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Item 8. Financial Statements and Supplementary Data

2020-11-10 compared with 2019-11-12 · 898 added, 851 removed, 399 unchanged (81% of the section changed)

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Opinion on the Financial Statements

We have audited the accompanying balance sheets of Pure Cycle Corporation (the “Company”) as of August 31, 2019 and 2018, the related statements of income, comprehensive income, shareholders' equity, and cash flows for

each of the years in the two-year period ended August 31, 2019, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above present fairly, in all material respects, the

financial position of the Company as of August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended August 31, 2019, in conformity with accounting principles generally accepted in

the United States of America.

We also have audited the Company’s internal control over financial reporting as of August 31, 2019, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), based on

criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

Our report dated November 12, 2019, expresses an

adverse opinion.

We have audited the accompanying consolidated balance sheets of Pure Cycle Corporation (the “Company”) as of August 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income,

shareholders’ equity, and cash flows for each of the years in the two-year period ended August 31, 2020, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements referred to above

present fairly, in all material respects, the financial position of the Company as of August 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the two-year period ended August 31, 2020 and 2019, in

conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

The Company’s management is responsible for these financial statements.

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

We are a public accounting firm registered

with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

We are a public accounting

firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

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

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material misstatement, whether due to error or fraud.

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

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management,

as well as evaluating the overall presentation of the financial statements.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

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

procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well

as evaluating the overall presentation of the financial statements.

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

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November 10, 2020

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Pure Cycle Corporation

Adverse Opinion on Internal Control over Financial Reporting

We have audited Pure Cycle Corporation’s (the Company’s) internal control over financial reporting as of August 31, 2019, based on criteria established in Internal

Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, because of the effect of the material weakness described in the following paragraph on the

achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of August 31, 2019, based on criteria established in Internal

Control—Integrated Framework (2013) issued by COSO.

A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material

misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

The following material weaknesses have been identified and included in management’s assessment.

The control surrounding identification of accruals of costs incurred from related parties was not operating effectively to ensure that transactions were

properly recorded in a timely manner.

Additionally, the Company does not have adequate controls in place around preparation of the income tax provision.

These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 financial statements, and this report does not affect our

report dated November 12, 2019, on those financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the balance sheets and the related statements of income,

comprehensive income, shareholders’ equity, and cash flows of the Company, and our report dated November 12, 2019, expressed an unqualified opinion.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over

financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting .

Our responsibility is to express an

opinion on the Company’s internal control over financial reporting based on our audit.

We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S.

securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal

control over financial reporting was maintained in all material respects.

Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material

weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

Our audit also included performing such other procedures as we considered necessary in the circumstances.

that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial

statements for external purposes in accordance with generally accepted accounting principles.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in

reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance

with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding

prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

Also, projections of any evaluation of effectiveness to future periods are

subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Plante & Moran PLLC

November 12, 2019

PURE CYCLE CORPORATION

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Prepaid expenses and deposits

Taxes receivable

Land development inventories

Income taxes receivable

Total current assets

Long-term investments

Investments in water and water systems, net

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Notes receivable – related parties, including accrued interest

Long-term land investment

Deferred tax asset

Taxes receivable

Long-term land investment

Operating leases - right of use assets, less current portion

Income taxes receivable

Current liabilities:

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Accrued liabilities

Accrued liabilities - related parties

Deferred revenues

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Participating Interests in Export Water Supply

Deferred tax liability

Lease obligations - operating leases, less current portion

Total liabilities

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23,856,098 and 23,826,598 shares issued and outstanding, respectively

Collateral stock

Additional paid-in capital

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Total liabilities and shareholders’ equity

See accompanying Notes to Financial Statements

See accompanying Notes to Consolidated Financial Statements

PURE CYCLE CORPORATION

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For the Fiscal Years Ended August 31,

Metered water usage

Metered water usage from:

Municipal customers

Industrial - Oil and gas operations

Wastewater treatment fees

Special facility funding recognized

Water tap fees recognized

Water and wastewater tap fees

Total revenues

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General and administrative expenses

Operating income (loss)

Other income (expense):

Non-cash mineral interest impairment charge

Operating income

Other income:

Reimbursement of construction costs - related party

Oil and gas lease income, net

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Net income before taxes

Income tax benefit

Unrealized holding (losses) gains

Income tax (expense) benefit

Unrealized holding losses

Total comprehensive income

Basic and diluted net income per common share

Weighted average common shares outstanding – basic

Weighted average common shares outstanding – diluted

See accompanying Notes to Financial Statements

Earnings per common share:

Weighted average common shares outstanding:

See accompanying Notes to Consolidated Financial Statements

PURE CYCLE CORPORATION

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Preferred Stock

Accumulated Other

Comprehensive

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Exercise of options

Adoption of accounting standards

Unrealized holding gain on investments

Unrealized holding losses on investments

August 31, 2019 balance:

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Exercise of options

Unrealized holding loss on investments

Unrestricted stock issue

Unrealized holding losses on investments

August 31, 2020 balance:

See accompanying Notes to Financial Statements

See accompanying Notes to Consolidated Financial Statements

PURE CYCLE CORPORATION

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Cash flows from operating activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Share-based compensation expense

Depreciation and depletion

Bad debt (recovery) expense

Recovery of doubtful accounts

Investment in Well Enhancement and Recovery Systems LLC

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Deferred income taxes

Proceeds from Sky Ranch CAB reimbursement applied to land development inventories

Non-cash mineral interest impairment charge

Changes in operating assets and liabilities:

Land development inventories

Trade accounts receivable

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Deferred revenues

Deferred income – oil and gas lease

Deferred income – oil and gas lease and water sales payment

Lease obligations - operating leases

Net cash provided by operating activities

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Investments in water, water systems and land

Investments in Sky Ranch pipeline

Investments in Sky Ranch land development

Sales and maturities of marketable securities

Purchase of short-term investments

Purchase of long-term investments

Purchase of marketable securities

Purchase of property and equipment

Net cash (used in) provided by investing activities

Net cash used by investing activities

Cash flows from financing activities:

Proceeds from note receivable – related parties

Proceeds from exercise of options

Payment to contingent liability holders

Net cash provided in financing activities

Net cash provided by financing activities

Net change in cash and cash equivalents

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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES

Inventories included in accounts payable and accrued liabilities

Land development inventories included in accounts payable and accrued liabilities

Investments in water, water systems and land included in accounts payable and accrued liabilities

Transfer of income taxes to income taxes receivable

Transfer of prepaid asset to other asset

Transfer of land and development costs to inventory

See accompanying Notes to Financial Statements

Income taxes paid, net of refunds

See accompanying Notes to Consolidated Financial Statements

PURE CYCLE CORPORATION

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The Company operates in two business segments:

(i) developing wholesale water and wastewater systems

in the water-short Denver metropolitan area, and (ii) developing a Master Planned Community on approximately 930 acres of land located along the Interstate 70 corridor (“I-70”), approximately four miles south of Denver International Airport (“DIA”),

which is planned to include a mix of 3,200 single-family and multifamily residential units and over 2 million square feet of commercial, retail, and industrial space.

The Company has accumulated valuable water and land interests over the past 30

years and has developed an extensive network of wholesale water production, storage, treatment, and distribution systems, and wastewater collection and treatment systems which serve domestic, commercial and industrial customers in the Denver

metropolitan region.

The Company's land assets are located in one of the most active development areas in the Denver metropolitan region along I-70.

As of August 31, 2019, the Company had approximately $15.2 million of working capital, which included approximately $9.7 million of cash and cash equivalents,

including investments with maturities less than 90 days.

(i) wholesale water and wastewater services and

(ii) land development.

The Company has accumulated valuable water and land interests over the past 30 years and has developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater

collection and treatment systems which serve domestic, commercial and industrial customers in the Denver metropolitan region.

The Company’s land assets are located along the active and high-profile I-70 corridor in

the Denver metropolitan region.

Through its land development segment, the Company is developing Sky Ranch, a 930 acre master planned community located four miles south of Denver International Airport.

Sky Ranch is planned to include a

mix of 3,200 single-family and multifamily residential units and over two million square feet of commercial, retail, and industrial space.

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its majority-owned and controlled subsidiaries.

The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its wholly-owned and controlled subsidiary.

Intercompany accounts and transactions have been eliminated in

consolidation.

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

On March 27, 2020, Congress enacted the CARES Act to provide financial relief due to the outbreak of a novel strain of the

coronavirus (“COVID-19”) .

The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses,

temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax

depreciation of certain qualified improvement property, and the creation of certain refundable employee retention credits.

The Company does not believe there will be any material impacts to its financial statements because of the CARES Act.

On April 17, 2020, the Company entered into a $390,000 note payable to Central Bank & Trust part of Farmers & Stockmens Bank, pursuant to the Paycheck Protection Program (“PPP Loan”) under the CARES Act.

May 13, 2020, the Company returned the entire outstanding balance of $390,278, inclusive of interest.

The interest was waived by Central Bank & Trust.

Reclassifications

Certain reclassifications have been made to the financial statements to conform to the consolidated 2020 financial statement presentation.

These reclassifications had no effect on net earnings

or cash flows previously reported.

Use of Estimates

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reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Estimates are used to account for

certain items such as revenue recognition, reimbursable costs and expenses, costs of revenue for lot sales, share-based compensation, deferred tax asset valuation, and the useful lives of assets.

Actual results could differ from those estimates.

Estimates are used to account

for certain items such as revenue recognition, reimbursable costs and expenses, costs of revenue for lot sales, share-based compensation, deferred tax asset valuation, and the useful lives of assets.

Actual results could differ from those

Cash and Cash Equivalents

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Treasury debt securities.

At various times during the fiscal year ended August 3 1, 2019, t he Company’s main operating account exceeded federally

The Company had no cash equivalents as of August 31, 2020.

At various times during the fiscal year ended August 31, 2020, the Company’s main operating account exceeded federally

insured limits.

The Company has never suffered a loss due to such excess balance.

Land Development Inventories

Inventories primarily include land held for development and sale.

Inventories are stated at cost.

Capitalized lot development costs at Sky Ranch are costs incurred to construct lots at Sky Ranch that meet the Company’s

capitalization criteria for improvements to a lot and are capitalized as incurred.

The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development of lots at Sky Ranch.

Company uses the specific identification method for the purpose of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sale.

The Company records all land cost of sales over time based on inputs

of costs incurred to date to total estimated costs to complete.

In accordance with Accounting Standards Codification (“ASC”) Topic 360, Property, Plant and Equipment (“ASC 360”), the Company values land held for sale at the lower of the

carrying value or net realizable value.

In determining net realizable value, the Company primarily relies upon the most recent negotiated price that is a Level 2 input (see Note 3 – Fair Value Measurements for

definitions of fair value inputs).

If a negotiated price is not available, the Company will consider several factors, including, but not limited to, current market conditions, recent comparable sales transactions and market analysis studies.

net realizable value is lower than the current carrying value, the land is written down to its estimated net realizable value.

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

Certificates of deposit and debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity.

The Company has $192,800 of investments classified

as held-to-maturity at August 31 , 2019 , which represent certificates of deposit that mature within 12 months and are, therefore, classified as short-term.

Securities that the Company does not

have the positive intent or ability to hold to maturity, including debt securities, are classified as available for sale securities and reported at their fair value.

Changes in value on such securities are recorded as a component of Accumulated other comprehensive income (loss).

To date, the Company has never suffered a loss due to such excess balance.

Contract Asset

Contract assets reflect revenue which has been earned but not yet invoiced.

Contract assets are transferred to receivables when the Company has the right to bill such amounts and

they are invoiced.

Contract receivables are recorded at the invoiced amount and do not bear interest.

Credit is extended based on the evaluation of a customer’s financial condition and collateral is not required.

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

Marketable securities the Company does not have the positive intent or ability to hold to maturity, including certificate of deposits and U.S.

Treasury debt securities, are reported at their fair value.

value of such securities are recorded as a component of Accumulated other comprehensive income (loss).

The cost of securities sold is based on the specific identification method.

The Company’s treasury securities are typically 30-day maturities.

As of August 31, 2020,

the Company held no marketable securities.

Land Development Inventories

Land development inventories primarily include land held for development and sale stated at cost.

The Company began developing its Sky Ranch property in 2018.

Capitalized lot development costs at Sky Ranch are costs incurred to construct

finished lots that meet the Company’s capitalization criteria for improvements to a lot and are capitalized as incurred.

The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to

the development of lots at Sky Ranch.

The Company uses the specific identification method for purposes of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sale.

The Company records all

land cost of sales when a lot is completed and sold on a lot-by-lot basis.

Costs included in Land Development Inventories include common area costs the Company funded through the Sky Ranch Community

Authority Board (the “Sky Ranch CAB”).

The Company believes these costs will be reimbursable by the Sky Ranch CAB.

The Company will record any reimbursements as a reduction of capitalized costs remaining in Land

Development Inventories once the Sky Ranch CAB has reimbursed the costs (i.e., once the Sky Ranch Districts and/or the Sky Ranch CAB has issued bonds).

The Company measures land held for sale at the lower of the carrying value or net realizable value.

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

If recent sales prices are not available, the Company will consider several factors, including, but not limited to, current market conditions, nearby recent sales transactions, and market analysis studies.

If the net realizable value is lower

than the current carrying value, the land is written down to its net realizable value.

Concentration of Credit Risk and Fair Value

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments.

From time to time, the Company places its cash in money market

instruments, certificates of deposit and U.S.

From time to time, the Company places its cash in money

market instruments, certificates of deposit and U.S.

government treasury obligations.

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The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value.

Cash and Cash Equivalents – The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are

The Company uses a fair value hierarchy that has

three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant input to determine where within the fair value hierarchy the measurement falls.

The estimated fair value measurements in Note 2 – Fair Value Measurements are based on Level 2 of the fair value hierarchy.

Cash and Cash Equivalents – The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds

These securities primarily include balances in the Company’s operating and savings accounts.

The carrying amount of cash and cash equivalents approximate fair value.

Trade Accounts Receivable – The Company records accounts receivable net of allowances for uncollectible accounts and the carrying value approximate fair value

due to the short-term nature of the receivables.

Trade Accounts Receivable – The Company records accounts receivable net of allowances for uncollectible accounts and the carrying values approximate fair

value due to the short-term nature of the receivables.

Investments – The carrying amounts of investments approximate fair value.

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Long-Term Financial Liabilities – The Comprehensive Amendment Agreement No.

1 (the “CAA”) is comprised of a recorded

balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (as defined in Note 4 – Water and Land Assets ).

The amount payable is a

fixed amount but is repayable only upon the sale of “Export Water” (as defined in Note 4 – Water and Land Assets ).

Because of the uncertainty of the sale of Export Water, the Company has determined that the

contingent portion of the CAA does not have a readily determinable fair value.

1 (the “CAA”) is comprised of a

recorded balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (as defined in Note 4 – Water and Land Assets ).

payable is a fixed amount but is repayable only upon the sale of “Export Water” (as defined in Note 4 – Water and Land Assets ).

Because of the uncertainty of the sale of Export Water, the Company has

determined that the contingent portion of the CAA does not have a readily determinable fair value.

The CAA is described further in Note 5 – Participating Interests in Export Water .

Notes Receivable – Related Parties – The carrying amounts of the Notes receivable –

related parties (including with the Rangeview Metropolitan District (the “Rangeview District”) and the Sky Ranch Community Authority Board (the “CAB”)) approximate their fair value because the interest rates on the notes approximate market

Notes Receivable – Related Parties – The carrying amounts of the Notes

receivable – related parties (including with the Rangeview Metropolitan District (the “Rangeview District”) and the Sky Ranch CAB) approximate their fair value because the interest rates on the notes approximate market rates.

Off-Balance Sheet Instruments – The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA.

Because repayment of this

portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value.

Because repayment of

this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value.

See further discussion in Note 5 – Participating Interests in Export Water .

The Company did not have any debt during the fiscal years ended August 31, 2019 and 2018, and therefore did not pay any interest during the fiscal years ended August

31, 2019 and 2018.

The Company did not pay any income taxes during the fiscal year ended August 31, 2018 .

Trade Accounts Receivable

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The allowance for uncollectible accounts was determined based on a specific review of all past due accounts.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Recoverability of assets to be held and used is

measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the eventual use of the asset.

If such assets are considered to be impaired, the impairment to be recognized is measured by

the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

The Company determined that no indicators were

noted which would result in an impairment of the Company’s long-lived assets for the period ended August 31, 2019 and 2018.

Long-Lived Assets Impairment Loss

The Company evaluates its long-lived assets for impairment at least annually or more frequently if the Company believes events or changes in circumstances indicate that the carrying amount of an asset may not be

Estimates of future cash flows and timing of events for evaluating long-lived assets for impairment are based upon management’s assumptions and market conditions.

If any of its long-lived assets are

deemed to be impaired, the amount of impairment to be recognized is the excess of the carrying amount of the assets over its fair value.

Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs

The impairment testing of long-lived assets during fiscal 2020 resulted in $1.4 million impairment charge for the Arkansas Valley mineral rights, as described below.

As of August 31, 2020, the Company assessed the recoverability of its Arkansas Valley mineral rights.

The Company determined the carrying value of these mineral rights is not recoverable.

As a result, the Company

recorded an impairment charge of $1.4 million.

The charge was recorded in Non-cash mineral asset impairment charge in

the consolidated statements of operations and comprehensive income for fiscal 2020.

There was no impairment for the Arkansas Valley mineral rights long-lived asset in fiscal 2019.

Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges

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estimated useful lives of up to 30 years.

The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its

water assets.

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

its water assets.

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

Revenue Recognition

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which businesses are described below.

The Company generates revenues through its wholesale water and wastewater business predominantly from three sources:

(i) monthly wholesale water usage fees and wastewater service fees, (ii) one-time water and

wastewater tap fees and construction fees/Special Facility funding, and (iii) consulting fees.

Because these items are separately delivered and distinct, the Company accounts for each of the items separately, as described below.

Wholesale Water and Wastewater Fees

Monthly water usage and wastewater treatment fees – Monthly wholesale water usage charges are assessed to the Company’s customers based on actual metered usage each

month plus a base monthly service fee assessed per single family equivalent (“SFE”) unit served.

One SFE is a customer, whether residential, commercial or industrial, that imparts a demand on the Company’s water or wastewater systems

similar to the demand of a family of four persons living in a single-family house on a standard-sized lot.

Water usage pricing uses a tiered pricing structure.

The Company recognizes wholesale water usage revenues at a point in time upon

delivering water to its customers or its governmental customers’ end-use customers, as applicable.

Revenues recognized by the Company from the sale of “Export Water” and other portions of its “Rangeview Water Supply” off the Lowry Range

are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”).

The Company is the primary distributor of the “Export Water” and sets pricing for the sale of Export Water.

Revenues recognized by the

Company from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.

For water sales on the Lowry Range, the Rangeview District is directly selling the water

and deemed the primary distributor of the water.

Water and Wastewater Segment Revenues

The Company generates revenues through its wholesale water and wastewater business predominantly from the items identified below.

Because these items are separately delivered and distinct, the Company accounts for

each of the items separately, as described below.

Monthly water usage and wastewater treatment fees – The Company provides water and wastewater services to customers, for which the customers are

charged fees monthly.

Water usage fees are assessed to customers based on actual metered usage each month plus a base monthly service fee assessed per single family equivalent (“SFE”) unit served.

One SFE is a customer, whether residential,

commercial or industrial, that imparts a demand on the Company’s water or wastewater systems similar to the demand of a family of four persons living in a single-family house on a standard-sized lot.

Water usage pricing is based on a tiered

pricing structure.

The Company recognizes wholesale water usage revenues at a point in time upon delivering water to its customers or its governmental customers’ end-use customers, as applicable.

Revenues recognized by the Company from the sale

of “Export Water” and other portions of its “Rangeview Water Supply” off the “Lowry Range” are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”).

The Company is the primary distributor of the Export

Water and sets pricing for the sale of Export Water.

Revenues recognized by the Company from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.

For water sales on

the Lowry Range, the Rangeview District is directly selling the water and deemed the primary distributor of the water.

The Rangeview District sets the price for the water sales on the Lowry Range.

See further description of “Export Water,” the “Lowry Range,” and the “Rangeview Water Supply” in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System.”

In addition to providing domestic water, the Company provides raw water for hydraulic fracturing to industrial customers in the oil and gas industry that are located in and adjacent to its service

Frack water revenues are recognized at a point in time upon delivering water to a customer.

The Company delivered 356.1 million and 406.6 million gallons of water to customers during the years ended August 31, 2019 and 2018, respectively, of which 84% and 77% was used for oil and gas exploration, respectively.

See further description of “Export Water,” the

“Lowry Range,” and the “Rangeview Water Supply” in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System.”

The Company also sells raw water for industrial uses to oil and gas companies during drilling processes (referred to as “O&G operations”).

O&G operations revenues are recognized at a point in time upon

delivering water to the customer, unless other special arrangements are made.

The Company delivered 76.2 million and 356.3 million gallons of water to customers during the years ended August 31, 2020 and 2019.

Of this, 1% and 84% was used for O&G operations.

The Company recognizes wastewater treatment revenues monthly based on a flat monthly fee and actual usage charges.

The monthly wastewater treatment fees are shown net of amounts retained by the

Rangeview District.

The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview District.

Costs of delivering water and providing wastewater service to customers are recognized as incurred.

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include payment of tap fees.

A tap fee constitutes a right to connect to the Company’s wholesale water and wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may

make a physical tap into the wholesale line(s) to connect its property for water and/or wastewater service.

Once connected to the water and/or wastewater systems, the customer has live service to receive metered water deliveries from the

Company’s system and send wastewater into the Company’s system.

Thus, the customer has full control of the connection right as it has the ability to obtain all of the benefits from this right.

As such, management has determined that tap

fees are separate and distinct performance obligations.

The Company recognizes water and wastewater tap fee revenues at the time the Company grants a right for the customer to connect to the water or wastewater service line to obtain service.

recognized $3,018,300 and $49,900 of water tap fee revenues during the years ended August 31, 2019 and 2018, respectively.

The water tap fees recognized are based on the amounts billed to the Rangeview District and any amounts paid to third parties

pursuant to the CAA as further described in Note 7 – Long-Term Obligations and Operating Lease .

The Company recognized $526,400 of wastewater tap fees during the year ended August 31, 2019.

No wastewater taps

were sold during the year ended August 31, 2018.

The Company recognizes construction fees, including fees received to construct “Special Facilities,” over time as the construction is completed because the customer is generally able to use the

property improvement to enhance the value of other assets during the construction period.

Special Facilities are facilities that enable water to be delivered to a single customer and are not otherwise classified as a typical wholesale facility or

retail facility.

Temporary infrastructure required prior to construction of permanent water and wastewater systems or transmission pipelines to transfer water from one location to another are examples of Special Facilities.

Management has determined

that Special Facilities are separate and distinct performance obligations because these projects are contracted to construct a specific water and wastewater system or transmission pipeline and typically do not include multiple performance obligations

in a contract with a customer.

A tap constitutes a right to connect to the wholesale water and wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may make a physical tap

into the wholesale line(s) to connect its property for water and/or wastewater service.

The right stays with the property.

The Company has no obligation to physically connect the property to the lines.

Once connected to the water and/or

wastewater systems, the customer has live service to receive metered water deliveries from the Company’s system and send wastewater into the Company’s system.

Thus, the customer has full control of the connection right as it can obtain all the

benefits from this right.

As such, management has determined that tap fees are separate and distinct performance obligations that are recognized at a point in time.

The Company recognizes water and wastewater tap fee revenues at the time the Company grants a right for the customer to connect to the water or wastewater service line to obtain service, and the customer pays the

During the years ended August 31, 2020 and 2019, the Company recognized $4,758,700 and $3,116,100 of water tap fee revenues.

The water tap fees recognized are based on the amounts billed by the Rangeview District to customers, after

deduction of royalties due to the Land Board for water taps, if applicable, and net of amounts paid to third parties pursuant to the CAA as further described in Note 7 – Long-Term Obligations and Operating Lease .

During the years ended August 31, 2020 and 2019, the Company recognized $882,300 and $526,400 of wastewater tap fee revenues.

The Company recognizes construction fees, including fees received to construct “special facilities,” over time as the construction is completed because the customer is generally able to use the property improvement to enhance the value of

other assets during the construction period.

Special facilities are facilities that enable water to be delivered to a single customer and are not otherwise classified as a typical wholesale facility or retail facility.

Temporary infrastructure

required prior to construction of permanent water and wastewater systems or transmission pipelines to transfer water from one location to another are examples of special facilities.

Management has determined that special facilities are separate

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

No special facilities revenue was recognized during the fiscal year ended August 31, 2020 or 2019.

As of August 31, 2020 and 2019, the Company had no contract liabilities related to water tap and construction fee/special facility funding revenue.

Consulting fees – Consulting fees are fees that the Company receives, typically on a monthly basis, from municipalities and area water providers along the I-70 corridor, for contract operations services over time as services are

Consulting fees – The Company receives, typically on a monthly basis, fees from municipalities and area water providers along the I-70 corridor, for contract operations services over time as services are

Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed.

The Company recognized $158,600 and $142,700 of consulting fees during the years ended August 31, 2019 and 2018,

respectively.

Land Development Activities

The Company generates revenues through the sale of finished lots at its Sky Ranch development primarily from several sources of revenues:

(i) the sale of finished lots, (ii) construction support activities, (iii)

project management services, and (iv) reimbursable expenses incurred to develop certain public improvements.

Land development through the sale of finished lots – The Company acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch along the I-70 corridor east of Denver, Colorado.

The Company has

entered into purchase and sale agreements with three separate home builders pursuant to which the Company agreed to sell, and each builder agreed to purchase, residential lots at the property.

The Company began construction of lots in

March 2018 and segments its reporting of the activity relating to the costs and revenues from the construction and sale of lots at Sky Ranch.

The Company sells lots at Sky Ranch pursuant to distinct agreements with each builder.

During the years ended August 31, 2020 and 2019, the Company recognized $25,700 and $158,600 of consulting fees.

year ended August 31, 2020, the Company cancelled all but one of its remaining consulting contracts to focus its resources on the Sky Ranch water and wastewater operations and land development.

These fees are classified in Other income .

Land Development Segment Revenues

The Company generates revenues through its land development business predominantly from the sources described below.

Because these items are separately delivered and distinct, the Company accounts for each of the

items separately, as described below.

Sale of finished lots – The Company acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch along the I-70 corridor east of Denver, Colorado.

The Company has entered

into purchase and sale agreements with three separate home builders pursuant to which the Company agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch.

The Company began construction of lots in March 2018 and

segments its reporting of the activity relating to the costs and revenues from the construction and sale of lots at Sky Ranch.

The Company sells lots at Sky Ranch pursuant to distinct agreements with each home builder.

These agreements follow one of two formats.

One format is the sale of a finished lot, whereby the purchaser pays

for a ready-to-build finished lot and payment is a lump-sum payment upon completion of the finished lot.

The Company will recognize revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder

and the builder is able to obtain a building permit, as the transaction cycle will be complete and the Company will have no further obligations for the lot.

During the year ended August 31, 2019, the Company received payment and recognized revenue

of $4,053,800 from one home builder in exchange for the delivery of 57 finished lots.

No revenue was recognized for lot sales at a point in time during the year ended August 31, 2018.

The Company’s second format is the sale of finished lots pursuant to a development agreement with builders, whereby the Company receives payments in stages that include (i) payment upon the delivery

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

Ownership and

control of the platted lots pass to the builders once the Company closes the sale of the platted lots.

Because the builder (i.e., the customer) takes control of the lot at the first closing and subsequent improvements made by the Company improve the

builder’s lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs.

Any revenue in excess of amounts entitled to be billed is reflected on

the balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue.

As of August 31, 2019, the Company had received cumulative payments of approximately $14.0 million under the development

agreements relating to 198 lots from two home builders, of which approximately $10.0 million of revenue was recognized over time based on the costs incurred to date compared to total expected costs for full completion of the 198 lots.

For the years

ended August 31, 2019 and 2018, the Company recognized approximately $7.9 million and approximately $2.1 million of lot sales over time, respectively.

The Company had deferred revenues of $3,991,500 and $361,100 as of August 31, 2019 and 2018,

respectively.

The Company does not have any material significant payment terms as all payments are expected to be received within 12 months after the delivery of the platted lot.

The Company adopted the practical expedient for financing components

and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year.

Construction support activities – The Company performs certain construction activities at Sky Ranch.

The activities performed include construction and maintenance of the grading erosion and sediment control best management

practices and other construction-related services.

These activities are invoiced upon completion and are included in Inventories and subsequently expensed through Land development construction costs until bonds are issued by the Sky Ranch Districts (as defined in Note 14 – Related Party Transactions ) and/or the CAB and the CAB reimburses

the Company for public improvements.

The portion of the reimbursable costs that are repaid, including reimbursable costs for construction support activities, will be recorded as a note receivable and will reduce any remaining respective

reimbursable capitalized expenses in Inventories .

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

To date, the Company has invoiced the CAB

$430,300 for construction support activities, which amount is included in Inventories .

Project management services – The Company entered into two Service Agreements for Project Management Services with the CAB on May 2, 2018.

The CAB was organized by Sky Ranch Metropolitan District Nos.

1 and 5 to construct,

operate and maintain certain public facilities and improvements in accordance with the Sky Ranch Community Authority Board Establishment Agreement and each of the service plans for Sky Ranch Metropolitan District Nos.

has experience in providing the services and is willing to provide such services to the CAB for reasonable consideration for the project improvements.

Pursuant to these agreements, the Company acts as the project manager and provides any and all services required to deliver the CAB-eligible improvements, including but not limited to CAB compliance;

planning design and approvals;

One format is the sale of a finished lot, whereby the purchaser pays for a

ready-to-build finished lot and the sales price is paid in a lump-sum upon completion of the finished lot that is permit ready.

The Company recognizes revenues at the point in time of the closing of the sale of a finished lot in which control

transfers to the builder as the transaction cycle is complete and the Company has no further obligations for the lot.

During the year ended August 31, 2020, the Company received payment and recognized revenue of $4,911,700 from one home builder

in exchange for the delivery of 70 finished lots.

During the year ended August 31, 2019, the Company received payment and recognized revenue of $4,053,800 from one home builder in exchange for the delivery of 57 finished lots.

The second format is the sale of finished lots pursuant to a lot development agreement with builders, whereby the Company receives payments in stages that include:

(i) payment upon the delivery of platted lots

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

Ownership and control of the

platted lots pass to the builders once the Company closes the sale of the platted lots.

Because the builder (i.e., the customer) takes control of the lot at the first closing and subsequent improvements made by the Company improve the builder’s

lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs.

Any revenue in excess of amounts entitled to be billed is reflected on the

balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue.

As of August 31, 2020, the Company had received cumulative payments of $25.6 million under the development agreements

relating to 356 lots from two home builders, of which $24.1 million of revenue was recognized over time based on the costs incurred to date compared to total expected costs for full completion of the 356 lots.

For the years ended August 31, 2020

and 2019, the Company recognized $14,022,700 and $7,902,200 of lot sales over time.

As of August 31, 2020 and 2019, the Company had deferred revenues of $1,635,400 and $3,991,500.

The Company does not have any material significant payment terms

as all payments are expected to be received within 12 months after the delivery of the platted lot.

The Company adopted the practical expedient for financing components and does not need to account for a financing component of these lot sales as

the delivery of lot sales is expected to occur within one year.

Reimbursable Costs for Public Improvements – The Sky Ranch CAB is required to construct certain public improvements, such as water distribution systems, sewer collection systems, storm water systems,

drainage improvements, roads, curbs, sidewalks, landscaping, and parks, the costs of which may qualify as reimbursable costs.

Pursuant to its agreements with the Sky Ranch CAB (see Note 6 – Related Party

Transactions ), the Company is obligated to finance this infrastructure.

These public improvements are constructed pursuant to design standards specified by the Sky Ranch Districts and/or the Sky Ranch CAB, and, after inspection and

acceptance, are turned over to the applicable governmental entity to operate and maintain.

As these public improvements are owned and operated on behalf of a governmental entity, they may qualify for reimbursement.

Pursuant to the agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to the Company for any advances made by the Company or expenses incurred related to construction of public

improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of the advances made and expenses incurred.

Because the timing of the issuance and

approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land development i nventories.

If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed

through Land development construction costs when the lots are sold consistent with other construction related costs.

If bonds ultimately are issued, upon receipt of reimbursements by the Company, the

Company records the reimbursements received as Other income to the extent that costs have previously been expensed and reduces Land development i nventories by any remaining reimbursables received.

The Company submits specific costs for reimbursement to the Sky Ranch CAB.

If reimbursable costs received exceed

actual expenses incurred by the Company for the cost of the public improvements, they are recorded as O ther income as received.

The Company has entered certain funding agreements with the Sky Ranch CAB, which are described in Note 6 – Related Party Transactions.

These agreements allow for interest

to be accrued on amounts funded by the Company to the Sky Ranch CAB.

Due to the uncertainty of collecting the interest (because payment is contingent on the issuance of bonds), interest income is not recognized on the amounts owed by the Sky

Ranch CAB until the bonds are issued.

As of August 31, 2020, the Company had deferred the recognition of $1,176,300 of interest income on advances made to the Sky Ranch CAB.

On November 19, 2019, the Sky Ranch CAB sold tax-exempt, fixed rate senior bonds in the aggregate principal amount of $11,435,000 and tax-exempt, fixed-rate subordinate bonds in the aggregate principal amount of

$1,765,000 (collectively, the “Bonds”).

Upon the issuance of the Bonds, the Company received $10.5 million as partial reimbursement for advances the Company made to the Sky Ranch CAB to fund the construction of public improvements to the Sky

Ranch property.

Of the $10.5 million received by the Company, $6.3 million was recognized as Income from reimbursement of construction costs (related party) in other income and the remaining $4.2 million

partially reduced the remaining capitalized costs in Land development i nventories .

Project management services – On May 2, 2018, the Company entered into two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB.

Pursuant to the

Project Management Agreements, the Company acts as the project manager and provides any and all services required to deliver the Sky Ranch CAB-eligible improvements, including but not limited to Sky Ranch CAB compliance;

planning design and

project administration;

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and construction management and administration.

The Company must submit to the CAB a monthly invoice, in a form acceptable to the CAB.

The Company is responsible for all

expenses it incurs in the performance of the agreements and is not entitled to any reimbursement or compensation except as defined in the agreements, unless otherwise approved in advance by the CAB in writing.

The CAB is subject to annual budget and

appropriation procedures and does not intend to create a multiple-fiscal year direct or indirect debt or other financial obligation.

The Company receives a project management fee of five percent (5%) of actual construction costs of CAB-eligible

improvements.

The Company is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any

reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing.

The Company receives a project management fee of five percent (5%) of actual

construction costs of Sky Ranch CAB-eligible improvements.

The project management fee qualifies as a reimbursable cost to the Company.

The project management fee is based only on the actual costs of the improvements;

thus, items such as fees, permits, review fees, consultant or other soft

costs, and land acquisition or any other costs that are not directly related to the cost of construction of CAB-eligible improvements are not included in the calculation of the project management fee.

Soft costs and other costs that are not directly

related to the construction of CAB-eligible improvements are included in Inventories and accounted for in the same manner as construction support activities as described above.

The Company and the CAB have

agreed that no payment is required by the CAB with respect to project management fees unless and until the CAB and/or the Sky Ranch Districts issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances

provided or expenses incurred for reimbursables.

Due to this contingency, the project management fees are being accrued to revenue with a corresponding allowance until the point in time when bonds are issued by the Sky Ranch Districts and/or the CAB

and the CAB reimburses the Company for the public improvements.

At that point, the portion of the project management fees repaid will be recorded as a note receivable and will be recognized as other income.

To date, the Company has accrued $860,300 in project management services to the CAB.

Reimbursable expenses – The CAB is required to construct certain infrastructure, the costs of which qualify as reimbursable costs.

costs include costs incurred for construction of water distribution systems, sewer collection systems, storm water system, drainage improvements, roads, curb, sidewalks, landscaping, and parks.

The Company is obligated to finance this

infrastructure pursuant to its agreements with the CAB (see Note 14 – Related Party Transactions ).

The Company and the CAB have agreed that no payment is required with respect to advances made by

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

expenses incurred.

Due to this contingency, the reimbursable costs for the construction of infrastructure are included in Inventories and subsequently expensed through Land development construction costs until the point in time when municipal bonds are issued and the CAB reimburses the Company for public improvements.

At that point, the portion of the reimbursable costs repaid,

including reimbursable costs for the construction of infrastructure, will be recorded as a note receivable and will reduce any remaining capitalized expenses.

Any reimbursable costs repaid in excess of capitalized expenses will be

recognized as other income.

thus, items such as fees,

permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible improvements are not included in the calculation of the project

management fee.

Soft costs and other costs that are not directly related to the construction of Sky Ranch CAB-eligible improvements are included in Land development i nventories

and accounted for in the same manner as construction support activities as described below.

Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees unless and until the Sky Ranch

CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided or expenses incurred for reimbursables.

Due to this contingency, the project

management fees are deferred and will not be recognized until bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses the Company for the public improvements.

At that point, the portion of the project

management fees repaid will be recognized as revenue.

As of August 31, 2020, the Company had deferred recognition of $1,464,900 in project management services to the Sky Ranch CAB.

Construction support activities – The Company performs certain construction activities at Sky Ranch.

The activities performed include construction and maintenance of the grading erosion and sediment control

best management practices and other construction-related services.

These activities are invoiced upon completion and are included in Land development i nventories

and subsequently expensed through Land development construction costs unless or until bonds are issued by the Sky Ranch Districts (as defined in Note 6 – Related Party

Transactions ) and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses the Company for public improvements.

Refer to Reimbursable Costs for Public Improvements above for details on repayment of

reimbursable costs.

As of August 31, 2020, the Company had invoiced the Sky Ranch CAB $674,800 for construction support activities, which amount was recorded to Land development inventories .

Unpaid reimbursable costs the Company believes are recoverable from the Sky Ranch CAB are recorded to a note receivable from the Sky Ranch CAB.

Each reporting period, the Company assesses the collectability of the

receivable from the Sky Ranch CAB and the recoverability of the outstanding reimbursable costs to determine if the amounts should be expensed.

The following table summarizes all reimbursable costs incurred as of August 31, 2020, payments made

from the Sky Ranch CAB and any outstanding reimbursable amounts.

As of August 31, 2020

Costs incurred

Reimbursement Received

Net costs incurred

Public Improvements

Accrued interest

Project management services

Construction support activities

Total reimbursable costs

The Company believes it will incur an additional $2.3 million through the end of the calendar year 2021 to complete the construction related to public improvements for the initial lots at Sky Ranch.

believes that it will be reimbursed an additional $18.5 million related to the public improvement costs on this initial filing.

Pursuant to the Company’s agreements with the Sky Ranch CAB, no payment is required by the Sky Ranch CAB with respect

to reimbursable costs unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided or expenses incurred for

reimbursables.

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

Deferred Revenue

Deferred revenues as of August 31, 2019 , was comprised mainly of unearned revenue from lot sales, a Paid-Up Oil and Gas Lease between the Company and Bison Oil

and Gas, LLP for the purpose of exploring for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Bison Lease”) and an Agreement on Locations of Oil and Gas Operations

Area covering approximately 16 acres entered into between the Company and the operator of the O&G Lease (defined under “ Oil and Gas Lease Payments ” below) in July 2019 (the “OGOA”).

Deferred revenues from lot sales for the years ended August 31, 2019 and 2018 were $4.0 million and $361,100, respectively.

The Company received an up-front payment of $167,200 in fiscal 2018, which is being recognized as income on a straight-line basis over three years (the term of the Bison Lease).

The Company recognized lease income of

$55,700 and $51,100 during the fiscal years ended August 31, 2019 and 2018, respectively, related to the up-front payment received pursuant to the Bison Lease.

As of August 31, 2019, the Company has deferred revenues of $60,400 related to the Bison

Lease that will be recognized into income ratably through September 2020.

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 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 $75,000 to the Company.

The operator may only extend the OGOA for two additional years for a total

of five years.

The Company 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, the Company has deferred revenues of $547,500 related to

the OGOA that will be recognized into income ratably through July 2022.

The Company received an up-front payment of $425,800 in fiscal 2019, which will be recognized as income as industrial water is provided to the operator beginning in October 2019.

None of this up-front payment was

recognized in revenue as of August 31, 2019.

Deferred revenues by segment is as follows:

In July 2019, the Company received an up-front payment of $573,700 from an Agreement on Locations of Oil and Gas Operations (the “OGOA”) for a pad site covering approximately 16 acres with the operator of the Sky

Ranch O&G Lease (defined below under the heading Oil and Gas Lease Payments), which will be recognized as income on a straight-line basis over three years.

If after three years the operator has not spud

at least one well on the OGOA, the operator may extend the right to the OGOA one additional year by paying the Company $75,000.

The operator may only extend the OGOA for two additional years for a total of five years.

The Company recognizes the

up-front payments on a straight-line basis over the term of the OGOA.

For the years ended August 31, 2020 and 2019, the Company recognized $191,200 and $26,200 of income related to the up-front payments received pursuant to the OGOA.

31, 2020 and 2019, the Company had deferred revenue of $356,300 and $547,500, related to the OGOA.

In September 2017, the Company entered a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (the “Bison Lease”).

Pursuant to the Bison Lease, the Company received an up-front payment of $167,200 in October 2017,

which will be recognized as income on a straight-line basis over the three-year term of the lease.

During each of the years ended August 31, 2020 and 2019, the Company recognized lease income of $55,700 related to the up-front payment received

pursuant to the Bison Lease.

As of August 31, 2020 and 2019, the Company had deferred revenue of $4,700 and $60,400, related to the Bison Lease that will be recognized as income ratably through September 2020.

One of the Company’s industrial water customers provided $2.0 million of advanced water purchase payments to the Company to reserve first-priority water for O&G operations for defined periods through January 2021.

The customer is

required to use predetermined amounts of water on a predetermined schedule.

The Company recognizes revenue based on the amount of water used by the customer in the period the water is used.

If the customer does not use the water pursuant to the

predetermined use and timing schedules, then the customers first-priority is forfeited.

The Company records breakage revenue when it is remote that any future water services will be provided to the customer.

In July 2020, the customer failed to

use its water pursuant to the predetermined schedule.

The customer revised its water usage estimate;

therefore, the first of its upfront payments of $425,800 was recognized in Industrial - Oil and gas

operations under metered water usage revenues because it was then determined the customer was unable to utilize the first advanced payment, which expired prior to August 31, 2020.

As of August 31, 2020 and 2019, the Company had

deferred recognition of $1.6 million and $425,800, as a result of these advanced water purchase payments.

The Company has also deferred recognition of lot sale revenues, which are recognized as development progresses.

As of August 31, 2020 and 2019, the Company’s deferred revenues along with the changes in the

deferred revenues are as follows:

August 31, 2020

August 31, 2019

Wholesale water and wastewater services

Land development activities

Oil and gas leases

Balance, end of period

Changes in unearned revenue were as follows:

Deferred lot sale revenue

Oil and gas lease and water sales payments

Total deferred revenues

Changes in deferred revenue were as follows:

August 31, 2020

1 unchanged sentence

Balance, beginning of period

Cumulative effect of adoption of ASU 2014-09

Contract revenues recognized

Revenue recognized

Balance, end of period

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized (“contracted not recognized revenue”), which includes unearned revenue and amounts that will be

invoiced and recognized as revenue in future periods.

At August 31, 2019, the Company had outstanding open contracts for $22,189,000, which primarily related to the sale of 506 lots at Sky Ranch.

The Company expects to recognize approximately 70% of

such revenue over the next 12 months.

Inventories primarily include land held for development and sale, which the Company has begun developing and are stated at cost.

Capitalized lot development costs at Sky Ranch are costs incurred to construct finished

lots at Sky Ranch that meet the Company’s capitalization criteria for improvements to a lot and are capitalized as incurred.

The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to

the development of lots at Sky Ranch.

The Company uses the specific identification method for purposes of accumulating land development costs and allocates costs to each lot to determine the cost basis for each lot sale.

The Company will record all

land cost of sales when a lot is completed and sold on a lot-by-lot basis.

Costs included in Inventories include common area costs that the Company funded through the CAB.

The Company expects that such costs

will be reimbursable by the CAB.

The Company will record any reimbursements as a reduction of any capitalized costs remaining in Inventories once the CAB has the ability to reimburse the costs (i.e., once

the Sky Ranch Districts and/or the CAB has issued bonds).

In accordance with ASC 360, the Company measures land held for sale at the lower of the carrying value or net realizable value.

In determining fair value, the Company primarily relies upon the most recent negotiated

price that is a Level 2 input (see Note 3 – Fair Value Measurements for definitions of fair value inputs).

If a negotiated price is not available, the Company will consider several factors, including, but not

limited to, current market conditions, recent comparable sales transactions and market analysis studies.

If the net realizable value is lower than the current carrying value, the land is written down to its net realizable value.

As of August 31, 2020, one homebuilder at Sky Ranch still has payment obligations to the Company pursuant to a purchase and sale agreement for lots at Sky Ranch.

This contracted payment represents revenue that

has not yet been fully recognized because revenue is recognized as construction work is completed.

At August 31, 2020, the Company had outstanding open contracts for $1.6 million, which relates to the last payment for the sale of the final lots

in the first development filing at Sky Ranch, which contractually was payable in December 2020, but was paid on November 3, 2020.

In addition to the deferred revenues recorded on the Company’s consolidated balance sheet, the Company has deferred interest income of $1.2 million and project management revenues of $1.5 million due from the Sky

Ranch CAB related to the development at Sky Ranch, which, due to the contingent nature of the payments, are not reflected on the Company’s consolidated balance sheet.

Royalty and Other Obligations

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Oil and Gas Lease Payments

In July 2019, the Company received an up-front payment of $573,700 for the OGOA, which will be recognized as income on a straight-line basis over three years.

If after three years the operator has not spud at least one

well on the OGOA, the operator may extend the right to the OGOA one additional year by paying $75,000 to the Company.

The operator may only extend the OGOA for two additional years for a total of five years.

The Company recognizes the up-front

payments on a straight-line basis over the terms of the respective agreements.

During the fiscal years ended August 31, 2 019 and 2018 , the Company recognized $26,200 and $0, respectively, of income related to the up-front payments received pursuant to the OGOA.

The Company entered into the Bison Lease, on September 20, 2017.

Pursuant to the Bison Lease, the Company received an up-front payment of $167,200, which is being recognized as income on a straight-line basis over

three years (the term of the Bison Lease).

The Company recognized lease income of $55,700 and $51,100 during the fiscal years ended August 31, 2019 and 2018, respectively, related to the up-front payment received.

As of August 31, 2019, the Company

has deferred revenues of $60,400 of income related to the Bison Lease that will be recognized into income ratably through September 2020.

As further described in Note 4 – Water and Land Assets below, on March 10, 2011, the Company entered into a three-year Paid-Up Oil and Gas Lease (the “O&G Lease”) and a

Surface Use and Damage Agreement with Anadarko E&P Company, L.P.

(“Anadarko”), which subsequently sold the O&G Lease to a wholly-owned subsidiary of ConocoPhillips Company, for the purpose of exploring for, developing, producing and marketing

oil and gas on approximately 634 acres of mineral estate owned by the Company at its Sky Ranch property.

In 2014, the O&G Lease was extended for an additional two years.

During 2015, two wells were placed into service and began producing oil and

gas and accruing royalties to the Company.

The O&G Lease is now held by production.

During the fiscal years ended August 31 , 2019, and 2018, the Company received $148,300 and $191,300,

respectively, in royalties attributable to these two wells.

The Company classifies income from lease and royalty payments as Other income in the consolidated statements of operations and comprehensive income

as the Company does not consider these arrangements to be an operating business activity.

As further described in Note 4 – Water and Land Assets below, on March 10, 2011, the Company entered into a Paid-Up Oil and Gas Lease (the “Sky Ranch O&G Lease”) and a

Surface Use and Damage Agreement that were subsequently purchased by a wholly owned subsidiary of ConocoPhillips Company and recently acquired by Crestone Peak Resources.

Six wells have been drilled within the Company’s mineral interest and

placed into service (four new wells beginning in fiscal 2020) and are producing oil and gas and accruing royalties to the Company.

During the fiscal years ended August 31, 2020, and 2019, the Company received $669,000 and $148,300, in royalties

attributable to these six wells.

The Company classifies income from lease and royalty payments as Other income in the consolidated statements of operations and comprehensive income as the Company does not

consider these arrangements to be an operating business activity.

Oil and gas operations, although material in certain years, are deemed a passive activity as the Chief Operating Decision Maker (“CODM”) does not actively allocate resources to

these projects;

therefore, this is not classified as a reportable segment.

Share-based Compensation

The Company maintains a stock option plan for the benefit of its employees and non-employee directors.

The Company recognizes share-based compensation costs as expenses over the applicable vesting period of the stock

award using the straight-line method.

The Company recognizes share-based compensation costs as expenses over the applicable vesting period of the

stock award using the straight-line method.

The compensation costs to be expensed are measured at the grant date based on the fair value of the award.

The Company has adopted the alternative transition method for calculating the tax effects of share-based

compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation.

The Company has adopted the alternative transition method for calculating the tax effects of

share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation.

The Company has released its full valuation allowance on its deferred tax assets as of August 31, 2019.

The impact on the income

tax provision for the granting and exercise of stock options during the fiscal year ended August 31, 2019, was a tax expense of approximately $82,900.

Because the Company had a full

valuation allowance on its deferred tax assets as of August 31, 2018 t here was approximately a $410,600 deferred tax impact on the income tax provision as a result of the granting and

exercise of stock options.

The Company recognized $336,200 and $324,800 of share-based compensation expenses during the fiscal years ended August 31,

2019 and 2018, resp ectively.

on the income tax provision for the granting and exercise of stock options during the fiscal year ended August 31, 2020, was a tax expense of $80,300.

Because the Company had a full valuation allowance on its deferred tax assets as of August 31,

2018, there was a $410,600 deferred tax impact on the 2019 income tax provision as a result of the granting and exercise of stock options.

The Company recognized $517,000 and $336,200 of share-based compensation expenses during the years ended August 31, 2020 and 2019.

The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company.

does not have any significant unrecognized tax benefits as of August 31 , 2019.

The Company’s deferred tax asset and valuation allowance was decreased by approximately $1.2 million as a result of the decreased corporate tax rate that went into effect pursuant to H.R.1, commonly known as the Tax

Cuts and Jobs Act (the “Tax Act”), signed into law on December 22, 2017.

As of August 31, 2018, the Company has a $282,000 alternative minimum tax (“AMT”) deferred tax asset for which it does not have a valuation allowance.

The Company expects to

receive the AMT as a refund in future years.

Most, if not all, of this credit will be refundable starting with the filing of the 2018 (fiscal year ended 2019) through 2021 (fiscal year ending 2022) tax returns, subject to limitations of Internal

Revenue Code Section 382 (arises with ownership changes) and the sequestration limitation of the Balanced Budget Act of 1997.

The Company will continue to evaluate the impact of the Tax Act and will record any resulting tax adjustments during fiscal

The Company maintained a valuation allowance on the net deferred tax asset other than AMT credits as of August 31, 2018.

The Company has determined it is more likely than not that the Company will

realize its deferred tax assets.

Such assets primarily consist of operating loss carryforwards.

The Company assessed the realizability of its deferred tax asset using all available evidence.

In particular, the Company considered both historical

results and projections of profitability for the reasonably foreseeable future periods.

The Company is required to reassess its conclusions regarding the realization of its deferred tax assets at each financial reporting date.

As a result of the

evaluation, the Company concluded that all of the valuation allowance is no longer necessary.

By releasing the valuation allowance, the Company recognized a deferred tax benefit of approximately $1,284,100 which positively impacted the Company’s

results of operations and financial position.

Company does not have any significant unrecognized tax benefits as of August 31, 2020.

The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying

consolidated balance sheets, as well as operating losses and tax credit carry-forwards.

The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those

temporary differences are expected to be recovered or settled.

Due to continued operating losses, prior to the Company’s fiscal 2019, the Company maintained a valuation allowance on the net deferred tax assets other than Alternative Minimum Tax (“AMT”)

During the year ended August 31, 2019, the Company determined it was more likely than not that the Company would realize its deferred tax assets, consisting primarily of net operating loss carryforwards, resulting in the release of the

valuation allowance.

By releasing the valuation allowance, for the year ended August 31, 2019, the Company recognized a deferred tax benefit of $1,284,100.

The Company is required to reassess its conclusions regarding the realization of its

deferred tax assets at each financial reporting date.

The Company files income tax returns with the Internal Revenue Service and the State of Colorado.

The tax years that remain subject to examination are fiscal 2015 through fiscal 2019.

The Company does not believe that

The Company does not believe

there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense.

At August 31 , 2019, the

Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the fiscal year ended August 31, 2019 or 2018.

Income (Loss) per Common Share

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each period.

Common stock options of 206,860 and 169,770 common share equivalents as

of August 31, 2019 and 2018, respectively, were included in the calculation of income per common share as dilutive common stock equivalents using the treasury stock method.

Common stock options

aggregating 50,000 common share equivalents as of August 31, 2019, have been excluded from the cal culation of income per common share as their effect is anti-dilutive.

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax positions as a component of income tax expense.

At August 31, 2020, the Company did not have any accrued interest or

penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the years ended August 31, 2020 or 2019.

Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted-average number of shares outstanding during each period.

Diluted earnings per share is computed similarly but reflects the

potential dilution that would occur if dilutive options were exercised and all unvested share-based payment awards were vested.

As of August 31, 2020 and 2019, the Company included 216,600 and 206,860 stock options in the calculation of diluted

earnings per common share as dilutive common stock equivalents using the treasury stock method.

As of each August 31, 2020 and 2019, the Company excluded 50,000 stock options from the diluted earnings per common share as their effect is

anti-dilutive.

Recently Issued Accounting Pronouncements

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New pronouncements assessed by the Company recently are discussed below:

In June 2018, the Financial Accounting Standards Board (the “FASB”) issued ASU 2018-07, Compensation — Stock Compensation (Topic 718):

Improvements to Nonemployee

Share-Based Payment Accounting .

ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees.

This standard expands the scope of Accounting Standards Codification

Topic 718, Compensation — Stock Compensation , which currently only includes share-based payments issued to employees, to include share-based payments issued to nonemployees for goods and services.

Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned.

ASU 2018-07 supersedes ASC Subtopic 505-50, Equity — Equity-Based Payments to Non-Employees .

The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within these fiscal years.

The Company believes that the impact of this standard on its consolidated financial statements is

In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220);

Reclassification of Certain Tax Effects from Accumulated

Other Comprehensive Income .

The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act.

Consequently, the amendments eliminate

the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users.

The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods

within those fiscal years.

Early adoption is permitted in any interim period after issuance of the standard.

The Company believes that the impact of this standard on its consolidated financial statements is immaterial.

In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No.

2016-02, Leases (Topic 842).

ASU 2016-02 provides guidance on the recognition, measurement, presentation and disclosure of leases.

The new standard supersedes the present GAAP standard on leases and requires substantially all leases to be reported

on the balance sheet as right-of-use assets and lease obligations.

This standard is effective for fiscal years beginning after December 15, 2018.

The Company adopted the standard effective September 1, 2019, and recorded a right-of-use asset of

$258,900 and a lease obligation liability of $252,300.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments – Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments .

Among other things,

these amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Companies will now use

forward-looking information to better inform their credit loss estimates.

The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.

The Company is currently assessing the

provisions of the standard and the impact of this ASU on its consolidated financial statements.

In February 2016, the FASB issued ASU No.

2016-02, Leases (Topic 842).

ASU 2016-02 provides guidance on the recognition, measurement,

presentation, and disclosure of leases.

The new standard supersedes the present GAAP standard on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease obligations.

This standard is effective

for fiscal years beginning after December 15, 2018.

The Company adopted ASU 2016-02 on September 1, 2019.

The Company anticipates that the adoption will result in right-to use assets and a corresponding liability of approximately of $750,000 on its

balance sheet.

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts.

Companies will

now use forward-looking information to better inform their credit loss estimates.

ASU 2016-13 was set to be effective for public companies on January 1, 2020;

however, the FASB delayed the effective date to January 1, 2023 for smaller reporting

The Company continues to monitor economic implications of the COVID-19 pandemic;

however, based on current market conditions, we do not expect the impact of ASU 2016-13 to be material upon adoption.

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

statements and related disclosures.

NOTE 3 – FAIR VALUE MEASUREMENTS

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Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market.

The Company had no Level 1 assets or liabilities as of August 31, 2019 or August 31, 2018.

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

The Company had one and seven Level 2 assets as of August 31, 2019 and 2018, respectively, which consist of certificates of deposit and/or U.S.

As of August 31, 2020 and August 31, 2019, the Company had no Level 1 assets or liabilities.

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

As of August 31, 2020 and

2019, the Company had zero and one Level 2 assets, which consisted of U.S.

treasury notes.

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on

market exchange, dealer, or broker-traded transactions.

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or

broker-traded transactions.

Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The Company had one Level 3 liability, the contingent

portion of the CAA, as of August 31, 2019 and 2018.

The Company has determined that the contingent portion of the CAA does not have a readily determinable fair value (see Note 5 – Participating Interests in Export

As of August 31, 2020, the Company had two level

3 assets, the right-of-use asset (its operating lease) and the Arkansas Valley mineral rights and one Level 3 liability, the contingent portion of the CAA.

August 31, 2019, the Company had one level 3 asset, the Arkansas Valley mineral rights and one Level 3 liability, the contingent portion of the CAA.

The Company has determined that the contingent

portion of the CAA does not have a readily determinable fair value (see Note 5 – Participating Interests in Export Water ).

The Company maintains policies and procedures to value instruments using what management believes to be the best and most relevant data available.

Level 2 Asset – Investments.

The Company’s investments are the

Company’s only financial asset measured at fair value on a recurring basis.

The fair value of the investment securities is based on the values reported by the financial institutions where the funds are held.

These securities include only federally

insured certificates of deposit and U.S.

The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2019:

Fair Val ue Measurement Using:

Certificates of deposit

The Company’s investments are the Company’s only financial asset measured at fair value on a recurring basis.

The fair value

of the investment securities is based on the values reported by the financial institutions where the funds are held.

These securities include only federally insured certificates of deposit and U.S.

The Company’s non-financial assets measured at fair value on a non-recurring basis when assessing recoverability consist entirely of its investments in water and water systems and other long-lived assets.

4 – Water and Land Assets below.

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

The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2019:

Fair Value Measurement Using:

Certificates of deposit

The Company also holds a certificate of deposit that is not carried at fair value on the consolidated balance sheets and is classified as a held-to-maturity security.

As of August 31, 2019, the carrying amount of held-to-maturity securities was $192,800.

As of August 31, 2018 , t he

carrying amount of held-to-maturity securities was $190,400.

As of August 31, 2019, the Company held a $192,800 certificate of deposit that is not carried at fair value on the consolidated balance sheets because it is classified as a held-to-maturity security.

31, 2020, the Company had no securities it was holding-to-maturity.

Level 3 Assets and Liability.

The Company’s non-financial assets that

were required to be remeasured at fair value on a non-recurring basis consist of the operating lease right-of-use asset and the Arkansas Valley mineral rights.

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

During 2020, as described in Note 2 – Summary of significant Accounting Policies , the Company determined the carrying value of the Arkansas mineral

rights was not recoverable and recorded an impairment of $1.4 million.

The Company estimated the fair value of the mineral rights using a market approach based upon anticipated sales proceeds less costs to sell.

The Company has determined that

the contingent portion of the CAA does not have a readily determinable fair value (see Note 5 – Participating Interests in Export Water ).

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

NOTE 4 – WATER AND LAND ASSETS

Investment in Water and Water Systems

The Company’s water and water systems consist of the following approximate costs and accumulated depreciation and depletion as of August 31:

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

August 31, 2020

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Net investments in water and water systems

The Company is constructing a water reclamation facility for the Sky Ranch development.

The costs of the facility are being recorded in construction in progress.

The Company anticipates the facility will be completed

in the second quarter of fiscal 2020 at a total cost of approximately $12 million.

Construction in progress primarily consists of an irrigation system and new water well at Sky Ranch.

The Company anticipates the additional facilities will be placed in service during fiscal

During fiscal 2019, the Company constructed a water reclamation facility for the Sky Ranch development.

The costs of the facility were recorded in construction in progress.

The Company placed the facility in

service during the second quarter of fiscal 2020 at a total cost of $10.2 million.

The Rangeview water system includes the Sky Ranch water reclamation facility.

Depletion and Depreciation

The Company recorded $1,900 and $2,200 of depletion charges during the fiscal years ended August 31 , 2019 and 2018, respectively.

During the fiscal years ended August

31, 2019 and 2018, this related entirely to the Rangeview Water Supply (as defined below).

The Company recorded $1,278,900 and $900,500 of depreciation expense in the fiscal years ended August 31, 2019 and 2018, respectively.

These figures include $312,600 and $251,200

of depreciation expense for other equipment not included in the table above in the fiscal years ended August 31, 2019 and 2018, respectively.

During the years ended August 31, 2020 and 2019, the Company recorded an immaterial amount of depletion charges, which relates entirely to the Rangeview Water Supply (as defined below).

During the years ended August 31, 2020 and 2019, the Company recorded $1,722,200 and $1,278,900 of depreciation expense.

These figures include $355,900 and $312,600 of depreciation expense for other equipment not

included in the table above in the fiscal years ended August 31, 2020 and 2019.

The following table presents the estimated useful lives by asset class used for calculating depreciation and depletion charges:

Assets Classes

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26,000-acre property owned by the Land Board located 16 miles southeast of Denver, Colorado.

Approximately $18.4 million of Investments in Water and Water Systems on the Company’s balance sheet as of August 31 , 2019, r epresents the costs of assets acquired or facilities constructed to extend water service to customers located on and off the Lowry Range.

The recorded costs of the Rangeview Water Supply include payments to the sellers

of the Rangeview Water Supply, design and construction costs and certain direct costs related to improvements to the asset, including legal and engineering fees.

The Company acquired the Rangeview Water Supply beginning in 1996 when:

The Rangeview District entered into the 1996 Amended and Restated Lease Agreement with the Land Board, which owns the Lowry Range;

The Company entered into the Agreement for Sale of Export Water with the Rangeview District;

The Company entered into the 1996 Service Agreement with the Rangeview District for the provision of water service to the Rangeview District’s customers on the Lowry Range;

In 1997, the Company entered into the Wastewater Service Agreement with the Rangeview District for the provision of wastewater service to the Rangeview District’s customers on the Lowry Range.

In July 2014, the Company, the Rangeview District and the Land Board entered into the 2014 Amended and Restated Lease (the “Lease”), which superseded the original 1996 lease, and the Company and the Rangeview District

entered into an Amended and Restated Service Agreement.

Collectively, the foregoing agreements, as amended, are referred to as the “Rangeview Water Agreements.”

As of August 31, 2020, the Company had invested $17.9 million in facilities to extend water service to customers located on and off the Lowry Range.

recorded costs of the Rangeview Water Supply include payments to the sellers of the Rangeview Water Supply, design and construction costs and certain direct costs related to improvements to the asset, including legal and engineering fees.

The Company acquired the Rangeview Water Supply in 1996 pursuant to the following agreements:

1996 Amended and Restated Lease Agreement between the Land Board and the Rangeview District, which was superseded by the 2014 Amended and Restated Lease Agreement, dated July 10, 2014 (the “Lease”), between the Company, the Land Board,

and the Rangeview District;

The 1996 Service Agreement between the Company and the Rangeview District, which was superseded by the Amended and Restated Service Agreement, dated July 11, 2014, between the Company and the Rangeview District (the “Lowry Service

Agreement”), which provides for the provision of water service to the Rangeview District’s customers located on the Lowry Range;

The Agreement for Sale of non-tributary and not non-tributary groundwater between the Company and the Rangeview District (the “Export Agreement”), pursuant to which the Company purchased a portion of

the Rangeview Water Supply referred to as the “Export Water” because the Export Agreement allows the Company to export water from the Lowry Range to supply water to nearby communities;

The 1997 Wastewater Service Agreement between the Company and Rangeview District (the “Lowry Wastewater Agreement”), which allows the Company 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, the Company purchased approximately 300 acre-feet of fully consumptive surface water in the Lost Creek Designated Ground Water Basin (“Lost Creek Water”).

The Lost Creek Water is currently adjudicated for

agricultural use, and the Company has filed an application with the Colorado water court to change the use of the water to augment its municipal/industrial water supplies at the Lowry Range.

The Company has consolidated the Lost Creek Water

with the Rangeview Water Supply to provide service to the Rangeview District’s customers both on and off the Lowry Range.

Pursuant to the Rangeview Water Agreements, the Company owns 11,650 acre feet of water consisting of 10,000 acre feet of groundwater and 1,650 acre feet of average yield surface water which can be exported off the

Lowry Range to serve area users (referred to as “Export Water”).

The 1,650 acre feet of surface rights are subject to completion of documentation by the Land Board related to the Company’s exercise of its right to substitute an aggregate gross volume

of 165,000 acre feet of its groundwater for 1,650 acre feet per year of adjudicated surface water and to use this surface water as Export Water.

Additionally, assuming completion of the substitution of groundwater for surface water, the Company has

the exclusive right to provide water and wastewater service, through 2081, to all water users on the Lowry Range and the right to develop an additional 13,685 acre feet of groundwater and 1,650 acre feet of adjudicated surface water to serve

customers either on or off the Lowry Range.

The 1,650 acre feet of surface rights are subject to completion of documentation by the Land Board related to the Company’s exercise of its right to substitute an aggregate gross

volume of 165,000 acre feet of its groundwater for 1,650 acre feet per year of adjudicated surface water and to use this surface water as Export Water.

Additionally, assuming completion of the substitution of groundwater for surface water, the

Company has the exclusive right to provide water and wastewater service, through 2081, to all water users on the Lowry Range and the right to develop an additional 13,685 acre feet of groundwater and 1,650 acre feet of adjudicated surface water

to serve customers either on or off the Lowry Range.

The Rangeview Water Agreements also provide for the Company to use surface reservoir storage capacity in providing water service to customers both on and off the Lowry Range.

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District’s water and wastewater systems to provide service to the Rangeview District’s customers on the Lowry Range.

The Company will operate both the water and the wastewater systems during the contract period, and the Rangeview District owns both

The Company will operate both the water and the wastewater systems during the contract period, and the Rangeview District owns

both systems.

After 2081, ownership of the water system will revert to the Land Board, with the Rangeview District retaining ownership of the wastewater system.

Rates and charges for all water and wastewater services on the Lowry Range, including tap fees and usage or monthly fees, are governed by the terms of the Rangeview Water Agreements.

Rates and charges are required to

be not greater than the average of similar rates and charges of three surrounding municipal water and wastewater service providers, which are reassessed annually.

Pursuant to the Rangeview Water Agreements, the Land Board receives a royalty of 10% or

12% of gross revenues from the sale or disposition of the water, depending on the nature and location of the purchaser of the water, except that the royalty on tap fees shall be 2% (other than taps sold for Sky Ranch which are exempt).

also is required to pay the Land Board a minimum annual water production fee, which will offset future royalty obligations.

The Company has made minimum annual royalty payments of $45,600.

The Rangeview District retains 2% of the remaining gross

revenues, and the Company receives 98% of the remaining gross revenues after the Land Board royalty.

Rates and charges cannot exceed

the average of similar rates and charges of three surrounding municipal water and wastewater service providers, which are reassessed annually.

Pursuant to the Rangeview Water Agreements, the Land Board receives a royalty of 10% or 12% of gross

revenues from the sale or disposition of the water, depending on the nature and location of the purchaser of the water, except that the royalty on tap fees shall be 2% (other than taps sold for Sky Ranch which are exempt).

The Company also is

required to pay the Land Board a minimum annual water production fee of $45,600 per year, which offsets earned royalties, and annual rent of $7,600 which amount is increased every five years based on the Consumer Price Index for Urban Customers

The Rangeview District retains 2% of the remaining revenues, and the Company receives 98% of the remaining revenues after the Land Board royalty.

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

The Company receives 100% of the Rangeview District’s wastewater tap fees and 90% of

the Rangeview District’s wastewater usage fees (the Rangeview District retains the other 10%).

Export Water – The Company owns the Export Water and intends to use it to provide wholesale water and wastewater services to customers off the Lowry Range,

including customers of the Rangeview District and other governmental entities and industrial and commercial customers.

The Company receives 100% of the

Rangeview District’s wastewater tap fees and 90% of the Rangeview District’s wastewater treatment fees (the Rangeview District retains the other 10%).

Export Water – The Company owns the Export Water and intends to use it to provide wholesale water and wastewater services to customers off the Lowry

Range, including customers of the Rangeview District and other governmental entities and industrial and commercial customers.

The Company will own all wholesale facilities required to extend water and wastewater services using its Export Water.

anticipates contracting with third parties for the construction of these facilities.

If the Company sells Export Water, the Company is required to pay royalties to the Land Board ranging from 10% to 12% of gross revenues, except that the royalty on

tap fees shall be 2% (other than taps sold for Sky Ranch which are exempt).

The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among

the 10 members of the SMWA, Denver Water and Aurora Water.

The Company anticipates contracting with third parties for the construction of these facilities.

If the Company sells Export Water, the Company is required to pay royalties to the Land Board ranging from 10% to 12% of gross revenues, except that

the royalty on tap fees shall be 2% (other than taps sold for Sky Ranch which are exempt).

among the 10 members of the SMWA, Denver Water and Aurora Water.

Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years.

During fi scal 2019,

the Company made $419,200 in capital investments in WISE.

During fiscal 2018, the Comp any did not make any capital investments in WISE.

Capitalized terms used under this caption are defined in Note 7 – Long-Term

Obligations and Operating Lease .

During the years ended August 31, 2020 and 2019, the Company

made $2.8 million and $419,200 in capital investments in WISE.

Capitalized terms used under this caption are defined in Note 7 – Long-Term Obligations and Operating Lease .

The Arapahoe County Fairgrounds Water and Water System

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outside the Lowry Range.

The $2.9 million of capitalized costs noted in the table above includes the costs to construct various Wholesale and Special Facilities, including a new deep water well, a 500,000-gallon water tank and pipelines to transport

water to the Arapahoe County fairgrounds.

The $2.9 million of capitalized costs noted in the table Investment in Water and Water Systems above includes the costs to construct various wholesale and special facilities,

including a new deep water well, a 500,000-gallon water tank and pipelines to transport water to the Arapahoe County fairgrounds.

The Lost Creek Water Supply

In August 2019, the Company purchased 150 acre-feet of ditch water rights, 800 acre-feet of renewable groundwater rights, 70 acre-feet of deep groundwater rights and 260 acres of land in Weld County.

Total consideration for the land and water included the $3.5 million purchase price, plus direct costs and fees of $42,200.

The Company allocated the total acquisition cost to the land and water rights based on

estimates of each asset’s respective fair value.

The purchase of the Lost Creek land and water was accounted for as an asset acquisition.

consideration for the land, water and related costs was $3.5 million.

The Company allocated the acquisition cost to the land and water rights based on estimates of each asset’s respective fair value at the acquisition date.

The purchase of the

Lost Creek land and water was accounted for as an asset acquisition.

Service to Customers Not on the Lowry Range

Sky Ranch – In 2010, the Company purchased approximately 930 acres of undeveloped land known as Sky Ranch.

The property includes the rights to approximately

830 acre feet of water.

The Company plans to use this water in conjunction with its Rangeview Water Supply to provide water service to the Rangeview District’s customers at Sky Ranch.

The $11.9 million of capitalized costs includes the costs to

acquire the water rights and to construct various facilities.

Total consideration for the land and water included the $7.0 million purchase price, plus direct costs and fees of $554,100.

The Company allocated the total acquisition cost to the land and water rights based on

estimates of each asset’s respective fair value.

In June 2017, the Company completed and placed into service its Sky Ranch pipeline, connecting its Sky Ranch water system to the Rangeview District’s water system for approximately $5.7 million.

Sky Ranch – In 2010, the Company purchased the undeveloped land known as Sky Ranch.

The property includes the rights to approximately 830 acre-feet of

water, which the Company is using in conjunction with its Rangeview Water Supply to provide water service to the Rangeview District’s customers at Sky Ranch.

The $23.4 million of capitalized costs includes the costs to acquire the water rights

and to construct various facilities.

Total consideration for the land, water and acquisition related costs and fees was $7.6 million.

The Company allocated the total acquisition cost to the land and water rights based on estimates of each asset’s

respective fair value at the acquisition date.

The purchase of the Sky Ranch land and water was accounted for as an asset acquisition.

In June 2017, the Company completed and placed into service its Sky Ranch pipeline, which cost $5.7 million to construct, connecting its Sky Ranch water system to the Rangeview District’s water system.

Wild Pointe – On December 15, 2016, the Rangeview District, acting by and through its water activity enterprise, and Elbert & Highway 86 Commercial

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Subject to the conditions set forth in the Wild Pointe Service Agreement and the terms of the Company’s engagement by the Rangeview District as the Rangeview District’s exclusive service provider, the Company acquired, among other

things, the exclusive right to provide water services to residential and commercial customers in the Wild Pointe development, located in unincorporated Elbert County, Colorado, in exchange for $1,600,000 in cash.

Pursuant to the terms of the Wild

Pointe Service Agreement, the Company, in its capacity as the Rangeview District’s service provider, is responsible for providing water services to all users of water services within the boundaries and service area of the Elbert 86 District and for

Pursuant to the terms of the Wild Pointe

Service Agreement, the Company, in its capacity as the Rangeview District’s service provider, is responsible for providing water services to all users of water services within the boundaries and service area of the Elbert 86 District and for

operating and maintaining the Elbert 86 District’s water system.

In exchange, the Company receives 100% of system development (or tap) fees from new customers and 98% of all other fees and charges, including monthly water service revenues, remitted

to the Rangeview District by the Elbert 86 District pursuant to the Wild Pointe Service Agreement.

The Elbert 86 District’s water system currently provides water service to approximately 200 existing SFE water connections in Wild Pointe.

In 2011, the Company entered into the O&G Lease with Anadarko.

Pursuant to the O&G Lease, the Company received an up-front payment from Anadarko for the purpose of exploring for, developing, producing and marketing

oil and gas on 634 acres of mineral estate owned by the Company at its Sky Ranch property.

The O&G Lease is now held by production, entitling the Company to royalties based on production.

In September 2017, the Company entered into the three-year Bison Lease for the purpose of exploring for, developing, producing and marketing oil and gas on 40 acres of mineral estate owned by the Company adjacent to

the Lowry Range.

Land and Mineral Interests

As part of the 2010 Sky Ranch acquisition, the Company acquired approximately 930 acres of land that is valued at approximately $3.1 million as of August 3 1, 2019.

Ad ditionally, the Company holds approximately 13,900 acres of mineral interests in Southeast Colorado in Otero, Bent and Prowers Counties

and has valued these mineral interests at approximately $1,425,500.

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

In exchange, the Company receives 100% of the tap fees from new customers and 98% of all other fees and charges, including monthly water service revenues, remitted to the Rangeview

District by the Elbert 86 District pursuant to the Wild Pointe Service Agreement.

The Elbert 86 District’s water system currently provides water service to approximately 200 SFE water connections in Wild Pointe.

In 2011, the Company signed the Sky Ranch O&G Lease with Anadarko.

Pursuant to the Sky Ranch O&G Lease, the Company received an up-front payment from Anadarko for the purpose of

exploring for, developing, producing and marketing oil and gas on 634 acres of mineral estate owned by the Company at its Sky Ranch property.

The Sky Ranch O&G Lease is now held by production, entitling the Company to royalties based on

In September 2017, the Company signed the three-year Bison Lease for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate owned by the Company adjacent to the

Land and Mineral Rights

As part of the 2010 Sky Ranch acquisition, the Company acquired approximately 930 acres of land, of which approximately 150 acres have been sold to home builders for the purpose of building residential homes.

August 31, 2020, the remaining acres the Company owns, which are also intended to be sold to builders, are valued at $3.6 million.

Additionally, the Company holds approximately 13,900 acres of mineral interests in Southeast Colorado in Otero, Bent and Prowers Counties and has valued these mineral interests at $1.4 million.

described in Note 2 – Summary of significant Accounting Policies , the Company assessed the recoverability of the Arkansas Valley mineral right and

determined that the fair value of these assets was below their carrying value by $1.4 million.

As a result, the Company recorded an impairment charge of $1.4 million in Non-cash

mineral rights impairment charge in the consolidated statements of operations and comprehensive income for

There was no impairment for the Arkansas Valley mineral rights long-lived asset in fiscal 2019.

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

August 31, 2020

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Net land and mineral interests

The Company transferred $585,700 of Sky Ranch land costs to Inventories related to the initial phase of development, consisting of 151 acres, which began in fiscal 2018.

NOTE 5 – PARTICIPATING INTERESTS IN EXPORT WATER

The Company acquired its Rangeview Water Supply through various amended agreements entered into in the early 1990s.

The acquisition was finalized with the signing of the CAA in 1996.

Upon entering into the CAA, the

Company recorded an initial liability of $11.1 million, which represented the cash that the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water and Land Assets ).

The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million

The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is contingent on the sale of Export Water,

the amounts and timing of which are not reasonably determinable.

The acquisition of the Rangeview Water Supply was finalized with the signing of the CAA in 1996.

Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash

that the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water and Land Assets ).

The Company agreed

to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investment.

The obligation for the $11.1 million was recorded as debt, and the

remaining $20.7 million contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.

The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company.

Additionally, if the Company does not sell the Export Water, the holders of

the Series B Preferred Stock are not entitled to payment of any dividend and have no contractual recourse against the Company.

Additionally, if the Company does not sell the Export Water, the holders

of the Series B Preferred Stock are not entitled to payment of any dividend and have no contractual recourse against the Company.

As the proceeds from the sale of Export Water are received and the amounts are remitted to the CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating

Interests in Export Water Supply liability account), with the balance of the payment being charged to the contingent obligation portion.

Because the original recorded liability, which was $11.1 million, was

35% of the original total liability of $31.8 million, approximately 35% of each payment remitted to the CAA holders is allocated to the recorded liability account.

The remaining portion of each payment, or approximately 65%, is allocated to the

contingent obligation, which is recorded on a net revenue basis.

Because the original recorded liability, which was $11.1 million,

was 35% of the original total liability of $31.8 million, approximately 35% of each payment remitted to the CAA holders is allocated to the recorded liability account.

The remaining portion of each payment, or approximately 65%, is allocated to

the contingent obligation, which is recorded on a net revenue basis.

From time to time, the Company repurchased various portions of the CAA obligations, which retained their original priority.

The Company did not make any CAA acquisitions during the

fiscal year ended August 31, 2019 or 2018.

The Company did not make any CAA acquisitions during the fiscal year ended August 31, 2020

The Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty.

Additionally, as a result of the

acquisitions, and the consideration from the cumulative sales of Export Water, as detailed in the table below, the remaining potential third-party obligation at August 31, 2019, is approximately $1 million:

Additionally, as a result of the acquisitions, and the consideration

from the cumulative sales of Export Water, as detailed in the table below, the remaining potential third-party obligation at August 31, 2020, is approximately $1 million:

Proceeds Received

Proceeds to Pure Cycle

Third-party Obligation

Participating

Interests Liability

Original balances

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The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority.

This means the first payees receive their full payment before the next priority level receives

any payment and so on until full repayment.

Of the next approximately $6.5 million of Export Water payouts, which at current levels would occur over several years, the Company will receive approximately $5.7 million of revenue.

This means the first payees receive their full payment before the next priority level

receives any payment and so on until full repayment.

Of the next $6.3 million of Export Water payouts, which at current levels would occur over several years, the Company will receive $5.6 million of revenue.

Thereafter, the Company will be

entitled to all but $220,000 of the proceeds from the sale of Export Water after deduction of the Land Board royalty.

NOTE 6 – ACCRUED LIABILITIES

At August 31, 2019, t he Company had accrued liabilities of $3,428,400, of which $460,500 was for accrued compensation, $94,000 was for estimated property

taxes, $70,000 was for professional fees and the remaining $2,803,900 was related to operating payables, of which $1,399,600 is payable to the CAB for the development of Sky Ranch.

These costs are included in Inventories

and subsequently expensed through Land development construction costs .

In addition, $930,900 of the operating payables is payable to the Rangeview District for construction costs related to the wastewater

These costs are also included in Investments in water and water systems.

At August 31 , 2018, the Company had accrued liabilities of $849,500, of which $400,000 was for accrued compensation, $29,000 was for estimated property taxes,

$59,000 was for professional fees and the remaining $361,500 was related to operating payables.

At August 31, 2020, the Company had accrued liabilities of $2.6 million, of which $766,800 was for accrued compensation, $74,000 was for current operating lease obligations, $72,200 was for estimated property

taxes, $56,000 was for professional fees and the remaining $1.7 million was related to operating payables.

Of the $1.7 million in operating payables, $1.2 million is payable to the Sky Ranch CAB related to development costs at Sky Ranch.

costs are included in Land development i nventories and subsequently expensed through Land development construction costs .

In addition, $42,800 of the operating payables is payable to the Rangeview District for construction costs related to water infrastructure at Sky Ranch.

These costs are included in Investments in water and water

At August 31, 2019, the Company had accrued liabilities of $3.4 million, of which $460,500 was for accrued compensation, $94,000 was for estimated property taxes, $70,000 was for professional fees and the remaining

$2.8 million was related to operating payables.

Of the $2.8 million in operating payables, $1.4 million is payable to the Sky Ranch CAB for costs related to the development of Sky Ranch.

These costs are included in Land development inventories and subsequently expensed through Land development construction costs .

In addition, $930,900 of the operating payables is payable to the Rangeview District

for construction costs related to the wastewater facility.

These costs are included in Investments in water and water systems.

NOTE 7 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

As of August 31, 2019 and 2018, t he Company had no debt.

As of August 31, 2020 and 2019, the Company had no debt.

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

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During December 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31,

(the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its utility enterprise (“Aurora Water”), and the South Metro WISE

Authority (“SMWA”).

The SMWA was formed by the Rangeview District and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December

31, 2013 (the “SM IGA”), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the WISE Partnership Agreement.

The SM IGA specifies each

member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE.

The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities,

and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water.

Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years.

fiscal 2019, t he Company did not make any capital investments in WISE.

By consenting to the waiver of the contingencies set forth in the WISE Partnership Agreement, pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (the “WISE Financing

Agreement”) between the Company and the Rangeview District, the Company has an agreement to fund the Rangeview District’s participation in WISE effective as of December 22, 2014.

The Company’s cost of funding the Rangeview District’s purchase of its

share of existing infrastructure and future infrastructure for WISE and funding operations and water deliveries related to WISE is projected to be approximately $7.0 million over the next five years.

2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its utility enterprise (“Aurora Water”), and the South Metro

WISE Authority (“SMWA”).

December 31, 2013 (the “SM IGA”), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the WISE Partnership Agreement.

specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE.

The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water

treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water.

Certain infrastructure has been constructed and other infrastructure will be constructed over the

next several years.

Pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (the “WISE Financing Agreement”) between the Company and the Rangeview District, the Company has an agreement to fund

the Rangeview District’s participation in WISE effective as of December 22, 2014.

During the years ended August 31, 2020 and 2019, the Company through the Rangeview District, purchased an additional 400 and 0 acre-feet of WISE water for $582,200

See further discussion in Note 14 – Related Party Transactions.

Operating Lease

Effective February 2018, the Company entered into an operating lease for approximately 11,393 square feet of office and warehouse space.

The lease has a three-year term with payments of $6,600 per month and an option

to extend the primary lease term for a two-year period at a rate representing a 12.5% increase over the primary base payments.

The change in the lease costs is not material to the Company’s operations.

Lease Commitments

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

Effective February 2018, the Company entered into an operating lease for 11,393 square

feet of office and warehouse space in Watkins, Colorado.

The lease has a three-year term with payments of $6,600 per month and an option to extend the primary lease term for a two-year period at a rate equal to a 12.5% increase over the primary

base payments.

As of September 1, 2019, the company adopted ASU No.

2016-02, Leases (“Topic 842”).

Under Topic 842, operating lease expense is generally recognized evenly over the term of the

Prior to September 1, 2019 leases were accounted for under the previous guidance in Accounting Standard Codification 840.The Company did not enter into any new leases in fiscal 2020.

years ended August 31, 2020 and 2019, rent expense consisted of operating lease expense of $85,200 and $79,200.

The Company paid $72,800 against Lease obligations — operating

leases during fiscal 2020.

Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet.

For lease agreements entered into or reassessed in the future, the Company will be

required to combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets.

The Company’s lease agreements generally do not provide an implicit borrowing rate;

therefore, an internal incremental borrowing rate is determined based on information available

at lease commencement date for purposes of determining the present value of lease payments.

The Company used the incremental borrowing rate of 6% on September 1, 2019, for all leases that commenced prior to that date.

The Company elected the hindsight practical expedient to determine the lease term for existing leases, which resulted in the lengthening of the lease term related to the Company’s office lease.

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

As of August 31, 2020

Operating leases - ROU assets

Accrued liabilities

Lease obligations - operating leases, net of current portion

Total lease liability

Weighted average remaining lease term (in years)

Weighted average discount rate

NOTE 8 – SHAREHOLDERS’ EQUITY

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The Company’s non-voting Series B Preferred Stock has a preference in liquidation of $1.00 per share less any dividends previously paid.

Additionally, the Series B Preferred Stock is redeemable at the discretion of the

Company for $1.00 per share less any dividends previously paid.

In the event that the Company’s proceeds from the sale or disposition of Export Water rights exceed $36,026,232, the Series B Preferred Stockholders will receive the next $432,513 of

proceeds in the form of a dividend.

Additionally, the Series B Preferred Stock is redeemable at the discretion of

the Company for $1.00 per share less any dividends previously paid.

In the event the proceeds from the sale or disposition of Export Water rights exceed $36,026,232, the Series B Preferred Shareholders will receive the next $432,513 of proceeds

in the form of a dividend.

The terms of the Series B Preferred Stock prohibit payment of dividends on common stock unless all dividends accrued on the Series B Preferred Stock have been paid.

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The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective April 12, 2014.

Executives, eligible employees, consultants and

non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan.

Pursuant to the 2014 Equity Plan, options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting

conditions and other performance criteria determined by the Compensation Committee of the Company’s board of directors.

Executives, eligible employees, consultants, and non-employee directors

are eligible to receive options and stock grants pursuant to the 2014 Equity Plan.

Pursuant to the 2014 Equity Plan, options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting conditions and

other performance criteria determined by the Compensation Committee of the Company’s board of directors.

The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan.

Awards to purchase 402,000

shares of the Company’s common stock have been made under the 2014 Equity Plan.

Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”),

which expired April 11, 2014.

As of August 31, 2020, stock awards

and awards to purchase 511,500 shares of the Company’s common stock have been made under the 2014 Equity Plan.

As of August 31, 2020 and 2019, there were 1 ,088,500 and 1,230,500

shares available for grant under the 2014 Equity Plan.

Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan

(the “2004 Incentive Plan”), which expired April 11, 2014.

No additional awards may be granted pursuant to the 2004 Incentive Plan;

however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004

Incentive Plan.

however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in

accordance with the terms of the 2004 Incentive Plan.

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

Using the Black-Scholes model, the value of the portion of

the award that is ultimately expected to vest is recognized as a period expense over the requisite service period in the consolidated statements of operations and comprehensive income (loss).

Option forfeitures are to be estimated at the time of

grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

The Company does not expect any forfeiture of its option grants and therefore the compensation expense has not been reduced for estimated

During fiscal yea r 2019, no options expired.

During fiscal year 2018, 2,50 0 options expired.

The Company attributes the value of share-based compensation to expense using the

straight-line single option method for all options granted.

Using the Black-Scholes model, the value of the portion

of the award that is ultimately expected to vest is recognized as a period expense over the requisite service period in the consolidated statements of operations and comprehensive income (loss).

Option forfeitures are to be estimated at the time

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

The Company does not expect any forfeiture of its option grants, and therefore, the compensation expense has not been reduced for

estimated forfeitures.

For the years ended August 31,2020 and 2019, 6,500 options and zero options expired.

The Company attributes the value of share-based compensation to expense using the straight-line single option method for all options

The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions:

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

In fiscal 2019, the Company granted its President and non-employee directors options to purchase 50,000 and a combined 32,500 shares of the Company’s common stock pursuant to the 2014 Equity Plan, respectively.

the options expire 10 years after the date of grant.

The Company calculated the fair value of the options granted during 2019 using the Black-Scholes model.

In fiscal 2018, the Company granted its President and non-employee directors options to purchase 50,000 and a combined 32,500 shares of the Company’s common stock pursuant to the 2014 Equity Plan, respectively.

the options expire 10 years after the date of grant.

The Company calculated the fair value of the options granted during 2018 using the Black-Scholes model.

In fiscal 2020, the Company granted 80,000 stock options to employees with weighted-average grant-date fair values of $4.21, and three-year vesting terms which expire ten years from the grant date.

In fiscal 2020,

the Company granted 50,000 stock options to an executive officer with a weighted-average grant-date fair value of $4.16, a three-year vesting term and an expiration date of ten years from the grant date.

In addition, the six non-employee Board

members were each granted 2,000 unrestricted stock grants.

The fair market value of the unrestricted shares for share-based compensation expensing is equal to the closing price of the Company’s common stock on the date of grant of $12.45.

Stock-based compensation expense includes $149,400 of expense related to these unrestricted stock grants.

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

There was no stock-based compensation expense related to unrestricted stock grants for fiscal 2019.

In fiscal 2019, the Company granted 50,000 stock options to an executive officer with a weighted-average grant-date fair value of $5.06, a three-year vesting term and an expiration date

of ten years from the grant date.

In fiscal 2019, the Company granted its non-employee directors a combined 32,500 stock options with a weighted-average grant-date fair value of $126,700, a one year vesting term and an expiration date of ten

years from the grant date.

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

For the Fiscal Years Ended

For the Fiscal Years Ended August 31,

Expected term (years)

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Weighted average grant-date fair value

During the fiscal years ended August 31, 2019 and 2018, 62,500 and 10,000 options were exercised, respectively.

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the fiscal year ended August 31 , 2019:

During the fiscal years ended August 31, 2020 and 2019, 17,500 and 62,500 options were exercised.

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

Weighted Average

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Options exercisable at August 31, 2020

The following table summarizes the activity and value of non-vested options as of and for the fiscal year ended August 31, 2019 :

The following table summarizes the activity and value of non-vested options as of and for the year ended August 31, 2020:

Weighted Average

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All non-vested options are expected to vest.

The total fair value of options vested during the fiscal years ended August 3 1, 2019 and 2018, was $297,100 and

$210,700, respectively.

The weighted average grant date fair value of options granted during the fiscal years ended August 31, 20 1 9 and 2018 w as $4.60 and $4.41, respectively.

Share-based compensation expense for the fiscal years ended A ugust 31, 2019 and 2018, was $336,200 and $324,840, respectively.

At August 31, 2019 , the Company had unrecognized expenses totaling $284,000 relating to non-vested

options that are expected to vest.

The weighted average period over which these options are expected to vest is less than three years.

For the years ended August 31, 2020 and 2019, the total fair value of options vested was $384,400 and $297,100.

For the years ended August 31, 2020 and 2019, the

weighted-average grant-date fair value of options granted was $4.19 and $4.60.

For the years ended August 31, 2020 and 2019, share-based compensation expense was $517,000 and $336,200.

As of August 31, 2020, the Company had unrecognized share-based compensation expenses totaling $461,100 relating to non-vested options that are expected to vest.

The weighted average period over which these options

are expected to vest is 1.7 years.

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

As of August 31, 2020, the Company had outstanding warrants to purchase 92 shares of common stock at an exercise price of $1.80 per share.

These warrants

expire six months from the earlier of:

The date that all of the Export Water is sold or otherwise disposed of,

These warrants expire six months from the earlier of:

The date that all the Export Water is sold or otherwise disposed of,

The date that the CAA is terminated with respect to the original holder of the warrant, or

The date on which the Company makes the final payment pursuant to Section 2.1(r) of the CAA.

No warrants were exercised during fisca l 2019 and 2018.

No warrants were exercised during fiscal 2020 and 2019.

NOTE 9 – SIGNIFICANT CUSTOMERS

Water and Wastewater

Pursuant to the Rangeview Water Agreements and an Export Service Agreement entered into with the Rangeview District dated June 16, 2017, the Company provides water and wastewater services on the Rangeview District’s

behalf to the Rangeview District’s customers.

Sales to the Rangeview District accounted for 4% and 6% of the Company’s total water and wastewater revenues for the fiscal years ended August 31, 2019 and 2018, respectively.

The Rangeview District had one significant customer, the Ridgeview Youth Services Center.

The Rangeview District’s significant customer accounted for 3% and 4% of the Company’s

total water and wastewater revenues for the fiscal years ended August 31, 2019 and 2018, respe ctively.

Revenues from two customers represented approximately 72% and 16% of the Company’s water and wastewater revenues for the fiscal year ended August 31, 2019.

Both customers are in the oil and gas industry.

Revenues from

one customer represented approximately 68% of the Company’s water and wastewater revenues for the fiscal year ended August 31, 2018.

This customer was in the oil and gas industry.

The Company primarily provides 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 the Company’s water and wastewater service

revenue, the Company has included the end-use customers of the Rangeview District who generate the most revenue for it on its list of significant customers.

Additionally, the Company has presented the percentages of revenue from water and

wastewater services and water and wastewater tap sales separately (versus by the water and wastewater resource development segment or total revenue) because it believes that provides a more meaningful presentation of the relevance of each

customer to that service line.

Lot sales are generated entirely through sales to three customers as noted below.

The tables below present revenue generated from the Company's significant customers for each of the services presented.

For the year ended August 31, 2020

Water and wastewater metered services

Water and wastewater tap fees

Land development

Revenues from three customers represented 100% (34%, 34% and 32%) 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.

Of the two customers, one customer represented 66% and the second customer represented 32% of the Company’s land development revenues for the fiscal year ended August 31, 2018.

The Company had accounts receivable from the Rangeview District which accounted for 40% and 3% of the Company’s trade receivables balances at August 31, 2019 and

2018, respectively.

The Company had accounts receivable from one other customer which accounted for approximately 57% of its trade receivable balances at August 31, 2019.

The Company had accounts receivable from two other customers which accounted

for approximately 43% and 30% of its trade receivable balances at August 31, 2018, respectively.

Accounts receivable from the Rangeview District’s largest customer accounted for 5% and 2% of the Company’s water and wastewater trade receivables as

of August 31, 2019 and 2018, respectively.

(Lot sales recognized)

Ridgeview Youth Services

Conoco / Crestone Peak (O&G 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

Water and wastewater metered services

Water and wastewater tap fees

Land development

(Lot sales recognized)

Ridgeview Youth Services

Conoco / Crestone Peak (O&G 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

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

Because the Company provides services to the Rangeview District’s customers, and those customers pay the Rangeview District, which then remits amounts to the Company, the Company’s trade receivables at August 31,

2020 and 2019 from the Rangeview District comprise 81% and 40% of the balances.

However, the receivable balances from the end-use customers that are owed to the Rangeview District, the majority of which in turn are owed to the Company, are

comprised primarily of amounts owed by the home builders at Sky Ranch for tap fees.

As of August 31, 2020, the three home builders accounted for 42% of the receivables balance, with all Sky Ranch homeowners combined accounting for 17% of the

receivable balance and all Wild Pointe homeowners combined accounting for 14% of the receivable balance.

As of August 31, 2019, the three home builders accounted for 5% of the receivables balance, with all Wild Pointe homeowners combined

accounting for 26% of the receivable balance, and Conoco accounting for 57% of the receivable balance.

NOTE 10 – INCOME TAXES

Deferred income taxes reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used

for income tax purposes.

The Company recorded income tax expense of $2.2 million and an income tax benefit of $1.3 million for the fiscal years ended August 31, 2020 and 2019.

The net expense during the fiscal year

ended August 31, 2020, consisted of current income tax expense of $0 and deferred income tax expense of $2.2 million.

The deferred tax expense consists of the usage of the Company’s $2.2 million net operating loss carryforwards and the timing

difference between book and tax depreciation of fixed assets.

The Company’s effective income tax rate was 24.4% and (36.4%) for fiscal years August 31, 2020 and 2019.

The Company’s effective tax rate was a benefit for 2019 due to the release of its valuation allowance on its

deferred tax assets.

The Company paid Federal and State tax installments of $1,089,700 and $215,500, respectively, during fiscal year ended August 31, 2020.

No taxes were paid during the fiscal year ended August 31, 2019.

used for income tax purposes.

Significant components of the Company’s deferred tax assets as of August 31 are as follows:

For the Fiscal Years Ended

For the Fiscal Years Ended August 31,

Deferred tax assets (liabilities):

4 unchanged sentences

Depreciation and depletion

NQ stock options

Non-qualified stock options

Valuation allowance

Net deferred tax asset

The Company maintained a valuation allowance on the net deferred tax asset other than AMT credit carryforwards as of August 31, 2018.

For the fiscal year ended August 31, 2019, the Company has

determined it is more likely than not that the Company will realize its deferred tax assets, which consist primarily net operating loss carryforwards.

The Company assessed the realizability of its deferred tax assets using all available evidence;

Net deferred tax (liability) asset

As of August 31, 2020 and August 31, 2019 the Company had no liability for unrecognized tax benefits.

The Company maintained a valuation allowance on the net deferred tax asset other than AMT credit carryforwards through fiscal year August 31, 2018.

During the fiscal year ended August 31, 2019,

the Company had determined it is more likely than not that the Company will realize its deferred tax assets, which consist primarily net operating loss carryforwards.

The Company assessed the realizability of its deferred tax assets using all

available evidence;

considering both historical results and projections of profitability for the reasonably foreseeable future periods.

As a result of the Company’s annual reassessment of its conclusions regarding the realization of its deferred tax assets at each

financial reporting date, the Company concluded that its deferred tax assets are realizable, and therefore, the valuation allowance is no longer necessary.

By releasing the valuation allowance, the Company recognized a deferred tax benefit of

approximately $1,284,100 which positively impacted the Company's results of operations and financial position.

As a result of the Company’s annual reassessment of its conclusions regarding the realization of its deferred

tax assets at each financial reporting date, the Company concluded that its deferred tax assets were realizable, and therefore, the valuation allowance was no longer necessary.

By releasing the valuation allowance, the Company recognized a

deferred tax benefit of approximately $1,284,100 which positively impacted the Company’s results of operations and financial position.

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

For the Fiscal Years Ended

Expected benefit from federal taxes at statutory rate of 21% and 34% for the years 2019 and 2018

For the Fiscal Years Ended August 31,

Expected benefit from federal taxes at statutory rate of 21% for the years 2020 and 2019

State taxes, net of federal benefit

Permanent and other differences

Change in tax rate

Temporary difference true up

NQ stock options adjustment

AMT credit carryforward

Non-qualified stock options adjustment

Change in valuation allowance

Total income tax expense / (benefit)

At August 31, 2019 , th e Company has $2.5 million of net operating loss carryforwards available for income tax purposes.

operating loss carryforwards expire at various times beginning in 2036 and ending in 2038 for federal income tax purposes and expire at various times beginning in 2035 and ending in 2036 for state income tax purposes.

At August 31, 2020, the Company has $109,200 of net operating loss carryforwards available for income tax purposes.

The net operating loss carryforwards expire at various times beginning in 2036 and ending in 2038

for federal income tax purposes and expire at various times beginning in 2035 and ending in 2036 for state income tax purposes.

At August 31, 2019, the Company had $2.5 million of net operating loss carryforwards available for income tax

No net operating loss carryforwards expired during the fiscal year ended August 31, 2020 or 2019.

The Tax Act reduced the Company’s corporate federal tax rate from 34% to 21% effective January 1, 2018.

As a result, the Company is required to re-measure its deferred tax assets and liabilities using the enacted rate

at which it expects them to be recovered or settled.

The effect of this re-measurement is recorded to income tax expense (benefit) in the year the tax law is enacted.

The Company’s deferred tax asset and full valuation allowance was decreased by

approximately $1.2 million as a result of the decreased corporate tax rate during the fiscal year ended August 31, 2018 .

In addition, the Company recorded a $282,000 AMT deferred tax asset for which it does not

have a valuation allowance.

The Company expects to receive the AMT deferred tax asset as a refund in future years.

Most, if not all, of this credit will be refundable starting with the filing of the 2018 (fiscal year ending 2019) through 2021 (fiscal

year ending 2022) tax returns, subject to limitations of the Internal Revenue Code.

The Company will continue to evaluate the impact of the Tax Act and will record any resulting tax adjustments during 2019.

NOTE 11 – 401(k) PLAN

The Company maintains a Pure Cycle Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”), a defined contribution retirement plan for the benefit of its employees.

The 401(k) Plan is currently a salary deferral

only plan, and at this time the Company does not match employee contributions.

The Company maintains the Pure Cycle Corporation 401(k) Profit Sharing Plan (the “401(k) Plan”), a defined contribution retirement plan for the benefit of its employees.

In fiscal 2020, the Company implemented a

401(k) Plan match, for which the Company contributes 1.5% if an employee contributes 3% or more up to a maximum contribution of $2,500 per annum.

The contributions vest based on years of service - first anniversary 25%, second anniversary 50%,

third anniversary 75% and the fourth anniversary 100%.

The Company pays the annual administrative fees of the 401(k) Plan, and the 401(k) Plan participants pay the investment fees.

The 401(k) Plan is open to all employees, age

21 or older, who have been employees of the Company for at least six months.

During the fiscal years ended August 31 , 2019 and 2018, th e Company paid fees of $6,000 and $5,900, respectively,

for the administration of the 401(k) Plan.

The 401(k) Plan is open to all employees, age 18 or older, who

have been employees of the Company for at least three months.

For the years ended August 31, 2020 and 2019, the Company recorded total expense of $28,900 and $6,000, related to the 401(k) Plan.

NOTE 12 – COMMITMENTS AND CONTINGENCIES

2 unchanged sentences

occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes.

The Company makes such estimates based on information known about the claims and

experience in contesting, litigating and settling similar claims.

The Company makes such estimates based on information known about the claims

and experience in contesting, litigating, and settling similar claims.

Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows.

The Company had

no contingencies where the risk of material loss was reasonably possible as of August 31, 2019.

August 31, 2020, the Company had no contingencies where the risk of material loss was probable.

NOTE 13 – SEGMENT REPORTING

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (“CODM”), or decision-making group,

to evaluate performance and make operating decisions.

The Company has identified its CODM as the Chief Executive Officer.

During the year 2018, the Company began construction of lots at Sky Ranch, which the Company has identified as a segment.

Currently, the Company operates its wholesale water and wastewater services segment and land

development activities at Sky Ranch as its two lines of business.

The wholesale water and wastewater services business includes selling water service to customers, which water is provided by the Company using water rights owned or controlled by the Company, and developing

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the CODM, or decision-making group, to evaluate performance and make operating decisions.

Company has identified its CODM as its Chief Executive Officer.

Because of the methods used by the CODM to allocate resources, the Company has identified two operating segments which meet GAAP segment disclosure requirements, namely the water and wastewater resource development

segment and the land development segment.

The water and wastewater resource development business includes selling water services to customers, which water is provided by the Company using water rights owned or controlled by the Company, and developing

infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater.

As part of the Company’s land development activities at Sky Ranch, the Company entered into contracts for the sale of lots (see Note 2 – Summary of Significant Accounting Policies ).

The Company has identified land development and lot sales as a separate segment beginning in the fiscal year 2018.

Oil and gas royalties and licenses are a passive activity and not an operating business activity and, therefore, are not classified as a segment.

The following table summarizes wholesale water and wastewater services and land development revenue information by segment (1) :

For the Fiscal Years Ended August 31,

Wholesale water and wastewater services

Land development activities

Total wholesale water and wastewater services and land development revenues

(1) The Company had other income from non-segment sources (oil and gas, interest and other) of $529,293 and $441,407 for the fiscal years ended August 31, 2019 and 2018, respectively.

The following table summarizes wholesale water and wastewater services and land development pretax income by segment:

For the Fiscal Years Ended August 31,

Wholesale water and wastewater services

Land development activities

Depreciation, general and administrative expenses

Total income (loss) from operations

The following table summarizes total assets for the Company’s wholesale water and wastewater services business and land development business by segment.

The assets consist primarily of water rights and water and

wastewater systems in the Company’s wholesale water and wastewater services segment and land, inventories and deposits in the Company’s land development segment.

The Company’s other assets (“Corporate”) primarily consist of cash and cash

equivalents, equipment, mineral rights, related party notes receivables and a deferred tax asset.

August 31, 2019

August 31, 2018

Wholesale water and wastewater services

Land development activities

For the years ended August 31, 2019 and 2018, the Company had asset additions of $14.1 million and $2.9 million, respectively, in the wholesale water and wastewater services segment.

For the years ended August 31, 2019 and 2018, the Company had asset additions of $18.6 million and $4.7 million, respectively, in the land development activities segment.

The Company allocated $4.8 million from other

water and wastewater to its land development activities segment in fiscal 2018.

The land development segment includes all the activities necessary to develop and sell finished lots, which as of August 31, 2020 and 2019, was

done exclusively at the Company’s Sky Ranch Master Planned Community.

O&G operations, although material in certain years, are deemed a passive activity as the CODM does not actively allocate resources to these projects;

therefore, this is not classified as a reportable segment.

The tables below present the measure of profit and assets the CODM uses to assess the performance of the segment for the periods presented:

Year Ended August 31, 2020

wastewater resource

Total revenue

Cost of revenue

Depletion and depreciation

Total cost of revenue

Reimbursement of construction costs - related party

Gross Margin after reimbursables

Pretax operating income

Total long-term assets

Year Ended August 31, 2019

wastewater resource

Total revenue

Cost of revenue

Depletion and depreciation

Total cost of revenue

Pretax operating income

Total long-term assets

NOTE 14 – RELATED PARTY TRANSACTIONS

On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District

joining the South Metro Water Supply Authority (“SMWSA”).

The Company provided funding of $22,200 and $198,200 for the fiscal years ended August 31, 2019 and 2018 , respectively.

Through the WISE Financing Agreement, to date the Company has made payments totaling $3,533,300 to purchase certain rights to use existing water transmission and

related infrastructure acquired by the WISE project and to construct the connection to the WISE system.

The amounts are included in Investments in water and water systems on the Company’s balance sheet as

of August 31, 2019.

The C ompany anticipates 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:

Estimated WISE Costs

For the Fiscal Years Ended August 31,

Water delivery

The Company has outstanding notes receivable of $988,400 in the aggregate from the Rangeview District and the CAB, which are related parties, as discussed below:

District joining the South Metro Water Supply Authority (“SMWSA”).

During the years ended August 31, 2020 and 2019, the Company provided funding of $17,400 and $22,200 to the Rangeview District related to this Participation Agreement.

Through the WISE Financing Agreement, to date the Company has made payments totaling $6,316,600 to purchase certain rights to use existing water transmission and related infrastructure acquired by the WISE project

and to construct the connection to the WISE system.

The amounts are included in Investments in water and water systems on the Company’s balance sheet as of August 31, 2020.

During the fiscal year ended

August 31, 2020, the Company, through the Rangeview District, purchased an additional 400 acre feet of WISE water for $582,200.

The cost of the water to the members is based on the water rates charged by Aurora Water and can be adjusted each January 1.

As of January 1, 2020, WISE water was $5.77 per thousand gallons and such rate will remain in effect through

calendar 2021.

In addition, the Company pays certain system operational and construction costs.

If a WISE member, including the Rangeview District, does not need its WISE water each year or a member needs additional water, the members can trade

and/or buy and sell water amongst themselves.

During the years ended August 31, 2020 and 2019, the Company provided $2.8 million and $1.5 million of financing to the Rangeview District to fund the Rangeview District’s obligation to purchase WISE water rights and pay for operational and

construction charges.

Ongoing funding requirements are dependent on the WISE water subscription amount and the Rangeview District’s allocated share of the operational and overhead costs of SMWA and construction activities related to delivery of

The Company has outstanding notes receivable of $1,078,600 in the aggregate from the Rangeview District and the Sky Ranch CAB, which are related parties, as discussed below:

The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas.

Rangeview District is governed by an elected board of directors.

The Rangeview District is governed by an elected board of directors.

Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of the Rangeview District.

The Company owns

certain rights and real property interests which encompass the current boundaries of the Rangeview District.

Company owns certain rights and real property interests which encompass the current boundaries of the Rangeview District.

Sky Ranch Metropolitan District Nos.

1, 3, 4 and 5 (the “Sky Ranch Districts”) and the CAB are quasi-municipal corporations and political

subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property.

The current members of the board of directors of the Rangeview District, each Sky Ranch District, and the CAB consist of three employees of the

Company (including the Company’s President) and one independent board member.

1, 3, 4 and 5 (the “Sky Ranch Districts”) and the Sky Ranch CAB are quasi-municipal

corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property.

The current members of the board of directors of the Rangeview District, each Sky Ranch District, and the Sky

Ranch CAB consist of three employees of the Company (including the Company’s President) and one independent board member.

The Rangeview District

5 unchanged sentences

Of the August 31, 2020 balance in Notes receivable - related parties , $1,050,000 includes borrowings by the Rangeview District of $598,500 and accrued interest of $451,500.

Of the August 31, 2018 balance in Notes receivable - related

parties , $880,700 includes borrowings by the Rangeview District of $484,000 and accrued interest of $396,700.

Of the August 31, 2019 balance in Notes receivable -

related parties , $961,700 includes borrowings by the Rangeview District of $546,500 and accrued interest of $414,800.

Sky Ranch Metropolitan District Nos.

3 unchanged sentences

The Sky Ranch District paid the outstanding note receivable to the Company in November 2017.

As of August 31, 2018, there was no

outstanding balance under these agreements.

In November 2014, but effective as of January 1, 2014, the Company entered into a Facilities Funding and Acquisition Agreement with a Sky Ranch District obligating the Company to either finance district improvements or

to construct improvements on behalf of the Sky Ranch District subject to reimbursement.

As of August 31, 2018, there was

no outstanding balance under these agreements.

improvements or to construct improvements on behalf of the Sky Ranch District subject to reimbursement.

Each advance or reimbursable expense accrued interest at a rate of 6% per annum.

No payments were required by the Sky Ranch District unless and until the Sky

Ranch District issued bonds in an amount sufficient to reimburse the Company for all or a portion of the advances and costs incurred.

The CAB agreed to repay the amounts owed by the Sky Ranch District under this agreement and the agreement was

terminated pursuant to the 2018 FFAA (defined and described below).

No payments were required by the Sky Ranch District unless

and until the Sky Ranch District issued bonds in an amount sufficient to reimburse the Company for all or a portion of the advances and costs incurred.

The Sky Ranch CAB agreed to repay the amounts owed by the Sky Ranch District under this

agreement and the agreement was terminated pursuant to the Sky Ranch FFAA (defined and described below).

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 property.

1 and Sky Ranch Metropolitan District

5 formed the Sky Ranch CAB to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts.

the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to

the provision of services that benefit the property.

In November 2017, but effective as of January 1, 2018, the Company entered into a Project Funding and Reimbursement Agreement (“PF Agreement”) with the CAB for the Sky Ranch property.

The PF Agreement required the Company

to fund an agreed upon list of public improvements for Sky Ranch with respect to earthwork, erosion control, streets, drainage and landscaping at an estimated cost of $13.2 million for calendar years 2018 and 2019.

Each advance or reimbursable

expense accrues interest at a rate of 6% per annum.

On September 18, 2018, the parties entered into a series of agreements, including a Facilities Funding and Acquisition Agreement with an effective date of November 13, 2017 (the “2018 FFAA”), which supersedes and

consolidates the previous agreements pursuant to which

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

Agreement required the Company to fund an agreed upon list of public improvements for Sky Ranch with respect to earthwork, erosion control, streets, drainage, and landscaping at an estimated cost of $13.2 million for calendar years 2018 and 2019.

Each advance or reimbursable expense accrues interest at a rate of 6% per annum.

On September 18, 2018 and effective as of November 13, 2017, the parties entered into a series of agreements that superseded and consolidated the previous agreements into one primary agreement, the Facilities

Funding and Acquisition Agreement (the “Sky Ranch FFAA”), pursuant to which:

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

5 to the Company totaling $857,900, and the previous Facilities Funding and Acquisition Agreement entered into between the Company and Sky Ranch

1 unchanged sentence

5 in 2014 was terminated;

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

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

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

All amounts owed under the terminated agreements and all amounts advanced under the 2018 FFAA, collectively totaling $20 million, bear interest at a rate of 6% per annum.

No payment is required of the CAB for advances

made to the CAB or expenses incurred related to construction of improvements unless and until the CAB and/or Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of advances or other expenses incurred.

The CAB agrees to exercise reasonable efforts to issue bonds to reimburse the Company 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 the Company.

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

In 2018, the Company advanced the CAB $2.3 million to begin construction of improvements on the Sky Ranch property.

In 2019, the Company advanced the CAB $17.7 million for the Sky Ranch property.

The advances have been

used by the CAB to pay for construction of public improvements and have been recorded as Inventories and subsequently expensed through Land development construction costs in the accompanying financial

If the Sky Ranch Districts and/or the CAB issues bonds and the CAB reimburses the Company, the reimbursement will reduce any applicable capitalized costs remaining in Inventories.

In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the CAB obligating the Company to advance funding to the CAB for operation and maintenance expenses for

the 2018 and 2019 calendar years.

All payments are subject to annual appropriations by the CAB in its absolute discretion.

The advances by the Company accrue interest at the rate of 6% per annum from the date of the advance.

$27,100 of the balance

of the Notes receivable – related parties at August 31, 2019, includes borrowings by the CAB of $25,500 and accrued interest of $1,600.

The $25,500 balance of the Notes

receivable – related parties at August 31, 2018, includes borrowings by the CAB of $25,500 and accrued interest of $0.

NOTE 15 – UNAUDITED QUARTERLY FINANCIAL DATA

Quarterly Results of Operations

Three Months Ended

In thousands, except per share data

Total revenues

Operating income (loss)

Net income (loss)

Basic and diluted income (loss) per share

Amount is less than $.01 per share

The following item had a significant impact on the Company’s net income (loss):

In fiscal 2019, the Company sold approximately $4,238,300 ($1,285,000, $124,200, $1,308,500 and $1,520,600 in fiscal Q1, Q2, Q3 and Q4, respectively) in water related to oil and gas

activities as compared to $4,044,300 ($846,400, $753,000, $1,022,300 and $1,422,600 in fiscal Q1, Q2, Q3 and Q4, respectively) in fiscal 2018.

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

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

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

All amounts owed under the terminated agreements and all amounts advanced under the Sky Ranch FFAA, collectively totaling $20 million, bear interest at a rate of 6% per annum.

No payment is required of the Sky

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

portion of advances or other expenses incurred.

The Sky Ranch CAB agrees to exercise reasonable efforts to issue bonds to reimburse the Company subject to certain limitations.

In addition, the Sky Ranch CAB agrees to utilize any available moneys

not otherwise pledged to payment of debt, used for operation and maintenance expenses, or otherwise encumbered, to reimburse the Company.

Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058, shall be deemed forever

discharged and satisfied in full.

As of August 31, 2020, the balance of the Company’s advances for improvements, excluding interest, net of costs reimbursed in November 2019, to the Sky Ranch CAB totaled $15.9 million, of which $0.5 million is

included in Land development i nventories and $15.4 million was expensed through Land development construction costs .

advances have been used by the Sky Ranch CAB to pay for construction of public improvements.

The Company submits specific costs for reimbursement to the Sky Ranch CAB.

Based on the specific costs being reimbursed by the Sky Ranch CAB, the Company

records those costs that have been previously expensed in cost of sales as other income and those costs that remain capitalized as land development inventory costs as a reduction of the related land development inventory costs held in Land development i nventories.

Any reimbursable costs repaid after all capitalized expenses and lot revenues have been fully recognized are recorded as Other income .

Refer to Note 2 – Summary of Significant Accounting Policies - Revenue Recognition - Land Development Activities for a summary of reimbursable costs incurred as of August

31, 2020, payments made by the Sky Ranch CAB, and any outstanding reimbursable amounts.

In 2018, the Company advanced the Sky Ranch CAB $2.3 million to begin construction of improvements on the Sky Ranch property.

In 2019, the Company advanced the Sky Ranch CAB $17.7 million for the Sky Ranch

The advances have been used by the Sky Ranch CAB to pay for construction of public improvements and have been recorded as Land development inventories and subsequently expensed through Land development construction costs in the accompanying consolidated financial statements.

If the Sky Ranch Districts and/or the Sky Ranch CAB issues bonds and the Sky Ranch CAB reimburses the Company, the

reimbursement will reduce any applicable capitalized costs remaining in Inventories.

In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the Sky Ranch CAB obligating the Company to advance funding to the Sky Ranch CAB for operation and

maintenance expenses for the 2018 and 2019 calendar years.

All payments are subject to annual appropriations by the Sky Ranch CAB in its absolute discretion.

The advances by the Company accrue interest at the rate of 6% per annum from the date of

$28,600 of the balance of the Notes receivable – related parties at August 31, 2020, includes borrowings by the Sky Ranch CAB of $25,500 and accrued interest of $3,100.

The $27,100 balance of

the Notes receivable – related parties at August 31, 2019, includes borrowings by the Sky Ranch CAB of $25,500 and accrued interest of $1,600.

NOTE 15 – SUBSEQUENT EVENTS

On October 25, 2019, the CAB filed a preliminary offering memorandum for the offering and issuance of tax-exempt, fixed rate senior bonds in the aggregate principal amount of approximately $10,820,000 and tax-exempt,

fixed-rate subordinate bonds in the aggregate principal amount of approximately $1,765,000 (collectively, the “Bonds”).

If the Bonds are sold successfully, approximately $10 million of the net proceeds from the Bonds are expected to be used to

reimburse the Company for advances it made to the CAB pursuant to the 2018 FFAA to fund the construction of public improvements to the Sky Ranch property.

The Company, through its wholly-owned subsidiary PCY Holdings, LLC, entered into contracts for the purchase and sale of real estate in its second filing at Sky Ranch (collectively, the “Purchase and Sale Contracts”) with each of KB Home

Colorado Inc.

(“KB Home”), Melody Homes, Inc., a wholly-owned subsidiary of DR Horton, Inc.

(“Melody Home”), Challenger Denver, LLC (“Challenger”), and Meritage Homes of Colorado, Inc.

(“Meritage Home”), collectively referred to as the

“Builders.” The Purchase and Sale Contracts with KB Home and Melody were entered into on October 30, 2020.

The Purchase and Sale Contracts with Meritage and Challenger were entered into on November 2, 2020.

Each Purchase and Sale Contract

provides that, upon the terms and subject to the conditions set forth in the Purchase and Sale Contract, PCY Holdings will sell, and the Builder will purchase, a certain number of platted residential lots at the Sky Ranch property.

is required to purchase water and wastewater taps for the lots from the Rangeview District.

The closing of the transactions contemplated by each Purchase and Sale Contract is subject to customary closing conditions, including, among others, the Builder’s completion to its satisfaction of a title review and other due diligence of

the property, the accuracy of the representations and warranties made by the Company contained in the Purchase and Sale Contract, and a commitment by the title company to issue to the Builder a title policy, subject to certain conditions.

Home, Meritage, and Challenger have a 60-day due diligence period, and Melody has a 75-day due diligence period.

Within seven business days of the execution of each Purchase and Sale Contract, the Builders are obligated to make an earnest money

Pursuant to certain Purchase and Sale Contracts, Builders are required to make additional earnest money deposits after the due diligence period and/or final approval of the entitlements for the property.

If a Purchase and Sale Contract

is terminated prior to the expiration of the due diligence period, then the earnest money deposit must be refunded to the Builder.

Otherwise, the earnest money deposit and other deposits will be applied to the payment of the purchase price of

the lots at closing in accordance with a specified takedown schedule or be paid to the Company, subject to certain conditions.

Pursuant to each Purchase and Sale Contract, the Company must use commercially reasonable efforts to obtain final

approval of the entitlements for the property on or before nine months after the expiration of the due diligence period, but the Company will have the right to extend the date for obtaining final approval of the entitlements for up to six

months after the initial nine-month period.

The Company estimates that the development of the finished lots for the second filing (nearly 900 lots) of Sky Ranch will cost $65.6 million.

The total proceeds from the Purchase and Sales Contracts with the four

builders for the 789 finished lots contracted for is $63.4 million.

If the remaining 100+ lots, which have been reserved for future use, were sold at prices comparable to the first 789 lots, the total sales proceeds for all of filing two would

be $72.6 million.

The timing of cash flows will include payments for certain milestone deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final

completion of lot deliveries.

Additionally, on November 3, 2020, the Company completed the sale of the remaining lots in the initial Sky Ranch filing for consideration of $1.6 million.

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

As discussed in our Current Report on Form 8-K filed on October 4, 2018, EKS&H LLLP (“EKS&H”) resigned as our independent registered public accounting firm.

EKS&H resigned because EKS&H combined with

Plante & Moran PLLC (“Plante Moran”).

On October 1, 2018, the Audit Committee of our board of directors engaged Plante Moran to serve as the independent registered public accounting firm for the Company effective as of that date.

been the Company’s independent registered public accounting firm since December 4, 2017.

During the period from December 4, 2017 to August 31, 2018, and the subsequent interim period through October 1, 2018 we did not have any disagreements with EKS&H on any matter of accounting principles or

practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to EKS&H’s satisfaction, would have caused EKS&H to make reference thereto in its reports on our financial statements for the

relevant periods.

During the period from December 4, 2017 to August 31, 2018, and the subsequent interim period through October 1, 2018, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.

As discussed in our Current Report on Form 8-K filed on December 6, 2017, we dismissed Crowe Horwath LLP (now known as Crowe LLP) (“Crowe”) as the Company’s independent registered public accounting firm.

The dismissal of Crowe was approved by the Audit Committee of the board of directors of the Company.

Crowe had been the Company’s independent registered public accounting firm since January 16, 2017.

During the fiscal year ended August 31, 2017 and through December 4, 2017 (the date of the change in auditors) , we did not have any disagreements with Crowe on any matter of

accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreements, if not resolved to Crowe’s satisfaction, would have caused Crowe to make reference thereto in its reports on our financial

statements for the relevant periods.

During the fiscal year ended August 31, 2017 and through December 4, 2017, there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation S-K.

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data