# Pure Cycle Corp: Form 10-Q for the period ended May 31, 2023

- Company: [Pure Cycle Corp](/companies/pcyo.md) (CIK 276720)
- Form: 10-Q
- Filed: 2023-07-14
- Accepted by EDGAR: Jul 14, 2023, 16:05 ET
- Period: 2023-05-31
- Accession: 0001558370-23-011889
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/276720/000155837023011889/pcyo-20230531x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/276720/000155837023011889/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-05-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-03-01 to 2023-05-31 | $6.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-09-01 to 2023-05-31 | $11.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-03-01 to 2023-05-31 | $2.2m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2022-09-01 to 2023-05-31 | $4.9m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-03-01 to 2023-05-31 | $4.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-09-01 to 2023-05-31 | $6.3m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-03-01 to 2023-05-31 | $3.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-09-01 to 2023-05-31 | $2.0m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-03-01 to 2023-05-31 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-09-01 to 2023-05-31 | $1.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-03-01 to 2023-05-31 | $3.3m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2022-09-01 to 2023-05-31 | $3.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-03-01 to 2023-05-31 | $0.14 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-09-01 to 2023-05-31 | $0.15 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-03-01 to 2023-05-31 | $0.14 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-09-01 to 2023-05-31 | $0.15 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-03-01 to 2023-05-31 | 24,166,344 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-09-01 to 2023-05-31 | 24,131,621 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-09-01 to 2023-05-31 | −$3.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2023-05-31 | $26.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-05-31 | $30.0m | us-gaap:AssetsCurrent |
| Total assets | at 2023-05-31 | $128.2m | us-gaap:Assets |
| Current liabilities | at 2023-05-31 | $6.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-05-31 | $11.0m | us-gaap:Liabilities |
| Long-term debt | at 2023-05-31 | $3.9m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-05-31 | $10.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-05-31 | $117.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,252 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 and land resource 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 within our master planned communities. 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. In the third quarter of calendar 2022, the housing market experienced increased challenges, which have continued through the date of this filing and shows signs of continuing throughout 2023. These challenges were caused by multiple factors including rising mortgage interest rates; the war in Ukraine, which has impacted supplies of energy, food, fertilizer, and fuel; increasing inflation; inflation; disruptions in supply chains, distribution networks and consumer behavior; and the recent collapse of three large banks, which will certainly impact the availability of lending and deposit rates. The U.S. Federal Reserve Board (**Federal Reserve**) remains aggressive in its actions to combat inflation, which has resulted in mortgage rates continuing to rise, which have hit their highest levels in over 15 years, further challenging the housing market.

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, our future performance and strategies will depend significantly on the housing market which is impacted by the factors noted in the paragraph above. Like many other businesses, our contractors have experienced delays in receiving materials and parts, rising costs, and labor shortages. However, we have adjusted our purchases and operations in ways that we believe will reduce the impact these factors have on our construction and other activities. Specifically, we delayed the start of construction on Phase 2B to avoid incurring development costs when market demand declined and to give our home builder partners additional time to absorb lots from Phase 2A. 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. We continue to work closely with our home builder partners to provide affordable lots for entry level homes and to deliver those lots incrementally to minimize inventories for both the Company’s construction of lots and our home builders’ ownership of finished lots.

The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during calendar 2022 and so far in 2023 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 throughout 2023 as they have elevated mortgage loan interest rates and created macroeconomic uncertainty and volatility across financial markets. 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. and Colorado markets. We continue to work proactively to mitigate these impacts working with our home builder partners on timing of investment and delivery of lots; however, the potential extent and effect of these factors on our business is uncertain, unpredictable, and outside our control, and our past performance should not be considered indicative of our future results.

Additionally, in early calendar 2023, Silicon Valley Bank, Signature Bank, and First Republic Bank were taken over by the FDIC or a larger bank, which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system in the United States. We do not hold our cash at any of these banks, and the banks we use are well capitalized and FDIC insured. If the banks and financial institutions at which we hold our cash enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened, and such events could have a material adverse effect on our business and financial condition.

### 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 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 U.S., and particularly in Colorado, are a scarce and valuable resource. Our owned and/or controlled portfolio of nearly 30,000 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 primarily located 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 serve include the Rangeview Metropolitan District (**Rangeview District**), Arapahoe County, the Sky Ranch Community Authority Board and related metropolitan districts (**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. Prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping parks irrigated. Additionally, 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. We develop and primarily sell 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 activities 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, which we are developing in phases. We believe it will take approximately eight to ten more years to fully develop Sky Ranch. 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). As of May 31, 2023, Phase 1 of the Sky Ranch development is complete, and all revenue and costs have been recognized.

During our fiscal 2021, we began construction on the second development phase at Sky Ranch. For this phase, we entered 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 65 lots (through such contracts and subsequent amendments) for use in our single-family home rental business. The second development phase is approximately 250 acres and is being 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 activities in Phase 2A at Sky Ranch, which has 229 residential lots, 10 of which we have retained for use in our single-family rental business. As of May 31, 2023, we have received plats and substantially completed wet and dry utilities, roads, and sidewalks for Phase 2A and are actively working on landscaping and fencing for the neighborhood. Contracts with three of the four homebuilders include milestone payments as construction progresses, with the fourth homebuilder contract having one payment due at delivery of the finished lot (i.e. the transfer of the title). As of May 31, 2023, Phase 2A of the Sky Ranch development is approximately 90% complete, and we have received all $18.4 million of payments related to the sale of the 219 lots in Phase 2A.

In March 2023, we began construction activities in Phase 2B at Sky Ranch, which is platted for 211 residential lots, 17 of which we have retained for use in our single-family rental business. Contracts with three of the four homebuilders in Phase 2B include milestone payments as construction progresses, with the fourth homebuilder having one payment due at the transfer of title of the finished lots. As of May 31, 2023, Phase 2B of the Sky Ranch development is approximately 21% complete. During the three months ended May 31, 2023, we received $4.2 million which consists of the first milestone payments from the three builders with milestone payment contracts.

We expect the remaining milestone payments and the finished lot payment for Phase 2B, which total $13.0 million, to be received over the twelve months.

We recognize revenue earned under these contracts over time using the percentage of completion method which aligns the recognition of revenue with the requisite progress made on construction activities. During the three months ended May 31, 2023 and 2022, due to the construction progress in Phase 2A and 2B, we recognized $3.2 million and $1.0 million of lot sale revenue related to construction at Sky Ranch. During the nine months ended May 31, 2023 and 2022, due to the construction progress in Phase 2A and 2B, we recognized $5.1 million and $5.6 million of lot sale revenue related to construction at Sky Ranch. Due to construction progress, we have recognized a total of $16.6 million of lot sales revenue since construction began on Phase 2A and $2.6 million of lot sale revenue since construction began on Phase 2B. We expect to recognize the majority of the remaining $1.8 million of revenue for Phase 2A before the end of our fiscal 2023, and the remaining $14.5 million of revenue for Phase 2B over the next twelve months.

Payments for lot sales and the related revenue for Phases 2C and 2D will occur as construction of those phases occurs. We 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 May 31, 2023, we have received $20.7 million of water and wastewater tap fees from the homebuilders, which is for all 509 taps sold in Phase 1 (with four being allocated to our single-family rentals) and 196 of 219 taps sold in Phase 2A (with 10 being allocated to our single-family rentals). The timing of tap sales is dependent on when homebuilders request 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 2 in total, we estimate water and wastewater tap fees will exceed $20.0 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 May 31, 2023, we have finished building four single-family homes on these lots which we own, maintain, and have leased to qualified renters under one-year lease terms. We have expanded our single-family rentals in our second development phase of Sky Ranch by building homes on lots we did not sell to our home builder partners, which we will rent out once completed. As of May 31, 2023, we reserved a total of 65 lots in Phase 2, 10 of which are in Phase 2A and are under construction as of May 31, 2023. Five of the units in Phase 2A were completed and rented after May 31, 2023, and we expect the remaining five to be ready for rental around August 31, 2023. Additionally, we have reserved 17 lots in Phase 2B, which we anticipate starting construction in our fiscal 2024.

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 May 31, 2023, we generated net income of $3.3 million compared to $0.8 million for the comparable period in fiscal 2022. The increase was primarily driven by increased lot sale revenue being recognized using the percentage of completion method, which is based on progress of construction and significant water sales to oil and gas operators for drilling purposes. Despite increased challenges on the housing market, our land development activities showed an increase in growth over last year as we began construction on Phase 2B at Sky Ranch, which we believe is due to our entry level pricing and affordable lot costs.

For the nine months ended May 31, 2023, we generated net income of $3.6 million compared to $4.0 million for the comparable period in fiscal 2022. These are relatively comparable for each of the periods presented, with our lot sales, tap sales, and commercial water usage revenues being the significant drivers of net income.

The tables below present our consolidated results of operations for the three and nine months ended May 31, 2023 and 2022.

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

| ​ ​ | ​ ​ | ​ ​ Three Months Ended May 31, 2023 | ​ | ​ ​ May 31, 2022 | ​ ​ | ​ ​ ​ $ Change | ​ ​ | ​ ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Water and wastewater resource development revenue | ​ | $3,643 | ​ | $2,011 | ​ | $1,632 | ​ | 81% |
| Land development revenue: | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Lot sales | ​ | ​ 3,160 | ​ | ​ 1,070 | ​ | ​ 2,090 | ​ | 195% |
| Project management fees | ​ | ​ 42 | ​ | ​ 81 | ​ | ​ (39) | ​ | (48)% |
| Single-family rental | ​ | ​ 34 | ​ | ​ 25 | ​ | ​ 9 | ​ | 36% |
| Total revenue | ​ | ​ 6,879 | ​ | ​ 3,187 | ​ | ​ 3,692 | ​ | 116% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water and wastewater development cost of revenue | ​ | ​ 1,150 | ​ | ​ 1,097 | ​ | ​ 53 | ​ | 5% |
| Land development cost of revenue | ​ | ​ 1,032 | ​ | ​ 288 | ​ | ​ 744 | ​ | 258% |
| Single-family rental cost of revenue | ​ | ​ 24 | ​ | ​ 9 | ​ | ​ 15 | ​ | 167% |
| Total cost of revenue | ​ | ​ 2,206 | ​ | ​ 1,394 | ​ | ​ 812 | ​ | 58% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| General and administrative expense and depreciation | ​ | ​ 916 | ​ | ​ 1,169 | ​ | ​ (253) | ​ | (22)% |
| Operating income | ​ | ​ 3,757 | ​ | ​ 624 | ​ | ​ 3,133 | ​ | 502% |
| Other income, net | ​ | ​ 662 | ​ | ​ 459 | ​ | ​ 203 | ​ | 44% |
| Income taxes | ​ | ​ (1,124) | ​ | ​ (246) | ​ | ​ 878 | ​ | 357% |
| Net income | ​ | $3,295 | ​ | $837 | ​ | $2,458 | ​ | 294% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Basic EPS | ​ | $0.14 | ​ | $0.03 | ​ | $0.11 | ​ | 367% |
| Diluted EPS | ​ | $0.14 | ​ | $0.03 | ​ | $0.11 | ​ | 367% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water delivered (thousands of gallons) | ​ | ​ 183,557 | ​ | ​ 59,826 | ​ | ​ 123,731 | ​ | 207% |
| Water taps sold | ​ | ​ 44 | ​ | ​ 45 | ​ | ​ (1) | ​ | (2)% |
| Wastewater taps sold | ​ | ​ 43 | ​ | ​ 45 | ​ | ​ (2) | ​ | (4)% |

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

| ​ ​ | ​ ​ | ​ ​ Nine Months Ended May 31, 2023 | ​ | ​ ​ May 31, 2022 | ​ ​ | ​ ​ ​ ​ $ Change | ​ ​ | ​ ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Water and wastewater resource revenue | ​ | $5,882 | ​ | $5,891 | ​ | $(9) | ​ | (0)% |
| Land development revenue | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Lot sales | ​ | ​ 5,064 | ​ | ​ 5,644 | ​ | ​ (580) | ​ | (10)% |
| Project management fees | ​ | ​ 173 | ​ | ​ 529 | ​ | ​ (356) | ​ | (67)% |
| Single-family rental | ​ | ​ 90 | ​ | ​ 59 | ​ | ​ 31 | ​ | 153% |
| Total revenue | ​ | ​ 11,209 | ​ | ​ 12,123 | ​ | ​ (914) | ​ | (8)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water and wastewater resource cost of revenue | ​ | ​ 3,371 | ​ | ​ 3,109 | ​ | ​ 262 | ​ | 8% |
| Land development cost of revenue | ​ | ​ 1,509 | ​ | ​ 1,160 | ​ | ​ 349 | ​ | 30% |
| Single-family rental cost of revenue | ​ | ​ 53 | ​ | ​ 16 | ​ | ​ 37 | ​ | 331% |
| Total cost of revenue | ​ | ​ 4,933 | ​ | ​ 4,285 | ​ | ​ 648 | ​ | 15% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| General and administrative expense and depreciation | ​ | ​ 4,248 | ​ | ​ 4,227 | ​ | ​ 21 | ​ | 0% |
| Operating income | ​ | ​ 2,028 | ​ | ​ 3,611 | ​ | ​ (1,583) | ​ | (44)% |
| Other income, net | ​ | ​ 2,959 | ​ | ​ 1,657 | ​ | ​ 1,302 | ​ | 79% |
| Income tax expense | ​ | ​ (1,344) | ​ | ​ (1,224) | ​ | ​ 120 | ​ | 10% |
| Net income | ​ | $3,643 | ​ | $4,044 | ​ | $(401) | ​ | (10)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Basic EPS | ​ | $0.15 | ​ | $0.17 | ​ | $(0.02) | ​ | (12)% |
| Diluted EPS | ​ | $0.15 | ​ | $0.17 | ​ | $(0.02) | ​ | (12)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water delivered (thousands of gallons) | ​ | ​ 262,553 | ​ | ​ 274,978 | ​ | ​ (12,425) | ​ | (5)% |
| Water taps sold | ​ | ​ 85 | ​ | ​ 81 | ​ | ​ 4 | ​ | 5% |
| Wastewater taps sold | ​ | ​ 79 | ​ | ​ 81 | ​ | ​ (2) | ​ | (2)% |

### Three Months Ended May 31, 2023 Results Compared to 2022

For the three months ended May 31, 2023, total revenue increased as compared to 2022, primarily due to increased lot sale revenue due to Phase 2A having more activity in 2023 and Phase 2B starting, resulting in more revenue being recognized, and a nearly 300% increase in water sales to oil and gas operators. Our water and wastewater tap sales remained consistent period over period, which is indicative of the strong and steady home sales at Sky Ranch. Lot sales are recognized using the percentage of completion method and due to increased construction activity in 2023 despite the increased challenges on the housing market and severe weather in our market, construction activities increased to provide additional lots to builders. We had a significant increase in oil and gas drilling operations in our service area resulting in a substantial increase in commercial water sales.

For the three months ended May 31, 2023, total costs of revenue increased as compared to 2022, primarily due to higher costs in the land development segment as we continued developing Phases 2A and 2B of Sky Ranch, and higher costs related to the delivery of water to oil and gas operators. Costs of revenue for the water segment did not increase the same percentage as revenue, as the water sold to oil and gas operators is lower cost water resulting in higher profits than traditional domestic usage.

For the three months ended May 31, 2023, general and administrative expenses decreased as compared to 2022 due mainly to the receipt of $0.5 million of employee retention credits resulting from our retaining or increasing headcount throughout the COVID-19 pandemic.

For the three months ended May 31, 2023, water deliveries increased as compared to 2022 primarily due to increased water sales to oil and gas operators.

### Nine Months Ended May 31, 2023 Results Compared to 2022

For the nine months ended May 31, 2023, total revenue decreased as compared to 2022, primarily due to less recognized lot sale revenue as earlier in our fiscal 2023 we slowed the construction activity in Phase 2A and delayed Phase 2B to align our lot delivery schedule with the builders anticipated needs for delivering finished homes. This construction pace increased in the later part of the nine months as evidenced by the increased lot sales in our third quarter as described above. With the increased commercial water sales in Q3, our water and wastewater sales for the nine months ended May 31, 2023 and 2022 are comparable.

For the nine months ended May 31, 2023, total costs of revenue increased as compared to 2022, primarily due to higher costs in the land development segment as we continued developing Phases 2A and started Phase 2B of Sky Ranch, and increased costs related to the delivery of water to oil and gas operators. Costs of revenue for the water segment did not increase the same percentage as revenue, as the water sold to oil and gas operators is lower cost water resulting in higher profits than traditional domestic usage.

For the nine months ended May 31, 2023, general and administrative expenses were consistent with 2022. We received $0.7 million of employee retention credits during the nine months ended May 31, 2023, which were offset by payroll and related increases due to increased headcount attributable to our growing operations requiring more employees, higher depreciation charges as we continue to invest in long-term assets for use in all our business segments, and continued increases in general operating expenses such as insurance and professional fees.

For the nine months ended May 31, 2023, other income, net increased due to interest income recorded on the note receivable from the Sky Ranch CAB related to reimbursable public improvements 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 nine months ended May 31, 2023, water deliveries remained consistent with 2022.

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

*(In thousands, except for water deliveries)*

| ​ ​ Metered water usage from: | ​ ​ ​ | ​ ​ Three Months Ended May 31, 2023 ​ | ​ ​ | ​ ​ May 31, 2022 ​ ​ | ​ ​ ​ | ​ ​ ​ $ Change ​ ​ | ​ ​ ​ | ​ ​ ​ ​ % Change ​ ​ ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Municipal water usage | ​ | $145 | ​ | $94 | ​ | $51 | ​ | 54% |
| Commercial water usage | ​ | ​ 2,145 | ​ | ​ 549 | ​ | ​ 1,596 | ​ | 291% |
| Wastewater treatment fees | ​ | ​ 75 | ​ | ​ 66 | ​ | ​ 9 | ​ | 14% |
| Water and wastewater tap fees | ​ | ​ 1,256 | ​ | ​ 1,273 | ​ | ​ (17) | ​ | (1)% |
| Other revenue | ​ | ​ 22 | ​ | ​ 29 | ​ | ​ (7) | ​ | (24)% |
| Total segment revenue | ​ | ​ 3,643 | ​ | ​ 2,011 | ​ | ​ 1,632 | ​ | 81% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water service costs | ​ | ​ 576 | ​ | ​ 560 | ​ | ​ 16 | ​ | 3% |
| Wastewater service costs | ​ | ​ 96 | ​ | ​ 109 | ​ | ​ (13) | ​ | (12)% |
| Depreciation | ​ | ​ 407 | ​ | ​ 349 | ​ | ​ 58 | ​ | 17% |
| Other | ​ | ​ 71 | ​ | ​ 79 | ​ | ​ (8) | ​ | (10)% |
| Total expenses | ​ | ​ 1,150 | ​ | ​ 1,097 | ​ | ​ 53 | ​ | 5% |
| Segment operating income | ​ | $2,493 | ​ | $914 | ​ | $1,579 | ​ | 173% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water deliveries (thousands of gallons) | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| On Site | ​ | ​ 115 | ​ | ​ 175 | ​ | ​ (60) | ​ | (34)% |
| Export - Commercial | ​ | ​ 2,190 | ​ | ​ 2,636 | ​ | ​ (446) | ​ | (17)% |
| Sky Ranch | ​ | ​ 9,790 | ​ | ​ 10,318 | ​ | ​ (528) | ​ | (5)% |
| Wild Pointe | ​ | ​ 11,583 | ​ | ​ 5,668 | ​ | ​ 5,915 | ​ | 104% |
| O&G operations | ​ | ​ 159,879 | ​ | ​ 41,029 | ​ | ​ 118,850 | ​ | 290% |
| Total water deliveries | ​ | ​ 183,557 | ​ | ​ 59,826 | ​ | ​ 123,731 | ​ | 207% |

*(In thousands, except for water deliveries)*

| ​ ​ Metered water usage from: | ​ ​ ​ | ​ ​ Nine Months Ended May 31, 2023 ​ | ​ ​ | ​ ​ May 31, 2022 ​ ​ | ​ ​ ​ | ​ ​ ​ $ Change ​ ​ | ​ ​ ​ | ​ ​ ​ ​ % Change ​ ​ ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Municipal water usage | ​ | $349 | ​ | $274 | ​ | $75 | ​ | 27% |
| Commercial water usage | ​ | ​ 2,596 | ​ | ​ 2,686 | ​ | ​ (90) | ​ | (3)% |
| Wastewater treatment fees | ​ | ​ 216 | ​ | ​ 185 | ​ | ​ 31 | ​ | 17% |
| Water and wastewater tap fees | ​ | ​ 2,400 | ​ | ​ 2,447 | ​ | ​ (47) | ​ | (2)% |
| Other revenue | ​ | ​ 321 | ​ | ​ 299 | ​ | ​ 22 | ​ | 7% |
| Total segment revenue | ​ | ​ 5,882 | ​ | ​ 5,891 | ​ | ​ (9) | ​ | (0)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water service costs | ​ | ​ 1,457 | ​ | ​ 1,419 | ​ | ​ 38 | ​ | 3% |
| Wastewater service costs | ​ | ​ 350 | ​ | ​ 337 | ​ | ​ 13 | ​ | 4% |
| Depreciation | ​ | ​ 1,246 | ​ | ​ 1,055 | ​ | ​ 191 | ​ | 18% |
| Other | ​ | ​ 318 | ​ | ​ 298 | ​ | ​ 20 | ​ | 7% |
| Total expenses | ​ | ​ 3,371 | ​ | ​ 3,109 | ​ | ​ 262 | ​ | 8% |
| Segment operating income | ​ | $2,511 | ​ | $2,782 | ​ | $(271) | ​ | (10)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Water deliveries (thousands of gallons) | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| On Site | ​ | ​ 2,590 | ​ | ​ 24,372 | ​ | ​ (21,782) | ​ | (89)% |
| Commercial sales - export water and other | ​ | ​ 12,799 | ​ | ​ 11,353 | ​ | ​ 1,446 | ​ | 13% |
| Sky Ranch | ​ | ​ 32,664 | ​ | ​ 31,899 | ​ | ​ 765 | ​ | 2% |
| Wild Pointe | ​ | ​ 21,352 | ​ | ​ 15,384 | ​ | ​ 5,968 | ​ | 39% |
| O&G operations | ​ | ​ 193,148 | ​ | ​ 191,970 | ​ | ​ 1,178 | ​ | 1% |
| Total water deliveries | ​ | ​ 262,553 | ​ | ​ 274,978 | ​ | ​ (12,425) | ​ | (5)% |

For the three and nine months ended May 31, 2023, residential water usage revenue increased over 2022 mainly due to increased residential customers at Sky Ranch. Commercial water usage revenue increased for Q3-2023 over 2022 due to increased water sales to oil and gas operators; however, for the nine month periods presented, commercial water sales remained consistent.

For the three and nine months ended May 31, 2023, wastewater treatment fees increased slightly as compared to 2022 primarily due to new Sky Ranch customers.

For the three and nine months ended May 31, 2023, water and wastewater tap sales remained relatively consistent with 2022 due to timing of closings at Sky Ranch. Tap sales are driven by builders obtaining building permits in anticipation of home closings.

#### Land Development Results of Operations

*(In thousands)*

| ​ ​ ​ | ​ ​ ​ | ​ ​ ​ ​ Three Months Ended May 31, 2023 | ​ ​ | ​ ​ ​ ​ May 31, 2022 | ​ ​ ​ | ​ ​ ​ ​ ​ $ Change | ​ ​ ​ | ​ ​ ​ ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Lot sales | ​ | $3,160 | ​ | $1,070 | ​ | $2,090 | ​ | 195% |
| Project management revenue | ​ | ​ 42 | ​ | ​ 81 | ​ | ​ (39) | ​ | (48) ​ |
| Total revenue | ​ | ​ 3,202 | ​ | ​ 1,151 | ​ | ​ 2,051 | ​ | 178% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Land development construction and project management costs | ​ | ​ 1,032 | ​ | ​ 288 | ​ | ​ 744 | ​ | 258% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Segment operating income | ​ | $2,170 | ​ | $863 | ​ | $1,307 | ​ | 151% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |

*(In thousands)*

| ​ ​ | ​ ​ | ​ ​ ​ Nine Months Ended May 31, 2023 | ​ | ​ ​ May 31, 2022 | ​ | ​ ​ ​ $ Change | ​ ​ | ​ ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Lot sales | ​ | $5,064 | ​ | $5,644 | ​ | $(580) | ​ | (10)% |
| Project management revenue | ​ | ​ 173 | ​ | ​ 529 | ​ | ​ (356) | ​ | (67) ​ |
| Total revenue | ​ | ​ 5,237 | ​ | ​ 6,173 | ​ | ​ (936) | ​ | (15)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Land development construction and project management costs | ​ | ​ 1,509 | ​ | ​ 1,160 | ​ | ​ 349 | ​ | 30% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Segment operating income | ​ | $3,728 | ​ | $5,013 | ​ | $(1,285) | ​ | (26)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |

For the three months ended May 31, 2023, lot sales revenue increased as compared to 2022 due to timing of development activities and 2023 having two phases under construction (Phase 2A and 2B). Per lot revenue is expected to remain consistent for all four subphases of Phase 2. 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 Phase 2.

For the three months ended May 31, 2023, land development construction costs increased compared to 2022 due to increased construction activity and having two subphases under development in 2023.

For the nine months ended May 31, 2023, lot sales revenue decreased as compared to 2022 due to timing of development activities at Sky Ranch, even though the price per lot for delivered lots in Phase 2 increased an average of 40% over Phase 1. Additionally, lot sale revenue declined as we delayed the start of construction on Phase 2B by several months due to the increased challenges in the housing market in late 2022.

Despite the decline in lot sale revenue for the nine months ended May 31, 2023, land development construction costs increased compared to 2022, this is due to increased construction activity near the end of the period, but also due to the type of construction activity. For Phase 2B, which just started, a lot of the costs incurred to date are related directly to our lots, which are expensed, and not the public improvements, which are not expensed as they are reimbursable. Both costs are used to estimate the revenue to recognize, this margin will normalize as Phase 2B construction progresses.

#### Single-Family Rental Results of Operations

In fiscal 2021, we began construction on three homes that were completed and rented effective November 1, 2021. Each home was rented under a one-year non-cancellable lease agreement. 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 that are 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 10 rental units in Phase 2A, six of which were completed and rented after May 31, 2023. We anticipate the remaining four rental units will be completed and ready for rental around the end of our fiscal 2023.

### Liquidity, Capital Resources and Financial Position

As of May 31, 2023, our working capital, defined as current assets less current liabilities, was $23.8 million, which included $26.0 million in cash and cash equivalents. All our cash is maintained at high-credit quality institutions and overnight investments are made into an insured cash sweep program which provides FDIC insurance for our entire cash balance through the banks in which our cash is being held. We believe that as of May 31, 2023 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, Phase 2 began in February 2021, which is being done in four subphases, of which Phase 2A and Phase 2B are the only two being actively developed as of May 31, 2023. We estimate total costs to complete the infrastructure (including public improvements) for all 850 lots in Phase 2 to total $74.3 million. Of this, we anticipate spending up to $18.0 million in the next 12 months, and we anticipate receiving approximately $20.0 million in milestone payments, completed lot payments, and tap fees from the home builders over the same period. The amounts we expect to spend and receive in the next twelve months are dependent on the pace of construction in both Phase 2A and Phase 2B. We believe 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 contracted construction costs for all eleven units is $3.8 million, which as of May 31, 2023, we had incurred $3.0 million of these construction costs. We anticipate incurring the majority of the remaining $0.8 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 are a flat fee $3,000 per month through April 2032. 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 fund development of 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.

#### Summary Cash Flows Table

*(In thousands)*

| ​ ​ Cash (used) provided by: | ​ ​ | ​ ​ Nine Months Ended May 31, 2023 ​ | ​ | ​ ​ May 31, 2022 ​ | ​ ​ | ​ ​ ​ ​ $ Change ​ | ​ ​ | ​ ​ ​ % Change ​ |
| --- | --- | --- | --- | --- | --- | --- | --- | ---: |
| Operating activities | ​ | $(2,970) | ​ | $(11,933) | ​ | $8,963 | ​ | 75% |
| Investing activities | ​ | ​ (5,801) | ​ | ​ (3,794) | ​ | ​ (2,007) | ​ | (53)% |
| Financing activities | ​ | ​ (119) | ​ | ​ 1,033 | ​ | ​ (1,152) | ​ | (112)% |
| ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ | ​ | ​ ​ |
| Net Change in cash | ​ | $(8,890) | ​ | $(14,694) | ​ | $5,804 | ​ | 39% |

For the nine months ended May 31, 2023, we used cash as follows:

- Operating activities used $3.0 million of cash, mainly for normal operations, to fund construction activities (including the public improvements) at Sky Ranch, and timing of when payments are remitted to vendors including income taxes. We anticipate continuing to spend cash for the construction activities at Sky Ranch for the foreseeable future.
- Investing activities used $5.8 million in cash, mainly to buy U.S. Treasury Bills (which matured during the period), construction of single-family rentals, investing in future phases of Sky Ranch, and construction of additional water delivery infrastructure.
- Financing activities used $0.1 million of cash, mainly to acquire 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 our 2022 Annual Report. The accounting policies and estimates used in preparing our interim consolidated financial statements for the three and nine months ended May 31, 2023 are the same as those described in our 2022 Annual Report. There have been no changes to our critical accounting policies during the three and nine months ended May 31, 2023. 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, 1,401 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 May 31, 2023, pursuant to Rule 13a-15(b) under the Exchange Act. Based on the fiscal 2022 evaluation, the President and the Chief Financial Officer each concluded that, during fiscal 2022 and as of May 31, 2023, 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 Jul 14, 2023.
Source: SEC EDGAR, the filing index for accession 0001558370-23-011889. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.