PURE CYCLE CORP 10-K

Item 8 – Financial Statements and Supplementary Data Index to Financial Statements and Supplementary Data Page Report of Independent Registered Public Accounting Firm ( FORVIS, LLP , Denver, CO , PCAOB ID 686 ) F-2 Report of Independent Registered Public Accounting Firm (Plante & Moran, PLLC, Broomfield, CO, PCAOB ID 166) F-4 Consolidated Balance Sheets F-5 Consolidated Statements of Income F-6 Consolidated Statements of Shareholders’ Equity F-7 Consolidated Statements of Cash Flows F-8 Notes to Consolidated Financial Statements F-9 ​ ​ ​ ​ F-1 Table of Contents 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. F-2 Table of Contents ​ 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 matter. ​ 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 F-3 Table of Contents 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 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 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 included 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. ​ ​ ​ /s/ Plante & Moran, PLLC We served as the Company’s auditor from 2017 to 2022. Broomfield, Colorado November 14, 2022 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ● ● ● ● ● ● ● ​ ​ ​ ​ F-4 Table of Contents PURE CYCLE CORPORATION CONSOLIDATED BALANCE SHEETS ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands, except shares) ​ August 31, 2023 August 31, 2022 ​ ASSETS: ​ ​ ​ ​ ​ ​ ​ Current assets: ​ ​ ​ Cash and cash equivalents ​ $ 26,012 ​ $ 34,894 ​ Trade accounts receivable, net ​ 1,092 ​ 2,425 ​ Land under development ​ ​ 1,726 ​ ​ — ​ Income taxes receivable ​ ​ 551 ​ ​ — ​ Prepaid expenses and other assets ​ 346 ​ 467 ​ Total current assets ​ 29,727 ​ 37,786 ​ Restricted cash ​ ​ 2,475 ​ ​ 2,328 ​ Investments in water and water systems, net ​ 57,798 ​ 58,763 ​ Construction in progress ​ ​ 5,457 ​ ​ 1,224 ​ Single-family rental units ​ ​ 4,490 ​ ​ 975 ​ Land and mineral rights: ​ ​ ​ ​ ​ ​ Held for development ​ ​ 4,652 ​ 6,773 ​ Held for investment purposes ​ ​ 451 ​ 451 ​ Other assets ​ 1,359 ​ 2,463 ​ Notes receivable – related parties, including accrued interest ​ ​ ​ ​ ​ Reimbursable public improvements and project management fees ​ ​ 24,999 ​ ​ 17,208 ​ Other ​ ​ 1,451 ​ ​ 1,120 ​ Operating leases - right of use assets ​ 357 ​ 138 ​ Total assets ​ $ 133,216 ​ $ 129,229 ​ ​ ​ ​ ​ ​ ​ ​ ​ LIABILITIES: ​ ​ ​ ​ ​ ​ ​ Current liabilities: ​ ​ ​ ​ ​ ​ ​ Accounts payable ​ $ 1,960 ​ $ 849 ​ Accrued liabilities ​ ​ 1,761 ​ ​ 2,029 ​ Accrued liabilities – related parties ​ 1,021 ​ 560 ​ Income taxes payable ​ ​ — ​ ​ 2,530 ​ Deferred lot sale revenues ​ 1,661 ​ 4,275 ​ Deferred water sales revenues ​ 69 ​ 570 ​ Debt, current portion ​ ​ 31 ​ ​ 10 ​ Total current liabilities ​ 6,503 ​ 10,823 ​ Participating interests in export water supply ​ — ​ 323 ​ Debt, less current portion ​ ​ 6,885 ​ 3,950 ​ Deferred tax liability, net ​ 1,352 ​ 1,075 ​ Lease obligations - operating leases, less current portion ​ 242 ​ 62 ​ Total liabilities ​ 14,982 ​ 16,233 ​ Commitments and contingencies ​ ​ ​ ​ ​ ​ ​ SHAREHOLDERS’ EQUITY: ​ ​ ​ ​ ​ ​ ​ 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; 24,078,720 and 23,980,645 outstanding, respectively ​ 80 ​ 80 ​ Additional paid-in capital ​ 174,689 ​ 174,150 ​ Accumulated deficit ​ ( 56,535 ) ​ ( 61,234 ) ​ Total shareholders’ equity ​ 118,234 ​ 112,996 ​ Total liabilities and shareholders’ equity ​ $ 133,216 ​ $ 129,229 ​ ​ See accompanying Notes to Consolidated Financial Statements ​ F-5 Table of Contents ​ PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF INCOME ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended (In thousands, except share information) August 31, 2023 August 31, 2022 Revenues: ​ ​ Metered water usage from: ​ ​ ​ ​ ​ ​ Municipal customers ​ $ 504 ​ $ 440 Commercial customers ​ 3,059 ​ 4,107 Wastewater treatment fees ​ 302 ​ 248 Water and wastewater tap fees ​ 2,991 ​ 4,922 Lot sales ​ 6,815 ​ 12,187 Project management fees ​ ​ 283 ​ ​ 683 Single-family rentals ​ ​ 165 ​ ​ 82 Special facility projects and other ​ 467 ​ 334 Total revenues ​ 14,586 ​ 23,003 ​ ​ ​ ​ ​ ​ ​ Expenses: ​ ​ ​ ​ ​ ​ Water service operations ​ 1,757 ​ 1,910 Wastewater service operations ​ 675 ​ 501 Land development construction costs ​ 1,606 ​ 1,990 Project management costs ​ 286 ​ 176 Single-family rental costs ​ 73 ​ 23 Depletion and depreciation ​ 1,658 ​ 1,740 Other ​ 491 ​ 289 Total cost of revenues ​ 6,546 ​ 6,629 ​ ​ ​ ​ ​ ​ ​ General and administrative expenses ​ 5,470 ​ 5,893 Depreciation ​ 498 ​ 385 Operating (loss) income ​ 2,072 ​ 10,096 ​ ​ ​ ​ ​ ​ ​ Other income (expense): ​ ​ ​ ​ ​ ​ Interest income - related party ​ ​ 1,481 ​ ​ 1,937 Interest income - Investments ​ ​ 1,023 ​ ​ 32 Oil and gas royalty income, net ​ ​ 267 ​ ​ 498 Oil and gas lease income, net ​ ​ 75 ​ ​ 171 Other, net ​ ​ 1,508 ​ ​ 61 Interest expense, net ​ ​ ( 206 ) ​ ​ ( 90 ) Income from operations before income taxes ​ 6,220 ​ 12,705 Income tax expense ​ 1,521 ​ 3,086 Net income ​ $ 4,699 ​ $ 9,619 ​ ​ ​ ​ ​ ​ ​ Earnings per common share - basic and diluted ​ ​ ​ ​ ​ ​ Basic ​ $ 0.20 ​ $ 0.40 Diluted ​ $ 0.19 ​ $ 0.40 Weighted average common shares outstanding: ​ ​ ​ ​ ​ ​ Basic ​ 24,031,068 ​ ​ 23,953,740 Diluted ​ 24,106,067 ​ ​ 24,155,990 ​ ​ ​ ​ ​ ​ ​ ​ See accompanying Notes to Consolidated Financial Statements ​ ​ F-6 Table of Contents PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended August 31, 2023 ​ ​ Preferred Stock ​ Common Stock ​ Additional ​ Accumulated ​ ​ ​ (in thousands, except shares) Shares Amount Shares Amount Paid-in Capital Deficit ​ Total Balance at August 31, 2022 432,513 $ — 23,980,645 $ 80 $ 174,150 $ ( 61,234 ) $ 112,996 Stock options exercised ​ — ​ ​ — ​ 63,877 ​ ​ — ​ ​ — ​ ​ — ​ ​ — Restricted stock grants ​ — ​ ​ — ​ 16,000 ​ ​ — ​ ​ 111 ​ ​ — ​ ​ 111 Stock granted for services ​ — ​ — 18,198 ​ — ​ 180 ​ — ​ 180 Share-based compensation — ​ — — ​ — ​ 248 ​ — ​ 248 Net income — ​ — — ​ — ​ — ​ 4,699 ​ 4,699 Balance at August 31, 2023 432,513 ​ $ — 24,078,720 ​ $ 80 ​ $ 174,689 ​ $ ( 56,535 ) ​ $ 118,234 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended August 31, 2022 ​ ​ Preferred Stock ​ Common Stock ​ Additional ​ Accumulated ​ ​ ​ (in thousands, except shares) Shares Amount Shares Amount Paid-in Capital Deficit ​ Total Balance at August 31, 2021 432,513 $ — 23,916,633 $ 80 $ 173,513 $ ( 70,853 ) $ 102,740 Stock options exercised ​ — ​ ​ — ​ 52,012 ​ ​ — ​ ​ 34 ​ ​ — ​ ​ 34 Stock granted for services ​ — ​ — 12,000 ​ — ​ 159 ​ — ​ 159 Share-based compensation — ​ — — ​ — ​ 444 ​ — ​ 444 Net income ​ — ​ ​ — ​ — ​ ​ — ​ ​ — ​ ​ 9,619 ​ ​ 9,619 Balance at August 31, 2022 432,513 ​ $ — 23,980,645 ​ $ 80 ​ $ 174,150 ​ $ ( 61,234 ) ​ $ 112,996 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ See accompanying Notes to Consolidated Financial Statements ​ F-7 Table of Contents PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ (In thousands) August 31, 2023 August 31, 2022 ​ Cash flows from operating activities: ​ ​ ​ Net income ​ $ 4,699 ​ $ 9,619 ​ Adjustments to reconcile net income to net cash used by operating activities: ​ ​ ​ ​ ​ ​ ​ Depreciation and depletion ​ ​ 2,156 ​ ​ 2,125 ​ Trade accounts receivable ​ 1,333 ​ ( 893 ) ​ Accounts payable and accrued liabilities ​ 1,262 ​ ( 2,362 ) ​ Other assets and liabilities ​ 874 ​ ​ ( 83 ) ​ Share-based compensation expense ​ 539 ​ 603 ​ Deferred income taxes ​ 277 ​ ( 540 ) ​ Prepaid expenses ​ 121 ​ ( 59 ) ​ Amortized discount on U.S. Treasury Bills ​ ​ ( 256 ) ​ ​ — ​ Net activity for notes receivable - related party, other ​ ​ ( 331 ) ​ ​ 43 ​ Deferred water sales revenue ​ ( 501 ) ​ ​ 160 ​ Land under development ​ ( 2,564 ) ​ 608 ​ Deferred lot sale revenues ​ ( 2,614 ) ​ 2,280 ​ Taxes payable / receivable ​ ​ ( 3,081 ) ​ ​ ( 1,633 ) ​ Net activity on note receivable - related party, reimbursable public improvements ​ ​ ( 4,253 ) ​ 7,586 ​ Net cash (used) provided by operating activities ​ ( 2,339 ) ​ 17,454 ​ Cash flows from investing activities: ​ ​ ​ ​ ​ ​ ​ Maturity of held-to-maturity investments in U.S. Treasury Bills ​ ​ 15,256 ​ ​ — ​ Purchase of property and equipment ​ ( 394 ) ​ ( 157 ) ​ Investments in future development phases at Sky Ranch ​ ​ ( 1,686 ) ​ ​ ( 849 ) ​ Construction costs of single-family rentals ​ ​ ( 3,480 ) ​ ​ ( 143 ) ​ Investments in water and water systems ​ ( 3,937 ) ​ ( 5,519 ) ​ Purchase of held-to-maturity investments in U.S. Treasury Bills ​ ​ ( 15,000 ) ​ ​ — ​ Net cash used by investing activities ​ ( 9,241 ) ​ ( 6,668 ) ​ Cash flows from financing activities: ​ ​ ​ ​ ​ ​ ​ Proceeds from notes payable ​ 3,000 ​ 4,000 ​ Proceeds from option exercises ​ ​ — ​ ​ 34 ​ Payments on notes payable ​ ​ ( 44 ) ​ ​ ( 40 ) ​ Payments to contingent liability holders ​ ( 111 ) ​ ( 2 ) ​ Net cash provided by financing activities ​ 2,845 ​ 3,992 ​ Net change in cash, cash equivalents and restricted cash ​ ( 8,735 ) ​ 14,778 ​ Cash, cash equivalents and restricted cash – beginning of period ​ 37,222 ​ 22,444 ​ Cash, cash equivalents and restricted cash – end of period ​ $ 28,487 ​ $ 37,222 ​ Cash and cash equivalents ​ $ 26,012 ​ $ 34,894 ​ Restricted cash ​ ​ 2,475 ​ ​ 2,328 ​ Total cash, cash equivalents and restricted cash ​ $ 28,487 ​ $ 37,222 ​ ​ ​ ​ ​ ​ ​ ​ ​ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION ​ Cash paid for income taxes ​ $ 947 ​ $ 5,260 ​ Cash paid for interest ​ $ 142 ​ $ 55 ​ SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: ​ Change in reimbursable public improvements included in accounts payable and accrued liabilities ​ $ 727 ​ $ 536 ​ Issuance of stock for compensation ​ $ 111 ​ $ 159 ​ Change in investments in water and water systems included in accounts payable and accrued liabilities ​ $ 808 ​ $ 157 ​ ​ See accompanying Notes to Consolidated Financial Statements F-8 Table of Contents PURE CYCLE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2023 and 2022 NOTE 1 – ORGANIZATION Pure Cycle Corporation (Company or Pure Cycle) was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008. Pure Cycle currently operates in two reportable business segments: (i) wholesale water and wastewater services and (ii) land development. Pure Cycle launched its single-family rental business which constructs and leases single-family homes in its Sky Ranch neighborhood. Management believes the single-family rental business will likely become its third operating segment, once material. ​ Since its inception, Pure Cycle has accumulated valuable water and land interests and has developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems which serve domestic, commercial and industrial customers in the Denver metropolitan region. Pure Cycle’s land assets are located along the bustling and high-profile I-70 corridor in the Denver metropolitan region. Through its land development segment, Pure Cycle is developing Sky Ranch, a 930 -acre master planned community located four miles south of Denver International Airport. Sky Ranch is planned to include a mix of 3,200 single-family and multifamily residential units, 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 Principles of Consolidation The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its two wholly-owned and controlled subsidiaries, PCY Holdings, LLC and PCYO Home Rentals, LLC. Intercompany accounts and transactions have been eliminated in consolidation. Coronavirus (COVID-19) Since early 2020, COVID-19 has caused substantial disruption in international and U.S. economies and markets. The impacts of COVID-19 are continuing but have lessened as vaccines have become widely available in the U.S, although there have been periodic increases in the number of cases in the U.S. due to the spread of COVID-19 variants. COVID-19 has resulted in government restrictions of various degrees and effective at various times, including stay-at-home orders, bans on travel, limitations on the size of gatherings, limitations on the operations of businesses deemed non-essential, closures of work facilities, schools, public buildings and businesses, cancellation of events (including entertainment events, conferences, and meetings), quarantines, mask mandates and social distancing measures. Due to the outbreak of COVID-19 and related restrictions, Phase 2A of Sky Ranch was delayed due to the extended time taken to approve the platted lots through the county government. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for certain items such as revenue recognition, reimbursable costs and expenses, costs of revenue for lot sales, share-based compensation, deferred tax asset valuation, and the useful lives and recoverability of long-lived assets. Actual results could differ from those estimates. 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 F-9 Table of Contents management fees, and interest income are deemed probable. Based on this Pure Cycle recognizes these items in the consolidated financial statements as they occur. The timing and amount of potential payments have been estimated based on growth trends utilizing current assessed values and historic growth rates which have been projected to current and contracted lot sales through the contractual obligation period. ​ Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company had no cash equivalents as of August 31, 2023 or 2022. 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. Contract Asset Contract assets reflect revenue which has been earned but not yet invoiced. Contract assets are transferred to receivables when the Company has the right to bill such amounts and they are invoiced. Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer’s financial condition and collateral is not required. At August 31, 2023 and August 31, 2022, the Company had no contract assets. Land Under Development The land under development account primarily includes land stated at cost which Pure Cycle is developing and plans to sell. Pure Cycle began developing its Sky Ranch property in 2017. Pure Cycle capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development at Sky Ranch that meet the Company’s capitalization criteria for improvements to a lot. These costs are capitalized as incurred. The Company uses the specific identification method for purposes of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sold. Prior to fiscal 2021, costs included in the land under development accounts included common area costs Pure Cycle funded through the Sky Ranch CAB when collectability of such reimbursable costs was not considered probable. However, in fiscal 2021, because the Company believes these costs have and will be reimbursed by the Sky Ranch CAB, those costs are now reflected in a note receivable account from the Sky Ranch CAB since management believes collectability is deemed probable due to increases in mill levies resulting from remaining phases being in a different taxing district, the increased tax base resulting from completed homes and lots under contract, as well as other relevant factors impacting the Sky Ranch CAB’s future liquidity. As a result the land under development accounts primarily contain costs directly attributable to lots to be sold, which will not be reimbursed, but will be expensed as land cost of sales as lots are being completed and sold on a lot-by-lot basis. The Company measures land under development costs held for sale at the lower of the carrying value or net realizable value. In determining net realizable value, the Company primarily relies upon the most recent comparable sales prices. If recent sales prices are not available, the Company will consider several factors, including, but not limited to, current market conditions, nearby recent sales transactions, and market analysis studies. If the net realizable value is lower than the current carrying value, the land is written down to its net realizable value. Notes Receivable – Sky Ranch CAB 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. The Sky Ranch CAB is expected to repay the Company; it has made multiple payments to date to the Company. The Company has determined the reimbursement of public improvement costs, for which the Company has an enforceable right to payment for costs incurred, are probable of collection. Therefore, the Company will recognize the reimbursable public improvements costs incurred to date at Sky Ranch in the Notes receivable – related party, reimbursable public improvements account on the accompanying consolidated balance sheet. F-10 Table of Contents Concentration of Credit Risk and Fair Value Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. From time to time, the Company places its cash in money market instruments, certificates of deposit and U.S. government treasury obligations. To date, the Company has not experienced significant losses on any of these investments. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant input to determine where within the fair value hierarchy the measurement falls. The estimated fair value measurements in Note 2 are based on Level 2 of the fair value hierarchy. Cash and cash equivalents – The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held. These securities primarily include balances in the Company’s operating and savings accounts. The carrying amount of cash and cash equivalents approximate fair value. 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 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. 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 currently approximate market rates. Accounts payable – The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments. Debt – The carrying amounts of the Company’s debt approximate fair value because the rates are floating rates based on the prime lending rate, which approximates market rates. 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 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. Recoverability of Long-Lived Assets The Company evaluates its long-lived assets for impairment if the Company determines events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. 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. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. During the years ended August 31, 2023 and 2022, the Company did no t identify any indications of impairment loss. ​ Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, if applicable, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years . The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. F-11 Table of Contents The Company depletes its water assets that are being utilized based on units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees. Revenue Recognition 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. Revenues are derived through its wholesale water and wastewater business and through the sale of developed land primarily for residential lots, both of which businesses are described below. Water and Wastewater Resource Development Segment Revenues Pure Cycle generates revenues through its wholesale water and wastewater business predominantly from the items described below. Because these items are separately delivered and distinct, Pure Cycle accounts for each of the items separately. Monthly water usage and wastewater treatment fees – Pure Cycle provides water and wastewater services to customers, for which the customers are charged monthly usage fees. Water usage fees are assessed to customers based on actual metered usage each month plus a base monthly service fee assessed per single-family equivalent (SFE) unit served. One SFE is a customer, whether residential, commercial or industrial, that imparts a demand on the Company’s water or wastewater systems similar to the demand of a family of four persons living in a single-family house on a standard-sized lot. Water usage pricing is based on a tiered pricing structure. 