What changed in this filing

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Item 1. Business

2022-11-14 compared with 2021-11-10 · 207 added, 160 removed, 316 unchanged (54% of the section changed)

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Unless otherwise specified or the context otherwise requires, any reference to “Pure Cycle,” the “Company,” “we,” “us” or “our” is to Pure Cycle Corporation and its wholly-owned subsidiaries on a consolidated basis.

We are a diversified land and water resource development company.

We are a diversified water resource and land development company.

At our core, we are a wholesale water and wastewater service provider that develops land we own into master planned communities.

Our newest business is the development of single-family homes held for rental purposes.

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.

Over the past 30+ years, we have accumulated a large portfolio of valuable water rights and land interests along the Front Range of Colorado.

We have added an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial, and industrial customers in the eastern Denver metropolitan region (the illustration below notes the general area of our land and water assets).

Our primary land asset, known as Sky Ranch, is in one of the most active development areas in the Denver metropolitan region along the rapidly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses.

Sky Ranch is zoned to include up to 3,200 single family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over two million square feet of retail, commercial and light industrial space, all of which will be serviced by our water and wastewater resource development segment.

Our newest line of business is our single-family rental business where we build single-family homes for rental purposes in Sky Ranch under annual lease agreements.

We plan to expand this new line of business to more than 200 rental units over the next several years.

Through our land development segment, we develop master planned communities creating value and opportunity for investors, homeowners, water customers, and businesses along the busy I-70 corridor of the Denver metropolitan area.

Our land development segment (including the newly launched rental division which will be described in detail below) was borne from our need to control the addition of water and wastewater customers to our systems as opposed to waiting for third-party entities to contract with us or for growth to come to us.

At our core we are an innovative and vertically integrated water and wastewater service provider that owns and develops a valuable portfolio of water rights in a water short region.

We believe our water resources, land, and infrastructure, located in southeastern Denver, are positioned in one of the most attractive development areas of the Denver metropolitan region and will provide favorable investment returns.

The eastern I-70 corridor is experiencing continued substantial growth which we believe will continue over several decades.

We are developing the Sky Ranch Master Planned Community located along the eastern I-70 corridor (see map below with location of Sky Ranch and other service areas).

Sky Ranch is planned to include up to 3,200 single family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over two million square feet of retail, commercial and light industrial space, all of which will be serviced by our water and wastewater resource development segment.

Our land development segment was borne from our desire to capitalize on the increase in the value water provides to raw land in the Colorado front range.

Our land development activities provide a strategic complement to our water and wastewater resource development business, and vice versa.

A significant component of any master planned community is its ability to bring high quality domestic water, irrigation water, and wastewater services to the community.

Having control over the water resources in conjunction with developing the land enables us to efficiently build and maintain infrastructure for potable water and irrigation water distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments.

It also enables us to efficiently align construction and delivery of these investments with phased take-down commitments from our home builder customers, minimizing significant excess capacity or downtime in these significant investments.

roads, parks, open spaces, and other investments.

By being the landowner, land developer, and water/wastewater provider, we believe we offer a more efficient development process, with more competitive lot pricing, which results in a more affordable and marketable product.

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We refer to these segments as our water and wastewater resource development segment and our land development segment, both of which are described in greater detail below.

In March 2021, we launched a new line of business which will be referred to as our Build-to-Rent or single-family home rental line of business.

During our initial development phase of Sky Ranch, we retained ownership of three residential lots, on which we have begun building three single-family homes which we will own, maintain, and rent to qualified renters.

We have contracted for the construction of the homes with a reputable home builder, and we expect these three homes to be completed and ready for renters in November 2021.

In March 2021, we launched a new line of business which will be referred to as our single-family home rental line of business.

During Phase 1 of the development of Sky Ranch, we retained ownership of four residential lots, on which we built or are building single-family homes which we own, maintain, and rent to qualified renters.

We have contracted for the construction of ten homes with a reputable home builder in Phase 2A, and we expect these homes to be completed and ready for renters at various dates throughout our fiscal 2023.

We anticipate that this single-family home rental business will become our third segment when it is material to our operations.

Water and Wastewater Resource Development Segment

We operate our water and wastewater resource development segment on a vertically integrated basis.

Specifically, we own or control the water and infrastructure required to (i) withdraw, treat, store and deliver water (i.e., water rights, wells, diversion structures, pipelines, reservoirs and treatment facilities required to extract and use the water);

We own or control the water and infrastructure required to (i) withdraw, treat, store and deliver water (i.e., water rights, wells, diversion structures, pipelines, reservoirs and treatment facilities required to extract and use the water);

(ii) collect, treat, store and reuse wastewater (i.e., we design, build, and operate water treatment and wastewater reclamation facilities);

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Having a valuable portfolio of water in a water short region provides us with a competitive advantage over other land developers who may be required to buy expensive water, pay significant fees to another water provider, in lieu of buying water, and/or wait for a city to annex property and extend costly water and wastewater infrastructure to the property before development can begin.

Having our own water supply gives us more control over the land entitlement and development process and the ability to capitalize on the value of our water

rights, as well as enhances the value of the land to which we provide our water.

Having our own water supply gives us more control over the land entitlement and development process and the ability to capitalize on the value of our water rights.

In addition, we have significant in-house expertise in engineering, operations, and land development which allows us to take a hands-on approach to the water and land development process.

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We have the exclusive right to provide water and wastewater services to the Rangeview District’s customers in its exclusive 24,000-acre service area in the southeastern Denver metropolitan area pursuant to various agreements that are described in greater detail below.

As of September 30, 2021, through the Rangeview District, we provide service to 855 single-family equivalent (“SFE”) water connections and 580 SFE wastewater connections.

As of August 31, 2022, through the Rangeview District, we provide service to more than 1,000 single-family equivalent (SFE) water connections and more than 700 SFE wastewater connections.

These connections are located mainly in the southeastern metropolitan Denver area on the Lowry Range, at our Sky Ranch development and other nearby areas where we have acquired service rights.

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Sales of water to industrial customers in the oil and gas industry are unpredictable and fluctuate dramatically.

After several years of significant activity throughout our service area, beginning around March 2020, demand for water from the oil and gas industry dropped precipitously due to low oil and gas prices caused by increased world-wide production and decreased demand due to stay-at-home orders resulting from the coronavirus (“COVID-19”) pandemic.

In 2021, we saw some recovery in the oil and gas markets, and this resulted in additional water sales to oil and gas clients in 2021.

In late 2021 and throughout 2022, we saw a significant recovery in the oil and gas markets, and this resulted in additional water sales to oil and gas clients in our fiscal 2022 and 2021.

Land Development Segment

In 2010, at a time when real estate prices were severely depressed due to the credit crisis the United States endured from 2007 until 2012, we purchased approximately 930 acres of land known as Sky Ranch.

We acquired Sky Ranch with the intention of selling lots to national home builders to add value to our core water and wastewater operations by adding the ultimate purchasers of the homes as our water customers.

In June 2017, we entered into agreements with three national home builders to sell the initial 505 residential lots at Sky Ranch.

As of August 31, 2021, we have delivered all 505 finished lots in this development phase and in February 2021, we broke ground on the second development phase which will ultimately include approximately 850 residential lots.

