PURE CYCLE CORPORATION In Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), "we," "us," "our" and "Pure Cycle" refer toPure Cycle Corporation and all entities owned or controlled byPure Cycle Corporation . You should read the following discussion in conjunction with our consolidated financial statements and accompanying notes, related MD&A and discussion of our business included in our Annual Report on Form 10-K for the year endedAugust 31, 2022 (2022 Annual Report) filed with theUnited States (U.S.) Securities and Exchange Commission (SEC) and the unaudited consolidated financial statements and accompanying notes included in this Form 10-Q. The results of operations reported and summarized below are not necessarily indicative of future operating results, and future results could differ materially from those anticipated in forward-looking statements (refer to "Disclosure Regarding Forward-Looking Statements" in this Form 10-Q; and Part I, Item 1A. "Risk Factors" in our 2022 Annual Report for further discussion). We are a diversified water resource and land development company. At our core, we are a wholesale water and wastewater service provider, and we develop land we own into master planned communities. Our newest business is the development of single-family homes held for rental purposes within our master planned communities. Both the land development and single-family home rental lines of business generate customers and usage fees for our water and wastewater resource development business.
Recent Developments and Economic Conditions
The housing market experienced tremendous growth for several years through 2022. However, in the third quarter of 2022, the housing market deteriorated rapidly largely due to rising interest rates. This has continued through the date of this filing and shows signs of continuing throughout 2023. This deterioration was caused by multiple factors including; the war inUkraine , which has impacted supplies of energy, food, fertilizer and fuel; increasing inflation; the ongoing COVID-19 pandemic which continues to impact global markets; mortgage interest rates; inflation; disruptions in supply chains, distribution networks and consumer behavior; and the recent collapse of large banks, which will certainly impact the availability of lending and deposit rates. The United States Federal Reserve Board (Federal Reserve ) remains aggressive in its actions to combat inflation, which is having a negative impact on the housing market due to rising mortgage rates. As a result, 30-year fixed mortgage rates continued to rise and have hit their highest levels in over 15 years further weakening demand in the housing market. Despite this, we believe several long-term land development and housing market fundamental factors remain positive. For example, available lots and housing supply-demand remain imbalanced due to a decade-plus of underproduction of new homes in relation to population growth and low resale home inventory. While we remain confident in the long-term growth prospects for the industry given these and other factors, our future performance and strategies will depend significantly on the housing market which is impacted by the factors noted in the paragraph above. Like many other businesses, our contractors have experienced delays in receiving materials and parts, rising costs, and labor shortages. However, we have adjusted our purchases and operations in ways that we believe will reduce the impact these factors have on our construction and other activities. Specifically, we delayed the start of construction on Phase 2B for three months to avoid incurring development costs when market demand has declined, and to give our home builder partners additional time to absorb lots from Phase 2A. We believe our reasonably priced lots and the low inventory of entry level housing in theDenver market will helpSky Ranch navigate the changing market better than other surrounding and significantly higher priced communities. We continue to work closely with our home builder partners to provide affordable lots for entry level homes and to deliver those lots incrementally to minimize inventories for both the Company's construction of lots and our home builders' ownership of finished lots. TheFederal Reserve's aggressive raising of the federal funds interest rate and other measures during calendar 2022 and the start of 2023 to moderate persistentU.S. inflation, and the further actions it has stated it intends to take, are expected to be an ongoing headwind for the housing market throughout 2023 as they have elevated mortgage loan interest rates and created macroeconomic uncertainty and volatility across financial markets. In addition, consumer demand for our homes, and our ability to grow our scale, revenues, and returns in fiscal 2023 could be materially and negatively affected by the above-described monetary policy impacts or other factors that curtail mortgage loan availability, employment or income growth or consumer confidence in theU.S. and Colorado markets. We continue to work proactively to mitigate these impacts working with our home builder partners on timing of investment and delivery of lots; however, the potential extent and effect of these factors on our business is uncertain, unpredictable, and outside our control, and our past performance should not be considered indicative of our future results. 21
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Additionally, inMarch 2023 ,Silicon Valley Bank and Signature Bank were closed and taken over by theFDIC , which created significant market disruption and uncertainty for those who bank with those institutions, and which raised significant concern regarding the stability of the banking system inthe United States . We do not hold our cash at either of those banks and the banks we use are well capitalized andFDIC insured. If the banks and financial institutions at which we hold our cash enter receivership or become insolvent in the future in response to financial conditions affecting the banking system and financial markets, our ability to access our cash and cash equivalents may be threatened and such events could have a material adverse effect on our business and financial condition.