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 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 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. Of this, 64 % and 70 % was sold to O&G operators. Pure Cycle recognizes wastewater treatment revenues monthly based on a flat monthly fee and actual usage charges. The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview District. Costs of delivering water and providing wastewater service to customers are recognized as incurred. Water and wastewater tap fees and construction fees/special facility funding – Pure Cycle has various water and wastewater service agreements, components of which may require the payment of tap fees. A tap constitutes a right to connect to the wholesale water and wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may make a physical tap into the wholesale line(s) to connect its property to Pure Cycle’s water and/or wastewater systems. The right stays with the property upon sale or transfer. Pure Cycle has no obligation to physically connect the property to the lines. Once connected to the water and/or wastewater systems, the customer has live service and the ability to receive metered water deliveries from Pure Cycle’s system and send wastewater into Pure Cycle’s system. Thus, once the connection right is granted, the customer has full control of the connection right as it can obtain all the benefits from this right. Therefore, management has determined that tap fees are separate and distinct performance obligations that are recognized at a point in time. Pure Cycle recognizes water and wastewater tap fee revenues when Pure Cycle grants the right for the customer to connect to the water or wastewater service line to obtain service, and the customer pays the tap fee. During the years ended August 31, 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 F-12 Table of Contents 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. Pure Cycle recognizes construction fees, including fees received to construct “special facilities,” over time as the construction is completed because the customer is generally able to use the property improvement to enhance the value of other assets during the construction period. Special facilities are facilities that enable water to be delivered to a single customer and are not otherwise classified as a typical wholesale facility or retail facility. Temporary infrastructure required prior to construction of permanent water and wastewater systems or transmission pipelines to transfer water from one location to another are examples of special facilities. 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, 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. Consulting fees – Pure Cycle can receive, typically monthly, fees from customers including municipalities and area water providers, for contract operations services. Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed. For the years ended August 31, 2023 and 2022, Pure Cycle recognized less than $ 0.1 million and $ 0.1 million of consulting fees. These fees are classified in Special facility projects and other income. Land Development Segment Revenues Pure Cycle generates revenues through its land development business predominantly from the sources described below. Because these items are separately delivered and distinct, Pure Cycle accounts for each of the items separately. Sale of finished lots – Pure Cycle acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch. Pure Cycle has entered into multiple purchase and sale agreements with home builders pursuant to which Pure Cycle agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch. Pure Cycle began Phase 1 in March 2018 and broke ground on Phase 2 in February 2021. As of August 31, 2023, Phase 1 is complete and includes 509 lots, of which 505 were sold to three homebuilders and the remainder were retained by Pure Cycle for use in its single-family rental business. Phase 2 is planned to have 850 lots ( 785 under contract with homebuilders and 65 retained for use in the single-family rental business) and is being developed in four subphases (referred to as Phase 2A, 2B, 2C and 2D). Phase 2A broke ground in February 2021, includes a total of 229 lots, of which 219 lots were sold to home builders and 10 were retained for use in the single-family rental business. 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. Pure Cycle sells lots at Sky Ranch pursuant to distinct agreements with each builder. These agreements require the same level of construction for all lots and builders, the primary difference in the agreements is the timing of payments and timing of the transfer of ownership of the lots. Pure Cycle’s lot sales agreements require payments under one of the two following structures: (1) Upon the substantial completion of the finished lot, whereby the builder pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon substantial completion of the finished lot (typically subject to completion of related public improvements by the Sky Ranch CAB) that is permit ready. Depending on timing of delivery of the finished lot to the builder, Pure Cycle may still have unfulfilled contract performance obligations related to the timing of completion of public improvements and other amenities. If these unfulfilled obligations are deemed other than insignificant, the company follows format 2 and recognizes revenue over time based on the estimated progress using overall costs incurred to date compared to F-13 Table of Contents total estimated costs from the period of time the lot is delivered until the remaining performance obligations are substantially completed. (2) As certain construction milestones are achieved, which include payments due as follows pursuant to a lot development agreement with the builder: (i) payment upon the delivery of platted lots (which requires Pure Cycle to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. Typically these lots are also subject to completion of related public improvements by the Sky Ranch CAB after all three payments have been received. Under the first payment structure, the builder (i.e., the customer) takes control/ownership of the lot at the time payment is received and the lot is substantially complete. Under the second payment structure, the builder takes control/ownership at the first closing, or delivery of the platted lots. Under both payment scenarios Pure Cycle has subsequent improvements to make to the lot to either improve the builder’s lot and/or complete its performance obligations of managing the public improvements required to complete the neighborhood, which includes items such as fencing, final utility installation, and landscaping. Because Pure Cycle has obligations remaining under the contracts, Pure Cycle accounts for lot sales revenue over time as construction progresses, with progress measured based upon costs incurred to date compared to total expected costs for a particular construction phase (i.e. for 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. Pure Cycle does not have any material significant payment terms as all payments are expected to be received within a few months after invoicing. Pure Cycle adopted the practical expedient for financing components and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year . For the years ended August 31, 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. 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. Public improvements are items that are not associated with an individual lot or home, but can be used by the public, whether living in Sky Ranch or not. Public improvements include items such as roads, curbs, sidewalks, landscaping, and parks but also includes items such as water distribution systems, sewer collection systems, storm water systems, and drainage improvements. These public improvements are constructed pursuant to design standards specified by local governmental jurisdictions including the Sky Ranch Metropolitan District Nos. 1, 3, 4, 5, 6, 7 and 8 (collectively, the Sky Ranch Districts), the Sky Ranch CAB, Arapahoe County, and the local stormwater authority and, after inspection and acceptance, are turned over to the applicable governmental entity to own, operate and maintain. Pursuant to agreements between the Company and the Sky Ranch CAB (see Note 15), the Company is obligated to provide advance funding to the Sky Ranch CAB related to the construction of these public improvements pursuant to a note. Because public improvements are utilized by more than just a single home, the costs are typically reimbursed through property tax assessments, fees, and other funding mechanisms like municipal bonds. Although the Company is developing Sky Ranch in phases, the Sky Ranch CAB collects taxes and fees for the entire community and those funds are available to repay the Company regardless of the location of the public improvement (except for certain regional public improvements). Additional information about the amounts spent on public improvements as well as amounts repaid are further detailed in Note 5. F-14 Table of Contents The Company evaluates the notes receivable - related parties, reimbursable public improvements for indicators of impairment each reporting period and an impairment charge will be incurred for any amounts deemed uncollectible. The note receivable from the Sky Ranch CAB bears an interest rate of six percent ( 6 %) per annum until paid. To date no impairment has been recorded for the reimbursable amounts on the note receivable. Project management services – Pursuant to two Service Agreements for Project Management Services (Project Management Agreements) with the Sky Ranch CAB, Pure Cycle acts as the project manager and provides the services required to deliver the Sky Ranch CAB-eligible public improvements (see discussion of reimbursable public improvements above and in Note 5), including but not limited to Sky Ranch CAB compliance; planning design and approvals; project administration; contractor agreements; and construction management and administration. Pure Cycle is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing. Pure Cycle receives a project management fee of five percent ( 5 %) of actual qualifying construction costs of Sky Ranch CAB-eligible public improvements. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, 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. Other costs incurred by Pure Cycle that are not directly related to the construction of Sky Ranch CAB-eligible public improvements are included in the land under development account and accounted for in the same manner as construction support activities as described below. Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have sufficient funds from tax assessment, fees or the issuance of municipal bonds in an amount sufficient to reimburse Pure Cycle for all or a portion of advances provided or expenses incurred for construction of public improvements that qualify as reimbursable expenses. Historically, the recognition of project management revenue was deferred as the payment was deemed contingent on a sufficient tax base and/or the issuance of municipal bonds for collectability to be considered probable. Due to an approved increase in the mill levy due to the remaining phases being in a different taxing district, the completion of Phase 1, higher than projected assessed home values, and the increase in lots under contract, Pure Cycle has determined that it is probable that the Sky Ranch CAB reimbursement to Pure Cycle for its project management fees, for which service has previously been provided is collectible. Additional information on the Project Management fees and treatment of the related receivables is included in Note 5 below. Construction support activities – Pure Cycle performs certain construction activities at Sky Ranch. The activities performed include construction and maintenance of the grading erosion and sediment control, best management practices and other construction-related services. For Phase 1, these activities are invoiced to the Sky Ranch CAB upon completion and will be recognized in the land under development account or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured. The Phase 2 activities are invoiced based on an agreement between Pure Cycle and the Sky Ranch CAB. The amounts are invoiced and recognized as special facility projects revenue and is a component in trade accounts receivable, net. For the years ended August 31, 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 As noted above, the Company recognizes certain lot sales over time as construction activities progress for lots sold pursuant to lot development agreements and not when payment is received. Based on this, the Company will frequently receive milestone payments before revenue can be recognized (i.e. prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company recording deferred revenue. The Company recognizes this revenue into income as 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. During fiscal 2022, the Company received up-front payments from an oil and gas industrial customer for future drilling needs. The customer paid deposits on three different occasions for an estimated 25 % of future water usage to reduce future cash payments when drilling. The customer drilled, during fiscal 2022, wells utilizing two of the three deposits paid. For the year ended August 31, 2022, the Company had deferred revenue of $ 0.5 million. For the year ended August 31, 2023 those drilling activities were completed and the company recognized the $ 0.5 million as revenue. F-15 Table of Contents 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 ​ Total Balance at August 31, 2022 ​ $ 570 ​ $ 4,275 ​ $ 4,845 Revenue recognized ​ ​ ( 576 ) ​ ​ ( 7,041 ) ​ ​ ( 7,617 ) Revenue deferred ​ ​ 75 ​ ​ 4,427 ​ ​ 4,502 Balance at August 31, 2023 ​ $ 69 ​ $ 1,661 ​ $ 1,730 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended August 31, 2022 (In thousands) ​ Water and Wastewater Resource Development ​ Land Development ​ Total Balance at August 31, 2021 ​ $ 410 ​ $ 1,995 ​ $ 2,405 Revenue recognized ​ ​ ( 791 ) ​ ​ ( 11,434 ) ​ ​ ( 12,225 ) Revenue deferred ​ ​ 951 ​ ​ 13,714 ​ ​ 14,665 Balance at August 31, 2022 ​ $ 570 ​ $ 4,275 ​ $ 4,845 ​ 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 income. ​ Royalty and Other Obligations 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. Oil and Gas Lease Payments 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 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 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; therefore, this is not classified as a reportable segment. Share-based Compensation The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company recognizes share-based compensation costs as expenses over the applicable vesting period of the stock award using the straight-line method. The compensation costs to be expensed are measured at the grant date based on the fair value of the award. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation. The impact on the income tax provision for the granting and exercise of stock options during each of the years ended August 31, 2023 and 2022, was immaterial. During the years ended August 31, 2023 and 2022, the Company recognized $ 0.5 million and $ 0.6 million of share-based compensation expense. F-16 Table of Contents Income Taxes 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. The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating losses and tax credit carryforwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal 2018 through fiscal 2023. The Company does no t believe there will be any material changes in its unrecognized tax positions over the next 12 months. Earnings per Common Share Basic earnings per common share is computed by dividing net income by the weighted-average number of shares outstanding during each period. Diluted earnings per share is computed similarly but reflects the potential dilution that would occur if dilutive options were exercised and all unvested share-based payment awards were vested. Certain outstanding options are excluded from the diluted earnings per share calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than decrease earnings per share). ​ Recently Issued Accounting Pronouncements The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its consolidated financial statements and to ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below: 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. F-17 Table of Contents ​ Reclassifications The Company has reclassified certain prior year information to conform to the current year presentation. ​ ​ ​ ​ ​ NOTE 3 – FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant inputs to determine the level in the fair value hierarchy which is applicable to the fair value measure. Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market. As of August 31, 2023 and August 31, 2022, the Company had no recurring Level 1 assets or liabilities. Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. As of August 31, 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, 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 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. There were no transfers between Level 1, 2 or 3 categories during the years ended August 31, 2023 or 2022. ​ F-18 Table of Contents NOTE 4 – WATER AND LAND ASSETS Investment in Water and Water Systems The Company’s water and water systems consist of the following: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ August 31, 2023 ​ August 31, 2022 ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ Depreciation ​ ​ ​ ​ Depreciation (In thousands) Costs and Depletion Costs and Depletion Rangeview water system ​ $ 20,020 ​ $ ( 2,813 ) ​ $ 19,881 ​ $ ( 2,099 ) Rangeview water supply ​ ​ 15,084 ​ ​ ( 18 ) ​ ​ 14,809 ​ ​ ( 17 ) Water supply – Other ​ 7,612 ​ ( 2,064 ) ​ 7,612 ​ ( 1,739 ) Sky Ranch water rights and other costs ​ 7,764 ​ ( 1,487 ) ​ 7,764 ​ ( 1,280 ) Sky Ranch pipeline ​ 5,740 ​ ( 1,175 ) ​ 5,740 ​ ( 984 ) Lost Creek water supply ​ 7,328 ​ — ​ 7,041 ​ — Fairgrounds water and water system ​ 2,900 ​ ( 1,503 ) ​ 2,900 ​ ( 1,415 ) Wild Pointe service rights ​ 1,632 ​ ( 1,222 ) ​ 1,632 ​ ( 1,082 ) Totals ​ 68,080 ​ ( 10,282 ) ​ 67,379 ​ ( 8,616 ) Net investments in water and water systems ​ $ 57,798 ​ ​ ​ ​ $ 58,763 ​ ​ ​ ​ Construction in Progress ​ The construction in progress account represents costs incurred on various construction projects currently underway that as of the balance sheet date have not been completed and placed into service. The construction in progress account consists primarily of water facilities being constructed which the Company anticipates will be placed in service during the next twelve months. During the year ended August 31, 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, 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 ​ During the years ended August 31, 2023 and 2022, the Company recorded an immaterial amount of depletion charges, which relates entirely to the Rangeview Water Supply (as defined below). ​ During the years ended August 31, 2023 and 2022, the Company recorded $ 2.2 million and $ 2.1 million of depreciation expense, which include $ 0.5 million and $ 0.3 million of depreciation expense for other equipment not included in the table above. ​ ​ F-19 Table of Contents The following table presents the estimated useful lives by asset class used for calculating depreciation and depletion charges: ​ ​ ​ ​ Assets Classes Estimated Useful Lives Wild Pointe Units of production depletion Rangeview water supply Units of production depletion Lost Creek water supply Units of production depletion Rangeview, Sky Ranch and WISE water systems 30 years ECCV wells 10 years Furniture and fixtures 5 years Trucks and heavy equipment 5 years Water system general (pumps, valves, etc.) 5 years Computers 3 years Water equipment 3 years Software 1 year ​ 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 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. The Company acquired the Rangeview Water Supply in 1996 pursuant to the following agreements: ● 1996 Amended and Restated Lease Agreement between the Land Board and the Rangeview District, which was superseded by the 2014 Amended and Restated Lease Agreement, dated July 10, 2014 (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 Ranch; ● 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 Ranch to supply water to nearby communities; and ● 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 Ranch. The Lease, the Lowry Service Agreement, the Export Agreement, and the Lowry Wastewater Agreement are collectively referred to as the Rangeview Water Agreements. In August 2019, the Company acquired 300 acre-feet of fully consumptive surface water in the Lost Creek Designated Ground Water Basin. In June 2022, the Company acquired 370 acre-feet of fully consumptive surface water through the acquisition of three wells located in the Lost Creek Designated Ground Water Basin (both acquisitions are referred to collectively as the Lost Creek Water). The Lost Creek Water is currently adjudicated for municipal/industrial use, and the Company has filed an application with the Colorado water court to change the use of the water to augment its municipal/industrial water supplies at the Lowry Ranch. 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. F-20 Table of Contents 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 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 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 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. The Land Board does not receive a royalty on wastewater fees. 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 – 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. The Company anticipates contracting with third parties for the construction of these facilities. If the Company sells Export Water, the Company is required to pay royalties to the Land Board ranging from 10 % to 12 % of gross revenues, except that the royalty on tap fees shall be 2 % (other than taps sold for Sky Ranch which are exempt). WISE The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the ten members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years. During each of the years ended August 31, 2023 and 2022, the Company made less than $ 0.1 million in capital investments in WISE. Capitalized terms used under this caption are defined in Note 8 below. The Arapahoe County Fairgrounds Water and Water System 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 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. F-21 Table of Contents The Lost Creek Water Supply On June 27, 2022, Pure Cycle acquired 370 acre-feet of designated groundwater rights located in the Lost Creek basin in Weld County Colorado. The acquisition included three water wells and related well permits and structures. The total purchase price was $ 3.7 million, which was allocated entirely to the water rights as the other assets were deemed to not have determinable values. This acquisition of Lost Creek water was accounted for as an asset acquisition. ​ In August 2019, the Company purchased 150 acre-feet of ditch water rights, 300 acre-feet of designated groundwater rights, 70 acre-feet of deep groundwater rights and 260 acres of land in the Lost Creek Basin in Weld County. Total consideration for the land, water and related costs was $ 3.5 million. The Company allocated the acquisition cost to the land and water rights based on estimates of each asset’s respective fair value at the acquisition date. The Lost Creek land and water acquisition was accounted for as an asset acquisition. 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. The property includes the rights to approximately 830 acre-feet of water, which the Company is using in conjunction with its Rangeview Water Supply to provide water service to the Rangeview District’s customers at Sky Ranch. The $ 13.5 million of capitalized costs includes the costs to acquire the water rights and to construct various facilities. Total consideration for the land, water, and acquisition related costs and fees was $ 7.6 million. The Company allocated the total acquisition cost to the land and water rights based on estimates of each asset’s respective fair value at the acquisition date. The purchase of the Sky Ranch land and water was accounted for as an asset acquisition. In June 2017, the Company completed and placed into service its Sky Ranch pipeline, which cost $ 5.7 million to construct, connecting its Sky Ranch water system to the Rangeview District’s water system. Wild Pointe – On December 15, 2016, the Rangeview District, acting by and through its water activity enterprise, and Elbert & Highway 86 Commercial Metropolitan District, a quasi-municipal corporation and political subdivision of the State of Colorado, acting by and through its water enterprise (Elbert 86 District), entered into a Water Service Agreement (Wild Pointe Service Agreement). Subject to the conditions set forth in the Wild Pointe Service Agreement and the terms of the Company’s engagement by the Rangeview District as the Rangeview District’s exclusive service provider, the Company acquired, among other things, the exclusive right to provide water services to residential and commercial customers in the Wild Pointe development, located in unincorporated Elbert County, Colorado, for $ 1.6 million in cash. Pursuant to the terms of the Wild Pointe Service Agreement, the Company, in its capacity as the Rangeview District’s service provider, is responsible for providing water services to all users of water services within the boundaries and service area of the Elbert 86 District and for operating and maintaining the Elbert 86 District’s water system. In exchange, the Company receives 100 % of the tap fees from new customers and 98 % of all other fees and charges, including monthly water service revenues, remitted to the Rangeview District by the Elbert 86 District pursuant to the Wild Pointe Service Agreement. The Elbert 86 District’s water system currently provides water service to approximately 247 SFE water connections in Wild Pointe. O&G Leases In 2011, the Company entered the Sky Ranch O&G Lease. Pursuant to the Sky Ranch O&G Lease, the Company received an up-front payment for the purpose of exploring for, developing, producing, and marketing oil and gas on 634 acres of mineral estate owned by the Company at its Sky Ranch property. 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 Ranch. 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 342 acres have been sold to home builders for the purpose of building residential homes or dedicated for schools and public rights of way. F-22 Table of Contents As of August 31, the costs allocated to the Company’s land held for development is as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ August 31, 2023 August 31, 2022 Sky Ranch land ​ $ 1,982 ​ $ 2,482 Sky Ranch development costs ​ 2,452 ​ 4,073 Lost Creek land ​ 218 ​ 218 Net land and mineral interests held for development ​ $ 4,652 ​ $ 6,773 ​ The Company also owns 700 acres of land in the Arkansas River valley which is held for investment purposes. ​ NOTE 5 – REIMBURSABLE PUBLIC IMPROVEMENTS AND NOTE RECEIVABLE FROM THE SKY RANCH CAB The note receivable from the Sky Ranch CAB reports the balances owed by the Sky Ranch CAB to the Company for public improvements paid for by the Company which are reimbursable from the Sky Ranch CAB, project management fees, and interest accrued on the unpaid balances related to the ongoing development of the Sky Ranch master planned community. The Company has advanced funds to the Sky Ranch CAB for the cost of public improvements at Sky Ranch which are the ultimate responsibility of the Sky Ranch CAB. During the 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, 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ August 31, 2023 August 31, 2022 Beginning balance ​ $ 17,208 ​ $ 24,794 Additions ​ ​ 8,699 ​ ​ 16,550 Payments received ​ ​ ( 908 ) ​ ​ ( 24,136 ) Ending balance ​ $ 24,999 ​ $ 17,208 ​ ​ ​ ​ ​ ​ ​ ​ The note receivable from the Sky Ranch CAB accrues interest at 6 % per annum. Public improvements which are not probable of reimbursement at the time of being incurred are considered contract fulfillment costs and are recorded as land development construction costs as incurred. If public improvement costs are deemed probable of collection, the costs are recognized as notes receivable - related party. The Company assesses the collectability of the note receivable from the Sky Ranch CAB, which includes reimbursable public improvements, project management fees and the related interest income, when events or circumstances indicate the amounts may not be recoverable. The Sky Ranch CAB has an obligation to repay the Company, but the ability of the Sky Ranch CAB to do so before the contractual termination dates is dependent upon the establishment of a tax base or other fee generating activities sufficient to fund reimbursable costs incurred. NOTE 6 – PARTICIPATING INTERESTS IN EXPORT WATER The acquisition of the Rangeview Water Supply was finalized with the signing of the CAA in 1996. Upon entering the CAA, the Company recorded a liability of $ 11.1 million, which represented the cash the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4). The Company agreed to remit a total of $ 31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $ 11.1 million investment. The obligation for the $ 11.1 million was recorded as debt, and the remaining $ 20.7 million contingent liability was (and is) not reflected on the Company’s balance sheet because the obligation to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable. The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. Additionally, if the Company does not sell the Export Water, the holders of the Series B Preferred Stock are not entitled to payment of any dividend and have no contractual recourse against the Company. F-23 Table of Contents As the proceeds from the sale of Export Water are received and the amounts are remitted to the CAA holders, the Company allocates a ratable percentage of each payment to the principal portion (the Participating Interests in Export Water Supply liability account), with the balance of the payment being charged to the contingent obligation portion. Because the original recorded liability, which was $ 11.1 million, was 35 % of the original total liability of $ 31.8 million, approximately 35 % of each payment remitted to the CAA holders is allocated to the recorded liability account. 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 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, 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 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 At August 31, 2022 and 2021, the Company’s current accrued liabilities are: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) August 31, 2023 August 31, 2022 Accrued compensation ​ $ 985 ​ $ 1,325 Other operating payables ​ 406 ​ 308 Property taxes ​ ​ 148 ​ ​ 164 Operating lease obligation, current ​ ​ 118 ​ ​ 76 Professional fees ​ ​ 70 ​ ​ 115 WISE water ​ ​ — ​ ​ 32 Rental deposits ​ ​ 34 ​ ​ 9 Total accrued liabilities ​ $ 1,761 ​ $ 2,029 ​ ​ ​ ​ ​ ​ ​ Land development costs due to the Sky Ranch CAB ​ $ 727 ​ $ 536 Due to Rangeview Metropolitan District ​ ​ 294 ​ ​ 24 Total accrued liabilities - related parties ​ $ 1,021 ​ $ 560 ​ 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 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. The remaining items that make up accrued liabilities are generally self-explanatory. ​ F-24 Table of Contents NOTE 8 – DEBT AND OTHER LONG-TERM OBLIGATIONS The total scheduled maturities of the Company’s loans for each of the years ending August 31 are as follows, with each loan described below the table: ​ ​ ​ ​ (In thousands) ​ Scheduled principal payments Within 1 year ​ $ 41 Year 2 ​ ​ 104 Year 3 ​ ​ 418 Year 4 ​ ​ 1,343 Year 5 ​ ​ 3,154 Thereafter ​ ​ 1,925 Total principal payments ​ $ 6,985 ​ SFR Note ​ 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 homes. The SFR Note has the following terms: ​ ● Initial principal amount of $ 1.0 million ● Floating per annum interest rate equal to the Western Edition of the “Wall Street Journal” Prime Rate plus 0.5 % ( 4.25 % as of August 31, 2023), which has a floor of 3.75 % and a ceiling of 4.25 % . In the event of default, the interest rate on the SFR Note would be increased by adding an additional 2.0 % ● Maturity date of December 1, 2026 ● Six interest only payments beginning January 1, 2022 ● Fifty-three principal and interest payments each month beginning July 1, 2022 in the amount of $ 4,600 each ● Estimated final principal and interest balloon payment of $ 0.9 million payable on December 1, 2026 ● Secured by the three single-family rental homes ● Required minimum debt service coverage ratio of 1.10 , measured annually based on audited financial statements, calculated as net operating income less distributions divided by required principal and interest payments, with net operating income defined as net income plus interest, depreciation, and amortization. ​ Lost Creek Note On June 28, 2022, the Company entered a loan with its primary bank to fund the acquisition of 370 acre-feet of water rights the Company acquired on June 27, 2022, in the Lost Creek region of Colorado (Lost Creek Note). The Lost Creek Note has a principal balance of $ 3.0 million, a ten-year maturity, monthly interest only payments averaging $ 12,000 per month for thirty-six months beginning on July 28, 2022, twenty-four monthly principal and interest payments of $ 42,000 beginning on July 28, 2025, fifty-nine monthly principal and interest payments of $ 32,000 beginning on July 28, 2027, and a balloon payment of less than $ 0.8 million plus unpaid and accrued interest due on June 28, 2032. The Lost Creek Note has a thirty-year amortization period and a fixed per annum interest rate equal to 4.90 %. The Lost Creek Note is secured by the Lost Creek Water rights acquired with the note and any fees derived from the use of the Lost Creek Water rights. ​ SFR Note 2 ​ 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 % F-25 Table of Contents ● 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 On January 31, 2022, the Company entered into a Business Loan Agreement (Working Capital LOC) with its primary bank to provide a $ 5.0 million operating line of credit. The Working Capital LOC has a two-year maturity, monthly interest only payments if the line is drawn upon with unpaid principal and interest due at maturity, and a floating per annum interest rate equal to the rate published in the Western Edition of the Wall Street Journal as the Prime Rate plus 0.5 % ( 9.0 % as of August 31, 2023), which has a floor of 3.75 %. In the event of default, the interest rate on the Working Capital LOC would be increased by adding an additional 2.0 %. As of August 31, 2023, the Company has not drawn on the Working Capital LOC. ​ Letters of Credit During the year August 31, 2021, the Company entered four Irrevocable Letters of Credit (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. Therefore, these liabilities are not disclosed in tabular format. However, the Participating Interests in Export Water Supply are described in Note 6. WISE Partnership During 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (WISE Partnership Agreement), among the City and County of Denver acting through its Board of Water Commissioners (Denver Water), the City of Aurora acting by and through its utility enterprise (Aurora Water), and the South Metro WISE Authority (SMWA). SMWA was formed by the Rangeview District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (SM-IGA), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (WISE) created by the WISE Partnership Agreement. The SM-IGA specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the members of SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years. Pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (WISE Financing Agreement) between the Company and the Rangeview District, the Company has an agreement to fund the Rangeview District’s participation in WISE effective as of December 22, 2014. During each of the years ended August 31, 2023 and 2022, the Company, through the Rangeview District, purchased 199 acre-feet and 360 acre-feet of WISE water for $ 0.4 million and $ 0.7 million. See further discussion in Note 15 . Lease Commitments Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet. For lease agreements with an initial term of more than twelve months, the Company combines the lease and non-lease components in determining the lease liabilities and right-of-use (ROU) assets. Operating lease expense is generally recognized evenly over the term of the lease. F-26 Table of Contents 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’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate of six percent ( 6 %) for its office and warehouse lease. ROU lease assets and lease liabilities for the Company’s operating leases were recorded in the consolidated balance sheet as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) August 31, 2023 ​ August 31, 2022 Operating leases - ROU assets $ 357 ​ $ 138 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities, current ​ $ 118 ​ ​ $ 76 ​ Operating lease liabilities, long term ​ 242 ​ ​ 62 ​ Total lease liability ​ $ 360 ​ ​ $ 138 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average remaining lease term (in years) ​ 2.8 ​ ​ 1.8 ​ Weighted average discount rate ​ 6 % ​ 6 % ​ ​ ​ NOTE 9 – SHAREHOLDERS’ EQUITY Preferred Stock The Company’s non-voting Series B Preferred Stock has a preference in liquidation of $ 1.00 per share less any dividends previously paid. Additionally, the Series B Preferred Stock is redeemable at the discretion of the Company for $ 1.00 per share less any dividends previously paid. In the event the proceeds from the sale or disposition of Export Water rights exceed $ 36.0 million the Series B Preferred Shareholders will receive the next $ 0.4 million of proceeds in the form of a dividend. The terms of the Series B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid. To date, no dividends have been accrued as this contingency has not been met. Equity Compensation Plan The Company maintains the 2014 Equity Incentive Plan (2014 Equity Plan), which was approved by shareholders in January 2014 and became effective April 12, 2014. Executives, eligible employees, consultants, and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the Company’s board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. 