As of September 30, 2021, home builders have built and sold 368 homes at Sky Ranch, with another approximately 100 homes under construction and under contract with home buyers.

Based on current sales levels, we believe homes in this initial development phase will be sold out by the end of the second quarter of our fiscal 2022, which is nearly two-years ahead of forecast.

In February 2021, we broke ground on the second development phase at Sky Ranch.

The second phase, which will be constructed in four subphases, will include 850 residential lots, for which we have contracted to sell 804 finished lots to four homebuilders who will construct attached and detached single-family residential homes.

We have retained 46 lots which we will build homes to be included in our build-to-rent segment.

As of August 31, 2021, we have completed the grading and received plats for the first subphase of 229 lots, which includes 10 to be used in our build-to-rent division.

We believe it will take three years to complete all construction and sell all the finished lots all four subphases of the second development phase, depending on the market conditions and permitting process.

Additionally, as disclosed in March 2021, Sky Ranch Academy was formed for the purposes of partnering with the Bennett School District 29J in support of a new K-12 Charter School to be located at Sky Ranch.

Sky Ranch Academy has partnered with National Heritage Academy (www.nhaschools.com) to operate the charter.

NHA brings over 25 years of experience providing educational services at 90 schools in nine states, educating more than 60,000 students including four other schools in Colorado.

In 2010 we purchased approximately 930 acres of land known as Sky Ranch.

The illustration on the next page provides our planned overall layout of Sky Ranch.

We acquired Sky Ranch with the intention of selling lots to home builders to add value to our core water and wastewater operations by adding the ultimate purchasers of the homes as our water customers.

Sky Ranch is being developed in phases over several years, which began in June 2017, when we entered into agreements with three national home builders to sell the initial 505 residential lots at Sky Ranch (referred to as Phase 1), and has continued when in February 2021, we entered contracts with four national homebuilders for approximately 850 residential lots, in what we call Phase 2 of the Sky Ranch Development.

We have divided Phase 2 into four subphases that we refer to as Phases 2A, 2B, 2C and 2D.

The Phase 1 lots and the lots being developed in Phase 2A and 2B are shown in the map below.

Illustrative map of the Sky Ranch Master Planned Community

As of August 31, 2022, we have delivered to homebuilders all 505 lots in Phase 1 and 219 lots in Phase 2A of the Sky Ranch development.

In addition, we retained four lots in Phase 1 for our single-family rental business and ten lots in Phase 2A for the single-family rental business (bringing total lots to 509 in Phase 1 and 229 in Phase 2A).

As of August 31, 2022, homebuilders have built and sold 473 homes at Sky Ranch, with another approximately 90 homes under construction.

In addition, we completed three rental units, which have been rented since November 2021, and began construction on the next eleven units.

All Phase 1 lots in Sky Ranch are complete and all public improvements have been accepted by the various governmental entities that will control and maintain the infrastructure.

In February 2021, we broke ground on Phase 2 lots at Sky Ranch, which will include 850 residential lots, for which we have contracted to sell 804 finished lots to four homebuilders who will construct attached and detached single-family residential homes.

We retained 46

lots which we will use in our single-family rental business.

As of August 31, 2022, we have closed on the 219 lots in Phase 2A sold to the home builders and are completing landscaping and other items required under the sales contracts.

We believe we will complete all our required construction items in Phase 2A in the next twelve months.

We believe it will take three years to complete all construction and sell all the finished lots in all four subphases of Phase 2, depending on the market conditions and permitting process.

As disclosed in March 2021, a new Charter School, Sky Ranch Academy, was formed for the purposes of partnering with the Bennett School District 29J to operate a new K-12 Charter School to be located at Sky Ranch.

Sky Ranch Academy has partnered with National Heritage Academy (NHA) to operate the charter.

NHA brings more than 25 years of experience providing educational services at 100 schools in nine states, educating more than 60,000 students including four other schools in Colorado.

Sky Ranch Academy is expected to open in August 2023.

Build-to-Rent

As the housing market in Colorado continues to grow and prices continue to rise at double-digit rates, we believe rental units are becoming increasingly necessary to provide affordable housing options to the growing population in Colorado.

During fiscal 2021, to capitalize on the growing single-family rental market, we launched our build-to-rent division.

We contracted with a local semi-custom home builder to construct three single-family detached homes on three lots in our first development phase at Sky Ranch that were retained for future growth purposes.

The homes are nearing completion and are expected to be available for rent in November 2021.

These three rental units represent the initial investment into what we expect to become our third operating segment and expect to add 46 homes in our second development phase.

Single-Family Rentals

The past several years the housing market and home prices in Colorado grew at double-digit rates.

In recent months this growth has tapered in many markets, specifically in higher priced homes.

As mortgage rates increase, and the average price of homes in Colorado continues to increase, we believe rental units are increasingly necessary to provide affordable housing options to the growing population in Colorado.

Additionally, more than any other time in the USA, we have seen a shift from people having to rent to people choosing to rent.

We believe this shift will continue to shape the housing market for the foreseeable future.

To capitalize on the growing single-family rental market, in 2021 we launched our single-family rental division.

We contracted with a local semi-custom home builder to construct four single-family detached homes on four lots in Phase 1 at Sky Ranch that we retained for use in our rental division.

Three of the homes were completed and rented in November 2021.

With the initial success of our first three rental homes, during fiscal 2022, we began construction on eleven more homes we will use in our rental division upon completion (expected to be completed and ready for rental at various dates throughout our fiscal 2023).

These rental units represent the initial investment into what we expect to become our third operating segment as we expect to add 46 homes in Phase 2 with the ability to add more than 100 more units in the near term.

We believe having ongoing recurring rental income, in a community we are heavily involved with, which is experiencing double digit growth in home values provides tremendous upside potential for growing our balance sheet and diversifying our recurring revenue streams.

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Our water assets are summarized in the table below and further discussed in this section:

Designated Groundwater

Surface Water

Rangeview Water Supply

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(1) Pending completion by the “Land Board” (defined below) of documentation related to the exercise of our right to substitute 1,650 acre-feet of our groundwater for a comparable amount of surface water.

(2) We have the exclusive right to use this water to provide water services to customers on and off the Lowry Range, which is described further below.

(3) Amount of WISE water available for our use varies by year and is described in greater detail below.

We capitalize costs associated with obtaining, defending, enhancing, and developing our water rights.

We capitalize costs incurred to construct infrastructure required to deliver water and wastewater services to our customers, and we capitalize costs to develop our land assets that are not sold to home builders.

(2) We have the exclusive right to use this water to provide water services to customers on and off the Lowry Range, as described further below.

(3) Amount of WISE water available for our use may vary by year and is described in greater detail below.

Rangeview Water Supply

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● Tributary Groundwater – all water located in an aquifer that is hydrologically connected to a natural stream such that depletion has an impact on the surface stream.

● Designated Groundwater – renewable and sustainable groundwater from certain areas of Colorado designated by the Colorado Ground Water Commission subject to management under the Colorado Ground Water Commission’s rules.

● Tributary Surface Water – water on the surface of the ground flowing in a stream or river system.

