Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Three and six months ended February 28, 2022; unaudited. Pure Cycle develops water and wastewater resources, develops the Sky Ranch master-planned community, and has begun a single-family rental business. Financial amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Three months ended Feb. 28, 2022 | Six months ended Feb. 28, 2022 |
|---|---|---|
| Revenue | $4.664 (prior year $4.739) | $8.936 (prior year $9.607) |
| Operating income | $1.508 (prior year $2.058); 32.3% margin | $2.987 (prior year $3.011); 33.4% margin |
| Net income | $1.693 (prior year $17.352) | $3.207 (prior year $18.197) |
| Diluted EPS | $0.07 (prior year $0.72) | $0.13 (prior year $0.76) |
| Operating cash flow | Not presented separately for the quarter | $(13.685) (prior year $(0.087)) |
- Six-month segment revenue was $3.880 from water and wastewater, $5.022 from land development, and $0.034 from rentals. Land development segment profit was $4.150; water and wastewater segment profit was $1.868.
- At February 28, cash and cash equivalents were $5.215; restricted cash was $2.328. Working capital was $21.0. Total assets were $113.361 and shareholders’ equity was $106.352.
- Debt was approximately $1.0, principally the note financing the first three rental homes. A separate $5.0 working-capital line of credit was undrawn. The rental-home note bears floating interest, reported at 3.75% at period-end.
- Six-month investing cash outflow was $2.249; financing provided $1.033. Cash, cash equivalents and restricted cash declined $14.901, mainly reflecting operating outflows and construction investment.
Changes versus the prior comparable period
- Six-month revenue fell 7%, while operating income was nearly unchanged. Net income fell sharply because the prior-year period included approximately $20.8 of recognition associated with Sky Ranch public-improvement reimbursements and related interest, as well as $1.5 of project-management revenue recognized after collection was deemed probable.
- Six-month lot-sale revenue increased 59% to $4.574 as the second Sky Ranch development phase advanced. The company reported average second-phase lot prices approximately 40% above first-phase prices.
- Water deliveries increased 96% to 215.2 million gallons for the six months, driven mainly by oil and gas operations. Water and wastewater tap sales decreased 59% to 36, partly because of development and home-closing timing.
- General and administrative expense and depreciation rose 18% for the six months, primarily from higher headcount and legal and professional fees. The rental business began generating revenue in November 2021.
- Cash and cash equivalents declined from $20.117 at August 31, 2021, to $5.215 at February 28, 2022. The company also recorded $1.0 of rental-home borrowing.
Outlook, risks and unusual items
- Management said working capital and financing sources were sufficient for the next 12 months. For the next 12 months, it anticipated $18.8 of Sky Ranch second-phase infrastructure spending and $18.8 of milestone and completed-lot payments from builders.
- The company expected to deliver 219 lots in the first subphase in summer 2022; it anticipated the next subphase would begin in fall 2022 and estimated about three years to complete the full 850-lot second phase. These are projections, not guarantees.
- Management expected Sky Ranch CAB repayments in the near term, potentially including at least $16.0 from bond offerings within three or four months. The filing cautions that bond issuance is not assured. The CAB owed $32.963 at February 28, 2022, including reimbursable improvements, project-management fees and accrued interest; collection depends on the CAB’s tax base, fees and financing.
- The company estimated $65.0 in total infrastructure costs to complete the second phase, and planned about $4.0 in school-site public improvements over 18 months that it believes are reimbursable. Failure to meet certain school-site construction dates could result in liquidated damages of up to $4.0.
- Management planned to expand the rental business to more than 200 units over several years. Three homes were leased; construction of a fourth was expected to be completed around the start of fiscal 2023. Forty-six second-phase lots were reserved for future rentals.
- COVID-related governmental approval delays affected Sky Ranch development. Other disclosed risks include permitting and construction delays, housing-market and customer demand changes, water availability and drought restrictions, and labor and material costs.
- Disclosure controls were deemed ineffective due to a material weakness in controls over spreadsheets used for public-improvement reimbursements and related interest. Management was enhancing review procedures and considering automation; remediation had not yet been established.
- A Sky Ranch pipeline contractor, Nelson Pipeline Constructors, was majority-owned by the company’s board chairman. The CAB paid Nelson $8.1 during the six months.
- No formal earnings or revenue guidance was provided. Interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the Sky Ranch CAB can repay the $32.963 receivable on the expected timetable, and whether planned bond financing is completed.
- Progress, costs, permitting and builder payments for the second Sky Ranch phase, including delivery of the first 219 lots and collection of milestone amounts.
- Whether water sales to oil and gas operators and tap sales can sustain revenue as development activity and customer timing change.
- Cash burn, access to the undrawn credit line, and financing needs for planned construction and WISE-related commitments.
- Whether management remediates the material weakness in financial reporting controls and maintains effective controls over receivable estimates and related-party transactions.