Our Business Strategy
For more than three decades we have accumulated a large portfolio of valuable water rights and land interests inColorado . We have added an extensive network of wholesale water production, storage, treatment and distribution systems, and wastewater collection and treatment systems that we use to serve domestic, commercial, and industrial water demands in the easternDenver metropolitan region. Our primary land asset,Sky Ranch , is in one of the most active development areas in theDenver metropolitan region along the rapidly developingI-70 corridor, and we are developing lots atSky Ranch for residential, commercial, retail, and light industrial uses. We also have launched a single-family rental business where we rent homes inSky Ranch to families under annual lease agreements. We plan to expand this new line of business to more than 200 rental units over the next several years. Although we report our results of operations through our water and wastewater resource development segment and our land development segment, we operate these segments as a cohesive business designed to provide a cost effective, sustainable, and value-added business enterprise.
Water and Wastewater
Water resources throughout the westernUnited States and more prominently inColorado are a scarce and valuable resource. Our portfolio of approximately 30,000 acre-feet of water is comprised of groundwater, designated basin groundwater, and surface water supplies. Our other significant water assets include 26,000 acre-feet of adjudicated reservoir sites, two wastewater reclamation facilities, water treatment facilities, potable and raw water storage facilities, wells and water production facilities, and roughly 50 miles of water distribution and wastewater collection lines. Our water supplies and wholesale facilities are in southeastDenver , an area which is limited in both water availability and infrastructure to produce, treat, store, and distribute water and wastewater. We believe this provides us with a unique competitive advantage in offering these services. We provide wholesale water and wastewater service to local governments for both residential and commercial customers. The local governments we service include theRangeview Metropolitan District (Rangeview District ),Arapahoe County , the Sky Ranch Community Authority Board (Sky Ranch CAB), and the Elbert and Highway 86Commercial Metropolitan District (Elbert 86 District). Our mission is to provide sustainable, reliable, high-quality water to our customers and collect, treat, and reuse wastewater using advance water treatment systems, which produce high quality reclaimed water we can reuse for outdoor irrigation and industrial demands. By using and reusing our water supplies, we proactively manage our valuable water rights in the water-scarceDenver, Colorado region which dramatically reduces the environmental impact of our water resource operations. We design, permit, construct, operate and maintain wholesale water and wastewater systems that we own or operate on behalf of governmental entities. We also design, permit, construct, operate, and maintain retail distribution and collection systems that we own or exclusively operate on behalf of our governmental customers. Additionally, we handle administrative functions, including meter reading, billing and collection of monthly water and wastewater revenues, regulatory water quality monitoring, sampling, testing, and reporting requirements to theColorado Department of Public Health and Environment . Revenues for our water operations are dependent on us growing the number of customers we serve. If we are unable to add customers to our systems and sell taps to builders, our revenues could be negatively impacted. We currently are the developer of theSky Ranch Master Planned Community which is the main driver of our tap sales. Additionally, prolonged periods of hot and dry weather generally cause increased water usage for watering lawns, washing cars, and keeping parks irrigated. Conversely, prolonged periods of dry weather could lead to drought restrictions and limited water availability. Despite our substantial water supply, customers may be required to cut back water usage under such drought restrictions which would negatively impact metered usage revenues. We have addressed some of this vulnerability by instituting minimum customer charges which are intended to cover fixed costs of operations under all likely weather conditions. 22 Table of ContentsLand Development OurLand Development segment is primarily focused on developing theSky Ranch Master Planned Community located along the boomingI-70 corridor to provide residential, commercial, retail, and light industrial lots. Sky Ranch is zoned to include up to 3,200 single-family and multifamily homes, parks, open spaces, trails, recreational centers, and schools. Additionally, Sky Ranch is zoned to include over two million square feet of retail, commercial, and light industrial space, which is the equivalent of approximately 1,800 residential units, meaning the Sky Ranch community at build-out will include a total of roughly 5,000 residential and equivalent units. Our land development activities include the design, permitting, and construction of all the horizontal infrastructure, including, storm water, drainage, roads, curbs, sidewalks, parks, open space, trails, and other infrastructure to deliver "ready to build" finished lots to home builders and commercial customers. Our land development activities generate revenue from the sale of finished lots as well as construction revenues from activities where we construct infrastructure on behalf of others. Land development revenues come from our home builder customers under specific agreements for the delivery of finished lots. Additionally, pursuant to certain agreements with the Sky Ranch CAB and its related metropolitan districts, on their behalf we construct public infrastructure such as roads, curbs, storm water, drainage, sidewalks, parks, open space, trails etc., the costs of which are reimbursed to us by the Sky Ranch CAB through funds generated from property taxes, fees or the issuance of municipal bonds. Our land development activities provide a strategic complement to our water and wastewater services because a significant component of any master planned community is providing high quality domestic water, irrigation water, and wastewater to the community. Having control over land and the water and wastewater services enables us to build infrastructure for potable water and irrigation distribution, wastewater and storm water collection, roads, parks, open spaces, and other investments efficiently and to manage delivery of these investments to match take-down commitments from our home builder customers without significant excess capacity in any of these investments. We have been developing the Sky Ranch community since 2017. We are developing it in phases, which is anticipated to take approximately eight to ten more years until it is fully built out. In 2017, we began the initial development phase of Sky Ranch when we entered separate contracts withRichmond American Homes ,Taylor Morrison , and KB Home, pursuant to which we sold a total of 505 single-family, detached residential lots at Sky Ranch. Pursuant to these agreements, we were obligated to construct infrastructure and other public improvements as well as wholesale infrastructure improvements (i.e., a wastewater reclamation facility and wholesale water facilities), all of which are complete as ofFebruary 28, 2023 . During our fiscal 2021, we began construction on the second development phase at Sky Ranch. For this phase, we entered into separate contracts with KB Home,Lennar Colorado , Melody (aDR Horton Company ) andChallenger Homes to sell 804 single-family attached and detached residential lots at Sky Ranch, and we retained 46 lots for use in our single-family home rental segment. The second development phase will incorporate approximately 250 acres and is planned to be completed in four sub-phases (referred to as Phase 2A, 2B, 2C and 2D). Due to our strong performance in the first phase of the Sky Ranch project, we were able to realize an approximate 40% increase in our average lot prices. For example, we increased our sales price for a 50' foot lot from$75,000 to$108,000 and added an escalation clause that increases the prices depending on timing of payments. The timing of cash flows includes certain milestone deliveries such as the completion of governmental approvals for final plats, installation of wet utilities, and final completion of lot deliveries. InFebruary 2021 , we began construction on Phase 2A at Sky Ranch, which is platted for 229 residential lots. We have retained ten of these lots for use in our single-family rental business. As ofFebruary 28, 2023 , we have received plats and substantially completed wet and dry utilities, roads, and sidewalks for Phase 2A, and are actively working on landscaping. Contracts with three of the four homebuilders include milestone payments as construction progresses, with the contract with the fourth homebuilder having one payment due at delivery of the finished lot (i.e. the transfer of the title). As ofFebruary 28, 2023 , we have received all payments related to the sale of the 219 lots in Phase 2A which totaled$18.4 million . We recognize revenue earned under these contracts over time using the percentage of completion method to measure progress, which aligns the recognition of revenue with the requisite service period. During the three months endedFebruary 28, 2023 and 2022, due to the construction progress, we recognized$1.4 million and$1.6 million of lot sale revenue related to construction at Sky Ranch. During the six months endedFebruary 28, 2023 and 2022, due to the construction progress, we recognized$1.9 million and$4.3 million of lot sale revenue related to construction at Sky Ranch. Phase 1 of the Sky Ranch development is complete, and all revenue has been recognized. Phase 2A is approximately 87% complete, for which we have recognized$16.0 million of lot sales revenue since construction began on Phase 2A, with the remaining$2.4 million of revenue to be recognized over time as Phase 2A construction is completed. We expect the majority of this remaining revenue to be recognized before the end of our fiscal 2023. 23
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Payments for lot sales and the related revenue for Phases 2B, 2C, and 2D will occur as construction of those phases occurs. Construction of Phase 2B is scheduled to begin inApril 2023 , which we, in consultation with our home builder partners, delayed the start of Phase 2B due to the slowing of the housing market in late 2022. OnMarch 15, 2023 ,March 27, 2023 , andApril 12, 2023 , we received$1.0 million ,$1.9 million and$1.2 million , from the three home builders that are on the milestone payment terms, which was the first milestone payment for Phase 2B from these builders. We believe it will take approximately three more years to complete construction and sell the finished lots in all four subphases depending on the market conditions and permitting process. In addition to the lot sales described above, from the start of development at Sky Ranch throughFebruary 28, 2023 , we have received$19.5 million of water and wastewater tap fees from the homebuilders, which is for all 505 taps sold in Phase 1 and 149 of 219 taps sold in Phase 2A. The timing of tap sales is dependent on when homebuilders request building permits. Fees charged per water tap are dependent on lot sizes and average water usage across a broad range of housing product types including duplexes and townhomes. For Phase 2 in total, we estimate water and wastewater tap fees will exceed$20.0 million .
Single-Family Rentals
During our fiscal 2021, we launched a new line of business we are referring to as our single-family rental business. During Phase 1 of Sky Ranch, we retained ownership of four residential lots for use in this business. As ofFebruary 28, 2023 , we have finished building four single-family homes on these lots which we own, maintain, and have leased to qualified renters under one-year lease terms. We intend to expand our single-family rentals in our second development phase of Sky Ranch by building and renting homes on lots we did not sell to our home builder partners. As ofFebruary 28, 2023 , the total lots we reserved in Phase 2 was 46, 10 of which are in Phase 2A and are currently under construction, and we expect these homes to be ready for rental at various dates throughout our fiscal 2023. OnMarch 8, 2023 , andMarch 16, 2023 , we amended two of the contracts with home builders whereby we retained an additional 7 lots in Phase 2B (bringing the total rental lots to 17 in Phase 2B), 4 lots in Phase 2C (bringing the total rental lots to 20 in Phase 2C), and 8 additional lots in Phase 2D (bringing the total rental lots to 18 in Phase 2D), which brings our total reserved rental lots to 65 in total for Phase 2, which when combined with Phase 1 provides a total of 69 rental units. We capitalize the costs of the homes and when applicable depreciate the costs over periods not exceeding thirty-years. Lease income is recorded monthly as earned. We began recognizing monthly lease income for the first three rental units onNovember 1, 2021 . Results of Operations Executive Summary For the three months endedFebruary 28, 2023 , we generated net income of$0.2 million compared to$1.7 million for the comparable period in fiscal 2022. The decrease was primarily driven by decreased lot sale revenue being recognized using the percentage of completion method, which is based on progress of construction and declines in water sold to oil and gas operators. Due to the decline in the housing market and weather conditions resulting in a delay in planned landscape construction, we had lower revenue recognized in Phase 2A and did not begin Phase 2B as planned. The only phase being developed as ofFebruary 28, 2023 , is Phase 2A, which is approximately 87% complete. We began construction activities on Phase 2B afterFebruary 28, 2023 ; therefore, no revenues have been recorded as of the date of this filing related to that subphase. Additionally, we had a reduction in water being used by oil and gas operators electing to drill wells in other counties due to lease deadlines and other factors outside our control. For the six months endedFebruary 28, 2023 , we generated net income of$0.4 million compared to$3.2 million for the comparable period in fiscal 2022. The decrease was primarily driven by decreased lot sales being recognized under the percentage of completion method as described in the paragraph above and the decline in water sales to oil and gas operators. We also experienced a reduction in water being used by oil and gas operators electing to drill wells in other counties, outside our service area, due to lease deadlines and other factors outside our control. The items noted above were partially offset by one time income events related to additional land use payments received from oil and gas operators for future drilling purposes and interest income recognized on the note receivable from the Sky Ranch CAB. 24
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The tables below present our consolidated results of operations for the three
and six months ended
Three Months Ended
(In thousands, except for water
deliveries and taps sold) February 28, 2023 February 28, 2022 $ Change % Change
Water and wastewater resource
development revenue $ 1,445 $ 2,809 $ (1,364) (49) %
Land development revenue:
Lot sales 1,391 1,629 (238) (15) %
Project management fees 123 200 (77) (39) %
Single-family rental 31 26 5 19 %
Total revenue 2,990 4,664 (1,674) (36) %
Water and wastewater development
cost of revenue 1,120 1,162 (42) (4) %
Land development cost of revenue 262 341 (79) (23) %
Single-family rental cost of
revenue 19 4 15 375 %
Total cost of revenue 1,401 1,507 (106) (7) %
General and administrative expense
and depreciation 1,829 1,649 180 11 %
Operating income (240) 1,508 (1,268) (84) %
Other income, net 519 686 (167) (24) %
Income taxes (90) (501) (411) (82) %
Net income $ 189 $ 1,693 $ (1,504) (89) %
Basic EPS $ 0.01 $ 0.07 $ (0.06) (86) %
Diluted EPS $ 0.01 $ 0.07 $ (0.06) (86) %
Water delivered (thousands of
gallons) 10,647 137,898 (127,251) (92) %
Water taps sold 35 27 8 30 %
Wastewater taps sold 32 27 5 19 %
Six Months Ended
(In thousands, except for water
deliveries and taps sold) February 28, 2023 February 28, 2022 $ Change % Change
Water and wastewater resource
revenue $ 2,239 $ 3,880 $ (1,641) (42) %
Land development revenue
Lot sales 1,904 4,574 (2,670) (58) %
Project management fees 131 448 (317) (71) %
Single-family rental 56 34 22 165 %
Total revenue 4,330 8,936 (4,606) (52) %
Water and wastewater resource cost
of revenue 2,221 2,012 209 10 %
Land development cost of revenue 477 872 (395) (45) %
Single-family rental cost of
revenue 29 7 22 414 %
Total cost of revenue 2,727 2,891 (164) (6) %
General and administrative expense
and depreciation 3,332 3,058 274 9 %
Operating income (1,729) 2,987 (1,258) (42) %
Other income, net 2,297 1,198 1,099 92 %
Income tax expense (220) (978) (758) (78) %
Net income $ 348 $ 3,207 $ (2,859) (89) %
Basic EPS $ 0.01 $ 0.13 $ (0.12) (92) %
Diluted EPS $ 0.01 $ 0.13 $ (0.12) (92) %
Water delivered (thousands of
gallons) 78,996 215,152 (136,156) (63) %
Water taps sold 39 36 3 8 %
Wastewater taps sold 36 36 - - %
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For the three and six months ended February 28, 2023 , total revenue decreased as
compared to the same periods in 2022, primarily due to less recognized lot sale
revenue in Phase 2A and lower water usage revenues as oil and gas operators did
not drill any wells in our service area. Lot sales are recognized using the
percentage of completion method and due to the declining housing market, we
slowed our construction activities which slows revenue recognition.
Additionally, we delayed the start of Phase 2B due to the housing market, which
resulted in no revenue being recognized on that phase for the six months ended
February 28, 2023 . Phase 2B began construction after February 28, 2023 , and we
will begin recognizing revenue on those activities in our third quarter of
fiscal 2023. Additionally, on March 15, 2023 , March 27, 2023 , and April 12,
2023 , we received $1.0 million , $1.9 million and $1.2 million , from the three
home builders that are on the milestone payment terms, which was the first
milestone payment for Phase 2B from these builders. These declines were coupled
with lower water fees recognized due to less construction and less initial
seeding irrigation water used in our service area.
For the three and six months ended February 28, 2023 , costs of revenue decreased
as compared to 2022, primarily due to declines in lot sales and lower water sold
to oil and gas operators which decreases our costs. Additionally, since our Sky
Ranch water and wastewater systems are new, the systems are not operating at
full capacity currently, which impacts the productivity of the infrastructure as
the facilities are designed to operate at full capacity. Until our facilities
are operating at full capacity, costs are expected to remain volatile and will
not necessarily increase and decrease with the related revenues.
For the three and six months ended February 28, 2023 , general and administrative
expenses increased as compared to 2022 due to increased headcount attributable
to increased operations requiring more employees, higher depreciation charges as
we continue to invest in long-term assets for use in all our business segments,
and continued increases in general operating expenses such as insurance and
professional fees.
For the six months ended February 28, 2023 , other income, net increased due to
interest income recorded on the note receivable from the Sky Ranch CAB related
to reimbursable public improvements and project management fees, and the receipt
of $0.9 million for right-of-way and surface use agreements with oil and gas
operators related to oil and gas drilling activities.
For the three and six months ended February 28, 2023 , water deliveries decreased
as compared to 2022 primarily due to decreased water sales to oil and gas
operators, and decreased water sales related to the establishment of new sod,
reduced park and public space irrigation, and the slowing of construction
activities.
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Water and Wastewater Resource Development Results of Operations
Three Months Ended
(In thousands, except for
water deliveries) February 28, 2023 February 28, 2022 $ Change % Change
Metered water usage from:
Municipal water usage $ 83 $ 69 $ 14 20 %
Commercial water usage 59 1,541 (1,482) (96) %
Wastewater treatment fees 78 64 14 22 %
Water and wastewater tap fees 994 913 81 9 %
Other revenue 231 222 9 4 %
Total segment revenue 1,445 2,809(1,364) (49) %
Water service costs 402 570 (168) (29) % Wastewater service costs 116 99
17 17 %
Depreciation 461 352 109 31 %
Other 141 141 - - %
Total expenses 1,120 1,162 (42) (4) %Segment operating income $ 325 $ 1,647
Water deliveries (thousands of gallons) On Site 171 4,213 (4,042) (96) % Export - Commercial 144 2,611 (2,467) (94) % Sky Ranch 5,295 4,209 1,086 26 % Wild Pointe 2,637 2,774 (137) (5) % O&G operations 2,399 124,091 (121,692) (98) %
Total water deliveries 10,647 137,898
(127,251) (92) %
Six Months Ended
(In thousands, except for
water deliveries) February 28, 2023 February 28, 2022 $ Change % Change
Metered water usage from:
Municipal water usage $ 204 $ 180 $ 24 13 %
Commercial water usage 451 2,137 (1,686) (79) %
Wastewater treatment fees 141 119 22 18 %
Water and wastewater tap fees 1,144 1,174 (30) (3) %
Other revenue 299 270 29 11 %
Total segment revenue 2,239 3,880(1,641) (42) %
Water service costs 881 859 22 3 % Wastewater service costs 254 228
26 11 %
Depreciation 839 706 133 19 %
Other 247 219 28 13 %
Total expenses 2,221 2,012 209 10 %Segment operating income $ 18 $ 1,868
Water deliveries (thousands of gallons) On Site 2,475 24,197 (21,722) (90) % Commercial sales - export water and other 10,609 8,717 1,892 22 % Sky Ranch 22,874 21,581 1,293 6 % Wild Pointe 9,769 9,716 53 1 % O&G operations 33,269 150,941 (117,672) (78) %
Total water deliveries 78,996 215,152
(136,156) (63) %
For the three and six months endedFebruary 28, 2023 , residential water usage revenue remained relatively consistent compared to 2022. Commercial water usage revenue declined compared to 2022 due to decreased water sales to oil and gas operators, slowing construction activities, and some of the irrigation water delivered to irrigate parks at the end of the irrigation season not being billed as the water was 27 Table of Contents
delivered for us to balance our water storage facilities in preparation for winter storage requirements resulting in higher usage without corresponding revenues.
For the three and six months ended
For the three and six months endedFebruary 28, 2023 , water and wastewater tap sales remained relatively consistent with 2022 due to timing of closings at Sky Ranch. Tap sales are driven by builders obtaining building permits in anticipation of home closings.
Land Development Results of Operations
Three Months Ended
(In thousands) February 28, 2023 February 28, 2022 $ Change % Change
Lot sales $ 1,391 $ 1,629 $ (238) (15) %Project management revenue 123 200 (77) (39) Total revenue 1,514
1,829 (315) (17) %
Land development construction and project management costs 262 341 (79) (23) % Segment operating income $ 1,252 $ 1,488$ (236) (16) % Six Months Ended (In thousands) February 28, 2023 February 28, 2022 $ Change % Change Lot sales $ 1,904 $ 4,574$ (2,670) (58) % Project management revenue 131 448 (317) (71) Total revenue 2,035
5,022 (2,987) (59) %
Land development construction and project management costs 477
872 (395) (45) %
Segment operating income $ 1,558 $
4,150
For the three and six months endedFebruary 28, 2023 , lot sales revenue decreased as compared to 2022 due to timing of development activities at Phase 2A at Sky Ranch, even though the price per lot for delivered lots in the second development phase increased an average of 40% over the first phase. Per lot revenue is expected to remain consistent for all four subphases of the second development phase. Revenue for builder contracts is recognized over time with progress measured under the percent of completion method. Therefore, revenue will fluctuate due to timing of construction activities throughout the second phase. Additionally, lot sale revenue declined as we delayed the start of construction on Phase 2B by three months due to the slowing of the housing market.
For the three and six months ended
Single-Family Rental Results of Operations
In fiscal 2021, we began construction on three homes that were completed and put into service onNovember 1, 2021 . All three homes were rented effectiveNovember 1, 2021 , under one-year non-cancellable lease agreements. The costs reflected as cost of sales for the rental units include a pro-rata share of the annual property taxes and insurance related specifically to the rental units as well as immaterial fees related to the operations and maintenance assessments from the Sky Ranch CAB that are assessed to every home inSky Ranch . Our tenants are responsible for all other utilities including water and wastewater services that are paid to us. In the first quarter of fiscal 2022, we contracted for the construction of the fourth rental home, which was completed and rented inDecember 2022 . In the third quarter of fiscal 2022, we contracted for the construction of 10 rental units in Phase 2A, which we anticipate being completed and ready for rental beginning in the third quarter of our fiscal 2023. 28
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Liquidity, Capital Resources and Financial Position
As ofFebruary 28, 2023 , our working capital, defined as current assets less current liabilities, was$20.3 million , which included$7.2 million in cash and cash equivalents and$15.2 million of treasury notes which matured inMarch 2023 . All our cash is maintained at high-credit quality institutions and overnight investments are made into an insured cash sweep program which providesFDIC insurance for our entire cash balance at the bank. We believe that as ofFebruary 28, 2023 and as of the date of the filing of this Quarterly Report on Form 10-Q, we have sufficient working capital to fund our operations for the next 12 months. Our expected obligations for the next 12 months are described below.Sky Ranch Development Phase 1 of the Sky Ranch development is complete, Phase 2 began inFebruary 2021 , which is being done in four subphases, of which Phase 2A is the only one being actively developed as ofFebruary 28, 2023 . We estimate total costs to complete the infrastructure (including public improvements) for the 850 lots in the second phase of Sky Ranch to total$74.3 million . Of this, we anticipate spending up to$18.0 million in the next 12 months, and we anticipate receiving approximately$20.0 million in milestone payments, completed lot payments, and tap fees from the home builders over the same period. The amounts we expect to spend and receive in the next twelve months are dependent on the pace of construction in Phase 2B. We believe future revenues from water and wastewater tap fees as well as progress payments from our homebuilder customers and our existing cash balances will fund our obligations for the next 12 months.
Single-Family Rental Construction Contract
In fiscal 2022 we entered two separate contracts with a local builder to
construct eleven rental units at Sky Ranch to be used in our single-family
rental business. The contracted costs for all eleven units is
ECCV Capacity Operating System
The Rangeview District may purchase water produced fromEast Cherry Creek Valley Water and Sanitation District's (ECCV) Land Board system, which we would pay for pursuant to our funding agreements with theRangeview District . Our costs associated with the use of the ECCV system are a flat fee$3,000 per month throughApril 2032 . Additionally, we pay a fee per 1,000 gallons of water produced from the ECCV system, which is included in the water usage fees charged to customers.
We have entered into a financing agreement that obligates us to fund theRangeview District's cost of participating in WISE. We anticipate investing$1.0 million in 2023 and up to$6.0 million in total for the fiscal years 2024 through 2025 to fund theRangeview District's obligation to purchase water and fund development of infrastructure for WISE, its obligations related to SMWSA, and the construction of a connection to the WISE system. In exchange for funding theRangeview District's obligations in WISE, we have the sole right to use and reuse theRangeview District's 9% share of the WISE water and infrastructure to provide water service to theRangeview District's customers and to receive the revenue from such service. Our current WISE subscription entitles us to approximately 3.0 million gallons per day of transmission pipeline capacity and up to 900 acre-feet per year of water. Summary Cash Flows Table Six Months Ended (In thousands) February 28, 2023 February 28, 2022 $ Change % Change Cash (used) provided by: Operating activities $ (7,856) $ (13,685)$ 5,829 43 % Investing activities (19,695) (2,249) (17,446) (776) % Financing activities (116) 1,033 (1,149) (111) % Net Change in cash $ (27,667) $ (14,901)$ (12,766) (86) %
For the six months endedFebruary 28, 2023 , operating activities used a net$7.6 million of cash, which is due to positive net income being offset by the use of cash to fund construction activities (including the public improvements) at
Sky
Ranch, and timing of when
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payments are remitted to vendors including income taxes. We anticipate continuing to spend cash for the construction activities at Sky Ranch for the foreseeable future.
For the six months endedFebruary 28, 2023 , investing activities used$19.9 million in cash. The majority of this was related to us purchasing$15.0 million of treasury notes to capitalize on increased interest rates and construction of single-family rentals and additional water delivery infrastructure.
For the six months ended
Critical Accounting Policies and Use of Estimates
Our critical accounting policies and estimates are described in "Critical Accounting Policies and Estimates" within Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 3 of the Notes to Consolidated Financial Statements in "Financial Statements and Supplementary Data" included in our 2022 Annual Report. The accounting policies and estimates used in preparing our interim consolidated financial statements for the three and six months endedFebruary 28, 2023 are the same as those described in our 2022 Annual Report. There have been no changes to our critical accounting policies during the three and six months endedFebruary 28, 2023 . Certain information and note disclosures normally included in our annual financial statements prepared in accordance with accounting principles generally accepted inthe United States of America have been condensed or omitted from the interim financial statements included in this Quarterly Report on Form 10-Q pursuant to the rules and regulations of theSEC , although we believe that the disclosures made are adequate to make the information not misleading. The unaudited consolidated financial statements and other information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto in our 2022 Annual Report.
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