What changed in this filing

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Item 1. Business

2020-11-10 compared with 2019-11-12 · 577 added, 477 removed, 72 unchanged (94% of the section changed)

Item 1 – Business

Pure Cycle Corporation, a Colorado corporation (“we,” “us” or “our”), is a wholesale water and wastewater company and land development 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;

operates a land development segment that is developing a master planned mixed-use community.

Our wholesale water and wastewater segment provides wholesale water and wastewater services to customers within our exclusive service area and elsewhere in the Denver Metropolitan Area.

We own or control water rights

we use to provide domestic, irrigation, and raw water to our customers (including surface water, groundwater, reclaimed water rights and water storage rights).

We own or control 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 untreated wholesale water services predominantly to industrial customers for various purposes and to oil and gas companies for hydraulic fracturing on properties located within or adjacent to our service

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 water supplies and infrastructure.

In addition, we provide wholesale water and wastewater services to 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 “Non-Lowry Service Agreement” (each as defined below).

Through the Rangeview District, we currently provide wholesale service to 462 SFE water connections and 214 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.

In addition to our water and wastewater operations, we are developing approximately 930 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.

Our agreements with our home builder customers follow one of two formats;

one known as a lot delivery agreement whereby we receive progress payments from

two builders for certain delivery milestones when completing a finished lot, and second a finished lot delivery agreement where we are paid by one builder as we deliver a completed finished lot.

Beginning in March of 2018, we began receiving

payments from builders pursuant to our agreements for the construction of finished lots.

As of the close of our fiscal year ended August 31, 2019, we have delivered and have been paid for the delivery of 255 finished lots.

Pursuant to agreements with the Rangeview District, we are the exclusive provider of wholesale water and wastewater services to the residents of Sky Ranch.

As of August 31, 2019, we sold 113 water and wastewater tap

fees and are providing water and wastewater services to customers at 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 references to “we,” “us,” or “our” are 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.”

Our Water and Land Assets

This section should be read in conjunction with Item 1A – Risk Factors, Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical

Accounting Policies and Use of Estimates and Note 4 – Water and Land Assets .

The $46.9 million of capitalized water costs on our balance sheet represents the costs of the water rights we own or have the exclusive right to use and the related

infrastructure developed to provide wholesale water and wastewater services.

Our water assets are as follows:

Table A - Water Assets

Lowry (Rangeview Water Supply)

Non-Export (1)

Unless otherwise specified or the context otherwise requires, any reference to the “Company,” “we,” “us” or “our” is

to Pure Cycle Corporation and its subsidiaries on a consolidated basis.

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 land development activities provide a strategic complement to our water and wastewater 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 with developing the land enables us to efficiently build and maintain 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 these 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 water/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 business which are operated as separate, but cohesive segments within the

We refer to these segments as our water and wastewater segment and our land development segment, both of which are described in more detail below.

Water and Wastewater Resource Development Segment

We 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 that land, as well as our water resources, 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 water rights, as well as enhances the

value 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.

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 term “acre-feet” is used to designate 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 oil 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 low 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 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 summarized in the table below and further discussed in this section:

Summary Water Assets Table

Surface Water

Lost Creek Supply (2)

Other Water Rights

Rangeview Water Supply

Non-Export (2)

Lost creek supply

The combined Lowry water rights are 26,985 acre feet.

In August 2019, we acquired over 800 acre feet of tributary groundwater, approximately 150 acre feet of Henrylyn surface water (which is not usable in our service areas) and approximately 70 acre feet of non-tributary groundwater.

Based on engineering estimates, we believe that the historic consumptive use of the tributary groundwater will be approximately 300 acre feet per year, which is the amount included under Surface Water attributable to the Lost Creek Supply

in the table above.

Henrylyn is a statutory irrigation district that owns its water rights in trust for its landowners.

We believe we can serve approximately 60,000 SFEs.

Our service areas and water and land assets are described in greater detail in the maps and discussion that follow.

The map below indicates the location of our Denver area assets.

Rangeview Water Supply and the Lowry Range

Our Rangeview Water – We own or control approximately 26,985 acre feet of tributary surface water, non-tributary groundwater and not non-tributary

groundwater, and approximately 26,000 acre feet of adjudicated reservoir sites that we refer to as our “Rangeview Water Supply” and an additional approximately 2,200 acre feet of water that is not part of our Rangeview Water Supply.

