PURE CYCLE CORP (PCYO)

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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

Executive Summary

We saw an increase in the demand for new homes which increased our land development segment revenue during fiscal 2024. We also saw an increase in our water/wastewater sales, primarily from an increase in selling water to oil and gas operators.  Our single-family rental business experienced an increase in revenue as well, due to increasing the number of rental homes in fiscal 2024. Due to the demand of affordable housing in our market, we accelerated our land development activity in fiscal 2024 in our Sky Ranch Master Planned Community. Phase 1 is complete, Phase 2A is approximately 99% complete, Phase 2B is approximately 92% complete and Phase 2C is approximately 27% complete. We continue to work on projects to expand our water assets by completing two new wells on the Lowry Ranch during fiscal 2024. Our notable financial highlights from fiscal 2024 include the following:

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Recent Developments

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The housing market stabilized in fiscal 2024 as the Federal Reserve shifted from an aggressive monetary policy in 2023 to a balance policy in 2024 with interest rates remaining relatively consistent throughout 2024. However, with the rising interest rates in 2022 and 2023, the 30-year fixed mortgage rates are still at their highest level in over 15 years. Homebuilders' strategic use of interest rate buydowns as incentives has played a crucial role in driving sales during higher levels of interest rates. These incentives, coupled with the anticipation of lower interest rates in 2025 due to inflation rates moving toward the Federal Reserve’s targeted rate, have fostered a more optimistic outlook among homebuilders.

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We believe several long-term land development and housing market fundamental factors remain positive, including favorable demographics, a lot and housing supply-demand imbalance resulting from a decade-plus underproduction of new homes in relation to population growth, and low resale home inventory. While we remain confident in the long-term growth prospects for the industry given these factors, the current demand for new homes is subject to continued uncertainty due to many factors. The combination of higher mortgage interest rates since early 2022, several years of rising housing prices, elevated inflation, and various other macroeconomic and geopolitical concerns, has been moderating housing demand. Although interest and inflation rates have been stabilizing, we expect this moderate demand to continue into 2025. Given current conditions, we plan to continue to monitor market dynamics and surrounding community performance and adjust the timing of additional construction expenditures at Sky Ranch as necessary. We believe our reasonably priced (entry level) 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.

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Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economics, homebuilding industry, capital, credit and financial market conditions and on a fairly stable and constructive political and regulatory environment (particularly regarding housing and mortgage loan financing policies). The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during 2022 and 2023 to moderate persistent U.S. inflation, and the uncertainty in future Federal Reserve monetary policy, are expected to be an ongoing headwind for the housing market in 2025 and beyond, as they have elevated mortgage loan interest rates and created macroeconomic uncertainty and volatility across financial markets. 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 2024. In addition, consumer demand for our homes, and our ability to grow our scale, revenue and returns in fiscal 2025 could be materially and negatively affected by the above-described monetary policy impacts or other factors that curtail mortgage loan availability, employment or income growth or consumer confidence in the U.S. or in the Colorado markets. The potential extent and effect of these factors on our business is highly uncertain, unpredictable and outside our control, and our past performance, including in fiscal 2024, should not be considered indicative of our future results.

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Results of Operations

The results of our operations for the fiscal years ended August 31, 2024 and 2023 were as follows:

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Fiscal 2024 vs. Fiscal 2023

Revenue – Total revenue increased in 2024 as compared to 2023, primarily due to an increase in lot sales at Sky Ranch. With increased demand for affordable housing, we accelerated our development activities with three ongoing phases in our Sky Ranch Master Planned Community. Additionally, commercial water sales, mainly to oil and gas operators for use in their drilling operations, increased to $6.1 million in 2024 from $3.1 million in 2023. Water revenue also increased due to an increase in tap revenue to $3.4 million in 2024 from $3.0 million in 2023. Project management revenue at Sky Ranch increased to $0.7 million in 2024 from $0.3 million in 2023. As Sky Ranch continues to grow, we expect lot sales to generate significant revenue in the future, and increasing water and wastewater usage and taps purchased as we continue to add customers to our water resource development segment.

Cost of revenue – Total costs of revenue increased in 2024 as compared to 2023, primarily due to increased construction costs in the development of Sky Ranch as construction accelerated in 2024 with three active phases.

General and administrative expense – General and administrative expense increased in 2024 as compared to 2023, primarily due to the receipt of three quarters of qualified Employee Retention Credits from the Internal Revenue Service in 2023 and an overall increase in operations in fiscal 2024.

Other income, net – Other income, net decreased in 2024 as compared to 2023, primarily due to the receipt of several one-time payments from oil and gas operators primarily for surface use and damage payment agreements in fiscal 2023. Additionally, in fiscal 2024 we recognized $0.4 million of interest expense, compared to $0.2 million in fiscal 2023, related to notes payable we entered into with our primary lender for the financing of the rental homes and the Lost Creek Water purchase, which are described in greater detail in Notes 4 and 8 to the accompanying consolidated financial statements.

Income tax expense – Income tax expense increased in 2024 as compared to 2023, due to higher pre-tax income primarily from the increase of lots sales in Sky Ranch and increase in commercial water sales, mainly to oil and gas operators, in fiscal 2024. Our effective tax rate remained relatively consistent year over year.

Water delivered – Water deliveries increased in 2024 as compared to 2023, primarily due to increased sales to oil and gas operators, as well as new Sky Ranch customers. Oil and gas operations are highly variable and dependent on oil prices, demand for gas, and timing of other leases in our service areas; therefore, we cannot provide any assurances that we will continue to realize this level of sales to oil and gas customers in the future. As Sky Ranch continues to develop, we anticipate continued growth in our residential water and wastewater service revenue.

Water and wastewater tap sales – Water and wastewater tap sales increased in 2024 as compared to 2023 primarily due to the type of taps (commercial vs. residential) sold during each year and a price increase of water and wastewater taps in 2024. Tap sales are driven by the issuance of building permits and the timing of these are not contractually established with the home builders. During fiscal 2024, we sold 16 taps in Phase 2A and 53 taps in Phase 2B, with an additional 17 taps allocated to our single-family rental segment. We expect to substantially complete the next 141 lots in Phase 2B in fiscal 2025 and expect to realize additional tap sales in fiscal 2025 relating to the delivery of the Phase 2C lots.

Lots delivered – The number of lots delivered (which refers to when title passed on a lot to the homebuilder) increased in 2024 compared to 2023 due to the remaining 43 finished lots in Phase 2B being delivered to a builder by the end of fiscal 2024 resulting in $4.5 million of revenue. Additionally, we recognized certain milestone from our Lot Delivery Agreements from home builders in 2024 which accounted for $1.2 million in lot sales revenue for Phase 2A, $7.7 million in lot sales revenue for Phase 2B and $2.7 million in lot sales revenue for Phase 2C. We expect to be substantially complete with the delivery of all 228 lots in Phase 2C lots during fiscal 2025. Despite lots being transferred to the homebuilders, we still have minor construction activities to complete Phases 2A and 2B and to turn over the completed infrastructure to the applicable governmental agency for maintenance.

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Water and Wastewater Resource Development Results of Operations

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Municipal water usage – Municipal water usage increased in 2024 compared to 2023, primarily due to new Sky Ranch customers in our water and wastewater resource development segment. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Commercial water usage – The main component of commercial water usage is from sales to oil and gas operators for use in their drilling process. Commercial water sales increased during fiscal 2024, primarily due to increased demand by our oil and gas customers. Because oil and gas is cyclical in nature as demand and prices fluctuate, we have no way of knowing if water provided to oil and gas operators will increase or decrease in the future.

Wastewater treatment fees – Wastewater treatment fees increased in 2024 compared to 2023, primarily due to new Sky Ranch customers in our water and wastewater resource development segment. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Water and wastewater tap fees –Water and wastewater tap sales increased in 2024 compared to 2023, primarily due to the type of taps (commercial vs. residential) sold during each year and a price increase of water and wastewater taps in 2024. Water and wastewater taps are sold to home builders at the time a building permit is issued and are dependent on when the home builder constructs homes and not contractually driven in terms of timing; therefore, timing of tap sales fluctuate with demand for new construction. During 2024, the average price of a Sky Ranch water and wastewater tap was $38,000 compared to $30,000 per tap for 2023.

Other revenue – Other revenue increased in 2024 as compared to 2023, primarily due to increased revenue on the grading, erosion, and sediment control (GESC) and fence contracts at Sky Ranch.

Water service costs – Water service costs increased in 2024 as compared to 2023, primarily due to increase costs related to higher oil and gas water deliveries this fiscal year.

Wastewater service costs – Wastewater service costs increased slightly in 2024 as compared to 2023, primarily due to additional costs incurred with the servicing of the Ridgeview facility, which required work to be completed in anticipation of new development in fiscal 2025.

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Other costs of revenue – Other costs of revenue increased in 2024 as compared to 2023, primarily due to costs associated with the GESC and fence contracts in Sky Ranch.

Water delivered – Water deliveries increased in 2024 as compared to 2023, primarily due to increased oil and gas operations and by new Sky Ranch customers.

Land Development Results of Operations

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Lot sales – Lot sales increased in 2024 as compared to 2023, primarily due to an increase in lot deliveries at Sky Ranch and our accelerated development activities with three ongoing phases in our Sky Ranch Master Planned Community. Phase 2A is substantially completed at approximately 99%.  We delivered finished lots in Phase 2B, and Phase 2B is approximately 92% complete. Phase 2C is approximately 27% complete, and we are beginning our development activity in Phase 2D.

Project management revenue – Project management revenue increased in 2024 as compared to 2023, which was primarily due to increased development activities in Phase 2B and Phase 2C. We earn a 5% project management fee on construction costs for managing the completion of public improvements at Sky Ranch.

Land development construction and project management costs – Land development construction costs increased in 2024 as compared to 2023, primarily due to accelerated development activities in Phases 2B and 2C. As Phase 2B winds down, more of our costs are anticipated to be public improvements costs, whereas the beginning of Phase 2C is anticipated to result in us incurring more lot costs.  This is due to the timing of the development of the costs incurred in the beginning of the development phase compared to those costs incurred towards the end.

Lots delivered – The number of lots delivered (which refers to when title is passed to the homebuilder) increased in 2024 compared to 2023 due to the delivery of the remaining lots of Phase 2B and the commencement of lots deliveries in Phase 2C been delivered by the end of fiscal 2024. No finished lots were delivered to homebuilders during fiscal 2023. Despite the lots being transferred to the homebuilders, we still have minor construction activities to complete Phase 2A and 2B to turn over the completed infrastructure to the applicable governmental agency that will maintain the infrastructure, and we did receive certain milestone payments for Phase 2B and 2C lots. Because we record lot sales as construction progresses, the timing of revenue and lot deliveries are not necessarily correlated.

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General and Administrative Expenses

The table below details significant items and changes included in our General and Administrative Expenses (G&A Expenses) as well as the impact that share-based compensation has on our G&A Expenses for the fiscal years ended August 31, 2024 and 2023.

Summary of G&A Expenses

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Salary and Salary-Related Expenses – Salary and salary-related expenses net increased in fiscal 2024 compared to fiscal 2023 due to the receipt of three quarters worth of Employee Retention Credits from the Internal Revenue Service in 2023. During fiscal 2024, we increased our staff by one employee. Share-based compensation expense decreased due to options and restricted stock grant forfeitures during fiscal 2024.

Professional Fees – Professional fees consist mainly of IT, telecom, legal, consulting and accounting fees.  IT, telecom, accounting and legal fees increased over the prior year as information technology and cyber security have continued to take on an increased focused, and we amended builder contracts to better time lot delivers to a slowing residential housing market.

Public Entity-Related Expenses, including director fees – Costs associated with being a corporation and costs associated with being a publicly traded entity consist primarily of XBRL and EDGAR conversion fees, stock exchange fees, and press releases. These costs fluctuate from year to year but remained relatively consistent from 2023 to 2024. Compensation including stock grants paid to our board was consistent in fiscal 2024 compared to fiscal 2023.

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

All other – All other expenses include typical operating expenses related to the maintenance of our office and equipment, business development, travel, property taxes, and funding provided to the Rangeview District and the Sky Ranch Districts. Other expenses increased during fiscal 2024 compared to fiscal 2023. The changes were primarily the result of increased equipment maintenance and the timing of various expenses, which will fluctuate year over year.

Liquidity, Capital Resources and Financial Position

We believe we are well-positioned to navigate the ever-evolving market conditions given our strong financial position. At August 31, 2024, our working capital, defined as current assets less current liabilities, was $28.5 million, which includes $22.1 million in cash and cash equivalents. We believe that as of August 31, 2024, and as of the date of the filing of this Annual Report on Form 10-K, we have sufficient working capital to fund our operations for the next 12 months. We have completed Phase 1 and have completed approximately 99% of the work required to deliver Phase 2A at Sky Ranch. Phase 2B is approximately 92% complete, and Phase 2C is approximately 27% complete.  We anticipate starting work on Phase 2D during fiscal 2025. We sold 219 lots in Phase 2A at Sky Ranch (retaining 10 lots for ourselves) and have only 1% of the construction-related activities remaining for Phase 2A to be finished. We expect to spend $0.2 million in the next twelve months completing the construction of Phase 2A (of which we estimate $0.2 million will be reimbursable by the Sky Ranch CAB). We have sold 194 lots in Phase 2B at Sky Ranch (retaining 17 lots for ourselves) and have approximately 8% of construction-related activities remaining for Phase 2B to be finished. We expect to spend $1.5 million in the next twelve months on remaining Phase 2B construction activities (of which we estimate $1.5 million will be reimbursable by the Sky Ranch CAB). We expect to be substantially complete with Phase 2C during our fiscal 2025 and expect to spend $13.2 million in the next twelve months on

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remaining Phase 2C construction activities (of which we estimate $12.0 million will be reimbursable by the Sky Ranch CAB). We anticipate starting work on Phase 2D during fiscal 2025 and expect to spend $6.4 million in the next twelve months on remaining Phase 2D construction activities (of which we estimate $5.4 million will be reimbursable by the Sky Ranch CAB). We anticipate receiving nearly $18.0 million in milestone payments and approximately $5.8 million of water and wastewater taps fees from the homebuilders over the same period. We also anticipate receiving reimbursement from Sky Ranch CAB of approximately $10.1 million pursuant to a refinancing of the 2019 Bonds.  We believe we can fund such capital expenditures from cash and cash equivalents on hand, phased payments from our lot sales agreements, and payments from the Sky Ranch CAB for reimbursement of public improvements.

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Summary Cash Flows

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Changes in Operating Activities – Operating activities include amounts we receive from the sale of wholesale water and wastewater services, costs incurred in the delivery of those services, the sale of lots, the costs incurred in completing and delivering finished lots, rental income from single-family homes and the cost incurred in constructing and maintaining our single-family rental homes, and G&A Expenses.

Cash provided by operations in fiscal 2024 increased due to the timing of cash receipts of trade receivables, payments of payables and accrued liabilities, and federal and state income taxes payable, partially offset by increases to the note receivable from the Sky Ranch CAB for continued construction costs related to public improvements.  The Sky Ranch CAB made payments to us totaling $0.7 million in fiscal 2024 from excess funds from higher fees and property taxes collected by the Sky Ranch CAB. In fiscal 2023, cash used by operations was primarily related to increases to the note receivable from the Sky Ranch CAB for the continued construction costs related to public improvements, partially offset by the timing differences on payments of payables and accrued liabilities, deferred revenue, and federal and state income taxes payable.

Changes in Investing Activities – Investing activities in fiscal 2024 consisted primarily of the investment in our land and water system of $1.9 million and investments in future development phases of Sky Ranch for $2.2 million. Investing activities in fiscal 2023 consisted primarily of the investment in our land and water system of $3.9 million and investments in future development phases of Sky Ranch for $1.7 million. We capitalize costs associated with obtaining, defending, enhancing, and developing our water rights. We capitalize costs incurred to construct infrastructure required to deliver water and wastewater services to our customers, and we capitalize costs to develop our land assets that are not sold to home builders.

Changes in Financing Activities – Financing activities in 2024 consisted of payments on existing debt facilities as well as cash used to repurchase the Company’s common stock. Financing activities in 2023 consisted of proceeds from debt of $3.0 million to finance 11 single-family rental homes.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Our discussion and analysis of our financial condition and results of operations are based on these consolidated financial statements. The preparation of our consolidated financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, engineering estimates, historical results, and other assumptions believed to be reasonable. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 2 in the accompanying consolidated financial statements. Estimates are used for, but not limited to, determining the recoverability of notes receivable, measure of progress related to our land development activities, and accrued liabilities. Actual results could differ from these estimates.

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Accounting estimates are considered critical if both of the following conditions are met: (1) the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change and (2) the effect of the estimates and assumptions is material to the financial statements. The following provides a summary of the two critical estimates we identified.

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Collectability of the Notes Receivable from the Sky Ranch CAB – The notes receivable from the Sky Ranch CAB are comprised of amounts we incurred and provided to the Sky Ranch CAB for costs related to the construction of public improvements which are reimbursable to us, along with related project management fees and accrued interest associated with those costs. Collectability of the notes is based on the Sky Ranch CAB generating sufficient cash flows to repay us prior to certain contractual dates, which is deemed probable based on a mill levy increase resulting from the remainder of Sky Ranch being in a different taxing district than Phase 1, higher than projected assessed values of completed homes, and additional houses from the start of the next development phase at Sky Ranch. The notes are evaluated for a credit loss at each reporting period based on the factors indicated, and an impairment would be recognized whenever it was determined that a credit loss had occurred.  Management applies judgment to assess whether a credit loss has occurred, and factors that are considered include, but are not limited to: significant decreases in the market price of houses which generate tax payments to the Sky Ranch CAB; significant adverse changes in the business climate or legal factors including significant decreases in housing sales or assessments; significant increase in costs and accumulation of costs significantly in excess of the amount originally expected for the construction of the associated public improvements; and current period cash flow or operating losses combined with a history of losses or a forecast of losses.  Recoverability of these notes is measured by comparing the carrying value to the future cash flows expected to be generated by the Sky Ranch CAB which can be used to repay us.  If the carrying value of the notes exceeds the fair value of the estimated cash flows, an impairment loss would be recorded by writing down the carrying value of the related asset to its estimated fair value, which is determined using discounted future cash flows or other measures of fair value.

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Revenue recognition on lot sales under the percentage-of-completion method – We recognize lot revenue over time as construction progresses for most of our lot development contracts. This involves an estimation of the total project costs which are incurred over several months or even years. This requires management to estimate labor and material costs which could change materially over the life of that construction project and have a material impact on the timing of revenue recognition. Under the percentage of completion method, revenue and related costs from lots sold pursuant to lot development contracts requiring milestone payments as construction occurs are recognized over the course of the construction period based on the completion progress of that project phase (i.e. Phase 2A). In relation to each phase or subphase, revenue is determined by calculating the ratio of incurred construction costs, including construction costs related to public improvements subject to reimbursement, to total estimated costs and applying that ratio to the contracted sales amounts. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts. Cost of sales is the cost incurred related to construction of lots. Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in estimated costs or losses, if any, are recognized in the period in which they are determined.

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Off-Balance Sheet Arrangements

None

Recently Adopted and Issued Accounting Pronouncements

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

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Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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

Executive Summary

Due to rapidly rising mortgage interest rates, we saw a slow-down in the demand for housing which impacted our land development segment during fiscal 2023, with a similar cooling to water/wastewater sales.  Only our single-family rental business saw an increase in revenue, due the addition of 11 more rental homes during fiscal 2023. Our land development segment was negatively impacted by construction delays in the continued development of our Sky Ranch Master Planned Community. Phase 1 is now complete, with Phase 2A at approximately 93% complete, and Phase 2B at approximately 31% complete. We continue to work on projects to expand our water assets by completing two new wells on the Lowry Ranch that we expect to be placed in service during the second quarter of fiscal 2024. Our notable financial highlights from fiscal 2023 include the following:

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Recent Developments

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The housing market deteriorated in the third quarter of calendar 2022 and continued through fiscal 2023 as the Federal Reserve remained aggressive in its actions to combat inflation by raising interest rates. As a result, 30-year fixed mortgage rates have continued to rise and are 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.

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We believe several long-term land development and housing market fundamental factors remain positive, including favorable demographics, a lot and housing supply-demand imbalance resulting from a decade-plus underproduction of new homes in relation to population growth, and low resale home inventory. While we remain confident in the long-term growth prospects for the industry given

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these factors, the current demand for new homes is subject to continued uncertainty due to many factors. The combination of sharply higher mortgage interest rates since early 2022, several years of rising housing prices, elevated inflation, and various other macroeconomic and geopolitical concerns, is moderating housing demand which is expected to continue into 2024. Given current conditions, we plan to continue to monitor market dynamics and surrounding community performance and adjust the timing of additional construction expenditures at Sky Ranch as necessary. We believe our reasonably priced (entry level) 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.

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Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economics, homebuilding industry, capital, credit and financial market conditions and on a fairly stable and constructive political and regulatory environment (particularly regarding housing and mortgage loan financing policies). The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during 2022 and 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 in 2024 and beyond, as they have elevated mortgage loan interest rates, and created macroeconomic uncertainty and volatility across financial markets. 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 2023. In addition, consumer demand for our homes, and our ability to grow our scale, revenues and returns in fiscal 2024 could be materially and negatively affected by the above-described monetary policy impacts or other factors that curtail mortgage loan availability, employment or income growth or consumer confidence in the U.S. or in the Colorado markets. The potential extent and effect of these factors on our business is highly uncertain, unpredictable and outside our control, and our past performance, including in fiscal 2023, should not be considered indicative of our future results.

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Results of Operations

The results of our operations for the fiscal years ended August 31, 2023 and 2022 were as follows:

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Fiscal 2023 vs. Fiscal 2022

Revenue – Total revenue decreased in 2023 as compared to 2022, primarily due to delays in the continued development of our Sky Ranch Master Planned Community because of home builders’ caution in the housing market as a result of rising interest rates. The delays in development resulted in a reduction in water and wastewater tap sales and project management fees. Additionally, commercial

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water sales, mainly to oil and gas operators for use in their drilling operations, decreased from $4.1 million in 2022 to $3.1 million in 2023. These decreases include decreased tap revenue (from $4.9 million in 2022 to $3.0 million in 2023), and project management revenue at Sky Ranch (from $0.7 million in 2022 to $0.3 million in 2023). As Sky Ranch continues to grow, we expect lot sales to generate significant revenue in the future, and increasing water and wastewater usage and taps purchased as we continue to add customers to our water resource development segment.

Cost of revenue – Total costs of revenue decreased marginally in 2023 as compared to 2022, primarily due to reduced construction costs in the development of Sky Ranch as construction delays were encountered.

General and administrative expense – General and administrative expense net decreased in 2023 as compared to 2022, primarily due to the receipt of three quarters of qualified Employee Retention Credits from the Internal Revenue Service.

Other income, net – Other income, net increased in 2023 as compared to 2022, primarily due to the receipt of several one-time payments from oil and gas operators primarily for surface use and damage payment agreements. Additionally, in fiscal 2023 we recognized $0.2 million of interest expense, compared to $0.1 million in fiscal 2022, related to three notes payable we entered into with our primary lender for the financing of the rental homes and the Lost Creek Water purchase, which are described in greater detail in Note 8 to the accompanying consolidated financial statements.

Income tax expense – Income tax expense decreased in 2023 as compared to 2022, due to lower pre-tax income primarily from the impact of construction delays in developing Sky Ranch. Our effective tax rate remained relatively consistent year over year.

Water delivered – Water deliveries decreased in 2023 as compared to 2022, primarily due to decreased sales to oil and gas operators, offset by new Sky Ranch customers. Oil and gas operations are highly variable and dependent on oil prices, demand for gas, and timing of other leases in our service areas; therefore, we cannot provide any assurances that we will realize this level of sales to oil and gas customers in the future. As Sky Ranch continues to develop, we anticipate continued growth in our residential water and wastewater service revenues.

Water and wastewater tap sales – Water and wastewater tap sales decreased in 2023 as compared to 2022 due to the timing of closings at Sky Ranch. The decrease in tap sales was offset by an increase in the rate per water tap sold in 2023. Tap sales are driven by the issuance of building permits and the timing of these are not contractually established with the home builders. During fiscal 2023, we sold 90 taps in Phase 2A, with an additional 10 taps allocated to our single-family rental segment. These taps combined with the sale of 113 taps in fiscal 2022 leave a remaining 16 taps which we expect to sell in fiscal 2024 for a total of 229 lots in Phase 2A. We expect to substantially complete the next 211 lots in Phase 2B in fiscal 2024 and expect to realize additional tap sales in fiscal 2024 relating to the delivery of the Phase 2B lots.

Lots delivered – The number of lots delivered (which refers to when title passed on a lot to the homebuilder) decreased in 2023 compared to 2022 due to all lots in Phase 2A being delivered to builders by the end of fiscal 2022. No finished lots were delivered to homebuilders during fiscal 2023; however, we did recognize certain milestone payments from our Lot Delivery Agreements from home builders in 2023 which accounted for $3.8 million in lot sales revenue for Phase 2B and $3.0 million in lot sales revenue for Phase 2A. We expect to be substantially complete with the delivery of all 211 Phase 2B lots during fiscal 2024. Despite lots being transferred to the homebuilders, we still have various construction activities to complete Phase 2A and to turn over the completed infrastructure to the applicable governmental agency for maintenance.

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Water and Wastewater Resource Development Results of Operations

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Municipal water usage – Municipal water usage increased in 2023 compared to 2022, primarily due to new Sky Ranch customers in our water and wastewater resource development segment. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Commercial water usage – The main component of commercial water usage is from sales to oil and gas operators for use in their drilling process. Commercial water sales decreased during fiscal 2023, primarily due to decreased demand by our oil and gas customers. Because oil and gas is cyclical in nature as demand and prices fluctuate, we have no way of knowing if water provided to oil and gas operators will increase or decrease in the future.

Wastewater treatment fees – Wastewater treatment fees increased in 2023 compared to 2022, primarily due to new Sky Ranch customers in our water and wastewater resource development segment. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Water and wastewater tap fees –Water and wastewater tap sales decreased in 2023 compared to 2022, primarily due to a decrease in the number of taps sold due to timing on construction of Phase 2A and the delayed start of Phase 2B, which was partially offset by a price increase of water and wastewater taps. Water and wastewater taps are sold to home builders at the time a building permit is issued and are dependent on when the home builder constructs homes and not contractually driven in terms of timing; therefore, timing of tap sales fluctuate with demand for new construction. During the fiscal year ended 2023, the average price of a Sky Ranch water and wastewater tap was $30,000 compared to $28,000 per tap for the fiscal year 2022.

Other revenue – Other revenue increased in 2023 as compared to 2022, primarily due to increased revenues on the grading, erosion, and sediment control (GESC) and fence contracts at Sky Ranch, offset by reductions in construction management revenue related to the construction of the school in Sky Ranch.

Water service costs – Water service costs decreased in 2023 as compared to 2022, primarily due to fewer additional incurred costs related to lower oil and gas water deliveries this fiscal year.

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Wastewater service costs – Wastewater service costs increased in 2023 as compared to 2022, primarily due to additional costs incurred with the servicing of the Ridgeview facility, which required work to be completed in anticipation of new tenants in fiscal 2024.

Other costs of revenue – Other costs of revenue increased in 2023 as compared to 2022, primarily due to costs associated with the GESC and fence contracts in Sky Ranch.

Water delivered – Water deliveries decreased in 2023 as compared to 2022, primarily due to decreased oil and gas operations, offset by new Sky Ranch customers.

Land Development Results of Operations

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Lot sales – Lot sales decreased in 2023 as compared to 2022, primarily due to construction delays in beginning Phase 2B coupled by the slower completion of Phase 2A, which still has approximately 7% of final landscaping and public improvements to be completed to finalize the phase. We delayed the start of construction on Phase 2B for 90 days due to home builders’ caution in the housing market as a result of rising interest rates.

Project management revenues – Project management revenues decreased in 2023 as compared to 2022, which was primarily due to the construction delays encountered in beginning Phase 2B. We earn a 5% project management fee on construction costs for managing the completion of public improvements at Sky Ranch.

Land development construction and project management costs – Land development construction costs decreased in 2023 as compared to 2022, primarily due construction delays encountered in Phases 2A and 2B. As Phase 2A winds down, more of our costs are anticipated to be public improvements costs, whereas the beginning of Phase 2B is anticipated result in us incurring more lot costs.  This is due to the timing of the development of the costs incurred in the beginning of the development phase compared to those costs incurred towards the end.

Lots delivered – The number of lots delivered (which refers to when title is passed to the homebuilder) decreased in 2023 compared to 2022 due to all lots in Phase 2A of Sky Ranch having been delivered by the end of fiscal 2022. No finished lots were delivered to homebuilders during fiscal 2023. Despite the lots being transferred to the homebuilders, we still have various construction activities to complete Phase 2A to turn over the completed infrastructure to the applicable governmental agency that will maintain the infrastructure, and we did receive certain milestone payments for Phase 2B lots. Because we record lot sales as construction progresses, the timing of revenue and lot deliveries are not necessarily correlated.

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General and Administrative Expenses

The table below details significant items and changes included in our General and Administrative Expenses (G&A Expenses) as well as the impact that share-based compensation has on our G&A Expenses for the fiscal years ended August 31, 2023 and 2022.

Summary of G&A Expenses

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Salary and Salary-Related Expenses – Salary and salary-related expenses net decreased in fiscal 2023 compared to fiscal 2022 due to the receipt of three quarters worth of Employee Retention Credits from the Internal Revenue Service. During fiscal 2023, we increased our staff by two employees. Share-based compensation expense decreased due to options and restricted stock grant forfeitures during fiscal 2023.

Professional Fees – Professional fees consist mainly of IT and telecom, legal, consulting and accounting fees.  IT, telecom and legal fees increased over the prior year as information technology and cyber security have continued to take on an increased focused, and we amended builder contracts to better time lot delivers to a slowing residential housing market.

Public Entity-Related Expenses, including director fees – Costs associated with being a corporation and costs associated with being a publicly traded entity consist primarily of XBRL and EDGAR conversion fees, stock exchange fees, and press releases. These costs fluctuate from year to year but remained relatively consistent from 2022 to 2023. Compensation including stock grants paid to our board increased in fiscal 2023 compared to fiscal 2022.

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

All other – All other expenses include typical operating expenses related to the maintenance of our office and equipment, business development, travel, property taxes, and funding provided to the Rangeview District and the Sky Ranch Districts. Other expenses increased during fiscal 2023 compared to fiscal 2022. The changes were primarily the result of increased equipment maintenance and the timing of various expenses, which will fluctuate year over year.

Liquidity, Capital Resources and Financial Position

We believe we are well-positioned to navigate the ever-evolving market conditions given our strong financial position. At August 31, 2023, our working capital, defined as current assets less current liabilities, was $23.2 million, which includes $26.0 million in cash and cash equivalents. We believe that as of August 31, 2023, and as of the date of the filing of this Annual Report on Form 10-K, we have sufficient working capital to fund our operations for the next 12 months. We have completed Phase 1 and have completed nearly 93% of the work required to deliver Phase 2A at Sky Ranch. Phase 2B is nearly 31% complete and we anticipate starting work on Phase 2C during fiscal 2024. We have sold 219 lots in Phase 2A (retaining 10 lots for ourselves) at Sky Ranch and have just over 7% of the construction related activities remaining for Phase 2A to be finished. We expect to spend $1.5 million in the next twelve months completing the construction of Phase 2A (of which we estimate $1.4 million will be reimbursable by the Sky Ranch CAB). We expect to be substantially complete with Phase 2B during our fiscal 2024 and expect to spend $13.0 million in the next twelve months on remaining Phase 2B construction activities (of which we estimate $10.3 million will be reimbursable by the Sky Ranch CAB). We anticipate receiving nearly $13.0 million in milestone payments and approximately $3 million of water and wastewater taps fees from

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

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Summary Cash Flows

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Changes in Operating Activities – Operating activities include amounts we receive from the sale of wholesale water and wastewater services, costs incurred in the delivery of those services, the sale of lots, the costs incurred in completing and delivering finished lots, rental income from single-family homes and the cost incurred in constructing our single-family rental homes, and G&A Expenses.

Cash used by operations in fiscal 2023 is primarily comprised of increases to the note receivable from the Sky Ranch CAB for the continued construction costs related to public improvements, partially offset by the timing of cash receipts of trade receivables, payments of payables and accrued liabilities, and federal and state income taxes payable. The Sky Ranch CAB made payments to us totaling $0.9 million in fiscal 2023 from excess funds from higher fees and property taxes collected by the Sky Ranch CAB. In fiscal 2022, cash provided by operations was primarily related to the reimbursement of capitalized reimbursable costs and interest of $24.1 million and cash collections from lot sales, partially offset by the timing differences on payments of payables and accrued liabilities, deferred revenue, and federal and state income taxes payable.

Changes in Investing Activities – Investing activities in fiscal 2023 consisted primarily of the investment in our land and water system of $3.9 million, additions to our single-family rentals of $3.5 million, and investments in future development phases of Sky Ranch for $1.7 million. Investing activities in fiscal 2022 consisted primarily of the investment in our land and water system of $5.5 million. We capitalize costs associated with obtaining, defending, enhancing, and developing our water rights. We capitalize costs incurred to construct infrastructure required to deliver water and wastewater services to our customers, and we capitalize costs to develop our land assets that are not sold to home builders.

Changes in Financing Activities – Financing activities in 2023 consisted of proceeds from debt of $3.0 million to finance the next 11 single-family rental homes. Financing activities in 2022 consisted of proceeds from debt of $4.0 million to finance our single-family rental homes and the acquisition of 370 acre feet of Lost Creek Water.

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Our discussion and analysis of our financial condition and results of operations are based on these consolidated financial statements. The preparation of our consolidated financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, engineering estimates, historical results, and other assumptions believed to be reasonable. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 2 in the accompanying consolidated financial statements. Estimates are used for, but not limited to, determining the recoverability of notes receivable, measure of progress related to our land development activities, and accrued liabilities. Actual results could differ from these estimates.

Accounting estimates are considered critical if both of the following conditions are met: (1) the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change and (2) the effect of the estimates and assumptions is material to the financial statements. The following provides a summary of the two critical estimates we identified.

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Collectability of the Notes Receivable from the Sky Ranch CAB – The notes receivable from the Sky Ranch CAB are comprised of amounts we incurred and provided to the Sky Ranch CAB for costs related to the construction of public improvements which are

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reimbursable to us, along with related project management fees and accrued interest associated with those costs. Collectability of the notes is based on the Sky Ranch CAB generating sufficient cash flows to repay us prior to certain contractual dates, which is deemed probable based on a mill levy increase resulting from the remainder of Sky Ranch being in a different taxing district than Phase 1, higher than projected assessed values of completed homes, and additional houses from the start of the next development phase at Sky Ranch. The notes are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the note may not be recoverable. Management applies judgment to assess whenever events or changes in circumstances indicate the carrying amount of the notes may not be recoverable giving rise to the requirement to conduct an impairment test. Circumstances which could trigger an impairment test include, but are not limited to: significant decreases in the market price of houses which generate tax payments to the Sky Ranch CAB; significant adverse changes in the business climate or legal factors including significant decreases in housing sales or assessments; significant increase in costs and accumulation of costs significantly in excess of the amount originally expected for the construction of the associated public improvements; and current period cash flow or operating losses combined with a history of losses or a forecast of losses.  Recoverability of these notes is measured by comparing the carrying value to the future cash flows expected to be generated by the Sky Ranch CAB which can be used to repay us.  When the carrying value of an asset exceeds the related undiscounted cash flows, an impairment loss is recorded by writing down the carrying value of the related asset to its estimated fair value, which is determined using discounted future cash flows or other measures of fair value.

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Revenue recognition on lot sales under the percentage-of-completion method – We recognize lot revenue over time as construction progresses for most of our lot development contracts. This involves an estimation of the total project costs which are incurred over several months or even years. This requires management to estimate labor and material costs which could change materially over the life of that construction project and have a material impact on the timing of revenue recognition. Under the percentage of completion method, revenues and related costs from lots sold pursuant to lot development contracts requiring milestone payments as construction occurs are recognized over the course of the construction period based on the completion progress of that project phase (i.e. Phase 2A). In relation to each phase or subphase, revenue is determined by calculating the ratio of incurred construction costs, including construction costs related to public improvements subject to reimbursement, to total estimated costs and applying that ratio to the contracted sales amounts. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts. Cost of sales is the cost incurred related to construction of lots. Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in estimated costs or losses, if any, are recognized in the period in which they are determined.

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Off-Balance Sheet Arrangements

None

Recently Adopted and Issued Accounting Pronouncements

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

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Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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

Executive Summary

We saw tremendous growth in each of our business lines in fiscal 2022. Our land development segment was positively impacted by the continued development of our Sky Ranch Master Planned Community (Phase 1 complete and Phase 2A nearly 80% complete with Phase 2B on the horizon). We expanded our water assets by completing a $3.0 million well and pipeline extension in the Box Elder Creek basin and through the acquisition of 370 acre-feet of water in the Lost Creek basin and had a record year for commercial water sales to oil and gas operators. We launched our single-family home rental business with the completion and rental of three homes and construction commenced on the next eleven units. Our notable financial highlights from fiscal 2022 include the following:

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Recent Developments

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The housing market deteriorated rapidly in the third quarter of calendar 2022 as the Federal Reserve remained aggressive in its actions to combat inflation. As a result, 30-year fixed mortgage rates continued to rise and ended the quarter at their highest level in over 15 years. The magnitude and speed of these recent rate increases has caused many buyers to pause and reconsider a home purchase.

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

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population growth, and low resale home inventory. While we remain confident in the long-term growth prospects for the industry given these factors, the current demand for new homes is subject to continued uncertainty due to many factors. The combination of sharply higher mortgage interest rates since early 2022, several years of rising housing prices, elevated inflation, and various other macroeconomic and geopolitical concerns, is moderating housing demand which is expected to continue into 2023. Given current conditions, we plan to continue to monitor market dynamics and surrounding community performance to determine timing of additional construction expenditures at Sky Ranch. we believe our reasonably priced lots and the low inventory of entry level housing in the Denver market will help Sky Ranch navigate the changing market better than other surrounding and significantly higher priced communities.

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Our future performance and the strategies we implement (and adjust or refine as necessary or appropriate) will depend significantly on prevailing economic, homebuilding industry and capital, credit and financial market conditions and on a fairly stable and constructive political and regulatory environment (particularly regarding housing and mortgage loan financing policies). The Federal Reserve’s aggressive raising of the federal funds interest rate and other measures during the first nine months of 2022 to moderate persistent U.S. inflation, and the further actions it has stated it intends to take, are expected to be an ongoing headwind for the housing market in 2022 and beyond, as they have elevated mortgage loan interest rates, and created macroeconomic uncertainty and volatility across financial markets. In addition, we and our homebuilding partners continue to experience services and supply constraints and rising and volatile raw material prices. Prolonged supply chain disruptions and other production-related challenges could extend or delay our construction cycle times and intensify construction-related cost pressures beyond our experience in fiscal 2022. In addition, consumer demand for our homes, and our ability to grow our scale, revenues and returns in fiscal 2023 could be materially and negatively affected by the above-described monetary policy impacts or other factors that curtail mortgage loan availability, employment or income growth or consumer confidence in the U.S. or in the Colorado markets. The potential extent and effect of these factors on our business is highly uncertain, unpredictable and outside our control, and our past performance, including in fiscal 2022, should not be considered indicative of our future results.

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Results of Operations

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

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Fiscal 2022 vs. Fiscal 2021

Revenue – Total revenue increased in 2022 as compared to 2021, primarily due to increased revenue from lot sales due to Phase 1 being completed early in fiscal 2022 and the recognition of revenue from the development of Phase 2A. Additionally, commercial water sales, mainly to oil and gas operators for use in their drilling operations, increased from $3.3 million in 2021 to $4.1 million in 2022, as oil and gas operators increased drilling operations throughout the front range of Colorado. These increases are partially offset by decreased tap fees (from $5.2 million in 2021 to $4.9 million in 2022) due to timing of when Phase 2A started in relation to when Phase 1 was completed, and project management revenue (from $1.6 million in 2021 to $0.7 million in 2022). Project management revenue declined from 2021, due to the recording of the cumulative project management fees in 2021 which have been earned since the start of development at the Sky Ranch community, which was booked in 2021 because of the removal of the contingency of the collection of the fees. As Sky Ranch continues to grow we expect lot sales to generate significant revenue in the future, and increasing water and wastewater usage fees as we continue to add customers to our water resource development segment.

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

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

Other income, net – Other income, net decreased in 2022 as compared to 2021, primarily due to the 2021 recognition of outstanding reimbursable costs and interest income totaling $20.2 million as the collection of these amounts was deemed probable. Additional information on the reimbursables can be found in Notes 5 and 15 to the accompanying consolidated financial statements. Additionally, in fiscal 2022 we recognized $0.1 million of interest expense related to two notes payable we entered into with our primary lender for the financing of the rental units and the Lost Creek Water purchase, both of which are described in greater detail in Note 8 to the accompanying consolidated financial statements.

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

Water delivered – Water deliveries increased in 2022 as compared to 2021, primarily due to increased sales to oil and gas operators, new Sky Ranch customers and increased landscaping and irrigation water usage as more parks and public spaces were completed at Sky Ranch. Oil and gas operations are highly variable and dependent on oil prices, demand for gas, and timing of other leases in our service areas; therefore, we cannot provide any assurances that we will realize this level of sales to oil and gas customers in the future. As Sky Ranch continues to develop, we anticipate continued growth in our residential water and wastewater service revenues.

Water and wastewater tap sales – Water and wastewater tap sales decreased in 2022 as compared to 2021 due to the timing of closings at Sky Ranch. The decrease in tap sales was offset by an increase in the rate per water tap sold in 2022. Tap sales are driven by the issuance of building permits and the timing of these are not contractually established with the home builders. During fiscal 2022, we sold 41 taps in Phase 1 and 113 taps in Phase 2A. We expect to sell the remaining 116 taps in Phase 2A at Sky Ranch in fiscal 2023.

Lots delivered – The number of lots delivered (which refers to when title passed on a lot to the homebuilder) decreased in 2022 compared to 2021 due to all lots in Phase 1 of Sky Ranch having been delivered as of the first quarter of fiscal 2021, and 152 of the lots in Phase 2A having been delivered in the fourth quarter of fiscal 2021. During fiscal 2022, we delivered 67 finished lots to the one builder in Phase 2A that is buying finished lots versus making milestone payments as construction progresses. Despite the lots being transferred to the homebuilders, we still have various construction activities to complete Phase 2A and to turn over the completed infrastructure to the applicable governmental agency for maintenance.

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Water and Wastewater Resource Development Results of Operations

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Municipal water usage – Municipal water usage increased in 2022 compared to 2021, primarily due to new Sky Ranch customers in our water and wastewater resource development segment as well as increased water usage due to landscaping and irrigation usage. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Commercial water usage – The main component of commercial water usage is from sales to oil and gas operators for use in their drilling process. Commercial water sales increased during fiscal 2022, primarily due to increased oil and gas prices and new fracking permits obtained by our oil and gas customers. Because oil and gas is cyclical in nature as demand and prices fluctuate, we have no way of knowing if water provided to oil and gas operators will increase or decrease in the future. Commercial revenues in fiscal 2021 also included $0.4 million of revenue recognized when a deposit on water from an oil and gas operator expired unused and the deposit was forfeited.

Wastewater treatment fees – Wastewater treatment fees increased in 2022 compared to 2021, primarily due to new Sky Ranch customers in our water and wastewater resource development segment. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Water and wastewater tap fees –Water and wastewater tap fees decreased in 2022 compared to 2021, primarily due to a decrease in the number of taps sold due to timing on completion of Phase 1 and the start of Phase 2A, which was partially offset by a price increase of water and wastewater taps. Water and wastewater taps are sold to home builders at the time a building permit is issued and are dependent on when the home builder constructs homes and not contractually driven in terms of timing; therefore, timing of tap sales fluctuate with demand for new construction. During the fiscal year ended 2022, the average price of a Sky Ranch water and wastewater tap was $33,000 compared to $31,000 per tap for the fiscal year 2021.

Other revenue – Other revenue decreased in 2022 as compared to 2021, primarily due to a 2021 agreement to construct a special facility for WISE, for which $0.2 million and $0.4 million of revenue was recognized in fiscal 2022 and 2021. The project recognized revenue on a percent of completion basis and was completed during fiscal 2022.

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Water service costs – Water service costs increased in 2022 as compared to 2021, primarily due to increased water usage associated with our oil and gas customers and additional purchases of WISE water.

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

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

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

Land Development Results of Operations

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

Project management revenues – Project management revenues decreased in 2022 as compared to 2021, which was due to the determination in 2021 that reimbursable costs due from the Sky Ranch CAB are deemed probable of collection based on projections showing the Sky Ranch CAB will generate sufficient funds from its tax and fee income to repay us, resulting in the recognition of $1.5 million of cumulative project management fees being recorded in 2021. We earn a 5% project management fee on certain costs for managing the construction of public improvements at Sky Ranch.

Land development construction and project management costs –  Land development construction costs decreased in 2022 as compared to 2021, primarily due to Phase 1 being completed and Phase 2A construction progressing. The Phase 2A costs that are expensed are lower than Phase 1 due to the treatment of public improvement costs being added to the note receivable – related party versus being expensed as they were during a portion of fiscal 2021, until collectability was deemed probable.

Lots delivered – The number of lots delivered (which refers to when title is passed to the homebuilder) decreased in 2022 compared to 2021 due to all lots in Phase 1 of Sky Ranch having been delivered as of the first quarter of fiscal 2021, and 152 of the lots in Phase 2A having been delivered in the fourth quarter of fiscal 2021. During fiscal 2022, we delivered 67 finished lots to the one builder in Phase 2A who is buying finished lots instead of making milestone payments as construction progresses. Despite the lots being transferred to the homebuilders, we still have various construction activities to complete Phase 2A to turn over the completed infrastructure to the applicable governmental agency that will maintain the infrastructure. Because we record lot sales as construction progresses, the timing of revenue and lot deliveries are not necessarily correlated.

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General and Administrative Expenses

The table below details significant items and changes included in our General and Administrative Expenses (G&A Expenses) as well as the impact that share-based compensation has on our G&A Expenses for the fiscal years ended August 31, 2022 and 2021.

Summary of G&A Expenses

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Salary and Salary-Related Expenses – Salary and salary-related expenses increased in fiscal 2022 compared to fiscal 2021 due to a larger employee base to manage the development of our Sky Ranch property and our water and wastewater systems, additional administrative staff, and increased compensation costs for employees to continue to attract and retain top talent. During fiscal 2022, we increased our staff by four employees. Share-based compensation expense increased due to option grants in fiscal 2022 and the fair value of unrestricted stock granted to non-employee board members in fiscal 2022.

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

Public Entity-Related Expenses, including director fees – Costs associated with being a corporation and costs associated with being a publicly traded entity consist primarily of XBRL and EDGAR conversion fees, stock exchange fees, and press releases. These costs fluctuate from year to year but remained relatively consistent from 2021 to 2022. Fees paid to our board increased in fiscal 2022 compared to fiscal 2021, due to the determination to increase director fees in 2022.

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

All other – All other expenses include typical operating expenses related to the maintenance of our office and equipment, business development, travel, property taxes, and funding provided to the Rangeview District and the Sky Ranch Districts. Other expenses decreased during fiscal 2022 compared to fiscal 2021. The changes were primarily the result of decreased equipment maintenance and the timing of various expenses, which will fluctuate year over year.

Liquidity, Capital Resources and Financial Position

We believe we are well-positioned to navigate the ever-evolving market conditions given our strong financial position. At August 31, 2022, our working capital, defined as current assets less current liabilities, was $27.0 million, which includes $34.9 million in cash and cash equivalents. We believe that as of August 31, 2022, and as of the date of the filing of this Annual Report on Form 10-K, we have sufficient working capital to fund our operations for the next 12 months. We have completed Phase 1 and have completed nearly 80% of the work required to deliver Phase 2A at Sky Ranch. Phase 2B is anticipated to begin during fiscal 2023. We have sold 219 lots in Phase 2A at Sky Ranch and have just over 20% of the construction related activities remaining for Phase 2A to be finished, which we anticipate completing during our fiscal 2023. We expect to spend $5.0 million in the next twelve months completing the construction of Phase 2A (of which we estimate $4.3 million will be reimbursable by the Sky Ranch CAB). We expect to begin Phase 2B during our fiscal 2023 and expect to spend $17.5 million in the next twelve months on remaining Phase 2A and Phase 2B construction activities. We anticipate receiving $19.0 million in milestone payments and $3.1 million of water and wastewater taps fees from the homebuilders over the same period. We believe we can fund such capital expenditures from cash and cash equivalents on hand, phased payments from our lot sales agreements, and payments from the Sky Ranch CAB for reimbursement of public improvements.

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Summary Cash Flows

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

Cash provided by operations in fiscal 2022 increased substantially as compared to fiscal 2021, primarily related to the reimbursement of capitalized reimbursable costs and interest of $24.1 million in 2022 and cash collections from lot sales, partially offset by the timing differences on payments of payables and accrued liabilities, deferred revenue, and federal and state income taxes payable. The Sky Ranch CAB made payments to us totaling $24.1 million in fiscal 2022 from funds received in the second bond offering issued by the Sky Ranch CAB as well as excess funds from higher fees and property taxes collected by the Sky Ranch CAB.

Changes in Investing Activities – Investing activities in fiscal 2022 consisted primarily of the investment in our land and water system of $5.5 million. Investing activities in fiscal 2021 consisted of the investment in our land and water system of $2.5 million, and the purchase of equipment of $0.4 million. We capitalize costs associated with obtaining, defending, enhancing, and developing our water rights. We capitalize costs incurred to construct infrastructure required to deliver water and wastewater services to our customers, and we capitalize costs to develop our land assets that are not sold to home builders.

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

Critical Accounting Estimates

Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. Our discussion and analysis of our financial condition and results of operations are based on these consolidated financial statements. The preparation of our consolidated financial statements requires the application of these accounting principles in addition to certain estimates and judgments based on current available information, engineering estimates, historical results, and other assumptions believed to be reasonable. These estimates, assumptions and judgments are affected by our application of accounting policies, which are discussed in Note 2 in the accompanying consolidated financial statements. Estimates are used for, but not limited to, determining the recoverability of notes receivable, measure of progress related to our land development activities, and accrued liabilities. Actual results could differ from these estimates.

Accounting estimates are considered critical if both of the following conditions are met: (1) the nature of the estimates or assumptions is material because of the levels of subjectivity and judgment needed to account for matters that are highly uncertain and susceptible to change and (2) the effect of the estimates and assumptions is material to the financial statements. The following provides a summary of the two critical estimates we identified.

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Collectability of the Notes Receivable from the Sky Ranch CAB – The notes receivable from the Sky Ranch CAB are comprised of amounts we incurred and provided to the Sky Ranch CAB for costs related to the construction of public improvements which are reimbursable to us, along with related project management fees and accrued interest associated with those costs. Collectability of the notes is based on the Sky Ranch CAB generating sufficient cash flows to repay us prior to certain contractual dates, which is deemed probable based on a mill levy increase resulting from the remainder of Sky Ranch being in a different taxing district than Phase 1, higher than projected assessed values of completed homes, and additional houses from the start of the next development phase at Sky Ranch. The notes are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of the note may not be recoverable. Management applies judgment to assess whenever events or changes in circumstances indicate the carrying amount of the notes may not be recoverable giving rise to the requirement to conduct an impairment test. Circumstances which could trigger an

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impairment test include, but are not limited to: significant decreases in the market price of houses which generate tax payments to the Sky Ranch CAB; significant adverse changes in the business climate or legal factors including significant decreases in housing sales or assessments; significant increase in costs and accumulation of costs significantly in excess of the amount originally expected for the construction of the associated public improvements; and current period cash flow or operating losses combined with a history of losses or a forecast of losses.  Recoverability of these notes is measured by comparing the carrying value to the future cash flows expected to be generated by the Sky Ranch CAB which can be used to repay us.  When the carrying value of an asset exceeds the related undiscounted cash flows, an impairment loss is recorded by writing down the carrying value of the related asset to its estimated fair value, which is determined using discounted future cash flows or other measures of fair value.

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Revenue recognition on lot sales under the percentage-of-completion method – We recognize lot revenue over time as construction progresses for most of our lot development contracts. This involves an estimation of the total project costs which are incurred over several months or even years. This requires management to estimate labor and material costs which could change materially over the life of that construction project and have a material impact on the timing of revenue recognition. Under the percentage of completion method, revenues and related costs from lots sold pursuant to lot development contracts requiring milestone payments as construction occurs are recognized over the course of the construction period based on the completion progress of that project phase (i.e. Phase 2A). In relation to each phase or subphase, revenue is determined by calculating the ratio of incurred construction costs, including construction costs related to public improvements subject to reimbursement, to total estimated costs and applying that ratio to the contracted sales amounts. Current period amounts are calculated based on the difference between the life-to-date project totals and the previously recognized amounts. Cost of sales is the cost incurred related to construction of lots. Any changes in significant judgments and/or estimates used in determining construction and development revenue could significantly change the timing or amount of construction and development revenue recognized. Changes in estimated costs or losses, if any, are recognized in the period in which they are determined.

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Off-Balance Sheet Arrangements

None

Recently Adopted and Issued Accounting Pronouncements

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

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Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

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

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

Executive Summary

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

In fiscal 2021, revenues were comprised mainly of $5.8 million of lot sales, $5.1 million from the sale of 167 and 163 water and wastewater taps, and $2.8 million from oil and gas operations in their drilling process. Comparatively, in fiscal 2020, total revenues were $25.9 million, primarily consisting of $18.9 million of lot sales, and $5.6 million from the sale of 201 and 189 water and wastewater taps. The number of wastewater taps sold are less than the number of water taps sold because we do not provide wastewater services at Wild Pointe. In addition, during fiscal 2021, we recognized $1.6 million of project management fees related to the development at Sky Ranch.

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Results of Operations

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

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Fiscal 2021 vs. Fiscal 2020

Revenue – Revenue decreased in 2021 as compared to 2020, primarily due to decreased lot sales due to the first development phase being nearly complete and our recognition of revenue in the second development phase not starting until the fourth fiscal quarter. This decrease is partially offset by increased metered water usage from oil and gas operations, recognition of project management revenue related to our management of the construction projects at Sky Ranch, recognition of a forfeited water reserve agreement, and a special facility construction project for WISE. As Sky Ranch continues to grow we anticipate lot sales generating significant revenue in fiscal 2022, and increasing water and wastewater usage fees as we continue to add customers to our water resource development segment.

Cost of revenue – Costs of revenue decreased in 2021 as compared to 2020, primarily due to a decrease in land development costs due to the first development phase being nearly complete and recognition of costs related to the second development phase beginning in the fourth quarter of fiscal 2021. The decreases were partially offset by costs attributable to the special facility construction project for WISE and increased water usage related to oil and gas operations.

General and administrative expense – General and administrative expense increased in 2021 as compared to 2020, primarily due to increased head count in 2021 as operations and development continue to expand and increased legal expense of $0.3 million related to the Sky Ranch lot closings with our home builder customers.

Other income, net – Other income, net increased in 2021 as compared to 2020, primarily due to the recognition of outstanding reimbursable costs totaling $20.2 million as the collection of these amounts was deemed probable. Additional information on the reimbursables can be found in Note 14 to the accompanying consolidated financial statements.

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Income tax expense – Income tax expense increased in 2021 as compared to 2020, due to higher pre-tax income primarily from the impact related to the recognition of reimbursable costs due from the Sky Ranch CAB. Our effective tax rate remained relatively consistent year over year.

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage as more parks and public spaces were completed at Sky Ranch. Oil and gas operations are highly variable and dependent on oil prices and demand for gas and as such we cannot provide any assurances that we will realize this level of sales to oil and gas customers in the future. As Sky Ranch continues to development, we anticipate continued growth in our residential service revenues.

Water and wastewater tap sales – Water and wastewater tap sales decreased in 2021 as compared to 2020 due to the timing of closings at Sky Ranch. The decrease in tap sales was offset by an increase in the rate per water tap sold in 2021. Tap sales are driven by the issuance of building permits and the timing of these are not contractually established with the home builders. The company expects to sell the remaining 41 taps from the first development phase at Sky Ranch in fiscal 2022 and the 229 taps from the first subphase of the second development phase of Sky Ranch during fiscal 2022 through fiscal 2024.

Lots delivered – Lot deliveries decreased in 2021 compared to 2020 due to all lots in the first development phase of Sky Ranch having been delivered as of the first quarter of fiscal 2021. In February 2021, we broke ground on the second development phase and delivered the first 156 lots to home builders in the first subphase.

Water and Wastewater Resource Development Results of Operations

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Municipal water usage – Municipal water usage increased in 2021 compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment as well as increased water usage due to landscaping and irrigation usage. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Oil and gas operations – Oil and gas operations increased in 2021 compared to 2020, primarily due to increased oil and gas prices and new fracking permits obtained by our oil and gas customers. Oil and gas is cyclical in nature as demand and prices fluctuate, as such, we have no way of knowing if water provided to oil and gas operators will increase or decrease in the future.

Wastewater treatment fees – Wastewater treatment fees increased in 2021 compared to 2020, primarily due to new Sky Ranch customers in our water and wastewater resource development segment. We anticipate these revenues to continue to increase in the future as more customers are added to our system as Sky Ranch continues to develop.

Water and wastewater tap fees –Water and wastewater tap fees decreased in 2021 compared to 2020, primarily due to a decrease in the number of taps sold, slightly offset by a price increase of water and wastewater taps. Water and wastewater taps are sold to home builders at the time a building permit is issued and are dependent on when the home builder constructs homes and not contractually driven in terms of timing, as such timing of tap sales fluctuate with demand for new construction. During the fiscal year ended 2021, the average price of a Sky Ranch water and wastewater tap was $31,000 per tap, compared to $29,000 per tap for the fiscal year 2020. During fiscal 2021, we sold 167 water and wastewater taps. During fiscal 2020, we sold 201 water and wastewater taps.

Other revenue – Other revenue increased in 2021 as compared to 2020, primarily due to a 2021 agreement to construct a special facility for WISE, for which $0.4 million of revenue was recognized. The project is recognizing revenue on a percent of completion basis.

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

Wastewater service costs – Wastewater service costs increased in 2021 as compared to 2020, primarily due to the new Sky Ranch water reclamation facility being online for the entire fiscal year to date and requiring more staff to run.

Other costs of revenue – Other costs of revenue increased in 2021 as compared to 2020, primarily due to costs to construct a special facility for WISE.

Water delivered – Water deliveries increased in 2021 as compared to 2020, primarily due to increased oil and gas operations, new Sky Ranch customers and increased landscaping and irrigation water usage.

Land Development Results of Operations