UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-Q
 
☑
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: May 31, 20172018
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission file number 0-8814
 
PURE CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
PURE CYCLE CORPORATION
(Exact name of registrant as specified in its charter)
Colorado 84-0705083
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
34501 E. Quincy Avenue, Bldg. 34, Box 10, Watkins, CO 80137
(Address of principal executive offices) (Zip Code)
 
(303) 292 – 3456
(Registrant’s telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐
 ☐
Accelerated filer
 ☑
☒
Non-accelerated filer
 ☐
 Smaller reporting company
 ☐
(Do not check if a smaller reporting company)Smaller reporting company ☐
Emerging growth company
☐

If an emerging growth company, indicate by check mark if the registrant has elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act [ ]☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑☒
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of July 06, 2017:6, 2018:
 
Common stock, 1/3 of $.01 par value
23,764,098
 23,754,098
(Class)
 (Number(Number of Shares)
 

PURE CYCLE CORPORATION
INDEX TO MAY 31, 20162018 FORM 10-Q

 Page
  
PART I. FINANCIAL INFORMATION
1
  
Item 1. Consolidated Financial Statements
1
  
Consolidated Balance Sheets:
May 31, 20172018 (unaudited) and August 31, 20162017
1
  
Consolidated Statements of Operations and Comprehensive Income (Loss):
For the three and nine months ended May 31, 2018 and 2017 and 2016 (unaudited)
2
  
Consolidated Statement of Shareholders’ Equity:
For the nine months ended May 31, 20172018 (unaudited)
3
  
Consolidated Statements of Cash Flows:
For the nine months ended May 31, 2018 and 2017 and 2016 (unaudited)
4
  
Notes to Consolidated Financial Statements
5

Item 2. Management’s Discussion and Analysis of  Financial Condition and Results of Operations
1920
  
Item 3. Quantitative and Qualitative Disclosures About Market Risk
32
Item 4. Controls and Procedures32
PART II. OTHER INFORMATION33
  
Item 6. Exhibits4. Controls and Procedures
33
  
SIGNATURES
PART II. OTHER INFORMATION
34
Item 6. Exhibits
34
SIGNATURES
35
 
i
Index
PART I – FINANCIAL INFORMATION

Item 1.Consolidated Financial Statements
Item 1.
Consolidated Financial Statements

PURE CYCLE CORPORATION
CONSOLIDATED BALANCE SHEETS

ASSETS: May 31, 2018  August 31, 2017 
  (unaudited)    
Current assets:      
Cash and cash equivalents $2,876,152  $5,575,823 
Short-term investments  17,005,914   20,055,345 
Trade accounts receivable  1,218,251   663,762 
Notes receivable - related parties, including accrued interest, current  -   215,504 
Notes receivable, current  173,249   - 
Prepaid expenses and other current assets  1,340,409   503,100 
Inventories  2,074,543   - 
Assets of discontinued operations, net  86,789   110,748 
Total current assets  24,775,307   27,124,282 
         
Long-term investments  189,774   187,975 
Investments in water and water systems, net  35,609,275   34,575,713 
Land and mineral interests  6,075,834   6,248,371 
Notes receivable - related parties, including accrued interest  2,375,352   776,364 
Other assets  654,027   424,226 
Assets of discontinued operations held for sale  450,641   450,641 
Total assets $70,130,210  $69,787,572 
         
LIABILITIES:        
Current liabilities:        
Accounts payable $269,025  $492,410 
Accrued liabilities  379,336   380,852 
Deferred revenues, current  -   55,800 
Deferred oil and gas lease payment, current  55,733   - 
Liabilities of discontinued operations  5,559   11,165 
Total current liabilities  709,653   940,227 
         
Deferred revenues, less current portion  -   999,688 
Deferred oil and gas lease payment, less current portion  74,311   - 
Participating Interests in Export Water Supply  339,406   341,558 
Total liabilities  1,123,370   2,281,473 
         
SHAREHOLDERS’ EQUITY:        
Preferred stock:        
Series B - par value $.001 per share, 25 million shares authorized;        
432,513 shares issued and outstanding        
(liquidation preference of $432,513)  433   433 
Common stock:        
Par value 1/3 of $.01 per share, 40 million shares authorized;        
23,764,098 and 23,754,098 shares outstanding, respectively  79,218   79,185 
Additional paid-in capital  171,747,662   171,431,486 
Accumulated other comprehensive income (loss)  60,225   (11,105)
Accumulated deficit  (102,880,698)  (103,993,900)
Total shareholders’ equity  69,006,840   67,506,099 
Total liabilities and shareholders’ equity $70,130,210  $69,787,572 
ASSETS:
 
May 31,
2017
 
 
August 31,
2016
 
Current assets:
 
(unaudited)
 
 
 
 
  Cash and cash equivalents
 $5,747,551 
 $4,697,288 
  Short-term investments
  20,232,935 
  23,176,450 
  Trade accounts receivable
  61,554 
  181,006 
  Prepaid expenses
  515,445 
  350,819 
  Assets of discontinued operations
  560,543 
  680,287 
  Total current assets
  27,118,028 
  29,085,850 
 
    
    
Long-term investments
  1,430,177 
  6,853,276 
Investments in water and water systems, net
  34,343,476 
  28,321,926 
Land and mineral interests
  5,618,800 
  5,345,800 
Notes receivable - related parties, including accrued interest
  905,503 
  800,369 
Other assets
  451,072 
  472,393 
  Total assets
 $69,867,056 
 $70,879,614 
 
    
    
LIABILITIES:
    
    
Current liabilities:
    
    
  Accounts payable
 $445,485 
 $160,390 
  Accrued liabilities
  70,807 
  242,624 
  Deferred revenues
  55,800 
  55,800 
  Deferred oil and gas lease payment
  1,000 
  19,000 
  Liabilities of discontinued operations
  8,646 
  4,394 
  Total current liabilities
  581,738 
  482,208 
 
    
    
Deferred revenues, less current portion
  1,013,639 
  1,055,491 
Participating Interests in Export Water Supply
  341,864 
  343,966 
  Total liabilities
  1,937,241 
  1,881,665 
 
    
    
Commitments and contingencies
    
    
 
    
    
SHAREHOLDERS’ EQUITY:
    
    
Preferred stock:
    
    
  Series B - par value $.001 per share, 25 million shares authorized;
    
    
  432,513 shares issued and outstanding
    
    
  (liquidation preference of $432,513)
  433 
  433 
Common stock:
    
    
  Par value 1/3 of $.01 per share, 40 million shares authorized;
    
    
  23,754,098 and 23,754,098 shares outstanding, respectively
  79,185 
  79,185 
Additional paid-in capital
  171,366,275 
  171,198,241 
Accumulated other comprehensive (loss) income
  (23,366)
  3,122 
Accumulated deficit
  (103,492,712)
  (102,283,032)
  Total shareholders' equity
  67,929,815 
  68,997,949 
  Total liabilities and shareholders’ equity
 $69,867,056 
 $70,879,614 

See accompanying Notes to Consolidated Financial Statements
 

1
Index
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(unaudited)

  Three Months Ended May 31,  Nine Months Ended May 31, 
  2018  2017  2018  2017 
Revenues:            
Metered water usage $1,162,570  $47,695  $2,888,913  $379,462 
Wastewater treatment fees  11,675   6,967   32,157   30,516 
Special facility funding recognized  -   10,377   -   31,131 
Water tap fees recognized  -   46,978   49,948   54,125 
Other  37,874   21,991   95,893   74,952 
Total revenues  1,212,119   134,008   3,066,911   570,186 
                 
Expenses:                
Water service operations  (418,280)  (76,878)  (906,899)  (234,444)
Wastewater service operations  (6,632)  (7,509)  (21,303)  (22,478)
Depletion and depreciation  (79,772)  (69,013)  (179,913)  (178,394)
Other  (24,243)  (13,649)  (64,822)  (45,921)
Total cost of revenues  (528,927)  (167,049)  (1,172,937)  (481,237)
Gross profit (loss)  683,192   (33,041)  1,893,974   88,949 
                 
General and administrative expenses  (635,502)  (518,625)  (1,816,110)  (1,411,410)
Depreciation  (135,488)  (79,388)  (380,065)  (227,643)
Operating loss  (87,798)  (631,054)  (302,201)  (1,550,104)
                 
Other income (expense):                
Oil and gas lease income, net  13,933   6,000   37,156   17,265 
Oil and gas royalty income, net  61,113   24,935   152,653   164,338 
Interest income  69,027   59,578   176,001   199,242 
Other  (2,643)  (2,600)  (7,846)  (7,814)
Net income (loss) from continuing operations  53,632   (543,141)  55,763   (1,177,073)
Income (loss) from discontinued operations, net of taxes  969   (11,275)  2,390   (32,607)
Net income (loss) $54,601  $(554,416) $58,153  $(1,209,680)
Unrealized holding gains (losses)  40,613   8,404   71,330   (26,488)
Total comprehensive income (loss) $95,214  $(546,012) $129,483  $(1,236,168)
                 
Basic and diluted net income (loss) per common share                
Income (loss) from continuing operations  *  $(0.02)  *  $(0.05)
Income (loss) from discontinued operations  *   *   *   * 
Net income (loss)  *  $(0.02)  *  $(0.05)
                 
Weighted average common shares outstanding–basic  23,764,098   23,754,098   23,759,654   23,754,098 
Weighted average common shares outstanding–diluted  23,955,046   23,754,098   23,913,863   23,754,098 
 
 
Three Months Ended May 31,
 
 
Nine Months Ended May 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
  Metered water usage
 $47,695 
 $35,659 
 $379,462 
 $119,832 
  Wastewater treatment fees
  6,967 
  10,537 
  30,516 
  31,540 
  Special facility funding recognized
  10,377 
  10,377 
  31,131 
  31,131 
  Water tap fees recognized
  46,978 
  3,574 
  54,125 
  10,721 
  Other
  21,991 
  40,705 
  74,952 
  109,980 
  Total revenues
  134,008 
  100,852 
  570,186 
  303,204 
 
    
    
    
    
Expenses:
    
    
    
    
  Water service operations
  (76,878)
  (65,184)
  (234,444)
  (190,976)
  Wastewater service operations
  (7,509)
  (7,286)
  (22,478)
  (20,555)
  Depletion and depreciation
  (69,013)
  (41,604)
  (178,394)
  (124,834)
  Other
  (13,649)
  (20,763)
  (45,921)
  (51,373)
  Total cost of revenues
  (167,049)
  (134,837)
  (481,237)
  (387,738)
Gross (loss) profit
  (33,041)
  (33,985)
  88,949 
  (84,534)
 
    
    
    
    
General and administrative expenses
  (518,625)
  (431,737)
  (1,411,410)
  (1,294,585)
Depreciation
  (79,388)
  (67,172)
  (227,643)
  (182,999)
Operating loss
  (631,054)
  (532,894)
  (1,550,104)
  (1,562,118)
 
    
    
    
    
Other income (expense):
    
    
    
    
  Oil and gas lease income, net
  6,000 
  31,905 
  17,265 
  354,765 
  Oil and gas royalty income, net
  24,935 
  76,400 
  164,338 
  271,002 
  Interest income
  59,578 
  66,253 
  199,242 
  175,356 
  Other
  (2,600)
  (2,671)
  (7,814)
  (8,004)
  Net loss from continuing operations
  (543,141)
  (361,007)
  (1,177,073)
  (768,999)
  Loss from discontinued operations, net of taxes
  (11,275)
  (61,263)
  (32,607)
  (21,511)
  Net loss
 $(554,416)
 $(422,270)
 $(1,209,680)
 $(790,510)
  Unrealized holding gains (losses)
  8,404 
  (35,517)
  (26,488)
  (23,335)
  Total comprehensive loss
 $(546,012)
 $(457,787)
 $(1,236,168)
 $(813,845)
 
    
    
    
    
  Basic and diluted net income (loss) per common share –
    
    
    
    
  Loss from continuing operations
 $(0.02)
 $(0.02)
 $(0.05)
 $(0.03)
  (Loss) earnings from discontinued operations
  * 
  * 
  * 
  * 
  Net loss
 $(0.02)
 $(0.02)
 $(0.05)
 $(0.03)
 
    
    
    
    
  Weighted average common shares outstanding – basic
  23,754,098 
  23,754,098 
  23,754,098 
  23,795,627 
  Weighted average common shares outstanding – diluted
  23,754,098 
  23,754,098 
  23,754,098 
  23,795,627 
* Amount is less than $.01 per share

See accompanying Notes to Consolidated Financial Statements
 

2
Index
PURE CYCLE CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
Nine months ended May 31, 20172018
(unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
 
Accumulated  
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additional 
 
 
 Other
 
 
 
 
 
 
 
 
 
 Preferred Stock  
 
 
 Common Stock  
 
 
Paid-in 
 
 
Comprehensive 
 
 
Accumulated 
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Loss
 
 
Deficit
 
 
Total
 
August 31, 2016 balance:
  432,513 
 $433 
  23,754,098 
 $79,185 
 $171,198,241 
 $3,122 
 $(102,283,032)
 $68,997,949 
Share-based compensation
  – 
  – 
  – 
  – 
  168,034 
  – 
  – 
  168,034 
Net loss
  – 
  – 
  – 
  – 
  – 
  – 
  (1,209,680)
  (1,209,680)
Unrealized holding loss on investments
  – 
  – 
  – 
  – 
  – 
  (26,488)
  – 
  (26,488)
May 31, 2017 balance:
  432,513 
 $433 
  23,754,098 
 $79,185 
 $171,366,275 
 $(23,366)
 $(103,492,712)
 $67,929,815 

See accompanying Notes to Consolidated Financial Statements

PURE CYCLE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
 
Nine Months Ended May 31,
 
 
 
2017
 
 
2016
 
Cash flows from operating activities:
 
 
 
 
 
 
  Net loss
 $(1,209,680)
 $(790,510)
  Adjustments to reconcile net loss to net cash
    
    
  used in operating activities:
    
    
  Depreciation and depletion
  405,167 
  307,834 
  Investment in Well Enhancement Recover Systems, LLC
  7,652 
  8,004 
  Stock-based compensation expense
  168,034 
  167,061 
  Interest income and other non-cash items
  (26,641)
  (37,299)
  Interest added to receivable from related parties
  (18,316)
  (22,503)
  Changes in operating assets and liabilities:
    
    
  Trade accounts receivable
  119,452 
  248,731 
  Prepaid expenses
  (164,626)
  (145,826)
  Notes receivable - related parties
  (86,818)
  (26,483)
  Accounts payable and accrued liabilities
  (90,322)
  (486,170)
  Income taxes
  - 
  (292,729)
  Deferred revenues
  (41,852)
  (41,852)
  Deferred oil and gas lease payment
  (18,000)
  (354,765)
  Net cash used in operating activities from continuing operations
  (955,950)
  (1,466,507)
  Net cash provided by operating activities from discontinued operations
  116,706 
  1,251,527 
  Net cash used in operating activities
  (839,244)
  (214,980)
 
    
    
Cash flows from investing activities:
    
    
  Sale (purchase) of short-term investments
  8,366,614 
  (23,142,484)
  Purchase of long-term investments
  - 
  (7,026,424)
  Investments in Sky Ranch pipeline
  (4,101,010)
    
  Investments in Sky Ranch land development
  (378,600)
    
  Investments in water, water systems, and land
  (1,918,153)
  (695,746)
  Purchase of property and equipment
  (77,242)
  (441,768)
  Net cash provided by (used in) investing activities from continuing operations
  1,891,609 
  (31,306,422)
  Net cash used in investing activities from discontinued operations
  - 
  (451,347)
  Net cash provided by (used in) investing activities
  1,891,609 
  (31,757,769)
 
    
    
Cash flows from financing activities:
    
    
  Payments to contingent liability holders
  (2,102)
  (1,629)
  Net cash used in financing activities from continuing operations
  (2,102)
  (1,629)
  Net cash provided by financing activities from discontinued operations
  - 
  - 
  Net cash used in financing activities
  (2,102)
  (1,629)
Net change in cash and cash equivalents
  1,050,263 
  (31,974,378)
Cash and cash equivalents – beginning of period
  4,697,288 
  37,089,041 
Cash and cash equivalents – end of period
 $5,747,551 
 $5,114,663 
 
    
    
SUPPLEMENTAL DISCLSOURES OF NON-CASH ACTIVITIES
    
    
  Investment in Sky Ranch pipeline through accounts payable
 $210,889 
 $- 
  Retirement of collateral stock
 $- 
 $1,407,000 
   
 
Preferred Stock
     Common Stock       
Additional
Paid-in
Capital
      
Accumulated
Other
Comprehensive
(Loss) Income
        
Accumulated
Deficit
      Total   
  Shares  Amount  Shares  Amount
August 31, 2017 balance:  432,513  $433   23,754,098  $79,185  $171,431,486  $(11,105) $(103,993,900) $67,506,099 
Stock option exercises          10,000  $33  $74,967           75,000 
Share-based compensation  –   –   –   –   241,209   –   –   241,209 
Adoption of accounting standards  –   –   –   –   –   –   1,055,049   1,055,049 
Net income  –   –   –   –   –   –   58,153   58,153 
Unrealized holding gain on investments  –   –   –   –   –   71,330   –   71,330 
May 31, 2018 balance:  432,513  $433   23,764,098  $79,218  $171,747,662  $60,225  $(102,880,698) $69,006,840 
 
See accompanying Notes to Consolidated Financial Statements
 
43
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS
MAY 31, 2017(unaudited)

  Nine Months Ended May 31, 
  2018  2017 
Cash flows from operating activities:      
Net income (loss) $58,153  $(1,209,680)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and depletion  559,975   405,167 
Equity loss in Well Enhancement Recovery Systems, LLC  7,847   7,652 
Share-based compensation expense  241,209   168,034 
Interest income and other non-cash items  (867)  (26,641)
Interest added to receivable from related parties  (46,377)  (18,316)
Changes in operating assets and liabilities:        
Trade accounts receivable  (554,489)  119,452 
Prepaid expenses  (926,917)  (164,626)
Inventories  (382,554)  - 
Notes receivable - related parties  (62,611)  (86,818)
Notes receivable  (172,698)  - 
Accounts payable and accrued liabilities  (224,901)  (90,322)
Deferred revenues  -   (41,852)
Deferred oil and gas lease payment  130,044   (18,000)
Net cash used in operating activities from continuing operations  (1,374,186)  (955,950)
Net cash provided by operating activities from discontinued operations  17,914   116,706 
Net cash used in operating activities  (1,356,272)  (839,244)
         
Cash flows from investing activities:        
Sale of short-term investments, net  3,118,962   8,366,614 
Issuance of note receivable - related parties  (1,490,000)  - 
Investments in water, water systems, and land  (2,989,567)  (6,397,763)
Purchase of property and equipment  (271,146)  (77,242)
Net cash (used in) provided by investing activities  (1,631,751)  1,891,609 
         
Cash flows from financing activities:        
Proceeds from note receivable - related parties  215,504   - 
Proceeds from the issuance of stock  75,000   - 
Payments to contingent liability holders  (2,152)  (2,102)
Net cash provided by (used in) financing activities  288,352   (2,102)
Net change in cash and cash equivalents  (2,699,671)  1,050,263 
Cash and cash equivalents – beginning of period  5,575,823   4,697,288 
Cash and cash equivalents – end of period $2,876,152  $5,747,551 
         
SUPPLEMMENTAL DISCLOSURE OF NON-CASH ACTIVITIES        
Investment in water assets through accounts payable $-  $210,889 
Transfer of prepaid asset to other asset $89,609  $- 
Transfer of land and mineral interest to inventory $1,691,989  $- 

See accompanying Notes to Consolidated Financial Statements
 
NOTE 1 – PRESENTATION OF INTERIM INFORMATION

The May 31, 20172018 consolidated balance sheet, the consolidated statements of operations and comprehensive income (loss) for the three and nine months ended May 31, 20172018 and 2016,2017, the consolidated statement of shareholders’ equity for the nine months ended May 31, 2017,2018, and the consolidated statements of cash flows for the nine months ended May 31, 20172018 and 20162017 have been prepared by Pure Cycle Corporation (the “Company”) and have not been audited. The unaudited consolidated financial statements include all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows at May 31, 2017,2018, and for all periods presented. As described in Revenue Recognition and Recently Issued Accounting Pronouncements below, the Company early adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the modified retrospective method.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 20162017 (the “2016“2017 Annual Report”) filed with the Securities and Exchange Commission (the “SEC”) on October 28, 2016.November 15, 2017. The results of operations for interim periods presented are not necessarily indicative of the operating results for the full fiscal year. The August 31, 20162017 balance sheet was derived from the Company’s audited consolidated financial statements.

