Item 7. Management’s Discussion and Analysis
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:
● Total revenue was $28.7 million, up from $14.6 million in 2023 (a 96% increase), primarily driven by an increase in lot sales at Sky Ranch and an increase in water sales to oil and gas operators for use in their drilling operations;
◾ Revenue from commercial water sales, which includes selling water to oil and gas operators, was $6.1 million in 2024 compared to $3.1 million in 2023;
◾ Recorded lot sales for 2024 were $16.0 million, compared to $6.8 million in 2023, which is due to the development work in Phases 2B and 2C;
● Pre-tax income was $15.6 million in 2024, which is up from $6.2 million in 2023 (a 152% increase);
● In 2024 we posted $0.48 of earnings per fully diluted common share, which is up from $0.19 in 2023 (a 153% increase);
● Total assets continue to increase to $147.4 million at August 31, 2024 from $133.2 million at August 31, 2023; and
● Total equity increased to $129.7 million at August 31, 2024 from $118.2 million at August 31, 2023.
Recent Developments
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.
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.
Results of Operations
The results of our operations for the fiscal years ended August 31, 2024 and 2023 were as follows:
Year Ended
(In thousands, except for water deliveries and taps sold)
August 31, 2024
August 31, 2023
$ Change
% Change
Water and wastewater resource revenue
$
11,561
$
7,323
$
4,238
58
%
Land development revenue
Lot sales
15,998
6,815
9,183
135
%
Project management fees
707
283
424
150
%
Single-family rental
481
165
316
192
%
Total revenue
28,747
14,586
14,161
97
%
Water and wastewater resource cost of revenue
5,281
4,581
700
15
%
Land development cost of revenue
3,519
1,892
1,627
86
%
Single-family rental cost of revenue
188
73
115
158
%
Total cost of revenue
8,988
6,546
2,442
37
%
General and administrative expense and depreciation
7,517
5,968
1,549
26
%
Operating income
12,242
2,072
10,170
491
%
Other income, net
3,390
4,148
(758)
(18)
%
Income tax expense
(4,019)
(1,521)
2,498
164
%
Net income
$
11,613
$
4,699
$
6,914
147
%
Basic EPS
$
0.48
$
0.20
$
0.28
140
%
Diluted EPS
$
0.48
$
0.19
$
0.29
153
%
Water delivered (acre-feet)
1,818
964
854
89
%
Water taps sold
73
104
(31)
(30)
%
Wastewater taps sold
69
90
(21)
(23)
%
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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
Year Ended
(In thousands, except for water deliveries)
August 31, 2024
August 31, 2023
$ Change
% Change
Metered water usage from:
Municipal water usage
$
788
$
504
$
284
56
%
Commercial water usage
6,095
3,059
3,036
99
%
Wastewater treatment fees
343
302
41
14
%
Water and wastewater tap fees
3,384
2,991
393
13
%
Other revenue
951
467
484
104
%
Total segment revenue
11,561
7,323
4,238
58
%
Water service costs
2,204
1,757
447
25
%
Wastewater service costs
691
675
16
2
%
Depreciation
1,504
1,658
(154)
(9)
%
Other
882
491
391
80
%
Total expenses
5,281
4,581
700
15
%
Segment operating income
$
6,280
$
2,742
$
3,538
129
%
Water deliveries (acre-feet)
On Site
3
9
(6)
(67)
%
Commercial sales - export water and other
4
50
(46)
(92)
%
Sky Ranch
306
193
113
59
%
Wild Pointe
97
96
1
1
%
O&G operations
1,408
616
792
129
%
Total water deliveries
1,818
964
854
89
%
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
Year Ended
(In thousands)
August 31, 2024
August 31, 2023
$ Change
% Change
Lot sales
$
15,998
$
6,815
$
9,183
135
%
Project management revenue
707
283
424
150
Total revenue
16,705
7,098
9,607
135
%
Land development construction and project management costs
3,519
1,892
1,627
86
%
Segment operating income
$
13,186
$
5,206
$
7,980
153
%
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
Year Ended
(in thousands)
August 31, 2024
August 31, 2023
$ Change
% Change
Significant G&A Expense items:
Salary and salary-related expenses
$
3,563
$
2,678
$
885
33
%
Share-based compensation
436
539
(103)
(19)
%
Professional fees
1,090
832
258
31
%
Public entity-related expenses, including director fees
450
449
1
0
%
Corporate insurance
329
299
30
10
%
All other combined
1,053
673
380
56
%
G&A Expenses as reported
$
6,921
$
5,470
$
1,451
27
%
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.
Summary Cash Flows
Year Ended
(In thousands)
August 31, 2024
August 31, 2023
$ Change
% Change
Cash (used) provided by:
Operating activities
$
2,212
$
(2,339)
$
4,551
195
%
Investing activities
(4,729)
(9,241)
4,512
49
%
Financing activities
(612)
2,845
(3,457)
(122)
%
Net Change in cash
$
(3,129)
$
(8,735)
$
5,606
64
%
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.
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.
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.
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.
Item 7A – Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
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