What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-04-14 compared with 2021-01-05 · 348 added, 232 removed, 52 unchanged (92% of the section changed)

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

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in the 2020 Annual Report,

that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those

forward-looking statements.

Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements”

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in the 2020 Annual

Report, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by

those forward-looking statements.

Statements” below.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition and should be read in conjunction with the accompanying

condensed consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in the 2020 Annual Report.

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 from lot sales at Sky Ranch;

Expenses associated with developing our water and land assets;

Cash available to continue development of our land, water rights and service agreements.

We are a diversified land and water resource development company.

At our core, we are an innovative and vertically integrated wholesale water and wastewater service provider that, in addition to owning and developing

water and wastewater resources, is developing a master planned community on land we own and to which we provide water and wastewater services.

We have accumulated valuable water and land interests over the past 30 years and have developed an

extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial and industrial customers in the Denver metropolitan region.

primary land asset, Sky Ranch, is located in one of the most active development areas in the Denver metropolitan region along the quickly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and

light industrial uses.

Although we report our results of operations in two segments, our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business designed to

provide a cost effective, sustainable and value-added business enterprise.

We are a diversified water resource and land development company.

At our core, we are an innovative and vertically integrated wholesale water and wastewater service provider which also develops land we own into

master planned communities, to which we will continue to provide water and wastewater services as well as operate long-term build-to-rent properties.

We have accumulated valuable water and land interests over the past 30 years and have developed

an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial and industrial customers in the Denver metropolitan region.

Our primary land asset, Sky Ranch, is located in one of the most active development areas in the Denver metropolitan region along the quickly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail,

and light industrial uses.

Although we currently report our results of operations in two segments, our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business

designed to provide a cost effective, sustainable and value-added business enterprise.

We will separately present the Build-to-Rent segment once material.

Water and Wastewater

Water resources throughout the western United States and more prominently in Colorado are a scarce and valuable resource.

We own or control a portfolio of 29,500 acre-feet of groundwater and surface water supplies,

26,000 acre-feet of adjudicated reservoir sites, wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and

wastewater collection lines.

Our water supplies and wholesale facilities are located in southeast Denver, in Arapahoe County, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and

wastewater, which we believe provides us with a unique competitive advantage in offering these services.

We provide wholesale water and wastewater service to local governments, including the Rangeview District, Arapahoe County, the Sky Ranch CAB, and Elbert 86 District.

Our mission is to provide sustainable, reliable,

high quality water to our customers and collect and treat wastewater using advance water treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands.

By using and reusing our water

supplies, we seek to demonstrate good stewardship over our valuable water rights in the water-scarce Denver, Colorado region.

We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate on behalf

of governmental entities.

We also design, permit, construct, operate and maintain retail distribution and collection systems that we own or operate on behalf of our governmental customers.

Additionally, we handle administrative functions, including

meter reading, billing and collection of monthly water and wastewater revenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to the Colorado Department of Public Health and Environment.

Our portfolio of 29,500 acre-feet is comprised of groundwater and surface water supplies.

Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, multiple water treatment facilities, potable and raw water storage facilities, wells and water production

facilities, and roughly 50 miles of water distribution and wastewater collection lines.

Our water supplies and wholesale facilities are in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat,

store, and distribute water and wastewater.

We believe this provides us with a unique competitive advantage in offering these services.

We provide wholesale water and wastewater service to local governments, including the Rangeview Metropolitan District (the “Rangeview District”), Arapahoe County, the Sky Ranch Community Authority Board (the “Sky

Ranch CAB”), and the Elbert and Highway 86 Metropolitan District (the “Elbert 86 District”).

Our mission is to provide sustainable, reliable, high quality water to our customers and collect, treat, and reuse wastewater using advance water

treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands.

By using and reusing our water supplies, we proactively manage our valuable water rights in the water-scarce Denver,

Colorado region.

We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate on behalf of governmental entities.

We also design, permit, construct, operate and maintain retail distribution and

collection systems that we own or operate on behalf of our governmental customers.

Additionally, we handle administrative functions, including meter reading, billing and collection of monthly water and wastewater revenues, regulatory water

quality monitoring, sampling, testing, and reporting requirements to the Colorado Department of Public Health and Environment.

Land Development

Our Land Development segment is primarily focused on actively developing the Sky Ranch Master Planned Community located along the I-70 corridor to provide residential, commercial, retail, and light industrial lots.

