and Phase 2D (206 lots). As of May 31, 2024, Phase 2A is approximately 98% complete, Phase 2B is approximately 70% complete and Phase 2C is approximately 22% complete. Phase 2A is substantially completed with some landscaping items remaining. Phase 2B is expected to be complete by the end of Pure Cycle’s fiscal 2024 and Phase 2C is expected to be complete during Pure Cycle’s fiscal 2025.

Project management services – During each of the three-month periods ended May 31, 2024 and 2023, the Company recognized $0.2 million and 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-month periods ended May 31, 2024 and 2023, the Company recognized $0.4 million and $0.2 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 constructing and 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 one year lease agreements. As of May 31, 2024, Pure Cycle has 14 single-family detached homes rented under separate lease agreements. For the three months ended May 31, 2024 and 2023, the Company recognized $0.1 million and less than $0.1 million of rental property revenues. For the nine months ended May 31, 2024 and 2023, the Company recognized $0.4 million and less than $0.1 million of rental property revenues.

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Pure Cycle will begin construction on 17 additional rental homes in Phase 2B, all of which the Company believes will be available for rent in fiscal 2025. As of May 31, 2024, the Company had reserved 83 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 97. The Company expects to take approximately three more years to build and rent all these units. Based on these projections, the Company believes this could become a reportable operating segment in the future once its operations become material.

Special facility projects and other revenue

Pure Cycle receives fees from customers including municipalities and area water providers for contract operations services. These fees are recognized as earned, typically monthly, plus charges for additional work performed. Additionally, the Company performs certain construction activities at Sky Ranch. The activities performed include construction and maintenance services. The revenue for both types of services are invoiced and recognized as special facility projects revenue. For the three months ended May 31, 2024 and 2023, the Company recognized $0.2 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. For the nine months ended May 31, 2024 and 2023, the Company recognized $0.6 million and $0.3 million of special facility projects and other revenue, an immaterial amount of which is from work performed for the Sky Ranch CAB, a related party.

Deferred revenue

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


	Three Months Ended May 31, 2024
(In thousands)	Water and Wastewater Resource Development	Land Development	Total
Balance at February 29, 2024	$