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Item 8. Financial Statements and Supplementary Data

2022-11-14 compared with 2021-11-10 · 462 added, 367 removed, 578 unchanged (59% of the section changed)

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Index to Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm ( Plante & Moran, PLLC , Broomfield, CO , PCAOB ID 166 )

Consolidated Balance Sheets

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Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (the “PCAOB”) and are required to be independent with respect to the Company in accordance with U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments.

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.

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Critical Audit Matter Description

As described in Note 2 in the consolidated financial statements, the Company records revenue on the sale of lots to customers either over time or at a point in time based upon the specific terms of each contract with the customer.

As described in Note 2 in the consolidated financial statements, the Company records revenue on the sale of lots to customers over time based upon the specific terms of each contract with the customer.

Auditing management’s determination of revenue recognized involved significant auditor judgement, as it required the evaluation of subjective factors including the most representative measure of progress for revenue recognized over time, determining the pattern of revenue recognition, and assumptions related to forecasted labor and subcontractor costs.

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Evaluation of the reasonableness of estimated costs to complete by obtaining and analyzing supporting documentation and evaluation of estimated costs at completion to actual costs on similar historical projects.

Assessment of Existence and Collectability of Related Party Public Improvement Reimbursable – Refer to Notes 2 and Note 14 of the financial statements

Testing of Company prepared spreadsheets supporting the estimated progress by builder, the related revenue recognition and the respective contract liabilities.

Assessment of Existence and Collectability of Related Party Public Improvement Reimbursable – Refer to Notes 2, 5, and 15 of the financial statements

Critical Audit Matter Description

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● We obtained an understanding of the Company’s process and related controls to evaluate the existence and collectability of the public improvement reimbursable costs.

● We evaluated the assumptions used by the Company to develop projections of future sources of the Sky Ranch CAB revenues and liquidity and we tested the completeness and accuracy of the underlying data used in the projections.

● We confirmed amounts outstanding and tested underlying support for advances made to the Sky Ranch CAB, including evaluating the specialist used by management.

● We reviewed the Valuation of Notes Receivables analysis which was performed by an independent third-party for impairment testing purposes, including evaluating the specialist used by management.

● We evaluated the assumptions used by the Company and the third-party to develop projections of future sources of the Sky Ranch CAB revenues and liquidity and we tested the completeness and accuracy of the underlying data used in the projections.

● We compared an estimate of anticipated future lot sales and projections of new home builds to our independent expectation.

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We have served as the Company’s auditor since 2017.

Boulder, Colorado

Broomfield, Colorado

November 14, 2022

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CONSOLIDATED BALANCE SHEETS

(In thousands, except shares)

August 31, 2022

August 31, 2021

(In thousands, except share and

per share amounts)

Current assets:

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Prepaid expenses and other assets

Land development inventories

Notes receivable - public improvement reimbursables - related party

Income taxes receivable

Land under development

Notes receivable - related party, reimbursable public improvements

Total current assets

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Investments in water and water systems, net

Land and mineral interests

Construction in progress

Single-family rental units

Land and mineral rights:

Held for development

Held for investment purposes

Notes receivable – related parties, including accrued interest:

Public improvement reimbursables

Long-term land investment

Reimbursable public improvements

Operating leases - right of use assets, less current portion

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Deferred lot sale revenues

Deferred oil and gas lease payment and water sales payment

Deferred water sales revenues

Debt, current portion

Total current liabilities

Deferred oil and gas lease payment and water sales payment, less current portion

Participating interests in export water supply

Debt, less current portion

Deferred tax liability, net

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SHAREHOLDERS’ EQUITY:

Preferred stock:

Series B – par value $ 0.001 per share, 25 million shares authorized;

432,513 shares issued and outstanding (liquidation preference of $ 432,513 )

Common stock:

Par value 1/3 of $.01 per share, 40 million shares authorized;

23,916,633 and 23,856,098 shares outstanding, respectively

Series B preferred shares par value $ 0.001 per share,

25 million authorized;

432,513 issued and outstanding (liquidation preference of $ 432,513 )

Common shares par value 1/3 of $.01 per share,

40.0 million authorized;

23,980,645 and 23,916,633 outstanding, respectively

Additional paid-in capital

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except share information)

August 31, 2022

August 31, 2021

Metered water usage from:

Municipal customers

Oil and gas operations

Commercial customers

Wastewater treatment fees

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Project management fees

Single-family rentals

Special facility projects and other

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Land development construction costs

Project management costs

Single-family rental costs

Depletion and depreciation

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General and administrative expenses

Non-cash mineral interest impairment charge

Operating income

Other income:

Recognition of public improvement reimbursables including interest income - related party

Interest income - related party

Recognition of public improvement reimbursables - related party

Reimbursement of construction costs - related party

Oil and gas royalty income, net

Oil and gas lease income, net

Interest income from investments

Reimbursement of construction costs - related party

Interest expense, net

Income from operations before income taxes

Income tax expense

Unrealized holding losses

Total comprehensive income

Earnings per common share:

Earnings per common share - basic and diluted

Weighted average common shares outstanding:

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CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except for share amounts)

Year Ended August 31, 2022

Preferred Stock

Comprehensive

Income (Loss)

August 31, 2019 balance:

(in thousands, except shares)

Paid-in Capital

Balance at August 31, 2021

Stock option exercises

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Share-based compensation

Unrealized holding losses on investments

August 31, 2020 balance:

Balance at August 31, 2022

Year Ended August 31, 2021

Preferred Stock

(in thousands, except shares)

Paid-in Capital

Balance at August 31, 2020

Stock option exercises

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Share-based compensation

August 31, 2021 balance:

Balance at August 31, 2021

See accompanying Notes to Consolidated Financial Statements

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(In thousands)

August 31, 2022

August 31, 2021

Cash flows from operating activities:

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

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

Deferred lot sale revenues

Depreciation and depletion

Land under development

Share-based compensation expense

Investment in Well Enhancement and Recovery Systems LLC

Interest income and other non-cash items

Deferred water sales revenue

Prepaid expenses

Other assets and liabilities

Deferred income taxes

Interest added to receivable from related parties

Proceeds from the Sky Ranch CAB reimbursement applied to land development inventories

Non-cash mineral interest impairment charge

Changes in operating assets and liabilities:

Trade accounts receivable

Prepaid expenses

Land development inventories

Public improvement reimbursables, including interest

Taxes payable net of taxes receivable

Accounts payable and accrued liabilities

Deferred revenues

Other assets and liabilities

Taxes payable

Activity for note receivable - related party, reimbursable public improvements:

Payments received

Net other activity

Activity for note receivable - related party, other

Payments received

Net other activity

Net cash provided by operating activities

Cash flows from investing activities:

Investments in water, water systems and land

Construction costs of single-family rentals

Purchase of property and equipment

Sale and maturities of short-term investments

Purchase of short-term investments

Investments in future development phases at Sky Ranch

Investments in water and water systems

Net cash used by investing activities

Cash flows from financing activities:

Proceeds from exercise of options

Proceeds from notes payable

Proceeds from option exercises

Payments to contingent liability holders

Payments on notes payable

Net cash provided by financing activities

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Total cash, cash equivalents and restricted cash

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON-CASH ACTIVITIES

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for income taxes

Cash paid for interest

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

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

Issuance of stock for compensation

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

Transfer of land development costs to other assets

Transfer of land development costs to inventory

Changes in Land development inventories included in accounts payable and accrued liabilities

Changes in Investments in water, water systems and land included in accounts payable and accrued liabilities

Transfer of land development costs to land under development

Change in land under development included in accounts payable and accrued liabilities

Transfer of income taxes receivable to income taxes payable

Income taxes paid

See accompanying Notes to Consolidated Financial Statements

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NOTE 1 – ORGANIZATION

Pure Cycle Corporation (the “Company”) was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008.

The Company currently operates in two business segments:

Pure Cycle Corporation (Company or Pure Cycle) was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008.

Pure Cycle currently operates in two reportable business segments:

(i) wholesale water and wastewater services and (ii) land development.

During its fiscal 2021, the Company launched what management believes will likely become its third operating segment, which is its build-to-rent segment which will construct and rent out single-family homes in its Sky Ranch neighborhood.

Since its inception, the Company has accumulated valuable water and land interests and has developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems which serve domestic, commercial and industrial customers in the Denver metropolitan region.

The Company’s land assets are located along the bustling and high-profile I-70 corridor in the Denver metropolitan region.

Through its land development segment, the Company is developing Sky Ranch, a 930 acre master planned community located four miles south of Denver International Airport.

During its fiscal 2021, Pure Cycle launched its single-family rental business which constructs and leases single-family homes in its Sky Ranch neighborhood.

Management believes the single-family rental business will likely become its third operating segment, once material.

Since its inception, Pure Cycle has accumulated valuable water and land interests and has developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems which serve domestic, commercial and industrial customers in the Denver metropolitan region.

Pure Cycle’s land assets are located along the bustling and high-profile I-70 corridor in the Denver metropolitan region.

Through its land development segment, Pure Cycle is developing Sky Ranch, a 930 -acre master planned community located four miles south of Denver International Airport.

Sky Ranch is planned to include a mix of 3,200 single-family and multifamily residential units and over two million square feet of commercial, retail, and industrial space.

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Intercompany accounts and transactions have been eliminated in consolidation.

Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”)

In March 2020, Congress enacted the CARES Act to provide certain relief because of the outbreak of a novel strain of the coronavirus (“COVID-19”) pandemic.

The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits.

COVID-19 delayed the second phase of the Sky Ranch development construction progress due to the extended time taken to approve the platted lots through the County Government.

Other than the delay of the approval of the platted lots, there has not been a material impact to the Company’s consolidated financial statements as a result of the CARES Act.

Coronavirus (COVID-19)

Since early 2020, COVID-19 has caused substantial disruption in international and U.S.

economies and markets.

The impacts of COVID-19 are continuing but have lessened as vaccines have become widely available in the U.S, although there have been periodic increases in the number of cases in the U.S.

due to the spread of COVID-19 variants.

COVID-19 has resulted in government restrictions of various degrees and effective at various times, including stay-at-home orders, bans on travel, limitations on the size of gatherings, limitations on the operations of businesses deemed non-essential, closures of work facilities, schools, public buildings and businesses, cancellation of events (including entertainment events, conferences, and meetings), quarantines, mask mandates and social distancing measures.

Due to the outbreak of COVID-19 and related restrictions, Phase 2A of Sky Ranch was delayed due to the extended time taken to approve the platted lots through the county government.

Use of Estimates

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Actual results could differ from those estimates.

During fiscal 2021, the Company determined the reimbursable public improvements, project management fees and interest income related to the Sky Ranch community being developed by Pure Cycle were probable of collectability.

Historically, due to a lack of tax base and no operating history for the Sky Ranch Community Authority Board (Sky Ranch CAB), the Company was unable to estimate when or if it would receive payment for these items and deferred recognition of them until cash was received.

As a result of an established and growing tax base resulting from the success of the initial development, increases in housing values in Colorado, added mill levies,

and additional unencumbered fees received by the Sky Ranch CAB, Pure Cycle believes repayment of the public improvements, payment of the project management fees, and interest income are deemed probable.

