impairment charge will be incurred for any amounts deemed uncollectible. The reimbursable public improvement costs bear an interest rate of 6% per annum.

Project management services – Pursuant to ~~two~~2 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 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 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 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 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. Historically, the recognition of project management revenue was deferred as the payment was deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. With the first phase nearing completion, the Sky Ranch CAB has an established tax base, with which Management believes provides reasonable assurance the Sky Ranch CAB can repay the Company for qualifying expenditures. The Company has determined that payment from the Sky Ranch CAB is probable and as such, the Company has recognized $23,000 and $1.6 million for the three and nine months ended May 31, 2021, of project management revenue for all reimbursable construction costs incurred to date ~~of $1.6 million~~ and will recognize future project management revenue each period based on actual construction costs related to the public improvements when collectability is deemed to be reasonably assured. The $1.6 million was recognized as a component of the Notes receivable - related ~~party.~~party and accrues interest at 6% per annum. Future amounts will be added to Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

~~Index~~

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 to the Sky Ranch CAB upon completion and will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

The 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 May 31, 2021
					Amounts payable to Pure
			Payments repaid by		Cycle by the Sky Ranch
	Costs incurred to date		Sky Ranch CAB		CAB

	(In thousands)
Phase 1
Public improvements	$	27,205	$	10,505	$	16,700
Accrued interest		2,626		400		2,226
Project management services		1,556		0		1,556
Construction support activities		834		0		834
Phase 1 reimbursable costs	$	32,221	$	10,905	$	21,316

Phase 2
Public improvements	$	444	$	0	$	444
Phase 2 reimbursable costs	$	444	$	0	$	444

As of February 28, 2021
Costs incurred to date
Payments repaid by
Sky Ranch CAB

Amounts payable to Pure
Cycle by the Sky Ranch
CAB

(In thousands)
Phase 1
Public improvements $ 28,565 $ 10,505 $ 18,060
Accrued interest 1,433 400 1,033
Project management services 1,539 — 1,539
Construction support activities 834 — 834
Phase 1 reimbursable costs $ 32,371 $ 10,905 $ 21,466

Phase 2
Public improvements $ 315 $ — $ 315
Phase 2 reimbursable costs $ 315 $ — $ 315

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Public improvements and construction support activities accrue interest of 6% per annum, which was not previously recognized as the interest payments were deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. This interest was recognized as a portion of the recognition of ~~$21.5~~$21.3 million of reimbursable costs as collection is deemed probable. ~~Project management fees do not accrue interest.~~ The Company expects to incur an additional ~~$0.9~~$0.5 million through the end of the calendar year 2021, with an estimated ~~$0.6~~$0.4 million for construction costs related to public improvements to complete the first development phase of the 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, collects fees, or property tax ~~assessments.~~

assessments support collectability being reasonably assured.

Deferred Revenue

As noted above, the Company recognizes certain 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 frequently receive milestone payments before revenue can be recognized (i.e. prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company recording deferred revenue. The Company recognizes this revenue into income as construction activities progress measured based on costs incurred to total expected costs of the project which management believes is a faithful representation of the transfer of goods and services to the customer.

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. As the 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 2018 payment has been fully recognized as of the first quarter of fiscal 2021.

~~Index~~

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 which have expired pursuant to the agreement. The customer had up to one year from the invoice date to use such water. The customer did not use the water in the contract period which ended in January 2021, and such water was forfeited by the customer resulting in the Company recognizing revenue of $0.4 million.

Deferred revenue by segment is as follows:

February 28, 2021 August 31, 2020
(In thousands)
Land development segment $ 995 $ 1,636
Water and wastewater resource development segment 260 1,965
Balance, end of period $ 1,255 $ 3,601


	May 31, 2021		August 31, 2020

	(In thousands)
Land development segment	$	550	$	1,636
Water and wastewater resource development segment		275		1,965
Balance, end of period	$	825	$	3,601

Changes in deferred revenue were as follows:

February 28, 2021
(In thousands)
Balance, August 31, 2020 $ 3,601
Deferral of revenue 2,231
Recognition of unearned revenue (4,577 )
Balance, February 28, 2021 $ 1,255


	May 31, 2021
	(In thousands)
Balance, August 31, 2020	$	3,601
Deferral of revenue		2,293
Recognition of unearned revenue		(5,069)
Balance, May 31, 2021	$	825

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 November 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 45 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy

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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 no0 Level 1 assets or liabilities as of ~~February 28,~~May 31, 2021 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.~~liabilities which include observable inputs but are not based on observable prices in active markets at the measurement date for the asset or liability. The Company had no0 Level 2 assets or liabilities as of ~~February 28,~~May 31, 2021 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 broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. ~~The Company had one Level 3 asset, Notes receivable - related party, and one liability, the contingent portion of the CAA, as of February 28, 2021.~~

The Company has determined the fair value of the reimbursable public improvements note receivable to be $17.8 million, compared to a carrying value of $21.5 million. The Company determined the fair value by estimating future cash flows discounted by a market rate. This note receivable does not have a stated repayment schedule and the Company relies on Sky Ranch CAB budgets and forecasted property tax revenues to estimate future cash flows. The Other notes receivables do not have a determinable fair value as the borrowing and repayments from the Rangeview District and the Sky Ranch CAB cannot be reasonably estimated.

~~The Company has determined that the contingent portion of the CAA does not have a determinable fair value (see Note 6 –~~ ~~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.

~~Index~~

NOTE 56 – WATER AND LAND ASSETS

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 ~~February 28,~~May 31, 2021 and August 31, 2020:

February 28, 2021 August 31, 2020
Costs
Accumulated
Depreciation
and Depletion
Costs
Accumulated
Depreciation
and Depletion

(In thousands)
Rangeview water supply $ 14,573 $ (16 ) $ 14,570 $ (15 )
Sky Ranch water rights and other costs 7,336 (995 ) 7,499 (981 )
Fairgrounds water and water system 2,900 (1,283 ) 2,900 (1,239 )
Rangeview water system 16,960 (1,157 ) 15,948 (789 )
Water supply – Other 7,548 (1,274 ) 7,550 (1,116 )
Wild Pointe service rights 1,632 (741 ) 1,632 (708 )
Sky Ranch pipeline 5,727 (698 ) 5,727 (602 )
Lost Creek water supply 3,374 — 3,372 —
Construction in progress 851 — 1,339 —
Totals 60,901 (6,164 ) 60,537 (5,450 )
Net investments in water and water systems $ 54,737 $ 55,087


	May 31, 2021				August 31, 2020
			Accumulated				Accumulated
			Depreciation				Depreciation
	Costs		and Depletion		Costs		and Depletion

	(In thousands)
Rangeview water supply	$	14,586	$	(16)	$	14,570	$	(15)
Sky Ranch water rights and other costs		7,371		(1,042)		7,499		(981)
Fairgrounds water and water system		2,900		(1,305)		2,900		(1,239)
Rangeview water system		17,496		(1,317)		15,948		(789)
Water supply – Other		7,552		(1,353)		7,550		(1,116)
Wild Pointe service rights		1,632		(741)		1,632		(708)
Sky Ranch pipeline		5,727		(745)		5,727		(602)
Lost Creek water supply		3,374		0		3,372		0
Construction in progress		1,021		0		1,339		0
Totals		61,659		(6,519)		60,537		(5,450)
Net investments in water and water systems	$	55,140			$	55,087

Construction in progress primarily consists of additional water facilities at Sky ~~Ranch.~~Ranch and the Build-to-Rent houses. The Company anticipates the additional facilities and houses will be placed in service during ~~fiscal~~calendar 2021.

NOTE 67 – 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 form but is described below.

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Participating Interests in Export Water Supply

The acquisition of the Rangeview Water Supply was finalized with the signing of the Comprehensive Amendment Agreement (the “CAA”) in 1996. The 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. 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 ~~February 28,~~May 31, 2021, 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. This means that the first payees receive their full payment before the next priority level receives any payment and so on until full repayment. Of the next $6.3 million of Export Water payouts, which 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 State Land Board royalty.

The Company has determined that the contingent portion of the CAA does not have a determinable fair value.

Sky Ranch

In November 2020 and February 2021, the Company entered into separate contracts with KB Home, Melody (a DR Horton Company), Challenger Homes, and Lennar Colorado, LLC to sell 789 single-family attached and detached residential lots at the Sky Ranch property. This next development phase of Sky Ranch will incorporate approximately 250 acres and is planned to be completed in ~~four~~4 sub-phases. Due to the Company’s strong performance in the first phase of the Sky Ranch project, the Company was able to realize an approximate 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 the second phase. 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. The Company began construction in February 2021 on the second phase 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 use as long-term Build-to-Rent rental properties.

~~Index~~

WISE Partnership

The South Metro WISE Authority (“SMWA”) is a group of ~~ten~~10 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~~10 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 years. 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 and nine months ended ~~February 28,~~May 31, 2021, the Company through the Rangeview District, received metered water deliveries of 100 and ~~February 29,~~300 acre-feet of WISE water, paying $0.2 and $0.6 million for this water. During the three and nine months ended May 31, 2020, the Company through the Rangeview District ~~purchased an additional 35~~received metered water deliveries of 0 and 400 acre-feet of WISE water, ~~for less than $0.1 million~~paying $0 and $0.6 ~~million.~~million for this water. See further discussion in Note 8 9 – Related Party Transactions.

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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 ~~six~~the nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020, the Company recorded less than $0.1 million of rent expense related to its office lease. During the ~~six~~nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020, 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. 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; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. The Company used the incremental borrowing rate of 6% on August 31, 2019, for all leases that commenced prior to that date. The Company elected the hindsight practical expedient to determine the lease term for existing leases, which resulted in the lengthening of the lease term related to the Company’s office lease.

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

As of February 28, 2021 As of August 31, 2020
(In thousands)
Operating leases - right of use assets $ 159 $ 196

Accrued liabilities $ 81 $ 74
Lease obligations - operating leases, net of current portion 79 120
Total lease liability $ 160 $ 194

Weighted average remaining lease term (in years) 1.9 2.4
Weighted average discount rate 6 % 6 %

~~Index~~


	As of May 31, 2021			As of August 31, 2020

	(In thousands)
Operating leases - right of use assets	$	141		$	196

Accrued liabilities	$	82		$	74
Lease obligations - operating leases, net of current portion		58			120
Total lease liability	$	140		$	194

Weighted average remaining lease term (in years)		1.7			2.4
Weighted average discount rate		6	%		6	%

NOTE 78 – SHAREHOLDERS’ EQUITY

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. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. As of ~~February 28,~~May 31, 2021, and August 30, 2020, there were ~~970,723~~974,965 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.

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The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the ~~six~~nine months ended ~~February 28,~~May 31, 2021:

Number
of Options

Weighted Average
Exercise Price

Weighted Average
Remaining
Contractual Term

Approximate
Aggregate
Intrinsic Value
(in thousands)

Outstanding at August 31, 2020 661,500 $ 7.23 6.17 $ 1,831
Granted 115,000 $ 9.00
Exercised (5,000 ) 2.76
Net settlement exercised (24,500 ) $ 3.07
Outstanding at February 28, 2021 747,000 $ 7.64 6.68 3,078

Options exercisable at February 28, 2021 528,667 $ 6.78 5.61 2,634


					Approximate
				Weighted Average	Aggregate
	Number	Weighted Average		Remaining	Intrinsic Value
	of Options	Exercise Price		Contractual Term	(in thousands)
Outstanding at August 31, 2020	661,500	$	7.23	6.17	$	1,831
Granted	115,000	$	9.00
Exercised	(18,000)	$	3.41
Net settlement exercised	(37,500)	$	3.99
Outstanding at May 31, 2021	721,000	$	7.77	6.30	$	4,592

Options exercisable at May 31, 2021	502,667	$	6.92	5.22	$	3,627

On January 13, 2021, the ~~six~~6 non-employee Board members were each granted 2,000 unrestricted ~~stock grants.~~shares of stock. The fair market value of the unrestricted shares for share-based compensation expense is equal to the closing price of the ~~Company's~~Company’s common stock on the date of grant of $11.33. There is no vesting requirement for the unrestricted stock grants and the Company recognized the full expense of $0.1 million in the ~~three~~month granted.

During the nine months ended ~~February 28, 2021.~~

~~During the six months ended February 28,~~May 31, 2021, 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 ~~February 28,~~May 31, 2021 resulted in ~~3,159~~8,758 shares issued and ~~3,341~~4,242 options cancelled in settlement of shares issued. Net settlement exercises during the ~~six~~nine months ended ~~February 28,~~May 31, 2021 resulted in ~~15,277~~24,035 shares issued and ~~9,223~~13,465 options cancelled in settlement of shares issued. There were no0 net settlement exercises during the ~~six~~three or nine months ended ~~February 29,~~May 31, 2020.

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 ~~six~~nine months ended ~~February 28,~~May 31, 2021:


		Weighted Average
	Number	Grant Date
	of Options	Fair Value
Non-vested options outstanding at August 31, 2020	179,999	$	4.31
Granted	115,000	$	3.78
Vested	(76,666)	$	4.27
Forfeited (a)	0	$	0
Non-vested options outstanding at May 31, 2021	218,333	$	4.04

Number
of Options

Weighted Average
Grant Date
Fair Value

Non-vested options outstanding at August 31, 2020 179,999 $ 4.31
Granted 115,000 $ 3.78
Vested (76,666 ) $ 4.27
Forfeited (a) — $ —
Non-vested options outstanding at February 28, 2021 218,333 $ 4.04

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

For ~~each~~the three ~~month periods~~months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020, the Company recorded ~~$0.2~~$0.1 million of stock-based compensation expense. For ~~each six month periods~~the nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020, the Company recorded ~~$0.3~~$0.4 million of stock-based compensation expense.

~~Index~~

At ~~February 28,~~May 31, 2021, the Company had unrecognized compensation expenses totaling ~~$0.7~~$0.6 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.~~

two and a half years.

NOTE 89 – 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. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property

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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. 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 and nine months ended ~~February 28,~~May 31, 2021, the Company through the Rangeview District, received metered water deliveries of 100 and ~~February 29,~~300 acre-feet of WISE water, paying $0.2 and $0.6 million for this water. During the three and nine months ended May 31, 2020, the Company through the Rangeview District ~~purchased an additional 35~~received metered water deliveries of 0 and 400 acre-feet of WISE water, ~~for less than $0.1 million~~paying $0 and $0.6 ~~million.~~million for this water. 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, 2021, WISE water was $5.77 per thousand gallons and such rate will remain in effect through calendar 2021. In addition, the Company pays certain system operational and construction costs. If a WISE member, including the Rangeview District, does not need its WISE water each year or a member needs additional water, the members can trade and/or buy and sell water amongst themselves.

To date, the Company has capitalized the construction funding ~~provided~~ pursuant to the WISE Financing Agreement because the funding has been provided to ~~purchase~~build assets which provide capacity in the WISE infrastructure. The Company’s total investment in the WISE ~~assets~~infrastructure as of ~~February 28,~~May 31, 2021, is ~~$6.2~~$6.3 million.

Additionally, the Rangeview District has entered into an agreement with WISE to construct a special facility during fiscal 2021. Pure Cycle will fund the construction of the special facility and Rangeview will remit 100% of the reimbursement revenue to Pure Cycle.

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 ~~February 28,~~May 31, 2021). The maturity date of the loan is December 31, 2020, at which time it will automatically renew for another ~~12 month~~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. Of the ~~February 28,~~May 31, 2021 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 million. 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

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~~4 employees of the Company and ~~one~~1 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 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. Any advances not paid or reimbursed by the Sky Ranch CAB by December 31, 2058 for first phase and December 31, 2060 for the second phase, shall be deemed forever discharged and satisfied in full.

~~Index~~

As of ~~February 28,~~May 31, 2021, the balance of the Company’s advances for improvements, including interest, net of reimbursements from the Sky Ranch CAB, to the Sky Ranch CAB totaled ~~$21.5~~$21.3 million. 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 which have been certified by

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an independent third-party. Previously, the reimbursable expenditures funded by the Company were expensed through Land development construction costs and project management revenue and interest income were not recognized as the reimbursement was deemed contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonable assured. Additionally, the Sky Ranch CAB is contractually obligated to utilize any available funds not otherwise pledged to payment of previously issued bonds, used for operation and maintenance expenses, or otherwise encumbered, to reimburse the Company. As the collectability of reimbursable expenditures incurred to date for the first development phase of Sky Ranch is determined to be probable, the Company has recognized the remaining ~~$21.5~~reimbursable costs, project management fees, and interest. The Company recognized an increase of $0.6 million ~~as Notes~~to the Note receivable – related party ~~and recognized $1.6 million as~~with the offsetting entry being to Project management revenue ~~$1.0 million as Interest~~and other income ~~and $18.9 million as Other income.~~ during the three months ended May 31, 2021, for a note receivable balance of $21.3 million. For the second phase and beyond, the Company will continue to assess the collectability of reimbursable public improvement expenditures. The Sky Ranch CAB has an obligation to repay the Company but the ability of the Sky Ranch CAB to repay the Company before the contractual termination of December 31, 2060 is dependent upon the establishment of a tax base or other fee generating activities sufficient to recover reimbursable costs incurred. Costs incurred will be recognized as Land development inventories or Notes receivable – related party, dependent upon whether collectability is deemed to be reasonably assured.

In addition to the note receivable balance of $21.3 million, the Sky Ranch CAB is obligated to refund the Company $0.5 million for the reimbursement of construction costs from the South Metropolitan Water Supply Authority (“SMWSA”). These costs will be distributed to the Sky Ranch CAB upon the acceptance of the stormwater infrastructure by SMWSA in calendar year 2021. The Company records this reimbursable cost in Trade accounts receivable, net.

Refer to Note 34 - 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 the advance. As of the ~~February 28,~~May 31, 2021 and August 31, 2020, the balances included in Notes receivable – related parties, related to the Operation Funding Agreement are immaterial.

NOTE 910 – SIGNIFICANT CUSTOMERS

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 in aggregate, Crestone Peak Resources (oil & gas operations) and the WISE partnership related to a special facilities construction project. 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 1011 – ACCRUED LIABILITIES

February 28, 2021 August 31, 2020
(In thousands)
Accrued compensation $ 268 $ 767
Due to the Sky Ranch CAB - related party 193 1,169
Land development - warranty and other - related party 181 —
Other operating payables 91 353
Operating lease obligations 81 74
WISE water 66 69
Property taxes 36 72
Professional fees 21 56
Due to Rangeview - related party - 43
Total $ 937 $ 2,603


	May 31, 2021		August 31, 2020

	(In thousands)
Due to the Sky Ranch CAB - related party	$	514	$	1,169
Accrued compensation		464		767
Other operating payables		320		353
WISE water		115		69
Land development - warranty and other - related party		120		0
Operating lease obligations		82		74
Property taxes		43		72
Professional fees		46		56
Due to Rangeview - related party		0		43
Total	$	1,704	$	2,603

NOTE 1112 – COMMITMENTS AND CONTINGENCIES

The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a material loss contingency when its occurrence is probable and damages can be

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reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and experience in contesting, litigating and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows. The Company is involved in certain legal proceedings as in the ordinary course of adjudicating and protecting its water and water rights. The Company had no contingencies where the risk of material loss was reasonably possible as of ~~February 28,~~May 31, 2021, or August 31, 2020.

~~Index~~

NOTE 1213 – SEGMENT INFORMATION

~~Because of~~

Based on the methods used by the Chief Operating Decision Maker (the “CODM”) to allocate resources, the Company has identified ~~two~~2 operating segments which meet GAAP segment disclosure requirements, namely the water and wastewater resource development segment and the land development segment. A third segment, Build-to-Rent (“BTR”), will be presented once material to operations.

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 ~~six~~nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020, 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 May 31, 2021
	Water and
	wastewater
	resource
	development		Land development		Corporate		Total

	(In thousands)
Total revenue	$	2,198	$	468	$	0	$	2,666
Cost of revenue		(483)		(99)		0		(582)
Depreciation and depletion		(358)		0		0		(358)
Total cost of revenue		(841)		(99)		0		(940)
Gross profit	$	1,357	$	369	$	0	$	1,726


	Three Months Ended May 31, 2020
	Water and
	wastewater
	resource
	development		Land development		Corporate		Total

	(In thousands)
Total revenue	$	1,154	$	696	$	0	$	1,850
Cost of revenue		(164)		(556)		0		(720)
Depreciation and depletion		(386)		0		0		(386)
Total cost of revenue		(550)		(556)		0		(1,106)
Gross profit	$	604	$	140	$	0	$	744

Three Months Ended February 28, 2021

Water and
wastewater resource
development

Land
development
Corporate Total
(In thousands)
Total revenue $ 2,676 $ 2,063 $ — $ 4,739

Cost of revenue (640 ) (269 ) — (909 )
Depreciation and depletion (354 ) — — (354 )
Total cost of revenue (994 ) (269 ) — (1,263 )
Gross margin $ 1,682 $ 1,794 $ — $ 3,476

Three Months Ended February 29, 2020

Water and
wastewater resource
development

Land
development
Corporate Total
(In thousands)
Total revenue $ 1,254 $ 2,265 $ — $ 3,519

Cost of revenue (248 ) (1,817 ) — (2,065 )
Depreciation and depletion (383 ) — — (383 )
Total cost of revenue (631 ) (1,817 ) — (2,448 )
Gross margin $ 623 $ 448 $ — $ 1,071

Six Months Ended February 28, 2021

Water and
wastewater resource
development

Land
development
Corporate Total
(In thousands)
Total revenue $ 5,188 $ 4,419 $ — $ 9,607

Cost of revenue (1,301 ) (1,988 ) — (3,289 )
Depreciation and depletion (719 ) — — (719 )
Total cost of revenue (2,020 ) (1,988 ) — (4,008 )
Gross margin $ 3,168 $ 2,431 $ — $ 5,599

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~~Index~~

Six Months Ended February 29, 2020

Water and
wastewater resource
development

Land
development
Corporate Total
(In thousands)
Total revenue

$
3,172

$
10,807

$
—

$
13,979

Cost of revenue

(552
)

(9,880
)

—

(10,432
)
Depreciation and depletion

(602
)

—

—

(602
)
Total cost of revenue
(1,154
)

(9,880
)

—

(11,034
)
Gross margin

$
2,018

$
927

$
—

$
2,945


	Nine Months Ended May 31, 2021
	Water and
	wastewater
	resource
	development		Land development		Corporate		Total

	(In thousands)
Total revenue	$	7,386	$	4,887	$	0	$	12,273
Cost of revenue		(1,785)		(2,087)		0		(3,872)
Depreciation and depletion		(1,077)		0		0		(1,077)
Total cost of revenue		(2,862)		(2,087)		0		(4,949)
Gross profit	$	4,524	$	2,800	$	0	$	7,324


	Nine Months Ended May 31, 2020
	Water and
	wastewater
	resource
	development		Land development		Corporate		Total

	(In thousands)
Total revenue	$	4,326	$	11,503	$	0	$	15,829
Cost of revenue		(716)		(10,436)		0		(11,152)
Depreciation and depletion		(988)		0		0		(988)
Total cost of revenue		(1,704)		(10,436)		0		(12,140)
Gross profit	$	2,622	$	1,067	$	0	$	3,689

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, cash equivalents and restricted cash, equipment, and related party notes receivables.

February 28, 2021 August 31, 2020
(In thousands)
Water and wastewater resource development
$
54,949

$
56,267

Land development
6,338

6,975

Corporate
47,239

26,519

Total assets
$
108,526

$
89,761


	May 31, 2021		August 31, 2020

	(In thousands)
Water and wastewater resource development	$	55,832	$	56,267
Land development		28,897		6,975
Corporate		24,381		26,519
Total assets	$	109,110	$	89,761

NOTE 1314 – INCOME TAXES

The income tax provision for interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items. As of ~~February 28,~~May 31, 2021 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. There is a potential for volatility of the effective tax rate due to various factors.

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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. Income tax information for the three and ~~six~~nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020 are as follows:

Three Months Ended Six Months Ended

February 28,
2021

February 29,
2020

February 28,
2021

February 29,
2020

(In thousands)
Effective income tax rate
24.7
%

22.3
%

24.7
%

24.6
%
Income tax expense (benefit):
Current
$
5,723

$
76

$
5,856

$
1,244

Deferred
(56
)

3

71

722

Total
$
5,667

$
79

$
5,927

$
1,966

Income taxes paid:
Federal
$
—

$
877

$
—

$
877

State
—

194

—

194

Total
$
—

$
1,071

$
—

$
1,071


	Three Months Ended						Nine Months Ended
	May 31,			May 31,			May 31,			May 31,
	2021			2020			2021			2020

	(In thousands)
Effective income tax rate		24.7	%		24.8	%		24.7	%		24.6	%
Income tax expense (benefit):
Current	$	(394)		$	21		$	5,283		$	1,265
Deferred		552			(12)			623			710
Total	$	158		$	9		$	5,906		$	1,975
Income taxes paid:
Federal	$	0		$	212		$	0		$	1,089
State		0			22			0			216
Total	$	—		$	234		$	—		$	1,305

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 liability as of ~~February 28,~~May 31, 2021 and August 31, 2020 are as follows:

February 28, 2021 August 31, 2020
Deferred tax assets (liabilities): (In thousands)
Depreciation and depletion
(1,654
)

(1,701
)
Non-qualified stock options
522

491

Accrued compensation
66

167

Deferred revenues
64

89

Other
45

45

Net operating loss carryforwards
$
—

$
23

Net deferred tax liability
$
(957
)

$
(886
)


	May 31, 2021		August 31, 2020

	(In thousands)
Deferred tax assets (liabilities):
Depreciation and depletion		(2,244)		(1,701)
Non-qualified stock options		528		491
Accrued compensation		98		167
Deferred revenues		52		89
Other		57		45
Net operating loss carryforwards	$	0	$	23
Net deferred tax liability	$	(1,509)	$	(886)

~~Index~~

NOTE 1415 – 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~~NaN options were excluded ~~totaled 0 and 130,000~~ for the three and ~~six~~nine months ended ~~February 28,~~May 31, 2021. ~~There were no~~The excluded options totaled 180,000 and 0 for the three and ~~six~~nine months ended ~~February 29,~~May 31, 2020.


	Three Months Ended				Nine Months Ended
	May 31,		May 31,		May 31,		May 31,
	2021		2020		2021		2020

	(In thousands, except share and per share amounts)
Net income	$	624	$	27	$	18,276	$	6,064
Basic weighted average common shares		23,907,140		23,852,765		23,885,179		23,841,876
Effect of dilutive securities		277,255		200,055		219,229		229,142
Weighted average shares applicable to diluted earnings per share		24,184,395		24,052,820		24,104,408		24,071,018
Earnings per share - basic	$	0.03	$	0.00	$	0.77	$	0.25
Earnings per share - diluted	$	0.03	$	0.00	$	0.76	$	0.25

Three Months Ended Six Months Ended

February 28,
2021

February 29,
2020

February 28,
2021

February 29,
2020

(In thousands, except share and per share amounts)
Net income
$
17,352

$
274

$
18,197

$
6,037

Basic weighted average common shares
23,881,655

23,846,265

23,874,198

23,836,431

Effect of dilutive securities
210,693

263,273

190,216

243,685

Weighted average shares applicable to diluted earnings per share
24,092,349

24,109,538

24,064,414

24,080,116

Earnings per share - basic
$
0.73

$
0.01

$
0.76

$
0.25

Earnings per share - diluted
$
0.72

$
0.01

$
0.76

$
0.25

~~NOTE 15 – SUBSEQUENT EVENT~~

The Company announced in March 2021 the launch of a new line of business which will be referred to as Build-to-Rent (“BTR”). BTR is expected to represent as a separate reporting segment and will be presented once material. Previously reported financial information for the current segments will not change as a result of the new segment.

During the initial development phase of Sky Ranch, the Company retained ownership of three residential lots, on which the Company has begun building three single family homes which Pure Cycle will own, maintain and rent to qualified renters. The Company has contracted out the construction to a local construction company and expects these three homes to be completed and ready for renters in the fall of 2021. After the successful completion and operational start up of the three houses in the first phase, the Company intends to expand this BTR line in the second development phase of Sky Ranch by building and renting homes on the 106 lots that were not sold to the Company's home builder partners. Grading on the second phase of Sky Ranch has begun, and once complete the Company will look to partner with certain builders to construct additional BTR units as the second development phase of Sky Ranch is completed.

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~~Index~~

~~Item 2.~~

~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in the 2020 Annual Report, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition and should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in the 2020 Annual Report.

Our Business

We are a diversified water resource and land development company. At our core, we are an innovative and vertically integrated wholesale water and wastewater service provider which also develops land we own into master planned communities, to which we will continue to provide water and wastewater services as well as operate long-term build-to-rent properties. We have accumulated valuable water and land interests over the past 30 years and have developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial and industrial customers in the Denver metropolitan region. Our primary land asset, Sky Ranch, is located in one of the most active development areas in the Denver metropolitan region along the quickly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses.

Although we currently report our results of operations in two segments, our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable and value-added business enterprise. We will separately present the Build-to-Rent segment once material.

Water and Wastewater

Water resources throughout the western United States and more prominently in Colorado are a scarce and valuable resource. Our portfolio of 29,500 acre-feet is comprised of groundwater and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, multiple water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services.

We provide wholesale water and wastewater service to local governments, including the Rangeview Metropolitan District (the “Rangeview District”), Arapahoe County, the Sky Ranch Community Authority Board (the “Sky Ranch CAB”), and the Elbert and Highway 86 Commercial Metropolitan District (the “Elbert 86 District”). Our mission is to provide sustainable, reliable, high quality water to our customers and collect, treat, and reuse wastewater using advance water treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we proactively manage our valuable water rights in the water-scarce Denver, Colorado region. We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate on behalf of governmental entities. We also design, permit, construct, operate and maintain retail distribution and collection systems that we own or operate on behalf of our governmental customers. Additionally, we handle administrative functions, including meter reading, billing and collection of monthly water and wastewater revenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to the Colorado Department of Public Health and Environment.

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Land Development

Our Land Development segment is primarily focused on actively developing the Sky Ranch Master Planned Community located along the booming I-70 corridor to provide residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,400 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is zoned to include over two million square feet of retail, commercial and light industrial space, which is the equivalent of 1,600 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units. Our land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver “ready to build” finished lots to home builders and commercial customers. Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots. Additionally, pursuant to certain agreements with the Sky Ranch metropolitan districts, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which costs are reimbursed to us by the Sky Ranch CAB, through funds generated by the Sky Ranch districts through taxes, fees or the issuance of municipal bonds.

~~Index~~

Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments efficiently, and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments.

In June 2017, we entered into separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we agreed to sell 506 total single-family, detached residential lots at the Sky Ranch property. We are obligated, pursuant to these contracts, to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities).

As of ~~February 28,~~May 31, 2021, we have incurred ~~$34.9~~$35.3 million of the total estimated $35.8 million in costs related to the development of the first phase of Sky Ranch. We anticipate the majority of the remaining ~~$0.9~~$0.5 million, of which $0.4 million is estimated to be reimbursable, will be incurred during our remaining fiscal 2021. These amounts include estimated reimbursable costs of ~~$32.4~~$32.2 million, for which we received a partial reimbursement of $10.5 million through proceeds from municipal bonds and an additional payment of $0.4 million of unencumbered funds resulting from a budget surplus in 2020. We believe the outstanding ~~$21.5~~$21.3 million of remaining reimbursables from the Sky Ranch CAB will be paid from future fees, taxes, and municipal bonds as the project continues to grow its assessed value and tax base. As homes at Sky Ranch have sold faster than anticipated (as of May 31, 2021 there are approximately 330 homes sold and occupied in the first development phase) and assessed values have exceeded early estimates, the Sky Ranch CAB has developed an established tax basis and has the intent and ability to issue municipal bonds. As such, the collectability of these reimbursables is deemed probable. ~~As such, we have~~The Company recognized an increase of $0.3 million to the ~~remaining $21.5 million of reimbursables as a Notes~~Note receivable – related party ~~and recognized $1.6 million as~~with the offsetting entry recorded to Project management revenue ~~$1.0 million as Interest income,~~ and ~~$18.9 million as Other~~other income during the three ~~and six~~ months ended ~~February 28, 2021.~~May 31, 2021, for a note receivable balance of $21.3 million. As of ~~February 28,~~May 31, 2021, we have recognized ~~$35.9~~$36.3 million of the sales price contracted for with the home builders and the remaining ~~$0.9~~$0.5 million is expected to be recognized as revenue in our remaining fiscal 2021. In addition, from the start of development at Sky Ranch through ~~February 28,~~May 31, 2021, the Sky Ranch development produced ~~$11.5~~$13.3 million of water and wastewater tap fees, and we expect that an additional ~~$3.4~~$1.5 million of tap fees will be received during calendar 2021.

In November 2020 and February 2021, we entered into separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company) and Challenger Homes to sell 789 single-family attached and detached residential lots at the Sky Ranch property. This next development phase of Sky Ranch will incorporate approximately 250 acres and is planned to be completed in four sub-phases. Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an approximate 30% increase in our lot price from $75,000 for a 50’ lot in phase one to $97,000 for the same 50’ lot in the first subphase of the second phase. 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 February 2021, we began construction on the second development phase at Sky Ranch, which is expected to include nearly 900 residential lots. We expect delivery of platted lots to begin in the fourth quarter of fiscal 2021 and continue steadily over the next several years. The 100+ lots not currently under contract to home builders are being retained for use as build-to-rent long-term rental properties, as described below.

~~Build-to-Rent~~

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~~During the three months ended February 28, 2021, as~~

Build-to-Rent

As announced in March 2021, we launched a new line of business which will be referred to as our Build-to-Rent (“BTR”) line of business. During our initial development phase of Sky Ranch, we retained ownership of three residential lots, on which we have begun building three single family homes which we will own, maintain and rent to qualified renters. We have contracted ~~out~~for the construction toof the homes with a reputable construction company and we expect these three homes to be completed and ready for renters in the fall of 2021. Foundations and framing of the homes are complete and construction is progressing, on schedule and on budget.

After the successful completion of the three houses in the first phase, we intend to expand this BTR line in our second development phase of Sky Ranch by building and renting homes on the 100+ lots we did not sell to our home builder partners. Grading on the second phase of Sky Ranch has begun, and once complete we will look to partner with certain builders to construct our BTR units as the second development phase of Sky Ranch is completed.

~~Index~~

Recent Developments

As the coronavirus (“COVID-19”) pandemic continues, we have continued to enforce many safety measures enacted to protect the health and well-being of our employees, customers, business partners, and their families. WeWhile state and local mandates have ~~implemented~~been eased, we continue to encourage voluntary vaccinations and ~~adjusted~~healthy practices such as ~~necessary staggered in-office work hours for various staff to ensure we can maintain proper~~hand washing, disinfecting, social distancing, ~~we require~~and face coverings ~~in all indoor settings as well as~~ when ~~employees are unable to maintain proper distance while working outside, and we have enhanced our cleaning and disinfecting activities.~~necessary. We have been able to maintain our level of efficiency with the use of video conferencing and electronic data sharing platforms. We were informed that our builder customers also took precautionary measures to ensure the safety of their employees, customers, business partners, and their families. These measures varied by builder. As a result, some of our builder customers reported material net housing order declines in 2020. However, they are also reporting material increases in orders since the stay-at-home orders have been reduced. We had been expecting to accelerate deliveries of the remaining finished lots at Sky Ranch into fiscal 2020; however, because of the COVID-19 precautionary measures and stay-at-home orders, we delivered the remaining lots during the first quarter of fiscal 2021. These deliveries were still ahead of the original delivery dates set forth in our contracts with the home builders by nearly two years. The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring governmental agencies due to expansive work restrictions imposed on their operations. We expect COVID-19 to continue to play a role in potential delays related to the second filing at Sky Ranch due to rapidly changing governmental orders, city and country shutdowns, and public health concerns. Mainly, we have experienced delays in the permitting process through the ~~county.~~county which has delayed the revenue recognition of the Phase two of the Sky Ranch development.

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Results of Operations

Executive Summary

The results of our operations for the three and ~~six~~nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020 are as follows:

Consolidated Results of Operations


	Three Months Ended
					$ Change
	May 31,		May 31,		Increase/
	2021		2020		(Decrease)		% Change

	(In thousands, except for water and lot deliveries and taps sold)
Water and wastewater resource development revenue	$	2,198	$	1,154	$	1,044	90	%
Land development revenue		468		696		(228)	(33)	%
Total revenue		2,666		1,850		816	44	%

Water and wastewater development cost of revenue		(841)		(550)		291	53	%
Land development cost of revenue		(99)		(556)		(457)	(82)	%
Total cost of revenue		(940)		(1,106)		(166)	(15)	%

General and administrative expense		(1,398)		(887)		511	58	%
Other income, net		454		179		275	154	%
Income taxes		(158)		(9)		149	1,656	%
Net income	$	624	$	27	$	597	2,211	%

Basic EPS	$	0.03	$	—	$	0.03	—	%
Diluted EPS	$	0.03	$	—	$	0.03	—	%

Water delivered (thousands of gallons)		16,541		12,205		4,336	36	%
Water and wastewater taps sold		59		36		23	64	%

Three Months Ended

February 28,
2021

February 29,
2020

$ Change
Increase/
(Decrease)
% Change
(In thousands, except for water and lot deliveries and taps sold)
Water and wastewater resource development revenue
$
2,676

$
1,254

$
1,422

113
%
Land development revenue
2,063

2,265

(202
)

(9
)%
Total revenue
4,739

3,519

1,220

35
%

Water and wastewater development cost of revenue
(994
)

(631
)

363

58
%
Land development cost of revenue
(269
)

(1,817
)

(1,548
)

(85
)%
Total cost of revenue
(1,263
)

(2,448
)

(1,185
)

(48
)%

General and administrative expense
(1,418
)

(1,132
)

286

25
%
Other income, net
20,961

414

20,547

4,963
%
Income taxes
(5,667
)

(79
)

5,588

7,073
%
Net income
$
17,352

$
274

$
17,078

6,233
%

Basic EPS
$
0.73

$
0.01

$
0.72

7,200
%
Diluted EPS
$
0.72

$
0.01

$
0.71

7,100
%

Water delivered (thousands of gallons)
5,820

4,011

1,809

45
%
Water and wastewater taps sold
51

45

6

13
%
Lots delivered
—

20

(20
)

(100
)%

Table of Contents

~~Index~~


													Nine Months Ended
																	$ Change
													May 31,		May 31,		Increase/
													2021		2020		(Decrease)		% Change
	Six Months Ended
	February 28, 2021			February 29, 2020			$ Change Increase/ (Decrease)			% Change
	(In thousands, except for water and lot deliveries and taps sold)
													(In thousands, except for water and lot deliveries and taps sold)
Water and wastewater resource revenue	$	5,188		$	3,172		$	2,016			64	%	$	7,386	$	4,326	$	3,060	71	%
Land development revenue		4,419			10,807			(6,388	)		(59	)%		4,887		11,503		(6,616)	(58)	%
Total revenue		9,607			13,979			(4,372	)		(31	)%		12,273		15,829		(3,556)	(22)	%


Water and wastewater resource cost of revenue		(2,020	)		(1,154	)		866			75	%		(2,862)		(1,704)		1,158	68	%
Land development cost of revenue		(1,988	)		(9,880	)		(7,892	)		(80	)%		(2,087)		(10,436)		(8,349)	(80)	%
Total cost of revenue		(4,008	)		(11,034	)		(7,026	)		(64	)%		(4,949)		(12,140)		(7,191)	(59)	%


General and administrative expense		(2,588	)		(2,018	)		570			28	%		(3,986)		(2,905)		1,081	37	%
Other income, net		21,113			7,076			14,037			198	%		20,844		7,255		13,589	187	%
Income taxes		(5,927	)		(1,966	)		3,961			201	%		(5,906)		(1,975)		3,931	199	%
Net income	$	18,197		$	6,037		$	12,160			201	%	$	18,276	$	6,064	$	12,212	201	%


Basic EPS	$	$ 0.76		$	$ 0.25		$	$ 0.51			204	%	$	0.77	$	0.25	$	0.52	208	%
Diluted EPS	$	$ 0.76		$	$ 0.25		$	$ 0.51			204	%	$	0.76	$	0.25	$	0.51	204	%


Water delivered (thousands of gallons)		109,712			20,012			89,700			448	%		126,253		32,394		93,859	290	%
Water and wastewater taps sold		87			96			(9	)		(9	)%		146		139		7	5	%
Lots delivered		22			136			(114	)		(84	)%		22		136		(114)	(84)	%

Three months ended ~~February 28,~~May 31, 2021 vs. Three months ended ~~February 29,~~May 31, 2020

Revenue – Total revenue increased in 2021 as compared to 2020, primarily ~~as a result of the recognition of project management revenues from the first phase of Sky Ranch,~~due to increased water and wastewater tap sales, ~~recognition of a forfeited~~increased municipal water ~~reserve agreement,~~usage, and a special facility construction project for ~~WISE,~~WISE. These increases were partially offset by decreased land development sales ~~as a result of~~due to phase one being nearly complete almost two years ahead of schedule and phase two not yet recognizing revenue until platted lots are delivered, which is expected in ~~early summer.~~

the fourth fiscal quarter of 2021.

Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily ~~as a result of a decrease~~due to decreases in land development costs ~~as a result of~~due to phase one being nearly complete. Phase two costs are currently being capitalized as inventories until revenue recognition ~~begins,~~begins. These decreases were partially offset by increased water and wastewater service costs primarily due to additional WISE water purchases.

General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily due to increased head count of five full time employees in 2020 and increased legal and professional fees due to the second development phase at Sky Ranch.

Other income, net – Other income, net increased in 2021 as compared to 2020, primarily due to interest income recognized on the outstanding note receivable related to reimbursable costs.

Income tax expense – Income tax expense increased in 2021 as compared to 2020, primarily due to the recognition of reimbursable costs due from the Sky Ranch CAB.

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased Export water usage, related to increased irrigation water usage, new Sky Ranch and Wild Pointe customers and increased landscaping and irrigation water usage in these neighborhoods.

Water and wastewater tap sales – Water and wastewater tap sales increased in 2021 as compared to 2020 due to timing of closings at Sky Ranch. Tap sales are driven by home closings and are not contractually established with the builders.

Table of Contents

Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020

Revenue – Revenue decreased in 2021 as compared to 2020, primarily due to decreased land development sales due to phase one being nearly complete and phase two not yet recognizing revenue until platted lots are delivered, which is expected in the fourth fiscal quarter. This decrease is partially offset by increased metered water usage from oil and gas operations, recognition of project management revenue from the first phase at Sky Ranch, recognition of a forfeited water reserve agreement, and a special facility construction project for WISE.

Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily due to a decrease in land development costs due to phase one being nearly complete and phase two costs are currently being capitalized until revenue recognition begins. The decreases were partially offset by costs attributable to the special facility construction project for ~~WISE.~~

WISE and increased water usage related to oil and gas operations.

General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily ~~as a result of~~due to increased head ~~count. Pure Cycle added five full time employees~~count in ~~2020~~2021 as operations ~~have increased~~ and development ~~has continued.~~

continue to expand.

Other income, net – Other income, net increased in 2021 as compared to 2020, primarily ~~as a result~~due to the recognition of ~~2021~~ outstanding reimbursable costs being recognized. The reimbursable costs are no longer contingent and have been recognized as a Note receivable – related party, Interest income, Project management revenue, and Other income, consistent with bond proceeds received in November 2019.

costs.

Income tax expense – Income tax expense increased in 2021 as compared to 2020, primarily ~~as a result of~~due to the recognition of reimbursable costs due from the Sky Ranch CAB.

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily ~~as a result of~~due to increased oil and gas operations, new Sky Ranch customers and ~~Wild Pointe customers, partially offset by decreased On Site water usage as a result of winter~~increased landscaping and ~~less~~ irrigation water usage.

Water and wastewater tap sales – Water and wastewater tap sales increased in 2021 as compared to 2020 due to the timing of closings at Sky Ranch. Tap sales are driven by building permits and are not contractually established with the builders.

Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of fiscal 2021. We have broken ground on the second phase and expect lot deliveries to begin this fall.

~~Six~~

Table of Contents

Water and Wastewater Resource Development Results of Operations


	Three Months Ended
					$ Change
	May 31,		May 31,		Increase/
	2021		2020		(Decrease)		% Change

	(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage	$	188	$	98	$	90	92	%
Oil and gas operations usage		22		15		7	47	%
Wastewater treatment fees		51		22		29	132	%
Water and wastewater tap fees		1,856		1,005		851	85	%
Other revenue		81		14		67	479	%
Total segment revenue		2,198		1,154		1,044	90	%

Water service costs		(316)		(95)		221	233	%
Wastewater service costs		(102)		(62)		40	65	%
Depreciation		(358)		(386)		(28)	(7)	%
Other		(65)		(7)		58	829	%
Total expenses		(841)		(550)		291	53	%

Segment operating income	$	1,357	$	604	$	753	125	%

Water deliveries (thousands of gallons)
On Site		475		1,702		(1,227)	(72)	%
Export - Commercial		4,827		583		4,244	728	%
Sky Ranch		7,389		5,549		1,840	33	%
Wild Pointe		3,850		4,371		(521)	(12)	%
O&G operations		—		—		—	—	%
Total water deliveries		16,541		12,205		4,336	36	%

Table of Contents


	Nine Months Ended
					$ Change
	May 31,		May 31,		Increase/
	2021		2020		(Decrease)		% Change

	(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage	$	429	$	238	$	191	80	%
Oil and gas operations usage		1,804		72		1,732	2,406	%
Wastewater treatment fees		144		62		82	132	%
Water and wastewater tap fees		4,522		3,850		672	17	%
Other revenue		487		104		383	368	%
Total segment revenue		7,386		4,326		3,060	71	%

Water service costs		(1,074)		(556)		518	93	%
Wastewater service costs		(258)		(126)		132	105	%
Depreciation		(1,077)		(988)		89	9	%
Other		(453)		(34)		419	1,232	%
Total expenses		(2,862)		(1,704)		1,158	68	%

Segment operating income	$	4,524	$	2,622	$	1,902	73	%

Water deliveries (thousands of gallons)
On Site		3,715		8,416		(4,701)	(56)	%
Export - Commercial		7,276		2,619		4,657	178	%
Sky Ranch		22,044		6,271		15,773	252	%
Wild Pointe		13,052		14,160		(1,108)	(8)	%
O&G operations		80,166		928		79,238	8,539	%
Total water deliveries		126,253		32,394		93,859	290	%

Three months ended ~~February 28,~~May 31, 2021 vs. ~~Six~~Three months ended ~~February 29,~~May 31, 2020

Municipal water usage – Municipal water usage increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment as well as increased water usage due to landscaping and irrigation usage.

Wastewater treatment fees – Wastewater treatment fees increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment.

Water and wastewater tap fees –Water and wastewater tap fees increased in 2021 as compared to 2020, primarily due to increased taps sold and increased prices, on average, of water and wastewater taps. During the three months ended May 31, 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the three months ended May 31, 2020. During the third quarter of fiscal 2021, we sold 59 water and wastewater taps. During the third quarter of fiscal 2020, we sold 36 water and wastewater taps.

Other revenue – Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, which is recognizing revenue on a percent of completion basis and increased consulting revenues.

Water service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to the purchase of additional WISE water.

Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to the new Sky Ranch water reclamation facility being online for the entire quarter and requiring more staff to run.

~~Revenue~~

Table of Contents

Other costs of revenue – ~~Revenue~~Other costs of revenue increased in 2021 as compared to 2020, primarily due to costs to construct a special facility for WISE.

Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020

Oil and gas operations – Oil and gas operations increased in 2021 as compared to 2020, primarily due to increased oil and gas prices and new fracking permits obtained by our oil and gas customers and recognition of a forfeited water reserve agreement totaling $0.4 million.

Wastewater treatment fees – Wastewater treatment fees increased in 2021 as compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment.

Water and wastewater tap fees –Water and wastewater tap fees increased in 2021 as compared to 2020, primarily due to an increase in the number of taps sold and increased price, on average, of water and wastewater taps. During the nine months ended May 31, 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the nine months ended May 31, 2020. During the nine months ended May 31, 2021, we sold 146 water and wastewater taps. During the same nine months ended May 31, 2020, we sold 139 water and wastewater taps.

Other revenue – Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, for which $0.4 million of revenue was recognized. The project is recognizing revenue on a percent of completion basis.

Water service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to increased water usage associated with our oil and gas customers and additional purchases of WISE water.

Other costs of revenue – Other costs of revenue increased in 2021 as compared to 2020, primarily due to costs to construct a special facility for WISE.

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage.

Table of Contents

Land Development Results of Operations


	Three Months Ended
					$ Change
	May 31,		May 31,		Increase/
	2021		2020		(Decrease)		% Change

	(In thousands, except for lots delivered)
Lot sales	$	445	$	696	$	(251)	(36)	%
Project management revenue		23		—		23	—
Total revenue		468		696		(228)	(33)	%

Land development construction		(97)		(506)		(409)	(81)	%
Sky Ranch property tax		(2)		(50)		(48)	(96)	%
Total costs of revenue		(99)		(556)		(457)	(82)	%

Segment operating income	$	369	$	140	$	229	164	%

Lots delivered		—		—		—	—	%


	Nine Months Ended
					$ Change
	May 31,		May 31,		Increase/
	2021		2020		(Decrease)		% Change

	(In thousands, except for lots delivered)
Lot sales	$	3,316	$	11,503	$	(8,187)	(71)	%
Project management revenue		1,571		—		1,571	—
Total revenue		4,887		11,503		(6,616)	(58)	%

Land development construction		(2,074)		(10,190)		(8,116)	(80)	%
Sky Ranch property tax		(13)		(246)		(233)	(95)	%
Total costs of revenue		(2,087)		(10,436)		(8,349)	(80)	%

Segment operating income	$	2,800	$	1,067	$	1,733	162	%

Lots delivered		22		136		(114)	(84)	%

Three months ended May 31, 2021 vs. Three months ended May 31, 2020

Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily ~~as a result of decreased land development sales as a result of~~due to phase one being nearly ~~complete~~complete. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates due to the timing of revenue recognition as lots are delivered over time. Revenues recognized in the third quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase. The second development phase ~~two~~will not ~~yet~~begin recognizing revenue until platted lots are delivered to the home builders, which is expected to begin in ~~early summer, partially offset by~~the fourth fiscal quarter of 2021.

Project management revenues – Project management revenues increased ~~metered water usage from oil and gas operations, recognition of project management revenue~~in 2021 as compared to 2020 due to the determination that reimbursable costs due from the ~~first phase at~~ Sky Ranch ~~recognition of~~CAB are deemed collectable based on Sky Ranch having a ~~forfeited water reserve agreement, and a special facility~~sufficient tax base.

Land development construction ~~project for WISE.~~

~~Cost of revenue~~costs – ~~Costs of revenue~~Land development construction costs decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. Phase two costs are currently being capitalized as inventories until revenue recognition begins.

Sky Ranch property taxes –Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily due to the improved lots being sold to the homebuilders. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use. All 506 of the initial lots have been sold to home builders.

Table of Contents

Nine months ended May 31, 2021 vs. Nine months ended May 31, 2020

Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily due to phase one being nearly complete. We will not begin recognizing revenue on phase two until platted lots are delivered to the home builders, which is expected to begin in the fourth fiscal quarter of 2021. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates due to the timing of revenue recognition as lots are delivered over time. Revenues recognized in the third quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase.

Project management revenues – Project management revenues increased in 2021 as compared to 2020 due to the determination that reimbursable costs due from the Sky Ranch CAB are deemed collectable based on Sky Ranch having a ~~result of a decrease~~sufficient tax base.

Land development construction costs – Land development construction costs decreased in ~~land development costs~~2021 as ~~a result of~~compared to 2020, primarily due to phase one being nearly complete. Phase two costs are currently being capitalized until revenue recognition ~~begins, partially offset by costs attributable to the special facility construction project for WISE and increased water usage related to oil and gas operations.~~

~~General and administrative expense~~begins.

Sky Ranch property taxes –~~General and administrative expense increased~~Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily ~~as a result of increased head count. Pure Cycle added five full time employees~~due to the improved lots being sold to the homebuilders. Our current basis in ~~2020 as operations have increased and development has continued.~~

~~Index~~

~~Other income, net –~~ Other income, net increased in 2021 as compared to 2020, primarily as a result of 2021 outstanding reimbursable costs being recognized. The reimbursable costs are no longer contingent and have been recognized as a Note receivable – related party, Interest income, Project management revenue, and Other income, consistent with bond proceeds received in November 2019.

~~Income tax expense –~~ ~~Income tax expense increased in 2021 as compared to 2020, primarily as a result of the recognition of reimbursable costs due from~~ the Sky Ranch ~~CAB.~~

~~Water delivered –~~ ~~Water deliveries increased in 2021~~land is low as ~~compared to 2020, primarily as a result of increased oil~~the land is not yet improved for residential and ~~gas operations and increased Sky Ranch customers.~~

~~Water and wastewater tap sales –~~ Water and wastewater tap sales decreased in 2021 as compared to 2020 as a result of timing of closings at Sky Ranch. Tap sales are driven by home closings and are not contractually established with the builders.

commercial use.

~~Water and Wastewater Resource Development Results of Operations~~

Three Months Ended

February 28,
2021

February 29,
2020

$ Change
Increase/
(Decrease)
% Change
(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage
$
74

$
37

$
37

100
%
Oil and gas operations usage
583

20

563

2,815
%
Wastewater treatment fees
51

20

31

155
%
Water and wastewater tap fees
1,583

1,173

410

35
%
Other revenue
385

4

381

9,525
%
Total segment revenue
2,676

1,254

1,422

113
%

Water service costs
(213
)

(207
)

6

3
%
Wastewater service costs
(64
)

(38
)

26

68
%
Depreciation
(354
)

(383
)

(29
)

(8
)%
Other
(363
)

(3
)

360

12,000
%
Total expenses
(994
)

(631
)

363

58
%

Segment operating income
$
1,682

$
623

$
1,059

170
%

Water deliveries (thousands of gallons)
On Site
599

1,211

(612
)

(51
)%
Export - Commercial
95

259

(164
)

(63
)%
Sky Ranch
2,357

349

2,008

575
%
Wild Pointe
2,707

2,012

695

35
%
O&G operations
62

180

(118
)

(66
)%
Total water deliveries
5,820

4,011

1,809

45
%

~~Index~~

Six Months Ended

February 28,
2021

February 29,
2020

$ Change
Increase/
(Decrease)
% Change
(In thousands, except for water deliveries)
Metered water usage from:
Municipal water usage
$
241

$
140

$
101

72
%
Oil and gas operations usage
1,782

57

1,725

3,026
%
Wastewater treatment fees
93

40

53

133
%
Water and wastewater tap fees
2,666

2,845

(179
)

(6
)%
Other revenue
406

90

316

351
%
Total segment revenue
5,188

3,172

2,016

64
%

Water service costs
(758
)

(461
)

297

64
%
Wastewater service costs
(156
)

(64
)

92

144
%
Depreciation
(719
)

(602
)

117

19
%
Other
(387
)

(27
)

360

1,333
%
Total expenses
(2,020
)

(1,154
)

866

75
%

Segment operating income
$
3,168

$
2,018

$
1,150

57
%

Water deliveries (thousands of gallons)
On Site
3,240

6,671

(3,431
)

(51
)%
Export - Commercial
2,448

1,903

545

29
%
Sky Ranch
14,655

722

13,933

1,930
%
Wild Pointe
9,202

9,788

(586
)

(6
)%
O&G operations
80,166

928

79,238

8,539
%
Total water deliveries
109,711

20,012

89,699

448
%

~~Three months ended February 28, 2021 vs. Three months ended February 29, 2020~~

~~Municipal water usage –~~ ~~Municipal water usage increased in 2021 as compared to 2020, primarily as a result of new Sky Ranch customers in our water and wastewater resource development segment.~~

~~Oil and gas operations –~~ Oil and gas operations increased in 2021 as compared to 2020, primarily as a result of recognition of a forfeited water reserve agreement totaling $0.4 million and increased oil and gas activity in our service area.

~~Wastewater treatment fees –~~ ~~Wastewater treatment fees increased in 2021 as compared to 2020, primarily as a result of new Sky Ranch customers in our water and wastewater resource development segment.~~

~~Water and wastewater tap fees –~~Water and wastewater tap fees increased in 2021 as compared to 2020, primarily as a result of increased price, on average, of water and wastewater taps. During the three months ended February 28, 2021, the average price of a Sky Ranch water and wastewater tap was $31 thousand per tap, compared to $26 thousand per tap for the three months ended February 29, 2020. During the second quarter of fiscal 2021, we sold 51 water and wastewater taps. During the second quarter of fiscal 2020, we sold 45 water and wastewater taps.

~~Other revenue –~~ Other revenue increased in 2021 as compared to 2020, primarily as a result of a 2021 agreement to construct a special facility for WISE, for which $0.4 million of revenue was recognized. The project is recognizing revenue on a percent of completion basis.

~~Wastewater service costs –~~ Wastewater service costs increased in 2021 as compared to 2020, primarily as a result of the new Sky Ranch water reclamation facility being online for the entire quarter and requiring more staff to run.

~~Other costs of revenue –~~ ~~Other costs of revenue increased in 2021 as compared to 2020, primarily as a result of costs to construct a special facility for WISE.~~

~~Water delivered –~~ Water deliveries increased in 2021 as compared to 2020, primarily as a result of increased Sky Ranch and Wild Pointe customers, partially offset by decreased On Site water usage as a result of winter and less irrigation water usage.

~~Six months ended February 28, 2021 vs. Six months ended February 29, 2020~~

~~Oil and gas operations –~~ Oil and gas operations increased in 2021 as compared to 2020, primarily as a result of increased oil and gas prices and new fracking permits obtained by our oil and gas customers and recognition of a forfeited water reserve agreement totaling $0.4 million.

~~Index~~

~~Water service costs –~~ ~~Wastewater service costs increased in 2021 as compared to 2020, primarily as a result of increased water usage associated with our oil and gas customers.~~

~~Other costs of revenue –~~ ~~Other costs of revenue increased in 2021 as compared to 2020, primarily as a result of costs to construct a special facility for WISE.~~

~~Water delivered –~~ ~~Water deliveries increased in 2021 as compared to 2020, primarily as a result of increased oil and gas operations and increased Sky Ranch customers.~~

~~Land Development Results of Operations~~

Three Months Ended

February 28,
2021

February 29,
2020

$ Change
Increase/
(Decrease)
% Change
(In thousands, except for lots delivered)
Lot sales
$
515

$
2,265

$
(1,750
)

(77
)%
Project management revenue
1,548

—

1,548

—

Total revenue
2,063

2,265

(202
)

(9
)%

Land development construction
(233
)

(1,645
)

(1,412
)

(86
)%
Sky Ranch property tax
(36
)

(172
)

(136
)

(79
)%
Total costs of revenue
(269
)

(1,817
)

(1,548
)

(85
)%

Segment operating income
$
1,794

$
448

$
1,346

300
%

Lots delivered
—

20

(20
)

(100
)%

Six Months Ended

February 28,
2021

February 29,
2020

$ Change
Increase/
(Decrease)
% Change
(In thousands, except for lots delivered)
Lot sales
$
2,871

$
10,807

$
(7,936
)

(73
)%
Project management revenue
1,548

—

1,548

—

Total revenue
4,419

10,807

(6,388
)

(59
)%

Land development construction
(1,944
)

(9,684
)

(7,740
)

(80
)%
Sky Ranch property tax
(44
)

(196
)

(152
)

(78
)%
Total costs of revenue
(1,988
)

(9,880
)

(7,892
)

(80
)%

Segment operating income
$
2,431

$
927

$
1,504

162
%

Lots delivered
22

136

(114
)

(84
)%

~~Three months ended February 28, 2021 vs. Three months ended February 29, 2020~~

~~Lot sales –~~ Lot sales decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates as a result of the timing of revenue recognition as lots are delivered over time. Revenues recognized in the second quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase. The second development phase will not begin recognizing revenue until platted lots are delivered to the home builders.

~~Project management revenues –~~ Project management revenues increased in 2021 as compared to 2020 as a result of the determination that reimbursable funds due from the Sky Ranch CAB are no longer contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. These revenues increased Notes receivable – related party.

~~Index~~

~~Land development construction costs –~~ Land development construction costs decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete. Phase two costs are currently being capitalized until revenue recognition begins.

~~Sky Ranch property taxes –~~Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily as a result of the improved lots being sold to the homebuilders. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use.

~~Lots delivered –~~ Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of fiscal 2021. We have broken ground on the second phase and expect lot deliveries to begin this fall.

~~Six months ended February 28, 2021 vs. Six months ended February 29, 2020~~

~~Lot sales –~~ Lot sales decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete. Phase two will not yet begin recognizing revenue until platted lots are delivered to the home builders. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates as a result of the timing of revenue recognition as lots are delivered over time. Revenues recognized in the second quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase. The second development phase will not begin recognizing revenue until platted lots are delivered to the home builders.

Liquidity, Capital Resources and Financial Position

As of ~~February 28,~~May 31, 2021, our working capital, defined as current assets less current liabilities, was $16.5 million, which included ~~$20.8~~$19.8 million in cash and cash equivalents, of which, $0.3 million is restricted. We believe that as of ~~February 28,~~May 31, 2021 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next twelve months. Our expected obligations of ~~$17~~$22.6 million for the next twelve months are described below.

Sky Ranch Development

The first phase at Sky Ranch is nearing completion, with approximately ~~$0.9~~$0.5 million remaining ~~obligations.~~to be spent. We broke ground on the second phase in February 2021. We estimate total costs to complete the second phase of Sky Ranch to be ~~$66~~$65 million. Of this, we anticipate ~~to spend~~spending approximately ~~$15~~$21 million in the next twelve months and we anticipate receiving approximately ~~$12~~$22.5 million in milestone payments from the home builders over the same period. We believe future revenues from water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.

ECCV Capacity Operating System

The Rangeview District may purchase water produced from East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board system. ECCV’s Land Board system is comprised of eight wells and more than 10 miles of buried water pipeline located on the Lowry Range. In May 2012, we entered into an agreement to operate and maintain the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing of oil and gas wells. Our costs associated with the use of the ECCV system are a flat fee of eight thousand dollars per month from January 1, 2013 through December 31, 2020, and decreased to three thousand dollars per month effective January 1, 2021 through April 2032. Additionally, we pay a fee per 1,000 gallons of water produced from the ECCV’s system, which is included in the water usage fees charged to customers. The ECCV system is anticipated to continue to cost us approximately ten thousand dollars per month to maintain going forward.

~~Index~~

South Metropolitan Water Supply Authority (“SMWSA”) and the Water Infrastructure Supply Efficiency Partnership (“WISE”)

We have entered into a financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE. We anticipate that we will be investing $1.1 million in 2021 and $7.5 million in total for the fiscal years 2022 through 2025 to fund the

Table of Contents

Rangeview District’s obligation to purchase water and infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding the Rangeview District’s obligations in WISE, we will have the sole right to use and reuse the Rangeview District’s 9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue from such service. Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and 900 acre feet per year of water.

Summary Cash Flows Table

Six Months Ended
February 28, 2021 February 29, 2020 $ Change % Change
(In thousands)
Cash (used) provided by:
Operating activities
$
(87
)

$
16,542

$
(16,629
)

(101
)%
Investing activities
$
(959
)

$
(1,156
)

$
197

17
%
Financing activities
$
12

$
31

$
(19
)

(61
)%


	Nine Months Ended
	May 31, 2021		May 31, 2020		$ Change		% Change

	(In thousands)
Cash (used) provided by:
Operating activities	$	193	$	15,204	$	(15,011)	(99)	%
Investing activities	$	(2,253)	$	(2,643)	$	(390)	(15)	%
Financing activities	$	59	$	36	$	23	64	%

Changes in Operating Activities – Operating activities include revenues produced by our segments less costs incurred in the delivery of those services and G&A expenses.

Cash provided by operations decreased in the ~~six~~nine months ended ~~February 28,~~May 31, 2021 compared to 2020, primarily ~~as a result of~~due to the bond payment of $10.5 million we received as partial reimbursement of public improvement expenditures from the Sky Ranch CAB in fiscal 2020 and decreased lot sales in the ~~six~~nine months ended ~~February 28,~~May 31, 2021 as compared to ~~February 29,~~May 31, 2020.

Changes in Investing Activities – During the ~~six~~nine months ended ~~February 28,~~May 31, 2021, investing activities decreased ~~as a result of~~due to decreased investments in water, water systems, and land as compared to the ~~six~~nine months ended ~~February 29,~~May 31, 2020, partially offset by net sales of short-term investments in fiscal 2020.

Changes in Financing Activities – Cash provided by financing activities ~~decreased~~increased in 2021 from 2020, ~~as a result of decreased~~due to increased stock option exercises.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA as described in Note 67 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply to the accompanying condensed consolidated financial statements. The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of Export Water, the amounts and timing of which are not reasonably determinable.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies and estimates are described in “Critical Accounting Policies and Estimates” within Item 7 ~~“Management's~~“Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended August 31, 2020 and Note 2 of the Notes to Consolidated Financial Statements in “Financial Statements and Supplementary Data” included as Item 8 in our Annual Report on Form 10-K for the year ended August 31, 2020. With the exception of updates to significant accounting policies discussed in Note 1 of this Quarterly Report on Form 10-Q, the accounting policies and estimates used in preparing our interim condensed consolidated financial statements for the three and ~~six~~nine months ended ~~February 28,~~May 31, 2021 are the same as those described in our Annual Report on Form 10-K for the year ended August 31, 2020. There have been no changes to our critical accounting policies during the quarter ended ~~February 28,~~May 31, 2021. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended August 31, 2020.

Table of Contents

~~Index~~

Recently Adopted and Issued Accounting Pronouncements

See Note 1 – Presentation of Interim Information to the accompanying condensed consolidated financial statements for recently adopted and issued accounting pronouncements.

Disclosure Regarding Forward-Looking Statements

Statements that are not historical facts contained in or incorporated by reference into this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Forward-Looking Statements” and “Risk Factors” in Part II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.

~~Index~~

~~Item 3.~~

~~Quantitative and Qualitative Disclosures About Market Risk~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

~~Item 4.~~

~~Controls and Procedures~~

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. The President and the Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures as of ~~February 28,~~May 31, 2021, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the President and the Chief Financial Officer each concluded that, ~~as of the end of~~during the period covered by this report, ~~the Company’s~~our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were ~~effective.~~not effective due to a material weakness in internal controls over financial reporting resulting from ineffective controls related to the management preparation and review of spreadsheets which compromised the integrity of the spreadsheets used to support and record transactions related to the public improvement reimbursable amounts and related interest income.

To address this material weakness, management has devoted, and plans to continue to devote, significant effort and resources to the remediation and improvement of its internal control over financial reporting by implementing additional steps in the review process of various complex schedules that support accounting entries on a monthly and quarterly basis or moving these manual tracking and reconciliation processes to a purchase software system.

~~Colorado~~		~~84-0705083~~
Colorado		84-0705083
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


34501 E. Quincy Avenue, Bldg. 34, Watkins, CO		80137
(Address of principal executive offices)		(Zip Code)


Common Stock 1/3 of $.01 par value	PCYO	The NASDAQ Stock Market
(Title of each class)	~~(Trading~~ (Trading Symbol(s))	(Name of each exchange on which registered)


Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐


Common stock, 1/3 of $.01 par value		~~23,905,644~~ 23,910,133
(Class)		(Number of Shares)

		~~Page~~
		Page

PART I. FINANCIAL INFORMATION		1

	Item 1. Condensed Consolidated Financial Statements	1

	Condensed Consolidated Balance Sheets: ~~February 28,~~ May 31, 2021 (unaudited) and August 31, 2020	1

	Condensed Consolidated Statements of Operations and Comprehensive Income (unaudited): For the three and ~~six~~nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020	2

	Condensed Consolidated Statements of Shareholders’ Equity (unaudited): For the three and ~~six~~nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020	3

	Condensed Consolidated Statements of Cash Flows (unaudited): For the ~~six~~nine months ended ~~February 28,~~May 31, 2021 and ~~February 29,~~ 2020	5

	Notes to Condensed Consolidated Financial Statements	6

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19 22

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	29 34

	Item 4. Controls and Procedures	29 34

PART II. OTHER INFORMATION		30 36

	Item 6. Exhibits	30 36

SIGNATURES		31 37

	February 28, 2021 (unaudited)			August 31, 2020
	(In thousands, except share and per share amounts)
ASSETS:
Current assets:
Cash, cash equivalents and restricted cash	$	20,763		$	21,797
Trade accounts receivable, net		1,385			1,124
Prepaid expenses and other assets		445			1,001
Land development inventories:
Land development - Phase 1		—			481
Land development - Phase 2		151			—
Public improvement reimbursables - Phase 2		315			—
Income taxes receivable		—			1,588
Total current assets		23,059			25,991

Investments in water and water systems, net		54,737			55,087
Land and mineral interests		5,055			4,915
Other assets		2,440			2,042
Notes receivable - related parties, including accrued interest:
Public improvement reimbursables - Phase 1		21,466			—
Other		1,159			1,079
Long-term land investment		451			451
Operating leases - right of use assets, less current portion		159			196
Total assets	$	108,526		$	89,761

LIABILITIES:
Current liabilities:
Accounts payable	$	137		$	180
Accrued liabilities		563			1,391
Accrued liabilities - related parties		374			1,212
Income taxes payable		4,267			—
Deferred lot sale revenues		995			1,635
Deferred oil and gas lease payment and water sales payment		191			1,800
Total current liabilities		6,527			6,218

Deferred oil and gas lease payment and water sales payment, less current portion		69			165
Participating interests in export water supply		326			328
Deferred tax liability		957			886
Lease obligations - operating leases, less current portion		79			120
Total liabilities		7,958			7,717

Commitments and contingencies

SHAREHOLDERS’ EQUITY:
Preferred stock:
Series B - par value $0.001 per share, 25 million shares authorized; 432,513 shares issued and outstanding (liquidation preference of $432,513)		—			—
Common stock:
Par value 1/3 of $.01 per share, 40 million shares authorized; 23,888,375 and 23,856,098 shares outstanding, respectively		80			80
Additional paid-in capital		173,254			172,927
Accumulated deficit		(72,766	)		(90,963	)
Total shareholders’ equity		100,568			82,044
Total liabilities and shareholders’ equity	$	108,526		$	89,761


	May 31, 2021
	(unaudited)		August 31, 2020

	(In thousands, except share and
	per share amounts)
ASSETS:
Current assets:
Cash, cash equivalents and restricted cash	$	19,796	$	21,797
Trade accounts receivable, net		1,933		1,124
Prepaid expenses and other assets		528		1,001
Land development inventories:
Land development - Phase 1		0		481
Land development - Phase 2		172		0
Public improvement reimbursables - Phase 2		444		0
Income taxes receivable		0		1,588
Total current assets		22,873		25,991

Investments in water and water systems, net		55,140		55,087
Land and mineral interests		5,625		4,915
Other assets		2,390		2,042
Notes receivable – related parties, including accrued interest:
Public improvement reimbursables - Phase 1		21,316		0
Other		1,174		1,079
Long-term land investment		451		451
Operating leases - right of use assets, less current portion		141		196
Total assets	$	109,110	$	89,761

LIABILITIES:
Current liabilities:
Accounts payable	$	208	$	180
Accrued liabilities		1,070		1,391
Accrued liabilities - related parties		634		1,212
Income taxes payable		3,695		0
Deferred lot sale revenues		550		1,635
Deferred oil and gas lease payment and water sales payment		253		1,800
Total current liabilities		6,410		6,218

Deferred oil and gas lease payment and water sales payment, less current portion		22		165
Participating interests in export water supply		325		328
Deferred tax liability		1,509		886
Lease obligations - operating leases, less current portion		58		120
Total liabilities		8,324		7,717

Commitments and contingencies

SHAREHOLDERS’ EQUITY:
Preferred stock:
Series B – par value $0.001 per share, 25 million shares authorized; 432,513 shares issued and outstanding (liquidation preference of $432,513)		—		—
Common stock:
Par value 1/3 of $.01 per share, 40 million shares authorized; 23,910,133 and 23,856,098 shares outstanding, respectively		80		80
Additional paid-in capital		173,393		172,927
Accumulated other comprehensive income		—		0
Accumulated deficit		(72,687)		(90,963)
Total shareholders’ equity		100,786		82,044
Total liabilities and shareholders’ equity	$	109,110	$	89,761

	Three Months Ended						Six Months Ended
	February 28, 2021			February 29, 2020			February 28, 2021			February 29, 2020
Revenues:	(In thousands, except per share amounts)
Metered water usage from:
Municipal customers	$	74		$	37		$	241		$	140
Oil and gas operations		583			20			1,782			57
Wastewater treatment fees		51			20			93			40
Water and wastewater tap fees		1,583			1,173			2,666			2,845
Lot sales		515			2,265			2,871			10,807
Project management fees - recognized		1,548			—			1,548			—
Special facility projects and other		385			4			406			90
Total revenues		4,739			3,519			9,607			13,979

Expenses:
Water service operations		(213	)		(207	)		(758	)		(461	)
Wastewater service operations		(64	)		(38	)		(156	)		(64	)
Land development construction costs		(269	)		(1,817	)		(1,988	)		(9,880	)
Depletion and depreciation		(354	)		(383	)		(719	)		(602	)
Other		(363	)		(3	)		(387	)		(27	)
Total cost of revenues		(1,263	)		(2,448	)		(4,008	)		(11,034	)
Gross profit		3,476			1,071			5,599			2,945

General and administrative expenses		(1,342	)		(1,037	)		(2,428	)		(1,838	)
Depreciation		(76	)		(95	)		(160	)		(180	)
Operating income (loss)		2,058			(61	)		3,011			927

Other income:
Recognition of public improvement reimbursables - related party		18,894			—			18,894			—
Interest income		1,448			84			1,463			138
Reimbursement of construction costs - related party		485			—			485			6,276
Oil and gas royalty income, net		76			269			151			539
Oil and gas lease income, net		48			61			100			123
Other		10			—			20			—
Income from operations before income taxes		23,019			353			24,124			8,003
Income tax expense		(5,667	)		(79	)		(5,927	)		(1,966	)
Net income	$	17,352		$	274		$	18,197		$	6,037
Unrealized holding losses		—			—			—			(4	)
Total comprehensive income	$	17,352		$	274		$	18,197		$	6,033

Earnings per common share:
Basic	$	0.73		$	0.01		$	0.76		$	0.25
Diluted	$	0.72			0.01		$	0.76			0.25

Weighted average common shares outstanding:
Basic		23,882			23,846			23,874			23,836
Diluted		24,092			24,110			24,064			24,080


	Three Months Ended May 31, 2021
									Accumulated
							Additional		Other
	Preferred Stock			Common Stock			Paid-in		Comprehensive		Accumulated
	Shares	Amount		Shares	Amount		Capital		Income (Loss)		Deficit		Total

	(In thousands)
February 28, 2021 balance:	433	$	0	23,888	$	80	$	173,254	$	0	$	(72,766)	$	100,568
Prior period adjustment	—		—	—		—		—		—		(545)		(545)
Stock option exercises	0		0	22		0		48		0		0		48
Stock granted for services	0		0	0		0		0		0		0		0
Share-based compensation	0		0	0		0		91		0		0		91
Net income	0		0	0		0		0		0		624		624
May 31, 2021 balance:	433	$	0	23,910	$	80	$	173,393	$	0	$	(72,687)	$	100,786

	Three Months Ended February 28, 2021
	Preferred Stock				Common Stock				Additional Paid-in		Accumulated Other Comprehensive		Accumulated
	Shares		Amount		Shares		Amount		Capital		Income (Loss)		Deficit			Total
	(In thousands)
November 30, 2020 balance:		433	$	—		23,868	$	80	$	173,013	$	—	$	(90,118	)	$	82,975
Stock option exercises		—		—		8		—		14		—		—			14
Stock granted for services		—		—		12		—		136		—		—			136
Share-based compensation		—		—		—		—		91		—		—			91
Net income		—		—		—		—		—		—		17,352			17,352
February 28, 2021 balance:		433	$	—		23,888	$	80	$	173,254	$	—	$	(72,766	)	$	100,568

	Three Months Ended February 29, 2020
	Preferred Stock				Common Stock				Additional Paid-in		Accumulated Other Comprehensive		Accumulated
	Shares		Amount		Shares		Amount		Capital		Income (Loss)		Deficit			Total
	(In thousands)
November 30, 2019 balance:		433	$	—		23,827	$	79	$	172,466	$	—	$	(91,950	)	$	80,595
Stock option exercises		—		—		13		—		35		—		—			35
Stock granted for services		—		—		12		—		149		—		—			149
Share-based compensation		—		—		—		—		99		—		—			99
Net income		—		—		—		—		—		—		274			274
February 29, 2020 balance:		433	$	—		23,852	$	79	$	172,749	$	—	$	(91,676	)	$	81,152

	Six Months Ended February 28, 2021
	Preferred Stock				Common Stock				Additional Paid-in		Accumulated Other Comprehensive		Accumulated
	Shares		Amount		Shares		Amount		Capital		Income (Loss)		Deficit			Total
	(In thousands)
August 31, 2020 balance:		433	$	—		23,856	$	80	$	172,927	$	—	$	(90,963	)	$	82,044
Stock option exercises		—		—		20		—		14		—		—			14
Stock granted for services		—		—		12		—		136		—		—			136
Share-based compensation		—		—		—		—		177		—		—			177
Net income		—		—		—		—		—		—		18,197			18,197
February 28, 2021 balance:		433	$	—		23,888	$	80	$	173,254	$	—	$	(72,766	)	$	100,568

	Six Months Ended February 29, 2020
	Preferred Stock				Common Stock				Additional Paid-in		Accumulated Other Comprehensive			Accumulated
	Shares		Amount		Shares		Amount		Capital		Income (Loss)			Deficit			Total
	(In thousands)
August 31, 2019 balance:		433	$	—		23,827	$	79	$	172,361	$	4		$	(97,713	)	$	74,731
Stock option exercises		—		—		13		—		35		—			—			35
Stock granted for services		—		—		12		—		149		—			—			149
Share-based compensation		—		—		—		—		204		—			—			204
Net income		—		—		—		—		—		—			6,037			6,037
Unrealized holding loss on investments		—		—		—		—		—		(4	)		—			(4	)
February 29, 2020 balance:		433	$	—		23,852	$	79	$	172,749	$	—		$	(91,676	)	$	81,152


	For the Three Months Ended February 28, 2021


	As Reported		Adjustments		As Adjusted

	(In thousands)
Statement of Operations
Other Income
Recognition of public improvement reimbursables including interest income - related party	$	20,327	$	(723)	$	19,604

Income tax expense	$	(5,667)	$	178	$	(5,489)

Net Income	$	17,352	$	(545)	$	16,807

Earnings per common share - Diluted	$	0.72	$	(0.02)	$	0.70

Weighted average common shares outstanding - Diluted		24,092		24,092		24,092

	For the Six Months Ended February 28, 2021


	As Reported		Adjustments		As Adjusted

	(In thousands)
Statement of Operations
Other Income
Recognition of public improvement reimbursables including interest income - related party	$	20,327	$	(723)	$	19,604

Income tax expense	$	(5,927)	$	178	$	(5,749)

Net Income	$	18,197	$	(545)	$	17,652

Earnings per common share - Diluted	$	0.76	$	(0.02)	$	0.74

Weighted average common shares outstanding - Diluted		24,064		24,064		24,064


	As of February 28, 2021

	Balance
	As Reported		Adjustments		As Adjusted

	(In thousands)
Balance Sheet
Assets
Public improvement reimbursables - Phase 1	$	21,466	$	(723)	$	20,743
Liabilities
Income taxes payable	$	4,267	$	(178)	$	4,089
Equity
Accumulated deficit	$	(72,766)	$	(545)	$	(73,311)

	As of February 28, 2021
	Costs incurred to date		Payments repaid by Sky Ranch CAB		Amounts payable to Pure Cycle by the Sky Ranch CAB
	(In thousands)
Phase 1
Public improvements	$	28,565	$	10,505	$	18,060
Accrued interest		1,433		400		1,033
Project management services		1,539		—		1,539
Construction support activities		834		—		834
Phase 1 reimbursable costs	$	32,371	$	10,905	$	21,466

Phase 2
Public improvements	$	315	$	—	$	315
Phase 2 reimbursable costs	$	315	$	—	$	315

	February 28, 2021		August 31, 2020
	(In thousands)
Land development segment	$	995	$	1,636
Water and wastewater resource development segment		260		1,965
Balance, end of period	$	1,255	$	3,601

	February 28, 2021					August 31, 2020
	Costs		Accumulated Depreciation and Depletion			Costs		Accumulated Depreciation and Depletion
	(In thousands)
Rangeview water supply	$	14,573	$	(16	)	$	14,570	$	(15	)
Sky Ranch water rights and other costs		7,336		(995	)		7,499		(981	)
Fairgrounds water and water system		2,900		(1,283	)		2,900		(1,239	)
Rangeview water system		16,960		(1,157	)		15,948		(789	)
Water supply – Other		7,548		(1,274	)		7,550		(1,116	)
Wild Pointe service rights		1,632		(741	)		1,632		(708	)
Sky Ranch pipeline		5,727		(698	)		5,727		(602	)
Lost Creek water supply		3,374		—			3,372		—
Construction in progress		851		—			1,339		—
Totals		60,901		(6,164	)		60,537		(5,450	)
Net investments in water and water systems	$	54,737				$	55,087

	As of February 28, 2021			As of August 31, 2020
	(In thousands)
Operating leases - right of use assets	$	159		$	196

Accrued liabilities	$	81		$	74
Lease obligations - operating leases, net of current portion		79			120
Total lease liability	$	160		$	194

Weighted average remaining lease term (in years)		1.9			2.4
Weighted average discount rate		6	%		6	%

	Number of Options			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Approximate Aggregate Intrinsic Value (in thousands)
Outstanding at August 31, 2020		661,500		$	7.23		6.17	$	1,831
Granted		115,000		$	9.00
Exercised		(5,000	)		2.76
Net settlement exercised		(24,500	)	$	3.07
Outstanding at February 28, 2021		747,000		$	7.64		6.68		3,078

Options exercisable at February 28, 2021		528,667		$	6.78		5.61		2,634

	Number of Options			Weighted Average Grant Date Fair Value
Non-vested options outstanding at August 31, 2020		179,999		$	4.31
Granted		115,000		$	3.78
Vested		(76,666	)	$	4.27
Forfeited (a)		—		$	—
Non-vested options outstanding at February 28, 2021		218,333		$	4.04

	Three Months Ended February 28, 2021
	Water and wastewater resource development			Land development			Corporate		Total
	(In thousands)
Total revenue	$	2,676		$	2,063		$	—	$	4,739

Cost of revenue		(640	)		(269	)		—		(909	)
Depreciation and depletion		(354	)		—			—		(354	)
Total cost of revenue		(994	)		(269	)		—		(1,263	)
Gross margin	$	1,682		$	1,794		$	—	$	3,476

	Six Months Ended
	February 28, 2021			February 29, 2020			$ Change			% Change
	(In thousands)
Cash (used) provided by:
Operating activities	$	(87	)	$	16,542		$	(16,629	)		(101	)%
Investing activities	$	(959	)	$	(1,156	)	$	197			17	%
Financing activities	$	12		$	31		$	(19	)		(61	)%

~~Exhibit~~ ~~Number~~		~~Description~~
Exhibit Number		Description
~~3.1~~
3.1		Articles of Incorporation of the Company. Incorporated by reference to Appendix B to the Proxy Statement on Schedule 14A filed on December 14, ~~2007.~~2007.

3.2		Bylaws of the Company. Incorporated by reference to Appendix C to the Proxy Statement on Schedule 14A filed on December 14, 2007.

31.1		Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

31.2		Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *

32.1		Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

32.2		Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **

101.INS		Inline XBRL Instance Document. *

101.SCH		Inline XBRL Taxonomy Extension Schema Document. *

101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document. *

101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document. *

101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document. *

101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document. *

104		Cover page formatted as inline XBRL and contained in Exhibit 101


/s/ Kevin B. McNeill
Kevin B. McNeill
Vice President and Chief Financial Officer

~~April 14,~~ July 9, 2021