# Pure Cycle Corp: Form 10-Q for the period ended Nov 30, 2022

- Company: [Pure Cycle Corp](/companies/pcyo.md) (CIK 276720)
- Form: 10-Q
- Filed: 2023-01-13
- Accepted by EDGAR: Jan 13, 2023, 16:39 ET
- Period: 2022-11-30
- Accession: 0001558370-23-000271
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/276720/000155837023000271/pcyo-20221130x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/276720/000155837023000271/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2022-11-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-09-01 to 2022-11-30 | $1.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-09-01 to 2022-11-30 | $1.3m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2022-09-01 to 2022-11-30 | $14.0k | us-gaap:GrossProfit |
| Operating income | 3 months, 2022-09-01 to 2022-11-30 | −$1.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2022-09-01 to 2022-11-30 | $130.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-09-01 to 2022-11-30 | $159.0k | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2022-09-01 to 2022-11-30 | $0.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-09-01 to 2022-11-30 | $0.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-09-01 to 2022-11-30 | 24,087,893 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-09-01 to 2022-11-30 | −$758.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2022-11-30 | $16.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2022-11-30 | $33.5m | us-gaap:AssetsCurrent |
| Total assets | at 2022-11-30 | $128.0m | us-gaap:Assets |
| Current liabilities | at 2022-11-30 | $9.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2022-11-30 | $14.8m | us-gaap:Liabilities |
| Long-term debt | at 2022-11-30 | $3.9m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2022-11-30 | $10.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2022-11-30 | $113.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,239 characters.

*In Management’s Discussion and Analysis of Financial Condition and Results of Operations (****MD&A), “****we,” “us,” “our” and "Pure Cycle" refer to Pure Cycle Corporation and all entities owned or controlled by Pure Cycle Corporation. You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes, related MD&A and discussion of our business included in our Annual Report on Form 10-K for the year ended August 31, 2022 (****2022 Annual Report****) filed with the United States (****U.S.)*** *Securities and Exchange Commission (****SEC****) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to “Disclosure Regarding Forward-Looking Statements” in this Form 10-Q; and Part I, Item 1A. “Risk Factors” in our 2022 Annual Report for further discussion).*

We are a diversified water resource and land development company. At our core, we are a wholesale water and wastewater service provider, and we develop land we own into master planned communities. Our newest business is the development of single-family homes held for rental purposes. Both the land development and single-family home rental lines of business generate customers and usage fees for our water and wastewater resource development business.

### Recent Developments and Economic Conditions

The housing market experienced tremendous growth for several years through 2022. However, in the third quarter of 2022, the housing market deteriorated rapidly. This has continued through the date of this filing and shows signs of continuing into 2023. This deterioration was caused by multiple factors including; the war in Ukraine, which has impacted supplies of food, fertilizer and fuel, increasing inflation; and the ongoing COVID-19 pandemic which continues to impact global economies, mortgage interest rates, the rate of inflation, supply chains, distribution networks and consumer behavior around the world. The United States Federal Reserve System (**Federal Reserve**) remains aggressive in its actions to combat inflation, which is having a negative impact on the housing market due to rising mortgage rates. 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.

Despite this, we believe several long-term land development and housing market fundamental factors remain positive. For example, available lots and housing supply-demand remain imbalanced due to a decade-plus of 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 and other 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 are moderating housing demand, which are expected to continue into 2023. Like many other businesses, our contractors have experienced delays in receiving materials and parts, rising costs, and labor shortages. However, we have been able to adjust our purchases and operations enough to reduce the impact these factors have on our construction and other activities. Specifically, we have delayed the start of construction on Phase 2B to avoid incurring development costs when market demand has declined, and it is uncertain how long demand will remain depressed. 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. The severity and duration of the COVID-19 pandemic and the Ukraine war, as well as the current inflationary environment, remain uncertain and it is difficult for us to estimate the extent to which these conditions will impact our financial results and operations in future periods.

Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic, homebuilding industry, credit, and financial market conditions and on a 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 calendar 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 into 2023 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 should not be considered indicative of our future results.