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 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 income. Option forfeitures are to be F-27 Table of Contents 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, 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. The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions: ● The grant date exercise price – is the closing market price of the Company’s common stock on the date of grant; ● Estimated dividend rates – based on historical and anticipated dividends over the life of the option; ● Life of the option – based on historical experience, including actual and projected employee stock option exercise, option grants have lives of between five and ten years ; ● Risk-free interest rates – with maturities that approximate the expected life of the options granted; ● 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, 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 . Stock-based compensation expense includes $ 0.2 million of expense related to these unrestricted stock grants. 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, 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. 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 . Stock-based compensation expense includes $ 0.2 million of expense related to these unrestricted stock grants. The unrestricted stock grants were fully expensed at the date of the grant because no vesting requirements existed for the unrestricted stock grants. The assumptions used in the fair value calculations using the Black-Scholes model are as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ August 31, 2023 August 31, 2022 Expected term (years) ​ — ​ 6.00 ​ Risk-free interest rate ​ — % ​ 1.31 % Expected volatility ​ — % ​ 38.25 % Expected dividend yield ​ — % ​ — % Weighted average grant-date fair value ​ $ — ​ $ 5.16 ​ ​ 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. The Company received less than $ 0.1 million in cash on the exercise of 6,000 options. The net settlement exercises during the year ended August 31, 2022, resulted in 46,012 shares issued and 51,655 options cancelled in settlement of shares issued. F-28 Table of Contents 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 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Approximate Aggregate Intrinsic Value (in thousands) Outstanding at August 31, 2022 ​ 712,500 ​ $ 8.75 ​ 5.7 ​ $ 1,489 Granted — ​ $ — ​ ​ ​ ​ ​ Exercised ( 119,500 ) ​ $ — ​ ​ ​ ​ ​ Forfeited / Expired ​ ( 30,000 ) ​ $ — ​ ​ ​ ​ ​ Outstanding at August 31, 2023 563,000 ​ $ 9.15 ​ 4.0 ​ $ 1,221 Options exercisable at August 31, 2023 452,000 ​ $ 8.71 ​ 5.1 ​ $ 1,100 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding at August 31, 2021 714,500 ​ $ 7.80 ​ 6.1 ​ $ 5,107 Granted 105,000 ​ $ 13.37 ​ ​ ​ ​ ​ Net settlement exercised ( 103,667 ) ​ $ 6.87 ​ ​ ​ ​ ​ Forfeited / Expired ​ ( 3,333 ) ​ $ 10.45 ​ ​ ​ ​ ​ Outstanding at August 31, 2022 712,500 ​ $ 8.75 ​ 5.7 ​ $ 1,489 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 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 Weighted Average Grant Date Fair Value Non-vested options outstanding at August 31, 2022 ​ 232,998 ​ $ 4.47 Granted — ​ $ — Vested ( 91,998 ) ​ $ 4.31 Forfeited / Expired ( 30,000 ) ​ $ 5.16 Non-vested options outstanding at August 31, 2023 111,000 ​ $ 4.43 ​ ​ ​ ​ ​ ​ Non-vested options outstanding at August 31, 2021 218,333 ​ $ 4.04 Granted 105,000 ​ $ 5.16 Vested ( 87,002 ) ​ $ 4.21 Forfeited ​ ( 3,333 ) ​ $ 4.21 Non-vested options outstanding at August 31, 2022 232,998 ​ $ 4.47 ​ ​ ​ ​ ​ ​ ​ 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 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 1.33 years. The Company has not recorded any excess tax benefits to additional paid-in capital. Warrants As of August 31, 2023, the Company had outstanding warrants to purchase 92 shares of common stock at an exercise price of $ 1.80 per share. These warrants expire six months from the earlier of: ● The date that all the Export Water is sold or otherwise disposed of, ● The date that the CAA is terminated with respect to the original holder of the warrant, or ● The date on which the Company makes the final payment pursuant to Section 2.1(r) of the CAA. F-29 Table of Contents ​ No warrants were exercised during fiscal 2023 and 2022. ​ NOTE 10 – SIGNIFICANT CUSTOMERS The Company has significant customers in its operations. The table below presents the percentage of total revenue for the reported customers for the years ended August 31, 2023 and 2022. For water and wastewater customers, the Company primarily provides services on behalf of the Rangeview District for which the significant end users include all Sky Ranch homes in the aggregate combined with the Sky Ranch CAB and two oil & gas operators. The home builders at Sky Ranch account for lot purchase revenue but also for water and wastewater tap fees revenues. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended % of Total Revenue Generated From: ​ August 31, 2023 ​ August 31, 2022 Melody (DR Horton) ​ 20 % ​ - % Two oil & gas operators ​ 18 % ​ 16 % Lennar ​ 17 % ​ 18 % Challenger ​ 16 % ​ 14 % KB Home ​ 12 % ​ 10 % Sky Ranch homes and Sky Ranch CAB in the aggregate ​ 12 % ​ 5 % Richmond ​ - % ​ 6 % ​ 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. 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, 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. Significant components of the Company’s deferred tax assets as of August 31 are as follows: ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) August 31, 2023 August 31, 2022 Deferred tax assets (liabilities): ​ ​ Depreciation and depletion ​ $ ( 2,155 ) ​ $ ( 2,061 ) Non-qualified stock options ​ 484 ​ 568 Accrued compensation ​ ​ 170 ​ ​ 279 Deferred revenues ​ ​ 121 ​ ​ 108 Other ​ 28 ​ 31 Net deferred tax liability ​ $ ( 1,352 ) ​ $ ( 1,075 ) ​ As of August 31, 2023 and 2022, the Company had no liability for unrecognized tax benefits. ​ F-30 Table of Contents Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following for the fiscal years ended August 31: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ August 31, 2023 August 31, 2022 Expected expense (benefit) from federal taxes at statutory rate of 21 % for the years 2023 and 2022 ​ $ 1,306 ​ $ 2,668 State taxes, net of federal benefit ​ ​ 201 ​ ​ 456 Permanent and other differences ​ ​ ( 57 ) ​ ​ 4 Stock Compensation ​ ​ 12 ​ ​ 22 Other ​ ​ 59 ​ ​ ( 64 ) Total income tax expense ​ $ 1,521 ​ $ 3,086 ​ ​ ​ ​ ​ ​ ​ ​ At August 31, 2022 and 2021, the Company had no net operating loss carryforwards available for income tax purposes. NOTE 12 – 401(k) PLAN The Company maintains the Pure Cycle Corporation 401(k) Profit Sharing Plan (401(k) Plan), a defined contribution retirement plan for the benefit of its employees. The Company matches employee contributions at the rate of 50 % of the first 3 % up to a maximum of $ 2,500 per annum. The contributions vest based on years of service - first anniversary 25 %, second anniversary 50 %, third anniversary 75 % and the fourth anniversary 100 %. The Company pays the annual administrative fees of the 401(k) Plan, and the 401(k) Plan participants pay the investment fees. The 401(k) Plan is open to all employees, age 18 or older, who have been employees of the Company for at least three months . For the years ended August 31, 2023 and 2022, the Company recorded less than $ 0.1 million of expenses related to the 401(k) Plan. ​ NOTE 13 – COMMITMENTS AND CONTINGENCIES The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and experience in contesting, litigating, and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows. As of August 31, 2023, the Company had no contingencies where the risk of material loss was probable or reasonably possible of resulting in a material loss. ​ NOTE 14 – SEGMENT REPORTING An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the CODM, or decision-making group, to evaluate performance and make operating decisions. The Company has identified its CODM as its Chief Executive Officer. Based on the methods used by the CODM to allocate resources, the Company has identified two operating segments which meet GAAP segment disclosure requirements, namely the water and wastewater resource development segment and the land development segment. The Company’s new single-family rental business will likely