Based on this Pure Cycle recognizes these items in the consolidated financial statements as they occur.

The timing and amount of potential payments have been estimated based on growth trends utilizing current assessed values and historic growth rates which have been projected to current and contracted lot sales through the contractual obligation period.

Cash and Cash Equivalents

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At August 31, 2022, August 31, 2021, and September 1, 2020, the Company had no contract assets.

Land Development Inventories

Land development inventories primarily includes land, stated at cost, the Company is developing with plans to sell.

The Company began developing its Sky Ranch property in 2018.

The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development of finished lots at Sky Ranch that meet the Company’s capitalization criteria for improvements to a lot.

Land Under Development

The land under development account primarily includes land stated at cost which Pure Cycle is developing and plans to sell.

Pure Cycle began developing its Sky Ranch property in 2018.

Pure Cycle capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development at Sky Ranch that meet the Company’s capitalization criteria for improvements to a lot.

These costs are capitalized as incurred.

The Company uses the specific identification method for purposes of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sold.

Costs included in Land Development Inventories historically included common area costs the Company funded through the Sky Ranch Community Authority Board (the "Sky Ranch CAB") when collectability of such reimbursable costs was not considered probable.

However, in fiscal 2021, because the Company believes these costs will be reimbursed by the Sky Ranch CAB, those costs are now reflected in a note receivable account from the Sky Ranch CAB and collectability was deemed probable due to increases in mill levies resulting from remaining phases being in a different taxing district, the increased tax base resulting from completed homes and lots under contract, as well as other relevant factors impacting the Sky Ranch CAB’s future liquidity so that the land development inventory accounts contain costs directly attributable to lots to be sold, which will not be reimbursed;

and expensed as land cost of sales as lots are being completed and sold on a lot-by-lot basis.

The Company measures land development inventories held for sale at the lower of the carrying value or net realizable value.

Prior to fiscal 2021, costs included in the land under development accounts included common area costs Pure Cycle funded through the Sky Ranch CAB when collectability of such reimbursable costs was not considered probable.

However, in fiscal 2021, because the Company believes these costs have and will be reimbursed by the Sky Ranch CAB, those costs are now reflected in a note receivable account from the Sky Ranch CAB since management believes collectability is deemed probable due to increases in mill levies resulting from remaining phases being in a different taxing district, the increased tax base resulting from completed homes and lots under contract, as well as other relevant factors impacting the Sky Ranch CAB’s future liquidity.

As a result the land under development accounts primarily contain costs directly attributable to lots to be sold, which will not be reimbursed, but will be expensed as land cost of sales as lots are being completed and sold on a lot-by-lot basis.

The Company measures land under development costs held for sale at the lower of the carrying value or net realizable value.

In determining net realizable value, the Company primarily relies upon the most recent comparable sales prices.

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Notes Receivable – Sky Ranch CAB

As noted above and described in greater detail in Note 14 – Related Party Transactions , the Sky Ranch CAB is responsible for building certain public improvements at Sky Ranch, for which the Company provided the funding to the Sky Ranch CAB which is reimbursable to the Company.

As noted above and described in greater detail in Note 5, the Sky Ranch CAB is responsible for building certain public improvements at Sky Ranch, for which the Company provided the funding to the Sky Ranch CAB and which is reimbursable to the Company.

Prior to fiscal 2021, the repayment of the public improvement reimbursable costs was contingent upon the Sky Ranch CAB issuing bonds or generating enough funds to repay the Company such that collectability was deemed probable.

As the Sky Ranch CAB’s mill levy share increased, home values continued to rise, and more lots were sold, the current tax base and related future revenues have grown at Sky Ranch, the Sky Ranch CAB has the expected ability to repay the Company.

The Company has determined the reimbursement of public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection, and as such, has recognized the reimbursable public improvements costs incurred to date at Sky Ranch, which is reflected in the Notes Receivable – Related Parties account on the accompanying consolidated balance sheet.

As the Sky Ranch CAB’s mill levy share increased, home values continued to rise, and more lots were sold, the current tax base and related future revenues have grown at Sky Ranch.

The Sky Ranch CAB is expected to repay the Company;

it has made multiple payments to date to the Company.

The Company has determined the reimbursement of public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection.

Therefore, the Company will recognize the reimbursable public improvements costs incurred to date at Sky Ranch in the Notes receivable – related party, reimbursable public improvements account on the accompanying consolidated balance sheet.

Concentration of Credit Risk and Fair Value

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The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant input to determine where within the fair value hierarchy the measurement falls.

The estimated fair value measurements in Note 2 – Fair Value Measurements are based on Level 2 of the fair value hierarchy.

The estimated fair value measurements in Note 2 are based on Level 2 of the fair value hierarchy.

Cash and cash equivalents – The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held.

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The carrying amount of cash and cash equivalents approximate fair value.

Trade Accounts Receivable – The Company records accounts receivable net of allowances for uncollectible accounts and the carrying values approximate fair value due to the short-term nature of the receivables.

Trade accounts receivable – Trade accounts receivable are reported net of allowances for uncollectible accounts and the carrying values approximate fair value due to the short-term nature of the receivables.

Restricted cash – The Company has entered into four separate cash-secured performance standby letter of credit agreements with its primary bank to provide assurance the Company will perform on various construction agreements.

As of August 31, 2022, the four letters of credit totaled $ 2.3 million, which are fully secured by cash held in a restricted account at the bank, which approximates its fair value as it is cash held in a savings account.

Notes receivable – related parties – The carrying amounts of the notes receivable – related parties (with the Rangeview Metropolitan District (Rangeview District) and the Sky Ranch CAB approximate their fair value because the interest rates on the notes approximate market rates.

Accounts payable – The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments.

Debt – The carrying amounts of the Company’s debt approximate fair value because the rates are floating rates based on the prime lending rate, which approximates market rates.

Long-term financial liabilities – The Comprehensive Amendment Agreement No.

1 (the “CAA”) is comprised of a recorded balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (as defined in Note 4 – Water and Land Assets ).

The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (as defined in Note 4 – Water and Land Assets ).

1 (CAA) is comprised of a recorded balance and an unrecorded or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (as defined in Note 4).

The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (as defined in Note 4 ).

Because of the uncertainty of the sale of Export Water, the Company has determined that the contingent portion of the CAA does not have a readily determinable fair value.

The CAA is described further in Note 5 – Participating Interests in Export Water .

Notes Receivable – Related Parties – The carrying amounts of the Notes receivable – related parties (with the Rangeview Metropolitan District (the “Rangeview District”) and the Sky Ranch CAB approximate their fair value because the interest rates on the notes approximate market rates.

Off-Balance Sheet Instruments – The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA.

The CAA is described further in Note 6.

Unrecorded Instruments – The Company’s unrecorded financial instruments consist entirely of the contingent portion of the CAA.

Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value.

See further discussion in Note 5 – Participating Interests in Export Water .

See further discussion in Note 6.

Trade Accounts Receivable

The Company records accounts receivable net of allowances for uncollectible accounts.

The Company has recorded an allowance for uncollectible accounts in receivables from continuing operations totaling less than $ 0.1 million and $ 0.2 million for the periods ended August 31, 2021 and 2020.

The Company has recorded an allowance for uncollectible accounts in receivables from continuing operations totaling less than $ 0.1 million for the periods ended August 31, 2022 and 2021.

The allowance for uncollectible accounts was determined based on a specific review of all past due accounts.

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Estimates of future cash flows and timing of events for evaluating long-lived assets for impairment are based upon management’s assumptions and market conditions.

If any of its long-lived assets are deemed to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value.

If any of its long-lived assets are deemed

to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

During the year ended August 31, 2021 the Company did no t identify any indications of impairment loss.

The impairment testing of long-lived assets during fiscal 2020 resulted in $ 1.4 million impairment charge for the Arkansas Valley mineral rights, as described below.

As of August 31, 2020, the Company assessed the recoverability of its Arkansas Valley mineral rights.

The Company determined the carrying value of these mineral rights is not recoverable.

As a result, the Company recorded an impairment charge of $ 1.4 million.

The charge was recorded in Non-cash mineral asset impairment charge in the consolidated statements of operations and comprehensive income for fiscal 2020.

During the years ended August 31, 2022 and 2021, the Company did no t identify any indications of impairment loss.

Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges

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Water and Wastewater Resource Development Segment Revenues

The Company generates revenues through its wholesale water and wastewater business predominantly from the items described below.

Because these items are separately delivered and distinct, the Company accounts for each of the items separately.

Monthly water usage and wastewater treatment fees – The Company provides water and wastewater services to customers, for which the customers are charged monthly usage fees.

Pure Cycle generates revenues through its wholesale water and wastewater business predominantly from the items described below.

Because these items are separately delivered and distinct, Pure Cycle accounts for each of the items separately.

Monthly water usage and wastewater treatment fees – Pure Cycle provides water and wastewater services to customers, for which the customers are charged monthly usage fees.

Water usage fees are assessed to customers based on actual metered usage each month plus a base monthly service fee assessed per single family equivalent (SFE) unit served.

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Water usage pricing is based on a tiered pricing structure.

The Company recognizes wholesale water usage revenues at a point in time upon delivering water to its customers or its governmental customers’ end-use customers, as applicable.

Revenues recognized by the Company from the sale of “Export Water” and other portions of its “Rangeview Water Supply” off the “Lowry Range” are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”).

The Company is the primary distributor of the Export Water and sets pricing for the sale of Export Water.

Revenues recognized by the Company from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.

Pure Cycle recognizes wholesale water usage revenues at a point in time upon delivering water to its customers or its governmental customers’ end-use customers, as applicable.

Revenues recognized by Pure Cycle from the sale of “Export Water” and other portions of its “Rangeview Water Supply” off the “Lowry Range” are reported net of royalties to the State of Colorado Board of Land Commissioners (Land Board).

Pure Cycle is the distributor of the Export Water and sets pricing for the sale of Export Water.

Revenues recognized by Pure Cycle from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.

For water sales on the Lowry Range, the Rangeview District is directly selling the water and deemed the primary distributor of the water.

The Rangeview District sets the price for the water sales on the Lowry Range.

See further description of “Export Water,” the “Lowry Range,” and the “Rangeview Water Supply” in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System.”

The Company also sells raw water for industrial uses, mainly to oil and gas companies for use in the drilling processes (referred to as “O&G operations”).

See further description of “Export Water,” the “Lowry Range,” and the “Rangeview Water Supply” in Note 4 under “Rangeview Water Supply and Water System.”

Pure Cycle also sells raw water for industrial uses, mainly to oil and gas companies for use in the drilling processes (referred to as “O&G operations”).

O&G operations revenues are recognized at a point in time upon delivering water to the customer, unless other special arrangements are made.

During the years ended August 31, 2022 and 2021, the Company delivered 404.9 million and 257.8 million gallons of water to customers.

Of this, 60 % and 1 % was used for O&G operations.

The Company recognizes wastewater treatment revenues monthly based on a flat monthly fee and actual usage charges.

Of this, 70 % and 60 % was sold to O&G operators.

Pure Cycle recognizes wastewater treatment revenues monthly based on a flat monthly fee and actual usage charges.