Additionally, as the COVID-19 pandemic continues, we continue to enforce many safety measures enacted to protect the health and well-being of our employees, customers, business partners, and their families. We have been able to maintain our level of efficiency with the use of video conferencing and electronic data sharing platforms. We were informed that our builder customers continue to use precautionary measures to ensure the safety of their employees, customers, business partners, and their families. The most dramatic impact on our operations has been the delay in inspections, the permit process and other activities requiring the involvement of governmental agencies due to employee shortages and pandemic-related restrictions imposed on their operations. All our operations are in Colorado and travel and related restrictions have not impacted our operations.

### Our Business Strategy

For more than three decades we have accumulated a large portfolio of valuable water rights and land interests in Colorado. We have added 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 water demands in the eastern Denver metropolitan region. Our primary land asset, Sky Ranch, is in one of the most active development areas in the Denver metropolitan region along the rapidly developing I-70 corridor, and we are developing lots at Sky Ranch for residential, commercial, retail, and light industrial uses. We also have launched a single-family rental business where we rent homes in Sky Ranch to families under annual lease agreements. We plan to expand this new line of business to more than 200 rental units over the next several years.

Although we currently report our results of operations through our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable, and value-added business enterprise.

### Water and Wastewater

Water resources throughout the western United States and more prominently in Colorado are a scarce and valuable resource. Our portfolio of over 29,900 acre-feet of water is comprised of groundwater, designated basin groundwater, and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are in southeast Denver, an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services.

We provide wholesale water and wastewater service to local governments for both residential and commercial customers. The local governments we service include the Rangeview Metropolitan District (**Rangeview District**), Arapahoe County, the Sky Ranch Community Authority Board (**Sky Ranch CAB**), and the Elbert and Highway 86 Commercial Metropolitan District (**Elbert 86 District**). Our mission is to provide sustainable, reliable, high-quality water to our customers and collect, treat, and reuse wastewater using advance water treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we proactively manage our valuable water rights in the water-scarce Denver, Colorado region which dramatically reduces the environmental impact of our water resource operations. 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 exclusively 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.

Revenues for our water operations are dependent on us growing the number of customers we serve. If we are unable to add customers to our systems and sell taps to builders, our revenues could be negatively impacted. We currently are the developer of the Sky Ranch Master Planned Community which is the main driver of our tap sales. Additionally, prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping parks irrigated. Conversely, prolonged periods of dry weather could lead to drought restrictions and limited water availability. Despite our substantial water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact metered usage revenues. We have addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions.

### Land Development

Our Land Development segment is primarily focused on developing the Sky Ranch Master Planned Community located along the booming I-70 corridor to provide residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,200 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is zoned to include over two million square feet of retail, commercial, and light industrial space, which is the equivalent of approximately 1,800 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units. Our land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver “ready to build” finished lots to home builders and commercial customers. Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots. Additionally, pursuant to certain agreements with the Sky Ranch CAB and its related metropolitan districts, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., the costs of which are reimbursed to us by the Sky Ranch CAB through funds generated from property taxes, fees or the issuance of municipal bonds.

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.

We have been developing the Sky Ranch community since 2017. We are developing it in phases, which is anticipated to take approximately eight to ten more years until it is fully built out. In 2017, we began the initial development phase of Sky Ranch when we entered separate contracts with Richmond American Homes, Taylor Morrison, and KB Home, pursuant to which we sold a total of 505 single-family, detached residential lots at Sky Ranch. Pursuant to these agreements, we were obligated to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities), all of which are complete as of November 30, 2022.

During our fiscal 2021, we began construction on the second development phase at Sky Ranch. For this phase, we entered into separate contracts with KB Home, Lennar Colorado, Melody (a DR Horton Company) and Challenger Homes to sell 804 single-family attached and detached residential lots at Sky Ranch, and we retained 46 lots for use in our single-family home rental segment. The second development phase will incorporate approximately 250 acres and is planned to be completed in four sub-phases (referred to as Phase 2A, 2B, 2C and 2D). Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an approximate 40% increase in our average lot prices. For example, we increased our sales price for a 50’ foot lot from $75,000 to $108,000 and added an escalation clause that increases the prices depending on timing of payments. The timing of cash flows includes certain milestone deliveries such as the completion of governmental approvals for final plats, installation of wet utilities, and final completion of lot deliveries.

