What changed in this filing

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Item 1. Financial Statements

2021-01-05 compared with 2020-07-07 · 454 added, 814 removed, 207 unchanged (86% of the section changed)

1 unchanged sentence

PURE CYCLE CORPORATION

CONSOLIDATED BALANCE SHEETS

CONDENSED CONSOLIDATED BALANCE SHEETS

November 30, 2020

August 31, 2020

(In thousands, except share and per share

Current assets:

Cash and cash equivalents

Short-term investments

Trade accounts receivable, net

Prepaid expenses and deposits

Prepaid expenses and other assets

Land development inventories

6 unchanged sentences

Operating leases - right of use assets, less current portion

Deferred tax asset

Income taxes receivable

Current liabilities:

2 unchanged sentences

Accrued liabilities - related parties

Deferred revenues, current

Deferred lot sale revenues

Deferred oil and gas lease payment and water sales payment

1 unchanged sentence

Deferred oil and gas lease payment and water sales payment, less current portion

Lease obligations - operating leases, less current portion

Participating interests in export water supply

Deferred tax liability

Lease obligations - operating leases, less current portion

Total liabilities

Commitments and contingencies

SHAREHOLDERS’ EQUITY:

6 unchanged sentences

Additional paid-in capital

Accumulated other comprehensive income

Accumulated deficit

1 unchanged sentence

Total liabilities and shareholders’ equity

See accompanying Notes to Consolidated Financial Statements

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Three Months Ended May 31,

Nine Months Ended May 31,

Metered water usage - municipal

Metered water usage - oil and gas

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

Three Months Ended November 30,

(In thousands, except per share amounts)

Metered water usage from:

Municipal customers

Oil and gas operations

Wastewater treatment fees

4 unchanged sentences

Land development construction costs

Depletion and depreciation

Depreciation and depletion

Total cost of revenues

General and administrative expenses

Operating (loss) income

Other income (expense):

Reimbursement of construction costs - related party

Oil and gas lease income, net

Oil and gas royalty income, net

Operating income

Other income:

Oil and gas royalty income

Oil and gas lease income

Interest income

Income from operations before income taxes

Income from reimbursement of construction costs - related party

Net income before taxes

Income tax expense

1 unchanged sentence

Total comprehensive income

Earnings per common share:

Weighted average common shares outstanding:

* Amount is less than $0.01 per share

See accompanying Notes to Consolidated Financial Statements

PURE CYCLE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended May 31, 2020 and 2019

Preferred Stock

Comprehensive

Income (Loss)

February 29, 2020 balance:

Stock option exercises

Stock granted for services

Share-based compensation

Unrealized holding loss on investments

May 31, 2020 balance:

Preferred Stock

Comprehensive

Income (Loss)

February 28, 2019 balance:

Stock option exercises

Share-based compensation

Unrealized holding loss on investments

May 31, 2019 balance:

See accompanying Notes to Consolidated Financial Statements

Basic and diluted net income per common share

Weighted average common shares outstanding–basic

Weighted average common shares outstanding–diluted

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Nine Months Ended May 31, 2020 and 2019

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

Three Months Ended November 30, 2020

Preferred Stock

1 unchanged sentence

Income (Loss)

(In thousands)

August 31, 2020 balance:

Stock option exercises

Stock granted for services

Share-based compensation

Unrealized holding loss on investments

May 31, 2020 balance:

November 30, 2020 balance:

Three Months Ended November 30, 2019

Preferred Stock

1 unchanged sentence

Income (Loss)

(In thousands)

August 31, 2019 balance:

Stock option exercises

Share-based compensation

Adoption of accounting standards

Unrealized holding loss on investments

May 31, 2019 balance:

See accompanying Notes to Consolidated Financial Statements

November 30, 2019 balance:

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended May 31,

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended November 30,

(In thousands)

Cash flows from operating activities:

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

Share-based compensation expense

Depreciation and depletion

Recovery of doubtful accounts

Investment in Well Enhancement and Recovery Systems LLC

Interest income and other non-cash items

Share-based compensation expense

Interest added to receivable from related parties

2 unchanged sentences

Changes in operating assets and liabilities:

Land development inventories

Trade accounts receivable

Prepaid expenses

Notes receivable - related parties

Land development inventories

Accounts payable and accrued liabilities

Deferred revenues

Deferred income - oil and gas lease and water sales payment

Lease obligations - operating leases

Net cash provided (used) by operating activities

Other assets and liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Sale and maturities of short-term investments

Purchase of short-term investments

Investments in water, water systems and land

Purchase of property and equipment

Net cash used by investing activities

Net cash (used) provided by investing activities

Cash flows from financing activities:

Proceeds from exercise of stock options

Payments to contingent liability holders

Net cash provided by financing activities

Net cash used by financing activities

Net change in cash and cash equivalents

4 unchanged sentences

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

Income taxes paid

See accompanying Notes to Consolidated Financial Statements

See accompanying Notes to Condensed Consolidated Financial Statements

PURE CYCLE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOVEMBER 30, 2020

NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The May 31, 2020 consolidated balance sheet, the consolidated statements of operations and comprehensive income for the three and nine months ended May 31, 2020 and 2019, the consolidated statements of shareholders’

equity for the three and nine months ended May 31, 2020 and 2019, and the consolidated statements of cash flows for the nine months ended May 31, 2020 and 2019 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited.

The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at May 31, 2020, and for all periods presented.

The November 30, 2020 condensed consolidated balance sheet, the condensed consolidated statements of operations and comprehensive income for the three months ended November 30, 2020 and 2019, the condensed

consolidated statements of shareholders’ equity for the three months ended November 30, 2020 and 2019, and the condensed consolidated statements of cash flows for the three months ended November 30, 2020 and 2019 have been prepared by Pure Cycle

Corporation (the “Company”) and have not been audited.

The unaudited condensed consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of

operations and cash flows at November 30, 2020, and for all periods presented.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed

It is suggested that the accompanying consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended

August 31, 2019 (the “2019 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 12, 2019.

The results of operations for interim periods presented are not necessarily indicative of the operating results expected

for the full fiscal year.

It is suggested that the accompanying condensed consolidated financial statements and notes be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the

fiscal year ended August 31, 2020 (the “2020 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on November 10, 2020.

The results of operations for interim periods presented are not necessarily indicative of the operating

results expected for the full fiscal year.

The August 31, 2020 balance sheet was derived from the Company’s audited consolidated financial statements.

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

On March 27, 2020, Congress enacted the CARES Act to provide certain relief as a result of the

recent outbreak of a novel strain of the coronavirus (“COVID-19”) pandemic.

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.

We are currently evaluating the impact on our financial statements and have not yet

quantified what material impacts to the financial statements, if any, that may result from the CARES Act.

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

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

The interest was waived by Central Bank & Trust.

Reclassifications

Certain reclassifications have been made to the 2019 financial statements to conform to the consolidated 2020 financial statement presentation.

These reclassifications had no effect on net earnings or

cash flows previously reported.

On March 27, 2020, Congress enacted the CARES Act to provide certain relief because of the recent outbreak of a novel strain of the coronavirus

(“COVID-19”) pandemic.

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 impact to its condensed consolidated financial statements because of the CARES Act.

Use of Estimates

1 unchanged sentence

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, depreciation and the recoverability of long lived assets.

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 and liability valuation, depreciation and the recoverability of long lived assets.

Actual results and outcomes may differ from

management’s estimates and assumptions due to risks and uncertainties, including uncertainty in the current economic environment due to COVID-19.

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.

At various times during the three months ended May 31, 2020, the Company’s main operating account exceeded federally insured limits.

To date, the Company has not suffered a loss due

to such excess balance.

Land Development Inventories

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

The majority of the costs included in the Land development inventories line relate to costs to acquire and

develop the Company’s Sky Ranch development.

Sky Ranch is a 930-acre master planned development located in Arapahoe County, Colorado, and the Land development inventories account reflects costs incurred to construct infrastructure on the lots at Sky

Ranch that meet the Company’s capitalization criteria for improvements.

Costs 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 accumulates land development costs and allocates costs to each lot to determine the cost basis for each lot sale.

The Company records all land cost of sales over time based on inputs of costs incurred to date to total

estimated costs to complete.

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

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

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

If the net realizable value is lower than the current carrying value, the land is

written down to its estimated net realizable value.

Contract Asset

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

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

The contract assets are transferred to receivables when the Company has the right to bill such amounts and they are

Management determines the appropriate classification of its investments at the time of purchase and re-evaluates such determinations each reporting period.

Securities that 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 May 31, 2020, the Company held

no securities.

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.

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

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

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

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

due to the short-term nature of the receivables.

Investments – The carrying amounts of investments are recorded at fair value.

Investments are described further in Note 2 – 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 at fair value 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 in Part II,

Item 8 of the 2019 Annual Report).

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 in Part II, Item 8 of the 2019

Annual Report).

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 determinable fair value.

The CAA is described further in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply .

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

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

market rates.

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

Because repayment of this

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

See further discussion in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply .

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 primarily through two lines of business:

(i) through the provision of wholesale water and wastewater services and (ii) through the sale of developed land predominately in the form of

residential lots, both of which are described in greater detail below..

Wholesale Water and Wastewater Service Fees

The Company generates revenue through its wholesale water and wastewater services predominantly from three sources, which are described in detail 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.

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.

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

Revenues recognized by the Company from the sale of “Export Water”

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

The Company is the primary distributor of the Export Water and sets

pricing for the sale of Export Water.

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

For water sales on the Lowry

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

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

See further description of Export Water, the Lowry

Range, and the Rangeview Water Supply in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System” in Part II, Item 8 of the 2019 Annual Report.

In addition, the Company provides water for hydraulic fracturing to industrial customers in the oil and gas industry that are located in and adjacent to its service areas (referred to as “O&G

operations”).

O&G operations revenues are recognized at a point in time upon delivering water to a customer, unless other special arrangements are made.

The Company delivered 12.2 million and 96.9 million gallons of water to customers during the three months ended May 31, 2020 and May 31, 2019, respectively, of which 0% and 93% was used for oil and

gas exploration.

The Company delivered 32.4 million and 232.3 million gallons of water to customers during the nine months ended May 31, 2020 and May 31, 2019 , respectively, of which 3% and 85% was used for oil and gas exploration.

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 services to customers are recognized as incurred.

Water and wastewater tap fees/Special Facility funding – The Company recognizes water and wastewater tap fees as revenue at the time the Company grants a right for the customer to tap into the water or wastewater service line to

obtain service.

Water tap fees recognized are based on the amounts billed by the Rangeview District and any amounts paid to third parties pursuant to the CAA as further described in Note 4 – Long-Term

Obligations and Operating Lease – Participating Interests in Export Water Supply below.

The Company recognized $852,800 and $929,400 of water tap fee

revenues during the three months ended May 31, 2020 and 2019, respectively, and $3.2 million and $1.5 million of water tap revenues during the nine months ended May 31, 2020 and 2019, respectively.

The Company recognized $152,100 and $153,800

of wastewater tap fee revenues during the three months ended May 31, 2020 and 2019, respectively, and $602,900 and $256,300 of wastewater tap fee revenues during the nine months ended May 31, 2020 and 2019, respectively.

The Company recognizes construction fees, including fees received to construct “Special Facilities” (as defined under “ Critical Accounting Policies – Revenue Recognition – Wholesale Water and Wastewater Fees ” below), 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 has been recognized during the three or nine months ended May 31, 2020 or 2019.

Consulting fees – The Company recognizes consulting fees as revenues typically on a monthly basis.

The Company earns these fees from municipalities and area water providers along the I-70 corridor, for which the Company provides

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, if applicable.

The Company recognized $13,800 and $37,900 of

consulting fees during the three months ended May 31, 2020 and 2019, respectively, and $104,000 and $148,200 of consulting fees during the nine months ended May 31, 2020 and 2019, respectively.

Land Development Activities

The Company generates revenues through the sale of finished lots at its Sky Ranch development primarily from four sources of revenues, which are described in detail below:

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

The Company has entered into purchase and sale

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

The Company began construction of lots in March 2018 and segments its reporting of

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

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

Recently Issued Accounting Pronouncements

The Company continually assesses 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 consequences 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

New pronouncements assessed by the Company recently are discussed below:

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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;

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,

the Company does not expect the adoption of ASU 2016-13 to have a material impact on the Company’s financial statements.

NOTE 2 – REVENUE RECOGNITION AND REIMBURSABLE COSTS

The Company disaggregates revenue by major product line as reported on the condensed consolidated statement of operations and comprehensive income, which the Company believes best depicts the nature, timing, and

uncertainty of the Company’s revenue and cash flows.

The Company primarily generates revenues through two lines of business, its water and wastewater resource development business and through the sale of finished lots in its land development business,

both of which are described below.

Water and Wastewater Resource Development Segment

The Company’s water and wastewater resource development segment provides municipal water and wastewater services, through the Rangeview Metropolitan District (the “Rangeview District”) and Elbert and

Highway 86 Metropolitan District (the “Elbert 86 District”) to end use customers for fees, described below.

The Rangeview District services Sky Ranch and the other customers on the Lowry Range.

The Elbert 86 District services Wild Pointe.

Monthly water usage and wastewater treatment fees – The Company provides water to customers, collects wastewater from

those customers and treats that wastewater which is reused for irrigation purposes.

For these services, the Company charges customers monthly fees.

Potable and reuse water fees are comprised of a base charge and a usage charge based on actual

amounts of water delivered to the customer using a tiered structure that results in higher fees for higher usage.

Wastewater treatment services incur flat monthly fees.

The Company recognizes these revenues at a point in time upon delivering

water to the end use customers.

Water and wastewater tap fees – A tap constitutes a right to connect a residential or

commercial building or property to the Company’s water and wastewater systems.

Once granted, the customer may make a physical tap into the service line(s) to connect its property to the Company’s systems to obtain 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 to the Company.

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

As such, tap fees are deemed separate and distinct performance obligations that

are recognized as revenue at a point in time.

Land Development Segment

Sale of finished lots – The Company sells lots at its Master Planned Community, 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 three months ended May 31, 2020, the Company received no payments and recognized no revenue from its agreement

for the sale of ready-to-build finished lots.

During the nine months ended May 31, 2020, the Company received payment and recognized revenue of $2,836,700 from one home builder in exchange for the delivery of 41 finished lots.

During the three months ended May 31, 2019, the Company received payment and recognized revenue of $1,770,000 from one home builder in exchange for the delivery of 25 finished lots.

During the nine

months ended May 31, 2019, the Company received payment and recognized revenue of $2,070,000 from one home builder in exchange for the delivery of 29 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 May 31, 2020, the Company had received cumulative payments of approximately $21 million under development agreements

relating to the sale of 293 lots from two home builders, of which approximately $18.6 million of revenue was recognized over time based on the costs incurred to date compared to total expected costs for full completion of the 293 lots.

three months ended May 31, 2020 and 2019, the Company recognized $696,200 and $938,100 of lot sales over time, respectively.

For the nine months ended May 31, 2020 and 2019, the Company recognized $8,666,800 and $3,965,700 of lot sales over time,

respectively.

The Company had deferred revenue related to lot sales of $2,526,200 as of May 31, 2020.

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

each 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 or less.

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

sidewalks, landscaping and parks, the costs of which may qualify as reimbursable costs.

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

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

Because the timing of the issuance and approval of any

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

If reimbursable costs received exceed actual expenses incurred by the Company for the cost of the

public improvements, they are recorded as other income as received.

All amounts owed under the “2018 FFAA” (as defined in Note 6 – Related Party Transactions ) bear interest at a rate of 6% per annum.

Due to the uncertainty of

collecting the interest (because payment is contingent on the issuance of bonds), interest income is not recognized on the amounts owed by the CAB until the bonds are issued.

To date, the Company has deferred the recognition of $1,052,900 of interest

income on advances made to the CAB.

