UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 20172020

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-8814


PURE CYCLE CORPORATION
(Exact name of registrant as specified in its charter)

Colorado 
Colorado84-0705083
(State or other jurisdiction of incorporation
or organization)
(I.R.S. Employer Identification No.)Number)
  
34501 E. Quincy Ave.,Avenue, Bldg. 34, Box 10
Watkins, CO 80137
(303) 292-3456
80137
(Address of principal executive offices) (Zip
(Zip Code)

(303) 292 – 3456
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(b) of the Act:
Common Stock 1/3 of $.01 par value
PCYO
The NASDAQ Stock Market
(Title of each class)(Trading Symbol(s))(Name of each exchange on which registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐Accelerated filer ☐
Securities registered pursuant to Section 12(g) of the Act:NONENon-accelerated filer ☒
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.                       Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.                       Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                       Yes [X] No [ ]Smaller reporting company ☒
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [   ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [  ]     Accelerated filer [X]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [  ]
Emerging growth company [  ]
If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter:$87,215,786
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: November 7, 2017: 23,754,098
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference from the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held in January 2018, which will be filed with the SEC within 120 days of the close of the fiscal year ended August 31, 2017.
☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $191,563,737

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: October 29, 2020 - 23,868,216

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III is incorporated by reference from the registrant’s definitive proxy statement for the Annual Meeting of Shareholders to be held in January 2021, which will be filed with the Securities and Exchange Commission within 120 days of the close of the fiscal year ended August 31, 2020.

Table of Contents

Item Page
 Part I 
1
Business
5
1A.
Risk Factors
20
1B.
Unresolved Staff Comments
30
2
Properties
30
3
Legal Proceedings
30
4
Mine Safety Disclosures
30
 Part II 
530
6
Selected Financial Data
31
732
7A.
Quantitative and Qualitative Disclosures About Market Risk
43
8
Financial Statements and Supplementary Data
44
945
9A.
Controls and Procedures
45
9B.
Other Information
46
 Part III 
10
Directors, Executive Officers and Corporate Governance
46
11
Executive Compensation
46
1246
13
Certain Relationships and Related Transactions and Director Independence
46
14
Principal Accounting Fees and Services
46
 Part IV 
15
Exhibits and Financial Statement Schedules
47
16
Form 10-K Summary
47
 
Signatures
52

Item Page
 Part I 
1Business4
1A.Risk Factors20
1B.Unresolved Staff Comments28
2Properties28
3Legal Proceedings28
4Mine Safety Disclosures28
 Part II 
5Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities29
6Selected Financial Data31
7Management’s Discussion and Analysis of Financial Condition and Results of Operations32
7A.Quantitative and Qualitative Disclosures About Market Risk42
8Consolidated Financial Statements and Supplementary Data43
9Changes in and Disagreements with Accountants on Accounting and Financial Disclosure44
9A.Controls and Procedures44
9B.Other Information45
 Part III 
10Directors, Executive Officers and Corporate Governance45
11Executive Compensation45
12Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters45
13Certain Relationships and Related Transactions and Director Independence46
14Principal Accountant Fees and Services46
 Part IV 
15Exhibits and Financial Statement Schedules47
16Form 10-K Summary47
 Signatures48
2
FORWARD-LOOKING STATEMENTS

Statements that are not historical facts contained in this Annual Report on Form 10-K, or incorporated by reference into this Annual Report on Form 10-K, are“forward-looking “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).The words “anticipate,” “seek,” “project,” “future,” “likely,” “believe,” “may,” “should,” “could,” “will,” “estimate,” “expect,” “plan,” “intend” and similar expressions, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements include statements relating to, among other things:


●
future water supply needs in Colorado and how such needs will be met;

●
anticipated increases in residential and commercial demand for water services and competition for these services;

●
estimated population increases in the Denver metropolitan area and the South Platte River basin;

●
plans for, and the efficiency of, development of our Sky Ranch property;

●
our competitive advantage;

●
the impact of individual housing and economic cycles on the number of connections we can serve with our water;

●
the number of new water connections needed to recover the costs of our water supplies;

●
the number of units planned for development at Sky Ranch;

●
the timing of the completion of construction of finished lots at Sky Ranch;

●
the number of lots expected to be delivered in a fiscal period;

●
anticipated start of construction of the second filing at Sky Ranch;

●
anticipated financial results from development of our Sky Ranch property;

●
timing of and interpretation of royalties to the State Board of Land Commissioners;

●
participation in regional water projects, including “WISE” and the timing and availability of water from, and projected costs related to, WISE;

●
increases in future water tap fees;

●
our ability to collect fees and charges from customers and other users;

●
the estimated amount of reimbursable costs for Sky Ranch and the collectability of reimbursables;

●
anticipated timing and amount of, and sources of funding for, (i) capital expenditures to construct infrastructure and increase production capacities, (ii) compliance with water, environmental and other regulations, and (iii) operations, including delivery and treatment of water and wastewater;

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capital required and costs to develop Sky Ranch;

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anticipated development of other filings concurrently with the second filing of Sky Ranch;

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plans to provide water for drilling and hydraulic fracturing of oil and gas wells;

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changes in oil and gas drilling activity on our property, on the Lowry Range, or in the surrounding areas;

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estimated costs of earthwork, erosion control, streets, drainage and landscaping at Sky Ranch;

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the anticipated revenues from customers in the Rangeview and Sky Ranch Districts;

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plans with respect to mineral interests;

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plans for the use and development of our water assets and potential delays;

●
factors affecting demand for water;

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our ability to meet customer demands in a sustainable and environmentally friendly way;

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our ability to reduce the amount of up-front construction costs for water and wastewater systems;

●
costs and plans for treatment of water and wastewater;

●
anticipated number of deep-water wells required to continue expanding and developing our Rangeview Water Supply;

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capital expenditures for investing in expenses and assets of the Rangeview District;

●
regional cooperation among area water providers in the development of new water supplies and water storage, transmission and distribution systems as the most cost-effective way to expand and enhance service capacities;

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plans to drill water walls into aquifers located beneath the Lowry Range and the timing and estimated costs of such a build out;

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sufficiency of tap fees to fund infrastructure costs of the Rangeview District;

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our ability to assist Colorado “Front Range” water providers in meeting current and future water needs;

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plans to use raw water, effluent water or reclaimed water for agricultural and irrigation uses;

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factors that may impact labor and material costs;

●
use of third parties to construct water and wastewater facilities and Sky Ranch lot improvements;

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plans to utilize fixed-price contracts;

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estimated supply capacity of our water assets;

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our belief that we have exceeded, and will continue to exceed, market expectations with the delivery of our lots at Sky Ranch;

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our ability to comply with permit requirements and environmental regulations and the cost of such compliance;

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the impact of water quality, solid waste disposal and environmental regulations on our financial condition and results of operations;

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negotiation of payment terms for fees;

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the impact of COVID-19;

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the impact of any downturn in the homebuilding and credit markets on our business and financial condition;

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future fluctuations in the price and trading volume of our common stock;
 
●3
factors affecting demand for water;
●
our competitive advantage;Table of Contents
●
plans to develop additional water assets within the Denver area;
●
future water supply needs in Colorado and how such needs will be met;
●
anticipated increases in residential and commercial demand for water services and competition for these services;
●
estimated population increases in the Denver metropolitan area and the South Platte River basin;
●
plans for the use and development of our water assets and potential delays;
●
plans to provide water for drilling and hydraulic fracturing of oil and gas wells;
●
changes in oil and gas drilling activity on our property, on the Lowry Range, or in the surrounding areas;
●
regional cooperation among area water providers in the development of new water supplies and water storage, transmission and distribution systems as the most cost-effective way to expand and enhance service capacities;
●
the impact of individual housing and economic cycles on the number of connections we can serve with our water;
●
increases in future water tap fees;
●
negotiation of payment terms for fees;
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plans for development of our Sky Ranch property;
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the number of units planned for the first phase of development at Sky Ranch;
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the number of lots on which construction is expected to begin in the current fiscal year;
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capital required and costs to develop the first phase of Sky Ranch;
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anticipated revenues and margins from development of our Sky Ranch property;
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estimated time period for build out of Sky Ranch and sufficiency of tap fees to fund infrastructure costs;
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the impact of any downturn in the homebuilding and credit markets on our business and financial condition;
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the sufficiency of our working capital and financing sources to fund our operations;
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estimated supply capacity of our water assets;
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need for additional production capacity;
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costs and plans for treatment of water and wastewater;
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plans to use raw water, effluent water or reclaimed water for agricultural and irrigation uses;
●
participation in regional water projects, including “WISE” and the timing and availability of water from WISE;
●
our ability to assist Colorado “Front Range” water providers in meeting current and future water needs;
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timing of and interpretation of Land Board royalties;
●
the number of new water connections needed to recover the costs of our water supplies;
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the adequacy of the provisions in the “Lease” for the Lowry Range to cover present and future circumstances;
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factors that may impact labor and material costs;
●

●
loss of key employees and hiring additional personnel for our operations;
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anticipated timing and amount of, and sources of funding for (i) capital expenditures to construct infrastructure and increase production capacities, (ii) compliance with water, environmental and other regulations, and (iii) operations including delivery and treatment of water and wastewater;
●
the ability of our deep water well enhancement tool and process to increase efficiency of wells and our plans to market that product to area water providers;
●
our ability to reduce the amount of up-front construction costs for water and wastewater systems;

●
the recoverability of water and wastewater service costs from rates;

●
our belief that we are not a public utility under Colorado law;

●
the adequacy of the provisions in the “Lease” for the Lowry Range to cover present and future circumstances;

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our ability to successfully maintain our “conditional decrees” and continue to develop our Lowry Range surface rights;

●
environmental clean-up at the Lowry Range by the U.S. Army Corps of Engineers;

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plans to retain earnings and not pay dividends;

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forfeitures of option grants, vesting of non-vested options and the fair value of option awards;

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the sufficiency of our working capital and financing sources to fund our operations;

●
estimated costs of public improvements to be funded by Pure Cycle and constructed on behalf of the Sky Ranch Community Authority Board;

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changes in unrecognized tax positions;

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service life of constructed facilities.

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accounting estimates and the impact of new accounting pronouncements;

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the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting;

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our belief that we have remediated previously disclosed material weaknesses; and

●
timing of the filing of our proxy statement.
 

●
ability to generate working capital and market our water assets;
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plans to sell certain farms;
●
service life of constructed facilities;
●
use of third parties to construct water and wastewater facilities and Sky Ranch lot improvements;
●
plans to utilize fixed-price contracts;
●
payment of amounts due from the Rangeview District and the Sky Ranch Districts;
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estimated property taxes;
●
utilization of net operating losses;
●
capital expenditures for investing in expenses and assets of the Rangeview District;
●
the impact of water quality, solid waste disposal and environmental regulations on our financial condition and results of operations;
●
environmental clean-up at the Lowry Range by the U.S. Army Corps of Engineers;
●
our ability to comply with permit requirements and environmental regulations and the cost of such compliance;
●
our ability to meet customer demands in a sustainable and environmentally friendly way;
●
the recoverability of construction and acquisition costs from rates;
●
our belief that we are not a public utility under Colorado law;
●
impairments in carrying amounts of long-lived assets;
●
changes in unrecognized tax positions;
●
plans to retain earnings and not pay dividends;
●
forfeitures of option grants, vesting of non-vested options and the fair value of option awards;
●
the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting;
●
accounting estimates and the impact of new accounting pronouncements;
●
future fluctuations in the price and trading volume of our common stock; and
●
timing of the filing of our proxy statement.
Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties, and assumptions.We cannot assure you There are no assurances that any of our expectations will be realized.Ourrealized and actual results could differ materially from those in such statements. Factors that could cause actual results to differ from those contemplated by such forward-looking statements include, without limitation:
●
the timing of new home construction and other development in the areas where we may sell our water, which in turn may be impacted by credit availability;
●
population growth;
●
changes in employment levels, job and personal income growth and household debt-to-income levels;
●
changes in consumer confidence generally and confidence of potential homebuyers in particular;
●
the ability of existing homeowners to sell their existing homes at prices that are acceptable to them;
●
changes in the supply of available new or existing homes and other housing alternatives, such as apartments and other residential rental property;
●
timing of oil and gas development in the areas where we sell our water;
●
general economic conditions;
●
the market price of water;
●
the market price of oil and gas;
●
changes in customer consumption patterns;
●
changes in applicable statutory and regulatory requirements;
●
changes in governmental policies and procedures, including with respect to land use, environmental and tax matters;
●
changes in interest rates;
●
private and federal mortgage financing programs and lending practices;
●
uncertainties in the estimation of water available under decrees;
●
uncertainties in the estimation of costs of delivery of water and treatment of wastewater;
●
uncertainties in the estimation of the service life of our systems;
●
uncertainties in the estimation of costs of construction projects;


●
outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade and business operations;

●
political and economic instability, whether resulting from natural disasters, wars, terrorism, pandemics or other sources;

●
the ability to continue new home construction in the event the home builders’ employees or our land development employees are quarantined due to the impact of the COVID-19;

●
the timing of new home construction and other development in the areas where we may sell our water, which in turn may be impacted by credit availability;

●
population growth;

●
changes in employment levels, job and personal income growth and household debt-to-income levels;

●
changes in consumer confidence generally and confidence of potential home buyers in particular;

●
the ability of existing homeowners to sell their existing homes at prices that are acceptable to them;

●
changes in the supply of available new or existing homes and other housing alternatives, such as apartments and other residential rental property;

●
timing of oil and gas development in the areas where we sell our water;

●
general economic conditions, including the continued impact of COVID-19;

●
the market price of water, oil and gas;

●
changes in customer consumption patterns, including as a result of stay-at-home orders;

●
changes in applicable statutory and regulatory requirements;

●
changes in governmental policies and procedures, including with respect to land use and environmental and tax matters;

●
changes in interest rates;

●
changes in private and federal mortgage financing programs and lending practices;

●
uncertainties in the estimation of water available under decrees;

●
uncertainties in the estimation of costs of delivery of water and treatment of wastewater;

●
uncertainties in the estimation of the service life of our systems;

●
uncertainties in the estimation of costs of construction projects;

●
the strength and financial resources of our competitors;

●
our ability to find and retain skilled personnel;

●
climatic and weather conditions, including floods, droughts and freezing conditions;

●
turnover of elected and appointed officials and delays caused by political concerns and government procedures;

●
availability and cost of labor, material and equipment;

●
engineering and geological problems;

●
environmental risks and regulations;

●
our ability to raise capital;

●
our ability to negotiate contracts with customers;

●
uncertainties in water court rulings;

●
security and data breaches, including unauthorized access to confidential information on our information technology systems; and

●
the factors described under “Risk Factors” in this Annual Report on Form 10-K.
●
the strength and financial resources of our competitors;
●
our ability to find and retain skilled personnel;
●
climatic and weather conditions, including floods, droughts and freezing conditions;
●
labor relations;
●
turnover of elected and appointed officials and delays caused by political concerns and government procedures;
●
availability and cost of labor, material and equipment;
●
delays in anticipated permit and construction dates;
●
engineering and geological problems;
●
environmental risks and regulations;
●
our ability to raise capital;
●
our ability to negotiate contracts with new customers;
●
uncertainties in water court rulings; and
●
the factors described under “Risk Factors” in this Annual Report on Form 10-K.

We undertake no obligation, and disclaim any obligation, to publicly update or revise any forward-looking statements, whether as a resultbecause of new information, future events or otherwise. All forward-looking statements are expressly qualified by this cautionary statement.

Glossary of terms
4
The following terms are commonly used in the water industry and are used throughout our annual report:
●
Customer Facilities – facilities that carry potable water and reclaimed water to customers from the retail water distribution system (see “Retail Facilities” below) and collect wastewater from customers and transfer it to the retail wastewater collection system. Water and wastewater service lines, interior plumbing, meters and other components are typical examples of Customer Facilities. In many cases, portions of the Customer Facilities are constructed by the developer. Customer Facilities are typically owned and maintained by the customer.
●
Non-Tributary Groundwater – groundwater located outside the boundaries of any designated groundwater basins in existence on January 1, 1985, the withdrawal of which will not, within one hundred years of continuous withdrawal, deplete the flow of a natural stream at an annual rate greater than one-tenth of one percent of the annual rate of withdrawal.
●
Not Non-Tributary Groundwater – statutorily defined as groundwater located within those portions of the Dawson, Denver, Arapahoe, and Laramie Fox-Hill aquifers outside of designated basins that does not meet the definition of “non-tributary.”
●
Retail Facilities – facilities that distribute water to and collect wastewater from an individual subdivision or community. Developers are typically responsible for the funding and construction of Retail Facilities. Once we certify that the Retail Facilities have been constructed in accordance with our design criteria, the developer dedicates the Retail Facilities to a quasi-municipal political subdivision of the state, and we operate and maintain the facilities on behalf of such political subdivision.
●
Section – a parcel of land equal to one square mile and containing 640 acres.
PART I

●
SFE – a single family equivalent unit. One SFE is a customer – whether residential, commercial or industrial – that imparts a demand on our 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. One SFE is assumed to have a water demand of approximately 0.4 acre feet per year and to contribute wastewater flows of approximately 300 gallons per day.
●
Special Facilities – facilities that are required to extend services to an individual development 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. We typically design and construct the Special Facilities using funds provided by the developer in addition to the normal rates, fees and charges that we collect from our customers. We are typically responsible for the operation and maintenance of the Special Facilities upon completion.
●
Tributary Groundwater – all water located in an aquifer that is hydrologically connected to a natural stream such that depletion has an impact on the surface stream.
●
Tributary Surface Water – water on the surface of the ground flowing in a stream or river system.
●
Wholesale Facilities – facilities that serve an entire service area or major regions or portions thereof. Wells, treatment plants, pump stations, tanks, reservoirs, transmission pipelines, and major sewage lift stations are typical examples of Wholesale Facilities. We own, design, construct, operate, maintain and repair Wholesale Facilities which are typically funded using rates, fees and charges that we collect from our customers.
PART I
Item 1 – Business
Pure Cycle Corporation, a Colorado corporation (“we,” “us” or “our”), is a vertically integrated water company that:
●       
provides wholesale water and wastewater services;
●       
designs, constructs, operates and maintains water and wastewater systems;
●       
supplies untreated water for hydraulic fracturing and other commercial/industrial uses; and
●       
is developing a master planned residential community as part of our plan to monetize our water assets.
As a vertically integrated water company, we own or control substantially all assets necessary to provide wholesale water and wastewater services to our customers. We own or control the water rights that we use to provide domestic and irrigation water to our wholesale customers (including surface water, groundwater, reclaimed water rights and water storage rights). We own the infrastructure required to (i) withdraw, treat, store and deliver water (such as wells, diversion structures, pipelines, reservoirs and treatment facilities); (ii) collect, treat, store and reuse wastewater; and (iii) treat and deliver reclaimed water for irrigation use. We are principally targeting the “I-70 corridor,” a largely undeveloped area located east of downtown Denver and south of Denver International Airport along Interstate 70, as we expect the I-70 corridor to experience substantial growth over the next 30 years.
We provide wholesale water and wastewater services predominantly to two local governmental entities that in turn provide residential and commercial water and wastewater services to communities along the eastern slope of Colorado in the area referred to as the “Front Range,” extending essentially from Fort Collins on the north to Colorado Springs on the south. Our largest customer is the Rangeview Metropolitan District (the “Rangeview District”), which is a quasi-municipal political subdivision of the State of Colorado. We have the exclusive right to provide wholesale water and wastewater services to the Rangeview District and its end-use customers pursuant to the “Rangeview Water Agreements” and the “Off-Lowry Service Agreement” (each defined below). Through the Rangeview District, we currently provide wholesale service to 391 SFE water connections and 157 SFE wastewater connections located in the Rangeview District’s service area of southeastern metropolitan Denver in an area called the Lowry Range and other nearby areas where we have acquired service rights.
We supply untreated water to industrial customers for various purposes and to oil and gas companies for hydraulic fracturing on properties located within or adjacent to our service areas. Oil and gas operators have leased more than 135,000 acres within and adjacent to our service areas to explore and develop oil and gas interests in the oil-rich Niobrara and other formations. We have capitalized on the need for significant water supplies for hydraulic fracturing in proximity to our existing water supplies and infrastructure.

In addition to our water and wastewater operations we are developing 931 acres of land we own along Denver’s I-70 corridor as a master planned community known as Sky Ranch. In June 2017, we entered into agreements to sell a total of 506 residential lots at Sky Ranch to three national home builders. Pursuant to agreements with the Rangeview District, we are the exclusive provider of wholesale water and wastewater services to the future residents of Sky Ranch.
Pure Cycle Corporation was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008. Unless otherwise specified or the context otherwise requires, all referencesany reference to the “Company,” “we,” “us,”“us” or “our” areis to Pure Cycle Corporation and its subsidiaries on a consolidated basis. Pure Cycle’s common stock trades on The NASDAQ Stock Market under the ticker symbol “PCYO.”

Background

We are a diversified land and water resource development company. At our core we are an innovative and vertically integrated water and wastewater service provider that owns and develops a valuable portfolio of water rights in a water short region. In conjunction with developing water rights which culminates in providing water and wastewater services to customers, we also develop master planned communities creating value and opportunity for water customers, investors, homeowners, and businesses along the busy I-70 corridor of the Denver metropolitan area. We believe our water resources, land, and infrastructure, located in southeastern Denver, are positioned in one of the most attractive development areas of the Denver metropolitan region and will provide favorable investment returns. The eastern I-70 corridor is experiencing substantial growth which we believe will continue over several decades.

We are developing the Sky Ranch Master Planned Community located along the eastern I-70 corridor (see map below). Sky Ranch is planned to include up to 3,200 single family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over two million square feet of retail, commercial and light industrial space, all of which will be serviced by our water and wastewater resource development segment.

Our Waterland development activities provide a strategic complement to our water and Land Assets
This section should be readwastewater resource development business because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater services to the community. Having control over the water resources in conjunction withItem 1A – Risk Factors, Item 7 – Management’s Discussion developing the land enables us to efficiently build and Analysismaintain infrastructure for potable water and irrigation water distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments. It also enables us to essentially align construction and delivery of Financial Conditionthese investments with phased take-down commitments from our home builder customers, minimizing significant excess capacity or downtime in these significant investments. By being the landowner, land developer, and Resultswater/wastewater provider, we believe we can offer a more efficient development process, with more competitive lot pricing, which results in a more affordable and marketable product.

Our water and land assets are designed, constructed, operated, and maintained by us. Our water and land activities are each a distinct line of Operations – Critical Accounting Policiesbusiness which are operated as separate, but cohesive segments within the Company. We refer to these segments as our water and Usewastewater segment and our land development segment, both of Estimates, and Note 4 –which are described in more detail below.

Water and Land Assets.Wastewater Resource Development Segment

The $34.6 millionWe operate our water and wastewater resource development segment on a vertically integrated basis. Specifically, we own or control the water and infrastructure required to (i) withdraw, treat, store and deliver water (i.e., water rights, wells, diversion structures, pipelines, reservoirs and treatment facilities required to extract and use the water); (ii) collect, treat, store and reuse wastewater (i.e., we design, build, and operate water treatment and wastewater reclamation facilities); and (iii) treat and deliver reclaimed water for irrigation use (i.e., we use and reuse our valuable water supplies through non-potable irrigation systems to irrigate parks and open spaces).

Our water supplies, which can be used in our exclusive service area and other areas along the eastern I-70 corridor, enable us to add significant value to our land development segment by bringing water to land that does not have water for development and enhance the value of capitalizedthat land, as well as our water costsresources, to a greater extent than either a traditional water utility or land developer can. Having a valuable portfolio of water in a water short region provides us with a competitive advantage over other land developers who may be required to buy expensive water, pay significant fees to another water provider, in lieu of buying water, and/or wait for a city to annex property and extend costly water and wastewater infrastructure to the property before development can begin. Having our own water supply gives us more control over the land development process and the ability to capitalize on the value of our balance sheet representswater rights, as well as enhances the costsvalue of the land to which we provide our water. In addition, we have significant in-house expertise in engineering, operations, and land development which allows us to take a hands-on approach to the water and land development process.

We mainly provide wholesale water and wastewater services to local governmental entities that in turn provide residential and commercial water and wastewater services to customers in their communities. Our largest customer is the Rangeview Metropolitan District (“Rangeview District”). We have the exclusive right to provide water and wastewater services to the Rangeview District’s customers in its exclusive 24,000-acre service area in southeast Denver metropolitan area pursuant to various agreements that are described in greater detail below. As of August 31, 2020, through the Rangeview District, we provide service to 649 single family equivalent (“SFE”) water connections and 384 SFE wastewater connections. These connections are located mainly in the southeastern metropolitan Denver area on the Lowry Range, at our Sky Ranch development and other nearby areas where we have acquired service rights. With the water rights we own and control, we believe we can serve over 60,000 SFEs. An SFE is a customer, whether residential, commercial, or industrial, that imparts a demand on our water or wastewater systems like the demand of a family of four persons living in a single-family house on a standard sized lot. One SFE is assumed to have a water demand of approximately 0.4 acre-feet per year and to contribute wastewater flows of approximately 300 gallons per day. An acre foot of water is approximately 326,000 gallons of water, or enough water to cover an acre of ground with one foot of water. For some instances herein, as context dictates, the exclusive rightterm “acre-feet” is used to usedesignate an annual decreed amount of water available during a typical year.

In addition to our domestic customers, we provide raw water for oil and gas operations. Multiple operators lease more than 135,000 acres in and adjacent to our service area with more than 100 wells and miles of oil and gas collection lines. Sales of water to industrial customers in the related infrastructure developedoil and gas industry are unpredictable and fluctuate dramatically. After several years of significant activity throughout our service area, beginning around March 2020, demand for water from the oil and gas industry dropped precipitously due to provide wholesalelow oil and gas prices caused by increased world-wide production and decreased demand due to stay-at-home orders resulting from the coronavirus (“COVID-19”) pandemic.

Land Development Segment

In 2010, at a time when real estate prices were severely depressed due to the credit crisis the United States endured from 2007 until 2012, we purchased approximately 930 acres of land known as Sky Ranch. We acquired Sky Ranch with the intention of selling lots to national home builders in order to add value to our core water and wastewater services.operations by adding the ultimate purchasers of the homes as our water customers. In June 2017, we entered into agreements with three national home builders to sell the initial 506 residential lots at Sky Ranch. As of August 31, 2020, we have delivered 483 finished lots. The remaining finished lots were delivered on November 3, 2020. As of October 31, 2020, these home builders have built and sold over 315 homes at Sky Ranch. Based on current sales levels, we believe homes in this initial filing will be sold out by the end of calendar 2021, which is nearly two-years ahead of forecast. In December 2020, we plan to begin construction on the second filing at Sky Ranch. We anticipate that this filing will be platted for nearly 900 lots for residential units.

Subsequent to August 31, 2020, we entered into agreements with four national home builders to sell 789 finished lots for building attached and detached single-family residential homes in the second filing of Sky Ranch. We expect construction of the second filing at Sky Ranch will begin in December 2020. The second filing is planned to be developed in four sub-phases. We believe it will take three years to complete all construction and sell the finished lots, depending on market conditions.

Our Water Assets

We use our valuable and growing inventory of water and land assets to conduct our water and land development operations. Our water assets are as follows:
Table A - Water Assets
Water Source
Groundwater (acre feet)
Lowry (Rangeview Water Supply)
  Export (1)
11,650
  Non-Export (1)
12,035
Fairgrounds
321
Sky Ranch
828
24,834
Surface Water (acre feet)
Lowry (1)
3,300
WISE
500
3,800
Total (Groundwater and Surface Water)
28,634
(1) The combined Lowry water rights are 26,985 acre feet.
We believe we can serve approximately 60,000 SFEs.
Our service areas and water and land assets are described in greater detailsummarized in the mapstable below and discussion that follow:
further discussed in this section:

Summary Water Assets Table
The map below indicates the location
Water Source 
Groundwater
(acre-feet)
  
Surface Water
(acre-feet)
  
Other Water Rights
(acre-feet)
  
Total
acre-feet
 
Rangeview Water Supply            
Export (1)  
11,650
   
1,650
   
—
   
13,300
 
Non-Export (2)  
12,035
   
1,650
   
—
   
13,685
 
Fairgrounds  
321
   
—
   
—
   
321
 
Sky Ranch  
828
   
—
   
—
   
828
 
Lost creek supply  
—
   
300
  ��
220
   
520
 
WISE (3)  
—
   
900
   
—
   
900
 
Total  
24,834
   
4,500
   
220
   
29,554
 


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

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

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

We capitalize costs associated with obtaining, defending, enhancing, and developing our Denver area assets.
water rights. We capitalize costs incurred to construct infrastructure required to deliver water and wastewater services to our customers, and we capitalize costs to develop our land assets that are not sold to home builders.

Rangeview Water Supply and the Lowry Range

OurThe Rangeview Water –We own or control a totalSupply consists of approximately 3,300 acre feet26,985 acre-feet of tributary surface water, 23,685 acre feet of non-tributary groundwater, and not non-tributary groundwater rights, and approximatelygroundwater. Additionally, the Rangeview Water Supply has 26,000 acre feetacre-feet of adjudicated reservoir sitessites. Terminology typically used in the water industry that we refermay help readers understand water rights are detailed below.

Non-Tributary Groundwater – groundwater located outside the boundaries of any designated groundwater basins in existence on January 1, 1985, the withdrawal of which will not, within one hundred years of continuous withdrawal, deplete the flow of a natural stream at an annual rate greater than one-tenth of one percent of the annual rate of withdrawal.

Not Non-Tributary Groundwater – statutorily defined as groundwater located within those portions of the Dawson, Denver, Arapahoe, and Laramie Fox-Hill aquifers outside of designated basins that does not meet the definition of “non-tributary.”

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

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

The Rangeview Water Supply is principally located in the southeast Denver metropolitan area at the “Lowry Range,” which is land owned by the State Board of Land Commissioners (the “Land(“Land Board”) and is described below.

Rangeview Water Agreements –We acquired our Rangeview Water Supply in April 1996 pursuant tothrough the following agreements:

(i) 
The 1996 Amended and Restated Lease Agreement between the Land Board and the Rangeview District, which was superseded by the 2014 Amended and Restated Lease Agreement, dated July 10, 2014 (the “Lease”), among us, the Land Board, the Rangeview District and us;
(ii) 
The Agreement for Sale of non-tributary and not non-tributary groundwater which we can “export” from the Lowry Range to supply water to nearby communities (this portion of the Rangeview Water Supply is referred to as our “Export Water”) between us and the Rangeview District (the “Export Agreement”); and
District;

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

The Agreement for Sale of non-tributary and Restated Service Agreement, dated July 11, 2014 (the “Lowry Service Agreement”),not non-tributary groundwater between us and the Rangeview District.
District (the “Export Agreement”), pursuant to which we purchased a portion of the Rangeview Water Supply that we refer to as our “Export Water” because the Export Agreement allows us to export this water from the Lowry Range to supply water to nearby communities; and

Additionally, in
The 1997 we entered into a Wastewater Service Agreement between us and Rangeview District (the “Lowry Wastewater Agreement”) with the Rangeview District, which allows us to provide wastewater service to the Rangeview District’s customers on the Lowry Range.

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

PursuantAdditionally, in August 2019, we purchased approximately 300 acre-feet of fully consumptive surface water in the Lost Creek Designated Ground Water Basin (“Lost Creek Water”). The Lost Creek Water is currently adjudicated for agricultural use, and we have filed an application with the Colorado water court to change the use of the water to augment our municipal/industrial water supplies at the Lowry Range. We have consolidated our Lost Creek Water with our Rangeview Water Supply to provide service to the Rangeview Water Agreements,District’s customers both on and off the Lowry Range.

Pursuant to service agreements with Rangeview (including the Lowry Service Agreement, the Lowry Wastewater Agreement and the Non-Lowry Service Agreement described below), we design, construct, operate and maintain the Rangeview District’s water and wastewater systems to allow the Rangeview Districtthat are used to provide water and wastewater serviceservices to itsthe Rangeview District’s customers located within the Rangeview District’s exclusive service area, at the Lowry Range.and other approved areas. Subject to the terms and conditions of our agreements with the Lease,Rangeview District, we are the exclusive water and wastewater provider to the Rangeview District’s customers. For the Rangeview District’s customers located on the Lowry Range, and we operate both the water and the wastewater systems during our contract period on behalf of the Rangeview District, which owns the facilities for both systems. At the expiration of our contract term in 2081, ownership of the water system facilities located on the Lowry Range used to deliver Non-Export Waterwater to customers on the Lowry Range will revert to the Land Board, with the Rangeview District retaining ownership of any wastewater facilities located on the wastewater facilities. ThroughLowry Range. The water system and related facilities we own, we use ourused to deliver water to customers off the Lowry Range (including Export Water,Water) will remain with us and we intend to use other supplies owned by us, tothe Rangeview District. We provide wholesale water service and wastewater service to customers located both on and outside of the Lowry Range, including customers of the Rangeview District and other governmental entities, and industrial and commercial customers.

Of the approximately 26,985 acre feet of water comprising our Rangeview Water Supply, we own 11,650 acre feet of Export Water, which consists of 10,000 acre feet of groundwater and 1,650 acre feet of average yield surface water, pending completion by the Land Board of documentation related to the exercise of our right to substitute 1,650 acre feet of our groundwater for a comparable amount of surface water. Additionally, assuming the completion of the substitution of groundwater for surface water, we hold the exclusive right to develop and deliver through the year 2081 the remaining 13,685 acre feet of groundwater and approximately 1,650 acre feet of average yield surface water to customers either on or off of the Lowry Range. The Rangeview Water Agreements also grant us the right to use approximately 26,000 acre-feet of surface reservoir capacity to provide water service to customers both on and off the Lowry Range.



The Lowry Range Property–

The Lowry Range is locatedconsists of nearly 26,000 acres, or 40 square miles, of primarily undeveloped land in unincorporated Arapahoe County, aboutCounty. It is located 20 miles southeast of downtown Denver. The Lowry RangeDenver and is one of the largest contiguous parcels under single ownership next to a major metropolitan area in the United States. The Lowry Range is approximately 27,000 acres in size or about 40 square miles of land. Of the 27,000 acres, pursuantPursuant to our agreements with the Land Board, andwe, together with the Rangeview District, we have the exclusive rights to provide water and wastewater services to approximately 24,000 acres of the Lowry Range.

The Rangeview District
Rangeview Metropolitan District –
The Rangeview District is a quasi-municipal corporation and political subdivision of the State of Colorado formed in 1986 for the purpose of providing water and wastewater serviceservices to the Lowry Range and other approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as directors of the Rangeview District must own an interest in property within the boundaries of the Rangeview District. We own certain rights and real property interests which encompass the current boundaries of the Rangeview District. The current directors of the Rangeview District are Mark W. Harding (our President, Chief Executive Officer, and a director), Kevin B. McNeill (our Vice President and Chief Financial Officer), Scott E. Lehman and James Ewing (all are employees(an employee of Pure Cycle)ours), Dirk Lashnits (an employee of ours), and twoone independent board members.member. Pursuant to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year. Mr.Messrs. Harding, Mr.McNeill, Lehman, and Mr. EwingLashnits have all elected to forego these payments.
South Metropolitan Water Supply Authority (“SMWSA”) and Water Infrastructure Supply Efficiency Partnership (“WISE”) –SMWSA is a municipal water authority in the State of Colorado organized to pursue the acquisition and development of new water supplies on behalf of its members, including the Rangeview District. SMWSA members include 14 Denver area water providers in Arapahoe and Douglas Counties. The Rangeview District became a member of SMWSA in 2009 in an effort to participate with other area water providers, in developing regional water supplies along the Front Range. We entered into a Participation Agreement with the Rangeview District on December 16, 2009, whereby we agreed to provide funding to the Rangeview District in connection with its membership in the SMWSA (the “SMWSA Participation Agreement”). SMWSA members have been working with the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”) and the City of Aurora acting by and through its Utility Enterprise (“Aurora Water”) on a cooperative water project known as the WISE, which seeks to develop regional infrastructure that would interconnect members’ water transmission systems to be able to develop additional water supplies from the South Platte River in conjunction with Denver Water and Aurora Water. In July 2013, the Rangeview District together with nine other SMWSA members formed the South Metro WISE Authority (“SMWA”) pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement (the “SM IGA”) to enable its members to participate in WISE. The SM IGA specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. On December 31, 2013, SMWA, Denver Water and Aurora Water entered into the Amended and Restated WISE Partnership – Water Delivery Agreement (the “WISE Partnership Agreement”), which provides for the purchase and construction of certain infrastructure (pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. We have entered into the Rangeview/Pure Cycle WISE Project Financing and Service Agreement with the Rangeview District dated November 19, 2014 (effective as of December 22, 2014), which obligates us to fund the Rangeview District’s cost of participating in WISE (the “WISE Financing Agreement”). In exchange for funding the Rangeview District’s obligations in WISE, we will have the sole right to use and reuse the Rangeview District’s approximate 7% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue from such service. Upon completion of the WISE infrastructure in 2017, we will be entitled to approximately three million gallons per day of transmission pipeline capacity and 500 acre feet per year of water.In accordance with the WISE Financing Agreement and the SMWSA Participation Agreement, to date we have provided approximately $3.1 million of financing to the Rangeview District to fund its obligation to finance the purchase of infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system.We anticipate that we will be spending the following over the next five fiscal years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries related to WISE:
 
Table B - Estimated WISE Costs
 
 
 
For the Fiscal Years Ended August 31,
 
 
 
2018
 
 
2019
 
 
2020
 
 
2021
 
 
2022
 
Subscription (Operations)
 $51,800 
 $51,800 
 $51,800 
 $51,800 
 $51,800 
Water Deliveries
  232,000 
  348,000 
  493,000 
  738,000 
  897,000 
Capital (Infrastructure)
  338,100 
  1,555,400 
  74,200 
  - 
  - 
Other
  23,600 
  86,600 
  23,600 
  68,300 
  83,200 
 
 $645,500 
 $2,041,800 
 $642,600 
 $858,100 
 $1,032,000 

Land Board Royalties and Fees

Water Deliveries–Pursuant to the Rangeview Water Agreements, the Land Board is entitled to royalty payments based on a percentage of revenues earned from water sales that utilize water fromuse the Rangeview Water Supply. The calculation of royalties depends on the water source,location of the customer and whether the customer is a public or private entity, and the location of the customer. Royalties were modified in July 2014 pursuant to the terms of the Lease.entity. The Land Board does not receive a royalty from wastewater services.
Water Customers–When we develop, operate and deliver water service utilizing water from our Rangeview Water Supply, payments from customers generate royalties to the Land Board receives royalties on the gross revenues at a rate of 12% of gross revenues from water delivered to all customers located on the Lowry Range and to all private customers and customers onlocated off the Lowry Range and 10% from public entity customers.customers located off the Lowry Range. In the event that either (i) metered production of water used on the Lowry Range in any calendar year exceeds 13,000 acre feetacre-feet or (ii) 10,000 surface acres of land on the Lowry Range have been rezoned to non-agricultural use, finally platted and water tap agreements have been entered into with respect to all improvements to be constructed on such acreage, the Land Board may elect, at its option, to receive in(in lieu of its royalty of 12% of gross revenues,from customers on the Lowry Range), 50% of the collective net profits (ours and the Rangeview District’s) derived from the sale or other disposition of water on the Lowry Range. To date, neither of these conditions has been met, and such conditions are not likely to be met any time soon. In addition to royalties on the sale of metered water deliveries, the Land Board will receive a royalty onof two percent (2%) of the gross amount received from the sale of water taps atto be served by the rate of two percent,Rangeview Water Supply, except for the sale of any taps to Sky Ranch, of the gross amount received from the sale of a water tap.
Sale of Water Rights–In the eventRanch. Escalated royalties will be owed if we sell our Export Water right outright rather than developing and delivering water service, royalties to the Land Board escalate based on the amount of gross revenue we receive and are lower for sales to a water district or similar municipal or public entity than for sales to a private entity as noted in Table C.service. We do not currently anticipate selling our Export Water.

 
Table C - Royalties for Sale of Export Water Rights
 
 
 
 
 
Royalty Rate
 
 
Gross Revenues
 
 
Private Entity Buyer
 
 
Public Entity Buyer
 
 $0 - $45,000,000 
  12%
  10%
 $45,000,001 - $60,000,000 
  24%
  20%
 $60,000,001 - $75,000,000 
  36%
  30%
 $75,000,001 - $90,000,000 
  48%
  40%
 
Over $90,000,000
 
  50%
  50%
Annual Production Fee – We are also required to paypre-pay the Land Board a minimum annual water production fee, which is currently under negotiation, but we have estimated the minimum fee to be approximately $45,600royalty of $46,000 per year, which is to be credited against futureearned royalties.

Annual Rent – We pay the Land Board annual rent under the Lease of $7,600, which amount is increased every five years based on the Consumer Price Index for Urban Consumers.

South Metropolitan Water Supply Authority (“SMWSA”) and Water Infrastructure Supply Efficiency Partnership (“WISE”)

SMWSA is a municipal water authority in Colorado organized to pursue the acquisition and development of water supplies on behalf of its members, which include the Rangeview District. SMWSA members include 14 Denver area water providers in Arapahoe and Douglas Counties. Pursuant to certain agreements between us and the Rangeview District, we agreed to provide funding to enable the Rangeview District to acquire rights to water projects undertaken by SMWSA, including rights to water supplied pursuant to the cooperative water project known as WISE. WISE provides for the purchase and construction of infrastructure (such as pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the South Metro WISE Authority (“SMWA”), consisting of the Rangeview District and nine other SMWSA members, from the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”) and the City of Aurora acting by and through its utility enterprise (“Aurora Water”). In exchange for funding the Rangeview District’s WISE obligations, we have the exclusive right to use and reuse the Rangeview District’s share of WISE water (approximately 9%) and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue from providing those services. Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and increasing acre-feet of water per year as noted below.

Water Year
(June 1 – May 31)
 
Acre-feet
Subscription
2021 400
2022 500
2023 600
2024 700
2025 800
Thereafter 900

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, 2020, WISE water was $5.77 per thousand gallons and such rate will remain in effect through calendar 2021. In addition, we pay certain system operational and construction costs. If a WISE member, including the Rangeview District, does not need its WISE water each year or a member needs additional water, the members can trade and/or buy and sell water amongst themselves. During the fiscal year ended August 31, 2020, the Company, through the Rangeview District, purchased an additional 400 acre-feet of WISE water for $582,200, which amount is in addition to the subscription described above.

During the years ended August 31, 2020 and 2019, we provided $2.8 million and $1.5 million of financing to the Rangeview District to fund the Rangeview District’s obligation to purchase WISE water rights and pay for operational and construction charges. Ongoing funding requirements are dependent on the WISE water subscription amount and the Rangeview District’s allowable share of the operational and overhead costs of SMWA and construction activities related to delivery of WISE water.

East Cherry Creek Valley System –

Pursuant to a 1982 contractual right,agreement, the Rangeview District may purchase water produced from East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board system. ECCV’s Land Board system is comprised of eight wells and more than 10ten miles of buried water pipeline located on the Lowry Range. In May 2012, in order to increase the delivery capacity and reliability of these wells, in our capacity as the Rangeview District’s service provider and the Export Water Contractor (as defined in the Lease among us, the Rangeview District and the Land Board), we entered into an agreement to operate and maintain the ECCV facilities allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing offor oil and gas wells.Our costs associated with the The agreement allows us to use of the ECCV system arethrough April 30, 2032, in exchange for a flat monthly fee of $8,000 per month from January 1, 2013 through December 31, 2020, and will decrease to $3,000 per month from January 1, 2021 through April 2032. Additionally, we pay a fee per 1,000 gallons of water produced from ECCV’s system, which is included in the water usage fees charged to customers.

Sources of Water and Wastewater Service Revenues

Arapahoe County Fairgrounds Agreement for Water Service
In 2005, we entered into an Agreement for Water Service (the “County Agreement”) with Arapahoe County to design, construct, operate and maintain a water system for, and provide water services to, the county for use at the Arapahoe County fairgrounds (the “Fairgrounds”), which are located west of the Lowry Range. Pursuant to the County Agreement, we purchased 321 acre feet of water from the county in 2008. Further details of the arrangements with the county are described in Note 4 –Water and Land Assetsto the accompanying financial statements.
Pursuant to the County Agreement, we constructed and own a deep water well, a 500,000-gallon water tank and pipelines to transport water to the Fairgrounds. The construction of these items was completed in our fiscal 2006, and we began providing water service to the county in 2006.
Water Sales for Fracking
We provide water for hydraulic fracturing (“fracking”) of oil and gas wells being developed in the Niobrara Formation to and around the Land Board’s Lowry Range property and our Sky Ranch property. Oil and gas drilling in our area is affected by the price of oil and can vary from year to year. Wells developed in the Niobrara Formation utilize between 10 and 20 million gallons of water to drill and frack, which equates to selling water to between approximately 100 and 200 homes for an entire year.
Water revenues from sales of water for the construction of well sites and for drilling and fracking wells drilled into the Niobrara Formation were approximately $478,000 and $600 during the fiscal years ended August 31, 2017 and 2016, respectively. With a large percentage of the acreage surrounding the Lowry Range in Arapahoe, Adams, Elbert, and portions of Douglas Counties already leased by oil companies, we anticipate providing additional water for drilling and fracking of oil and gas wells in the future. Previously nearly all oil and gas development was attributable to our largest fracking customer ConocoPhillips Company (“ConocoPhillips”). However, in the past year there have been two other oil and gas companies acquiring lease interests in the area and each of these companies have drilled and fracked wells. We anticipate continued development of oil and gas wells at the Lowry Range, Sky Ranch and the surrounding area by multiple operators.
Service to Customers Not on the Lowry Range
Since January 2017, we have had an agreement with the Rangeview District to be the Rangeview District’s exclusive provider ofOur water and wastewater services tosegment generates revenue from the Rangeview District’s customers located outside of its Lowry Range service area. This agreement was confirmedfollowing sources, described in the Export Service Agreement, dated June 16, 2017 (the “Off-Lowry Service Agreement”), between us and the Rangeview District. Pursuant to the Off-Lowry Service Agreement, we design, construct, operate and maintain the Rangeview District’sgreater detail below:

Monthly water usage and wastewater systems and the systems of other communities that have service contracts with the Rangeview District to provide water and wastewater services to the Rangeview District’s customers that are not on the Lowry Range (currently, Wild Pointe Ranch and Sky Ranch). In exchange for providing water and wastewater services to the Rangeview District’s customers that are not on the Lowry Range, we receive 100% oftreatment fees
One-time water and wastewater tap (connection) fees 98% of the water usage fees,
Construction and 90% of the monthly wastewater servicespecial facility funding fees
Consulting fees; and wastewater usage fees received by the Rangeview District from its customers that are not located on the Lowry Range, after deduction of royalties due to the Land Board, if applicable. See Rangeview Water Supply and Lowry Range
Industrial –Land Board Royaltiesabove. The water usage fees to be collected for service at Sky Ranch are the only fees that would currently be subject to the Land Board royalty.
Wild Pointe – Elbert & Highway 86 Commercial Metropolitan District –In 2017, we entered into an agreement with the Rangeview District, which had entered into an agreement with Elbert & Highway 86 Commercial Metropolitan District (“Elbert 86 District”) to operate and maintain a water system for residential and commercial customers at the Wild Pointe development in Elbert County. The water system includes two deep water wells, a pump station, treatment facility, storage facility, over eight miles of transmission lines, and approximately 457 acre feet of water rights serving the development. We provided $1.6 million in funding to acquire the exclusive rights to operate and maintain all the water facilities in exchange for payment of the remaining residential and commercial tap fees and annual water use fees. Service to Wild Pointe is governed by the Off-Lowry Service Agreement.

Sky Ranch Water and Wastewater Service –As described in more detail below, we are developing 931 acres of land we own as a master planned communityknown as Sky Ranch. Pursuant to the Sky Ranch Water and Wastewater Service Agreement, dated June 19, 2017 (the “Sky Ranch Service Agreement”), between PCY Holdings, LLC, our wholly owned subsidiary and the owner of the Sky Ranch property (“PCY Holdings”), and the Rangeview District, PCY Holdings agreed to construct certain facilities necessary to provide water and wastewater service to Sky Ranch, and the Rangeview District agreed to provide water and wastewater services for the Sky Ranch development. Pursuant to the Off-Lowry Service Agreement, we are the exclusive provider of water and wastewater services to future residents of the Sky Ranch development.
Sky Ranch Development
In 2010, we purchased approximately 931 acres of undeveloped land located in unincorporated Arapahoe County known as Sky Ranch. Sky Ranch is located directly adjacent to I-70, 16 miles east of downtown Denver, four miles north of the Lowry Range, and four miles south of Denver International Airport.
The property includes rights to approximately 830 acre feet of water and approximately 640 acres of oil and gas mineral rights and has been zoned for residential, commercial and retail uses that may include up to 4,850 SFEs. Sky Ranch is zoned for 4,400 homes and 1.35 million square feet of commercial and retail property. We currently lease the land to an area farmer on a year to year basis. We have leased the minerals underlying the land to a major independent exploration and production company. We have been engaged in the design, permitting, engineering and development of Sky Ranch to develop residential lots for entry-level housing (houses costing in the $300,000 range). We plan to develop the first phase of Sky Ranch, which will include 151 acres and 506 detached single family lots. We anticipate beginning construction of an initial 200 lots in fiscal 2018 pursuant to the Purchase and Sale Contracts described below.operations fees.