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

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

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 the Land Board, the

Rangeview District and us;

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”);

The 1996 Service Agreement between us and the Rangeview District for the provision of water service to the Rangeview District’s customers located on the Lowry Range, which was superseded by the Amended and Restated Service Agreement,

dated July 11, 2014 (the “Lowry Service Agreement”), between us and the Rangeview District.

Additionally, in 1997 we entered into a Wastewater Service Agreement (the “Lowry Wastewater Agreement”) with the Rangeview District to provide wastewater service to the Rangeview District’s customers on the Lowry

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

Pursuant to the Rangeview Water Agreements, we design, construct, operate and maintain the Rangeview District’s water and wastewater systems to allow the Rangeview District to provide water and wastewater service to

its customers located within the Rangeview District’s service area at the Lowry Range and other approved areas.

Subject to the terms and conditions of the Lease, we are the exclusive water and wastewater

provider 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 leased water (which excludes Export Water) to customers will revert to the Land Board, with the Rangeview District retaining ownership of the wastewater facilities

and the water system and related facilities used to deliver Export Water and other water to customers off the Lowry Range.

Through facilities we own, we use our Export Water, and we intend to use other supplies owned by us, to provide wholesale water

service and wastewater service to customers located outside of the Lowry Range, including customers of the Rangeview District and other governmental entities and industrial and commercial customers.

Of the total 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 water to customers either on or off the Lowry Range.

The Rangeview Water Agreements also grant us the right to use surface reservoir capacity to

provide water service to customers both on and off the Lowry Range.

The Lowry Range Property – The Lowry Range is located in unincorporated Arapahoe County, about 20 miles southeast of downtown Denver.

The Lowry Range 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, pursuant to our agreements

with the Land Board and the Rangeview District, we have the exclusive rights to provide water and wastewater services to approximately 24,000 acres of the Lowry Range.

Rangeview Metropolitan District – 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.

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.

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

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 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

The Rangeview Water Supply consists of 26,985 acre-feet of tributary surface water, non-tributary groundwater, and not non-tributary groundwater.

Additionally, the Rangeview Water Supply has 26,000 acre-feet of

adjudicated reservoir sites.

Terminology typically used in the water industry that may 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 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.

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 (“Land Board”) and is described below.

We acquired our Rangeview Water Supply through the following agreements:

Rangeview District;

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;

The Agreement for Sale of non-tributary and not non-tributary groundwater between us and the Rangeview 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;

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

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

Additionally, 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 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 that are used to provide water and wastewater services to the Rangeview District’s customers located within the Rangeview District’s exclusive service area, and other approved areas.

Subject to the terms and conditions of our agreements with the 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, 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 water 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 Lowry Range.

water system and related facilities used to deliver water to customers off the Lowry Range (including Export Water) will remain with us and the 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.

The Rangeview Water Agreements 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 consists of nearly 26,000 acres, or 40 square miles, of primarily undeveloped land in unincorporated Arapahoe County.

It is located 20 miles southeast of downtown Denver and is one of the largest

contiguous parcels under single ownership next to a major metropolitan area in the United States.

Pursuant to our agreements with the Land Board, we, together with the Rangeview District, have the exclusive rights to provide water and wastewater

services to 24,000 acres of the Lowry Range.

The Rangeview 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 services to the Lowry Range and other approved

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.

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.

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 Financial Officer and a director), Scott E.

Lehman (a Pure Cycle employee), and Dirk Lashnits (a Pure Cycle employee), 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.

Lehman, and Mr.

Lashnits have all elected to forego these payments .

Land Board Royalties – 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 from the Rangeview Water Supply.

The calculation of royalties depends on the water source, whether the customer is a public or private entity, and the location of the customer.

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 at a rate of 12% of gross revenues from private customers and customers on the Lowry Range and 10% from public entity customers.

In the event that either (i) metered production of water used on the Lowry

Range in any calendar year exceeds 13,000 acre feet or (ii) 10,000 surface acres 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 lieu of its royalty of 12% of gross revenues, 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.

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.

Harding, McNeill, Lehman, and Lashnits have all elected to forego these payments .

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 use the Rangeview Water Supply.

calculation of royalties depends on the location of the customer and whether the customer is a public or private entity.

The Land Board does not receive a royalty from wastewater services.

When we develop, operate and deliver water from our Rangeview

Water Supply, the Land Board receives royalties on the gross revenues at a rate of 12% from water delivered to all customers located on the Lowry Range and to all private customers located off the Lowry Range and 10% from public entity customers

located off the Lowry Range.

