PURE CYCLE CORP 10-K

Item 8 – Financial Statements and Supplementary Data Index to Financial Statements and Supplementary Data Page Report of Independent Registered Public Accounting Firm F-1 Consolidated Balance Sheets F-2 Consolidated Statements of Operations and Comprehensive Income F-3 Consolidated Statements of Shareholders’ Equity F-4 Consolidated Statements of Cash Flows F-5 Notes to Consolidated Financial Statements F-6 44 Table of Contents Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Pure Cycle Corporation: Opinion on the Financial Statements We have audited the accompanying consolidated balance 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 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence 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. /s/ Plante & Moran PLLC We have served as the Company’s auditor since 2017. Boulder, CO November 10, 2020 F-1 Table of Contents PURE CYCLE CORPORATION CONSOLIDATED BALANCE SHEETS ASSETS: August 31, 2020 August 31, 2019 Current Assets: Cash and cash equivalents $ 21,797,358 $ 4,478,020 Short-term investments — 5,188,813 Trade accounts receivable, net 1,123,740 1,099,631 Prepaid expenses and deposits 1,000,617 1,016,751 Land development inventories 481,451 11,613,112 Income taxes receivable 1,588,035 141,410 Total current assets 25,991,201 23,537,737 Investments in water and water systems, net 55,086,743 50,270,310 Land and mineral interests 4,914,880 5,104,477 Other assets 2,043,429 1,945,202 Notes receivable – related parties, including accrued interest 1,078,596 988,381 Deferred tax asset — 1,283,246 Long-term land investment 450,641 450,641 Operating leases - right of use assets, less current portion 195,566 — Income taxes receivable — 141,410 Total assets $ 89,761,056 $ 83,721,404 LIABILITIES: Current liabilities: Accounts payable 179,718 170,822 Accrued liabilities 1,390,949 1,097,922 Accrued liabilities - related parties 1,212,404 2,330,496 Deferred revenues 1,635,443 3,991,535 Deferred oil and gas lease and water sales payment 1,800,068 706,464 Total current liabilities 6,218,582 8,297,239 Deferred oil and gas lease and water sales payment, less current portion 165,012 360,884 Participating Interests in Export Water Supply 327,718 332,140 Deferred tax liability 885,632 — Lease obligations - operating leases, less current portion 120,285 — Total liabilities 7,717,229 8,990,263 Commitments and contingencies SHAREHOLDERS’ EQUITY: Preferred stock: Series B – par value $ .001 per share, 25 million shares authorized; 432,513 shares issued and outstanding (liquidation preference of $ 432,513 ) 433 433 Common stock: Par value 1/3 of $.01 per share, 40 million shares authorized; 23,856,098 and 23,826,598 shares issued and outstanding, respectively 79,525 79,427 Additional paid-in capital 172,926,538 172,360,413 Accumulated other comprehensive income — 3,891 Accumulated deficit (90,962,669 ) (97,713,023 ) Total shareholders’ equity 82,043,827 74,731,141 Total liabilities and shareholders’ equity $ 89,761,056 $ 83,721,404 See accompanying Notes to Consolidated Financial Statements F-2 Table of Contents PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the Fiscal Years Ended August 31, 2020 2019 Revenues: Metered water usage from: Municipal customers $ 524,060 $ 318,199 Industrial - Oil and gas operations 512,772 4,238,334 Wastewater treatment fees 95,810 35,818 Lot sales 18,934,400 11,955,989 Water and wastewater tap fees 5,641,020 3,642,548 Other 147,153 170,621 Total revenues 25,855,215 20,361,509 Expenses: Water service operations (804,080 ) (1,502,370 ) Wastewater service operations (199,962 ) (28,020 ) Land development construction costs (15,869,547 ) (11,304,962 ) Other (70,408 ) (140,118 ) Depletion and depreciation (1,367,160 ) (968,229 ) Total cost of revenues (18,311,157 ) (13,943,699 ) Gross profit 7,544,058 6,417,810 General and administrative expenses (4,249,315 ) (3,106,547 ) Non-cash mineral interest impairment charge (1,425,459 ) — Depreciation (355,909 ) (312,602 ) Operating income 1,513,375 2,998,661 Other income: Reimbursement of construction costs - related party 6,275,500 — Oil and gas lease income, net 246,962 55,733 Oil and gas royalty income, net 669,033 148,327 Interest income 178,554 298,605 Other 35,723 26,627 Net income before taxes 8,919,147 3,527,953 Income tax (expense) benefit (2,168,793 ) 1,283,195 Net income $ 6,750,354 $ 4,811,148 Unrealized holding losses (3,891 ) (62,556 ) Total comprehensive income $ 6,746,463 $ 4,748,592 Earnings per common share: Basic $ 0.28 $ 0.20 Diluted $ 0.28 $ 0.20 Weighted average common shares outstanding: Basic 23,845,015 23,795,973 Diluted 24,061,612 24,002,836 See accompanying Notes to Consolidated Financial Statements F-3 Table of Contents PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Preferred Stock Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Shares Amount Shares Amount Capital Income (Loss) Deficit Total August 31, 2018 balance: 432,513 433 23,764,098 79,218 171,831,293 66,446 (102,524,171 ) 69,453,219 Share-based compensation — — — — 336,228 — — 336,228 Exercise of options — — 62,500 209 192,892 — — 193,101 Net income — — — — — — 4,811,148 4,811,148 Unrealized holding losses on investments —— — — — — (62,556 ) — (62,556 ) August 31, 2019 balance: 432,513 433 23,826,598 79,427 172,360,413 3,891 (97,713,023 ) 74,731,141 Share-based compensation — — — — 367,624 — — 367,624 Exercise of options — — 17,500 58 49,141 — — 49,199 Unrestricted stock issue — — 12,000 40 149,360 — — 149,400 Net income — — — — — — 6,750,354 6,750,354 Unrealized holding losses on investments — — — — — (3,891 ) — (3,891 ) August 31, 2020 balance: 432,513 $ 433 23,856,098 $ 79,525 $ 172,926,538 $ — $ (90,962,669 ) $ 82,043,827 See accompanying Notes to Consolidated Financial Statements F-4 Table of Contents PURE CYCLE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Fiscal Years Ended August 31, 2020 2019 Cash flows from operating activities: Net income $ 6,750,354 $ 4,811,148 Adjustments to reconcile net income to net cash provided by operating activities: Share-based compensation expense 517,024 336,228 Depreciation and depletion 1,723,069 1,280,830 Recovery of doubtful accounts — (37,233 ) Investment in Well Enhancement and Recovery Systems LLC 11,730 6,601 Interest income and other non-cash items (175 ) (420 ) Interest added to receivable from related parties (45,556 ) (41,776 ) Deferred income taxes 2,168,878 (1,284,066 ) Proceeds from Sky Ranch CAB reimbursement applied to land development inventories 4,229,501 — Non-cash mineral interest impairment charge 1,425,459 — Changes in operating assets and liabilities: Land development inventories 6,487,689 (5,018,452 ) Trade accounts receivable (24,109 ) 4,870 Prepaid expenses and other assets 91,195 (700,063 ) Note receivable – related parties (44,659 ) (40,406 ) Accounts payable and accrued liabilities 192,057 (368,456 ) Income taxes (1,305,215 ) — Deferred revenues (2,353,591 ) 3,630,485 Deferred income – oil and gas lease and water sales payment 897,732 951,237 Lease obligations - operating leases (1,291 ) — Net cash provided by operating activities 20,720,092 