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Item 7. Management’s Discussion and Analysis

2021-11-10 compared with 2020-11-10 · 163 added, 515 removed, 33 unchanged (95% of the section changed)

Item 7 – 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” and

elsewhere in this Annual Report on Form 10-K, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and the 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 Annual Report on Form 10-K should be read in

conjunction with our disclosure under the heading “FORWARD-LOOKING STATEMENTS” on page 1.

accompanying consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.

The following sections focus on the key indicators reviewed by

management in evaluating our financial condition and operating performance, including the following:

Revenues generated from providing water and wastewater services;

Revenues from water and wastewater tap sales;

Revenues from lot sales at Sky Ranch;

Expenses associated with developing our water and land assets;

Expenses associated with developing lots at Sky Ranch;

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

Our MD&A section includes the following items:

Executive Summary – a summary of important financial metrics in fiscal 2020;

Our Business – a general description of our business, our services, and our business strategy;

Critical Accounting Policies and Use of Estimates – a discussion of our critical accounting policies that require critical

judgments, assumptions, and estimates;

Results of Operations – an analysis of our results of operations for the three fiscal years presented in our accompanying consolidated financial

Liquidity, Capital Resources and Financial Position – an analysis of our cash position and cash flows, as well as a discussion

of our financial obligations.

The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” and elsewhere in this Annual Report on Form 10-K, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and the 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 Annual Report on Form 10-K should be read in conjunction with our disclosure under the heading “FORWARD-LOOKING STATEMENTS” on page 1.

The following Management’s Discussion and Analysis (“MD&A”) is intended to help the reader understand the results of operations and our financial condition and should be read in conjunction with the accompanying consolidated financial statements and the notes thereto included in Part II, Item 8 of this Annual Report on Form 10-K.

Executive Summary

Fiscal 2020 was highlighted by the substantial completion of the initial phase of our Sky Ranch property.

Fiscal 2021 was highlighted by the substantial completion of the initial development phase and start of our second development phase at our Sky Ranch property, along with the launch of our new single-family home rental business.

Other notable items include the following:

Total revenue increased to $25.9 million for fiscal 2020 (a $5.5 million or 27% increase compared to fiscal 2019) primarily due to lot sales and water and wastewater tap fees at Sky Ranch

Net income increased to $6.8 million for fiscal 2020 (a $1.9 million or 40% increase compared to fiscal 2019), primarily due to lot sales, partial satisfaction of the contingency related to public improvement reimbursables, and water

and wastewater tap fees at Sky Ranch

Fully diluted earnings per common share for fiscal 2020 was $0.28 versus $0.20 for fiscal 2019

Total assets increased to $89.8 million as of August 31, 2020 (a $6.0 million or 7.2% increase compared to 2019), primarily due to increased cash from payments for lots and water, and wastewater taps

at Sky Ranch and a $10.5 million expense reimbursement from the Sky Ranch CAB through bond proceeds of which $4.2 million reduced Land development inventories on the consolidated balance

sheet and $6.3 million was recognized as Other income - Reimbursement of construction costs - related party on the c onsolidated statements of operations and comprehensive income and increased Investments in water and

wastewater systems on the consolidated balance sheet;

Total equity increased to $82.0 million as of August 31, 2020 (a $7.3 million or 9.8% increase compared to 2019), primarily due to net income for fiscal 2020

In fiscal 2020, total revenues were $25.9 million, primarily consisting of $18.9 million of lot sales recognized under the percentage-of-completion method as well as a point in time for one home builder customer,

and a combined $5.6 million from the sale of 201 and 189 water and wastewater taps.

The number of wastewater taps sold are less than the number of water taps sold because we do not sell wastewater taps at Wild Pointe.

Wild Pointe customers are on

septic systems.

Comparatively, in fiscal 2019, total revenues were $20.4 million, primarily from $12.0 million of recognized lot sales and $3.5 million from the sale of 119 and 113 water and wastewater taps.

income increased in fiscal 2020 mainly due to the $6.3 million of reimbursables we received from the Sky Ranch CAB for partial reimbursement of public improvement costs we funded at Sky Ranch.

In total, we received $10.5 million from the

Sky Ranch CAB for partial reimbursement of public improvement costs we funded, the remaining $4.2 million reduced Land development inventories on our consolidated balance sheet.

Due to the strong

performance of our land development segment, which produced the lot sales and lead to the increase in water and wastewater taps sales, along with the recognition of the $6.3 million of other income from receipt of the reimbursables, net income

increased to $6.8 million for fiscal 2020 compared to $4.8 million for fiscal 2019, for an increase of 40%.

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 wholesale water and

wastewater resources, develops 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.

Our primary land

asset, Sky Ranch, is located in one of the most active development areas in the Denver metropolitan region along the 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 service 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.

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

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 water and wastewater service segment generates revenue from the following sources, described in greater detail in Item 1 – Business above:

Monthly water usage and wastewater treatment fees;

One-time water and wastewater tap (connection) fees;

Construction and Special Facility funding fees;

Consulting fees;

Industrial – oil and gas operation fees

Land Development

In 2017, we launched our land development segment.

We are 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 DIA.

development activities include the design, permitting, and construction of all of 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

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.

In June 2017, we entered into separate contracts with three national home builders (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 improvements, such as roads, curbs and gutters, park amenities, sidewalks, street and traffic signs, water and

sanitary sewer mains and stubs, storm water management facilities, and lot grading improvements for delivery of finished lots to each builder.

We were also required to cause the Rangeview District to install and construct wholesale infrastructure

improvements (i.e., a wastewater reclamation facility and wholesale water facilities) for the provision of water and wastewater service to the property.

As of August 31, 2020, we have substantially completed all of the wholesale infrastructure

improvements for the initial residential lots, which included the completion of a wastewater reclamation facility that can serve approximately 2,000 SFE’s in Sky Ranch before expansion.

Pursuant to various agreements, we provide financing to the

Rangeview District and the Sky Ranch Districts (through the Sky Ranch CAB) as described in Note 14 – Related Party Transactions to the accompanying consolidated financial statements for the majority of

the improvements at Sky Ranch.

In conjunction with approvals from Arapahoe County for the Sky Ranch project, we, together with the Rangeview District and/or Sky Ranch Districts and/or the Sky Ranch CAB, are obligated to maintain a deposit account

with Arapahoe County to ensure completion of certain public infrastructure improvements and to warranty the improvements for a one-year period following completion and delivery.

As of August 31, 2020, $1.0 million remains on deposit, with the

warranty period set to expire in October 2021.

As of August 31, 2020, we have expended $33.5 million related to the development of the first filing of Sky Ranch out of the total estimated $35.8 million.

We anticipate the remaining $2.3 million will be spent during our fiscal 2021.