In June 2017, we entered into purchaseMonthly Water Usage and sale agreements (collectively, the “Purchase and Sale Contracts”) with three separate home builders pursuant to which we agreed to sell, and each builder agreed to purchase, a certain number (totaling 506) of single-family, detached residential lots at the Sky Ranch property. We will be developing finished lots for each of the three home builders (which are lots on which homes are ready to be built that include roads, curbs, wet and dry utilities, storm drains and other improvements). Each builder is required to purchase water and sewer taps for the lots from the Rangeview District, the cost of which depends on the size of the lot, the size of the house, and the amount of irrigated turf. Pursuant to the Off-Lowry Service Agreement, we will receive all of the water tap fees and wastewater tap fees and 90% of the monthly service fees and usage fees for wastewater services received by the Rangeview District from customers at Sky Ranch. We will also receive 98% of the usage fees for water services received by the Rangeview District from customers at Sky Ranch, after deduction, in most instances, of the royalty to the Land Board related to the use of the Rangeview Water Supply.
The closing of the transactions contemplated by each Purchase and Sale Contract is subject to customary closing conditions, including, among others, the builder’s completion to its satisfaction of a title review and other due diligence of the property, the accuracy of the representations and warranties made by us in the Purchase and Sale Contract, and a commitment by the title company to issue to the builder a title policy, subject to certain conditions. Within three business days of the execution of each Purchase and Sale Contract, each builder paid an earnest money deposit. Each builder had a 60-day due diligence period during which it had the right to terminate the Purchase and Sale Contract and receive a full refund of its earnest money deposit.  The initial due diligence period was extended; however, on November 10, 2017, each builder completed its due diligence period and agreed to continue with its respective Purchase and Sale Contract. Pursuant to certain Purchase and Sale Contracts, the builder is required to make an additional earnest money deposit or deposits after the due diligence period and/or final approval of the entitlements for the property. The earnest money deposit or deposits will be applied to the payment of the purchase price of the lots at closing in accordance with a specified takedown schedule or be paid to us in the event of certain defaults by a builder. Pursuant to each Purchase and Sale Contract, we must obtain final approval of the entitlements for the property by August 2018 (which date we may extend by six months).
Wastewater Treatment Fees

We are obligated pursuant to the Purchase and Sale Contracts, or separate Lot Development Agreements (the “Lot Development Agreements” and, together with the Purchase and Sale Contracts, the “Builder Contracts”), to construct infrastructure and other improvements, such as roads, curbs and gutters, park amenities, sidewalks, street and traffic signs, water and sanitary sewer mains and stubs, storm water management facilities, and lot grading improvements for delivery of finished lots to each builder. Pursuant to the Builder Contracts, we must cause the Rangeview District to install and construct off-site infrastructure improvements (i.e., drainage and storm water retention ponds, a wastewater reclamation facility, and wholesale water facilities) for the provision of water and wastewater service to the property. In conjunction with our approvals with Arapahoe County for the Sky Ranch project, we and/or the Rangeview District and the Sky Ranch Districts are obligated to deposit into an account the anticipated costs to install and construct substantially all the off-site infrastructure improvements (which include drainage, wholesale water and wastewater, and entry roadway), which we estimate will be approximately $10.2 million.
We estimate the total capital required to develop lots in the first phase (506 lots) of Sky Ranch is approximately $27.8 million, and estimate lots sales to home builders to generate $35 million providing a margin on lots of approximately $7.2 million. Utility revenues are derived from tap fees (which vary depending on lot size, house size, and amount of irrigated turf) and usage fees (which are monthly water and wastewater fees). Our current Sky Ranch water tap fees are $26,650 (per SFE), and wastewater taps fees are $4,659 (per SFE).
Sky Ranch Metropolitan District No. 1, 3, 4, and 5 –The Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 are quasi-municipal corporations and political subdivisions of Colorado formed in 2004 for the purpose of providing service to the approximately 930 acres of the Sky Ranch property (the “Sky Ranch Districts”). The Sky Ranch Districts are governed by an elected board of directors. Eligible voters and persons eligible to serve as directors of the Sky Ranch Districts must own an interest in property within the boundaries of the district. We own certain rights and real property interests which encompass the current boundaries of the districts. The current directors of the districts are Mark W. Harding, Scott E. Lehman, and James Ewing (all are employees of Pure Cycle), and two independent board members. Pursuant to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year. Mr. Harding, Mr. Lehman, and Mr. Ewing have all elected to forego these payments.
Oil and Gas Leases
In 2011, we entered into a three year Oil and Gas Lease (the “O&G Lease”) and Surface Use and Damage Agreement (the “Surface Use Agreement”) and received an up-front payment of $1,243,400 ($1,900 per mineral acre), and a 20% of gross proceeds royalty (less certain taxes) from the sale of any oil and gas produced from the approximately 634 acres of mineral estate we own at Sky Ranch. In 2014 the O&G Lease was extended for an additional two (2) years, and we received an additional up-front payment of $1,243,400 for the extension. The O&G Lease is now held by production and we have been receiving royalties from the oil and gas production from two wells drilled within our mineral interest. During the fiscal year ended August 31, 2017, we received $186,600 in royalties attributable to these two wells.
In 2015, we received an up-front payment of $72,000, pursuant to a lease (which expired in fiscal 2017) for the purpose of exploring for, developing, producing, and marketing oil and gas of 40 acres of mineral estate we own adjacent to the Lowry Range (the “Rangeview Lease”). In September 2017, we entered into a three-year Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (the “Bison Lease”), for this 40-acre mineral estate, and we received an up-front payment of $167,200.
Arkansas River Land and Minerals
We own three farms totaling 700 acres in the Arkansas River Valley. The farms were acquired in order to correct dry-up covenant issues related to water only farms and we currently lease all three farms for dry land grazing. We intend to sell the farms in due course and have classified the farms as long term investments. We also own approximately 13,900 acres of mineral interests in the Arkansas River Valley, which have an estimated value of approximately $1.4 million. We currently have no plans to sell our mineral interests.

Well Enhancement and Recovery Systems
In 2007, we, along with two other parties, formed Well Enhancement and Recovery Systems LLC (“Well Enhancement LLC”), to develop a new deep water well enhancement tool and process that we believe will increase the efficiency of wells completed into the Denver Basin groundwater formations. According to results from studies performed by an independent hydro-geologist, the well enhancement tool effectively increased the production of the two test wells by 80% and 83% when compared to that of nearby wells developed in similar formations at similar depths. Based on the positive results of the test wells, we continue to refine the process of enhancing deep water wells and are marketing the tool to area water providers. We currently hold a 50% interest in Well Enhancement LLC. We have not drilled any new wells in the past three years and have not used the tool during this period, but we intend to continue to use the tool when we drill new water wells.
Revenues
We generate revenues through our wholesale water and wastewater operations predominately from three sources: (i) monthly service and contract delivery fees, (ii) one-time water and wastewater tap fees and construction fees, and (iii) consulting fees. Our revenue sources and how we account for them are described in greater detail below. We typically negotiate the payment terms for tap fees, construction fees, and other water and wastewater service fees with our wholesale customers as a component of our service agreements prior to construction of the project. However, with respect to customers on the Lowry Range, pursuant to the Lease, the Rangeview District’s rates and charges to such end-use customers may not exceed the average of similar rates and charges of three nearby water providers.
i)
Monthly Service Fees–Monthly wholesale water usage fees are assessed to our customers based on actual metered deliveries to their end-use customers each month. Water usage fees are based on a tiered pricing structure that provides for higher prices as customers use greater amounts of water. The water usage fees for end-use customers on the Lowry Range are noted below in the table below:

Current Lowry Range Tiered Water Usage Pricing Structure
 
   Table D - Lowry Range Tiered Water Usage Pricing Structure
 
 
 
Price ($ per thousand gallons)
 
Base charge per SFE
 $32.27 
 $30.35 
 $30.35 
0 gallons to 10,000 gallons
 $3.91 
 $3.51 
 $3.51 
10,001 gallons to 20,000 gallons
 $5.14 
 $5.31 
 $5.31 
20,001 gallons to 40,000 gallons
 $8.08 
 $8.12 
 $8.12 
40,001 gallons and above
 $9.87 
 $9.55 
 $9.55 

Base charge per SFE per month 
$
32.74
 
Price ($ per thousand gallons used per month)
0 gallons to 15,000 gallons
 
$
4.63
 
15,001 gallons to 30,000 gallons 
$
8.10
 
30,001 gallons and above 
$
9.95
 

The figures in Table Dthe table above reflect the amounts charged to the Rangeview District’s end-use customers on the Lowry Range. Pursuant to the Lease, the amounts charged by the Rangeview District to its end-use customers on the Lowry Range cannot exceed the average of similar rates and charges of three surrounding municipal water and wastewater service providers. In exchange for providing water service to the Rangeview District’s Lowry Range customers, we receive 98% of the usage charges received by the Rangeview District relating to water services after deducting the required royalty to the Land Board (described above at Rangeview Water Supply and Lowry Range – Land Board Royalties and Fees).

The amounts charged by the Rangeview District to its end-use customers off the Lowry Range are determined pursuant to the Rangeview District’s service agreements with such customers and such rates may vary. In exchange for providing water service to the Rangeview District’s customers off the Lowry Range, we receive 98% of the usage charges received by the Rangeview District relating to water services after deducting any required royalty to the Land Board. The royalty to the Land Board is required for water service provided utilizing our Rangeview Water Supply, which includes most of our current customers off the Lowry Range except those at Wild Pointe. In exchange for providing wastewater services, we receive 90% of the Rangeview District’s monthly wastewater service and usage fees,Elbert & Highway 86 Commercial District (also known as well as the right to use or“Wild Pointe” described below).

We sell the reclaimed water.
In addition to the tieredbulk water usage pricing structure, we currently chargeat a hydrant rate of $10.50$14.76 per thousand gallons forto commercial and industrial customers. customers through the use of hydrant meters.

We also collect other immaterial fees and charges from customers and other users to cover miscellaneous administrative and service expenses, such as application fees, review fees, reinspection fees, and permit fees.

In exchange for providing wastewater services, we receive 90% of the Rangeview District’s monthly wastewater treatment fees, as well as the right to use or sell the reclaimed water.

ii)
Water and Wastewater Tap Fees

We generate significant revenues from fees charged to customers to connect to our water and Construction Fees–Tapwastewater systems. These fees are known as tap fees. The tap fee is a non-refundable fee that is payable typically paid by developers in advanceat the time a building permit is granted for construction of construction activitiesa home or business and authorizes the property to connect to the water or wastewater system. Once granted, the right stays with the property. We have no obligation to physically connect the property to the lines. Once connected to the water and/or wastewater systems, the customer has live service to receive metered water deliveries from our system and send wastewater into our system. Thus, the customer has full control of the connection right as it can obtain all the benefits from this right. Our systems are non-refundable. Tap fees are typically“wholesale facilities,” namely those assets used to fund constructiondeliver water and wastewater to a service area or major regions or portions thereof. Wells, treatment plants, pump stations, tanks, reservoirs, transmission pipelines, and major sewage lift stations are typical examples of the Wholesale Facilities and defray the acquisition costs of obtaining water rights and operatingwholesale facilities.

The Rangeview District’s 20172020 water tap fees are $24,974,$27,209 per SFE, and its wastewater tap fees are $4,659.$4,752.

In exchange for providing water service to the Rangeview District’s customers on the Lowry Range, we receive 100% of the Rangeview District’s tap fees after deducting the two percent royalty to the Land Board described above. In exchange for providing water service to the Rangeview District’s customers off the Lowry Range, we currently receive 100% of the Rangeview District’s tap fees. If water taps are sold to customers not located on the Lowry Range that are to be serviced utilizingusing the Rangeview Water Supply (other than taps to Sky Ranch, which are exempt), we receive 98% of the two percent royalty toRangeview District’s tap fees and the Land Board would be deducted fromreceives the amount we receive.remaining two percent as a royalty. In exchange for providing wastewater services, whether to customers on or off the Lowry Range, we receive 100% of the Rangeview District’s wastewater tap fees.

Construction and Special Facility Funding Fees

Construction and Special Facility Funding fees are fees we receive, typically in advance, from developers for us to build certain infrastructure such as Special Facilities which arethat is normally the responsibility of the developer.developer because the facilities service only the developer’s property. Those type of facilities may include retail facilities, which distribute water to and collect wastewater from an individual subdivision or a community, and special facilities, which are required to extend services to an individual development and are not otherwise classified as a typical wholesale facility or retail facilities. 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. Once we certify that the special facilities have been constructed in accordance with our design criteria, the developer dedicates the special facilities to the Rangeview District, and we operate and maintain the facilities on behalf of Rangeview.

Consulting Fees–

Consulting fees are fees we receive, typically on a monthly, basis, from municipalities and area water providers alongfor whom we provide contract operation services.

Industrial – Oil and Gas Operations Fees

We provide water for oil and gas operators that are performing hydraulic fracturing, mainly in the I-70 corridor,Niobrara Formation around our service area and our Sky Ranch property. These fees are paid based on the metered gallons of water delivered. Oil and gas drilling in our area is affected by the price of oil and state, local and federal government regulations. The number of wells drilled vary from year to year. Each well utilizes between 10 and 20 million gallons of water during the hydraulic fracturing process, which equates to selling water to between approximately 100 and 200 homes for an entire year. With a large percentage of the acreage surrounding the Lowry Range in Arapahoe, Adams, Elbert, and portions of Douglas Counties already leased by oil companies, we anticipate continuing to provide water for drilling and hydraulic fracturing in the future.

Service to Customers Not on the Lowry Range

In addition to customers on the Lowry Range, we have an exclusive agreement with the Rangeview District to provide water and wastewater service, including the design, construction, operation and maintenance of water and wastewater systems to serve the Rangeview District’s customers located outside the Lowry Range service area (for example Wild Pointe and Sky Ranch) (the “Non-Lowry Service Agreement”). In exchange for providing water and wastewater services to the Rangeview District’s customers that are not on the Lowry Range, we receive 100% of water and wastewater tap fees, 98% of the water usage fees, and 90% of the monthly wastewater service and usage fees received by the Rangeview District from these customers, after deduction of royalties due to the Land Board, if applicable (i.e., if we use a portion of the Rangeview Water Supply, such as the Export Water, to provide service to such customers). We are currently not using the Rangeview Water Supply at Sky Ranch, but we may do so in the future, in which case water usage fees to be collected for such service would become subject to the Land Board royalty.

Sky Ranch Water and Wastewater Service – As described in more detail below, we are developing approximately 930 acres of land as a Master Planned Community known as Sky Ranch. Pursuant to the Non-Lowry Service Agreement, we are the exclusive provider of water and wastewater services to future residents of the Sky Ranch development.

Wild Pointe – Elbert & Highway 86 Commercial Metropolitan District – In 2017, we entered into an agreement with the Rangeview District, which had entered into an agreement with Elbert & Highway 86 Commercial Metropolitan District (the “Elbert 86 District”) to operate and maintain a water system for residential and commercial customers at the Wild Pointe development in Elbert County. The water system includes two deep water wells, a pump station, treatment facility, storage facility, over eight miles of transmission lines, and over 450 acre-feet of water rights serving Wild Pointe. We provided $1.6 million in funding to acquire the exclusive rights to operate and maintain all the water facilities in exchange for payment of the remaining residential and commercial tap fees and annual water use fees. Service to Wild Pointe is governed by the Non-Lowry Service Agreement.

Our Land Development Assets – Sky Ranch

In 2010, we purchased approximately 930 acres of undeveloped land in unincorporated Arapahoe County, which we are actively developing as the master planned community known as Sky Ranch. With the property acquisition, we also acquired nearly 830 acre-feet of water beneath Sky Ranch, and approximately 640 acres of oil and gas mineral rights.  Sky Ranch is located 16 miles east of downtown Denver, four miles north of the Lowry Range, and four miles south of Denver International Airport.

Sky Ranch is zoned for residential, commercial, and retail uses, including up to 3,200 homes and more than two million square feet of commercial, retail, and light industrial development. The development of Sky Ranch will occur in multiple filings and phases which will take several years to complete. Our first filing of more than 150 acres is platted for a total of 506 detached single-family residential lots (see illustration below for the layout of filing 1). As of August 31, 2020, we had delivered 483 finished lots in our first filing and the remaining finished lots sold on November 3, 2020. Our second filing, which is planned to have four sub-phases, is approximately 250 acres and is expected to be platted for nearly 900 lots (see illustration below for the proposed layout of filing 2). We plan to begin development activities for filing 2 by the end of calendar 2020.  Subsequent to August 31, 2020, we entered into contracts with four home builders to sell 789 finished lots, on which the home builders will construct both attached and detached single-family residential units. We are retaining the remaining 100+ lots for future uses. The total sales price for the 789 lots contracted for is $63.4 million, subject to price escalations depending on development timing. The remaining lots held for future use, assuming comparable lot prices to the contracted prices and excluding escalators, coupled with the contracted-for lots would result in total sales for the second filing of $72.6 million. Our preliminary total cost estimates for developing the nearly 900 lots is $65.6 million. We estimate that more than $48.0 million of this amount will be spent on public improvements that will be eligible for reimbursement by the Sky Ranch CAB. See below for a description of the conditions that may limit our ability to receive reimbursables and a definition of the Sky Ranch CAB.

Filing 1 Illustrative Layout


Filing 2 Illustrative Layout


As the land developer, we are providing finished lots (i.e. lots ready for building permits to construct homes) to each of the home builders. We build, or contract to build, the roads, curbs, wet and dry utilities, storm drains, parks, open spaces, and other related improvements as part of a fully master planned community. Each builder is required to purchase water and sewer taps for each lot from the Rangeview District at the time of permitting, the cost of which depends on the size of the lot, the size of the house, and the amount of irrigated turf. Pursuant to the Non-Lowry Service Agreement, we receive all the water and wastewater tap fees from tap sales at Sky Ranch and 98% of the ongoing monthly water and wastewater service revenues.

Public improvements, such as roads, parks, and water and sanitary sewer mains, storm sewer, and drainage improvements, that are shared by all homeowners in the development and not specific to any private finished lot are ultimately owned by the governmental metropolitan district or other municipality that is responsible for the maintenance of the improvements. Upon completion and acceptance of certain public improvements by the “Sky Ranch Districts” or the “Sky Ranch CAB” (both of which are defined below), we are entitled to receive reimbursement for the verified public improvement costs. Pursuant to the agreements between us and the Sky Ranch CAB, no payment is required by the Sky Ranch CAB with respect to whichreimbursable costs unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds to reimburse us for all or a portion of advances provided or expenses incurred for reimbursable public improvements. Due to this contingency, reimbursable costs are capitalized and expensed consistent with other development costs until the Sky Ranch CAB reimburses us for the public improvement costs. When we provide contract operations services.receive reimbursement, we reduce any remaining capitalized amounts, with any excess proceeds over the currently remaining capitalized costs being recognized as Other income at the time of payment.

Significant Customers
OurPursuant to our service agreements, the Company must construct all required wholesale water and wastewater salesimprovements (i.e., a wastewater reclamation facility, water supply, storage, treatment and other wholesale facilities) for the provision of water and wastewater service to the property. As of August 31, 2020, we have completed the required wholesale facilities and other infrastructure to provide water for the first 900 homes, and wastewater for over 2,000 homes at Sky Ranch. The most significant wholesale facility built was the wastewater reclamation facility, which cost $10.2 million and has a designed capacity to provide wastewater for more than 2,000 single family homes before requiring expansion. This allows the treatment facility to process wastewater for several development phases at Sky Ranch before additional investment is needed to increase its capacity.

We expect to have other filings developing concurrently with the second filing that will include commercial, retail, and light industrial sites. We expect full development of the Sky Ranch Master Planned Community to take another ten years.

Pursuant to the Sky Ranch Water and Wastewater Service Agreement, dated June 19, 2017, between PCY Holdings, LLC (a wholly-owned subsidiary of ours that holds title to the Sky Ranch land), and the Rangeview District, PCY Holdings, LLC, agreed to construct certain facilities necessary to provide water and wastewater service to Sky Ranch. The Rangeview District, through us as its exclusive service provider, agreed to provide water and wastewater services to the Sky Ranch property. We have installed over 15.5 miles of water delivery and wastewater collection infrastructure at a cost of $4.9 million, which we believe will be reimbursable by the Sky Ranch CAB as outlined above.

We have leased the oil and gas minerals underlying the property to a major independent exploration and production company.

Sky Ranch Metropolitan District Nos. 1, 3, 4, and 5

The Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 are quasi-municipal corporations and political subdivisions of Colorado formed in 2004 for the purpose of providing service to the Sky Ranch property (the “Sky Ranch Districts”). The Sky Ranch Districts are governed by an elected board of directors. Eligible voters and persons eligible to serve as directors of the Sky Ranch Districts must own an interest in property within the boundaries of the district. We own certain rights and real property interests which encompass the current boundaries of the districts and certain of our employees serve on the boards of directors of the Sky Ranch Districts. The current directors of the districts are Mark W. Harding (our President, Chief Executive Officer and a director), Kevin B. McNeill (our Vice President and Chief Financial Officer), Scott E. Lehman (an employee of ours), Dirk Lashnits (an employee of ours), and one independent board member. Pursuant to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year. Messrs. Harding, McNeill, Lehman, and Lashnits have all elected to forego these payments.

Sky Ranch Community Authority Board

Districts No. 1 and 5 of the Sky Ranch Districts, formed the Sky Ranch Community Authority Board (“Sky Ranch CAB”) to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District and/or the Sky Ranch CAB to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property. We entered into agreements, first with Sky Ranch Metropolitan District No. 1 in 2014 and later with the Sky Ranch CAB, that require us to fund expenses related to the construction of an agreed upon list of public improvements for the Sky Ranch Master Planned Community.

In September 2018 and effective as of November 13, 2017, the parties entered into a series of agreements that superseded and consolidated the previous agreements into one primary agreement, the Facilities Funding and Acquisition Agreement (the “Sky Ranch FFAA”), pursuant to which:


●
the Sky Ranch CAB agreed to repay to us the amounts owed by Sky Ranch Metropolitan District No. 5;

●
previous agreements between us and Sky Ranch Metropolitan District No. 5 and us and the Sky Ranch CAB were terminated;

●
the Sky Ranch CAB acknowledged all amounts owed to us under the terminated agreements, as well as amounts we incurred to finance the formation of the Sky Ranch CAB; and

●
we agreed to fund expenses related to the construction of an agreed upon list of improvements to be constructed by the Sky Ranch CAB with an estimated cost of $30 million (including improvements already funded) on an as-needed basis for calendar years 2018–2023.

Advances and verified costs expended by us for expenses related to the Rangeview Water Agreements accountedconstruction of the agreed upon public improvements are reimbursable to us by the Sky Ranch CAB. All reimbursable expense incurred under the agreement accrues interest at a rate of 6% per annum from the time funds are advanced by us to the Sky Ranch CAB or costs are incurred by us for 26%, 67%expenses related to the construction of improvements, as applicable. No repayment is required of the Sky Ranch CAB for advances made or expenses incurred related to the construction of public improvements unless and 19%until the Sky Ranch CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to reimburse us for all or a portion of our total water revenuesadvances or other public improvement expenses incurred. The Sky Ranch CAB agrees to exercise reasonable efforts to issue bonds to reimburse us subject to certain limitations. In addition, the Sky Ranch CAB agrees to utilize any available moneys not otherwise pledged to payment of debt or used for operation and maintenance expenses to reimburse us. Any advances or expenses not paid or reimbursed by the fiscalSky Ranch CAB by December 31, 2058, shall be deemed forever discharged and satisfied in full. During the years ended August 31, 2017, 20162018 through 2020, we advanced the Sky Ranch CAB $26.4 million for the construction of public improvements, including improvements with respect to earthwork, erosion control, streets, drainage, water sewer, stormwater and 2015, respectively.landscaping. In November 2019, the Sky Ranch CAB issued bonds and repaid $10.5 million of the advances to date leaving $15.9 million outstanding as of August 31, 2020. We expect to fund $48.3 million of reimbursable public improvements for filing 2. The Rangeview District hastiming of those expected expenditures and reimbursement from the Sky Ranch CAB will depend on absorption of homes in filing 2.

The current directors of the Sky Ranch CAB are Mark W. Harding (our President, Chief Executive Officer and a director), Kevin B. McNeill (our Vice President and Chief Financial Officer), Scott E. Lehman (an employee of ours), Dirk Lashnits (an employee of ours), and one significant customer, the Ridgeview Youth Services Center (“Ridgeview”).independent board member. Pursuant to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year. Messrs. Harding, McNeill, Lehman, and Lashnits have all elected to forego these payments.

Other Assets

Oil and Gas Leases

In 2011, we entered into a three-year Oil and Gas Lease (the “Sky Ranch O&G Lease”) and Surface Use and Damage Agreement and received an up-front payment and a 20% of gross proceeds royalty (less certain taxes) from the sale of any oil and gas produced from the mineral estate we own at Sky Ranch. In 2014, the Sky Ranch O&G Lease was extended for an additional two years. The Sky Ranch O&G Lease is now held by production, and we have been receiving royalties from the oil and gas production from six wells drilled within our Rangeview Water Agreements withmineral interest. During the Rangeview District, we are providing water to Ridgeview on behalf of the Rangeview District. Ridgeview accounted for 21%, 55% and 16% of our total water revenues for the fiscal years ended August 31, 2020 and 2019, we received $669,000 and $148,300 in royalties attributable to these wells.

In September 2017, 2016we entered into a three-year Paid-Up Oil and 2015, respectively.
Our industrial water sales (i) directly and indirectly to ConocoPhillips accounted for approximately 30%,less than1% and 75% and (ii) toGas Lease with Bison Oil and Gas, LLP (the “Bison Lease”) for the purpose of exploring for, developing, producing, and marketing oil and gas from 40 acres of mineral estate we own adjacent to the Lowry Range, and we received an up-front payment of $167,200. The up-front payment received pursuant to the Bison Lease is being recognized into revenue ratably over a three-year period, which expires in September 2020, and was not extended.

In July 2019, we entered into an Agreement on Locations of Oil and Gas Operations covering approximately 16 acres at Sky Ranch with the operator of the Sky Ranch O&G Lease (the “OGOA”). The Company received an up-front payment of $573,700 in fiscal 2019 for the OGOA, which is being recognized as income on a straight-line basis over three years (the term of the OGOA). If after three years the operator has not spud at least one well on the oil and gas operations area, the operator may extend the right to the OGOA one additional year by paying us $75,000. The operator may only extend the OGOA for two additional years for a total of five years.

Arkansas River Land and Minerals

We own approximately 700 acres of land in the Arkansas River Valley in southeastern Colorado.  We currently lease all these acres for dry land grazing. We intend to sell the land in due course and have classified it as a long-term investment. We also own approximately 13,900 acres of mineral interests in the Arkansas River Valley, which have a carrying value of $1.4 million. In fiscal 2020, we assessed the recoverability of the Arkansas Valley mineral rights. We determined that the carrying value of these mineral rights is not recoverable. As a result, we recorded an impairment charge of $1.4 million in Non-cash mineral asset impairment charge in the consolidated statements of operations and comprehensive income. We currently have no plans to sell our mineral interests.

Significant Customers

We primarily provide water and wastewater services on the Rangeview District’s behalf to the Rangeview District’s customers. Because the Rangeview District accounts for the majority of our water and wastewater service revenue, we have included the end-use customers of the Rangeview District who generate the most revenue for us on our list of significant customers. Additionally, we have presented the percentages of revenue from water and wastewater services and water and wastewater tap sales separately (versus by the water and wastewater resource development segment or total revenue), because we believe that provides a more meaningful presentation of the relevance of each customer to that service line. Lot sales are generated entirely through sales to three customers as noted below. The tables below present revenue generated from our significant customers for each of the services presented.

For the year ended August 31, 2020 
Water and
wastewater
metered services
  
Water and
wastewater tap fees
  
Land development
(Lot sales recognized)
 
Ridgeview Youth Services  
14
%
  
–
   
–
 
Conoco / Crestone Peak (oil & gas operations)  
45
%
  
–
   
–
 
All Sky Ranch Homes (1)  
22
%
  
–
   
–
 
All Wild Pointe Homes (2)  
9
%
  
4
%
  
–
 
Taylor Morrison  
–
   
28
%
  
32
%
KB Home  
–
   
37
%
  
26
%
Richmond Homes  
–
   
31
%
  
42
%
Combined totals presented  
90
%
  
100
%
  
100
%

(1) This represents the water and wastewater fees for all homes combined at Sky Ranch and not one individual home
(2) This represents the water and wastewater metered services and water and wastewater tap fees for all homes combined at Wild Pointe and not one individual home

For the year ended August 31, 2019 
Water and
wastewater
metered services
  
Water and
wastewater tap fees
  
Land development
(Lot sales recognized)
 
Ridgeview Youth Services  
3
%
  
–
   
–
 
Conoco / Crestone Peak (oil & gas operations)  
74
%
  
–
   
–
 
All Sky Ranch Homes (1)  
–
   
–
   
–
 
All Wild Pointe Homes (2)  
3
%
  
6
%
  
–
 
Taylor Morrison  
–
   
27
%
  
34
%
KB Home  
–
   
29
%
  
34
%
Richmond Homes  
–
   
38
%
  
32
%
Combined totals presented  
80
%
  
100
%
  
100
%

(1) We did not begin providing significant water and wastewater services to Sky Ranch until fiscal 2020.
(2) This represents the water and wastewater metered services and water and wastewater tap fees for all homes combined at Wild Pointe and not one individual home

The Ridgeview Youth Services customer accounted for approximately 25%, nil,the same dollar sales year over year, but due to the decline in oil and nil, of our total water revenues forgas operations revenue, the percentage increased in fiscal years ended August 31, 2017, 2016 and 2015, respectively.2020 over 2019.

Our Projected Operations

This section should be read in conjunction with Item 1A – Risk Factors.

Along the Colorado Front Range, there are over 70 water providers with varying needs for replacement andand/or new water supplies. We believe that we are well positioned to assist certain of these providers in meeting their current and future water needs.

We design, construct, and operate our water and wastewater facilities using advanced water purificationtreatment and wastewater treatment technologies, which allow us to use our water supplies in an efficient and environmentally sustainable manner. We plan to develop our water and wastewater systems in stages to efficiently meet customer demands in our service areas thereby reducing the amount of up-frontby managing capital costsinvestments required for construction of facilities. We use third-party contractors to construct our facilities as needed. We employ licensed water and wastewater operators to operaterun our water and wastewater systems. As our systems expand, we expect to hire additional personnel to operate our systems, which include water production, treatment, testing, storage, distribution, metering, billing, and operations management.

Our water and wastewater systems conjunctively use surface and groundwater supplies and storage of raw water and highly treated effluentreclaimed water supplies to provide a balanced sustainable water supply for our wholesale customers and their end-use customers. Integrating conservation practices and incentives, together with effective water reuse, demonstrates our commitment to providing environmentally responsible and sustainable water and wastewater services. Water supplies and water storage reservoirs are competitively sought throughout the west and along the Front Range of Colorado. We believe that regional cooperation among area water providers in developing new water supplies, water storage, and transmission and distribution systems provides the most cost effectivecost-effective way of expanding and enhancing service capacities for area water providers. We continue to discussseek opportunities for developing water supplies and water storage opportunities with other area water providers.

16
We expect the development
As we continue expanding and developing our Rangeview Water Supply, to requirewe anticipate needing a significant number of high capacity deep water wells. We anticipate drilling separateThese wells would be drilled into eachone or more of the three principal aquifers located beneath the Lowry Range. Each well is intended to deliverRange, and, as with our current wells, the water would be delivered to central water treatment facilities for treatment prior to delivery to customers. DevelopmentContinued development of our Lowry Range surface water supplies will require facilities to divert surface water to storage reservoirs to be located on the Lowry Range, andadditional treatment facilities to treat the water prior to introduction into our distribution systems. Surfacesystem(s), and additional surface water diversion facilities will be designed with capacities to divert the surface water when available (particularly during seasonal events such as spring run-off and summer storms) for storage in reservoirs to be constructed on the Lowry Range. Based on preliminary engineering estimates,We estimate the full build-out of water and wastewater facilities (including diversion structures, transmission pipelines, reservoirs, and water treatment facilities) on the Lowry Range willto develop and deliver our portfolio of water would cost in excess of $412$850 million, based on estimated costs, and willwould accommodate water service to customers located on and outside the Lowry Range. We expectbelieve this build out towould occur in phases over an extended period of at least 50 years,many decades, and we expect thatbelieve tap fees willwould be sufficient to fund the required infrastructure costs.

Our Denver-based supplies are a valuable, locally available resource located near the point of use. This enables us to incrementally develop infrastructure to produce, treat and deliver water to customers based on their growing demands.

During fiscal 2017,2020, we invested approximately $4.5$6.3 million to construct pipelinesin plant and facilities that interconnect the Rangeview District, WISE, and Sky Ranch water systems.and wastewater systems to provide water and wastewater services to our growing customers at Sky Ranch and elsewhere. We expect to continue to invest in pipelines at the Sky Ranch property in anticipation of the first phase of development. We also expect to add additional wellswater rights and facilities as demand for water grows.our customer demands grow.
The Rangeview District is a participant in the WISE project. This project is developing infrastructure to interconnect providers’ water systems and to extend renewable water sources owned by Denver Water and Aurora Water to participating South Metro water providers, including the Rangeview District and, through our agreements with the Rangeview District, us. This system will diversify our sources of water and will enable providers to move water among themselves, which will increase the reliability of our and others’ water systems. Through the WISE Financing Agreement, we funded the Rangeview District’s purchase of certain rights to use existing water transmission and related infrastructure acquired and constructed by the WISE project. We invested approximately $198,200 in the WISE system during fiscal 2017 and have invested approximately $3.1 million to date. We anticipate that we will be spending approximately $645,500 on this system during fiscal 2018 and $4.6 million during the next four years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries related to WISE. Timing of the investment will vary depending on the schedule of projects within WISE.

We are in the process of developing our Sky Ranch property, including building finishedfinishing lots for home builders, and building theadditional water and wastewater infrastructure for housingresidential and commercial development ofat the property. We currently anticipate construction starting onDuring the first phase of development (506 lots) in early 2018, subject to obtaining approvalsyears ended August 31, 2020 and the timing of the final engineering designs. The timing for us to develop the remaining phases of the property will be largely dependent on the Denver real estate market and the interest we receive from home builders and developers. During fiscal 2017,2019, we invested approximately $902,600$8.5 million and $17.7 million, in our Sky Ranch property,land to deliver the finished lots, which consistedwas done ahead of planning, preliminaryour original schedule and final engineering designs, grading, erosion, sediment control, drainage design,on budget. We anticipate the second filing of Sky Ranch will require $65.6 million of construction costs to deliver the lots, which is planned to occur over three years and be funded by the $72.5 million of total fees to be paid under our lot sales agreements. During the years ended August 31, 2020 and 2019, the initial filing of Sky Ranch produced $5.4 million and $3.4 million, respectively, of water and wastewater facility designs,tap fees, and constructionwe believe we will receive the remaining $5.9 million in water and wastewater tap fees for the lots in the initial filing of approximately 10 milesSky Ranch during our fiscal 2021. We believe the second filing of new transmission lines.Sky Ranch will produce in excess of $22 million in water and wastewater tap fee revenue over several years.

We plan to develop additional water assets within the Denver area and are exploring opportunities to utilize our water assets in areas adjacent to our existing water supplies.
Additionally, we continue to source additional land acquisitions that could be paired with our water to provide additional growth to both our land development and water and wastewater segments.

Water and Growth in Colorado

Calendar year 2020 was a strong year for the Colorado has experiencedhousing market. As COVID-19 escalated, we took measures to protect the health and well-being of our employees, customers, business partners, and their families. We were informed that our builder customers also took precautionary measures to ensure the safety of their employees, customers, business partners, and their families. These measures varied by builder. As a robustresult, some of our builder customers reported material net housing order declines during the state-wide stay-at-home order period (March – May). However, as shelter-in-place and stay-at-home orders were removed, the builders reported material increases in orders. Due to COVID-19, we have witnessed several changing consumer patterns, including residents leaving downtown urban areas to buy homes in the suburbs. This put our Sky Ranch community in the enviable position of being able to respond to this demand due to its great location, affordable home prices, available inventory, and easy access to work centers and major transportation corridors. We believe our ability to pair our water to our land and our in-house expertise for operating our systems allowed us to provide home builders with an affordable and sustainable master planned community that allowed our builders to quickly satisfy the increased demand from home buyers.

Despite the economic issues caused by COVID-19, the Colorado housing market over the past 24 months. The key drivershas continued to housing in the area are:
●
Housing Starts–From September 2016 to September 2017, annual housing starts increasedgrow. This was fueled by 6%. From September 2015 to September 2016, annual housing starts increased by 24%.
●
Unemployment –The unemployment ratepopulation growth in Colorado, was 2.4% at August 31, 2017, comparedwhich is projected to a national unemployment rate of 4.4%. Colorado added an estimated 118,200 jobs from August 2016 to August 2017.
●
Population –continue far into the foreseeable future. The Denver Regional Council of Governments, (“DRCOG”), a voluntary association of over 50 county and municipal governments in the Denver metropolitan area, estimates that the Denver metropolitan area population will increase by about 38% from today’s 3.4 million peoplenearly 40% to 4.7 million people by the year 2040. A Statewide Water Supply Initiative report by the Colorado Water Conservation Board estimates that the South Platte River basin, which includes the Denver metropolitan region (and our Sky Ranch community), will grow from a current population of 3.9approximately 4.0 million to 4.9 million by the year 2030, while the state’s population will increase from roughly 5.7 million to 7.2 million.
●
Demand –Approximately 70% of This growth furthers the state’s projected population increase is anticipatedneed for sustainable water supplies and intensifies the competition to occur within the South Platte River basin. Significant increases in Colorado’s population, particularly in the Denver metro region and other areas in the water-short South Platte River basin, together with increasing agricultural, recreational, and environmental water demands, will intensify competition for waterobtain those supplies. The estimated population increases are expected to result in demands for water services in excess ofthat exceed the current capabilities of municipal service providers, especially during drought conditions.
●
Supply –Growth in the Denver area has trended east with significant activity occurring along the I-70 corridor, an area which enjoys excellent transportation infrastructure with I-70, rail access, and Denver International Airport (“DIA”). The region has significant employment centers, including DIA, the University of Colorado Anschutz Medical Campus, an Amazon fulfillment center, the Rocky Mountain Regional VA Medical Center, Buckley Airforce Base, and more, creating demand for residential, retail, and commercial development opportunities.

The Statewide Water Supply Initiative estimates that population growth in the Denver region and the South Platte River basin could result inrequire an additional water supply demands400,000 acre-feet of over 400,000 acre feetwater by the year 2030.
●
Development – What makes this more difficult for land developers and builders is that Colorado law requires property developers to demonstrate that they have sufficient water supplies for their proposed projects before rezoningzoning applications will be considered. These factors indicateThis means developers and builders must solve their own water problems prior to development rather than wait for cities and municipalities to solve the problem. This indicates that water and availability of water will continue to be critical to growth prospects for the region and the state, and that competition for available sources of water will continue to intensify. We focus the marketing

In addition to actively seeking to expand our land holdings for development purposes, we also market our water supplies and services to developers and home builders that are active along the Colorado Front Range as well as other area water providers in need of additional supplies.

Colorado’s future water supply needs will be met through conservation, reuse, and the development of new supplies. The Rangeview District’s rules and regulations for water and wastewater service call for adherence to strict conservation measures, including low-flow water fixtures, high efficiency appliances, and advanced irrigation control devices. Additionally, our systems are designed and constructed using a dual-pipe water distribution system to segregate the delivery of high quality potable drinking water to our local governmental entities and their end-use customers through one system and a second system to supply raw or reclaimed water for irrigation demands.demands in parks and open spaces. About one-half of the water used by a typical Denver-area residential water customer is used for outdoor landscape and lawn irrigation. We believe that raw or reclaimed water supplies provide the lowest cost, most environmentally sustainable water for outdoor irrigation. We expect our systems to include an extensive water reclamation systemprocess in which essentially all effluent water from wastewater treatment plants will be reused to meet non-potable outdoor irrigation water demands. Our dual-distribution systems demonstrate our commitment to environmentally responsible water management policies in our water shortwater-short region.

Labor and Raw Materials

The Builder ContractsWe competitively bid contracts for infrastructure improvements (grading, utilities, roads, water and wastewater infrastructure) at Sky Ranch andRanch. Many of our contractors enter fixed priced contracts where the contracts we enter into to design and construct water facilities are fixed-price contracts in which we bear all or a significant portion of thecontractor is at risk for cost overruns.overruns prior to completion of improvements. Under these fixed-price contracts, the contract prices that we agree to are established in part based on fixed, firm subcontractor quotes on contracts and on cost and scheduling estimates. These quotes or estimates may be based on a number ofseveral assumptions, including assumptions about prices and availability of labor, equipment and materials, and other issues. Increased costs or shortages of skilled labor, and/or concrete, steel, pipe, and other materials could cause increases in property development costs and delays. These shortages and delays may result in delays in the delivery of the residential lots under development reducedor the completion of water or wastewater facilities, increase costs for us or other contractors on our projects, reduce gross margins from lot sales, or both. We plansubject us to penalties or defaults under our agreements. While we contract with third parties for our labor and materials at a fixed price, which should allowwe believe allows us the ability to mitigate the risks associated with shortages of and increases in the cost of labor and building materials.
materials, other unforeseen factors may arise which could increase our costs.

Competition
Competition
Water and Wastewater Services

We negotiate individual service agreements with our governmental customers and with their developers and/or home builders to design, construct and operate water and wastewater systems and to provide services to end-useend use customers of governmental entities and to commercial and industrial customers. These service agreements seek to address all aspects of the development of the water and wastewater systems, including:


(i)
the purchase of water and wastewater taps in exchange for our obligation to construct certain wholesale facilities;

(ii)
the establishment of payment terms, timing, capacity, and location of special facilities (if any); and
(iii)
specific terms related to our provision of ongoing water and wastewater services to our local governmental customers as well as the governmental entities’ end-use customers.
(i) 
the purchase of water and wastewater taps in exchange for our obligation to construct certain Wholesale Facilities;
(ii) 
the establishment of payment terms, timing, capacity and location of Special Facilities (if any); and
(iii) 
specific terms related to our provision of ongoing water and wastewater services to our local governmental customers as well as the governmental entity’s end-use customers.

Although we have exclusive long-term water and wastewater service contracts for 24,000 acres of the 27,000-acre Lowry Range, Wild Pointe, and Sky Ranch pursuant to the Lowry Service Agreement,our service agreements, providing water and wastewater services to areas other than Wild Pointe, Sky Ranch and a portion of the Lowry Rangeservice is subject to competition. Alternate sources of water are available, principally from other private parties such as farmers or others owning water rights that have historically been used for agriculture, and from municipalities seeking to annex new development areas in order to increase their tax base. Our principal competition in areas close to the Lowry Range is the City of Aurora. Principal factors affecting competition for potential purchasers of our Export Waterwater service include the availability of water for the particular purpose, the cost of delivering the water to the desired location (including the cost of required taps), and the reliability of the water supply during drought periods.periods, and the political climate for additional annexations. We estimate that the water assets we own and have the exclusive right to use have a supply capacity of approximately 60,000 SFE units, and we believe that they provide us with a significant competitive advantage along the Front Range. Our legal rights to the Rangeview Water Supply have been confirmed for municipal use, and our water supply is close to Denver area water users. We believe that our pricing structure is competitive and that our water portfolio is well balanced with senioramong surface water rights, groundwater rights, storage capacity and reclaimed water supplies.

Land Development

Developing raw land is a highly competitive business, requires substantial upfront capital and typically requires many years to complete. There are many developers, as well as properties and development projects, in the same geographic area in which Sky Ranch is located. Competition among developers and projects is determined by the location of the real estate, the market appeal of the development plan, the cost and value of the end product, the developer’s ability to build, market and deliver projects on a timely and cost effective basis, and the availability of water to serve the project. Residential developers sell to home builders, who in turn compete based on location, price/value, market segmentation, product design, and reputation. Commercial, retail, and industrial developers sell to and/or compete with other developers, owners, and operators of real estate for a limited number of potential buyers. We believe we have exceeded the market’s expectations with the delivery of our initial phase lots at Sky Ranch and have demonstrated we have the ability and expertise to continue to deliver lots in a large scale master planned community.

Environmental, Health and Safety Regulation

Provision of water and wastewater services is subject to regulation under the federal Safe Drinking Water Act, the Clean Water Act, related state laws, and federal and state regulations issued under these laws. These laws and regulations establish criteria and standards for drinking water and for wastewater discharges. In addition, we are subject to federal and state laws and other regulations relating to solid waste disposal and certain other aspects of our operations.

Environmental compliance issues may arise in the normal course of operations or as a resultbecause of regulatory changes. We attempt to align capital budgeting and expenditures to address these issues in a timely manner.

Safe Drinking Water Act –

The Safe Drinking Water Act establishes criteria and procedures for the U.S. Environmental Protection Agency (the “EPA”) to develop national quality standards for drinking water. Regulations issued pursuant to the Safe Drinking Water Act and its amendments set standards on the amount of certain microbial and chemical contaminants and radionuclides allowable in drinking water. The State of Colorado has assumed primary responsibility for enforcing the standards established by the Safe Drinking Water Act and has adopted the Colorado Primary Drinking Water Standards (5(Code of Colorado Regulations 5 CCR 1003-1). Current requirements for drinking water are not expected to have a material impact on our financial condition or results of operations as we have made and are making investments to meet existing water quality standards. In the future, we might be required to change our method of treating drinking water and make additional capital investments if additional regulations become effective.

The federal Groundwater Rule became effective December 1, 2009. This rule requires additional testing of water from well sources and under certain circumstances requires demonstration and maintenance of effective disinfection. In 2009, Colorado adopted Article 13 to the Colorado Primary Drinking Water Standards to establish monitoring and compliance criteria for the Groundwater Rule. We have implemented measures to comply with the Groundwater Rule.

Clean Water Act

Clean Water Act–The Clean Water Act regulates wastewater discharges from drinking water and wastewater treatment facilities and storm water discharges into lakes, rivers, streams, and wetlands. The State of Colorado has assumed primary responsibility for enforcing the standards established by the federal Clean Water Act for wastewater discharges from domestic water and wastewater treatment facilities and has adopted the Colorado Water Quality Control Act and related regulations, which also regulate discharges to groundwater. It is our policy to obtain and maintain all required permits and approvals for discharges from our water and wastewater facilities and to comply with all conditions of those permits and other regulatory requirements. A program is in place to monitor facilities for compliance with permitting, monitoring, and reporting for wastewater discharges. From time to time, discharge violations might occur which might result in fines and penalties, but we have no reason to believe that any such fines or penalties are pending or will be assessed.

In the future, we anticipate changing our method of treating wastewater, which will require future additional capital investments, as additional regulations become effective. In 2016, we invested $368,600 to design, permit and construct a 13 million gallon effluent storage reservoir at our wastewater treatment facility and have converted our facility to a zero discharge treatment facility. We are storing the treated effluent water and expect to use the water for agricultural and irrigation uses.
Solid Waste Disposal –

The handling and disposal of residuals and solid waste generated from water and wastewater treatment facilities is governed by federal and state laws and regulations. We have a program in place to monitor our facilities for compliance with regulatory requirements, and we do not anticipate that costs associated with our handling and disposal of waste material from our water and wastewater operations will have a material impact on our business or financial condition.

Employees

We currently have 11 full-time employees.31 employees, all of whom are full-time.

Available Information and Website Address

Our website address is www.purecyclewater.com. We make available free of charge through our website our annual reportsAnnual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing with the Securities and Exchange Commission (“SEC”(the “SEC”).

These reports and all other material we file with the SEC may be obtained directly from the SEC’s website, www.sec.gov/edgar/searchedgar/companysearch.html, under CIK code 276720. The contents of our website are not incorporated by reference into this report. You may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. Operating information for the Public Reference Room is available by calling the SEC at 1-800-SEC-0330.

Item 1A – Risk Factors

The following section describes the material risks and uncertainties that management believes could have a material adverse effect on our business, financial condition, results of operations, and the market price of our common stock. The risks discussed below include forward-looking statements, and our actual results may differ materially from those discussed in these forward-looking statements. These risks should be read in conjunction with the other information set forth in this report, including the accompanying financial statements and notes thereto.

General Risks Related to Our Company

Our business, operations and financial condition and results may be impacted by the COVID-19 pandemic to varying degrees.

In December 2019, a novel strain of coronavirus, referred to as the COVID-19 virus, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to multiple countries, including the United States. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the United States government-imposed travel restrictions on travel between the United States, Europe and other countries. Further, the President of the United States declared the COVID-19 pandemic a national emergency. In addition, the State of Colorado implemented stay-at-home orders requiring everyone to stay-at-home except to obtain or provide essential services such as food and medical care during portions of March through May. Many businesses responded with their own work-from-home or quarantine policies and/or indefinite closures. Since June, most businesses have been allowed to reopen subject to capacity restrictions, social distancing and mask requirements. State and local restrictions have been varying in response to whether the number of COVID-19 cases is increasing or decreasing.