In the event that (i) metered production of water used on the Lowry Range in any calendar year exceeds 13,000 acre-feet or (ii) 10,000 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 lieu of its royalty of 12% 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 on the

sale of water taps, except for the sale of any taps to Sky Ranch, at the rate of two percent of the gross amount received from the sale of a water tap.

Escalated royalties would be owed if we were to sell our Export Water outright rather than

delivering water service.

addition to royalties on the sale of metered water deliveries, the Land Board will receive a royalty of two percent (2%) of the gross amount received from the sale of water taps to be served by the Rangeview Water Supply, except for the sale of any

taps to Sky Ranch.

Escalated royalties will be owed if we sell our Export Water outright rather than delivering water service.

We do not currently anticipate selling our Export Water.

Annual Production Fee – We are also required to pay the Land Board a minimum annual water production fee of $45,600 per year, which is to be credited against future royalties.

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 water supplies on behalf of its members, including the Rangeview District.

SMWSA members include 14 Denver area water providers in Arapahoe and Douglas Counties.

to certain agreements between the Rangeview District and us, 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”, 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 South Metro WISE Authority, consisting of the Rangeview District and nine other SMWSA members (“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”).

In exchange for funding the Rangeview District’s obligations in WISE, we 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.

Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and 500 acre feet per year of

In accordance with certain financing agreements, to date we have provided approximately $3.5 million of financing to the Rangeview District to fund its obligation to purchase 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,

Subscription (Operations)

Water Deliveries

Capital (Infrastructure)

East Cherry Creek Valley System – Pursuant to a 1982 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 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 monthly fee of

$8,000 per month from January 2013 through December 31, 2020 and will decrease to $3,000 per month beginning 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.

In addition, the ECCV system costs us approximately $12,500 per month to maintain.

Revenues from our Water Supply – We generate revenues through our wholesale water and wastewater operations predominantly from three sources:

water usage and wastewater treatment fees, (ii) one-time water and wastewater tap fees and construction fees/Special Facility funding, 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.

Monthly Water Usage and Wastewater Treatment 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

Table C – Lowry Range Tiered Water Usage Pricing Structure

Price ($ per thousand gallons)

Base charge per SFE

Annual Production Fee – We are also required to pre-pay the Land Board a minimum annual water royalty of $46,000 per year, which is credited against earned 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.

(June 1 – May 31)

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 agreement, the Rangeview District may purchase water 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 ten 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 hydraulic fracturing for oil and gas wells.

The agreement allows us to use the ECCV system through April 30, 2032, in exchange for a flat monthly fee and 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

Our water and wastewater segment generates revenue from the following sources, described in greater detail below:

Monthly water usage and wastewater treatment fees

One-time water and wastewater tap (connection) fees

Construction and special facility funding fees

Consulting fees;

Industrial – oil and gas operations fees.

Monthly Water Usage and Wastewater Treatment Fees

Monthly water usage fees are assessed to customers based on actual metered deliveries 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 customers on the Lowry Range are noted in the table below:

Current Lowry Range Tiered Water Usage Pricing Structure

Base charge per SFE per month

Price ($ per thousand gallons used per month)

0 gallons to 15,000 gallons

1 unchanged sentence

30,001 gallons and above

The figures in Table C reflect the amounts charged to the Rangeview District’s end-use customers on the Lowry Range.

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 ).

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

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

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 the Elbert & Highway 86 Commercial District

(“Wild Pointe”).

In addition to the tiered water usage pricing structure, we currently charge a hydrant rate of $13.00 per thousand gallons for commercial and industrial customers.

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 and permit fees.

The figures in the 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 – 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.

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.

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 the Elbert & Highway 86 Commercial District (also known as

“Wild Pointe” described below).

We sell bulk water at a rate of $14.76 per thousand gallons to commercial and industrial 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.

Water and Wastewater Tap Fees and Construction Fees/Special Facility Funding – Tap fees are typically paid by developers in advance of construction activities and are

non-refundable.

Tap fees are typically used to fund construction of the Wholesale Facilities and defray the acquisition costs of acquiring water rights.

Water and Wastewater Tap Fees

We generate significant revenues from fees charged to customers to connect to our water and wastewater systems.

These fees are known as tap fees.

The tap fee is a non-refundable fee that is payable typically at the

time a building permit is granted for construction of a 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 “wholesale facilities,” namely those assets used to deliver 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 wholesale facilities.

The Rangeview District’s 2020 water tap fees are $27,209 per SFE, and its wastewater tap fees are $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.

