PURE CYCLE CORP 10-Q

Item 2. 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” in our Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended February 29, 2020, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and 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 Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below. The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition and should be read in conjunction with the accompanying consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019 (the “2019 Annual Report”). This section focuses on the key indicators reviewed by management in evaluating our financial condition and operating performance, including the following: ● Revenue generated from providing water and wastewater services; ● Revenue from lot sales at Sky Ranch; ● Expenses associated with developing our water and land assets; and ● Cash available to continue development of our land, water rights and service agreements. Our MD&A section includes the following items: Our Business – a general description of our business, our services and our business strategy. Results of Operations – an analysis of our results of operations for the periods presented in our consolidated financial statements. We present our discussion in the MD&A in conjunction with the accompanying consolidated financial statements. Liquidity, Capital Resources and Financial Position – an analysis of our cash position and cash flows, as well as a discussion of our financial obligations. Critical Accounting Policies and Use of Estimates – a discussion of our critical accounting policies that require critical judgments, assumptions and estimates. Our Business Pure Cycle Corporation (“we,” “us,” or “our”) is a Colorado corporation that operates in two business segments: (i) wholesale water and wastewater services, and (ii) land development. We develop wholesale water and wastewater systems in the water-short Denver metropolitan area and are developing a Master Planned Community called Sky Ranch on approximately 930 acres of land located along the Interstate 70 corridor (“I-70”), approximately four miles south of Denver International Airport (“DIA”). Sky Ranch includes a mix of 3,200 single-family and multifamily residential units and over 2 million square feet of commercial, retail, and industrial space. 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 in the Denver metropolitan region. Our land assets, which include zoning for residential, commercial, retail and light industrial, are located in one of the most active development areas in the Denver metropolitan region along I-70. Recent Developments As the novel strain of the coronavirus (“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 result, some of our builder customers reported material net housing order declines during the period (compared to the same period a year ago). However, they are also reporting material increases in orders since the stay-at-home orders have been reduced. We had been expecting to accelerate deliveries of the remaining finished lots at Sky Ranch into fiscal 2020; however, as a result of the COVID-19 precautionary measures and stay-at-home orders, we now expect to deliver the remaining lots by the end of calendar 2020. These deliveries will still be ahead of the original delivery dates set forth in our contracts with the home builders. 24 Index In addition, due to low prices per barrel for crude oil, as a result of lower demand and higher supplies, we saw a significant decrease in the demand for water used for hydraulic fracturing by our industrial customers (referred to as “O&G operations”). Wholesale 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 approximately 29,600 acre feet of groundwater and surface water supplies, approximately 26,000 acre feet of adjudicated reservoir sites, two wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and nearly 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 to produce, treat, store, and distribute water and wastewater, which we believe provides us with a unique competitive advantage offering these services. We provide wholesale water and wastewater service to local governments, including the Rangeview Metropolitan District (“Rangeview District”), Arapahoe County, the Sky Ranch Community Authority Board (the “CAB”), and the Elbert & Highway 86 Commercial District (“Wild Pointe”). Our mission is to provide reliable, high quality water to our customers and collect and treat wastewater using advanced water treatment systems that produce high quality reclaimed water that we can reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we seek to demonstrate good stewardship over our valuable water rights in the water-scarce Denver, Colorado region. We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate and maintain on behalf of governmental entities. 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 fees, regulatory water quality monitoring, sampling, testing, and reporting requirements to the Colorado Department of Public Health and Environment. Our wholesale water and wastewater segment generates revenues from three sources: (i) tap fees, which are a one-time charge to home builders or businesses to connect to our water and wastewater systems, (ii) usage charges, which are monthly metered water and wastewater fees, and (iii) construction or special facility fees, which are specifically contracted for when necessary. We estimate that our water portfolio can provide service to approximately 60,000 single family equivalent (“SFE”) units. Our current water tap fee is $26,675 per SFE, and our wastewater tap fee is $4,659 per SFE. On average, we generate annual revenue of approximately $1,000 per SFE water connection and $500 per SFE wastewater connection. We provide potable water to nearly 547 SFE connections and domestic wastewater services to approximately 285 SFE connections. We believe that 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 because this region is well positioned for substantial growth over the next 30 years. 