be presented as a third segment in future periods when it is material to the Company’s operations. The water and wastewater resource development segment provides water and wastewater services to customers for fees. The water is provided by the Company using water rights owned or controlled by the Company, and developing infrastructure to divert, treat and distribute that water and collect, treat, and reuse wastewater. The land resource development segment includes all the activities necessary to develop and sell finished lots, which as of August 31, 2023 and 2022, was done exclusively at the Company’s Sky Ranch Master Planned Community. F-31 Table of Contents O&G operations, although material in certain years, are deemed a passive activity as the CODM does not actively allocate resources to these projects; therefore, this is not classified as a reportable segment. The tables below present the measure of profit and assets the CODM uses to assess the performance of the segment for the periods presented: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended August 31, 2023 (In thousands) Water and wastewater resource development Land development ​ Single-family rental Total Total revenue $ 7,323 $ 7,098 ​ $ 165 $ 14,586 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenue ​ 2,923 ​ 1,892 ​ 73 ​ 4,888 Depreciation and depletion ​ 1,658 ​ — ​ — ​ 1,658 Total cost of revenue ​ 4,581 ​ 1,892 ​ 73 ​ 6,546 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment (loss) profit ​ $ 2,742 ​ $ 5,206 ​ $ 92 ​ $ 8,040 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended August 31, 2022 (In thousands) Water and wastewater resource development Land development ​ Single-family rental Total Total revenue ​ $ 10,051 ​ $ 12,870 ​ $ 82 ​ $ 23,003 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cost of revenue ​ 2,700 ​ 2,166 ​ 23 ​ 4,889 Depreciation and depletion ​ 1,740 ​ — ​ — ​ 1,740 Total cost of revenue ​ 4,440 ​ 2,166 ​ 23 ​ 6,629 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment profit ​ $ 5,611 ​ $ 10,704 ​ $ 59 ​ $ 16,374 ​ The following table summarizes the Company’s total assets by segment. The assets consist of water rights and water and wastewater systems in the Company’s water and wastewater resource development segment; land, land development costs and deposits in the Company’s land development segment; and the cost of the homes in the single-family rental line. The Company’s other assets (“Corporate”) primarily consist of cash, cash equivalents, restricted cash, equipment, and related party notes receivables. ​ ​ ​ ​ ​ ​ ​ ​ (In thousands) August 31, 2023 August 31, 2022 Water and wastewater resource development ​ $ 64,580 ​ $ 63,064 Land development ​ ​ 32,709 ​ ​ 25,522 Single-family rental ​ ​ 5,128 ​ ​ 1,715 Corporate ​ ​ 30,799 ​ ​ 38,928 Total assets ​ $ 133,216 ​ $ 129,229 ​ ​ NOTE 15 – RELATED PARTY TRANSACTIONS The Rangeview District On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District joining the South Metro Water Supply Authority (SMWSA). During the years ended August 31, 2023 and 2022, the Company provided funding of less than $ 0.1 million to the Rangeview District related to this Participation Agreement. Through the WISE Financing Agreement, to date the Company has made payments totaling $ 6.4 million to purchase certain rights to use existing water transmission and related infrastructure acquired by the WISE project and to construct the connection to the WISE system. At August 31, 2023, the amounts are included in Investments in water and water systems on the Company’s balance sheet. During the year ended August 31, 2023, the Company, through the Rangeview District, purchased 199 acre-feet of WISE water for $ 0.4 million. The cost of the water to the members is based on the water rates charged by Aurora Water and can be adjusted each January 1. As of January 1, 2022, WISE water was $ 6.13 per thousand gallons and such rate remained in effect through calendar 2022. Effective, January F-32 Table of Contents 1, 2023, WISE water increased to $ 6.48 per thousand gallons which will remain in effect through the end of calendar 2023. In addition, the Company pays certain system operational and construction costs. If a WISE member, including the Rangeview District, does not need its WISE water each year or a member needs additional water, the members can trade and/or buy and sell water amongst themselves. In fiscal 2021, the Company agreed to fund the construction of the WISE Rangeview pipeline extension through the Rangeview District. Per the agreement, the Rangeview District constructed the pipeline extension in exchange for $ 0.6 million. Because the Company is funding the entire project costs, the revenue from the agreement was recognized 100 % by the Company. As of August 31, 2022, the Company has recognized the full amount in revenue related to this construction project as it was completed prior to the end of fiscal 2022. During the years ended August 31, 2023 and 2022, the Company provided $ 0.6 million and $ 0.9 million of financing to the Rangeview District to fund the Rangeview District’s obligation to purchase WISE water rights and pay for operational and construction charges. Ongoing funding requirements are dependent on the WISE water subscription amount and the Rangeview District’s allocated share of the operational and overhead costs of SMWA and construction activities related to delivery of WISE water. 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 Ranch and other approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of the Rangeview District. The Company owns certain rights and real property interests which encompass the current boundaries of the Rangeview District. In 1995, the Company extended a loan to the Rangeview District. The loan provided for borrowings of up to $ 0.25 million, is unsecured, and bears interest based on the prevailing prime rate plus 2 % ( 10.50 % at August 31, 2023). The maturity date of the loan is December 31, 2023. 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, 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 Pursuant to a certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District No. 1 and Sky Ranch Metropolitan District No. 5 formed the Sky Ranch CAB to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property. In November 2017, but effective as of January 1, 2018, the Company entered into a Project Funding and Reimbursement Agreement (PF Agreement) with the CAB for the Sky Ranch property. The PF Agreement required the Company to fund an agreed upon list of public improvements for Sky Ranch with respect to earthwork, erosion control, streets, drainage, and landscaping at an estimated cost of $ 13.2 million for calendar years 2018 and 2019. Each advance or reimbursable expense accrues interest at a rate of six percent ( 6 %) per annum. The Company and the Sky Ranch CAB entered into a Facilities Funding and Acquisition Agreement (FFAA) effective November 2017, obligating the company to advance funding to the Sky Ranch CAB for specified public improvements constructed from 2018 to 2023. All amounts owed under the FFAA bear interest at a rate of six percent ( 6 %) per annum. Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058 for Phase 1 and December 31, 2060 for Phase 2, shall be deemed forever discharged and satisfied in full. F-33 Table of Contents As of August 31, 2023, the balance of the Company’s advances for improvements, including interest, net of reimbursements already received from the Sky Ranch CAB, totaled $ 25.0 million. The advances have been used by the Sky Ranch CAB to pay for construction of public improvements. The Company submits specific costs for reimbursement to the Sky Ranch CAB which have been certified by an independent third-party. ​ Sky Ranch Metropolitan District Nos. 1, 3, 4, 5, 6, 7 and 8 (Sky Ranch Districts) and the Sky Ranch CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The current members of the board of directors of the Rangeview District, each Sky Ranch District, and the Sky Ranch CAB consist of four employees of the Company (including the Company’s CEO and CFO) and one independent board member. Nelson Pipeline Constructors LLC Through a competitive bidding process, the Sky Ranch CAB awarded Nelson Pipeline Constructors, LLC (Nelson) a contract to construct the wet utility pipelines in Phase 2A of Sky Ranch. As the project progressed, change orders were approved by the Sky Ranch CAB board upon review by an independent engineer hired by the Sky Ranch CAB to certify costs are reasonable and appropriate for the scope of work contemplated. During the years ended August 31, 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. ​ NOTE 16 – EARNINGS PER SHARE Certain outstanding options are excluded from the diluted earnings per share calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than decrease earnings per share). No options were excluded for the fiscal years ended August 31, 2023 and 2022. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended (In thousands, except share and per share amounts) August 31, 2023 August 31, 2022 Net income ​ $ 4,699 ​ $ 9,619 ​ ​ ​ ​ ​ ​ ​ Basic weighted average common shares ​ ​ 24,031,068 ​ ​ 23,953,740 Effect of dilutive securities ​ ​ 74,999 ​ ​ 202,250 Weighted average shares applicable to diluted earnings per share ​ ​ 24,106,067 ​ ​ 24,155,990 ​ ​ ​ ​ ​ ​ ​ Earnings per share - basic ​ $ 0.20 ​ $ 0.40 Earnings per share - diluted ​ $ 0.19 ​ $ 0.40 ​ ​ F-34 Table of Contents ​ 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. ​ ​