In February 2021, we began construction on Phase 2A at Sky Ranch, which is platted for 229 residential lots. We have retained ten of these lots for use in our single-family rental business. As of November 30, 2022, we have received plats and substantially completed wet and dry utilities, roads, and sidewalks for Phase 2A. Contracts with three of the four homebuilders include milestone payments as construction progresses, with the contract with the fourth homebuilder having one payment due at delivery of the finished lot (i.e. the transfer of the title). As of November 30, 2022, we have received substantially all payments related to the sale of the 219 lots in Phase 2A, which totaled $18.4 million. We recognize revenue earned under these contracts over time using the percentage of completion method to measure progress, which aligns the recognition of revenue with the requisite service period. During the three months ended November 30, 2022 and 2021, due to the construction progress, we recognized $0.5 million and $2.9 million of lot sale revenue related to construction at Sky Ranch. Phase 1 of the Sky Ranch development is complete, and all revenue has been recognized. Phase 2A is approximately 80% complete, for which we have recognized $14.6 million of lot sales revenue since construction began on Phase 2A, with the remaining $3.8 million of revenue to be recognized over time as Phase 2A construction is completed, which we expect will be before the end of our fiscal 2023.

Payments for lot sales and the related revenue for Phases 2B, 2C, and 2D will occur as construction of those phases occurs. We believe construction of Phase 2B will begin in the summer of 2023, which we delayed the start of Phase 2B due to the slowing of the housing market in late 2022. We further believe it will take approximately three more years to complete construction and sell the finished lots in all four subphases depending on the market conditions and permitting process.

In addition to the lot sales described above, from the start of development at Sky Ranch through November 30, 2022, we have received $18.5 million of water and wastewater tap fees from the homebuilders, which is for all 505 taps sold in Phase 1 and 117 of 219 taps sold in Phase 2A. Timing of tap sales is dependent on when homebuilders begin requesting building permits. Fees charged per water tap are dependent on lot sizes and average water usage across a broad range of housing product types including duplexes and townhomes. For Phase 2A we estimate water and wastewater tap fees will exceed $4.0 million.

### Single-Family Rentals

During our fiscal 2021, we launched a new line of business we are referring to as our single-family rental business. During Phase 1 of Sky Ranch, we retained ownership of four residential lots for use in this business. As of November 30, 2022, we have finished building three single-family homes which we own, maintain, and have leased to qualified renters under one-year lease terms. Construction of the fourth home began in 2022 and it was completed and rented to a qualified renter in December 2022. We intend to expand our single-family rentals in our second development phase of Sky Ranch by building and renting homes on the 46 lots we did not sell to our home builder partners, ten of which are in Phase 2A and are currently under construction, which we expect to be ready for rental at various dates throughout our fiscal 2023.

We capitalize the costs of the homes and when applicable depreciate the costs over periods not exceeding thirty-years. Lease income is recorded monthly as earned. We began recognizing monthly lease income for the first three rental units on November 1, 2021.

### Results of Operations

#### Executive Summary

For the three months ended November 30, 2022, we generated net income of $0.2 million, a decline from the comparable period in 2021 of $1.3 million or 89%. The decrease was primarily driven by decreased lot sales being recognized as we slowed construction on Phase 2A due to the decline in the housing market and weather conditions resulting in the delay in planned landscaping construction, and a reduction in water being used by oil and gas operators electing to drill wells in other counties due to lease deadlines and other factors outside our control. The items noted above were partially offset by one time income events related to additional land use payments received from oil and gas operators for future drilling purposes and interest income recognized on the note receivable from the Sky Ranch CAB.

#### Consolidated Results of Operations

The table below presents the summarized consolidated financial results.

