What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-11-15 compared with 2022-11-14 · 270 added, 241 removed, 799 unchanged (39% of the section changed)

1 unchanged sentence

Index to Financial Statements and Supplementary Data

Report of Independent Registered Public Accounting Firm ( FORVIS, LLP , Denver, CO , PCAOB ID 686 )

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

Consolidated Balance Sheets

Consolidated Statements of Operations and Comprehensive Income

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

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Report of Independent Registered Public Accounting Firm

To the Shareholders, Board of Directors,

and Audit Committee of

Pure Cycle Corporation

Watkins, Colorado

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Pure Cycle Corporation (the Company) as of August 31, 2023, the related consolidated statements of income, shareholders’ equity, and cash flows for the year ended August 31, 2023, and the related notes (collectively referred to as the financial statements).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2023, and the results of its operations and its cash flows for the year ended August 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

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

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 audit in accordance with the standards of the PCAOB.

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.

As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

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 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 separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition of Lot Sales

As described in Note 2 to the consolidated financial statements, the Company 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 each particular construction phase.

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 year ended August 31, 2023, the Company recognized $6.8 million of lot sale revenue, over time, using the percentage of completion method.

Auditing lot sales revenue recognized under the percentage of complete method required a high degree of auditor judgment due to the use of significant assumptions developed by the management team, most notably the estimated budgeted cost for any particular phase to be developed and the estimated remaining cost to complete the phase being developed.

Our audit procedures related to the revenue recognition of lot sales included the following procedures:

● Obtained an understanding and evaluated the design effectiveness of the Company’s processes over the development of estimated budgeted and remaining cost to complete the phase being developed.

● Evaluated the reasonableness of management’s estimated budgeted and remaining cost to complete the phase being developed by performing the following:

o Inspected contracts with customers

o Tested a sample of actual costs incurred by phase

o Physically observed the development sites

o Interviewed the management team to gain an understanding of the budgeting process and project status

o Performed a lookback analysis by comparing actual costs incurred to budgeted costs on historical, completed phases for similar projects

o Agreed the number of lots to be sold by builder to respective contracts

Collectability of Related-party Note Receivable – Reimbursable Public Improvements

As described in Note 2 and Note 5 to the consolidated financial statements, the Sky Ranch Community Authority Board (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.

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

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, project management fees, and interest accrued on the unpaid balances related to the ongoing development of the Sky Ranch master planned community.

As of August 31, 2023, the Company’s related-party note receivable was approximately $25 million.

Management’s estimate of collectability and whether the Sky Ranch CAB will have sufficient sources of liquidity to support the payment of the note receivable balance involves a long-term projection of the development of the Sky Ranch master planned community, and the future revenues that will be available for repayment of the note.

Auditing this estimate requires complex auditor judgment because of the subjective and long-term nature of the estimation, and the specialized knowledge needed to address the

Our audit procedures related to the collectability of the related party note receivable included the following procedures:

● Obtained an understanding and evaluated the design effectiveness of the Company’s processes over the valuation analysis of the notes receivable.

● Obtained and reviewed a legal analysis of the enforceability of the Company’s right to payment from the Sky Ranch CAB for the reimbursable costs.

● Obtained and reviewed the valuation analysis of notes receivable report of management’s outside vendor and challenged management’s review of the appropriateness of the valuation;

including but not limited to, testing all critical inputs, reasonableness of assumptions applied, and valuation models utilized by the outside vendor.

● Utilized internal valuation specialists to assist with testing the reasonableness of the valuation analysis of notes receivable.

/s/ FORVIS, LLP

We have served as the Company’s auditor since 2022.

Denver, Colorado

November 15, 2023

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of Pure Cycle Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Pure Cycle Corporation (the “Company”) as of August 31, 2022 and 2021, the related consolidated statements of operations and comprehensive income, shareholders' equity, and cash flows for each of the years in the two-year period ended August 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended August 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated balance sheet of Pure Cycle Corporation (the “Company”) as of August 31, 2022, the related consolidated statements of income, shareholders' equity, and cash flows for the year ended August 31, 2022, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2022, and the results of its operations and its cash flows for the year ended August 31, 2022, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The Company's management is responsible for these financial statements.

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

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

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.

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

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.

As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

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) 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.

Revenue Recognition of Lot Sales – Refer to Note 2 of the financial statements

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 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.