Sky Ranch is zoned to include up to 3,200 single-family and multifamily homes, parks, open spaces, trails, recreational centers, schools, and over two million square feet of retail, commercial and light industrial space just four miles south of

Denver International Airport.

Our land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails and other

infrastructure to deliver “ready to build” finished lots to home builders and commercial customers.

Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct

infrastructure on behalf of others.

Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots as well as reimbursements for the construction of public improvements, such as roads,

curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which come from the local governmental entity, the Sky Ranch CAB, subject to the approval and issuance of municipal bonds to fund such reimbursements.

Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation

water, and wastewater to the community.

Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open

spaces and other investments efficiently, and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments.

Our Land Development segment is primarily focused on actively developing the Sky Ranch Master Planned Community located along the booming I-70 corridor to provide residential, commercial, retail, and light

industrial lots.

Sky Ranch is zoned to include up to 3,400 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools.

Additionally, Sky Ranch is zoned to include over two million square feet of retail,

commercial and light industrial space, which is the equivalent of 1,600 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units.

Our land development activities

include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver “ready to build” finished lots to

home builders and commercial customers.

Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others.

Land development

revenues come from our home builder customers under specific agreements for the delivery of finished lots.

Additionally, pursuant to certain agreements with the Sky Ranch metropolitan districts, on their behalf we construct public infrastructure

such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which costs are reimbursed to us by the Sky Ranch CAB, through funds generated by the Sky Ranch districts through taxes, fees or the issuance of municipal

irrigation water, and wastewater to the community.

Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads,

parks, open spaces, and other investments efficiently, and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments.

In June 2017, we entered into separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we agreed to sell 506 total single-family, detached residential lots at the Sky Ranch

We are obligated, pursuant to these contracts, to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities).

As of November 30, 2020, we have incurred $34.5 million related to the development of the first filing of Sky Ranch out of the total estimated $35.8 million.

We anticipate the remaining $1.3 million will be incurred

during our fiscal 2021.

These amounts include estimated reimbursable costs of $31.6 million, for which we received a partial reimbursement of $10.5 million in November 2019.

We believe the outstanding $21.1 million of remaining reimbursables from

the Sky Ranch CAB will be paid from future municipal bonds as the project continues to grow its assessed value and tax base.

As of November 30, 2020, we have recognized $35.4 million of the sales price contracted for with the home builders and the

remaining $1.4 million is expected to be recognized as revenue in our fiscal 2021.

In addition, from the start of development at Sky Ranch through November 30, 2020, the Sky Ranch development produced $9.9 million of water and wastewater tap fees,

and we expect that an additional $5.0 million of tap fees will be received during our remaining fiscal 2021.

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

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

Due to our strong performance in the first filing of the Sky Ranch project, we were able to realize a 30% increase in our

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

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

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

In January 2021, we expect to begin construction on the second filing at Sky Ranch, which is expected to include 895 residential

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

As of February 28, 2021, we have incurred $34.9 million of the total estimated $35.8 million in costs related to the development of the first phase of Sky Ranch.

We anticipate the remaining $0.9 million will be

incurred during our remaining fiscal 2021.

These amounts include estimated reimbursable costs of $32.4 million, for which we received a partial reimbursement of $10.5 million through proceeds from municipal bonds and an additional payment of $0.4

million of unencumbered funds resulting from a budget surplus in 2020.

We believe the outstanding $21.5 million of remaining reimbursables from the Sky Ranch CAB will be paid from future fees, taxes, and municipal bonds as the project continues

to grow its assessed value and tax base.

As homes at Sky Ranch have sold faster than anticipated and assessed values have exceeded early estimates, the Sky Ranch CAB has developed an established tax basis and has the intent and ability to issue

municipal bonds.

As such, the collectability of these reimbursables is probable.

As such, we have recognized the remaining $21.5 million of reimbursables as a Notes receivable – related party and recognized $1.6 million as Project management

revenue, $1.0 million as Interest income, and $18.9 million as Other income during the three and six months ended February 28, 2021.

As of February 28, 2021, we have recognized $35.9 million of the sales price contracted for with the home

builders and the remaining $0.9 million is expected to be recognized as revenue in our remaining fiscal 2021.

In addition, from the start of development at Sky Ranch through February 28, 2021, the Sky Ranch development produced $11.5 million of

water and wastewater tap fees, and we expect that an additional $3.4 million of tap fees will be received during calendar 2021.

In November 2020 and February 2021, we entered into separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company) and Challenger Homes to sell 789 single-family attached and detached residential

lots at the Sky Ranch property.

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

Due to our strong performance in the first phase of the Sky Ranch project, we

were able to realize an approximate 30% increase in our lot price from $75,000 for a 50’ lot in phase one to $97,000 for the same 50’ lot in the first subphase of the second phase.

The timing of cash flows will include certain milestone

deliveries, including, but not limited to, completion of governmental approvals for final plats, installation of wet utility public improvements, and final completion of lot deliveries.

In February 2021, we began construction on the second

development phase at Sky Ranch, which is expected to include nearly 900 residential lots.

The 100+ lots not currently under contract to home builders are being retained for use as build-to-rent long-term rental properties, as described below.

Build-to-Rent

During the three months ended February 28, 2021, as announced in March 2021, we launched a new line of business which will be referred to as our Build-to-Rent (“BTR”) line of business.

During our initial

development phase of Sky Ranch, we retained ownership of three residential lots, on which we have begun building three single family homes which we will own, maintain and rent to qualified renters.

We have contracted out the construction to a

reputable construction company and we expect these three homes to be completed and ready for renters in the fall of 2021.

After the successful completion of the three houses in the first phase, we intend to expand this BTR line in our second

development phase of Sky Ranch by building and renting homes on the 100+ lots we did not sell to our home builder partners.

Grading on the second phase of Sky Ranch has begun, and once complete we will look to partner with certain builders to

construct our BTR units as the second development phase of Sky Ranch is completed.

Recent Developments

As the novel strain of the coronavirus (“COVID-19”) continues to escalate, we have taken measures to protect the health and well-being of our employees, customers, business partners, and their families.

staggered the in-office work hours of various staff to ensure we can maintain proper social distancing, we require face coverings in all indoor settings as well as when employees are unable to maintain proper distance while working outside,

and we have enhanced our cleaning and disinfecting activities.

We have been able to maintain our level of efficiency with the use of video conferencing and electronic data sharing platforms.

We were informed that our builder customers also

took precautionary measures to ensure the safety of their employees, customers, business partners, and their families.

As the coronavirus (“COVID-19”) pandemic continues, we have continued to enforce many safety measures enacted to protect the health and well-being of our employees, customers, business partners, and

their families.

We have implemented and adjusted as necessary staggered in-office work hours for various staff to ensure we can maintain proper social distancing, we require face coverings in all indoor settings as well as when employees are

unable to maintain proper distance while working outside, and we have enhanced our cleaning and disinfecting activities.

We have been able to maintain our level of efficiency with the use of video conferencing and electronic data sharing

We were informed that our builder customers also took precautionary measures to ensure the safety of their employees, customers, business partners, and their families.

These measures varied by builder.

As a result, some of our builder customers reported material net housing order declines

during the period (compared to the same period a year prior).

As a result, some of our

builder customers reported material net housing order declines in 2020.

However, they are also reporting material increases in orders since the stay-at-home orders have been reduced.

1 unchanged sentence

finished lots at Sky Ranch into fiscal 2020;

however, as a result of the COVID-19 precautionary measures and stay-at-home orders, we delivered the remaining lots during the three months ended November 30, 2020.

These deliveries were still

ahead of the original delivery dates set forth in our contracts with the home builders by nearly two years.

The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring

governmental agencies due to expansive work restrictions imposed on their operations.

We expect COVID-19 to continue to play a role in potential delays related to the second filing at Sky Ranch due to rapidly changing governmental orders,

city and country shutdowns, and public health concerns.

however, because of the COVID-19 precautionary measures and stay-at-home orders, we delivered the remaining lots during the first quarter of fiscal 2021.

These deliveries were still ahead of the

original delivery dates set forth in our contracts with the home builders by nearly two years.

The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring governmental agencies

due to expansive work restrictions imposed on their operations.

We expect COVID-19 to continue to play a role in potential delays related to the second filing at Sky Ranch due to rapidly changing governmental orders, city and country shutdowns,

and public health concerns.

Mainly, we have experienced delays in the permitting process through the county.

1 unchanged sentence

Executive Summary

The results of our operations for the three months ended November 30, 2020 and 2019 are as follows:

Table 1 - Summary of Results of Operations

Three Months Ended November 30,

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

Consolidated Results of Operations

Three Months Ended

(In thousands, except for water and lot deliveries and taps sold)

Water and wastewater resource development revenue

Land development revenue

Total revenue

Water and wastewater development cost of revenue

Land development cost of revenue

Total cost of revenue

General and administrative expense

Other income, net

Water delivered (thousands of gallons)

Water and wastewater taps sold

Lots delivered

Six Months Ended

(In thousands, except for water and lot deliveries and taps sold)

Water and wastewater resource revenue

Land development revenue

Total revenue

Water and wastewater resource cost of revenue

Land development cost of revenue

Total cost of revenue

General and administrative expense

Other income, net

Water delivered (thousands of gallons)

Water and wastewater taps sold

Lots delivered

Three months ended February 28, 2021 vs.

Three months ended February 29, 2020

Revenue – Total revenue increased in 2021 as compared to 2020, primarily as a result of the recognition of project management revenues from the first phase of Sky Ranch,

increased water and wastewater tap sales, recognition of a forfeited water reserve agreement, and a special facility construction project for WISE, partially offset by decreased land development sales as a result of phase one being nearly

complete almost two years ahead of schedule and phase two not yet recognizing revenue until platted lots are delivered, which is expected in early summer.

Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily as a result of a decrease in land development costs as a result of phase one being

nearly complete.

Phase two costs are currently being capitalized until revenue recognition begins, partially offset by costs attributable to the special facility construction project for WISE.

General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily as a result of increased head count.

added five full time employees in 2020 as operations have increased and development has continued.

Other income, net – Other income, net increased in 2021 as compared to 2020, primarily as a result of 2021 outstanding reimbursable

costs being recognized.

The reimbursable costs are no longer contingent and have been recognized as a Note receivable – related party, Interest income, Project management revenue, and Other income, consistent with bond proceeds received in

November 2019.

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

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily as a result of increased Sky Ranch and Wild Pointe customers, partially offset by

decreased On Site water usage as a result of winter and less irrigation water usage.

Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of

We have broken ground on the second phase and expect lot deliveries to begin this fall.

Six months ended February 28, 2021 vs.

Six months ended February 29, 2020

Revenue – Revenue decreased in 2021 as compared to 2020, primarily as a result of decreased land development sales as a result of phase one being nearly complete and phase

two not yet recognizing revenue until platted lots are delivered, which is expected in early summer, partially offset by increased metered water usage from oil and gas operations, recognition of project management revenue from the first phase at

Sky Ranch, recognition of a forfeited water reserve agreement, and a special facility construction project for WISE.

Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily as a result of a decrease in land development costs as a result of phase one being

nearly complete.

Phase two costs are currently being capitalized until revenue recognition begins, partially offset by costs attributable to the special facility construction project for WISE and increased water usage related to oil and gas

General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily as a result of increased head count.

added five full time employees in 2020 as operations have increased and development has continued.

Other income, net – Other income, net increased in 2021 as compared to 2020, primarily as a result of 2021 outstanding reimbursable

costs being recognized.

November 2019.

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

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

Water and wastewater tap sales – Water and wastewater tap sales decreased in 2021 as compared to 2020 as a result of timing of closings at Sky Ranch.

Tap sales are driven

by home closings and are not contractually established with the builders.

Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of

We have broken ground on the second phase and expect lot deliveries to begin this fall.

Water and Wastewater Resource Development Results of Operations

Three Months Ended

(In thousands, except for water deliveries)

Millions of gallons of water delivered

Municipal water usage revenues

Oil and gas operations water usage revenues

Total metered water usage revenues

Operating costs to deliver water (excluding depreciation and depletion)

Water delivery gross margin

Water delivery gross margin %

Wastewater treatment revenues

Operating costs to treat wastewater

Wastewater treatment gross margin

Wastewater treatment gross margin %

Lot sales revenue

Land development construction costs incurred

Land development gross margin

Land development gross margin %

Metered water usage from:

Municipal water usage

Oil and gas operations usage

Wastewater treatment fees

Water and wastewater tap fees

Other income costs incurred

General and administrative expenses

Discussion of Changes in Summary Results

Metered water usage revenues – Our water service charges 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 based on the average rates and charges of three surrounding water providers.

Water deliveries and water revenues increased during the three months ended November 30, 2020, as compared to the three months ended November 30, 2019, primarily as a result of water sales to oil and gas operations.

Water delivery gross margin increased from fiscal year 2020 as a result of the difference in metered rates for fracking water compared to rates for tap customers, as revenues received for fracking water have a higher margin.

Increases and decreases

in water deliveries charged at different rates will result in disproportionate increases and decreases in revenues and margins.

The following tables detail the sources of our sales, the number of kgal (1,000 gallons) sold, and the average price per

kgal for the three months ended November 30, 2020 and 2019.

Table 2 - Water Revenue Summary

Three Months Ended November 30,

Customer Type

(In thousands)

Average price

Other revenue

Total segment revenue

Water service costs

Wastewater service costs

Total expenses

Segment operating income

Water deliveries (thousands of gallons)

Export - Commercial

Wastewater treatment revenues – Our wastewater customers are charged based on the estimated amount of wastewater treated.

Wastewater treatment revenues

increased during the three months ended November 30, 2020, as compared to the three months ended November 30, 2019.

The increase was primarily due to increased wastewater treatment revenues from the development at Sky Ranch.

The wastewater gross

margin decreased compared to the three months ended November 30, 2019, due to an increase in staff required to maintain the water reclamation facility at Sky Ranch development and additional startup costs related to the new facility, which went

into service in the second quarter of fiscal 2020.

As we add customers to the wastewater system, the margins are expected to increase as the system was designed to provide services to more than 2,000 connections, which has the effect of

overburdening the initial revenues with higher per unit costs upfront.

Lot sales revenues – Lot sales revenues decreased during

the three months ended November 30, 2020 compared to the three months ended November 30, 2019, primarily as a result of timing of our progress of the first filing at Sky Ranch.

To date, we have recognized $35.4 million of the estimated total

revenue $36.8 million related to the first filing at Sky Ranch.

Revenue for KB Homes, for which we recognize revenue when finished lots have been delivered, has been fully recognized.

The remaining revenues relate to Richmond Home and Taylor

Morrison and will be recognized in our fiscal 2021.

Water and wastewater tap fees – Tap fees and other revenues decreased during the three months ended November 30, 2020 compared to the three months ended

November 30, 2019, primarily as a result of timing of tap sales by our homebuilder customers.

During the three months ended November 30, 2020, we sold 35 water and wastewater taps at Sky Ranch and 1 water tap at Wild Pointe, compared to 58 water

and wastewater taps during the three months ended November 30, 2019.

Tap sales are driven by home closings and are not contractually established with the builders.

General and Administrative Expenses

Significant general and administrative (“G&A”) expenses for the three months ended November 30, 2020 and 2019, respectively, were:

Table 3 - Significant G&A Expenses

Three Months Ended November 30,

(In thousands)

Salary and salary-related expenses:

Including share-based compensation

Excluding share-based compensation

Professional fees

Fees paid to directors and D&O insurance

Public entity related expenses

Salary and salary-related expenses – Salary and salary-related expenses increased for the three months ended November 30, 2020, as compared to the three

months ended November 30, 2019, primarily as a result of increased headcount of 5, fiscal 2021 bonus accrual and the addition of our 401K match policy.

Professional fees – Professional fees increased for the three months ended November 30, 2020, as compared to the three months ended November 30, 2019,

primarily as a result of increased consulting services and increased audit and tax fees.

Other Income and Expense Items

Table 4 - Other Items

Three Months Ended November 30,

(In thousands)

Other income items:

Oil and gas royalty income, net

Oil and gas lease income, net

Interest income

Income from reimbursement of construction costs (related party)

Oil and gas royalty income – Oil and gas royalty income decreased during the three months ended November 30, 2020 compared to the three months ended

November 30, 2019, primarily as a result of decreased oil and gas production.

As a result of COVID-19 and the resulting economic effects caused by stay-at-home orders and less travel and commuting, oil and gas prices decreased significantly and

have not rebounded, making new production less attractive to oil and gas companies.

Oil and gas lease income – Oil and gas lease income decreased during the three months ended November 30, 2020 compared to the three months ended November

30, 2019, primarily as a result of the expiration of our lease with Bison Oil and Gas, LLP.

Interest income – Interest income represents interest earned on the temporary investment of capital in cash and cash equivalents, investments, finance

charges, and interest accrued on the notes receivable from the Rangeview District and the Sky Ranch Districts.

The decrease in the three months ended November 30, 2020 compared to 2019 was primarily attributable to short term investments held in

the first quarter of fiscal 2020.

Due to the current low interest rates, we are no longer holding any short-term investments.