3,530,527 Cash flows from investing activities: Investments in water, water systems and land (8,044,059 ) (14,106,724 ) Sales and maturities of marketable securities 6,905,157 55,697,933 Purchase of marketable securities (1,720,234 ) (52,040,964 ) Purchase of property and equipment (586,396 ) (353,995 ) Net cash used by investing activities (3,445,532 ) (10,803,750 ) Cash flows from financing activities: Proceeds from exercise of options 49,199 193,101 Payment to contingent liability holders (4,421 ) (6,896 ) Net cash provided by financing activities 44,778 186,205 Net change in cash and cash equivalents 17,319,338 (7,087,018 ) Cash and cash equivalents – beginning of year 4,478,020 11,565,038 Cash and cash equivalents – end of year $ 21,797,358 $ 4,478,020 SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES Land development inventories included in accounts payable and accrued liabilities $ 985,130 $ 1,399,602 Investments in water, water systems and land included in accounts payable and accrued liabilities $ 260,649 $ 930,895 Transfer of income taxes to income taxes receivable $ — $ 282,820 Income taxes paid, net of refunds $ 1,022,310 $ — See accompanying Notes to Consolidated Financial Statements F-5 Table of Contents PURE CYCLE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS August 31, 2020 and 2019 NOTE 1 – ORGANIZATION Pure Cycle Corporation (the “Company”) was incorporated in Delaware in 1976 and reincorporated in Colorado in 2008. The Company operates in two business segments: (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 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. On May 13, 2020, the Company returned the entire outstanding balance of $390,278, inclusive of interest. The interest was waived by Central Bank & Trust. Reclassifications Certain reclassifications have been made to the financial statements to conform to the consolidated 2020 financial statement presentation. These reclassifications had no effect on net earnings or cash flows previously reported. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for certain items such as revenue recognition, reimbursable costs and expenses, costs of revenue for lot sales, share-based compensation, deferred tax asset valuation, and the useful lives of assets. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company’s cash equivalents are comprised entirely of money market funds maintained at a reputable financial institution and U.S. Treasury debt securities. The Company had no cash equivalents as of August 31, 2020. At various times during the fiscal year ended August 31, 2020, the Company’s main operating account exceeded federally insured limits. To date, the Company has never suffered a loss due to such excess balance. F-6 Table of Contents 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. Investments 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. Changes in 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. 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. government treasury obligations. To date, the Company has not experienced significant losses on any of these investments. The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of significant input to determine where within the fair value hierarchy the measurement falls. The estimated fair value measurements in Note 2 – Fair Value Measurements are based on Level 2 of the fair value hierarchy. Cash and Cash Equivalents – The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held. These securities primarily include balances in the Company’s operating and savings accounts. The carrying amount of cash and cash equivalents approximate fair value. Trade Accounts Receivable – The Company records accounts receivable net of allowances for uncollectible accounts and the carrying values approximate fair value due to the short-term nature of the receivables. Investments – The carrying amounts of investments approximate fair value. Investments are described further in Note 3 – Fair Value Measurements. Accounts Payable – The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments. Long-Term Financial Liabilities – The Comprehensive Amendment Agreement No. 1 (the “CAA”) is comprised of a recorded balance and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (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. 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 CAB) approximate their fair value because the interest rates on the notes approximate market rates. F-7 Table of Contents Off-Balance Sheet Instruments – The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA. Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. See further discussion in Note 5 – Participating Interests in Export Water . Trade Accounts Receivable The Company records accounts receivable net of allowances for uncollectible accounts. The Company has not recorded an allowance for uncollectible accounts in receivables from continuing operations for either of the periods ended August 31, 2020 or 2019. The allowance for uncollectible accounts was determined based on a specific review of all past due accounts. 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 recoverable. 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 to sell. The impairment testing of long-lived assets during fiscal 2020 resulted in $1.4 million impairment charge for the Arkansas Valley mineral rights, as described below. As of August 31, 2020, the Company assessed the recoverability of its Arkansas Valley mineral rights. The Company determined the carrying value of these mineral rights is not recoverable. As a result, the Company recorded an impairment charge of $1.4 million. The charge was recorded in Non-cash mineral asset impairment charge in the consolidated statements of operations and comprehensive income for fiscal 2020. There was no impairment for the Arkansas Valley mineral rights long-lived asset in fiscal 2019. Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, if applicable, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. The Company depletes its water assets that are being utilized based on units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees. Revenue Recognition The Company disaggregates revenue by major product line as reported on the consolidated statements of operations and comprehensive income. The Company generates revenues through two lines of business. Revenues are derived through its wholesale water and wastewater business and through the sale of developed land primarily for residential lots, both of which businesses are described below. Water and Wastewater 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.” F-8 Table of Contents 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. Costs of delivering water and providing wastewater service to customers are recognized as incurred. Water and wastewater tap fees and construction fees/special facility funding – The Company has various water and wastewater service agreements, components of which may include payment of tap fees. A tap constitutes a right to connect to the wholesale water and wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may make a physical tap into the wholesale line(s) to connect its property for water and/or wastewater service. The right stays with the property. The Company has no obligation to physically connect the property to the lines. Once connected to the water and/or wastewater systems, the customer has live service to receive metered water deliveries from the Company’s system 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 tap fee. During the years ended August 31, 2020 and 2019, the Company recognized $4,758,700 and $3,116,100 of water tap fee revenues. The water tap fees recognized are 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 – 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 consumed. Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed. During the years ended August 31, 2020 and 2019, the Company recognized $25,700 and $158,600 of consulting fees. During the year ended August 31, 2020, the Company cancelled all but one of its remaining consulting contracts to focus its resources on the Sky Ranch water and wastewater operations and land development. These fees are classified in Other income . Land Development Segment Revenues The Company generates revenues through its land development business predominantly from the sources described below. Because these items are separately delivered and distinct, the Company accounts for each of the items separately, as described below. Sale of finished lots – The Company acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch along the I-70 corridor east of Denver, Colorado. The Company has entered into purchase and sale agreements with three separate home builders pursuant to which the Company agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch. The Company began construction of lots in March 2018 and segments its reporting of the activity relating to the costs and revenues from the construction and sale of lots at Sky Ranch. F-9 Table of Contents The Company sells lots at Sky Ranch pursuant to distinct agreements with each home builder. These agreements follow one of two formats. One format is the sale of a finished lot, whereby the purchaser pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon completion of the finished lot that is permit ready. The Company recognizes revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete and the Company has no further obligations for the lot. During the year ended August 31, 2020, the Company received payment and recognized revenue of $4,911,700 from one home builder in exchange for the delivery of 70 finished lots. During the year ended August 31, 2019, the Company received payment and recognized revenue of $4,053,800 from one home builder in exchange for the delivery of 57 finished lots. The second format is the sale of finished lots pursuant to a lot development agreement with builders, whereby the Company receives payments in stages that include: (i) payment upon the delivery of platted lots (which requires the Company to deliver deeded title to individual lots), (ii) a second payment upon the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. Ownership and control of the platted lots pass to the builders once the Company closes the sale of the platted lots. Because the builder (i.e., the customer) takes control of the lot at the first closing and subsequent improvements made by the Company improve the builder’s lot as construction progresses, the Company accounts for revenue over time with progress measured based upon costs incurred to date compared to total expected costs. Any revenue in excess of amounts entitled to be billed is reflected on the balance sheet as a contract asset, and amounts received in excess of revenue recognized are recorded as deferred revenue. As of August 31, 2020, the Company had received cumulative payments of $25.6 million under the development agreements relating to 356 lots from two home builders, of which $24.1 million of revenue was recognized over time based on the costs incurred to date compared to total expected costs for full completion of the 356 lots. For the years ended August 31, 2020 and 2019, the Company recognized $14,022,700 and $7,902,200 of lot sales over time. As of August 31, 2020 and 2019, the Company had deferred revenues of $1,635,400 and $3,991,500. The Company does not have any material significant payment terms as all payments are expected to be received within 12 months after the delivery of the platted lot. The Company adopted the practical expedient for financing components and does not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one year. Reimbursable Costs for Public Improvements – The Sky Ranch CAB is required to construct certain public improvements, such as water distribution systems, sewer collection systems, storm water systems, drainage improvements, roads, curbs, sidewalks, landscaping, and parks, the costs of which may qualify as reimbursable costs. Pursuant to its agreements with the Sky Ranch CAB (see Note 6 – Related Party Transactions ), the Company is obligated to finance this infrastructure. These public improvements are constructed pursuant to design standards specified by the Sky Ranch Districts and/or the Sky Ranch CAB, and, after inspection and acceptance, are turned over to the applicable governmental entity to operate and maintain. As these public improvements are owned and operated on behalf of a governmental entity, they may qualify for reimbursement. Pursuant to the agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to the Company for any advances made by the Company or expenses incurred related to construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of the advances made and expenses incurred. Because the timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land development 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 . F-10 Table of Contents Project management services – On May 2, 2018, the Company entered into two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB. Pursuant to the Project Management Agreements, the Company acts as the project manager and provides any and all services required to deliver the Sky Ranch CAB-eligible improvements, including but not limited to Sky Ranch CAB compliance; planning design and approvals; project administration; contractor agreements; and construction management and administration. The Company is responsible for all expenses it incurs in the performance of the Project Management Agreements and is not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in writing. The Company receives a project management fee of five percent (5%) of actual construction costs of Sky Ranch CAB-eligible improvements. The project management fee qualifies as a reimbursable cost to the Company. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible improvements are not included in the calculation of the project management fee. Soft costs and other costs that are not directly related to the construction of Sky Ranch CAB-eligible improvements are included in Land development 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 $ 26,355,400 $ 10,505,000 $ 15,850,400 Accrued interest 1,176,300 — 1,176,300 Project management services 1,464,900 — 1,464,900 Construction support activities 674,800 — 674,800 Total reimbursable costs $ 29,671,400 $ 10,505,000 $ 19,166,400 The Company believes it will incur an additional $2.3 million through the end of the calendar year 2021 to complete the construction related to public improvements for the initial lots at Sky Ranch. It further believes that it will be reimbursed an additional $18.5 million related to the public improvement costs on this initial filing. Pursuant to the Company’s agreements with the Sky Ranch CAB, no payment is required by the Sky Ranch CAB with respect to reimbursable costs unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided or expenses incurred for reimbursables. The Company evaluated disaggregation of revenue and has determined that no additional disaggregation of revenue is necessary. Deferred Revenue In July 2019, the Company received an up-front payment of $573,700 from an Agreement on Locations of Oil and Gas Operations (the “OGOA”) for a pad site covering approximately 16 acres with the operator of the Sky Ranch O&G Lease (defined below under the heading Oil and Gas Lease Payments), which will be recognized as income on a straight-line basis over three years. If after three years the operator has not spud at least one well on the OGOA, the operator may extend the right to the OGOA one additional year by paying the Company $75,000. The operator may only extend the OGOA for two additional years for a total of five years. The Company recognizes the up-front payments on a straight-line basis over the term of the OGOA. For the years ended August 31, 2020 and 2019, the Company recognized $191,200 and $26,200 of income related to the up-front payments received pursuant to the OGOA. As of August 31, 2020 and 2019, the Company had deferred revenue of $356,300 and $547,500, related to the OGOA. F-11 Table of Contents In September 2017, the Company entered a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP (the “Bison Lease”). Pursuant to the Bison Lease, the Company received an up-front payment of $167,200 in October 2017, which will be recognized as income on a straight-line basis over the three-year term of the lease. During each of the years ended August 31, 2020 and 2019, the Company recognized lease income of $55,700 related to the up-front payment received pursuant to the Bison Lease. As of August 31, 2020 and 2019, the Company had deferred revenue of $4,700 and $60,400, related to the Bison Lease that will be recognized as income ratably through September 2020. One of the Company’s industrial water customers provided $2.0 million of advanced water purchase payments to the Company to reserve first-priority water for O&G operations for defined periods through January 2021. The customer is required to use predetermined amounts of water on a predetermined schedule. The Company recognizes revenue based on the amount of water used by the customer in the period the water is used. If the customer does not use the water pursuant to the predetermined use and timing schedules, then the customers first-priority is forfeited. The Company records breakage revenue when it is remote that any future water services will be provided to the customer. In July 2020, the customer failed to use its water pursuant to the predetermined schedule. The customer revised its water usage estimate; therefore, the first of its upfront payments of $425,800 was recognized in Industrial - Oil and gas operations under metered water usage revenues because it was then determined the customer was unable to utilize the first advanced payment, which expired prior to August 31, 2020. As of August 31, 2020 and 2019, the Company had deferred recognition of $1.6 million and $425,800, as a result of these advanced water purchase payments. The Company has also deferred recognition of lot sale revenues, which are recognized as development progresses. As of August 31, 2020 and 2019, the Company’s deferred revenues along with the changes in the deferred revenues are as follows: August 31, 2020 August 31, 2019 Deferred lot sale revenue $ 1,635,443 $ 3,991,535 Oil and gas lease and water sales payments 1,965,080 1,067,348 Total deferred revenues $ 3,600,523 $ 5,058,883 Changes in deferred revenue were as follows: August 31, 2020 August 31, 2019 Balance, beginning of period $ 5,058,883 $ 477,161 Billings 24,643,817 24,998,964 Revenue recognized (26,102,177 ) (20,417,242 ) Balance, end of period $ 3,600,523 $ 5,058,883 As of August 31, 2020, one homebuilder at Sky Ranch still has payment obligations to the Company pursuant to a purchase and sale agreement for lots at Sky Ranch. This contracted payment represents revenue that has not yet been fully recognized because revenue is recognized as construction work is completed. At August 31, 2020, the Company had outstanding open contracts for $1.6 million, which relates to the last payment for the sale of the final lots in the first development filing at Sky Ranch, which contractually was payable in December 2020, but was paid on November 3, 2020. In addition to the deferred revenues recorded on the Company’s consolidated balance sheet, the Company has deferred interest income of $1.2 million and project management revenues of $1.5 million due from the Sky Ranch CAB related to the development at Sky Ranch, which, due to the contingent nature of the payments, are not reflected on the Company’s consolidated balance sheet. F-12 Table of Contents Royalty and Other Obligations Revenues from the sale of Export Water are shown gross of royalties payable to the Land Board. Revenues from the sale of water on the Lowry Range are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to the Company by the Rangeview District. Water revenue from such sales are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District. Oil and Gas Lease Payments As further described in Note 4 – Water and Land Assets below, on March 10, 2011, the Company entered into a 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 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 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, 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. Income Taxes The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company does not have any significant unrecognized tax benefits as of August 31, 2020. The Company records deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax basis of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as operating losses and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. Due to continued operating losses, prior to the Company’s fiscal 2019, the Company maintained a valuation allowance on the net deferred tax assets other than Alternative Minimum Tax (“AMT”) credits. During the year ended August 31, 2019, the Company determined it was more likely than not that the Company would realize its deferred tax assets, consisting primarily of net operating loss carryforwards, resulting in the release of the valuation allowance. By releasing the valuation allowance, for the year ended August 31, 2019, the Company recognized a deferred tax benefit of $1,284,100. The Company is required to reassess its conclusions regarding the realization of its deferred tax assets at each financial reporting date. The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal 2015 through fiscal 2019. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months. The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax 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. F-13 Table of Contents 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 The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its consolidated financial statements and to ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below: In 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 (“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 companies. The Company continues to monitor economic implications of the COVID-19 pandemic; however, based on current market conditions, we do not expect the impact of ASU 2016-13 to be material upon adoption. Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our consolidated financial statements and related disclosures. F-14 Table of Contents NOTE 3 – FAIR VALUE MEASUREMENTS Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value. Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as The NASDAQ Stock Market. 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 incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. 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. As of 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. treasuries. 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. See Note 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: Fair Value Cost / Other Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Accumulated Unrealized Gains and (Losses) U.S. treasuries $ 4,996,000 $ 4,992,100 $ — $ 4,996,000 $ — $ 3,900 Total $ 4,996,000 $ 4,992,100 $ — $ 4,996,000 $ — $ 3,900 As of August 31, 2019, the Company held a $192,800 certificate of deposit that is not carried at fair value on the consolidated balance sheets because it is classified as a held-to-maturity security. As of August 31, 2020, the Company had no securities it was holding-to-maturity. Level 3 Assets and Liability. The Company’s non-financial assets that were required to be remeasured at fair value on a non-recurring basis consist of the operating lease right-of-use asset and the Arkansas Valley mineral rights. The carrying value of the operating lease right-of-use asset is deemed recoverable based on the present value of the estimated future cash flows using a discount rate commensurate with the risk. During 2020, as described in Note 2 – Summary of significant Accounting Policies , the Company determined the carrying value of the Arkansas mineral rights was not recoverable and recorded an impairment of $1.4 million. The Company estimated the fair value of the mineral rights using a market approach based upon anticipated sales proceeds less costs to sell. The Company has determined that the contingent portion of the CAA does not have a readily determinable fair value (see Note 5 – Participating Interests in Export Water ). There were no transfers between Level 1, 2 or 3 categories during the years ended August 31, 2020 or 2019. F-15 Table of Contents NOTE 4 – WATER AND LAND ASSETS Investment in Water and Water Systems The Company’s water and water systems consist of the following: August 31, 2020 August 31, 2019 Costs Accumulated Depreciation and Depletion Costs Accumulated Depreciation and Depletion Rangeview water supply $ 14,569,900 $ (15,600 ) $ 14,823,800 $ (14,700 ) Sky Ranch water rights and other costs 7,498,900 (980,600 ) 7,371,500 (757,400 ) Fairgrounds water and water system 2,899,900 (1,238,900 ) 2,899,800 (1,151,000 ) Rangeview water system 15,947,700 (788,600 ) 5,617,800 (372,300 ) Water supply – other 7,549,800 (1,115,800 ) 4,758,200 (860,100 ) Wild Pointe service rights 1,631,800 (708,500 ) 1,631,800 (489,800 ) Sky Ranch pipeline 5,727,300 (602,300 ) 5,723,700 (411,600 ) Lost Creek water supply 3,372,400 — 3,324,000 — Construction in progress 1,339,300 — 8,176,600 — Totals 60,537,000 (5,450,300 ) 54,327,200 (4,056,900 ) Net investments in water and water systems $ 55,086,700 $ 50,270,300 Construction in progress primarily consists of an irrigation system and new water well at Sky Ranch. The Company anticipates the additional facilities will be placed in service during fiscal 2021. During fiscal 2019, the Company constructed a water reclamation facility for the Sky Ranch development. The costs 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 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 Estimated Useful Lives Wild Pointe Units of production depletion Rangeview water supply Units of production depletion Lost Creek water supply Units of production depletion Rangeview, Sky Ranch and WISE water systems 30 years ECCV wells 10 years Furniture and fixtures 5 years Trucks and heavy equipment 5 years Water system general (pumps, valves, etc.) 5 years Computers 3 years Water equipment 3 years Software 1 year Rangeview Water Supply and Water System The “Rangeview Water Supply” consists of approximately 27,000 acre-feet and is a combination of tributary surface water and groundwater rights along with certain storage rights associated with the Lowry Range, a 26,000-acre property owned by the Land Board located 16 miles southeast of Denver, Colorado. 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. 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. F-16 Table of Contents 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; and • 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 Rangeview Water Agreements also provide for the Company to use surface reservoir storage capacity in providing water service to customers both on and off the Lowry Range. Services on the Lowry Range – Pursuant to the Rangeview Water Agreements, the Company designs, finances, constructs, operates and maintains the Rangeview District’s water and wastewater systems to provide service to the Rangeview District’s customers on the Lowry Range. The Company will operate both the water and the wastewater systems during the contract period, and the Rangeview District owns both systems. After 2081, ownership of the water system will revert to the Land Board, with the Rangeview District retaining ownership of the wastewater system. Rates and charges for all water and wastewater services on the Lowry Range, including tap fees and usage or monthly fees, are governed by the terms of the Rangeview Water Agreements. Rates and charges 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 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. The Company anticipates contracting with third parties for the construction of these facilities. If the Company sells Export Water, the Company is required to pay royalties to the Land Board ranging from 10% to 12% of gross revenues, except that the royalty on tap fees shall be 2% (other than taps sold for Sky Ranch which are exempt). F-17 Table of Contents WISE The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed and other infrastructure will be constructed over the next several years. During 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 The Company owns 321 acre-feet of groundwater purchased pursuant to its agreement with Arapahoe County. The Company plans to use this water in conjunction with its Rangeview Water Supply in providing water to areas outside the Lowry Range. The $2.9 million of capitalized costs noted in the table Investment in Water and Water Systems above includes the costs to construct various 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, 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 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 Metropolitan District, a quasi-municipal corporation and political subdivision of the State of Colorado, acting by and through its water enterprise (the “Elbert 86 District”), entered into a Water Service Agreement (the “Wild Pointe Service Agreement”). Subject to the conditions set forth in the Wild Pointe Service Agreement and the terms of the Company’s engagement by the Rangeview District as 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, for $1.6 million 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 operating and maintaining the Elbert 86 District’s water system. In exchange, the Company receives 100% of the tap fees from new customers and 98% of all other fees and charges, including monthly water service revenues, remitted to the Rangeview District by the Elbert 86 District pursuant to the Wild Pointe Service Agreement. The Elbert 86 District’s water system currently provides water service to approximately 200 SFE water connections in Wild Pointe. O&G Leases 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 production. 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 Lowry Range. F-18 Table of Contents 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. As of 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. As further described in Note 2 – Summary of significant Accounting Policies , the Company assessed the recoverability of the Arkansas Valley mineral right and determined that the fair value of these assets was below their carrying value by $1.4 million. As a result, the Company recorded an impairment charge of $1.4 million in Non-cash mineral rights impairment charge in the consolidated statements of operations and comprehensive income for fiscal 2020. There was no impairment for the Arkansas Valley mineral rights long-lived asset in fiscal 2019. As of August 31, the costs allocated to the Company’s land and mineral interest are as follows: August 31, 2020 August 31, 2019 Sky Ranch land $ 3,569,266 $ 3,037,556 Sky Ranch development costs 1,127,476 423,324 Lost Creek land 218,138 218,138 Arkansas Valley mineral rights — 1,425,459 Net land and mineral interests $ 4,914,880 $ 5,104,477 NOTE 5 – PARTICIPATING INTERESTS IN EXPORT WATER The 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. 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. 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, 2020 or 2019. 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, 2020, is approximately $1 million: Export Water Proceeds Received Initial Export Water Proceeds to Pure Cycle Total Potential Third-party Obligation Participating Interests Liability Contingency Original balances $ — $ 218,500 $ 31,807,700 $ 11,090,600 $ 20,717,100 Activity from inception until August 31, 2017 : Acquisitions — 28,042,500 (28,042,500 ) (9,790,000 ) (18,252,500 ) Relinquishment — 2,386,400 (2,386,400 ) (832,100 ) (1,554,300 ) Option payments - Sky Ranch and The Hills at Sky Ranch 110,400 (42,300 ) (68,100 ) (23,800 ) (44,300 ) Arapahoe County tap fees 533,000 (373,100 ) (159,900 ) (55,800 ) (104,100 ) Export Water sale payments 737,300 (593,900 ) (143,400 ) (49,800 ) (93,600 ) Balance at August 31, 2018 1,380,700 29,638,100 1,007,400 339,100 668,300 Fiscal 2019 activity: 166,300 (146,500 ) (19,800 ) (6,900 ) (12,900 ) Balance at August 31, 2019 1,547,000 29,491,600 987,600 332,200 655,400 Fiscal 2020 activity: Export Water sale payments 106,600 (93,900 ) (12,700 ) (4,500 ) (8,200 ) Balance at August 31, 2020 $ 1,653,600 $ 29,397,700 $ 974,900 $ 327,700 $ 647,200 F-19 Table of Contents 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 $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, 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. These 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 systems. 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, 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. Therefore, these liabilities are not disclosed in tabular format. However, the Participating Interests in Export Water Supply are described in Note 5 – Participating Interests in Export Water . WISE Partnership During December 2014, the Company, through the Rangeview District, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its utility 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. 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 and $0. See further discussion in Note 14 – Related Party Transactions. F-20 Table of Contents 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 lease. Prior to September 1, 2019 leases were accounted for under the previous guidance in Accounting Standard Codification 840.The Company did not enter into any new leases in fiscal 2020. For the years ended August 31, 2020 and 2019, rent expense consisted of operating lease expense of $85,200 and $79,200. The Company paid $72,800 against Lease obligations — operating leases during fiscal 2020. Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet. For lease agreements entered into or reassessed in the future, the Company will be required to combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets. The Company’s lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate of 6% on September 1, 2019, for all leases that commenced prior to that date. The Company elected the hindsight practical expedient to determine the lease term for existing leases, which resulted in the lengthening of the lease term related to the Company’s office lease. ROU lease assets and lease liabilities for the Company’s operating leases were recorded in the consolidated balance sheet as follows: As of August 31, 2020 Operating leases - ROU assets $ 195,566 Accrued liabilities $ 73,991 Lease obligations - operating leases, net of current portion 120,285 Total lease liability $ 194,275 Weighted average remaining lease term (in years) 2.4 Weighted average discount rate 6 % NOTE 8 – SHAREHOLDERS’ EQUITY Preferred Stock The Company’s non-voting Series B Preferred Stock has a preference in liquidation of $1.00 per share less any dividends previously paid. Additionally, the Series B Preferred Stock is redeemable at the discretion of the Company for $1.00 per share less any dividends previously paid. In the event 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. Equity Compensation Plan The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective April 12, 2014. Executives, eligible employees, consultants, and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the Company’s board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. 