Since December 2019, COVID-19 has resulted in numerous deaths, travel restrictions, closed international borders, enhanced health screening at ports of entry and elsewhere, prolonged quarantines and the imposition of both local and more widespread “work from home” measures, cancellations, supply chain disruptions, and lower consumer demand, as well as general concern and uncertainty. The ongoing spread of COVID-19 has, and is expected to continue to have, a material adverse impact on local economies in the affected jurisdictions and also on the global economy, as cross border commercial activity and market sentiment are increasingly impacted by the outbreak and government and other measures seeking to contain its spread. Our water and wastewater services are essential services, and we intend to continue to provide those services for our customers. However, our land development activities and our ability to expand our water and wastewater services may be disrupted, and we may be delayed in our current projects and timelines, the magnitude of which will depend, in part, on the length and severity of the COVID-19 outbreak. The COVID-19 virus poses the risk that we or our employees, governmental agencies permitting our projects, suppliers, consumers, and other business partners, including our home builders, may be prevented from conducting business activities in the ordinary course for an indefinite period of time, should the United States, the state of Colorado, or local governmental authorities implement further stay-at-home orders or restrictions. Shutdowns or other restrictions could also adversely impact the availability or cost of materials, which could limit our business operations or increase our costs.

The duration of the COVID-19 outbreak and its ultimate impact on the Company and, on the global economy, cannot be determined with certainty. The COVID-19 pandemic and its effects may last for an extended period of time, and could result in significant and continued declines in global financial markets, higher default rates, and a substantial economic downturn or recession. The extent to which COVID-19 will affect the Company will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of COVID-19 and the actions taken to contain COVID-19. Given the significant economic and financial market disruptions associated with the COVID-19 pandemic, the Company’s results of operations could be adversely impacted.

Our net losses may continueoperations are concentrated in the Front Range area of Colorado; we are subject to general economic conditions in Colorado. Our assets and weoperations are located solely in the Front Range area of Colorado. Our performance could be adversely affected by economic conditions in, and other factors relating to, Colorado, including supply and demand for housing, and zoning and other regulatory conditions. To the extent that the general economic conditions in the Front Range area of Colorado deteriorate, the value of our assets, our results of operations and our financial condition could be materially adversely affected.

We may not have sufficient cash flows from operations or other capital resources to pursue our business objectives. WeWhile we have experienced significantgenerated net losses; ourincome in the past three fiscal years, we have a history of losses. Our cash flows from operations generally have not been sufficient to fund our operations, in the past; and we have been required to raise debt and equity capital and sell assets to remain in operation. Since 2004, we have obtained $76.2raised $76.3 million through (i) the issuance of $25.2$25.3 million of common stock (including the issuance of stock pursuant to the exercise of options, net of expenses), (ii) the issuance of $5.2 million of Convertible Debt,convertible debt, which was converted to common stock on January 11, 2011, and (iii)the sale of our Arkansas River water and land for approximately $45.8 million in cash.cash. Our continuing development of the first 250 homes in the first phase of Sky Ranch requires significant cash expendituresexpenditures. We have advanced the Sky Ranch CAB $26 million for construction of approximately $18public improvements on the Sky Ranch property and expect to advance another $3 million before we will generate positive cash flows fromfor the salecompletion of lotsour initial filing, with another $65.5 million expected to be advanced for filing 2. The Sky Ranch CAB is not required to repay us for advances made or expenses incurred for improvements at Sky Ranch unless and wateruntil the Sky Ranch CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to reimburse us for all or a portion of advances made or expenses incurred. We have funded and sewer tap fees. We expect to continue to fund such expenditures with cash on hand and cash flows from operations. AtAs of August 31, 2017,2020, we had $26$21.8 million of cash and marketable securities on hand. We currently have a limited number of customers. If our cash on hand and future cash flows from operations are not sufficient to fund our operations and the significant capital expenditure requirements to build our water delivery systems andcontinue to develop Sky Ranch, we may be forced to seek to obtain additional debt or equity capital. Economic conditions and disruptions have previously caused substantial volatility in capital markets, including credit markets and the banking industry, increasing the cost, and significantly reducing the availability of financing, which may reoccur in the future. There can be no assurance that financing will be available on acceptable terms or at all.

We experience variability in our operating results on a quarterly basis and, as a result, our historical performance may not be a meaningful indicator of future results. We historically have experienced, and expect to continue to experience, variability in quarterly results. As a result of such variability, our short-term performance may not be a meaningful indicator of future results. Our quarterly results of operations may continue to fluctuate in the future because of a variety of factors, including, among others, the timing of the closings of sales of residential lots and weather-related problems.

Our stock price has been volatile in the past and may decline in the future. Our common stock has experienced significant price and volume fluctuations in the past and may experience significant fluctuations in the future depending upon several factors, some of which are beyond our control. Factors that could affect our stock price and trading volume include, among others, the perceived prospects of our business; differences between anticipated and actual operating results; changes in analysts’ recommendations or projections; the commencement and/or results of litigation and other legal proceedings; and future sales of our common stock by us or by significant shareholders, officers and directors. In addition, stock markets in general have experienced price and volume volatility from time to time, which may adversely affect the market price of our common stock for reasons unrelated to our performance.

Risks Related to Our Business Generally

We are dependent on the housing market and development in our targeted service areas for future revenues. Providing wholesale water service using our Colorado Front Range water supplies is one of our key sources of future revenue. The timing and amount of these revenues will depend in part on housing developments being built near our water assets. The development of the Lowry Range, Sky Ranch and other properties is subject to many factors that are not within our control. If wholesale water sales are not forthcoming or development on the Lowry Range, Sky Ranch or other properties in our targeted service areas is delayed or curtailed, we may need to use our capital resources, incur additional short or long-term debt obligations or seek to sell additional equity. We may not have sufficient capital resources or be successful in obtaining additional operating capital. Although there have been positive market gains in the Colorado housing market in recent years, if a downturn in the homebuilding or credit markets returns, or if the state or national economy weakens and economic concerns intensify, such a development could have a significant negative impact on our business and financial condition and our plans for future development of additional phases of Sky Ranch.

Although the Colorado economy has become increasingly diverse, the oil and gas industry remains an important segment of the Colorado economy. New statutes, regulations or other initiatives that would limit oil and gas exploration or increase the cost of exploration, as well as declines in the price of oil and gas, among other things, could lead to a downturn in the Colorado economy, including increased unemployment, which would likely have a negative impact on the housing market and our business and financial condition.

We may not be able to manage the increasing demands of our expanded operations.We have historically depended on a limited number of employees to administer our existing operations, interface with governmental entities, market our services and plan for the construction and development of our assets. The execution of contracts for lot sales and the continued development of Sky Ranch has increased the size and complexity of our business. The success of our current business and future business development and our ability to capitalize on growth opportunities depends on our ability to attract and retain additional experienced and qualified persons to operate and manage our business. We may not be able to maximize the value of our assets if we are unable to attract and retain qualified personnel and to manage the demands of a workforce that has nearly tripled in the past two years. State regulations set the training, experience and qualification standards required for our employees to operate specific water and wastewater facilities. Failure to find state-certified and qualified employees to support the operation of our facilities could put us at risk for, among other things, regulatory penalties (including fines and suspension of operations), operational errors at the facilities, improper billing and collection processes, claims for personal injury and property damage, and loss of contracts and revenues. We may be unsuccessful in managing our operations and growth.

We are dependent on the services of a key employee. Our success largely depends on the continuing services of our President and Chief Executive Officer, Mark W. Harding. We believe that Mr. Harding possesses valuable knowledge, experience and leadership abilities that would be difficult in the short term to replicate. Mr. Harding also serves on the boards of the Rangeview District, the Sky Ranch Districts, and the Sky Ranch CAB. The loss of Mr. Harding as a key employee and as a director of these boards would cause a significant interruption of our operations.

Our construction of water and wastewater projects and improvements at Sky Ranch may expose us to certain completion, performance, and financial risks. We expect to rely on independent contractors to construct our water and wastewater facilities and Sky Ranch lot improvements. These construction activities may involve risks, including shortages of materials and labor, work stoppages, labor relations disputes, injuries to third parties, damages to property, weather interference, engineering, environmental, permitting, or geological problems and unanticipated cost increases. These issues could give rise to delays, cost overruns or performance deficiencies, or otherwise adversely affect the construction or operation of our water and wastewater delivery systems and the construction and delivery of residential lots. In addition, we may experience quality problems in the construction of our systems and facilities, including equipment failures. We may not meet the required deadlines under our sale and construction contracts. We may face claims from customers or others regarding product quality and installation of equipment placed in service by contractors.

The sales contracts at Sky Ranch and contracts for the water and wastewater facilities that we design and construct are fixed-price contracts, in which we bear all or a significant portion of the risk for cost overruns. Under these fixed-price contracts, contract prices are established in part based on fixed, firm subcontractor quotes on contracts and on cost and scheduling estimates. These quotes or estimates may be based on several assumptions, including assumptions about prices and availability of labor, equipment and materials, and other issues. If these subcontractor quotations or cost estimates prove inaccurate, or if circumstances change, cost overruns may occur, and our financial results would be negatively impacted. In many cases, the incurrence of these additional costs would not be within our control.

Pursuant to various contracts related to the development of Sky Ranch, we guarantee that the project, when completed, will achieve certain performance standards, meet certain quality specifications, and satisfy certain requirements for governmental approvals. If we fail to complete the project as scheduled, meet guaranteed performance standards or quality specifications, or obtain the required governmental approvals, we may be held responsible for cost impacts and/or penalties to the customer resulting from any delay or for the costs to alter the project to achieve the performance standards and the quality specifications and to obtain the required government approvals. To the extent that these events occur and are not due to circumstances for which the customer accepts responsibility or cannot be mitigated by performance bonds or the provisions of our agreements with contractors, the total costs of the project would exceed our original estimates and our financial results would be negatively impacted.

We are required to secure, or to have our subcontractors secure, performance and completion bonds for certain contracts and projects. The market environment for surety companies has become increasingly risk averse. We and our subcontractors secure performance and completion bonds for our contracts from these surety companies. To the extent we or our subcontractors are unable to obtain bonds, we may breach existing agreements and/or not be awarded new contracts. We may not be able to secure performance and completion bonds when required.

Government regulations and legal challenges may delay the closing of the sale of our residential lots, increase our expenses or limit other activities, which could have a negative impact on our results of operations. The approval of numerous governmental authorities must be obtained in connection with both our water and wastewater projects and our land development activities, and these governmental authorities often have broad discretion in exercising their approval authority. We incur substantial costs related to compliance with legal and regulatory requirements. Any increase in legal and regulatory requirements may cause us to incur substantial additional costs. Various local, state and federal statutes, ordinances, rules and regulations concerning health and safety, site and building design, environmental, zoning, and similar matters apply to and/or affect the construction and operation of our water and wastewater systems and our land development activities. For example, zoning or other regulations may seek to limit housing density or create setbacks from oil and gas drilling operations or other restrictions on the use of land. To the extent that these regulations are modified, the value of the land that we already own or the availability of land that we are looking to acquire may decline, either of which may adversely impact the financial position, results of operations and cash flows of our business. In addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or approvals already obtained depends on factors beyond our control, such as changes in federal, state and local policies, rules and regulations and their interpretations and application. Furthermore, we are subject to various fees and charges of government authorities designed to defray the cost of providing certain governmental services and improvements. For example, local and state governments have broad discretion regarding the imposition of development fees for projects under their jurisdictions, as well as requiring concessions or that the property developer and/or home builder construct certain improvements to public places such as parks and streets or fund schools.

Municipalities or state water agencies may restrict or place moratoriums on the availability of utilities, such as water and sewer taps, which could have an adverse effect on our business by causing delays or increasing our costs.

We must provide water that meets all federal and state regulatory water quality standards and operate our water and wastewater facilities in accordance with these standards. Future changes in regulations governing the supply of drinking water and treatment of wastewater may have a material adverse impact on our financial results. With respect to service of customers on the Lowry Range, the Rangeview District’s rates might not be sufficient to cover the cost of compliance with additional or more stringent requirements. If the cost of compliance were to increase, we anticipate that the rates of the nearby water providers that the Rangeview District uses to establish its rates and charges would increase to reflect these cost increases, thereby allowing the Rangeview District to increase its rates and charges. However, these water providers may not raise their rates in an amount that would be sufficient to enable the Rangeview District (and us) to cover any increased compliance costs.

In addition, there is a variety of legislation being enacted, or considered for enactment, at the federal, state, and local level relating to energy and climate change. This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards. Such environmental laws may affect, for example, how we manage storm water runoff, wastewater discharges and dust; how we develop or operate on properties on or affecting resources such as wetlands, endangered species, cultural resources, or areas subject to preservation laws; and how we address contamination. As climate change concerns continue to grow, compliance with legislation and regulations of this nature is expected to become more costly. Energy-related initiatives affect a wide variety of companies throughout the United States and the world and, because our operations are dependent on significant amounts of raw materials, such as pipe, steel and concrete, they could have an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of the materials used in the development of our properties are burdened with expensive tariffs, cap and trade and similar taxes and regulations. In addition, tariffs imposed by the United States on imported steel could increase our property development costs. It is possible that new standards could be imposed that will require additional capital expenditures or raise our operating costs. With respect to service of customers on the Lowry Range, the Rangeview District’s rates might not be sufficient to cover the cost of compliance with new requirements. Although we would expect the rates of the nearby water providers that the Rangeview District uses to establish its rates and charges to increase to cover increased compliance costs, such rates may not cover all our costs and our costs of complying with new standards or laws could adversely affect our business, results of operations or financial condition. Our noncompliance with environmental laws could result in fines and penalties, obligations to remediate, permit revocations and other sanctions.

Government agencies may initiate audits, reviews, or investigations of our business practices to ensure compliance with applicable laws and regulations, which can cause us to incur costs or create other disruptions in our business that can be significant. Further, we may experience delays and increased expenses because of legal challenges to our proposed development activities, whether brought by governmental authorities or private parties.

The enactment of Senate Bill 19-181 “Protect Public Welfare Oil and Gas Operations” increased the regulatory authority of local governments in Colorado over facilities siting and surface impacts of oil and gas development, which could have an adverse effect on our water sales to the oil and gas industry for hydraulic fracturing (“fracking”) and demand for new homes at Sky Ranch. Colorado Senate Bill 19-181 (“SB181”) was signed into law on April 16, 2019. Among other things, SB181 authorizes local governments to approve the siting of oil and gas locations and regulate the surface impacts of oil and natural gas development, including empowering local governments to adopt requirements that are more stringent than state requirements. SB181 changes the mission of the Colorado Oil and Gas Conservation Commission from fostering responsible and balanced development to regulating development to minimize adverse impacts to public health and the environment. SB181 also requires the Colorado Oil and Gas Conservation Commission and the Air Quality Control Commission to undertake rulemaking on numerous issues, including environmental protection, facility siting, application fees, and minimizing emissions of hydrocarbons and other compounds. The Colorado Oil and Gas Conservation Commission has proposed rules related to setbacks and siting requirements for well locations that would require any well pad surface proposed to be located greater than 500 feet and less than 2,000 feet from a residential or high occupancy building to obtain an exemption from the Commission by satisfying certain requirements in the rule (such as consent from owners and tenants) or to seek a ruling from the Commission, after a hearing, finding that the conditions of approval will provide substantially equivalent protections to a 2000 foot setback for public health, safety, welfare, the environment and wildlife resources. These and related rulemaking activities by the State Commissions and local governments could lead to delays and additional costs for oil and gas operators, which, in turn, could result in a decline in oil and gas drilling activities. A significant decline in oil and gas drilling activities in and around the Lowry Range and our Sky Ranch property would have an adverse effect on our water sales for fracking and our financial condition. Further, a significant decline in oil and gas activities throughout Colorado could negatively impact the Colorado economy, which could have an adverse effect on demand for new homes at Sky Ranch.

Rulemaking activities by the Colorado Oil and Gas Conservation Commission could adversely impact the number of lots available for land development in Colorado, which could have an adverse effect on our land development activities. As noted above, the Colorado Oil and Gas Conservation Commission has proposed rules related to setbacks and siting requirements for well locations. Depending on how these proposed rules are applied and interpreted, if adopted, they could have the effect of limiting property development within 2,000 feet of a well pad surface. If the proposed rules are implemented or interpreted in a manner that severely limits the exemptions, landowners could be forced to choose between limiting oil and gas development on their property to maximize the land available for residential and commercial development or to limit land development to maximize revenue from oil and gas development. Under a restrictive interpretation of such rules, we might have to limit drilling on our mineral rights at Sky Ranch in order to proceed with the occupancy densities we have planned, which would adversely affect our industrial water sales to the oil and gas industry. Restrictive rules could also reduce the supply of other land acquisition opportunities for development or make such land opportunities less attractive or uneconomical. Additionally, any rules that would require the Land Board to elect between oil and gas or land development with respect to the Lowry Range would likely have an adverse effect on our financial condition, because we have the exclusive right to provide water service to customers on the Lowry Range, including both lessees of the oil and gas rights on the Lowry Range and future occupants of the Lowry Range if the Land Board sells the land for development.

Natural disasters and severe weather conditions could delay the closing of the sale of residential lots at Sky Ranch and increase our costs, which could harm our sales and results of operations. We conduct our operations in the Colorado Front Range, which is subject to natural disasters, including droughts, tornadoes, wildland fires, and severe weather. The occurrence of natural disasters or severe weather conditions in Colorado or elsewhere could delay our construction activities, increase costs, and lead to shortages of labor and materials. If our insurance or the insurance of our subcontractors does not fully cover business interruptions or losses resulting from these events, our results of operations could be adversely affected.

We may be subject to significant potential liabilities because of warranty and liability claims made against us. Design, construction, or system failures related to our water and wastewater delivery systems could result in injury to third parties or damage to property. In addition, as a property developer, we are subject in the ordinary course of our business to warranty claims. We are also subject to claims for losses or injuries that occur during our property development activities. We plan to record warranty and other reserves for the residential lots we sell based on historical trends in our market and our judgment of the qualitative risks associated with the type of lots we sell. We have, and many of our subcontractors have, general liability, property, workers’ compensation, and other business insurance. These insurance policies are intended to protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles, and coverage limits. However, it is possible that this insurance will not be adequate to address all warranty and liability claims to which we are subject. Additionally, the coverage offered and the availability of general liability insurance for construction defects are currently limited and policies that can be obtained are costly and often include exclusions based upon past losses insurers suffered as a result of use of defective materials used by other property developers. As a result, our subcontractors may be unable to obtain insurance, and we may have to waive our customary insurance requirements, which increases our and our insurers’ exposure to claims and increases the possibility that our insurance will not be adequate to protect us for all the costs we incur. Any losses that exceed claims against our contractors, the performance bonds and our insurance limits at such facilities could result in claims against us. In addition, if there is a customer dispute regarding performance of our services, the customer may decide to delay or withhold payment to us. No warranty and liability claims have been made against us as of the date of this report.

A major health and safety incident relating to our business could be costly in terms of potential liabilities and reputational damage. Water facility and land development construction sites are inherently dangerous and pose certain inherent health and safety risks to construction workers and other persons on the site. Any failure in health and safety performance may result in penalties for non-compliance with relevant regulatory requirements, and a failure that results in a major or significant health and safety incident is likely to be costly in terms of potential liabilities incurred as a result. Such a failure could generate significant negative publicity and have a corresponding impact on our reputation, our relationships with relevant regulatory agencies or governmental authorities, and our ability to attract customers and employees, which in turn could have a material adverse effect on our business, financial condition and operating results.

Conflicts of interest may arise relating to the operation of the Rangeview District, the Sky Ranch Districts and the Sky Ranch CAB. Our Chief Executive Officer, Chief Financial Officer and two of our employees constitute 80% of the directors of each of the Rangeview District, the Sky Ranch Districts and the Sky Ranch CAB. These officers and employees, along with Pure Cycle, and one unrelated individual, own certain property interests in the 40 acres that constitute the Rangeview District and the acreage that constitutes the Sky Ranch Districts. We have made loans to the Rangeview District to fund its operations. As of August 31, 2020, total principal and interest owed to us by the Rangeview District was just under $1.0 million. Pursuant to our water and wastewater service agreements with the Rangeview District, the Rangeview District retains two percent of the revenues from the sale of water to its end-use customers and 10% of the revenues from the provision of wastewater services to its end-use customers. Proceeds from the fee collections will initially be used to repay the Rangeview District’s obligations to us, but after these loans are repaid, the Rangeview District is not required to use the funds to benefit Pure Cycle.

Similarly, we have made loans to and incurred expenses reimbursable by the Sky Ranch Districts, which amounts were fully refunded to us as of August 31, 2020, and we have advanced the Sky Ranch CAB $26 million for construction of public improvements on the Sky Ranch property. The Sky Ranch CAB is not required to repay us for advances made or expenses incurred for improvements at Sky Ranch unless and until the Sky Ranch CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to reimburse us for all or a portion of advances made or expenses incurred. We have received benefits from our activities undertaken in conjunction with the Rangeview and Sky Ranch Districts and the Sky Ranch CAB, but conflicts may arise between our interests and those of the Rangeview and Sky Ranch Districts and the Sky Ranch CAB and our officers and employees who are acting in dual capacities in negotiating contracts to which we and a district and/or the Sky Ranch CAB are parties. We expect that the Rangeview and Sky Ranch Districts will expand when more properties are developed and become part of the respective districts, and our officers and employees acting as directors of these districts will have fiduciary obligations to those other constituents. Conflicts may not be resolved in the best interests of the Company and our shareholders. In addition, other landowners coming into a district will be eligible to vote and to serve as directors of these districts. Our officers and employees may not remain as directors of these districts, and the actions of subsequently elected boards could have an adverse impact on our operations.

Growth limitations or moratoriums imposed by governmental authorities could adversely affect our land development activities or the land development activities of our customers, which could adversely impact both the land development and water and wastewater segments of our business. The State of Colorado or counties in which our service areas and properties are located may approve limitations or moratoriums on residential growth within their respective boundaries, which limitations or moratoriums could have the effect of delaying, limiting or halting development within Sky Ranch or other areas where we may provide water and wastewater services or develop land. We are not aware of any such proposals in the areas in which we operate, but proposals have been made to limit growth in various communities along the Front Range. Because all of the property in Sky Ranch has been platted, we do not expect future growth moratoriums to restrict Sky Ranch as currently planned; however, if growth moratoriums or restrictions are imposed in the areas in which we provide services or develop land, it could negatively impact our ability to develop our land as planned or our customers’ ability to grow their communities as anticipated, which would also reduce the number of water and wastewater service customers we expect, which would have a negative impact on our business and financial condition.

We could be hurt by efforts to impose liabilities or obligations on us regarding labor law violations by other persons whose employees perform contracted services. The infrastructure and improvements on our water and wastewater systems and on the finished lots we sell or that we must provide pursuant to service agreements and lot development agreements are done by employees of subcontractors and other contract parties. We do not have the ability to control what these contract parties pay their employees or the work rules they impose on their employees. However, there have been efforts by government agencies to hold contract parties like us responsible for violations of wage and hour laws and other work-related laws by firms whose employees are performing contracted-for services. This includes a 2016 National Labor Relations Board (“NLRB”) ruling which held that for labor law purposes a firm could under some circumstances be responsible as a joint employer of its contractors’ employees even if the firm had no direct control over the employees’ terms and conditions of employment. The NLRB ultimately reversed this ruling through a final rule issued in February 2020. The Colorado Department of Labor and Employment proposed similar changes in an April 2020 emergency rulemaking but ultimately withdrew them in May 2020 following a notice and comment period. Although these changes in the joint employer framework have not yet succeeded, governmental rulings that make us responsible for labor practices by our subcontractors could create substantial exposures for us in situations that are not within our control.

Unauthorized access to confidential information and data on our information technology systems and security and data breaches could materially adversely affect our business, financial condition, and operating results. As part of our operations, we rely on our computer systems to process transactions, communicate with our suppliers and other third parties, and on continued and unimpeded access to secure network connections to use our computer systems. We have physical, technical, and procedural safeguards in place that are designed to protect information and protect against security and data breaches as well as fraudulent transactions and other activities. Despite these safeguards and our other security processes and protections, we cannot be assured that all of our systems and processes are free from vulnerability to security breaches (through cyberattacks, which are evolving and becoming increasingly sophisticated, physical breach or other means) or inadvertent data disclosure by third parties or by us. A significant data security breach, including misappropriation of customer, supplier or employee confidential information, could cause us to incur significant costs, which may include potential costs of investigations, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation, remediation and litigation, substantial repair or replacement costs. We could also experience data losses that would impair our ability to manage our business operations, including accounting and project costs, manage our water and wastewater systems or process transactions and have a negative impact on our reputation and loss of confidence of our customers, suppliers and others, any of which could have a material adverse impact on our business, financial condition and operating results.

Risks Related to the Water Segment of Our Business

The rates that the Rangeview District is allowed to charge customers on the Lowry Range for water services are limited by the Lease with the Land Board and our contract with the Rangeview District and may not be sufficient to cover our costs of construction and operation. The prices charged by the Rangeview District for water service on the Lowry Range are subject to pricing regulations set forth in the Lease with the Land Board. Both the tap fees and usage rates and charges are capped at the average of the rates of three nearby water providers. Annually, the Rangeview District surveys the tap fees and rates of the three nearby providers, and the Rangeview District may adjust tap fees and rates and charges for water service on the Lowry Range based on the average of those charged by this group,group. We receive 100% of tap fees and we receive 98% of whateverwater usage fees charged by the Rangeview District chargesto its customers.customers after the deduction of royalties owed to the Land Board. Our costs associated with the construction of water delivery systems and the production, treatment and delivery of water are subject to market conditions and other factors, which may increase at a significantly higher rate than that of the fees we receive from the Rangeview District. Factors beyond our control and which cannot be predicted, such as government regulations, insurance and labor markets, drought, water contamination and severe weather conditions, like tornadoes and floods, may result in additional labor and material costs that may not be recoverable under the current rate structure. Both increased customer demand and increased water conservation may also impact the overall cost of our operations. If the costs for construction and operation of our wholesale water services, including the cost of extracting our groundwater, exceed our revenues, we would be providing water service to the Rangeview District for use at the Lowry Range at a loss. The Rangeview District may petition the Land Board for rate increases; however, there can be no assurance that the Land Board would approve a rate increase request. Further, even if a rate increase were approved, it might not be granted in a timely manner or in an amount sufficient to cover the expenses for which the rate increase was sought.

Our water business is subject to seasonal fluctuations and weather conditions that could affect demand for our water service and our revenues.We depend on an adequate water supply to meet the present and future demands of our customers and their end-use customers and to continue our expansion efforts. Conditions beyond our control may interfere with our water supply sources. Drought and overuse may limit the availability of water. These factors might adversely affect our ability to supply water in sufficient quantities to our customers, and our revenues and earnings may be adversely affected. Additionally, cool and wet weather, as well as drought restrictions and our customers’ conservation efforts, may reduce consumption demands, adversely affecting our revenue and earnings. Furthermore, freezing weather may contribute to water transmission interruptions caused by pipe and main breakage. If we experience an interruption in our water supply, it could have a material adverse effect on our financial condition and results of operations. Demand for our water during the warmer months is generally greater than during cooler months due primarily to additional requirements for water in connection with cooling systems, irrigation systems and other outside water use. Throughout the year, and particularly during typically warmer months, demand will vary with temperature and rainfall levels. If temperatures during the typically warmer months are cooler than expected or there is more rainfall than expected, the demand for our water may decrease and adversely affect our revenues.

SalesOur water sales for the past three years have been highly concentrated among companies providing hydraulic fracturing services to the frackingoil and gas industry, and such sales can fluctuate significantly. Our water sales have been historically highly concentrated directly and indirectly with one companyto three companies providing frackinghydraulic fracturing services to the oil and gas industry on and around the Lowry Range and our Sky Ranch property. SalesGenerally, investment in oil and gas development is dependent on the price of oil and gas. During the years ended August 31, 2020, 2019, and 2018 water sales for oil and gas operations represented 49%, 93%, and 90%, respectively, of our total metered water revenues. We have no long-term contractual commitments that will ensure these sales continue in the future. The oil and gas industry has periodically gone through periods when activity has significantly declined such as earlier this year due to low oil and gas prices caused by increased world-wide production and decreased demand due to stay-at-home orders related to the COVID‑19 pandemic.

Further sales to this customer base as well as renewals of our oil and gas leases, if any, in the future are impacted by statutory ballot initiatives, regulations, rulemaking initiatives by the Colorado Oil and Gas Conservation Commission, court interpretations of the statutory mandate of the Colorado Oil and Gas Conservation Commission, fracking technologies, the success of the wells and the price of oil and gas, among other things. InvestmentFor example, certain interest groups in Colorado opposed to oil and natural gas development generally, and hydraulic fracturing in particular, have advanced ballot initiatives that would significantly curtail oil and natural gas development in the state, including a Colorado proposed initiative that would have made drilling unlawful on approximately 85% of the non-federal surface area of the state of Colorado. Although these initiatives have not passed, interest groups opposed to oil and natural gas development have continued to seek restrictions. The enactment of SB181 and the release of a Colorado Department of Public Health and Environment report dated October 17, 2019, entitled Final Report: Human Health Risk Assessment for Oil & Gas Operations in Colorado, concluding that people living within 2,000 feet of fracking sites could face elevated health risks, may lead to increased opposition and tougher oversight of oil and gas development is dependent onoperations, which could reduce the pricedemand for water for fracking.

A significant portion of oil and gas. While water sales for fracking are now increasing, we have no contractual commitment that will ensure these sales in the future.
We are dependent on the housing market and development in our targeted service areas for future revenues.Providing wholesale water service using our Colorado Front Range water supplies iscome from non-renewable aquifers. A significant portion of our principal sourcewater supplies comes from non-renewable Denver Basin aquifers. The State of future revenue. The timingColorado regulates development and withdrawal of water from the Denver Basin aquifers to a rate of 1 percent of the aggregate amount of these revenues will dependwater determined to be in part on housing developments being built nearstorage each year, which means our water assets. The development ofsupply should last approximately 100 years even if no efforts were made to conserve or recharge the Lowry Range, Sky Ranch and other properties is subject to many factors that are not within our control. If wholesale water sales are not forthcoming or development on the Lowry Range, Sky Ranch or other properties in our targeted service areas is delayed,supply. Nonetheless, we may need to useseek additional water supplies as our capital resources, incur additional short or long-term debt obligations or seeknon-renewable supplies are depleted. While the acquisition of Lost Creek water, a renewable “surface” water right that is diverted from an alluvial aquifer that is hydrologically connected to sell additional equity. Wethe surface water system, mitigates some of the risk of owning non-renewable supplies, if we are unable to obtain sufficient replacement supplies, it would have a material adverse impact on our business and financial condition. Additionally, the cost of developing and withdrawing water from the aquifers will increase over time, and we may not have sufficient capital resources or be successful in obtaining additional operating capital. After several years of significant declines in new home construction, there have been positive market gains inable to recover the Colorado housing market since 2013. However, ifincreased costs through our rates and charges. Increased costs to develop water from the downturn in the homebuilding and credit markets return or if the national economy weakens and economic concerns intensify, itaquifers could have a significant negative impact on our business, results of operations, cash flows and financial condition and our plans for future development of additional phases of Sky Ranch.
condition.

Development on the Lowry Range is not within our control and is subject to obstacles.Development on the Lowry Range is controlled by the Land Board, which is governed by a five-person citizen board of commissioners representing education, agriculture, local government and natural resources, plus one at-large commissioner, each appointed for a four-year term by the Colorado governor and approved by the Colorado Senate. The Land Board’s focus with respect to issues such as development and conservation on the Lowry Range tends to change as membership on the Land Board changes. In addition, there are often significant delays in the adoption and implementation of plans with respect to property administered by the Land Board because the process involves many constituencies with diverse interests. In the event water sales are not forthcoming or development of the Lowry Range is delayed or abandoned, we may need to use our capital resources, incur additional short or long-term debt obligations or seek to sell additional equity. We may not have sufficient capital resources or be successful in obtaining additional operating capital.
Because of the prior use of the Lowry Range as a military facility, environmental clean-up may be required prior to development, including the removal of unexploded ordnance. The U.S. Army Corps of Engineers has been conducting unexploded ordnance removal activities at the Lowry Range for more than 20 years. Continued activities are dependent on federal appropriations, and the Army Corps of Engineers has no assurance from year to year of such appropriations for its activities at the Lowry Range.
We do not have experience with the development of real property.While we have experience designing and constructing water and wastewater facilities and maintaining and operating these facilities, we do not have experience developing real property. We may underestimate the capital expenditures required to develop the first phase of Sky Ranch, including the costs of certain infrastructure improvements. We lack experience in managing property development activities, including the permitting and other approvals required, which may result in delays in obtaining the necessary permits and government approvals.
Our construction of water and wastewater projects may expose us to certain completion, performance and financial risks.We expect to rely on independent contractors to construct our water and wastewater facilities and Sky Ranch lot improvements. These construction activities may involve risks, including shortages of materials and labor, work stoppages, labor relations disputes, weather interference, engineering, environmental, permitting or geological problems and unanticipated cost increases. These issues could give rise to delays, cost overruns or performance deficiencies, or otherwise adversely affect the construction or operation of our water and wastewater delivery systems and the construction and delivery of residential lots pursuant to our Builder Contracts. In addition, we may experience quality problems in the construction of our systems and facilities, including equipment failures. We may not meet the required deadlines under our Builder Contracts. We may face claims from customers or others regarding product quality and installation of equipment placed in service by contractors.
The Builder Contracts for Sky Ranch and for the water facilities that we design and construct are fixed-price contracts, in which we bear all or a significant portion of the risk for cost overruns. Under these fixed-price contracts, contract prices are established in part based on fixed, firm subcontractor quotes on contracts and on cost and scheduling estimates. These estimates may be based on a number of assumptions, including assumptions about prices and availability of labor, equipment and materials, and other issues. If these subcontractor quotations or cost estimates prove inaccurate, or if circumstances change, cost overruns may occur, and our financial results would be negatively impacted. In many cases, the incurrence of these additional costs would not be within our control.
Pursuant to our Builder Contracts for Sky Ranch, we guarantee project completion of water and wastewater delivery systems and lot improvements by a scheduled date. We also guarantee that the project, when completed, will achieve certain performance standards, meet certain quality specifications and satisfy certain requirements for governmental approvals. If we fail to complete the project as scheduled, or if we fail to meet guaranteed performance standards or quality specifications, or obtain the required governmental approvals, we may be held responsible for cost impacts and/or penalties to the customer resulting from any delay or for the costs to alter the project to achieve the performance standards and the quality specifications and to obtain the required government approvals. To the extent that these events occur and are not due to circumstances for which the customer accepts responsibility or cannot be mitigated by performance bonds or the provisions of our agreements with contractors, the total costs of the project would exceed our original estimates and our financial results would be negatively impacted.

We are required to secure, or to have our subcontractors secure, performance and completion bonds for certain contracts and projects. The market environment for surety companies has become more risk averse. We and our subcontractors secure performance and completion bonds for our contracts from these surety companies. To the extent we or our subcontractors are unable to obtain bonds, we may breach existing agreements and/or not be awarded new contracts. We may not be able to secure performance and completion bonds when required.
We may be subject to significant potential liabilities as a result of warranty and liability claims made against us.Design, construction or system failures related to our water and wastewater delivery systems could result in injury to third parties or damage to property. As a property developer, we are also subject in the ordinary course of our business to warranty claims. We are also subject to claims for injuries that occur in the course of our property development activities. We plan to record warranty and other reserves for the residential lots we sell based on historical experience in our market and our judgment of the qualitative risks associated with the type of lots we sell. We have, and many of our subcontractors have, general liability, property, workers’ compensation and other business insurance. These insurance policies are intended to protect us against a portion of our risk of loss from claims, subject to certain self-insured retentions, deductibles and coverage limits. However, it is possible that this insurance will not be adequate to address all warranty and liability claims to which we are subject. Additionally, the coverage offered and the availability of general liability insurance for construction defects are currently limited and policies that can be obtained are costly and often include exclusions based upon past losses those insurers suffered as a result of use of defective materials used by other property developers. As a result, our subcontractors may be unable to obtain insurance, and we may have to waive our customary insurance requirements, which increases our and our insurers’ exposure to claims and increases the possibility that our insurance will not be adequate to protect us for all the costs we incur. Any losses that exceed claims against our contractors, the performance bonds and our insurance limits at such facilities could result in claims against us. In addition, if there is a customer dispute regarding performance of our services, the customer may decide to delay or withhold payment to us.
We have a limited number of employees and may not be able to manage the increasing demands of our expanded operations.We have a limited number of employees to administer our existing assets, interface with applicable governmental bodies, market our services and plan for the construction and development of our assets. We may not be able to maximize the value of our assets because of our limited manpower. We depend significantly on the services of Mark W. Harding, our President and Chief Financial Officer. The loss of Mr. Harding would cause a significant interruption of our operations. Further, the execution of the Builder Contracts for Sky Ranch has increased the size and complexity of our business. The success of our current business and future business development and our ability to capitalize on growth opportunities depends on our ability to attract and retain additional experienced and qualified persons to operate and manage our business. State regulations set the training, experience and qualification standards required for our employees to operate specific water and wastewater facilities. Failure to find state-certified and qualified employees to support the operation of our facilities could put us at risk for, among other things, regulatory penalties (including fines and suspension of operations), operational errors at the facilities, improper billing and collection processes, and loss of contracts and revenues. We may be unsuccessful in managing our assets and growth.
Supply shortages and risks related to the demand for skilled labor and building materials could increase costs and delay closings. The property development industry is highly competitive for skilled labor and materials. Labor shortages in the Colorado Front Range have become more acute in recent years as the supply chain adjusts to uneven industry growth. Increased costs or shortages of skilled labor and/or concrete, steel, pipe and other materials could cause increases in property development costs and delays. We are unable to pass on increases in property development costs to home builders with whom we have already entered into purchase and sale contracts for residential lots, as our contracts fix the price of the lots at the time the contracts are signed, which will be well in advance of property development. Sustained increases in development costs may, over time, erode our margins.
Products supplied to us and work done by subcontractors can expose us to risks that could adversely affect our business. We rely on subcontractors to perform the actual property development, and in many cases, to select and obtain concrete and other materials. Subcontractors may use improper construction processes or defective materials. Defective products can result in the need to perform extensive repairs. The cost of complying with our warranty obligations may be significant if we are unable to recover the cost of repairs from subcontractors, materials suppliers and insurers.

A failure of the water wells or distribution networks that we own or control could result in losses and damages that may affect our business and financial condition and reputation.condition. We distribute water through a network of pipelines and store water in storage tanks and a pond.ponds. A failure of these pipelines, tanks or the pondponds could result in injuries and damage to property for which we may be responsible, in whole or in part. The failure of these pipelines, tanks, or pondponds may also result in the need to shut down some facilities or parts of our water distribution network in order to conduct repairs. Such failures and shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water delivery requirements prescribed by our contracts, which could adversely affect our financial condition,business, results of operations, cash flow, liquidityflows, and reputation.financial condition. Any business interruption or other losses might not be covered by insurance policies or be recoverable through rates and charges, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.

Conflicts of interestContamination to our water supply may arise relatingresult in disruption in our services and litigation, which could adversely affect our business, operating results and financial condition. Our water supplies are subject to the risk of potential contamination, including contamination from naturally occurring compounds, pollution from man-made sources and intentional sabotage. Our land at Sky Ranch and a portion of the Lowry Range have been leased for oil and gas exploration and development. Such exploration and development could expose us to additional contamination risks from related leaks or spills. In addition, we handle certain hazardous materials at our water treatment facilities, primarily sodium hypochlorite. Any failure of our operation of the facilities or any contamination of our supplies, including sewage spills, noncompliance with water quality standards, hazardous materials leaks and spills, and similar events, could expose us to environmental liabilities, claims and litigation costs. If any of these events occur, we may have to interrupt the use of that water supply until we are able to substitute the supply from another source or treat the contaminated supply. We cannot assure you that we will successfully manage these issues, and failure to do so could have a material adverse effect on our future results of operations.

We may incur significant costs in order to treat the contaminated source through expansion of our current treatment facilities or development of new treatment methods. If we are unable to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition. The costs we incur to decontaminate a water source or an underground water system could be significant and could adversely affect our business, operating results and financial condition and may not be recoverable in rates.

We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage. For example, private plaintiffs could assert personal injury or other toxic tort claims arising from the presence of hazardous substances in our drinking water supplies. Although we have not been a party to any environmental or pollution-related lawsuits, such lawsuits have increased in frequency in recent years. If we are subject to an environmental or pollution-related lawsuit, we might incur significant legal costs, and it is uncertain whether we would be able to recover the legal costs from ratepayers or other third parties. Our insurance policies may not cover or provide sufficient coverage for the losses associated with or the costs of these claims.

We may be adversely affected by any future decision by the Colorado Public Utilities Commission to regulate us as a public utility. The Colorado Public Utilities Commission (“CPUC”) regulates investor-owned water companies operating for the purpose of supplying water to the public. The CPUC regulates many aspects of public utilities’ operations, including establishing water rates and fees, initiating inspections, enforcement and compliance activities and assisting consumers with complaints. We do not believe that we are a public utility under Colorado law. We currently provide services by contract mainly to the Rangeview District, which supplies the public. Quasi-municipal metropolitan districts, such as the Rangeview District and the Sky Ranch Districts.Districts, are exempt by statute from regulation by the CPUC. However, the CPUC could attempt to regulate us as a public utility. If this were to occur, we might incur significant expense challenging the CPUC’s assertion of jurisdiction, and we may be unsuccessful. In the future, existing regulations may be revised or reinterpreted, and new laws and regulations may be adopted or become applicable to us or our facilities. If we become regulated as a public utility, our ability to generate profits could be limited, and we might incur significant costs associated with regulatory compliance.

The Rangeview District’s and our rights under the Lease have been challenged by third parties. Our officersThe Rangeview District’s and employees constitute 60% ofour rights under the directors ofLease have been challenged by third parties, including the Land Board, in the past. In 2014, in connection with settling a lawsuit filed by us and the Rangeview District against the Land Board, the Land Board, the Rangeview District and we amended and restated the Sky Ranch Districts. Pure Cycle, alongLease to clarify and update a number of provisions. However, there are issues still subject to disagreement and negotiation, including our rights with respect to revenue from our officersExport Water after 2081, and employeesit is likely that during the remaining term (through 2081) of the Lease, the parties will disagree over interpretations of provisions in the Lease again. The Rangeview District’s or our rights under the Lease could be challenged in the future, which could require potentially expensive litigation to enforce our rights.

Our Lowry Range surface water rights are “conditional decrees” and two unrelated individuals, ownrequire findings of reasonable diligence. Our surface water interests and reservoir sites at the 40 acresLowry Range are conditionally decreed and are subject to a finding of reasonable diligence from the Colorado water court every six years. To arrive at a finding of reasonable diligence, the water court must determine that constitutewe continue to diligently pursue the development of said water rights. If the water court is unable to make such a finding, we could lose the water right under review. During each of fiscal 2012 and 2018, the Lowry Range conditional decrees were granted review by the water court, which determined that we and the Rangeview District andmet the acreagediligence criteria. The water court entered a finding of reasonable diligence on the Lowry Range surface water decrees in January 2019. Our next review for reasonable diligence on the Lowry Range surface water decrees will be in January 2025. We believe that constituteswe will be successful in maintaining our decrees as we continue to develop these rights. If the Sky Ranch Districts. We have made loans towater court does not make a determination of reasonable diligence, the value of our interests in the Rangeview District to fund its operations. At August 31, 2017, total principal and interest owed to us by the Rangeview District was $776,400. Pursuant to our water and wastewater service agreements with the Rangeview District, the Rangeview District retains two percent of the revenues from the sale of water to its end-use customers and 10% of the revenues from the provision of wastewater services to its end-use customers. Proceeds from the fee collections will initiallyWater Supply would be used to repay the Rangeview District’s obligations to us, but after these loans are repaid, the Rangeview District is not required to use the funds to benefit Pure Cycle.materially adversely impacted.

Similarly, we have made loans to and incurred expenses reimbursable by the Sky Ranch Districts. At August 31, 2017, total principal and interest owed to us by the Sky Ranch Districts was $215,500. It is anticipated that these amounts will be repaid once Sky Ranch has sold residential units and has a tax base to issue bonds to pay for services. We have received benefits from our activities undertaken in conjunction with these districts, but conflicts may arise between our interests and those of the Rangeview and Sky Ranch Districts and our officers and employees who are acting in dual capacities in negotiating contracts to which both we and a district are parties. We expect that the Rangeview and Sky Ranch Districts will expand when more properties are developed and become part of the respective districts, and our officers and employees acting as directors of these districts will have fiduciary obligations to those other constituents. Conflicts may not be resolved in the best interests of the Company and our shareholders. In addition, other landowners coming into a district will be eligible to vote and to serve as directors of that district. Our officers and employees may not remain as directors of these districts, and the actions of subsequently elected boards could have an adverse impact on our operations.
Our operations are affected by local politics and governmental procedures that are beyond our control. We operate in a highly political environment. We market our water rights to municipalities and other governmental entities run by elected or politically appointed officials. Our principal competitors are municipalities seeking to expand their sales tax base and other water districts. Various constituencies, including our competitors, developers, environmental groups, conservation groups, and agricultural interests, have competing agendas with respect to the development of water rights in Colorado, which means that decisions affecting our business are based on many factors other than economic and business considerations. Additional risks associated with dealing with governmental entities include turnover of elected and appointed officials, changes in policies from election to election, and a lack of institutional history in these entities concerning their prior courses of dealing with the Company. We spend significant time and resources educating elected officials, local authorities and others regarding our water rights and the benefits of contracting with us. Political concerns and governmental procedures and policies may hinder or delay our ability to enter into service agreements or develop our water rights or infrastructure to deliver our water. While we have worked to reduce the political risks in our business through our participation as the service provider for the Rangeview District in regional cooperative resource programs, such as the SMWSA and itsthe WISE partnership with Denver Water and Aurora Water, as well as education and communication efforts and community involvement, our efforts may be unsuccessful.

The number of connections we can serve are affected by local governmental policies that are beyond our control. We market our water rights through service agreements to developers, municipalities and other governmental entities run by elected or politically appointed officials. We believe that our water rights can serve approximately 60,000 single family connections based on standards applied to water providers in Arapahoe, Douglas, and Adams Counties. These standards are policy driven, based on assumed life and reliability of water supplies and may become more restrictive at the discretion of the governmental entity. If these standards become more restrictive, water supplies of all water providers, including those of the Company, may not serve the number of connections that providers currently estimate.

Development on the Lowry Range is not within our control and is subject to obstacles. Development on the Lowry Range is controlled by the Land Board, which is governed by a five-person citizen board of commissioners representing education, agriculture, local government and natural resources, plus one at-large commissioner, each appointed for a four-year term by the Colorado governor and approved by the Colorado Senate. The Land Board’s focus with respect to issues such as development and conservation on the Lowry Range tends to change as membership on the Land Board changes. In addition, there are often significant delays in the adoption and implementation of plans with respect to property administered by the Land Board because the process involves many constituencies with diverse interests. In the event water sales are not forthcoming or development of the Lowry Range is delayed or abandoned, we may need to use our capital resources, incur additional short or long-term debt obligations or seek to sell additional equity. We may not have sufficient capital resources or be successful in obtaining additional operating capital.

Because of the prior use of the Lowry Range as a military facility, environmental clean-up may be required prior to development, including the removal of unexploded ordnance. The U.S. Army Corps of Engineers has been conducting unexploded ordnance removal activities at the Lowry Range for more than 30 years. Continued activities are dependent on federal appropriations, and the Army Corps of Engineers has no assurance from year to year of such appropriations for its activities at the Lowry Range.

Risks Related to the Land Development Segment of Our Business

The homebuilding industry is cyclical and a deterioration in industry conditions or downward changes in general economic or other business conditions could adversely affect our business, results of operations, cash flows and financial condition. The residential homebuilding industry is cyclical and is highly sensitive to changes in general economic conditions such as levels of employment, consumer confidence and income, availability of mortgage financing for acquisitions, interest rate levels and inflation, among other factors. Additionally, the residential housing market is impacted by federal and state personal income tax rates and provisions, and government actions, policies, programs and regulations directed at or affecting the housing market, including the Tax Cuts and Jobs Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, tax benefits associated with purchasing and owning a home, and the standards, fees and size limits applicable to the purchase or insuring of mortgage loans by government-sponsored enterprises and government agencies. In fiscal 2019, housing starts in Colorado declined compared to housing starts in fiscal 2018. However, in fiscal 2020 housing starts in Colorado increased compared to fiscal 2019. Although the number of housing starts continues to be better than during the last economic downturn, if the recovery of the Colorado housing market reverses, we could experience declines in the market value of our inventory and demand for our lots, which could have a material adverse effect on our business, results of operations, cash flows and financial condition.

We have limited experience with the development of real property. While we have extensive experience designing and constructing water and wastewater facilities and maintaining and operating these facilities, we have limited experience developing real property. We may underestimate the capital expenditures required to develop Sky Ranch, including the costs of certain infrastructure improvements. We also have limited experience in managing property development activities, including the permitting and other approvals required, which may result in delays in obtaining the necessary permits and government approvals.

Significant competition from other development projects could adversely affect our results. Land development is a highly competitive business. There are numerous land developers, as well as properties and development projects, in the same geographic area in which Sky Ranch is located. Many of our land development competitors may have advantages over us, such as more favorable locations, which may provide more desirable schools and easier access to roads and shopping, or amenities that we may not offer, as well as greater financial resources. If other development projects are found to be more attractive to home buyers, home builders or other developers or operators of real estate based on location, price, or other factors, then we may be pressured to reduce our prices or delay further development, either of which could materially adversely affect our business, results of operations, cash flows and financial condition.