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 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. Industrial Oil and Gas Operations Deliveries In addition to our domestic customers, we provide raw water for O&G 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 oil and gas industry are unpredictable and fluctuate dramatically. After several years of significant activity throughout our service area, beginning around March of 2020, demand for water by the oil and gas industry dropped precipitously due to all-time low oil and gas prices caused by increased production by Saudi Arabia and Russia and decreased demand due to stay-at-home orders resulting from the COVID-19 pandemic. Land Development Activities We are actively developing an approximately 930-acre Master Planned Community along the I-70 corridor that is planned to include 3,200 single family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over 2 million square feet of retail, commercial and light industrial space just four miles south of DIA. Our land development activities include the design, permitting, and construction of all of the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open spaces, trails and other infrastructure to deliver “ready to build” finished lots to home builders and commercial customers. We generate revenue from the sale of finished lots to our home builder customers as well as from the construction of public improvements on behalf of local governmental entities that reimburse us for such improvements upon the issuance of municipal bonds to fund such reimbursements. 25 Index Our land development activities provide a strategic complement to our wholesale water and wastewater segment as a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater service to the community. Having control over land and utility development enables us to efficiently build infrastructure for water, irrigation, wastewater, distribution, collection, storm water, roads, parks, open spaces and other investments, and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in these investments. In June 2017, we entered into contracts with three national home builders (Richmond American Homes, Taylor Morrison, and KB Home) for the sale of 506 single-family, detached residential lots at the Sky Ranch property (the “Builder Contracts”). Pursuant to the Builder Contracts we are constructing 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 a specified number of finished lots to each builder. Additionally, we must cause the Rangeview District to install and construct off-site infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities) for the provision of water and wastewater service to the property. In conjunction with approvals from Arapahoe County for the Sky Ranch project, we, together with the Rangeview District and/or Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (collectively, the “Sky Ranch Districts”) and/or the CAB, are obligated to maintain a deposit account with Arapahoe County to ensure completion of the off-site infrastructure improvements. Approximately $1,000,000 remains on deposit. We have substantially completed all of the off-site infrastructure improvements for the initial 506 residential lots. We have financed the obligations of the Rangeview District and the Sky Ranch Districts (through the CAB) as described in Note 6 – Related Party Transactions to the accompanying consolidated financial statements. We estimate that the development of the finished lots for the first filing (506 lots) of Sky Ranch will require total capital of $36 million, which includes estimated reimbursable costs of up to $29 million that could be reimbursable to us by the CAB from municipal bonds the CAB will try to issue. Per the agreements between us and the CAB, no payments are required by the CAB with respect to reimbursable costs unless and until the CAB and/or the Sky Ranch Districts are able to issue municipal bonds in an amount sufficient to reimburse us for all or a portion of advances provided or expenses incurred for reimbursables. As of May 31, 2020, the CAB has reimbursed the Company $10.5 million through the sale of municipal bonds. Additional information on the accounting for reimbursable costs can be found in Note 1 – Presentation of Interim Information to the accompanying consolidated financial statements. Lot sales to home builders are expected to generate $37 million in revenues, of which $26 million has been recognized as of May 31, 2020. The costs of developing lots and revenues from the sales of finished lots in the first filing have been and are expected to continue to be incurred over several quarters, and the timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals, installation of improvements, and completion of lot deliveries. Results of Operations Executive Summary The results of our operations for the three and nine months ended May 31, 2020 and 2019 are as follows: Table 1a - Summary of Results of Operations Three Months Ended May 31, 2020 May 31, 2019 $ Change % Change Millions of gallons of water delivered 12.2 96.9 (84.7 ) (87 )% Municipal water usage revenues $ 97,700 $ 39,500 $ 58,200 147 % Oil and gas water usage revenues 15,000 1,308,500 (1,293,500 ) (99 )% Total metered water usage revenues $ 112,700 $ 1,348,000 $ (1,235,300 ) (92 )% Operating costs to deliver water (excluding depreciation and depletion) $ 94,900 $ 400,500 $ (305,600 ) (76 )% Water delivery gross margin % 16 % 70 % Wastewater treatment revenues $ 22,500 $ 7,400 $ 15,100 204 % Operating costs to treat wastewater $ 63,000 $ 14,500 $ 48,500 334 % Wastewater treatment gross margin % (180 )% (96 )% Lot sales revenue $ 696,200 $ 2,708,100 $ (2,011,900 ) (74 )% Land development construction costs incurred $ 555,800 $ 2,588,100 $ (2,032,300 ) (79 )% Lot sales gross margin % 20 % 4 % Other income $ 13,800 $ 37,900 $ (24,100 ) (64 )% Other expenses $ 7,100 $ 33,900 $ (26,800 ) (79 )% Tap and Special Facility revenues $ 1,004,900 $ 1,083,200 $ (78,300 ) (7 )% General and administrative expenses $ 800,600 $ 665,700 $ 134,900 20 % Net income $ 27,300 $ 1,261,400 $ (1,234,100 ) (98 )% 26 Index Table 1b - Summary of Results of Operations Nine Months Ended May 31, 2020 May 31, 2019 $ Change % Change Millions of gallons of water delivered 32.4 232.3 (199.9 ) (86 )% Municipal water usage revenues $ 238,000 $ 157,200 $ 80,800 51 % Oil and gas water usage revenues 71,900 2,717,700 (2,645,800 ) (97 )% Total metered water usage revenues $ 309,900 $ 2,874,900 $ (2,565,000 ) (89 )% Operating costs to deliver water (excluding depreciation and depletion) $ 556,000 $ 965,300 $ (409,300 ) (42 )% Water delivery gross margin % (79 )% 66 % Wastewater treatment revenues $ 62,400 $ 23,800 $ 38,600 162 % Operating costs to treat wastewater $ 126,500 $ 21,900 $ 104,600 478 % Wastewater treatment gross margin % (103 )% 8 % Lot sales revenue 11,503,500 6,035,700 5,467,800 91 % Land development construction costs incurred 10,436,200 5,716,000 4,720,200 83 % Lot sales gross margin % 9 % 5 % Other income $ 104,100 $ 148,200 $ (44,100 ) (30 )% Other expenses $ 34,600 $ 104,200 $ (69,600 ) (67 )% Tap and specialty facility revenues $ 3,849,900 $ 1,805,100 $ 2,044,800 113 % General and administrative expenses $ 2,638,600 $ 1,864,100 $ 774,500 42 % Net income $ 6,063,700 $ 1,799,300 $ 4,264,400 237 % Changes in Revenues Metered Water Usage Revenues – Our water service charges include a fixed monthly fee and a fee based on actual amounts of metered water delivered, which is