Income from reimbursement of construction costs - related party – In November 2019, the Sky Ranch CAB issued $13.2 million of bonds related to the public

improvements at Sky Ranch.

This is only a portion of the total $31.6 million which is eligible for reimbursement.

We anticipate the Sky Ranch CAB will reimburse us for the remaining $21.1 million either by the issuance of bonds for that amount in

the future as development continues at Sky Ranch or from property tax assessments received by the Sky Ranch CAB.

Of the $13.2 million of bonds issued, we received $10.5 million, which represents the partial reimbursement of the advances we made to

the Sky Ranch CAB for construction of the public improvements pursuant to a funding agreement between us and the Sky Ranch CAB.

Of the $10.5 million we received, $4.2 million was recorded as a reduction to the Land Development Inventories account and $6.3 million was recognized as Income from reimbursement of construction costs - related party in other income.

O&G operations

Total water deliveries

Six Months Ended

(In thousands, except for water deliveries)

Metered water usage from:

Municipal water usage

Oil and gas operations usage

Wastewater treatment fees

Water and wastewater tap fees

Other revenue

Total segment revenue

Water service costs

Wastewater service costs

Total expenses

Segment operating income

Water deliveries (thousands of gallons)

Export - Commercial

O&G operations

Total water deliveries

Three months ended February 28, 2021 vs.

Three months ended February 29, 2020

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

development segment.

Oil and gas operations – Oil and gas operations increased in 2021 as compared to 2020, primarily as a result of recognition of a forfeited water reserve agreement totaling

$0.4 million and increased oil and gas activity in our service area.

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

resource development segment.

Water and wastewater tap fees – Water and wastewater tap fees increased in 2021 as compared to 2020, primarily as a result of increased price, on average, of water and

wastewater taps.

During the three months ended February 28, 2021, the average price of a Sky Ranch water and wastewater tap was $31 thousand per tap, compared to $26 thousand per tap for the three months ended February 29, 2020.

During the second

quarter of fiscal 2021, we sold 51 water and wastewater taps.

During the second quarter of fiscal 2020, we sold 45 water and wastewater taps.

Other revenue – Other revenue increased in 2021 as compared to 2020, primarily as a result of a 2021 agreement to construct a special facility for WISE, for which $0.4

million of revenue was recognized.

The project is recognizing revenue on a percent of completion basis.

Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily as a result of the new Sky Ranch water reclamation facility being online

for the entire quarter and requiring more staff to run.

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

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily as a result of increased Sky Ranch and Wild Pointe customers, partially offset by

decreased On Site water usage as a result of winter and less irrigation water usage.

Six months ended February 28, 2021 vs.

Six months ended February 29, 2020

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

development segment.

Oil and gas operations – Oil and gas operations increased in 2021 as compared to 2020, primarily as a result of increased oil and gas prices and new fracking permits

obtained by our oil and gas customers and recognition of a forfeited water reserve agreement totaling $0.4 million.

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

resource development segment.

Other revenue – Other revenue increased in 2021 as compared to 2020, primarily as a result of a 2021 agreement to construct a special facility for WISE, for which $0.4

million of revenue was recognized.

The project is recognizing revenue on a percent of completion basis.

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

Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily as a result of the new Sky Ranch water reclamation facility being online

for the entire fiscal year to date and requiring more staff to run.

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

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

Land Development Results of Operations

Three Months Ended

(In thousands, except for lots delivered)

Project management revenue

Total revenue

Land development construction

Sky Ranch property tax

Total costs of revenue

Segment operating income

Lots delivered

Six Months Ended

(In thousands, except for lots delivered)

Project management revenue

Total revenue

Land development construction

Sky Ranch property tax

Total costs of revenue

Segment operating income

Lots delivered

Three months ended February 28, 2021 vs.

Three months ended February 29, 2020

Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete.

Sales price per lot for all delivered lots within the

first development has not increased but the revenue per delivered lot fluctuates as a result of the timing of revenue recognition as lots are delivered over time.

Revenues recognized in the second quarter and remaining revenues to be recognized

relate to work that is not specific to one lot but rather benefits the entire development phase.

The second development phase will not begin recognizing revenue until platted lots are delivered to the home builders.

Project management revenues – Project management revenues increased in 2021 as compared to 2020 as a result of the determination that reimbursable funds due from the Sky

Ranch CAB are no longer contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured.

These revenues increased Notes receivable – related party.

Land development construction costs – Land development construction costs decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete.

Phase two costs are currently being capitalized until revenue recognition begins.