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We acquired our Rangeview Water Supply through the following agreements:

● The 1996 Amended and Restated Lease Agreement between the Land Board and the Rangeview District, which was superseded by the 2014 Amended and Restated Lease Agreement, dated July 10, 2014 (the “Lease”), among us, the Land Board, and the Rangeview District;

● The 1996 Service Agreement between us and the Rangeview District, which was superseded by the Amended and Restated Service Agreement, dated July 11, 2014, between us and the Rangeview District (the “Lowry Service Agreement”), which provides for the provision of water service to the Rangeview District’s customers located on the Lowry Range;

● The Agreement for Sale of non-tributary and not non-tributary groundwater between us and the Rangeview District (the “Export Agreement”), pursuant to which we purchased a portion of the Rangeview Water Supply that we refer to as our “Export Water” because the Export Agreement allows us to export this water from the Lowry Range to supply water to nearby communities;

● The 1997 Wastewater Service Agreement between us and Rangeview District (the “Lowry Wastewater Agreement”), which allows us to provide wastewater service to the Rangeview District’s customers on the Lowry Range.

● The 1996 Amended and Restated Lease Agreement between the Land Board and the Rangeview District, which was superseded by the 2014 Amended and Restated Lease Agreement, dated July 10, 2014 (Lease), among us, the Land Board, and the Rangeview District;

● The 1996 Service Agreement between us and the Rangeview District, which was superseded by the Amended and Restated Service Agreement, dated July 11, 2014, between us and the Rangeview District (Lowry Service Agreement), which allows us to provide water service to the Rangeview District’s customers located on the Lowry Range;

● The Agreement for Sale of non-tributary and not non-tributary groundwater between us and the Rangeview District (Export Agreement), pursuant to which we purchased a portion of the Rangeview Water Supply that we refer to as our “Export Water” because the Export Agreement allows us to export this water from the Lowry Range to supply water to nearby communities;

● The 1997 Wastewater Service Agreement between us and Rangeview District (Lowry Wastewater Agreement), which allows us to provide wastewater service to the Rangeview District’s customers on the Lowry Range.

The Lease, the Lowry Service Agreement, the Export Agreement, and the Lowry Wastewater Agreement are collectively referred to as the “Rangeview Water Agreements.”

Additionally, in August 2019, we purchased approximately 300 acre-feet of fully consumptive surface water in the Lost Creek Designated Ground Water Basin (“Lost Creek Water”).

The Lost Creek Water is currently adjudicated for agricultural use, and we have filed an application with the Colorado water court to change the use of the water to augment our municipal/industrial water supplies at the Lowry Range.

We have consolidated our Lost Creek Water with our Rangeview Water Supply to provide service to the Rangeview District’s customers both on and off the Lowry Range.

We provide wholesale water service and wastewater service to customers located both on and outside of the Lowry Range, including customers of the Rangeview District and other governmental entities, and industrial and commercial customers.

Pursuant to service agreements with Rangeview (including the Lowry Service Agreement, the Lowry Wastewater Agreement and the Non-Lowry Service Agreement described below), we design, construct, operate and maintain the Rangeview District’s water and wastewater systems that are used to provide water and wastewater services to the Rangeview District’s customers located within the Rangeview District’s exclusive service area, and other approved areas.

Subject to the terms and conditions of our agreements with the Rangeview District, we are the exclusive water and wastewater provider to the Rangeview District’s customers.

For the Rangeview District’s customers located on the Lowry Range, we operate both the water and the wastewater systems during our contract period on behalf of the Rangeview District, which owns the facilities for both systems.

For the Rangeview District’s customers located on the Lowry Range, we operate both the water and the wastewater systems during our contract period on behalf of the Rangeview

District, which owns the facilities for both systems.

At the expiration of our contract term in 2081, ownership of the water system facilities located on the Lowry Range used to deliver water to customers on the Lowry Range will revert to the Land Board, with the Rangeview District retaining ownership of any wastewater facilities located on the Lowry Range.

The water system and related facilities used to deliver water to customers off the Lowry Range (including Export Water) will remain with us and the Rangeview District.

The Rangeview Water Agreements grant us the right to use approximately 26,000 acre-feet of surface reservoir capacity to provide water service to customers both on and off the Lowry Range.

Fairgrounds Water

The fairgrounds water represents groundwater rights we acquired from Arapahoe County in conjunction with us entering into water service agreements with the county for the Arapahoe County Fairgrounds.

We use this water with our overall Rangeview Water Supply for supplying water services throughout our service area.

Sky Ranch Water Supply

As part of the acquisition of the Sky Ranch land in 2010, we also acquired the 828 acre-feet of water located beneath the property.

The water is being used as part of our overall water distribution system, which includes providing services to the Sky Ranch Master Planned Community.

Lost Creek Water Supply

The “Lost Creek Water” is comprised of water rights we acquired in 2019 and 2022 in the Lost Creek Designated Ground Water Basin.

In August 2019, we purchased 300 acre-feet of designated groundwater and 220 acre-feet of groundwater and ditch water.

In June 2022, we purchased 370 acre-feet of designated groundwater.

All the Lost Creek Water has been changed for use as municipal/industrial water, additionally we have filed an application with the Colorado Water Court to use the Lost Creek Water to augment our municipal/industrial water supplies at the Lowry Range.

Our plans are to consolidate our Lost Creek Water with our Rangeview Water Supply to provide service to the Rangeview District’s customers both on and off the Lowry Range.

The Lowry Range Property

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The Rangeview District is a quasi-municipal corporation and political subdivision of the State of Colorado formed in 1986 for the purpose of providing water and wastewater services to the Lowry Range and other approved areas.

The Rangeview District is governed

by an elected board of directors.

The Rangeview District is governed by an elected board of directors.

Eligible voters and persons eligible to serve as directors of the Rangeview District must own an interest in property within the boundaries of the Rangeview District.

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The Land Board does not receive a royalty from wastewater services.

When we develop, operate, and deliver water from our Rangeview Water Supply, the Land Board receives royalties on the gross revenues at a rate of 12% from water delivered to all customers located on the Lowry Range and to all private customers located off the Lowry Range and 10% from public entity customers located off the Lowry Range.

When we develop, operate, and deliver water from our Rangeview Water Supply, the Land Board receives royalties on the gross revenues

at a rate of 12% from water delivered to all customers located on the Lowry Range and to all private customers located off the Lowry Range and 10% from public entity customers located off the Lowry Range.

In the event that (i) metered production of water used on the Lowry Range in any calendar year exceeds 13,000 acre-feet or (ii) 10,000 acres of land on the Lowry Range have been rezoned to non-agricultural use, finally platted and water tap agreements have been entered into with respect to all improvements to be constructed on such acreage, the Land Board may elect, at its option, to receive (in lieu of its royalty of 12% from customers on the Lowry Range), 50% of the collective net profits (ours and the Rangeview District’s) derived from the sale or other disposition of water on the Lowry Range.

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WISE provides for the purchase and construction of infrastructure (such as pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the South Metro WISE Authority (SMWA), consisting of the Rangeview District and nine other SMWSA members, from the City and County of Denver acting through its Board of Water Commissioners (Denver Water) and the City of Aurora acting by and through its utility enterprise (Aurora Water).

In exchange for funding the Rangeview District’s WISE obligations, we have the exclusive right to use and reuse the Rangeview District’s share of WISE water (approximately 9%) and infrastructure to provide water service to the Rangeview District’s

customers and to receive the revenue from providing those services.

Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and increasing acre-feet of water per year as noted below.

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The cost of the 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, 2021, WISE water was $5.98 per thousand gallons and such rate will remain in effect through calendar 2021.

Effective, January 1, 2022, WISE water is expected to increase to $6.13 per thousand gallons.

As of January 1, 2021, WISE water was $5.98 per thousand gallons and such rate remained in effect through calendar 2021.

Effective, January 1, 2022, WISE water increased to $6.13 per thousand gallons, which will be in effect for all of calendar 2022.

In addition, we pay certain system operational and construction costs.

If a WISE member, including the Rangeview District, does not need its WISE water each year or a member needs additional water, the members can trade and/or buy and sell water amongst themselves.

For the year ended August 31, 2021, we, through the Rangeview District, purchased a total of 120 acre-feet of WISE water for $0.6 million.

For the year ended August 31, 2020, we, through the Rangeview District, purchased a total of 49 acre-feet of WISE water for $0.1 million.

During the years ended August 31, 2021 and 2020, we provided $1.1 million and $2.8 million of financing to the Rangeview District to fund the Rangeview District’s obligation to purchase WISE water rights and pay for operational and construction charges.

Ongoing funding requirements are dependent on the WISE water subscription amount and the Rangeview District’s allowable share of the operational and overhead costs of SMWA and construction activities related to delivery of WISE water.

Additionally, the Rangeview District has entered into an agreement with WISE to construct special facilities for $0.6 million, which began in our fiscal 2021.

We are funding the construction of the special facility and the Rangeview District will remit 100% of the amount it receives to us.

The construction of the special facility was approximately 75% complete as of August 31, 2021.

For the year ended August 31, 2022, we, through the Rangeview District, purchased a total of just over 360 acre-feet of WISE water for $0.7 million.

For the year ended August 31, 2021, we, through the Rangeview District, purchased a total of just under 320 acre-feet of WISE water for $0.6 million.

During the years ended August 31, 2022 and 2021, we provided $0.9 and $1.1 million of financing to the Rangeview District to fund the Rangeview District’s obligation to purchase WISE water rights and pay for operational and construction charges.

Ongoing funding requirements are dependent on the WISE water subscription amount and the Rangeview District’s allocable share of the operational and overhead costs of SMWA and construction activities related to delivery of WISE water.

Additionally, in 2021 the Rangeview District entered into an agreement with WISE to construct special facilities for $0.6 million.

The construction of these special facilities began in our fiscal 2021 and was completed in our fiscal 2022.

We funded the construction of the special facilities, and the Rangeview District remitted the entire $0.6 million it received to us.

East Cherry Creek Valley System

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Water usage fees are based on a tiered pricing structure that provides for higher prices as customers use greater amounts of water.

The water usage fees for customers on the Lowry Range are noted in the table below:

Current Lowry Range Tiered Water Usage Pricing Structure

The water usage fees for customers on the Lowry Range are noted in the tables below:

Current Lowry Range tiered potable water usage pricing structure

Base charge per SFE per month

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30,000 gallons and above

Current Lowry Range tiered non-potable water usage pricing structure

Base charge per SFE per month

Price ($ per thousand gallons used per month)

0 gallons to 15,000 gallons

15,000 gallons to 30,000 gallons

30,000 gallons and above

The figures in the table above reflect the amounts charged to the Rangeview District’s end-use customers on the Lowry Range.

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We have no obligation to physically connect the property to the lines;

this is typically done by the homebuilder.

Once connected to the water and/or wastewater systems, the property has live service, and the customer can receive metered water deliveries from our system and send wastewater into our system.

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The Rangeview District’s 2022 water tap fees are $28,308 per SFE, and its wastewater tap fees are $4,944.

In exchange for providing water service to the Rangeview District’s customers using the Rangeview Water Supply (other than taps to Sky Ranch, which are exempt), we receive 98% of the Rangeview District’s tap fees and the Land Board receives the remaining

two percent as a royalty.

The Rangeview District assesses its tap and usage fees annually and adjusts the rates as necessary.

In exchange for providing wastewater services, whether to customers on or off the Lowry Range, we receive 100% of the Rangeview District’s wastewater tap fees.

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In addition to customers on the Lowry Range, we have an agreement with the Rangeview District to be its exclusive water and wastewater service provider throughout its service area.

This includes the design, construction, operation and maintenance of water and wastewater systems to serve the Rangeview District’s customers located outside the Lowry Range service area (for example Wild Pointe and Sky Ranch) (the “Non-Lowry Service Agreement”).

In exchange for providing water and wastewater services to the Rangeview District’s customers that are not on the Lowry Range, we receive 100% of water and wastewater tap fees, 98% of the water usage fees, and 90% of the monthly wastewater service and usage fees received by the Rangeview District from these customers, after deduction of royalties due to the Land Board, if applicable (i.e., if we use a portion of the Rangeview Water Supply, such as the Export Water, to provide service to such customers).

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Pursuant to the Non-Lowry Service Agreement, we are the exclusive provider of water and wastewater services to all current and future residents, businesses, and other water users at the Sky Ranch development.

Wild Pointe – Elbert & Highway 86 Commercial Metropolitan District – In 2017, we entered into an agreement with the Rangeview District, which had entered into an agreement with Elbert & Highway 86 Commercial Metropolitan District (the “Elbert 86 District”) to operate and maintain a water system for residential and commercial customers at the Wild Pointe development in Elbert County.

Wild Pointe – Elbert & Highway 86 Commercial Metropolitan District – In 2017, we entered into an agreement with the Rangeview District, which had entered into an agreement with Elbert & Highway 86 Commercial Metropolitan District (Elbert 86 District), to operate and maintain a water system for residential and commercial customers at the Wild Pointe development in Elbert County.

The water system includes two deep water wells, a pump station, treatment facility, storage facility, over eight miles of transmission lines, and over 450 acre-feet of water rights serving Wild Pointe.

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Sky Ranch is zoned for residential, commercial, and retail uses, including up to 3,200 homes and more than two million square feet of commercial, retail, and light industrial development.

See illustration above for the current layout of Sky Ranch.

The development of Sky Ranch will occur in multiple filings and phases which will take several years to complete.

Our first development phase of more than 150 acres has a total of 509 detached single-family residential lots (see illustration below for the layout of this initial development phase).

Phase 1 of Sky Ranch included more than 150 acres and has a total of 509 detached single-family residential lots.

Of the 509 lots, we sold 505 finished lots to homebuilders, all of which were sold as of August 31, 2021, and retained the remaining lots for use in our single-family home rental business.

In February 2021, we began construction on the second development phase, which will include 850 lots for which we have contracted to sell 804 lots to home builders for detached and attached single-family homes, and 46 lots we plan to use for our single-family home rental business.

The second development phase, totaling approximately 250 acres, will be constructed in four subphases (see illustration below for the proposed layout of the second development phase).

Development activities for the first subphase began in February 2021, and by August 31, 2021, we had received the plats for 229 lots, which includes 10 lots we will use in our single-family home rental business.

These lots are anticipated to be finished and ready for the four homebuilders to begin constructing homes by the summer of 2022.

The total sales price for the 804 lots being sold to the homebuilders is $65.0 million, which is subject to price escalations depending on development timing which are not included in that figure.

