PURE CYCLE CORP 10-K

Item 7 – 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” 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 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 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. 41 Table of Contents Results of Operations The results of our operations for the fiscal years ended August 31, 2021 and 2020 were as follows: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ Change ​ ​ ​ ​ ​ August 31, ​ August 31, ​ Increase/ ​ ​ ​ ​ 2021 2020 (Decrease) % Change ​ ​ ​ (In thousands, except for water and lot deliveries and taps sold) ​ Water and wastewater resource revenue ​ $ 9,656 ​ $ 6,921 ​ $ 2,735 ​ 40 % Land development revenue ​ ​ 7,469 ​ ​ 18,934 ​ ​ (11,465) ​ (61) % Total revenue ​ ​ 17,125 ​ ​ 25,855 ​ ​ (8,730) ​ (34) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Water and wastewater resource cost of revenue ​ ​ (3,868) ​ ​ (2,441) ​ ​ 1,427 ​ 58 % Land development cost of revenue ​ ​ (2,535) ​ ​ (15,870) ​ ​ (13,335) ​ (84) % Total cost of revenue ​ ​ (6,403) ​ ​ (18,311) ​ ​ (11,908) ​ (65) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ General and administrative expense ​ ​ (5,454) ​ ​ (4,606) ​ ​ 848 ​ 18 % Non-cash mineral interest impairment charge ​ ​ — ​ ​ (1,425) ​ ​ (1,425) ​ (100) % Other income, net ​ ​ 21,321 ​ ​ 7,406 ​ ​ 13,915 ​ 188 % Income taxes ​ ​ (5,906) ​ ​ (2,169) ​ ​ 3,737 ​ 172 % Net income ​ $ 20,683 ​ $ 6,750 ​ $ 13,933 ​ 206 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic EPS ​ $ 0.87 ​ $ 0.28 ​ $ 0.59 ​ 211 % Diluted EPS ​ $ 0.86 ​ $ 0.28 ​ $ 0.58 ​ 207 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Water delivered (millions of gallons) ​ ​ 257.8 ​ ​ 76.2 ​ ​ 182 ​ 238 % Water and wastewater taps sold ​ ​ 167 ​ ​ 201 ​ ​ (34) ​ (17) % Lots delivered - Phase 1 ​ ​ 22 ​ ​ 228 ​ ​ (206) ​ (90) % Lots delivered - Phase 2 ​ ​ 152 ​ ​ — ​ ​ 152 ​ — % ​ Fiscal 2021 vs. Fiscal 2020 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. 42 Table of Contents 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ Change ​ ​ ​ ​ ​ August 31, ​ August 31, ​ Increase/ ​ ​ ​ ​ 2021 2020 (Decrease) % Change ​ ​ ​ (In thousands, except for water deliveries) ​ Metered water usage from: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Municipal water usage ​ $ 846 ​ $ 524 ​ $ 322 ​ 61 % Oil and gas operations usage (1) ​ ​ 2,792 ​ ​ 513 ​ ​ 2,279 ​ 444 % Wastewater treatment fees ​ ​ 199 ​ ​ 96 ​ ​ 103 ​ 107 % Water and wastewater tap fees ​ ​ 5,163 ​ ​ 5,641 ​ ​ (478) ​ (8) % Other revenue ​ ​ 656 ​ ​ 147 ​ ​ 509 ​ 346 % Total segment revenue ​ ​ 9,656 ​ ​ 6,921 ​ ​ 2,735 ​ 40 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Water service costs ​ ​ (1,546) ​ ​ (804) ​ ​ 742 ​ 92 % Wastewater service costs ​ ​ (371) ​ ​ (200) ​ ​ 171 ​ 86 % Depreciation ​ ​ (1,457) ​ ​ (1,367) ​ ​ 90 ​ 7 % Other ​ ​ (494) ​ ​ (70) ​ ​ 424 ​ 606 % Total expenses ​ ​ (3,868) ​ ​ (2,441) ​ ​ 1,427 ​ 58 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment operating income ​ $ 5,788 ​ $ 4,480 ​ $ 1,308 ​ 29 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Water deliveries (thousands of gallons) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ On Site ​ ​ 10,652 ​ ​ 16,011 ​ ​ (5,359) ​ (33) % Export - Commercial ​ ​ 25,489 ​ ​ 7,226 ​ ​ 18,263 ​ 253 % Sky Ranch ​ ​ 42,965 ​ ​ 26,829 ​ ​ 16,137 ​ 60 % Wild Pointe ​ ​ 24,014 ​ ​ 25,235 ​ ​ (1,221) ​ (5) % O&G operations ​ ​ 154,656 ​ ​ 928 ​ ​ 153,728 ​ 16,567 % Total water deliveries ​ ​ 257,776 ​ ​ 76,229 ​ ​ 181,548 ​ 238 % (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. 43 Table of Contents 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. 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. Land Development Results of Operations ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ $ Change ​ ​ ​ ​ ​ August 31, ​ August 31, ​ Increase/ ​ ​ ​ ​ 2021 2020 (Decrease) % Change ​ ​ ​ (In thousands, except for lots delivered) ​ Lot sales ​ $ 5,840 ​ $ 18,934 ​ $ (13,094) ​ (69) % Project management revenue ​ ​ 1,629 ​ ​ — ​ ​ 1,629 ​ — ​ Total revenue ​ ​ 7,469 ​ ​ 18,934 ​ ​ (11,465) ​ (61) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Land development construction ​ ​ (2,519) ​ ​ (15,624) ​ ​ (13,105) ​ (84) % Sky Ranch property tax ​ ​ (16) ​ ​ (246) ​ ​ (230) ​ (93) % Total costs of revenue ​ ​ (2,535) ​ ​ (15,870) ​ ​ (13,335) ​ (84) % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Segment operating income ​ $ 4,934 ​ $ 3,064 ​ $ 1,870 ​ 61 % ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Lots delivered - Phase 1 ​ ​ 22 ​ ​ 228 ​ ​ (206) ​ (90) % Lots delivered - Phase 2 ​ ​ 152 ​ ​ — ​ ​ 152 ​ — % ​ 44 Table of Contents 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, 2021 and 2020. Summary of G&A Expenses ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Change ​ ​ ​ ​ ​ ​ ​ ​ ​ 2021 versus 2020 ​ ​ 2021 2020 $ % ​ Significant G&A Expense items: ​ ​ ​ ​ ​ ​ ​ ​ Salary and salary-related expenses ​ $ 2,820 ​ $ 2,362 ​ $ 458 ​ 19 % Share-based compensation ​ ​ 497 ​ ​ 517 ​ ​ (20) ​ (4) % Professional fees ​ ​ 610 ​ ​ 499 ​ ​ 111 ​ 22 % Fees paid to directors and D&O insurance ​ ​ 196 ​ ​ 194 ​ ​ 2 ​ 1 % Corporate insurance ​ ​ 85 ​ ​ 72 ​ ​ 13 ​ 18 % Public entity-related expenses ​ ​ 166 ​ ​ 125 ​ ​ 41 ​ 33 % Consulting fees ​ ​ 122 ​ ​ 40 ​ ​ 82 ​ 205 % All other combined ​ ​ 643 ​ ​ 441 ​ ​ 202 ​ 46 % G&A Expenses as reported ​ $ 5,139 ​ $ 4,250 ​ $ 889 ​ 21 % ​ 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. 45 Table of Contents 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 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 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, 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 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Year Ended ​ ​ ​ ​ ​ ​ August 31, 2021 August 31, 2020 $ Change % Change ​ ​ (In thousands) ​ Cash (used) provided by: ​ ​ ​ ​ Operating activities ​ $ 3,456 ​ $ 20,720 ​ $ (17,264) ​ (83) % Investing activities ​ $ (2,896) ​ $ (3,446) ​ $ (550) ​ (16) % Financing activities ​ $ 87 ​ $ 45 ​ $ 42 ​ 93 % ​ 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. 46 Table of Contents 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. ​ 47 Table of Contents 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 $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 See Note 2 – Summary of Significant Accounting Policies to the accompanying consolidated financial statements for recently adopted and issued accounting pronouncements. ​ Item 7A – Quantitative and Qualitative Disclosures About Market Risk Not applicable. ​ 48 Table of Contents