Sky Ranch property taxes – Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily as a result of the improved lots being sold to the homebuilders.

current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use.

Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of

We have broken ground on the second phase and expect lot deliveries to begin this fall.

Six months ended February 28, 2021 vs.

Six months ended February 29, 2020

Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete.

Phase two will not yet begin recognizing revenue

until platted lots are delivered to the home builders.

Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates as a result of the timing of revenue recognition as lots

are delivered over time.

Revenues recognized in the second quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase.

The second development phase will not

begin recognizing revenue until platted lots are delivered to the home builders.

Project management revenues – Project management revenues increased in 2021 as compared to 2020 as a result of the determination that reimbursable funds due from the Sky

Ranch CAB are no longer contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured.

These revenues increased Notes receivable – related party.

Land development construction costs – Land development construction costs decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete.

Phase two costs are currently being capitalized until revenue recognition begins.

Sky Ranch property taxes – Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily as a result of the improved lots being sold to the homebuilders.

current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use.

Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of

We have broken ground on the second phase and expect lot deliveries to begin this fall.

Liquidity, Capital Resources and Financial Position

At November 30, 2020, our working capital, defined as current assets less current liabilities, was $19.9 million, which included $21.3 million in cash and cash equivalents.

We believe that as of November 30, 2020,

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.

As of February 28, 2021, our working capital, defined as current assets less current liabilities, was $16.5 million, which included $20.8 million in cash and cash equivalents, of which, $0.3 million is restricted.

We believe that as of February 28, 2021 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next twelve months.

Our expected obligations of $17 million for the

next twelve months are described below.

Sky Ranch Development

The first filing at Sky Ranch is nearing completion, with approximately $1.3 million remaining obligations.

Filing 2 is preparing to break ground January 2021.

We anticipate future revenues from water and wastewater

tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.

The first phase at Sky Ranch is nearing completion, with approximately $0.9 million remaining obligations.

We broke ground on the second phase in February 2021.

We estimate total costs to complete the second phase

of Sky Ranch to be $66 million.

Of this, we anticipate to spend approximately $15 million in the next twelve months and we anticipate receiving approximately $12 million in milestone payments from the home builders over the same period.

believe future revenues from water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.

ECCV Capacity Operating System

The Rangeview District may purchase water produced from East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board system.

ECCV’s Land Board system is comprised of eight wells and more than 10 miles

of buried water pipeline located on the Lowry Range.

ECCV’s Land Board system is comprised of eight wells and more than 10

miles of buried water pipeline located on the Lowry Range.

In May 2012, we entered into an agreement to operate and maintain the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including

customers providing water for drilling and hydraulic fracturing of oil and gas wells.

Our costs associated with the use of the ECCV system are a flat fee of eight thousand dollars per month from January 1, 2013 through December 31, 2020, and will

decrease to three thousand dollars per month from January 1, 2021 through April 2032.

Our costs associated with the use of the ECCV system are a flat fee of eight thousand dollars per month from January 1, 2013 through December 31, 2020, and

decreased to three thousand dollars per month effective January 1, 2021 through April 2032.

Additionally, we pay a fee per 1,000 gallons of water produced from the ECCV’s system, which is included in the water usage fees charged to customers.

system is anticipated to continue to cost us approximately ten thousand dollars per month to maintain going forward.

ECCV system is anticipated to continue to cost us approximately ten thousand dollars per month to maintain going forward.

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

We have entered into a financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE.

We anticipate that we will be investing $1.1 million in 2021 and $7.5 million in total for

the fiscal years 2022 through 2025 to fund the Rangeview District’s obligation to purchase water and infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system.

In exchange for funding the

Rangeview District’s obligations in WISE, we will have the sole right to use and reuse the Rangeview District’s 9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue

from such service.

We anticipate that we will be investing $1.1 million in 2021 and $7.5 million in total

for the fiscal years 2022 through 2025 to fund the Rangeview District’s obligation to purchase water and infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system.

In exchange for funding

the Rangeview District’s obligations in WISE, we will have the sole right to use and reuse the Rangeview District’s 9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the

revenue from such service.

Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and 900 acre feet per year of water.

Summary Cash Flows Table

Table 5 - Summary Cash Flows Table

Three Months Ended November 30,

Six Months Ended

February 28, 2021

February 29, 2020

(In thousands)

Cash provided by (used in):

Cash (used) provided by:

Operating activities

1 unchanged sentence

Financing activities

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

G&A expenses.