The funds that we are advancing to the Sky Ranch CAB for construction of public improvements might not be repaid, which would negatively impact our income, gross margin on selling lots, and cash flows. We have advanced the Sky Ranch CAB $26 million for construction of public improvements and expect to fund an additional estimated $3 million in buildout costs for filing one and $48 million for filing two that we expect will be reimbursable by the Sky Ranch CAB. No payment is required by the Sky Ranch CAB with respect to construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided or expenses incurred for reimbursables. The ability and obligation of the Sky Ranch CAB to reimburse us is dependent on sufficient home sales and commercial development occurring at Sky Ranch to create a tax base that would enable the Sky Ranch CAB to issue bonds to pay for the improvements. If development at Sky Ranch is delayed or curtailed for any reason, including regulatory restrictions, a downturn in the economy or default by one or more of the builders at Sky Ranch, the Sky Ranch CAB may not have sufficient revenues to issue bonds. Because the timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities, are not included on our consolidated balance sheets and are initially capitalized in Land development inventories. If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs. If bonds ultimately are issued, upon receipt of reimbursements by the Company, the Company records the reimbursements received as Other income to the extent that costs have previously been expensed and reduces Land development inventories by any remaining reimbursables received. Failure of the Sky Ranch CAB to repay a significant portion of the funds that we have advanced for public improvements would negatively impact our income, gross margin on selling lots and cash flows.

Supply shortages and risks related to the demand for skilled labor and building materials could increase costs and delay closings. The property development industry is highly competitive for skilled labor and materials. Labor shortages in the Colorado Front Range have become more acute in recent years as the supply chain adjusts to uneven industry growth. Increased costs or shortages of skilled labor and/or concrete, steel, pipe and other materials could cause increases in property development costs and delays. We are unable to pass on increases in property development costs to home builders with whom we have already entered into purchase and sale contracts for residential lots, as our contracts fix the price of the lots at the time the contracts are signed, which will be well in advance of property development. Sustained increases in development costs may, over time, erode our margins.

Products supplied to us and work done by subcontractors can expose us to risks that could adversely affect our business. We rely on subcontractors to perform the actual property development, and in many cases, to select and obtain concrete and other materials. Subcontractors may use improper construction processes or defective materials. Defective products can result in the need to perform extensive repairs. The cost of complying with our warranty obligations may be significant if we are unable to recover the cost of repairs from subcontractors, materials suppliers and insurers.

We may purchase additional land parcels for development or other purposes, thereby exposing us to certain financial risks. In the future, we may purchase additional land parcels for development or other purposes. As noted above, land development requires significant cash expenditures before positive cash flows can be generated from the sale of lots and water and sewer tap fees. If there is considerable lag time between the time we acquire land and the time we begin selling finished lots, we may generate significant operating losses. In addition, if sales of homes on the finished lots are delayed, our revenue from water and wastewater resource development services will be delayed. If our cash on hand and future cash flows from operations are not sufficient to fund our operations and the significant capital expenditure requirements to develop any acquired land and build water and wastewater systems, we may be forced to seek to obtain additional debt or equity capital. There can be no assurance that financing will be available on acceptable terms or at all.

Delays in property development may extend the time it takes us to recover our property development costs.costs and delay our revenue from water and wastewater resource development services. We incur many costs, such as the costs of preparing land, finishing and entitling lots, installing roads, sewers, water systems and other utilities, taxes and other costs related to ownership of the land and/or developing lots on behalf of builders who purchase the land, before we close on the sale of residentialfinished lots to home builders. If the rate at which we develop residential lots slows, we may incur additional costs, and it may take longer for us to recover our costs. In addition, if sales of homes on the finished lots are delayed, our revenue from utilitywater and wastewater resource development services will be delayed.

Government regulations A significant downturn in the housing market could cause our builders to delay building homes on their lots until market conditions improve. Builders with contracts that do not require purchasing the lot until we deliver a finished, ready-to-build lot could walk away from the contract anytime prior to closing without consequence other than the forfeiture of their upfront deposits for the lot, utilities and legal challenges may delayother improvements. If a builder elected to walk away without cause, we would be entitled to keep these deposits as liquidated damages, but the closing of the sale of our residential lots, increase our expenses or limit other activities, which could have a negative impact on our results of operations. The approval of numerous governmental authorities must be obtained in connection with our property development activities, and these governmental authorities often have broad discretion in exercising their approval authority. We incur substantial costs related to compliance with legal and regulatory requirements. Any increase in legal and regulatory requirements may cause us to incur substantial additional costs. Various local, state and federal statutes, ordinances, rules and regulations concerning building, health and safety, site and building design, environment, zoning, and similar matters apply to and/or affect property developers like us. In addition, our ability to obtain or renew permits or approvals and the continued effectiveness of permits already granted or approvals already obtained depends on factors beyond our control, such as changes in federal, state and local policies, rules and regulations and their interpretations and application. Furthermore, we are also subject to various fees and charges of government authorities designed to defray the cost of providing certain governmental services and improvements. For example, local and state governments have broad discretion regarding the imposition of development fees for projects under their jurisdictions, as well as requiring concessions or that the property developer and/or home builder construct certain improvements to public places such as parks and streets or fund schools.
Municipalities or state water agencies may restrict or place moratoriums on the availability of utilities, such as water and sewer taps, which could have an adverse effect on our business by causing delays or increasing our costs.
We must provide water that meets all federal and state regulatory water quality standards and operate our water and wastewater facilities in accordance with these standards. Future changes in regulations governing the supply of drinking water and treatment of wastewater may have a material adverse impact on our financial results. With respect to service of customers on the Lowry Range, the Rangeview District’s rates mightdeposits would not be sufficient to cover the cost of compliance with additional or more stringent requirements.expenses we expect to incur to finish the lots for delivery. We would not be able to recover our costs until we were able to sell the finished lots to another builder. If the costoriginal builder did not go through with the closing due to a poor housing market, we would likely have difficulty finding another buyer for the same reason..

Fluctuations in real property values may require us to write-down the book value of compliance were to increase, we anticipate that the rates of the nearby water providers that the Rangeview District uses to establish its rates and charges would increase to reflect these cost increases, thereby allowing the Rangeview District to increase its rates and charges. However, these water providers may not raise their rates in an amount that would be sufficient to enable the Rangeview District (and us) to cover any increased compliance costs.
In addition, thereour land interests. The land development industry is a variety of legislation being enacted, or considered for enactment, at the federal, state and local level relating to energy and climate change. This legislation relates to items such as carbon dioxide emissions control and building codes that impose energy efficiency standards. Such environmental laws may affect, for example, how we manage storm water runoff, wastewater discharges and dust; how we develop or operate on properties on or affecting resources such as wetlands, endangered species, cultural resources, or areas subject to preservation laws;significant variability and how we address contamination.fluctuations in real property values. As climate change concerns continuea result, the Company may be required to grow, compliancewrite-down the book value of its Sky Ranch or other land interests in accordance with legislation and regulations of this nature are expected to become more costly. Energy-related initiatives affect a wide variety of companies throughoutaccounting principles generally accepted in the United States of America, and the world and, because our operations are now dependent on significant amountssome of raw materials, such as steel and concrete, they could have an indirect adverse impact on our operations and profitability to the extent the manufacturers and suppliers of the materials used in the development of our properties are burdened with expensive cap and trade and similar energy related taxes and regulations. It is possible that new standardsthose write-downs could be imposed that will require additional capital expenditures or raise our operating costs. With respect to servicematerial. Any material write-downs of customers on the Lowry Range, the Rangeview District’s rates might not be sufficient to cover the cost of compliance with new requirements. Although we would expect the rates of the nearby water providers that the Rangeview District uses to establish its rates and charges to increase to cover increased compliance costs, such rates may not cover all our costs and our costs of complying with new standards or laws could adversely affect our business, results of operations or financial condition. Our noncompliance with environmental laws could result in fines and penalties, obligations to remediate, permit revocations and other sanctions.

Government agencies may initiate audits, reviews or investigations of our business practices to ensure compliance with applicable laws and regulations, which can cause us to incur costs or create other disruptions in our business that can be significant. Further, we may experience delays and increased expenses as a result of legal challenges to our proposed development activities, whether brought by governmental authorities or private parties.
Our Lowry Range surface water rights are “conditional decrees” and require findings of reasonable diligence.Our surface water interests and reservoir sites at the Lowry Range are conditionally decreed and are subject to a finding of reasonable diligence from the Colorado water court every six years. To arrive at a finding of reasonable diligence, the water court must determine that we continue to diligently pursue the development of said water rights. If the water court is unable to make such a finding, we could lose the water right under review. During fiscal 2012, the Lowry Range conditional decrees were granted their first review by the water court, which determined that we and the Rangeview District met the diligence criteria. The water court entered a finding of reasonable diligence on the Lowry Range surface water decrees on February 11, 2012. Our next diligence period will be in February 2018. If the water court does not make a determination of reasonable diligence in 2018, it would materially adversely impact the value of our interests in the Rangeview surface water supply.
Contamination to our water supply may result in disruption in our services and litigation, which could adversely affect our business, operating results and financial condition.Our water supplies are subject to the risk of potential contamination, including contamination from naturally occurring compounds, pollution from man-made sources and intentional sabotage. Our land at Sky Ranch and a portion of the Lowry Range have been leased for oil and gas exploration and development. Such exploration and development could expose us to additional contamination risks from related leaks or spills. In addition, we handle certain hazardous materials at our water treatment facilities, primarily sodium hypochlorite. Any failure of our operation of the facilities or any contamination of our supplies, including sewage spills, noncompliance with water quality standards, hazardous materials leaks and spills, and similar events could expose us to environmental liabilities, claims and litigation costs. If any of these events occur, we may have to interrupt the use of that water supply until we are able to substitute the supply from another source or treat the contaminated supply. We cannot assure you that we will successfully manage these issues, and failure to do soassets could have a material adverse effect on our futurebusiness, prospects, financial condition or results of operations.
We may incur significant costs The Company assesses its land interests when indicators of impairment exist. Indicators of impairment include a decrease in order to treat the contaminated source through expansion of our current treatment facilities or development of new treatment methods. If we are unable to substitute water supply from an uncontaminated water source, or to adequately treat the contaminated water source in a cost-effective manner, there may be an adverse effect on our revenues, operating results and financial condition. The costs we incur to decontaminate a water source or an underground water system could be significant and could adversely affect our business, operating results and financial condition and may not be recoverable in rates.
We could also be held liable for consequences arising out of human exposure to hazardous substances in our water supplies or other environmental damage. For example, private plaintiffs could assert personal injury or other toxic tort claims arising from the presence of hazardous substances in our drinking water supplies. Although we have not been a party to any environmental or pollution-related lawsuits, such lawsuits have increased in frequency in recent years. If we are subject to an environmental or pollution-related lawsuit, we might incur significant legal costs, and it is uncertain whether we would be able to recover the legal costs from ratepayers or other third parties. Our insurance policies may not cover or provide sufficient coverage for the costs of these claims.
We may be adversely affected by any future decision by the Colorado Public Utilities Commission to regulate us as a public utility.The Colorado Public Utilities Commission (“CPUC”) regulates investor-owned water companies operating for the purpose of supplying water to the public. The CPUC regulates many aspects of public utilities’ operations, including establishing water rates and fees, initiating inspections, enforcement and compliance activities and assisting consumers with complaints. We do not believe we are a public utility under Colorado law. We currently provide services by contract mainly to the Rangeview District, which supplies the public. Quasi-municipal metropolitan districts, such as the Rangeview District and the Sky Ranch Districts, are exempt by statute from regulation by the CPUC. However, the CPUC could attempt to regulate us as a public utility. If this were to occur, we might incur significant expense challenging the CPUC’s assertion of jurisdiction, and we may be unsuccessful. In the future, existing regulations may be revised or reinterpreted, and new laws and regulations may be adopted or become applicable to us or our facilities. If we become regulated as a public utility, our ability to generate profits could be limited, and we might incur significant costs associated with regulatory compliance.

The Rangeview District’s and our rights under the Lease have been challenged by third parties.The Rangeview District’s and our rights under the Lease have been challenged by third parties, including the Land Board, in the past. In 2014, in connection with settling a lawsuit filed by us and the Rangeview District against the Land Board, the Land Board, the Rangeview District and we amended and restated the Lease to clarify and update a number of provisions. However, there are issues still subject to negotiation and it is likely that during the remaining 64-year term of the Lease the parties will disagree over interpretations of provisions in the Lease again. The Rangeview District’s or our rights under the Lease could be challenged in the future, which could require potentially expensive litigation to enforce our rights.
Our operations are concentrated in the Front Range area of Colorado; we are subject to general economic conditions in Colorado.Our water assets and operations are located solely in the Front Range area of Colorado. Our performance could be adversely affected by economic conditions in, and other factors relating to, Colorado, including supply and demand for housing zoning and other regulatory conditions. Todue to soft market conditions; competitive pricing pressures that reduce the extent the general economic conditionsaverage sales price of finished lots; sales absorption rates below management expectations; a decrease in the Front Range area of Colorado deteriorate, the value of our assets, our results ofhomes or the underlying land due to general market conditions, actual or perceived risks due to proximity to oil and gas drilling operations, or other reasons; and our financial condition could be materially adversely affected.a decrease in projected cash flows for a project.

Natural disastersOur land development segment may be subject to risks related to oil and severe weather conditionsgas operations in the vicinity of our Sky Ranch development, which could delayhave an adverse impact on the closingmarketability and/or value of our Sky Ranch property. We have leased the saleminerals underlying Sky Ranch to a wholly owned subsidiary of residentiala major independent exploration and production company. Oil and gas extraction is an inherently dangerous activity that can potentially lead to air and water contamination, fire, explosion or other hazards. While the State of Colorado, local governments, and private operators have regulations and procedures in place intended to mitigate these risks, there can be no assurances that these safeguards will be effective in all cases with respect to any oil and gas activity around Sky Ranch. The existence of oil and gas wells and drilling activity in or near our property and public concern regarding the negative health impacts from emissions near drilling and hydraulic fracturing sites, including those detailed in a recent 380-page report submitted to the Colorado Department of Public Health and Environment entitled the Final Report: Human Health Risk Assessment for Oil & Gas Operations in Colorado dated October 17, 2019, may adversely impact the marketability and/or value of the lots at Sky Ranch and increasedecrease demand for homes in proximity to oil and gas operations, negatively impacting our costs,land development segment, which could harmalso negatively impact our salesbusiness and results of operations. We conduct our property development operations in the Colorado Front Range, which is subject to natural disasters, including droughts, tornadoes, wildland fires, and severe weather. The occurrence of natural disasters or severe weather conditions in Colorado or elsewhere could delay property development, increase costs by delaying closings and lead to shortages of labor and materials. If our insurance or the insurance of our subcontractors does not fully cover business interruptions or losses resulting from these events, our results of operations could be adversely affected. For example, as a result of Hurricane Harvey in the Texas Gulf Coast, the cost of pipe increased approximately 35%. This additional cost is not clearly reimbursable by insurance.
We could be hurt by efforts to impose liabilities or obligations on persons with regard to labor law violations by other persons whose employees perform contracted services. The infrastructure and improvements on our water and wastewater systems and on the finished lots we sell or that we must provide pursuant to service agreements and lot development agreements are done by employees of subcontractors and other contract parties. We do not have the ability to control what these contract parties pay their employees or the work rules they impose on their employees. However, various governmental agencies are trying to hold contract parties like us responsible for violations of wage and hour laws and other work related laws by firms whose employees are performing contracted-for services. A 2016 National Labor Relations Board ruling holds that for labor law purposes a firm could under some circumstances be responsible as a joint employer of its contractors’ employees even if the firm had no direct control over the employees’ terms and conditions of employment. If that ruling is upheld on appeal, it could make us responsible for collective bargaining obligations and labor law violations by our subcontractors. Governmental rulings that make us responsible for labor practices by our subcontractors could create substantial exposures for us in situations that are not within our control.
We experience variability in our operating results on a quarterly basis and, as a result, our historical performance may not be a meaningful indicator of future results. We historically have experienced, and expect to continue to experience, variability in quarterly results. As a result of such variability, our short-term performance may not be a meaningful indicator of future results. Our quarterly results of operations may continue to fluctuate in the future as a result of a variety of factors, including, among others, the timing of the closings of sales of residential lots and weather-related problems.
Our stock price has been volatile in the past and may decline in the future.Our common stock has experienced significant price and volume fluctuations in the past and may experience significant fluctuations in the future depending upon a number of factors, some of which are beyond our control. Factors that could affect our stock price and trading volume include, among others, the perceived prospects of our business; differences between anticipated and actual operating results; changes in analysts’ recommendations or projections; the commencement and/or results of litigation and other legal proceedings; and future sales of our common stock by us or by significant shareholders, officers and directors. In addition, stock markets in general have experienced price and volume volatility from time to time, which may adversely affect the market price of our common stock for reasons unrelated to our performance.
financial condition.

Item 1B – Unresolved Staff Comments

None.

Item 2 – Properties

Corporate Office
Effective January 2016, we entered into an operating lease for approximately 2,500 square feet of office and warehouse space. The lease has a two-year term with payments of $3,000 per month.
Water Related Assets

In addition to the water rights and adjudicated reservoir sites that are described in Item 1 – Our Water and Land Assets, we also own or have exclusive rights to use, through the Rangeview District a 1.0 million-gallon and two 500,000-gallon treated water tank, 400,000-barrel storage reservoir, a 300,000-barreltanks, three storage reservoir, threereservoirs that can store 1.7 million barrels of water (71.4 million gallons), five deep water wells, athree alluvial wells, three pump station, and severalstations, over 50 miles of water pipelinetransmission and distribution lines, and more than 20 miles of wastewater collection pipelines in Arapahoe County, Colorado. Although owned by the Rangeview District, we operateIn conjunction with Wild Pointe, and maintain another 500,000-gallon water tank, two deep water wells, a pump station, three alluvial wells, the Rangeview District’s wastewater treatment plant, and water distribution and wastewater collection pipelines that serve customers located at the Lowry Range. Although owned by the Elbert 86 District, we have exclusive rights to use, operate and maintain two water tanks with a combined capacity of 438,000-gallons of water,438,000 gallons, two deep water wells, a pump station, and 10ten miles of transmission line for thelines serving customers at Wild Pointe development in Elbert County. These assets are used to provide service to our customers.

Land and Mineral Interests

We own approximately 931780 acres of land known asremaining at our Sky Ranch that is described further inItem 1 – Our Water and Land Assets –Master Planned Community as well as approximately 634 net mineral acres at Sky Ranch.We own 40 acres of land that comprise the current boundaries of the Rangeview District.District (together with all the minerals). We also own approximately 700 acres of land in the Arkansas River Valley, which is currently classified as land held for sale.and we hold 13,900 acres of mineral interests in the Arkansas River Valley in Southeast Colorado in Otero, Bent and Prowers Counties.
 
Item 3 – Legal Proceedings

None.

Item 4 – Mine Safety Disclosures

None.

PART II

Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Our common stock is traded on The NASDAQ Stock Market under the symbol “PCYO.” The high and low sales prices of our common stock, by quarter, for the fiscal years ended August 31, 2016 and 2015 are presented below:

 
Table E - Market Information
 
Fiscal 2017 quarters ended:
 
August 31
 
 
May 31
 
 
February 28
 
 
November 30
 
  Market price of common stock
 
 
 
 
 
 
 
 
 
 
 
 
  High
 $8.73 
 $8.10 
 $5.70 
 $5.93 
  Low
 $6.55 
 $5.20 
 $4.90 
 $4.60 
 
    
    
    
    
Holders
Fiscal 2016 quarters ended:
 
August 31
 
 
May 31
 
 
February 29
 
 
November 30
 
  Market price of common stock
 
 
 
 
 
 
 
 
 
 
 
 
  High
 $5.20 
 $4.91 
 $5.12 
 $5.73 
  Low
 $4.34 
 $4.29 
 $3.65 
 $4.56 
Holders

On October 17, 2017,29, 2020, there were 552772 holders of record of our common stock.

Dividends

We have never paid any dividends on our common stock and expect for the foreseeable future to retain all of our capital and earnings from operations, if any, for use in expanding and developing our business.water and land development businesses. Any future decision as to the payment of dividends will be at the discretion of our board of directors and will depend upon our earnings, financial position, capital requirements, plans for expansion and such other factors as our board of directors deems relevant. The terms of our Series B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid and require dividends to be paid on the Series B Preferred Stock if proceeds from the sale of Export Water exceed $36,026,232. For further discussion, see Note 8 – Shareholders’ Equity to the accompanying consolidated financial statements.
Performance Graph1
This graph compares the cumulative total return of our common stock for the last five fiscal years with the cumulative total return for the same period of the S&P 500 Index and a peer group index.2The graph assumes the investment of $100 in common stock in each of the indices as of the market close on August 31 and reinvestment of all dividends.
 
  8/12 
  8/13 
  8/14 
  8/15 
  8/16 
  8/17 
 
    
    
    
    
    
    
Pure Cycle Corporation
  100.00 
  260.00 
  326.00 
  250.00 
  242.00 
  362.50 
S&P 500
  100.00 
  118.70 
  148.67 
  149.38 
  168.13 
  195.43 
Peer Group
  100.00 
  119.89 
  133.12 
  139.83 
  178.40 
  213.02 

1. 
This performance graph is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act or the Exchange Act whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
2. 
The Peer Group consists of the following companies that have been selected on the basis of industry focus or industry leadership: American States Water Company, Aqua America, Inc., Artesian Resources Corp., California Water Service Group, Connecticut Water Service, Inc., Middlesex Water Company, SJW Corp., and The York Water Company.
Recent Sales of Unregistered Securities; Use of Proceeds Fromfrom Registered Securities

None.

PurchasePurchases of Equity Securities Byby the Issuer and Affiliated Purchasers

None.

Item 6 – Selected Financial Data

 
Table F - Selected Financial Data
 
In thousands (except per share data)
 
For the Fiscal Years Ended August 31,
 
 
 
2017
 
 
2016
 
 
2015
 
 
2014
 
 
2013
 
Summary Statement of Operations Items:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Total revenue
 $1,227.8 
 $452.2 
 $1,196.6 
 $2,023.1 
 $615.6 
  (Loss) income from continuing operations
 $(1,678.8)
 $(1,230.3)
 $(575.1)
 $285.5 
 $(1,227.9)
  Net loss
 $(1,710.9)
 $(1,310.6)
 $(23,127.9)
 $(311.4)
 $(4,150.4)
  Basic and diluted loss per share
 $(0.07)
 $(0.06)
 $(0.96)
 $(0.01)
 $(0.17)
  Weighted average shares outstanding
  23,754 
  23,781 
  24,041 
  24,038 
  24,038 
Selected Financial Data Table

 
 
As of August 31,
 
Summary Balance Sheet Information:
 
2017
 
 
2016
 
 
2015
 
 
2014
 
 
2013
 
  Current assets
 $27,124.3 
 $29,085.9 
 $39,580.9 
 $4,463.3 
 $9,900.0 
  Total assets
 $69,787.6 
 $70,879.6 
 $73,060.9 
 $108,173.8 
 $108,618.3 
  Current liabilities
 $940.2 
 $482.2 
 $1,499.1 
 $3,274.4 
 $5,402.3 
  Long-term liabilities
 $1,341.3 
 $1,399.5 
 $1,476.4 
 $13,868.9 
 $65,443.5 
  Total liabilities
 $2,281.5 
 $1,881.7 
 $2,975.5 
 $17,143.3 
 $70,845.8 
  Equity
 $67,506.1 
 $68,997.9 
 $70,085.5 
 $91,030.5 
 $37,772.5 
In thousands (except per share data)

  For the Fiscal Years Ended August 31, 
  2020  2019  2018  2017  2016 
Summary Statement of Operations Items:               
Total revenue 
$
25,855.2
  
$
20,361.5
  
$
6,959.2
  
$
1,227.8
  
$
452.2
 
Income (loss) before taxes 
$
8,919.1
  
$
3,528.0
  
$
132.7
  
$
(1,678.8
)
 
$
(1,230.3
)
Net income (loss) 
$
6,750.4
  
$
4,811.1
  
$
414.7
  
$
(1,710.9
)
 
$
(1,310.6
)
Basic income (loss) per share 
$
0.28
  
$
0.20
  
$
0.02
  
$
(0.07
)
 
$
(0.06
)
Diluted income (loss) per share 
$
0.28
  
$
0.20
  
$
0.02
  
$
(0.07
)
 
$
(0.06
)
Weighted-average basic shares outstanding  
23,845
   
23,795
   
23,760
   
23,754
   
23,781
 
Weighted-average diluted shares outstanding  
24,062
   
24,003
   
23,930
   
23,754
   
23,781
 

  As of August 31, 
  2020  2019  2018  2017  2016 
Summary Balance Sheet Information:               
Current assets 
$
25,991.2
  
$
23,537.7
  
$
27,918.2
  
$
27,124.3
  
$
29,085.9
 
Total assets 
$
89,761.1
  
$
83,721.4
  
$
71,906.6
  
$
69,787.6
  
$
70,879.6
 
Current liabilities 
$
6,218.6
  
$
8,297.2
  
$
2,054.0
  
$
940.2
  
$
482.2
 
Long-term liabilities 
$
1,498.6
  
$
693.1
  
$
399.4
  
$
1,341.3
  
$
1,399.5
 
Total liabilities 
$
7,717.2
  
$
8,990.3
  
$
2,453.4
  
$
2,281.5
  
$
1,881.7
 
Shareholders’ equity 
$
82,043.8
  
$
74,731.1
  
$
69,453.2
  
$
67,506.1
  
$
68,997.9
 

The following items had a significant impact on our operations:

(a)
In fiscal 2020, due to land development activities at Sky Ranch, we recognized $18.9 million in revenue from lot sales and $5.7 million in revenue from the sale of water and wastewater taps. Our revenue from water sales decreased by 78% to $1.0 million primarily related to the decline in the demand for industrial water sales, and we recorded a non-cash long-lived asset impairment charge of $1.4 million on our mineral rights in the Arkansas Valley, Colorado, in both cases due to the drop of the price of crude oil as a result of increased world-wide production and lower demand because of the COVID-19 pandemic and related shelter-in-place and stay-at-home orders. We invested $8.0 million in our land, water and wastewater systems, including $1.9 million for the wastewater facility at Sky Ranch, $586,400 for the purchase of equipment, and $8.5 million in costs related to the development of our Sky Ranch property. During fiscal 2020, we had net sales or maturities of marketable securities of $5.2 million. In addition, we received $10.5 million as partial reimbursement for advances we made to the Sky Ranch CAB to fund the construction of public improvements at the Sky Ranch property. Of the $10.5 million we received, $6.3 million was recognized in Other income and the remaining $4.2 million partially reduced the remaining capitalized costs in Land development inventories.

(b)
In fiscal 2019, due to land development activities at Sky Ranch, we recognized $12.0 million in revenue from lot sales and $3.4 million in revenue from the sale of water and wastewater taps. Our revenue from water sales increased by 2% to $4.7 million primarily related to industrial water sales. We invested $14.1 million in our water and wastewater systems, including $8.1 million for the wastewater facility at Sky Ranch and $3.5 million for a water right and land acquisition, $354,000 for the purchase of equipment and $17.7 million in costs related to the development of our Sky Ranch property. During fiscal 2019, we had net sales or maturities of marketable securities of $3.7 million. In addition, we released our valuation allowance on our net deferred tax assets and recognized a deferred tax benefit of $1.3 million.

(c)
In fiscal 2018, we invested $1.1 million in our water and wastewater systems, $1.8 million for the construction of pipelines, $5.3 million related to the development of our Sky Ranch property, and $445,400 for the purchase of equipment. During fiscal 2018, we had net sales or maturities of marketable securities of $11.4 million. Our revenue from water sales increased by 452% to $4.6 million primarily related to industrial water sales. In addition, we began construction at Sky Ranch and recognized $2.1 million in revenue from platted lot sales under the percentage-of-completion method.

(d)
In fiscal 2017, we invested $2.5 million in our water and wastewater systems, $4.4 million for the construction of pipelines, $0.9 million related to development of our Sky Ranch property, and $95,400 for the purchase of equipment. During fiscal 2017, we had sales or maturities of marketable securities of $9.8 million.

(e)
In fiscal 2016, we invested $923,800 in our water and wastewater systems and $285,600 for planning and design of our Sky Ranch property. We also purchased land for $450,300 in the Arkansas River Valley in Southeastern Colorado.

31
(b)
In fiscal 2016, we invested $923,800 in our water and wastewater systems and $285,600 for planning and design of our Sky Ranch property. We also purchased three farms for approximately $450,300 in order to correct dry-up covenant issues related to water-only farms in order obtain the release of the escrow funds related to the Company’s farm sale to Arkansas River Farms, LLC.
(c)
In fiscal 2015, we sold our remaining farm assets for approximately $45.8 million, for a loss of approximately $22.3 million. In conjunction with the sale, we repaid $4.9 million in mortgage debt relating to the farms and we invested approximately $3.5 million into our water systems. Financial results for the farm assets have been reflected as discontinued operations and all prior periods have been reclassified.
(d)
In fiscal 2014, in order to protect our farm assets, we acquired the remaining approximately $2.6 million of the $9.6 million in notes defaulted on by High Plains A&M, LLC (“HP A&M”).Additionally, we borrowed $1.75 million, sold farms for $5.8 million, and invested $3.7 million in our water systems. Additionally, we recorded an impairment of approximately $400,000 on land and water rights held for sale, and we recorded a gain of $1.3 million upon completing the sale of certain farms that we previously impaired in fiscal 2012.
(e)
In fiscal 2013, in order to protect our farm assets, we acquired approximately $7 million of the $9.6 million in HP A&M defaulted notes. Additionally, we sold 1,500,000 unregistered shares of Pure Cycle common stock owned by HP A&M for $2.35 per share, yielding approximately $3.4 million, net of expenses.

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” and elsewhere in this Annual Report on Form 10-K, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and the periods that follow to differ materially from those expressed in, or implied by, those forward-looking statements.Readers are cautioned that forward-looking statements contained in this Annual Report on Form 10-K should be read in conjunction with our disclosure under the heading “FORWARD-LOOKING STATEMENTS” on page 1.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and our financial condition and should be read in conjunction with the accompanying consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K. The following sections focus on the key indicators reviewed by management in evaluating our financial condition and operating performance, including the following:

●Revenues generated from providing water and wastewater services;
Revenue generated
Revenues from water and wastewater services;
tap sales;
Revenues from lot sales at Sky Ranch;
●
Expenses associated with developing our water and land assets;
Expenses associated with developing lots at Sky Ranch; and
●
Cash available to continue development of our land, water rights and service agreements.
agreements

Our MD&A section includes the following items:

Our BusinessExecutive Summary – a summary of important financial metrics in fiscal 2020;

Our Business –a general description of our business, our services, and our business strategy.strategy;

Critical Accounting Policies and Use of Estimates – a discussion of our critical accounting policies that require critical judgments, assumptions, and estimates.estimates;

Results of Operations – ananalysis of our results of operations for the three fiscal years presented in our accompanying consolidated financial statements. We present our discussion in the MD&A in conjunction with the accompanying financial statements.statements; and

Liquidity, Capital Resources and Financial Position – an analysis of our cash position and cash flows, as well as a discussion of our financial obligations.

Our BusinessExecutive Summary

Pure Cycle Corporation is a Colorado corporation that provides wholesaleFiscal 2020 was highlighted by the substantial completion of the initial phase of our Sky Ranch property. Other notable items include the following:

Total revenue increased to $25.9 million for fiscal 2020 (a $5.5 million or 27% increase compared to fiscal 2019) primarily due to lot sales and water and wastewater servicestap fees at Sky Ranch
Net income increased to customers$6.8 million for fiscal 2020 (a $1.9 million or 40% increase compared to fiscal 2019), primarily due to lot sales, partial satisfaction of governmental entitiesthe contingency related to public improvement reimbursables, and commercialwater and industrial customerswastewater tap fees at Sky Ranch
Fully diluted earnings per common share for fiscal 2020 was $0.28 versus $0.20 for fiscal 2019
Total assets increased to $89.8 million as of August 31, 2020 (a $6.0 million or 7.2% increase compared to 2019), primarily due to increased cash from payments for lots and is in the process of providing finished lots to national home builders developing single family homes on itswater, and wastewater taps at Sky Ranch land holdings.and a $10.5 million expense reimbursement from the Sky Ranch CAB through bond proceeds of which $4.2 million reduced Land development inventories on the consolidated balance sheet and $6.3 million was recognized as Other income - Reimbursement of construction costs - related party on the consolidated statements of  operations and comprehensive income and increased Investments in water and wastewater systems on the consolidated balance sheet; and
Total equity increased to $82.0 million as of August 31, 2020 (a $7.3 million or 9.8% increase compared to 2019), primarily due to net income for fiscal 2020
Our utility services include

In fiscal 2020, total revenues were $25.9 million, primarily consisting of $18.9 million of lot sales recognized under the percentage-of-completion method as well as a point in time for one home builder customer, and a combined $5.6 million from the sale of 201 and 189 water production, storage, treatment, bulk transmissionand wastewater taps. The number of wastewater taps sold are less than the number of water taps sold because we do not sell wastewater taps at Wild Pointe. Wild Pointe customers are on septic systems. Comparatively, in fiscal 2019, total revenues were $20.4 million, primarily from $12.0 million of recognized lot sales and $3.5 million from the sale of 119 and 113 water and wastewater taps. Other income increased in fiscal 2020 mainly due to retail distribution systems, wastewater collection and treatment, irrigation water treatment and transmission, construction management, billing and collection and emergency response. Our land operations include developing finished lotsthe $6.3 million of reimbursables we received from the Sky Ranch CAB for home builders and commercial users who develop homes and businessespartial reimbursement of public improvement costs we funded at Sky Ranch. In total, we received $10.5 million from the Sky Ranch CAB for partial reimbursement of public improvement costs we funded, the remaining $4.2 million reduced Land development inventories on our Sky Ranch property.consolidated balance sheet. Due to the strong performance of our land development segment, which produced the lot sales and lead to the increase in water and wastewater taps sales, along with the recognition of the $6.3 million of other income from receipt of the reimbursables, net income increased to $6.8 million for fiscal 2020 compared to $4.8 million for fiscal 2019, for an increase of 40%.

WaterOur Business

We are a diversified land and Wastewater Utilities
Our utility operations position us as awater resource development company. At our core we are an innovative and vertically integrated wholesale water and wastewater service provider which means we own or control substantially all assets necessarythat, in addition to provideowning and developing wholesale water and wastewater servicesresources, develops a master planned community on land we own and to our customers. This includes owning or controlling (i)which we provide water rights whichand wastewater services. We have accumulated valuable water and land interests over the past 30 years and have developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to provideserve domestic, irrigation,commercial and industrial customers in the Denver metropolitan region. Our primary land asset, Sky Ranch, is located in one of the most active development areas in the Denver metropolitan region along the I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses.

Although we report our results of operations in two segments, our water and wastewater service segment and our land development segment, we operate these segments as a cohesive business designed to our wholesale customers (weprovide a cost effective, sustainable and value added business enterprise.

Water and Wastewater

Water resources throughout the western United States and more prominently in Colorado are a scarce and valuable resource.  We own or control a portfolio of 29,500 acre-feet of groundwater and surface water groundwater, reclaimedsupplies, 26,000 acre-feet of adjudicated reservoir sites, wastewater reclamation facilities, water rightstreatment facilities, potable and raw water storage rights), (ii)facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are located in southeast Denver, in Arapahoe County, an area which is limited in both water availability and infrastructure (such as wells, diversion structures, pipelines, reservoirs and treatment facilities) required to withdraw,produce, treat, store, and deliverdistribute water (iii) infrastructure required to collect, treat, store and reuse wastewater, and (iv) infrastructure required to treat and deliver reclaimed water for irrigation use.which we believe provides us with a unique competitive advantage in offering these services.

We currently provide wholesale water and wastewater service predominately to two local governmental customers. Our wholesale domestic customers aregovernments, including the Rangeview District, Arapahoe County, the Sky Ranch CAB, and Arapahoe County. WeElbert 86 District. Our mission is to provide servicesustainable, reliable, high quality water to Rangeview District’s end-useour customers pursuant to individual Lowry Service and Off-Lowry Service Agreements, serving 391collect and treat wastewater using advance water connections and 157 wastewater connections located in southeastern metropolitan Denver. In addition to providing domestictreatment systems, which produce high quality reclaimed water we provide untreatedcan reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we seek to industrial customersdemonstrate good stewardship over our valuable water rights in the oilwater-scarce Denver, Colorado region. We design, permit, construct, operate and gas industry located in our service areas and adjacent to our service areas for hydraulic fracturing. Oil and gas operators have leased approximately 135,000 acres within and adjacent to our service areas for the purpose of exploring oil and gas interests in the Niobrara and other formations, and this activity had led to increased water demands.
We plan to utilize our significant water assets along with our adjudicated reservoir sites to providemaintain wholesale water and wastewater services to localsystems that we own or operate on behalf of governmental entities which in turn will provide residential/commercialentities. We also design, permit, construct, operate and maintain retail distribution and collection systems that we own or operate on behalf of our governmental customers. Additionally, we handle administrative functions, including meter reading, billing and collection of monthly water and wastewater servicesrevenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to communitiesthe Colorado Department of Public Health and Environment.

Our water and wastewater service segment generates revenue from the following sources, described in greater detail in Item 1 – Business above:

Monthly water usage and wastewater treatment fees;
One-time water and wastewater tap (connection) fees;
Construction and Special Facility funding fees;
Consulting fees; and
Industrial – oil and gas operation fees

Land Development

In 2017, we launched our land development segment. We are actively developing the Sky Ranch Master Planned Community located along the eastern slope of Colorado in the area generally referred to as the Front Range. Principally, we target the I-70 corridor which is located east of downtown Denver and south of Denver International Airport. This area is predominately undeveloped and is expected to experience substantial growth over the next 30 years.We also plan to continue to provide water service to commercial and industrial customers.
Land Development
Our land development services at Sky Ranch include development of up to 4,400 single-family and multi-family homes, and over 1.6 million square feet ofresidential, commercial, retail, and light industrial development.lots. Sky Ranch will develop in multiple phasesis zoned to include up to 3,200 single-family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over a numbertwo million square feet of years.retail, commercial and light industrial space just four miles south of DIA. Our first phaseland development activities include the design, permitting, and construction of 151 acres is platted for 506 detached single-family residential lots. We have entered into agreements with three nationalall of the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails and other infrastructure to deliver “ready to build” finished lots to home builders forand commercial customers. Our land development activities generate revenue from the sale of all 506finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development of which is anticipated to begin in early 2018, with model homes scheduledrevenues come from our home builder customers under specific agreements for construction in the fall of 2018. We expect to phase the development of our initial 506 lots beginning with delivery of approximately 150finished lots in 2018, delivering an additional 100 lots in mid-2019as well as reimbursements for the construction of public improvements, such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which come from the local governmental entity, the Sky Ranch CAB, subject to the approval and issuance of municipal bonds to fund such reimbursements.

Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the balancewater and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces and other investments efficiently, and to manage delivery of the lotsthese investments to eachmatch take-down commitments from our home builder depending on home sales. We estimate that build outcustomers without significant excess capacity in any of our initial 506 lots will take between three and four years.these investments.

In June 2017, we entered into purchase and sale agreements (collectively, the “Purchase and Sale Contracts”)separate contracts with three separatenational home builders (Richmond American Homes, Taylor Morrison, and KB Home), pursuant to which we agreed to sell and each builder agreed to purchase, a certain number (totaling 506) of506 total single-family, detached residential lots at the Sky Ranch property. We will be developing finished lots for each of the three home builders (which are lots on which homes are ready to be built that include roads, curbs, wet and dry utilities, storm drains andother improvements). Each builder is required to purchase water and sewer taps for the lots from the Rangeview District, the cost of which depends on the size of the lot, the size of the house, and the amount of irrigated turf. Pursuant to the Off-Lowry Service Agreement, we will receive all of the water tap fees and wastewater tap fees and 90% of the monthly service fees and usage fees for wastewater services received by the Rangeview District from customers at Sky Ranch. We will also receive 98% of the usage fees for water services received by the Rangeview District from customers at Sky Ranch, after deduction, in most instances, of the royalty to the Land Board related to the use of the Rangeview Water Supply.
The closing of the transactions contemplated by each Purchase and Sale Contract is subject to customary closing conditions, including, among others, the builder’s completion to its satisfaction of a title review and other due diligence of the property, the accuracy of the representations and warranties made by us in the Purchase and Sale Contract, and a commitment by the title company to issue to the builder a title policy, subject to certain conditions. Within three business days of the execution of each Purchase and Sale Contract, each builder paid an earnest money deposit. Each builder had a 60-day due diligence period during which it had the right to terminate the Purchase and Sale Contract and receive a full refund of its earnest money deposit.  The initial due diligence period was extended; however, on November 10, 2017, each builder completed its due diligence period and agreed to continue with its respective Purchase and Sale Contract. Pursuant to certain Purchase and Sale Contracts, the builder is required to make an additional earnest money deposit or deposits after the due diligence period and/or final approval of the entitlements for the property. The earnest money deposit or deposits will be applied to the payment of the purchase price of the lots at closing in accordance with a specified takedown schedule or be paid to us in the event of certain defaults by a builder. Pursuant to each Purchase and Sale Contract, we must obtain final approval of the entitlements for the property by August 2018 (which date we may extend by six months).
We are obligated, pursuant to the Purchase and Sale Contracts, or separate Lot Development Agreements (the “Lot Development Agreements” and, together with the Purchase and Sale Contracts, the “Builder Contracts”),these contracts, to construct infrastructure and other improvements, such as roads, curbs and gutters, park amenities, sidewalks, street and traffic signs, water and sanitary sewer mains and stubs, storm water management facilities, and lot grading improvements for delivery of finished lots to each builder. PursuantWe were also required to the Builder Contracts, we must cause the Rangeview District to install and construct off-sitewholesale infrastructure improvements (i.e.(i.e., drainage and storm water retention ponds, a wastewater reclamation facility and wholesale water facilities) for the provision of water and wastewater service to the property. As of August 31, 2020, we have substantially completed all of the wholesale infrastructure improvements for the initial residential lots, which included the completion of a wastewater reclamation facility that can serve approximately 2,000 SFE’s in Sky Ranch before expansion. Pursuant to various agreements, we provide financing to the Rangeview District and the Sky Ranch Districts (through the Sky Ranch CAB) as described in Note 14 – Related Party Transactions to the accompanying consolidated financial statements for the majority of the improvements at Sky Ranch. In conjunction with our approvals withfrom Arapahoe County for the Sky Ranch project, we, and/ortogether with the Rangeview District andand/or Sky Ranch Districts and/or the Sky Ranch DistrictsCAB, are obligated to maintain a deposit into an account the anticipated costswith Arapahoe County to install and construct substantially all the off-siteensure completion of certain public infrastructure improvements (which include drainage, wholesale water and wastewater,to warranty the improvements for a one-year period following completion and entry roadway), whichdelivery. As of August 31, 2020, $1.0 million remains on deposit, with the warranty period set to expire in October 2021.

As of August 31, 2020, we estimate will be approximately $10.2 million.
We estimatehave expended $33.5 million related to the total capital required to develop lots indevelopment of the first phase (506 lots)filing of Sky Ranch is approximately $27.8out of the total estimated $35.8 million. We anticipate the remaining $2.3 million will be spent during our fiscal 2021. These amounts include estimated reimbursable costs of $29.0 million, for which we received a partial reimbursement of $10.5 million in November 2019. We believe the remaining $18.5 million remaining reimbursables from the Sky Ranch CAB will be paid from future municipal bonds as the project continues to grow its assessed value and estimate lotstax base. As of August 31, 2020, lot sales to home builders to generate $35generated $35.1 million providing a margin on lotsin cash payments, with the remaining $1.6 million paid in November 2020, which combined represents the full $36.7 million sales price contracted for with the home builders. In addition, as of approximately $7.2 million. Utility revenues are derived from tap fees (which vary depending on lot size, house size, and amountAugust 31, 2020, the Sky Ranch development produced $8.9 million of irrigated turf) and usage fees (which are monthly water and wastewater fees). Our currenttap fees, and we expect that an additional $5.9 million of tap fees will be received during our fiscal 2021.

In December 2020, we expect to begin construction on the second filing at Sky Ranch, water tap fees are $26,650 (per SFE),which is expected to include nearly 900 residential lots. Subsequent to August 31, 2020, we entered into separate agreements with four home builders (KB Home, Meritage Homes, DR Horton and wastewater taps fees are $4,659 (per SFE).
We have begun designChallenger Homes) pursuant to which we agreed to sell 789 single-family attached and preliminary engineering fordetached residential lots at the Sky Ranch property. Due to our secondstrong performance in phase which will include approximately 320 acres of residential development and 160 acres of commercial, retail, and industrial development along the Interstate-70 frontage. We expect to have multiple phases being developed concurrently and would expect the full developmentone of the Sky Ranch project, we were able to occur over 10 – 14 years, depending on demand.realize a 30% increase in our lot price from $75,000 for a 50’ lot in phase one to $97,000 for the same 50’ lot in phase two. This next filing at Sky Ranch will incorporate approximately 250 acres and is planned to be completed in four sub-phases. The timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries.

Critical Accounting Policies and 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 about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.


The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the timing of revenue recognition, the impairment of water assets and other long-lived assets, fair value estimates and share-based compensation. Below is a summary of these critical accounting policies.

Revenue Recognition

Our revenues
Revenues derived from our water and wastewater services consist mainly of monthly servicemetered wholesale water usage and wastewater treatment fees, tap fees, construction fees,fees/special facility funding, and consulting fees. AsRevenues derived from land development activities consist mainly of lot sales and project management service fees. Revenue is recognized from our water and wastewater  segment and land development segment as described below and further described in Note 2 – Summary of Significant Accounting Policies to the accompanying consolidated financial statements, proceedsstatements.

Water and Wastewater Revenue

Monthly wholesale water charges are assessed to our customers based on actual metered usage each month plus a base monthly service fee assessed per SFE unit served. One SFE is a customer, whether residential, commercial or industrial, that imparts a demand on our water or wastewater systems are computed based on the demand of a single-family detached home of four persons living on a standard-sized 5,500 square foot lot. Water consumption pricing uses a tiered pricing structure where the cost of water increases as customers use more water. We recognize wholesale water usage revenues at a point in time upon delivering water to our customers or our governmental customers’ end-use customers, as applicable. Revenues recognized by us from tap salesthe sale of Export Water and constructionother portions of our “Rangeview Water Supply” off the Lowry Range are shown gross of royalties to the Land Board. Revenues recognized by us from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.

In addition, we provide water for hydraulic fracturing to industrial customers in the oil and gas industry who are located in and adjacent to our service areas. Oil and gas operations revenues are recognized at a point in time upon delivering water to a customer, unless other special arrangements are made.

We recognize wastewater treatment revenues monthly based on a fixed flat monthly fee and actual monthly usage charges. The monthly wastewater treatment fees are deferred upon receiptshown net of amounts retained by the Rangeview District. Costs of delivering water and recognized in income based on whether we own or do not own the facilities constructed with the proceeds. We recognize tap and construction fees derived from agreements for which we construct infrastructure owned by others as revenue, along with the associated costs of construction, pursuantproviding wastewater services to the percentage-of-completion method. The percentage-of-completion method requires management to estimate the percent of work that is completed on a particular project, which could change materially throughout the duration of the construction period and result in significant fluctuations in revenue recognized during the reporting periods throughout the construction process. During the fiscal year ended August 31, 2017, we recognized $203,200 in tap fee revenues associated with the Wild Pointe acquisition. We did not recognize any tap revenues during the fiscal years ended August 31, 2016 or 2015.

Tap and construction fees derived from agreements for which we own the infrastructurecustomers are recognized as incurred.

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 for water and/or wastewater service. The right stays with the property. We have no obligation to physically connect the property to the lines. Once connected to the water and/or wastewater systems, the customer has live service to receive metered water deliveries from our system and send wastewater into our system. We recognize water and wastewater tap fees as revenue ratablyat the time we grant a right for the customer to tap into the water or wastewater service line to obtain service.

The Rangeview District sets water usage, wastewater treatment, and tap fees for the customers we serve through our service agreements with the Rangeview District.

We recognize construction fees, including fees received to construct special facilities, over time as the estimated service lifeconstruction is completed.

Consulting fees are fees we receive, typically monthly. We earn these fees from municipalities and area water providers along the I-70 corridor for which the Company provides contract operations services. Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed, if applicable.

Land Development Revenue

Revenues derived from lot sales depend on the terms of the assets constructedagreement with said fees. Although the cashbuilder. Lots are completed and sold pursuant to distinct agreements with each home builder. These agreements follow one of two formats. One format is the sale of a fully finished lot, whereby the purchaser pays for a ready-to-build finished lot and the sales price is paid in a lump-sum amount upon completion of the finished lot that is building permit ready. We recognize revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete, and we have no further obligations for the lot. Our second format is the sale of finished lots pursuant to a lot development agreement with builders, whereby we receive payments in stages. Because the builder (i.e., the customer) takes ownership and control of the lot at the first closing and subsequent improvements made by us improve the builder’s lot as construction progresses, we account for revenue over time with progress measured based upon costs incurred to date compared to total expected costs (percent complete methodology). Any revenue in excess of amounts entitled to be billed is reflected on the balance sheet as a contract asset and amounts received up-frontin excess of revenue recognized are recorded as deferred revenue. We do not have any material significant payment terms as all payments are expected to be received within 12 months after the delivery of the platted lot. We adopted the practical expedient for financing components and most construction will be completeddo 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 of receipt of the proceeds, revenue recognition may occur over 30 years or more. Managementwhen we begin construction on those lots.