Use of Estimates

The preparation of consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company’s cash equivalents are comprised entirely of money market funds maintained at a financially stablereputable financial institution. At various times during the three and nine months ended May 31, 2017,2018, the Company’s main operating account exceeded federally insured limits. The Company has never suffered a loss due to such excess balance.
 
InvestmentsInventories

ManagementInventories primarily include land held for development and sale. Inventories are stated at cost, less reimbursements.  Capitalized lot development costs at Sky Ranch are costs incurred to construct lots at Sky Ranch that meet the Company’s capitalization criteria for improvements to a lot and are capitalized as incurred, including interest. The Company capitalizes certain legal, engineering, design, permitting, land acquisition, and construction costs related to the development of lots at Sky Ranch. We use the specific identification method for purposes of accumulating land development costs and allocate costs to each lot to determine the cost basis for each lot sale. We will record all land cost of sales when a lot is closed on a lot-by-lot basis.

Investments

Management determines the appropriate classification of its investments in certificates of deposit and debt and equity securities at the time of purchase and reevaluatesre-evaluates such determinations each reporting period.

Certificates of deposit and debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. The Company has $1,430,000$190,000 of investments classified as held-to-maturity at May 31, 2017, that2018, which represent certificates of deposit and U.S. treasury notes with a maturity datesdate after May 31 2018. Certificates of deposit and debt securities, 2019.

Securities that the Company does not have the positive intent or ability to hold to maturity, are classified as available-for-sale, along withincluding certificates of deposit, debt securities and any investments in equity securities.securities, are classified as available-for-sale. Securities classified as available-for-sale are marked-to-market at each reporting period. Changes in value onof such securities are recorded as a component of Accumulated other comprehensive income (loss).The cost of securities sold is based on the specific identification method. The Company’s debtcertificates of deposit and treasury securities mature at various dates through July 2018. March 2019.
 
Concentration of Credit Risk and Fair Value

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash, cash equivalents and investments. From time to time, the Company places its cash in money market instruments, commercial paper obligations, corporate bondscertificates of deposit and U.S. government treasury obligations. To date, the Company has not experienced significant losses on any of these investments.

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

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

Cash and Cash Equivalents – The Company’s cash and cash equivalents are reported using the values as reported by the financial institution where the funds are held. These securities primarily include balances in the Company’s operating and savings accounts. The carrying amounts of cash and cash equivalents approximate fair value.

Trade Accounts Receivable – The carrying amount of the trade accounts receivable approximate their fair value due to the relatively short term nature of the receivables. The Company records accounts receivable net of allowances for uncollectible accounts.

Investments –The carrying amounts of investments are recorded atapproximate fair value. Investments are described further in Note 2 – Fair Value Measurements.

Accounts Payable – The carrying amounts of accounts payable approximate fair value due to the relatively short period to maturity for these instruments.

Long-Term Financial Liabilities– The Comprehensive Amendment Agreement No. 1 (the “CAA”) is comprised of a recorded balance sheet and an off-balance sheet or “contingent” obligation associated with the Company’s acquisition of its “Rangeview Water Supply” (defined in Note 4 – Water and Land Assets toin Part II, Item 8 of the 20162017 Annual Report). The amount payable is a fixed amount but is repayable only upon the sale of “Export Water” (defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 20162017 Annual Report). Because of the uncertainty of the sale of Export Water, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. The CAA is described further in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply.

Notes Receivable – Related Parties–The market value of the Notesnotes receivable – related parties from Rangeview Metropolitan District (“Rangeview”(the “Rangeview District”) and, Sky Ranch Metropolitan District No. 5, and the Sky Ranch Community Authority Board, an entity formed by Sky Ranch Metropolitan District Nos. 1 and 5 (the “CAB”), as described further in Note 6 – Related Party Transactions, are not practical to estimate due to the related party nature of the underlying transactions.

The note receivable – related parties balance primarily relates to the Company funding certain costs related to the development of public improvements, such as drainage improvements, storm water improvements, roadways, curb and gutter improvements, parks and open spaces. These costs are incurred by the CAB and funds for these improvements are advanced by the Company to the CAB under a Project Funding and Reimbursement Agreement which acts as a loan of funds from the Company to the CAB and earns interest at the rate of 6%. As homes are sold, the Sky Ranch Metropolitan Districts will develop assessed value in the community and levy mills against the assessed value to generate property tax revenues to the Sky Ranch Metropolitan Districts that can be used to fund the CAB to repay the Company’s loan advances. These loan advances are recorded as a note receivable and accrue interest from the time of the loan.

Notes Receivable – PCY Holdings, LLC, a wholly owned subsidiary of the Company (“PCY Holdings”) entered into a Twelfth Amendment to contract for Purchase and Sale of Real Estate (the “Twelfth Amendment”) with each of two builders purchasing its lots for sale (each, a “Builder”). The Company’s finished lot improvements obligation for each lot does not include any over-excavation on the property. Each Builder is solely responsible to perform the over-excavation and is granted the right (pursuant to a license agreement to be provided by PCY Holdings) to enter the lots for the purpose of performing the over-excavation. In order to facilitate each Builder’s ability to enter into a over-excavation contract (the “Over-excavation Contract”) with a grading contractor (the “Grading Contractor”), and solely as an accommodation to each Builder, PCY Holdings agreed to make progress payments to the Grading Contractor under the terms of an Over-excavation Contract as such payments become due and payable for work performed the Over-excavation Contract through and until the first to occur of the following: (i) the date of the first closing of the purchase and sale of the applicable Phase 1 lots (the “Takedown 1 Closing Date”), (ii) the termination of the applicable Contract for Purchase and Sale of Real Estate, or (iii) the total amount paid by PCY Holdings as progress payments equals $350,000 or $136,700, as specified in each Twelfth Amendment (the “Payment Cap”). After the applicable Payment Cap has been met or after the occurrence of the Takedown 1 Closing Date, whichever first occurs, each Builder will be solely responsible for making all progress payments to the Grading Contractor that become due and payable on or after such date, and PCY Holdings will be relieved of any obligation under the Twelfth Amendment to make any further payment for the benefit of such Builder under the Over-excavation Contract. At the first closing of the purchase and sale of the applicable Phase 1 lots (the “First Closing”), and in addition to that portion of the purchase price for each lot payable by each Builder at the First Closing, each Builder must as a condition to closing reimburse PCY Holdings for all progress payments and any other payments made by PCY Holdings pursuant to the Over-excavation Contract, plus simple interest at 6% per annum on each payment from the date paid by PCY Holdings until the earlier of (i) the date that is 60 days after the date of the first progress payment made by PCY Holdings and (ii) the Takedown 1 Closing Date (collectively, the “Over-excavation Payment). If PCY Holdings does not satisfy its closing obligation for the First Closing, the Builder will not be obligated to pay the Over-excavation Payment and PCY Holdings will be obligated to reimburse the Grading Contractor for any amounts the Builder owes for work performed prior to termination that was not previously paid by PCY Holdings pursuant to the Twelfth Amendment.
 
The market value of the notes receivable approximate fair value due to the relatively short period to maturity for these instruments and the prevailing rates approximate market rates.

Off-Balance Sheet Instruments –The Company’s off-balance sheet instruments consist entirely of the contingent portion of the CAA. Because repayment of this portion of the CAA is contingent on the sale of Export Water, which is not reasonably estimable, the Company has determined that the contingent portion of the CAA does not have a determinable fair value. See further discussion in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply.

Revenue Recognition

The Company disaggregates revenue by major product line as reported on the consolidated statements of operations and comprehensive income (loss).

Comparative results for the three and nine months ended May 31, 2018 and 2017 differ due to the adoption by the Company of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as of September 1, 2017. Prior to the adoption of ASU 2014‑09, proceeds from tap fees and construction fees were deferred upon receipt and recognized in income either upon completion of construction of infrastructure or ratably over time, depending on whether the Company owned the infrastructure constructed with the proceeds or a customer owned the infrastructure constructed with the proceeds. Tap and construction fees derived from agreements in which the Company would not own the assets constructed with the fees were recognized as revenue using the percentage-of-completion method. Tap and construction fees derived from agreements for which the Company would own the infrastructure were recognized as revenues ratably over the estimated accounting service life of the facilities constructed, starting at completion of construction, which could be in excess of 30 years.

As described in Recently Issued Accounting Pronouncements Recognitionbelow, the Company has completed its review of the adoption of ASU 2014‑09 and the related impact on each of the Company’s revenue streams (water and wastewater usage fees, consulting fees, tap fees, special facility or construction fees, lot sales and oil and gas revenues). Upon completion of the Company’s evaluation of the standard, the Company determined to early adopt the new revenue recognition standard beginning September 1, 2017, in accordance with the transition provisions in ASU 2014‑09, utilizing the modified retrospective method. The Company’s analysis concluded that the adoption did have a material impact on the 2018 financial statements.

The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The most significant impact of the standard relates to the Company’ accounting for tap fees and special facility or construction fees, which revenues are expected to be recognized in earlier periods under the new revenue standard. Revenue recognition related to the Company’s water and wastewater usage fees, consulting fees and oil and gas royalty or lease payments will remain substantially unchanged as a result of the adoption of ASU 2014-09.

Wholesale Water and Wastewater Fees – Monthly wholesale water usage charges are assessed to the Company’s customers based on actual metered usage each month plus a base monthly service fee. The Company recognizes wholesale water usage revenues upon delivering water to its customers or its governmental customer’s end-use customers, as applicable. Sales of Export Water are invoiced directly by the Company, and revenues recognized by the Company are shown gross of royalties to the State of Colorado Board of Land Commissioners (the “Land Board”). Sales of water on the “Lowry Range” (described in Note 4 – Water and Land Assets under “Rangeview Water Supply and Water System” of the 2017 Annual Report) are invoiced directly by the Rangeview District, and the Rangeview District pays a percentage of such collections to the Company. Water revenues recognized from sales on the Lowry Range are recognized based on the amounts billed to the Rangeview District. The Company recognized $47,700$1,162,600 and $35,700$47,700 of metered water usage revenues during the three months ended May 31, 20172018 and 2016,2017, respectively. The Company recognized $379,500$2,889,000 and $119,800$379,500 of metered water usage revenues during the nine months ended May 31, 2018 and 2017, and 2016, respectively.
 
The Company recognizes wastewater treatment fees monthly based on usage. The monthly wastewater treatment fees are shown net ofrecognized based on the amounts retained by Rangeview.billed to the Rangeview District. The Company recognized $7,000$11,700 and $10,500$7,000 of wastewater treatment fees during the three months ended May 31, 20172018 and 2016,2017, respectively. The Company recognized $30,500$32,200 and $31,500$30,500 of wastewater treatment fees during the nine months ended May 31, 20172018 and 2016,2017, respectively. Costs of delivering water and providing wastewater services to customers are recognized as incurred. For the three and nine months ended May 31, 2017, the Company recognized approximately $13,000 and $18,000, respectively, of water revenue related to its Wild Pointe Service Agreement (as defined in Note 3 –Water and Land Assetsbelow).

Tap Fees– The Company has various water and wastewater service agreements, a componentcomponents of which may include tap fees, or system development fees, which are non-refundable and are typically used to fund construction of certain facilities and defray the acquisition costs of obtaining water rights. Tap fees are typically paid at the time the customer receivesfees. A tap fee constitutes a building permit that allows the customer or developerright to connect to the Company’s wholesale water and wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may make a physical tap into the wholesale line(s) to connect its property for water and/or wastewater systems.
Construction Fees– The Company may alsoservice. Once connected to the water and/or wastewater systems, the customer has live service to receive certain constructionmetered water deliveries from our system and send wastewater into our system. Thus, the customer has full control of the connection right as it has the ability to obtain all of the benefits from this right. As such, management has determined that tap fees which are fees used by the Company to construct assets that are typically required to be constructed by developers or home builders and are separate from tap fees. Construction fees are usually required for specific facilities that are needed to extend water or wastewater service to individual users and that are not available to all users of the Company’s wholesale water and wastewater system. Construction fees are typically identified separately in our water and wastewater service agreements.
distinct performance obligations.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

Proceeds fromThe Company recognizes water tap fees and construction fees are deferred upon receipt and recognized in income either upon completion of construction of infrastructure or ratably overas revenue at the time depending on whether the Company orgrants a right for the customer ownsto tap into the infrastructure constructed with the proceeds.
Tap and construction fees derived from agreements pursuantwater service line to which the Company will not own the assets constructed with the fees are recognized as revenue using the percentage-of-completion method. Costs of construction of the assets when the Company will not own the assets are recorded as construction costs.obtain water service. The Company recognized $43,000$0 and $47,000 of water tap fee revenues related to its Wild Pointe Service Agreement (as defined in Note 3 –Water and Land Assetsbelow) during the three months ended May 31, 2017.
Tap2018 and construction fees derived from agreements pursuant to which the Company will own the infrastructure are recognized as revenues ratably over the estimated accounting service life of the facilities constructed, starting at completion of construction, which could be excess of 30 years. Costs of the construction of the assets when the Company will own the assets are capitalized and depreciated over their estimated economic lives.2017, respectively. The Company recognized $3,600$49,900 and $10,700$54,100 of water tap fee revenues during each of the three and nine months ended May 31, 20172018 and 2016,2017, respectively. The water tap fees to be recognized over this period are net ofbased on the royalty paymentsamounts billed to the State Board of Land Commissioners (the “Land Board”)Rangeview District and any amounts paid to third parties pursuant to the CAA as further described in Note 4 –Long-Term Obligations and Operating Lease below.

The Company recognized $10,400 and $31,100 ofrecognizes construction fees, including fees received to construct “Special Facilities” (defined in Part I, Item 1 of the 20162017 Annual Report), on a percentage-of-completion basis as the construction is completed. Special Facilities are facilities that enable water to be delivered to a single customer. Management has determined that Special Facilities are separate and distinct performance obligations. The Company recognized $10,400 and $31,100 of Special Facilities funding as revenue under its previous revenue recognition ASU No. 2009-13, Revenue Recognition (Topic 605) standard during each of the three and nine months ended May 31, 2017, and 2016, respectively. This isNo Special Facilities revenue has been recognized during the three or nine months ended May 31, 2018. The 2017 amounts are the ratable portion of the Special Facilities funding, proceedsor construction fees, received from water agreements as more fully described in Note 2 – Summary of Significant Accounting Policies toin Part II, Item 8 of the 20162017 Annual Report.

As of May 31, 2017,2018, and August 31, 2016,2017, the Company hadhas deferred recognition of approximately $1,069,400$0 and $1,111,300,$1,055,500, respectively, of water tap and construction fee revenue from Arapahoe County, Colorado, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described above.revenue.

Consulting feesFees –Consulting fees are fees the Company receives, typically on a monthly basis, from municipalities and area water providers along the I-70 corridor, for contract operations services. Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed. The Company recognized $37,900 and $22,000 of consulting fees during the three months ended May 31, 2018 and 2017, respectively. The Company recognized $95,900 and $75,000 of consulting fees during the nine months ended May 31, 2018 and 2017, respectively.

Lot Sales – The Company owns 931 acres of land zoned as a Master Planned Community along the I-70 corridor east of Denver, Colorado, known as Sky Ranch. We have entered into purchase and sale agreements with three separate home builders pursuant to which the Company agreed to sell, and each builder agreed to purchase, residential lots at the property. The Company began construction of lots on March 1, 2018 and will segment its reporting of the activity relating to the costs and revenues from the construction and sale of lots at Sky Ranch. The Company did not recognize any lot sales during the nine months ended May 31, 2018.

The Company sells lots at Sky Ranch pursuant to distinct agreements with each builder. These agreements follow one of two formats. One format is the sale of a finished lot, whereby the purchaser pays for a ready-to-build finished lot and payment is a lump-sum payment upon completion of the finished lot. The Company will recognize revenues at the point in time at the closing of the sale of an individual finished lot as the transaction cycle will be complete and the Company will have no further obligations for the lot.

The Company’s second format is the sale of finished lots pursuant to a development agreement with builders, whereby the Company will recognize revenues in stages that include (i) payment upon the delivery of platted lots (which requires the Company to deliver deeded title to individual lots), (ii) a second payment at the completion of certain infrastructure milestones, and (iii) final payment upon the delivery of the finished lot. The Company has determined that the development agreement format has a single performance obligation and thus will defer the receipt of revenues from the first two milestones and recognize the full revenue from the sale of the lot at a point in time upon delivery of the third milestone once the Company completes all contractual commitments concurrent with the delivery of the finished lot.
 
Royalty and Other Obligations

Revenues from the sale of Export Water are shown gross of royalties payable to the Land Board. Revenues from the sale of water on the “Lowry Range” (described in Note 4 – Water and Land Assets in Part II, Item 8 of the 20162017 Annual Report) are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to the Company by the Rangeview District. Water revenue from such sales are shown net of the royalties paid to the Land Board and the amounts retained by the Rangeview which amounts are remitted by Rangeview to the Company.District.