On November 19, 2019, the 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 CAB pursuant to the 2018 FFAA 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 .

As a result of the reimbursed costs, the margin from land development

revenues is expected to increase to approximately 27%.

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

Pursuant to the Project Management Agreements, the

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

One format is the sale of a finished lot, whereby the home builder 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.

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

(i) payment upon the delivery of a

platted lot (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 lot passes to the builder once the Company closes the sale of the platted lots.

Because the builder takes control and legal ownership 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.

Reimbursable Public Improvement Costs – The Sky Ranch Community Authority Board (the “Sky Ranch

CAB”) is obligated to construct certain public improvements at Sky Ranch.

Public improvements are items that are not associated with one lot or one home, but can be used by the public, whether living in Sky Ranch or not.

Public improvements

include items such as roads, curbs, sidewalks, landscaping, and parks but also includes items such as water distribution systems, sewer collection systems, storm water systems, and drainage improvements.

Pursuant to agreements between the

Company and the Sky Ranch CAB (see Note 7 – Related Party Transactions ), the Company is obligated to provide funding to the Sky Ranch CAB related to

the construction of these public improvements.

Because public improvements are utilized by more than just a single home, the costs are typically reimbursed through property tax assessments.

During the initial development filing at Sky Ranch,

the Sky Ranch CAB expended $ 31.6 million to build these public improvements, including accrued interest, project management fees, and construction support activities,

which the Company provided the funding for.

In November 2019, the Sky Ranch CAB issued $13.2 million of bonds to recover a portion of the $ 31.6 million of public

improvements constructed for the initial filing at Sky Ranch.

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 these

public improvements.

The Sky Ranch CAB fully intends to issue additional bonds at some time in the future to recover the remaining $21.1 million of total reimbursable costs not included in the initial bond offering, which pursuant to the

funding agreement between the Company and the Sky Ranch CAB would be payable to the Company since the Company provided the initial funding.

Even if the Sky Ranch CAB does not issue bonds to repay the remaining $21.1 million, the Sky Ranch CAB

will receive property tax assessments which could be used to repay the amounts owed to the Company for the public improvements.

This filing represented the Company’s and the Sky Ranch CAB’s first land development activities, as such there was

no assurance the property taxes or bond issuances would occur in a timely manner or in an amount sufficient to cover the costs of the public improvements.

Because the amount and timing were contingent, the Company did not estimate or record any

potential reimbursements until the cash was received.

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 .

The agreements between the Company and the Sky Ranch CAB 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 this was the Company’s first development, it had no basis to support estimated payments, and payment is contingent on tax receipts or the issuance of bonds), interest

income is not recognized on the amounts owed by the Sky Ranch CAB related to the initial development until it is received.

These public improvements are constructed pursuant to design standards specified by local governmental jurisdictions including the Sky Ranch Districts, the Sky Ranch CAB and Arapahoe County, and,

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

Project management services – Pursuant to two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB, the Company acts as the project manager and provides the services required to deliver the Sky Ranch CAB-eligible public improvements (see discussion of reimbursable public improvements above), including but not limited

to Sky Ranch CAB compliance;

planning design and approvals;

project administration;

contractor agreements;

and construction management and administration.

The Company must submit to the CAB a monthly invoice, in a form acceptable to the CAB, detailing all project management activities during the period.

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 CAB

The CAB is subject to annual budget and appropriation procedures and does not intend to create a multiple-fiscal year direct or indirect debt or other financial obligation.

The Company receives a project management fee of five

percent (5%) of actual construction costs of CAB-eligible improvements.

The 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;

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

project management fee.

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

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

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

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

Due to this contingency, the project management fees

are being accrued to revenue with a corresponding allowance until the point in time when bonds are issued by the Sky Ranch Districts and/or the CAB and the CAB reimburses the Company for the public improvements.

At that point, the portion of

the project management fees repaid will be recognized as revenue.

To date, the Company has accrued $1,371,600 in project management services to the 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 CAB and the CAB reimburses the Company for public improvements.

Refer to section (ii) Reimbursable Costs for Public Improvements for details on repayment of

reimbursable costs.

To date, the Company has invoiced the CAB $581,100 for construction support activities, which amount is included in Land development inventories .

Unpaid reimbursable costs the Company believes are recoverable from the CAB pursuant to the 2018 FFAA, are recorded to a Note Receivable from the CAB.

Each reporting period, the Company performs an

analysis on the collectability of the receivable from the 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 to date,

payments made from the CAB and any outstanding reimbursable amounts

As of May 31, 2020

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 public improvements.

The project management fee to be paid to the Company 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 public improvements are not included in the calculation of the project management fee.

Soft costs and other costs incurred by the Company that are not directly related to the construction of Sky Ranch CAB-eligible public

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 construction of public improvements that qualify as

reimbursable expenses.

Because payment is contingent on receipt of tax dollars or the issuance of bonds, project management fees are deferred and not recognized until they are received.

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 reimbursement occurs.

As noted above, pursuant to the funding agreements between the Company and the Sky Ranch CAB, the Company is owed amounts it funded or that the Sky Ranch CAB was unable to pay at the time of construction.

following table summarizes the amounts the Company paid, what was repaid by the Sky Ranch CAB and amounts still owed to the Company by the Sky Ranch CAB:

As of November 30, 2020

Costs incurred to date

Payments repaid by

Net costs incurred to date

Sky Ranch CAB

Amounts payable to Pure

Cycle by the Sky Ranch

(In thousands)

Public Improvements

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Total reimbursable costs

The Company expects to incur an additional $3.5 million through the end of the calendar year 2020 for construction costs related to public improvements to complete its initial 506 lots and expects to

be reimbursed an additional $21.6 million.

Pursuant to the Company's agreements with the CAB, no payment is required by the CAB with respect to reimbursable costs unless and until the CAB and/or the Sky Ranch Districts have funds or issue municipal

bonds in an amount sufficient to reimburse the Company for all or a portion of advances provided or expenses incurred for reimbursables.

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

Contract asset by segment is as follows:

The Company did not have a contract asset at May 31, 2020 and 2019 or August 31, 2019.

Changes in contract asset were as follows:

August 31, 2019

Balance, beginning of period

Recognition of land development revenue contract asset

Land development contract asset invoiced

Balance, end of period

As noted above, the project management services and construction support activities amounts do not include interest since payment of that interest is deemed too contingent.

The Company expects to incur an additional $1.3 million through the

end of the calendar year 2021 for construction costs related to public improvements to complete its initial 506 lots and expects that amount to be reimbursed to the Company along with the amounts noted in the table above as the Sky Ranch CAB

issues bonds or collects property tax assessments.

Deferred Revenue

As noted above, the Company recognizes some lot sales over time as construction activities progress for lots sold pursuant to lot development agreements and not when payment is received.

Based on this, the Company

will receive milestone payments before revenue can be recognized (i.e.

prior to the Company completing the construction milestones which produced the revenue) which results in the Company recording deferred revenue.

The Company will recognize this

revenue into income as construction activities progress.

In fiscal 2018 and 2019, the Company received up-front payments for certain oil and gas leases which permitted an oil and gas operator priority rights to water deliveries over a specified period of time.

Company was not required to perform on its delivery obligations when the payments were received, recognition of revenue was deferred and is being recognized on a straight-line basis over the agreement term.

The Company also received an up-front

payment from an oil and gas industrial customer to reserve priority water for their operations, which the Company is recognizing this revenue based either on actual usage each reporting period or based on amounts not expected to be used by the

The customer may take up to one year from the invoice date to use such water.

If the customer uses water, the Company recognizes the amount of water used as revenue in the period the water is delivered.

If the customer does not use the

water in the contract period, such water is forfeited by the customer.

The Company evaluates the likelihood that the customer will use the water each reporting period and estimates and recognizes any amounts not anticipated to be used by the

customer as revenue in the period the Company determines it is remote the customer will use all the remaining prepaid water volume during the remaining contract period.

Deferred revenue by segment is as follows:

November 30, 2020

August 31, 2020

Land development activities

Oil and gas leases and water sales payment

(In thousands)

Land development segment

Water and wastewater resource development segment

Balance, end of period

The current portion of deferred revenue for oil and gas leases and water sales payment as of May 31, 2020 and August 31, 2019, is $2,254,830 and $706,464, respectively.

There were no water segment deferred revenues as

of May 31, 2019 and August 31, 2019.

Changes in deferred revenue were as follows:

August 31, 2019

Balance, beginning of period

November 30, 2020

(In thousands)

Balance, August 31, 2020

Deferral of revenue

Recognition of unearned revenue

Balance, end of period

The recognition of unearned revenue was $11,503,523 and $11,955,989 from land development activities and $4,511,428 and $8,461,253 from oil and gas leases and water sales payments for the nine months ended May 31, 2020

and August 31, 2019, respectively.

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

invoiced and recognized as revenue in future periods.

At May 31, 2020, the Company had outstanding open contracts for $12,957,000, which primarily relate to the 115 lots of the initial 506 lots at Sky Ranch that remain unsold.

The Company expects to

recognize approximately 98% of such revenue over the next 12 months.

Land Development Inventories

Land development inventories primarily include real estate held for development and sale, which the Company has begun developing and are stated at cost.

Capitalized lot development costs at Sky Ranch are costs incurred

to construct required infrastructure to produce finished lots at Sky Ranch that meet the Company’s capitalization criteria for lot improvements 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 i nventories

include common area costs that the Company funded through the CAB.

The Company expects that such costs will be reimbursable by the CAB.

The Company records future reimbursements as a reduction of reimbursable capitalized costs remaining in Land development i nventories once the CAB has the ability to reimburse the costs (i.e., once the Sky Ranch Districts and/or the 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.

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.

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 described in Note 2 – Summary of Significant Accounting Policies in Part II, Item 8 of the 2019 Annual Report, 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 three months ended May 31, 2020 and 2019, the Company received $74,100 and $37,300 net

of taxes, respectively, in royalties attributable to these wells.

During the nine months ended May 31, 2020 and 2019, the Company received $612,700 and $113,100 net of taxes, respectively, in royalties attributable to these wells.

classifies income from oil and gas lease and royalty payments as Other income in the statement of operations and comprehensive income as the Company does not consider these arrangements to be a primary

operating business activity.

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, 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 terms of the respective agreements.

During the three

and nine months ended May 31, 2020, the Company recognized $47,800 and $143,400 of income, respectively, related to the up-front payments received pursuant to the OGOA.

No revenue was recognized for the three or nine months ended May 31, 2019 related

to the up-front payments received pursuant to the OGOA.

As of May 31, 2020 and August 31, 2019, the Company had deferred revenue of $404,000 and $547,500, respectively, related to the OGOA.

In September 2017, the Company entered into 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.

The Company recognized lease income of $13,900 during the three months ended May 31, 2020 and 2019 related to the up-front payment received

pursuant to the Bison Lease.

The Company recognized lease income of $41,800 during the nine months ended May 31, 2020 and 2019 related to the up-front payment received pursuant to the Bison Lease.

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

had deferred revenue of $18,600 and $60,400, respectively, related to the Bison Lease that will be recognized as income ratably through September 2020.

As of May 31, 2020, the Company has also billed and received payments of $2.0 million from one of its industrial water customers to reserve first priority water for O&G operations for defined periods through

December 2020.

As the customer uses the forecasted volumes each month, the Company will recognize revenue based on the volumes used.

The customer may take such volumes up to one year from invoice date.

If the customer does not take the forecasted

volumes in the anticipated period, such volumes are forfeited by the customer.

At that time, any payments received for unused volumes will be recognized as revenue.

As of May 31, 2020, the Company had deferred revenue of $2.0 million as a result of

these advanced water purchase payments.

Long-Lived Assets

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

Recoverability of assets to be held and used is

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

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

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

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

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

Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including any interest, 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 groundwater assets that are being utilized on the basis of units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees.

Share-Based Compensation

The Company maintains an equity incentive plan for the benefit of its employees and non-employee directors.

The Company records share-based compensation costs as expense 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 impact on the income tax provision for the granting and exercise of stock options during the three and nine months ended May

31, 2020 was a deferred tax benefit of $18,700 and a deferred tax benefit of $39,000, respectively.

Because the Company had a full valuation allowance on its deferred tax assets as of November 30, 2018, there was no effect on the tax provision during

The Company recognized $81,900 of share-based compensation expense and $96,100 of share-based compensation expense during the three months ended May 31, 2020 and 2019, respectively.

The Company recognized $435,100 of share-based

compensation expense, which included unrestricted stock grants, and $257,800 of share-based compensation expense during the nine months ended May 31, 2020 and 2019, respectively.

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.

did not have any significant unrecognized tax benefits as of May 31, 2020.

As a result of H.R.1, commonly known as the Tax Cuts and Jobs Act (the “Tax Act”), signed into law on December 22, 2017, the Company has a $282,000 alternative minimum tax (“AMT”) deferred tax asset for which it did

not have a valuation allowance as of May 31, 2020 and August 31, 2019.

The Company expects to receive the AMT as a refund in future years.

Most, if not all, of this credit will be refundable with the filing of the 2018 (fiscal year ended 2019)

through 2019 (fiscal year ending 2020) tax returns, subject to limitations of Internal Revenue Code Section 382 (arises with ownership changes) and the sequestration limitation of the Balanced Budget Act of 1997.

The Company’s effective tax rate was 24.8% and 24.6% for the three and nine months ended May 31, 2020, respectively.

The effective tax rate was 0% for the three and nine months ended May 31, 2019 due to

the valuation allowance the Company maintained on its net deferred tax asset.

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

consolidated balance sheets, as well as operating loss 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.

The Company maintained a valuation allowance on the net deferred tax asset other than AMT credits as of May 31, 2019, as the Company had determined it was more likely than not that the Company would not

realize its deferred tax assets as of May 31, 2019.

Such assets primarily consisted of operating loss carryforwards.

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

In particular, the Company considered

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

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

result of the evaluation, the Company concluded that all of the valuation allowance was no longer necessary as of August 31, 2019 and released the valuation allowance.

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 year 2015 through fiscal year 2019.

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

At May 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 nine months ended May 31, 2020 and 2019.

Earnings per Common Share

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

For the three months ended May 31, 2020 and 2019, respectively, options to

acquire common stock of 200,056 and 201,644 common share equivalents were included in the calculation of income per common share as dilutive common stock equivalents using the treasury stock method.

Common stock options of 229,142 and 206,934 common

share equivalents as of the nine months ended May 31, 2020 and 2019, respectively, were included in the calculation of income per common share as dilutive common stock equivalents using the treasury stock method.

Common stock options aggregating

180,000 and 0 common share equivalents as of the three and nine months ended May 31, 2020, respectively, have been excluded from the calculation of income per common share as their effect is anti-dilutive.

Common stock options aggregating 50,000

common share equivalents as of the three and nine months ended May 31, 2019, have been excluded from the calculation of income per common share as their effect is anti-dilutive.

Recently Issued Accounting Pronouncements

The Company continually assesses new accounting pronouncements to determine their applicability.

When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company

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

approximately $258,900 and a lease obligation liability of approximately $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”).

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.

Balance, November 30, 2020

For the three months ended November 30, 2020 and 2019, we recognized deferred land development revenues of $2.4 million and $8.5 million, and recognized deferred oil and gas leases and water sales revenues of $1.2

million and $1.9 million.

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in

future periods.

During the three months ended November 30, 2020, the Company received the final payment of $2.2 million, including $1.6 million for outstanding open contracts in the first development filing at Sky Ranch, which represents the final

lot sales in the first filing at Sky Ranch, and $0.6 million for neighborhood amenities.

NOTE 3 – FAIR VALUE MEASUREMENTS

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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 significant input to determine where within the fair value hierarchy the

measurement falls.

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 fair value.

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

The Company had no Level 1 assets or liabilities as of May 31, 2020 or August 31, 2019.

The Company had no Level 1 assets or liabilities as of November 30, 2020 or August 31, 2020.

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

The Company had zero and one

Level 2 assets as of May 31, 2020 and August 31, 2019, respectively, which consisted of a short-term certificate of deposit.

The Company had no Level 2

assets or liabilities as of November 30, 2020 or August 31, 2020.

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

1 unchanged sentence

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

The Company had one Level 3 liability, the contingent portion of the CAA, as of May

31, 2020 and August 31, 2019.

The Company had one Level 3 liability, the contingent portion of the CAA, as of

November 30, 2020 and August 31, 2020.

The Company has determined that the contingent portion of the CAA does not have a determinable fair value (see Note 5 – Long-Term Obligations and Operating Lease) .

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 investment securities are the Company’s only financial assets measured at fair value on a recurring basis.

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

Investment securities include certificates of deposit and U.S.

Treasury debt securities.

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.

Water and Land Assets below.

There were no assets or liabilities measured at fair value on a recurring basis as of May 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:

Quoted Prices in

Active Markets

for Identical

Observable Inputs

Treasury debt securities

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

As of May 31, 2020, the carrying amount of

held-to-maturity securities was $0.

As of August 31, 2019, the carrying amount of held-to-maturity securities was $192,800 and is recorded as short-term investments in the accompanying consolidated financial statements.

There were no assets or liabilities measured at fair value on a recurring basis as of November 30, 2020 and August 31, 2020.

NOTE 4 – WATER AND LAND ASSETS

The Company’s water rights and current water and wastewater service agreements are more fully described in Note 4 – Water and Land Assets in Part II, Item 8 of the 2019 Annual

There have been no significant changes to the Company’s water rights or water and wastewater service agreements during the nine months ended May 31, 2020.

The Company’s water rights and current water and wastewater service agreements, including capitalized terms not defined herein, are more fully described in Note 4 – Water and Land

Assets in Part II, Item 8 of the 2020 Annual Report.

Investment in Water and Water Systems

The Company’s Investments in Water and Water Systems consist of the following costs and accumulated depreciation and depletion at May 31, 2020 and August 31, 2019:

The Company’s Investments in Water and Water Systems consist of the following costs and accumulated depreciation and depletion at November 30, 2020 and August 31, 2020:

November 30, 2020

August 31, 2020

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and Depletion

(In thousands)

Rangeview water supply

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Net investments in water and water systems

Capitalized terms in this section not defined herein are defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 2019 Annual Report.

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

The Company placed the facility in service during February 2020.

Construction in progress primarily consists of additional water facilities at Sky Ranch.

The Company anticipates the additional facilities will

be placed in service during the fourth quarter of fiscal 2020.

Depletion and Depreciation

The Company recorded an immaterial amount of depletion charges during the three and nine months ended May 31, 2020 and 2019.

The depletion was related entirely to the Rangeview Water Supply.

The Company recorded $471,200 and $322,700 of depreciation expense during the three months ended May 31, 2020 and 2019, respectively.

These figures include $85,600 and $97,800 of depreciation expense for other

equipment not included in the table above during the three months ended May 31, 2020 and 2019, respectively.

The Company recorded $1,253,200 and $812,700 of depreciation expense during the nine months ended May 31, 2020 and 2019, respectively.

These figures include $265,900 and $276,200 of depreciation expense for other

equipment not included in the table above during the nine months ended May 31, 2020 and 2019, respectively.

The Company anticipates the additional facilities will be placed in service during fiscal 2021.

NOTE 5 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

The Participating Interests in Export Water Supply is an obligation of the Company that has no scheduled maturity date.

Therefore, maturity of this liability is not disclosed in tabular format but is described below.

Therefore, maturity of this liability is not disclosed in tabular form but is described below.

Participating Interests in Export Water Supply

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

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

Upon entering into the CAA, the

Company recorded an initial liability of $11.1 million, which represented the cash 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 in Part II, Item 8 of the 2019 Annual Report).

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 consolidated balance sheet because the obligation

to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.

The acquisition of the Rangeview Water Supply was finalized with the signing of the Comprehensive Amendment Agreement (the “CAA”) in 1996.

CAA is explained in greater detail in Note 5 to the 2020 Annual Report.

The terms and conditions of the CAA, other than whom the amounts are payable too, have not been modified since signing.

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.

If the Company does not sell the Export Water, the holders of the Series B

preferred stock of the Company are also not entitled to payment of any dividend and have no contractual recourse against the Company.

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

Participating Interests in Export Water 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 reacquired various portions of the CAA obligations, which retained their original priority, including the Land Board’s CAA interest which was assigned and relinquished to the Company in

The Company did not make any CAA acquisitions during the three and nine months ended May 31, 2020 and 2019.

The Company is currently allocated 88.105% of the total proceeds from the sale of Export Water after payment of the Land Board royalty.

As a result of the acquisitions and consideration from cumulative sales of Export

Water as detailed in the table below, the remaining potential third-party obligation at May 31, 2020, is less than $1.0 million.

Initial Export

Participating

Original balances

Activity from inception until August 31, 2019:

Relinquishment

Option payments - Sky Ranch and The Hills at Sky Ranch

Arapahoe County tap fees

Export Water sale payments

Balance at August 31, 2019

Activity for the nine months ended May 31, 2020:

Export Water sale payments

Balance at May 31, 2020

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 they are either retained by the Company or remitted to various parties pursuant to the CAA.

As of November 30, 2020, the recorded obligation of the CAA is

$0.3 million and the contingent off-balance sheet portion is $0.6 million.

The CAA includes contractually established priorities which call for payments to CAA holders in order of their priority.

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receives any payment and so on until full repayment.

Of the next approximately $6.4 million of Export Water payouts, which based on current payout levels would occur over several years, the Company will receive approximately $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.

Of the next $6.3 million of Export Water payouts, which based on current payout levels would occur over several years, the Company will receive $5.6 million of revenue.

Thereafter, the Company

will be entitled to all but $0.2 million of the proceeds from the sale of Export Water after deduction of the Land Board royalty.

In November 2020, the Company entered into separate contracts with KB Home, Meritage Homes, Melody (a DR Horton Company) and Challenger Homes to sell 789 single-family attached and detached residential lots at the Sky Ranch property.

development phase of Sky Ranch will incorporate approximately 250 acres and is planned to be completed in four sub-phases.

Due to the Company’s strong performance in the first filing of the Sky Ranch project, the Company was able to realize a 30%

increase in lot prices from $75,000 for a 50’ lot in phase one to $97,000 for the same 50’ lot in the first subphase of filing two.

The timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of

governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries.

In January 2021, the Company expects to begin construction on the second filing at Sky Ranch, which is expected to

include 895 residential lots.

The 106 lots not currently under contract to home builders are being retained for future use.

WISE Partnership

The Company, through the Rangeview District, entered into 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.

Pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing 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 three and nine months ended May 31, 2020, the Company through the Rangeview District, purchased an additional 0 and 400 acre feet of WISE water for $0 and $582,200,

respectively.

The Company’s cost of funding the Rangeview District’s purchase of its share of existing infrastructure and future infrastructure for WISE and funding operations and water deliveries related to WISE is projected to be approximately $4.6

million over the next five years.

See further discussion in Note 6 – Related Party Transactions.

The South Metro WISE Authority (“SMWA”) is a group of ten governmental or quasi-governmental water providers including the Rangeview District, that was formed to enable its members to

participate in a regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the “WISE Partnership Agreement,” defined below.

Each member of SMWA controls a contractually defined 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 ten members of the SMWA, and to “Denver Water” and “Aurora Water,” both defined below.

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

In 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”).

In December 2014, the Company and the Rangeview District entered the Rangeview/Pure Cycle WISE Project Financing and Service Agreement (the “WISE Financing Agreement”), which requires the Company to fund the Rangeview

District’s participation in WISE.

During the three months ended November 30, 2020 and 2019, the Company through the Rangeview District, purchased an additional 166 and 0 acre-feet of WISE water for $0.3 million and $0.

See further discussion in

Note 7 – Related Party Transactions.

Lease Commitments

In 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.

For both three month periods ended November 30, 2020 and 2019, the Company recorded less than $0.1 million of rent expense related to its office lease.

During both the three month

periods ended November 30, 2020 and 2019, the Company paid less than $0.1 million against the Lease obligations — operating leases .

Operating lease expense is generally recognized evenly over the term of the lease.

Effective as of 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

The Company did not enter into any new leases in the three or nine months ended May 31, 2020.

Rent expense consisted of operating lease expense of $21,300 and $63,900 for the three

and nine months ended May 31, 2020, respectively.

There was no sublease rental income for the three or nine months ended May 31, 2020.

The Company paid $19,800 and $59,500 against Lease

obligations — operating leases during the three and nine months ended May 31, 2020, respectively.

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.

Leases with an initial term of twelve months or less are not recorded on the condensed 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;

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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 May 31, 2020

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

As of November 30, 2020

As of August 31, 2020

(In thousands)

Operating leases - right of use assets

Accounts payable and accrued liabilities

Accrued liabilities

Lease obligations - operating leases, net of current portion

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The Company maintains the 2014 Equity Incentive Plan (the “2014 Equity Plan”), which was approved by shareholders in January 2014 and became effective on 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 stock awards can be granted with exercise prices, vesting conditions

and other performance criteria determined by the Compensation Committee of the board of directors.

Executives, eligible employees, consultants and non-employee directors

are eligible to receive options and stock grants pursuant to the 2014 Equity Plan.

Pursuant to the 2014 Equity Plan, options to purchase shares of stock and stock awards can be granted with exercise prices, vesting conditions and other

performance criteria determined by the Compensation Committee of the board of directors.

The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan.

The Company began awarding options and stock

awards under the 2014 Equity Plan in January 2015.

Prior to the effective date of the 2014 Equity Plan, the Company granted options and stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired on

April 11, 2014.

No additional awards may be granted pursuant to the 2004 Incentive Plan;

As of November 30, 2020

and August 30, 2020, there were 979,382 and 1,088,500 shares available for grant under the 2014 Equity Plan The Company began awarding options and stock awards under the 2014 Equity Plan in January 2015.

Prior to the effective date of

the 2014 Equity Plan, the Company granted options and stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired on April 11, 2014.

No additional awards may be granted pursuant to the 2004

Incentive Plan;

however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the nine months ended May 31, 2020:

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the three months ended November 30, 2020:

Weighted Average

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Intrinsic Value

(in thousands)

Outstanding at August 31, 2020

Forfeited or expired

Outstanding at May 31, 2020

Options exercisable at May 31, 2020

On September 25, 2019 and September 27, 2019 there were 80,000 and 50,000 stock options granted to employees and senior management, respectively.

The weighted-average grant-date fair value of stock options granted were

$4.21 and $4.16, respectively.

These options vest evenly over three years from the date of the grant and expire no more than ten years from the date of the grant.

On January 15, 2020, 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 for the nine months ended May 31, 2020.

These 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 the three months ended May 31, 2020 and 2019 and nine

months ended May 31, 2019.

The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as of and for the nine months ended May 31, 2020:

Net settlement exercised

Outstanding at November 30, 2020

Options exercisable at November 30, 2020

On September 23, 2020, there were 85,000 stock options granted to employees, which vest evenly over five years from the date of the grant.

All 85,000 options expire no more than ten years from the date of the grant.

The weighted-average grant-date fair value of stock options granted was $3.93.

Additionally, on September 23, 2020, there were 30,000 stock options granted to an executive officer which vest evenly over three years from the date of the grant.

All 30,000 options expire no more than ten years

from the date of the grant.

The weighted-average grant-date fair value of stock options granted was $3.37.

During the three months ended November 30, 2020, the Company had net settlement exercises of stock options, whereby the optionee did not pay cash for the options but instead received the number of

shares equal to the difference between the exercise price and the market price on the date of exercise.

Net settlement exercises during the three months ended November 30, 2020, resulted in 12,118 shares issued and 5,882 options cancelled in

settlement of shares issued.

There were no net settlement exercises during the three months ended November 30, 2019.

The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as of and for the three months ended November 30, 2020:

Weighted Average

Non-vested options outstanding at August 31, 2020

Non-vested options outstanding at May 31, 2020

All non-vested options are expected to vest.

Stock-based compensation expense was $81,900 and $96,100 for the three months ended May 31, 2020 and 2019, respectively.

Stock-based compensation expense, including unrestricted stock grant expense, was $435,100 and

$257,800 for the nine months ended May 31, 2020 and 2019, respectively.

At May 31, 2020, the Company had unrecognized compensation expenses totaling $543,000 relating to non-vested options that are expected to vest.

The weighted-average period over which these options are expected to vest

is approximately two years.

Forfeited (a)

Non-vested options outstanding at November 30, 2020

(a) All non-vested options are expected to vest.

For the three months ended November 30, 2020 and 2019, the Company recorded less than $0.1 million and $0.1 million of stock-based compensation expense.

At November 30, 2020, the Company had unrecognized compensation expenses totaling $0.8 million relating to non-vested options that are expected to vest.

The weighted-average period over which these options are

expected to vest is approximately three years.

NOTE 7 – RELATED PARTY TRANSACTIONS

The Rangeview District

The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas.

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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 (collectively, the “Sky Ranch Districts”) and the CAB are quasi-municipal corporations and

political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property.

The current members of the board of directors of each of the Rangeview District, the Sky Ranch Districts and the CAB consist of three

employees of the Company and one independent board member.

The Rangeview District

On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District

joining the South Metro Water Supply Authority (“SMWSA”).

The Company provides funding pursuant to the Participation Agreement annually with $17,400 and $22,200 being provided during fiscal years 2020 and 2019, respectively.

owns certain rights and real property interests which encompass the current boundaries of the Rangeview District.

On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to

provide funding to the Rangeview District in connection with the Rangeview District joining the South Metro Water Supply Authority (“SMWSA”).

The Company provides funding pursuant to the Participation Agreement annually, which for fiscal 2021 and

2020 is an immaterial amount.

Through the WISE Financing Agreement, the Company agreed to fund the Rangeview District’s cost of participating in the regional water supply project known as the WISE partnership.

During the three months ended February

29, 2020, the Company, through the Rangeview District, purchased an additional 400 acre feet of WISE water for $582,200.

The Company did not purchase any additional water during the three months ended May 31, 2020.

The Company anticipates spending an

additional $4.6 million over the next five fiscal years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries

related to WISE.

During the three months ended

November 30, 2020 and 2019, the Company through the Rangeview District, purchased an additional 166 and 0 acre-feet of WISE water for $0.3 million and $0.

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

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.

To date, the Company has capitalized the funding provided pursuant to the WISE Financing Agreement because the funding has been provided to purchase capacity in the WISE infrastructure.

The Company’s total investment in the WISE

assets as of May 31, 2020, is $6.1 million.

The Company’s total investment in the WISE assets as of

November 30, 2020, is $6.1 million.

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 May 31, 2020).

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 November 30,

The maturity date of the loan is December 31, 2020, at which time it will automatically renew for another 12 month term.

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 2014 Amended and Restated Lease Agreement

remains in effect.

$1,031,500 of the balance in Notes receivable - related parties, including accrued interest at May 31, 2020, includes borrowings by the Rangeview District of $590,300 and accrued interest

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 2014 Amended and Restated Lease

Agreement remains in effect.

Of the November 30, 2020 balance in Notes receivable - related parties, $1.1 million includes borrowings by the Rangeview District of $0.7 million and accrued interest of $0.4

Of the August 31, 2020 balance in Notes receivable - related parties, $1.1 million includes borrowings by the Rangeview District of $0.6 million and accrued interest of $0.5 million.

Sky Ranch Community Authority Board

Sky Ranch Metropolitan District Nos.