based on a tiered pricing structure that provides for higher prices as customers use greater amounts of water. We typically negotiate the terms of our rates and charges with our wholesale customers as a component of our service agreements prior to commencement of service. Our rates and charges for service on the Lowry Range are based on the average rates and charges of three surrounding water providers. Municipal water usage deliveries increased 86% and water revenues increased 147% during the three months ended May 31, 2020, as compared to the three months ended May 31, 2019. The increase in municipal water usage deliveries and revenue relate to the growth from the development at Sky Ranch. Municipal water usage deliveries decreased 8% and water revenues increased 51% during the nine months ended May 31, 2020, as compared to the nine months ended May 31, 2019. Municipal water deliveries are lower in the current period due to higher demand in the first quarter of 2019 for water for irrigation purposes. Municipal water revenues are higher during the nine months ending May 31, 2020, due to the development at Sky Ranch. O&G operations water deliveries decreased 100% and water revenues decreased 99% during the three months ended May 31, 2020, as compared to the three months ended May 31, 2019. O&G operations water deliveries decreased 100% and water revenues decreased 97% during the nine months ended May 31, 2020, as compared to the nine months ended May 31, 2019. The decreases in O&G operations water deliveries and revenues are the result of a decrease in demand from our industrial customers for water for O&G operations. The demand decreased due to the decision of our largest industrial water customer to shut down operations in the later months of calendar 2019 to pursue the sale of its oil and gas leases in the region (which were, in fact, sold), decreased production due to historically low oil prices and changes relating to lower demand due to stay-at-home orders because of COVID-19 and the oil and gas regulatory environment in the State of Colorado. As a result of the difference in metered rates for water for O&G operations compared to rates for residential customers, revenues received for water for O&G operations have a greater margin. Increases and decreases in water deliveries charged at different rates will result in disproportionate increases and decreases in revenues and margins. The following tables detail the sources of our sales, the number of “kgal” (1,000 gallons) sold, and the average price per kgal for the three and nine months ended May 31, 2020 and 2019, respectively. 27 Index Table 2a - Water Revenue Summary Three Months Ended May 31, 2020 May 31, 2019 Customer Type Sales kgal Average price per kgal Sales kgal Average price per kgal On Site $ 36,500 1,702.0 $ 21.45 $ 24,300 1,582.5 $ 15.36 Export - Commercial 9,900 582.8 16.99 10,200 989.0 10.31 Sky Ranch 37,800 5,548.5 6.81 2,600 304.0 8.55 Wild Pointe 13,500 4,371.6 3.09 2,400 3,980.6 0.60 O&G operations 15,000 — — 1,308,500 90,091.7 14.52 $ 112,700 12,204.9 $ 9.23 $ 1,348,000 96,947.8 $ 13.90 Table 2b - Water Revenue Summary Nine Months Ended May 31, 2020 May 31, 2019 Customer Type Sales kgal Average price per kgal Sales kgal Average price per kgal On Site $ 102,000 8,416.4 $ 12.12 $ 113,300 18,402.8 $ 6.16 Export - Commercial 32,000 2,618.8 12.22 33,200 2,968.2 11.19 Sky Ranch 56,900 6,270.5 9.07 2,600 304.0 8.55 Wild Pointe 47,100 14,159.9 3.33 8,100 13,006.4 0.62 O&G operations 71,900 927.9 77.49 2,717,700 197,637.2 13.75 $ 309,900 32,393.5 $ 9.57 $ 2,874,900 232,318.6 $ 12.37 The gross margin on delivering water decreased to 16% and (79%) during the three and nine months ended May 31, 2020, respectively, as compared to the gross margins of 71% and of 67% during the three and nine months ended May 31, 2019, respectively. The change in our gross margins for the three and nine months ended May 31, 2020, was due to decreased demand for water for O&G operations. This was partially offset by lower costs of revenue due to a decrease in the amount of high cost “WISE” water purchased during the current period due to lower demand. See Liquidity, Capital Resources and Financial Position – South Metropolitan Water Supply Authority (“SMWSA”) and Water Infrastructure Supply Efficiency Partnership (“WISE”) for a description of WISE. Wastewater Treatment Revenues – Our wastewater customers are charged based on the estimated amount of wastewater treated, which is estimated by the average water delivered in the winter months December through February. Wastewater treatment revenues increased 204% and 162% during the three and nine months ended May 31, 2020, respectively, as compared to the three and nine months ended May 31, 2019, respectively. The increase for the three and nine months ended May 31, 2020, was primarily due to additional customers from the development at Sky Ranch. The wastewater gross margin decreased to (180%) compared to (96%) during the three months ended May 31, 2020 and 2019, respectively, and decreased to (103%) compared to 8% during the nine months ended May 31, 2020 and 2019, respectively. These changes were due to an increase in the number of staff required to maintain the water reclamation facility at Sky Ranch development. Such an increase in the number of staff was necessary because we constructed the plant to be able to treat the entire proposed Sky Ranch development and not just the initial filing of 506 homes. We anticipate positive margins from wastewater treatment revenues once all 506 houses are occupied, which is expected to occur by the end of fiscal 2022. Tap and Special Facility/Construction Revenues – We have various water and wastewater service agreements, a component of which may include tap fee and “Special Facility” (as defined under “Critical Accounting Policies – Revenue Recognition – Wholesale Water and Wastewater Fees” below) or construction fee revenues. For the three months ended May 31, 2020 , and 2019 , we sold 36 and 36 water and wastewater taps, recognizing revenues of $1,004,900 and $1,083,200, respectively. For the nine months ended May 31, 2020 and 2019 , we sold 139 and 60 water and wastewater taps, recognizing revenues of $3,849,900, and $1,805,100, respectively. Tap fee revenues for the three and nine months ended May 31, 2020 , included $57,100 and $171,200, respectively, from the sale of 3 and 11 water taps, respectively, at Wild Pointe. Tap fee revenues for the three and nine months ended May 31, 2019 , included $48,900 from the sale of 3 water taps, at Wild Pointe. The remaining water and wastewater taps sold in the three and nine months ended May 31, 2020 and 2019 were sold to the builders at Sky Ranch. The taps sold at Sky Ranch and Wild Pointe are exempt from royalty payments to the Land Board. 