Cash provided by operations decreased in the three months ended November 30, 2020 compared to 2019, primarily as a result of the bond payment we received as partial reimbursement of public improvement expenditures

from the Sky Ranch CAB and increased lot sales revenues in the three months ended November 30, 2019.

Changes in Investing Activities – During the three months ended November 30, 2020, investing activities used $0.5

million primarily due to investments in our water, water systems, and land development activities.

Conversely, during the three months ended November 30, 2019, investing activities produced $2.9 million, primarily as a result of the sale of

short-term investments, partially offset by investments in our water, water systems, and land development activities.

Changes in Operating Activities – Operating activities include revenues produced by our segments less costs incurred in the delivery of those services

and G&A expenses.

Cash provided by operations decreased in the six months ended February 28, 2021 compared to 2020, primarily as a result of the bond payment we received as partial reimbursement of public improvement expenditures

from the Sky Ranch CAB in fiscal 2020 and decreased lot sales in the six months ended February 28, 2021 as compared to February 29, 2020.

Changes in Investing Activities – During the six months ended February 28, 2021, investing activities decreased

as a result of decreased investments in water, water systems, and land as compared to the six months ended February 29, 2020, partially offset by net sales of short-term investments in fiscal 2020.

Changes in Financing Activities – Cash provided by financing activities decreased in 2021 from 2020, as a result

of decreased stock option exercises.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA as described in Note 5 – Long-Term Obligations and Operating Lease – Participating Interests

in Export Water Supply to the accompanying condensed consolidated financial statements.

The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of Export Water, the

amounts and timing of which are not reasonably determinable.

Our off-balance sheet arrangements consist entirely of the contingent portion of the CAA as described in Note 6 – Long-Term Obligations and Operating Lease – Participating

Interests in Export Water Supply to the accompanying condensed consolidated financial statements.

The contingent liability is not reflected on our balance sheet because the obligation to pay the CAA is contingent on sales of Export

Water, the amounts and timing of which are not reasonably determinable.

Critical Accounting Policies and Use of Estimates

Our critical accounting policies and estimates are described in “Critical Accounting Policies and Estimates” within Item 7 “Management's Discussion and Analysis of Financial Condition and Results of

Operations” included in our Annual Report on Form 10-K for the year ended August 31, 2020 and Note 2 of the Notes to Consolidated Financial Statements in “Financial Statements and Supplementary Data” included as Item 8 in our Annual Report on Form

10-K for the year ended August 31, 2020.

With the exception of updates to significant accounting policies discussed in Note 1 of this Quarterly Report on Form 10-Q, the accounting policies and estimates used in preparing our interim condensed

consolidated financial statements for the three months ended November 30, 2020 are the same as those described in our Annual Report on Form 10-K for the year ended August 31, 2020.

There have been no changes to our critical accounting policies

during the quarter ended November 30, 2020.

Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted from the interim financial statements included

in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading.

The unaudited condensed consolidated financial statements and

other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the year ended August 31, 2020.

Form 10-K for the year ended August 31, 2020.

With the exception of updates to significant accounting policies discussed in Note 1 of this Quarterly Report on Form 10-Q, the accounting policies and estimates used in preparing our interim

condensed consolidated financial statements for the three and six months ended February 28, 2021 are the same as those described in our Annual Report on Form 10-K for the year ended August 31, 2020.

There have been no changes to our critical

accounting policies during the quarter ended February 28, 2021.

Certain information and note disclosures normally included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted from the interim

financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading.

The unaudited condensed

consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the

year ended August 31, 2020.

Recently Adopted and Issued Accounting Pronouncements

8 unchanged sentences

Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Risk Factors” in Part II Item 1A of our most recent Annual

Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission.

These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Forward-Looking Statements” and “Risk Factors” in Part II Item

1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission.

These risks are not exhaustive.

Moreover, we operate in a very competitive and rapidly changing environment.

New risk factors emerge from time to time

and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those

contained in any forward-looking statements.

factors emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to

differ materially from those contained in any forward-looking statements.

Forward-looking statements should not be relied upon as predictions of future events.

We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be

achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law.

We can provide no assurance that the events and circumstances reflected in the

forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements.

We assume no obligation to update or supplement forward-looking statements, except as may be

required under applicable law.

Quantitative and Qualitative Disclosures About Market Risk

1 unchanged sentence

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis