What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-11-14 compared with 2021-11-10 · 135 added, 102 removed, 94 unchanged (72% of the section changed)

4 unchanged sentences

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.

We saw tremendous growth in each of our business lines in fiscal 2022.

Our land development segment was positively impacted by the continued development of our Sky Ranch Master Planned Community (Phase 1 complete and Phase 2A nearly 80% complete with Phase 2B on the horizon).

We expanded our water assets by completing a $3.0 million well and pipeline extension in the Box Elder Creek basin and through the acquisition of 370 acre-feet of water in the Lost Creek basin and had a record year for commercial water sales to oil and gas operators.

We launched our single-family home rental business with the completion and rental of three homes and construction commenced on the next eleven units.

Our notable financial highlights from fiscal 2022 include the following:

● Total revenues were $23.0 million, up from $17.1 million in 2021, primarily driven by the recognition of revenue related to lot sales at Sky Ranch and record level water sales to oil and gas operators for use in their drilling operations;

◾ Revenue from commercial water sales, which includes selling water to oil and gas operators, was $4.1 million in 2022 compared to $3.3 million in 2021;

◾ Recorded lot sales for 2022 were $12.2 million, compared to $5.8 million in 2021, which is due to the completion of Phase 1 and the focus on getting Phase 2A finished lots delivered by year end, despite the delays in permitting at the county;

● Pre-tax income was $12.7 million in 2022, which is down from $26.6 million in 2021.

This is largely attributable to 2021 being positively impacted by 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 in 2021;

● In 2022 we posted $0.40 of earnings per fully diluted common share, which is down from $0.83 in 2021, mainly due to the impact to earnings from the recording of the reimbursables in 2021 as noted above;

● Total assets continue to increase to $129.2 million at August 31, 2022 from $117.2 million at August 31, 2021;

● Total equity increased to $113.0 million at August 31, 2022 from $102.7 million at August 31, 2021.

Recent Developments

The housing market deteriorated rapidly in the third quarter of calendar 2022 as the Federal Reserve remained aggressive in its actions to combat inflation.

As a result, 30-year fixed mortgage rates continued to rise and ended the quarter at their highest level in over 15 years.

The magnitude and speed of these recent rate increases has caused many buyers to pause and reconsider a home purchase.

We believe several long-term land development and housing market fundamental factors remain positive, including favorable demographics, a lot and housing supply-demand imbalance resulting from a decade-plus underproduction of new homes in relation to

population growth, and low resale home inventory.

While we remain confident in the long-term growth prospects for the industry given these factors, the current demand for new homes is subject to continued uncertainty due to many factors.

The combination of sharply higher mortgage interest rates since early 2022, several years of rising housing prices, elevated inflation, and various other macroeconomic and geopolitical concerns, is moderating housing demand which is expected to continue into 2023.

Given current conditions, we plan to continue to monitor market dynamics and surrounding community performance to determine timing of additional construction expenditures at Sky Ranch.

we believe our reasonably priced lots and the low inventory of entry level housing in the Denver market will help Sky Ranch navigate the changing market better than other surrounding and significantly higher priced communities.

Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic, homebuilding industry and capital, credit and financial market conditions and on a fairly stable and constructive political and regulatory environment (particularly regarding housing and mortgage loan financing policies).

The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during the first nine months of 2022 to moderate persistent U.S.

inflation, and the further actions it has stated it intends to take, are expected to be an ongoing headwind for the housing market in 2022 and beyond, as they have elevated mortgage loan interest rates, and created macroeconomic uncertainty and volatility across financial markets.

In addition, we and our homebuilding partners continue to experience services and supply constraints and rising and volatile raw material prices.

Prolonged supply chain disruptions and other production-related challenges could extend or delay our construction cycle times and intensify construction-related cost pressures beyond our experience in fiscal 2022.

In addition, consumer demand for our homes, and our ability to grow our scale, revenues and returns in fiscal 2023 could be materially and negatively affected by the above-described monetary policy impacts or other factors that curtail mortgage loan availability, employment or income growth or consumer confidence in the U.S.

or in the Colorado markets.

The potential extent and effect of these factors on our business is highly uncertain, unpredictable and outside our control, and our past performance, including in fiscal 2022, should not be considered indicative of our future results.