These assumptions involved significant management judgement, which affects the revenue recognized by the Company.

How the Critical Audit Matter was Addressed in the Audit

We tested management’s estimates related to revenue recognized.

The following are the primary procedures we performed to address this critical audit matter:

We obtained an understanding of the Company’s process and related controls over revenue recognition.

We evaluated management’s determination of the most representative measure of progress for contracts in which revenue is being recognized over time.

We tested the Company’s assessment of progress and related revenue recognized on a contract basis including performing the following:

Inspecting related contract agreements,

Interviews of project team personnel to obtain an understanding of the status of the projects,

Observation of project sites,

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.

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

As described in Note 2 to the consolidated financial statements, the Company records a public improvement reimbursable receivable when the Company has a legally enforceable right to payment for reimbursable costs incurred to date and when collectability of those reimbursable expenditures incurred to date have been determined to be probable of occurrence.

As of August 31, 2022, the Company’s related party public improvement reimbursable receivable was $17.2 million.

Auditing management’s assessment of existence and collectability of public improvement reimbursable costs involved subjective estimation and complex auditor judgment in determining whether the Company has a legally enforceable right to payment for incurred reimbursable costs and whether the Sky Ranch Community Authority Board (the “Sky Ranch CAB”) has future sources of liquidity which are deemed to be probable of occurrence based upon current and past events to generate sufficient cash flows to support the payment of the existing reimbursable costs incurred as of the balance sheet date.

How the Critical Audit Matter was Addressed in the Audit

The following are the primary procedures we performed to address this critical audit matter:

● 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 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.

● We obtained legal analysis from the Company’s general counsel as to the enforceability of applicable contracts with the Sky Ranch CAB in support of the Company having a legally enforceable right to payment.

● We also considered macroeconomic indicators such as current and projected growth rates and inflation rates to assess the reasonableness of the Sky Ranch CAB’s overall projected revenue base.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provides a reasonable basis for our opinion.

/s/ Plante & Moran, PLLC

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

We served as the Company’s auditor from 2017 to 2022.

Broomfield, Colorado

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Trade accounts receivable, net

Prepaid expenses and other assets

Land under development

Notes receivable - related party, reimbursable public improvements

Income taxes receivable

Prepaid expenses and other assets

Total current assets

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Notes receivable – related parties, including accrued interest

Reimbursable public improvements

Operating leases - right of use assets, less current portion

Reimbursable public improvements and project management fees

Operating leases - right of use assets

Current liabilities:

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SHAREHOLDERS’ EQUITY:

Series B preferred shares par value $ 0.001 per share,

25 million authorized;

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;

Common shares:

par value 1/3 of $.01 per share, 40.0 million authorized;

24,078,720 and 23,980,645 outstanding, respectively

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PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except share information)

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General and administrative expenses

Operating income

Other income:

Operating (loss) income

Other income (expense):

Interest income - related party

Recognition of public improvement reimbursables - related party

Reimbursement of construction costs - related party

Interest income - Investments

Oil and gas royalty income, net

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Balance at August 31, 2022

Stock option exercises

Stock options exercised

Restricted stock grants

Stock granted for services

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Balance at August 31, 2021

Stock option exercises

Stock options exercised

Stock granted for services

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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

Deferred water sales revenue

Prepaid expenses

Other assets and liabilities

Deferred income taxes

Trade accounts receivable

Accounts payable and accrued 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

Other assets and liabilities

Share-based compensation expense

Deferred income taxes

Prepaid expenses

Amortized discount on U.S.

Treasury Bills

Net activity for notes receivable - related party, other

Deferred water sales revenue

Land under development

Deferred lot sale revenues

Taxes payable / receivable

Net activity on note receivable - related party, reimbursable public improvements

Net cash (used) provided by operating activities

Cash flows from investing activities:

Construction costs of single-family rentals

Maturity of held-to-maturity investments in U.S.

Treasury Bills

Purchase of property and equipment

Investments in future development phases at Sky Ranch

Construction costs of single-family rentals

Investments in water and water systems

Purchase of held-to-maturity investments in U.S.

Treasury Bills

Net cash used by investing activities

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Proceeds from option exercises

Payments to contingent liability holders

Payments on notes payable

Payments to contingent liability holders

Net cash provided by financing activities

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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 land under development

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

Transfer of income taxes receivable to income taxes payable

See accompanying Notes to Consolidated Financial Statements

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

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

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.

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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.

Sky Ranch is planned to include a mix of 3,200 single-family and multifamily residential units, including more than 200 single family residential homes owned by the Company for rent, and over two million square feet of commercial, retail, and industrial space.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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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.

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.

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.

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The Company had no cash equivalents as of August 31, 2023 or 2022.

At various times during the fiscal year ended August 31, 2022, the Company’s main operating account exceeded federally insured limits.

At various times during the fiscal years ended August 31, 2023 and 2022, the Company’s main operating account exceeded federally insured limits.

To date, the Company has never suffered a loss due to such excess balance.

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Credit is extended based on the evaluation of a customer’s financial condition and collateral is not required.

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

At August 31, 2023 and August 31, 2022, the Company had no contract assets.

Land Under Development

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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 is expected to repay the Company;

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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.

Restricted cash – The Company has entered into five 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, 2023, the five letters of credit totaled $ 2.5 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.

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 (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 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 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 for the periods ended August 31, 2022 and 2021.

The Company has recorded an allowance for uncollectible accounts in receivables from continuing operations totaling approximately $ 0.1 million for the periods ended August 31, 2023 and 2022.

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.

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Revenue Recognition

The Company disaggregates revenue by major product line as reported on the consolidated statements of operations and comprehensive income.

The Company disaggregates revenue by major product line as reported on the consolidated statements of income.

The Company currently generates revenues through its two business segments.

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Water usage pricing is based on a tiered pricing structure.

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 recognizes wholesale water usage revenues at a point in time upon delivering water to its governmental customers’ end-use customers.

Revenues recognized by Pure Cycle from the sale of “Export Water” and other portions of its “Rangeview Water Supply” off the “Lowry Ranch” 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 under “Rangeview Water Supply and Water System.”

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

For water sales on the Lowry Ranch, 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 Ranch.

See further description of “Export Water,” the “Lowry Ranch,” 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.

O&G operations revenues are recognized at a point in time upon delivering water to its governmental customers’ end-use customers, unless other special arrangements are made.

During the years ended August 31, 2023 and 2022, the Company delivered 313.8 million and 404.9 million gallons of water to customers.

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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.

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.

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During the years ended August 31, 2023 and 2022, Pure Cycle recognized $ 2.5 million and $ 4.1 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.

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 6.

During the years ended August 31, 2023 and 2022, the Company recognized $ 0.5 million and $ 0.8 million of wastewater tap fee revenues.

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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, 2022 and 2021, Pure Cycle recognized $ 0.2 million and $ 0.4 million of special facilities revenue.

For the years ended August 31, 2023 and 2022, Pure Cycle recognized less than $ 0.1 million and $ 0.2 million of special facilities revenue.

As of August 31, 2023 and 2022, Pure Cycle had no contract liabilities related to tap and construction fee/special facility funding revenue.

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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.

Phase 2B broke ground in March 2023, includes a total of 211 lots, of which 194 lots were sold to home builders and 17 lots 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.

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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.

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:

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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).

for Phases 2A and 2B).

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.

1 unchanged sentence

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.

For the years ended August 31, 2023 and 2022, Pure Cycle recognized $ 6.8 million and $ 12.2 million of lot sale revenue related to Phases 2A and 2B at Sky Ranch for recognition of the performance obligations using the percentage-of-completion methods for each builder contract in each phase.

Since development of Sky Ranch began through August 31, 2023, Pure Cycle has received payments totaling $ 26.2 million related to the agreements with builders in Phase 1, $ 18.4 million in Phase 2A, and $ 4.2 million in Phase 2B.

Of the amounts received for Phase 1, as of August 31, 2023, 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, 2023, $ 17.1 million has been recognized as revenue as Phase 2A is approximately 93 % 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.

Of the amounts received for Phase 2B, as of August 31, 2023, $ 3.8 million has been recognized as revenue as Phase 2B is approximately 31 % complete.

As of August 31, 2023, $ 1.3 million of revenue has been deferred related to Phase 2A contracts and less than $ 0.5 million of revenue has been deferred related to Phase 2B contracts.

Deferred revenues will be recognized over time as the Company completes its performance obligations of managing the completion of the public improvements in Phases 2A and 2B, which includes items such as fencing, final utility installation, and landscaping.

Substantial completion of Phase 2A and 2B is expected by the end of fiscal 2024.

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

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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.

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.

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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

For the years ended August 31, 2023 and 2022, the Company recognized less than $ 0.4 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 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.

As the Company was not required to perform on its delivery obligations when the payments were received, recognition of revenue was deferred and was recognized on a straight-line basis over the agreement term.

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.

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.

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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.

For the year ended August 31, 2022, the Company had deferred revenue of $ 0.5 million.

For the year ended August 31, 2023 those drilling activities were completed and the company recognized the $ 0.5 million as revenue.

As of August 31, 2023 and 2022, the Company’s deferred revenues along with the changes in the deferred revenues are as follows:

Year Ended August 31, 2023

(In thousands)

Water and Wastewater Resource Development

Land Development

(In thousands)

Balance at August 31, 2022

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Year Ended August 31, 2022

(In thousands)

Water and Wastewater Resource Development

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Balance at August 31, 2022

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.

Royalty and Other Obligations

Revenues from the sale of Export Water are shown gross of royalties payable to the Land Board.

Revenues from the sale of water on the Lowry Range are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to the Company by the Rangeview District.

Revenues from the sale of Export Water are shown net of royalties payable to the Land Board.

Revenues from the sale of water on the Lowry Ranch are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to the Company by the Rangeview District.

Water revenue from such sales are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.

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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.

Six wells have been drilled within the Company’s mineral interest and placed into service and are producing oil and gas and accruing royalties to the Company.

During the years ended August 31, 2023, and 2022, the Company received $ 0.3 million and $ 0.5 million, in royalties attributable to these wells.

The Company classifies income from lease and royalty payments as Other income in the consolidated statements of operations and comprehensive income as the Company does not consider these arrangements to be an operating business activity.

The Company classifies income from lease and royalty payments as Other income in the consolidated statements of income as the Company does not consider these arrangements to be an operating business activity.

Oil and gas operations, although material in certain years, are deemed a passive activity as the Chief Operating Decision Maker (CODM) does not actively allocate resources to these projects;

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The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense.

At August 31, 2023, the Company did no t have any accrued interest or penalties associated with any unrecognized tax benefits, no r was any interest expense recognized during the year ended August 31, 2023.

The Company does no t have any significant unrecognized tax benefits as of August 31, 2023.

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The Company does no t believe there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense.

At August 31, 2022, the Company did no t have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year ended August 31, 2021.

Earnings per Common Share

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New pronouncements assessed by the Company recently are discussed below:

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASU 2016-13).

Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Companies will now use forward-looking information to better inform their credit loss estimates.

ASU 2016-13 was set to be effective for public companies on January 1, 2021;

however, the FASB delayed the effective date for smaller reporting companies, which for the Company the effective date is September 1, 2023.

The Company continues to monitor economic implications of the COVID-19 pandemic and is analyzing how the adoption of ASU 2016-13 might impact its notes receivable from the Sky Ranch CAB and the Rangeview District, but the Company does not anticipate ASU 2016-12 having a material impact on the Company’s consolidated financial statements.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, "Reference Rate Reform (Topic 848)", as amended by ASU 2021-01 in January 2021, which provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by the cessation of the London Interbank Offered Rate (LIBOR) or by another reference rate expected to be discontinued.

The guidance was effective beginning March 12, 2020 and can be applied prospectively through December 31, 2024.

The adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments — Credit Losses:

Measurement of Credit Losses on Financial Instruments , which changes the impairment model for most financial assets.

The ASU introduces a new credit loss methodology, Current Expected Credit Losses (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

Since its original issuance in 2016, the FASB has issued several updates to the original ASU.

The CECL framework utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for loans, held-to-maturity securities and other receivables at the time the financial asset is originated or acquired.

The expected credit losses are adjusted each period for changes in expected lifetime credit losses.

The methodology replaces the multiple existing impairment methods, which generally require that a loss be incurred before it is recognized.

The Company adopted the guidance on September 1, 2023 on a modified retrospective basis and does not expect a material impact to the Company’s consolidated financial statements

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.

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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, 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 .

As of August 31, 2023, the Company has three non-recurring Level 2 liabilities, both of the SFR Notes and the Lost Creek Note (all 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, 2022, the Company had two non-recurring Level 2 liabilities (the original SFR Note and the Lost Creek Note, all of which are defined in Note 8).

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, 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, 2023 and 2022, 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 impairment charges, as the fair value, based on a discounted cash flow analysis, exceeded the carrying value.

As of August 31, 2023 and 2022, 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 has determined that the contingent portion of the CAA does not have a readily determinable fair value and is immaterial (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.

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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.

During the year ended August 31, 2023, the Company added (1) $ 1.2 million of costs related to its construction projects, (2) incurred net additions of $ 3.2 million toward various water infrastructure projects, and (3) incurred $ 3.5 million in net costs associated with its single-family rental homes resulting in the capitalization of $ 3.6 million of costs.

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 homes 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.

During the year ended August 31, 2022, the Company contracted for construction of 11 additional rental homes to be used in the rental business.

During the year ended August 31, 2023, the Company capitalized nine additional single-family homes, whether detached houses, townhomes or paired homes, which are being utilized in the Company’s single-family rental business.

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

As of August 31, 2023, all 12 completed homes have been rented, with two additional homes in Phase 2A wrapping up construction with estimated delivery dates in the first quarter of fiscal 2024.

The Company has reserved a total of 65 lots in Phase 2 ( 10 of which are in Phase 2A and either completed or nearing completion as of August 31, 2023) of Sky Ranch to build additional rental homes.

Depletion and Depreciation

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Rangeview Water Supply and Water System

The “Rangeview Water Supply” consists of approximately 27,000 acre-feet and is a combination of tributary surface water and groundwater rights along with certain storage rights associated with the Lowry Range, a 26,000 -acre property owned by the Land Board located 16 miles southeast of Denver, Colorado.

As of August 31, 2022, the Company has invested $ 19.9 million in facilities to extend water service to customers located on and off the Lowry Range.

The “Rangeview Water Supply” consists of approximately 27,000 acre-feet and is a combination of tributary surface water and groundwater rights along with certain storage rights associated with the Lowry Ranch, a 26,000 -acre property owned by the Land Board located 16 miles southeast of Denver, Colorado.

As of August 31, 2023, the Company has invested $ 20.0 million in facilities to extend water service to customers located on and off the Lowry Ranch.

The recorded costs of the Rangeview Water Supply include payments to the sellers of the Rangeview Water Supply, design and construction costs and certain direct costs related to improvements to the asset, including legal and engineering fees.

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● 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.

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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.

Pursuant to the Rangeview Water Agreements, the Company owns 11,650 acre-feet of water consisting of 10,000 acre-feet of groundwater and 1,650 acre-feet of average yield surface water which can be exported off the Lowry Range to serve area users (referred to as Export Water).

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 Ranch.

Pursuant to the Rangeview Water Agreements, the Company owns 11,650 acre-feet of water consisting of 10,000 acre-feet of groundwater and 1,650 acre-feet of average yield surface water which can be exported off the Lowry Ranch to serve area users (referred to as Export Water).

The 1,650 acre-feet of surface rights are subject to completion of documentation by the Land Board related to the Company’s exercise of its right to substitute an aggregate gross volume of 165,000 acre-feet of its groundwater for 1,650 acre-feet per year of adjudicated surface water and to use this surface water as Export Water.

Additionally, assuming completion of the substitution of groundwater for surface water, the Company has the exclusive right to provide water and wastewater service, through 2081, to all water users on the Lowry Range and the right to develop an additional 13,685 acre-feet of groundwater and 1,650 acre-feet of adjudicated surface water to serve customers either on or off the Lowry Range.

The Rangeview Water Agreements also provide for the Company to use surface reservoir storage capacity in providing water service to customers both on and off the Lowry Range.

Services on the Lowry Range – Pursuant to the Rangeview Water Agreements, the Company designs, finances, constructs, operates and maintains the Rangeview District’s water and wastewater systems to provide service to the Rangeview District’s customers on the Lowry Range.

Additionally, assuming completion of the substitution of groundwater for surface water, the Company has the exclusive right to provide water and wastewater service, through 2081, to all water users on the Lowry Ranch and the right to develop an additional 13,685 acre-feet of groundwater and 1,650 acre-feet of adjudicated surface water to serve customers either on or off the Lowry Ranch.

The Rangeview Water Agreements also provide for the Company to use surface reservoir storage capacity in providing water service to customers both on and off the Lowry Ranch.

Services on the Lowry Ranch – Pursuant to the Rangeview Water Agreements, the Company designs, finances, constructs, operates and maintains the Rangeview District’s water and wastewater systems to provide service to the Rangeview District’s customers on the Lowry Ranch.

The Company will operate both the water and the wastewater systems during the contract period, and the Rangeview District owns both systems.

After 2081, ownership of the water system will revert to the Land Board, with the Rangeview District retaining ownership of the wastewater system.

Rates and charges for all water and wastewater services on the Lowry Range, including tap fees and usage or monthly fees, are governed by the terms of the Rangeview Water Agreements.

Rates and charges for all water and wastewater services on the Lowry Ranch, including tap fees and usage or monthly fees, are governed by the terms of the Rangeview Water Agreements.

Rates and charges cannot exceed the average of similar rates and charges of three surrounding municipal water and wastewater service providers, which are reassessed annually.

Pursuant to the Rangeview Water Agreements, the Land Board receives a royalty of 10 % or 12 % of gross revenues from the sale or disposition of the water, depending on the nature and location of the purchaser of the water, except that the royalty on tap fees shall be 2 % (other than taps sold for Sky Ranch which are exempt).

The Company also is required to pay the Land Board a minimum annual water production fee of $ 46,000 per year, which offsets earned royalties, and annual rent of $ 8,400 which amount is increased every five years based on the Consumer Price Index for Urban Customers.

The Company also is required to pay the Land Board a minimum annual water production fee of approximately $ 46,000 per year, which offsets earned royalties, and annual rent of $ 8,400 which amount is increased every five years based on the Consumer Price Index for Urban Customers.

The Rangeview District retains 2 % of the remaining revenues, and the Company receives 98 % of the remaining revenues after the Land Board royalty.

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The Company receives 100 % of the Rangeview District’s wastewater tap fees and 90 % of the Rangeview District’s wastewater treatment fees (the Rangeview District retains the other 10 %).

Export Water – The Company owns the Export Water and intends to use it to provide wholesale water and wastewater services to customers off the Lowry Range, including customers of the Rangeview District and other governmental entities and industrial and commercial customers.

Export Water – Pursuant to the Rangeview Water Agreements, the Company owns the Export Water and intends to use it to provide wholesale water and wastewater services to customers off the Lowry Ranch, including customers of the Rangeview District and other governmental entities and industrial and commercial customers.

The Company will own all wholesale facilities required to extend water and wastewater services using its Export Water.

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The Company owns 321 acre-feet of groundwater purchased pursuant to its agreement with Arapahoe County.

The Company plans to use this water in conjunction with its Rangeview Water Supply in providing water to areas outside the Lowry Range.

The Company plans to use this water in conjunction with its Rangeview Water Supply in providing water to areas outside the Lowry Ranch.

The $ 2.9 million of capitalized costs noted in the table Investment in Water and Water Systems above includes the costs to construct various wholesale and special facilities, including a new deep water well, a 500,000 -gallon water tank and pipelines to transport water to the Arapahoe County fairgrounds.

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

Service to Customers Not on the Lowry Range

Service to Customers Not on the Lowry Ranch

Sky Ranch – In 2010, the Company purchased approximately 930 acres of undeveloped land known as Sky Ranch.

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The Sky Ranch O&G Lease is now held by production, entitling the Company to royalties based on production.

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 would have expired during the year ended August 31, 2023, 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.

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

As part of the Sky Ranch acquisition, the Company acquired approximately 930 acres of land, of which approximately 342 acres have been sold to home builders for the purpose of building residential homes or dedicated for schools and public rights of way.

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

August 31, 2023

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Lost Creek land

Net land and mineral interests

Net land and mineral interests held for development

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

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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, 2023, the Company spent $ 7.0 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, 2023, project management fees owed to the Company of $ 0.3 million, and interest income on the outstanding note receivable of $ 1.4 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.

During the year ended August 31, 2023, the Sky Ranch CAB made two payments to the Company on the note totaling $ 0.9 million, which was applied to interest on the note.

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

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Beginning balance

Amounts recognized with release of contingency

Payments received

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The remaining portion of each payment is allocated to the contingent obligation, which is recorded on a net revenue basis.

Since entering the CAA, the Company has repurchased various portions of the CAA obligations, which retained their original priority.

During the years ended August 31, 2022 and 2021, the Company did not make any CAA acquisitions.

Since entering the CAA, the Company has repurchased nearly all of the CAA obligations, which retained their original priority.

During the year ended August 31, 2023 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.

Because of these acquisitions, the Company is currently receiving 99 % 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, 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.

Additionally, as a result of the acquisitions, and the consideration from the cumulative sales of Export Water, at August 31, 2023, the remaining total potential third-party unrecorded contingent obligation is $ 0.2 million, while the recorded portion has been eliminated.

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.

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.

As a result of the CAA obligation acquisition during the year ended August 31, 2023, the Company will be entitled to all but approximately $ 0.2 million of the proceeds from the sale of Export Water after deduction of the Land Board royalty.

NOTE 7 – ACCRUED LIABILITIES

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Other operating payables

Operating lease obligation, current

Property taxes

Operating lease obligation, current

Professional fees

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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

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

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.

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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.

Total principal payments

The SFR Note has the following terms:

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● 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

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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.

On August 30, 2023, PCY Holdings, LLC, a wholly owned subsidiary of the Company, entered a Promissory Note (SFR Note 2) with its primary bank to reimburse amounts expended for the construction of the next 11 single-family rental homes.

The SFR Note 2 has the following terms:

● Initial principal amount of $ 3.0 million

● An interest rate of 7.51 % .

In the event of default, the interest rate on the SFR Note 2 would be increased by adding an additional 5.0 %

● Maturity date of August 30, 2028

● Fifty-nine principal and interest payments each month beginning September 30, 2023 in the amount of $ 21,200 each

● Estimated final principal and interest balloon payment of $ 2.9 million payable on August 30, 2028

● Secured by 11 single-family rental homes

● Required minimum EBITDA of $ 3.0 million, measured annually at each fiscal year end.

Working Capital Line of Credit

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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.

As long as the Company performs on the contracts, which the Company has the full intent and ability to perform on the contracts, the LOC’s will expire at various dates from December 2023 through July 2024.

As of August 31, 2022, these four LOCs totaled $ 2.3 million, which are secured by cash balances maintained in restricted cash accounts at the Company’s bank.

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

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

As long as the Company performs on the contracts, which the Company has the full intent and ability to perform on the contracts, the LC’s will expire at various dates from December 2023 through July 2024.

As of August 31, 2023, these four LCs totaled $ 2.3 million.

During the year ended August 31, 2023, the Company entered into an additional LC for less than $ 0.2 million, which expires one year from date of issuance and can be renewed for periods of one year .

All five LCs are secured by cash balances maintained in restricted cash accounts at the Company’s bank.

The Participating Interests in Export Water Supply are obligations of the Company that have no scheduled maturity dates.

14 unchanged sentences

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.

Effective June 1, 2023, the Company entered into an amendment of its July 1, 2022 operating lease.

This amendment added 5,100 square feet of space to the Company’s more than 11,400 square-feet of office and warehouse space in Watkins, Colorado.

Additionally, the Company entered into a sublease for the additional 5,100 square feet of space.

The July 2022 lease replaced the Company’s prior office and warehouse lease when it moved to a new building in the same facility.

The amended lease has an initial thirteen-month term with payments of approximately $ 11,300 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.

As a result of the amended lease, the Company’s associated right of use asset and liability increased, as noted in the table below.

For the years ended August 31, 2023 and 2022, 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;

6 unchanged sentences

Operating leases - ROU assets

Accrued liabilities

Lease obligations - operating leases, net of current portion

Operating lease liabilities, current

Operating lease liabilities, long term

Total lease liability

13 unchanged sentences

The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan.

As of August 31, 2022, stock awards and awards to purchase 755,500 shares of the Company’s common stock have been made under the 2014 Equity Plan, of which 712,500 remain outstanding.

As of August 31, 2023, restricted stock awards and awards to purchase 718,500 shares of the Company’s common stock have been made under the 2014 Equity Plan, of which 567,800 remain outstanding.

As of August 31, 2023, there were 964,378 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 (2004 Incentive Plan), which expired April 11, 2014.

No additional awards may be granted pursuant to 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.

No additional awards may be granted pursuant to the 2004 Incentive Plan and no granted awards under the plan are outstanding as of August 31, 2023.

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.

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.

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 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.

For the years ended August 31, 2023 and 2022, 30,000 options and 3,333 options expired.

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

5 unchanged sentences

● 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.

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.

For the year ended August 31, 2023, the Company granted no stock options.

The six non-employee Board members were each granted 3,033 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 $ 9.89 .

1 unchanged sentence

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

In addition, 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 $ 13.23 .

10 unchanged sentences

During the years ended August 31, 2023 and 2022, 119,500 and 103,667 options were exercised.

For the options exercised in 2023, the Company had no options exercised for cash and only 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.

The net settlement exercises during the year ended August 31, 2023, resulted in 63,877 shares issued and 55,623 options cancelled in settlement of shares issued.

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.

1 unchanged sentence

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.

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:

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the years ended August 31, 2023 and August 31, 2022:

Number of Options

4 unchanged sentences

Outstanding at August 31, 2022

Net settlement exercised

Outstanding at August 31, 2021

Forfeited / Expired

1 unchanged sentence

Options exercisable at August 31, 2023

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

Outstanding at August 31, 2021

Net settlement exercised

Forfeited / Expired

Outstanding at August 31, 2022

The following table summarizes the activity and value of non-vested options as of and for the years ended August 31, 2023 and August 31, 2022:

Number of Options

1 unchanged sentence

Non-vested options outstanding at August 31, 2022

Forfeited / Expired

Non-vested options outstanding at August 31, 2023

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, 2023 and 2022, the total fair value of options that vested during the year was $ 0.4 million and $ 0.4 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 .

For the year ended August 31, 2023, there were no options granted.

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

For the years ended August 31, 2023 and 2022, share-based compensation expense was $ 0.5 million and $ 0.6 million.

As of August 31, 2023, the Company had unrecognized share-based compensation expenses totaling $ 0.3 million relating to non-vested options that are expected to vest.

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

The weighted average period over which these options are expected to vest is 1.33 years.

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

13 unchanged sentences

August 31, 2022

Sky Ranch homes and Sky Ranch CAB in the aggregate

Melody (DR Horton)

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.

Sky Ranch homes and Sky Ranch CAB in the aggregate

Additionally, as of August 31, 2023, 14 % of the trade accounts receivable balance was owed by National Heritage Academies related to construction activities for the school site managed by the Company on the school’s behalf.

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

NOTE 11 – INCOME TAXES

For the year ended August 31, 2023, Pure Cycle recorded income tax expense of $ 1.5 million, which consisted of current income tax expense of $ 1.2 million and deferred income tax expense of $ 0.3 million.

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

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, 2023, Pure Cycle made Federal and State income tax installments of $ 3.5 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.

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

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.

13 unchanged sentences

August 31, 2022

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

Expected expense (benefit) from federal taxes at statutory rate of 21 % for the years 2023 and 2022

State taxes, net of federal benefit

36 unchanged sentences

Total cost of revenue

Segment profit

Segment (loss) profit

Year Ended August 31, 2022

39 unchanged sentences

The Company has outstanding notes receivable of $ 26.5 million in the aggregate from the Rangeview District and the Sky Ranch CAB, which are related parties, as discussed below:

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

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

5 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.

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, 2023, balance in notes receivable - related parties, other totaled $ 1.5 million, which included borrowings of $ 1.3 million and accrued interest of $ 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, 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.

Sky Ranch CAB

18 unchanged sentences

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.

During the years ended August 31, 2023 and August 31, 2022, the Sky Ranch CAB paid Nelson $ 1.1 million and $ 8.2 million, respectively, related to this contract.

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

11 unchanged sentences

Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

As previously reported, on September 15, 2022, we dismissed Plante & Moran, LLC as our independent registered public accounting firm and appointed FORVIS, LLP as our independent registered public accounting firm for the Company’s fiscal year ending August 31, 2023.

The dismissal of Plante & Moran, LLC and engagement of FORVIS, LLP was approved by the Audit Committee of the board of directors and the full board of directors.

We filed a Current Report on Form 8-K with the Securities and Exchange Commission on September 19, 2022 announcing the change in auditors, which filing is incorporated by reference herein.

Our independent registered accounting firm’s report on the financial statements for each of the past two years did not contain an adverse opinion or a disclaimer of opinion, and was not qualified or modified as to uncertainty, audit scope, or accounting principles.

In connection with the foregoing change in accountants, there was no disagreement of the type described in paragraph (a)(1)(iv) of Item 304 of Regulation S-K or any reportable event as described in paragraph (a)(1)(v) of such Item.

For more information, please refer to the Company’s Current Report on Form 8-K filed on September 19, 2022.

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