If water taps are sold to customers not located on the Lowry Range that are to be serviced utilizing the Rangeview Water Supply (other than taps to Sky Ranch, which are exempt), the two percent royalty to the Land Board is

deducted from the amount we receive.

In exchange for providing water service to the Rangeview District’s customers using the Rangeview Water Supply (other than taps to Sky Ranch, which are exempt), we receive 98% of the Rangeview District’s tap fees and

the Land Board receives the 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 fees are fees we receive, typically in advance, from developers for us to build certain infrastructure such as Special Facilities, which are normally the responsibility of the developer.

Consulting Fees – Consulting fees are fees we receive, typically on a monthly basis, from municipalities and area water providers along the I-70 corridor, for systems with respect to which we provide contract operations

Water Sales for Fracking

We provide water for hydraulic fracturing (“fracking”) of oil and gas wells being developed in the Niobrara Formation around our service area and our Sky Ranch property.

Oil and gas drilling in our area is affected by

the price of oil, state, local and federal government regulations and the number of wells drilled and fracked can vary from year to year.

Each well developed in the Niobrara Formation utilizes 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, drilling and fracking wells developed in the Niobrara Formation were approximately $4,238,300 and $4,044,300 during the fiscal years ended August 3 1, 2019 and 2018, re spectively.

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”).

in recent years, there have been three other oil and gas companies acquiring lease interests in the area, and each of these companies has drilled and fracked wells in the area.

We anticipate continued development of oil and gas wells at the Lowry

Range, Sky Ranch and the surrounding area by multiple operators.

See “ Our water sales for the past two years have been highly concentrated among companies providing fracking services to the oil and

gas industry, and such sales can fluctuate significantly”, “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” and “ Our land development segment may be subject to risks related to oil and gas operations in the vicinity of our Sky Ranch development, which could have an adverse impact on the marketability and/or value of

our Sky Ranch property” in Item 1A – Risk Factors of this Annual Report on Form 10-K.

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 infrastructure that is normally the responsibility of the 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 monthly, from municipalities and area water providers for 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 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 our Lowry Range service agreements, we have an agreement with the Rangeview District to provide exclusive 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 (e.g.

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.

See Rangeview Water Supply and Lowry Range – Land Board Royalties above.

The water usage fees to be collected for service at Sky

Ranch may be subject to the Land Board royalty.

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.

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 Non-Lowry Service

Sky Ranch Water and Wastewater Service – As described in more detail below, we are developing approximately 930 acres of land we own as a master planned

community known as Sky Ranch.

Pursuant to the Sky Ranch Water and Wastewater Service Agreement, dated June 19, 2017, 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 Non-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 930 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

approximately 5,000 SFEs.

Sky Ranch is zoned for 3,200 homes and over 2.0 million square feet of commercial, retail and light industrial development.

Sky Ranch will develop in multiple phases over a number of years.

Our first phase of 151 acres is

platted for 506 detached single-family residential lots.

We have entered into purchase and sale agreements (described in more detail below) with three national home builders pursuant to which the Company agreed to sell, and the builders agreed to

purchase, the initial 506 residential lots at the property.

We began construction of 255 residential lots for entry-level housing (houses costing in the $375,000 to $470,000 range) on March 1, 2018, and as of August 31, 2019 we have delivered and

received payment for 255 finished lots.

We expect to deliver an additional 200 lots in 2020 and the balance of the lots thereafter depending on home sales.

We estimate that build out of our initial 506 lots will take between three and four years.

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

In June 2017, we entered into purchase and sale agreements and related agreements (collectively, the “Builder 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 Sky Ranch.

We are 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 Non-Lowry Service Agreement, we will receive all of the water tap fees and wastewater tap fees.

We will receive the monthly service fees and usage fees for water and wastewater services received by the Rangeview

District from customers at Sky Ranch net of fees retained by the Rangeview District noted above.

As of August 31, 2019, we have completed and sold 255 finished lots to our home builder customers, and have received payments of $18,086,200, $14,094,900 of which we have recognized as revenues.

In addition, we have

completed grading, water, sewer, and storm drain improvements for the remaining 251 lots and expect to finish the remaining improvements during fiscal year 2020.

All three of our home builder customers have accelerated their purchases of finished

lots from their original agreements, and we expect to close on an additional 200 finished lots in 2020 and on the remaining 51 lots in early fiscal year 2021.

Pursuant to the Builder Contracts, 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.

We have substantially completed all of the off-site infrastructure improvements for the initial 506 residential lots.