Our preliminary total cost estimates for developing all 229 lots in the first subphase is $20.4 million, with approximately $17.2 million of that estimated to be spent on public improvements which are eligible for reimbursement by the Sky Ranch CAB.

In February 2021, we began construction on Phase 2 of the development, which will include 850 lots of which we have contracted to sell 804 lots to home builders for detached and attached single-family homes, and the remaining 46 lots we plan to use for our single-family home rental business.

Phase 2 is approximately 250 acres and will be constructed in four subphases which we refer to as Phase 2A, 2B, 2C and 2D.

Development activities for Phase 2A, consisting of 229 lots, began in February 2021, and by August 31, 2022, we had substantially completed construction and transferred 219 lots to the four homebuilders.

We retained ten lots in Phase 2A on which we are constructing units for our single-family rental business.

The total sales price for the 804 lots sold to the homebuilders is $65.0 million, which is subject to price escalations depending on development timing which are not included in that figure.

The total sales price for the 219 lots in Phase 2A is $18.4 million.

Our preliminary total cost estimates for developing all 229 lots in Phase 2A is $20.4 million, with

approximately $17.8 million of that estimated to be spent on public improvements which are eligible for reimbursement by the Sky Ranch CAB.

See below for a description of the conditions that may limit our ability to receive reimbursables and a definition of the Sky Ranch CAB.

First Development Phase Illustrative Layout

Second Development Phase Illustrative Layout

As the land developer, we are providing finished lots (i.e.

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We build, or contract to build, the roads, curbs, wet and dry utilities, storm drains, parks, open spaces, and other related improvements as part of a fully master planned community.

Each builder is required to purchase water and wastewater taps for each lot from the Rangeview District at the time of building permit, the cost of which depends on the size of the lot, the size of the house, and the amount of irrigated turf.

Each builder is required to purchase water and wastewater taps for each lot from the Rangeview District at the time a building permit is issued.

The cost of the water and wastewater tap for a lot depends on the size of the lot, the size of the house, and the amount of irrigated landscaping.

Pursuant to the Non-Lowry Service Agreement, we receive all the water and wastewater tap fees from tap sales at Sky Ranch and 98% of the ongoing monthly water and wastewater service revenues.

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Pursuant to certain agreements with the Sky Ranch Districts and the Sky Ranch CAB, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which costs are reimbursed to us by the Sky Ranch CAB, through funds generated by the Sky Ranch Districts through taxes, fees, or the issuance of municipal bonds.

See Note 2 to the accompanying financial statements regarding treatment and recognition of these public improvement costs.

See Note 2 and Note 5 to the accompanying consolidated financial statements regarding treatment and recognition of these public improvement costs.

Pursuant to our service agreements, we are required to construct all required wholesale water and wastewater improvements (i.e., a wastewater reclamation facility, water supply, storage, treatment, and other wholesale facilities) for the provision of water and wastewater service to the property.

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This allows the treatment facility to process wastewater for several development phases at Sky Ranch before additional investment is needed to increase its capacity.

We expect to have other filings developing concurrently with the second filing that could include commercial, retail, and light industrial sites.

We expect full development of the Sky Ranch Master Planned Community to take another eight to ten years.

We expect to have other phases developing concurrently with the second phase that could include commercial, retail, and light industrial sites.

We expect full development of the Sky Ranch Master Planned Community to take another eight to ten years depending on market conditions.

Pursuant to the Sky Ranch Water and Wastewater Service Agreement, dated June 19, 2017, between PCY Holdings, LLC (a wholly-owned subsidiary of ours that holds title to the Sky Ranch land), and the Rangeview District, PCY Holdings, LLC, agreed to construct certain facilities necessary to provide water and wastewater service to Sky Ranch.

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The Sky Ranch Metropolitan District Nos.

1, 3, 4, 5, 6, 7 and 8 are quasi-municipal corporations and political subdivisions of Colorado formed in 2004 for the purpose of providing services to the Sky Ranch property (the “Sky Ranch Districts”).

1, 3, 4, 5, 6, 7 and 8 are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing services to the Sky Ranch property (Sky Ranch Districts).

The Sky Ranch Districts are governed by an elected board of directors.

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McNeill (our Vice President and Chief Financial Officer), Scott E.

Lehman (an employee of ours), Dirk Lashnits (an employee of ours), and one independent board member.

Lehman (our employee), Dirk Lashnits (an employee of ours), and one independent board member.

Pursuant to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year.

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1 and 5 of the Sky Ranch Districts, formed the Sky Ranch Community Authority Board (Sky Ranch CAB) 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.

In order for the public improvements to be constructed and/or acquired, it is

necessary for each Sky Ranch District and/or 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.

In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District and/or 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.

We entered into agreements, first with Sky Ranch Metropolitan District No.

1 in 2014 and later with the Sky Ranch CAB, that require us to fund expenses related to the construction of an agreed upon list of public improvements for the Sky Ranch Master Planned Community.

We and the Sky Ranch CAB entered into a Facilities Funding and Acquisition Agreement (the “FFAA”) effective November 2017, obligating us to advance funding to the Sky Ranch CAB for specified public improvements constructed from 2018 to 2023.

We and the Sky Ranch CAB entered into a Facilities Funding and Acquisition Agreement (FFAA) effective November 2017, obligating us to advance funding to the Sky Ranch CAB for specified public improvements constructed from 2018 to 2023.

All amounts owed under the FFAA 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 first phase and December 31, 2060, for the second phase, shall be deemed forever discharged and satisfied in full.

Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058, for Phase 1 and December 31, 2060, for Phase 2A, shall be deemed forever discharged and satisfied in full.

Advances and verified costs expended by us for expenses related to the construction of the agreed upon public improvements are reimbursable to us by the Sky Ranch CAB.

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Since 2017, we have advanced the Sky Ranch CAB a total of $42.1 million for funding the construction of the public improvements.

In November 2019, the Sky Ranch CAB issued bonds and repaid $10.5 million of the advances and in January 2021 the Sky Ranch CAB repaid $0.4 million from unencumbered funds resulting from a budget surplus in 2020.

Previously, the reimbursable expenditures we funded were expensed through land development construction costs, and project management revenue and interest income were not recognized as the reimbursement was deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonable assured.

Additionally, the Sky Ranch CAB is contractually obligated to utilize any available funds not otherwise pledged to payment of previously issued bonds, used for operation and maintenance expenses, or otherwise encumbered, to reimburse us.

As Sky Ranch continues to grow, housing values continue to increase, and as the Sky Ranch CAB has demonstrated the ability to repay the amounts owed to us, the collectability of reimbursable expenditures incurred to date has been determined to be probable, as such, during fiscal 2021 we have recognized the remaining reimbursable costs, project management fees, and interest.

During the year ended August 31, 2021, we recognized $21.7 million as a Note receivable – related party with the offsetting entries being to Other income, Project management revenue and Interest income for costs deemed reimbursable from the first development phase at Sky Ranch.

Due to continue growth and the continued belief the Sky Ranch CAB has the ability to repay amounts we spend on public improvements, the second phase reimbursable public improvements, along with the Project management revenue and interest income, totaling $3.1 million as of August 31, 2021, are being recorded as a Note receivable from the Sky Ranch CAB as incurred.