These amounts include estimated reimbursable costs of $29.0 million, for which we received a partial reimbursement of $10.5 million in November 2019.

We believe the remaining $18.5 million 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 August 31, 2020, lot sales to home builders generated $35.1 million in cash payments, with the remaining $1.6 million paid in

November 2020, which combined represents the full $36.7 million sales price contracted for with the home builders.

In addition, as of August 31, 2020, the Sky Ranch development produced $8.9 million of water and wastewater tap fees, and we

expect that an additional $5.9 million of tap fees will be received during our fiscal 2021.

In December 2020, we expect to begin construction on the second filing at Sky Ranch, which is expected to include nearly 900 residential lots.

Subsequent to August 31, 2020, we entered into separate agreements

with four home builders (KB Home, Meritage Homes, DR Horton and Challenger Homes) pursuant to which we agreed to sell 789 single-family attached and detached residential lots at the Sky Ranch property.

Due to our strong performance in phase one

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 phase two.

This next filing at Sky Ranch will incorporate approximately 250 acres and is

planned to be completed in four sub-phases.

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.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions about future events

that affect the amounts reported in the financial statements and accompanying notes.

Future events and their effects cannot be determined with absolute certainty.

Therefore, the determination of estimates requires the exercise of judgment.

results inevitably will differ from those estimates, and such differences may be material to the financial statements.

The most significant accounting estimates inherent in the preparation of our financial statements include estimates associated with the timing of revenue recognition, the impairment of water assets and other

long-lived assets, fair value estimates and share-based compensation.

Below is a summary of these critical accounting policies.

Revenue Recognition

Revenues derived from our water and wastewater services consist mainly of monthly metered wholesale water usage and wastewater treatment fees, tap fees, construction fees/special facility funding, and consulting fees.

Revenues derived from

land development activities consist mainly of lot sales and project management service fees.

Revenue is recognized from our water and wastewater segment and land development segment as described below and further described in Note 2 – Summary of Significant Accounting Policies to the accompanying consolidated financial statements.

Water and Wastewater Revenue

Monthly wholesale water charges are assessed to our customers based on actual metered usage each month plus a base monthly service fee assessed per SFE unit served.

One SFE is a customer, whether residential, commercial or industrial, that

imparts a demand on our water or wastewater systems are computed based on the demand of a single-family detached home of four persons living on a standard-sized 5,500 square foot lot.

Water consumption pricing uses a tiered pricing structure

where the cost of water increases as customers use more water.

We recognize wholesale water usage revenues at a point in time upon delivering water to our customers or our governmental customers’ end-use customers, as applicable.

recognized by us from the sale of Export Water and other portions of our “Rangeview Water Supply” off the Lowry Range are shown gross of royalties to the Land Board.

Revenues recognized by us from the sale of water on the Lowry Range are shown

net of royalties paid to the Land Board and amounts retained by the Rangeview District.

In addition, we provide water for hydraulic fracturing to industrial customers in the oil and gas industry who are located in and adjacent to our service areas.

Oil and gas operations revenues are recognized at a point in time upon

delivering water to a customer, unless other special arrangements are made.

We recognize wastewater treatment revenues monthly based on a fixed flat monthly fee and actual monthly usage charges.

The monthly wastewater treatment fees are shown net of amounts retained by the Rangeview

Costs of delivering water and providing wastewater services to customers are recognized as incurred.

A tap constitutes a right to connect to the wholesale water and wastewater systems through a service line to a residential or commercial building or property, and once granted, the customer may make a physical tap into the wholesale line(s)

to connect its property for water and/or wastewater service.

The right stays with the property.

We have no obligation to physically connect the property to the lines.

Once connected to the water and/or wastewater systems, the customer has live

service to receive metered water deliveries from our system and send wastewater into our system.

We recognize water and wastewater tap fees as revenue at the time we grant a right for the customer to tap into the water or wastewater service

line to obtain service.

The Rangeview District sets water usage, wastewater treatment, and tap fees for the customers we serve through our service agreements with the Rangeview District.

We recognize construction fees, including fees received to construct special facilities, over time as the construction is completed.

Consulting fees are fees we receive, typically monthly.

We earn these fees from municipalities and area water providers along the I-70 corridor for which the Company provides contract operations services.

Consulting fees are recognized monthly based on a flat monthly fee plus charges for additional work performed, if applicable.

Land Development Revenue

Revenues derived from lot sales depend on the terms of the agreement with the builder.

Lots are completed and sold pursuant to distinct agreements with each home builder.

These agreements follow one of two formats.

One format is the sale of

a fully finished lot, whereby the purchaser pays for a ready-to-build finished lot and the sales price is paid in a lump-sum amount upon completion of the finished lot that is building permit ready.

We recognize revenues at the point in time of

the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete, and we have no further obligations for the lot.

Our second format is the sale of finished lots pursuant to a lot

development agreement with builders, whereby we receive payments in stages.

Because the builder (i.e., the customer) takes ownership and control of the lot at the first closing and subsequent improvements made by us improve the builder’s lot as

construction progresses, we account for revenue over time with progress measured based upon costs incurred to date compared to total expected costs (percent complete methodology).

Any revenue in excess of amounts entitled to be billed is

reflected on the balance sheet as a contract asset and amounts received in excess of revenue recognized are recorded as deferred revenue.

We do not have any material significant payment terms as all payments are expected to be received within

12 months after the delivery of the platted lot.

We adopted the practical expedient for financing components and do not need to account for a financing component of these lot sales as the delivery of lot sales is expected to occur within one

year of when we begin construction on those lots.

The Sky Ranch CAB is required to construct certain public improvements, such as water distribution systems, sewer collection systems, storm water systems, drainage improvements, roads, curbs, sidewalks, landscaping

and parks, the costs of which may qualify as reimbursable costs.

Pursuant to our agreements with the Sky Ranch CAB (see Note 14 – Related Party Transactions to the accompanying consolidated financial

statements), we are obligated to finance this infrastructure, which we have substantially completed for the initial filing.

These public improvements are constructed pursuant to design standards specified by the Sky Ranch Districts and/or the Sky

Ranch CAB, Rangeview District, or other governmental entities, and after inspection and acceptance, are turned over to the applicable governmental entity to operate and maintain.

Because these public improvements are owned and operated on behalf

of a governmental entity, they may qualify for reimbursement.

Pursuant to our agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to us for any advances made or expenses incurred by us related to construction of public improvements unless and

until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse us for all or a portion of the advances made and expenses incurred.

Because the timing of the issuance and approval of any bonds is subject to

considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are initially capitalized in Land

development inventories.

If the bonds have not been approved and issued prior to the sale of the lots serviced by the public improvements, the costs are expensed through Land development construction

costs when the lots are sold consistent with other construction related costs.