Oil and Gas Lease Payments

As further described in Note 2 – Summary of Significant Accounting Policies in Part II, Item 8 of the 20162017 Annual Report, in March 2011, the Company entered into a Paid-Up Oil and Gas Lease (the “O&G Lease”)and a Surface Use and Damage Agreement that waswere subsequently purchased by a wholly owned subsidiary of ConocoPhillips Company and a Surface Use Damage Agreement (the “Surface Use Agreement”). Pursuant to the O&G Lease, during the year ended August 31, 2011, the Company received an up-front payment of $1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of mineral estate owned by the Company at its “Sky Ranch” property (described in Note 4 –Water and Land Assetsin Part II, Item 8 of the 2016 Annual Report). The Company began recognizing the up-front payments as income on a straight-line basis over three years (the initial term of the O&G Lease) on March 10, 2011. The Company received an additional payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016, which payment was recognized as income on a straight-line basis over two years (the extension term of the O&G Lease). During the fiscal year ended August 31, 2014, the Company received an up-front payment of $72,000 for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Rangeview Lease”). The Company recognized $6,000 and $31,900 during the three months ended May 31, 2017 and 2016, respectively, of lease income related to the up-front payments received pursuant to the O&G Lease and the Rangeview Lease. The Company recognized $17,265 and $354,800 during the nine months ended May 31, 2017 and 2016, respectively, of lease income related to the up-front payments received pursuant to the O&G Lease and the Rangeview Lease.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

As of May 31, 2017 and August 31, 2016, the Company had deferred recognition of $1,000 and $19,000, respectively, of income related to the O&G Lease and the Rangeview Lease. The balance as of May 31, 2017 will be recognized into income ratably through June 2017.
During the three months ended February 28, 2015, twoCompany. Two wells were drilled within the Company’s mineral interest. Beginning in March 2015, both wells wereinterest and placed into service and began producing oil and gas and accruing royalties to the Company. In May 2015, certain gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties attributable to gas production. During the three months ended May 31, 20172018 and 2016,2017, the Company receivedreceived $61,100 and $24,900 and $76,400,net of taxes, respectively, in royalties attributable to these two wells. During the nine months ended May 31, 20172018 and 2016,2017, the Company received $152,700 and $164,300 and $271,000 respectively,net of taxes, respectively, in royalties attributable to these two wells. The Company classifies income from oil and gas lease and royalty payments as Other income in the statement of operations and comprehensive income (loss) as the Company does not consider these arrangements to be an operating business activity.

On October 5, 2017, the Company entered into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP for the purpose of exploring for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the “Bison Lease”). Pursuant to the Bison Lease, the Company received an up-front payment of $167,200, which will be recognized as income on a straight-line basis over three years (the term of the Bison Lease). The Company recognized lease income of $13,900 and $37,200 during the three and nine months ended May 31, 2018, respectively, related to the up-front payment received pursuant to the Bison Lease. As of May 31, 2018, the Company has deferred recognition of $130,000 of income related to the Bison Lease which will be recognized into income ratably through September 2020.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the eventual use of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

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

Costs to construct water and wastewater systems that meet the Company’s capitalization criteria are capitalized as incurred, including interest, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets. The Company depletes its groundwater assets that are being utilized on the basis of units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees.

Share-Based Compensation

The Company maintains a stock option plan for the benefit of its employees and non-employee directors. The Company records share-based compensation costs as expense over the applicable vesting period of the stock award using the straight-line method. The compensation costs to be expensed are measured at the grant date based on the fair value of the award. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation, which allows for a simplified method of calculating the tax effects of employee share-based compensation. Because the Company has a full valuation allowance on its deferred tax assets, the granting and exercise of stock options has no impact on the income tax provisions. The Company recognized $63,500$83,600 and $58,200$63,500 of share-based compensation expense during the three months ended May 31, 2018 and 2017, respectively, and 2016, respectively. The Company recognized$241,200 and $168,000 and $167,100 of share-based compensation expense during the nine months ended May 31, 20172018 and 2016,2017, respectively.
 
Income Taxes

The Company uses a “more-likely-than-not” threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company did not have any significant unrecognized tax benefits as of May 31, 2017.2018.

Due to the complexities involved in accounting for the recently enacted Tax Cuts and Jobs Act (the “Tax Act”), the SEC’s Staff Accounting Bulletin No. 118 (“SAB 118”) requires that the Company include in its financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such estimate has been determined. Pursuant to SAB 118, the Company is allowed a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. The final impact on the Company from the Tax Act may differ from the aforementioned estimates due to the complexity of calculating and supporting with primary evidence, changes in interpretations of the Tax Act, future legislative action to address questions that arise because of the Tax Act, changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the Company has utilized to calculate the reasonable estimate. The Company’s deferred tax asset and full valuation allowance was decreased by approximately $1 million as a result of the decreased corporate tax rate. The Company will continue to evaluate the impact of the Tax Act and will record any resulting tax adjustments during 2018.

The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal yearsyear 2014 through 2016.fiscal year 2017. The Company does not believe that there will be any material changes in its unrecognized tax positions over the next 12 months.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At May 31, 2017,2018, the Company did not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the three or nine months ended May 31, 20172018 or 2016.2017.

The Company has recorded a valuation allowance against the deferred tax assets as the Company is unable to reasonably determine if it is more likely than not that deferred tax assets will ultimately be realized.
Discontinued Operations

In August 2015, the Company sold substantially all of its Arkansas River water and land properties. Pursuant to the terms of the purchase and sale agreement, the Company continued to manage and receive the lease income associated with such properties until December 31, 2015. The operating results and the assets and liabilities of the discontinued operations, which formerly comprised the agricultural segment, are presented separately in the Company’s consolidated financial statements. Summarized financial information for the discontinued agricultural business is shown below. Prior period balances have been reclassified to present the operations of the agricultural business as a discontinued operation.
 
Discontinued Operations Income Statement
Discontinued Operations Income Statement 
             
  Three Months Ended May 31,  Nine Months Ended May 31, 
  2018  2017  2018  2017 
Farm revenues $1,000  $600  $2,400  $6,300 
Farm expenses  -   -   -   - 
Gross profit  1,000   600   2,400   6,300 
                 
General and administrative expenses  -   11,900   -   48,300 
Operating profit (loss)  1,000   (11,300)  2,400   (42,000)
Finance charges  -   -   -   9,400 
Income (loss) from discontinued operations $1,000  $(11,300) $2,400  $(32,600)
 
 
 
Three Months Ended May 31,
 
 
Nine Months Ended May 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Farm revenues
 $600 
 $- 
 $6,300 
 $276,000 
Farm expenses
  - 
  (22,700)
  - 
  (56,000)
  Gross profit (loss)
  600 
  (22,700)
  6,300 
  220,000 
 
    
    
    
    
General and administrative expenses
  11,900 
  48,400 
  48,300 
  287,800 
  Operating loss
  (11,300)
  (71,100)
  (42,000)
  (67,800)
Gain on sale of farm assets
  - 
  - 
  - 
  4,300 
Finance charges
  - 
  9,800 
  9,400 
  42,000 
 Loss from discontinued operations
 $(11,300)
 $(61,300)
 $(32,600)
 $(21,500)
The Company anticipates continued expenses through calendar 20172018 related to the discontinued operations. The Company will continue to incur expenses (including property taxes) related to the remaining agricultural land the Company continues to own and for the purpose of collecting outstanding receivables.
 

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

The individual assets and liabilities of the discontinued agricultural business are combined in the captions “Assets of discontinued operations”operations held for sale” and “Liabilities of discontinued operations” in the consolidated balance sheet. The carrying amounts of the major classes of assets and liabilities included as part of the discontinued business are presented in the following table:
 
Discontinued Operations Balance Sheet
10
 
 
May 31,
2017
 
 
August 31,
2016
 
Assets:
 
 
 
 
 
 
Trade accounts receivable
 $110,700 
 $227,000 
Land held for sale (*)
  449,800 
  450,300 
Prepaid expenses
  - 
  2,900 
Total assets
 $560,500 
 $680,200 
 
    
    
Liabilities:
    
    
Accrued liabilities
 8,600
  4,400 
Total liabilities
 $8,600
 $4,400 
Discontinued Operations Balance Sheet 
       
  May 31, 2018  August 31, 2017 
Assets:      
Trade accounts receivable $86,800  $110,700 
Land held for sale (*)  450,600   450,600 
Total assets $537,400  $561,300 
         
Liabilities:        
Accrued liabilities $5,600  $11,200 
Total liabilities $5,600  $11,200 

(*) Land Held for Sale.During the fiscal quarter ended November 30, 2015, the Company purchased three farms totaling 700 acres for approximately $450,000. The Company acquired a total of 700 acres.$450,600. The farms were acquired in order to correct dry-up covenant issues related to water only farms in order to obtain the release of the escrow funds related to the Company’s farm sale to Arkansas River Farms, LLC. The Company intends to sell the farms withinin due course and has classified the next fiscal year.farms as long-term assets.

Income (Loss) per Common Share

Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during each period. Common stock options and warrants aggregating 470,600535,500 and 338,100470,600 common share equivalents were outstanding as of May 31, 20172018 and 2016,2017, respectively, and have been included in the calculation of diluted net income per common share but excluded from the calculation of loss per common share as their effect is anti-dilutive.

Recently Issued Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its consolidated financial statements and ensure that there are proper controls in place to ascertain that the Company’s consolidated financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:

In MayFebruary 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 provides for amendments to ASU No. 2014-09,2016-02, Revenue from Contracts with CustomersLeases (Topic 842). , amending theASU 2016‑02 provides guidance on transition, collectability, noncash considerationthe recognition, measurement, presentation, and disclosure of leases. The new standard supersedes the presentation of salespresent GAAP standard on leases and other similar taxes. Specifically, ASU 2016-12 clarifies that, for a contractrequires substantially all leases to be considered completed at transition, all (or substantially all) ofreported on the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability thresholdbalance sheet as right-of-use assets and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria.lease obligations. This standard is effective for fiscal years beginning after December 15, 2018. The Company is currently assessing the impact of ASU 2016-12.2016-02.

In AprilJanuary 2016, the FASB issued ASU No. 2016-10, 2016-01,Revenue from Contracts with Customers Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 606): Identifying Performance Obligations and Licensing825). ASU 2016-10 providesNo. 2016-01 revises the classification and measurement of investments in certain equity investments and the presentation of certain fair value changes for amendments tocertain financial liabilities measured at fair value. ASU No. 2014-09, Revenue from Contracts with Customers, reducing2016-01 requires the complexity when applying the guidance for identifying performance obligations and improving the operability and understandabilitychange in fair value of the license implementation guidance. The Company is currently assessing the impact of ASU 2016-10.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 provides for amendments to ASU No. 2014-09, Revenue from Contracts with Customers, clarifying the implementation guidance on principal versus agent considerations in the new revenue recognition standard. Specifically, ASU 2016-08 clarifies how an entity should identify the unit of accounting (i.e., the specified good or service) for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements. The Company is currently assessing the impact of ASU 2016-08.
In May, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)” and requires entities to recognize revenue in a way that depicts the transfer of potential goods or services to customers in an amount that reflects the consideration to which the entity expectsmany equity investments to be entitled to the exchange for those goods or services. ASU 2014-09recognized in net income. This standard is effective for the Company September 1, 2018interim and annual periods beginning after December 15, 2017 with early adoption permitted for the Company on September 1, 2017.permitted. The Company does not expectadopted ASU No. 2016-01 in its third quarter of 2018 utilizing the modified retrospective transition method. Based on the composition of the Company’s investment portfolio, the adoption of ASU 2014-09 toNo. 2016-01 did not have a material impact on its wholesale water and wastewater and consulting fees as the underlying contracts with these customers are relatively straightforward. The Company is currently assessing the impact of ASU 2014-09 on its water and wastewater tap and construction fees.  The Company anticipates this assessment to be completed in sufficient time to allow for an efficient adoption of the standard.consolidated financial statements.

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 changes the presentation and disclosure requirements for discontinued operations. The update was adopted by the Company in fiscal year 2016.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity'sEntity’s Ability to Continue as a Going Concern. ASU 2014-15 describes how an entity'sentity’s management should assess, considering both quantitative and qualitative factors, whether there are conditions and events that raise substantial doubt about an entity'sentity’s ability to continue as a going concern within one year after the date that the financial statements are issued, which represents a change from the existing literature that requires consideration about an entity'sentity’s ability to continue as a going concern within one year after the balance sheet date. The standard iswas effective for the Company on September 1, 2017. The Company is assessing the impact of ASU 2014-15, but it does not expect the adoption of ASU 2014-15 todid not have a material impact on itsthe Company’s financial statements.
 
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), that requires recognition of revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. The FASB has also issued several updates to ASU 2014-09. The standard supersedes ASU No. 2009-13, Revenue Recognition (Topic 605) (“ASC 605”), and requires the use of more estimates and judgments than do the present standards. It also requires additional disclosures. The Company has completed its review of the adoption of ASU 2014‑09 and the related impact on each of the Company’s revenue streams (water and wastewater usage fees, consulting fees, tap fees, special facility or construction fees, lot sales and oil and gas revenues). Upon completion of the Company’s evaluation of the standard, the Company determined to early adopt the new revenue recognition standard beginning September 1, 2017, in accordance with the transition provisions in ASU 2014‑09, utilizing the modified retrospective method. The Company concluded that the adoption did have a material impact on the Company’s financial statements.

The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

The cumulative effect of the changes made to the Company’s consolidated September 1, 2017 balance sheet for the adoption of ASU 2014-09 were as follows:

    
Balance at
August 31, 2017
    
Adjustments
Due to ASU 2014-09
    
Balance at
September 1, 2017
  
Balance Sheet         
Assets
         
Deferred tax assets (Deferred revenue) $316,400  $(316,400) $- 
Deferred tax assets - valuation allowance (Deferred revenue)  (316,400)  316,400   - 
Liabilities
            
Deferred revenues, current $55,800  $(55,800) $- 
Deferred revenues, less current portion  999,249   (999,249)  - 
Equity
            
Accumulated deficit $(103,993,900) $1,055,049  $(102,938,851)

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on the Company’s consolidated statements of operations and comprehensive income (loss) and balance sheet was as follows:
For the Nine Months Ended May 31, 2018 
 
 
   As Reported    
Amounts that would
have been reported
under ASC 605
    

Effect of Change
Higher/(Lower)
  
Income statement         
Revenues
         
Special facility fees $-  $31,131  $(31,131)
Water tap fees  49,948   60,669   (10,721)
Net income $58,153  $100,004  $(41,852)
As of May 31, 2018 
     As Reported    
Amounts that would
have been reported
under ASC 605 (1)
    

Effect of Change
Higher/(Lower)
  
Balance Sheet         
Liabilities
         
Deferred revenues, current $-  $55,800  $(55,800)
Deferred revenues, less current portion  -   957,836   (957,836)
Deferred oil and gas lease payment, current (1)
  55,733   55,733   - 
Deferred oil and gas lease payment, less current portion  74,311   74,311   - 
             
Equity
            
Accumulated deficit $(102,880,698) $(103,893,896) $1,013,198 

(1)Inclusive of the Bison Lease deferred oil and gas lease payment and water tap and construction fee deferred revenues as described in the 2017 Annual Report.

Revenue recognition related to the Company’s water and wastewater usage, consulting revenues and oil and gas revenues will remain substantially unchanged as a result of the adoption of ASU 2014-09. The most significant impact of the standard relates to the Company’s accounting for water and wastewater tap fees and special facility/construction fees, which revenues will be recognized in earlier periods when performance obligations are complete under the new revenue standard.

NOTE 2 – FAIR VALUE MEASUREMENTS

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal or most advantageous market. The Company uses a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine where within the fair value.value hierarchy the measurement falls.

Level 1 — Valuations for assets and liabilities traded in active exchange markets, such as the NASDAQ Stock Market. The Company had none of these instrumentsno Level 1 assets or liabilities as of May 31, 20172018 or August 31, 2016.2017.

Level 2 — Valuations for assets and liabilities obtained from readily available pricing sources via independent providers for market transactions involving similar assets or liabilities. The Company had 5116 and 3656 Level 2 assets as of May 31, 20172018 and August 31, 2016,2017, respectively, which consistedconsist of certificates of deposit, U.S. Treasury bills and U.S. treasuryTreasury notes.

Level 3 — Valuations for assets and liabilities that are derived from other valuation methodologies, including discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities. The Company had one Level 3 liability, the contingent portion of the CAA, as of May 31, 20172018 and August 31, 2016, which the2017. The Company has determined that the contingent portion of the CAA does not have a determinable fair value (see Note 4)4 – 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.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

Level 2 AssetsAsset – Available for Sale Securities. The Company’s available for sale securities are the Company’s only financial asset withmeasured at fair value measured on a recurring basis. At May 31, 2017, these The fair value of the available for sale securities is based on the values reported by the financial institutions where the funds are held. These securities include only federally insured certificates of deposit and U.S. treasuryTreasury bills and notes.

The Company’s non-financial assets measured at fair value on a non-recurring basis consist entirely of its investments in water and water systems, land held for sale, and other long-lived assets. See Note 3 – Water and Land Assets below.

The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of May 31, 2017:2018:
 
 
 
 
 
 
 
 
 
Fair Value Measurement Using:
 
 
 
 
 
 
 
 
 
Cost / Other
 
 
Quoted Prices in Active Markets for Identical Assets
 
 
Significant Other Observable Inputs
 
 
Significant Unobservable Inputs
 
 
Accumulated Unrealized Gains and
 
 
 
Fair Value
 
 
Value
 
 
(Level 1)
 
 
(Level 2)
 
 
(Level 3)
 
 
(Losses)
 
Certificates of deposit
 $11,432,214 
 $11,443,068 
 $- 
 $11,432,214 
 $- 
 $(10,854)
U.S. Treasuries
  8,800,721 
  8,814,820 
  - 
  8,800,721 
  - 
  (14,099)
  Subtotal
 $20,232,935 
 $20,257,888 
 $- 
 $20,232,935 
 $- 
 $(24,953)
Long-term investments
  1,430,177 
  1,431,712 
  - 
  1,430,177 
    
  (1,535)
  Total
 $21,663,112 
 $21,689,600 
 $- 
 $21,663,112 
 $- 
 $(26,488)
        Fair Value Measurement Using:    
     Fair Value    
Cost / Other
Value
    
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Accumulated
Unrealized
Gains and
(Losses)
  
Certificates of deposit $1,248,781  $1,250,000  $-  $1,248,781  $-  $(1,219)
U.S. treasuries  15,757,133   15,695,690   -   15,757,133   -   61,443 
Total $17,005,914  $16,945,690  $-  $17,005,914  $-  $60,224 
 
The following table provides information on the assets and liabilities measured at fair value on a recurring basis as of August 31, 2017:

        Fair Value Measurement Using:    
     Fair Value    
Cost / Other
Value
    
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
    
Significant
Other
Observable
Inputs
(Level 2)
    
Significant
Unobservable
Inputs
(Level 3)
    
Accumulated
Unrealized
Gains and
(Losses)
  
Certificates of deposit $12,673,700  $12,694,500  $-  $12,673,700  $-  $(20,800)
U.S. treasuries  7,381,700   7,372,000   -   7,381,700   -   9,700 
Total $20,055,400  $20,066,500  $-  $20,055,400  $-  $(11,100)

The Company also holds a certificate of deposit that is not carried at fair value on the consolidated balance sheets and is classified as a held-to-maturity security. As of May 31, 2018, the carrying amount of held-to-maturity securities was $189,800. As of August 31, 2017, the carrying amount of held-to-maturity securities was $188,000.

