PURE CYCLE CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in the 2020 Annual Report, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the heading “Disclosure Regarding Forward-Looking Statements” below. The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand our results of operations and financial condition and should be read in conjunction with the accompanying condensed consolidated financial statements and the notes thereto and the financial statements and the notes thereto contained in the 2020 Annual Report. Our Business We are a diversified water resource and land development company. At our core, we are an innovative and vertically integrated wholesale water and wastewater service provider which also develops land we own into master planned communities, to which we will continue to provide water and wastewater services as well as operate long-term build-to-rent properties. We have accumulated valuable water and land interests over the past 30 years and have developed an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial and industrial customers in the Denver metropolitan region. Our primary land asset, Sky Ranch, is located in one of the most active development areas in the Denver metropolitan region along the quickly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses. Although we currently report our results of operations in two segments, our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable and value-added business enterprise. We will separately present the Build-to-Rent segment once material. Water and Wastewater Water resources throughout the western United States and more prominently in Colorado are a scarce and valuable resource. Our portfolio of 29,500 acre-feet is comprised of groundwater and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, multiple water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services. We provide wholesale water and wastewater service to local governments, including the Rangeview Metropolitan District (the “Rangeview District”), Arapahoe County, the Sky Ranch Community Authority Board (the “Sky Ranch CAB”), and the Elbert and Highway 86 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 booming I-70 corridor to provide residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,400 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is zoned to include over two million square feet of retail, commercial and light industrial space, which is the equivalent of 1,600 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units. Our land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver “ready to build” finished lots to home builders and commercial customers. Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots. Additionally, pursuant to certain agreements with the Sky Ranch metropolitan districts, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., which costs are reimbursed to us by the Sky Ranch CAB, through funds generated by the Sky Ranch districts through taxes, fees or the issuance of municipal bonds. 19 Index Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments efficiently, and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments. In June 2017, we entered into separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we agreed to sell 506 total single-family, detached residential lots at the Sky Ranch property. We are obligated, pursuant to these contracts, to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities). As of February 28, 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. 20 Index Recent Developments As the coronavirus (“COVID-19”) pandemic continues, we have continued to enforce many safety measures enacted to protect the health and well-being of our employees, customers, business partners, and their families. 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 platforms. We were informed that our builder customers also took precautionary measures to ensure the safety of their employees, customers, business partners, and their families. These measures varied by builder. As a result, some of our builder customers reported material net housing order declines in 2020. However, they are also reporting material increases in orders since the stay-at-home orders have been reduced. We had been expecting to accelerate deliveries of the remaining finished lots at Sky Ranch into fiscal 2020; however, because of the COVID-19 precautionary measures and stay-at-home orders, we delivered the remaining lots during the first quarter of fiscal 2021. These deliveries were still ahead of the original delivery dates set forth in our contracts with the home builders by nearly two years. The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring governmental agencies due to expansive work restrictions imposed on their operations. We expect COVID-19 to continue to play a role in potential delays related to the second filing at Sky Ranch due to rapidly changing governmental orders, city and country shutdowns, and public health concerns. Mainly, we have experienced delays in the permitting process through the county. Results of Operations Executive Summary 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 February 28, 2021 February 29, 2020 $ Change Increase/ (Decrease) % Change (In thousands, except for water and lot deliveries and taps sold) Water and wastewater resource development revenue $ 2,676 $ 1,254 $ 1,422 113 % Land development revenue 2,063 2,265 (202 ) (9 )% Total revenue 4,739 3,519 1,220 35 % Water and wastewater development cost of revenue (994 ) (631 ) 363 58 % Land development cost of revenue (269 ) (1,817 ) (1,548 ) (85 )% Total cost of revenue (1,263 ) (2,448 ) (1,185 ) (48 )% General and administrative expense (1,418 ) (1,132 ) 286 25 % Other income, net 20,961 414 20,547 4,963 % Income taxes (5,667 ) (79 ) 5,588 7,073 % Net income $ 17,352 $ 274 $ 17,078 6,233 % Basic EPS $ 0.73 $ 0.01 $ 0.72 7,200 % Diluted EPS $ 0.72 $ 0.01 $ 0.71 7,100 % Water delivered (thousands of gallons) 5,820 4,011 1,809 45 % Water and wastewater taps sold 51 45 6 13 % Lots delivered — 20 (20 ) (100 )% 21 Index Six Months Ended February 28, 2021 February 29, 2020 $ Change Increase/ (Decrease) % Change (In thousands, except for water and lot deliveries and taps sold) Water and wastewater resource revenue $ 5,188 $ 3,172 $ 2,016 64 % Land development revenue 4,419 10,807 (6,388 ) (59 )% Total revenue 9,607 13,979 (4,372 ) (31 )% Water and wastewater resource cost of revenue (2,020 ) (1,154 ) 866 75 % Land development cost of revenue (1,988 ) (9,880 ) (7,892 ) (80 )% Total cost of revenue (4,008 ) (11,034 ) (7,026 ) (64 )% General and administrative expense (2,588 ) (2,018 ) 570 28 % Other income, net 21,113 7,076 14,037 198 % Income taxes (5,927 ) (1,966 ) 3,961 201 % Net income $ 18,197 $ 6,037 $ 12,160 201 % Basic EPS $ $ 0.76 $ $ 0.25 $ $ 0.51 204 % Diluted EPS $ $ 0.76 $ $ 0.25 $ $ 0.51 204 % Water delivered (thousands of gallons) 109,712 20,012 89,700 448 % Water and wastewater taps sold 87 96 (9 ) (9 )% Lots delivered 22 136 (114 ) (84 )% 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. Pure Cycle 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 fiscal 2021. We have broken ground on the second phase and expect lot deliveries to begin this fall. Six months ended February 28, 2021 vs. Six months ended February 29, 2020 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 operations. General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily as a result of increased head count. Pure Cycle added five full time employees in 2020 as operations have increased and development has continued. 22 Index Other income, net – Other income, net increased in 2021 as compared to 2020, primarily as a result of 2021 outstanding reimbursable costs being recognized. The reimbursable costs are no longer contingent and have been recognized as a Note receivable – related party, Interest income, Project management revenue, and Other income, consistent with bond proceeds received in November 2019. Income tax expense – Income tax expense increased in 2021 as compared to 2020, primarily as a result of the recognition of reimbursable costs due from the Sky Ranch CAB. Water delivered – Water deliveries increased in 2021 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 fiscal 2021. 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 February 28, 2021 February 29, 2020 $ Change Increase/ (Decrease) % Change (In thousands, except for water deliveries) Metered water usage from: Municipal water usage $ 74 $ 37 $ 37 100 % Oil and gas operations usage 583 20 563 2,815 % Wastewater treatment fees 51 20 31 155 % Water and wastewater tap fees 1,583 1,173 410 35 % Other revenue 385 4 381 9,525 % Total segment revenue 2,676 1,254 1,422 113 % Water service costs (213 ) (207 ) 6 3 % Wastewater service costs (64 ) (38 ) 26 68 % Depreciation (354 ) (383 ) (29 ) (8 )% Other (363 ) (3 ) 360 12,000 % Total expenses (994 ) (631 ) 363 58 % Segment operating income $ 1,682 $ 623 $ 1,059 170 % Water deliveries (thousands of gallons) On Site 599 1,211 (612 ) (51 )% Export - Commercial 95 259 (164 ) (63 )% Sky Ranch 2,357 349 2,008 575 % Wild Pointe 2,707 2,012 695 35 % O&G operations 62 180 (118 ) (66 )% Total water deliveries 5,820 4,011 1,809 45 % 23 Index Six Months Ended February 28, 2021 February 29, 2020 $ Change Increase/ (Decrease) % Change (In thousands, except for water deliveries) Metered water usage from: Municipal water usage $ 241 $ 140 $ 101 72 % Oil and gas operations usage 1,782 57 1,725 3,026 % Wastewater treatment fees 93 40 53 133 % Water and wastewater tap fees 2,666 2,845 (179 ) (6 )% Other revenue 406 90 316 351 % Total segment revenue 5,188 3,172 2,016 64 % Water service costs (758 ) (461 ) 297 64 % Wastewater service costs (156 ) (64 ) 92 144 % Depreciation (719 ) (602 ) 117 19 % Other (387 ) (27 ) 360 1,333 % Total expenses (2,020 ) (1,154 ) 866 75 % Segment operating income $ 3,168 $ 2,018 $ 1,150 57 % Water deliveries (thousands of gallons) On Site 3,240 6,671 (3,431 ) (51 )% Export - Commercial 2,448 1,903 545 29 % Sky Ranch 14,655 722 13,933 1,930 % Wild Pointe 9,202 9,788 (586 ) (6 )% O&G operations 80,166 928 79,238 8,539 % Total water deliveries 109,711 20,012 89,699 448 % Three months ended February 28, 2021 vs. Three months ended February 29, 2020 Municipal water usage – Municipal water usage increased in 2021 as compared to 2020, primarily as a result of new Sky Ranch customers in our water and wastewater resource development segment. Oil and gas operations – Oil and gas operations increased in 2021 as compared to 2020, primarily as a result of recognition of a forfeited water reserve agreement totaling $0.4 million and increased oil and gas activity in our service area. Wastewater treatment fees – Wastewater treatment fees increased in 2021 as compared to 2020, primarily as a result of new Sky Ranch customers in our water and wastewater resource development segment. Water and wastewater tap fees – Water and wastewater tap fees increased in 2021 as compared to 2020, primarily as a result of increased price, on average, of water and wastewater taps. During the three months ended February 28, 2021, the average price of a Sky Ranch water and wastewater tap was $31 thousand per tap, compared to $26 thousand per tap for the three months ended February 29, 2020. During the second quarter of fiscal 2021, we sold 51 water and wastewater taps. During the second quarter of fiscal 2020, we sold 45 water and wastewater taps. Other revenue – Other revenue increased in 2021 as compared to 2020, primarily as a result of a 2021 agreement to construct a special facility for WISE, for which $0.4 million of revenue was recognized. The project is recognizing revenue on a percent of completion basis. Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily as a result of the new Sky Ranch water reclamation facility being online for the entire quarter and requiring more staff to run. Other costs of revenue – Other costs of revenue increased in 2021 as compared to 2020, primarily as a result of costs to construct a special facility for WISE. Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily as a result of increased Sky Ranch and Wild Pointe customers, partially offset by decreased On Site water usage as a result of winter and less irrigation water usage. Six months ended February 28, 2021 vs. Six months ended February 29, 2020 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. 24 Index Water service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily as a result of increased water usage associated with our oil and gas customers. 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 February 28, 2021 February 29, 2020 $ Change Increase/ (Decrease) % Change (In thousands, except for lots delivered) Lot sales $ 515 $ 2,265 $ (1,750 ) (77 )% Project management revenue 1,548 — 1,548 — Total revenue 2,063 2,265 (202 ) (9 )% Land development construction (233 ) (1,645 ) (1,412 ) (86 )% Sky Ranch property tax (36 ) (172 ) (136 ) (79 )% Total costs of revenue (269 ) (1,817 ) (1,548 ) (85 )% Segment operating income $ 1,794 $ 448 $ 1,346 300 % Lots delivered — 20 (20 ) (100 )% Six Months Ended February 28, 2021 February 29, 2020 $ Change Increase/ (Decrease) % Change (In thousands, except for lots delivered) Lot sales $ 2,871 $ 10,807 $ (7,936 ) (73 )% Project management revenue 1,548 — 1,548 — Total revenue 4,419 10,807 (6,388 ) (59 )% Land development construction (1,944 ) (9,684 ) (7,740 ) (80 )% Sky Ranch property tax (44 ) (196 ) (152 ) (78 )% Total costs of revenue (1,988 ) (9,880 ) (7,892 ) (80 )% Segment operating income $ 2,431 $ 927 $ 1,504 162 % Lots delivered 22 136 (114 ) (84 )% Three months ended February 28, 2021 vs. Three months ended February 29, 2020 Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates as a result of the timing of revenue recognition as lots are delivered over time. Revenues recognized in the second quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase. The second development phase will not begin recognizing revenue until platted lots are delivered to the home builders. Project management revenues – Project management revenues increased in 2021 as compared to 2020 as a result of the determination that reimbursable funds due from the Sky Ranch CAB are no longer contingent on a sufficient tax base and or the issuance of municipal bonds for collectability to be reasonably assured. These revenues increased Notes receivable – related party. 25 Index Land development construction costs – Land development construction costs decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete. Phase two costs are currently being capitalized until revenue recognition begins. Sky Ranch property taxes – Sky Ranch property taxes decreased in 2021 as compared to 2020, primarily as a result of the improved lots being sold to the homebuilders. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use. Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of fiscal 2021. We have broken ground on the second phase and expect lot deliveries to begin this fall. Six months ended February 28, 2021 vs. Six months ended February 29, 2020 Lot sales – Lot sales decreased in 2021 as compared to 2020, primarily as a result of phase one being nearly complete. Phase two will not yet begin recognizing revenue until platted lots are delivered to the home builders. Sales price per lot for all delivered lots within the first development has not increased but the revenue per delivered lot fluctuates as a result of the timing of revenue recognition as lots are delivered over time. Revenues recognized in the second quarter and remaining revenues to be recognized relate to work that is not specific to one lot but rather benefits the entire development phase. The second development phase will not begin recognizing revenue until platted lots are delivered to the home builders. 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. Our current basis in the Sky Ranch land is low as the land is not yet improved for residential and commercial use. Lots delivered – Lot deliveries decreased in 2021 as compared to 2020 due to all lots in the first phase of Sky Ranch having been delivered as of the first quarter of fiscal 2021. We have broken ground on the second phase and expect lot deliveries to begin this fall. Liquidity, Capital Resources and Financial Position 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 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. We believe future revenues from water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months. ECCV Capacity Operating System The Rangeview District may purchase water produced from East Cherry Creek Valley Water and Sanitation District’s (“ECCV”) Land Board system. ECCV’s Land Board system is comprised of eight wells and more than 10 miles of buried water pipeline located on the Lowry Range. In May 2012, we entered into an agreement to operate and maintain the ECCV facilities, allowing us to utilize the system to provide water to commercial and industrial customers, including customers providing water for drilling and hydraulic fracturing of oil and gas wells. Our costs associated with the use of the ECCV system are a flat fee of eight thousand dollars per month from January 1, 2013 through December 31, 2020, and decreased to three thousand dollars per month effective January 1, 2021 through April 2032. Additionally, we pay a fee per 1,000 gallons of water produced from the ECCV’s system, which is included in the water usage fees charged to customers. The ECCV system is anticipated to continue to cost us approximately ten thousand dollars per month to maintain going forward. 26 Index South Metropolitan Water Supply Authority (“SMWSA”) and the Water Infrastructure Supply Efficiency Partnership (“WISE”) We have entered into a financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE. We anticipate that we will be investing $1.1 million in 2021 and $7.5 million in total for the fiscal years 2022 through 2025 to fund the Rangeview District’s obligation to purchase water and infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding the Rangeview District’s obligations in WISE, we will have the sole right to use and reuse the Rangeview District’s 9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue from such service. Our current WISE subscription entitles us to approximately three million gallons per day of transmission pipeline capacity and 900 acre feet per year of water. Summary Cash Flows Table Six Months Ended February 28, 2021 February 29, 2020 $ Change % Change (In thousands) Cash (used) provided by: Operating activities $ (87 ) $ 16,542 $ (16,629 ) (101 )% Investing activities $ (959 ) $ (1,156 ) $ 197 17 % Financing activities $ 12 $ 31 $ (19 ) (61 )% 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 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 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. 27 Index Recently Adopted and Issued Accounting Pronouncements See Note 1 – Presentation of Interim Information to the accompanying condensed consolidated financial statements for recently adopted and issued accounting pronouncements. Disclosure Regarding Forward-Looking Statements Statements that are not historical facts contained in or incorporated by reference into this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including without limitation the risks described in “Forward-Looking Statements” and “Risk Factors” in Part II Item 1A of our most recent Annual Report on Form 10- K, and in the reports we file with the Securities and Exchange Commission. These risks are not exhaustive. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements should not be relied upon as predictions of future events. We can provide no assurance that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. We assume no obligation to update or supplement forward-looking statements, except as may be required under applicable law. 28 Index Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable.