Pure Cycle Corporation — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2021; unaudited. Amounts below are in U.S. dollars. The company operates water and wastewater services and land development, principally at the Sky Ranch community in Colorado.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Revenue | $4.74 million | $3.52 million | $9.61 million | $13.98 million |
| Gross profit | $3.48 million | $1.07 million | $5.60 million | $2.95 million |
| Operating income | $2.06 million | $(0.06) million | $3.01 million | $0.93 million |
| Net income | $17.35 million | $0.27 million | $18.20 million | $6.04 million |
| Diluted EPS | $0.72 | $0.01 | $0.76 | $0.25 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $(0.09) million | $16.54 million |
Gross margin was approximately 73% for Q2 and 58% for the six-month period. Operating margin was approximately 43% and 31%, respectively. These results include substantial nonrecurring recognition of Sky Ranch Community Authority Board (CAB) reimbursements and related amounts; reported net income is not a straightforward measure of ongoing operating performance.
Q2 revenue rose 35% year over year as water and wastewater revenue increased 113%, partly offset by lower land-development revenue. Six-month revenue fell 31%, mainly because first-phase lot sales were substantially complete and the next phase had not yet begun recognizing lot revenue. Six-month water deliveries increased 448%, largely reflecting oil and gas activity and growing Sky Ranch service.
Liquidity, cash flow and obligations
- At February 28, 2021, cash, cash equivalents and restricted cash were $20.76 million, including $0.28 million restricted; working capital was $16.5 million.
- Total assets were $108.53 million and total liabilities were $7.96 million. The balance sheet reports no conventional borrowing debt; liabilities include $0.33 million of participating interests in export water supply and lease obligations.
- Operating cash flow was negative $0.09 million for the six months, versus positive $16.54 million a year earlier. Management attributed the decline principally to the prior-year CAB bond reimbursement and lower lot sales. Investing cash outflow was $0.96 million; financing cash inflow was $0.01 million.
- Management said available working capital was sufficient for operations over the next 12 months. The filing identifies approximately $17 million of expected obligations over that period.
Material changes, outlook and risks
- Significant estimate change: The company concluded CAB repayment of first-phase Sky Ranch public improvements and associated amounts was reasonably assured, citing an established and growing tax base, fees and potential bond financing. It recognized a $21.5 million related-party note receivable and recorded $18.9 million of other income, $1.6 million of project-management revenue and approximately $1.0 million of interest income. The note carries 6% interest, has no stated repayment schedule, and its estimated fair value was $17.8 million versus a $21.5 million carrying value. Collection timing and amount depend on CAB revenues and financing; the company will assess impairment each reporting period.
- Sky Ranch development: Phase one was nearing completion, with about $0.9 million of estimated costs remaining. Construction on phase two began in February 2021; the company estimated total phase-two costs of $66 million, with about $15 million expected to be spent and approximately $12 million of homebuilder milestone payments expected during the next 12 months. It reported contracts for 789 lots and an approximately 30% increase in the price of a 50-foot lot in the first subphase, from $75,000 to $97,000.
- Build-to-rent: The company announced a new business line after the quarter, starting with three homes expected to be ready for renters in fall 2021. It intends to consider rental homes on 106 lots retained in phase two.
- Other planned investment: The company anticipated investing $1.1 million in WISE during 2021 and $7.5 million in total over fiscal 2022–2025 for water, infrastructure and related commitments.
- Risks and contingencies: COVID-19-related government permitting and inspection delays could affect phase-two timing. CAB reimbursement depends on future taxes, fees or bond issuance, with contractual repayment terms extending to 2060. A further $0.6 million CAA obligation is contingent on export-water sales and is off balance sheet. The company reported no contingencies with a reasonably possible material loss at period-end.
Key investor verification points
- Assess the sustainability of earnings excluding the one-time $18.9 million CAB-related other-income recognition and related project-management and interest income.
- Review the CAB note’s repayment forecasts, estimated fair value, collection timetable and potential impairment exposure.
- Track phase-two permitting, construction spending, lot-delivery milestones and the timing of the expected $12 million in builder payments.
- Monitor operating cash generation and the funding requirements for Sky Ranch, WISE and the new build-to-rent business.
- Evaluate exposure to oil and gas customer activity and possible COVID-19-related delays.