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. F-21 Table of Contents 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 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 granted. The Company’s determination of the estimated fair value of share-based payment awards on the date of grant is affected by the following variables and assumptions: ● The grant date exercise price – is the closing market price of the Company’s common stock on the date of grant; ● Estimated option lives – based on historical experience with existing option holders; ● Estimated dividend rates – based on historical and anticipated dividends over the life of the option; ● Life of the option – based on historical experience, option grants have lives of between five and 10 years; ● Risk-free interest rates – with maturities that approximate the expected life of the options granted; ● Calculated stock price volatility – calculated over the expected life of the options granted, which is calculated based on the weekly closing price of the Company’s common stock over a period equal to the expected life of the option; and ● Option exercise behaviors – based on actual and projected employee stock option exercises. In fiscal 2020, the Company granted 80,000 stock options to employees with weighted-average grant-date fair values of $4.21, and three-year vesting terms which expire ten years from the grant date. In fiscal 2020, the Company granted 50,000 stock options to an executive officer with a weighted-average grant-date fair value of $4.16, a three-year vesting term and an expiration date of ten years from the grant date. In addition, the six non-employee Board members were each granted 2,000 unrestricted stock grants. The fair market value of the unrestricted shares for share-based compensation expensing is equal to the closing price of the Company’s common stock on the date of grant of $12.45. Stock-based compensation expense includes $149,400 of expense related to these unrestricted stock grants. The unrestricted stock grants were fully expensed at the date of the grant because no vesting requirements exist for unrestricted stock grants. There was no stock-based compensation expense related to unrestricted stock grants for fiscal 2019. 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 August 31, 2020 2019 Expected term (years) 6.00 5.80 Risk-free interest rate 1.71 % 2.93 % Expected volatility 39.32 % 41.83 % Expected dividend yield 0 % 0 % Weighted average grant-date fair value $ 4.19 $ 4.60 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: Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Term Approximate Aggregate Intrinsic Value Outstanding at August 31, 2018 535,500 $ 5.31 6.04 $ 3,180,990 Granted 82,500 $ 10.48 Exercised (62,500 ) $ 3.09 Forfeited or expired — $ — Outstanding at August 31, 2019 555,500 $ 6.33 6.27 $ 2,527,590 Granted 130,000 $ 10.41 Exercised (17,500 ) $ 2.81 Forfeited or expired (6,500 ) $ 6.08 Outstanding at August 31, 2020 661,500 $ 7.23 6.17 $ 1,831,075 Options exercisable at August 31, 2020 481,501 $ 6.08 5.22 $ 1,795,076 F-22 Table of Contents The following table summarizes the activity and value of non-vested options as of and for the year ended August 31, 2020: Number of Options Weighted Average Grant Date Fair Value Non-vested options outstanding at August 31, 2019 152,499 $ 4.03 Granted 130,000 4.19 Vested (102,500 ) 3.75 Forfeited — — Non-vested options outstanding at August 31, 2020 179,999 $ 4.31 All non-vested options are expected to vest. 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. Warrants 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 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 fiscal 2020 and 2019. NOTE 9 – SIGNIFICANT CUSTOMERS 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 (Lot sales recognized) Ridgeview Youth Services 14 % – – Conoco / Crestone Peak (O&G operations) 45 % – – All Sky Ranch Homes (1) 22 % – – All Wild Pointe Homes (2) 9 % 4 % – Taylor Morrison – 28 % 32 % KB Home – 38 % 26 % Richmond Homes – 31 % 42 % Combined totals presented 90 % 100 % 100 % (1) This represents the water and wastewater fees for all homes combined at Sky Ranch and not one individual home (2) This represents the water and wastewater metered services and water and wastewater tap fees for all homes combined at Wild Pointe and not one individual home F-23 Table of Contents For the year ended August 31, 2019 Water and wastewater metered services Water and wastewater tap fees Land development (Lot sales recognized) Ridgeview Youth Services 3 % – – Conoco / Crestone Peak (O&G operations) 74 % – – All Sky Ranch Homes (1) – – – All Wild Pointe Homes (2) 3 % 6 % – Taylor Morrison – 26 % 34 % KB Home – 29 % 34 % Richmond Homes – 38 % 32 % Combined totals presented 80 % 100 % 100 % (1) This represents the water and wastewater fees for all homes combined at Sky Ranch and not one individual home (2) This represents the water and wastewater metered services and water and wastewater tap fees for all homes combined at Wild Pointe and not one individual home The Ridgeview Youth Services customer accounted for approximately the same dollar sales year over year, but due to the decline in O&G operations revenue, the percentage increased in fiscal 2020 over 2019. Because the Company provides services to the Rangeview District’s customers, and those customers pay the Rangeview District, which then remits amounts to the Company, the Company’s trade receivables at August 31, 2020 and 2019 from the Rangeview District comprise 81% and 40% of the balances. However, the receivable balances from the end-use customers that are owed to the Rangeview District, the majority of which in turn are owed to the Company, are comprised primarily of amounts owed by the home builders at Sky Ranch for tap fees. As of August 31, 2020, the three home builders accounted for 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 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. Deferred income taxes reflect the tax effects of net operating loss carryforwards and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets as of August 31 are as follows: For the Fiscal Years Ended August 31, 2020 2019 Deferred tax assets (liabilities): Net operating loss carryforwards $ 22,922 $ 609,439 AMT credit carryforward — — Accrued compensation 166,948 113,559 Deferred revenues 88,994 149,895 Depreciation and depletion (1,700,771 ) (46,408 ) Non-qualified stock options 490,952 410,633 Other 45,323 46,128 Valuation allowance — — Net deferred tax (liability) asset $ (885,632 ) $ 1,283,246 F-24 Table of Contents 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 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 August 31, 2020 2019 Expected benefit from federal taxes at statutory rate of 21% for the years 2020 and 2019 $ 1,873,021 $ 740,870 State taxes, net of federal benefit 326,441 129,123 Permanent and other differences 2,137 10,388 NOL true up (8,240 ) 225,067 Non-qualified stock options adjustment — (348,441 ) Other (24,566 ) (26,202 ) Change in valuation allowance — (2,014,000 ) Total income tax expense / (benefit) $ 2,168,793 $ (1,283,195 ) 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 purposes. No net operating loss carryforwards expired during the fiscal year ended August 31, 2020 or 2019. NOTE 11 – 401(k) PLAN 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 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 The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and experience in contesting, litigating, and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows. As of August 31, 2020, the Company had no contingencies where the risk of material loss was probable. NOTE 13 – SEGMENT REPORTING 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. The Company has identified its CODM as its Chief Executive Officer. F-25 Table of Contents 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. 