In total, as of August 31, 2021, the Note receivable from the Sky Ranch CAB totals $24.8 million, which is comprised of $20.6 million of public improvement costs, $1.7 million of project management fees and $2.5 million of interest.

The Sky Ranch CAB has remitted the following amounts to us for repayment of public improvements and the related interest.

● In November 2019, the Sky Ranch CAB issued bonds and repaid $10.5 million

● In January 2021, the Sky Ranch CAB repaid $0.4 million from unencumbered funds resulting from a budget surplus in 2021

● In May 2022, the Sky Ranch CAB repaid $0.1 million from unencumbered funds resulting from a budget surplus in 2022

● In August 2022, the Sky Ranch CAB issued bonds and repaid $23.6 million

Prior to our fiscal 2021, the reimbursable expenditures we funded were expensed through land development construction costs, and project management revenue and interest income were not recognized as the reimbursement was deemed contingent on a sufficient tax base and/or the issuance of municipal bonds for collectability to be considered probable.

As Sky Ranch continues to grow, housing values increased, and the Sky Ranch CAB demonstrated the ability to repay the amounts owed to us, the collectability of reimbursable expenditures incurred to date has been determined to be probable;

Therefore, during fiscal 2021 we recognized the remaining reimbursable costs, project management fees, and interest.

During the year ended August 31, 2021, we recognized $21.7 million as a note receivable – related party with the offsetting entries being to other income, project management revenue and interest income for costs deemed reimbursable from the Sky Ranch CAB.

Due to continue growth and the continued belief the Sky Ranch CAB can repay amounts we spend on public improvements, Phase 2 reimbursable public improvements, along with the project management revenue, and interest income are being recorded as a note receivable from the Sky Ranch CAB as incurred.

Note 5 to the accompanying consolidated financial statements summarizes the changes to the note receivable.

The Sky Ranch CAB has an obligation to repay us but the ability of the Sky Ranch CAB to repay us before the contractual termination dates is dependent upon the establishment of a tax base or other fee generating activities sufficient to recover reimbursable costs incurred.

Costs incurred will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

In addition, to the note receivable balance, the Sky Ranch CAB is obligated to refund $0.5 million for the reimbursement of construction costs from the Southeast Metropolitan Water Supply Authority (“SEMSWA”).

These costs will be distributed to the Sky Ranch CAB upon the acceptance of the stormwater infrastructure by SEMSWA, anticipated to be in fiscal year 2022.

We recorded this reimbursable cost in trade accounts receivable at August 31, 2021.

Costs incurred will be recognized as land under development costs or notes receivable – related party, depending on whether collectability is deemed to be considered probable.

In addition to the note receivable balance, the Sky Ranch CAB refunded $0.5 million for the reimbursement of construction costs from the Southeast Metropolitan Storm Water Authority (SEMSWA).

These costs were distributed to the Sky Ranch CAB upon the acceptance of the stormwater infrastructure by SEMSWA during our fiscal 2022.

The current directors of the Sky Ranch CAB are Mark W.

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McNeill (our Vice President and Chief Financial Officer), Scott E.

Lehman (an employee of ours), Dirk Lashnits (an employee of ours), and one independent board member.

Lehman (our employee), Dirk Lashnits (our employee), and one independent board member.

Pursuant to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year.

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Oil and Gas Leases

In 2011, we entered into a three-year Oil and Gas Lease (the “Sky Ranch O&G Lease”) and Surface Use and Damage Agreement and received an up-front payment and a 20% of gross proceeds royalty (less certain taxes) from the sale of any oil and gas produced from the mineral estate we own at Sky Ranch.

The Sky Ranch O&G Lease is now held by production, and we have been receiving royalties

from the oil and gas production from six wells drilled within our mineral interest.

During the years ended August 31, 2021 and 2020, we received $0.3 million $0.7 million in royalties attributable to these wells.

In September 2017, we entered into a three-year Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (the “Bison Lease”) for the purpose of exploring for, developing, producing, and marketing oil and gas from 40 acres of mineral estate we own adjacent to the Lowry Range, and we received an up-front payment of $0.2 million.

The up-front payment received pursuant to the Bison Lease is being recognized into revenue ratably over a three-year period, which expired in September 2020, and was not extended.

In July 2019, we entered into an Agreement on Locations of Oil and Gas Operations covering approximately 16 acres at Sky Ranch with the operator of the Sky Ranch O&G Lease (the “OGOA”).

The Company received an up-front payment of $0.6 million in fiscal 2019 for the OGOA, which is being recognized as income on a straight-line basis over three years (the term of the OGOA).

If after three years (by July 2022) the operator has not spud at least one well on the oil and gas operations area, the operator may extend the right to the OGOA one additional year by paying us $75,000.

The operator may only extend the OGOA for two additional years for a total of five years.

In 2011, we entered into an Oil and Gas Lease (Sky Ranch O&G Lease) and Surface Use and Damage Agreement and received an up-front payment and a 20% of gross proceeds royalty (less certain taxes) from the sale of any oil and gas produced from the mineral estate we own at Sky Ranch.

The Sky Ranch O&G Lease is now held by production, and we have been receiving royalties from the oil and gas production from six wells drilled within our mineral interest.

During the years ended August 31, 2022 and 2021, we received $0.5 million and $0.3 million in royalties attributable to these wells.

In September 2017, we entered into a three-year Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (Bison Lease) for the purpose of exploring for, developing, producing, and marketing oil and gas from 40 acres of mineral estate we own adjacent to the Lowry Range, and we received an up-front payment of $0.2 million.

The up-front payment received pursuant to the Bison Lease was being recognized into revenue ratably over a three-year period, which expired in September 2021, and was not extended.

In July 2019, we entered into an Agreement on Locations of Oil and Gas Operations covering approximately 16 acres at Sky Ranch with the operator of the Sky Ranch O&G Lease (OGOA).

The Company received an up-front payment of $0.6 million in fiscal 2019 for the OGOA, which was recognized as income on a straight-line basis over three years (the term of the OGOA).

In July 2022, the operator had not spud at least one well on the oil and gas operations area.

To extend its rights under the OGOA for one additional year, the oil and gas operator paid us $75,000, which is being recognized into income over the term of the extension.

The operator may extend the OGOA for one additional year after that for a total of five years.

As of August 31, 2022, no wells have been drilled.

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Water supplies and water storage reservoirs are competitively sought throughout the west and along the Front Range of Colorado.

We believe that regional cooperation among area water providers in developing new water supplies, water storage, and transmission and distribution systems provides the most cost-effective way of expanding and enhancing service capacities for area water providers.

We believe that regional cooperation among area water providers in developing new water supplies, water

storage, and transmission and distribution systems provides the most cost-effective way of expanding and enhancing service capacities for area water providers.

We continue to seek opportunities for developing water supplies and water storage opportunities with other area water providers.

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We continue developing our Sky Ranch property, including finishing lots for home builders, building additional water and wastewater infrastructure for residential and commercial development at the property, and having homes constructed for our single-family home rental business.

During the years ended August 31, 2021 and 2020, we invested $7.3 million and $9.4 million in our Sky Ranch land to deliver finished lots and we spent under $1.0 million so far constructing three units for use in our build-to-rent business.

Although the first development phase was our first project as a land developer, it was done ahead of our original schedule and on budget.

We anticipate the first subphase of the second development phase, which broke ground in February 2021, to incur a total of $20.4 million of construction costs to deliver the lots, which is planned to occur over three years and be funded by the $17.8 million of total fees to be paid under our lot sales agreements and the reimbursement by the Sky Ranch CAB of $17.2 million of estimated public improvement costs.

During the years ended August 31, 2022 and 2021, for Phases 1 and 2A we invested $11.5 million and $7.3 million in our Sky Ranch land which included $2.0 million and $2.5 million of expensed costs related to the delivery of finished lots and $9.5 million and $4.8 million of costs for public improvements which we expect to be repaid by the Sky Ranch CAB.

Additionally, we spent approximately $0.9 million and $1.0 million on construction costs related to our single-family rental business.

Phase 1 was our first project as a land developer and was done ahead of our original schedule and on budget.

We anticipate Phase 2A, which broke ground in February 2021, to incur a total of $20.4 million of construction costs to deliver the lots (of which we estimate $17.8 million is for public improvements which we expect to be repaid by the Sky Ranch CAB).

Phase 2A is planned to be complete in the next year and has been funded by the $18.4 million of total fees paid under our lot sales agreements and will be further funded by the reimbursements from the Sky Ranch CAB of public improvements, which we estimate to be $17.8 million.

During the years ended August 31, 2022 and 2021, we sold 154 and 163 water and wastewater taps at Sky Ranch to homebuilders, which generated $4.5 million and $5.1 million of tap fees.

As of August 31, 2021, we have sold 464 water and wastewater taps in the first development phase of Sky Ranch, which we believe the remaining 41 water and wastewater taps will be sold before the end of our second fiscal quarter of 2022, which will produce $1.2 million in revenue and cash.

Based on current prices and engineering estimates, we believe the second development phase of Sky Ranch will produce more than $24.0 million in water and wastewater tap fee revenue and cash over several years.

We are nearing completion of the first three rental units at Sky Ranch, and in conjunction with the second development phase, plan to build more than 47 additional rental units over several years.

We anticipate building these units concurrent with construction of homes in the second development phase using a combination of home builders that are building homes in this phase along with other builders as needed to ensure homes are delivered in a timely and cost-effective manner.

We are working on finalizing the proposed size and layouts of the rental units to be constructed and currently do not have an estimate of the costs to construct or potential returns of the homes.

As of August 31, 2022, we have sold 618 water and wastewater taps at Sky Ranch in Phases 1 and 2A.

Based on current prices and engineering estimates, we believe Phase 2 of Sky Ranch will produce more than $24.0 million in water and wastewater tap fee revenue and cash over the next 3-5 years.

Our first three rental units at Sky Ranch were completed and rented in November 2021.

We have begun construction on the next eleven rental units and plan to build more than 36 additional rental units over the next several years in Phases 2B-D.

We anticipate building these units concurrent with construction of homes in Phase 2.

We design and price rental units closer to the start of construction and currently do not have an estimate of the costs to construct or potential returns of the future rental units.

We plan to develop additional water assets within the Denver area and are exploring opportunities to utilize our water assets in areas adjacent to our existing water supplies.

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Growth in Colorado

Calendar year 2020 and 2021 were strong years for the Colorado housing market.

As COVID-19 escalated and has continued to hold-on, we took and continue to adapt measures to protect the health and well-being of our employees, customers, business partners, and their families.

Our home builder customers also took and continue to adapt precautionary measures to ensure the safety of their employees, customers, business partners, and their families.

These measures varied by builder.

Despite the impacts of COVID-19, Colorado has continued to grow.

According to the 2021 census report, Colorado added over 744,000 residents from 2010 to 2021, a growth of 14.8%, bringing the Colorado population to nearly 5.8 million, which is projected to grow to more than 8.7 million by 2050.

A Statewide Water Supply Initiative report by the Colorado Water Conservation Board estimates that the South Platte River basin, which includes the Denver metropolitan region (and our Sky Ranch community), could require an additional

400,000 acre-feet of water by the year 2030 due to continued growth.

What makes this difficult for land developers and builders is that Colorado law requires developers to demonstrate they have sufficient water supplies for their proposed projects before zoning applications will be considered.

This means developers and builders must solve their own water problems prior to development rather than wait for cities and municipalities to solve the problem.

This indicates that water will continue to be critical to growth prospects for the region and the state, and that competition for available sources of water will continue to intensify.

Due to COVID-19, we have witnessed several changing consumer patterns, including residents leaving downtown urban areas to buy homes in the suburbs.

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We believe our ability to pair our water to our land and our in-house expertise for operating our systems allowed us to provide home builders with an affordable and sustainable master planned community that allowed our builders to quickly satisfy the increased demand from home buyers.

Despite the continued impacts of COVID-19, Colorado has continued to grow.

According to the 2020 census report, Colorado added over 744,000 residents from 2010 to 2020, a growth of 14.8% bringing the Colorado population to nearly 5.8 million.

What makes this more difficult for land developers and builders is that Colorado law requires developers to demonstrate they have sufficient water supplies for their proposed projects before zoning applications will be considered.

This means developers and builders must solve their own water problems prior to development rather than wait for cities and municipalities to solve the problem.

This indicates that water will continue to be critical to growth prospects for the region and the state, and that competition for available sources of water will continue to intensify.

We believe our affordable community will continue to grow even in the slowing housing market we are experiencing in the later months of calendar 2022.

Growth in the Denver area has trended east with significant activity occurring along the I-70 corridor, an area which enjoys excellent transportation infrastructure with I-70, rail access, and Denver International Airport (DIA).

The region has significant employment centers, including DIA, the University of Colorado Anschutz Medical Campus, an Amazon fulfillment center, the Rocky Mountain Regional VA Medical Center, Buckley Airforce Base, and more, creating demand for residential, retail, and commercial development opportunities.

This tremendous growth, coupled with dwindling new and resale inventory, along with a shift in lifestyle choices from home ownership to renting, has pushed the single-family rental market into double-digit growth.

The region has significant employment centers, including DIA, the University of Colorado Anschutz Medical Campus, an Amazon fulfillment center, the Rocky Mountain Regional VA Medical Center, Buckley Space Force Base, and more, creating demand for residential, retail, and commercial development opportunities.

This tremendous growth, coupled with the low new and resale inventory, along with a shift in lifestyle choices from home ownership to renting, has pushed the single-family rental market into double-digit growth.

Although this market has existed for decades, the focus has shifted from individuals owning the units to commercial institutions buying large blocks of houses for rentals.

The single-family rental space is emerging as one of the strongest growth sectors in commercial real estate.

Demand for rentals SFR has been steadily increasing due to current demographic trends related to Gen-Y and baby boomers;

however, migration patterns related to Covid-19 have accelerated that demand, and this single-family rental growth is expected to outpace multifamily, office, retail, storage, and hospitality growth by 2022.

The single-family rental space is now the fastest growing segment in the U.S.

housing market.

Demand for rental has been steadily increasing due to current demographic trends related to Gen-Y and baby boomers;

however, migration patterns related to Covid-19 have accelerated that demand.

According to the 2021 census, single-family rentals grew by 31% from 2007 to 2016, compared to 14% for multifamily rentals over the same period.