The Sky Ranch CAB is required to estimateconstruct certain public improvements, such as water distribution systems, sewer collection systems, storm water systems, drainage improvements, roads, curbs, sidewalks, landscaping and parks, the service life, and currently the service life is based on the estimated useful accounting lifecosts of the assets constructedwhich may qualify as reimbursable costs. Pursuant to our agreements with the tap fees. The useful accounting life ofSky Ranch CAB (see Note 14 – Related Party Transactions to the asset is based on management’s estimation and may differ fromaccompanying consolidated financial statements), we are obligated to finance this infrastructure, which we have substantially completed for the actual life ofinitial filing. These public improvements are constructed pursuant to design standards specified by the asset Sky Ranch Districts and/or the actual service lifeSky Ranch CAB, Rangeview District, or other governmental entities, and after inspection and acceptance, are turned over to the applicable governmental entity to operate and maintain. Because these public improvements are owned and operated on behalf of the tap due to a varietygovernmental entity, they may qualify for reimbursement.

35
Table of factors. This is deemed a reasonable recognition life of the revenues because the depreciation of the assets constructed generating those revenues will therefore be matched with the revenues.Contents
Monthly water usage fees, monthly wastewater service fees, and consulting fees are recognized in income each month as earned.
Pursuant to our agreements with the O&GSky Ranch CAB, the Sky Ranch CAB is not required to make payments to us for any advances made or expenses incurred by us related to construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse us for all or a portion of the advances made and expenses incurred. Because the timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land development inventories. If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs. If bonds ultimately are issued, when we receive the reimbursement, we record the amount received as Other income to the extent that costs have previously been expensed and reduce Land development inventories by any remaining reimbursables received. We submit specific costs for reimbursement to the Sky Ranch CAB. If reimbursable costs received exceed actual expenses we incurred for the cost of the public improvements, they are recorded as Other income as received.

All amounts owed pursuant to agreements with the Sky Ranch Districts or the Sky Ranch CAB bear interest at a rate of 6% per annum. Due to the uncertainty of collecting the interest (because payment is contingent on the issuance of bonds), interest income accrues but is not recognized by the Sky Ranch CAB until the bonds are issued. As of August 31, 2020, we have deferred recognition of $1.2 million in interest due on these amounts.

On May 2, 2018, we entered into two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB. Pursuant to the Project Management Agreements, we act as the project manager and provide any and all services required to deliver the Sky Ranch CAB-eligible improvements, including but not limited to Sky Ranch CAB compliance, planning design and approvals, project administration, contractor agreements, and construction management and administration. We must submit to the Sky Ranch CAB a monthly invoice, in a form acceptable to the Sky Ranch CAB, detailing all project management activities during the period. We are responsible for all expenses we incur in the performance of the Project Management Agreements and are not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing. The Sky Ranch CAB is subject to annual budget and appropriation procedures and does not intend to create a multiple-fiscal year direct or indirect debt or other financial obligation. We receive a project management fee of five percent (5%) of actual construction costs of Sky Ranch CAB-eligible improvements. The project management fees owed to us qualify as a reimbursable cost. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible improvements are not included in the calculation of the project management fee. Soft costs and other costs that are not directly related to the construction of Sky Ranch CAB-eligible improvements are included in Land development inventories and accounted for in the same manner as construction support activities as described below. Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse us for all or a portion of advances provided or expenses incurred for reimbursables. Due to this contingency, the project management fees have been deferred and won’t be recognized as revenue until the bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses us for the public improvements. At that point, the portion of the project management fees repaid will be recognized as revenue. As of August 31, 2020, we have deferred recognition of $1.5 million in project management services to the Sky Ranch CAB.

We perform 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. These activities are invoiced upon completion and are included in Land development inventories and subsequently expensed through Land development construction costs unless or until bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses us for public improvements. See Note 2 – Summary of Significant Account Policies – Land Development Segment Revenue –Reimbursable Costs for Public Improvements to the accompanying consolidated financial statements for details on repayment of reimbursable costs.

Other Revenue

Up-front payments we received pursuant to the Bison Lease and the Rangeview Lease, we received up-front payments which wereOGOA are recognized as other income on a straight-line basis over the initial term or extension of term, as applicable, of the leases. The up-front payments we received subsequent to year end pursuant to the Bison Lease will be recognized as other income on a straight-line basis over the initial term of the Bison Lease. 
these agreements.

Impairment of Water Assets and Other Long-Lived Assets

We review our long-lived assets for impairment whenever management believesat least annually or more frequently if we believe events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverabilityIf we believe it is more likely than not that the carrying value of assetsthe long-lived asset exceeds its fair value, then we perform a valuation to be helddetermine the fair value of the asset and used by a comparisonrecognize an impairment loss equal to the excess of the carrying amount of anthe asset to estimated future undiscounted net cash flows we expect to be generated by the eventual useover its fair value.

Our water assets will be utilized in the provision of water services which inevitably will encompass many housing and economic cycles. Our service capacities are quantitatively estimated based on an average single family home consuming approximately 0.2 acre feet of water per year. Average water deliveries are approximately 0.4 acre feet; however, approximately 50% or 0.2 acre feet are returned and available for reuse. Our water supplies are legally decreed to us through the water court. The water court decree allocates a specific amount of water (subject to continued beneficial use) which historically has not changed. Thus, individual housing and economic cycles typically do not have an impact on the number of connections we can serve with our supplies or the amount of water legally decreed to us relating to these supplies.
We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell.
Our Water Rights –We determine the undiscounted cash flows for

During our Denver-based assets by estimating tap salesfiscal 2020, there were no indicators of impairment related to potential new developments in our service areas and along the Front Range, using estimated future tap fees less estimated costs to provide water services, over an estimated development period. Actual new home development in our service areas and the Front Range, actual future tap fees, and actual future operating costs inevitably will vary significantly from our estimates, which could have a material impact on our financial statements as well as our results of operations. Werights; therefore, we performed an impairment analysis as of August 31, 2017,2020, and determined there werethat it is not more likely than not that the carrying value of our water rights exceeds the fair value of the water rights.  There have been no material changes andto our water rights which would indicate they are impaired are or that our Denver-based assets are not impaired and their costs are deemednot recoverable. Our impairment analysis is based on development occurring within areas in which we have agreements to provide water services utilizing water rights owned by us (e.g., Sky Ranch and the Lowry Range) as well as in surrounding areas, including the Front Range and the I-70 corridor. Our water assets are being utilized to provide water services to customers on the Lowry Range, at Wild Pointe and along the I-70 corridor including Sky Ranch. We will continue to expand our water services as Sky Ranch continues to develop and will continue to enhance our water rights in the water courts.  Our water supplies are legally decreed for use through the water court. The water court decree allocates a specific amount of water (subject to continued beneficial use) for municipal and industrial uses. Our combined Rangeview Water Supply and Sky Ranch water assets have a carrying value of $34.6$53.9 million as of August 31, 2017.2020. Based on the carrying value of our water rights, the long-term and uncertain nature of any development plans, current tap fees of $24,974$27,209 and estimated gross margins on these tap fees, we estimate that we would need to add approximately 2,300 newserve a total of 4,250 water connections (requiring 4%7% of our portfolio) to generate net revenuescash flows (deemed equivalent to fair value) sufficient to recover the costs of our Rangeview Water Supply and Sky Ranch water. If our water tap fees increase 5%, we would need to add approximately 2,200 newserve a total of 4,050 water tapsconnections (requiring 3.8%just under 7% of our portfolio) to recover the costs of our Rangeview Water Supply and Sky Ranch water. If tap fees decrease 5%, we would need to add approximately 2,400 newservice a total of 4,500 water tapsconnections (requiring 4.2%just over 7% of our portfolio) to recover the costs of our Rangeview Water Supply and Sky Ranch water.

Although the timing of actual new home development throughout the Front Range will impact our estimated tap sale projections, it will not alter our water ownership, our service obligations to existing properties or the number of SFEs we can service.service; therefore, no impairment indicators are present as of August 31, 2020.

Our Land Development Assets

During our fiscal 2020, there were no indicators of impairment related to our land; therefore, we performed an impairment analysis as of August 31, 2020, and determined that it is not more likely than not that the carrying value of our land will exceed the fair value of the land. We are actively developing and selling lots at Sky Ranch. We have completed the initial filling at Sky Ranch for 506 lots, all of which are under contract, with 483 finished lots delivered and fully paid for as of August 31, 2020, and the remaining lots were delivered and paid for on November 3, 2020. The 506 lots have a total sales price of $36.7 million with total land development costs expected to be $35.8 million.  Additionally, we collected $10.5 million of public improvement reimbursables during the year ended August 31, 2020, which will result in us realizing a net profit of $11.3 million on the sale of all 506 lots. We have constructed $18.5 million of remaining public improvements, which are potentially reimbursable from our first filing at Sky Ranch. If Sky Ranch home sales continue to be successful, we believe we will be able to collect these reimbursables from future Sky Ranch CAB bond proceeds. Pursuant to the agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to the Company for any advances made by the Company or expenses incurred related to construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of the advances made and expenses incurred. Because the timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land development inventories. If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs. If bonds ultimately are issued, upon receipt of reimbursements by the Company, the Company records the reimbursements received as Other income to the extent that costs have previously been expensed and reduces Land development inventories by any remaining reimbursables received. The Company submits specific costs for reimbursement to the Sky Ranch CAB. If reimbursable costs received exceed actual expenses incurred by the Company for the cost of the public improvements, they are recorded as Other income as received.

Subsequent to August 31, 2020, we announced the second phase at Sky Ranch. The second phase will be platted for nearly 900 lots, for which we plan to begin development activities before the end of calendar 2020.  Subsequent to August 31, 2020, we entered into contracts with four home builders (Melody Homes (a wholly-owned subsidiary of DR Horton), KB Homes, Meritage Homes and Challenger Homes), to sell 789 finished lots, on which the home builders will construct both attached and detached homes. We are retaining the remaining 100+ lots for future uses. The total sales price for the 789 lots contracted for is $63.4 million, subject to price escalations depending on development timing. The remaining lots held for future use, assuming comparable lot prices to the contracted prices and excluding escalations, would result in a total sales value for the second filing of $72.6 million. Our preliminary total cost estimates for developing the nearly 900 lots is $65.6 million. We believe that more than $48.0 million of this amount will be spent on public improvements that will be eligible for reimbursement by the Sky Ranch CAB subject to the conditions described above.

As of August 31, 2020, our Sky Ranch land assets under development, shown as Land development inventories on our balance sheet, have a carrying value of $481,500. Because per lot sales prices are increasing, per lot costs are not anticipated to increase materially, and we are continuing to actively develop the land, there are no indications of impairment.

Other Assets

In fiscal 2020, we assessed the recoverability of our 13,900 acres of mineral interests in the Arkansas River Valley in southeastern Colorado. We determined that it appears more likely than not that the carrying value of our Arkansas River Valley mineral rights is not recoverable as of August 31, 2020. As a result, we recorded a non-cash impairment charge of $1.4 million. The charge was recorded as a Non-cash mineral interest impairment charge in the consolidated statements of operations and comprehensive income included in Part II, Item 8 of this Annual Report.

Fair Value Estimates

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. We generally use a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value. The fair value of the investment securities is based on the values reported by the financial institutions where the funds are held. These securities include only federally insured certificates of deposit and U.S. treasuries. See Note 3 – Fair Value Measurements to the accompanying consolidated financial statements.

Share-based Compensation

We estimate the fair value of share-based payment awards made to key employees and directors on the date of grant using the Black-Scholes option-pricing model. We then expense the fair value over the vesting period of the grant using a straight-line expense model. The fair value of share-based payments requires management to estimate/‌estimate or calculate various inputs such as the volatility of the underlying stock, the expected dividend rate, the estimated forfeiture rate, and an estimated life of each option. We do not expect any forfeiture of option grants; therefore, the compensation expense has not been reduced for estimated forfeitures. These assumptions are based on historical trends and estimated future actions of option holders and may not be indicative of actual events, which may have a material impact on our financial statements. For further details on share-based compensation expense, see Note 8 – Shareholders’ Equity to the accompanying consolidated financial statements.

Results of Operations

Executive Summary of Results of Operations
Executive Summary

The results of our operations for the fiscal years ended August 31, 2017, 20162020 and 20152019 were as follows:

 
Table G - Summary of Results of Operations
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
 
 
Fiscal Years Ended August 31,
 
  2017-2016
 
  2016-2015 
 
 
2017
 
 
2016
 
 
2015
 
 
$
 
 
%
 
 
$
 
 
%
 
Millions of gallons of water delivered
  94.6 
  33.9 
  97.5 
  60.7 
  179%
  (63.6)
  -65%
Water revenues generated
 $825,100 
 $221,000 
 $970,000 
 $604,100 
  273%
 $(749,000)
  -77%
 Water tap fee revenue
 217,500 
 14,300 
 14,300 
 203,200 
   1421%
 - 
  -
Water delivery operating costs incurred
    
    
    
    
    
    
    
  (excluding depreciation and depletion)
 $332,400 
 $264,400 
 $464,900 
 $68,000 
  26%
 $(200,500)
  -43%
  Water delivery gross margin %
  60%
  -20%
  52%
    
    
    
    
 
    
    
    
    
    
    
    
Wastewater treatment revenues
 $45,100 
 $43,700 
 $50,100 
 $1,400 
  3%
 $(6,400)
  -13%
Wastewater treatment operating costs incurred
 $28,600 
 $29,200 
 $66,700 
 $(600)
  -2%
 $(37,500)
  -56%
  Wastewater treatment gross margin %
  37%
  33%
  -33%
    
    
    
    
 
    
    
    
    
    
    
    
Other income
 $98,600 
 $131,700 
 $120,700 
 $(33,100)
  -25%
 $11,000 
  9%
Other income costs incurred
 $61,900 
 $68,500 
 $55,200 
 $(6,600)
  -10%
 $13,300 
  24%
  Other income gross margin %
  37%
  48%
  54%
    
    
    
    
 
    
    
    
    
    
    
    
General and administrative expenses
 $2,201,700 
 $1,849,700 
 $1,939,400 
 $352,000 
  19%
 $(89,700)
  -5%
 
    
    
    
    
    
    
    
(Loss) income from continuing operations
 $(1,678,900)
 $(1,230,300)
 $(575,100)
 $(448,600)
  36%
 $(655,200)
  114%
Loss from discontinued operations
 $(32,000)
 $(80,300)
 $(22,552,800)
 $48,300 
  -60%
 $22,472,500 
  -100%
Net loss
 $(1,710,900)
 $(1,310,600)
 $(23,127,900)
 $(400,300)
  31%
 $21,817,300 
  -94%
        Change 
     2020 versus 2019 
  2020  2019     $% 
Millions of gallons of water delivered  
76.2
   
356.3
   
(280.1
)
  
(79
%)
 
Municipal water usage revenues
 
$
524,000
  
$
318,200
  
$
205,800
   
65
%
Oil and gas water usage revenues  
512,800
   
4,238,400
   
(3,725,600
)
  
(88
%)
Total metered water usage revenues 
$
1,036,800
  
$
4,556,600
  
$
(3,519,800
)
  
(77
%)
                 
Water delivery operating costs incurred
    (excluding depreciation and depletion)
  
(804,100
)
  
(1,502,400
)
  
698,300
   
46
%
Gross margin for delivering water
 
$
232,700
  
$
3,054,200
  
$
(2,821,500
)
  
(92
%)
Gross margin % for delivering water
  
22
%
  
67
%
        
                 
Wastewater treatment revenues 
$
95,800
  
$
35,800
  
$
60,000
   
168
%
Operating costs to treat wastewater  
(200,000
)
  
(28,000
)
  
(172,000
)
  
614
%
Gross margin for treating wastewater
 
$
(104,200
)
 
$
7,800
  
$
(112,000
)
  
(1,436
%)
Gross margin % for treating wastewater
  
(109
%)
  
22
%
        
                 
Lot sales revenue 
$
18,934,400
  
$
11,956,000
  
$
6,978,400
   
58
%
Lot development construction costs incurred  
(15,869,600
)
  
(11,305,000
)
  
(4,564,600
)
  
40
%
Gross margin on selling lots
 
$
3,064,800
  
$
651,000
  
$
2,413,800
   
371
%
Gross margin % on selling lots
  
16
%
  
5
%
        
                 
                 
Water and wastewater tap revenue 
$
5,641,000
  
$
3,642,500
  
$
1,998,500
   
55
%
                 
General and administrative expenses 
$
4,249,300
  
$
3,106,500
  
$
1,142,800
   
37
%
                 
Non-cash mineral rights impairment charge
 
$
1,425,500
  
$
—
  
$
1,425,500
   
—
 
                 
 
Other income
 
$
7,405,800
  
$
529,300
  
$
6,876,500
   
1,299
%
                 
Net income 
$
6,750,400
  
$
4,811,100
  
$
1,939,300
   
40
%

Changes in Revenues and Gross Margin
We generate revenues from water and wastewater services. Water and wastewater revenues are generated from (i) monthly wholesale water usage fees and wastewater service fees, (ii) one-time water and wastewater tap fees and construction fees, and (iii) consulting fees.

Water Usage Revenues and Wastewater RevenuesMargins – Our water deliveries increased 179%decreased 79% in fiscal 20172020 compared to fiscal 2016 and decreased 65% in fiscal 2016 compared to fiscal 2015.2019. Water revenues increased 273% in fiscal 2017 compared to fiscal 2016 and decreased 77% in fiscal 20162020 compared to fiscal 2015. The2019 and our gross margin % dropped from 67% to 22%. These changes in deliveries and sales were primarily due to the changesa 100% decline in demand for water to be used forby oil and gas activities – namely, frackingcompanies for hydraulic fracturing of oil wells, drilled intowhich was partially offset by the Niobrara Formation. Additionally, during fiscal 2017, we acquiredincrease in water used due to the service rights forsale of homes at Sky Ranch.  Due to the Wild Pointeincrease in water system, whichsales at Sky Ranch, municipal water delivered increased our revenue by $268,800 from fiscal 2016. 29%.

Water Usage Revenue Summary

The following table details the sources of our water sales, the number of kgal (1,000 gallons) sold, and the average price per kgal for fiscal 2017, fiscal 2016,2020 and fiscal 2015.2019.

  2020  2019 
Customer Type 
Sales
(in thousands)
  kgal  Average per kgal  
Sales
(in thousands)
  kgal  Average per kgal 
On-Site 
$
153.8
   
16,010.8
  
$
9.61
  
$
180.4
   
28,925.7
  
$
6.24
 
Export-Commercial  
78.3
   
7,226.1
   
10.84
   
68.0
   
7,350.7
   
9.25
 
Wild Pointe  
100.3
   
25,235.2
   
3.97
   
62.9
   
21,113.9
   
2.98
 
Sky Ranch  
191.6
   
26,828.5
   
7.14
   
7.0
   
901.7
   
7.76
 
Industrial (1)  
87.0
   
927.9
   
93.76
   
4,238.3
   
298,014.0
   
14.22
 
  
$
611.0
   
76,228.4
  
$
8.02
  
$
4,556.6
   
356,306.0
  
$
12.79
 

(1) Industrial water revenue does not include $425,800 of industrial water revenue recognized due to a pre-paid water agreement that was forfeited by the customer because it was not able to use the water within 12 months of the invoice date.

39
 
Table H - Water Revenue Summary
 
 
 
2017
 
 
2016  
 
 
2015     
 
Customer Type
 
Sales (in thousands)
 
 
kgal
 
 
Average per kgal
 
 
Sales (in thousands)
 
 
kgal
 
 
Average per kgal
 
 
Sales (in thousands)
 
 
kgal
 
 
Average per kgal
 
On-Site
 $174.6 
  26,996.1 
 $6.47 
 $149.1 
  26,620.8 
 $5.60 
 $137.3 
  20,821.7 
 $6.59 
Export-Commercial
  106.4 
  10,020.0 
  10.62 
  71.3 
  7,216.2 
  9.88 
  50.0 
  4,158.4 
  12.02 
Wild Pointe
  65.6 
  11,388.4 
  5.76 
  - 
  - 
  - 
  - 
  - 
  - 
Industrial/Fracking
  478.5 
  46,146.2 
  10.37 
  0.6 
  58.2 
  10.31 
  782.7 
  72,557.6 
  10.79 
 
 $825.1 
  94,550.7 
 $8.73 
 $221.0 
  33,895.2 
 $6.52 
 $970.0 
  97,537.7 
 $9.94 
Wastewater Treatment Revenues –Our gross margin on delivering water (not including depletion charges) was 59%wastewater treatment revenues increased 168% in fiscal 2017, negative 20% in fiscal 2016 and 52% during fiscal 2015. The changes in our gross margins were due to changes in demand related to water sales to the fracking industry and our ability to offset the ECCV system costs with increased water deliveries in fiscal 2017 and fiscal 2015.
Our wastewater fees increased 3% in fiscal 20172020 compared to fiscal 2016 and decreased 13%2019. The increase in wastewater revenues is a result of the wastewater service provided to customers at Sky Ranch. In fiscal 2016 compared to fiscal 2015.2019, wastewater revenues were only recognized from one commercial customer. Wastewater feerevenue fluctuations result from demand changes from our only customer.customers.

Water and Wastewater Tap Fees Revenues –We sold 10188 water and wastewater taps at Sky Ranch and 13 water taps at Wild Pointe during fiscal 2017,2020, which generated revenues of approximately $203,200 that are included in$5.6 million. We sold 113 water and wastewater taps at Sky Ranch, one commercial water tap fee salesand six residential water taps at Wild Pointe during fiscal 2019, which generated revenues of $3.6 million. We have 202 water and wastewater taps remaining to be sold in the statementfirst phase of comprehensive loss.the development at Sky Ranch, which we believe will be sold in our fiscal 2021.

Land Development Revenues– We did not sell any wastewater taps duringbroke ground on our first phase of Sky Ranch in March 2018. As of August 31, 2020, we completed construction on all 506 lots and delivered and received payment for 483 finished lots to home builders. We delivered the remaining lots on November 3, 2020.  During fiscal 2017. We did not sell any2020 and 2019, we received $16.6 million and $15.6 million in lot sale proceeds, for a total of $35.1 million since development started. During fiscal 2020 and 2019, we recognized revenues of $18.9 million and $12.0 million using both the over time and point in time accounting methods. Additionally, we have substantially completed improvements (including over lot grading, water, or wastewater taps during fiscal 2016 or 2015.
Other income consisted principally of consulting fees of $98,600, $131,700,sewer, and $85,800storm water), off-site improvements (including drainage), and our entry roadway (Monahan Road), for the fiscal years endedremaining lots, and carry those investments, totaling $481,500 in Land development inventories in our financial statements. As of October 31, 2020, the builders have sold 315 homes at Sky Ranch. Based on current sales rates, we believe the initial filing at Sky Ranch will be sold out before the end of calendar 2021.

We act as the project manager and provide all services required to deliver eligible improvements for the Sky Ranch CAB. For these services, we charge a five percent (5%) project management fee calculated on actual construction of Sky Ranch CAB eligible reimbursable improvements. No payment is required of the Sky Ranch CAB for project management fees unless and until the Sky Ranch CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to pay us for all or a portion of the project management fees. Because it is uncertain if bonds will be issued and when we will receive payment, we defer recognition of project management fee income from the Sky Ranch CAB until the issuance of the bonds is certain. Once issuance of the bonds and payment to us is certain, the portion of the project management fees repaid will be recognized as revenue. As of August 31, 2017, 2016, and 2015, respectively, which are recognized upon the rendering2020, we have deferred recognition of our services. Our consulting fees decreased 25%$1.5 million in fiscal 2017 compared to fiscal 2016 and increased 54% in fiscal 2016 compared to fiscal 2015. The decrease in fees during fiscal 2017 is due to a reduction in the amount of consulting billings from water systems we managed in fiscal 2017 compared to fiscal 2016. The increase in fees in fiscal 2016 was the result of an increase in the number of water systems we managed in fiscal 2016 compared to fiscal 2015. During the fiscal year ended August 31, 2015, we also received income related to a cost-sharing arrangement from our industrial water sales related to the fracking industry in the amount of $34,900. Our margins have fluctuated as we allocated additional staff costs to system management.project management fees.

General and Administrative Expenses

Table IThe table below details significant items, and changes, included in our General and Administrative Expenses (“G&A Expenses”) as well as the impact that share-based compensation has on our G&A Expenses for the fiscal years ended August 31, 2017, 20162020 and 2015,2019, respectively.

Summary of G&A Expenses
 
Table I - G&A Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
 
 
Fiscal Years Ended August 31,
 
  2017-2016
 
  2016-2015 
 
 
2017
 
 
2016
 
 
2015
 
 
$
 
 
%
 
 
$
 
 
%
 
Significant G&A Expense items:
 
 
 
 
 
 
 
 
 
    
    
    
    
  Salary and salary-related expenses
 $1,389,700 
 $1,084,300 
 $1,234,100 
 $305,400 
  28%
 $(149,800)
  -12%
  Professional fees
  237,000 
  250,900 
  291,400 
  (13,900)
  -6%
  (40,500)
  -14%
  Fees paid to directors including insurance
  131,100 
  134,400 
  140,400 
  (3,300)
  -2%
  (6,000)
  -4%
  Insurance
  29,900 
  35,900 
  31,600 
  (6,000)
  -17%
  4,300 
  14%
  Public entity related expenses
  134,700 
  109,500 
  83,200 
  25,200 
  23%
  26,300 
  32%
  Consulting fees
  11,200 
  5,700 
  18,300 
  5,500 
  96%
  (12,600)
  -69%
  Property taxes
  7,500 
  9,200 
  7,400 
  (1,700)
  -18%
  1,800 
  24%
  All other components of G&A combined
  260,700 
  219,800 
  133,000 
  40,900 
  19%
  86,800 
  65%
G&A Expenses as reported
  2,201,800 
  1,849,700 
  1,939,400 
  352,100 
  19%
  (89,700)
  -5%
Share-based compensation
  (233,200)
  (219,900)
  (240,000)
  (13,300)
  6%
  20,100 
  -8%
G&A Expenses less share-based compensation
 $1,968,600 
 $1,629,800 
 $1,699,400 
 $338,800 
  21%
 $(69,600)
  -4%
 
    
    
    
    
    
    
    
Note - salary and salary-related expenses excluding share-based compensation:
    
    
    
    
    
    
    
  Salary and salary-related expenses
 $1,156,500 
 $864,400 
 $994,100 
 $292,100 
  34%
 $(129,700)
  -13%

     Change 
        
2020 versus 2019
 
  2020  2019  
$   % 
Significant G&A Expense items:             
Salary and salary-related expenses 
$
2,362,300
  
$
1,530,700
  
$
831,600
   
54
%
Share-based compensation  
517,000
   
336,200
   
180,800
   
54
%
Professional fees  
498,500
   
458,200
   
40,300
   
9
%
Fees paid to directors and D&O insurance  
194,100
   
199,900
   
(5,800
)
  
(3
)%
Corporate insurance  
71,800
   
52,700
   
19,100
   
36
%
Public entity-related expenses  
125,100
   
118,400
   
6,700
   
6
%
Consulting fees  
40,000
   
24,400
   
15,600
   
64
%
All other combined  
440,500
   
386,000
   
54,500
   
14
%
G&A Expenses as reported 
$
4,249,300
  
$
3,106,500
  
$
1,142,800
   
37
%

Salary and Salary-Related Expenses – Salary and salary-related expenses increased by 28% during54% for fiscal 20172020 as compared to fiscal 2016 and decreased by 12% during fiscal 2016 as compared to fiscal 2015.2019. The increase in fiscal 20172020 compared to fiscal 20162019 was the result of the increase from seven29 to 1131 employees as a result ofto manage the development of our Sky Ranch property and our water and wastewater systems. Additionally, we hired a Chief Financial Officer in April 2020 to help oversee the accounting, finance, IT, and operations teams, and help implement strategic goals for our continued growth. Other increases include higher incentive pay related to achieving development and financial goals, increased benefit costs, payroll taxes and the addition of the Wild Pointe water system. The decrease in fiscal 2016 compared to fiscal 2015 was the result of us paying lower bonuses, offset by the addition of one operator, during fiscal 2016. As noted on the bottom line of Table I, salary and salary-related expenses excluding share-based compensation expenses increased 34% during fiscal 2017 compared to fiscal 2016 and decreased 13% during fiscal 2016 compared to fiscal 2015.an employer match for our 401(k) plan. Share-based compensation expense increased 6% during54% for fiscal 20172020 compared to fiscal 20162019 as a result of an unrestricted stock grant to non-employee board members and an increase in the numberfair value of members on the boardstock option grants to employees.

Professional Fees (mainly legal and accounting fees) – Professional fees decreased 6% and 14% duringincreased 9% for fiscal 20172020 compared to fiscal 2016 and fiscal 2016 compared to fiscal 2015, respectively.2019. The decreases wereincrease was primarily the result of decreases in general legalhigher accounting fees in both fiscal 2017due to fees related to tax services and fiscal 2016 comparedhigher professional fees related to fiscal 2016 and fiscal 2015, respectively.business development.

Fees Paid to Our Board of Directors and Directors and Officers Insurance – Fees for our board in fiscal 20172020 include $55,600$67,900 for premiums related to our directors and officers insurance policy (this amount increased by $1,200$6,800 from fiscal 2016)2019). The remaining fiscal 20172020 fees of $74,500$126,200 represent amounts accrued toearned by our board members for annual service, meeting attendance fees and travel expenses, which were lower than in fiscal 20162019 due to a decrease in the number offewer board meetings held in 2017.fiscal 2020 and less travel expenses due to remote attendance in some instances because of COVID 19. Fees for our board in fiscal 20162019 include $54,400$61,100 for premiums related to our directors and officers insurance policy (this amount increased by $4,000 from fiscal 2015).policy. The remaining fiscal 20162019 fees of $80,000$138,800 represent amounts accrued toearned by our board members for annual service, meeting attendance fees and travel expenses, which were somewhat lower than in fiscal 2015 due to a decrease in the number of board meetings held in 2016. Fees for our board in fiscal 2015 include $50,500 for premiums related to our directors and officers insurance policy (this amount increased by $1,000 from fiscal 2014). The remaining fiscal 2015 fees of $89,900 represent amounts accrued to our board members for annual service, meeting attendance fees and travel expenses, which were higher than in fiscal 2014 due to changing from expensing annual director fees when paid to expensing annual director fees ratably throughout the calendar year.expenses.

Corporate Insurance – We maintain policies for general liability insurance, workers’ compensation insurance, and casualty insurance to protect our assets. Insurance expense fluctuates based on the number of employees and premiums associated with insuring our water systems.

Public EntityEntity-Related Expenses – Costs associated with being a corporation and costs associated with being a publicly traded entity consist primarily of XBRL and EdgarEDGAR conversion fees, stock exchange fees, and press releases. These costs fluctuate from year to year.

Consulting Fees – Consulting fees for fiscal 20172020 consisted of $6,300$17,100 for information technology and otherservices, $16,500 for business development services and $4,900 for valuation services. Consulting fees for fiscal 2016 consisted of $5,000$6,400 for board advisory services and $700 related to the development of the Sky Ranch water agreements. Consulting fees for fiscal 20152019 consisted of $10,000$4,000 for employee recruiting fees and other services, $11,600 for information technology services and $8,800 for board advisory services $3,800 related to developing Sky Ranch, and $4,500 related to the development of the Sky Ranch Districts.water agreements.

Property Taxes– Our property taxes relate to our Sky Ranch and Rangeview properties and were approximately $7,500 in fiscal 2017. These taxes are based on estimated taxes paid in arrears and vary slightly from year to year based on actual assessments.
Other G&A Expenses – Other G&A expenses include typical operating expenses related to the maintenance of our office, business development, and travel, property taxes, and funding provided to the Rangeview District and the Sky Ranch Districts. Other G&Aexpenses increased 19% and 65%14% during fiscal 20172020 compared to fiscal 2016 and fiscal 2016 compared to fiscal 2015, respectively.2019. The changes were primarily the result of the timing of various expenses.expenses and increased staffing.

Non-cash mineral rights impairment charge – Non-cash mineral rights impairment charge includes an impairment recorded for $1.4 million as a result of the Company impairing its Arkansas Valley, Colorado mineral rights.  No impairment of long-lived assets were recorded in fiscal 2019.

Other Income and Expense Items

     Change 
  For the Fiscal Years Ended August 31,  
2020 versus 2019
 
  2020  2019     $% 
Other income items:             
Reimbursement of construction costs - related party $6,275,500  
$
—
  
$
6,275,500
   
100
%
Oil and gas lease income, net 
$
247,000
  
$
55,700
  
$
191,300
   
343
%
Oil and gas royalty income, net 
$
669,000
  
$
148,300
  
$
520,700
   
351
%
Interest income 
$
178,600
  
$
298,600
  
$
(120,000
)
  
(40
)%
Other 
$
35,700
  
$
26,600
  
$
9,100
   
(34
)%

 
Table J - Other Items
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
 
 
For the Fiscal Years Ended August 31,
 
  2017-2016
 
  2016-2015 
 
 
2017
 
 
2016
 
 
2015
 
 
$
 
 
%
 
 
$
 
 
%
 
Other income items:
 
 
 
 
 
 
 $19 
    
    
    
    
  Oil and gas lease income, net
 $18,800 
 $360,800 
 $645,700 
 $(342,000)
  -95%
 $(284,900)
  -44%
  Oil and gas royalty income, net
 $186,600 
 $343,600 
 $412,600 
 $(157,000)
  -46%
 $(69,000)
  -17%
  Interest income
 $257,500 
 $241,300 
 $21,300 
 $16,200 
  7%
 $220,000 
  1033%
  Other
 $(10,500)
 $3,900 
 $22,100 
 $(14,400)
  -369%
 $(18,200)
  -82%
Reimbursement of construction costs (related party) – On November 19, 2019, the Sky Ranch CAB sold tax-exempt, fixed rate senior bonds in the aggregate principal amount of $11,435,000 and tax-exempt, fixed-rate subordinate bonds in the aggregate principal amount of $1,765,000 (collectively, the “Bonds”). Upon the sale of the Bonds approximately $10.5 million of the net proceeds from the Bonds were used to partially reimburse us for advances we made to the Sky Ranch CAB pursuant to the Sky Ranch FFAA to fund the construction of public improvements to the Sky Ranch property. The remaining gross proceeds from the issuance of the bonds, $2.7 million were retained by the Sky Ranch CAB in order to pay certain bond issuance costs and provide for debt service through 2021, when the Sky Ranch CAB expects to generate enough revenue through property taxes to repay bond holders. Of the amounts we received, $4.2 million reduced the remaining capitalized expenses in Land development inventories and $6.3 million was recognized as Income from reimbursement of construction costs (related party). The Company has no obligation for repaying the bonds in the event the Sky Ranch CAB defaults on repaying the bond holders.

Oil and gas lease income – The $18,800, $360,800,$247,000 and $645,700$55,700 of oil and gas lease payments recognized in fiscal 2017, fiscal 2016,2020 and fiscal 2015, respectively, primarily represent2019 include the deferred recognition of the up-front payments received$55,700 in March 2011both fiscal 2020 and February 2014, upon the signing of the O&G Lease and Surface Use Agreement and related extension. The amounts also represent the up-front payments received2019 for the Rangeview Lease. On March 10, 2011 we received andeferred up-front payment of $1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on 634 acres of mineral estate we own at our Sky Ranch property. The oil and gas rights under the remaining approximately 300 acres at Sky Ranch were already owned by a third party. We deferred immediate recognition of the up-front payment and began recognizing the up-front payment in income over the initial three-year term of the O&G Lease beginning March 10, 2011. During February 2014,$167,200 that we received an additionalin October 2017 in connection with the Bison Lease, which payment of $1,243,400 to extend the initial term of the O&G Lease by an additional two years through February 2016. The income received for the extension wasis being recognized in income over the two-year extensionthree year term of the Bison Lease, and the recognition of $191,300 in fiscal 2020 of the deferred up-front payment of $573,700 that we received in July 2019 for the OGOA giving the operator of the Sky Ranch O&G Lease.Lease (defined below) right to access 16 acres for an oil and gas pad site for three years through July 2022.

The oilOil and gas royalty income – Oil and gas royalty income represents amounts receivedwe receive pursuant to the Sky Ranch O&G Lease. The amountLease as royalties for fiscal 2015 includes royalties from oilwell production from commencementthe six wells in our mineral estate at Sky Ranch. Pursuant to the Sky Ranch O&G Lease, we receive 20% of the income generated by each well through(after payment of taxes by the oil and gas company). During the years ended August 15, 2015, which represents approximately31, 2020 and 2019, the six monthswells drilled on our property produced 413,700 and 50,600 barrels of production. The amounts for fiscal 2017 and 2016 include royalties of each well from August 16th through August 15th, during each year, respectively. The first well (referred to as “Sky Ranch”oil, respectively, resulting in the chart below) generated oil and gas royalty revenueincome of approximately $147,300, $266,600$669,000 and $321,800, 20% gross (net of taxes), based on the Company’s 3/8thsinterest of the total production of this 1,280-acre pooled mineral estate during the fiscal years ended August 31, 2017, 2016$148,300, respectively.

The wells produce oil, gas, and 2015, respectively. This 10,000-foot horizontal well recorded production of approximately 33,600, 80,400 and 105,000 barrels of oil for the fiscal years ended August 31, 2017, 2016 and 2015, respectively. The second well (referred to as “Property”natural gas liquids, which are hydrocarbons in the chart below) generatedsame family of molecules as natural gas and crude oil, composed exclusively of carbon and gas royalty revenue of approximately$41,300, $77,000 and $90,800, 20% gross (net of taxes), based on the Company’s 1/8thsinterest of the total production of this 1,280-acre pooled mineral estate during the fiscal years ended August 31, 2017, 2016 and 2015, respectively. This 10,000-foot horizontal well recorded production of approximately33,800,73,400 and 88,600 barrels of oil for the fiscal years ended August 31, 2017, 2016 and 2015, respectively. The following charts detail well production and oil and gas royalties during fiscal 2015, fiscal 2016, and fiscal 2017.
hydrogen.

Interest Income – Interest income represents interest earned on the temporary investment of capital in cash equivalents or available-for-saledebt securities and interest accrued on the notes receivable from the Rangeview District and the Sky Ranch District, andDistrict. The lower level of interest accrued on the Special Facilities construction proceeds receivable from Arapahoe County.The increase fromincome in fiscal 20152020 compared to fiscal 2016 and fiscal 2017 is due2019 was primarily attributable to the receipt of interest rates on investments related toand timing of the proceeds frommaturity of the sale of our farms.
Other represents income we received for various easements and the construction of infrastructure for the oil and gas industry, which is partially offset by other non-operational expenses.
Discontinued Operations
For additional information about our discontinued operations, see Note 2–Summary of Significant Account Policies to the accompanying financial statements.
investments.

The following table provides the components of discontinued operations:
 
Table K - Discontinued Operations Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal years ended August 31,
 
 
 
2017
 
 
2016
 
 
2015
 
Farm revenues
 $6,848 
 $267,472 
 $1,127,155 
Farm expenses
  (1,298)
  (77,132)
  (126,279)
  Gross profit
  5,550 
  190,340 
  1,000,876 
 
    
    
    
General and administrative expenses
  (46,942)
  (313,389)
  (760,192)
  Operating (loss) profit
  (41,392)
  (123,049)
  240,684 
Finance charges
  9,367 
  38,428 
  21,710 
(Loss) gain on sale of farm assets
  - 
  4,273 
  (22,108,145)
Interest expense (1)
  - 
  - 
  (390,505)
Interest imputed on the Tap Participation
    
    
    
  Fee payable to HP A&M (2)
  - 
  - 
  (23,816)
Taxes
    
    
  (292,729)
  Loss from discontinued operations
 $(32,025)
 $(80,348)
 $(22,552,801)
(1)
Interest expense represents interest accrued related to notes we had on our farm assets prior to the sale. All notes associated with the farms have been paid off, and thus we no longer incur interest on such notes.
(2)
Imputed interest represents an estimate of the interest accrued on the Tap Participation Fee payable to HP A&M, which was eliminated as a result of the settlement with HP A&M during the three months ended February 28, 2015. As a result, we stopped accruing interest related to the Tap Participation Fee on that date.
We anticipate continued expenses through the end of calendar 2018 related to the discontinued operations. We will continue to receive revenues for leased agricultural land and incur expenses related to the remaining agricultural land we own and for the purpose of collecting outstanding receivables. We intend to sell the remaining farms that we acquired during fiscal 2016 in due course.
Liquidity, Capital Resources and Financial Position

At August 31, 2017,2020, our working capital, defined as current assets less current liabilities, was $26.2$19.8 million, which includes $5.6$21.8 million in cash and cash equivalents. We believe that as of August 31, 2020, and as of the date of the filing of this annual reportAnnual Report on Form 10-K, we had and as of August 31, 2017, we have sufficient working capital to fund our operations for the next 12 months. We have substantially completed the work required to deliver all lots under contract in the first filing at Sky Ranch and are in the permitting process for the next filing at Sky Ranch. We estimate the cost to finish the nearly 900 lots expected to be platted in the second filing at Sky Ranch to be approximately $65.6 million. Of this, we estimate we will spend up to $15.0 million during fiscal 2021, and we anticipate receiving approximately $12.0 million in milestone payments from the homebuilders over the same period. Due to staffing shortages at Arapahoe County and the disruption to its operations caused by COVID-19, permitting is taking longer than normal, but we do anticipate having permits and beginning construction of the next phase of development before the end of calendar 2020. We believe we can fund such capital expenditures from cash and cash equivalents on hand and phased payments from our lot sales agreements.

ECCV Capacity Operating System

Pursuant to a 1982 contractual right, the Rangeview District may purchase water produced from the ECCV Land Board system, which is comprised of eight wells and more than 10 miles of buried water pipeline located on the Lowry Range. In May 2012, in order to increase the delivery capacity and reliability of these wells, in our capacity as the Rangeview District’s service provider and the Export Water Contractor (as defined in the Lease among us, the Rangeview District and the Land Board), we entered into an agreement to operate and maintain certain wells and transmission lines, the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing of oil and gas wells. Our costscost associated with the use of the ECCV system areis a flat monthly fee of $8,000 per month from January 1, 2013 through December 31, 2020, and will decreasewhich decreases to $3,000 per month from January 1, 2021 through April 30, 2032. Additionally, we pay a fee per 1,000 gallons of water produced from ECCV’s system, which is included in the water usage fees charged to customers. In addition, the ECCV system costs us approximately $1,900$5400 per month to maintain.

South Metropolitan Water Supply Authority and WISE

SMWSA is a municipal water authority in the State of Colorado organized to pursue the acquisition and development of new water supplies on behalf of its members, including the Rangeview District. Pursuant to the SMWSA Participation Agreementcertain agreements with the Rangeview District, we agreed to provide funding to the Rangeview District in connection with its membership in the SMWSA. During the fiscal years ended August 31, 2017, 2016 and 2015, we provided $198,200, $113,600, and $78,600, respectively, of funding to the Rangeview District pursuant to the SMWSA Participation Agreement. In July 2013, the Rangeview District, together with nine other SMWSA members, formed an entitySMWA to enable its members to participle in a cooperative water project known as WISE and entered into an agreement that specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. On December 31, 2013, SMWA, Denver Water, and Aurora Water entered into the Amended and Restated WISE Partnership – Water Delivery Agreement, which provides for the purchase of certain infrastructure (pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among Rangeview District and the 10other nine members of the SMWA from Denver Water and Aurora Water. We have entered into the WISE Financing Agreement, whicha financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE. During the years ended August 31, 2020 and 2019, we provided $2.8 million and $1.5 million, respectively, of financing to the Rangeview District to fund its obligation to purchase WISE water rights and pay for operational and construction charges. Ongoing funding requirements are dependent on operational and overhead costs of SMWA and the construction activities. We anticipate that we will be investing an additional $1.1 million in 2021 and $7.5 million in total for the fiscal years 2022 through 2025 to fund the Rangeview District’s obligation to purchase infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding the Rangeview District’s obligations in WISE, we will have the sole right to use and reuse the Rangeview District’s 7%9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue from such service. Upon completion of the WISE infrastructure in 2017, we expect to be entitled to approximately 3 million gallons per day of transmission pipeline capacity and 500 acre feet per year of water. In addition to the funding we have provided to the Rangeview District pursuant to the SMWSA Participation Agreement, to date we have provided approximately $3.1 million of financing to the Rangeview District to fund its obligation to finance the purchase of infrastructure for WISE and the construction of a connection to the WISE system in accordance with the WISE Financing Agreement. We anticipate that we will be spending approximately $645,500 in this system during fiscal 2018 and $4.6 million during the next four years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE.

Summary Cash Flows Table

     Change 
  For the Fiscal Years Ended August 31,  
2020 versus 2019
 
  2020  2019     $% 
Cash provided (used) by:             
Operating activities 
$
20,720,100
  
$
3,530,500
  
$
17,189,600
   
487
%
Investing activities 
$
(3,445,500
)
 
$
(10,803,800
)
 
$
7,358,300
   
(68
)%
Financing activities 
$
44,800
  
$
186,200
  
$
(141,400
)
  
(76
)%

 
Table L - Summary Cash Flows
 
 
 
 
 
 
 
 
 
 
 
 
Change
 
 
 
For the Fiscal Years Ended August 31,
 
 
2017-2016
 
 
2016-2015   
 
 
 
2017
 
 
2016
 
 
2015
 
 
$
 
 
%
 
 
$
 
 
%
 
Cash (used in) provided by:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Operating acitivites
 $(1,052,900)
 $(270,700)
 $(974,100)
 $(782,200)
  -289%
 $703,400 
  -72%
  Investing activities
 $1,933,800 
 $(32,119,000)
 $42,531,700 
 $34,052,800 
  -106%
 $(74,650,700)
  -176%
  Financing activities
 $(2,400)
 $(2,000)
 $(6,218,200)
 $(400)
  -20%
 $6,216,200 
  -100%
Changes in Operating Activities – Operating activities include revenuesamounts we receive from the sale of wholesale water and wastewater services, costs incurred in the delivery of those services, the sale of lots, the costs incurred in completing and delivering finished lots, and G&A Expenses, and depletion/depreciation expenses.Expenses.

Cash used inprovided by operations in fiscal 20172020 increased by $782,200, which was primarily the result of an increase in salary and salary related expenses and consulting expenses$17.2 million as compared to fiscal 2016.2019, which is primarily due to the reimbursement of capitalized costs of $10.5 million partially recorded in Land development inventories, the collection of up-front deferred oil and gas payments of $1.6 million, receipt of water and wastewater tap fees, receipt of lot sale proceeds, timing differences on payments of payables and accrued liabilities along with an increase in net income of $1.9 million. Cash used inprovided by operations in fiscal 2016 decreased2019 consisted primarily of payments received relating to milestone payments from two builders at Sky Ranch that had been deferred, an upfront payment for industrial water and a payment for the OGOA that had been deferred, offset by $703,400 comparedincreases in inventories related to fiscal 2015, which was primarily the resultconstruction activities of receivingSky Ranch, and the remaining escrow from the sale of our farmspayment of approximately $1.3 million. We will continue$1.0 million for a collateral deposit paid to provide wholesale domesticArapahoe County in connection with the grading, erosion and sediment control permit application for Sky Ranch, coupled with the increase in net income due primarily to recognized revenue from water and wastewater services to customers in our service areas, and we will continue to operate and maintain our water and wastewater systems with our own employees.tap fees of $3.5 million.

Changes in Investing Activities – Investing activities in fiscal 20172020 consisted of investments in our waterthe sale and wastewater systemsmaturity of approximately $2.5debt securities of $6.9 million pipelines of approximately $4.4 million (approximately $300 thousand was expended for the pipeline in fiscal 2016 and was reclassified from construction in progress to fixed assets when the pipeline was placed into service), the development of our Sky Ranch land of approximately $900,000, and new equipment of approximately $100,000. The investments in new assets were offset by the salepurchase of marketable$1.7 million in securities, of approximately $9.8 million.Investing activities in fiscal 2016 consisted of the investmentsinvestment in our land and water and wastewater systems and landsystem of approximately $1.2$8.0 million, and the purchase of equipment of approximately $472,300, and the net investment of approximately $30 million into U.S. treasuries and certificates of deposit.$586,000. Investing activities in fiscal 20152019 consisted of the sale and maturity of debt securities of $56 million offset by the purchase of $52 million in securities, the investment in our farms, which generated proceedswater system of approximately $44.6$14.1 million, and the additionpurchase of approximately $2.1 million in water assets, which primarily consistedequipment of the investment in WISE of approximately $2.5 million ($1.4 million acquired through the WISE Financing Agreement) and the addition of pipelines and other water infrastructure of approximately $1 million.$354,000.

Changes in Financing Activities – Financing activities in fiscal 2017 and 20162020 consisted only of paymentsproceeds from the exercise of stock options of $49,200, offset by a payment to our contingent liability holders of approximately $2,400 and $2,000, respectively.$4,400. Financing activities in fiscal 20152019 consisted primarily of payments on our promissory notesproceeds from the exercise of $8.9 million (which includes fundingstock options of the WISE Financing Agreement entered into in December 2014) and the issuance$193,100, offset by a payment to contingent liability holders of approximately $2.7 million in new promissory notes.
$6,900.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist entirely of the contingent portion of the Comprehensive Amendment Agreement No. 1 (the “CAA”), which is $673,000,$647,200, as described in Note 5 – Participating Interests in Export Water to the accompanying consolidated financial statements. The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of Export Water, the amounts and timing of which are not reasonably determinable.

Recently Adopted and Issued Accounting Pronouncements

See Note 2 – Summary of Significant Accounting Policies to the accompanying consolidated financial statements for recently adopted and issued accounting pronouncements.