If bonds ultimately are issued, when we receive the reimbursement, we record the amount received as Other income to

the extent that costs have previously been expensed and reduce Land development inventories by any remaining reimbursables received.

We submit specific costs for reimbursement to the Sky Ranch CAB.

If reimbursable costs received exceed actual expenses we incurred for the cost of the public improvements, they are recorded as Other income as received.

All amounts owed pursuant to agreements with the Sky Ranch Districts or the Sky Ranch CAB bear interest at a rate of 6% per annum.

Due to the uncertainty of collecting the interest (because payment is contingent on

the issuance of bonds), interest income accrues but is not recognized by the Sky Ranch CAB until the bonds are issued.

As of August 31, 2020, we have deferred recognition of $1.2 million in interest due on

these amounts.

On May 2, 2018, we entered into two Service Agreements for Project Management Services (the “Project Management Agreements”) with the Sky Ranch CAB.

Pursuant to the Project Management Agreements, we act as the

project manager and provide any and all services required to deliver the Sky Ranch CAB-eligible improvements, including but not limited to Sky Ranch CAB compliance, planning design and approvals, project administration, contractor agreements, and

construction management and administration.

We must submit to the Sky Ranch CAB a monthly invoice, in a form acceptable to the Sky Ranch CAB, detailing all project management activities during the period.

We are responsible for all expenses we

incur in the performance of the Project Management Agreements and are not entitled to any reimbursement or compensation except as set forth in the Project Management Agreements, unless otherwise approved in advance by the Sky Ranch CAB in

The Sky Ranch CAB is subject to annual budget and appropriation procedures and does not intend to create a multiple-fiscal year direct or indirect debt or other financial obligation.

We receive a project management fee of five percent

(5%) of actual construction costs of Sky Ranch CAB-eligible improvements.

The project management fees owed to us qualify as a reimbursable cost.

The project management fee is based only on the actual costs of the improvements;

thus, items such as

fees, permits, review fees, consultant or other soft costs, and land acquisition or any other costs that are not directly related to the cost of construction of Sky Ranch CAB-eligible improvements are not included in the calculation of the

project management fee.

Soft costs and other costs that are not directly related to the construction of Sky Ranch CAB-eligible improvements are included in Land development i nventories and accounted for in the same manner as construction support activities as described below.

Per the Project Management Agreements, no payment is required by the Sky Ranch CAB with respect to project management fees

unless and until the Sky Ranch CAB and/or the Sky Ranch Districts have funds or issue municipal bonds in an amount sufficient to reimburse us for all or a portion of advances provided or expenses incurred for reimbursables.

contingency, the project management fees have been deferred and won’t be recognized as revenue until the bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses us for the public improvements.

point, the portion of the project management fees repaid will be recognized as revenue.

As of August 31, 2020, we have deferred recognition of $1.5 million in project management services to the Sky Ranch

We perform certain construction activities at Sky Ranch.

The activities performed include construction and maintenance of the grading, erosion and sediment control best management practices and other

construction-related services.

These activities are invoiced upon completion and are included in Land development inventories and subsequently expensed through Land

development construction costs unless or until bonds are issued by the Sky Ranch Districts and/or the Sky Ranch CAB and the Sky Ranch CAB reimburses us for public improvements.

See Note 2 – Summary of

Significant Account Policies – Land Development Segment Revenue –Reimbursable Costs for Public Improvements to the accompanying consolidated financial statements for details on repayment of reimbursable costs.

Other Revenue

Up-front payments we received pursuant to the Bison Lease and the OGOA are recognized as other income on a straight-line basis over the initial term or extension of term, as applicable, of these agreements.

Impairment of Water Assets and Other Long-Lived Assets

We review our long-lived assets for impairment at least annually or more frequently if we believe events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.

If we believe it

is more likely than not that the carrying value of the long-lived asset exceeds its fair value, then we perform a valuation to determine the fair value of the asset and recognize an impairment loss equal to the excess of the carrying amount of

the asset over its fair value.

Our Water Rights

During our fiscal 2020, there were no indicators of impairment related to our water rights;

therefore, we performed an impairment analysis as of August 31, 2020, and determined that it is not more likely than not that the carrying value of

our water rights exceeds the fair value of the water rights.

There have been no material changes to our water rights which would indicate they are impaired are or that their costs are not recoverable.

Our analysis is based on development

occurring within areas in which we have agreements to provide water services utilizing water rights owned by us (e.g., Sky Ranch and the Lowry Range) as well as in surrounding areas, including the Front Range and the I-70 corridor.

assets are being utilized to provide water services to customers on the Lowry Range, at Wild Pointe and along the I-70 corridor including Sky Ranch.

We will continue to expand our water services as Sky Ranch continues to develop and will

continue to enhance our water rights in the water courts.

Our water supplies are legally decreed for use through the water court.

The water court decree allocates a specific amount of water (subject to continued beneficial use) for municipal

and industrial uses.

Our combined Rangeview Water Supply and Sky Ranch water assets have a carrying value of $53.9 million as of August 31, 2020.

Based on the carrying value of our water rights, the

long-term nature of any development plans, current tap fees of $27,209 and estimated gross margins on these tap fees, we estimate that we would need to serve a total of 4,250 water connections (requiring 7% of our portfolio) to generate cash

flows (deemed equivalent to fair value) sufficient to recover the costs of our Rangeview Water Supply and Sky Ranch water.

If our water tap fees increase 5%, we would need to serve a total of 4,050 water connections (requiring just under 7% of

our portfolio) to recover the costs of our Rangeview Water Supply and Sky Ranch water.

If tap fees decrease 5%, we would need to service a total of 4,500 water connections (requiring just over 7% of our portfolio) to recover the costs of our

Rangeview Water Supply and Sky Ranch water.

Although the timing of actual new home development throughout the Front Range will impact our tap sale projections, it will not alter our water ownership, our service obligations to existing properties or the

number of SFEs we can service;

therefore, no impairment indicators are present as of August 31, 2020.

Our Land Development Assets

During our fiscal 2020, there were no indicators of impairment related to our land;

therefore, we performed an impairment analysis as of August 31, 2020, and determined that it is not more likely than not that

the carrying value of our land will exceed the fair value of the land.

We are actively developing and selling lots at Sky Ranch.

We have completed the initial filling at Sky Ranch for 506 lots, all of which are under contract, with 483

finished lots delivered and fully paid for as of August 31, 2020, and the remaining lots were delivered and paid for on November 3, 2020.

The 506 lots have a total sales price of $36.7 million with total land development costs expected to be

$35.8 million.

Additionally, we collected $10.5 million of public improvement reimbursables during the year ended August 31, 2020, which will result in us realizing a net profit of $11.3 million on the sale of all 506 lots.

constructed $18.5 million of remaining public improvements, which are potentially reimbursable from our first filing at Sky Ranch.