Results of Operations

The results of our operations for the fiscal years ended August 31, 2022 and 2021 were as follows:

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

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

August 31, 2022

August 31, 2021

Water and wastewater resource revenue

Land development revenue

Project management fees

Single-family rental

Total revenue

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Land development cost of revenue

Single-family rental cost of revenue

Total cost of revenue

General and administrative expense

Non-cash mineral interest impairment charge

General and administrative expense and depreciation

Operating income

Other income, net

Water delivered (millions of gallons)

Income from operations before income taxes

Income tax expense

Water delivered (thousands of gallons)

Water and wastewater taps sold

Lots delivered - Phase 1

Lots delivered - Phase 2

Lots delivered - Phase 2A

Fiscal 2022 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.

Revenue – Total revenue increased in 2022 as compared to 2021, primarily due to increased revenue from lot sales due to Phase 1 being completed early in fiscal 2022 and the recognition of revenue from the development of Phase 2A.

Additionally, commercial water sales, mainly to oil and gas operators for use in their drilling operations, increased from $3.3 million in 2021 to $4.1 million in 2022, as oil and gas operators increased drilling operations throughout the front range of Colorado.

These increases are partially offset by decreased tap fees (from $5.2 million in 2021 to $4.9 million in 2022) due to timing of when Phase 2A started in relation to when Phase 1 was completed, and project management revenue (from $1.6 million in 2021 to $0.7 million in 2022).

Project management revenue declined from 2021, due to the recording of the cumulative project management fees in 2021 which have been earned since the start of development at the Sky Ranch community, which was booked in 2021 because of the removal of the contingency of the collection of the fees.

As Sky Ranch continues to grow we expect lot sales to generate significant revenue in the future, and increasing water and wastewater usage fees as we continue to add customers to our water resource development segment.

Cost of revenue – Total costs of revenue increased marginally in 2022 as compared to 2021, primarily due to water usage costs increasing due to the significant increase in water sales to oil and gas operators, offset by a decrease in land development costs that are expensed due to a change in how the public improvements are accounted for as detailed further below and in Note 5 to the accompanying financial statements.

General and administrative expense – General and administrative expense increased in 2022 as compared to 2021, primarily due to the increased number of employees and increased compensation for existing employees as operations and development continue to expand.

Other income, net – Other income, net decreased in 2022 as compared to 2021, primarily due to the 2021 recognition of outstanding reimbursable costs and interest income totaling $20.2 million as the collection of these amounts was deemed probable.

Additional information on the reimbursables can be found in Notes 5 and 15 to the accompanying consolidated financial statements.

Additionally, in fiscal 2022 we recognized $0.1 million of interest expense related to two notes payable we entered into with our primary lender for the financing of the rental units and the Lost Creek Water purchase, both of which are described in greater detail in Note 8 to the accompanying consolidated financial statements.

Income tax expense – Income tax expense decreased in 2022 as compared to 2021, due to lower pre-tax income primarily from the impact related to the recognition of reimbursable costs due from the Sky Ranch CAB recognized in fiscal 2021.

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 delivered – Water deliveries increased in 2022 as compared to 2021, primarily due to increased sales to oil and gas operators, 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, demand for gas, and timing of other leases in our service areas;

therefore, 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 develop, we anticipate continued growth in our residential water and wastewater service revenues.

Water and wastewater tap sales – Water and wastewater tap sales decreased in 2022 as compared to 2021 due to the timing of closings at Sky Ranch.

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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.

During fiscal 2022, we sold 41 taps in Phase 1 and 113 taps in Phase 2A.

We expect to sell the remaining 116 taps in Phase 2A at Sky Ranch in fiscal 2023.

Lots delivered – The number of lots delivered (which refers to when title passed on a lot to the homebuilder) decreased in 2022 compared to 2021 due to all lots in Phase 1 of Sky Ranch having been delivered as of the first quarter of fiscal 2021, and 152 of the lots in Phase 2A having been delivered in the fourth quarter of fiscal 2021.

During fiscal 2022, we delivered 67 finished lots to the one builder in Phase 2A that is buying finished lots versus making milestone payments as construction progresses.

