NOTE 4 – REVENUES, FEES AND OTHER INCOME ITEMS

Metered water usage, wastewater treatment fees, water and wastewater tap fees, lot sales, and project management 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 2022 Annual Report.

The following describes significant components of revenue for the three months ended November 30, 2022 and 2021.

Water and wastewater tap fees – During the three months ended November 30, 2022 and 2021, the Company sold a total of four and nine water and wastewater taps generating $0.2 million and $0.3 million in tap fee revenues. These taps were all sold at Sky Ranch and Wild Pointe.

Sale of finished lots – For the three months ended November 30, 2022 and 2021, the Company recognized $0.5 million and $2.9 million of lot sale revenue, which was recognized using the percent-of-completion method for the Company’s land development activities at the Sky Ranch master planned community. As of November 30, 2022, the first development phase is complete and the second development phase is being developed in four subphases, referred to as Phase 2A, Phase 2B, Phase 2C and Phase 2D. As of the date of this filing, only Phase 2A is being actively developed, and it is just under 80% complete.

Project management services – During the three months ended November 30, 2022 and 2021, the Company recognized less than $0.1 million and $0.2 million of project management revenue from the related party (Sky Ranch CAB) for managing the Sky Ranch development process.

Single-family rental revenue

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.  For both of the three-month periods ended November 30, 2022 and 2021, the Company reported less than $0.1 million of rental property revenues. The Company has begun construction on 11 additional rental homes, which the Company believes will be available for rent at various dates throughout fiscal 2023, and reserved an additional 36 lots in Phases 2B, 2C and 2D 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.

Special facility projects and other revenue

Pure Cycle receives fees from customers including municipalities and area water providers for contract operations services. These fees are recognized as earned, typically monthly, plus charges for additional work performed. Additionally, the Company performs certain construction activities at Sky Ranch. The activities performed include construction and maintenance services. The revenue for both types of services are invoiced and recognized as special facility projects revenue.  For both of the three-month periods ended November 30, 2022 and 2021, the Company recognized less than $0.1 million of special facility projects and other revenue, an immaterial amount of which is from work performed for the Sky Ranch CAB, a related party.

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 lot sales over time as construction activities progress and not necessarily 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.