28 Index We did not recognize any Special Facility fees for the three or nine months ended May 31, 2020 and 2019 . Other Income – Other income of $13,800 and $37,900 for the three months ended May 31, 2020 and 2019, and other income of $104,100 and $148,200 for the nine months ended May 31, 2020 and 2019, respectively, consisted principally of consulting fees. Consulting fees fluctuate from one period to the next based on our customers’ needs. We are reducing our consulting services in order to focus our resources on the water systems at Sky Ranch. We expect consulting fees to be minimal in future periods. Land Development Revenues – We broke ground on our first filing of Sky Ranch in March of 2018, and from that time through May 31, 2020 , we completed and sold to our home builder customers 391 finished lots and received total payments of $28.0 million. We sold 0 and 71 finished lots in the three months ended May 31, 2020 and 2019 , respectively, and recognized revenues of $696,200 and $2.7 million for the three months ended May 31, 2020 and 2019 , respectively. We sold 136 and 83 finished lots in the nine months ended May 31, 2020 and 2019 , respectively, and recognized revenues of $11.5 million and $6.0 million for the nine months ended May 31, 2020 and 2019 respectively. Additionally, we have completed improvements (including over lot grading, water, sewer, storm water), off-site improvements (including drainage), and our entry roadway (Monahan Road) for the remaining 115 lots and carry those investments, totaling $3.9 million, in Land development i nventories in the accompanying consolidated financial statements. We are working with each of our home builder customers to deliver the remaining finished lots by the end of calendar year 2020. As we make advances to the CAB for expenses incurred related to construction of public improvements, all amounts owed under the 2018 FFAA (as defined in Note 6 – Related Party Transactions ) bear interest at a rate of 6% per annum. No payment is required of the CAB for advances made to the CAB or expenses incurred related to construction of public improvements unless and until the 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. Because it is uncertain if bonds will be issued and when we will receive payment, we defer recognition of interest income on the CAB note until the issuance of the bonds is certain. We have deferred accruing $1.1 million of potential interest income from the CAB as of May 31, 2020 . We act as the project manager and provide any and all services required to deliver eligible improvements for the CAB. For these services, we charge a five percent (5%) project management fee calculated on actual construction costs of CAB-eligible improvements. No payment is required of the CAB for project management fees unless and until the CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to pay the Company 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 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. We have deferred recognition of approximately $1.4 million in project management services as of May 31, 2020 . General and Administrative Expenses Significant balances classified as general and administrative (“G&A”) expenses for the three and nine months ended May 31, 2020 and 2019, respectively, were as follows: Table 3a - Significant Balances in G&A Three Months Ended May 31, 2020 May 31, 2019 $ Change % Change Salary and salary-related expenses: Including share-based compensation $ 502,000 $ 330,900 $ 171,100 52 % Excluding share-based compensation $ 420,100 $ 234,800 $ 185,300 79 % Professional fees $ 66,800 $ 82,000 $ (15,200 ) (19 )% Fees paid to directors and corporate D&O insurance $ 38,900 $ 55,700 $ (16,800 ) (30 )% Public entity related expenses $ 32,400 $ 24,400 $ 8,000 33 % Table 3b - Significant Balances in G&A Nine Months Ended May 31, 2020 May 31, 2019 $ Change % Change Salary and salary-related expenses: Including share-based compensation $ 1,519,100 $ 956,600 $ 562,500 59 % Excluding share-based compensation $ 1,084,000 $ 698,700 $ 385,300 55 % Professional fees $ 347,200 $ 254,000 $ 93,200 37 % Fees paid to directors and corporate D&O insurance $ 140,600 $ 154,900 $ (14,300 ) (9 )% Public entity related expenses $ 99,000 $ 90,400 $ 8,600 10 % 29 Index Salary and salary-related expenses – Salary and salary-related expenses, including share-based compensation expense, increased 52% and 59%, respectively, for the three and nine months ended May 31, 2020, as compared to the three and nine months ended May 31, 2019. The increase for the three months ended May 31, 2020 was due primarily to the addition of three employees. The increase for the nine months ended May 31, 2020 was primarily the result of an unrestricted stock grant to the non-employee members of our board of directors and the addition of approximately three employees. The salary and salary-related expenses noted above include $81,900 and $96,100 of share-based compensation expenses recognized during the three months ended May 31, 2020 and 2019, respectively, and $435,100 and $257,900 of share-based compensation expenses recognized during the nine months ended May 31, 2020 and 2019, respectively. Professional fees (predominantly accounting and legal) – Professional fees decreased 19% and increased 37% during the three and nine months ended May 31, 2020, as compared to the three and nine months ended May 31, 2019, respectively. The decrease for the three months ended May 31, 2020 compared to the three months ended May 31, 2019 is due to lower legal fees of approximately $32,100 related to business development offset by higher accounting fees of approximately $16,900 related to audit and tax services. The increase in the nine months ended May 31, 2020, as compared to the nine months ended May 31, 2019, was primarily due to higher legal and professional fees of approximately $65,200 related to business development and the review of the CAB’s bond sale documents and higher accounting fees of approximately $28,000 related to audit and tax services. Fees paid to directors and corporate D&O insurance – During the three and nine months ended May 31, 2020, directors’ fees (including D&O insurance) decreased 30% and 9%, as compared to the three and nine months ended May 31, 2019, respectively. The lower fees in the current periods are primarily due to the lower board travel expenses for board meetings relating to stay-at-home orders because of COVID-19 offset by an increase in the annual D&O insurance premium. Public entity expenses – Costs associated with corporate governance and with being a publicly traded entity increased 33% and 10% for the three and nine months ended May 31, 2020, respectively, as compared to the three and nine months ended May 31, 2019, respectively. Any fluctuations are due to the timing and number of filings and compliance costs for filing with the Securities and Exchange Commission (the “SEC”). Other Income and Expense Items Table 4a - Other Items Three Months Ended May 31, 2020 May 31, 2019 $ Change % Change Other income items: Reimbursement of construction costs (related party) $ — $ — $ — — Oil and gas lease income, net $ 61,700 $ 13,900 $ 47,800 344 % Oil and gas royalty income, net $ 74,100 $ 37,300 $ 36,800 99 % Interest income $ 24,500 $ 54,000 $ (29,500 ) (55 )% Table 4b - Other Items Nine Months Ended May 31, 2020 May 31, 2019 $ Change % Change Other income items: Reimbursement of construction costs (related party) $ 6,275,500 $ — $ 6,275,500 100 % Oil and gas lease income, net $ 185,200 $ 41,800 $ 143,400 343 % Oil and gas royalty income, net $ 612,700 $ 113,100 $ 499,600 442 % Interest income $ 162,400 $ 246,800 $ (84,400 ) (34 )% Reimbursement of construction costs (related party) – On November 19, 2019, the CAB sold tax-exempt, fixed rate senior bonds in the aggregate principal amount of approximately $11,435,000 and tax-exempt, fixed-rate subordinate bonds in the aggregate principal amount of approximately $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 CAB pursuant to the 2018 FFAA to fund the construction of public improvements to the Sky Ranch property. Approximately $2.7 million of the bond proceeds were retained by the CAB in cash in order to pay certain bond issuance costs and repay debt service through 2021, when the CAB expects to generate enough revenue through mill levies to repay bond holders. 30 Index Of the amounts we received, $4.2 million reduced the remaining capitalized expenses in Land development i nventories and $6.3 million was recognized as Income from reimbursement of construction costs (related party) in other income for the nine months ending May 31, 2020. No Income from reimbursement of construction costs (related party) was recognized during the three months ending May 31, 2020 or during the three and nine months ending May 31, 2019. Oil and gas lease income – Of the $61,700 of oil and gas lease payments recognized during the three months ended May 31, 2020, $13,900 represents the deferred recognition of the up-front payment of $167,200 that we received in September 2017 in connection with entering into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (the “Bison Lease”), which payment is being recognized in income over the three year term of the Bison Lease and $47,800 represents the deferred recognition of the up-front payment of $573,700 that we received in July 2019 for an Agreement on Locations of Oil and Gas Operation (the “OGOA”) giving the operator of the Sky Ranch O&G Lease (defined below) a right to access 16 acres for an oil and gas pad site for three years through July 2022. During the nine month ended May 31, 2020, we recognized $41,800 and $143,400 of oil and gas lease income related to the up-front payment received pursuant to the Bison Lease and to the up-front payment received pursuant to the OGOA, respectively. The $13,900 and $41,800 of oil and gas lease income recognized during the three and nine months ended May 31, 2019, respectively, related to the up-front payment received pursuant to the Bison Lease. Oil and gas royalty income – In 2011, we entered into a Paid-Up Oil and Gas Lease, which was recently purchased by Crestone Peak Resources, 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 “Sky Ranch O&G Lease”). The Sky Ranch O&G Lease is held by production through two wells drilled in our mineral estate. The oil and gas royalty income represents amounts received pursuant to the Sky Ranch O&G Lease as royalties from oil and gas production from wells in our mineral estate at Sky Ranch. The royalties for the three months ended May 31, 2020, were $74,100, as compared to $37,300 for the same period in 2019. The royalties for the nine months ended May 31, 2020 were $612,700, as compared to $113,100 for the same period in 2019. The increase in oil and gas royalties for the three and nine months ended May 31, 2020 is a result of the addition of four wells since the prior periods resulting in higher production of oil and gas from wells in our mineral estate at Sky Ranch. Interest Income – Interest income represents interest earned on the temporary investment of capital in cash and cash equivalents, available-for-sale securities, finance charges, and interest accrued on the notes receivable from the Rangeview District and the Sky Ranch Districts. The decrease was primarily attributable to interest rates on investments and timing of the maturity of the investments. Liquidity, Capital Resources and Financial Position At May 31, 2020, our working capital, defined as current assets less current liabilities, was $16.7 million, which included $17.1 million in cash and cash equivalents. We believe that as of May 31, 2020, and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next 12 months. We have completed most of the work required to complete delivery of the first 506 lots under contract at Sky Ranch and are in the permitting process for the next filing at Sky Ranch, so we are not anticipating the need to make significant capital expenditures until such permits are obtained from Arapahoe County, Colorado. Due to staffing shortages at Arapahoe County and the likely disruption to their operations caused by COVID-19, permitting is anticipated to take longer than normal. Sky Ranch Development In the spring of fiscal year 2018, we began construction of off-site improvements at Sky Ranch, including drainage improvements, access roads and other improvements. We seek to manage our capital investments in the construction of finished lots for our home builder customers to match purchases required by each Builder Contract, for example, by authorizing specific contracts in phases. By way of further example, we have invested approximately $30.5 million into constructing the first 391 finished lots at Sky Ranch. We have received approximately $28.0 million from the sale of the finished lots. In addition, on November 19, 2019, the CAB sold the Bonds and used approximately $10.5 million of the net proceeds to partially reimburse us for advances we made to the CAB pursuant to the 2018 FFAA to fund the construction of public improvements to the Sky Ranch property. As of May 31, 2020, we have advanced the CAB approximately $15.1 million (including interest) that has not been reimbursed but that we expect will be reimbursable by the CAB upon the CAB successfully issuing additional bond offerings. ECCV Capacity Operating System Pursuant to a 1982 contractual right, 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 10 miles of buried water pipeline located on the Lowry Range. In May 2012, 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 of oil and gas wells. Our costs associated with the use of the ECCV system are a flat 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 the ECCV’s system, which is included in the water usage fees charged to customers. In addition, the ECCV system cost us $12,500 and $23,500 per month to maintain in 2020 and 2019, respectively, and is anticipated to continue to cost us approximately $10,000 per month to maintain. 