Despite the lots being transferred to the homebuilders, we still have various construction activities to complete Phase 2A and to turn over the completed infrastructure to the applicable governmental agency for maintenance.

Water and Wastewater Resource Development Results of Operations

(In thousands, except for water deliveries)

August 31, 2022

August 31, 2021

Metered water usage from:

Municipal water usage

Oil and gas operations usage (1)

Commercial water usage

Wastewater treatment fees

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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 2022 compared to 2021, 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.

Commercial water usage – The main component of commercial water usage is from sales to oil and gas operators for use in their drilling process.

Commercial water sales increased during fiscal 2022, primarily due to increased oil and gas prices and new fracking permits obtained by our oil and gas customers.

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

Commercial revenues in fiscal 2021 also included $0.4 million of revenue recognized when a deposit on water from an oil and gas operator expired unused and the deposit was forfeited.

Wastewater treatment fees – Wastewater treatment fees increased in 2022 compared to 2021, 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 and wastewater tap fees – Water and wastewater tap fees decreased in 2022 compared to 2021, primarily due to a decrease in the number of taps sold due to timing on completion of Phase 1 and the start of Phase 2A, which was partially offset by a price increase of water and wastewater taps.

therefore, timing of tap sales fluctuate with demand for new construction.

During the fiscal year ended 2022, the average price of a Sky Ranch water and wastewater tap was $33,000 compared to $31,000 per tap for the fiscal year 2021.

Other revenue – Other revenue decreased in 2022 as compared to 2021, primarily due to a 2021 agreement to construct a special facility for WISE, for which $0.2 million and $0.4 million of revenue was recognized in fiscal 2022 and 2021.

The project recognized revenue on a percent of completion basis and was completed during fiscal 2022.

Water service costs – Water service costs increased in 2022 as compared to 2021, 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 2022 as compared to 2021, primarily due to the Sky Ranch water reclamation facility increasing its production and requiring more staff to run.

Other costs of revenue – Other costs of revenue decreased in 2022 as compared to 2021, primarily due to fewer expenses remaining for the completion of the special facilities for WISE.

Water delivered – Water deliveries increased in 2022 as compared to 2021, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage.

Land Development Results of Operations

(In thousands, except for lots delivered)

(In thousands)

August 31, 2022

August 31, 2021

Project management revenue

Total revenue

Land development construction

Sky Ranch property tax

Total costs of revenue

Land development construction and project management costs

Segment operating income

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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.

Lot sales – Lot sales increased in 2022 as compared to 2021, primarily due to Phase 1 being complete early in fiscal 2022 and Phase 2A revenue being recognized throughout the year as construction progressed, with Phase 2A lot delivery completed by the end of summer 2022.

Project management revenues – Project management revenues decreased in 2022 as compared to 2021, which was due to the determination in 2021 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, resulting in the recognition of $1.5 million of cumulative project management fees being recorded in 2021.

We earn a 5% project management fee on certain costs for managing the construction of public improvements at Sky Ranch.

Land development construction and project management costs – Land development construction costs decreased in 2022 as compared to 2021, primarily due to Phase 1 being completed and Phase 2A construction progressing.

The Phase 2A costs that are expensed are lower than Phase 1 due to the treatment of public improvement costs being added to the note receivable – related party versus being expensed as they were during a portion of fiscal 2021, until collectability was deemed probable.

Lots delivered – The number of lots delivered (which refers to when title is passed to the homebuilder) decreased in 2022 compared to 2021 due to all lots in Phase 1 of Sky Ranch having been delivered as of the first quarter of fiscal 2021, and 152 of the lots in Phase 2A having been delivered in the fourth quarter of fiscal 2021.

During fiscal 2022, we delivered 67 finished lots to the one builder in Phase 2A who is buying finished lots instead of making milestone payments as construction progresses.

Despite the lots being transferred to the homebuilders, we still have various construction activities to complete Phase 2A to turn over the completed infrastructure to the applicable governmental agency that will maintain the infrastructure.

Because we record lot sales as construction progresses, the timing of revenue and lot deliveries are not necessarily correlated.

General and Administrative Expenses

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Summary of G&A Expenses

2021 versus 2020

(in thousands)

August 31, 2022

August 31, 2021

Significant G&A Expense items:

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Professional fees

Fees paid to directors and D&O insurance

Public entity-related expenses, including director fees

Corporate insurance

Public entity-related expenses

Consulting fees

All other combined

G&A Expenses as reported

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 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.

Salary and Salary-Related Expenses – Salary and salary-related expenses increased in fiscal 2022 compared to fiscal 2021 due to a larger employee base to manage the development of our Sky Ranch property and our water and wastewater systems, additional administrative staff, and increased compensation costs for employees to continue to attract and retain top talent.

During fiscal 2022, we increased our staff by four employees.

Share-based compensation expense increased due to option grants in fiscal 2022 and the fair value of unrestricted stock granted to non-employee board members in fiscal 2022.

Professional Fees – Professional fees consist mainly of legal and accounting fees, which remained consistent year over year.

Public Entity-Related Expenses, including director fees – 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 but remained relatively consistent from 2021 to 2022.

Fees paid to our board increased in fiscal 2022 compared to fiscal 2021, due to the determination to increase director fees in 2022.

Corporate insurance – Corporate insurance costs increased as our operations continue to expand which is due to adding additional construction and rental home policies, and overall insurance rate increases.

All other – All 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 decreased during fiscal 2022 compared to fiscal 2021.

The changes were primarily the result of decreased equipment maintenance and the timing of various expenses, which will fluctuate year over year.

Liquidity, Capital Resources and Financial Position

We believe we are well-positioned to navigate the ever-evolving market conditions given our strong financial position.

At August 31, 2022, our working capital, defined as current assets less current liabilities, was $27.0 million, which includes $34.9 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 that as of August 31, 2022, and as of the date of the filing of this Annual Report on Form 10-K, we have sufficient working capital to fund our operations for the next 12 months.

We have completed Phase 1 and have completed nearly 80% of the work required to deliver Phase 2A at Sky Ranch.

Phase 2B is anticipated to begin during fiscal 2023.

We have sold 219 lots in Phase 2A at Sky Ranch and have just over 20% of the construction related activities remaining for Phase 2A to be finished, which we anticipate completing during our fiscal 2023.

We expect to spend $5.0 million in the next twelve months completing the construction of Phase 2A (of which we estimate $4.3 million will be reimbursable by the Sky Ranch CAB).

We expect to begin Phase 2B during our fiscal 2023 and expect to spend $17.5 million in the next twelve months on remaining Phase 2A and Phase 2B construction activities.

We anticipate receiving $19.0 million in milestone payments and $3.1 million of water and wastewater taps fees 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

(In thousands)

August 31, 2022

August 31, 2021

(In thousands)

Cash (used) provided by:

2 unchanged sentences

Financing activities

Net Change in cash

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.

Cash provided by operations in fiscal 2022 increased substantially as compared to fiscal 2021, primarily related to the reimbursement of capitalized reimbursable costs and interest of $24.1 million in 2022 and cash collections from lot sales, 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 payments to us totaling $24.1 million in fiscal 2022 from funds received in the second bond offering issued by the Sky Ranch CAB as well as excess funds from higher fees and property taxes collected by the Sky Ranch CAB.

Changes in Investing Activities – Investing activities in fiscal 2022 consisted primarily of the investment in our land and water system of $5.5 million.

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.

We capitalize costs associated with obtaining, defending, enhancing, and developing our water rights.

We capitalize costs incurred to construct infrastructure required to deliver water and wastewater services to our customers, and we capitalize costs to develop our land assets that are not sold to home builders.

Changes in Financing Activities – Financing activities in 2022 consisted of proceeds from debt of $4.0 million to finance our single-family rental units and the acquisition of 370 acre feet of Lost Creek Water.

Critical Accounting Estimates

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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.

These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 2 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.

4 unchanged sentences

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.

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 Phase 1, 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:

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;

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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.

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

In relation to each phase or subphase, 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.

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

Cost of sales is the cost incurred related to construction of lots.

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.

Changes in estimated 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 $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.

See Note 2 to the accompanying consolidated financial statements for recently adopted and issued accounting pronouncements.

Item 7A – Quantitative and Qualitative Disclosures About Market Risk

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What changed 10-K

Item 7. Management’s Discussion and Analysis