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PRESENTATION OF INTERIM INFORMATION | 9 Months Ended
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May 31, 2020
PRESENTATION OF INTERIM INFORMATION [Abstract] |
PRESENTATION OF INTERIM INFORMATION | 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. 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 or omitted. 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. The August 31, 2019 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. On May 13, 2020, the Company returned the entire outstanding balance of $390,278, inclusive of interest. The interest was waived by Central Bank & Trust. Reclassifications Certain reclassifications have been made to the 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. Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used to account for certain items such as revenue recognition, reimbursable costs and expenses, costs of revenue for lot sales, share-based compensation, deferred tax asset valuation, 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 required. 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 invoiced. Investments 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 held. These securities primarily include balances in the Company’s operating and savings accounts. The carrying amount of cash and cash equivalents approximate fair value. Trade Accounts Receivable – The Company records accounts receivable net of allowances for uncollectible accounts and the carrying 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:
| (i) | Monthly water usage and wastewater treatment fees – The Company provides water and wastewater services to customers, for which the customers are charged fees monthly. Water usage fees are assessed to customers based on actual metered usage each month plus a base monthly service fee assessed per single family equivalent (“SFE”) unit served. One SFE is a customer, whether residential, commercial or industrial, that imparts a demand on the Company’s water or wastewater systems similar to the demand of a family of four persons living in a single-family house on a standard-sized lot. Water usage pricing is based on a tiered pricing structure. The Company recognizes wholesale water usage revenues at a point in time upon delivering water to its customers or its governmental customers’ end-use customers, as applicable. Revenues recognized by the Company from the sale of “Export Water” and other portions of its “Rangeview Water Supply” off the “Lowry Range” are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”). The Company is the primary distributor of the Export Water and sets pricing for the sale of Export Water. Revenues recognized by the Company from the sale of water on the Lowry Range are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District. For water sales on the Lowry Range, the Rangeview District is directly selling the water and deemed the primary distributor of the water. The Rangeview District sets the price for the water sales on the Lowry Range. See further description of Export Water, the Lowry Range, and the Rangeview Water Supply in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System” in 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.
| (ii) | 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.
| (iii) | 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:
| (i) | Sale of finished lots – The Company acquired approximately 930 acres of land zoned as a Master Planned Community known as Sky Ranch along the I-70 corridor east of Denver, Colorado. The Company has entered into purchase and sale agreements with three separate home builders pursuant to which the Company agreed to sell, and each builder agreed to purchase, residential lots at Sky Ranch. The Company began construction of lots in March 2018 and segments its reporting of the activity relating to the costs and revenues from the construction and sale of lots at Sky Ranch.
The Company sells lots at Sky Ranch pursuant to distinct agreements with each home builder. These agreements follow one of two formats. One format is the sale of a finished lot, whereby the purchaser pays for a ready-to-build finished lot and 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. During the 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.
| (ii) | Reimbursable Costs for Public Improvements – The CAB is required to construct certain public improvements, such as water distribution systems, sewer collection systems, storm water systems, drainage improvements, roads, curbs, sidewalks, landscaping and parks, the costs of which may qualify as reimbursable costs. Pursuant to 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 inventories. If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs. If bonds ultimately are issued, upon receipt of reimbursements by the Company, the Company records the reimbursements received as Other income to the extent that costs have previously been expensed and reduces Land development inventories 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 inventories. As a result of the reimbursed costs, the margin from land development revenues is expected to increase to approximately 27%.
| (iii) | 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; 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 in writing. The CAB is subject to annual budget and appropriation procedures and does not intend to create a multiple-fiscal year direct or indirect debt or other financial obligation. The Company receives a project management fee of five percent (5%) of actual construction costs of CAB-eligible improvements. The project management fee qualifies as a reimbursable cost to the Company. The project management fee is based only on the actual costs of the improvements; thus, items such as fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of CAB-eligible improvements are not included in the calculation of the project management fee. Soft costs and other costs that are not directly related to the construction of CAB-eligible improvements are included in Land development inventories 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.
| (iv) | 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 inventories 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 |
|  | Costs incurred to date |  |  | Payments repaid by CAB |  |  | Net costs incurred to date |
Public Improvements |  | $ | 25,431,500 |  |  | $ | 10,505,000 |  |  | $ | 14,926,500 |
Accrued interest |  |  | 1,052,900 |  |  |  | — |  |  |  | 1,052,900 |
Project management services |  |  | 1,371,600 |  |  |  | — |  |  |  | 1,371,600 |
Construction support activities |  |  | 581,100 |  |  |  | — |  |  |  | 581,100 |
Total reimbursable costs |  | $ | 28,437,100 |  |  | $ | 10,505,000 |  |  | $ | 17,932,100 |
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:
|  | May 31, 2020 |  |  | August 31, 2019 |
Balance, beginning of period |  | $ | — |  |  | $ | — |
Recognition of land development revenue contract asset |  |  | — |  |  |  | 1,020,146 |
Land development contract asset invoiced |  |  | — |  |  |  | (1,020,146 | )
Balance, end of period |  | $ | — |  |  | $ | — |
Deferred revenue by segment is as follows:
|  | May 31, 2020 |  |  | August 31, 2019 |
Land development activities |  | $ | 2,526,155 |  |  | $ | 3,991,535 |
Oil and gas leases and water sales payment |  |  | 2,467,649 |  |  |  | 1,067,348 |
Balance, end of period |  | $ | 4,993,804 |  |  | $ | 5,058,883 |
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:
|  | May 31, 2020 |  |  | August 31, 2019 |
Balance, beginning of period |  | $ | 5,058,883 |  |  | $ | 477,161 |
Deferral of revenue |  |  | 15,949,872 |  |  |  | 24,998,964 |
Recognition of unearned revenue |  |  | (16,014,951 | ) |  |  | (20,417,242 | )
Balance, end of period |  | $ | 4,993,804 |  |  | $ | 5,058,883 |
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 inventories include common area costs that the Company funded through the CAB. The Company expects that such costs will be reimbursable by the CAB. The Company records future reimbursements as a reduction of reimbursable capitalized costs remaining in Land development inventories once the CAB has the ability to reimburse the costs (i.e., once the Sky Ranch Districts and/or the CAB has issued bonds). The Company measures land held for sale at the lower of the carrying value or net realizable value. In determining net realizable value, the Company primarily relies upon the most recent comparable sales prices. If recent sales prices are not available, the Company will consider several factors, including, but not limited to, current market conditions, nearby recent sales transactions and market analysis studies. If the net realizable value is lower than the current carrying value, the land is written down to its net realizable value. 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. The Company 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 period. 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. Income Taxes The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company 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. As a 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 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 change. New pronouncements assessed by the Company recently are discussed below: In February 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842). ASU 2016-02 provides guidance on the recognition, measurement, presentation and disclosure of leases. The new standard supersedes the present GAAP standard on leases and requires substantially all leases to be reported on the balance sheet as right-of-use assets and lease obligations. This standard is effective for fiscal years beginning after December 15, 2018. The Company adopted the standard effective September 1, 2019, and recorded a right-of-use asset of 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”). Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Companies will now use forward-looking information to better inform their credit loss estimates. ASU 2016-13 was set to be effective for public companies on January 1, 2020; however, the FASB delayed the effective date to January 1, 2023 for smaller reporting companies. The Company continues to monitor economic implications of the COVID-19 pandemic; however, based on current market conditions, we do not expect the impact of ASU 2016-13 to be material upon adoption.

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- Definition The entire disclosure for the organization, consolidation and basis of presentation of financial statements disclosure, and significant accounting policies of the reporting entity. May be provided in more than one note to the financial statements, as long as users are provided with an understanding of (1) the significant judgments and assumptions made by an enterprise in determining whether it must consolidate a VIE and/or disclose information about its involvement with a VIE, (2) the nature of restrictions on a consolidated VIE's assets reported by an enterprise in its statement of financial position, including the carrying amounts of such assets, (3) the nature of, and changes in, the risks associated with an enterprise's involvement with the VIE, and (4) how an enterprise's involvement with the VIE affects the enterprise's financial position, financial performance, and cash flows. Describes procedure if disclosures are provided in more than one note to the financial statements. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -URI http://asc.fasb.org/topic&trid=2122149 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 810 -URI http://asc.fasb.org/topic&trid=2197479 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 275 -URI http://asc.fasb.org/topic&trid=2134479 + Details
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