31 Index South Metropolitan Water Supply Authority (“SMWSA”) and the 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. Pursuant to certain agreements with the Rangeview District, we agreed to provide funding to the Rangeview District in connection with its membership in the SMWSA. In July 2013, the Rangeview District, together with nine other SMWSA members, formed an entity 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, the South Metro WISE Authority (“SMWA”), 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”) entered into the Amended and Restated WISE Partnership – Water Delivery Agreement (the “WISE Partnership 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 other nine members of the SMWA, Denver Water and Aurora Water. We have entered into a financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE. We anticipate that we will be investing an additional approximately $0.4 million in 2020 and $4.2 million in total for the fiscal years 2021 through 2024 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% 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. Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and 900 acre feet per year of water. During the three months ended February 29, 2020, we purchased an additional 400 acre feet of WISE for $582,200 to bring our total subscription to 900 acre feet. The additional acre feet of water is not anticipated to have a material impact on the expenses we project to incur over the next several years. Summary Cash Flows Table Table 5 - Summary Cash Flows Table Nine Months Ended May 31, 2020 May 31, 2019 $ Change % Change Cash provided (used) by: Operating activities $ 15,203,600 $ (2,742,000 ) $ 17,945,600 654 % Investing activities $ (2,642,698 ) $ (5,350,600 ) $ 2,707,902 51 % Financing activities $ 35,800 $ (108,800 ) $ 144,600 133 % Changes in Operating Activities – Operating activities include revenues we receive from the sale of wholesale water and wastewater services, lot sales and costs incurred in the delivery of those services, G&A expenses, and depletion/depreciation expenses. Cash provided by operations in the nine months ended May 31, 2020, increased by approximately $17.9 million compared to the nine months ended May 31, 2019, which is primarily due to the partial reimbursement of capitalized costs of $10.5 million partially recorded in Land development i nventories to develop lots at Sky Ranch, the collection of up-front deferred oil and gas payments of $1.6 million, an increase of taxes receivable and deferred taxes of $0.7 million, coupled with an increase of net income of $4.3 million, primarily due to the gain on bond proceeds included in operating activities, the increase of prepaid expenses and other current assets of $1.6 million, and accounts payables and accrued liabilities of $0.4 million, offset by the recognition of deferred revenues net of advance payments for industrial water of $2.7 million. Changes in Investing Activities – The use of cash in investing activities during the nine months ended May 31, 2020, consisted of the maturity of short-term debt securities of $6.9 million, the investment in our water system of $7.3 million and the purchase of short-term investments of $1.7 million and equipment of $525,300. The use of cash in investing activities during the nine months ended May 31, 2019, consisted of the sale of multiple short-term debt securities totaling $36.7 million, the purchase of multiple short-term debt securities totaling $34.1 million, investments in our water systems of $7.7 million and the purchase of equipment of $320,000. Changes in Financing Activities – Cash provided by financing activities during the nine months ended May 31, 2020, consisted of proceeds from the exercise of stock options of $40,000, offset by a payment to contingent liability holders of $4,200. Cash provided by financing activities during the nine months ended May 31, 2019, consisted of proceeds from the exercise of stock options of $114,900, offset by a payment to contingent liability holders of $6,000. 32 Index Off-Balance Sheet Arrangements Our off-balance sheet arrangements consist entirely of the contingent portion of the Comprehensive Amendment Agreement No. 1 (the “CAA”) as described in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply 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” (as defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 2019 Annual Report), the amounts and timing of which are not reasonably determinable. 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 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 We generate revenues through two lines of business. Revenues are derived through our wholesale water and wastewater business and through the sale of developed land primarily for residential lots, both of which businesses are described below. Wholesale Water and Wastewater Service Fees We generate revenue through our wholesale water and wastewater services predominantly from three sources, which are described in detail below: (i) Monthly water usage and wastewater treatment fees – We provide water and wastewater services to customers, for which the customers are charged fees monthly. Water usage fees are assessed to 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 similar to the demand of a family of four persons living in a single-family house on a standard-sized lot. Water usage pricing uses a tiered pricing structure. 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 the sale of Export Water and other portions of our “Rangeview Water Supply” (as defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 2019 Annual Report) 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. For water sales on the Lowry Range, the Rangeview District is directly selling the water and deemed the distributor of the water. The Rangeview District sets the price for the water sales on the Lowry Range. In addition, the Company provides water for hydraulic fracturing to industrial customers in the oil and gas industry that are located in and adjacent to its service areas. O&G 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 flat monthly fee and actual usage charges. The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview District. Costs of delivering water and providing wastewater services to customers are recognized as incurred. (ii) Water and wastewater tap fees/Special Facility funding – A tap fee constitutes a right to connect to our 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. 