NOTE 3 – WATER AND LAND ASSETS

Wild Pointe
On December 15, 2016, Rangeview, acting byThe Company’s water rights and through its current water and wastewater service agreements are more fully described in Note 4 – Water Activity Enterprise, and Elbert & Highway 86 Commercial Metropolitan District, a quasi-municipal corporation and political subdivisionLand Assets in Part II, Item 8 of the State of Colorado, acting by and through its Water Enterprise (the “EH86 District”), entered into a Water Service Agreement (the “Wild Pointe Service Agreement”). Subject2017 Annual Report. There have been no significant changes to the conditions set forth inCompany’s water rights or water and wastewater service agreements during the Wild Pointe Service Agreement and the terms of the Company’s engagement by Rangeview as Rangeview’s exclusive service provider, the Company acquired, among other things, the exclusive right to provide water services to residential and commercial customers in Wild Pointe Ranch, located in unincorporated Elbert County, Colorado, in exchange for $1,600,000 in cash. Pursuant to the terms of the Wild Pointe Service Agreement, the Company, in its capacity as Rangeview’s service provider, is responsible for providing water services to all users of water services within the boundaries and service area of the EH86 District and for operating and maintaining the EH86 District’s water system. In exchange, the Company receives all rates, fees and charges remitted to Rangeview by the EH86 District pursuant to the Wild Pointe Service Agreement, including system development (or tap) fees from new customers and monthly water service revenues. The EH86 District’s water system currently provides water service to approximately 120 existing SFE water connections in Wild Pointe.
nine months ended May 31, 2018.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

Investment in Water and Water Systems

The Company’s Investments in Water and Water Systems consist of the following costs and accumulated depreciation and depletion at May 31, 20172018 and August 31, 2016:2017:
 
 
 
May 31, 2017
 
 
August 31, 2016
 
 
 
Costs
 
 
Accumulated Depreciation and Depletion
 
 
Costs
 
 
Accumulated Depreciation and Depletion
 
Rangeview water supply
 $14,495,400 
 $(10,000)
 $14,444,600 
 $(9,400)
Sky Ranch water rights and other costs
  6,723,000 
  (411,348)
  6,607,400 
  (334,500)
Fairgrounds water and water system
  2,899,800 
  (952,800)
  2,899,900 
  (886,800)
Rangeview water system
  1,639,000 
  (193,300)
  1,624,800 
  (152,800)
Water supply – other
  3,886,000 
  (375,500)
  3,703,000 
  (297,800)
Wild Pointe service rights
  1,661,000 
  (53,152)
  - 
  - 
Construction in progress
  5,035,400 
  - 
  723,500 
  - 
Totals
  36,339,600 
  (1,996,100)
  30,003,200 
  (1,681,300)
Net investments in water and water systems
 $34,343,500 
 $-
 
 $28,321,900 
 $-
 
Construction in progress relates to the Sky Ranch project and includes engineering and other initial costs (approximately $764,000) and water line installation (approximately $4.3 million). The Company has incurred an additional approximately $210,000 related to the water line installation, which was subsequently paid in June 2017.
14
  May 31, 2018  August 31, 2017 
  Costs  
Accumulated
Depreciation
and Depletion
  Costs  
Accumulated
Depreciation and
Depletion
 
Rangeview water supply $14,805,500  $(12,100) $14,529,600  $(10,600)
Sky Ranch water rights and other costs  7,342,400   (523,100)  6,725,000   (436,300)
Fairgrounds water and water system  2,899,900   (1,040,900)  2,899,900   (974,800)
Rangeview water system  1,652,400   (247,700)  1,639,000   (207,000)
WISE partnership  3,114,100   -   3,114,100   - 
Water supply – other  1,177,700   (486,700)  944,800   (401,300)
Wild Pointe service rights  1,631,800   (251,400)  1,631,700   (213,000)
Sky Ranch pipeline  4,697,800   (156,600)  4,700,000   (39,200)
Construction in progress  1,006,400   -   673,800   - 
Totals  38,328,000   (2,718,500)  36,857,900   (2,282,200)
Net investments in water and water systems $35,609,500      $34,575,700     

Capitalized terms in this section not defined herein are defined in Note 4 – Water and Land Assets toin Part II, Item 8 of the 20162017 Annual Report.

Depletion and Depreciation.Depreciation

The Company recorded depletion charges of $4,300 and $100 during each of the three months ended May 31, 2018 and 2017, and 2016.respectively. The Company recorded depletion charges of $600$5,300 and $200$600 during the nine months ended May 31, 20172018 and 2016,2017, respectively. During the three and nine months ended May 31, 2017, this2018, the depletion was related entirely to the Rangeview“Lowry Water Supply.” The Lowry Water Supply is defined as the “Rangeview Water Supply” and described in detail in Note 4 – Water and Land Assets in Part II, Item 8 of the Sky Ranch water assets.2017 Annual Report.

The Company recorded $148,400$211,000 and $108,700$148,400 of depreciation expense during the three months ended May 31, 20172018 and 2016,2017, respectively. The Company recorded $406,000$554,700 and $307,600$406,000 of depreciation expense during the nine months ended May 31, 2018 and 2017, and 2016, respectively. These figures include depreciation for other equipment not included in the table above.

NOTE 4 – LONG-TERM OBLIGATIONS AND OPERATING LEASE

The Participating Interests in Export Water Supply is an obligation of the Company that has no scheduled maturity date. Therefore, maturity of this liability is not disclosed in tabular format, but is described below.

Participating Interests in Export Water Supply

The Company acquired its RangeviewLowry Water Supply through various amended agreements entered into beginning in the early 1990s. The acquisition was consummated with the signing of the CAA in 1996. Upon entering into the CAA, the Company recorded an initial liability of $11.1 million, which represented the cash the Company received from the participating interest holders that was used to purchase the Company’s Export Water (described in greater detail in Note 4 – Water and Land Assetstoin Part II, Item 8 of the 20162017 Annual Report). The Company agreed to remit a total of $31.8 million of proceeds received from the sale of Export Water to the participating interest holders in return for their initial $11.1 million investment. The obligation for the $11.1 million was recorded as debt, and the remaining $20.7 million contingent liability was not reflected on the Company’s balance sheet because the obligation to pay this is contingent on the sale of Export Water, the amounts and timing of which are not reasonably determinable.

The CAA obligation is non-interest bearing, and if the Export Water is not sold, the parties to the CAA have no recourse against the Company. Additionally, ifIf the Company does not sell the Export Water, the holders of the Series B Preferred Stockpreferred stock of the Company are also not entitled to payment of any dividend and have no contractual recourse against the Company.

As the proceeds from the sale of Export Water are received and the amounts are remitted to the external CAA holders, the Company allocates a ratable percentage of this payment to the principal portion (the Participating Interests in Export Water Supplyliability account), with the balance of the payment being charged to the contingent obligation portion. Because the original recorded liability, which was $11.1 million, was 35% of the original total liability of $31.8 million, approximately 35% of each payment remitted to the CAA holders is allocated to the recorded liability account. The remaining portion of each payment, or approximately 65%, is allocated to the contingent obligation, which is recorded on a net revenue basis.

 
PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS15
MAY 31, 2017

Index
From time to time, the Company reacquired various portions of the CAA obligations, which retained their original priority, including the Land Board’s CAA interest which was assigned and relinquished to the Company in 2014. The Company did not make any CAA acquisitions during the ninethree months ended May 31, 2017 or 2016.2018 and 2017.

As a result of CAAthe acquisitions, the Company is currently allocated approximately 88% of the total proceeds from the sale of Export Water after payment of the Land Board royalty. The acquisitions and thecumulative sales of Export Water asare detailed in the table below, thebelow. The remaining potential third-party obligation at May 31, 2017,2018, is approximately $1 million, and the Company has the right to approximately $29.7 million in Export Water proceeds:million.

  
Export Water
Proceeds
Received
  
Initial Export
Water Proceeds
to Pure Cycle
  
Total Potential
Third-Party
Obligation
  
Paticipating
Interests
Liability
  Contingency 
Original balances $–  $218,500  $31,807,700  $11,090,600  $20,717,100 
Activity from inception until August 31, 2017:                 
Acquisitions  –   28,042,500   (28,042,500)  (9,790,000)  (18,252,500)
Relinquishment  –   2,386,400   (2,386,400)  (832,100)  (1,554,300)
Option payments - Sky Ranch  110,400   (42,300)  (68,100)  (23,800)  (44,300)
and The Hills at Sky Ranch                    
Arapahoe County tap fees (1)  533,000   (373,100)  (159,900)  (55,800)  (104,100)
Export Water sale payments  676,500   (540,300)  (136,200)  (47,300)  (88,900)
Balance at August 31, 2017  1,319,900   29,691,700   1,014,600   341,600   673,000 
Fiscal 2018 activity:                    
Export Water sale payments  51,900   (45,700)  (6,200)  (2,200)  (4,000)
Balance at May 31, 2018 $1,371,800  $29,646,000  $1,008,400  $339,400  $669,000 

 
 
Export Water Proceeds Received
 
 
Initial Export Water Proceeds to Pure Cycle
 
 
Total Potential Third-Party Obligation
 
 
Paticipating Interests Liability
 
 
Contingency
 
Original balances
 $– 
 $218,500 
 $31,807,700 
 $11,090,600 
 $20,717,100 
Activity from inception until August 31, 2015:
    
    
    
    
    
  Acquisitions
  – 
  28,042,500 
  (28,042,500)
  (9,790,000)
  (18,252,500)
  Relinquishment
  – 
  2,386,400 
  (2,386,400)
  (832,100)
  (1,554,300)
  Option payments - Sky Ranch
    
    
    
    
    
  and The Hills at Sky Ranch
  110,400 
  (42,300)
  (68,100)
  (23,800)
  (44,300)
  Arapahoe County tap fees *
  533,000 
  (373,100)
  (159,900)
  (55,800)
  (104,100)
  Export Water sale payments
  618,400 
  (489,100)
  (129,300)
  (44,900)
  (84,400)
Balance at August 31, 2016
  1,261,800 
  29,742,900 
  1,021,500 
  344,000 
  677,500 
Fiscal 2017 activity:
    
    
    
    
    
  Export Water sale payments
  50,700 
  (44,700)
  (6,000)
  (2,100)
  (3,900)
Balance at May 31, 2017
 $1,312,500 
 $29,698,200 
 $1,015,500 
 $341,900 
 $673,600 
(1)The Arapahoe County tap fees are net of $34,522 in royalties paid to the Land Board.
 * The Arapahoe County tap fees are net of $34,522 in royalties paid to the Land Board.

The CAA includes contractually established priorities thatwhich 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. TheOf the next approximately $6.6 million of Export Water payouts, which at current levels would occur over several years, the Company will receive approximately $5.9$5.8 million of revenue. Thereafter, the first priority payout (the remaining entire first priority payout totalsCompany will be entitled to all but approximately $6.7 million as$220,000 of May 31, 2017).the proceeds from the sale of Export Water after deduction of the Land Board royalty.

WISE Partnership

During December 2014, the Company, through Rangeview, consented to the waiver of all contingencies set forth in the Amended and Restated WISE Partnership – Water Delivery Agreement, dated December 31, 2013 (the “WISE Partnership Agreement”), among the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”), the City of Aurora acting by and through its Utility Enterprise (“Aurora Water”), and the South Metro WISE Authority (“SMWA”). The SMWA was formed by Rangeview and nine other governmental or quasi-governmental water providers pursuant to the South Metro WISE Authority Formation and Organizational Intergovernmental Agreement, dated December 31, 2013 (the “SM IGA”), to enable the members of SMWA to participate in the regional water supply project known as the Water Infrastructure Supply Efficiency partnership (“WISE”) created by the WISE Partnership Agreement. The SM IGA specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. The WISE Partnership Agreement provides for the purchase of certain infrastructure (i.e., pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. Certain infrastructure has been constructed, and other infrastructure will be constructed over the next several years.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

By consenting to the waiver of the contingencies set forth in the WISE Partnership Agreement, pursuant to the terms of the Rangeview/Pure Cycle WISE Project Financing Agreement (the “WISE Financing Agreement”) between the Company and Rangeview, the Company has an agreement to fund Rangeview’s participation in WISE effective as of December 22, 2014. The Company’s cost of funding Rangeview’s purchase of its share of existing infrastructure and future infrastructure for WISE and funding operations and water deliveries related to WISE is projected to be approximately $5.5$5.2 million over the next five years. See further discussion in Note 6 –Related Party Transactions.
 
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Operating Lease

Effective as of January 2017,February 2018, the Company entered into an operating lease for approximately 2,50011,393 square feet of office and warehouse space. The lease has a two-yearthree-year term with payments of $3,000$6,600 per month.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. The change in the lease costs is not material to the Company’s operations.

NOTE 5 – 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 April 12, 2014. Executives, eligible employees, consultants and non-employee directors are eligible to receive options and stock grants pursuant to the 2014 Equity Plan. Pursuant to the 2014 Equity Plan, options to purchase shares of stock and restricted stock awards can be granted with exercise prices, vesting conditions and other performance criteria determined by the Compensation Committee of the board of directors. The Company has reserved 1.6 million shares of common stock for issuance under the 2014 Equity Plan. The Company began awarding options under the 2014 Equity Plan during January 2015. Prior to the effective date of the 2014 Equity Plan, the Company granted stock awards to eligible participants under its 2004 Incentive Plan (the “2004 Incentive Plan”), which expired April 11, 2014. No additional awards may be granted pursuant to the 2004 Incentive Plan; however, awards outstanding as of April 11, 2014, will continue to vest and expire and may be exercised in accordance with the terms of the 2004 Incentive Plan.

The following table summarizes the combined stock option activity for the 2004 Incentive Plan and 2014 Equity Plan for the nine months ended May 31, 2017:
 
 
Number of Options
 
 
Weighted-Average Exercise Price
 
 
Weighted-Average Remaining Contractual Term
 
 
Approximate Aggregate Instrinsic Value
 
Oustanding at August 31, 2016  
  338,000 
 $4.83 
 
 
 
 
 
 
Granted
  142,500 
  5.47 
 
 
 
 
 
 
Exercised
  - 
  - 
 
 
 
 
 
 
Forfeited or expired
  (10,000)
  8.02 
 
 
 
 
 
 
Outstanding at May 31, 2017  
  470,500 
 $4.91 
  6.48 
 $1,354,390 
 
    
    
    
    
Options exercisable at May 31, 2017  
  323,000 
 $4.68 
  5.16 
 $1,003,990 
2018:

  
Number of
Options
  
Weighted-
Average
Exercise Price
  
Weighted-
Average
Remaining
Contractual
Term
  
Approximate
Aggregate
Instrinsic
Value
 
Oustanding at August 31, 2017  465,500  $4.88   6.30  $1,007,740 
Granted (1)
  82,500   8.05         
Exercised  (10,000)  7.50         
Forfeited or expired  (2,500)  7.50         
Outstanding at May 31, 2018  535,500  $5.31   6.29  $2,163,540 
                 
Options exercisable at May 31, 2018  379,668  $4.66   5.21  $1,780,275 

PURE CYCLE CORPORATION
(1)Includes 50,000 shares granted to Mr. Harding on September 27, 2017 and 32,500 total shares granted to the board of directors on January 17, 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

The following table summarizes the combined activity and value of non-vested options under the 2004 Equity Plan and 2014 Incentive Plan as of and for the nine months ended May 31, 2017:2018:

  
Number of
Options
  
Weighted-
Average Grant
Date Fair
Value
 
Non-vested options oustanding at August 31, 2017  147,500  $3.64 
Granted  82,500   4.41 
Vested  (74,168)  2.84 
Forfeited  -   - 
Non-vested options outstanding at February 28, 2018  155,832  $3.76 
 
 
Number of Options
 
 
Weighted-Average Grant Date Fair Value
 
Non-vested options oustanding at August 31, 2016  
  36,000 
 $4.59 
Granted
  142,500 
  3.67 
Vested
  (31,000)
  2.95 
Forfeited
  - 
  - 
Non-vested options outstanding at May 31, 2017  
  147,500 
 $3.52 

All non-vested options are expected to vest.

Stock-based compensation expense was $63,500$83,600 and $58,200$63,500 for the three months ended May 31, 20172018 and 2016,2017, respectively. Stock-based compensation expense was $168,000$241,200 and $167,100$168,000 for the nine months ended May 31, 20172018 and 2016,2017, respectively.
 
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At May 31, 2017,2018, the Company had unrecognized expenses totaling $392,500$378,400 relating to non-vested options that are expected to vest. The weighted-average period over which these options are expected to vest which options have a weighted average life of less than threeis approximately two years. The Company has not recorded any excess tax benefits to additional paid-in capital.

NOTE 6 – RELATED PARTY TRANSACTIONS

The Rangeview District is a quasi-municipal corporation and political subdivision of Colorado formed in 1986 for the purpose of providing water and wastewater service to the Lowry Range and other approved areas. The Rangeview District is governed by an elected board of directors. Eligible voters and persons eligible to serve as a director of the Rangeview District must own an interest in property within the boundaries of Rangeview.the Rangeview District. The Company owns certain rights and real property interests which encompass the current boundaries of Rangeview.the Rangeview District. Sky Ranch Metropolitan District Nos. 1, 3, 4 and 5 (the “Sky Ranch Districts”) and the CAB are quasi-municipal corporations and political subdivisions of Colorado formed for the purpose of providing service to the Company’s Sky Ranch property. The current members of the board of directors of each of the Rangeview includeDistrict, the Sky Ranch Districts and the CAB consist of three employees of the Company and two independent board members.

On December 16, 2009, the Company entered into a Participation Agreement with the Rangeview District, whereby the Company agreed to provide funding to the Rangeview District in connection with the Rangeview District joining the South Metro Water Supply Authority (“SMWSA”). The Company provides funding pursuant to the Participation Agreement annually with $22,200 and $198,200 being provided during fiscal years 2018 and 2017, respectively.

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. The Company anticipates spending approximately $5.2 million over the next five fiscal years to fund the Rangeview District’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries related to WISE. To date, the Company has capitalized the funding provided pursuant to the WISE Financing Agreement because the funding has been provided to purchase capacity in the WISE infrastructure. Total investment in the WISE assets as of May 31, 2018 is approximately $3.1 million.
 
In 1995, the Company extended a loan to the Rangeview a related party.District. The loan provided for borrowings of up to $250,000, is unsecured, and bears interest based on the prevailing prime rate plus 2% (6.00%(6.75% at May 31, 2017), and the2018). The maturity date of the loan is December 31, 2022. Beginning in2020. 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. The $694,200$862,800 balance of the notenotes receivable at May 31, 2017,2018, includes borrowings of $319,900$470,300 and accrued interest of $374,300.$392,500.

On December 16, 2009, theThe Company entered into a Participation Agreement with Rangeview, whereby the Company agreed to providehas been providing funding to Rangeview in connection with Rangeview joining the South Metro Water Supply Authority (“SMWSA”). On November 10, 2014, the Company and Rangeview entered into the WISE Financing Agreement, which became effective on December 23, 2014, whereby the Company agreed to fund Rangeview’s cost of participating in a regional water supply project known as the WISE partnership. The Company anticipates spending approximately $5.5 million over the next five fiscal years to fund Rangeview’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE and to fund operations and water deliveries related to WISE.
EachSky Ranch Districts. In each year, beginning insince 2012, the Company has entered into an Operation Funding Agreement with one of the Sky Ranch Metropolitan District No. 5Districts, obligating the Company to advance funding to the districtSky Ranch District for the district’s operations and maintenance expenses for the then-current calendar year. The district is expected to repay the amounts advanced pursuant to the funding agreements from future revenues from property tax assessments. All payments are subject to annual appropriations by the districtSky Ranch District in its absolute discretion. The advances by the Company accrue interest at a rate of 8% per annum from the date of the advance.

In November 2014, but effective as of January 1, 2014, the Company entered into a Facilities Funding and Acquisition Agreement with a Sky Ranch Metropolitan District No. 5 obligating the Company to either finance district improvements or to construct improvements on behalf of the districtSky Ranch District subject to reimbursement. Improvements subject to this agreement are determined pursuant to a mutually agreed upon budget. Each year in September, the parties are to mutually determine the improvements required for the following year and finalize a budget by the end of October. Each advance or reimbursable expense accrues interest at a rate of 6% per annum. No payments are required by the district unless and until the district issues bonds in an amount sufficient to reimburse the Company for all or a portion of the advances and costs incurred.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017

The $211,300 balance of the receivable due pursuant to the Operation Funding Agreements and the Facilities Funding and Acquisition Agreement at May 31, 2017, includes advances of $180,200 and accrued interest of $31,100. Upon the district’sSky Ranch District’s ratification of the advances and related expenditures, the amount wasis reclassified to long-term and is recorded as part of Notes receivable – related parties.parties.

During the nine months ended May 31, 2018, the Sky Ranch Districts repaid all advances plus accrued interest totaling $215,504, and as of the period then ended, there was no outstanding balance on the receivable.

Pursuant to that certain Community Authority Board Establishment Agreement, as the same may be amended from time to time, Sky Ranch Metropolitan District No. 1 and Sky Ranch Metropolitan District No. 5 formed the CAB to, among other things, design, construct, finance, operate and maintain certain public improvements for the benefit of the property within the boundaries and/or service area of the Sky Ranch Districts. In order for the public improvements to be constructed and/or acquired, it is necessary for each Sky Ranch District, directly or through the CAB, to be able to fund the improvements and pay its ongoing operations and maintenance expenses related to the provision of services that benefit the property. In November 2017, but effective as of January 1, 2018, the Company entered into a Project Funding and Reimbursement Agreement with the CAB for the Sky Ranch property. Improvements subject to the Project Funding and Reimbursement Agreement are determined pursuant to a mutually agreed upon budget. Each advance or reimbursable expense accrues interest at a rate of 6% per annum. Upon the CAB’s ratification of the advances and related expenditures, the amount is recorded as part of Notes receivable – related parties and reclassified from a short-term to a long-term asset.
 
On October 12, 2016,
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In February 2018, the Audit CommitteeCompany advanced the CAB $1,490,000 to begin construction of improvements on the Sky Ranch property. The $1,512,500 balance of the Company’s boardnotes receivable at May 31, 2018, includes borrowings of directors approved accepting a bid submitted by Nelson Pipeline Constructors LLC to construct a pipeline connecting its Sky Ranch water system to Rangeview’s water system for approximately $4.2 million (the “Nelson Bid”). Nelson Pipeline Constructors LLC is a wholly owned subsidiary$1,490,000 and accrued interest of Nelson Infrastructure Services LLC, a company in which Patrick J. Beirne owns a 50% interest. In addition, Mr. Beirne, a director of Pure Cycle, is Chairman and Chief Executive Officer of each of Nelson Pipeline Constructors LLC and Nelson Infrastructure Services LLC. Since Mr. Nelson is the 50% owner of the parent company of Nelson Pipeline Constructors LLC, Mr. Nelson’s interest in the transaction is approximately $2.1 million without taking into account any profit or loss from the Nelson Bid. Pursuant to the Company’s policies for review and approval of related party transactions, the Nelson Bid was reviewed and approved by the Audit Committee and by the board of directors, with Mr. Beirne abstaining.$22,500.

NOTE 7 – SIGNIFICANT CUSTOMERS

The Company sells wholesale water and wastewater services to Rangeview pursuantPursuant to the Rangeview Water Agreements (defined in Note 4 – Water and Land Assets in Part II, Item 8 of the 20162017 Annual Report). and an Export Service Agreement entered into with the Rangeview District dated June 16, 2017, the Company provides water and wastewater services on the Rangeview District’s behalf to the Rangeview District’s customers. Sales to the Rangeview District accounted for 75%9% and 78%75% of the Company’s total water and wastewater revenues for the three months ended May 31, 20172018 and 2016,2017, respectively. Sales to the Rangeview District accounted for 33%5% and 77%33% of the Company’s total water and wastewater revenues for the nine months ended May 31, 2018 and 2017, and 2016, respectively. The Rangeview District has one significant customer. Pursuant tocustomer, the Rangeview Water Agreements, the Company is providing water and wastewater services to this customer on behalf of Rangeview.Ridgeview Youth Services Center. Rangeview’s significant customer accounted for 59%4% and 63%59% of the Company’s total water and wastewater revenues for the three months ended May 31, 20172018 and 2016,2017, respectively. Rangeview’s significant customer accounted for 26%4% and 66%26% of the Company’s total water and wastewater revenues for the nine months ended May 31, 2018 and 2017, respectively.

Revenues related to the provision of water for the oil and 2016, respectively.
gas industry to one customer accounted for 87% of the Company’s water and wastewater revenues for the three months ended May 31, 2018. Revenues related to the provision of water for the oil and gas industry to three customers accounted for 91% of the Company’s water and wastewater revenues for the nine months ended May 31, 2018. Revenues related to the provision of water for the oil and gas industry to one customer accounted for 0% and 55% of the Company’s water and wastewater revenues for the three and nine months ended May 31, 2017, respectively. The Company had no revenues related to the provision of water for the oil and gas industry for the three or nine months ended May 31, 2016.

The Company had accounts receivable from the Rangeview District which accounted for 64%26% and 74%50% of the Company’s wholesale water and wastewater trade receivables balances at May 31, 20172018 and August 31, 2016,2017, respectively. Accounts receivable from Rangeview’sthe Rangeview District’s largest customer accounted for 57%15% and 63%19% of the Company’s water and wastewater trade receivables as of May 31, 20172018 and August 31, 2016,2017, respectively. As of May 31, 2018 and August 31, 2017 one significant customer accounted for 55% and 46% of the Company’s trade receivables balances, respectively.

NOTE 8 – ACCRUED LIABILITIES

At May 31, 2018, the Company had accrued liabilities of $379,300, of which $4,900 was for estimated property taxes, $68,000 was for professional fees, and $306,400 was for operating payables.

At August 31, 2017, the Company had accrued liabilities of $70,800,$380,900, of which $4,000$265,000 was for accrued compensation, $5,000 was for estimated property taxes, $39,500 was for professional fees, and $27,300 was for operating payables.
At August 31, 2016, the Company had accrued liabilities of $242,600, of which $160,000 was for accrued compensation, $5,700 was for estimated property taxes, $48,000$48,500 was for professional fees, and the remaining $28,900$62,400 was related to operating payables.

NOTE 9 – LITIGATION LOSS CONTINGENCIES

The Company has historically been involved in various claims, litigation and other legal proceedings that arise in the ordinary course of its business. The Company records an accrual for a loss contingency when its occurrence is probable and damages can be reasonably estimated based on the anticipated most likely outcome or the minimum amount within a range of possible outcomes. The Company makes such estimates based on information known about the claims and experience in contesting, litigating and settling similar claims. Disclosures are also provided for reasonably possible losses that could have a material effect on the Company’s financial position, results of operations or cash flows.
The Company is currently not aware of any probable or reasonably possible claims requiring disclosure or an accrual.

PURE CYCLE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2017
NOTE 10 – SEGMENT INFORMATION

Prior to the sale of the Company’s agricultural assets and the residual operations through December 31, 2015, the Company operated primarily in two lines of business: (i) the wholesale water and wastewater business;business and (ii) the agricultural farming business. The Company has discontinued its agricultural farming operations. TheCurrently, the Company will continue to operateoperates its wholesale water and wastewater services segment as its only line of business.business but anticipates it will report its land development activities at Sky Ranch as a separate segment in future filings. The wholesale water and wastewater services business includes selling water service to customers, which is then 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.
 
NOTE 11 – SUBSEQUENT EVENTS
In June 2017,As part of the Company’s Sky Ranch development, the Company entered into agreements with three national home builders, Richmond American Homes, KB Home and Taylor Morrison,contracts for the sale of 506 single family lots in its first phase(see Note 1 – Presentation of Sky Ranch. The agreements provide for earnest money deposits and a 60-day due diligence investigationInterim Information).  The lot prices range from $67,500 to $75,000 depending onCompany anticipates that the lot size and specific terms and conditions of the agreement with each builder. The Companyreal estate sales will be responsible for developing finished lots and believes it has adequate liquidity to fund the improvements needed to deliver finished lots to each builder. The Company considers lot sales to be a separate linesegment in fiscal 2018. As of May 31, 2018, there were no real estate revenues or profits, and the carrying cost of the real estate is primarily inventory and reimbursable costs which were approximately $3.7 million and are less than 10% of the Company’s total assets. Oil and gas royalties and licenses are a passive activity and not an operating business activity, and will disclose the salestherefore, are not classified as a separate segment from the wholesale water and wastewater business. This segment will include certain Sky Ranch Land assets totaling approximately $4.2 million, which are recorded on the balance sheet at May 31, 2017.segment.
 

Item 2.19Management’s Discussion and Analysis of Financial Condition and Results of Operations
Index
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 our Annual Report on Form 10-K, 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 consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 20162017 (the “2016“2017 Annual Report”). This section focuses on the key indicators reviewed by management in evaluating our financial condition and operating performance, including the following:
 
●
·Revenue generated from providing water and wastewater services;
Revenue generated from providing water and wastewater services;
·Expenses associated with developing our water and land assets; and
●
Expenses associated with developing our water and land assets; and
●
Cash available to continue development of our water rights, land assets and service agreements.
·Cash available to continue development of our land, water rights and service agreements.
 
Our MD&A section includes the following items:
 
Our Business –a general description of our business, our services and our business strategy.
 
Results of Operations – ananalysis of our results of operations for the periods presented in our consolidated financial statements. We present our discussion in the MD&A in conjunction with the accompanying financial statements.
 
Liquidity, Capital Resources and Financial Position –an analysis of our cash position and cash flows, as well as a discussion of our financial obligations.
 
Critical Accounting Policies and Use of Estimates –a discussion of our critical accounting policies that require critical judgments, assumptions and estimates.
 
Our Business
 
Pure Cycle Corporation (“we,” “us,” or “our”) is a Colorado corporation that (i) provides wholesale water and wastewater services to end-use customers of governmental entities and to commercial and industrial customers and (ii) untilis developing 931 acres of land zoned as a Master Planned Community along the end of calendar 2016, managed land and water assets for farming.I-70 corridor known as Sky Ranch.
 
Wholesale Water and Wastewater
 
TheseOur utility services include water production, storage, treatment, bulk transmission to retail distribution systems, wastewater collection and treatment, irrigation water treatment and transmission, industrial water sales, construction management, billing and collection and emergency response.
 
We are a vertically integrated wholesale water and wastewater provider, which means we own or control substantially all assets necessary to provide wholesale water and wastewater services to our customers. This includes owning (i) water rights which we use to provide domestic, irrigation, and industrial water to our wholesale customers (we own surface water, groundwater, reclaimed water rights and storage rights); (ii) infrastructure (such as wells, diversion structures, pipelines, reservoirs and treatment facilities) required to withdraw, treat, store and deliver water; (iii) infrastructure required to collect, treat, store and reuse wastewater; and (iv) infrastructure required to treat and deliver reclaimed water for irrigation and industrial use.
 
We own or control directly or through our participation in regional water partnerships approximately 26,98528,634 acre feet of surface water,tributary, non-tributary and not non-tributary groundwater rights and approximately 26,000 acre feet of adjudicated reservoir sites that we refer to as our “Rangeview Water Supply.”sites. This water is located in the southeast Denver metropolitan area onarea. Most of our water is located at the Lowry Range, a 27,000 acre27,000-acre parcel of land which is owned by the State of Colorado Board of Land Commissioners (the “Land Board”) known as the. Our “Lowry Range.” Of theWater Supply” consists of approximately 26,985 acre feet of water, comprising our Rangeview Water Supply, we own 11,650 acre feet of water which we own and can export from the Lowry Range (“Export Water”), which. Our Export Water consists of 10,000 acre feet of groundwater and 1,650 acre feet of average yield surface water, pending completion by the Land Board of documentation related to the exercise of our right to substitute 1,650 acre feet of our groundwater for a comparable amount of surface water. Additionally, assuming the completion of the substitution of groundwater for surface water, we hold the exclusive right to develop and deliver through the year 2081 the remaining 12,035 acre feet of groundwater and approximately 1,650 acre feet of average yield surface water to customers either on or off of the Lowry Range.
 

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We currently provide wholesale water and wastewater service predominantly to two local governmental entity customers. Our largest wholesale domestic customer is the Rangeview Metropolitan District (“Rangeview”(the “Rangeview District”). We provide service to the Rangeview District and its end-use customers pursuant to the Rangeview Water Agreements (defined in Part I, Item 1 – Business – Our Water and Land Assets in the 20162017 Annual Report). Through the Rangeview including through our recently acquired Wild Pointe Service Agreement,District, we serve 378391 Single Family Equivalent (“SFE”) water connections and 157 SFE wastewater connections located in southeastern metropolitan Denver. In the past three years, we have been providing
We also provide untreated water to industrial customers in the oil and gas industry located in our service areas and adjacent to our service areas for the purpose of hydraulic fracturing. Oil and gas operators have leased more than 135,000 acres within and adjacent to our service areas for the purpose of exploring oil and gas interests in the Niobrara and other formations, and this activity hadhas led to increasedvarying water demands.
 
We plan to utilize our significant water assets along with our adjudicated reservoir sites to provide wholesale water and wastewater services to local governmental entities, which in turn will provide residential/commercial water and wastewater services to communities along the eastern slope of Colorado in the area generally referred to as the Front Range. Principally, we target the I-70 corridor, which is located east of downtown Denver and south of Denver International Airport. This area is predominantly undeveloped and is expected to experience substantial growth over the next 30 years. We also plan to continue to provide water service to commercial and industrial customers.
 
Sky Ranch
 
We also own 931 acres of land, zoned as a Master Planned Community along the I-70 corridor east of Denver, Colorado. In anticipation of developing this land, we have installed approximately eightten miles of water transmission lines at a cost of $4.3 million to connect our Lowry Range water system to Sky Ranch. Construction was completed in May 2017Ranch and the water transmission line was placed intohave extended service in June 2017.lines to our initial phase of development at Sky Ranch.
 
Subsequent Event
Additionally, inIn June 2017, we entered into purchase and sale agreements (collectively, the “Purchase and Sale Contracts”) with three nationalseparate home builders Richmond American Homes, KB Homepursuant to which we agreed to sell, and Taylor Morrison,each builder agreed to purchase, a certain number (totaling 506) of single-family, detached residential lots at the Sky Ranch property. Each builder is also required to purchase from the Rangeview District water and sewer taps for the sale of 506 single family lots in the first phase of Sky Ranch. The agreements provide forlots. Each builder had a 60-day due diligence investigation, afterperiod which we will finalize designs forwas extended, during which it had the community includingright to terminate the final platted lots, roadways, open space, drainage,Purchase and Sale Contract and receive a full refund of its earnest money deposit. On November 10, 2017, each builder completed its due diligence period and agreed to continue with its respective Purchase and Sale Contract.
We are obligated, pursuant to the Purchase and Sale Contracts, or separate Lot Development Agreements (the “Lot Development Agreements” and, together with the Purchase and Sale Contracts, the “Builder Contracts”), to construct infrastructure and other improvements, such as roads, curbs and gutters, park amenities, sidewalks, street and traffic signs, water and wastewater systems. Thesanitary sewer mains and stubs, storm water management facilities, and lot prices range from $67,500 to $75,000 depending on the lot size and specific terms and conditionsgrading improvements for delivery of the agreement with each builder. We will be responsible for developing finished lots and believe we have adequate liquidity to fund the improvements needed to deliver finished lots to each builder. Pursuant to the Builder Contracts, we must cause the Rangeview District to install and construct off-site infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities) for the provision of water and wastewater service to the property. In conjunction with approvals with Arapahoe County for the Sky Ranch project, we and/or the Rangeview District and the Sky Ranch Metropolitan Districts, quasi-municipal corporations and political subdivisions of Colorado formed to provide service to the Sky Ranch property (the “Sky Ranch Districts”), are obligated to deposit into an account the anticipated costs to install and construct substantially all the off-site infrastructure improvements (which include drainage and storm water retention ponds and an entry roadway). The Rangeview and Sky Ranch off-site infrastructure improvements are estimated to cost approximately $10.2 million. We considerfinance the obligations of the Rangeview District and the Sky Ranch Districts as described in Note 6 – Related Party Transactions to the accompanying consolidated financial statements.
We estimate that the development of the finished lots for the first phase (506 lots) of Sky Ranch will require total capital of approximately $27.8 million and that lot sales to behome builders will generate gross proceeds of approximately $35 million, providing a separate lineprojected margin on lots of businessapproximately $7.2 million. The costs of developing lots and will discloserevenues from the sales as a separate segmentof finished lots are expected to be incurred over several quarters and the timing of cash flows will include certain milestone deliveries, including, but not limited to, completion of governmental approvals, installation of improvements, and completion of lot deliveries. Utility revenues are derived from the wholesaletap fees (which vary depending on lot size, house size, and amount of irrigated turf) and usage fees (which are monthly water and wastewater business.fees).
 