Total Contractual Cash Obligations
 
Table M - Contractual Cash Obligations
 
 
 
 
 
 
Payments due by period
 
 
 
Total
 
 
Less than 1 year
 
 
1-3 years
 
 
3-5 years
 
More than 5 years
Operating lease obligations (a)
 $12,000 
 $12,000 
 
(a)
 
 
(a)
 
(a)
Participating Interests in Export Water (b)
  344,000 
 
(b)
 
 
(b)
 
 
(b)
 
(b)
WISE participation (c)
  5,220,000 
  649,100 
  3,542,500 
  1,032,300 
(c)
  Total
 $5,576,000 
 $661,100 
 $3,542,500 
 $1,032,300 
 $-
(a)
Our only operating lease is related to our office space. We occupy 2,500 square feet at a cost of $3,000, per month, at the address shown on the cover of this Form 10-K. We lease these premises pursuant to a two-year operating lease agreement which expires in December 2018 with a third party.
(b)
The participating interests liability is payable to the CAA holders upon the sale of Export Water; therefore, the timing of the payments is uncertain and not reflected in the above table by period.
(c)
Projections for WISE participation have only been provided for the next five fiscal years. The timing and amount of payments beyond five years is uncertain and not reflected in the above table by period.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk

General
We have limited exposure to market risks from instruments that may impact our balance sheets, statements of comprehensive loss, and statements of cash flows. Such exposure is due primarily to changing interest rates.
Interest Rates
The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in diversified short-term interest bearing investments. As of August 31, 2017, we are holding $20.2 million in marketable securities consisting of certificates of deposit and U.S. treasury notes. We have no investments denominated in foreign country currencies; therefore, our investments are not subject to foreign currency exchange rate risk.
Not applicable.

Item 8 – Consolidated Financial Statements and Supplementary Data

Index to Consolidated Financial Statements and Supplementary Data

 Page
ReportsReport of Independent Registered Public Accounting FirmF-1
Consolidated Balance SheetsF-3F-2
Consolidated Statements of Operations and Comprehensive LossIncomeF-4F-3
Consolidated Statements of Shareholders’ EquityF-5F-4
Consolidated Statements of Cash FlowsF-6F-5
Notes to Consolidated Financial StatementsF-7F-6

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 sheetsheets of Pure Cycle Corporation (the “Company”) as of August 31, 2017,2020 and 2019, the related consolidated statements of operations, comprehensive loss, shareholders'income, shareholders’ equity, and cash flows for each of the year thenyears in the two-year period ended August 31, 2017. We also have audited the Company’s internal control over financial reporting as of August 31, 2017, based on criteria established in the 2013 Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Annual Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting2020, and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertainrelated notes (collectively referred to as the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
“financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pure Cycle Corporationthe Company as of August 31, 2017,2020 and 2019, and the results of its operations and its cash flows for the year ended August 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2017, based on criteria established in the 2013 Internal Control – Integrated Framework issued by COSO.
/s/ Crowe Horwath LLP
Denver, Colorado
November 15, 2017

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Pure Cycle Corporation
We have audited the accompanying consolidated balance sheet of Pure Cycle Corporation as of August 31, 2016, and the related consolidated statements of comprehensive loss, shareholders' equity, and cash flows for each of the years in the two-year period ended August 31, 2016. Pure Cycle Corporation's2020 and 2019, 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 thesethe Company’s consolidated 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 audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).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. Anmisstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit includesof its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Pure Cycle Corporation as of August 31, 2016, and the results of its operations and its cash flows for each of the years in the two-year period ended August 31, 2016 in conformity with accounting principles generally accepted in the United States of America.

/s/ GHP HORWATH, P.CPlante & Moran PLLC

Denver, ColoradoWe have served as the Company’s auditor since 2017.
October 27, 2016
Boulder, CO
November 10, 2020

F-1
PURE CYCLE CORPORATION
CONSOLIDATED BALANCE SHEETS

ASSETS: 
August 31, 2020
  
August 31, 2019
 
Current Assets:      
Cash and cash equivalents 
$
21,797,358
  
$
4,478,020
 
Short-term investments  
—
   
5,188,813
 
Trade accounts receivable, net  
1,123,740
   
1,099,631
 
Prepaid expenses and deposits  
1,000,617
   
1,016,751
 
Land development inventories  
481,451
   
11,613,112
 
Income taxes receivable  
1,588,035
   
141,410
 
Total current assets  
25,991,201
   
23,537,737
 
         
Investments in water and water systems, net  
55,086,743
   
50,270,310
 
Land and mineral interests  
4,914,880
   
5,104,477
 
Other assets  
2,043,429
   
1,945,202
 
Notes receivable – related parties, including accrued interest  
1,078,596
   
988,381
 
Deferred tax asset  
—
   
1,283,246
 
Long-term land investment  
450,641
   
450,641
 
Operating leases - right of use assets, less current portion  
195,566
   
—
 
Income taxes receivable  
—
   
141,410
 
Total assets 
$
89,761,056
  
$
83,721,404
 
         
LIABILITIES:        
Current liabilities:        
Accounts payable  
179,718
   
170,822
 
Accrued liabilities  
1,390,949
   
1,097,922
 
Accrued liabilities - related parties  
1,212,404
   
2,330,496
 
Deferred revenues  
1,635,443
   
3,991,535
 
Deferred oil and gas lease and water sales payment  
1,800,068
   
706,464
 
Total current liabilities  
6,218,582
   
8,297,239
 
         
Deferred oil and gas lease and water sales payment, less current portion  
165,012
   
360,884
 
Participating Interests in Export Water Supply  
327,718
   
332,140
 
Deferred tax liability  
885,632
   
—
 
Lease obligations - operating leases, less current portion  
120,285
   
—
 
Total liabilities  
7,717,229
   
8,990,263
 
         
Commitments and contingencies        
         
SHAREHOLDERS’ EQUITY:        
Preferred stock:        
Series B – par value $.001 per share, 25 million shares authorized; 432,513 shares issued and outstanding (liquidation preference of $432,513)
  
433
   
433
 
Common stock:        
Par value 1/3 of $.01 per share, 40 million shares authorized; 23,856,098 and 23,826,598 shares issued and outstanding, respectively
  
79,525
   
79,427
 
Additional paid-in capital  
172,926,538
   
172,360,413
 
Accumulated other comprehensive income  
—
   
3,891
 
Accumulated deficit  
(90,962,669
)
  
(97,713,023
)
Total shareholders’ equity  
82,043,827
   
74,731,141
 
Total liabilities and shareholders’ equity 
$
89,761,056
  
$
83,721,404
 

ASSETS:
 
August 31, 2017
 
 
August 31, 2016
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 $5,575,823 
 $4,697,288 
Short-term investments
  20,055,345 
  23,176,450 
Trade accounts receivable, net
  663,762 
  181,006 
Sky Ranch receivable
  215,504 
  171,924 
Prepaid expenses
  503,100 
  350,819 
Assets of discontinued operations
  110,748 
  229,940 
Total current assets
  27,124,282 
  28,807,427 
 
    
    
Long-term investments
  187,975 
  6,853,276 
Investments in water and water systems, net
  34,575,713 
  28,321,926 
Land and mineral interests
  6,248,371 
  5,345,800 
Notes receivable - related parties, including accrued interest
  776,364 
  628,446 
Other assets
  424,226 
  472,392 
Assets of discontinued operations held for sale
  450,641 
  450,347 
Total assets
 $69,787,572 
 $70,879,614 
 
    
    
LIABILITIES:
    
    
Current liabilities:
    
    
Accounts payable
  492,410 
  160,390 
Accrued liabilities
  380,852 
  242,624 
Deferred revenues
  55,800 
  55,800 
Deferred oil and gas lease payment
  - 
  19,000 
Liabilities of discontinued operations
  11,165 
  4,394 
Total current liabilities
  940,227 
  482,208 
 
    
    
Deferred revenues, less current portion
  999,688 
  1,055,491 
Participating Interests in Export Water Supply
  341,558 
  343,966 
Total liabilities
  2,281,473 
  1,881,665 
 
    
    
Commitments and contingencies
    
    
 
    
    
SHAREHOLDERS' EQUITY:
    
    
Preferred stock:
    
    
Series B - par value $.001 per share, 25 million shares authorized;
  433 
  433 
432,513 shares issued and outstanding (liquidation preference of $432,513)
    
    
Common stock:
    
    
Par value 1/3 of $.01 per share, 40 million shares authorized;
    
    
23,754,098 and 23,754,098 shares issued and outstanding, respectively
  79,185 
  79,185 
Collateral stock
  – 
  – 
Additional paid in capital
  171,431,486 
  171,198,241 
Accumulated other comprehensive income (loss)
  (11,105)
  3,122 
Accumulated deficit
  (103,993,900)
  (102,283,032)
Total shareholders' equity
  67,506,099 
  68,997,949 
Total liabilities and shareholders' equity
 $69,787,572 
 $70,879,614 
See accompanying Notes to Consolidated Financial Statements

F-2
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSSINCOME

  For the Fiscal Years Ended August 31, 
  2020  2019 
Revenues:      
Metered water usage from:
Municipal customers
 
$
524,060
  
$
318,199
 
Industrial - Oil and gas operations  
512,772
   
4,238,334
 
Wastewater treatment fees  
95,810
   
35,818
 
Lot sales  
18,934,400
   
11,955,989
 
Water and wastewater tap fees  
5,641,020
   
3,642,548
 
Other  
147,153
   
170,621
 
Total revenues  
25,855,215
   
20,361,509
 
         
Expenses:        
Water service operations  
(804,080
)
  
(1,502,370
)
Wastewater service operations  
(199,962
)
  
(28,020
)
Land development construction costs  
(15,869,547
)
  
(11,304,962
)
Other  
(70,408
)
  
(140,118
)
Depletion and depreciation  
(1,367,160
)
  
(968,229
)
Total cost of revenues  
(18,311,157
)
  
(13,943,699
)
Gross profit  
7,544,058
   
6,417,810
 
         
General and administrative expenses  
(4,249,315
)
  
(3,106,547
)
Non-cash mineral interest impairment charge  
(1,425,459
)
  
—
 
Depreciation  
(355,909
)
  
(312,602
)
Operating income  
1,513,375
   
2,998,661
 
         
Other income:        
Reimbursement of construction costs - related party  
6,275,500
   
—
 
Oil and gas lease income, net  
246,962
   
55,733
 
Oil and gas royalty income, net  
669,033
   
148,327
 
Interest income  
178,554
   
298,605
 
Other  
35,723
   
26,627
 
Net income before taxes  
8,919,147
   
3,527,953
 
Income tax (expense) benefit  
(2,168,793
)
  
1,283,195
 
Net income 
$
6,750,354
  
$
4,811,148
 
Unrealized holding losses  
(3,891
)
  
(62,556
)
Total comprehensive income 
$
6,746,463
  
$
4,748,592
 
Earnings per common share:        
Basic 
$
0.28
  
$
0.20
 
Diluted 
$
0.28
  
$
0.20
 
Weighted average common shares outstanding:        
Basic  
23,845,015
   
23,795,973
 
Diluted  
24,061,612
   
24,002,836
 

 
 
For the Fiscal Years Ended August 31,
 
 
 
2017
 
 
2016
 
 
2015
 
Revenues:
 
 
 
 
 
 
 
 
 
  Metered water usage
 $825,056 
 $220,997 
 $969,989 
  Wastewater treatment fees
  45,106 
  43,712 
  50,076 
  Special facility funding recognized
  41,508 
  41,508 
  41,508 
  Water tap fees recognized
  217,515 
  14,294 
  14,294 
  Other income
  98,602 
  131,650 
  120,702 
  Total revenues
  1,227,787 
  452,161 
  1,196,569 
 
    
    
    
Expenses:
    
    
    
  Water service operations
  (332,449)
  (264,424)
  (464,940)
  Wastewater service operations
  (28,615)
  (29,187)
  (66,745)
  Other
  (61,860)
  (68,478)
  (55,173)
  Depletion and depreciation
  (380,382)
  (166,670)
  (172,546)
  Total cost of revenues
  (803,306)
  (528,759)
  (759,404)
Gross margin
  424,481 
  (76,598)
  437,165 
 
    
    
    
General and administrative expenses
  (2,201,744)
  (1,849,743)
  (1,939,395)
Depreciation
  (353,939)
  (253,434)
  (174,717)
  Operating loss
  (2,131,202)
  (2,179,775)
  (1,676,947)
 
    
    
    
Other income (expense):
    
    
    
  Oil and gas lease income, net
  18,765 
  360,765 
  645,720 
  Oil and gas royalty income, net
  186,595 
  343,620 
  412,627 
  Interest income
  257,488 
  241,279 
  21,334 
  Other
  (10,489)
  3,852 
  22,120 
Loss from continuing operations
  (1,678,843)
  (1,230,259)
  (575,146)
Loss from discontinued operations, net of taxes
  (32,025)
  (80,348)
  (22,552,801)
  Net loss before taxes
  (1,710,868)
  (1,310,607)
  (23,127,947)
  Taxes
  – 
  – 
  – 
  Net loss
 $(1,710,868)
 $(1,310,607)
 $(23,127,947)
  Unrealized holding (losses) gains
  (14,227)
  3,122 
  – 
  Total comprehensive loss
 $(1,725,095)
 $(1,307,485)
 $(23,127,947)
 
    
    
    
  Basic and diluted net loss per common share -
    
    
    
  Loss from continuing operations
 $(0.07)
 $(0.06)
 $(0.03)
  Loss from discontinued operations
  * 
  * 
 $(0.93)
  Net loss
 $(0.07)
 $(0.06)
 $(0.96)
 
    
    
    
  Weighted average common shares outstanding –
    
    
    
  basic and diluted
  23,754,098 
  23,781,041 
  24,041,114 
 
    
    
    
* Amount is less than $.01 per share
    
    
    
See accompanying Notes to Consolidated Financial Statements

F-3
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS'SHAREHOLDERS’ EQUITY

  Preferred Stock  Common Stock  
Additional
Paid-in
  
Accumulated Other
Comprehensive
  Accumulated    
  Shares  Amount  Shares  Amount  Capital  
Income (Loss)
  Deficit  Total 
August 31, 2018 balance:
  
432,513
   
433
   
23,764,098
   
79,218
   
171,831,293
   
66,446
   
(102,524,171
)
  
69,453,219
 
Share-based compensation  
—
   
—
   
—
   
—
   
336,228
   
—
   
—
   
336,228
 
Exercise of options  
—
   
—
   
62,500
   
209
   
192,892
   
—
   
—
   
193,101
 
Net income  
—
   
—
   
—
   
—
   
—
   
—
   
4,811,148
   
4,811,148
 
Unrealized holding losses on investments  
——
   
—
   
—
   
—
   
—
   
(62,556
)
  
—
   
(62,556
)
August 31, 2019 balance:
  
432,513
   
433
   
23,826,598
   
79,427
   
172,360,413
   
3,891
   
(97,713,023
)
  
74,731,141
 
Share-based compensation  
—
   
—
   
—
   
—
   
367,624
   
—
   
—
   
367,624
 
Exercise of options  
—
   
—
   
17,500
   
58
   
49,141
   
—
   
—
   
49,199
 
Unrestricted stock issue  
—
   
—
   
12,000
   
40
   
149,360
   
—
   
—
   
149,400
 
Net income  
—
   
—
   
—
   
—
   
—
   
—
   
6,750,354
   
6,750,354
 
Unrealized holding losses on investments  
—
   
—
   
—
   
—
   
—
   
(3,891
)
  
—
   
(3,891
)
August 31, 2020 balance:
  
432,513
  
$
433
   
23,856,098
  
$
79,525
  
$
172,926,538
  
$
—
  
$
(90,962,669
)
 
$
82,043,827
 

 
 
   Preferred Stock
 
 
   Common Stock
 
 
Additional
Paid-in 
 
 
Accumulated Other
Comprehensice 
 
 
Collateral 
 
 
Accumulated 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income (loss)
 
 
Stock
 
 
Deficit
 
 
Total
 
September 1, 2014 balance:
  432,513 
  433 
  24,037,598 
  80,130 
  168,794,396 
  - 
  - 
  (77,844,478)
  91,030,481 
Share-based compensation
  - 
  - 
  - 
  - 
  239,986 
  - 
  - 
  - 
  239,986 
Exercise of options
  - 
  - 
  16,500 
  55 
  48,770 
  - 
  - 
  - 
  48,825 
Reduction in TPF due to remedies under
    
    
    
    
    
    
    
    
    
  the Arkansas River Agreement
  - 
  - 
  - 
  - 
  3,301,203 
  - 
  - 
  - 
  3,301,203 
Collateral stock
  - 
  - 
  - 
  - 
  - 
  - 
  (1,407,000)
  - 
  (1,407,000)
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (23,127,947)
  (23,127,947)
August 31, 2015 balance:
  432,513 
  433 
  24,054,098 
  80,185 
  172,384,355 
  - 
  (1,407,000)
  (100,972,425)
  70,085,548 
Share-based compensation
  - 
  - 
  - 
  - 
  219,886 
  - 
  - 
  - 
  219,886 
Collateral stock retired
  - 
  - 
  (300,000)
  (1,000)
  (1,406,000)
  - 
  1,407,000 
  - 
  - 
Net loss
  - 
  - 
  - 
  - 
  - 
  - 
  - 
  (1,310,607)
  (1,310,607)
Unrealized holding gain on investments
  - 
  - 
  - 
  - 
  - 
  3,122 
  - 
  - 
  3,122 
August 31, 2016 balance:
  432,513 
  433 
  23,754,098 
  79,185 
  171,198,241 
  3,122 
  - 
  (102,283,032)
  68,997,949 
Share-based compensation
    
    
    
    
  233,245 
    
    
    
  233,245 
Net loss
    
    
    
    
    
    
    
  (1,710,868)
  (1,710,868)
Unrealized holding gain on investments
    
    
    
    
    
  (14,227)
    
    
  (14,227)
August 31, 2017 balance:
  432,513 
 $433 
  23,754,098 
 $79,185 
 $171,431,486 
 $(11,105)
 $- 
 $(103,993,900)
 $67,506,099 
See accompanying Notes to Consolidated Financial Statements
F-5
F-4
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

  For the Fiscal Years Ended August 31, 
  2020  2019 
Cash flows from operating activities:      
Net income 
$
6,750,354
  
$
4,811,148
 
Adjustments to reconcile net income to net cash provided by operating activities:        
Share-based compensation expense  
517,024
   
336,228
 
Depreciation and depletion  
1,723,069
   
1,280,830
 
Recovery of doubtful accounts  
—
   
(37,233
)
Investment in Well Enhancement and Recovery Systems LLC  
11,730
   
6,601
 
Interest income and other non-cash items  
(175
)
  
(420
)
Interest added to receivable from related parties  
(45,556
)
  
(41,776
)
Deferred income taxes  
2,168,878
   
(1,284,066
)
Proceeds from Sky Ranch CAB reimbursement applied to land development inventories  
4,229,501
   
—
 
Non-cash mineral interest impairment charge  
1,425,459
   
—
 
Changes in operating assets and liabilities:        
Land development inventories  
6,487,689
   
(5,018,452
)
Trade accounts receivable  
(24,109
)
  
4,870
 
Prepaid expenses and other assets  
91,195
   
(700,063
)
Note receivable – related parties  
(44,659
)
  
(40,406
)
Accounts payable and accrued liabilities  
192,057
   
(368,456
)
Income taxes  
(1,305,215
)
  
—
 
Deferred revenues  
(2,353,591
)
  
3,630,485
 
Deferred income – oil and gas lease and water sales payment  
897,732
   
951,237
 
Lease obligations - operating leases  
(1,291
)
  
—
 
Net cash provided by operating activities  
20,720,092
   
3,530,527
 
         
Cash flows from investing activities:        
Investments in water, water systems and land  
(8,044,059
)
  
(14,106,724
)
Sales and maturities of marketable securities  
6,905,157
   
55,697,933
 
Purchase of marketable securities  
(1,720,234
)
  
(52,040,964
)
Purchase of property and equipment  
(586,396
)
  
(353,995
)
Net cash used by investing activities  
(3,445,532
)
  
(10,803,750
)
         
Cash flows from financing activities:        
Proceeds from exercise of options  
49,199
   
193,101
 
Payment to contingent liability holders  
(4,421
)
  
(6,896
)
Net cash provided by financing activities  
44,778
   
186,205
 
         
Net change in cash and cash equivalents  
17,319,338
   
(7,087,018
)
Cash and cash equivalents – beginning of year  
4,478,020
   
11,565,038
 
Cash and cash equivalents – end of year 
$
21,797,358
  
$
4,478,020
 

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
For the fiscal Years Ended August 31,
 
 
 
2017
 
 
2016
 
 
2015
 
Cash flows from operating activities:
 
 
 
 
 
 
 
 
 
Net loss
 $(1,710,868)
 $(1,310,607)
 $(23,127,947)
Adjustments to reconcile net loss to net cash provided by
    
    
    
(used in) operating activities:
    
    
    
Share-based compensation expense
  233,245 
  219,886 
  239,986 
Depreciation, depletion and other non-cash items
  734,324 
  420,104 
  347,263 
Investment in Well Enhancement and Recovery Systems LLC
  10,488 
  10,675 
  4,577 
Interest income and other non-cash items
  (14,647)
  (41,114)
  (419)
Interest added to receivable from related parties
  (34,755)
  (29,099)
  (15,493)
Changes in operating assets and liabilities:
    
    
    
Trade accounts receivable
  (482,756)
  (23,161)
  918,252 
Prepaid expenses
  (152,281)
  (122,733)
  43,472 
Note receivable - related parties
  (156,743)
  (31,633)
  (105,208)
Accounts payable and accrued liabilities
  477,538 
  (269,428)
  (848,669)
Income taxes
  - 
  (292,729)
  292,729 
Deferred revenue
  (55,803)
  (55,802)
  (64,226)
Deferred income - oil and gas lease
  (19,000)
  (360,765)
  (645,720)
Net cash used in operating activities from continuing operations
  (1,171,258)
  (1,886,406)
  (22,961,403)
Net cash provided by operating activities from discontinued operations
  118,379 
  1,615,677 
  21,987,337 
Net cash used in operating activities
  (1,052,879)
  (270,729)
  (974,066)
 
    
    
    
Cash flows from investing activities:
    
    
    
Investments in water, water systems and land
  (2,486,403)
  (1,209,416)
  (2,101,253)
Investments in Sky Ranch pipeline
  (4,368,196)
    
    
Ivestments in Sky Ranch land development
  (902,600)
    
    
Sales and maturities of marketable securities
  9,786,406 
  2,840,000 
  - 
Purchase of short-term investments
  - 
  (25,970,721)
  - 
Purchase of long-term investments
  - 
  (6,855,189)
  - 
Purchase of property and equipment
  (95,385)
  (472,310)
  (17,186)
Net cash provided by (used in) investing activities from continuing operations
  1,933,822 
  (31,667,636)
  (2,118,439)
Net cash provided by (used in) investing activities from discontinued operations
  - 
  (451,347)
  44,650,149 
Net cash provided by (used in) investing activities
  1,933,822 
  (32,118,983)
  42,531,710 
 
    
    
    
Cash flows from financing activities:
    
    
    
Proceeds from exercise of options
  - 
  - 
  48,825 
Payment to contingent liability holders
  (2,408)
  (2,041)
  (8,621)
Net cash (used in) provided by financing activities from continuing operations
  (2,408)
  (2,041)
  40,204 
Net cash used in financing activities from discontinued operations
  - 
  - 
  (6,258,365)
Net cash used in financing activities
  (2,408)
  (2,041)
  (6,218,161)
 
    
    
    
Net change in cash and cash equivalents
  878,535 
  (32,391,753)
  35,339,483 
Cash and cash equivalents - beginning of year
  4,697,288 
  37,089,041 
  1,749,558 
Cash and cash equivalents - end of year
 $5,575,823 
 $4,697,288 
 $37,089,041 
 
    
    
    
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
    
    
    
Retirement of collateral stock
 $- 
 $1,407,000 
 $- 
Reduction in Tap Participation Fee Liability and HP&AM
    
    
    
receivable, collateral stock, and mineral interests received
    
    
    
as a result of settlement of the Arkansas River Agreement
 $- 
 $- 
 $1,894,203 
Assets acquired through WISE funding obligation
 $- 
 $- 
 $1,381,004 

Land development inventories included in accounts payable and accrued liabilities 
$
985,130
  
$
1,399,602
 
Investments in water, water systems and land included in accounts payable and accrued liabilities 
$
260,649
  
$
930,895
 
Transfer of income taxes to income taxes receivable 
$
—
  
$
282,820
 
Income taxes paid, net of refunds 
$
1,022,310
  
$
—
 

See accompanying Notes to Consolidated Financial Statements
F-6

F-5
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 20162020 and 2015
2019
NOTE 1 – ORGANIZATION

Pure Cycle Corporation (the “Company”) was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008. The Company owns assetsoperates in the Denver, Colorado metropolitan area. The Company is currently using its water assets located in the Denver metropolitan area to providetwo business segments: (i) wholesale water and wastewater services toand (ii) land development. The Company has accumulated valuable water and land interests over the past 30 years 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 located in the Denver metropolitan area.
The Company provides a full line of wholesale water and wastewater services which includes designing and constructing water and wastewater systems as well as operating and maintaining such systems. region. The Company’s business focus is to provide wholesale waterland assets are located along the active and wastewater services, predominately to local governmental entities, which provide services to their end-use customers throughouthigh-profile I-70 corridor in the Denver metropolitan area as well as along the Colorado Front Range.
In addition to the Company’s water and wastewater operations,region. Through its land development segment, the Company is developing 931 acres of land owned by the Company along Denver’s I-70 corridor asSky Ranch, a 930 acre master planned community known aslocated four miles south of Denver International Airport. Sky Ranch.Ranch is planned to include a mix of 3,200 single-family and multifamily residential units and over two million square feet of commercial, retail, and industrial space.

As of August 31, 2017, the Company had $26.2 million of working capital, which included $5.6 million of cash and cash equivalents.
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 majority-ownedwholly-owned and controlled subsidiaries.subsidiary. Intercompany accounts and transactions have been eliminated in consolidation.

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

On March 27, 2020, Congress enacted the CARES Act to provide financial relief due to the outbreak of a novel strain of the coronavirus (“COVID-19”). The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits. The Company does not believe there will be any material impacts to its financial statements because of the CARES Act.

On April 17, 2020, the Company entered into a $390,000 note payable to Central Bank & Trust part of Farmers & Stockmens Bank, pursuant to the Paycheck Protection Program (“PPP Loan”) under the CARES Act. On May 13, 2020, the Company returned the entire outstanding balance of $390,278, inclusive of interest. The interest was waived by Central Bank & Trust.

Reclassifications

Certain reclassifications have been made to the financial statements to conform to the consolidated 2020 financial statement presentation. These reclassifications had no effect on net earnings or cash flows previously reported.

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 of assets, etc.assets. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company’s cash equivalents are comprised entirely of money market funds maintained at a reputable financial institution.institution and U.S. Treasury debt securities. The Company had no cash equivalents as of August 31, 2020. At various times during the fiscal year ended August 31, 2017,2020, the Company’s main operating account exceeded federally insured limits. TheTo date, the Company has never suffered a loss due to such excess balance.

Investments
F-6
Contract Asset

Contract assetsManagement 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.

Investments

Management determines the appropriate classification of its investments in certificates of deposit and treasurymarketable securities at the time of purchase and reevaluates such determinations each reporting period.

Certificates of deposit and debtMarketable securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. The Company has $188,000 of investments classified as held-to-maturity at August 31, 2017, which represent certificates of deposit and U.S. treasury notes with maturity dates after August 31, 2018. Securities that the Company does not have the positive intent or ability to hold to maturity, including certificatescertificate of deposit,deposits and U.S. Treasury debt securities, and any investments in equity securities, are classified as available-for-sale. Securities classified as available-for-sale are marked-to-marketreported at each reporting period.their fair value. Changes in value onof such securities are recorded as a component of Accumulated other comprehensive income (loss). The cost of securities sold is based on the specific identification method. The Company’s certificatesAs of deposit and treasury securities mature at various dates through July 2018.
August 31, 2020, the Company held no marketable securities.

PURE CYCLE CORPORATIONLand Development Inventories
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016Land development inventories primarily include land held for development and 2015
sale stated at cost. The Company began developing its Sky Ranch property in 2018. Capitalized lot development costs at Sky Ranch are costs incurred to construct finished lots that meet the Company’s capitalization criteria for improvements to a lot and are capitalized as incurred. The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development of lots at Sky Ranch. 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 sale. The Company records all land cost of sales when a lot is completed and sold on a lot-by-lot basis. Costs included in Land Development Inventories include common area costs the Company funded through the Sky Ranch Community Authority Board (the “Sky Ranch CAB”). The Company believes these costs will be reimbursable by the Sky Ranch CAB. The Company will record any reimbursements as a reduction of capitalized costs remaining in Land Development Inventories once the Sky Ranch CAB has reimbursed the costs (i.e., once the Sky Ranch Districts and/or the Sky Ranch CAB has issued bonds).

The Company measures land 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.

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

Investments – The carrying amounts of investments approximate fair value. Investments are described further in Note 3 – Fair Value Measurements.

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

Long-Term Financial Liabilities – The Comprehensive Amendment Agreement No. 1 (the “CAA”) is comprised of a recorded balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (defined(as defined in Note 4 – Water and Land Assets). The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (defined(as defined in Note 4 – Water and Land Assets). Because of the uncertainty of the sale of Export Water, the Company has determined that the recorded balancecontingent portion of the CAA does not have a readily determinable fair value. The CAA is described further in Note 5 – Participating Interests in Export Water.

Notes Receivable – Related Parties – The market valuecarrying amounts of the notesNotes receivable – related parties:parties (including with the Rangeview Metropolitan District (the “Rangeview District”) and the Sky Ranch Metropolitan District No. 5 are not practical to estimate due toCAB) approximate their fair value because the related party natureinterest rates on the notes approximate market rates.

Off-Balance Sheet Instruments – The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA. Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. See further discussion in Note 5 – Participating Interests in Export Water.

Cash Flows
The Company did not have any debt during the fiscal years ended August 31, 2017 and 2016, and therefore did not pay any interest during the fiscal years ended August 31, 2017 and 2016. The Company paid $441,400 in interest during the fiscal year ended August 31, 2015.
The Company did not pay any income taxes during the fiscal year ended August 31, 2017. In the fiscal year ended August 31, 2016, the Company paid $292,700 for alternative minimum tax the Company owed as a result of the sale of the Company’s farm assets. The Company did not pay any income taxes during the fiscal year ended August 31, 2015.
Trade Accounts Receivable

The Company records accounts receivable net of allowances for uncollectible accounts. Excluded from trade accounts receivable are balances due from discontinued operations. The Company has not recorded an allowance for uncollectible accounts in receivables from continuing operations for either of the periods ended August 31, 20172020 or 2016.2019. The allowance for uncollectible accounts was determined based on a specific review of all past due accounts.

Long-Lived Assets Impairment Loss

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
Long-Lived Assets
The Company reviewsevaluates its long-lived assets for impairment wheneverat least annually or more frequently if the Company believes events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. RecoverabilityEstimates of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the eventual useand timing of the asset.events for evaluating long-lived assets for impairment are based upon management’s assumptions and market conditions. If suchany of its long-lived assets are considereddeemed to be impaired, the amount of impairment to be recognized is measured by the amount by whichexcess of the carrying amount of the assets exceeds theover its fair value of the assets. value. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The impairment testing of long-lived assets during fiscal 2020 resulted in $1.4 million impairment charge for the Arkansas Valley mineral rights, as described below.

As of August 31, 2020, the Company assessed the recoverability of its Arkansas Valley mineral rights. The Company determined the carrying value of these mineral rights is not recoverable. As a result, the Company recorded an impairment charge of $1.4 million. The charge was recorded in Non-cash mineral asset impairment charge in the consolidated statements of operations and comprehensive income for fiscal 2020. There was no impairment for the Arkansas Valley mineral rights long-lived asset in fiscal 2019.

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.

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

Tap Participation Fee Liability and Imputed Interest Expense
Pursuant to the Asset Purchase Agreement dated May 10, 2006 (the "Arkansas River Agreement") between the Company and HP A&M (formerly a significant shareholder), the Company was obligated to pay HP A&M a defined percentage of a defined number of water tap fees the Company receives after the date of the Arkansas River Agreement (the "Tap Participation Fee" or "TPF"). Prior to September 1, 2014, the Company and HP A&M had a dispute regarding certain defaults of HP A&M relating to the agreement.  In 2014 and 2015, the Company settled its claims against HP A&M relating to the defaults.  As a result of the settlement, during the year ended August 31 2015, the remaining TPF liability of approximately $3.3 million, was eliminated, which, due to the related party nature of the transaction, was accounted for as an increase in equity of approximately $3.3 million.
Revenue Recognition

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

The Company generates revenues through one linetwo lines of business. Its revenuesRevenues are derived through its wholesale water and wastewater business and through the sale of developed land primarily for residential lots, both of which isbusinesses are described below.

Water and Wastewater Segment Revenues

The Company generates revenues through its wholesale water and wastewater business predominatelypredominantly from three sources: (i) monthly wholesale water usage fees and wastewater service fees, (ii) one-time water and wastewater tap fees and construction fees, and (iii) consulting fees.the items identified below. Because these items are separately delivered and distinct, the Company accounts for each of the items separately, as described below.

i)
Monthly wholesalewater usage and wastewater treatment fees– The Company provides water and wastewater serviceservices to customers, for which the customers are charged fees–Monthly wholesale water monthly. Water usage chargesfees are assessed to the Company’s 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 familysingle-family house on a standard sizedstandard-sized lot. One SFE is assumed to have a water demand of approximately 0.4 acre feet per year and to contribute wastewater flows of approximately 300 gallons per day. Water usage pricing usesis based on a tiered pricing structure. The Company recognizes wholesale water usage revenues at a point in time upon delivering water to its customers or its governmental customers’ end-use customers, as applicable.Revenues recognized by the Company from the sale of “Export Water” and other portions of its “Rangeview Water Supply” off the Lowry Range“Lowry Range” are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”). The Company is the primary distributor of the Export Water and sets pricing for the sale of Export Water. Revenues recognized by the Company from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District. For water sales on the Lowry Range, the Rangeview District is directly selling the water and deemed the primary distributor of the water. The Rangeview District sets the price for the water sales on the Lowry Range. See further description of “Export Water,” the “Lowry Range,” and the “Rangeview Water Supply” in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System.”

The Company also sells raw water for industrial uses to oil and gas companies during drilling processes (referred to as “O&G operations”). O&G operations revenues are recognized at a point in time upon delivering water to the customer, unless other special arrangements are made.

The Company delivered 76.2 million and 356.3 million gallons of water to customers during the years ended August 31, 2020 and 2019. Of this, 1% and 84% was used for O&G operations.

The Company recognizes wastewater processingtreatment revenues monthly based on a flat monthly fee and actual usage charges. The monthly wastewater servicetreatment fees are shown net of amounts retained by the Rangeview District. Amounts recognized for water and wastewater services during the fiscal years ended August 31, 2017, 2016 and 2015 are presented in the statements of comprehensive loss. Costs of delivering water and providing wastewater service to customers are recognized as incurred.
The Company delivered 94.6million, 33.9 million and 97.5 million gallons of water to customers during the fiscal years ended August 31, 2017, 2016 and 2015, respectively.

ii)
Water and wastewater tap fees and construction feesfees/special facility funding–Tap fees, also called The Company has various water and wastewater service agreements, components of which may include 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 for water and/or wastewater service. The right stays with the property. The Company has no obligation to physically connect the property to the lines. Once connected to the water and/or wastewater systems, the customer has live service to receive metered water deliveries from the Company’s system developmentand send wastewater into the Company’s system. Thus, the customer has full control of the connection right as it can obtain all the benefits from this right. As such, management has determined that tap fees are receivedseparate and distinct performance obligations that are recognized at a point in advance,time.

The Company recognizes water and wastewater tap fee revenues at the time the Company grants a right for the customer to connect to the water or wastewater service line to obtain service, and the customer pays the tap fee. During the years ended August 31, 2020 and 2019, the Company recognized $4,758,700 and $3,116,100 of water tap fee revenues. The water tap fees recognized are non-refundable and are typically used to fund construction of certain facilities and defraybased on the acquisition costs of obtaining water rights and constructing facilities to deliver water. Construction fees are fees usedamounts billed by the CompanyRangeview District to construct assets that are typically requiredcustomers, after deduction of royalties due to be constructed by developers or home buildersthe Land Board for water taps, if applicable, and are separate from tap fees.net of amounts paid to third parties pursuant to the CAA as further described in Note 7 – Long-Term Obligations and Operating Lease
.

Proceeds from tap feesDuring the years ended August 31, 2020 and construction fees are deferred upon receipt and recognized in income either upon completion of construction of infrastructure or ratably over time, depending on whether2019, the Company owns the infrastructure constructed with the proceeds or a customer owns the infrastructure constructed with the proceeds.
recognized $882,300 and $526,400 of wastewater tap fee revenues.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
Tap andThe Company recognizes construction fees, derived from agreements in whichincluding fees received to construct “special facilities,” over time as the Company willconstruction 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 own the assets constructed with the fees are recognizedotherwise classified as revenue using the percentage-of-completion method. Costs ofa typical wholesale facility or retail facility. Temporary infrastructure required prior to construction of the assets when the Company will not own the assets are recorded as construction costs.
Tap and construction fees derived from agreements for which the Company will own the infrastructure are recognized as revenues ratably over the estimated accounting service life of the facilities constructed, starting at completion of construction, which could be in excess of 30 years. Costs of construction of the assets when the Company will own the assets are capitalized and depreciated over their estimated economic lives.
From time to time, the Company enters into water service agreements to provide water service to customers. The Company owns the facilities which store, treat, and deliver thepermanent water and amortizeswastewater 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. No special facilities revenue was recognized during the cost of these facilities over their useful lives. The Company recognized $217,500 of tap fee revenue for thefiscal year ended August 31, 2017 and $14,300 of tap fee revenue in each of the two fiscal years ended August 31, 2016, and 2015. The Company recognized $41,500 of “Special Facilities” funding as revenue in each of the three fiscal years ended August 31, 2017, 2016, and 2015. 2020 or 2019.

As of August 31, 2017,2020 and 2019, the Company has deferred recognition of $1.1 million ofhad no contract liabilities related to water tap and construction revenue from customer agreements, which will be recognized as revenue ratably through 2036.fee/special facility funding revenue.

iii)
Consulting fees– Consulting fees are fees theThe Company receives, typically on a monthly basis, fees from municipalities and area water providers along the I-70 corridor, for contract operations services.  The Company recogizes consultingservices over time as services are consumed. Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed. During the years ended August 31, 2020 and 2019, the Company recognized $25,700 and $158,600 of consulting fees. During the year ended August 31, 2020, the Company cancelled all but one of its remaining consulting contracts to focus its resources on the Sky Ranch water and wastewater operations and land development. These fees are classified in Other income.

Land Development Segment Revenues

The Company generates revenues through its land development business predominantly from the sources described below. Because these items are separately delivered and distinct, the Company accounts for each of the items separately, as described below.

Sale of finished lots – The Company acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch along the I-70 corridor east of Denver, Colorado. The Company has entered into purchase and sale agreements with three separate home builders pursuant to which the Company agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch. The Company began construction of lots in March 2018 and segments its reporting of the activity relating to the costs and revenues from the construction and sale of lots at Sky Ranch.

The Company sells lots at Sky Ranch pursuant to distinct agreements with each home builder. These agreements follow one of two formats. One format is the sale of a finished lot, whereby the purchaser pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon completion of the finished lot that is permit ready. The Company recognizes revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete and the Company has no further obligations for the lot. During the year ended August 31, 2020, the Company received payment and recognized revenue of $4,911,700 from one home builder in exchange for the delivery of 70 finished lots. During the year ended August 31, 2019, the Company received payment and recognized revenue of $4,053,800 from one home builder in exchange for the delivery of 57 finished lots.

The second format is the sale of finished lots pursuant to a lot development agreement with builders, whereby the Company receives payments in stages that include: (i) payment upon the delivery of platted lots (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. Ownership and control of the platted lots pass to the builders once the Company closes the sale of the platted lots. Because the builder (i.e., the customer) takes control of the lot at the first closing and subsequent improvements made by the Company improve the builder’s lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs. 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. As of August 31, 2020, the Company had received cumulative payments of $25.6 million under the development agreements relating to 356 lots from two home builders, of which $24.1 million of revenue was recognized over time based on the costs incurred to date compared to total expected costs for full completion of the 356 lots. For the years ended August 31, 2020 and 2019, the Company recognized $14,022,700 and $7,902,200 of lot sales over time. As of August 31, 2020 and 2019, the Company had deferred revenues of $1,635,400 and $3,991,500. The Company does not have any material significant payment terms as all payments are expected to be received within 12 months after the delivery of the platted lot.  The Company adopted the practical expedient for financing components and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year.

Reimbursable Costs for Public Improvements – The Sky Ranch CAB is required to construct certain public improvements, such as water distribution systems, sewer collection systems, storm water systems, drainage improvements, roads, curbs, sidewalks, landscaping, and parks, the costs of which may qualify as reimbursable costs. Pursuant to its agreements with the Sky Ranch CAB (see Note 6 – Related Party Transactions), the Company is obligated to finance this infrastructure. These public improvements are constructed pursuant to design standards specified by the Sky Ranch Districts and/or the Sky Ranch CAB, and, after inspection and acceptance, are turned over to the applicable governmental entity to operate and maintain. As these public improvements are owned and operated on behalf of a governmental entity, they may qualify for reimbursement.

Pursuant to the agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to the Company for any advances made by the Company or expenses incurred related to construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of the advances made and expenses incurred. Because the timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land development inventories. If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs. If bonds ultimately are issued, upon receipt of reimbursements by the Company, the Company records the reimbursements received as Other income to the extent that costs have previously been expensed and reduces Land development inventories by any remaining reimbursables received. The Company submits specific costs for reimbursement to the Sky Ranch CAB. If reimbursable costs received exceed actual expenses incurred by the Company for the cost of the public improvements, they are recorded as Other income as received.

The Company has entered certain funding agreements with the Sky Ranch CAB, which are described in Note 6 – Related Party Transactions. These agreements allow for interest to be accrued on amounts funded by the Company to the Sky Ranch CAB. Due to the uncertainty of collecting the interest (because payment is contingent on the issuance of bonds), interest income is not recognized on the amounts owed by the Sky Ranch CAB until the bonds are issued. As of August 31, 2020, the Company had deferred the recognition of $1,176,300 of interest income on advances made to the Sky Ranch CAB.

On November 19, 2019, the Sky Ranch CAB sold tax-exempt, fixed rate senior bonds in the aggregate principal amount of $11,435,000 and tax-exempt, fixed-rate subordinate bonds in the aggregate principal amount of $1,765,000 (collectively, the “Bonds”). Upon the issuance of the Bonds, the Company received $10.5 million as partial reimbursement for advances the Company made to the Sky Ranch CAB to fund the construction of public improvements to the Sky Ranch property. Of the $10.5 million received by the Company, $6.3 million was recognized as Income from reimbursement of construction costs (related party) in other income and the remaining $4.2 million partially reduced the remaining capitalized costs in Land development inventories.

Project management services – On May 2, 2018, the Company entered into two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB. Pursuant to the Project Management Agreements, the Company acts as the project manager and provides any and all services required to deliver the Sky Ranch CAB-eligible improvements, including but not limited to Sky Ranch CAB compliance; planning design and approvals; project administration; contractor agreements; and construction management and administration. The Company is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing. The Company receives a project management fee of five percent (5%) of actual construction costs of Sky Ranch CAB-eligible improvements. The project management fee qualifies as a reimbursable cost to the Company. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible improvements are not included in the calculation of the project management fee. Soft costs and other costs that are not directly related to the construction of Sky Ranch CAB-eligible improvements are included in Land development inventories and accounted for in the same manner as construction support activities as described below. Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided or expenses incurred for reimbursables. Due to this contingency, the project management fees are deferred and will not be recognized until bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses the Company for the public improvements. At that point, the portion of the project management fees repaid will be recognized as revenue. As of August 31, 2020, the Company had deferred recognition of $1,464,900 in project management services to the Sky Ranch CAB.

Construction support activities – The Company 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. These activities are invoiced upon completion and are included in Land development inventories and subsequently expensed through Land development construction costs unless or until bonds are issued by the Sky Ranch Districts (as defined in Note 6 – Related Party Transactions) and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses the Company for public improvements. Refer to Reimbursable Costs for Public Improvements above for details on repayment of reimbursable costs. As of August 31, 2020, the Company had invoiced the Sky Ranch CAB $674,800 for construction support activities, which amount was recorded to Land development inventories.

Unpaid reimbursable costs the Company believes are recoverable from the Sky Ranch CAB are recorded to a note receivable from the Sky Ranch CAB. Each reporting period, the Company assesses the collectability of the receivable from the Sky Ranch CAB and the recoverability of the outstanding reimbursable costs to determine if the amounts should be expensed. The following table summarizes all reimbursable costs incurred as of August 31, 2020, payments made from the Sky Ranch CAB and any outstanding reimbursable amounts.

  
As of August 31, 2020
 
  Costs incurred  Reimbursement Received  Net costs incurred 
Public Improvements 
$
26,355,400
  
$
10,505,000
  
$
15,850,400
 
Accrued interest  
1,176,300
   
—
   
1,176,300
 
Project management services  
1,464,900
   
—
   
1,464,900
 
Construction support activities  
674,800
   
—
   
674,800
 
Total reimbursable costs 
$
29,671,400
  
$
10,505,000
  
$
19,166,400
 

The Company believes it will incur an additional $2.3 million through the end of the calendar year 2021 to complete the construction related to public improvements for the initial lots at Sky Ranch. It further believes that it will be reimbursed an additional $18.5 million related to the public improvement costs on this initial filing. Pursuant to the Company’s agreements with the Sky Ranch CAB, no payment is required by the Sky Ranch CAB with respect to reimbursable costs unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided or expenses incurred for reimbursables.

The Company evaluated disaggregation of revenue and has determined that no additional disaggregation of revenue is necessary.

Deferred Revenue

In July 2019, the Company received an up-front payment of $573,700 from an Agreement on Locations of Oil and Gas Operations  (the “OGOA”) for a pad site covering approximately 16 acres with the operator of the Sky Ranch O&G Lease (defined below under the heading Oil and Gas Lease Payments), which will be recognized as income on a straight-line basis over three years. If after three years the operator has not spud at least one well on the OGOA, the operator may extend the right to the OGOA one additional year by paying the Company $75,000. The operator may only extend the OGOA for two additional years for a total of five years. The Company recognizes the up-front payments on a straight-line basis over the term of the OGOA. For the years ended August 31, 2020 and 2019, the Company recognized $191,200 and $26,200 of income related to the up-front payments received pursuant to the OGOA. As of August 31, 2020 and 2019, the Company had deferred revenue of $356,300 and $547,500, related to the OGOA.

In September 2017, the Company entered a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (the “Bison Lease”). Pursuant to the Bison Lease, the Company received an up-front payment of $167,200 in October 2017, which will be recognized as income on a straight-line basis over the three-year term of the lease. During each of the years ended August 31, 2020 and 2019, the Company recognized lease income of $55,700 related to the up-front payment received pursuant to the Bison Lease. As of August 31, 2020 and 2019, the Company had deferred revenue of $4,700 and $60,400, related to the Bison Lease that will be recognized as income ratably through September 2020.

One of the Company’s industrial water customers provided $2.0 million of advanced water purchase payments to the Company to reserve first-priority water for O&G operations for defined periods through January 2021. The customer is required to use predetermined amounts of water on a predetermined schedule. The Company recognizes revenue based on the amount of water used by the customer in the period the water is used. If the customer does not use the water pursuant to the predetermined use and timing schedules, then the customers first-priority is forfeited. The Company records breakage revenue when it is remote that any future water services will be provided to the customer. In July 2020, the customer failed to use its water pursuant to the predetermined schedule. The customer revised its water usage estimate; therefore, the first of its upfront payments of $425,800 was recognized in Industrial - Oil and gas operations under metered water usage revenues because it was then determined the customer was unable to utilize the first advanced payment, which expired prior to August 31, 2020. As of August 31, 2020 and 2019, the Company had deferred recognition of $1.6 million and $425,800, as a result of these advanced water purchase payments.

The Company has also deferred recognition of lot sale revenues, which are recognized as development progresses.  As of August 31, 2020 and 2019, the Company’s deferred revenues along with the changes in the deferred revenues are as follows:

  
August 31, 2020
  
August 31, 2019
 
Deferred lot sale revenue 
$
1,635,443
  
$
3,991,535
 
Oil and gas lease and water sales payments
  
1,965,080
   
1,067,348
 
Total deferred revenues 
$
3,600,523
  
$
5,058,883
 

Changes in deferred revenue were as follows:
  
August 31, 2020
  
August 31, 2019
 
Balance, beginning of period 
$
5,058,883
  
$
477,161
 
Billings  
24,643,817
   
24,998,964
 
Revenue recognized  
(26,102,177
)
  
(20,417,242
)
Balance, end of period 
$
3,600,523
  
$
5,058,883
 

As of August 31, 2020, one homebuilder at Sky Ranch still has payment obligations to the Company pursuant to a purchase and sale agreement for lots at Sky Ranch. This contracted payment represents revenue that has not yet been fully recognized because revenue is recognized as construction work is completed. At August 31, 2020, the Company had outstanding open contracts for $1.6 million, which relates to the last payment for the sale of the final lots in the first development filing at Sky Ranch, which contractually was payable in December 2020, but was paid on November 3, 2020.
In addition to the deferred revenues recorded on the Company’s consolidated balance sheet, the Company has deferred interest income of $1.2 million and project management revenues of $1.5 million due from the Sky Ranch CAB related to the development at Sky Ranch, which, due to the contingent nature of the payments, are not reflected on the Company’s consolidated balance sheet.

