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Item 8. Financial Statements and Supplementary Data

2024-11-13 compared with 2023-11-15 · 195 added, 208 removed, 861 unchanged (32% of the section changed)

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Index to Financial Statements and Supplementary Data

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

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

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

Consolidated Balance Sheets

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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.

We have audited the accompanying consolidated balance sheets of Pure Cycle Corporation (the “Company”) as of August 31, 2024 and 2023, the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the two-year period ended August 31, 2024, 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, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended August 31, 2024, 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.

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

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (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.

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

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

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.

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

Accordingly, we express no such opinion.

Our 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.

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

Such procedures 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.

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

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

Critical Audit Matters

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

/s/ FORVIS, LLP

/s/ Forvis Mazars, LLP

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

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November 13, 2024

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.

Accordingly, we express no such opinion.

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

PURE CYCLE CORPORATION

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Land under development

Reimbursable public improvements and project management fees

Income taxes receivable

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Income taxes payable

Deferred lot sale revenues

Deferred water sales revenues

Deferred lot sales revenue

Deferred water sales revenue

Debt, current portion

Total current liabilities

Participating interests in export water supply

Debt, less current portion

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Total revenues

Cost of revenues:

Water service operations

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General and administrative expenses

Operating (loss) income

Operating income

Other income (expense):

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Balance at August 31, 2023

Stock options exercised

Restricted stock grants

Stock options exercised

Stock granted for services

Share-based compensation

Repurchases of common stock

Balance at August 31, 2024

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Stock options exercised

Restricted stock grants

Stock granted for services

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Land under development

Deferred lot sale revenues

Deferred lot sale revenue

Taxes payable / receivable

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

Net cash (used) provided by operating activities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

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Investments in water and water systems

Payments on note receivable - related party, other

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

Treasury Bills

Net cash used by investing activities

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from notes payable

Proceeds from option exercises

Payments on notes payable

Repurchases of common stock

Payments to contingent liability holders

Net cash provided by financing activities

Net cash (used in) provided by financing activities

Net change in cash, cash equivalents and restricted cash

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

Issuance of stock for compensation

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

Issuance of stock for compensation

See accompanying Notes to Consolidated Financial Statements

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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

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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

management fees, and interest income are deemed probable.

The Company has determined the reimbursable public improvements, project management fees and interest income related to the Sky Ranch community being developed by Pure Cycle is probable of collectability.

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

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Land Under Development

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

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

Pure Cycle began developing its Sky Ranch property in 2017.

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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.

The land under development accounts primarily contains 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.

Additionally, land under development may contain accruals related to retention on development contracts which may be eligible for reimbursement once paid.

The Company measures land under development costs as a current asset at the lower of the carrying value or net realizable value.

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

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Notes Receivable – Sky Ranch CAB

As noted above and described in greater detail in Note 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.

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.

Through various funding, the Company is obligated to provide funding to the Sky Ranch CAB for public improvements, 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.

Therefore, the Company recognizes the reimbursable public improvements costs incurred to date at Sky Ranch in the Notes receivable – related party, reimbursable public improvements and project management fees account on the accompanying consolidated balance sheet.

The Company performs a quantitative impairment assessment by estimating the fair value of the Notes receivable – related party using the discounted cashflow method.

Concentration of Credit Risk and Fair Value

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

Restricted cash – The Company has entered into 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.

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

As of August 31, 2024, the eight

letters of credit totaled $ 3.4 million, which are fully secured by cash held in restricted accounts at the banks, which approximates its fair value is cash is held in savings accounts.

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.

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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.

The Company records accounts receivable net of expected credit losses.

The Company has recorded expected credit losses for uncollectible accounts receivables from continuing operations totaling less than $ 0.1 million and $ 0.1 million for the periods ended August 31, 2024 and 2023.

The expected credit losses for uncollectible accounts was determined based on lifetime expected credit losses using an aging schedule for each pool of trade accounts receivable.

Pools are determined based on risk characteristics by the type of customer.

Recoverability of Long-Lived Assets

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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.

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.

The Company depletes its water assets that are being utilized based on units produced (i.e., acre-feet sold) divided by the total volume of water adjudicated in the water decrees.

Revenue Recognition

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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.

Water and Wastewater Resource Development Segment Revenue

Pure Cycle generates revenue 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.

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

Revenue 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.

Revenue 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.

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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.

O&G operations revenue is 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, 2024 and 2023, the Company delivered 1,818 acre-feet and 964 acre-feet of water to customers.

Of this, 77 % and 64 % was sold to O&G operators.

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

Pure Cycle recognizes wastewater treatment revenue 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.

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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

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 water and wastewater tap fee revenue 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, 2024 and 2023, Pure Cycle recognized $ 2.9 million and $ 2.5 million of water tap fee revenue.

The water tap fees recognized are based on the amounts billed by the Rangeview District to customers, after deduction of royalties due to the Land Board for water taps, if applicable.

During the years ended August 31, 2024 and 2023, the Company recognized $ 0.5 million and $ 0.5 million of wastewater tap fee revenue.

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.

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

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

For the years ended August 31, 2024 and 2023, Pure Cycle recognized $ 0.1 million and less than $ 0.1 million of special facilities revenue.

As of August 31, 2024 and 2023, Pure Cycle had no contract liabilities related to tap and construction fee/special facility funding revenue.

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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.

For the years ended August 31, 2024 and 2023, Pure Cycle recognized less than $ 0.1 million and less than $ 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.

Land Development Segment Revenue

Pure Cycle generates revenue 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 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, finished residential lots at Sky Ranch.

Per our agreements, Pure Cycle is obligated to deliver finished lots for which we develop through agreements with the Sky Ranch CAB.

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

As of August 31, 2024, 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 2 is planned to have 886 lots ( 792 allocated for sale to homebuilders and 94 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.

Phase 2C broke ground in March 2024, includes a total of 228 lots, of which 188 lots were sold to home builders, and 40 lots were retained for use in the single-family rental business.

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

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

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

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

If these unfulfilled obligations are deemed other than insignificant, the company follows format 2 and recognizes revenue over time based on the estimated progress using overall costs incurred to date compared to

total estimated costs from the period of time the lot is delivered until the remaining performance obligations are substantially completed.

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

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

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

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

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

Typically these lots are also subject to completion of related public improvements by the Company, through our development agreement with 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, at which point the Company recognizes revenue.

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.

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 construction of 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.

for Phases 2A, 2B and 2C).

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.

For the years ended August 31, 2024 and 2023, Pure Cycle recognized $ 16.0 million and $ 6.8 million of lot sale revenue related to Phases 2A, 2B and 2C 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, 2024, Pure Cycle has received payments totaling $ 18.4 million in Phase 2A, $ 17.3 million in Phase 2B, and $ 3.4 million in Phase 2C.

Of the amounts received for Phase 2A, as of August 31, 2024, $ 18.3 million has been recognized as revenue as Phase 2A is approximately 99 % complete.

Of the amounts received for Phase 2B, as of August 31, 2024, $ 16.0 million has been recognized as revenue as Phase 2B is approximately 92 % 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.

Of the amounts received for Phase 2C, as of August 31, 2024, $ 2.7 million has been recognized as revenue as Phase 2C is approximately 27 % complete.

As of August 31, 2024, $ 0.1 million of revenue has been deferred related to Phase 2A contracts, $ 1.3 million of revenue has been deferred related to Phase 2B contracts, and $ 0.7 million of revenue has been deferred related to Phase 2C contracts.

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

We anticipate the completion of Phase 2A and substantial completion of Phases 2B and 2C by the end of fiscal 2025.

Reimbursable Costs for Public Improvements – The Sky Ranch CAB is responsible for the construction of 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.

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

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

The Company evaluates the notes receivable - related parties, reimbursable public improvements for indicators of impairment each reporting period by estimating the fair value of the Notes receivable – related party using the discounted cashflow method.

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

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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.

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.

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

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.

For the years ended August 31, 2024 and 2023, the Company recognized $ 0.3 million and less than $ 0.4 million related to construction support activities at Sky Ranch.

Deferred Revenue

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

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

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

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) 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 the amount of costs incurred compared 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.

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

As of August 31, 2024 and 2023, the Company’s deferred revenue along with the changes in the deferred revenue are as follows:

Three Months Ended August 31, 2024

(In thousands)

Water and Wastewater Resource Development

Land Development

Balance at May 31, 2024

Revenue recognized

Revenue deferred

Balance at August 31, 2024

Three Months Ended August 31, 2023

Water and Wastewater Resource Development

Land Development

Balance at May 31, 2023

Revenue recognized

Revenue deferred

Balance at August 31, 2023

Year Ended August 31, 2024

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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.

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

Revenue 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.

1 unchanged sentence

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.

Nine 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, 2024, and 2023, the Company received $ 0.8 million and $ 0.3 million, in royalties attributable to these wells.

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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.

At August 31, 2024, 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, 2024.

The Company does no t have any significant unrecognized tax benefits as of August 31, 2024.

12 unchanged sentences

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.

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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.

In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, "Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures" ("ASU 2023-07"), which requires expanded disclosure of significant segment expenses and other segment items on an annual and interim basis.

ASU 2023-07 is effective for the Company for annual periods beginning after September 1, 2024 and interim periods beginning after September 1, 2025.

The Company is currently evaluating the impact ASU 2023-07 will have on its consolidated financial statement disclosures.

In December 2023, FASB issued ASU 2023-09, "Income Taxes (Topic 740):

Improvements to Income Tax Disclosures" ("ASU 2023-09"), which requires expanded disclosure of our income rate reconciliation and income taxes paid.

ASU 2023-09 is effective for the Company for annual periods beginning after September 1, 2025.

The Company is currently evaluating the impact ASU 2023-09 will have on its consolidated financial statement disclosures.

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

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

As of August 31, 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).

As of August 31, 2024 and 2023, the Company had 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.

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, 2024 and 2023, the Company had one Level 3 asset, 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, 2024 and 2023, the Company had one Level 3 liability, the contingent portion of the CAA.

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

During the year ended August 31, 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.

During the year ended August 31, 2024, the Company incurred net disposals and/or capitalization of assets placed in service from construction in process of (1) $ 0.1 million of costs related to its construction projects, (2) $ 1.8 million of various water infrastructure projects, and (3) $ 0.4 million for its single-family rental business.

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

Single-Family Rental Homes

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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.

During the year ended August 31, 2024, the Company capitalized the remaining two homes in Phase 2A.

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.

As of August 31, 2024, all 14 completed homes have been rented, with contracts signed to construct the first 12 single-family rentals in Phase 2B with construction set to begin in fiscal 2025.

The Company has reserved a total of 94 lots in Phase 2 ( 10 of which are in Phase 2A and completed as of August 31, 2024) of Sky Ranch to build additional rental homes.

Depletion and Depreciation

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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 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:

3 unchanged sentences

● 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.

● The ECCV Option Agreement, dated January 30, 2024, among the Company, Rangeview District, and the Land Board (ECCV Option), which allows the Company to add the East Cherry Creek Valley (ECCV) system and 4,000 acre-feet or Arapahoe aquifer groundwater, to the Lease, subject to the payment of additional rent, effective as of July 8, 2032 (the expiration of the ECCV lease).

The Lease, the Lowry Service Agreement, the Export Agreement, and the Lowry Wastewater Agreement, and the ECCV Option 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.

11 unchanged sentences

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).

Pursuant to the Rangeview Water Agreements, the Land Board receives a royalty of 10 % or 12 % of gross revenue 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 Rangeview District retains 2 % of the remaining revenue, and the Company receives 98 % of the remaining revenue after the Land Board royalty.

The Land Board does not receive a royalty on wastewater fees.

3 unchanged sentences

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).

If the Company sells Export Water, the Company is required to pay royalties to the Land Board ranging from 10 % to 12 % of gross revenue, except that the royalty on tap fees shall be 2 % (other than taps sold for Sky Ranch which are exempt).

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.

26 unchanged sentences

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.

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 revenue, 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.

3 unchanged sentences

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.

This O&G lease expired during the year ended August 31, 2024.

Land and Mineral Rights

10 unchanged sentences

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.

The Company has advanced funds to the Sky Ranch CAB for the cost of public improvements which the Sky Ranch CAB is responsible for constructing and the Company is obligated to fund through various funding agreements between the Sky Ranch CAB and the Company.

During the year ended August 31, 2024, the Company spent $ 14.4 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, 2024, project management fees owed to the Company of $ 0.7 million, and interest income on the outstanding note receivable of $ 1.6 million were also added to the note receivable.

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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.

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

23 unchanged sentences

Total principal payments

Deferred financing costs

Total principal payments, net

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.

13 unchanged sentences

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.

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.

The Lost Creek Note does not contain any financial covenants.

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.

10 unchanged sentences

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.

During the year ended August 31, 2024, the Company extended the Working Capital LOC, which now has an expiration date of January 31, 2026, 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 0.0 % ( 8.5 % as of August 31, 2024) and an amended floor rate of 5.00 %.

As of August 31, 2024, the Company has no t drawn on the Working Capital LOC.

Letters of Credit

1 unchanged sentence

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, 2024, 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.

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

During the year ended August 31, 2024, the Company entered into an additional three LCs totaling $ 0.9 million.

So long as the Company performs on the contracts, the LCs will expire at various dates from December 2024 through November 2025.

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

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

14 unchanged sentences

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

Effective 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.

Effective October 1, 2023, the Company replaced its operating lease with a new operating lease (New Lease).

The New Lease decreased the square footage of leased space to approximately 11,434 square feet.

The New Lease replaced the July 1, 2022 operating lease and June 1, 2023 amendment.

In addition, a 5,100 square feet sublease was terminated after entering into the New Lease.

The New Lease has an initial thirty-six -month term with the option to extend the lease term for up to two two-year periods.

The New Lease rental payment is approximately $ 10,000 per month which includes a certain pro-rata share of the lessor’s operating costs, which are variable in nature.

The monthly payment will increase roughly 2.0 % after twelve months.

The Company’s lease agreement does not contain any residual value guarantees or material restrictive covenants.

As a result of the New Lease, the Company’s associated right of use asset and liability decreased, as noted in the table below.

For the years ended August 31, 2024 and 2023, payments on lease liabilities totaled less than $ 0.1 million.

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:

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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.

The Company maintains the 2024 Equity Incentive Plan (2024 Equity Plan), which was approved by shareholders in January 2024 and became effective January 17, 2024.

Executives, eligible employees, consultants, and non-employee directors are eligible to receive options and stock grants pursuant to the 2024 Equity Plan.

1 unchanged sentence

The Company has reserved 2.0 million shares of common stock for issuance under the 2024 Equity Plan.

As of August 31, 2024, 1,608 shares had been issued and there were 1,998,392 shares available for grant under the 2024 Equity Plan.

Prior to the effective date of the 2024 Equity Plan, the Company granted stock awards to eligible participants under its 2014 Equity Incentive Plan (2014 Equity Plan), which expired April 12, 2024.

As of August 31, 2024, restricted stock awards and awards to purchase 577,000 shares of the Company’s common stock have been made under the 2014 Equity Plan, of which 534,500 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.

No additional awards may be granted pursuant to the 2014 Equity Plan.

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

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

Option forfeitures are to be

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

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

The Company does not expect any forfeiture of its options;

9 unchanged sentences

For the year ended August 31, 2024, 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 .

In addition, six non-employee Board members were each granted 3,006 unrestricted stock shares and one non-employee Board member was granted 1,608 unrestricted stock shares.

The fair market value of the unrestricted shares for share-based compensation expense is equal to the closing price of the Company’s common stock on the date of grants of $ 9.98 and $ 9.33 .

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.

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

The six non-employee Board members were each granted 3,033 unrestricted stock grants.

The fair market value of the unrestricted shares for share-based compensation expensing is equal to the closing price of the Company’s common stock on the date of grant of $ 9.89 .

1 unchanged sentence

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

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

August 31, 2023

August 31, 2022

Expected term (years)

Risk-free interest rate

Expected volatility

Expected dividend yield

Weighted average grant-date fair value

During the years ended August 31, 2024 and 2023, 38,500 and 119,500 options were exercised.

1 unchanged sentence

The net settlement exercises during the year ended August 31, 2024, resulted in 17,456 shares issued and 21,044 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.

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.

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:

The following table summarizes the combined stock option activity for the 2014 Equity Plan and 2024 Equity Plan for the years ended August 31, 2024 and August 31, 2023:

Number of Options

4 unchanged sentences

Outstanding at August 31, 2023

Net settlement exercised

Forfeited / Expired

16 unchanged sentences

For the year ended August 31, 2024, 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, 2024 and 2023, share-based compensation expense was $ 0.4 million and $ 0.5 million.

As of August 31, 2024, the Company had unrecognized share-based compensation expenses totaling $ 0.1 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 weighted average period over which these options are expected to vest is less than 1 year .

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

9 unchanged sentences

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.

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

% of Total Revenue Generated From:

3 unchanged sentences

Two oil & gas operators

Sky Ranch homes and Sky Ranch CAB in the aggregate

Sky Ranch CAB

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, 2024, Pure Cycle recorded income tax expense of $ 4.0 million, which consisted of current income tax expense of almost $ 4.0 million and deferred income tax expense of less than $ 0.1 million.

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

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.

During the year ended August 31, 2024, Pure Cycle paid Federal and State income tax installments of $ 1.6 million and $ 0.5 million.

During the year ended August 31, 2023, Pure Cycle paid Federal and State income tax installments of $ 3.5 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.

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Accrued compensation

Deferred revenues

Deferred revenue

Net deferred tax liability

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August 31, 2023

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

Expected expense (benefit) from federal taxes at statutory rate of 21 %

State taxes, net of federal benefit

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As of January 1, 2024, WISE water was $ 6.55 per thousand gallons and such rate remained in effect through calendar 2024.

Effective, January

1, 2023, WISE water increased to $ 6.48 per thousand gallons which will remain in effect through the end of calendar 2023.

Effective, January 1, 2023, WISE water increased to $ 6.48 per thousand gallons which was 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, 2024 and 2023, the Company provided $ 0.6 million and $ 0.6 million of financing to the Rangeview District to fund the Rangeview District’s obligation to purchase WISE water rights and pay for operational and construction charges.

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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.

The August 31, 2024 balance in notes receivable - related parties, other totaled $ 1.2 million, which included borrowings of $ 1.2 million and accrued interest of less

than $ 0.1 million.

During the year ended August 31, 2024, the Rangeview District made payments totaling $ 0.3 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.

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.

Sky Ranch CAB

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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.

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

Sky Ranch Metropolitan District No.

1 has a board comprised of three employees of the Company (including the Company’s CEO and CFO) and two independent board members.

Nelson Pipeline Constructors LLC

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Earnings per share - diluted

NOTE 17 – SUBSEQUENT EVENTS

On October 21, 2024, the Company completed the purchase of approximately 432 acres of land in Weld County together with 378 acre-feet of ditch water in the Henrylyn Irrigation District and 300 acre-feet of groundwater rights in the Lost Creek Designated Basin for a purchase price of approximately $ 5.4 M.

The purchase adds to the Company’s Lost Creek Water Supply, which it plans to consolidate with its Rangeview Water Supply to provide service to the Rangeview District’s customers both on and off the Lowry Ranch.

On October 30, 2024, the Sky Ranch CAB sold tax-exempt, fixed rate, investment grade senior bonds in the aggregate principal amount of $ 18,585,000 and tax-exempt, fixed-rate subordinate bonds in the aggregate principal amount of $ 3,307,000 (collectively, the “2024 Bonds”).

Upon the issuance of the 2024 Bonds, the Company received $ 10.1 million as partial reimbursement of the Company’s Note Receivable from the Sky Ranch CAB for advances the Company made to the Sky Ranch CAB to fund the construction of public improvements to the Sky Ranch property.

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.

As previously reported, on September 15, 2022, we dismissed Plante & Moran, LLC as our independent registered public accounting firm and appointed Forvis Mazars, LLP (formerly known as 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 Mazars, 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.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data