In addition to the lot sales, we will collect water and wastewater tap fees for each lot which will be paid at the time builders obtain building permits. The water tap fees will vary depending on the projected water demand for each individual lot. The average single family equivalent using 0.4 acre of water per year would correspond to a tap fee of $26,650. Wastewater tap fees are projected to be $4,600 per lot.
Frack Water Sales
During the three months ending May 31 and thereafter, new oil and gas drilling activity has commenced in our target service area with one rig having started its 4th well in the area. The region has had an increase in oil and gas activity with several new operators obtaining leases in the field with the expectation of additional drilling rig(s) later this year and into 2018. We have delivered frack water to one of the new operators under a new well stimulation design that more than doubled the amount of water used from 10 million gallons to more than 20 million gallons, increasing the revenue potential from $100,000 per well to $200,000 under the new design. We have significantly increased our supply capacity with the addition of the WISE water supply as well as our delivery capacity with completion of our new eight-mile transmission line to Sky Ranch. We believe we are well positioned to meet the increased demands from multiple operators in the field as well as water demands for development at our Sky Ranch project.21
Wild Pointe
Index
On December 15, 2016, Rangeview, acting by and through its Water Activity Enterprise, and Elbert & Highway 86 Commercial Metropolitan District, a quasi-municipal corporation and political subdivision of the State of Colorado, acting by and through its Water Enterprise (the “EH86” District”), entered into a Water Service Agreement (the “Wild Pointe Service Agreement”). Subject to the conditions set forth in the Wild Pointe Service Agreement and the terms of our engagement by Rangeview as Rangeview’s exclusive service provider, we acquired, among other things, the exclusive right to provide water services to residential and commercial customers in Wild Pointe Ranch, located 15 miles south of the Lowry Range in unincorporated Elbert County, Colorado, in exchange for $1,600,000 in cash. Pursuant to the terms of the Wild Pointe Service Agreement, we, in our capacity as Rangeview’s service provider, are responsible for providing water services to all users of water services within the boundaries and service area of the EH86 District and for operating and maintaining the EH86 District’s water system. In exchange, we receive all rates, fees and charges remitted to Rangeview by the EH86 District pursuant to the Wild Pointe Service Agreement, including system development (or tap) fees from new customers and monthly water service revenues. The EH86 District’s water system currently provides water service to approximately 120 existing SFE water connections in Wild Pointe Ranch and may grow to over 300 SFE water connections.

Discontinued Agricultural Operations and Leasing
 
On August 18,In 2015, we and our wholly owned subsidiary, PCY Holdings, LLC, sold approximately 14,600 acres of real property located in southeastern Colorado and related water rights in the Fort Lyon Canal Company (“FLCC”) to Arkansas River Farms, LLC, for approximately $45.8 million in cash. Pursuantand pursuant to the purchase and sale agreement, we retained our farm leasing operations through December 31, 2015.2015, after which we discontinued our farm operations.
 
After closing the sale of our farm portfolio, we purchasedWe continue to own approximately 700 acres of real property in thethis area to resolve certain dry-up covenants on three properties in order to obtain the releaseand approximately 13,900 acres of the remaining approximately $1.3 million in proceeds from the sale. During the quarter ended February 29, 2016, we resolved the dry-up covenant issues, the escrow proceeds were distributed to us, and the 700 acres are held as “land for sale” within Assets of discontinued operations.
mineral interests. We have discontinued our farm operations and will continueexpect to liquidate the remaining assets700 acres of property in this line of business.due course and are holding the property as a long term-asset. We intend to hold the mineral interests for future development.
 
ThisThese land interest isinterests are described in theLand and Mineral Interests Arkansas River Assetssection of Note 4 –Water and Land Assets in Part II, Item 8 of the 20162017 Annual Report.
 
22

Results of Operations
 
Executive Summary
 
The results of our operations for the three and nine months ended May 31, 20172018 and 20162017 are as follows:

Table 1a - Summary of Results of Operations 
  Three months ended May 31,    
  2018  2017  Change  % Change 
Millions of gallons of water delivered  102.0   6.4   95.6   1494%
Metered water usage revenues $1,162,600  $47,700  $1,114,900   2337%
Operating costs to deliver water $418,300  $76,900  $341,400   444%
(excluding depreciation and depletion)                
Water delivery gross margin %  64%  -61%        
                 
Wastewater treatment revenues $11,700  $7,000  $4,700   67%
Operating costs to treat wastewater $6,600  $7,500  $(900)  (12%)
Wastewater treatment gross margin %  44%  -7%        
                 
Other income $37,900  $22,000  $15,900   72%
Other income costs incurred $24,200  $13,700  $10,500   77%
Other income gross margin %  36%  38%        
                 
Tap and specialty facility revenues $-  $57,400  $(57,400)  (100%)
                 
General and administrative expenses $635,500  $518,600  $116,900   23%
Net income (loss) from continuing operatons $53,600  $(543,100) $596,700   110%
Net income (loss) from discontinued operations $1,000  $(11,300) $12,300   109%
Net income (loss) $54,600  $(554,400) $609,000   110%
Summary Table 1a
Table 1b - Summary of Results of Operations 
  Nine months ended May 31,    
  2018  2017  Change  % Change 
Millions of gallons of water delivered  242.3   42.0   200.3   477%
Metered water usage revenues $2,888,900  $379,500  $2,509,400   661%
Operating costs to deliver water $906,900  $234,400  $672,500   287%
(excluding depreciation and depletion)                
Water delivery gross margin %  69%  38%        
                 
Wastewater treatment revenues $32,200  $30,500  $1,700   6%
Operating costs to treat wastewater $21,300  $22,500  $(1,200)  (5%)
Wastewater treatment gross margin %  34%  26%        
                 
Other income $95,900  $75,000  $20,900   28%
Other income costs incurred $64,800  $45,900  $18,900   41%
Other income gross margin %  32%  39%        
                 
Tap and specialty facility revenues $49,900  $85,300  $(35,400)  (42%)
                 
General and administrative expenses $1,816,100  $1,411,400  $404,700   29%
Net income (loss) from continuing operatons $55,800  $(1,177,100) $1,232,900   105%
Net income (loss) from discontinued operations $2,400  $(32,600) $35,000   107%
Net income (loss) $58,200  $(1,209,700) $1,267,900   105%
 
 
 
Three months ended May 31,
 
 
 
 
 
 
2017
 
 
2016
 
 
Change
 
 
% Change
 
Millions of gallons of water delivered
  6.4 
  4.3 
  2.1 
  49%
Metered water usage revenues
 $47,700 
 $35,700 
 $12,000 
  34%
Operating costs to deliver water
 $76,900 
 $65,200 
 $11,700 
  18%
  (excluding depreciation and depletion)
    
    
    
    
  Water delivery gross margin %
  -61%
  -83%
    
    
 
    
    
    
    
Wastewater treatment revenues
 $7,000 
 $10,500 
 $(3,500)
  -33%
Operating costs to treat wastewater
 $7,500 
 $7,300 
 $200 
  3%
  Wastewater treatment gross margin %
  -7%
  30%
    
    
 
    
    
    
    
Other income
 $22,000 
 $40,700 
 $(18,700)
  -46%
Other income costs incurred
 $13,700 
 $20,800 
 $(7,100)
  -34%
  Other income gross margin %
  38%
  49%
    
    
 
    
    
    
    
Tap and specialty facility revenues
 $57,400 
 $14,000 
 $43,400 
  310%
 
    
    
    
    
General and administrative expenses
 $518,700 
 $431,700 
 $87,000 
  20%
Loss from continuing operatons
 $543,100 
 $361,000 
 $182,100 
  50%
Loss from discontinued operations
 $(11,300)
 $(61,300)
 $50,000 
  82%
Net loss
 $(554,400)
 $(422,300)
 $(132,100)
  -31%
23
Summary Table 1b
Index
 
 
Nine months ended May 31,
 
 
 
 
 
 
2017
 
 
2016
 
 
Change
 
 
% Change
 
Millions of gallons of water delivered
  42.0 
  14.8 
  27.2 
  184%
Metered water usage revenues
 $379,500 
 $119,800 
 $259,700 
  217%
Operating costs to deliver water
 $234,400 
 $191,000 
 $43,400 
  23%
  (excluding depreciation and depletion)
    
    
    
    
  Water delivery gross margin %
  38%
  -59%
    
    
 
    
    
    
    
Wastewater treatment revenues
 $30,500 
 $31,500 
 $(1,000)
  -3%
Operating costs to treat wastewater
 $22,500 
 $20,600 
 $1,900 
  9%
  Wastewater treatment gross margin %
  26%
  35%
    
    
 
    
    
    
    
Other income
 $75,000 
 $110,000 
 $(35,000)
  -32%
Other income costs incurred
 $46,000 
 $51,400 
 $(5,400)
  -11%
  Other income gross margin %
  39%
  53%
    
    
 
    
    
    
    
Tap and specialty facility revenues
 $85,300 
 $41,800 
 $43,500 
  104%
 
    
    
    
    
General and administrative expenses
 $1,411,400 
 $1,294,600 
 $116,800 
  9%
Loss from continuing operatons
 $(1,177,100)
 $(769,000)
 $(408,100)
  53%
Loss from discontinued operations
 $(32,600)
 $(21,500)
 $(11,100)
  52%
Net loss
 $(1,209,700)
 $(790,500)
 $(419,200)
  53%

Changes in Revenues
 
Metered Water Usage Revenues –Our water service charges, which are used to defray the costs to operate and maintain the systems, include a fixed monthly fee and a fee based on actual amounts of metered water delivered, which is based on a tiered pricing structure that provides for higher prices as customers use greater amounts of water. We typically negotiate the terms of our rates and charges with our wholesale customers as a component of our service agreements prior to commencement of service. Our rates and charges for service on the Lowry Range are established based on the average rates and charges of three surrounding water providers.
 
Water deliveries increased 49%1,494% and water revenues increased 34%2,337% during the three months ended May 31, 2017,2018, as compared to the three months ended May 31, 2016. Water deliveries increased 184% and water revenues increased 217% during the nine months ended May 31, 2017, compared to the nine months ended May 31, 2016.2017. The increaseincreases in water deliveries and revenues is primarilyare the result of an increase in demand for water for oil and gas operations, which is used primarily to frack wells drilled in the Niobrara formation. Water deliveries increased 477% and water revenues increased 661% during the nine months ended May 31, 2018, compared to the nine months ended May 31, 2017. This increase was due primarily to a higher demand for water by the oil and gas industry which was used primarilyduring the current nine-month period compared to frack a well drilled in the Niobrara formation. prior corresponding period. As a result of the difference in metered rates for fracking water compared to rates for tap customers, revenues received for fracking water have a highergreater margin. Increases and decreases in water deliveries charged at different rates will result in disproportionate increases and decreases in revenues. The following table detailstables detail the sources of our sales, the number of kgal (1,000 gallons) sold, and the average price per kgal for the three and nine months ended May 31, 20172018 and 2016,2017, respectively.

Table 2a - Water Revenue Summary 
  Three months ended May 31, 
  2018  2017 
Customer Type Sales  kgal  
Average price
per kgal
  Sales  kgal  
Average price
per kgal
 
On Site $98,900   20,549.5  $4.81  $31,000   4,865.0  $6.37 
Export - Commercial  41,300   4,439.9   9.30   16,700   1,556.6   10.73 
Fracking  1,022,300   77,058.2   13.27   -   -   - 
  $1,162,500   102,047.6  $11.39  $47,700   6,421.6  $7.43 

Table 2b - Water Revenue Summary 
  Nine months ended May 31, 
  2018  2017 
Customer Type Sales  kgal  
Average price
per kgal
  Sales  kgal  
Average price
per kgal
 
On Site $168,100   29,501.0  $5.70  $110,800   15,295.6  $7.24 
Export - Commercial  99,200   9,212.0   10.77   47,000   18,092.0   2.60 
Fracking  2,621,600   203,578.2   12.88   221,700   21,107.0   10.50 
  $2,888,900   242,291.2  $11.92  $379,500   54,494.6  $6.96 

Table 2a - Water Revenue Summary
 
 
Three months ended May 31,
 
 
 
2017
 
 
2016  
 
Customer Type
 
Sales
 
 
kgal
 
 
Average price per kgal
 
 
Sales
 
 
kgal
 
 
Average price per kgal
 
On Site
 $31,000 
  4,865.0 
 $6.37 
 $25,400 
  3,331.7 
 $7.62 
Export - Commercial
  16,700 
  1,556.6 
  10.73 
  10,300 
  951.5 
  10.83 
 
 $47,700 
  6,421.6 
 $7.43 
 $35,700 
  4,283.2 
 $8.33 
Table 2b - Water Revenue Summary
 
 
Nine months ended May 31,    
 
 
 
2017   
 
 
2016   
 
Customer Type
 
Sales
 
 
kgal
 
 
Average price per kgal
 
 
Sales
 
 
kgal
 
 
Average price per kgal
 
On Site
 $110,800 
  15,295.6 
 $7.24 
 $84,900 
  12,453.0 
 $6.82 
Export - Commercial
  47,000 
  18,092.0 
  2.60 
  34,900 
  2,393.9 
  14.58 
Fracking
  221,700 
  21,107.0 
  10.50 
  - 
  - 
  - 
 
 $379,500 
  54,494.6 
 $6.96 
 $119,800 
  14,846.9 
 $8.07 
The gross margin on delivering water increased to 64% and 69% during the three and nine months ended May 31, 2018, compared to a gross loss of 61% and a profitgross margin of 38% during the three and nine months ended May 31, 2017, respectively, compared to a loss of 83% and a loss of 59% during the three and nine months ended May 31, 2016, respectively,respectively. The change in our gross margin was due to an increased demand for water and our ability to apply the increase in waterrevenue from those deliveries related to offset the oil and gas industry. The Company is obligated to pay certain lease and operatingfixed costs related toof the ECCV system (defined under Liquidity, Capital Resources and Financial Position below). Our current cost associated with the use of the system without any production is a flat fee of $8,000 per month to maintain.month. In addition, the ECCV system costs us approximately $1,900$8,220 per month to maintain. We had significant production through the ECCV system related to the oil and gas water deliveries for the three and nine months ended May 31, 2017,2018, which has positively impacted our gross margin.
 
Wastewater Treatment Revenues –Our wastewater customer is charged based on the estimated amount of wastewater treated.
Wastewater fees decreased 33%increased 67% and 3%6% during the three and nine months ended May 31, 2017,2018, respectively, as compared to each of the three and nine months ended May 31, 2016,2017, respectively. The decreases wereincrease for the three months ended May 31, 2018, was due to timing of the wastewater processed through the system, and the increase for the nine months ended May 31, 2018, was primarily the result of decreasedhigher demand from our only wastewater customer. Wastewater operating costs and gross margin fluctuate based on timing of expenses and regulatory requirements, but generally fluctuate consistent with demand.
 

24
Tap and Special FacilityFacility/Construction Revenues –We have various water and wastewater service agreements, a component of which may include tap fee and special facility or construction fee revenues. We determined to early adopt Accounting Standards Update (“ASU”) No. 2014‑09, Revenue from Contracts with Customers (Topic 606), beginning September 1, 2017, in accordance with the transition provisions in ASU 2014‑09, utilizing the modified retrospective method. ASU 2014‑09 governs recognition of revenue from each of our revenue streams (water and wastewater usage fees, consulting fees, tap fees, special facility or construction fees, lot sales and oil and gas revenues).
The most significant impact of the standard relates to our accounting for tap fees and special facility or construction fees. Prior to the adoption of ASU 2014‑09, proceeds from tap fees and construction fees. We recognize water tap fees were deferred upon receipt and recognized in income either upon completion of construction of infrastructure or ratably over time, depending on whether the Company or a customer owned the infrastructure constructed with the proceeds. Tap and construction fees derived from agreements in which the Company would not own the assets constructed with the fees were recognized as revenue using the percentage-of-completion method. Tap and construction fees derived from agreements for which the Company would own the infrastructure were recognized as revenues ratably over the estimated accounting service life of the facilities constructed, starting at completion of construction, which could be in excess of 30 years.
Following adoption of ASU 2014‑09, tap fees are expected to be recognized once the tap fee has been paid and the customer has the right to receive water or wastewater service, and, once received, special facility fees or construction revenues are expected to be recorded as deferred revenue and recognized on a percentage-of-completion basis as the construction of the infrastructure is completed, regardless of whether the Company owns the assets. Once the infrastructure is completed, 100% of the deferred revenue will be recognized. We recognized the cumulative effect of applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Comparative results for the three and nine months ended May 31, 2018 and 2017 differ due to the adoption of ASU 2014-09.
We sold two tap fees during the nine months ended May 31, 2018, recognizing revenues of $49,900. We did not sell any water or wastewater taps during the nine months ended May 31, 2017; however, we recognized revenues of $3,600 and $10,700 of water tap fee revenues during each of$10,800 for the three and nine months ended May 31, 2017, and 2016, respectively ratablyunder the previous revenue recognition standard, ASU No. 2009-13, Revenue Recognition (Topic 605). The water tap fees to be recognized over the estimated service period upon completionthese periods are net of the “Wholesaleroyalty payments to the Land Board and amounts paid to third parties pursuant to the “CAA,” which is described in Note 4 – Long-Term Obligations and Operating Lease to the accompanying consolidated financial statements.
We did not recognize special facility fees for the three or nine months ended May 31, 2018. Prior to the adoption of ASU 2014‑09, we recognized approximately $10,300 and $31,000 of “Special Facilities” (defined in the 20162017 Annual Report) constructed to provide service to Arapahoe County. Duringfunding as revenue during the three and nine months ended May 31, 2017, we recognized $43,000 of water tap fee revenues related to our Wild Pointe Service Agreement. The water tap fees related to the Wild Pointe Service Agreement are recognized when received as the Company does not own the constructed assets.
We recognized $10,400 and $31,100 of “Special Facilities” (defined in the 2016 Annual Report) funding as revenue during each of the three and nine months ended May 31, 2017 and 2016, respectively.2017. This is the ratable portion of the Special Facilities funding proceeds received from Arapahoe County pursuant to a water service agreement as more fully described in Note 2 – Summary of Significant Accounting Policies to Part II, Item 8 of the 20162017 Annual Report.
 
At May 31, 2018 and 2017, we had deferred recognition of approximately $0 and $1.1 million, respectively, of water tap and special facility/construction fee revenue from Arapahoe County, which will be recognized as revenue ratably over the estimated useful accounting life of the assets constructed with the construction proceeds as described above.revenues.
 
Water tap fees are calculated based on a cost of service methodology which includes our historic cost to acquire the water rights, and the cost to develop and construct the infrastructure and facilities to service the individual customers and a rate of return. Rangeview’s water tap fees are $24,620 per SFE, and wastewater tap fees are $4,988 per SFE. Sky Ranch tap fees are $26,650 for water and $4,700 for wastewater. During the three and nine months ended May 31, 2017, the we recognized $43,000 of water tap fee revenue revenuesRevenue recognition related to our Wild Pointe asset. The water tapand wastewater usage fees, related toconsulting fees, and oil and gas revenue will remain substantially unchanged as a result of the Wild Pointe Service Agreement are recognized when received as we do not own the related assets.adoption of ASU 2014-09.
 