Royalty and Other Obligations

Revenues from the sale of Export Water are shown gross of royalties payable to the Land Board. Revenues from the sale of water on the Lowry Range are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to the Company by the Rangeview District. Water revenue from such sales are shown net of the royalties paid to the Land Board and the amounts retained by the Rangeview District.

Oil and Gas Lease Payments

As further described in Note 4 – Water and Land Assets below, on March 10, 2011, the Company entered into a three-year Paid-Up Oil and Gas Lease (the “O“Sky Ranch O&G Lease”) and a Surface Use and Damage Agreement (the “Surface Use Agreement”) with Anadarko E&P Company, L.P. (“Anadarko”), whichthat were subsequently sold the O&G Lease topurchased by a wholly-ownedwholly owned subsidiary of ConocoPhillips Company for the purpose of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of mineral estate ownedrecently acquired by the Company at its Sky Ranch property. The Company received a payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016, which was recognized as income on a straight-line basis over two years (the extension term of the O&G Lease). In addition, during the fiscal year ended August 31, 2015, the Company received an up-front payment of $72,000, for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Rangeview Lease”). The Company recognizes the up-front payments on a straight-line basis over the terms of the respective leases. During the fiscal years ended August 31, 2017, 2016 and 2015, the Company recognized $19,000, $360,800, and $645,700, respectively, of income related to the up-front payments received pursuant to these leases.
As of August 31, 2017, the Company recognized the remaining $19,000 of income related to the Rangeview Lease. Subsequent to August 31, 2017, the Company entered into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP, for the purpose of exploring for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Bison Lease”). Pursuant to the Bison Lease, on September 20, 2017, the Company received an up-front payment of $167,200, which will be recognized as income on a straight-line basis over three years (the term of the Bison Lease).

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
During the three months ended February 28, 2015, twoCrestone Peak Resources. Six wells werehave been drilled within the Company’s mineral interest. Beginning in March 2015, both wells wereinterest and placed into service (four new wells beginning in fiscal 2020) and beganare producing oil and gas and accruing royalties to the Company. In May 2015, certain gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties attributable to gas production. During the fiscal years ended August 31, 2017, 20162020, and 2015,2019, the Company received $186,600, $343,600$669,000 and $412,600, respectively,$148,300, in royalties attributable to these twosix wells. The Company classifies income from lease and royalty payments as Other income in the statementconsolidated statements of operations and comprehensive lossincome 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 recordsrecognizes share-based compensation costs whichas 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 and are recognized as expense over the applicable vesting period of the stock award using the straight-line method.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. Because theThe Company has areleased its full valuation allowance on its deferred tax assets as of August 31, 2019. The impact on the income tax provision for the granting and exercise of stock options during the fiscal yearsyear ended August 31, 2016 and 20152020, was a tax expense of $80,300. Because the Company had noa full valuation allowance on its deferred tax assets as of August 31, 2018, there was a $410,600 deferred tax impact on the 2019 income tax provisions.provision as a result of the granting and exercise of stock options.

The Company recognized $233,200, $219,900,$517,000 and $240,000$336,200 of share-based compensation expenses during the fiscalyears ended August 31, 2017, 20162020 and 2015, respectively.2019.

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 does not have any significant unrecognized tax benefits as of August 31, 2017.2020.

The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating losses and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled.

Due to continued operating losses, prior to the Company’s fiscal 2019, the Company maintained a valuation allowance on the net deferred tax assets other than Alternative Minimum Tax (“AMT”) credits. During the year ended August 31, 2019, the Company determined it was more likely than not that the Company would realize its deferred tax assets, consisting primarily of net operating loss carryforwards, resulting in the release of the valuation allowance. By releasing the valuation allowance, for the year ended August 31, 2019, the Company recognized a deferred tax benefit of $1,284,100. The Company is required to reassess its conclusions regarding the realization of its deferred tax assets at each financial reporting date.

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 20132015 through fiscal 2016.2019. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefitspositions as a component of income tax expense. At August 31, 2017,2020, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the fiscal years ended August 31, 2017, 20162020 or 2015.
Discontinued Operations
In August 2015, the Company sold approximately 14,600 acres of irrigated farm land and related Arkansas River water rights for proceeds of approximately $44.7 million, which were substantially all of the assets comprising the Company’s agricultural segment. Pursuant to the terms of the purchase and sale agreement, the Company continued to manage and receive the lease income until December 31, 2015. As a consequence of the sale, the operating results and the assets and liabilities of the discontinued operations, which formerly comprised the agricultural segment, are presented separately in the Company’s financial statements. Summarized financial information for the discontinued agricultural business is shown below. Prior period balances have been reclassified to present the operations of the agricultural business as a discontinued operation.
2019.

PURE CYCLE CORPORATIONF-13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
 
Discontinued Operations Statements of Operations
 
 
 
 
 
 
 
 
 
 
 
 
 
Fiscal years ended August 31,
 
 
 
2017
 
 
2016
 
 
2015
 
Farm revenues
 $6,800 
 $267,500 
 $1,127,200 
Farm expenses
  (1,300)
  (77,100)
  (126,300)
  Gross profit
  5,500 
  190,400 
  1,000,900 
 
    
    
    
General and administrative expenses
  (46,900)
  (313,400)
  (760,200)
  Operating (loss) profit
  (41,400)
  (123,000)
  240,700 
Finance charges
  9,400 
  38,400 
  21,700 
(Loss) gain on sale of farm assets
  - 
  4,300 
  (22,108,200)
Interest expense (1)
  - 
  - 
  (390,500)
Interest imputed on the Tap Participation
    
    
    
  Fee payable to HP A&M (2)
  - 
  - 
  (23,800)
Taxes
    
    
  (292,700)
  Loss from discontinued operations, net of taxes
 $(32,000)
 $(80,300)
 $(22,552,800)
(1) Interest expense represents interest accrued related to notes the Company had on its farm assets prior to the sale. All notes associated with the farms have been paid off, and thus the Company no longer incurs interest on such notes.
The Company anticipates continued expenses through the end of calendar 2018 related to the discontinued operations. The Company will continue to incur expenses related to the remaining agricultural land the Company continues to own and for the purpose of collecting outstanding receivables.
Earnings per Common Share

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
The individual assets and liabilities of the discontinued agricultural business are combined in the captions “Assets of discontinued operations” and “Liabilities of discontinued operations” in the consolidated balance sheets. The carrying amounts of the major classes of assets and liabilities included part of the discontinued business are presented in the following table:
 
Discontinued Operations Balance Sheets
 
 
 
 
 
 
 
 
 
 
August 31,
 
 
 
2017
 
 
2016
 
Assets:
 
 
 
 
 
 
Trade accounts receivable
 $110,700 
 $227,100 
Land held for sale (1)
  450,600 
  450,300 
Prepaid expenses
  - 
  2,900 
Total assets
 $561,300 
 $680,300 
 
    
    
Liabilities:
    
    
Accrued liabilities
  11,200 
  4,400 
Total liabilities
 $11,200 
 $4,400 
(1) 
Land Held for Sale.During the fiscal quarter ended November 30, 2015, the Company purchased three farms totaling 700 acres for approximately $451,000. The farms were acquired to correct dry-up covenant issues related to water only farms to obtain the release of the escrow funds related to the Company’s farm sale to Arkansas River Farms, LLC. The Company intends to sell the farms in due course and has classified the farms as long-term assets.
Loss per Common Share
LossBasic earnings per common share is computed by dividing net lossincome by the weighted averageweighted-average number of shares outstanding during each period. Common stockDiluted earnings per share is computed similarly but reflects the potential dilution that would occur if dilutive options were exercised and warrants aggregating 465,600, 338,100, and 312,100 common share equivalents asall unvested share-based payment awards were vested. As of August 31, 2017, 20162020 and 2015, respectively, have been excluded from2019, the Company included 216,600 and 206,860 stock options in the calculation of lossdiluted earnings per common share as dilutive common stock equivalents using the treasury stock method. As of each August 31, 2020 and 2019, the Company excluded 50,000 stock options from the diluted earnings per common share as their effect is anti-dilutive.

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 May 2014,February 2016, the Financial Accounting Standards Board (“FASB”(the “FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 842). , (Topic 606) thatASU 2016-02 provides guidance on the recognition, measurement, presentation and disclosure of leases. The new standard supersedes the present GAAP standard on leases and requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which we expectsubstantially all leases to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The standard supersedes U.S. GAAP guidancereported on revenue recognitionthe balance sheet as right-of-use assets and requires the use of more estimates and judgments than the present standards. It also requires additional disclosures.  The Company is continuing to study the impacts of this standard and its amendments, including impacts on tap fee and other up-front revenue payments and how impacts if any will be initially reflected at the adoption date.  The Company does not expect that revenue recognition from on-going water sale and delivery fees and  waste water disposal fees, or consulting service contracts, will be significantly affected but these  matters are continuing to be assessed. The newlease obligations. This standard is effective for annual reporting periodsfiscal years beginning after December 31, 2017, including interim reporting periods within that reporting period. Earlier adoption is permitted.15, 2018. The Company adopted the standard effective September 1, 2019, and recorded a right-of-use asset of $258,900 and a lease obligation liability of $252,300.

In August 2014,June 2016, the FASB issued ASU No. 2014-15,2016-13, PresentationFinancial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements - Going Concern (Subtopic 205-40): DisclosureInstruments (“ASU 2016-13”). Among other things, ASU 2016-13 requires the measurement of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 describes how an entity’s management should assess, considering both quantitative and qualitative factors, whether there areall expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and eventsreasonable and supportable forecasts. Companies will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 was set to be effective for public companies on January 1, 2020; however, the FASB delayed the effective date to January 1, 2023 for smaller reporting companies. The Company continues to monitor economic implications of the COVID-19 pandemic; however, based on current market conditions, we do not expect the impact of ASU 2016-13 to be material upon adoption.

Management has evaluated other recently issued accounting pronouncements and does not believe that raise substantial doubt about an entity’s ability to continue asany of these pronouncements will have a going concern within one year after the date that thesignificant impact on our consolidated financial statements are issued, which represents a change from the existing literature that requires consideration about an entity’s ability to continue as a going concern within one year after the balance sheet date. The standard is effective for the Company on September 1, 2016. The adoption of ASU 2014-15 did not have a material impact on the Company’s financial statements.

and related disclosures.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the presentation and disclosure requirements for discontinued operations. The update was adopted by the Company in fiscal year 2016.F-14
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 input to determine fair value.

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market. TheAs of August 31, 2020 and August 31, 2019, the Company had no Level 1 assets or liabilities as of August 31, 2017 or August 31, 2016.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. The Company had 56 and 36 Level 2 assets as As of August 31, 20172020 and 2016, respectively,2019, the Company had zero and one Level 2 assets, which consistconsisted of certificates of deposit and U.S. treasury notes.

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 assumptions and projections in determining the fair value assigned to such assets or liabilities. TheAs of August 31, 2020, the Company had two level 3 assets, the right-of-use asset (its operating lease) and the Arkansas Valley mineral rights and one Level 3 liability, the contingent portion of the CAA, asCAA. As of August 31, 20172019, the Company had one level 3 asset, the Arkansas Valley mineral rights and 2016.one Level 3 liability, the contingent portion of the CAA. The Company has determined that the contingent portion of the CAA does not have a readily determinable fair value (see Note 5)5 – Participating Interests in Export Water).

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.

Level 2 Asset – Available for Sale Securities.Investments. The Company’s available for sale securitiesinvestments are the Company’s only financial asset measured at fair value on a recurring basis. The fair value of the available for saleinvestment securities is based on the values reported by the financial institutions where the funds are held. These securities include only federally insured certificates of deposit and U.S. treasuries.

The following table provides informationCompany’s non-financial assets measured at fair value on thea non-recurring basis when assessing recoverability consist entirely of its investments in water and water systems and other long-lived assets. See Note 4 – Water and Land Assets below.

There were no assets andor liabilities measured at fair value on a recurring basis as of August 31, 2017:2020.

 
 
 
 
 
 
 
 
Fair Value Measurement Using:
 
 
 
 
 
 
 
 
 
 
 
 
Cost / Other
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant Unobservable Inputs
 
 
Accumulated Unrealized Gains and
 
 
 
Fair Value
 
 
Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
(Losses)
 
Certificates of deposit
 $12,673,700 
 $12,694,500 
 $- 
 $12,673,700 
 $- 
 $(20,800)
U.S. treasuries
  7,381,700 
  7,372,000 
  - 
  7,381,700 
  - 
  9,700 
  Subtotal
 $20,055,400 
 $20,066,500 
 $- 
 $20,055,400 
 $- 
 $(11,100)
Long-term investments
  188,000 
  188,000 
  - 
  188,000 
  - 
  - 
  Total
 $20,243,400 
 $20,254,500 
 $- 
 $20,243,400 
 $- 
 $(11,100)
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2016:2019:

        Fair Value Measurement Using:    
  Fair Value  
Cost /
Other Value
  
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
  
Significant
Other
Observable
Inputs
(Level 2)
  
Significant
Unobservable
Inputs
(Level 3)
  
Accumulated
Unrealized
Gains and
(Losses)
 
U.S. treasuries 
$
4,996,000
  
$
4,992,100
  
$
—
  
$
4,996,000
  
$
—
  
$
3,900
 
Total 
$
4,996,000
  
$
4,992,100
  
$
—
  
$
4,996,000
  
$
—
  
$
3,900
 

As of August 31, 2019, the Company held a $192,800 certificate of deposit that is not carried at fair value on the consolidated balance sheets because it is classified as a held-to-maturity security. As of August 31, 2020, the Company had no securities it was holding-to-maturity.

Level 3 Assets and Liability.The Company’s non-financial assets that were required to be remeasured at fair value on a non-recurring basis consist of the operating lease right-of-use asset and the Arkansas Valley mineral rights.

The carrying value of the operating lease right-of-use asset is deemed recoverable based on the present value of the estimated future cash flows using a discount rate commensurate with the risk.

During 2020, as described in Note 2 – Summary of significant Accounting Policies, the Company determined the carrying value of the Arkansas mineral rights was not recoverable and recorded an impairment of $1.4 million. The Company estimated the fair value of the mineral rights using a market approach based upon anticipated sales proceeds less costs to sell. The Company has determined that the contingent portion of the CAA does not have a readily determinable fair value (see Note 5 – Participating Interests in Export Water).

There were no transfers between Level 1, 2 or 3 categories during the years ended August 31, 2020 or 2019.

 
 
 
 
 
 
 
 
Fair Value Measurement Using:
 
 
 
 
 
 
 
 
 
 
 
 
Cost / Other
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant Unobservable Inputs
 
 
Accumulated Unrealized Gains and
 
 
 
Fair Value
 
 
Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
(Losses)
 
Certificates of deposit
 $6,050,500 
 $6,054,700 
 $- 
 $6,050,500 
 $- 
 $(4,200)
U.S. treasuries
  17,125,900 
  17,115,200 
  - 
  17,125,900 
  - 
  10,700 
  Subtotal
 $23,176,400 
 $23,169,900 
 $- 
 $23,176,400 
 $- 
 $6,500 
Long-term investments
  6,853,300 
  6,856,700 
  - 
  6,853,300 
  - 
  (3,400)
  Total
 $30,029,700 
 $30,026,600 
 $- 
 $30,029,700 
 $- 
 $3,100 
F-15
NOTE 4 – WATER AND LAND ASSETS

Investment in Water and Water Systems

The Company’s water and water systems consist of the following approximatefollowing:

  
August 31, 2020
  
August 31, 2019
 
  Costs  
Accumulated
Depreciation
and Depletion
  Costs  
Accumulated
Depreciation
and Depletion
 
Rangeview water supply 
$
14,569,900
  
$
(15,600
)
 
$
14,823,800
  
$
(14,700
)
Sky Ranch water rights and other costs  
7,498,900
   
(980,600
)
  
7,371,500
   
(757,400
)
Fairgrounds water and water system  
2,899,900
   
(1,238,900
)
  
2,899,800
   
(1,151,000
)
Rangeview water system  
15,947,700
   
(788,600
)
  
5,617,800
   
(372,300
)
Water supply – other  
7,549,800
   
(1,115,800
)
  
4,758,200
   
(860,100
)
Wild Pointe service rights  
1,631,800
   
(708,500
)
  
1,631,800
   
(489,800
)
Sky Ranch pipeline  
5,727,300
   
(602,300
)
  
5,723,700
   
(411,600
)
Lost Creek water supply  
3,372,400
   
—
   
3,324,000
   
—
 
Construction in progress  
1,339,300
   
—
   
8,176,600
   
—
 
Totals  
60,537,000
   
(5,450,300
)
  
54,327,200
   
(4,056,900
)
Net investments in water and water systems 
$
55,086,700
      
$
50,270,300
     

Construction in progress primarily consists of an irrigation system and new water well at Sky Ranch. The Company anticipates the additional facilities will be placed in service during fiscal 2021.

During fiscal 2019, the Company constructed a water reclamation facility for the Sky Ranch development. The costs and accumulated depreciation and depletion as of August 31:the facility were recorded in construction in progress. The Company placed the facility in service during the second quarter of fiscal 2020 at a total cost of $10.2 million. The Rangeview water system includes the Sky Ranch water reclamation facility.

 
 
August 31, 2017
 
 
August 31, 2016
 
 
 
Costs
 
 
Accumulated Depreciation and Depletion
 
 
Costs
 
 
Accumulated Depreciation and Depletion
 
Rangeview water supply
 $14,529,600 
 $(10,600)
 $14,444,600 
 $(9,400)
Sky Ranch water rights and other costs
  6,725,000 
  (436,300)
  6,607,400 
  (334,500)
Fairgrounds water and water system
  2,899,900 
  (974,800)
  2,899,900 
  (886,800)
Rangeview water system
  1,639,000 
  (207,000)
  1,624,800 
  (152,800)
Water supply – other
  4,058,900 
  (401,300)
  3,703,000 
  (297,800)
Wild Pointe service rights
  1,631,700 
  (213,000)
  - 
  - 
Sky Ranch pipeline
  4,700,000 
  (39,200)
    
    
Construction in progress
  673,800 
  - 
  723,500 
  - 
Totals
  36,857,900 
  (2,282,200)
  30,003,200 
  (1,681,300)
Net investments in water and water systems
 $34,575,700 
    
 $28,321,900 
    
Depletion and Depreciation

The Company recorded $1,300, $500, and $7,000 of depletion charges duringDuring the fiscal years ended August 31, 2017, 20162020 and 2015, respectively. During2019, the fiscal years ended August 31, 2017 and 2016, this relatedCompany recorded an immaterial amount of depletion charges, which relates entirely to the Rangeview Water Supply (defined(as defined below).

The Company recorded $733,000, $419,600, and $340,300 of depreciation expense in each ofDuring the fiscal years ended August 31, 2017, 20162020 and 2015, respectively.2019, the Company recorded $1,722,200 and $1,278,900 of depreciation expense. These figures include $355,900 and $312,600 of depreciation expense for other equipment not included in the table above.
above in the fiscal years ended August 31, 2020 and 2019.

PURE CYCLE CORPORATIONThe following table presents the estimated useful lives by asset class used for calculating depreciation and depletion charges:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assets ClassesEstimated 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

August 31, 2017, 2016 and 2015
Rangeview Water Supply and Water System

The “Rangeview Water Supply” consists of 26,985 acre feetapproximately 27,000 acre-feet and is a combination of tributary surface water and groundwater rights along with certain storage rights associated with the Lowry Range, a 27,000-acre26,000-acre property owned by the Land Board located 16 miles southeast of Denver, Colorado. Approximately $14.5 million of Investments in Water and Water Systems on the Company’s balance sheet asAs of August 31, 2017, represents2020, the costs of assets acquired orCompany had invested $17.9 million in facilities constructed to extend water service to customers located on and off the Lowry Range. 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 beginning in 1996 when:pursuant to the following agreements:

(i) 
The Rangeview District entered into the 1996 Amended and Restated Lease Agreement withbetween the Land Board and the Rangeview District, which ownswas superseded by the Lowry Range;
(ii) 
The2014 Amended and Restated Lease Agreement, dated July 10, 2014 (the “Lease”), between the Company, entered into the Agreement for Sale of Export Water withLand Board, and the Rangeview District;

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

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

(iv) 
InThe 1997 the Company entered into the Wastewater Service Agreement withbetween the Company and Rangeview District for(the “Lowry Wastewater Agreement”), which allows the provision ofCompany to provide wastewater service to the Rangeview District’s customers on the Lowry Range.

In July 2014,The Lease, the Company,Lowry Service Agreement, the Rangeview DistrictExport Agreement, and the Land Board entered into the 2014 Amended and Restated Lease (the “Lease”), which superseded the original 1996 lease, and the Company and the Rangeview District entered into an Amended and Restated Service Agreement. Collectively, the foregoing agreements, as amended,Lowry Wastewater Agreement are collectively referred to as the “Rangeview Water Agreements.”

Additionally, in August 2019, the Company purchased approximately 300 acre-feet of fully consumptive surface water in the Lost Creek Designated Ground Water Basin (“Lost Creek Water”). The Lost Creek Water is currently adjudicated for agricultural use, and the Company has filed an application with the Colorado water court to change the use of the water to augment its municipal/industrial water supplies at the Lowry Range. The Company has consolidated the Lost Creek Water with the Rangeview Water Supply to provide service to the Rangeview District’s customers both on and off the Lowry Range.

Pursuant to the Rangeview Water Agreements, the Company owns 11,650 acre feet of water consisting of 10,000 acre feet of groundwater and 1,650 acre feet of average yield surface water which can be exported off the Lowry Range to serve area users (referred to as “Export Water”). The 1,650 acre feet of surface rights are subject to completion of documentation by the Land Board related to the Company’s exercise of its right to substitute an aggregate gross volume of 165,000 acre feet of its groundwater for 1,650 acre feet per year of adjudicated surface water and to use this surface water as Export Water. Additionally, assuming completion of the substitution of groundwater for surface water, the Company has the exclusive right to provide water and wastewater service, through 2081, to all water users on the Lowry Range and the right to develop an additional 13,685 acre feet of groundwater and 1,650 acre feet of adjudicated surface water to serve customers either on or off the Lowry Range. The Rangeview Water Agreements also provide for the Company to use surface reservoir storage capacity in providing water service to customers both on and off the Lowry Range.

Services on the Lowry Range – Pursuant to the Rangeview Water Agreements, the Company designs, finances, constructs, operates and maintains the Rangeview District’s water and wastewater systems to provide service to the Rangeview District’s customers on the Lowry Range. The Company will operate both the water and the wastewater systems during the contract period, and the Rangeview District owns both systems. After 2081, ownership of the water system will revert to the Land Board, with the Rangeview District retaining ownership of the wastewater system.

Rates and charges for all water and wastewater services on the Lowry Range, including tap fees and usage or monthly fees, are governed by the terms of the Rangeview Water Agreements. Rates and charges are required to be less thancannot 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 which will offset future royalty obligations. The Company and the Land Board are working cooperatively to clarify the calculation of the minimum annual production fee. Pursuant to the Company’s determination, the Company has made payments of $45,600 per year, which offsets earned royalties, and annual rent of $7,600 which amount is increased every five years based on the Consumer Price Index for each of the past two years. The Company does not anticipate any modification to the minimum fee to be material.Urban Customers The Rangeview District retains 2% of the remaining gross revenues, and the Company receives 98% of the remaining gross 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 usagetreatment fees (the Rangeview District retains the other 10%).


PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
Export Water – The Company owns the Export Water and intends to use it to provide wholesale water and wastewater services to customers off the Lowry Range, including customers of the Rangeview District and other governmental entities and industrial and commercial customers. 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).

F-17
Water Supply - Other– 
WISE

The WISE Partnership Agreement (as defined below) provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years. During fiscal 2017,the years ended August 31, 2020 and 2019, the Company invested approximately $350,000made $2.8 million and $419,200 in infrastructure.capital investments in WISE. Capitalized terms used under this caption are defined in Note 7 – Long-Term Obligations and Operating Lease.

The Arapahoe County Fairgrounds Water and Water System

The Company owns 321 acre feetacre-feet of groundwater purchased pursuant to its agreement with Arapahoe County. The Company plans to use this water in conjunction with its Rangeview Water Supply in providing water to areas outside the Lowry Range. The $2.9 million of capitalized costs noted in the table Investment in Water and Water Systems above includes the costs to construct various Wholesalewholesale and Special Facilities,special facilities, including a new deep water well, a 500,000-gallon water tank and pipelines to transport water to the Arapahoe County fairgrounds.

The Lost Creek Water Supply

In August 2019, the Company purchased 150 acre-feet of ditch water rights, 800 acre-feet of renewable groundwater rights, 70 acre-feet of deep groundwater rights and 260 acres of land in Weld County. Total consideration for the land, water and related costs was $3.5 million. The Company allocated the acquisition cost to the land and water rights based on estimates of each asset’s respective fair value at the acquisition date. The purchase of the Lost Creek land and water was accounted for as an asset acquisition.

Service to Customers Not on the Lowry Range

Sky Ranch -– In 2010, the Company purchased approximately 931 acres ofthe undeveloped land known as Sky Ranch. The property includes the rights to approximately 830 acre feetacre-feet of water. Thewater, which the Company plans to use this wateris using in conjunction with its Rangeview Water Supply to provide water service to the Rangeview District’s customers at Sky Ranch. The $11.4$23.4 million of capitalized costs includes the costs to acquire the water rights and to construct various facilities, including an eight-mile pipeline, to extend service to customers at Sky Ranch.facilities.

Total consideration for the land, water and water included the $7.0 million purchase price, plus directacquisition related costs and fees of $554,100.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. 
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 Rangeview'sthe Rangeview District’s water system for approximately $4.7 million.system.

Wild Pointe -– On December 15, 2016, the Rangeview District, acting by and through its Water Activitywater 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 Enterprisewater enterprise (the “Elbert 86 District”), entered into a Water Service Agreement (the “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 Rangeview’sthe 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, in exchange for $1,600,000$1.6 million in cash. Pursuant to the terms of the Wild Pointe Service Agreement, the Company, in its capacity as Rangeview’sthe 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 system development (or tap)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 130 existing200 SFE water connections in Wild Pointe.

O&G Leases

In 2011, the Company entered intosigned the Sky Ranch O&G Lease and the Surface Use Agreement with Anadarko. Pursuant to the Sky Ranch O&G Lease, the Company received an up-front payment of $1,243,400 from Anadarko 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 Company also received $9,000 in surface use and damage payments. In December 2012, the O&G Lease was purchased by a wholly-owned subsidiary of ConocoPhillips Company. The Company received an additional payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016. TheSky Ranch O&G Lease is now held by production, entitling the Company to royalties based on production.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
In September 2017, subsequent to fiscal year end, the Company entered into asigned the three-year Paid-Up Oil and GasBison Lease with Bison Oil and Gas, LLP, for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate owned by the Company adjacent to the Lowry Range.

Land and Mineral InterestsRights

As part of the 2010 Sky Ranch acquisition, the Company acquired 931approximately 930 acres of land, of which isapproximately 150 acres have been sold to home builders for the purpose of building residential homes. As of August 31, 2020, the remaining acres the Company owns, which are also intended to be sold to builders, are valued at approximately $4.8$3.6 million.

Additionally, in fiscal 2015, as part of the settlement with HP A&M, the Company was assigned 75% mineral interests in the Arkansas River land. Together with the 25% mineral interests the Company owned prior to the settlement, the Company now holds approximately 13,900 acres of mineral interests. The Companyinterests in Southeast Colorado in Otero, Bent and Prowers Counties and has valued itsthese mineral interests at approximately $1,425,500.$1.4 million. As further described in Note 2 – Summary of significant Accounting Policies, the Company assessed the recoverability of the Arkansas Valley mineral right and determined that the fair value of these assets was below their carrying value by $1.4 million. As a result, the Company recorded an impairment charge of $1.4 million in Non-cash mineral rights impairment charge in the consolidated statements of operations and comprehensive income for fiscal 2020. There was no impairment for the Arkansas Valley mineral rights long-lived asset in fiscal 2019.

As of August 31, the costs allocated to the Company’s land and mineral interest are as follows:

  
August 31, 2020
  
August 31, 2019
 
Sky Ranch land 
$
3,569,266
  
$
3,037,556
 
Sky Ranch development costs  
1,127,476
   
423,324
 
Lost Creek land  
218,138
   
218,138
 
Arkansas Valley mineral rights  
—
   
1,425,459
 
Net land and mineral interests 
$
4,914,880
  
$
5,104,477
 

NOTE 5 – PARTICIPATING INTERESTS IN EXPORT WATER

The Company acquired itsacquisition of the Rangeview Water Supply through various amended agreements entered into in the early 1990s. The acquisition was consummatedfinalized with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash that the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water and Land Assets). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investment. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was 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. IfAdditionally, if the Company does not sell the Export Water, the holders of the Series B Preferred Stock are also not entitled to payment of any dividend and have no contractual recourse against the Company.

As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating Interests in Export Water Supplyliability 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, or approximately 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.

From time to time, the Company repurchased various portions of the CAA obligations, which retained their original priority. The Company did not make any CAA acquisitions during the fiscal yearsyear ended August 31, 20172020 or 2016. In July 2014, the Land Board relinquished its approximately $2.4 million of CAA interests to the Company as part of a settlement of the 2011 lawsuit filed by the Company and the Rangeview District against the Land Board.
2019.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
As a result of the acquisitions and the relinquishment by the Land Board, theThe Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty. Additionally, as a result of the acquisitions, the relinquishment by the Land Board, and the consideration from the cumulative sales of Export Water, as detailed in the table below, the remaining potential third-party obligation at August 31, 2017,2020, is approximately $1 millionmillion:

  
Export
Water
Proceeds Received
  
Initial
Export Water
Proceeds to Pure Cycle
  
Total
Potential
Third-party Obligation
  
Participating
Interests Liability
  Contingency 
Original balances 
$
—
  
$
218,500
  
$
31,807,700
  
$
11,090,600
  
$
20,717,100
 
Activity from inception until August 31, 2017:
                    
Acquisitions  
—
   
28,042,500
   
(28,042,500
)
  
(9,790,000
)
  
(18,252,500
)
Relinquishment  
—
   
2,386,400
   
(2,386,400
)
  
(832,100
)
  
(1,554,300
)
Option payments - Sky Ranch  and The Hills at Sky Ranch  
110,400
   
(42,300
)
  
(68,100
)
  
(23,800
)
  
(44,300
)
Arapahoe County tap fees  
533,000
   
(373,100
)
  
(159,900
)
  
(55,800
)
  
(104,100
)
Export Water sale payments  
737,300
   
(593,900
)
  
(143,400
)
  
(49,800
)
  
(93,600
)
Balance at August 31, 2018
  
1,380,700
   
29,638,100
   
1,007,400
   
339,100
   
668,300
 
Fiscal 2019 activity:
  
166,300
   
(146,500
)
  
(19,800
)
  
(6,900
)
  
(12,900
)
Balance at August 31, 2019
  
1,547,000
   
29,491,600
   
987,600
   
332,200
   
655,400
 
Fiscal 2020 activity:
                    
Export Water sale payments  
106,600
   
(93,900
)
  
(12,700
)
  
(4,500
)
  
(8,200
)
Balance at August 31, 2020
 
$
1,653,600
  
$
29,397,700
  
$
974,900
  
$
327,700
  
$
647,200
 

:F-19
 
 
Export Water Proceeds Received
 
 
Initial Export Water Proceeds to Pure Cycle
 
 
Total Potential Third-party Obligation
 
 
Participating Interests Liability
 
 
Contingency
 
Original balances
 $- 
 $218,500 
 $31,807,700 
 $11,090,600 
 $20,717,100 
 
Activity from inception until August 31, 2014:
 
    
    
    
    
  Acquisitions
  - 
  28,042,500 
  (28,042,500)
  (9,790,000)
  (18,252,500)
  Relinquishment
  - 
  2,386,400 
  (2,386,400)
  (832,100)
  (1,554,300)
  Option payments - Sky Ranch
    
    
    
    
    
      and The Hills at Sky Ranch
  110,400 
  (42,300)
  (68,100)
  (23,800)
  (44,300)
  Arapahoe County tap fees (1)
  533,000 
  (373,100)
  (159,900)
  (55,800)
  (104,100)
  Export Water sale payments
  410,500 
  (305,900)
  (104,600)
  (36,300)
  (68,300)
Balance at August 31, 2015
  1,053,900 
  29,926,100 
  1,046,200 
  352,600 
  693,600 
Fiscal 2016 activity:
  207,900 
  (183,200)
  (24,700)
  (8,600)
  (16,100)
Balance at August 31, 2016
  1,261,800 
  29,742,900 
  1,021,500 
  344,000 
  677,500 
Fiscal 2017 activity:
    
    
    
    
    
  Export Water sale payments
  58,100 
  (51,200)
  (6,900)
  (2,400)
  (4,500)
Balance at August 31, 2017
 $1,319,900 
 $29,691,700 
 $1,014,600 
 $341,600 
 $673,000 
(1)            Table of Contents
The Arapahoe County tap fees are less $34,522 in royalties paid to the Land Board.
The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority. This means the first payees receive their full payment before the next priority level receives any payment and so on until full repayment. Of the next approximately $6.7$6.3 million of Export Water payouts, which at current levels would occur over several years, the Company will receive approximately $5.9$5.6 million of revenue. Thereafter, the Company will be entitled to all but approximately $650,000$220,000 of the proceeds from the sale of Export Water after deduction of the Land Board royalty.

NOTE 6 – ACCRUED LIABILITIES

At August 31, 2017,2020, the Company had accrued liabilities of $381,000,$2.6 million, of which $265,000$766,800 was for accrued compensation, $27,000$74,000 was for current operating lease obligations, $72,200 was for estimated property taxes, $48,500$56,000 was for professional fees and the remaining $40,500$1.7 million was related to operating payables. Of the $1.7 million in operating payables, $1.2 million is payable to the Sky Ranch CAB related to development costs at Sky Ranch. These costs are included in Land development inventories and subsequently expensed through Land development construction costs. In addition, $42,800 of the operating payables is payable to the Rangeview District for construction costs related to water infrastructure at Sky Ranch. These costs are included in Investments in water and water systems.

At August 31, 2016,2019, the Company had accrued liabilities of $242,600,$3.4 million, of which $160,000$460,500 was for accrued compensation, $5,700$94,000 was for estimated property taxes, $48,000$70,000 was for professional fees and the remaining $28,900$2.8 million was related to operating payables. Of the $2.8 million in operating payables, $1.4 million is payable to the Sky Ranch CAB for costs related to the development of Sky Ranch. These costs are included in Land development inventories and subsequently expensed through Land development construction costs. In addition, $930,900 of the operating payables is payable to the Rangeview District for construction costs related to the wastewater facility. These costs are included in Investments in water and water systems.

NOTE 7 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

As of August 31, 20172020 and 2016,2019, the Company had no debt.

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 5 – Participating Interests in Export Water.

WISE Partnership

During December 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its Utility Enterpriseutility enterprise (“Aurora Water”), and the South Metro WISE Authority (“SMWA”). The SMWA was formed by the Rangeview District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (the “SM IGA”), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the WISE Partnership Agreement. The SM IGA specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years.  During fiscal 2017, the Company invested approximately $350,000 in infrastructure.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
By consenting to the waiver of the contingencies set forth in the WISE Partnership Agreement, pursuantPursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (the “WISE Financing Agreement”) between the Company and the Rangeview District, the Company has an agreement to fund the Rangeview District’s participation in WISE effective as of December 22, 2014. The Company’s cost of fundingDuring the years ended August 31, 2020 and 2019, the Company through the Rangeview District’s purchaseDistrict, purchased an additional 400 and 0 acre-feet of its share of existing infrastructureWISE water for $582,200 and future infrastructure for WISE and funding operations and water deliveries related to WISE is projected to be approximately $5.2 million over the next five years.$0. See further discussion in Note 14 –Related Party Transactions.

Lease Commitments

Operating Lease
lease expense is generally recognized evenly over the term of the lease. Effective January 2016,February 2018, the Company entered into an operating lease for approximately 2,50011,393 square feet of office and warehouse space.space in Watkins, Colorado. The lease has a two-yearthree-year term with payments of $3,000$6,600 per month.month and an option to extend the primary lease term for a two-year period at a rate equal to a 12.5% increase over the primary base payments.

As of September 1, 2019, the company adopted ASU No. 2016-02, Leases (“Topic 842”). Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. Prior to September 1, 2019 leases were accounted for under the previous guidance in Accounting Standard Codification 840.The Company did not enter into any new leases in fiscal 2020. For the years ended August 31, 2020 and 2019, rent expense consisted of operating lease expense of $85,200 and $79,200. The Company paid $72,800 against Lease obligations — operating leases during fiscal 2020.

Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet. For lease agreements entered into or reassessed in the future, the Company will be required to combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets.

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 6% on September 1, 2019, for all leases that commenced prior to that date. The Company elected the hindsight practical expedient to determine the lease term for existing leases, which resulted in the lengthening of the lease term related to the Company’s office lease.

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

  
As of August 31, 2020
 
Operating leases - ROU assets 
$
195,566
 
     
Accrued liabilities 
$
73,991
 
Lease obligations - operating leases, net of current portion  
120,285
 
Total lease liability 
$
194,275
 
     
Weighted average remaining lease term (in years)  
2.4
 
Weighted average discount rate  
6
%

NOTE 8 – 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 that the Company’s proceeds from the sale or disposition of Export Water rights exceed $36,026,232, the Series B Preferred Stock holdersShareholders will receive the next $432,513 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.

Equity Compensation Plan

The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective April 12, 2014. Executives, eligible employees, consultants, and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. 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 Board.Company’s board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. AwardsAs of August 31, 2020, stock awards and awards to purchase 62,000511,500 shares of the Company’s common stock have been made under the 2014 Equity Plan.As of August 31, 2020 and 2019, there were 1,088,500 and 1,230,500 shares available for grant under the 2014 Equity Plan. Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan; however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.

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 statementconsolidated statements of operations and comprehensive loss.income (loss). Option forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company does not expect any forfeiture of its option grants, and therefore, the compensation expense has not been reduced for estimated forfeitures. During fiscal year 2017, 15,000For the years ended August 31,2020 and 2019, 6,500 options expired. During fiscal year 2016, 10,000and zero options expired. The Company attributes the value of share-based compensation to expense using the straight-line single option method for all options granted.

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 option lives – based on historical experience with existing option holders;

●
Estimated dividend rates – based on historical and anticipated dividends over the life of the option;

●
Life of the option – based on historical experience, option grants have lives of between five and 10 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; and

●
Option exercise behaviors – based on actual and projected employee stock option exercises.

In fiscal 2020, the Company granted 80,000 stock options to employees with weighted-average grant-date fair values of $4.21, and three-year vesting terms which expire ten years from the grant date. In fiscal 2020, the Company granted 50,000 stock options to an executive officer with a weighted-average grant-date fair value of $4.16, a three-year vesting term and an expiration date of ten years from the grant date. In addition, the six non-employee Board members were each granted 2,000 unrestricted stock grants. 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;
●
Estimated option lives – based on historical experience with existing option holders;
grant of $12.45. Stock-based compensation expense includes $149,400 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 exist for unrestricted stock grants. There was no stock-based compensation expense related to unrestricted stock grants for fiscal 2019.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016In fiscal 2019, the Company granted 50,000 stock options to an executive officer with a weighted-average grant-date fair value of $5.06, a three-year vesting term and 2015
●
Estimated dividend rates – based on historical and anticipated dividends overan expiration date of ten years from the life of the option;
●
Life of the option – based on historical experience, option grants have lives of between 8 and 10 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; and
●
Option exercise behaviors – based on actual and projected employee stock option exercises and forfeitures.
grant date. In January 2017,fiscal 2019, the Company granted its non-employee directors options to purchase a combined 32,500 sharesstock options with a weighted-average grant-date fair value of the Company’s common stock pursuant to the 2014 Equity Plan. All of the options vest$126,700, a one year after thevesting term and an expiration date of ten years from the grant and expire 10 years after the date of grant. date.

The Company calculatedvariable assumptions used in the fair value of the options granted during January 2017 at approximately $112,700,calculations using the Black-Scholes model with the following variables: weighted average exercise price of $5.10 (which was the closing sales price of the Company’s common stock on the date of grant); estimated option lives of 10 years; weighted average risk free interest rate of 2.42%; weighted average stock price volatility of 57.56%; and an estimated forfeiture rate of 0%. The $112,700 of stock-based compensation is being expensed monthly over the vesting periods.
In October 2016, the Company granted its President an option to purchase 50,000 shares of the Company’s common stock pursuant to the 2014 Equity Plan. The option vests one-third one year from the date of grant, one-third two years from the date of grant, and one-third three years from the date of grant. The option expires 10 years from the date of grant. The Company calculated the fair value of this option at approximately $188,300 using the Black-Scholes model with the following variables: weighted average exercise price of $5.61 (which was the closing sales price of the Company’s common stock on the date of grant); estimated option life of 10 years; estimated dividend rate of 0%; weighted average risk-free interest rate of 1.79%; weighted average stock price volatility of 57.85%; and an estimated forfeiture rate of 0%. The $188,300 of stock-based compensationare as being expensed monthly over the vesting period. In September 2016, the Company granted employee options to purchase 60,000 shares of the Company’s common stock pursuant to the 2014 Equity Plan. The options vest one-third one year from the date of grant, one-third two years from the date of grant, and one-third three years from the date of grant. The options expire 10 years from the date of grant. The Company calculated the fair value of these options at approximately $222,500 using the Black-Scholes model with the following variables: weighted average exercise price of $5.56 (which was the closing sales price of the Company’s common stock on the date of grant); estimated option life of 10 years; estimated dividend rate of 0%; weighted average risk-free interest rate of 1.560%; weighted average stock price volatility of 57.81%; and an estimated forfeiture rate of 0%. The $222,500 of stock-based compensation as being expensed monthly over the vesting period.
In January 2016, the Company granted its non-employee directors options to purchase a combined 36,000 shares of the Company’s common stock pursuant to the 2014 Equity Plan. Options for 26,000 shares vest one year after the date of grant and options for 10,000 shares vest one half one year after the date of grant and one half two years after the date of grant. All of the options expire 10 years after the date of grant. The Company calculated the fair value of the options granted during January 2016 at approximately $104,100, using the Black-Scholes model with the following variables: weighted average exercise price of $4.26 (which was the closing sales price of the Company’s common stock on the date of grant); estimated option lives of 10 years; weighted average risk free interest rate of 2.06%; weighted average stock price volatility of 58.26%; and an estimated forfeiture rate of 0%. The $104,100 of stock-based compensation is being expensed monthly over the vesting periods.
In January 2015, the Company granted its non-employee directors options to purchase a combined 26,000 shares of the Company’s common stock pursuant to the 2014 Equity Plan. The options vest one year after the date of grant and expire 10 years after the date of grant. The Company calculated the fair value of the options granted during January 2015 at approximately $72,000, using the Black-Scholes model with the following variables: weighted average exercise price of $4.17 (which was the closing sales price of the Company’s common stock on the date of grant); estimated option lives of 10 years; weighted average risk free interest rate of 1.77%; weighted average stock price volatility of 57.45%; and an estimated forfeiture rate of 0%. The $72,000 of stock-based compensation is being expensed monthly over the vesting periods.
follows:

  
For the Fiscal Years Ended August 31,
 
  2020  2019 
Expected term (years)  
6.00
   
5.80
 
Risk-free interest rate  
1.71
%
  
2.93
%
Expected volatility  
39.32
%
  
41.83
%
Expected dividend yield  0%  0%
Weighted average grant-date fair value 
$
4.19
  
$
4.60
 
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
During the fiscal yearyears ended August 31, 2015, 16,5002020 and 2019, 17,500 and 62,500 options were exercised. No options were exercised during the fiscal year ended August 31, 2017 or 2016.

The following table summarizes the combined stock option activity for the combined 2004 Incentive Plan and 2014 Equity Plan for the fiscal year ended August 31, 2017:2020:

  
Number
of Options
  
Weighted Average
Exercise Price
  
Weighted Average
Remaining
Contractual Term
  
Approximate
Aggregate
Intrinsic Value
 
Outstanding at August 31, 2018  
535,500
  
$
5.31
   
6.04
  
$
3,180,990
 
Granted  
82,500
  
$
10.48
         
Exercised  
(62,500
)
 
$
3.09
         
Forfeited or expired  
—
  
$
—
         
Outstanding at August 31, 2019
  
555,500
  
$
6.33
   
6.27
  
$
2,527,590
 
Granted  
130,000
  
$
10.41
         
Exercised  
(17,500
)
 
$
2.81
         
Forfeited or expired  
(6,500
)
 
$
6.08
         
Outstanding at August 31, 2020  
661,500
  
$
7.23
   
6.17
  
$
1,831,075
 
                 
Options exercisable at August 31, 2020
  
481,501
  
$
6.08
   
5.22
  
$
1,795,076
 

 
 
Number of Options
 
 
Weighted-Average Exercise Price
 
 
Weighted-Average Remaining Contractual Term
 
 
Approximate Aggregate Intrinsic Value
 
Outstanding at August 31, 2016
  338,000 
 $4.77 
 
 
 
 
 
 
Granted
  142,500 
 $5.47 
 
 
 
 
 
 
Exercised
  - 
 $- 
 
 
 
 
 
 
Forfeited or expired
  (15,000)
 $7.88 
 
 
 
 
 
 
Outstanding at August 31, 2017
  465,500 
 $4.88 
  6.30 
 $1,007,740 
 
    
    
    
    
Options exercisable at August 31, 2017
  318,000 
 $4.63 
  4.98 
 $1,358,140 
F-22
The following table summarizes the activity and value of non-vested options as of and for the fiscal year ended August 31, 2017:2020:

  
Number
of Options
  
Weighted Average
Grant Date
Fair Value
 
Non-vested options outstanding at August 31, 2019
  
152,499
  
$
4.03
 
Granted  
130,000
   
4.19
 
Vested  
(102,500
)
  
3.75
 
Forfeited  
—
   
—
 
Non-vested options outstanding at August 31, 2020
  
179,999
  
$
4.31
 
 
 
Number of Options
 
 
Weighted-Average Grant Date Fair Value
 
Non-vested options outstanding at August 31, 2016
  36,000 
 $2.89 
Granted
  142,500 
  3.67 
Vested
  (31,000)
  2.92 
Forfeited
  - 
  - 
Non-vested options outstanding at August 31, 2017
  147,500 
 $3.64 

All non-vested options are expected to vest. TheFor the years ended August 31, 2020 and 2019, the total fair value of options vested duringwas $384,400 and $297,100. For the fiscal years ended August 31, 2017, 20162020 and 2015 was $90,500 $216,900, and $280,700, respectively. The weighted average grant date2019, the weighted-average grant-date fair value of options granted duringwas $4.19 and $4.60.

For the fiscal years ended August 31, 2017, 20162020 and 2015 was $3.67, $2.89, and $2.78, respectively.
Share-based2019, share-based compensation expense for the fiscal years endedwas $517,000 and $336,200.

As of August 31, 2017, 2016 and 2015, was $233,200, $219,900, and $240,000, respectively.
At August 31, 2017,2020, the Company had unrecognized share-based compensation expenses totaling $461,100 relating to non-vested options that are expected to vest totaling $335,800.vest. The weighted-averageweighted average period over which these options are expected to vest is less than three1.7 years. The Company has not recorded any excess tax benefits to additional paid inpaid-in capital.

Warrants

As of August 31, 2017,2020, 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:

(i) 
The date that all of the Export Water is sold or otherwise disposed of,
(ii) 
The date that the CAA is terminated with respect to the original holder of the warrant, or
(iii) 
The date on which the Company makes the final payment pursuant to Section 2.1(r) of the CAA.

No warrants were exercised during fiscal 2017, 2016 or 2015.
2020 and 2019.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
NOTE 9 – SIGNIFICANT CUSTOMERS

Pursuant to the Rangeview Water Agreements and an Export Service Agreement entered into with the Rangeview District dated June 16, 2017, the
The Company primarily provides water and wastewater services on the Rangeview District’s behalf to the Rangeview District’s customers. SalesBecause the Rangeview District accounts for the majority of the Company’s water and wastewater service revenue, the Company has included the end-use customers of the Rangeview District who generate the most revenue for it on its list of significant customers. Additionally, the Company has presented the percentages of revenue from water and wastewater services and water and wastewater tap sales separately (versus by the water and wastewater resource development segment or total revenue) because it believes that provides a more meaningful presentation of the relevance of each customer to that service line. Lot sales are generated entirely through sales to three customers as noted below. The tables below present revenue generated from the Company's significant customers for each of the services presented.

For the year ended August 31, 2020 Water and wastewater metered services  Water and wastewater tap fees  
Land development
(Lot sales recognized)
 
Ridgeview Youth Services  
14
%
  
–
   
–
 
Conoco / Crestone Peak (O&G operations)  
45
%
  
–
   
–
 
All Sky Ranch Homes (1)  
22
%
  
–
   
–
 
All Wild Pointe Homes (2)  
9
%
  
4
%
  
–
 
Taylor Morrison  
–
   
28
%
  
32
%
KB Home  
–
   
38
%
  
26
%
Richmond Homes  
–
   
31
%
  
42
%
Combined totals presented  
90
%
  
100
%
  
100
%

(1) This represents the water and wastewater fees for all homes combined at Sky Ranch and not one individual home
(2) This represents the water and wastewater metered services and water and wastewater tap fees for all homes combined at Wild Pointe and not one individual home

For the year ended August 31, 2019 Water and wastewater metered services  Water and wastewater tap fees  
Land development
(Lot sales recognized)
 
Ridgeview Youth Services  
3
%
  
–
   
–
 
Conoco / Crestone Peak (O&G operations)  
74
%
  
–
   
–
 
All Sky Ranch Homes (1)  
–
   
–
   
–
 
All Wild Pointe Homes (2)  
3
%
  
6
%
  
–
 
Taylor Morrison  
–
   
26
%
  
34
%
KB Home  
–
   
29
%
  
34
%
Richmond Homes  
–
   
38
%
  
32
%
Combined totals presented  
80
%
  
100
%
  
100
%

(1) This represents the water and wastewater fees for all homes combined at Sky Ranch and not one individual home
(2) This represents the water and wastewater metered services and water and wastewater tap fees for all homes combined at Wild Pointe and not one individual home

The Ridgeview Youth Services customer accounted for approximately the same dollar sales year over year, but due to the decline in O&G operations revenue, the percentage increased in fiscal 2020 over 2019.

Because the Company provides services to the Rangeview District’s customers, and those customers pay the Rangeview District, which then remits amounts to the Company, the Company’s trade receivables at August 31, 2020 and 2019 from the Rangeview District comprise 81% and 40% of the balances. However, the receivable balances from the end-use customers that are owed to the Rangeview District, the majority of which in turn are owed to the Company, are comprised primarily of amounts owed by the home builders at Sky Ranch for tap fees. As of August 31, 2020, the three home builders accounted for 25%, 67% and 19%42% of the Company’s total waterreceivables balance, with all Sky Ranch homeowners combined accounting for 17% of the receivable balance and wastewater revenuesall Wild Pointe homeowners combined accounting for 14% of the receivable balance. As of August 31, 2019, the three home builders accounted for 5% of the receivables balance, with all Wild Pointe homeowners combined accounting for 26% of the receivable balance, and Conoco accounting for 57% of the receivable balance.

NOTE 10 – INCOME TAXES

The Company recorded income tax expense of $2.2 million and an income tax benefit of $1.3 million for the fiscal years ended August 31, 2017, 20162020 and 2015, respectively.2019. The Rangeview District had one significant customer,net expense during the Ridgeview Youth Services Center.fiscal year ended August 31, 2020, consisted of current income tax expense of $0 and deferred income tax expense of $2.2 million. The Rangeview District’s significant customer accounted for 21%, 55%, and 16%deferred tax expense consists of the usage of the Company’s total water$2.2 million net operating loss carryforwards and wastewater revenuesthe timing difference between book and tax depreciation of fixed assets.

The Company’s effective income tax rate was 24.4% and (36.4%) for the fiscal years August 31, 2020 and 2019. The Company’s effective tax rate was a benefit for 2019 due to the release of its valuation allowance on its deferred tax assets.

The Company paid Federal and State tax installments of $1,089,700 and $215,500, respectively, during fiscal year ended August 31, 2017, 2016 and 2015, respectively.
Revenues from two other customers directly and indirectly represented approximately 55%, 1%, and 75% of the Company’s water and wastewater revenues for2020. No taxes were paid during the fiscal yearsyear ended August 31, 2017, 2016 and 2015, respectively.  Of the two customers, one customer represented 25%, nil, and nil of the Company's water and wastewater revenues for the fiscal years ended August 31, 2017, 2016, and 2015, respectively, and the other customer represented 30%, 1%, and 75% of the Company's water and wastewater revenues for the fiscal years ended August 31, 2017, 2016, and 2015, respectively.
2019.
The Company had accounts receivable from the Rangeview District which accounted for 50% and 74% of the Company’s trade receivables balances at August 31, 2017 and 2016, respectively. Of the trade receivables from the Rangeview District, approximately 50% is related to water tap sales and 50% is related to water and wastewater service sales. The Company had accounts receivable from one other customer of approximately 46% and 16% at August 31, 2017 and 2016, respectively. Accounts receivable from the Rangeview District’s largest customer accounted for 19% and 63% of the Company’s water and wastewater trade receivables as of August 31, 2017 and 2016, respectively.
NOTE 10 – INCOME TAXES

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:

  For the Fiscal Years Ended August 31, 
  2020  2019 
Deferred tax assets (liabilities):      
Net operating loss carryforwards 
$
22,922
  
$
609,439
 
AMT credit carryforward  
—
   
—
 
Accrued compensation  
166,948
   
113,559
 
Deferred revenues  
88,994
   
149,895
 
Depreciation and depletion  
(1,700,771
)
  
(46,408
)
Non-qualified stock options
  
490,952
   
410,633
 
Other  
45,323
   
46,128
 
Valuation allowance  
—
   
—
 
Net deferred tax (liability) asset 
$
(885,632
)
 
$
1,283,246
 

 
 
For the Fiscal Years Ended August 31,
 
 
 
2017
 
 
2016
 
Deferred tax assets:
 
 
 
 
 
 
  Net operating loss carryforwards
 $2,893,600 
 $2,393,200 
  Deferred revenue
  316,400 
  344,300 
  Depreciation and depletion
  289,200 
  247,400 
  Other
  88,000 
  65,600 
  Valuation allowance
  (3,587,200)
  (3,050,500)
  Net deferred tax asset
 $- 
 $- 
F-24
As of August 31, 2020 and August 31, 2019 the Company had no liability for unrecognized tax benefits.

The Company has recordedmaintained a valuation allowance againston the net deferred tax assets asasset other than AMT credit carryforwards through fiscal year August 31, 2018. During the fiscal year ended August 31, 2019, the Company had determined it is more likely than not that all or some portion of specificthe Company will realize its deferred tax assets, will not be realized,which consist primarily due tonet operating loss carryforwards. The Company assessed the fact thatrealizability of its deferred tax assets using all available evidence; considering both historical results and projections of profitability for the reasonably foreseeable future periods. As a result of the Company’s annual reassessment of its conclusions regarding the realization of its deferred tax assets at each financial reporting date, the Company has generatedconcluded that its deferred tax assets were realizable, and therefore, the valuation allowance was no longer necessary. By releasing the valuation allowance, the Company recognized a cumulative net loss position overdeferred tax benefit of approximately $1,284,100 which positively impacted the past three fiscal years.Company’s results of operations and financial position.

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

  For the Fiscal Years Ended August 31, 
  2020  2019 
Expected benefit from federal taxes at statutory rate of 21% for the years 2020 and 2019 
$
1,873,021
  
$
740,870
 
State taxes, net of federal benefit  
326,441
   
129,123
 
Permanent and other differences  
2,137
   
10,388
 
NOL true up  
(8,240
)
  
225,067
 
Non-qualified stock options adjustment  
—
   
(348,441
)
Other  
(24,566
)
  
(26,202
)
Change in valuation allowance  
—
   
(2,014,000
)
Total income tax expense / (benefit) 
$
2,168,793
  
$
(1,283,195
)

 
 
For the Fiscal Years Ended August 31,
 
 
 
2017
 
 
2016
 
 
2015
 
Expected benefit from federal taxes at statutory rate of 34%
 $(571,500)
 $(420,300)
 $(195,500)
State taxes, net of federal benefit
  (55,500)
  (40,700)
  (19,000)
Permanent and other differences
  90,300 
  84,500 
  91,900 
Change in valuation allowance
  536,700 
  376,500 
  122,600 
Total income tax expense / (benefit)
 $- 
 $- 
 $- 
At August 31, 2017,2020, the Company has $7.9$109,200 of net operating loss carryforwards available for income tax purposes. The net operating loss carryforwards expire at various times beginning in 2036 and ending in 2038 for federal income tax purposes and expire at various times beginning in 2035 and ending in 2036 for state income tax purposes. At August 31, 2019, the Company had $2.5 million of net operating loss carryforwards available for income tax purposes, which expire between fiscal 2032 and 2037.
purposes.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
No net operating loss carryforwards expired during the fiscal yearsyear ended August 31, 2017, 20162020 or 2015.2019.

NOTE 11 – 401(k) PLAN

The Company maintains athe Pure Cycle Corporation 401(k) Profit Sharing Plan (the “Plan”“401(k) Plan”), a defined contribution retirement plan for the benefit of its employees. The Plan is currently a salary deferral only plan, and at this timeIn fiscal 2020, the Company does notimplemented a 401(k) Plan match, for which the Company contributes 1.5% if an employee contributions.contributes 3% or more up to a maximum contribution 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 2118 or older, who have been employees of the Company for at least sixthree months. During

For the fiscal years ended August 31, 2017, 20162020 and 2015,2019, the Company paid feesrecorded total expense of $ 4,200, $5,000$28,900 and $3,800, respectively, for$6,000, related to the administration of the401(k) Plan.

NOTE 12 – LITIGATION LOSSCOMMITMENTS 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, 2020, the Company had no contingencies where the risk of material loss was probable.

NOTE 13 – SEGMENT REPORTING

Prior
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 the saleevaluate performance and make operating decisions. The Company has identified its CODM as its Chief Executive Officer.

Because of the Company’s agricultural assets andmethods used by the residual operations through December 31, 2015,CODM to allocate resources, the Company operated primarily inhas identified two lines of business: (i)operating segments which meet GAAP segment disclosure requirements, namely the wholesale water and wastewater businessresource development segment and (ii) the agricultural farming business. land development segment.

The Company has discontinued its agricultural farming operations. Currently the Company operates its wholesale water and wastewater services segment as its only line of business. The wholesale water and wastewater servicesresource development business includes selling water serviceservices to customers, which water is then 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. As partThe land development segment includes all the activities necessary to develop and sell finished lots, which as of August 31, 2020 and 2019, was done exclusively at the Company’s Sky Ranch development, the company is entering into contracts for the sale of lots, see Note 16 - Subsequent Event for further discussion.  The Company anticipates that the real estate sales will be a separate segmentMaster Planned Community.

O&G operations, although material in fiscal 2018.  As of and for the year ended August 31, 2017, there were no real estate revenues, or profit, and carrying cost of the real estate is less than 10% of the Company’s total assets.  Oil and gas royalties and licenses,certain years, are deemed a passive activity andas the CODM does not an operating business activity, andactively allocate resources to these projects; therefore, arethis 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, 2020 
  
Water and
wastewater resource
development
  
Land
development
  Corporate  Total 
Total revenue 
$
6,920,815
  
$
18,934,400
  
$
—
  
$
25,855,215
 
                 
Cost of revenue  
(1,074,450
)
  
(15,869,547
)
  
—
   
(16,943,997
)
Depletion and depreciation
  
(1,367,160
)
  
—
   
—
   
(1,367,160
)
Total cost of revenue  
(2,441,610
)
  
(15,869,547
)
  
—
   
(18,311,157
)
                 
Gross Margin  
4,479,205
   
3,064,853
   
—
   
7,544,058
 
Reimbursement of construction costs - related party
  
—
   
6,275,500
   
—
   
6,275,500
 
Gross Margin after reimbursables
 
$
4,479,205
  
$
9,340,353
  
$
—
  
$
13,819,558
 
                 
Pretax operating income
 
$
4,479,205
  
$
3,064,853
  
$
(6,030,683
)
 
$
1,513,375
 
                 
Total long-term assets 
$
56,266,579
  
$
6,975,289
  
$
26,519,188
  
$
89,761,056
 

  Year Ended August 31, 2019 
  
Water and
wastewater resource
development
  
Land
development
  Corporate  Total 
Total revenue 
$
8,405,520
  
$
11,955,989
  
$
—
  
$
20,361,509
 
                 
Cost of revenue  
(1,670,508
)
  
(11,304,962
)
  
—
   
(12,975,470
)
Depletion and depreciation  
(968,229
)
  
—
   
—
   
(968,229
)
Total cost of revenue  
(2,638,737
)
  
(11,304,962
)
  
—
   
(13,943,699
)
                 
Gross Margin 
$
5,766,783
  
$
651,027
  
$
—
  
$
6,417,810
 
                 
Pretax operating income 
$
5,766,783
  
$
651,027
  
$
(3,419,149
)
 
$
2,998,661
 
                 
Total long-term assets 
$
51,588,079
  
$
16,866,542
  
$
15,266,783
  
$
83,721,404
 

NOTE 14 – RELATED PARTY TRANSACTIONS

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”). TheDuring the years ended August 31, 2020 and 2019, the Company provided funding of $198,200, $113,600$17,400 and $78,600 for$22,200 to the fiscal years ended August 31, 2017, 2016, and 2015, respectively.Rangeview District related to this Participation Agreement.

Through the WISE Financing Agreement, to date the Company has made payments totaling $3,114,100$6,316,600 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. The amounts are included in Investments in Waterwater and Water Systemswater systems on the Company’s balance sheet as of August 31, 2017. 2020.  During the fiscal year ended August 31, 2020, the Company, through the Rangeview District, purchased an additional 400 acre feet of WISE water for $582,200.

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, 2020, WISE water was $5.77 per thousand gallons and such rate will remain in effect through calendar 2021. In addition, the Company anticipates spendingpays certain system operational and construction costs. If a WISE member, including the following overRangeview District, does not need its WISE water each year or a member needs additional water, the next five fiscalmembers can trade and/or buy and sell water amongst themselves.

During the years ended August 31, 2020 and 2019, the Company provided $2.8 million and $1.5 million of financing to the Rangeview District to fund the Rangeview District’s obligation to purchase of itsWISE 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 water transmission lineoperational and additional facilities, wateroverhead costs of SMWA and related assets for WISE and to fund operations and water deliveriesconstruction activities related to WISE:delivery of WISE water.
 
Estimated WISE Costs
 
 
 
For the Fiscal Years Ended August 31,
 
 
 
2018
 
 
2019
 
 
2020
 
 
2021
 
 
2022
 
Operations
 $51,800 
 $51,800 
 $51,800 
 $51,800 
 $51,800 
Water Delivery
  232,000 
  348,000 
  493,000 
  738,000 
  897,000 
Capital
  338,100 
  1,555,400 
  74,200 
  - 
  - 
Other
  23,600 
  86,600 
  23,600 
  68,300 
  83,200 
 
 $645,500 
 $2,041,800 
 $642,600 
 $858,100 
 $1,032,000 

The Company has outstanding loansnotes receivable of $991,900 to$1,078,600 in the aggregate from the Rangeview District and the Sky Ranch Districts (defined below),CAB, which are related parties, as discussed below:

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of Rangeview.the Rangeview District. The Company owns certain rights and real property interests which encompass the current boundaries of Rangeview.the Rangeview District. Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (the “Sky Ranch Districts”) and the Sky Ranch CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property (the “Sky Ranch Districts”).property. The current members of the board of directors of the Rangeview District, andeach Sky Ranch DistrictsDistrict, and the Sky Ranch CAB consist of three employees of the Company (including the Company’s President) and twoone independent board members.
member.

The Rangeview District

In 1995, the Company extended a loan to the Rangeview District. The loan provided for borrowings of up to $250,000, is unsecured, and bears interest based on the prevailing prime rate plus 2% (6.25%(5.25% at August 31, 2017)2020). The maturity date of the loan is December 31, 2020. 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 $776,400 balance ofOf the notes receivable at August 31, 2017,2020 balance in Notes receivable - related parties, $1,050,000 includes borrowings by the Rangeview District of $393,400$598,500 and accrued interest of $383,000. The $628,500 balance of$451,500. Of the notes receivable at August 31, 2016,2019 balance in Notes receivable - related parties, $961,700 includes borrowings by the Rangeview District of $260,200$546,500 and accrued interest of $368,300.$414,800.

Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5

The Company hashad been providing funding to the Sky Ranch Districts. Each year,Districts, beginning in 2012 the Company has enteredthrough 2016 by entering into anannual Operation Funding AgreementAgreements with one of the Sky Ranch Districts obligating the Company to advance funding to the Sky Ranch District for the operation and maintenance expenses for the then currentthen-current calendar year. All payments are subject to annual appropriations by theThe Sky Ranch District in its absolute discretion. The advances bypaid the outstanding note receivable to the Company accrue interest at a ratein November 2017. As of 8% per annum from the date of the advance.August 31, 2018, there was no outstanding balance under these agreements.

In November 2014, but effective as of January 1, 2014, the Company entered into a Facilities Funding and Acquisition Agreement with a Sky Ranch District obligating the Company to either finance district improvements or to construct improvements on behalf of the Sky Ranch District subject to reimbursement. Improvements subjectEach advance or reimbursable expense accrued interest at a rate of 6% per annum. No payments were required by the Sky Ranch District unless and until the Sky Ranch District issued bonds in an amount sufficient to reimburse the Company for all or a portion of the advances and costs incurred. The Sky Ranch CAB agreed to repay the amounts owed by the Sky Ranch District under this agreement are determinedand the agreement was terminated pursuant to the Sky Ranch FFAA (defined and described below).

Sky Ranch Community Authority Board

Pursuant to a mutuallycertain 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 budget. Each year in September, the parties arelist of public improvements for Sky Ranch with respect to mutually determine the improvements requiredearthwork, erosion control, streets, drainage, and landscaping at an estimated cost of $13.2 million for the following yearcalendar years 2018 and finalize a budget by the end of October.2019. Each advance or reimbursable expense accrues interest at a rate of 8%6% per annum.

On September 18, 2018 and effective as of November 13, 2017, the parties entered into a series of agreements that superseded and consolidated the previous agreements into one primary agreement, the Facilities Funding and Acquisition Agreement (the “Sky Ranch FFAA”), pursuant to which:


●
the Sky Ranch CAB agreed to repay the amounts owed by Sky Ranch Metropolitan District No. 5 to the Company totaling $857,900, and the previous Facilities Funding and Acquisition Agreement entered into between the Company and Sky Ranch Metropolitan District No. 5 in 2014 was terminated;

●
the PF Agreement and a June 2018 Funding Acquisition Agreement between the Sky Ranch CAB and the Company totaling $2.4 million were terminated;

●
the Sky Ranch CAB acknowledged all amounts owed to the Company under the terminated agreements totaling $3.3 million, as well as amounts the Company incurred to finance the formation of the Sky Ranch CAB; and

●
the Company agreed to fund an agreed upon list of improvements to be constructed by the Sky Ranch CAB with an estimated cost of $30,000,000 (including improvements already funded) on an as-needed basis for calendar years 2018–2023.

All amounts owed under the terminated agreements and all amounts advanced under the Sky Ranch FFAA, collectively totaling $20 million, bear interest at a rate of 6% per annum. No payments arepayment is required byof the Sky Ranch DistrictsCAB for advances made to the Sky Ranch CAB or expenses incurred related to construction of improvements unless and until the Sky Ranch CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of advances or other expenses incurred. The Sky Ranch CAB agrees to exercise reasonable efforts to issue bonds to reimburse the Company subject to certain limitations. In addition, the Sky Ranch CAB agrees to utilize any available moneys not otherwise pledged to payment of debt, used for operation and maintenance expenses, or otherwise encumbered, to reimburse the Company. Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058, shall be deemed forever discharged and costs incurred.satisfied in full.

The $215,500As of August 31, 2020, the balance of the Company’s advances for improvements, excluding interest, net of costs reimbursed in November 2019, to the Sky Ranch CAB totaled $15.9 million, of which $0.5 million is included in Land development inventories and $15.4 million was expensed through Land development construction costs. 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. Based on the specific costs being reimbursed by the Sky Ranch CAB, the Company records those costs that have been previously expensed in cost of sales as other income and those costs that remain capitalized as land development inventory costs as a reduction of the related land development inventory costs held in Land development inventories. Any reimbursable costs repaid after all capitalized expenses and lot revenues have been fully recognized are recorded as Other income.

Refer to Note 2 – Summary of Significant Accounting Policies - Revenue Recognition - Land Development Activities for a summary of reimbursable costs incurred as of August 31, 2020, payments made by the Sky Ranch CAB, and any outstanding reimbursable amounts.

In 2018, the Company advanced the Sky Ranch CAB $2.3 million to begin construction of improvements on the Sky Ranch property. In 2019, the Company advanced the Sky Ranch CAB $17.7 million for the Sky Ranch property. The advances have been used by the Sky Ranch CAB to pay for construction of public improvements and have been recorded as Land development inventories and subsequently expensed through Land development construction costs in the accompanying consolidated financial statements. If the Sky Ranch Districts and/or the Sky Ranch CAB issues bonds and the Sky Ranch CAB reimburses the Company, the reimbursement will reduce any applicable capitalized costs remaining in Inventories.

In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the Sky Ranch CAB obligating the Company to advance funding to the Sky Ranch CAB for operation and maintenance expenses for the 2018 and 2019 calendar years. All payments are subject to annual appropriations by the Sky Ranch CAB in its absolute discretion. The advances by the Company accrue interest at the rate of 6% per annum from the date of the advance. $28,600 of the balance of the Notes receivable – related parties at August 31, 2017,2020, includes advancesborrowings by the Sky Ranch CAB of $195,000$25,500 and accrued interest of $20,500. Upon$3,100. The $27,100 balance of the Sky Ranch District’s ratification of payment, the amount was reclassified to short-term and was recorded as part of Notes receivable – related parties. Subsequent to fiscal year end,parties at August 31, 2019, includes borrowings by the Sky Ranch District paid the outstanding note receivable to the Company.
Nelson Pipeline Constructors LLC
On October 12, 2016, the Audit CommitteeCAB of the Company’s board$25,500 and accrued interest of directors approved accepting a bid submitted by Nelson Pipeline Constructors LLC to construct a pipeline connecting its Sky Ranch water system to Rangeview’s water system for approximately $4.2 million (the “Nelson Bid”). Nelson Pipeline Constructors LLC is a wholly owned subsidiary of Nelson Infrastructure Services LLC, a company in which Patrick J. Beirne owns a 50% interest. In addition, Mr. Beirne, a director of Pure Cycle, is Chairman and Chief Executive Officer of each of Nelson Pipeline Constructors LLC and Nelson Infrastructure Services LLC. Since Mr. Nelson is the 50% owner of the parent company of Nelson Pipeline Constructors LLC, Mr. Nelson’s interest in the transaction is approximately $2.1 million without taking into account any profit or loss from the Nelson Bid. Pursuant to the Company’s policies for review and approval of related party transactions, the Nelson Bid was reviewed and approved by the Audit Committee and by the board of directors, with Mr. Beirne abstaining.
$1,600.

PURE CYCLE CORPORATIONF-28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
August 31, 2017, 2016 and 2015
NOTE 15 – UNAUDITED QUARTERLY FINANCIAL DATA
 
Quarterly results of operations
 
 
 
2017
 
 
2016  
 
 
 
Three months ended
 
 
Three months ended  
 
 
 
30 Nov
 
 
28 Feb
 
 
31 May
 
 
31 Aug
 
 
30 Nov
 
 
29 Feb
 
 
31 May
 
 
31 Aug
 
 
 
(In thousands, except per share data)
 
Total revenues
 $199 
 $237 
 $134 
 $658 
 $126 
 $76 
 $101 
 $149 
Gross margin
  54 
  68 
  (33)
  336 
  (7)
  (44)
  (34)
  8 
Operating loss
  (464)
  (455)
  (631)
  (581)
  (472)
  (557)
  (533)
  (618)
Discontinued operations
  (19)
  (3)
  (11)
  1 
  (3)
  (29)
  (61)
  13 
Net loss
 $(338)
 $(317)
 $(554)
 $(501)
 $(97)
 $(271)
 $(422)
 $(521)
 
    
    
    
    
    
    
    
    
Basic and diluted
    
    
    
    
    
    
    
    
  loss per share
 $(0.01)
 $(0.01)
 $(0.02)
 $(0.02)
  * 
 $(0.01)
 $(0.02)
 $(0.03)
* Amount is less than $.01 per share
    
    
    
    
    
    
    
    
The following item had a significant impact on the Company’s net income (loss):
●
In fiscal 2017, the Company sold approximately $478,500 ($80,300, $141,500 and $256,700 in 2017 fiscal Q1, Q2 and Q4, respectively) in water related to oil and gas activities as compared to nil in fiscal 2016.Table of Contents
NOTE 1615 – SUBSEQUENT EVENTEVENTS

In June 2017,
The Company, through its wholly-owned subsidiary PCY Holdings, LLC, entered into contracts for the purchase and sale agreementsof real estate in its second filing at Sky Ranch (collectively, the “Purchase and Sale Contracts”) with three separate home builders pursuanteach of KB Home Colorado Inc. (“KB Home”), Melody Homes, Inc., a wholly-owned subsidiary of DR Horton, Inc. (“Melody Home”), Challenger Denver, LLC (“Challenger”), and Meritage Homes of Colorado, Inc. (“Meritage Home”), collectively referred to whichas the Company agreed“Builders.”  The Purchase and Sale Contracts with KB Home and Melody were entered into on October 30, 2020.  The Purchase and Sale Contracts with Meritage and Challenger were entered into on November 2, 2020. Each Purchase and Sale Contract provides that, upon the terms and subject to the conditions set forth in the Purchase and Sale Contract, PCY Holdings will sell, and each builder agreed tothe Builder will purchase, a certain number (totaling 506) of single-family, detachedplatted residential lots at the Sky Ranch property. Each builderBuilder is required to purchase water and sewerwastewater taps for the lots from the Rangeview District.

The closing of the transactions contemplated by each Purchase and Sale Contract is subject to customary closing conditions, including, among others, the builder’sBuilder’s completion to its satisfaction of a title review and other due diligence of the property, the accuracy of the representations and warranties made by the Company contained in the Purchase and Sale Contract, and a commitment by the title company to issue to the builderBuilder a title policy, subject to certain conditions. Each builder hadKB Home, Meritage, and Challenger have a 60-day due diligence period, during which it hadand Melody has a 75-day due diligence period. Within seven business days of the right to terminate theexecution of each Purchase and Sale Contract, and receive a full refund of itsthe Builders are obligated to make an earnest money deposit. The initial due diligence period was extended. SubsequentPursuant to year end, on November 10, 2017, each builder completed its due diligence period and agreed to continue with its respective Purchase and Sale Contract.
The Company is obligated, pursuant to thecertain Purchase and Sale Contracts, Builders are required to make additional earnest money deposits after the due diligence period and/or separate Lot Development Agreements (the “Lot Development Agreements” and, together withfinal approval of the entitlements for the property. If a Purchase and Sale Contracts,Contract is terminated prior to the “Builder Contracts”),expiration of the due diligence period, then the earnest money deposit must be refunded to construct infrastructurethe Builder. Otherwise, the earnest money deposit and other improvements, such as roads, curbs and gutters, park amenities, sidewalks, street and traffic signs, water and sanitary sewer mains and stubs, storm water management facilities, and lot grading improvements for deliverydeposits will be applied to the payment of finishedthe purchase price of the lots at closing in accordance with a specified takedown schedule or be paid to the Company, subject to certain conditions. Pursuant to each builder. Pursuant to the Builder Contracts,Purchase and Sale Contract, the Company must causeuse commercially reasonable efforts to obtain final approval of the Rangeview District to install and construct off-site infrastructure improvements (i.e., drainage and storm water retention ponds, a wastewater reclamation facility, and wholesale water facilities)entitlements for the provisionproperty on or before nine months after the expiration of water and wastewater servicethe due diligence period, but the Company will have the right to extend the property. In conjunction with approvals with Arapahoe Countydate for obtaining final approval of the Sky Ranch project, The Company and/orentitlements for up to six months after the Rangeview District and the Sky Ranch Districts are obligated to deposit into an account the anticipated costs to install and construct substantially all the off-site infrastructure improvements (which include drainage, wholesale water and wastewater, and entry roadway), which is estimated to be approximately $10.2 million.initial nine-month period.
 
The Company estimates that the development of the finished lots for the first phase (506second filing (nearly 900 lots) of Sky Ranch will require an estimatedcost $65.6 million. The total capital of approximately $27.8 millionproceeds from the Purchase and estimates lot sales to home builders will generate approximately $35 million providing a projected margin on lots of approximately $7.2 million.  The cost of developing lots togetherSales Contracts with the sale offour builders for the 789 finished lots are expectedcontracted for is $63.4 million. If the remaining 100+ lots, which have been reserved for future use, were sold at prices comparable to occur over several quarters and the first 789 lots, the total sales proceeds for all of filing two would be $72.6 million. The timing of cash flows will include payments for 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.  Utility revenues are derived from tap fees (which vary depending
Additionally, on lot size, house size, and amountNovember 3, 2020, the Company completed the sale of irrigated turf) and usage fees (which are monthly water and wastewater fees). The currentthe remaining lots in the initial Sky Ranch water tap fees are $26,650 (per SFE), and wastewater taps fees are $4,659 (per SFE).filing for consideration of $1.6 million.
 

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

As discussed in our Current Report on Form 8-K filed on January 17, 2017, GHP Horwath, P.C. (“GHP”) resigned as our independent registered public accounting firm. GHP resigned because the partners and employees of GHP joined Crowe Horwath LLP (“Crowe”). On January 16, 2017, the Audit Committee of our board of directors engaged Crowe to serve as the independent registered public accounting firm for the Company effective as of that date.None

During the fiscal years ended August 31, 2015 and 2016 and through January 13, 2017, we did not have any disagreements with GHP on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to GHP’s satisfaction, would have caused GHP to make reference thereto in its reports on our financial statements for the relevant periods. During the fiscal years ended August 31, 2015 and 2016 and through January 13, 2017, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.
Item 9A – Controls and Procedures
(a)            
Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive and financial officer, as appropriate, to allow timely decisions regarding required disclosures. The PresidentOur Chief Executive Officer and our Chief Financial Officer (one person) evaluated the effectiveness of disclosure controls and procedures as of August 31, 2017,2020, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the PresidentChief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
(b)            
Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. The Exchange Act defines internal control over financial reporting as a process designed by, or under the supervision of, our executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:


●
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

●
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and

●
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
●
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
●
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and our directors; and
●
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of our internal control over financial reporting as of August 31, 2017. In making this assessment, we usedbased on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework (“2013(the “2013 COSO Framework”). Based on ourthat assessment, we determinedmanagement has concluded that, as of August 31, 2017,2020, our internal control over financial reporting wasis effective based on thosethese criteria.

A material weakness is a deficiency, or combination of deficiencies, in our internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
(c)            
ReportRemediation of Material Weaknesses Completed

Management identified control deficiencies related to our identification of expense accruals of costs incurred from related parties and the Independent Registered Public Accounting Firm
The effectivenesspreparation of our income tax provision that constituted material weaknesses in our internal control over financial reporting as of August 31, 2017, has2019, which continued as of May 31, 2020.  With oversight from our Audit Committee, management dedicated itself to remediating the control deficiencies that gave rise to the material weaknesses in our control over financial reporting.  As of August 31, 2020, the following measures, among others, have been audited by Crowe Horwath LLP, an independent registered public accounting firm,implemented to address the material weaknesses identified as stated in its attestation report which is included in Item 8 –Consolidated Financial Statementsof August 31, 2019 and Supplementary Data of this Annual Report on Form 10-K.May 31, 2020:

45
(d)          Table of Contents
We initiated compensating controls, including designating an additional person to review the completeness of our expense accruals;
We enhanced and revised the design of existing controls and procedures to improve our identification of expense accruals of costs;
We initiated compensating controls, including designating an external tax consulting firm and creating a new tax provision model enhancing our ability to review and confirm our quarterly income tax provisions are correct and complete; and
As described below, we hired a Chief Financial Officer separate from the President, who is expected to provide additional expertise and oversight of our internal control over financial reporting.


On April 1, 2020, Kevin B. McNeill, joined the Company as Vice President, and the board of directors of the Company voted to elect Mr. McNeill as Chief Financial Officer, principal accounting officer and principal financial officer of the Company effective as of April 10, 2020. Mark W. Harding continues to serve as the Company’s President and Chief Executive Officer, but relinquished his position as Chief Financial Officer, principal accounting officer and principal financial officer effective as of April 10, 2020.

As a result of these actions, management believes that the previously identified material weaknesses were remedied at August 31, 2020. Although management believes that the material weaknesses in our internal control over financial reporting have been remediated, we expect to continue implementing measures to improve our internal control over financial reporting, including upgrading our financial accounting systems and recruiting further accounting and/or finance staff, as necessary, in order to maintain an effective control environment while growing our business.

We cannot assure that any additional material weaknesses will not arise in the future.

Changes in Internal Controls

NoExcept as noted above, no changes were made to our internal control over financial reporting during our most recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting.

Item 9B – Other Information

Effective as of June 16, 2017, we entered into the Export Service Agreement (defined herein as the “Off-Lowry Service Agreement”) with the Rangeview District. This agreement confirms the prior understanding of the parties that we are the Rangeview District’s exclusive provider of water and wastewater services for customers located outside of its Lowry Range service area. Pursuant to the Off-Lowry Service Agreement, we design, construct, operate and maintain the Rangeview District’s water and wastewater systems and the systems of other communities that have service contracts with the Rangeview District to provide wholesale water and wastewater services to the Rangeview District’s customers that are not on the Lowry Range (currently, Wild Pointe Ranch and Sky Ranch). In accordance with the terms of the Off-Lowry Service Agreement, the Rangeview District will pay us 100% of water tap fees and 98% of water usage fees received by the Rangeview District for such services after deducting any royalties to the Land Board, if applicable. In addition, the Rangeview District will pay us 100% of wastewater tap fees and 90% of monthly service and usage fees for wastewater services received by the Rangeview District from customers off the Lowry Range.None.
We are obligated to provide such services in a commercially reasonable manner consistent with prudent water and wastewater provider practices in Colorado, as applicable, to meet the demands of the Rangeview District’s customers. The Off-Lowry Service Agreement remains in effect until all service obligations of Rangeview to customers located outside of the Lowry Range expire or are otherwise terminated.

PART III

Item 10 – Directors, Executive Officers and Corporate Governance

Our board of directors has adopted a Code of Business Conduct and Ethics applicable to all of our directors, officers and employees whichthat is available on our website atwww.purecyclewater.com. We intend to disclose any amendments to or waivers from the provisions of our Code of Business Conduct and Ethics that are applicable to our principal executive officer, principal financial officer or principal accounting officer and that relate to any element of the SEC’s definition of code of ethics by posting such information on our website, in a press release, or on a Current Report on Form 8-K.

Information required by this item will be contained in, and is incorporated herein by reference to, our definitive Proxy Statement pursuant to Regulation 14A promulgated under the Exchange Act for the Annual Meeting of Shareholders to be held in January 2018,2021, which is expected to be filed on or about December 8, 2017 1, 2020 (the “Proxy Statement”).

Item 11 – Executive Compensation

The information required by this item will be included in, and is incorporated herein by reference to, our Proxy Statement.

Item 12 – Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item will be included in, and is incorporated herein by reference to, our Proxy Statement.

Item 13 – Certain Relationships and Related Transactions, and Director Independence

The information required by this item will be included in, and is incorporated herein by reference to, our Proxy Statement.

Item 14 – Principal AccountantAccounting Fees and Services

The information required by this item will be included in, and is incorporated herein by reference to, our Proxy Statement.

PART IV

Item 15 – Exhibits and Financial Statement Schedules

(a)Documents filed as part of this Annual Report on Form 10-K


(1)
Financial Statements
. See “Index to Consolidated Financial Statements and Supplementary Data” in Part II, Item 8 of this Annual Report on Form 10-K.

 (2)
Financial Statement Schedules
. All schedules are omitted either because they are not required or the required information is shown in the consolidated financial statements or notes thereto.


(3)
Exhibits
. The exhibits listed on the accompanying “Exhibit Index” are filed or incorporated by reference as part of this Annual Report on Form 10-K, unless otherwise indicated.

Item 16 – Form 10-K Summary

None.

47
SIGNATURES
Pursuant to the requirementsTable of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.Contents
PURE CYCLE CORPORATION
/s/Mark W. Harding

Mark W. Harding, President and Chief Financial Officer
November 15, 2017

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SignatureTitleDate
/s/ Mark W. Harding
President,
Chief Financial Officer and Director
November 15, 2017
Mark W. Harding(Principal Executive Officer, Principal Financial and Accounting Officer)
/s/ Harrison H. Augur
Harrison H. AugurChairman, DirectorNovember 15, 2017
/s/ Patrick J. Beirne
Patrick J. BeirneDirectorNovember 15, 2017
/s/ Arthur G. Epker III
Arthur G. Epker IIIDirectorNovember 15, 2017
/s/ Richard L. Guido
Richard L. GuidoDirectorNovember 15, 2017
/s/ Peter C. Howell
Peter C. HowellDirectorNovember 15, 2017

EXHIBIT INDEX

Exhibit Number
Description
3.1
Articles of Incorporation of the Company. Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on December 14, 2007.
3.2
Bylaws of the Company. Incorporated by reference to Appendix C to the Proxy Statement on Schedule 14A filed on December 14, 2007.
4.1
Specimen Stock Certificate. Incorporated by reference to Exhibit 4.1 to Quarterly Report on Form 10 Q for the fiscal quarter ended February 28, 2015.
4.2
Description of Capital Stock. Incorporated by reference to Exhibit 4.2 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
10.1
2004 Incentive Plan, effective April 12, 2004. Incorporated by reference to Exhibit F to the Proxy Statement for the Annual Meeting held on April 12, 2004. **
10.2
Wastewater Service Agreement, dated January 22, 1997, by and between the Company and the Rangeview Metropolitan District. Incorporated by reference to Exhibit 10.3 to the Annual Report on Form 10-KSB for the fiscal year ended August 31, 1998.
10.3
Comprehensive Amendment Agreement No. 1, dated April 11, 1996, by and among Inco Securities Corporation, the Company, the Bondholders, Gregory M. Morey, Newell Augur, Jr., Bill Peterson, Stuart Sundlun, Alan C. Stormo, Beverlee A. Beardslee, Bradley Kent Beardslee, Robert Douglas Beardslee, Asra Corporation, International Properties, Inc., and the Land Board. Incorporated by reference to Exhibit 10.7 to the Quarterly Report on Form 10-QSB for the period ended May 31, 1996.
10.4
Agreement for Sale of Export Water dated April 11, 1996 by and between the Company and the Rangeview Metropolitan District. Incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-QSB for the fiscal quarter ended May 31, 1996.
10.5
Bargain and Sale Deed among the Land Board, the Rangeview Metropolitan District and the Company dated April 11, 1996. Incorporated by reference to Exhibit 10.18 to Amendment No. 1 to Registration Statement on Form SB-2, filed on June 7, 2004, Registration No. 333-114568.
10.6
Agreement for Water Service dated August 3, 2005 among the Company, Rangeview Metropolitan District and Arapahoe County incorporated by reference to Exhibit 10.24 to the Current Report on Form 8-K filed on August 4, 2005.
10.7
Amendment No. 1 to Agreement for Water Service dated August 25, 2008, between the Company and Arapahoe County. Incorporated by reference to Exhibit 10.36 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2008.
10.8
Paid-Up Oil and Gas Lease dated March 14, 2011, between the Company and Anadarko E&P Company, L.P. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on March 15, 2011.
10.9
Surface Use and Damage Agreement dated March 14, 2011, between the Company and Anadarko E&P Company, L.P. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on March 15, 2011.
10.10
2014 Equity Incentive Plan, effective April 12, 2014. Incorporated by reference to Appendix A to the Proxy Statement for the Annual Meeting held on January 15, 2014. **

Exhibit Number
10.11
Description
10.11
2014 Amended and Restated Lease Agreement, dated July 10, 2014, by and between the Land Board, the Rangeview Metropolitan District, and the Company. Incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed on July 14, 2014.

Exhibit Number
Description
10.12
2014 Amended and Restated Service Agreement, dated July 10, 2014, by and between the Company and the Rangeview Metropolitan District. Incorporated by reference to Exhibit 10.5 to the Current Report on Form 8-K filed on July 14, 2014.
10.13
Rangeview/Pure Cycle WISE Project Financing and Service Agreement, effective as of December 22, 2014. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 30, 2014.
10.14
South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013. Incorporated by reference to Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2014.
10.15
Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013, among the City and County of Denver acting through its Board of Water Commissioners, the City of Aurora acting by and through its Utility Enterprise, and South Metro WISE Authority. Incorporated by reference to Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2014.
10.16
Agreement for Purchase and Sale of Western Pipeline Capacity, dated November 19, 2014, among the Rangeview Metropolitan District and certain members of the South Metro WISE Authority. Incorporated by reference to Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2014.
10.17
Water Service Agreement by and between Rangeview Metropolitan District, acting by and through its Water Activity Enterprise, and Elbert & Highway 86 Commercial Metropolitan District, acting by and through its Water Enterprise, dated as of December 15, 2016. Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 19, 2016.
10.18
Export Service Agreement, effective as of June 16, 2017, between the Company and the Rangeview Metropolitan District. *

Incorporated by reference to Exhibit Number
Description10.18 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2017
10.19
Contract for Purchase and Sale of Real Estate, dated June 27, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by First Amendment to Contract for Purchase and Sale of Real Estate, dated August 28, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Second Amendment to Contract for Purchase and Sale of Real Estate, dated August 29, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Third Amendment to Contract for Purchase and Sale of Real Estate, dated September 8, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Fourth Amendment to Contract for Purchase and Sale of Real Estate, dated September 20, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Fifth Amendment to Contract for Purchase and Sale of Real Estate, dated October 6, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Sixth Amendment to Contract for Purchase and Sale of Real Estate, dated October 11, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Seventh Amendment to Contract for Purchase and Sale of Real Estate, dated October 18, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Eighth Amendment to Contract for Purchase and Sale of Real Estate, dated October 20, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Ninth Amendment to Contract for Purchase and Sale of Real Estate, dated October 20, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Tenth Amendment to Contract for Purchase and Sale of Real Estate, dated November 3, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc. *, as amended by Eleventh Amendment to Contract for Purchase and Sale of Real Estate, dated November 10, 2017, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Twelfth Amendment to Contract for Purchase and Sale of Real Estate, dated April 20, 2018, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Thirteenth Amendment to Contract for Purchase and Sale of Real Estate, dated August 9, 2018, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Fourteenth Amendment to Contract for Purchase and Sale of Real Estate, dated March 11, 2019, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc., as amended by Fifteenth Amendment to Contract for Purchase and Sale of Real Estate, dated September 26, 2019, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc. The Contract for Purchase and Sale of Real Estate and the First through Tenth Amendments are incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2017. The Eleventh Amendment is incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2017. The Twelfth Amendment is incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2018. The Thirteenth, Fourteenth and Fifteenth Amendments are incorporated by reference to Exhibit 10.19 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2019.

Exhibit Number
Description
10.20
Contract for Purchase and Sale of Real Estate, dated June 27, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by First Amendment to Contract for Purchase and Sale of Real Estate, dated August 24, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Second Amendment to Contract for Purchase and Sale of Real Estate, dated September 19, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Third Amendment to Contract for Purchase and Sale of Real Estate, dated October 6, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Fourth Amendment to Contract for Purchase and Sale of Real Estate, dated October 13, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Fifth Amendment to Contract for Purchase and Sale of Real Estate, dated October 18, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Sixth Amendment to Contract for Purchase and Sale of Real Estate, dated October 20, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Seventh Amendment to Contract for Purchase and Sale of Real Estate, dated October 20, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Eighth Amendment to Contract for Purchase and Sale of Real Estate, dated November 3, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Ninth Amendment to Contract for Purchase and Sale of Real Estate, dated November 7, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc. *, as amended by Tenth Amendment to Contract for Purchase and Sale of Real Estate, dated November 10, 2017, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Eleventh Amendment to Contract for Purchase and Sale of Real Estate, dated March 27, 2018, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Twelfth Amendment to Contract for Purchase and Sale of Real Estate, dated April 10, 2018, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Thirteenth Amendment to Contract for Purchase and Sale of Real Estate, dated August 9, 2018, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc., as amended by Fourteenth Amendment to Contract for Purchase and Sale of Real Estate, dated July 19, 2019, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc. The Contract for Purchase and Sale of Real Estate and the First through Ninth Amendments are incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2017. The Tenth Amendment is incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2017. The Eleventh and Twelfth Amendments are incorporated by reference to Exhibits 10.1 and 10.2, respectively, to the Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2018. The Thirteenth and Fourteenth Amendments are incorporated by reference to Exhibit 10.20 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2019.
10.21
Contract for Purchase and Sale of Real Estate, dated June 29, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by First Amendment to Contract for Purchase and Sale of Real Estate, dated August 28, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Second Amendment to Contract for Purchase and Sale of Real Estate, dated September 15, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Third Amendment to Contract for Purchase and Sale of Real Estate, dated September 28, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Fourth Amendment to Contract for Purchase and Sale of Real Estate, dated October 9, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Fifth Amendment to Contract for Purchase and Sale of Real Estate, dated October 18, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Sixth Amendment to Contract for Purchase and Sale of Real Estate, dated October 20, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Seventh Amendment to Contract for Purchase and Sale of Real Estate, dated October 31, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Eighth Amendment to Contract for Purchase and Sale of Real Estate, dated November 3, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Ninth Amendment to Contract for Purchase and Sale of Real Estate, dated November 7, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc. *, as amended by Tenth Amendment to Contract for Purchase and Sale of Real Estate, dated November 10, 2017, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Eleventh Amendment to Contract for Purchase and Sale of Real Estate, dated March 29, 2018, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Twelfth Amendment to Contract for Purchase and Sale of Real Estate, dated January 22, 2019, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Thirteenth Amendment to Contract for Purchase and Sale of Real Estate, dated April 18, 2019, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Fourteenth Amendment to Contract for Purchase and Sale of Real Estate, dated May 21, 2019, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Fifteenth Amendment to Contract for Purchase and Sale of Real Estate, dated February 20, 2020, by and between PCY Holdings, LLC and KB Home Colorado Inc., as amended by Sixteenth Amendment to Contract for Purchase and Sale of Real Estate, dated April 30, 2020, by and between PCY Holdings, LLC and KB Home Colorado Inc. The Contract for Purchase and Sale of Real Estate and the First through Ninth Amendments are incorporated by reference to Exhibit 10.21 to the Annual Report on Form 10-K for the fiscal year ended August 31, 2017. The Tenth Amendment is incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2017. The Eleventh Amendment is incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2019. The Twelfth Amendment is incorporated by reference to Exhibit 10.2 to the Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2019. The Thirteenth Amendment is incorporated by reference to Exhibit 10.3 to the Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2019. The Fourteenth Amendment is incorporated by reference to Exhibit 10.4 to the Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2019. The Fifteenth Amendment is incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended February 29, 2020. The Sixteenth Amendment is incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2020

Exhibit Number
Description
16.110.22
Offer Letter of GHP Horwath, P.C.,between Pure Cycle Corporation and Kevin B. McNeill dated January 13, 2017.23, 2020. Incorporated by reference to Exhibit 16.110.1 to the Current Report on Form 8 K8-K filed on January 17, 2017.April 13, 2020**
10.23
Contract for Purchase and Sale of Real Estate, dated October 30, 2020, by and between PCY Holdings, LLC and KB Home Colorado, Inc.*
10.24
Contract for Purchase and Sale of Real Estate, dated November 2, 2020, by and between PCY Holdings, LLC and Meritage Homes of Colorado, Inc.*
10.25
Contract for Purchase and Sale of Real Estate, dated November 2, 2020, by and between PCY Holdings, LLC and Challenger Denver, LLC.*
10.26
Contract for Purchase and Sale of Real Estate, dated October 30, 2020, by and between PCY Holdings, LLC and Melody Homes, Inc. (a wholly-owned subsidiary of DR Horton, Inc.). *


Exhibit Number
Description
21.1
Subsidiaries *
23.1
Consent of Crowe Horwath LLPPlante & Moran PLLC *
23.231.1
ConsentCertification of GHP Horwath, P.C. *
31.1
Certificationprincipal executive officer under Section 302 of the Sarbanes-Oxley Act of 2002. *
31.2
Certification of principal financial officer under Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1
Certification of principal executive officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ***
32.2
Certification of principal financial officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ***
101.INSXBRL Instance Document.
101.SCHXBRL Taxonomy Extension Schema Document. *
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. *
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. *
101.LABXBRL Taxonomy Extension Label Linkbase Document. *
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. *


*
Filed herewith

**
Indicates management contract or compensatory plan or arrangement in which directors or executive officers are eligible to participate.

***
Furnished herewith

51
* Table of Contents
Filed herewith
SIGNATURES
** 
Indicates management contractPursuant to the requirements of Section 13 or compensatory plan or arrangement15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PURE CYCLE CORPORATION
/s/ Kevin B. McNeill
Kevin B. McNeill
Vice President and Chief Financial Officer
November 10, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in which directors or executive officers are eligible to participate.the capacities and on the dates indicated.

SignatureTitleDate
/s/ Mark W. Harding
Mark W. HardingPresident, Chief Executive Officer and DirectorNovember 10, 2020
(Principal Executive Officer)
/s/ Kevin B. McNeill
Kevin B. McNeill
Vice President and Chief Financial Officer
November 10, 2020
(Principal Financial and Accounting Officer)
/s/ Harrison H. Augur
Harrison H. AugurChairman, DirectorNovember 10, 2020
/s/ Patrick J. Beirne
Patrick J. BeirneDirectorNovember 10, 2020
/s/ Arthur G. Epker III
Arthur G. Epker IIIDirectorNovember 10, 2020
/s/ Richard L. Guido
Richard L. GuidoDirectorNovember 10, 2020
/s/ Peter C. Howell
Peter C. HowellDirectorNovember 10, 2020
/s/ Jeffrey G. Sheets
Jeffrey G. SheetsDirectorNovember 10, 2020


52
*** 
Furnished herewith
52