As the demand for more single-family rental properties grows, an increasing number of larger investors are expanding their investment strategy to include the product.

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Under these fixed-price contracts, the contract prices are established in part based on fixed, firm subcontractor quotes on contracts and on cost and scheduling estimates.

These quotes or estimates may be based on several assumptions, including assumptions about prices and availability of labor, equipment and materials, and other issues.

These quotes or estimates may be based on several assumptions, including assumptions

about prices and availability of labor, equipment and materials, and other issues.

Increased costs or shortages of skilled labor, concrete, steel, pipe, and other materials could cause increases in development costs and delays.

These shortages and delays may result in delays in the delivery of the lots under development or the completion of water or wastewater facilities, increase costs for us or other contractors on our projects, reduce gross margins from sales, or subject us to penalties or defaults under our agreements.

While we contract with

third parties for our labor and materials at a fixed price, which we believe allows us the ability to mitigate the risks associated with shortages of and increases in the cost of labor and building materials, other unforeseen factors may arise which could increase our costs.

As the COVID-19 pandemic continues, we have continued to enforce many safety measures enacted to protect the health and well-being of our employees, customers, business partners, and their families.

While state and local mandates have been eased, we continue to encourage voluntary vaccinations and healthy practices such as hand washing, disinfecting, social distancing, and face coverings when necessary.

We have been able to maintain our level of efficiency with the use of video conferencing and electronic data sharing platforms.

While we contract with third parties for our labor and materials at a fixed price, which we believe allows us the ability to mitigate the risks associated with shortages of and increases in the cost of labor and building materials, other unforeseen factors may arise which could increase our costs.

As a result of the COVID-19 pandemic, we have continued to enforce many safety measures to protect the health and well-being of our employees, customers, business partners, and their families.

While state and local mandates have been for the most part removed, we continue to encourage voluntary vaccinations and healthy practices such as hand washing, disinfecting, and social distancing when necessary.

While we have transitioned back to a more traditional in office work environment, we continue to offer flexible work arrangements to employees and consultants while maintaining our efficiency with the use of video conferencing and electronic data sharing platforms.

We were informed that our builder customers also took precautionary measures to ensure the safety of their employees, customers, business partners, and their families.

These measures varied by builder.

As a result, some of our builder customers reported material net housing order declines in 2020.

However, they are also reporting material increases in orders since the stay-at-home orders have been reduced.

We had been expecting to accelerate deliveries of the remaining finished lots at Sky Ranch into fiscal 2020;

however, because of the COVID-19 precautionary measures and stay-at-home orders, we delivered the remaining lots during the first quarter of fiscal 2021.

These deliveries were still ahead of the original delivery dates set forth in our contracts with the home builders by nearly two years.

The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring governmental agencies due to expansive work restrictions imposed on their operations.

We expect COVID-19 to continue to play a role in potential delays related to the second filing at Sky Ranch due to rapidly changing governmental orders, city and country shutdowns, and public health concerns.

Mainly, we have experienced delays in the permitting process through the county which has delayed the construction of Phase two of the Sky Ranch development.

The most dramatic impact on our operations was and continues to be delays in the permitting process, inspections, and other activities requiring governmental agencies due to expansive work restrictions that continue to be imposed on their operations.

Mainly, we experienced delays in the permitting process through the county which delayed the start of construction of Phase 2A of the Sky Ranch development.

We expect COVID-19 to continue to play a role in potential delays related to the further subphases in Phase 2 at Sky Ranch due to continued changing governmental orders.

Water and Wastewater Services

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Competition among developers and projects is determined by the location of the real estate, the market appeal of the development plan, the cost and value of the end product, the developer’s ability to build, market and deliver projects on a timely and cost effective basis, and the availability of water to serve the project.

Residential developers sell to home builders, who in turn compete based on location, price/value, market segmentation, product design, and reputation.

Commercial, retail, and industrial developers sell to and/or compete

with other developers, owners, and operators of real estate for a limited number of potential buyers.

We believe we have exceeded the market’s expectations with the delivery of our initial phase lots at Sky Ranch and have demonstrated we have the ability and expertise to continue to deliver lots in a large-scale master planned community.

Residential developers sell to home builders, who in turn compete based on location,

price/value, market segmentation, product design, and reputation.

Commercial, retail, and industrial developers sell to and/or compete with other developers, owners, and operators of real estate for a limited number of potential buyers.

We believe we have exceeded the market’s expectations with the delivery of our Phase 1 lots at Sky Ranch and have demonstrated the ability and expertise to continue to deliver lots in a large-scale master planned community.

Environmental, Health and Safety Regulation

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The Safe Drinking Water Act establishes criteria and procedures for the U.S.

Environmental Protection Agency (the “EPA”) to develop national quality standards for drinking water.

Environmental Protection Agency (EPA) to develop national quality standards for drinking water.

Regulations issued pursuant to the Safe Drinking Water Act and its amendments set standards on the amount of certain microbial and chemical contaminants and radionuclides allowable in drinking water.

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Employees and Human Capital

We currently have 31 employees, all of whom are full-time.

We currently have 35 employees, all of whom are full-time, and all are located in the USA.

None of our employees are represented by a union or covered by a collective bargaining agreement.

We have not experienced any work stoppages, and we consider our relationship with our employees to be good.

Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants.

The principal purposes of our equity incentive plan are to attract, retain and reward personnel through the granting of stock-based compensation awards, in order to increase stockholder value and the success of our company by motivating such individuals to perform to the best of their abilities and achieve our objectives.

Compensation and Benefits Program

Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals and create long-term value for our shareholders.

We provide employees with compensation packages that include base salary, incentive bonuses, and long-term equity awards tied to the value of our stock price.

We believe that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns employee and shareholder interests, including by incentivizing business and individual performance (pay for performance), motivating based on long-term company performance and integrating compensation with our business plans.

In addition to cash and equity compensation, we also offer employees benefits such as fully or partially paid health insurance (medical, dental and vision), paid time off, paid sick leave, paid parental leave, paid bereavement time, and a 401(k) plan with a company match.

Diversity and Inclusion

We believe that an equitable and inclusive environment with diverse teams produces more creative solutions, results in better, more innovative services and is crucial to our efforts to attract and retain key talent.

During 2022 we created and filled a new position that is helping to align our employees and our board members around dimensions of diversity, such as gender, race, ethnicity, sexual orientation or other shared attributes, which we believe help build community and enable opportunities for development.

We continue to focus on building a pipeline for talent to create more opportunities for workplace diversity and to support greater representation within Pure Cycle.

We develop and encourage an inclusive culture through company events, participation in our recruitment efforts, and input into our hiring strategies.

Community Involvement

We aim to give back to the communities where we live and work and believe that this commitment helps in our efforts to attract and retain employees.

We offer employees the opportunity to give back through volunteering or company donations to approved causes.

For more information on our diversity and inclusion and community involvement initiatives, please see our ESG page on our website at www.purecyclewater.com.

Other Information

Pure Cycle was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008.

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Our website address is www.purecyclewater.com .

We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing with the Securities and Exchange Commission (the “SEC”).

These reports and all other material we file with the SEC may be obtained directly from the SEC’s website, www.sec.gov/edgar/searchedgar/companysearch.html , under CIK code 276720 .

1 unchanged sentence

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business