Other Income –Other income consisted principally of consulting fees of$37,900 and $22,000 and $40,700 for the three months ended May 31, 2018 and 2017, and 2016, respectively. Other incomerespectively, consisted principally of consulting feesfees. In addition, other income of $75,000$95,900 and $110,000$75,000 for the nine months ended May 31, 2018 and 2017, and 2016, respectively. Our margins have fluctuated as we allocated additional staff costsrespectively, consisted principally of consulting fees. Consulting fees fluctuate from one period to system management.the next based on our customers’ needs.
 
General and Administrative Expenses
 
Significant balances classified as general and administrative (“G&A”) expenses for the three and nine months ended May 31, 20172018 and 2016,2017, respectively, were:
 
Table 3a - Signficant Balances in G&A
25
Table 3a - Significant Balances in G&A 
  Three months ended May 31,    
  2018  2017  $ Change  % Change 
Salary and salary-related expenses:            
Including share-based compensation $310,900  $267,400  $43,500   16%
Excluding share-based compensation $227,300  $203,800  $23,500   12%
Professional fees $108,500  $77,200  $31,300   41%
Fees paid to directors (including insurance) $35,200  $34,100  $1,100   3%
Public entity related expenses $23,000  $41,800  $(18,800)  -45%
 
 
Three months ended May 31,
 
 
 
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Salary and salary-related expenses:
 
 
 
 
 
 
 
 
 
 
 
 
  Including share-based compensation
 $267,400 
 $219,000 
 $48,400 
  22%
  Excluding share-based compensation
 $203,800 
 $165,300 
 $38,500 
  23%
Professional fees
 $77,200 
 $58,300 
 $18,900 
  32%
Fees paid to directors (including insurance)
 $34,100 
 $38,000 
 $(3,900)
  -10%
Public entity related expenses
 $41,800 
 $28,100 
 $13,700 
  49%

Table 3b - Significant Balances in G&A 
  Nine months ended May 31,    
  2018  2017  $ Change  % Change 
Salary and salary-related expenses:            
Including share-based compensation $919,000  $774,400  $144,600   19%
Excluding share-based compensation $677,800  $606,300  $71,500   12%
Professional fees $267,300  $195,700  $71,600   37%
Fees paid to directors (including insurance) $116,900  $97,800  $19,100   20%
Public entity related expenses $96,100  $91,600  $4,500   5%

Table 3b - Signficant Balances in G&A
 
 
Nine months ended May 31,
 
 
  
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Salary and salary-related expenses:
 
 
 
 
 
 
 
 
 
 
 
 
  Including share-based compensation
 $774,400 
 $682,400 
 $92,000 
  13%
  Excluding share-based compensation
 $606,300 
 $515,400 
 $90,900 
  18%
Professional fees
 $195,700 
 $194,200 
 $1,500 
  1%
Fees paid to directors (including insurance)
 $97,800 
 $101,700 
 $(3,900)
  -4%
Public entity related expenses
 $91,600 
 $60,400 
 $31,200 
  52%
Salary and salary-related expenses –Salary and salary-related expenses including share-based compensation expense increased 22%16% and 13%19% for the three and nine months ended May 31, 2017,2018, respectively, as compared to the three and nine months ended May 31, 2016,2017, respectively. The increase was primarily the result of pay increasesadditional employees and the addition of three new employees.increased share-based compensation expense. The salary and salary-related expenses noted above include $63,500$83,600 and $53,700$63,500 of share-based compensation expenses during the three months ended May 31, 2018 and 2017, and 2016, respectively. TheIncluded in the above salary and salary-relatedsalary related expenses noted above includeare $241,200 and $168,000 and $167,100 of share-based compensation expenses during the nine months ended May 31, 2018 and 2017, and 2016, respectively.
 
Professional fees (mainly(predominately accounting and legal) –Legal and accounting fees increased 32%41% and 1%37% during the three and nine months ended May 31, 2017,2018, as compared to the three and nine months ended May 31, 2016,2017, respectively. The increase was primarily due to an increase in legal fees of approximately $10,700 for the three months ended May 31, 2017, as2018 compared to the three months ended May 31, 2016, respectively.2017 is due to higher legal fees of approximately $22,000 related to a certain water service agreement. The increase in the nine months ended May 31, 2018, as compared to the nine months ended May 31, 2017, was primarily due to additional accounting fees related to the 2017 10-K audit of approximately $35,000 and the aforementioned legal fees related to a certain water service agreement.
 
Fees paid to directors (including insurance) – Directors’ fees, including D&O insurance, decreased 10%increased 3% and 4%20% for the three and nine months ended May 31, 2017,2018, respectively, as compared to the three and nine months ended May 31, 2016, respectively. These2017. The increase is primarily due to a decision to increase fees payable to directors for service on the board of directors effective as of January 1, 2018. Once these fees are set, they may vary due to the number of boardmeetings and committee meetings.timing of payments; however, they are generally expected to remain consistent year over year.
 
Public entity expenses– Costs associated with corporate governance and costs associated with being a publicly traded entity increased 49% and 52%decreased 45% for the three months ended May 31, 2018 compared to the three months ended May 31, 2017 and increased 5% for the nine months ended May 31, 20172018, respectively, as compared to the three and nine months ended May 31, 2016,2017, respectively. The fluctuations are due to the timing and number of filings and compliance costs for filing with the Securities and Exchange Commission (the “SEC”).
26
Other Income and Expense Items
 
Table 4a - Other Items 
  Three Months Ended May 31,    
  2018  2017  $ Change  % Change 
Other income items:            
Oil and gas lease income, net $13,900  $6,000  $7,900   132%
Oil and gas royalty income, net $61,100  $24,900  $36,200   145%
Interest income $69,000  $59,600  $9,400   16%

Table 4b - Other Items 
  Nine Months Ended May 31,    
  2018  2017  $ Change  % Change 
Other income items:            
Oil and gas lease income, net $37,200  $17,300  $19,900   115%
Oil and gas royalty income, net $152,700  $164,300  $(11,600)  -7%
Interest income $176,000  $199,200  $(23,200)  -12%
Table 4a - Other Items
 
 
Three Months Ended May 31,
 
 
  
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Other income items:
 
 
 
 
 
 
 
 
 
 
 
 
  Oil and gas lease income, net
 $6,000 
 $31,900 
 $(25,900)
  -81%
  Oil and gas royalty income, net
 $24,900 
 $76,400 
 $(51,500)
  -67%
  Interest income
 $59,600 
 $66,300 
 $(6,700)
  -10%
Table 4b - Other Items
 
 
Nine Months Ended May 31,
 
 
  
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Other income items:
 
 
 
 
 
 
 
 
 
 
 
 
  Oil and gas lease income, net
 $17,300 
 $354,800 
 $(337,500)
  -95%
  Oil and gas royalty income, net
 $164,300 
 $271,000 
 $(106,700)
  -39%
  Interest income
 $199,200 
 $175,400 
 $23,800 
  14%
The oilOil and gas lease income amounts in 2016 primarily represent a portion of the up-front payments we received on March 10, 2011, upon the signing of a Paid-Up Oil and Gas Lease that was subsequently purchased by a wholly-owned subsidiary of ConocoPhillips Company (the "O&G Lease") and a Surface Use and Damage Agreement (the "Surface Use Agreement"). During fiscal year 2011, we received payments of $1,243,400 for the purpose of exploring for, developing, producing and marketing oil and gas on 634 acres of mineral estate we own at our Sky Ranch property. The income received was recognized in income ratably over the initial three-year term of the O&G Lease, which began on March 10, 2011. During February 2014, we received an additional payment of $1,243,400 to extend the initial term of the O&G Lease by an additional two years through February 2016. The income received for the extension was recognized in income over the two-year extension term of the O&G Lease.– The oil and gas lease income amounts in 2017 and a small portion of 2016 represent a portion of the up-front payment of $72,000 we received in fiscal 2014 for exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate we own adjacent to the Lowry Range (the "Rangeview Lease"“Rangeview Lease”). The income received for the Rangeview Lease is beingwas recognized ratably through June 2017.2017, and the Rangeview Lease has expired.
 

On October 5, 2017, we entered into a Paid-Up Oil and Gas Lease with Bison Oil and Gas, LLP for the purpose of exploring for, developing, producing, and marketing oil and gas on the 40 acres of mineral estate we own adjacent to the Lowry Range (the “Bison Lease”). Pursuant to the Bison Lease, we received an up-front payment of $167,200, which will be recognized as income on a straight-line basis over three years (the term of the Bison Lease). We recognized lease income of $13,900 and $37,200 during the three and nine months ended May 31, 2018, respectively, related to the up-front payment received pursuant to the Bison Lease. As of May 31, 2018, we had deferred recognition of $130,000 of income related to the Bison Lease, which will be recognized into income ratably through September 2020.
 
Oil and gas royalty income – In 2011, we entered into a Paid-Up Oil and Gas Lease, which was subsequently purchased by a wholly-owned subsidiary of ConocoPhillips Company, for the purpose of exploring for, developing, producing and marketing oil and gas on 634 acres of mineral estate we own at our Sky Ranch property (the “Sky Ranch O&G Lease”). The Sky Ranch O&G Lease is held by production through two wells drilled in our mineral estate. The oil and gas royalty income represents amounts received pursuant to the Sky Ranch O&G Lease. The amount includesLease as royalties from oil and gas production from wells in our mineral estate at Sky Ranch. The royalties for the three months ended May 31, 20172018, were approximately $24,900,$61,100, as compared to $76,400$24,900 for the same period in 2016.2017. The royalties for the nine months ended May 31, 20172018 were approximately $164,300,$152,700, as compared to $271,000$164,300 for the same period in 2016.2017. The decrease in oil and gas royalties is primarily attributed to one well undergoing maintenance during the quarter. As parta result of the maintenance the well ceasedlower production for a substantial portion of the quarter ended May 31, 2017.oil and gas from wells in our mineral estate at Sky Ranch.
 
Interest Income – Interest income represents interest earned on the temporary investment of capital in cash and cash equivalents, available-for-sale securities, finance charges, and interest accrued on the notes receivable from the Rangeview District and the Sky Ranch Metropolitan District No. 5.Districts. The increasedecrease was primarily attributable to the investmentuse of cash received fromto invest in the saledevelopment of our farms in August 2015 in a money market fund at a bank, certificates of deposit, and investments in U.S. treasury securities.Sky Ranch.
 
Discontinued Operations
 
For additional information about our discontinued operations, see NotesNote 1 – Presentation of Interim Information to Consolidated Financial Statements.the accompanying consolidated financial statements.
 
27
Index
The following table provides the components of discontinued operations:

Table 5 - Discontinued Operations Income Statement 
             
  Three Months Ended May 31,  Nine Months Ended May 31, 
  2018  2017  2018  2017 
Farm revenues $1,000  $600  $2,400  $6,300 
Farm expenses  -   -   -   - 
Gross profit  1,000   600   2,400   6,300 
                 
General and administrative expenses  -   11,900   -   48,300 
Operating (loss) profit  1,000   (11,300)  2,400   (42,000)
Finance charges  -   -   -   9,400 
                 
Income (loss) from discontinued operations $1,000  $(11,300) $2,400  $(32,600)
 
 
Three Months Ended May 31,
 
 
Nine Months Ended May 31,
 
 
 
2017
 
 
2016
 
 
2017
 
 
2016
 
Farm revenues
 $600 
 $- 
 $6,300 
 $276,000 
Farm expenses
  - 
  (22,700)
  - 
  (56,000)
  Gross profits (loss)
  600 
  (22,700)
  6,300 
  220,000 
 
    
    
    
    
General and administrative expenses
  11,900 
  48,400 
  48,300 
  287,800 
  Operating (loss) profit
  (11,300)
  (71,100)
  (42,000)
  (67,800)
Gain of sale of farm assets
  - 
  - 
  - 
  4,300 
Finance charges
  - 
  9,800 
  9,400 
  42,000 
  Income (loss) from discontinued operations
 $(11,300)
 $(61,300)
 $(32,600)
 $(21,500)

We anticipate continued expenses through the end of calendar 2017fiscal 2018 related to the discontinued operation. We will incuroperations, including expenses related to the remaining agricultural land we continue to own and for the purpose of collecting outstanding receivables.
 
Liquidity, Capital Resources and Financial Position
 
At May 31, 2017,2018, our working capital, defined as current assets less current liabilities, was $26.7$24.1 million, which included $26.0$19.9 million in cash and cash equivalents and short-term investments, and we have an additional $1.4 million$190,000 held in long-term investments.
We believe that as of May 31, 20172018, 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 12 months.
 
Sky Ranch SaleDevelopment – During fiscal year 2018, we began construction of Farm Assets –off-site improvements at Sky Ranch, including drainage improvements, access roads and other improvements which are estimated to cost approximately $10.2 million. As of May 31, 2018, Sky Ranch development costs of approximately $1.6 million have been incurred. We soldexpect to phase construction of lots to deliver approximately 250 initial lots to builders over the next 12-18 months, which have an estimated construction cost of approximately $8 million. Pursuant to our Arkansas River farm assetsBuilder Contracts, we will collect certain funds from two of the three builders as we reach specified infrastructure milestones. We estimate that the development of the finished lots for the first phase (506 lots) of Sky Ranch will require total capital of approximately $45.8$28 million and estimate lot sales to home builders will generate approximately $35 million, providing a projected margin on August 18, 2015.lots of approximately $7 million. We believe that our plan for phased construction and delivery of lots together with the progress payments from builders will enable us to have adequate cash to fund the development of lots.
 

System Expansion –During the nine months ended May 31, 2017, we spent approximately $4.3 million to install approximately eight miles of pipeline and other infrastructure at our Sky Ranch water system and infrastructure at Rangeview. The pipeline was completed and placed into service in June 2017.
ECCV Capacity Operating System – –Pursuant to a 1982 contractual right, Rangeview may purchase water produced from the East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board System (“ECCV”), whichsystem. 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, in order to increase the delivery capacity and reliability of these wells, in our capacity as Rangeview’s service provider and the Export Water Contractor (as defined in the 2014 Amended and Restated Lease Agreement among us, Rangeview and the Land Board), 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 $8,000 per month from January 1, 2013 through December 31, 2020, and will decrease to $3,000 per month from 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. In addition, in 2018 the ECCV system costshas cost us and is anticipated to continue to cost us approximately $1,900$8,200 per month to maintain.
 
South Metropolitan Water Supply Authority (“SMWSA”) and the Water Infrastructure Supply Efficiency Partnership (“WISE”) –SMWSA is a municipal water authority in the State of Colorado organized to pursue the acquisition and development of new water supplies on behalf of its members, including Rangeview. Pursuant to the SMWSA Participation Agreement with Rangeview, we agreed to provide funding to Rangeview in connection with its membership in the SMWSA. In July 2013, Rangeview, together with nine other SMWSA members, formed an entity to enable its members to participle in a cooperative water project known as WISE and entered into an agreement that specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE. On December 31, 2013, the South Metro WISE Authority (“SMWA”), the City and County of Denver acting through its Board of Water Commissioners (“Denver Water”) and the City of Aurora acting by and through its Utility Enterprise (“Aurora Water”) entered into the Amended and Restated WISE Partnership – Water Delivery Agreement (the “WISE Partnership Agreement”), which provides for the purchase of certain infrastructure (pipelines, water storage facilities, water treatment facilities, and other appurtenant facilities) to deliver water to and among the 10 members of the SMWA, Denver Water and Aurora Water. We have entered into the Rangeview/‌Pure Cycle WISE Project Financing Agreement (the “WISE Financing Agreement”), which obligates us to fund Rangeview’s cost of participating in WISE. We anticipate that we will be investing approximately $1.2$5.2 million per year for each ofin total over the next five fiscal years to fund Rangeview’s purchase of its share of the water transmission line and additional facilities, water and related assets for WISE. In exchange for funding Rangeview’s obligations in WISE, we will have the sole right to use and reuse Rangeview’s 7% share of the WISE water and infrastructure to provide water service to Rangeview’s customers and to receive the revenue from such service. Upon completion of the WISE infrastructure in 2017,At full capacity, we expect towill be entitled to approximately three million gallons per day of transmission pipeline capacity and 500 acre feet per year of water.
28
Summary Cash Flows Table
 
Table 6 - Summary Cash Flows Table 
  Nine Months Ended May 31,    
  2018  2017  $ Change  % Change 
Cash (used in) provided by:            
Operating activities $(1,356,300) $(839,200) $(517,100)  (62%)
Investing activities $(1,631,800) $1,891,600  $(3,523,400)  (186%)
Financing activities $288,400  $(2,100) $290,500   13833%
Table 5 - Summary Cash Flows Table
 
 
Nine Months Ended May 31,
 
 
  
 
 
 
2017
 
 
2016
 
 
$ Change
 
 
% Change
 
Cash (used in) provided by:
 
 
 
 
 
 
 
 
 
 
 
 
  Operating acitivites
 $(839,200)
 $(215,000)
 $(624,200)
  290%
  Investing activities
 $1,891,600 
 $(31,757,800)
 $33,649,400 
  -106%
  Financing activities
 $(2,100)
 $(1,600)
 $(500)
  31%

ChangesChanges in Operating Activities –Operating activities include revenues we receive from the sale of wholesale water and wastewater services and from leases on our farms, costs incurred in the delivery of those services, G&A expenses, and depletion/‌depreciation expenses.
 
Cash used in operations in the nine months ended May 31, 2017,2018, increased by $624,200approximately $517,100 compared to the nine months ended May 31, 2016,2017, which wasis primarily due mainly to the payment of approximately $1.1 million for a collateral deposit paid to the Southeast Metro Stormwater Authority in association of with the grading, erosion and sediment control permit application for Sky Ranch, anticipated to be refunded within twelve months, increased customer billings of approximately $674,000 due to increased fracking revenue, the capitalized costs to develop lots at Sky Ranch included in inventory of $382,600 and payments of approximately $138,600 of accounts payable, offset by an increase of net income of $1.3 million and taxesan increase in deferred oil and increased operating losses.gas lease payments of $148,000 for the nine months ended May 31, 2018.
 