Public improvements, such as roads, parks, and water and sanitary sewer mains, that will be shared by all homeowners in the development and not specific to a finished lot will ultimately be owned by the Rangeview

District, the Sky Ranch Districts (as defined below) or the Sky Ranch Community Authority Board (the “CAB”).

Upon completion of certain public improvements and acceptance by the Sky Ranch Districts or the CAB, we will be entitled to reimbursement for

the verified costs incurred with respect to such improvements.

We estimate that the total capital required to develop lots in the first phase (506 lots) of Sky Ranch will be approximately $35 million, which includes estimated reimbursable costs of

approximately of $29 million that will be reimbursable to us by the CAB, and that lot sales to home builders will generate approximately $36 million in revenues, providing a margin before reimbursements on lots of approximately $1 million.

Company and the CAB have agreed that no payment is required by the CAB with respect to reimbursable costs unless and until the CAB and/or the Sky Ranch Districts issue 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 reimbursable costs will be included in Inventories and subsequently expensed through Land

development construction costs until the point in time when bonding is obtained and the CAB reimburses the Company for the public improvements.

The portion of the reimbursable costs that are repaid will then be recorded as a note receivable

and will reduce any remaining capitalized expenses to the extent available.

Any reimbursable costs repaid in excess of capitalized expenses will be recognized as other income.

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 usage and wastewater treatment fees).

Our current Sky

Ranch water tap fees are $26,675 (per SFE), and wastewater taps fees are $4,659 (per SFE).

We are designing and engineering our second phase, which will include approximately 320 acres of residential development and 155 acres of commercial, retail, and industrial development along the I-70 frontage.

expect to have multiple phases being developed concurrently and expect the development of the Sky Ranch project to occur over 10–14 years, depending on demand.

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.

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

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

reimbursable 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 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.

Pursuant to our service agreements, the Company must construct all required wholesale water and wastewater improvements (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 approximately 930 acres of the Sky Ranch property (the “Sky Ranch Districts”).

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.

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.

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 Financial Officer and a director), Scott E.

Lehman (a Pure Cycle employee), and Dirk Lashnits (a Pure Cycle employee), and one independent board member.

Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year.

Lehman, and Mr.

Lashnits have all elected to forego these payments.

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.

to Colorado law, directors may receive $100 for each board meeting they attend, up to a maximum of $1,600 per year.

Harding, McNeill, Lehman, and Lashnits have all elected to forego these payments.

Sky Ranch Community Authority Board

Pursuant to a certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District No.

1 and Sky Ranch Metropolitan District No.

5 formed the 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 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

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.

5 in 2014 and later with the CAB, requiring us to fund expenses related to the construction of an agreed upon list of public improvements for the Sky Ranch property.

In September 2018 and effective as of November 13, 2017, the parties consolidated and superseded these previous agreements with one new agreement pursuant to which:

the CAB agreed to repay the amounts owed by Sky Ranch Metropolitan District No.

5 to Pure Cycle, and the previous agreement entered into between Pure Cycle and Sky Ranch Metropolitan District No.

5 in 2014 was terminated;

previous agreements between the CAB and Pure Cycle were terminated;

the CAB acknowledged all amounts owed to Pure Cycle under the terminated agreements, as well as amounts we incurred to finance the formation of the CAB;

Pure Cycle agreed to fund expenses related to the construction of an agreed upon list of improvements to be constructed by the CAB with an estimated cost of $30 million (including improvements already funded) on an as-needed basis for

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.

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;

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 construction of the agreed upon improvements are reimbursable to us by the CAB.

All amounts owed under the terminated agreements and each

reimbursable expense incurred under the new agreement accrues interest at a rate of 6% per annum from the time funds are advanced by us to the CAB or costs are incurred by us for expenses related to the construction of improvements, as applicable.

repayment is required of the CAB for advances made to the CAB or expenses incurred related to the construction of improvements unless and until the CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to reimburse us for all or a

portion of advances or other expenses incurred.

The CAB agrees to exercise reasonable efforts to issue bonds to reimburse us subject to certain limitations.

In addition, the 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 us.

Any advances or expenses not paid or reimbursed by the CAB by December 31, 2058, shall be deemed forever discharged and satisfied in full.

31, 2019, we have advanced the CAB approximately $20 million for the construction of public improvements, including improvements with respect to earthwork, erosion control, streets, drainage, and landscaping and expect to fund an additional estimated

$8.4 million in buildout costs associated with our first 506 lots of development that we expect will be reimbursable by the CAB.

The current directors of the CAB are Mark W.

Harding (our President, Chief Financial Officer and a director), Scott E.

Lehman (a Pure Cycle employee), and Dirk Lashnits (a Pure Cycle employee), and one independent

board member.

Advances and verified costs expended by us for expenses related to the construction 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 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 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 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 Sky Ranch CAB by December 31, 2058, shall be deemed forever discharged and satisfied in full.

years ended August 31, 2018 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

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 timing 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 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.

Lehman, and Mr.

Lashnits have all elected to forego these payments.

Harding, McNeill, Lehman, and Lashnits

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 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 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.

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, 2019, we received $148,300 in

royalties attributable to these two wells.

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 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.

In July 2019, we entered into an Agreement on Locations of Oil and Gas Operations covering approximately 16 acres with the operator of the O&G Lease (the “OGOA”).

The Company received an up-front payment of

$573,700 in fiscal 2019 for the OGOA, which will be recognized

as income on a straight-line basis over three years (the term of the agreement).

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.

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 mineral interest.

During the years ended August 31, 2020 and 2019, we received $669,000 and $148,300 in royalties attributable to these wells.

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.

We recognized lease income of $26,200 during the fiscal year ended August 31, 2019 related to the up-front

payment received pursuant to the OGOA.

As of August 31, 2019, we have deferred revenues of $547,500 related to the OGOA that will be recognized into income ratably through July 2022.

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

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

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

Water and Wastewater

Our wholesale water and wastewater use sales to the Rangeview District pursuant to the Rangeview Water Agreements accounted for 5%, 6% and 26% of our total water revenues for the fiscal years ended August 31, 2019, 2018 a nd 2017, respectively.

The Rangeview District has one significant customer, the Ridgeview Youth Services Center (“Ridgeview”).

Pursuant to our Rangeview Water Agreements, we are

providing water and wastewater services to Ridgeview on behalf of the Rangeview District.

Ridgeview accounted for 3%, 4% and 21% of our total water revenues for the fiscal years ended August 31,

2019, 2018 and 2017, respectively.

Our industrial water sales (i) directly and indirectly to ConocoPhillips accounted for approximately 74%, 68% and 30% and (ii) to other oil and gas operators accounted for approximately 16%, 21% and 25%, of our total

water revenues for the fiscal years ended August 31 , 2019, 2018 and 2017 respectively.

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

metered services

wastewater tap fees

Land development

Revenues from three customers represented 100% of the Company’s land development revenues for the fiscal year ended August 31, 2019.

Richmond American Homes of Colorado, Inc.

represented 32%, and each of KB Home

Colorado Inc.

and Taylor Morrison of Colorado, Inc.

represented 34% of the Company’s land development revenues for the fiscal year ended August 31, 2019.

Revenues from two customers represented 98% of the Company’s land development revenues for the

fiscal year ended August 31, 2018.

Richmond American Homes of Colorado, Inc.

represented 66% and Taylor Morrison of Colorado, Inc.

represented 32% of the Company’s land development revenues for the fiscal year ended August 31, 2018.

No revenues were

recognized from the Company’s land development activities for the fiscal year ended August 31, 2017.

Our Projected Operations

(Lot sales recognized)

Ridgeview Youth Services

Conoco / Crestone Peak (oil & gas operations)

All Sky Ranch Homes (1)

All Wild Pointe Homes (2)

Taylor Morrison

Richmond Homes

Combined totals presented

(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

metered services

wastewater tap fees

Land development

(Lot sales recognized)

Ridgeview Youth Services

Conoco / Crestone Peak (oil & gas operations)

All Sky Ranch Homes (1)

All Wild Pointe Homes (2)

Taylor Morrison

Richmond Homes

Combined totals presented

(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 the same dollar sales year over year, but due to the decline in oil and gas operations revenue, the percentage increased in fiscal 2020 over 2019.

Projected Operations

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

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sustainable manner.

We plan to develop our water and wastewater systems in stages to efficiently meet demands in our service areas by managing capital investments required for construction of facilities.

We develop our water and wastewater systems in stages to efficiently meet customer demands in our service areas by managing capital investments required for construction of facilities.

We use third-party contractors to construct

our facilities as needed.

We employ licensed water and wastewater operators to operate our water and wastewater systems.

We employ licensed water and wastewater operators to run 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 effluent supplies to provide a balanced sustainable water supply for our wholesale

customers and their end-use customers.

Our water and wastewater systems conjunctively use surface and groundwater supplies and storage of raw water and highly treated reclaimed water supplies to provide a balanced sustainable water supply for our customers.

Integrating conservation practices and incentives, together with effective water reuse, demonstrates our commitment to providing environmentally responsible and sustainable water and wastewater services.

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-effective way of expanding and enhancing service capacities for area water providers.

We continue to seek opportunities for developing water supplies and water storage opportunities with

other area water providers.

We expect the development of our Rangeview Water Supply to require a significant number of high capacity deep water wells.

We anticipate drilling separate wells into each of the three principal aquifers located beneath

the Lowry Range.

It is expected that each well will deliver water to central water treatment facilities for treatment prior to delivery to customers.

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 and treatment facilities to treat the water prior to introduction into our distribution systems.

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, the full build-out of water facilities

(including diversion structures, transmission pipelines, reservoirs, and water treatment facilities) on the Lowry Range will cost in excess of $850 million, based on estimated costs, and will accommodate water service to customers located on and

outside the Lowry Range.

We expect this build out to occur in phases over an extended period of at least 50 years, and we expect that tap fees will be sufficient to fund the infrastructure costs.

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-effective way of expanding and enhancing service capacities for area water providers.

We continue to seek opportunities for developing water supplies and water storage opportunities with other area water providers.

As we continue expanding and developing our Rangeview Water Supply, we anticipate needing a significant number of high capacity deep water wells.

These wells would be drilled into one or more of the three principal

aquifers located beneath the Lowry Range, and, as with our current wells, the water would be delivered to central water treatment facilities for treatment prior to delivery to customers.

Continued 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, additional treatment facilities to treat the water prior to introduction into our distribution system(s), and additional surface water diversion

facilities 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 constructed on the Lowry Range.

We estimate the full build-out of

water and wastewater facilities (including diversion structures, transmission pipelines, reservoirs, and water treatment facilities) to develop and deliver our portfolio of water would cost in excess of $850 million, and would accommodate water

service to customers located on and outside the Lowry Range.

We believe this build out would occur in phases over many decades, and we believe tap fees would be sufficient to fund the required infrastructure costs.

Our Denver-based supplies are a valuable, locally available resource located near the point of use.

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their growing demands.

During fisca l 2019, w e invested approximately $14.1 million in plant and facilities that interconnect the Rangeview District, WISE, and Sky Ranch water and

wastewater systems and provide water and wastewater services to our customers.

We expect to continue to invest in plants and facilities as our customer demands grow.

We are in the process of developing our Sky Ranch property, including building finished lots for home builders and building the water and wastewater infrastructure for residential and commercial development of the

In March 2018, we began construction of improvements for finished lots and will phase the construction of finished lots consistent with builder purchases of finished lots as defined in our agreements.

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 fisca l 2019, w e invested

approximately $17.7 million in our Sky Ranch property to deliver 255 finished lots and make other improvements to the remaining 251 lots.

During fiscal 2020, we invested $6.3 million in plant and facilities that interconnect the Rangeview District, WISE, and Sky Ranch water 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 water rights and facilities as our customer demands grow.

We are in the process of developing our Sky Ranch property, including finishing lots for home builders, and building additional water and wastewater infrastructure for residential and commercial development at the

During the years ended August 31, 2020 and 2019, we invested $8.5 million and $17.7 million, in our Sky Ranch land to deliver the finished lots, which was done ahead of our original schedule and 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 tap fees, and we believe we will receive the remaining $5.9 million in water and wastewater tap fees for the lots in the

initial filing of Sky Ranch during our fiscal 2021.

We believe the second filing of 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.

Water and Growth in Colorado

Colorado has experienced a robust housing market over the past 48 months.

The key drivers to housing in the area are:

Housing Starts – From September 2018 to September 2019, annual housing starts decreased by 9%.

From September 2017 to September 2018,

annual housing starts increased by 11.6%.

Unemployment – The unemployment rate in Colorado was 2.2% at August 31, 2019, compared to a national unemployment rate of 3.5%.

Population – The Denver Regional Council of Governments, 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 people 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, will grow from a current population of 3.9 million to 4.9 million by the year 2030, while the state’s population will increase from 5.7 million to 7.2 million.

Demand – Approximately 70% of the state’s projected population increase is anticipated 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 water

The estimated population increases are expected to result in demands for water services in excess of the current capabilities of municipal service providers, especially during drought conditions.

Supply – The Statewide Water Supply Initiative estimates that population growth in the Denver region and the South Platte River basin could result in additional water supply

demands of over 400,000 acre feet by the year 2030.