1, 3, 4 and 5 (collectively, 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 each of the Rangeview District, the Sky Ranch Districts and the Sky Ranch CAB consist of three employees of the Company and one independent

board member.

Pursuant to that certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District Nos.

1 and 5 formed the CAB to, among other things, design,

construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts.

In order for the public improvements to be constructed and/or acquired, it is

necessary for each Sky Ranch District, directly or through the CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property.

On September 18, 2018, the parties entered into a series of agreements, including a Facilities Funding and Acquisition Agreement (the “2018 FFAA”), with an effective date of November 13, 2017, which supersedes and

consolidates the previous funding agreements between the Company and the CAB and the Company and Sky Ranch Metropolitan District No.

5 pursuant to which

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

5 to the Company, and the previous Facilities Funding and Acquisition Agreement entered into between the Company and Sky Ranch Metropolitan District No.

2014 was terminated;

a Project Funding and Reimbursement Agreement and a June 2018 Funding Acquisition Agreement between the CAB and the Company were terminated;

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

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

1 and 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.

The Company and the Sky Ranch CAB entered into a Facilities Funding and Acquisition Agreement (the “FFAA”) effective November 2017, obligating the company to advance funding to the Sky Ranch CAB for specified public

improvements constructed from 2018 to 2023.

All amounts owed under the FFAA bear interest at a rate of 6% per annum.

Due to the uncertainty of collecting the interest (because payment is contingent on the issuance of bonds), interest income is not

recognized on the amounts owed by the CAB until the bonds are issued.

recognized on the amounts owed by the Sky Ranch CAB until the bonds are issued.

Due to this contingency, interest is deferred until the point in time when bonds are issued.

At that point, the accrued interest will be recognized.

The CAB agrees to exercise

reasonable efforts to issue bonds to reimburse the Company subject to certain limitations.

In addition, the CAB agrees to utilize any available moneys not otherwise pledged to payment of debt, used for operation and maintenance expenses, or otherwise

encumbered, to reimburse the Company.

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

As of May 31, 2020, the balance of the Company’s advances for improvements, excluding interest, net of costs reimbursed in November 2019, to the CAB totaled $14.9 million, of which $1.8 million is included in Land development i nventories and $13.1 million was expensed through Land development construction costs .

The advances have been

used by the CAB to pay for construction of public improvements.

The Company submits specific costs for reimbursement to the CAB.

Based on the specific costs being reimbursed by the 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 1 – Presentation of Interim Information - Revenue Recognition - Land Development Activities for a summary of reimbursable costs incurred to date, payments made

from the CAB and any outstanding reimbursable amounts.

In September 2018, effective as of November 13, 2017, the Company entered into an Operation Funding Agreement with the CAB obligating the Company to advance funding to the CAB for operation and maintenance expenses for

the 2018 and 2019 calendar years.

All payments are subject to annual appropriations by the CAB in its absolute discretion.

The advances by the Company accrue interest at the rate of 6% per annum from the date of the advance.

$28,200 of the balance

of the Notes receivable – related parties, including accrued interest at May 31, 2020, includes borrowings by the CAB of $25,500 and accrued interest of $2,700.

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 November 30, 2020, the balance of the Company’s advances for improvements, including interest, net of costs reimbursed in November 2019, to the Sky Ranch CAB totaled $21.1 million, of which $0.3 million is

included in Accrued liabilities, $19.3 million was expensed through Land development construction costs and $1.5 million of interest,

which has not yet been recognized.

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.

The Company expects the Sky Ranch CAB to fully reimburse all amounts owed either through future bond issuances or remittance of property taxes.

Refer to Note 2 – Revenue Recognition for a summary of reimbursable costs incurred to date, payments made from the Sky Ranch CAB and any outstanding reimbursable amounts.

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

As of the November 30, 2020 and August 31, 2020, the balances included in Notes receivable – related parties, related to the Operation Funding Agreement are immaterial.

NOTE 8 – SIGNIFICANT CUSTOMERS

Water and Wastewater

Pursuant to the Rangeview Water Agreements (defined in Note 4 – Water and

Land Assets in Part II, Item 8 of the 2019 Annual Report) and an Export Service Agreement entered into with the Rangeview District dated June 16, 2017, the Company provides water and

wastewater services on the Rangeview District’s behalf to the Rangeview District’s customers.

Sales to the Rangeview District accounted for 72% and 6% of the Company’s total water and wastewater revenues for the three months ended May 31, 2020 and 2019 respectively.

Sales to the Rangeview

District accounted for 68% and 5% of the Company’s total water and wastewater revenues for the nine months ended May 31, 2020 and 2019 , respectively.

The Rangeview District has three significant customers, the Ridgeview Youth Services Center (“Ridgeview”), Sky Ranch Community Development (“Sky Ranch”) and Elbert & Highway 86 Commercial

District (“Wild Pointe”).

The Rangeview District’s significant customers accounted for 21%, 39% and 10%, respectively, of the Company’s total water and wastewater revenues for the three months ended May 31,

2020 , and 2%, 0% and 4%, respectively, for the three months ended May 31, 2019 .

Ridgeview, Sky Ranch and Wild Pointe accounted for 27%, 24% and 13%, respectively, and 3%, 0% and 2%, respectively, for the nine months ended May 31, 2020 and 2019 .

Revenues related to the provision of water for the oil and gas industry to one customer accounted for 11% of the Company’s water and wastewater revenues for the three months ended May 31, 2020.

Revenues related to the

provision of water for the oil and gas industry to one customer represented 93% of the Company’s water and wastewater revenues for the three months ended May 31, 2019.

Revenues related to the provision of water for the oil and gas industry to one

customer represented approximately 19% of the Company’s water and wastewater revenues for the nine months ended May 31, 2020.

Revenues related to the provision of water for the oil and gas industry to two customers represented 67% and 25%,

respectively, for the nine months ended May 31, 2019.

Land Development

Revenues from two customers represented 100% of the Company’s lot sales revenues for the three months ended May 31, 2020.

The two customers represented 67% and 33%, respectively, of the Company’s lot sales revenues for

the three months ended May 31, 2020.

Revenues from three customers represented 100% of the Company’s lot sales revenues for the three months ended May 31, 2019.

The three customers represented 65%, 25% and 10%, respectively, of the Company’s lot

sales revenues for the three months ended May 31, 2019.

Revenues from three customers represented 100% of the Company’s lot sales revenues for the nine months ended May 31, 2020 and May 31, 2019.

The three customers represented 61%, 25% and 14%, respectively, of the

Company’s land development revenues for the nine months ended May 31, 2020 and 45%, 34% and 21%, respectively, of the Company’s lot sales revenues for the nine months ended May 31, 2019.

Accounts Receivable

The Company had accounts receivable from the Rangeview District which accounted for 76% and 40% of the Company’s trade receivables balances at May 31, 2020 and August 31, 2019, respectively.

The Company had accounts

receivable from one other customer which accounted for approximately 10% and 57% of its trade receivable balances at May 31, 2020 and August 31, 2019, respectively.

Accounts receivable from Ridgeview

accounted for 7% and 5% of the Company’s water and wastewater trade receivables as of May 31, 2020 and August 31, 2019, respectively.

Accounts receivable from Wild Pointe

accounted for 18% and 0% of the Company’s water and wastewater trade receivables as of May 31, 2020 and August 31, 2019, respectively.

The Company has significant customers in its operations.

For the water and wastewater resource development segment, the Company primarily provides water and wastewater services on behalf of Rangeview Metropolitan District.

The significant end

users include all Sky Ranch homes combined and Crestone Peak Resources (oil & gas operations).

For the land development segment and water and wastewater tap fees, which are reported within the water and wastewater resource development

segment, significant customers include Taylor Morrison, KB Home and Richmond Homes.

NOTE 9 – ACCRUED LIABILITIES

At May 31, 2020, the Company had accrued liabilities of $1,273,600, of which $70,200 was for current operating lease obligations, $111,100 was for estimated property taxes, $35,100 was for professional fees, and

$1,057,200 was for operating payables, of which $142,400 is payable to the Rangeview Metropolitan District for water infrastructure capital projects and $487,500 is payable to the CAB for the development of Sky Ranch.

The Sky Ranch development costs

are also included in Land development i nventories or expensed through Land development construction costs .

At August 31, 2019, the Company had accrued liabilities of $3,428,400, of which $460,500 was for accrued compensation, $94,000 was for estimated property taxes, $70,000 was for professional fees and the remaining

$2,803,900 was related to operating payables, of which $1,399,600 is payable to the CAB for the development of Sky Ranch and $930,900 is payable to the Rangeview District for water infrastructure capital projects.

The Sky Ranch development costs

were also included in Land development i nventories or expensed through Land development construction costs .

November 30, 2020

August 31, 2020

(In thousands)

Due to the Sky Ranch CAB - related party

Other operating payables

Land development - warranty and other - related party

Accrued compensation

Operating lease obligations

Property taxes

Professional fees

Due to the Rangeview District - related party

NOTE 10 – COMMITMENTS AND CONTINGENCIES

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Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows.

The Company was not involved in litigation or other legal proceedings and had no contingencies where the risk of material loss was reasonably possible as of May 31, 2020, or August 31, 2019.

The Company was not involved in litigation or other legal proceedings and had no contingencies where the risk of material loss was reasonably possible as of November 30, 2020, or August 31, 2020.

NOTE 11 – SEGMENT INFORMATION

An operating segment is defined as a component of an enterprise for which discrete financial information is available and is reviewed regularly by the Chief Operating Decision Maker (the “CODM”), or decision-making

group, to evaluate performance and make operating decisions.

The Company has identified its CODM as its Chief Executive Officer.

During the year 2018, the Company began construction of residential lots at Sky Ranch, which the Company has identified as a segment.

Currently, the Company operates its wholesale water and wastewater services and

land development activities at Sky Ranch as the Company's two operating segments.

The wholesale water and wastewater services business includes providing water service to customers, which water is provided by the Company using water rights owned or controlled by the Company, and developing

infrastructure to divert, treat and distribute that water and collect, treat and reuse wastewater.

As part of the Company’s land development activities at Sky Ranch, the Company entered into contracts for the sale of residential lots (see Note 2 – Summary of Significant

Accounting Policies in Part II, Item 8 of the 2019 Annual Report).

The Company identified land development and lot sales as a separate segment beginning in the fiscal year 2018.

Oil and gas royalties and licenses are a passive activity (i.e.

the Company’s CODM does not evaluate the performance of, or allocate resources specifically to, the oil and gas operations) and not an operating

business activity and, therefore, are not classified as a segment.

The following table summarizes wholesale water and wastewater services and land development revenue information by segment:

Three Months Ended

Nine Months Ended

Wholesale water and wastewater services

Land development activities

Total revenues

The following table summarizes wholesale water and wastewater services and land development pretax income by segment:

Three Months Ended

Nine Months Ended

Wholesale water and wastewater services

Land development activities

Total pretax income (loss)

The following table summarizes total assets by segment.

The assets consist of water rights and water and wastewater systems in the Company’s wholesale water and wastewater services segment.

The assets consist of

land, land development inventories and deposits in the Company’s land development segment.

The Company’s other assets primarily consist of cash and cash equivalents, equipment, mineral rights, related party notes receivables and a deferred tax

Because of the methods used by the Chief Operating Decision Maker (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 and for the three months

ended November 30, 2020 and 2019, was done exclusively at the Company’s Sky Ranch Master Planned Community.

Oil and gas 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:

Three Months Ended November 30, 2020

wastewater resource

(In thousands)

Total Revenue

Cost of revenue

Depreciation and depletion

Total cost of revenue

Pretax operating income

Three Months Ended November 30, 2019

(In thousands)

Total Revenue

Cost of revenue

Depreciation and depletion

Total cost of revenue

Reimbursement of construction costs

Gross Margin after reimbursables

Pretax operating income

The following table summarizes total assets for the Company’s water and wastewater resource development business and land development business by segment.

The assets consist of water rights and water

and wastewater systems in the Company’s water and wastewater resource development segment and land, inventories and deposits in the Company’s land development segment.

The Company’s other assets (“Corporate”) primarily consist of cash and cash

equivalents, equipment, mineral rights, related party notes receivables and an income tax receivable.

November 30, 2020

August 31, 2020

Wholesale water and wastewater services

Land development activities

(In thousands)

Water and wastewater resource development

Land development

NOTE 12 – INCOME TAXES

The Company recorded income tax expense of $8,900 and $0 for the three months ended May 31, 2020 and 2019, respectively, and $1,974,900 and $0 for the nine months ended May 31, 2020 and 2019,

respectively.

The net expense during the three months ended May 31, 2020 consisted of current income tax expense of $20,800 and deferred income tax benefit of ($11,900).

The net expense during the nine months ended May 31, 2020 consisted of

current income tax expense of $1,264,800 and deferred income tax expense of $710,100.

The deferred tax expense consists of the usage of the Company's remaining $2.5 million net operating loss carryforwards and payment of deferred compensation in

For the three months ended November 30, 2020 and 2019, the Company recorded income tax expense of $0.3 million and $1.9 million.

The net expense during the three months ended November 30, 2020

consisted of current income tax expense of $0.2 million and deferred income tax expense of $0.1 million.

The net expense during the three months ended November 30, 2019 consisted of current income tax expense of $1.2 million and deferred income tax

expense of $0.7 million.

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items.

At May 31, 2020 the Company is estimating an annual effective tax rate of

approximately 25%.

At November 30, 2020 the Company is estimating an annual effective tax rate

of approximately 25%.

Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made.

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The provision for income taxes is recorded at the end of each interim period based on the Company’s best estimate of its effective income tax rate expected to be applicable for the full fiscal year.

The Company’s

effective income tax rate was 24.8% and 24.6% for the three and nine months ended May 31, 2020, respectively.

The Company did not record income tax expense for the three or nine months ended May 31, 2019.

The Company paid Federal and State tax installments of $212,300 and $22,000, respectively, during the three months ended May 31, 2020.

The Company paid Federal and State tax installments of $1,089,700 and $215,500,

respectively, during the nine months ended May 31, 2020.

No taxes were paid during the three and nine months ended May 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 May 31, 2020 and August 31, 2019 are as follows:

For the Periods Ended:

For the three

months ended November 30, 2020 and 2019, the Company’s effective income tax rate was 24.6% and 24.7%

No taxes were paid during the three months ended November 30, 2020 and 2019, respectively.

for income tax purposes.

Significant components of the Company’s deferred tax liability as of November 30, 2020 and August 31, 2020 are as follows:

November 30, 2020

August 31, 2020

Deferred tax assets (liabilities):

(In thousands)

Net operating loss carryforwards

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Non-qualified stock options

Net deferred tax asset

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

For the fiscal year ended August 31, 2019, the Company has

determined it is more likely than not that the Company will realize its deferred tax assets, which consist primarily of net operating loss carryforwards.

The Company assessed the realizability of its deferred tax assets using all available

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

As a result of the Company’s annual reassessment of its conclusions regarding the realization of its deferred tax assets

at each financial reporting date, the Company concluded that its deferred tax assets are realizable, and therefore, the valuation allowance is no longer necessary.

At August 31, 2019, the Company had $2.5 million 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.

As of November 30, 2019, the Company used the remaining balance of its net operating loss carryforwards.

Net deferred tax liability

NOTE 13 – EARNINGS PER SHARE

Certain outstanding options are excluded from the diluted earnings per share calculation because they are anti-dilutive (i.e., their assumed conversion into common stock would increase rather than

decrease earnings per share).

The options excluded totaled 180,000 for the three months ended November 30, 2020.

There were no excluded options for the three months ended November 30, 2019.

Three Months Ended November 30,

(In thousands, except share and per share

Basic weighted average common shares

Effect of dilutive securities

Weighted average shares applicable to diluted earnings per share

Earnings per share - basic

Earnings per share - diluted

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

What changed 10-Q

Item 1. Financial Statements