The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview District.

Costs of delivering water and providing wastewater service to customers are recognized as incurred.

Water and wastewater tap fees and construction fees/special facility funding – The Company has various water and wastewater service agreements, components of which may require the payment of tap fees.

A tap constitutes a right to connect to the wholesale water and wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may make a physical tap into the wholesale line(s) to connect its property to the Company’s water and/or wastewater systems.

Water and wastewater tap fees and construction fees/special facility funding – Pure Cycle has various water and wastewater service agreements, components of which may require the payment of tap fees.

A tap constitutes a right to connect to the wholesale water and

wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may make a physical tap into the wholesale line(s) to connect its property to Pure Cycle’s water and/or wastewater systems.

The right stays with the property upon sale or transfer.

The Company has no obligation to physically connect the property to the lines.

Once connected to

the water and/or wastewater systems, the customer has live service and the ability to receive metered water deliveries from the Company’s system and send wastewater into the Company’s system.

Thus, the customer has full control of the connection right as it can obtain all the benefits from this right.

As such, management has determined that tap fees are separate and distinct performance obligations that are recognized at a point in time.

The Company recognizes water and wastewater tap fee revenues at the time the Company grants a right for the customer to connect to the water or wastewater service line to obtain service, and the customer pays the tap fee.

During the years ended August 31, 2021 and 2020, the Company recognized $ 4.4 million and $ 4.8 million of water tap fee revenues.

The water tap fees recognized are based on the amounts billed by the Rangeview District to customers, after deduction of royalties due to the Land Board for water taps, if applicable, and net of amounts paid to third parties pursuant to the CAA as further described in Note 7 – Long-Term Obligations and Operating Lease .

Pure Cycle has no obligation to physically connect the property to the lines.

Once connected to the water and/or wastewater systems, the customer has live service and the ability to receive metered water deliveries from Pure Cycle’s system and send wastewater into Pure Cycle’s system.

Thus, once the connection right is granted, the customer has full control of the connection right as it can obtain all the benefits from this right.

Therefore, management has determined that tap fees are separate and distinct performance obligations that are recognized at a point in time.

Pure Cycle recognizes water and wastewater tap fee revenues when Pure Cycle grants the right for the customer to connect to the water or wastewater service line to obtain service, and the customer pays the tap fee.

During the years ended August 31, 2022 and 2021, Pure Cycle recognized $ 4.1 million and $ 4.4 million of water tap fee revenues.

During the years ended August 31, 2022 and 2021, the Company recognized $ 0.8 million and $ 0.8 million of wastewater tap fee revenues.

The Company recognizes construction fees, including fees received to construct “special facilities,” over time as the construction is completed because the customer is generally able to use the property improvement to enhance the value of other assets during the construction period.

Pure Cycle recognizes construction fees, including fees received to construct “special facilities,” over time as the construction is completed because the customer is generally able to use the property improvement to enhance the value of other assets during the construction period.

Special facilities are facilities that enable water to be delivered to a single customer and are not otherwise classified as a typical wholesale facility or retail facility.

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Management has determined that special facilities are separate and distinct performance obligations because these projects are contracted to construct a specific water and wastewater system or transmission pipeline and typically do not include multiple performance obligations in a contract with a customer.

For the years ended August 31, 2021 and 2020, the Company recognized $ 0.4 million and $ 0 of special facilities revenue.

As of August 31, 2021 and 2020, the Company had no contract liabilities related to water tap and construction fee/special facility funding revenue.

Consulting fees – The Company receives, typically monthly, fees from municipalities and area water providers along the I-70 corridor, for contract operations services over time as services are consumed.

For the years ended August 31, 2022 and 2021, Pure Cycle recognized $ 0.2 million and $ 0.4 million of special facilities revenue.

As of August 31, 2022 and 2021, Pure Cycle had no contract liabilities related to tap and construction fee/special facility funding revenue.

Consulting fees – Pure Cycle can receive, typically monthly, fees from customers including municipalities and area water providers, for contract operations services.

Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed.

During each of the years ended August 31, 2021 and 2020, the Company recognized less than $ 100,000 of consulting fees.

For the years ended August 31, 2022 and 2021, Pure Cycle recognized less than $ 0.1 million and $ 0.1 million of consulting fees.

These fees are classified in Special facility projects and other income.

Land Development Segment Revenues

The Company generates revenues through its land development business predominantly from the sources described below.

Because these items are separately delivered and distinct, the Company accounts for each of the items separately.

Sale of finished lots – The Company acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch.

The Company has entered into purchase and sale agreements with home builders pursuant to which the Company agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch.

The Company began the first development phase in March 2018 and broke ground on the second development phase in February 2021.

The first development phase is nearly complete and includes 509 lots, of which 505 were sold to three homebuilders and the remainder were retained by the Company for use in its build-to-rent business.

The second development phase is planned to have 850 lots ( 804 under contract with homebuilders and 46 retained for use in the build-to-rent business), is being developed in four subphases (the first subphase is what broke ground in February 2021, which includes a total of 229 lots, 219 lots are sold to home builders with 10 being retained for use in the build-to-rent business).

The timing of cash flows from the second development phase, consistent with the first development phase, include certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries.

The Company sells lots at Sky Ranch pursuant to distinct agreements with each home builder.

These agreements follow one of two formats:

(1) The sale of a finished lot, whereby the homebuilder pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon completion of the finished lot that is permit ready.

The Company recognizes revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the homebuilder as the transaction cycle is then complete and the Company has no further obligations on the lot.

For the years ended August 31, 2021 and 2020, the Company received payment and recognized revenue of $ 1.6 million and $ 4.9 million from one homebuilder from the sale of 22 and 70 finished lots.

(2) The sale of finished lots pursuant to a lot development agreement with builders, whereby the Company receives payments in stages that include:

(i) payment upon the delivery of platted lots (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot.

Ownership and control of the platted lots pass to the builders once the Company closes the sale of the platted lots.

Because the builder (i.e., the customer) takes control of the lot at the first closing and subsequent improvements made by the Company improve the builder’s lot as construction progresses, the Company accounts for revenue under this delivery agreement over time with progress measured based upon costs incurred to date compared to total expected costs.

Pure Cycle generates revenues through its land development business predominantly from the sources described below.

Because these items are separately delivered and distinct, Pure Cycle accounts for each of the items separately.

Sale of finished lots – Pure Cycle acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch.

Pure Cycle has entered into multiple purchase and sale agreements with home builders pursuant to which Pure Cycle agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch.

Pure Cycle began Phase 1 in March 2018 and broke ground on Phase 2 in February 2021.

As of August 31, 2022, Phase 1 is complete and includes 509 lots, of which 505 were sold to three homebuilders and the remainder were retained by Pure Cycle for use in its single-family rental business.

Phase 2 is planned to have 850 lots ( 804 under contract with homebuilders and 46 retained for use in the single-family rental business) and is being developed in four subphases (referred to as Phase 2A, 2B, 2C and 2D).

Phase 2A broke ground in February 2021, includes a total of 229 lots, of which 219 lots were sold to home builders and 10 were retained for use in the single-family rental business.

The timing of cash flows from Phase 2, consistent with Phase 1, includes certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries.

Pure Cycle sells lots at Sky Ranch pursuant to distinct agreements with each builder.

These agreements require the same level of construction for all lots and builders, the primary difference in the agreements is the timing of payments and timing of the transfer of ownership of the lots.

Pure Cycle’s lot sales agreements require payments under one of the two following structures:

(1) Upon the substantial completion of the finished lot, whereby the builder pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon substantial completion of the finished lot (typically subject to completion of related public improvements by the Sky Ranch CAB) that is permit ready.

Depending on timing of delivery of the finished lot to the builder, Pure Cycle may still have unfulfilled contract performance obligations related to the timing of completion of public improvements and other amenities.

If these unfulfilled obligations are deemed other than insignificant, the company follows format 2 and recognizes revenue over time based on the estimated progress using overall costs incurred to date compared to total estimated costs from the period of time the lot is delivered until the remaining performance obligations are substantially completed.

(2) As certain construction milestones are achieved, which include payments due as follows pursuant to a lot development agreement with the builder:

(i) payment upon the delivery of platted lots (which requires Pure Cycle to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot.

Typically these lots are also subject to completion of related public improvements by the Sky Ranch CAB after all three payments have been received.

Under the first payment structure, the builder (i.e., the customer) takes control/ownership of the lot at the time payment is received and the lot is substantially complete.

Under the second payment structure, the builder takes control/ownership at the first closing, or delivery of the platted lots.

Under both payment scenarios Pure Cycle has subsequent improvements to make to the lot to either improve the builder’s lot and/or complete its performance obligations of managing the public improvements required to complete the neighborhood, which includes items such as fencing, final utility installation, and landscaping.

Because Pure Cycle has obligations remaining under the contracts, Pure Cycle accounts for lot sales revenue over time as construction progresses, with progress measured based upon costs incurred to date compared to total expected costs for a particular construction phase (i.e.

for Phase 2A).

Any revenue in excess of amounts entitled to be billed is reflected on the balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue.

For the years ended August 31, 2021 and 2020, the Company recognized $ 4.2 million and $ 14.0 million of lot sale revenue over time related to the first and second development phases at Sky Ranch pursuant to lot development agreements.

As of August 31, 2021, the Company had received cumulative payments of $ 26.2 million related to the agreements with home builders in the first development phase relating to 356 lots from two home builders, and $ 3.9 million from three home builders in the second development phase.

Of the amounts received in the first development phase, $ 26.0 million was recognized as revenue over time based on the costs incurred to date compared to total expected costs for full completion of the 356 lots.

Of the amounts received in the second development phase, $ 2.2 million was recognized as revenue over time based on the costs incurred to date compared to total expected costs for full completion of the 152 lots sold pursuant to lot development agreement.

The Company does not have any material significant payment terms as all payments from the homebuilders are expected to be received within 12 months after the delivery of the platted lot.

The Company adopted the practical expedient for financing components and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year .

Pure Cycle does not have any material significant payment terms as all payments are expected to be received within a few months after invoicing.

Pure Cycle adopted the practical expedient for financing components and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year .

For the years ended August 31, 2022 and 2021, Pure Cycle recognized $ 12.2 million and $ 5.8 million of lot sale revenue related to Phase 2A and Phase 1 at Sky Ranch for over time recognition of the performance obligations using the percentage-of-completion methods for each builder contract in each phase.

Pure Cycle recognized $ 1.6 million of revenue at a point in time upon the delivery of finished lots to the builder for the year ended August 31, 2021.

Since development of Sky Ranch began through August 31, 2022, Pure Cycle has received payments totaling $ 26.2 million related to the agreements with builders in Phase 1 and $ 18.4 million in Phase 2A.

Of the amounts received for Phase 1, as of August 31, 2022, all $ 26.2 million has been recognized as revenue as Phase 1 is complete.

Of the amounts received for Phase 2A, as of August 31, 2022, $ 14.1 million has been recognized as revenue as Phase 2A is approximately 76 % complete.

As of August 31, 2022, $ 4.3 million of revenue has been deferred related to Phase 2A contracts, which will be recognized over time as the Company completes its performance obligations of managing the completion of the public improvements in Phase 2A, which includes items such as fencing, final utility installation, and landscaping.

Such completion is expected by the end of fiscal 2023.

Reimbursable Costs for Public Improvements – The Sky Ranch CAB is obligated to construct certain public improvements at Sky Ranch.

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1, 3, 4, 5, 6, 7 and 8 (collectively, the Sky Ranch Districts), the Sky Ranch CAB, Arapahoe County, and the local stormwater authority and, after inspection and acceptance, are turned over to the applicable governmental entity to own, operate and maintain.

Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 14 – Related Party Transactions ), the Company is obligated to provide advance funding to the Sky Ranch CAB related to the construction of these public improvements pursuant to a note.

Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 15), the Company is obligated to provide advance funding to the Sky Ranch CAB related to the construction of these public improvements pursuant to a note.

Because public improvements are utilized by more than just a single home, the costs are typically reimbursed through property tax assessments, fees, and other funding mechanisms like municipal bonds.

During the first development phase at Sky Ranch, the Sky Ranch CAB expended $ 32.6 million to build these public improvements, including construction support activities totaling $ 29.7 million and accrued interest of $ 2.9 million, for which the Company provided the funding.

Pursuant to the funding agreement between the Company and the Sky Ranch CAB, the constructions costs, the accrued interest, and project management fees are payable to the Company since the Company provided the initial funding.

In November 2019, the Sky Ranch CAB issued $ 13.2 million of bonds to recover a portion of the total $ 32.7 million expected to be received related to the public improvements constructed for the first development phase at Sky

Upon the issuance of the bonds, the Company received $ 10.5 million as partial reimbursement for advances the Company made to the Sky Ranch CAB.

Additionally, in January 2021, the Sky Ranch CAB paid the Company $ 0.4 million as a result of unencumbered funds from a 2020 budget surplus.

With the first development phase nearing completion, 804 lots under contract in the second development phase sold (with 152 in the first subphase sold), the Sky Ranch CAB has established a tax base with revenue and fee generation from expected tax collections.

Historically, the recognition of these costs was contingent upon the Sky Ranch CAB repaying the Company, but as a mill levy increase was approved due to the remaining development phases at Sky Ranch being in a different taxing district, higher than projected assessed values on completed homes, and the growing lots paying taxes, the Sky Ranch CAB has established a revenue base which the Company has determined provides the Sky Ranch CAB the ability to repay the Company.

The Company has determined the reimbursement of these public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection due, as such, the Company has recognized the reimbursable public improvements costs incurred to date at Sky Ranch.

During the year ended August 31, 2021, the Company recognized an initial $ 21.7 million related to the Note receivable – related party related which was recorded to Project management revenue, Other income, and Interest Income - related party.

For the second development phase and beyond, the Company will continue to assess the collectability of reimbursable public improvement expenditures.

The Sky Ranch CAB has an obligation to repay the Company but the ability of the Sky Ranch CAB to repay the Company before the contractual termination of December 31, 2060, is dependent upon the continued establishment of a sufficient tax base or other fee generating activities sufficient to recover reimbursable costs incurred.

Public improvements are considered contract fulfillment costs of the Sky Ranch CAB which are payable to the Company, for which the Company has determined collectability is deemed to be probable and the public reimbursable expenditures incurred related to the second development phase are;

therefore, reflected as Notes receivable - related party.

During the year ended August 31, 2021, the Company recognized $ 3.1 million of project management revenue, other income, and interest income related to the amounts owed to the Company by the Sky Ranch CAB related to both development phases.

The Company will evaluate the Notes receivable - related party for indicators of impairment each reporting period and an impairment charge will be incurred for any amounts deemed uncollectible.

Although the Company is developing Sky Ranch in phases, the Sky Ranch CAB collects taxes and fees for the entire community and those funds are available to repay the Company regardless of the location of the public improvement (except for certain regional public improvements).

Additional information about the amounts spent on public improvements as well as amounts repaid are further detailed in Note 5.

The Company evaluates the notes receivable - related parties, reimbursable public improvements for indicators of impairment each reporting period and an impairment charge will be incurred for any amounts deemed uncollectible.

The note receivable from the Sky Ranch CAB bears an interest rate of six percent ( 6 %) per annum until paid.

Project management services – Pursuant to two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB, the Company acts as the project manager and provides the services required to deliver the Sky Ranch CAB-eligible public improvements (see discussion of reimbursable public improvements above), including but not limited to Sky Ranch CAB compliance;

To date no impairment has been recorded for the reimbursable amounts on the note receivable.

Project management services – Pursuant to two Service Agreements for Project Management Services (Project Management Agreements) with the Sky Ranch CAB, Pure Cycle acts as the project manager and provides the services required to deliver the Sky Ranch CAB-eligible public improvements (see discussion of reimbursable public improvements above and in Note 5), including but not limited to Sky Ranch CAB compliance;

planning design and approvals;

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and construction management and administration.

The Company is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing.

The Company receives a project management fee of five percent ( 5 %) of actual qualifying construction costs of Sky Ranch CAB-eligible public improvements.

Pure Cycle is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing.

Pure Cycle receives a project management fee of five percent ( 5 %) of actual qualifying construction costs of Sky Ranch CAB-eligible public improvements.

The project management fee is based only on the actual costs of the improvements;

thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible public improvements are not included in the calculation of the project management fee.

Soft costs and other costs incurred by the Company that are not directly related to the construction of Sky Ranch CAB-eligible public improvements are included in Land development inventories and accounted for in the same manner as construction support activities as described below.

Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have sufficient funds from tax assessment, fees or the issuance of municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided, or expenses incurred for construction of public improvements that qualify as reimbursable expenses.

thus, items such as fees, permits, review fees, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible public improvements are not included in the calculation of the project management fee.

Soft costs and other costs incurred by Pure Cycle that are not directly related to the construction of Sky Ranch CAB-eligible public improvements are included in the land under development account and accounted for in the same manner as construction support activities as described below.

Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have sufficient funds from tax assessment, fees or the issuance of municipal bonds in an amount sufficient to reimburse Pure Cycle for all or a portion of advances provided or expenses incurred for construction of public improvements that qualify as reimbursable expenses.

Historically, the recognition of project management revenue was deferred as the payment was deemed contingent on a sufficient tax base and/or the issuance of municipal bonds for collectability to be considered probable.

Due to an approved increase in the mill levy due to the remaining phases being in a different taxing district, the completion of the first development phase, higher than projected assessed home values, and the increase in lots under contract, the Company has determined that it is probable that the Sky Ranch CAB can pay the Company its project management fee, for which service has previously been provided.

The Company has determined that payment from the Sky Ranch CAB is probable and as such, during the fiscal year ended August 31, 2021, the Company recognized $ 1.7 million of project management revenue from construction activities at Sky Ranch.

The $ 1.7 million is included with the Notes receivable - related party and accrues interest at six percent ( 6 %) per annum.

Future amounts will be added to Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be probable of occurrence.

Construction support activities – The Company performs certain construction activities at Sky Ranch.

Due to an approved increase in the mill levy due to the remaining phases being in a different taxing district, the completion of Phase 1, higher than projected assessed home values, and the increase in lots under contract, Pure Cycle has determined that it is probable that the Sky Ranch CAB reimbursement to Pure Cycle for its project management fees, for which service has previously been provided is collectible.

Additional information on the Project Management fees and treatment of the related receivables is included in Note 5 below.

Construction support activities – Pure Cycle performs certain construction activities at Sky Ranch.

The activities performed include construction and maintenance of the grading erosion and sediment control, best management practices and other construction-related services.

For Phase 1, these activities are invoiced to the Sky Ranch CAB upon completion and will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

The second development phase activities are invoiced based on an agreement between the Company and the Sky Ranch CAB.

The amounts are invoiced and recognized in Special facility projects and other and is a component in Trade accounts receivable, net.

The following table summarizes the amounts the Company paid, what was repaid by the Sky Ranch CAB and amounts still owed to the Company by the Sky Ranch CAB:

As of August 31, 2021

Amounts payable to Pure

Payments repaid by

Cycle by the Sky Ranch

Costs incurred to date

Sky Ranch CAB

(In thousands)

Public improvements

Accrued interest

Project management services

Construction support activities

Phase 1 reimbursable costs

Public improvements

Accrued interest

Project management services

Phase 2 reimbursable costs

Total reimbursable costs

The Company believes it will incur an additional $ 0.2 million before the end of its second quarter of fiscal 2022, to complete the construction related to public improvements in the first development phase at Sky Ranch, and $ 14.2 million related to the first subphase of the second development phase through the end of its fiscal 2022.

For Phase 1, these activities are invoiced to the Sky Ranch CAB upon completion and will be recognized in the land under development account or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

The Phase 2 activities are invoiced based on an agreement between Pure Cycle and the Sky Ranch CAB.

The amounts are invoiced and recognized as special facility projects revenue and is a component in trade accounts receivable, net.

For the years ended August 31, 2022 and 2021, the Company recognized $ 0.1 million and $ 0.1 million related to construction support activities at Sky Ranch

Deferred Revenue

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prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company recording deferred revenue.

The Company recognizes this revenue into income as construction activities progress measured based on costs incurred to total expected costs of the project which management believes is a faithful representation of the transfer of goods and services to the customer.

The Company recognizes this revenue into income as control of lots are transferred to the homebuilder, generally from the period title to a lot is transferred until all construction activities (including public improvements the Company oversees) for that phase or subphase are completed and turned over to the

governmental agency that will maintain the asset.

As construction activities progress, which is measured based on amount of costs incurred to total expected costs of the project (i.e.

Phase 2A) which management believes is a faithful representation of the transfer of goods and services to the customer.

Prior to fiscal 2021, the Company received up-front payments for certain oil and gas leases which permitted an oil and gas operator priority rights to water deliveries over a specified period of time.

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All up-front payments have been fully recognized as of the first quarter of fiscal 2021.

The Company also received an up-front payment from an oil and gas industrial customer to reserve priority water for their operations, which the Company is recognizing this revenue based either on actual usage each reporting period or based on amounts which have expired pursuant to the agreement.

The Company also received an up-front payment from an oil and gas industrial customer to reserve priority water for their operations.

The Company recognized this revenue based either on actual usage each reporting period or based on amounts which had expired pursuant to the agreement.

The customer had up to one year from the invoice date to use such water.

The customer did not use the water in the contract period which ended in January 2021, and such water was forfeited by the customer resulting in the Company recognizing revenue of $ 1.2 million.

During fiscal 2022, the Company received up-front payments from an oil and gas industrial customer for future drilling needs.

The customer paid deposits on three different occasions for an estimated 25 % of future water usage to reduce future cash payments when drilling.

The customer drilled, during fiscal 2022, wells utilizing two of the three deposits paid.

For the year ended August 31, 2022, the Company had deferred revenue of $ 0.5 million for drilling activities expected to commence in early calendar year 2023.

As of August 31, 2022 and 2021, the Company’s deferred revenues along with the changes in the deferred revenues are as follows:

August 31, 2021

August 31, 2020

(In thousands)

Land development segment

Water and wastewater resource development segment

Balance, end of period

August 31, 2021

August 31, 2020

(In thousands)

Year Ended August 31, 2022

Water and Wastewater Resource Development

Land Development

(In thousands)

Balance, August 31, 2020

Deferral of revenue

Recognition of unearned revenue

Balance, August 31, 2021

Balance at August 31, 2021

Revenue recognized

Revenue deferred

Balance at August 31, 2022

Year Ended August 31, 2021

Water and Wastewater Resource Development

Land Development

Balance at August 31, 2020

Revenue recognized

Revenue deferred

Balance at August 31, 2021

When recognized, the amounts reflected as unearned revenue will be recorded in lot sales, metered water usage from oil and gas operations, or Other income oil and gas lease income, net in the consolidated statements of operations and comprehensive income.

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Oil and Gas Lease Payments

As further described in Note 4 – Water and Land Assets below, on March 10, 2011, the Company entered a Paid-Up Oil and Gas Lease (the “Sky Ranch O&G Lease”) and a Surface Use and Damage Agreement that have been assigned to various other oil and gas companies as a result of acquisitions.

Six wells have been drilled within the Company’s mineral interest and placed into service ( four new wells beginning in fiscal 2021) and are producing oil and gas and accruing royalties to the Company.

As further described in Note 4 below, on March 10, 2011, the Company entered a Paid-Up Oil and Gas Lease (Sky Ranch O&G Lease) and a Surface Use and Damage Agreement that have been assigned to various other oil and gas companies as a result of acquisitions.

Six wells have been drilled within the Company’s mineral interest and placed into service ( four new wells beginning in fiscal 2021) and

are producing oil and gas and accruing royalties to the Company.

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

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The Company does no t have any significant unrecognized tax benefits as of August 31, 2022.

The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating losses and tax credit carry-forwards.

The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.

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Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures.

Reclassifications

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

NOTE 3 – FAIR VALUE MEASUREMENTS

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Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market.

As of August 31, 2021 and August 31, 2020, the Company had no Level 1 assets or liabilities.

As of August 31, 2022 and August 31, 2021, the Company had no recurring Level 1 assets or liabilities.

Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities.

As of August 31, 2021 and 2020, the Company had no Level 2 assets.

As of August 31, 2022, the Company has two non-recurring Level 2 liabilities, the SFR Note and the Lost Creek Note (both defined in Note 8), for which the Company has determined the valuation of the liabilities can be obtained from readily available pricing sources via independent providers for market transactions involving similar liabilities.

As of August 31, 2021, the Company had no Level 2 assets or liabilities .

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions.

Level 3 valuations incorporate certain significant unobservable assumptions and projections in determining the fair value assigned to such assets or liabilities.

As of August 31, 2021, the Company had one Level 3 liability, the contingent portion of the CAA.

As of August 31, 2020, the Company had one Level 3 liability, the contingent portion of the CAA.

The Company has determined that the contingent portion of the CAA does not have a readily determinable fair value (see Note 5 – Participating Interests in Export Water ).

As of August 31, 2022 and 2021, the Company had one Level 3 asset measured on a non-recurring basis, the notes receivable – related party, reimbursable public improvements, for which the Company did not record any unrealized gains or losses as the fair value, based on a discounted cash flow analysis, approximated the carrying value.

As of August 31, 2022 and 2021, the Company had one Level 3 liability, the contingent portion of the CAA.

The Company has determined that the contingent portion of the CAA does not have a readily determinable fair value (see Note 6).

The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.

Non-Recurring Fair Value Measures

During 2020, as described in Note 2 – Summary of significant Accounting Policies, the Company determined the carrying value of the Arkansas mineral rights was not recoverable and recorded an impairment of $ 1.4 million.

The Company estimated the fair value of the mineral rights using a market approach based upon anticipated sales proceeds less costs to sell.

There were no transfers between Level 1, 2 or 3 categories during the years ended August 31, 2022 or 2021.

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August 31, 2021

(In thousands)

and Depletion

(In thousands)

Rangeview water supply

Sky Ranch water rights and other costs

Fairgrounds water and water system

Rangeview water system

Rangeview water supply

Water supply – Other

Wild Pointe service rights

Sky Ranch water rights and other costs

Sky Ranch pipeline

Lost Creek water supply

Construction in progress

Fairgrounds water and water system

Wild Pointe service rights

Net investments in water and water systems

Construction in progress primarily consists of the development of the Box Elder water project, the BTR houses and the Sky Ranch residential and commercial development.

The Company anticipates the projects will be placed in service during fiscal 2022.

Construction in Progress

The construction in progress account represents costs incurred on various construction projects currently underway that as of the balance sheet date have not been completed and placed into service.

The construction in progress account consists primarily of water facilities being constructed which the Company anticipates will be placed in service during the next twelve months.

During the year ended August 31, 2022, the Company incurred (1) $ 4.0 million of costs related to its construction projects, (2) completed various water infrastructure projects resulting in the capitalization of $ 5.1 million of costs, and (3) completed three single-family rental units resulting in the capitalization of $ 1.0 million of costs.

Single-Family Rental Homes

During the year ended August 31, 2021, the Company completed construction of the first three units being utilized in Pure Cycle’s single-family rental business.

The costs of the units are capitalized and when applicable are depreciated over periods not exceeding thirty-years , which is dependent on the asset type.

All three units were placed in service and leased effective November 1, 2021.

During the year ended August 31, 2022, the Company contracted for construction of eleven additional rental units to be used in the rental business.

The Company began construction on one single-family detached unit in March 2022 with an estimated completion in November 2022, with the remaining ten units, comprised of single-family detached houses, townhomes, and paired homes beginning construction in the summer of 2022 with estimated completion dates in the third and fourth quarter of fiscal 2023.

The Company has reserved a total of 46 lots in Phase 2 ( 10 of which are in Phase 2A and under construction as of August 31, 2022) of Sky Ranch to build additional rental units.

Depletion and Depreciation

During the years ended August 31, 2022 and 2021, the Company recorded an immaterial amount of depletion charges, which relates entirely to the Rangeview Water Supply (as defined below).

During the years ended August 31, 2021 and 2020, the Company recorded $ 1.8 million and $ 1.7 million of depreciation expense.

These figures include $ 0.3 million and $ 0.4 million of depreciation expense for other equipment not included in the table above in the fiscal years ended August 31, 2021 and 2020.

During the years ended August 31, 2022 and 2021, the Company recorded $ 2.1 million and $ 1.8 million of depreciation expense, which include $ 0.3 million and $ 0.3 million of depreciation expense for other equipment not included in the table above.

The following table presents the estimated useful lives by asset class used for calculating depreciation and depletion charges:

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The Company acquired the Rangeview Water Supply in 1996 pursuant to the following agreements:

● 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”), between the Company, the Land Board, and the Rangeview District;

● The 1996 Service Agreement between the Company and the Rangeview District, which was superseded by the Amended and Restated Service Agreement, dated July 11, 2014, between the Company 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 the Company and the Rangeview District (the “Export Agreement”), pursuant to which the Company purchased a portion of the Rangeview Water Supply referred to as the “Export Water” because the Export Agreement allows the Company to export water from the Lowry Range to supply water to nearby communities;

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

● 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), between the Company, the Land Board, and the Rangeview District;

● The 1996 Service Agreement between the Company and the Rangeview District, which was superseded by the Amended and Restated Service Agreement, dated July 11, 2014, between the Company and the Rangeview District (Lowry Service Agreement), which allows the Company 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 the Company and the Rangeview District (Export Agreement), pursuant to which the Company purchased a portion of the Rangeview Water Supply referred to as the “Export Water” because the Export Agreement allows the Company to export this water from the Lowry Range to supply water to nearby communities;

● The 1997 Wastewater Service Agreement between the Company and Rangeview District (Lowry Wastewater Agreement), which allows the Company 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.

In August 2019, the Company 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 the Company has filed an application with the Colorado water court to change the use of the water to augment its municipal/industrial water supplies at the Lowry Range.

In August 2019, the Company acquired 300 acre-feet of fully consumptive surface water in the Lost Creek Designated Ground Water Basin.

In June 2022, the Company acquired 370 acre-feet of fully consumptive surface water through the acquisition of three wells located in the Lost Creek Designated Ground Water Basin (both acquisitions are referred to collectively as the Lost Creek Water).

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

The Company has consolidated the Lost Creek Water with the Rangeview Water Supply to provide service to the Rangeview District’s customers both on and off the Lowry Range.

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Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years.

During the years ended August 31, 2021 and 2020, the Company made less than $ 0.1 million and $ 2.9 million in capital investments in WISE.

Capitalized terms used under this caption are defined in Note 7 – Long-Term Obligations and Operating Lease .

During each of the years ended August 31, 2022 and 2021, the Company made less than $ 0.1 million in capital investments in WISE.

Capitalized terms used under this caption are defined in Note 8 below.

The Arapahoe County Fairgrounds Water and Water System

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The Lost Creek Water Supply

In August 2019, the Company purchased 150 acre-feet of ditch water rights, 800 acre-feet of renewable groundwater rights, 70 acre-feet of deep groundwater rights and 260 acres of land in Weld County.

On June 27, 2022, Pure Cycle acquired 370 acre-feet of designated groundwater rights located in the Lost Creek basin in Weld County Colorado.

The acquisition included three water wells and related well permits and structures.

The total purchase price was $ 3.7 million, which was allocated entirely to the water rights as the other assets were deemed to not have determinable values.

This acquisition of Lost Creek water was accounted for as an asset acquisition.

In August 2019, the Company purchased 150 acre-feet of ditch water rights, 300 acre-feet of designated groundwater rights, 70 acre-feet of deep groundwater rights and 260 acres of land in the Lost Creek Basin in Weld County.

Total consideration for the land, water and related costs was $ 3.5 million.

The Company allocated the acquisition cost to the land and water rights based on estimates of each asset’s respective fair value at the acquisition date.

The purchase of the Lost Creek land and water was accounted for as an asset acquisition.

The Lost Creek land and water acquisition was accounted for as an asset acquisition.

Service to Customers Not on the Lowry Range

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In June 2017, the Company completed and placed into service its Sky Ranch pipeline, which cost $ 5.7 million to construct, connecting its Sky Ranch water system to the Rangeview District’s water system.

Wild Pointe – On December 15, 2016, the Rangeview District, acting by and through its water activity enterprise, and Elbert & Highway 86 Commercial Metropolitan District, a quasi-municipal corporation and political subdivision of the State of Colorado, acting by and through its water enterprise (the “Elbert 86 District”), entered into a Water Service Agreement (the “Wild Pointe Service Agreement”).

Wild Pointe – On December 15, 2016, the Rangeview District, acting by and through its water activity enterprise, and Elbert & Highway 86 Commercial Metropolitan District, a quasi-municipal corporation and political subdivision of the State of Colorado, acting by and through its water enterprise (Elbert 86 District), entered into a Water Service Agreement (Wild Pointe Service Agreement).

Subject to the conditions set forth in the Wild Pointe Service Agreement and the terms of the Company’s engagement by the Rangeview District as the Rangeview District’s exclusive service provider, the Company acquired, among other things, the exclusive right to provide water services to residential and commercial customers in the Wild Pointe development, located in unincorporated Elbert County, Colorado, for $ 1.6 million in cash.

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In September 2017, the Company entered a three-year O&G Lease for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate owned by the Company adjacent to the Lowry Range.

This O&G lease expired during the year end August 31, 2021.

This O&G lease would have expired during the year ended August 31, 2022, but the O&G Operator made a one year extension payment.

Land and Mineral Rights

As part of the Sky Ranch acquisition, the Company acquired approximately 930 acres of land, of which approximately 215 acres have been sold to home builders for the purpose of building residential homes.

Additionally, the Company holds approximately 13,900 acres of mineral interests in Southeast Colorado in Otero, Bent and Prowers Counties.

These mineral rights were initially valued at $ 1.4 million, but as further described in Note 2 – Summary of significant Accounting Policies , in fiscal 2020 the Company assessed the recoverability of the Arkansas Valley mineral right and determined that the fair value of these assets was below their carrying value by $ 1.4 million.

As a result, the Company recorded an impairment charge

of $ 1.4 million in Non-cash mineral rights impairment charge in the consolidated statements of operations and comprehensive income for fiscal 2020.

As of August 31, the costs allocated to the Company’s land is as follows:

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August 31, 2021

(In thousands)

Sky Ranch land

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Lost Creek land

Net land and mineral interest

Net land and mineral interests

The Company also owns 700 acres of land in the Arkansas River valley which is held for investment purposes.

NOTE 5 – REIMBURSABLE PUBLIC IMPROVEMENTS AND NOTE RECEIVABLE FROM THE SKY RANCH CAB

The note receivable from the Sky Ranch CAB reports the balances owed by the Sky Ranch CAB to the Company for public improvements paid for by the Company which are reimbursable from the Sky Ranch CAB, project management fees, and interest accrued on the unpaid balances related to the ongoing development of the Sky Ranch master planned community.

The Company has advanced funds to the Sky Ranch CAB for the cost of public improvements at Sky Ranch which are the ultimate responsibility of the Sky Ranch CAB.

During the second quarter of fiscal 2021, the Company determined that the Sky Ranch CAB repayment to the Company for those improvements was probable, along with the project management fees and interest on these costs.

Upon that determination, the Company began recording the reimbursable public improvements as a receivable from the Sky Ranch CAB (as opposed to the costs being expensed as land development construction costs) and began recognizing project management fee revenue and interest income on the entire note receivable from the Sky Ranch CAB.

Prior to that date, payment was not deemed to be probable;

therefore, the Company capitalized those costs as land under development and subsequently expensed the reimbursable public improvements and did not recognize any project management fees or interest income due to the uncertainty of collectability.

During the year ended August 31, 2022, the Company spent $ 14.0 million on public improvements which are payable by the Sky Ranch CAB to the Company and were therefore added to the note receivable from the Sky Ranch CAB.

Additionally, for the year ended August 31, 2022, project management fees owed to the Company of $ 0.7 million, and interest income on the outstanding note receivable of $ 1.9 million were also added to the note receivable.

During the year ended August 31, 2022, the Sky Ranch CAB made three payments to the Company on the note totaling $ 24.1 million, which was applied to interest and principal on the note.

Pursuant to the agreements with the Sky Ranch CAB, any payments received are initially applied to interest.

The Sky Ranch CAB issued two municipal bonds in the summer of 2022, from which it remitted $ 23.6 million to the Company as partial repayment of the note, the other two payments were made from funds available at the Sky Ranch CAB resulting from excess fees and taxes eared by the Sky Ranch CAB.

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

August 31, 2022

August 31, 2021

Beginning balance

Amounts recognized with release of contingency

Payments received

Ending balance

The note receivable from the Sky Ranch CAB accrues interest at 6 % per annum.

Public improvements which are not probable of reimbursement at the time of being incurred are considered contract fulfillment costs and are recorded as land development construction costs as incurred.

If public improvement costs are deemed probable of collection, the costs are recognized as notes receivable - related party.

The Company assesses the collectability of the note receivable from the Sky Ranch CAB, which includes reimbursable public improvements, project management fees and the related interest income, when events or circumstances indicate the amounts may not be recoverable.

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

NOTE 6 – PARTICIPATING INTERESTS IN EXPORT WATER

The acquisition of the Rangeview Water Supply was finalized with the signing of the CAA in 1996.

Upon entering the CAA, the Company recorded a liability of $ 11.1 million, which represented the cash the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water and Land Assets ).

The Company agreed to remit a total of $ 31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $ 11.1 million investment.

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Because of these acquisitions, the Company is currently receiving 88 % of the total proceeds from the sale of Export Water (after payment of the Land Board royalty).

Additionally, as a result of the acquisitions, and the consideration from the cumulative sales of Export Water, at August 31, 2021, the remaining total potential third-party off-balance sheet obligation is just under $ 1.0 million, while the recorded portion is $ 0.3 million

Additionally, as a result of the acquisitions, and the consideration from the cumulative sales of Export Water, at August 31, 2022, the remaining total potential third-party unrecorded contingent obligation is $ 0.6 million, while the recorded portion is $ 0.3 million.

After August 31, 2022, prior to the issuance of this annual report, the Company acquired $ 0.7 million of the remaining $ 1.0 million of the CAA obligations for a cash payment of just over $ 0.1 million.

The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority.

This means the first payees receive their full payment before the next priority level receives any payment and so on until full repayment.

Of the next $ 6.3 million of Export Water payouts, which at current levels would occur over several years, the Company will receive $ 5.5 million.

Thereafter, the Company will be entitled to all but $ 0.2 million of the proceeds from the sale of Export Water after deduction of the Land Board royalty.

As a result of the CAA obligation acquisition after August 31, 2022, the Company will be entitled to all but $ 0.2 million of the proceeds from the sale of Export Water after deduction of the Land Board royalty.

NOTE 7 – ACCRUED LIABILITIES

At August 31, 2021 and 2020, the Company had accrued liabilities of $ 4.1 million and $ 2.6 million, specific balances are detailed in the table below.

At August 31, 2022 and 2021, the Company’s current accrued liabilities are:

(In thousands)

August 31, 2022

August 31, 2021

(In thousands)

Due to the Sky Ranch CAB - related party

Accrued compensation

Other operating payables

Land development - warranty and other - related party

Operating lease obligations

Operating lease obligation, current

Property taxes

Professional fees

Due to Rangeview - related party

The amounts due to the Sky Ranch CAB are included in Notes receivable – related parties, including accrued interest or Land development i nventories.

The amounts recorded in inventory will be subsequently expensed through Land development construction costs .

Rental deposits

Total accrued liabilities

Land development costs due to the Sky Ranch CAB

Due to Rangeview Metropolitan District

Total accrued liabilities - related parties

The amounts due to the Sky Ranch CAB are included in notes receivable – related parties, including accrued interest or land under development.

The amounts recorded in land under development will be subsequently expensed through Land development construction

In addition, the amounts payable to the Rangeview District relate to construction costs of water infrastructure, these costs are included in Investments in water and water systems.

The remaining items that make up accrued liabilities are generally self-explanatory.

NOTE 7 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

As of August 31, 2021 and 2020, the Company had no debt.

During the year August 31, 2021, the Company entered four Irrevocable Letters of Credit (the “LOCs”).

NOTE 8 – DEBT AND OTHER LONG-TERM OBLIGATIONS

The total scheduled maturities of the Company’s loans for each of the years ending August 31 are as follows, with each loan described below the table:

(In thousands)

Scheduled principal payments

Within 1 year

Deferred financing costs

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

The SFR Note has the following terms:

● Initial principal amount of $ 1.0 million

● Floating per annum interest rate equal to the Western Edition of the “Wall Street Journal” Prime Rate plus 0.5 % ( 4.25 % as of August 31, 2022), which has a floor of 3.75 % and a ceiling of 4.25 % .

In the event of default, the interest rate on the SFR Note would be increased by adding an additional 2.0 %

● Maturity date of December 1, 2026

● Six interest only payments beginning January 1, 2022

● Fifty-three principal and interest payments each month beginning July 1, 2022 in the amount of $ 4,600 each

● Estimated final principal and interest balloon payment of $ 0.9 million payable on December 1, 2026

● Secured by the three single-family rental homes

● Required minimum debt service coverage ratio of 1.10 , measured annually based on audited financial statements, calculated as net operating income less distributions divided by required principal and interest payments, with net operating income defined as net income plus interest, depreciation, and amortization.

The Company is working with its primary bank to provide similar financing for the rental units currently under construction.

As of August 31, 2022, these loans have not been finalized.

Lost Creek Note

On June 28, 2022, the Company entered a loan with its primary bank to fund the acquisition of 370 acre-feet of water rights the Company acquired on June 27, 2022, in the Lost Creek region of Colorado (Lost Creek Note).

The Lost Creek Note has a principal balance of $ 3.0 million, a ten-year maturity, monthly interest only payments averaging $ 12,000 per month for thirty-six months beginning on July 28, 2022, twenty-four monthly principal and interest payments of $ 42,000 beginning on July 28, 2025, fifty-nine monthly principal and interest payments of $ 32,000 beginning on July 28, 2027, and a balloon payment of less than $ 0.8 million plus unpaid and accrued interest due on June 28, 2032.

The Lost Creek Note has a thirty-year amortization period and a fixed per annum interest rate equal to 4.90 %.

The Lost Creek Note is secured by the Lost Creek Water rights acquired with the note and any fees derived from the use of the Lost Creek Water rights.

Working Capital Line of Credit

On January 31, 2022, the Company entered into a Business Loan Agreement (Working Capital LOC) with its primary bank to provide a $ 5.0 million operating line of credit.

The Working Capital LOC has a two-year maturity, monthly interest only payments if the line is drawn upon with unpaid principal and interest due at maturity, and a floating per annum interest rate equal to the rate published in the Western Edition of the Wall Street Journal as the Prime Rate plus 0.5 % ( 6.0 % as of August 31, 2022), which has a floor of 3.75 %.

In the event of default, the interest rate on the Working Capital LOC would be increased by adding an additional 2.0 %.

As of August 31, 2022, the Company has not drawn on the Working Capital LOC.

Letters of Credit

During the year August 31, 2021, the Company entered four Irrevocable Letters of Credit (LOCs).

The LOCs are to guarantee the Company’s performance related to certain construction projects at Sky Ranch.

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Therefore, these liabilities are not disclosed in tabular format.

However, the Participating Interests in Export Water Supply are described in Note 5 – Participating Interests in Export Water .

However, the Participating Interests in Export Water Supply are described in Note 6.

WISE Partnership

During December 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its utility enterprise (“Aurora Water”), and the South Metro WISE Authority (“SMWA”).

The SMWA was formed by the Rangeview District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (the “SM IGA”), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the WISE Partnership Agreement.

During 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (WISE Partnership Agreement), among the City and County of Denver acting through its Board of Water Commissioners (Denver Water), the City of Aurora acting by and through its utility enterprise (Aurora Water), and the South Metro WISE Authority (SMWA).

SMWA was formed by the Rangeview District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (SM-IGA), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (WISE) created by the WISE Partnership Agreement.

The SM-IGA specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE.

The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water.

Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years.

Pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (the “WISE Financing Agreement”) between the Company and the Rangeview District, the Company has an agreement to fund the Rangeview District’s participation in WISE effective as of December 22, 2014.

During the years ended August 31, 2021 and 2020, the Company, through the Rangeview

District, purchased 120 acre-feet and 49 acre-feet of WISE water for $ 0.6 million and $ 0.1 million.

See further discussion in Note 14 – Related Party Transactions.

Pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (WISE Financing Agreement) between the Company and the Rangeview District, the Company has an agreement to fund the Rangeview District’s participation in WISE effective as of December 22, 2014.

During each of the years ended August 31, 2022 and 2021, the Company, through the Rangeview District, purchased 360 acre-feet and 320 acre-feet of WISE water for $ 0.7 million and $ 0.6 million.

See further discussion in Note 15 .

Lease Commitments

Operating lease expense is generally recognized evenly over the term of the lease.

Effective February 2018, the Company entered an operating lease for more than 11,000 square-feet of office and warehouse space in Watkins, Colorado.

The lease had an initial three-year term with payments of $ 6,600 per month and an option to extend the primary lease term for a two-year period at a rate equal to a 12.5 % increase over the primary base payments.

In February 2021, the Company exercised its option and extended the lease until February 2023, and its monthly lease payments effective March 1, 2021 are $ 7,100 per month.

As of September 1, 2019, the company adopted ASU No.

2016-02, Leases (“Topic 842”).

Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease.

Prior to September 1, 2019, leases were accounted for under the previous guidance in Accounting Standard Codification 840.

The Company did not enter into any new leases in fiscal 2020.

For the years ended August 31, 2021 and 2020, rent expense consisted of operating lease expense of $ 85,200 and $ 85,200 .

The Company paid $ 85,200 against Lease obligations — operating leases during fiscal 2021.

Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet.

For lease agreements entered into or reassessed in the future, the Company will be required to combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets.

For lease agreements with an initial term of more than twelve months, the Company combines the lease and non-lease components in determining the lease liabilities and right-of-use (ROU) assets.

Operating lease expense is generally recognized evenly over the term of the lease.

Effective July 1, 2022, the Company entered a new operating lease for more than 11,400 square-feet of office and warehouse space in Watkins, Colorado.

This lease replaces the Company’s prior office and warehouse lease when it moved to a new building in the same facility.

The lease has an initial two-year term with payments of approximately $ 7,400 per month and an option to extend the lease term for up to two two-year periods.

The monthly payment will increase 2.5 % after twelve months.

The prior office and warehouse lease had a year and half left on the term which was cancelled when the Company moved to the new office location.

For the years ended August 31, 2022 and 2021, rent expense consisted of operating lease expense of less than $ 0.1 million.

The Company paid less than $ 0.1 million against Lease obligations — operating leases during fiscal 2022.

The Company did not enter any new leases in fiscal 2021.

The Company’s lease agreements generally do not provide an implicit borrowing rate;

therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments.

The Company used the incremental borrowing rate of six percent ( 6 %) on September 1, 2019, for all leases that commenced prior to that date.

The Company elected the hindsight practical expedient to determine the lease term for existing leases, which resulted in the lengthening of the lease term related to the Company’s office lease.

The Company used the incremental borrowing rate of six percent ( 6 %) for its office and warehouse lease.

ROU lease assets and lease liabilities for the Company’s operating leases were recorded in the consolidated balance sheet as follows:

As of August 31, 2021

As of August 31, 2020

(In thousands)

August 31, 2022

August 31, 2021

Operating leases - ROU assets

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Equity Compensation Plan

The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective April 12, 2014.

The Company maintains the 2014 Equity Incentive Plan (2014 Equity Plan), which was approved by shareholders in January 2014 and became effective April 12, 2014.

Executives, eligible employees, consultants, and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan.

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As of August 31, 2022, there were 912,953 shares available for grant under the 2014 Equity Plan.

Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired April 11, 2014.

Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (2004 Incentive Plan), which expired April 11, 2014.

No additional awards may be granted pursuant to the 2004 Incentive Plan;

however, 126,000 granted awards are outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.

however, 106,500 granted awards are outstanding as of August 31, 2022, which may be exercised in accordance with the terms of the 2004 Incentive Plan.

The Company estimates the fair value of share-based payment awards on the date of grant using the Black-Scholes option-pricing model (Black-Scholes model).

Using the Black-Scholes model, the value of the portion of the award that is ultimately expected to vest is recognized as a period expense over the requisite service period in the consolidated statements of operations and comprehensive income (loss).

Option forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company does not expect any forfeiture of its option grants, and therefore, the compensation expense has not been reduced for estimated forfeitures.

For the years ended August 31,2021 and 2020, zero options and 6,500 options expired.

The Company does not expect any forfeiture of its options;

therefore, the compensation expense has not been reduced for estimated forfeitures.

For the years ended August 31, 2022 and 2021, 3,333 options and zero options expired.

The Company attributes the value of share-based compensation to expense using the straight-line single option method for all options granted.

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● Calculated stock price volatility – calculated over the expected life of the options granted, which is calculated based on the weekly closing price of the Company’s common stock over a period equal to the expected life of the option.

In fiscal 2021, the Company granted 85,000 stock options to employees with weighted-average grant-date fair values of $ 3.93 , and five-year vesting terms which expire ten years from the grant date.

In fiscal 2021, the Company granted 30,000 stock options to an executive officer with a weighted-average grant-date fair value of $ 3.37 , a three-year vesting term and an expiration date of ten years from the grant date.

For the year ended August 31, 2022, the Company granted 105,000 stock options to executive officers with weighted-average grant-date fair values of $ 5.16 , and three-year vesting terms which expire ten years from the grant date.

In addition, the six non-employee Board members were each granted 2,000 unrestricted stock grants.

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The unrestricted stock grants were fully expensed at the date of the grant because no vesting requirements existed for the unrestricted stock grants.

In fiscal 2020, the Company granted 80,000 stock options to employees with weighted-average grant-date fair values of $ 4.21 , and three-year vesting terms which expire ten years from the grant date.

In fiscal 2020, the Company granted 50,000 stock options to an executive officer with a weighted-average grant-date fair value of $ 4.16 , a three-year vesting term and an expiration date of ten years from the grant date.

In addition, the six non-employee Board members were each granted 2,000 unrestricted stock grants.

For the year ended August 31, 2021, the Company granted 85,000 stock options to employees with weighted-average grant-date fair values of $ 3.93 , and five-year vesting terms which expire ten years from the grant date.

In addition, the Company granted 30,000 stock options to an executive officer with a weighted-average grant-date fair value of $ 3.37 , a three-year vesting term and an expiration date of ten years from the grant date.

Further, the six non-employee Board members were each granted 2,000 unrestricted stock grants.

The fair market value of the unrestricted shares for share-based compensation expensing is equal to the closing price of the Company’s common stock on the date of grant of $ 11.33 .

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The assumptions used in the fair value calculations using the Black-Scholes model are as follows:

For the Years Ended August 31,

August 31, 2022

August 31, 2021

Expected term (years)

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During the years ended August 31, 2022 and 2021, 103,667 and 48,535 options were exercised.

For the options exercised in fiscal 2021, the Company had net settlement exercises of stock options, whereby the optionee did not pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market price on the date of exercise.

For the options exercised in 2022, the Company had options exercised for both cash and options exercised using a net settlement, whereby the optionee did not pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market price on the date of exercise.

The Company received less than $ 0.1 million in cash on the exercise of 6,000 options.

The net settlement exercises during the year ended August 31, 2022, resulted in 46,012 shares issued and 51,655 options cancelled in settlement of shares issued.

For the options exercised in 2021, the Company had no options exercised for cash and only net settlement exercises of stock options.

Net settlement exercises during the year ended August 31, 2021, resulted in 24,035 shares issued and 13,465 options cancelled in settlement of shares issued.

There were no net settlement exercises during fiscal 2020.

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the year ended August 31, 2022:

Weighted Average

Intrinsic Value

Exercise Price

Contractual Term

Number of Options

Weighted Average Exercise Price

Weighted Average Remaining Contractual Term

Approximate Aggregate Intrinsic Value

(in thousands)

Outstanding at August 31, 2020

Forfeited or expired

Outstanding at August 31, 2020

Net settlement exercised

Outstanding at August 31, 2021

Forfeited / Expired

Outstanding at August 31, 2022

Options exercisable at August 31, 2022

The following table summarizes the activity and value of non-vested options as of and for the year ended August 31, 2022:

Weighted Average

Number of Options

Weighted Average Grant Date Fair Value

Non-vested options outstanding at August 31, 2021

Non-vested options outstanding at August 31, 2022

All non-vested options are expected to vest.

For the years ended August 31, 2021 and 2020, the total fair value of options vested was $ 0.3 million and $ 0.4 million.

For the years ended August 31, 2022 and 2021, the total fair value of options that vested during the year was $ 0.4 million and $ 0.3 million.

For the years ended August 31, 2022 and 2021, the weighted-average grant-date fair value of options granted was $ 5.16 and $ 3.78 .

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As of August 31, 2022, the Company had unrecognized share-based compensation expenses totaling $ 0.6 million relating to non-vested options that are expected to vest.

The weighted average period over which these options are expected to vest is 2.3 years.

The weighted average period over which these options are expected to vest is two years .

The Company has not recorded any excess tax benefits to additional paid-in capital.

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NOTE 10 – SIGNIFICANT CUSTOMERS

The Company relies on its homebuilder customers for providing most of its land development revenue, and it relies on the Sky Ranch development (which includes both the Sky Ranch CAB and individual homeowners at Sky Ranch) as well as oil and gas operators for its water and wastewater resource revenue.

The Company primarily provides water and wastewater services on behalf of Rangeview Metropolitan District but since it is provided to various end users, the Rangeview Metropolitan District itself is not considered a significant customer.

For the year ended August 31, 2021, recognized lot sales and water and wastewater tap sales to three homebuilders accounted for 53 % of the Company’s total revenue, comprised of 20 % to KB Home, 17 % to Taylor Morrison and 16 % to Richmond.

The Sky Ranch CAB and Sky Ranch homeowners combined accounted for 14 % of the Company’s revenues, which includes water and wastewater usage fees and project management fees.

For the year ended August 31, 2020, recognized lot sales and water and wastewater tap sales to three homebuilders accounted for 94 % of the Company’s total revenue, comprised of 27 % to KB Home, 30 % to Taylor Morrison and 37 % to Richmond.

The Company has significant customers in its operations.

The table below presents the percentage of total revenue for the reported customers for the years ended August 31, 2022 and 2021.

For water and wastewater customers, the Company primarily provides services on behalf of the Rangeview District for which the significant end users include all Sky Ranch homes in the aggregate combined with the Sky Ranch CAB and two oil & gas operators.

The home builders at Sky Ranch account for lot purchase revenue but also for water and wastewater tap fees revenues.

% of Total Revenue Generated From:

August 31, 2022

August 31, 2021

Sky Ranch homes and Sky Ranch CAB in the aggregate

Two oil & gas operators

Taylor Morrison

Additionally, at August 31, 2022, 34 % of the trade accounts receivable balance was owed by Challenger for finished lot milestone payments.

NOTE 11 – INCOME TAXES

The Company recorded income tax expense of $ 6.5 million and an income tax benefit of $ 2.2 million for the fiscal years ended August 31, 2021 and 2020.

The net expense during the fiscal year ended August 31, 2021, consisted of current income tax expense of $ 5.8 million and deferred income tax expense of $ 0.7 million.

The deferred tax expense consists of the usage of the Company’s $ 0.6 million net operating loss carryforwards and the timing difference between book and tax depreciation of fixed assets.

For the years ended August 31, 2021 and 2020, the Company’s effective income tax rate was 24.7 % and 24.4 %.

No taxes were paid during the year ended August 31, 2021.

The Company paid Federal and State tax installments of $ 1.1 million and $ 0.2 million during the year ended August 31, 2020.

For the year ended August 31, 2022, Pure Cycle recorded income tax expense of $ 3.1 million, which consisted of current income tax expense of $ 3.6 million and deferred income tax benefit of $ 0.5 million.

The deferred tax benefit consists mainly of timing difference between book and tax depreciation of fixed assets.

For the year ended August 31, 2021, Pure Cycle recorded income tax expense of $ 6.5 million, which consisted of current income tax expense of $ 5.8 million and deferred income tax expense of $ 0.7 million.

The deferred tax expense consists of the usage of $ 0.6 million of net operating loss carryforwards and timing differences between book and tax depreciation of fixed assets.

During the year ended August 31, 2022, Pure Cycle made Federal and State income tax installments of $ 4.4 million and $ 0.9 million.

During the year ended August 31, 2021, the Company did no t make any Federal or State income tax installment payments.

Deferred income taxes reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

Significant components of the Company’s deferred tax assets as of August 31 are as follows:

(In thousands)

August 31, 2022

August 31, 2021

(In thousands)

Deferred tax assets (liabilities):

3 unchanged sentences

Deferred revenues

Net operating loss carryforwards

Net deferred tax liability

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Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following for the fiscal years ended August 31:

For the Fiscal Years Ended August 31,

August 31, 2022

August 31, 2021

Expected benefit from federal taxes at statutory rate of 21 % for the years 2022 and 2021

2 unchanged sentences

Stock Compensation

Total income tax expense / (benefit)

At August 31, 2021, the Company had no net operating loss carryforwards available for income tax purposes.

At August 31, 2020, the Company had $ 0.1 million of net operating loss carryforwards available for income tax purposes, which were used in fiscal 2021.

During the year ended August 31, 2020, no net operating loss carryforwards expired.

Total income tax expense

At August 31, 2022 and 2021, the Company had no net operating loss carryforwards available for income tax purposes.

NOTE 12 – 401(k) PLAN

The Company maintains the Pure Cycle Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”), a defined contribution retirement plan for the benefit of its employees.

The Company maintains the Pure Cycle Corporation 401(k) Profit Sharing Plan (401(k) Plan), a defined contribution retirement plan for the benefit of its employees.

The Company matches employee contributions at the rate of 50 % of the first 3 % up to a maximum of $ 2,500 per annum.

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Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows.

As of August 31, 2021, the Company had no contingencies where the risk of material loss was probable.

As of August 31, 2022, the Company had no contingencies where the risk of material loss was probable or reasonably possible of resulting in a material loss.

NOTE 14 – SEGMENT REPORTING

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Based on the methods used by the CODM to allocate resources, the Company has identified two operating segments which meet GAAP segment disclosure requirements, namely the water and wastewater resource development segment and the land development segment.

The Company’s newly launched build-to-rent business will likely be presented as a third segment in future periods when it is material to the Company’s operations.

The Company’s new single-family rental business will likely be presented as a third segment in future periods when it is material to the Company’s operations.

The water and wastewater resource development segment provides water and wastewater services to customers for fees.

The water is provided by the Company using water rights owned or controlled by the Company, and developing infrastructure to divert, treat and

distribute that water and collect, treat, and reuse wastewater.

The water is provided by the Company using water rights owned or controlled by the Company, and developing infrastructure to divert, treat and distribute that water and collect, treat, and reuse wastewater.

The land resource development segment includes all the activities necessary to develop and sell finished lots, which as of August 31, 2022 and 2021, was done exclusively at the Company’s Sky Ranch Master Planned Community.

3 unchanged sentences

Year Ended August 31, 2022

Land development

(In thousands)

Water and wastewater resource development

Land development

Single-family rental

Total revenue

2 unchanged sentences

Total cost of revenue

Segment profit

Year Ended August 31, 2021

Land development

(In thousands)

Water and wastewater resource development

Land development

Single-family rental

Total revenue

2 unchanged sentences

Total cost of revenue

The following table summarizes total assets for the Company’s water and wastewater resource development business and land development business by segment.

The assets consist of water rights and water and wastewater systems in the Company’s water and wastewater resource development segment and land, inventories, and deposits in the Company’s land development segment.

The Company’s other assets (“Corporate”) primarily consist of cash, cash equivalents and restricted cash, equipment, and related party notes receivables.

Segment profit

The following table summarizes the Company’s total assets by segment.

The assets consist of water rights and water and wastewater systems in the Company’s water and wastewater resource development segment;

land, land development costs and deposits in the Company’s land development segment;

and the cost of the homes in the single-family rental line.

The Company’s other assets (“Corporate”) primarily consist of cash, cash equivalents, restricted cash, equipment, and related party notes receivables.

(In thousands)

August 31, 2022

August 31, 2021

(In thousands)

Water and wastewater resource development

Land development

Single-family rental

NOTE 15 – RELATED PARTY TRANSACTIONS

The Rangeview District

On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District joining the South Metro Water Supply Authority (SMWSA).

2 unchanged sentences

At August 31, 2022, the amounts are included in Investments in water and water systems on the Company’s balance sheet.

During the year ended August 31, 2020, the Company, through the Rangeview District, purchased an additional 400 acre-feet of WISE water for $ 0.6 million.

During the year ended August 31, 2022, the Company, through the Rangeview District, purchased 360 acre-feet of WISE water for $ 0.7 million.

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 remain in effect through the end of calendar 2022.

In addition, the Company pays certain system operational and construction costs.

1 unchanged sentence

In fiscal 2021, the Company agreed to fund the construction of the WISE Rangeview pipeline extension through the Rangeview District.

Per the agreement, the Rangeview District will construct the pipeline extension in exchange for $ 0.6 million.

Because the Company is funding the entire project costs, the revenue from the agreement is recognized 100 % by the Company.

As of August 31, 2021, the Company has recognized $ 0.4 million in revenue related to this construction project.

The Company accounts for this revenue over time with progress measured based upon costs incurred to date compared to total expected costs.

As of August 31, 2021, the company has a deferred revenue balance of $ 0.2 million for this agreement.

Per the agreement, the Rangeview District constructed the pipeline extension in exchange for $ 0.6 million.

Because the Company is funding the entire project costs, the revenue from the agreement was recognized 100 % by the Company.

As of August 31, 2022, the Company has recognized the full amount in revenue related to this construction project as it was completed prior to the end of fiscal 2022.

During the years ended August 31, 2022 and 2021, the Company provided $ 0.9 million 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.

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The Company owns certain rights and real property interests which encompass the current boundaries of the Rangeview District.

Sky Ranch Metropolitan District Nos.

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

The current members of the board of directors of the Rangeview District, each Sky Ranch District, and the Sky Ranch CAB consist of three employees of the Company (including the Company’s President) and one independent board member.

The Rangeview District

In 1995, the Company extended a loan to the Rangeview District.

2 unchanged sentences

Beginning in January 2014, the Rangeview District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the Rangeview District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8 % per annum and remains in full force and effect for so long as the Lease remains in effect.

Of the August 31, 2021 balance in Notes receivable - related parties , $ 1.2 million includes borrowings by the Rangeview District of $ 0.7 million and accrued interest of $ 0.5 million.

Of the August 31, 2020 balance in Notes receivable - related parties , $ 1.1 million includes borrowings by the Rangeview District of $ 0.6 million and accrued interest of $ 0.5 million.

Sky Ranch Community Authority Board

The August 31, 2022, balance in notes receivable - related parties, other totaled $ 1.1 million, which included borrowings of $ 1.1 million and accrued interest of less than $ 0.1 million.

During the year ended August 31, 2022, the Rangeview District made payments totaling $ 0.5 million on the notes payable to the Company.

The August 31, 2021, balance in notes receivable - related parties, other totaled $ 1.2 million, which included borrowings of $ 0.7 million and accrued interest of $ 0.5 million.

Sky Ranch CAB

Pursuant to a certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District No.

1 unchanged sentence

5 formed the 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, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property.

In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property.

In November 2017, but effective as of January 1, 2018, the Company entered into a Project Funding and Reimbursement Agreement (PF Agreement) with the CAB for the Sky Ranch property.

1 unchanged sentence

Each advance or reimbursable expense accrues interest at a rate of six percent ( 6 %) per annum.

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

The Company and the Sky Ranch CAB entered into a Facilities Funding and Acquisition Agreement (FFAA) effective November 2017, obligating the company 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 six percent ( 6 %) per annum.

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

As of August 31, 2022, the balance of the Company’s advances for improvements, including interest, net of reimbursements already received from the Sky Ranch CAB, totaled $ 17.2 million.

1 unchanged sentence

The Company submits specific costs for reimbursement to the Sky Ranch CAB which have been certified by an independent third-party.

In addition to the note receivable balance of $ 24.8 million, the Sky Ranch CAB is obligated to refund the Company $ 0.5 million for the reimbursement of development fees from the South Metropolitan Water Supply Authority (“SMSWA”).

These fees will be refunded to the Sky Ranch CAB upon the acceptance of the stormwater infrastructure by SMSWA.

The Company recorded this reimbursable fee in Trade accounts receivable, net.

Sky Ranch Metropolitan District Nos.

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

The current members of the board of directors of the Rangeview District, each Sky Ranch District, and the Sky Ranch CAB consist of four employees of the Company (including the Company’s CEO and CFO) and one independent board member.

Nelson Pipeline Constructors LLC

Through a competitive bidding process, the Sky Ranch CAB awarded Nelson Pipeline Constructors, LLC (Nelson) a contract to construct the wet utility pipelines in Phase 2A of Sky Ranch.

As the project progressed, change orders were approved by the Sky Ranch CAB board upon review by an independent engineer hired by the Sky Ranch CAB to certify costs are reasonable and appropriate for the scope of work contemplated.

During the years ended August 31, 2022 and August 31, 2021, the Sky Ranch CAB paid Nelson $ 8.2 million and $ 0.5 million related to this contract.

Nelson is majority owned by the chair of the Company’s board of directors.

NOTE 16 – EARNINGS PER SHARE

Certain outstanding options are excluded from the diluted earnings per share calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than decrease earnings per share).

No options were excluded for the fiscal year ended August 31, 2021.

The excluded options totaled 50,000 for the fiscal year ended August 31, 2020.

No options were excluded for the fiscal years ended August 31, 2022 and 2021.

(In thousands, except share and per share amounts)

August 31, 2022

August 31, 2021

Basic weighted average common shares

5 unchanged sentences

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 8. Financial Statements and Supplementary Data