Development – Colorado law requires property developers to demonstrate that they have sufficient water supplies for their proposed projects before zoning applications will be

These factors indicate 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.

focus the marketing of 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, 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.

Growth in Colorado

Calendar year 2020 was a strong year for the Colorado housing market.

As COVID-19 escalated, we took measures to protect the health and well-being of our employees, customers, business partners, and their families.

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 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 has continued to grow.

This was fueled by population growth in Colorado, which is projected to continue far into the foreseeable future.

Denver Regional Council of Governments, 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 nearly 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 approximately 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.

This growth furthers the need for sustainable water supplies and intensifies the competition

to obtain those supplies.

The estimated population increases are expected to result in demands for water services that exceed the current capabilities of municipal service providers, especially during drought conditions.

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 require an additional 400,000 acre-feet of water by the year 2030.

What makes this more

difficult for land developers and builders is that Colorado law requires developers to demonstrate they have sufficient water supplies for their proposed projects before zoning applications will be considered.

This 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 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.

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 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.

About one-half of the water used by a

typical Denver-area residential water customer is used for outdoor landscape and lawn irrigation.

delivery of high quality potable drinking water to customers through one system and a second system to supply raw or reclaimed water for irrigation 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 system in which essentially all effluent water from wastewater treatment plants will be reused to meet non-potable water demands.

We expect our systems to include an

extensive water reclamation process 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

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Labor and Raw Materials

We competitively bid contracts for infrastructure improvements (grading, utilities, roads, water and wastewater) at Sky Ranch.

Contractors enter into fixed priced contracts where the contractor is at risk for cost

overruns prior to completion of improvements.

We competitively bid contracts for infrastructure improvements (grading, utilities, roads, water and wastewater infrastructure) at Sky Ranch.

Many of our contractors enter fixed priced contracts where the contractor is

at risk for cost overruns prior to completion of improvements.

Under these fixed-price contracts, the 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 a number of 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, reduced gross margins from lot sales, or both.

While we contract with third parties for our

labor and materials at a fixed price, which should allow us to mitigate the risks associated with increases in the cost of labor and building materials, other developments may arise which would increase lot delivery costs.

These quotes or

estimates may be based on several assumptions, including assumptions about prices and availability of labor, equipment and materials, and other issues.

Increased costs or shortages of skilled labor, concrete, steel, pipe, and other materials could

cause increases in development costs and delays.

These shortages and delays may result in delays in the delivery of the lots under development or the completion of water or wastewater facilities, increase costs for us or other contractors on our

projects, reduce gross margins from sales, or subject us to penalties or defaults under our agreements.

While we contract with third parties for our labor and materials at a fixed price, which we believe allows us the ability to mitigate the risks

associated with shortages of and increases in the cost of labor and building materials, other unforeseen factors may arise which could increase our costs.

Water and Wastewater Services

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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.

Although we have exclusive long-term water and wastewater service contracts for 24,000 acres of the 27,000-acre Lowry Range pursuant to the Lowry Service Agreement, providing water and wastewater services to areas

other than Wild Pointe, Sky Ranch and a portion of the Lowry Range 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.

Although we have exclusive long-term water and wastewater service contracts for 24,000 acres of the Lowry Range, Wild Pointe, and Sky Ranch pursuant to our service agreements, providing water and wastewater service 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 Water 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.

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

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

among surface water rights, groundwater rights, storage capacity and reclaimed water supplies.

Principal factors affecting competition for water 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, 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 among surface water rights, groundwater rights,

storage capacity and reclaimed water supplies.

Land Development

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.

Competition among land

developers and development projects is determined by the location of the real estate, the market appeal of the development plan, and the developer’s ability to build, market and deliver projects on a timely basis.

Many of our land development

competitors have greater financial resources than we do, and most if not all of our land development competitors have more development experience than we do.

Residential developers sell to home builders, who in turn compete based on location, price,

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.

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.

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

Environmental compliance issues may arise in the normal course of operations or as a result of regulatory changes.

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 because 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 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.

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 (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.

Safe Drinking Water Act

The Safe Drinking Water Act establishes criteria and procedures for the U.S.

Environmental Protection Agency 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 (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.

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We have implemented measures to comply with the Groundwater Rule.

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.

We currently have 29 full-time employees.

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.

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

We currently have 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 Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to

these reports as soon as reasonably practicable after filing with the Securities and Exchange Commission (the “SEC”).

We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current

Reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing with the Securities and Exchange Commission (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 .

1 unchanged sentence

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

What changed 10-K

Item 1. Business