Changes in Investing Activities–The use of cash in investing activities during the nine months ended May 31, 2018, consisted of the sale of available for sale securities Investingof $3.1 million, the investment in our water system of $3.4 million, funding payment of $1,490,000 for Sky Ranch Community Authority Board to begin construction on Sky Ranch and the purchase of equipment of $271,100. Cash provided by investing activities in the nine months ended May 31, 2017 consisted of the sale of available for sale securities for $8.4 million, the investment in our water systemssystem of $6.4 million, of which approximately $4.1 million (of the expectedtotal estimated $4.3 million)million cost) related to construction of the Sky Ranch pipeline, $1.6 million related to the Wild Pointe purchase and approximately $0.1 million related to the WISE infrastructure, and the purchase of equipment of $77,200. Investing
Changes in Financing Activities – Cash provided by financing activities induring the nine months ended May 31, 2016,2018, consisted of a receipt of a note receivable of $215,500 from a Sky Ranch District and proceeds from the purchaseexercise of $23.1 millionstock options of available for sale securities, the purchase$75,000, offset by a payment to contingent liability holders of $7.0 million of long term investments, the investment$2,200. Cash used in our water systems of $695,700 and the purchase of equipment of $411,800.

Changes in Financing Activities–Financingfinancing activities induring the nine months ended May 31, 2017 and 2016, consisted of paymentsa payment to contingent liability holders of $2,100 and $1,600, respectively$2,100.
 
Off-Balance Sheet Arrangements
 
Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA as described in Note 4 – Long-Term Obligations and Operating Lease – Participating Interests in Export Water Supply to the accompanying 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” (defined in Note 4 –Export Water, and Land Assetsin Part II, Item 8 of the 2016 Annual Report), the amounts and timing of which are not reasonably determinable.
 
Critical Accounting Policies and Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Future events and their effects cannot be determined with absolute certainty. Therefore, the determination of estimates requires the exercise of judgment. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
 
The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the timing of revenue recognition, the impairment of water assets and other long-lived assets, fair value estimates and share-based compensation. Below is a summary of these critical accounting policies.
 
Revenue Recognition
 
Our revenues consist mainly of monthly service fees, tap fees, construction fees, and constructionconsulting fees. Additionally, we receive other income from oil and gas leases and related royalties on our properties. Monthly metered water usage fees, and monthly wastewater treatment fees, consulting fees and oil and gas royalties are recognized in income each month as earned.
 
AsUntil September 1, 2017, as further described in Note 12 –Summary of Significant Accounting Policies Presentationin Part II, Item 8 of Interim Informationto the accompanying financial statements, proceeds from2017 Annual Report, tap sales and construction fees are deferred upon receipt and recognized in income based on whether we own the facilities constructed with the proceeds. We recognize tap fees derived from agreements for which we constructconstructed infrastructure owned by others were deferred upon receipt and recognized as revenue along with the associated costs of construction, pursuant to the percentage-of-completion method. The percentage-of-completion method requires management to estimate the percent of work that is completed on a particular project, which could change materially during the construction period and result in significant fluctuations in revenue recognized during the reporting periods throughout the construction process. We did not recognize any revenues pursuant to the percentage-of-completion method during the three and nine months ended May 31, 2017 or May 31, 2016.
Tap and construction fees derived from agreements for which we ownowned the infrastructure arewere recognized as revenue ratably over the estimated service life (30 years or more) of the assets constructed with such fees. Although
In the cash will be received up-front and most construction will bethree-month period ended November 30, 2017, we completed within one year of receiptour review of the proceeds, revenue recognition may occur over 30 years or more. Management is required to estimateadoption of ASU 2014‑09 and the service life, and currently the service life is basedrelated impact on the estimated useful accounting life of the assets constructed with the tap fees. The useful accounting life of the asset is based on management’s estimation and may not have any correlation to the actual life of the asset or the actual service life of the tap. The accounting-based useful life is deemed a reasonable recognition life of the revenues because the depreciation of the assets constructed generating those revenues will therefore be matched with the revenues.
On March 10, 2011, we entered into the O&G Lease. Pursuant to the O&G Lease, during each of the fiscal years ended August 31, 2011our revenue streams (water and 2014, we received up-front payments of $1,243,400 for the purpose of exploring for, developing, producingwastewater usage fees, consulting fees, tap fees, special facility or construction fees, lot sales and marketing oil and gas revenues). Upon completion of our evaluation of the standard, we determined to early adopt the new revenue recognition standard beginning September 1, 2017, in accordance with the transition provisions in ASU 2014‑09, utilizing the modified retrospective method. We concluded that the adoption did have a material impact on our financial statements.
We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit, which resulted in a reduction of our accumulated deficit of approximately 634 acres$1.1 million. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The most significant impact of mineral estatethe standard relates to our accounting for tap fees and special facility or construction fees, which revenues are expected to be recognized in earlier periods under the new revenue standard. Revenue recognition related to our water and wastewater usage fees and consulting fees will remain substantially unchanged as a result of the new revenue standard. Monthly wholesale water usage charges are assessed to our customers based on actual metered usage each month plus a base monthly service fee. We recognize wholesale water usage revenues upon delivering water to our customers or our governmental customer’s end-use customers, as applicable. We invoice sales of Export Water directly, and revenues we own at ourrecognize from such sales are shown gross of royalties to the Land Board. Sales of water on the Lowry Range are invoiced directly by the Rangeview District, and a percentage of such collections are then paid to us by the Rangeview District. Water revenues from such sales are shown net of royalties paid to the Land Board and amounts retained by the Rangeview District.
We recognize wastewater treatment fees monthly based on usage. The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview District. Costs of delivering water and providing wastewater services to customers are recognized as incurred.
Revenues received pursuant to the Rangeview Lease, the Sky Ranch property. We recognized or are recognizingO&G Lease and the Bison Lease consisting of up-front payments from the O&G Leasewere recognized as other income on a straight-line basis over three years (thethe initial term or extension of term, as applicable, of the O&G Lease) and over two years (the extended term of the O&G Lease). Pursuant to the Rangeview Lease, during the fiscal year ended August 31, 2015, we received an up-front payment of $72,000 for the purpose of exploring for, developing, producing and marketing oil and gas on 40 acres of mineral estate we own adjacent to the Lowry Range. In connection with the up-front payments received pursuant to the O&G Lease and the Rangeview Lease, we recognized oil and gas lease income of (i) $6,000 and $31,900 during the three months ended May 31, 2017 and 2016, respectively, and (ii) $17,300 and $354,800 for the nine months ended May 31, 2017 and 2016, respectively.

During the three months ended February 28, 2015, two wells were drilled within our mineral interest. Beginning in March 2015, both wells were placed into service and began producing oil and gas and accruing royalties to us. In May 2015, certain gas collection infrastructure was extended to the property to allow the collection of gas from the wells and accrual of royalties attributable to gas production. We received royalties attributable to these wells of (i) $24,900 and $76,400 during the three months ended May 31, 2017 and, 2016, respectively, and (ii) $164,300 and $271,000 for the nine months ended May 31, 2017 and, 2016, respectively.
Prior to discontinuing our farm operations, we leased our farms to local area farmers on both a cash and crop share lease basis. Our cash lease farmers were charged a fixed fee, which was billed semi-annually in March and November. During the November billing cycle, our cash lease billings included either a discount or a premium adjustment based on actual water deliveries by the FLCC. Our crop share lease fees were based on actual crop yields and were received upon the sale of the crops. All fees were estimated and recognized ratably on a monthly basis. We sold our farms in August 2015; however, pursuant to the purchase and sale agreement, we continued to receive lease income through December 31, 2015.leases.
 
Impairment of Water Assets and Other Long-Lived Assets
 
We review our long-lived assets for impairment whenever management believes events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We measure recoverability of assets to be held and used by a comparison of the carrying amount of an asset to estimated future undiscounted net cash flows we expect to be generated by the eventual use of the asset. If such assets are considered to be impaired and, therefore, the costs of the assets deemed to be unrecoverable, the impairment to be recognized would be the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets.
 
Our water assets will be utilized in the provision of water services that inevitably will encompass many housing and economic cycles. Our service capacities are quantitatively estimated based on an average single family home utilizing .4 acre feet of water per year. Average water deliveries are approximately .4 acre feet; however, approximately 50% or .2 acre feet are returned and available for reuse. Our water supplies are legally decreed to us through the water court. The water court decree allocates a specific amount of water (subject to continued beneficial use), which historically has not changed. Thus, individual housing and economic cycles typically do not have an impact on the number of connections we can serve with our supplies or the amount of water legally decreed to us relating to these supplies.
 
We report assets to be disposed of at the lower of the carrying amount or fair value less costs to sell. See further discussion regarding our land held for sale in Note 4 – Water and Land Assets to Part II, Item 8 of our 20152017 Annual Report.
 
Our Front Range Water Rights –We determine the undiscounted cash flows for our Denver-based assets by estimating tap sales to potential new developments in our service area and along the Front Range, using estimated future tap fees less estimated costs to provide water services, over an estimated development period. Actual new home development in our service area and the Front Range, actual future tap fees, and actual future operating costs inevitably will vary significantly from our estimates, which could have a material impact on our financial statements as well as our results of operations. We performed an impairment analysis as of August 31, 2016,2017, and determined that there were no material changes and that our Denver-based assets are not impaired and their costs are deemed recoverable. Our impairment analysis is based on development occurring within areas in which we have service agreements (e.g., Sky Ranch and the Lowry Range) as well as in surrounding areas, including the Front Range and the I-70 corridor. Our combined RangeviewLowry Water Supply and Sky Ranch water assets have a carrying value of $28.0$35.6 million as of May 31, 2017.2018. Based on the carrying value of our water rights, the long-term and uncertain nature of any development plans, current tap fees of $24,620$26,650 and estimated gross margins, we estimate that we would need to add 2,300 new water connections (requiring 3.5% of our portfolio) to generate net revenues sufficient to recover the costs of our RangeviewLowry Water Supply assets. If tap fees increase 5%, we would need to add 2,100 new water taps (requiring 3.4% of our portfolio) to recover the costs of our RangeviewLowry Water Supply assets. If tap fees decrease 5%, we would need to add 2,400 new water taps (requiring 3.7% of our portfolio) to recover the costs of our RangeviewLowry Water Supply assets.
 
Although changesChanges in the housing market throughout the Front Range have delayedcan vary from our estimated tap sale projections,projections; however, these changes do not alter our water ownership, our service obligations to existing properties or the number of SFEs we can service.
 

Share-Based Compensation
 
We estimate the fair value of share-based payment awards made to key employees and directors on the date of grant using the Black-Scholes option pricing model. We then expense the fair value over the vesting period of the grant using a straight-line expense model. The fair value of share-based payments requires management to estimate or calculate various inputs such as the volatility of the underlying stock, the expected dividend rate, the estimated forfeiture rate and an estimated life of each option. We do not expect any forfeiture of option grants; therefore, the compensation expense has not been reduced for estimated forfeitures. These assumptions are based on historical trends and estimated future actions of option holders and may not be indicative of actual events, which may have a material impact on our financial statements. For further details on share-based compensation expense, see Note 5 – Shareholders’ Equity to the accompanying financial statements.
 
Recently Adopted and Issued Accounting Pronouncements
 
See Note 1 – Presentation of Interim Information to the accompanying 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. We cannot assure you that any of our expectations will be realized. Forward-looking statements include, among others, statements we make regarding:
 
●
·material changes to unrecognized tax positions;
material changes to unrecognized tax positions;
·the impact of new accounting pronouncements;
●
·our intent to sell certain farms in due course and hold the related mineral interest for future development;
the impact of new accounting pronouncements;
·receipt of the first priority payout under the CAA;
●
·the timing and impact on our financial statements of new home construction and other development in the areas where we may sell our water;
our intent to sell certain held for sale farms;
·utilization of our water assets;
●
receipt of the first priority payout under the CAA;
●
the timing and impact on our financial statements of new home construction and other development in the areas where we may sell our water;
●
utilization of our water assets;
●
growth in our targeted service area;
●
plans to continue to provide water and wastewater services to commercial and industrial customers;
●
plans to finalize designs for Sky Ranch and the components of such designs;
●
sufficiency of our working capital to fund our operations for the next fiscal year and to fund improvements needed to deliver finished lots to home builders at Sky Ranch;
●
the potential for frack water sales;
●
our ability to meet the demands of water at Sky Ranch and for frack water;
●
consistency of director compensation;
●
deferred recognition of water tap and construction fee revenue from Arapahoe County;
●
costs associated with the use of the ECCV system;
●
infrastructure to be constructed over the next several years;
●
investments over the next five years for the WISE project;
●
estimated transmission pipeline capacity of, and decreed amount of water from, the WISE project upon its completion;
●
estimates associated with revenue recognition, asset impairments, and cash flows from our water assets;
●
variance in our estimates of future tap fees and future operating costs;
●
estimated number of SFE connections that can be served by our water systems;
●
number of new water connections necessary to recover costs;
●
continued expenses related to discontinued operations;
●
expected vesting and forfeitures of stock options;
●
objectives of our investment activities;
●
timing of the recognition of income related to the Rangeview Lease and
●
timing of the recognition of income related to the O&G Lease.
·growth in our targeted service area;
 
·plans to continue to provide water and wastewater services to commercial and industrial customers;
·projected capital spendings and projected gross proceeds and margin on lot sales for the first phase of Sky Ranch;
·timing of delivery of finished lots at Sky Ranch;
·sufficiency of our working capital to fund our operations for the next 12 months;
·our ability to fund improvements needed to deliver finished lots to home builders at Sky Ranch by phasing construction and delivery of lots and utilizing progress payments from builders;
·consistency of director compensation;
·costs associated with the use of the ECCV system;
·infrastructure to be constructed over the next several years;
·investments over the next five years for the WISE project;
·estimated transmission pipeline capacity of, and decreed amount of water from, the WISE project upon its completion;
·estimates associated with revenue recognition, asset impairments, and cash flows from our water assets;
·variance in our estimates of future tap fees and future operating costs;
·estimated number of SFE connections that can be served by our water systems;
·number of new water connections necessary to recover costs;
·expected vesting and forfeitures of stock options;
·timing and type of continued expenses related to the discontinued agricultural operations;
·anticipated refund of a collateral deposit paid to the Southeast Metro Stormwater Authority;
·objectives of our investment activities; and
·timing of the recognition of income related to the Bison Lease.
 
Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:
 
●
·the timing of new home construction and other development in the areas where we may sell our water;
the timing of new home construction and other development in the areas where we may sell our water;
·population growth;
●
·employment rates;
population growth;
·timing of oil and natural gas development in the areas where we sell our water;
●
·general economic conditions;
employment rates;
·the market price of water;
●
·the market price of oil and natural gas;
timing of oil and natural gas development in the areas where we sell our water;
·changes in customer consumption patterns;
●
·changes in applicable statutory and regulatory requirements;
general economic conditions;
·changes in governmental policies and procedures;
●
·uncertainties in the estimation of water available under decrees;
the market price of water;
·uncertainties in the estimation of costs of delivery of water and treatment of wastewater;
●
·uncertainties in the estimation of the service life of our systems;
the market price of oil and natural gas;
·uncertainties in the estimation of costs of construction projects;
●
·the strength and financial resources of our competitors;
changes in customer consumption patterns;
·our ability to find and retain skilled personnel;
●
·climatic and weather conditions, including floods, droughts and freezing conditions;
changes in applicable statutory and regulatory requirements;
·labor relations;
●
·turnover of elected and appointed officials and delays caused by political concerns and government procedures;
changes in governmental policies and procedures;
·availability and cost of labor, material and equipment;
●
·delays in anticipated permit and construction dates;
uncertainties in the estimation of water available under decrees;
·engineering and geological problems;
●
·environmental risks and regulations;
uncertainties in the estimation of costs of delivery of water and treatment of wastewater;
·our ability to raise capital;
●
·volatility in the price of our common stock;
uncertainties in the estimation of the service life of our systems;
·our ability to negotiate contracts with new customers;
●
·the outcome of any litigation and arbitration proceedings;
uncertainties in the estimation of costs of construction projects;
·uncertainties in water court rulings;
●
·our ability to collect on any judgments; and
the strength and financial resources of our competitors;
●
our ability to find and retain skilled personnel;
●
climatic and weather conditions, including floods, droughts and freezing conditions;
●
labor relations;
●
turnover of elected and appointed officials and delays caused by political concerns and government procedures;
●
availability and cost of labor, material and equipment;
●
delays in anticipated permit and construction dates;
●
engineering and geological problems;
●
environmental risks and regulations;
●
our ability to raise capital;
●
volatility in the price of our common stock;
●
our ability to negotiate contracts with new customers;
●
the outcome of any litigation and arbitration proceedings;
●
uncertainties in water court rulings;
●
our ability to collect on any judgments; and
●
the factors described under “Risk Factors” in our 2016 Annual Report.
·factors described under “Risk Factors” in our 2017 Annual Report.
 
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements are expressly qualified by these cautionary statements.
 

Item 3.32Quantitative and Qualitative Disclosures About Market Risk
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
General
 
We have limited exposure to market risks from instruments that may impact the Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income (Loss), and Consolidated Statements of Cash Flows.Such exposure is due primarily to changing interest rates.
 
Interest Rates
 
The primary objective for our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This is accomplished by investing in diversified short-term interest-bearing investments. As of May 31, 2017,2018, we own 51five certificates of deposit and 11 U. S. Treasury securities with a stated maturity dates and locked interest rates. Therefore, we are not subject to interest rate fluctuations. We have no investments denominated in foreign currencies; therefore, our investments are not subject to foreign currency exchange rate risk.
 
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 and financial officer, as appropriate to allow timely decisions regarding required disclosures. The President and Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures as of May 31, 2017,2018, pursuant to Rule 13a-15(b) under the Exchange Act. Based on that evaluation, the President and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
 
Changes in Internal Control Over Financial Reporting
 
No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 

33
PART II – OTHER INFORMATION
Item 6.Exhibits
 
Item 6.
Exhibits
Exhibit No.
Number
Description
 
3.1
Description
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, 2007.2007.
10.1
Eleventh Amendment to Contract for Purchase and Sale of Real Estate, dated March 27, 2018, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc. *
10.2
Twelfth Amendment to Contract for Purchase and Sale of Real Estate, dated April 10, 2018, by and between PCY Holdings, LLC and Taylor Morrison of Colorado, Inc. *
10.3
Twelfth Amendment to Contract for Purchase and Sale of Real Estate, dated April 20, 2018, by and between PCY Holdings, LLC and Richmond American Homes of Colorado, Inc. *
31.1
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. **
101.INS
101.INSXBRL Instance Document. *
101.SCH
101.SCHXBRL Taxonomy Extension Schema Document. *
101.CAL
101.CALXBRL Taxonomy Extension Calculation Linkbase Document. *
101.DEF
101.DEFXBRL Taxonomy Extension Definition Linkbase Document. *
101.LAB
101.LABXBRL Taxonomy Extension Label Linkbase Document. *
101.PRE
101.PREXBRL Taxonomy Extension Presentation Linkbase Document. *
*Filed herewith.
 
**Furnished herewith.

 
* 
Filed herewith.34
** 
Furnished herewith.

SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
PURE CYCLE CORPORATION

PURE CYCLE CORPORATION
/s/ Mark W. Harding 
By:  
/s/ Mark W. Harding
Mark W. Harding
President and Chief Financial Officer
July 6, 2018
                     July 7, 2017

 
 
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