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 Water and wastewater resource development Land development Corporate Total Total revenue $ 6,920,815 $ 18,934,400 $ — $ 25,855,215 Cost of revenue (1,074,450 ) (15,869,547 ) — (16,943,997 ) Depletion and depreciation (1,367,160 ) — — (1,367,160 ) Total cost of revenue (2,441,610 ) (15,869,547 ) — (18,311,157 ) Gross Margin 4,479,205 3,064,853 — 7,544,058 Reimbursement of construction costs - related party — 6,275,500 — 6,275,500 Gross Margin after reimbursables $ 4,479,205 $ 9,340,353 $ — $ 13,819,558 Pretax operating income $ 4,479,205 $ 3,064,853 $ (6,030,683 ) $ 1,513,375 Total long-term assets $ 56,266,579 $ 6,975,289 $ 26,519,188 $ 89,761,056 Year Ended August 31, 2019 Water and wastewater resource development Land development Corporate Total Total revenue $ 8,405,520 $ 11,955,989 $ — $ 20,361,509 Cost of revenue (1,670,508 ) (11,304,962 ) — (12,975,470 ) Depletion and depreciation (968,229 ) — — (968,229 ) Total cost of revenue (2,638,737 ) (11,304,962 ) — (13,943,699 ) Gross Margin $ 5,766,783 $ 651,027 $ — $ 6,417,810 Pretax operating income $ 5,766,783 $ 651,027 $ (3,419,149 ) $ 2,998,661 Total long-term assets $ 51,588,079 $ 16,866,542 $ 15,266,783 $ 83,721,404 F-26 Table of Contents 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”). 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 WISE water. 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. 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. Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (the “Sky Ranch Districts”) and the Sky Ranch CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The 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 In 1995, the Company extended a loan to the Rangeview District. The loan provided for borrowings of up to $250,000, is unsecured, and bears interest based on the prevailing prime rate plus 2% (5.25% at August 31, 2020). The maturity date of the loan is December 31, 2020. Beginning in January 2014, the Rangeview District and the Company entered into a funding agreement that allows the Company to continue to provide funding to the Rangeview District for day-to-day operations and accrue the funding into a note that bears interest at a rate of 8% per annum and remains in full force and effect for so long as the Lease remains in effect. 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, 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. 1, 3, 4 and 5 The Company had been providing funding to the Sky Ranch Districts, beginning in 2012 through 2016 by entering into annual Operation Funding Agreements with one of the Sky Ranch Districts obligating the Company to advance funding to the Sky Ranch District for the operation and maintenance expenses for the then-current calendar year. 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. 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 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). F-27 Table of Contents 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 Sky Ranch CAB to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the Sky Ranch CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property. In November 2017, but effective as of January 1, 2018, the Company entered into a Project Funding and Reimbursement Agreement (“PF Agreement”) with the CAB for the Sky Ranch property. The PF Agreement required the Company to fund an agreed upon 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 Metropolitan District No. 5 in 2014 was terminated; ● the PF Agreement and a June 2018 Funding Acquisition Agreement between the Sky Ranch CAB and the Company totaling $2.4 million were terminated; ● the Sky Ranch CAB acknowledged all amounts owed to the Company under the terminated agreements totaling $3.3 million, as well as amounts the Company incurred to finance the formation of the Sky Ranch CAB; and ● the Company agreed to fund an agreed upon list of improvements to be constructed by the Sky Ranch CAB with an estimated cost of $30,000,000 (including improvements already funded) on an as-needed basis for calendar years 2018–2023. All amounts owed under the terminated agreements and all amounts advanced under the Sky Ranch FFAA, collectively totaling $20 million, bear interest at a rate of 6% per annum. No 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 . The advances have been used by the Sky Ranch CAB to pay for construction of public improvements. The Company submits specific costs for reimbursement to the Sky Ranch CAB. Based on the specific costs being reimbursed by the Sky Ranch CAB, the Company records those costs that have been previously expensed in cost of sales as other income and those costs that remain capitalized as land development inventory costs as a reduction of the related land development inventory costs held in Land development 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 property. The advances have been used by the Sky Ranch CAB to pay for construction of public improvements and have been recorded as Land development inventories and subsequently expensed through Land development construction costs in the accompanying consolidated financial statements. If the Sky Ranch Districts and/or the Sky Ranch CAB issues bonds and the Sky Ranch CAB reimburses the Company, the reimbursement will reduce any applicable capitalized costs remaining in Inventories. In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the Sky Ranch CAB obligating the Company to advance funding to the Sky Ranch CAB for operation and maintenance expenses for the 2018 and 2019 calendar years. All payments are subject to annual appropriations by the Sky Ranch CAB in its absolute discretion. The advances by the Company accrue interest at the rate of 6% per annum from the date of the advance. $28,600 of the balance of the Notes receivable – related parties at August 31, 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. F-28 Table of Contents NOTE 15 – SUBSEQUENT EVENTS 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. Each Builder 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. KB 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 deposit. 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. F-29 Table of Contents Item 9 – Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None