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

| ​ ​ | ​ ​ | ​ ​ Three Months Ended November 30, 2022 | ​ | ​ ​ November 30, 2021 | ​ ​ | ​ ​ ​ ​ $ Change | ​ ​ | ​ ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Water and wastewater resource revenue | ​ | $794 | ​ | $1,072 | ​ | $(278) | ​ | (26)% |
| Land development revenue | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Lot sales | ​ | ​ 513 | ​ | ​ 2,945 | ​ | ​ (2,432) | ​ | (83)% |
| Project management fees | ​ | ​ 8 | ​ | ​ 248 | ​ | ​ (240) | ​ | (97)% |
| Single-family rental | ​ | ​ 25 | ​ | ​ 8 | ​ | ​ 17 | ​ | 313% |
| Total revenue | ​ | ​ 1,340 | ​ | ​ 4,273 | ​ | ​ (2,933) | ​ | (69)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water and wastewater resource cost of revenue | ​ | ​ 1,101 | ​ | ​ 849 | ​ | ​ 252 | ​ | 30% |
| Land development cost of revenue | ​ | ​ 215 | ​ | ​ 531 | ​ | ​ (316) | ​ | (60)% |
| Single-family rental cost of revenue | ​ | ​ 10 | ​ | ​ 3 | ​ | ​ 7 | ​ | 333% |
| Total cost of revenue | ​ | ​ 1,326 | ​ | ​ 1,383 | ​ | ​ (57) | ​ | (4)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| General and administrative expense and depreciation | ​ | ​ 1,503 | ​ | ​ 1,410 | ​ | ​ 93 | ​ | 7% |
| Operating income | ​ | ​ (1,489) | ​ | ​ 1,480 | ​ | ​ 9 | ​ | 1% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Other income, net | ​ | ​ 1,778 | ​ | ​ 511 | ​ | ​ 1,267 | ​ | 248% |
| Income from operations before income taxes | ​ | ​ 289 | ​ | ​ 1,991 | ​ | ​ (1,702) | ​ | (85)% |
| Income tax expense | ​ | ​ (130) | ​ | ​ (477) | ​ | ​ (347) | ​ | (73)% |
| Net income | ​ | $159 | ​ | $1,514 | ​ | $(1,355) | ​ | (89)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Basic EPS | ​ | $0.01 | ​ | $0.06 | ​ | $(0.05) | ​ | (83)% |
| Diluted EPS | ​ | $0.01 | ​ | $0.06 | ​ | $(0.05) | ​ | (83)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water delivered (thousands of gallons) | ​ | ​ 67,530 | ​ | ​ 77,254 | ​ | ​ (9,724) | ​ | (13)% |
| Water and wastewater taps sold | ​ | ​ 4 | ​ | ​ 9 | ​ | ​ (5) | ​ | (56)% |

For the three months ended November 30, 2022, total revenue decreased as compared to 2021, primarily due to reduced revenue related to lot sales as Phase 2A, which is nearly 80% complete, was slowed due to the declining housing market, and Phase 2B has not started yet due to the slowing housing market. These declines were coupled with lower water fees recognized due to less construction and less initial seeding irrigation water used in our service area in 2022, and a reduction in tap sales also due to the slowing of the housing market.

For the three months ended November 30, 2022, costs of revenue increased as compared to 2021, primarily due increased WISE water purchases and increased allocations of payroll costs incurred in our water and wastewater operations. Additionally, due to the fact that our Sky Ranch water and wastewater systems are relatively new, the systems are not operating at full capacity at this time which impacts the productivity of the infrastructure as the facilities are designed to operate at full capacity. Until they are, costs are expected to remain volatile and not necessarily increase and decrease with the related revenues.

For the three months ended November 30, 2022, general and administrative expense remained consistent with 2021.

For the three months ended November 30, 2022, other income, net increased $1.3 million or 248% due to interest income recorded on the note receivable from the Sky Ranch CAB related to reimbursable public improvements and project management fees, and the receipt of $0.9 million for right-of-way and surface use agreements with oil and gas operators related to oil and gas drilling activities.

For the three months ended November 30, 2022, water deliveries decreased as compared to 2021 primarily due to decreased water sales related to the establishment of new sod, reduced park and public space irrigation, and the slowing of construction activities.

For the three months ended November 30, 2022, water and wastewater tap sales declined as compared to 2021 due to timing of closings at Sky Ranch. Tap sales are driven by builders obtaining building permits in anticipation of home closings. As of November 30, 2022, permits issued for Phase 2A were limited to model homes and all the builders are sold out in the first development phase. As construction nears completion on Phase 2A and builders start taking contracts for homes, we anticipate tap sales to increase.

#### Water and Wastewater Resource Development Results of Operations

*(In thousands, except for water deliveries)*

| ​ ​ ​ Metered water usage from: | ​ ​ ​ ​ | ​ ​ ​ ​ Three Months Ended November 30, 2022 ​ | ​ ​ ​ | ​ ​ ​ ​ November 30, 2021 ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ $ Change ​ ​ | ​ ​ ​ ​ | ​ ​ ​ ​ ​ ​ % Change ​ ​ ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Municipal water usage | ​ | $121 | ​ | $147 | ​ | $(26) | ​ | (18)% |
| Commercial water usage | ​ | ​ 392 | ​ | ​ 560 | ​ | ​ (168) | ​ | (30)% |
| Wastewater treatment fees | ​ | ​ 63 | ​ | ​ 55 | ​ | ​ 8 | ​ | 15% |
| Water and wastewater tap fees | ​ | ​ 150 | ​ | ​ 261 | ​ | ​ (111) | ​ | (43)% |
| Other revenue | ​ | ​ 68 | ​ | ​ 49 | ​ | ​ 19 | ​ | 39% |
| Total segment revenue | ​ | ​ 794 | ​ | ​ 1,072 | ​ | ​ (278) | ​ | (26)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water service costs | ​ | ​ 479 | ​ | ​ 289 | ​ | ​ 190 | ​ | 66% |
| Wastewater service costs | ​ | ​ 138 | ​ | ​ 130 | ​ | ​ 8 | ​ | 6% |
| Depreciation | ​ | ​ 378 | ​ | ​ 354 | ​ | ​ 24 | ​ | 7% |
| Other | ​ | ​ 106 | ​ | ​ 77 | ​ | ​ 29 | ​ | 38% |
| Total expenses | ​ | ​ 1,101 | ​ | ​ 850 | ​ | ​ 251 | ​ | 30% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Segment operating income | ​ | $(307) | ​ | $222 | ​ | $85 | ​ | 38% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water deliveries (thousands of gallons) | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| On Site | ​ | ​ 2,304 | ​ | ​ 3,805 | ​ | ​ (1,501) | ​ | (39)% |
| Commercial sales - export water and other | ​ | ​ 10,477 | ​ | ​ 1,993 | ​ | ​ 8,484 | ​ | 426% |
| Sky Ranch | ​ | ​ 16,748 | ​ | ​ 33,551 | ​ | ​ (16,803) | ​ | (50)% |
| Wild Pointe | ​ | ​ 7,131 | ​ | ​ 6,942 | ​ | ​ 189 | ​ | 3% |
| O&G operations | ​ | ​ 30,870 | ​ | ​ 30,963 | ​ | ​ (94) | ​ | (0)% |
| Total water deliveries | ​ | ​ 67,530 | ​ | ​ 77,254 | ​ | ​ (9,724) | ​ | (13)% |

For the three months ended November 30, 2022, residential water usage revenue decreased largely attributable to fewer new homes with sod being established, which requires more water. Commercial water usage revenue declined compared to 2021 due to decreased water sales because of slowing construction activities, and some of the irrigation water delivered to irrigate parks at the end of the irrigation season were not billed as the water was delivered for us to balance our water storage facilities in preparation for winter storage requirements resulting in higher usage without corresponding revenues.

For the three months ended November 30, 2022, wastewater treatment fees increased slightly as compared to 2021 primarily due to new Sky Ranch customers in our water and wastewater resource development segment.

For the three months ended November 30, 2022, water and wastewater tap sales declined as compared to 2021 due to timing of closings at Sky Ranch. Tap sales are driven by building permit applications and are not contractually established with the builders. As of November 30, 2022, permits issued for Phase 2A were limited to model homes, and all three builders are sold out in the first development phase. As construction nears completion on Phase 2A and builders start taking contracts for homes, we anticipate tap sales to increase. During the three months ended November 30, 2022, the average price of a Sky Ranch water and wastewater tap was $34,000 per tap, compared to $31,000 per tap for the three months ended November 30, 2021.

For the three months ended November 30, 2022, water service costs increased as compared to 2021 primarily due to increased WISE water purchases, higher payroll allocations, and the fact that our systems are not at full capacity resulting in less-than-optimal operating efficiency which results in costs not necessarily being correlated to revenues or water usage.

For the three months ended November 30, 2022, wastewater service costs were consistent with 2021.

For the three months ended November 30, 2022, water deliveries decreased at Sky Ranch due to fewer new homes with sod being established. At Wild Pointe water deliveries increased as compared to 2021 primarily due to more homes built and occupied within the development.

#### Land Development Results of Operations

*(In thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ ​ ​ Three Months Ended November 30, 2022 | ​ ​ | ​ ​ ​ ​ November 30, 2021 | ​ ​ | ​ ​ ​ ​ ​ $ Change | ​ ​ ​ | ​ ​ ​ ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Lot sales | ​ | $513 | ​ | $2,945 | ​ | $(2,432) | ​ | (83)% |
| Project management revenue | ​ | ​ 8 | ​ | ​ 248 | ​ | ​ (240) | ​ | (97) ​ |
| Total revenue | ​ | ​ 521 | ​ | ​ 3,193 | ​ | ​ (2,672) | ​ | (84)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Land development construction and project management costs | ​ | ​ 215 | ​ | ​ 531 | ​ | ​ (316) | ​ | (60)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Segment operating income | ​ | $306 | ​ | $2,662 | ​ | $(2,356) | ​ | (89)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |

For the three months ended November 30, 2022, lot sales revenue decreased as compared to 2021 due to timing of development activities at Phase 2A at Sky Ranch, even though the price per lot for delivered lots in the second development phase increased an average of 40% over the first phase. Per lot revenue is expected to remain consistent for all four subphases of the second development phase unless contracts are renegotiated or builders do not participate in Phases 2B, 2C or 2D and we sell the lots to other builders. Revenue for builder contracts is recognized over time with progress measured under the percent of completion method. Therefore, revenue will fluctuate due to timing of construction activities throughout the second phase. Additionally, lot sale revenue declined as we have not begun construction on Phase 2B as we initially planned. Due to the slowing of the housing market, we delayed the start of construction of Phase 2B until later in fiscal 2023.

For the three months ended November 30, 2022, land development construction costs decreased compared to 2021 due to the same reasons noted above related to the decrease in lot sale revenue.

#### Single-Family Rental Results of Operations

In fiscal 2021, we began construction on three homes that were completed and put into service on November 1, 2021. All three homes were rented effective November 1, 2021, under one year lease agreements. For the three months ended November 30, 2021, the revenue presented in the statement of operations is the amount earned since November 1, 2021. The costs reflected as cost of sales for the rental units include a pro-rata share of the annual property taxes and insurance related specifically to the rental units as well as immaterial fees related to the operations and maintenance assessments from the Sky Ranch CAB that are assessed to every home in Sky Ranch. Our tenants are responsible for all other utilities including water and wastewater services paid to us. In the first quarter of fiscal 2022, we contracted for the construction of the fourth rental home, which was completed and rented in December 2022. In the third quarter of fiscal 2022, we contracted for the construction of ten rental units in Phase 2A, which we anticipate being completed and ready for rental beginning in the second or third quarter of our fiscal 2023.

### Liquidity, Capital Resources and Financial Position

As of November 30, 2022, our working capital, defined as current assets less current liabilities, was $24.0 million, which included $16.8 million in cash and cash equivalents and $15.0 million of treasury notes which will mature in the third quarter of fiscal 2023. We believe that as of November 30, 2022 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next 12 months. Our expected obligations for the next 12 months are described below.

#### Sky Ranch Development

Phase 1 of the Sky Ranch development is complete. We began construction on Phase 2 of Sky Ranch in February 2021, which is being done in four subphases, of which Phase 2A is the only one being actively developed. We estimate total costs to complete the infrastructure (including public improvements) for the 850 lots in the second phase of Sky Ranch to total $65.0 million. Of this, we anticipate spending $18.8 million in the next 12 months, and we anticipate receiving $18.8 million in milestone and completed lot payments from the home builders over the same period. The amounts we expect to spend and receive in the next twelve months are dependent on when we start construction on Phase 2B. If we delay starting Phase 2B beyond our current expected start date, we would likely spend and receive significantly less than the amounts noted above. We believe future revenues from water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.

#### Single-Family Rental Construction Contract

In fiscal 2022 we entered two separate contracts with a local builder to construct eleven rental units at Sky Ranch to be used in our single-family rental business. The total contracted costs for all eleven units is $3.6 million, which as of November 30, 2022, we had incurred $1.8 million of costs related to the construction of these units. We anticipate incurring the remaining $1.8 million in our fiscal 2023.

#### ECCV Capacity Operating System

The Rangeview District may purchase water produced from East Cherry Creek Valley Water and Sanitation District’s (**ECCV**) Land Board system, which we would pay for pursuant to our funding agreements with the Rangeview District. Our costs associated with the use of the ECCV system were a flat fee of $8,000 per month from January 1, 2013 through December 31, 2021. From January 1, 2021 through April 2032, the fee decreased to $3,000 per month. Additionally, we pay a fee per 1,000 gallons of water produced from the ECCV system, which is included in the water usage fees charged to customers.

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

We have entered into a financing agreement that obligates us to fund the Rangeview District’s cost of participating in WISE. We anticipate investing $1.0 million in 2023 and up to $6.0 million in total for the fiscal years 2024 through 2025 to fund the Rangeview District’s obligation to purchase water and infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding the Rangeview District’s obligations in WISE, we have the sole right to use and reuse the Rangeview District’s 9% share of the WISE water and infrastructure to provide water service to the Rangeview District’s customers and to receive the revenue from such service. Our current WISE subscription entitles us to approximately 3.0 million gallons per day of transmission pipeline capacity and up to 900 acre-feet per year of water by the end of the term.

#### Summary Cash Flows Table

*(In thousands)*

| ​ ​ Cash (used) provided by: | ​ ​ | ​ ​ Three Months Ended November 30, 2022 ​ | ​ | ​ ​ November 30, 2021 ​ | ​ ​ | ​ ​ ​ ​ $ Change ​ | ​ ​ | ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Operating activities | ​ | $(758) | ​ | $(5,954) | ​ | $5,196 | ​ | 87% |
| Investing activities | ​ | ​ (17,179) | ​ | ​ (2,248) | ​ | ​ (14,931) | ​ | (664)% |
| Financing activities | ​ | ​ (114) | ​ | ​ 1,000 | ​ | ​ (1,114) | ​ | (111)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Net Change in cash | ​ | $(18,051) | ​ | $(7,202) | ​ | $(10,849) | ​ | (151)% |

For the three months ended November 30, 2022, operating activities used a net $0.8 million of cash, which is due to positive net income being offset by the use of cash to fund construction activities (including the public improvements) at Sky Ranch, and timing of when payments are remitted to vendors. We anticipate continuing to spend cash for the construction activities at Sky Ranch for the foreseeable future.

For the three months ended November 30, 2022, investing activities used $17.2 million in cash. The majority of this was related to us purchasing $15.0 million of treasury notes to capitalize on increased interest rates and the purchase of three water wells in the Lost Creek Designated Groundwater Basin for $0.3 million.

For the three months ended November 30, 2022, financing activities used $0.1 million of cash, mainly due to the acquisition of the remaining CAA obligations.

### Critical Accounting Policies and Use of Estimates

Our critical accounting policies and estimates are described in “Critical Accounting Policies and Estimates” within Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 3 of the Notes to Consolidated Financial Statements in “Financial Statements and Supplementary Data” included in our 2022 Annual Report. The accounting policies and estimates used in preparing our interim consolidated financial statements for the three months ended November 30, 2022 are the same as those described in our 2022 Annual Report. There have been no changes to our critical accounting policies during the three months ended November 30, 2022. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of the SEC, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our 2022 Annual Report.

## Controls and procedures

As filed, 1,412 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures as defined in Rule 13a-15(e) of the Exchange Act that are designed to ensure that information required to be disclosed in our reports filed or submitted to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms, and that information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.

The President and the Chief Financial Officer evaluated the effectiveness of disclosure controls and procedures during our fiscal 2022, as well as of November 30, 2022, pursuant to Rule 13a-15(b) under the Exchange Act. Based on the fiscal 2021 evaluation, the President and the Chief Financial Officer each concluded that, during fiscal 2022 and as of November 30, 2022, our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) were effective.

### Changes in Internal Control Over Financial Reporting

No changes were made to our internal control over financial reporting during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Filed Jan 13, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-000271. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.