NOTE 3 – REVENUES, FEES AND OTHER INCOME ITEMS

Water, wastewater and land development revenue

The Company’s revenue is primarily generated from the sale of lots to homebuilders, sales of water and wastewater taps, and metered water and wastewater usage. Detailed descriptions of the policies related to revenue recognition are included in Note 2 to the 2021 Annual Report.

The following describes significant components of revenue for the three and six months ended February 28, 2022 and 2021.

Sale of finished lots – For the three months ended February 28, 2022 and 2021, the Company recognized $1.6 million and $0.5 million of lot sale revenue, which was recognized using the percent-of-completion method for development costs incurred on contracts that are satisfied over time and are ongoing at Sky Ranch. For the six months ended February 28, 2022 and 2021, the Company recognized $4.6 million and $2.9 million of lot sale revenue, which was recognized using the percent-of-completion method for development costs incurred on contracts that are satisfied over time and are ongoing at Sky Ranch. As of February 28, 2022, the first phase is 99.9% complete and the first subphase of the second development phase is 57.5% complete.

The Company also recognizes revenue from the sale of finished lots, whereby the home builder pays for a ready-to-build finished lot and the sales price is paid in a lump-sum upon completion of the finished lot that is permit ready. The Company recognizes revenues at the point in time of the closing of the sale of a finished lot in which control transfers to the builder as the transaction cycle is complete and the Company has no further obligations for the lot. For the three months ended February 28, 2022 and 2021, the Company recognized no revenue from ready-to-build finished lots. For the six months ended February 28, 2022 and 2021, the Company recognized $0 and $1.6 million from ready-to-build finished lots.  

Water and wastewater tap fees – During the three months ended February 28, 2022 and 2021, the Company sold a total of 27 and 51 water and wastewater taps generating $0.9 million and $1.6 million in tap fee revenues. During the six months ended February 28, 2022 and 2021, the Company sold a total of 36 and 87 water and wastewater taps generating $1.2 million and $2.7 million in tap fee revenues. These taps were all sold at Sky Ranch and Wild Pointe.

Project management services – During the three months ended February 28, 2022 and 2021, the Company recognized $0.2 million and $1.5 million of project management revenue for managing the Sky Ranch development process. During the six months ended February 28, 2022 and 2021, the Company recognized $0.4 million and $1.5 million of project management revenue for managing the Sky Ranch development process. During the second quarter of fiscal 2021, the Company determined the Sky Ranch CAB would be able to pay the Company for project management services and began recognizing this revenue. Prior to that date, payment was not deemed to be probable; therefore, the Company had deferred recognition of the project management fees income it had earned.

Single-family rental income

In November 2021, the Company began renting single-family homes and began recognizing lease income related to these rental units. The Company generally rents its single-family properties under non-cancelable lease agreements with a term of one year.  Rental and other property revenues represented less than 1.0% of our total revenue for the three and six months ended February 28, 2022. The Company has begun construction on a fourth house and reserved an additional 46 lots in the second development phase of Sky Ranch for rental units; therefore, the Company believes this could become a reportable operating segment in the future once its operations become material.

Undeveloped land sale and cash-in-lieu to school district

During the six months ended February 28, 2022, the Company entered various agreements to sell approximately 32 acres of undeveloped land in Sky Ranch for $1.6 million to a charter school operator for the purpose of constructing and operating a charter school. Simultaneously, pursuant to dedication standards issued by Arapahoe County (the county where Sky Ranch is located), the Company agreed to a $1.6 million cash-in-lieu payment to the Bennett School District to assist the school district with providing education facilities to the Sky Ranch Master Planned Community. The land sale agreements include requirements for the Company to construct, or have constructed, certain improvements leading to the school site such as roads, sidewalks, and landscaping, all of which were already planned

to be constructed as part of the overall master development of Sky Ranch. The Company determined the transaction was consummated in February 2022, when all pre-closing conditions were satisfied, and proceeds were received.

Deferred revenue

Changes and balances of the Company’s deferred revenue accounts by segment are as follows:

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The Company receives deposits or pre-payments from oil and gas operators to reserve water for use in future well drilling operations. When the operators use the water, the Company recognizes the revenue for these payments in the metered water usage from the commercial customers line on the statement of operations.

The Company recognizes certain lot sales over time as construction activities progress for lots sold pursuant to lot development agreements and not when payment is received. For example, the Company may receive milestone payments before revenue can be recognized (i.e., prior to the Company completing cumulative progress which faithfully represents the transfer of goods and services to the customer) which results in the Company recording deferred revenue. The Company recognizes this revenue into income as construction activities progress, measured based on costs incurred compared to total estimated costs of the project, which management believes is a faithful representation of the transfer of goods and services to the customer.

Revenue allocated to remaining performance obligations such as described above represents contracted revenue that has not yet been recognized, which includes unearned revenue and amounts that will be invoiced and recognized as revenue in future periods. During November 2021, the Company received a milestone payment of $3.8 million for outstanding open contracts related to lot sales in the first subphase of the second development phase at Sky Ranch. This revenue is being recognized over time.