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 at the time we grant a right for the customer to tap into the water or wastewater service line to obtain service. Water tap fees recognized are based on the amounts billed to the Rangeview District and any amounts paid to third parties pursuant to the CAA as further described in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply to the accompanying consolidated financial statements. 33 Index We recognize construction fees, including fees to construct “Special Facilities,” over time as the construction is completed. (iii) Consulting fees – We recognize consulting fees as revenues typically on a monthly basis. 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 Activities The Company generates revenues through the sale of finished lots at its Sky Ranch development primarily from four sources of revenues, which are described in detail below: (i) Sale of finished lots – We 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. We have entered into purchase and sale agreements with three separate home builders pursuant to which we agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch. We began constructing the required infrastructure on the lots in March 2018. We sell 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 amount upon completion of the finished lot that is 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 will be 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 that include (i) payment upon the delivery of platted lots (which requires us 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 we close 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 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. 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. 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 do 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. (ii) Reimbursable Costs for Public Improvements – The 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 our agreements with the CAB (see Note 6 – Related Party Transactions ), we are obligated to finance this infrastructure. These public improvements are constructed pursuant to design standards specified by the Sky Ranch Districts and/or the 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 our the agreements with the CAB, the 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 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 us, we record the reimbursements 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 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. All amounts owed under the 2018 FFAA 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 is not recognized on the amounts owed by the CAB until the bonds are issued. 34 Index (iii) Project management services – On May 2, 2018, we entered into two Service Agreements for Project Management Services (the “Project Management Agreements”) with the CAB. Pursuant to the Project Management Agreements, we act as the project manager and provide any and all services required to deliver the CAB-eligible improvements, including but not limited to CAB compliance, planning design and approvals, project administration, contractor agreements, and construction management and administration. We must submit to the CAB a monthly invoice, in a form acceptable to the 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 CAB in writing. The 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 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 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 CAB-eligible improvements are included in Land development i nventories 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 CAB with respect to project management fees unless and until the 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 being accrued to revenue with a corresponding allowance until the point in time when bonds are issued by the Sky Ranch Districts and/or the CAB and the CAB reimburses us for the public improvements. At that point, the portion of the project management fees repaid will be recognized as revenue. To date, we have accrued $1,371,600 in project management services to the CAB. (iv) Construction support activities – 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 CAB and the CAB reimburses the Company for public improvements. Refer to section (ii) Reimbursable Costs for Public Improvements for details on repayment of reimbursable costs. Leases Revenues received pursuant to the Bison Lease and the OGOA consisting of up-front payments are recognized as other income on a straight-line basis over the initial term or extension of term, as applicable, of the leases. Impairment of Water Assets and Other Long-Lived Assets We review our long-lived assets for impairment whenever management believes that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We specifically measure the recoverability of our water assets to be held and used by a comparison of the carrying amount of the asset to estimated future undiscounted net cash flows we expect to be generated by the eventual use of the asset. If such assets are considered to be impaired and, therefore, the costs of the assets deemed to be unrecoverable, the impairment to be recognized would be the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Our water assets will be utilized in the provision of water services that inevitably will encompass many housing and economic cycles. 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. Our Water Rights – We determine the undiscounted cash flows for our Denver-based assets by estimating tap sales to potential new developments in our service area 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 area 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. We performed an impairment analysis as of August 31, 2019, and determined that there were no material changes and that our Denver-based assets are not impaired and their costs are deemed recoverable. Our impairment analysis is based on development occurring within areas in which we have service agreements (e.g., Sky Ranch and the Lowry Range) as well as in surrounding areas, including the Front Range and the I-70 corridor. Our combined Rangeview Water Supply and Sky Ranch water assets have a carrying value of $49.2 million as of August 31, 2019. Based on the carrying value of our water rights, the long-term and uncertain nature of any development plans, current tap fees of $26,675 and estimated gross margins, we estimate that we would need to add 1,850 new water connections (requiring 7% of our portfolio) to generate net revenues sufficient to recover the costs of our Rangeview Water Supply and Sky Ranch water assets. If tap fees increase 5%, we would need to add 1,750 new water taps (requiring 7% of our portfolio) to recover the costs of our Rangeview Water Supply and Sky Ranch water assets. If tap fees decrease 5%, we would need to add 1,940 new water taps (requiring 7% of our portfolio) to recover the costs of our Rangeview Water Supply and Sky Ranch water assets. 35 Index 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. Our Land Development Assets – We determine the undiscounted cash flows from lot sales, defined under our Builder Contracts, using the costs incurred to date and estimated costs to build the remaining infrastructure for delivery of finished lots over an estimated development period. Our impairment analysis is based on comparing the lot sale price under our Builder Contracts, together with qualified reimbursables, with the cost to deliver the finished lots. Our Sky Ranch land assets under development, shown as Land development i nventories on our balance sheet, have a carrying value of $11.6 million as of August 31, 2019. Based on the carrying value of our land inventories and the estimated costs to complete finished lots, compared to revenue generated from lot sales and reimbursables, we estimate that we generate net revenues sufficient to recover the costs of our land development activities. If our costs increase 5% and our lot sale revenues remain the same pursuant to our agreements, we estimate that our recoverable reimbursable costs would increase 2.5% and that we would generate net revenues sufficient to recover the costs of our land development activities. Arkansas Valley Mineral Rights – Due to low demand and increased foreign supply, oil and gas prices have dropped to record lows in 2020 resulting in a significant decline in oil and gas exploration and production activities. This decline could continue for the foreseeable future. The oil and gas industry has always been volatile and routinely experiences dramatic decreases and increases in activity. However, the oil and gas industry has historically continued to maintain a high level of activity in Colorado. Changes in prices and demand have no impact on the amount of mineral rights we own, and historically when prices rebound, oil and gas producers have been able to quickly resume exploration and drilling operations. Therefore, despite the current industry declines, we believe the cash expected to be generated from the eventual use or sale of our Arkansas Valley mineral rights exceeds the carrying value of the assets and our mineral rights are not impaired. 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 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 5 – Shareholders’ Equity to the accompanying consolidated financial statements. Recently Adopted and Issued Accounting Pronouncements See Note 1 – Presentation of Interim Information to the accompanying consolidated financial statements for recently adopted and issued accounting pronouncements. 36 Index Disclosure Regarding Forward-Looking Statements Statements that are not historical facts contained in or incorporated by reference into this Quarterly Report on Form 10-Q are “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, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. 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 that any of our expectations will be realized. Forward-looking statements include, among others, statements we make regarding: ● the impact of COVID-19; ● reimbursements of certain costs, including interest, by the CAB and the estimated amount and timing of receipt of such reimbursable costs; ● the impact of new accounting pronouncements; ● the policies and procedures to value certain financial instruments; ● expected results of operations; ● anticipated margins from wastewater treatment services; ● estimated effective income tax rates expected to be applicable to the fiscal year; ● the timing and impact on our financial statements of new home construction and other development in the areas where we may sell our water; ● utilization of our water assets; ● growth in our targeted service area; ● anticipated AMT refund in future years; ● projected capital spending and projected gross proceeds and margin on lot sales for the first filing of Sky Ranch; ● timing of delivery of finished lots at Sky Ranch; ● expected payments to be received from home builders; ● expected occupany dates for houses at Sky Ranch; ● sufficiency of our working capital to fund our operations for the next 12 months; ● our ability to fund improvements needed to deliver finished lots to home builders at Sky Ranch by phasing construction and delivery of lots and utilizing progress payments from builders; ● costs associated with the use of the ECCV system; ● infrastructure to be constructed over the next several years, including the expected costs thereof; ● timing and availability of water from, and projected costs related to, WISE; ● estimates associated with revenue recognition, asset impairments, and cash flows from our water and land assets; ● variance in our estimates of future tap fees and future operating costs; ● estimated number of SFE units that can be served by our water systems; ● number of new water connections necessary to recover costs; ● expected vesting and forfeitures of stock options; ● objectives of our investment activities; ● timing of the recognition of income related to the Bison Lease and the OGOA; ● the effectiveness of our disclosure controls and our internal control over financial reporting; and ● our plans to remediate material weaknesses in our internal control over financial reporting. 37 Index Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation: ● 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 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 ability of the CAB to issue bonds n the capital markets; ● the market price of water; ● the market price of 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; ● 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, freezing conditions and tornadoes; ● 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; ● unauthorized access to confidential information and data on our information technology systems and security and data breaches; and ● factors described under “Risk Factors” in our 2019 Annual Report on Form 10-K and under Item 1A of our Quarterly Report on Form 10-Q for the quarter ended February 29, 2020. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements are expressly qualified by these cautionary statements. 38 Index Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.