If Sky Ranch home sales continue to be successful, we believe we will be able to collect these reimbursables

from future Sky Ranch CAB bond proceeds.

Pursuant to the agreements with the Sky Ranch CAB, the Sky Ranch CAB is not required to make payments to the Company for any advances made by the Company or expenses incurred related to

construction of public improvements unless and until the Sky Ranch CAB and/or the Sky Ranch Districts issue bonds in an amount sufficient to reimburse the Company for all or a portion of the advances made and expenses incurred.

timing of the issuance and approval of any bonds is subject to considerable uncertainty, any potential reimbursable costs for the construction of public improvements, including construction support activities and project management fees, are

initially capitalized in Land development i nventories.

If the bonds have not been approved and issued prior to the sale of the lots serviced by the public

improvements, the costs are expensed through Land development construction costs when the lots are sold consistent with other construction related costs.

If bonds ultimately are issued, upon receipt of

reimbursements by the Company, the Company records the reimbursements received as Other income to the extent that costs have previously been expensed and reduces Land

development i nventories by any remaining reimbursables received.

The Company submits specific costs for reimbursement to the Sky Ranch CAB.

reimbursable costs received exceed actual expenses incurred by the Company for the cost of the public improvements, they are recorded as Other income as received.

Subsequent to August 31, 2020, we announced the second phase at Sky Ranch.

The second phase will be platted for nearly 900 lots, for which we plan to begin development activities before the end of calendar 2020.

Subsequent to August 31, 2020, we entered into contracts with four home builders (Melody Homes (a wholly-owned subsidiary of DR Horton), KB Homes, Meritage Homes and Challenger Homes), to sell 789 finished lots, on which the home builders

will construct both attached and detached homes.

We are retaining the remaining 100+ lots for future uses.

The total sales price for the 789 lots contracted for is $63.4 million, subject to price escalations depending on development timing.

The remaining lots held for future use, assuming comparable lot prices to the contracted prices and excluding escalations, would result in a total sales value for the second filing of $72.6 million.

Our preliminary total cost estimates for

developing the nearly 900 lots is $65.6 million.

We believe that more than $48.0 million of this amount will be spent on public improvements that will be eligible for reimbursement by the Sky Ranch CAB subject to the conditions described

As of August 31, 2020, our Sky Ranch land assets under development, shown as Land development inventories on our balance sheet, have a carrying value of $481,500.

Because per lot sales prices are increasing, per lot costs are not anticipated to increase materially, and we are continuing to actively develop the land,

there are no indications of impairment.

In fiscal 2020, we assessed the recoverability of our 13,900 acres of mineral interests in the Arkansas River Valley in southeastern Colorado.

We determined that it appears more

likely than not that the carrying value of our Arkansas River Valley mineral rights is not recoverable as of August 31, 2020.

As a result, we recorded a non-cash impairment charge of $1.4 million.

The charge was recorded as a N on-cash mineral interest impairment charge in the consolidated statements of operations and comprehensive income included in Part II, Item 8 of

this Annual Report .

Fair Value Estimates

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

advantageous market.

We generally use a fair value hierarchy that has three levels of inputs, both observable and unobservable, with use of the lowest possible level of input to determine fair value.

The fair value of the investment securities is

based on the values reported by the financial institutions where the funds are held.

These securities include only federally insured certificates of deposit and U.S.

See Note 3 – Fair Value Measurements to the accompanying consolidated financial statements.

Share-based Compensation

We estimate the fair value of share-based payment awards made to key employees and directors on the date of grant using the Black-Scholes option-pricing model.

We then expense the fair value over the vesting period

of the grant using a straight-line expense model.

The fair value of share-based payments requires management to estimate or calculate various inputs such as the volatility of the underlying stock, the expected dividend rate, the estimated

forfeiture rate, and an estimated life of each option.

We do not expect any forfeiture of option grants;

therefore, the compensation expense has not been reduced for estimated forfeitures.

These assumptions are based on historical trends and

estimated future actions of option holders and may not be indicative of actual events, which may have a material impact on our financial statements.

For further details on share-based compensation expense, see Note 8 – Shareholders’ Equity to the accompanying consolidated financial statements.

● Total revenues were $17.1 million, primarily due to recognition of revenue related to lot sales at Sky Ranch, water and wastewater tap fees, water sales related to industrial water sales and recognition of project management fees

● Revenues from oil and gas operations was $2.8 million, which we believe is indicative of the resurgence of oil and gas operations in the area

● Pre-tax income was $26.6 million, attributable to positive earnings at both the water resource and land development segments, with the largest contributing factor being the recognition of a note receivable related to public improvement reimbursables allowing us to record $21.9 million of reimbursable income, project management fees and interest income as we have determined the Sky Ranch CAB’s ability to repay these amounts owed us is considered probable.

The probability of repayment is based on the Sky Ranch CAB’s increased share of mill levies due to the remainder of Sky Ranch being in a different taxing district, higher than projected assessed home values, and a broader tax base from the additional houses being built in the second development phase of Sky Ranch

● Fiscal year 2021 we posted $0.83 of earnings per fully diluted common share

● Total assets continue to increase and are $117.2 million as of August 31, 2021

● Total equity increased to $102.7 million as of August 31, 2021

In fiscal 2021, revenues were comprised mainly of $5.8 million of lot sales, $5.1 million from the sale of 167 and 163 water and wastewater taps, and $2.8 million from oil and gas operations in their drilling process.

Comparatively, in fiscal 2020, total revenues were $25.9 million, primarily consisting of $18.9 million of lot sales, and $5.6 million from the sale of 201 and 189 water and wastewater taps.

The number of wastewater taps sold are less than the number of water taps sold because we do not provide wastewater services at Wild Pointe.

In addition, during fiscal 2021, we recognized $1.6 million of project management fees related to the development at Sky Ranch.

Results of Operations

Executive Summary of Results of Operations

The results of our operations for the fiscal years ended August 31, 2021 and 2020 were as follows:

2020 versus 2019

Millions of gallons of water delivered

Municipal water usage revenues

Oil and gas water usage revenues

Total metered water usage revenues

Water delivery operating costs incurred

(excluding depreciation and depletion)

Gross margin for delivering water

Gross margin % for delivering water

Wastewater treatment revenues

Operating costs to treat wastewater

Gross margin for treating wastewater

Gross margin % for treating wastewater

Lot sales revenue

Lot development construction costs incurred

Gross margin on selling lots

Gross margin % on selling lots

Water and wastewater tap revenue

General and administrative expenses

Non-cash mineral rights impairment charge

Changes in Revenues and Gross Margin

Water Usage Revenues and Margins – Our water deliveries decreased 79% in fiscal 2020 compared to fiscal 2019.

Water revenues decreased 77% in fiscal 2020 compared to fiscal 2019 and our gross margin % dropped from 67% to 22%.

These changes were primarily due to a 100% decline in demand for water used by oil and gas companies for hydraulic fracturing of

oil wells, which was partially offset by the increase in water used due to the sale of homes at Sky Ranch.

Due to the increase in water sales at Sky Ranch, municipal water delivered increased by 29%.

Water Usage Revenue Summary

The following table details the sources of our water sales, the number of kgal (1,000 gallons) sold, and the average price per kgal for fiscal 2020 and fiscal 2019.

Customer Type

(in thousands)

Average per kgal

(in thousands)

Average per kgal

(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

Non-cash mineral interest impairment charge

Other income, net

Water delivered (millions of gallons)

Water and wastewater taps sold

Lots delivered - Phase 1

Lots delivered - Phase 2

Fiscal 2021 vs.

Revenue – Revenue decreased in 2021 as compared to 2020, primarily due to decreased lot sales due to the first development phase being nearly complete and our recognition of revenue in the second development phase not starting until the fourth fiscal quarter.

This decrease is partially offset by increased metered water usage from oil and gas operations, recognition of project management revenue related to our management of the construction projects at Sky Ranch, recognition of a forfeited water reserve agreement, and a special facility construction project for WISE.

As Sky Ranch continues to grow we anticipate lot sales generating significant revenue in fiscal 2022, and increasing water and wastewater usage fees as we continue to add customers to our water resource development segment.

Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily due to a decrease in land development costs due to the first development phase being nearly complete and recognition of costs related to the second development phase beginning in the fourth quarter of fiscal 2021.

The decreases were 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 due to increased head count in 2021 as operations and development continue to expand and increased legal expense of $0.3 million related to the Sky Ranch lot closings with our home builder customers.

Other income, net – Other income, net increased in 2021 as compared to 2020, primarily due to the recognition of outstanding reimbursable costs totaling $20.2 million as the collection of these amounts was deemed probable.

Additional information on the reimbursables can be found in Note 14 to the accompanying consolidated financial statements.

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

Our effective tax rate remained relatively consistent year over year.

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage as more parks and public spaces were completed at Sky Ranch.

Oil and gas operations are highly variable and dependent on oil prices and demand for gas and as such we cannot provide any assurances that we will realize this level of sales to oil and gas customers in the future.

As Sky Ranch continues to development, we anticipate continued growth in our residential service revenues.

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

The decrease in tap sales was offset by an increase in the rate per water tap sold in 2021.

Tap sales are driven by the issuance of building permits and the timing of these are not contractually established with the home builders.

The company expects to sell the remaining 41 taps from the first development phase at Sky Ranch in fiscal 2022 and the 229 taps from the first subphase of the second development phase of Sky Ranch during fiscal 2022 through fiscal 2024.

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

In February 2021, we broke ground on the second development phase and delivered the first 156 lots to home builders in the first subphase.

Water and Wastewater Resource Development Results of Operations

(In thousands, except for water deliveries)

Metered water usage from:

Municipal water usage

Oil and gas operations usage (1)

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

Industrial (1)

(1) Industrial water revenue does not include $425,800 of industrial water revenue recognized due to a pre-paid water agreement that was forfeited by the customer because it was not able to use the water within 12

months of the invoice date.

Wastewater Treatment Revenues – Our wastewater treatment revenues increased 168% in fiscal 2020 compared to

The increase in wastewater revenues is a result of the wastewater service provided to customers at Sky Ranch.

In fiscal 2019, wastewater revenues were only recognized from one commercial customer.

Wastewater revenue fluctuations

result from demand changes from our customers.

Water and Wastewater Tap Fees Revenues – We sold 188 water and wastewater taps at Sky Ranch and 13 water taps at

Wild Pointe during fiscal 2020, which generated revenues of $5.6 million.

We sold 113 water and wastewater taps at Sky Ranch, one commercial water tap and six residential water taps at Wild Pointe during fiscal 2019, which generated revenues of

$3.6 million.

We have 202 water and wastewater taps remaining to be sold in the first phase of the development at Sky Ranch, which we believe will be sold in our fiscal 2021.

Land Development Revenues – We broke ground on our first phase of Sky Ranch in

As of August 31, 2020, we completed construction on all 506 lots and delivered and received payment for 483 finished lots to home builders.

We delivered the remaining lots on November 3, 2020.

During fiscal 2020 and 2019, we

received $16.6 million and $15.6 million in lot sale proceeds, for a total of $35.1 million since development started.

During fiscal 2020 and 2019, we recognized revenues of $18.9 million and $12.0 million using both the over time and point

in time accounting methods.

Additionally, we have substantially completed improvements (including over lot grading, water, sewer, and storm water), off-site improvements (including drainage), and our entry roadway (Monahan Road), for the

remaining lots, and carry those investments, totaling $481,500 in Land development inventories in our financial statements.

As of October 31, 2020, the builders have sold 315 homes at Sky Ranch.

on current sales rates, we believe the initial filing at Sky Ranch will be sold out before the end of calendar 2021.

We act as the project manager and provide all services required to deliver eligible improvements for the Sky Ranch CAB.

For these services, we charge a five percent (5%) project

management fee calculated on actual construction of Sky Ranch CAB eligible reimbursable improvements.

No payment is required of the Sky Ranch CAB for project management fees unless and until the Sky Ranch CAB and/or Sky Ranch Districts issue

bonds in an amount sufficient to pay us for all or a portion of the project management fees.

Because it is uncertain if bonds will be issued and when we will receive payment, we defer recognition of project management fee income from the Sky

Ranch CAB until the issuance of the bonds is certain.

Once issuance of the bonds and payment to us is certain, the portion of the project management fees repaid will be recognized as revenue.

A s of August 31, 2020, we have deferred

recognition of $1.5 million in project management fees.

O&G operations

Total water deliveries

(1) Industrial water revenue includes $0.4 million and $0.4 million of industrial water revenue recognized due to a pre-paid water agreement that was forfeited by the customer because it was not able to use the water within 12 months of the invoice date for fiscal years 2021 and 2020.

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

We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Oil and gas operations – Oil and gas operations increased in 2021 compared to 2020, primarily due to increased oil and gas prices and new fracking permits obtained by our oil and gas customers.

Oil and gas is cyclical in nature as demand and prices fluctuate, as such, we have no way of knowing if water provided to oil and gas operators will increase or decrease in the future.

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

We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Water and wastewater tap fees – Water and wastewater tap fees decreased in 2021 compared to 2020, primarily due to a decrease in the number of taps sold, slightly offset by a price increase of water and wastewater taps.

Water and wastewater taps are sold to home builders at the time a building permit is issued and are dependent on when the home builder constructs homes and not contractually driven in terms of timing, as such timing of tap sales fluctuate with demand for new construction.

During the fiscal year ended 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the fiscal year 2020.

During fiscal 2021, we sold 167 water and wastewater taps.

During fiscal 2020, we sold 201 water and wastewater taps.

Other revenue – Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, for which $0.4 million of revenue was recognized.

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

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

Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to the new Sky Ranch water reclamation facility being online for the entire 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 due to costs to construct a special facility for WISE.

Land Development Results of Operations

(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 - Phase 1

Lots delivered - Phase 2

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

We did not begin recognizing revenue on phase two until the platted lots were delivered to our customer home builders, beginning in the fourth quarter of fiscal 2021.

Sales price per lot for all delivered lots within the first development has not increased but the revenue recognized per delivered lot does fluctuate due to the timing of revenue recognition as lots are delivered over time.

Project management revenues – Project management revenues increased in 2021 as compared to 2020 due to the determination that reimbursable costs due from the Sky Ranch CAB are deemed probable of collection based on projections showing the Sky Ranch CAB will generate sufficient funds from its tax and fee income to repay us.

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

Phase two costs were capitalized as inventory until the delivery of platted lots to the builders, at which time we began recognizing revenue over time as the construction progresses, which began in the fourth quarter 2021.

No completed lots were delivered in 2021 to homebuilders with finished lot delivery contracts.

The costs related to these lots remain in inventory until we deliver the finished lots, which we anticipate delivering the first subphase of the second delivery phase finished lots during our fiscal 2022.

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

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

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 the first of four planned lot deliveries occurred in the fourth quarter 2021.

General and Administrative Expenses

The table below details significant items, and changes, included in our General and Administrative Expenses (“G&A Expenses”) as well as the impact that share-based compensation has on our G&A Expenses for

the fiscal years ended August 31, 2020 and 2019, respectively.

Summary of G&A Expenses

10 unchanged sentences

G&A Expenses as reported

Salary and Salary-Related Expenses – Salary and salary-related expenses increased by 54% for fiscal 2020 as compared to fiscal 2019.

The increase in

fiscal 2020 compared to fiscal 2019 was the result of the increase from 29 to 31 employees to manage the development of our Sky Ranch property and our water and wastewater systems.

Additionally, we hired a Chief Financial Officer in April 2020 to

help oversee the accounting, finance, IT, and operations teams, and help implement strategic goals for our continued growth.

Other increases include higher incentive pay related to achieving development and financial goals, increased benefit

costs, payroll taxes and the addition of an employer match for our 401(k) plan.

Share-based compensation expense increased 54% for fiscal 2020 compared to fiscal 2019 as a result of an unrestricted stock grant to non-employee board members and an

increase in the fair value of stock option grants to employees.

Professional Fees (mainly legal and accounting fees) – Professional fees increased 9% for fiscal 2020 compared to fiscal 2019.

The increase was primarily

the result of higher accounting fees due to fees related to tax services and higher professional fees related to business development.

Fees Paid to Our Board of Directors and Directors and Officers Insurance – Fees for our board in fiscal 2020 include $67,900 for premiums related to our

directors and officers insurance policy (this amount increased by $6,800 from fiscal 2019).

The remaining fiscal 2020 fees of $126,200 represent amounts earned by our board members for annual service, meeting attendance fees and travel expenses,

which were lower than in fiscal 2019 due to fewer board meetings in fiscal 2020 and less travel expenses due to remote attendance in some instances because of COVID 19.

Fees for our board in fiscal 2019 include $61,100 for premiums related to our

directors and officers insurance policy.

The remaining fiscal 2019 fees of $138,800 represent amounts earned by our board members for annual service, meeting attendance fees and travel expenses.

Corporate Insurance – We maintain policies for general liability insurance, workers’ compensation insurance, and casualty insurance to protect our assets.

Insurance expense fluctuates based on the number of employees and premiums associated with insuring our water systems.

Public Entity-Related Expenses – Costs associated with being a corporation and costs associated with being a publicly traded entity consist primarily of

XBRL and EDGAR conversion fees, stock exchange fees, and press releases.

Salary and Salary-Related Expenses – Salary and salary-related expenses increased in fiscal 2021 compared to fiscal 2020 due to a larger employee base to manage the development of our Sky Ranch property, our water and wastewater systems and additional administrative staff.

Share-based compensation expense decreased slightly due to lower option grants in fiscal 2021 compared to fiscal 2020 and the fair value of unrestricted stock granted to non-employee board members in fiscal 2021 compared to fiscal 2020.

Professional Fees (mainly legal and accounting fees) – Professional fees increased in fiscal 2021 compared to fiscal 2020.

The increase was primarily the result of higher legal fees totaling $0.3 million related to the drafting of contracts related to the second development phase of Sky Ranch.

Fees Paid to Our Board of Directors and Directors and Officers Insurance – Fees for our board remained flat in fiscal 2021 compared to fiscal 2020.

Public Entity-Related Expenses – Costs associated with being a corporation and costs associated with being a publicly traded entity consist primarily of XBRL and EDGAR conversion fees, stock exchange fees, and press releases.

These costs fluctuate from year to year.

Consulting Fees – Consulting fees for fiscal 2020 consisted of $17,100 for information technology services, $16,500 for business development services and

$6,400 for board advisory services related to the development of the Sky Ranch water agreements.

Consulting fees for fiscal 2019 consisted of $4,000 for employee recruiting fees and other services, $11,600 for information technology services and

$8,800 for board advisory services related to the development of the Sky Ranch water agreements.

Other Expenses – Other expenses include typical operating expenses related to the maintenance of our office, business development, travel, property taxes,

and funding provided to the Rangeview District and the Sky Ranch Districts.

Consulting Fees – Consulting fees increased in fiscal 2021 compared to fiscal 2020 primarily due information technology services and board advisory services related to the development of the Sky Ranch.

Other Expenses – Other expenses include typical operating expenses related to the maintenance of our office and equipment, business development, travel, property taxes, and funding provided to the Rangeview District and the Sky Ranch Districts.

Other expenses increased during fiscal 2021 compared to fiscal 2020.

The changes were primarily the result of the timing of various expenses and increased staffing.

Non-cash mineral rights impairment charge – Non-cash mineral rights impairment charge includes an impairment recorded for $1.4 million as a result of the Company impairing its Arkansas Valley, Colorado mineral rights.

impairment of long-lived assets were recorded in fiscal 2019.

Other Income and Expense Items

For the Fiscal Years Ended August 31,

2020 versus 2019

Other income items:

Reimbursement of construction costs - related party

Oil and gas lease income, net

Oil and gas royalty income, net

Interest income

Reimbursement of construction costs (related party) – On November 19, 2019, the Sky Ranch CAB sold tax-exempt, fixed rate senior bonds in the aggregate

principal amount of $11,435,000 and tax-exempt, fixed-rate subordinate bonds in the aggregate principal amount of $1,765,000 (collectively, the “Bonds”).

Upon the sale of the Bonds approximately $10.5 million of the net proceeds from the Bonds

were used to partially reimburse us for advances we made to the Sky Ranch CAB pursuant to the Sky Ranch FFAA to fund the construction of public improvements to the Sky Ranch property.

The remaining gross proceeds from the issuance of the bonds,

$2.7 million were retained by the Sky Ranch CAB in order to pay certain bond issuance costs and provide for debt service through 2021, when the Sky Ranch CAB expects to generate enough revenue through property taxes to repay bond holders.

amounts we received, $4.2 million reduced the remaining capitalized expenses in Land development i nventories and $6.3 million was recognized as Income from reimbursement of construction costs (related party).

The Company has no obligation for repaying the bonds in the event the Sky Ranch CAB defaults on repaying the bond holders.

Oil and gas lease income – The $247,000 and $55,700 of oil and gas lease payments recognized in fiscal 2020 and fiscal 2019 include the recognition of $55,700 in both fiscal 2020

and 2019 for the deferred up-front payment of $167,200 that we received in October 2017 in connection with the Bison Lease, which payment is being recognized in income over the three year term of the Bison Lease, and the recognition of

$191,300 in fiscal 2020 of the deferred up-front payment of $573,700 that we received in July 2019 for the OGOA giving the operator of the Sky Ranch O&G Lease (defined below) right to access 16 acres for an oil and gas pad site for three

years through July 2022.

Oil and gas royalty income – Oil and gas royalty income represents amounts we receive pursuant to the Sky Ranch O&G Lease as royalties for well

production from the six wells in our mineral estate at Sky Ranch.

Pursuant to the Sky Ranch O&G Lease, we receive 20% of the income generated by each well (after payment of taxes by the oil and gas company).

During the years ended August 31,

2020 and 2019, the six wells drilled on our property produced 413,700 and 50,600 barrels of oil, respectively, resulting in oil and gas royalty income of $669,000 and $148,300, respectively.

The wells produce oil, gas, and natural gas liquids, which are hydrocarbons in the same family of molecules as natural gas and crude oil, composed exclusively of carbon and hydrogen.

Interest Income – Interest income represents interest earned on investment of capital in cash equivalents or debt securities and interest accrued on the

notes receivable from the Rangeview District.

The lower level of interest income in fiscal 2020 compared to fiscal 2019 was primarily attributable to interest rates on investments and timing of the maturity of the investments.

The changes were primarily the result of increased equipment maintenance and the timing of various expenses.

Liquidity, Capital Resources and Financial Position

At August 31, 2021, our working capital, defined as current assets less current liabilities, was $26.3 million, which includes $20.1 million in cash and cash equivalents.

We believe that as of August 31, 2020, and

as of the date of the filing of this Annual Report on Form 10-K, we had and have sufficient working capital to fund our operations for the next 12 months.

We have substantially completed the work required to deliver all lots under contract in the

first filing at Sky Ranch and are in the permitting process for the next filing at Sky Ranch.

We estimate the cost to finish the nearly 900 lots expected to be platted in the second filing at Sky Ranch to be approximately $65.6 million.

we estimate we will spend up to $15.0 million during fiscal 2021, and we anticipate receiving approximately $12.0 million in milestone payments from the homebuilders over the same period.

Due to staffing shortages at Arapahoe County and the

disruption to its operations caused by COVID-19, permitting is taking longer than normal, but we do anticipate having permits and beginning construction of the next phase of development before the end of calendar 2020.

We believe we can fund such

capital expenditures from cash and cash equivalents on hand and phased payments from our lot sales agreements.

ECCV Capacity Operating System

In May 2012, we entered into an agreement to operate and maintain certain wells and transmission lines, 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 cost associated with the use of the ECCV system is a flat monthly fee of $8,000 per month from January 1, 2013 through December 31,

2020, which decreases to $3,000 per month from January 1, 2021 through April 30, 2032.

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

the ECCV system costs us approximately $5400 per month to maintain.

South Metropolitan Water Supply Authority and WISE

SMWSA is a municipal water authority in the State of Colorado organized to pursue the acquisition and development of new water supplies on behalf of its members, including the Rangeview District.

certain agreements with the Rangeview District, we agreed to provide funding to the Rangeview District in connection with its membership in the SMWSA.

In July 2013, the Rangeview District, together with nine other SMWSA members, formed an SMWA to

enable its members to participle in a cooperative water project known as WISE and entered into an agreement that specifies each member’s pro rata share of WISE and the members’ rights and obligations with respect to WISE.

On December 31, 2013,

SMWA, Denver Water, and Aurora Water entered into the Amended and Restated WISE Partnership – Water Delivery Agreement, which provides for the purchase of certain infrastructure (pipelines, water storage facilities, water treatment facilities,

and other appurtenant facilities) to deliver water to and among Rangeview District and the other nine members of the SMWA from Denver Water and Aurora Water.

We have entered into a financing agreement that obligates us to fund the Rangeview

District’s cost of participating in WISE.

During the years ended August 31, 2020 and 2019, we provided $2.8 million and $1.5 million, respectively, of financing to the Rangeview District to fund its obligation to purchase WISE water rights and

pay for operational and construction charges.

Ongoing funding requirements are dependent on operational and overhead costs of SMWA and the construction activities.

We anticipate that we will be investing an additional $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 infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system.

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 believe that as of August 31, 2021, and as of the date of the filing of this Annual Report on Form 10-K, we had and have sufficient working capital to fund our operations for the next 12 months.

We have substantially completed the work required to deliver all lots under contract in the first development phase at Sky Ranch and are in the construction process for the second development phase at Sky Ranch.

We have plats for 229 lots in the first subphase of the second development phase at Sky Ranch, and we expect to spend approximately $16.4 million in the next twelve months completing the construction on these lots.

Of this, we anticipate receiving $14.0 million in milestone payments from the homebuilders over the same period.

We believe we can fund such capital expenditures from cash and cash equivalents on hand, phased payments from our lot sales agreements, and payments from the Sky Ranch CAB for reimbursement of public improvements.

Summary Cash Flows

For the Fiscal Years Ended August 31,

2020 versus 2019

Cash provided (used) by:

August 31, 2021

August 31, 2020

(In thousands)

Cash (used) provided by:

Operating activities

1 unchanged sentence

Financing activities

Changes in Operating Activities – Operating activities include amounts we receive from the sale of wholesale water and wastewater services, costs incurred

in the delivery of those services, the sale of lots, the costs incurred in completing and delivering finished lots, and G&A Expenses.

Cash provided by operations in fiscal 2020 increased $17.2 million as compared to fiscal 2019, which is primarily due to the reimbursement of capitalized costs of $10.5 million partially recorded in Land development i nventories , the collection of up-front deferred oil and gas payments of $1.6 million, receipt of water and wastewater tap fees, receipt of lot sale

proceeds, timing differences on payments of payables and accrued liabilities along with an increase in net income of $1.9 million.

Cash provided by operations in fiscal 2019 consisted primarily of payments received relating to milestone payments

from two builders at Sky Ranch that had been deferred, an upfront payment for industrial water and a payment for the OGOA that had been deferred, offset by increases in inventories related to the construction activities of Sky Ranch, and the

payment of approximately $1.0 million for a collateral deposit paid to Arapahoe County in connection with the grading, erosion and sediment control permit application for Sky Ranch, coupled with the increase in net income due primarily to

recognized revenue from water and wastewater tap fees of $3.5 million.

Changes in Investing Activities – Investing activities in fiscal 2020 consisted of the sale and maturity of debt securities of $6.9 million offset by the purchase of $1.7 million in securities, the investment in our land and water system of $8.0 million, and the purchase of equipment of $586,000.

Investing activities in

fiscal 2019 consisted of the sale and maturity of debt securities of $56 million offset by the purchase of $52 million in securities, the investment in our water system of $14.1 million, and the purchase of

equipment of $354,000.

Changes in Financing Activities – Financing activities in 2020 consisted of proceeds from the exercise of stock

options of $49,200, offset by a payment to contingent liability holders of $4,400.

Financing activities in 2019 consisted of proceeds from the exercise of stock options of $193,100, offset by a payment to contingent liability holders of $6,900.

Changes in Operating Activities – Operating activities include amounts we receive from the sale of wholesale water and wastewater services, costs incurred in the delivery of those services, the sale of lots, the costs incurred in completing and delivering finished lots, and G&A Expenses.

Cash provided by operations in fiscal 2021 decreased by $17.3 million as compared to fiscal 2020, primarily related to the reimbursement of capitalized reimbursable costs of $10.5 million in 2020 and cash collections from lot sales declined from $17 million in fiscal 2020 to $6 million in fiscal 2021, partially offset by the timing differences on payments of payables and accrued liabilities, deferred revenue and federal and state income taxes payable.

The Sky Ranch Cab made a $0.4 million interest payment in fiscal 2021 but did not reimburse the company for capitalized reimbursable cost in fiscal 2021.

Cash provided by operations in fiscal 2020 was primarily due to the reimbursement of capitalized costs of $10.5 million partially recorded in Land development i nventories , the collection of up-front deferred oil and gas payments of $1.6 million, receipt of water and wastewater tap fees, receipt of lot sale proceeds, timing differences on payments of payables and accrued liabilities along with an increase in net income of $1.9 million.

Changes in Investing Activities – Investing activities in fiscal 2021 consisted of the investment in our land and water system of $2.5 million, and the purchase of equipment of $0.4 million.

Investing activities in fiscal 2020 consisted of the sale and maturity of debt securities of $6.9 million offset by the purchase of $1.7 million in securities, the investment in our land and water system of $8.0 million, and the purchase of equipment of $0.6 million.

Changes in Financing Activities – Financing activities in 2021 consisted of proceeds from the exercise of stock options of $0.1 million.

Financing activities in 2020 consisted of proceeds from the exercise of stock options of less than $0.1 million.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States.

Our discussion and analysis of our financial condition and results of operations are based on these consolidated financial statements.

The preparation of our consolidated financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, engineering estimates, historical results, and other assumptions believed to be reasonable.

These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 2, “Summary of Significant Accounting Policies", and elsewhere in the accompanying consolidated financial statements.

Estimates are used for, but not limited to, determining the recoverability of notes receivable, measure of progress related to our land development activities, and accrued liabilities.

Actual results could differ from these estimates.

Accounting estimates are considered critical if both of the following conditions are met:

(1) the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change and (2) the effect of the estimates and assumptions is material to the financial statements.

The following provides a summary of the two critical estimates we identified.

Collectability of the Notes Receivable from the Sky Ranch CAB – The notes receivable from the Sky Ranch CAB are comprised of amounts we incurred and provided to the Sky Ranch CAB for costs related to the construction of public improvements which are reimbursable to us, along with related project management fees and accrued interest associated with those costs.

Collectability of the notes is based on the Sky Ranch CAB generating sufficient cash flows to repay us prior to certain contractual dates, which is deemed probable based on a mill levy increase resulting from the remainder of Sky Ranch being in a different taxing district than the first phase, higher than projected assessed values of completed homes, and additional houses from the start of the next development phase at Sky Ranch .The notes are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the note may not be recoverable.

Management applies judgment to assess whenever events or changes in circumstances indicate the carrying amount of the notes may not be recoverable giving rise to the requirement to conduct an impairment test.

Circumstances which could trigger an impairment test include, but are not limited to:

significant decreases in the market price of houses which generate tax payments to the Sky Ranch CAB;

significant adverse changes in the business climate or legal factors including significant decreases in housing sales or assessments;

significant increase in costs and accumulation of costs significantly in excess of the amount originally expected for the construction of the associated public improvements;

and current period cash flow or operating losses combined with a history of losses or a forecast of losses.

Recoverability of these notes is measured by comparing the carrying value to the future cash flows expected to be generated by the Sky Ranch CAB which can be used to repay us.

When the carrying value of an asset exceeds the related undiscounted cash flows, an impairment loss is recorded by writing down the carrying value of the related asset to its estimated fair value, which is determined using discounted future cash flows or other measures of fair value.

Revenue recognition on lot sales under the percentage-of-completion method – We recognize lot revenue over time as construction progresses for most of our lot development contracts.

This involves an estimation of the total project costs which are incurred over several months or even years.

This requires management to estimate labor and material costs which could change materially over the life of the project and have a material impact of the timing of revenue recognition.

Under the percentage of completion method, revenues and related costs from lots sold pursuant to lot development contracts requiring milestone payments as construction occurs are recognized over the course of the construction period based on the completion progress of the project.

In relation to any project, revenue is determined by calculating the ratio of incurred construction costs, including construction costs related to public improvements subject to reimbursement, to total estimated costs and applying that ratio to the contracted sales amounts.

Cost of sales is recognized by determining the projected margin of the project and applying that ratio to the incurred costs.

Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts.

Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized.

Changes in total estimated project costs or losses, if any, are recognized in the period in which they are determined.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements consist entirely of the contingent portion of the Comprehensive Amendment Agreement No.

1 (the “CAA”), which is $647,200, as described in Note 5 – Participating Interests in Export Water to the accompanying 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.

1 (the “CAA”), which is $0.6 million, as described in Note 5 – Participating Interests in Export Water to the accompanying 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.

Recently Adopted and Issued Accounting Pronouncements

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What changed 10-K

Item 7. Management’s Discussion and Analysis