PURE CYCLE CORP

Previous wording

We are a diversified water and land resource development company. At our core, we are a wholesale water and wastewater service provider, and we develop land we own into master planned communities, reserving certain lots on which we build homes for our single-family rental business. Both the land development and single-family home rental lines of business generate customers and usage fees for our water and wastewater resource development business.

Current wording

We are a diversified water resource and land development company. At our core, we are a wholesale water and wastewater service provider, and we develop land we own into master planned communities, reserving certain lots on which we build homes for our single-family rental business. Both the land development and single-family home rental lines of business generate customers and usage fees for our water and wastewater resource development business.

Previous wording

Water resources throughout the western U.S., and particularly in Colorado, are a scarce and valuable resource. Our owned and/or controlled portfolio of approximately 30,000 acre-feet of water is comprised of groundwater, designated basin groundwater, and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are primarily located in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services.

Current wording

Water resources throughout the western U.S., and particularly in Colorado, are a scarce and valuable resource. Our owned and/or controlled portfolio of more than 30,000 acre-feet of water is comprised of groundwater, designated basin groundwater, and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are primarily located in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services.

Previous wording

We have been developing the Sky Ranch community since 2017, which we are developing in phases. We believe it will take approximately eight to ten more years to fully develop Sky Ranch. In 2017, we began the initial development phase of Sky Ranch when we entered separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we sold a total of 505 single-family, detached residential lots at Sky Ranch. Pursuant to these agreements, we were obligated to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities). As of November 30, 2023, Phase 1 of the Sky Ranch development is complete, and all revenue and costs have been recognized.

Current wording

We have been developing the Sky Ranch community since 2017, which we are developing in phases. We believe it will take approximately eight to ten more years to fully develop Sky Ranch. In 2017, we began the initial development phase of Sky Ranch when we entered separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we sold a total of 505 single-family, detached residential lots at Sky Ranch. Pursuant to these agreements, we were obligated to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities). Phase 1 of the Sky Ranch development is complete, and all revenue and costs have been recognized.

Previous wording

During our fiscal 2021, we began construction on the second development phase at Sky Ranch. For this phase, we entered separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company), and Challenger Homes to sell 804 single-family attached and detached residential lots at Sky Ranch, and we retained 65 lots (through such contracts and subsequent amendments) for use in our single-family home rental business. The second development phase is approximately 250 acres and is being completed in four sub-phases (referred to as Phase 2A, 2B, 2C and 2D). Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an approximate 40% increase in our average lot prices. For example, we increased our sales price for a 50’ foot lot from $75,000 to $108,000 and added an escalation clause that increases the prices depending on timing of payments. The timing of cash flows includes certain milestone deliveries such as the completion of governmental approvals for final plats, installation of wet utilities, and final completion of lot deliveries.

Current wording

During our fiscal 2021, we began construction on the second development phase at Sky Ranch. For this phase, we entered separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company), and Challenger Homes to sell 781 single-family attached and detached residential lots at Sky Ranch, and we retained 93 lots (through such contracts and subsequent amendments) for use in our single-family home rental business. The second development phase is approximately 250 acres and is being completed in four sub-phases (referred to as Phase 2A, 2B, 2C and 2D). Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an approximate 38% increase in our average lot prices. For example, we increased our sales price for a 45’ foot lot from an average of $75,000 to $103,200 and added an escalation clause that increases the prices depending on timing of payments. The timing of cash flows includes certain milestone deliveries such as the completion of governmental approvals for final plats, installation of wet utilities, and final completion of lot deliveries.

Previous wording

In February 2021, we began construction activities in Phase 2A at Sky Ranch, which has 229 residential lots, 10 of which we have retained for use in our single-family rental business. As of November 30, 2023, we have received plats and substantially completed wet and dry utilities, roads, and sidewalks for Phase 2A and are actively working on landscaping and fencing for the neighborhood. Contracts with three of the four homebuilders include milestone payments as construction progresses, with the fourth homebuilder contract having one payment due at delivery of the finished lot (i.e. the transfer of the title). As of November 30, 2023, Phase 2A of the Sky Ranch development is approximately 95% complete, and we have received all $18.4 million of payments related to the sale of the 219 lots in Phase 2A.

Current wording

In February 2021, we began construction activities in Phase 2A at Sky Ranch, which has 229 residential lots, 10 of which we have retained for use in our single-family rental business. As of February 29, 2024, we have received plats and completed wet and dry utilities, roads, and sidewalks for Phase 2A and are actively working on landscaping and fencing for the neighborhood. Contracts with three of the four homebuilders include milestone payments as construction progresses, with the fourth homebuilder contract having one payment due at delivery of the finished lot (i.e. the transfer of the title). As of February 29, 2024, Phase 2A of the Sky Ranch development is approximately 96% complete, and we have received all $18.4 million of payments related to the sale of the 219 lots in Phase 2A.

Previous wording

In March 2023, we began construction activities in Phase 2B at Sky Ranch, which is platted for 211 residential lots, 17 of which we have retained for use in our single-family rental business. Contracts with three of the four homebuilders in Phase 2B include milestone payments as construction progresses, with the fourth homebuilder having one payment due at the transfer of title of the finished lots. As of November 30, 2023, Phase 2B of the Sky Ranch development is approximately 43% complete. During the three months ended

Current wording

In March 2023, we began construction activities in Phase 2B at Sky Ranch, which is platted for 211 residential lots, 17 of which we have retained for use in our single-family rental business. Contracts with three of the four homebuilders in Phase 2B include milestone payments as construction progresses, with the fourth homebuilder having one payment due at the transfer of title of the finished lots. As of February 29, 2024, Phase 2B of the Sky Ranch development is approximately 52% complete. During the three and six months ended February 29, 2024, we received $1.2 million and $4.1 million which consists of the second milestone payments from the three builders with milestone payment contracts. We expect the finished lot payment for Phase 2B, which totals $8.9 million, to be received over the next 9 months.

Previous wording

We recognize revenue earned under these contracts over time using the percentage of completion method which aligns the recognition of revenue with the requisite progress made on construction activities. During the three months ended November 30, 2023 and 2022, due to the construction progress in Phase 2A and 2B, we recognized $1.9 million and $0.5 million of lot sale revenue related to construction at Sky Ranch. Due to construction progress, we have recognized a total of $17.5 million of lot sales revenue since construction began on Phase 2A and $5.3 million of lot sale revenue since construction began on Phase 2B. We expect to recognize the majority of the remaining $0.9 million of revenue for Phase 2A before the end of our fiscal 2024, and the remaining $11.8 million of revenue for Phase 2B over the next 12 months.

Current wording

We recognize revenue earned under these contracts over time using the percentage of completion method which aligns the recognition of revenue with the requisite progress made on construction activities. During the three months ended February 29, 2024 and February 28, 2023, due to the construction progress in Phase 2A and 2B, we recognized $1.2 million and $1.4 million of lot sale revenue related to construction at Sky Ranch. During the six months ended February 29, 2024 and February 28, 2023, due to the construction progress in Phase 2A and 2B, we recognized $3.1 million and $1.9 million of lot sale revenue related to construction at Sky Ranch. Due to construction progress, we have recognized a total of $17.6 million of lot sales revenue since construction began on Phase 2A and $6.4 million of lot sale revenue since construction began on Phase 2B, as of February 29, 2024. We expect to recognize the majority of the remaining $0.8 million of revenue for Phase 2A before the end of our fiscal 2024, and the remaining $10.8 million of revenue for Phase 2B over the next 12 months.

Previous wording

Payments for lot sales and the related revenue for Phases 2C and 2D will occur as construction of those phases occurs. We believe it will take approximately three more years to complete construction and sell the finished lots in all four subphases depending on the market conditions and permitting process.

Current wording

Phase 2C construction has begun but has not met revenue recognition criteria as of February 29, 2024. The first milestone payments for Phase 2C were received in March 2024. Remaining payments for lot sales and the related revenue for Phases 2C and 2D will occur as construction of those phases occurs. We believe it will take approximately three more years to complete construction and sell the finished lots in all four subphases depending on market conditions and the permitting process.

Previous wording

During our fiscal 2021, we launched a new line of business we are referring to as our single-family rental business. During Phase 1 of Sky Ranch, we retained ownership of four residential lots for use in this business. As of November 30, 2023, we have completed 14 single-family homes on these lots which we own, maintain, and have leased to qualified renters under one-year lease terms. We have expanded our single-family rentals in our second development phase of Sky Ranch by building homes on lots we did not sell to our home builder partners, which we will rent out once completed. As of November 30, 2023, we reserved a total of 91 lots in Phase 2, 10 of which are in Phase 2A and are completed and rented as of November 30, 2023. Additionally, we have reserved 17 lots in Phase 2B, which we anticipate completed in calendar 2024.

Current wording

During our fiscal 2021, we launched a new line of business we are referring to as our single-family rental business. During Phase 1 of Sky Ranch, we retained ownership of four residential lots for use in this business. As of February 29, 2024, we have completed 14 single-family homes on these lots which we own, maintain, and have leased to qualified renters under one-year lease terms. We have expanded our single-family rentals in our second development phase of Sky Ranch by building homes on lots we did not sell to our home builder partners, which we will rent out once completed. As of February 29, 2024, we reserved a total of 93 lots in Phase 2, 10 of which are in Phase 2A and are completed and rented as of February 29, 2024. Additionally, we have reserved 17 lots in Phase 2B, which we anticipate completing in calendar 2024.

Previous wording

We capitalize the costs of the homes and when applicable depreciate the costs over periods not exceeding thirty-years. Lease income is recorded monthly as earned. We began recognizing monthly lease income for the first three rental units on November 1, 2021.

Current wording

We capitalize the costs of the homes and when applicable depreciate the costs over periods not exceeding thirty-years. Lease income is recorded monthly as earned and renters are typically under a one-year lease. We began recognizing monthly lease income for the first three rental units on November 1, 2021.

Previous wording

For the three months ended November 30, 2023, we generated net income of $2.1 million compared to $0.2 million for the comparable period in fiscal 2022. The increase was primarily driven by significant water sales to oil and gas operators for drilling purposes and increased lot sale revenue being recognized using the percentage of completion method, which is based on progress of construction. Despite increased challenges on the housing market, our land development activities showed an increase in growth over last year as we began construction on Phase 2B at Sky Ranch, which we believe is due to our entry level pricing and affordable lot costs.

Current wording

For the six months ended February 29, 2024, we generated net income of $2.2 million compared to $0.4 million for the comparable period in fiscal 2023. The increase was primarily driven by significant water sales to oil and gas operators for drilling purposes and increased lot sale revenue being recognized using the percentage of completion method, which is based on progress of construction. Despite increased challenges on the housing market, our land development activities showed an increase in growth over last year as we began construction on Phase 2B and Phase 2C at Sky Ranch, which we believe is due to our entry level pricing and affordable lot costs.

Previous wording

The tables below present our consolidated results of operations for the three months ended November 30, 2023 and 2022.

Current wording

The tables below present our consolidated results of operations for the three and six months ended February 29, 2024 and February 28, 2023.

Previous wording

Three Months Ended November 30, 2023 Results Compared to 2022

Current wording

Three and Six Months Ended February 29, 2024 Results Compared to 2023

Previous wording

For the three months ended November 30, 2023, total revenue increased as compared to 2022, primarily due to a significant increase in oil and gas drilling operations in our service area resulting in a substantial increase in commercial water sales. We also experienced increased lot sale revenue from multiple on-going Phases in 2023. Phase 2A had more activity in 2023 and we began construction on Phase 2B in 2023, resulting in more revenue being recognized. Our water and wastewater tap sales increased period over period. Lot sales are recognized using the percentage of completion method and due to increased construction activity in 2023 despite the increased challenges on the housing market and severe weather in our market, construction activities increased to provide additional lots to builders.

Current wording

For the three and six months ended February 29, 2024, total revenue increased as compared to 2023, primarily due to a significant increase in oil and gas operations in our service area resulting in a substantial increase in commercial water sales. We also experienced increased lot sale revenue for the six months ended February 29, 2024 compared to 2023 from multiple on-going Phases in 2024. Phase 2A had more activity in late 2023 and we began construction on Phase 2B during the end of 2023, resulting in more revenue being recognized. The increase was offset by a decrease in our water and wastewater tap sales period over period due to the timing of new home construction. Lot sales are recognized using the percentage of completion method and due to increased construction activity in late 2023 despite the increased challenges on the housing market and severe weather in our market, construction activities increased to provide additional lots to builders.

Previous wording

For the three months ended November 30, 2023, total costs of revenue increased as compared to 2022, primarily due to higher costs in the land development segment as we continued developing Phases 2A and 2B of Sky Ranch, and higher costs related to the delivery of water to oil and gas operators. Costs of revenue for the water and wastewater segment did not increase in line with revenue because the water sold to oil and gas operators was lower cost water resulting in higher profits versus traditional domestic usage.

Current wording

For the three and six months ended February 29, 2024, total costs of revenue increased as compared to 2023, primarily due to higher costs in the land development segment as we continued developing Phases 2A and 2B of Sky Ranch, and higher costs related to the delivery of water to oil and gas operators. Costs of revenue for the water and wastewater segment did not increase in line with revenue because the water sold to oil and gas operators was lower cost water resulting in higher profits versus traditional domestic usage.

Previous wording

For the three months ended November 30, 2023, water deliveries increased as compared to 2022 primarily due to increased water sales to oil and gas operators.

Current wording

For the three and six months ended February 29, 2024, water deliveries increased as compared to 2023 primarily due to increased water sales to oil and gas operators.

Previous wording

For the three months ended November 30, 2023, residential water usage revenue increased over 2022 mainly due to increased residential customers at Sky Ranch. Commercial water usage revenue increased for the three months ended November 30, 2023 compared to 2022 due to increased water sales to oil and gas operators.

Current wording

For the three and six months ended February 29, 2024, municipal water usage revenue increased over 2023 mainly due to increased residential customers at Sky Ranch. Commercial water usage revenue increased for the three and six months ended February 29, 2024 compared to 2023 due to increased water sales to oil and gas operators.

Previous wording

For the three months ended November 30, 2023, wastewater treatment fees increased slightly as compared to 2022 primarily due to new Sky Ranch customers.

Current wording

For the three and six months ended February 29, 2024, wastewater treatment fees increased slightly as compared to 2023 primarily due to new Sky Ranch customers.

Previous wording

For the three months ended November 30, 2023, water and wastewater tap sales increased compared to 2022 due to timing of closings at Sky Ranch. Tap sales are driven by builders obtaining building permits in anticipation of home closings.

Current wording

For the three and six months ended February 29, 2024, water and wastewater tap sales decreased compared to 2023 due to timing of closings at Sky Ranch. Tap sales are driven by builders obtaining building permits in anticipation of home closings.

Previous wording

For the three months ended November 30, 2023, lot sales revenue increased as compared to 2022 due to timing of development activities and 2023 having two phases under construction (Phase 2A and 2B). Per lot revenue is expected to remain consistent for all four subphases of Phase 2. Revenue for builder contracts is recognized over time with progress measured under the percent of completion method; therefore, revenue will fluctuate due to timing of construction activities throughout Phase 2.

Current wording

For the three months ended February 29, 2024, lot sales revenue decreased as compared to 2023 due to timing of development activities, and despite beginning field construction on Phase 2C in February 2024, we did not reach our first milestone to begin recognizing revenue. For the six months ended February 29, 2024, lot sales revenue increased as compared to 2023 due to having two phases under construction (Phase 2A and 2B) in 2024. Per lot revenue is expected to increase as we completed each of the four subphases of Phase 2. Revenue for builder contracts is recognized over time with progress measured under the percent of completion method; therefore, revenue will fluctuate due to timing of construction activities throughout Phase 2.

Previous wording

In fiscal 2021, we began construction on three homes that were completed and rented effective November 1, 2021. Each home was rented under a one-year non-cancellable lease agreement. The costs reflected as cost of sales for the rental units include a pro-rata share of the annual property taxes and insurance related specifically to the rental units as well as immaterial fees related to the operations and maintenance assessments from the Sky Ranch CAB that are assessed to every home in Sky Ranch. Our tenants are responsible for all other utilities including water and wastewater services that are paid to us. During Q1 2024, the Company had a total of 14 units rented.

