NOTE 3 – REVENUES, FEES AND OTHER INCOME ITEMS

The Company’s revenue is primarily generated from three unique segments: (1) Sales of water and wastewater taps, metered water and wastewater usage; (2) the sale of lots to homebuilders; and (3) rent collected from its single-family homes. Detailed descriptions of the policies related to revenue recognition are included in Note 2 to the 2024 Annual Report.

The following describes significant components of revenue for the three and nine months ended May 31, 2025 and 2024.

Water and wastewater tap fees – During the three months ended May 31, 2025 and 2024, the Company sold a total of 40 and 20 water taps, respectively, generating $1.4 million and $0.5 million in tap fee revenues, respectively. During the three months ended May 31, 2025 and 2024, the Company sold a total of 40 and 18 wastewater taps, respectively, generating $0.3 million and $0.1 million in tap fee revenues, respectively. During the nine months ended May 31, 2025 and 2024, the Company sold a total of 130 and 35 water taps, respectively, generating $4.3 million and $0.9 million in tap fee revenues, respectively. During the nine months ended May 31, 2025 and 2024, the Company sold a total of 127 and 33 wastewater taps, respectively, generating $1.0 million and $0.2 million in tap fee revenues, respectively. The water taps were all sold at Sky Ranch and Wild Pointe, and the wastewater taps were all sold at Sky Ranch.

Metered water usage and wastewater treatment fees – During the three months ended May 31, 2025 and 2024, the Company sold a total of 76 and 394 acre-feet of water, respectively, generating $0.4 million and $1.7 million in metered water and wastewater treatment fees revenue, respectively. During the nine months ended May 31, 2025 and 2024, the Company sold a total of 442 and 1,422 acre-feet of water, respectively, generating $2.1 million and $5.8 million in metered water and wastewater treatment fees revenue, respectively. 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 2024 Annual Report. The Company’s largest customers for water are for industrial users, mainly oil and gas companies using water in drilling and hydraulic fracking processes.

Lot sales – For the three months ended May 31, 2025 and 2024, the Company recognized $2.5 million and $4.8 million of lot sales revenue, respectively, 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, 2025 and 2024, the Company recognized $6.0 million and $7.9 million of lot sales revenue, respectively, 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, 2025, the first development phase (509 lots) is complete and the second development phase (1,032 lots) is being developed in five subphases, referred to as Phase 2A (229 lots), Phase 2B (211 lots), Phase 2C (228 lots), Phase 2D (218 lots) and Phase 2E (146 lots). As of May 31 2025, Phase 2A is 100% complete, Phase 2B is approximately 96% complete, Phase 2C is approximately 68% complete, Phase 2D is approximately 29% complete, and Phase 2E is expected to begin development work in fiscal 2026. Phase 2B is substantially complete with some landscaping and warranty items remaining. Phase 2C is expected to be completed by the end of Pure Cycle’s fiscal 2025, Phase 2D is expected to be completed in fiscal 2026, and Phase 2E is expected to be completed by the end of calendar 2026.

Project management fees – During the three months ended May 31, 2025 and 2024, the Company recognized $0.1 million and $0.2 million of project management revenue, respectively, from the Sky Ranch CAB, a related party, for managing the Sky Ranch development project. During the nine months ended May 31, 2025 and 2024, the Company recognized $0.5 million and $0.4 million of project management revenue, respectively, from the Sky Ranch CAB, a related party, for managing the Sky Ranch development project.  

Single-family rental revenue

As of May 31, 2025, Pure Cycle has 14 single-family detached homes rented under separate lease agreements.  Pure Cycle generally rents its single-family properties under non-cancelable one-year lease agreements. For the three months ended May 31, 2025 and 2024, the Company recognized $0.1 million and $0.1 million of rental property revenues, respectively. For the nine months ended May 31, 2025 and 2024, the Company recognized $0.4 million and $0.4 million of rental property revenues, respectively.  

Pure Cycle has begun construction on 17 additional rental homes in Phase 2B, all of which the Company believes will be available for rent in fiscal 2026. As of May 31, 2025, the Company had reserved 84 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 98. 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, 2025 and 2024, the Company recognized $0.2 million and $0.2 million of special facility projects and other revenue, an immaterial amount of which is from work performed for the Sky Ranch CAB, a related party. For the nine months ended May 31, 2025 and 2024, the Company recognized $0.6 million and $0.6 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:

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The Company receives deposits or pre-payments from oil and gas operators to reserve water for use in future well drilling and fracking 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.

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 recognized as revenue in future periods.