Current wording

In fiscal 2021, we began construction on three homes that were completed and rented effective November 1, 2021. Each home was rented under a one-year non-cancellable lease agreement. The costs reflected as cost of sales for the rental units include a pro-rata share of the annual property taxes and insurance related specifically to the rental units as well as immaterial fees related to the operations and maintenance assessments from the Sky Ranch CAB that are assessed to every home in Sky Ranch. Our tenants are responsible for all other utilities including water and wastewater services that are paid to us. As of February 29, 2024, the Company had a total of 14 units rented.

Previous wording

As of November 30, 2023, our working capital, defined as current assets less current liabilities, was $20.4 million, which included $22.0 million in cash and cash equivalents. All our cash is maintained at high-credit quality institutions and overnight investments are made into an insured cash sweep program which provides FDIC insurance for our entire cash balance through the banks in which our cash is being held. We believe that as of November 30, 2023 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next 12 months. Our expected obligations for the next 12 months are described below.

Current wording

As of February 29, 2024, our working capital, defined as current assets less current liabilities, was $19.9 million, which included $20.4 million in cash and cash equivalents. All our cash is maintained at high-credit quality institutions and overnight investments are made into an insured cash sweep program which provides FDIC insurance for our entire cash balance through the banks in which our cash is being held. We believe that as of February 29, 2024 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next 12 months. Our expected obligations for the next 12 months are described below.

Previous wording

Phase 1 of the Sky Ranch development is complete, Phase 2 began in February 2021, which is being done in four subphases, of which Phase 2A and Phase 2B are the only two being actively developed as of November 30, 2023. We estimate total costs to complete the infrastructure (including public improvements) for all 850 lots in Phase 2 to total $74.6 million. Of this, we anticipate spending up to $15.5 million in the next 12 months, and we anticipate receiving approximately $19 million in milestone payments from our builder customers, completed lot payments, and tap fees from the home builders over the same period. The amounts we expect to spend and receive in the next 12 months are dependent on the pace of construction in Phase 2A, Phase 2B and Phase 2C. We believe water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.

Current wording

Phase 1 of the Sky Ranch development is complete, Phase 2 began in February 2021, which is being done in four subphases, of which Phase 2A, Phase 2B and Phase 2C are being actively developed as of February 29, 2024. We estimate total costs to complete the infrastructure (including public improvements) for all 874 lots in Phase 2 to total $74.6 million. Of this, we anticipate spending up to $15.8 million in the next 12 months, and we anticipate receiving approximately $20.9 million in milestone payments from our builder customers and completed lot payments. Additionally, we will received tap fee payments from our builder customers over the same period. The amounts we expect to spend and receive in the next 12 months are dependent on the pace of construction in Phase 2A, Phase 2B and Phase 2C. We believe water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.

Previous wording

In calendar 2024 we anticipate entering into a contact with a national home builder to construct 17 rental units at Sky Ranch in Phase 2B to be used in our single-family rental business. The contracted construction costs for all 17 units will be approximately $6 million, as of November 30, 2023, we had incurred less than $0.1 million of these construction costs. We anticipate incurring the majority of the remaining cost in calendar 2024.

Current wording

In calendar 2024, we anticipate entering into a contract with national home builders to construct 17 rental units at Sky Ranch in Phase 2B and 40 rental units at Sky Ranch in Phase 2C to be used in our single-family rental business. The contracted construction costs for all 17 units in Phase 2B will be approximately $6 million. As of February 29, 2024, we had incurred less than $0.1 million of these construction costs. We anticipate incurring and financing the majority of the remaining cost for Phase 2B rental units in calendar 2024.

Previous wording

For the three months ended November 30, 2023, we used cash as follows:

Current wording

For the six months ended February 29, 2024, we used cash as follows:

Previous wording

Our critical accounting policies and estimates are described in “Critical Accounting Policies and Estimates” within Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 of our 2023 Annual Report. The accounting policies and estimates used in preparing our interim consolidated financial statements for the three months ended November 30, 2023 are the same as those described in our 2023 Annual Report. There have been no changes to our critical accounting policies during the three months ended November 30, 2023. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our 2023 Annual Report.

Current wording

Our critical accounting policies and estimates are described in “Critical Accounting Policies and Estimates” within Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 of our 2023 Annual Report. The accounting policies and estimates used in preparing our interim consolidated financial statements for the three and six months ended February 29, 2024 are the same as those described in our 2023 Annual Report. There have been no changes to our critical accounting policies during the three and six months ended February 29, 2024. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading.