Pure Cycle Corporation — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended May 31, 2021. Financial statements are unaudited; amounts below are in millions of dollars unless otherwise noted. Pure Cycle develops and supplies water and wastewater services and develops land, primarily at its Sky Ranch community in Colorado.
Financial performance and position
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $2.666 | $1.850 | $12.273 | $15.829 |
| Gross profit | $1.726 | $0.744 | $7.324 | $3.689 |
| Operating income (loss) | $0.328 | $(0.143) | $3.338 | $0.784 |
| Net income | $0.624 | $0.027 | $18.276 | $6.064 |
| Diluted EPS | $0.03 | $0.00 | $0.76 | $0.25 |
| Gross margin | 64.7% | 40.2% | 59.7% | 23.3% |
- Revenue mix and changes: Q3 revenue rose 44%, led by water and wastewater revenue, up 90% to $2.198 million, including higher tap fees and a WISE special-facility project. Nine-month revenue fell 22% as first-phase Sky Ranch lot sales wound down; land-development revenue declined 58% to $4.887 million, partly offset by water and wastewater revenue growth of 71% to $7.386 million.
- Earnings quality: Nine-month net income includes $19.888 million of other income from recognizing Sky Ranch public-improvement reimbursements, project-management amounts and related interest as collection became reasonably assured. This is a major, unusual, related-party accrual rather than ordinary operating revenue. Nine-month operating cash flow was only $0.193 million.
- Cash flow: Operating activities provided $0.193 million, versus $15.204 million in the prior-year period. Investing activities used $2.253 million; financing activities provided $0.059 million. Cash, cash equivalents and restricted cash decreased $2.001 million to $19.796 million.
- Liquidity and obligations: Working capital was $16.5 million. Cash and cash equivalents were $19.514 million, including $0.282 million restricted. Total liabilities were $8.324 million, including $0.325 million of participating interests in export water supply and $0.140 million of lease liabilities; the filing reports no conventional borrowings. Management said available working capital was sufficient for the next 12 months.
- Balance sheet: Total assets were $109.110 million and shareholders’ equity was $100.786 million at May 31, 2021. The company recorded a $21.316 million related-party receivable for Phase 1 Sky Ranch reimbursables, including interest and project-management fees.
Material developments, outlook and risks
- Phase 1 at Sky Ranch was nearly complete, with about $0.5 million of estimated costs remaining. The company had contracted to sell 789 lots for Phase 2, begun construction in February 2021, and expected platted-lot deliveries to start in fiscal Q4 2021. Phase 2 is estimated to cost $65 million; management anticipated spending about $21 million and receiving about $22.5 million in builder milestone payments over the next 12 months.
- For comparable 50-foot lots, the company cited an approximately 30% increase in price, from $75,000 in Phase 1 to $97,000 in the first Phase 2 subphase. More than 100 Phase 2 lots not under builder contract are being retained for possible build-to-rent use.
- The company launched a build-to-rent initiative and was constructing three homes, expected to be ready for renters in fall 2021. Expansion to additional retained lots is planned, subject to development and construction.
- COVID-19-related government permitting and inspection delays postponed Phase 2 revenue recognition. The company expected lot deliveries to begin in fiscal Q4, but timing depends on approvals and construction milestones.
- Management anticipated $1.1 million of WISE investment in 2021 and $7.5 million over fiscal 2022–2025 for water, infrastructure and related obligations. The company also expects to spend about $0.5 million to finish Phase 1, of which an estimated $0.4 million is reimbursable.
- Reimbursement of the $21.3 million Phase 1 receivable depends on Sky Ranch CAB tax receipts, fees or municipal bond issuance. The agreement provides for repayment over time and has a contractual termination date in 2060; collection timing and amount remain important estimates. Phase 2 reimbursements will be assessed separately for collectability.
- A prior-period adjustment reduced previously reported February 2021 quarter and six-month net income by $0.545 million, reflecting an error in public-improvement reimbursables and associated income taxes. Management concluded the error was not material to those prior results and did not restate them; it adjusted opening accumulated deficit and retrospectively adjusted comparative cumulative figures presented in this filing.
- Management identified ineffective spreadsheet preparation and review controls as a material weakness in internal control over financial reporting; disclosure controls were deemed ineffective. Remediation includes added review and validation steps and consideration of moving manual tracking to software. The filing reports no contingencies for which a material loss was reasonably possible.
Important facts for investors to verify
- How much of the recognized $21.3 million Sky Ranch CAB receivable is collected, and on what schedule; assess the tax-base, fee and bond assumptions supporting collectability.
- Whether Phase 2 permits, lot deliveries and builder milestone payments occur on the expected timetable, and whether estimated costs remain within plan.
- Why reported nine-month net income of $18.276 million substantially exceeds operating cash flow of $0.193 million, including the noncash and related-party effects of the reimbursement recognition.
- Progress in remediating the material weakness, including evidence that spreadsheet controls and related accounting estimates are reliable.
- Actual spending and returns from WISE commitments and the build-to-rent initiative, alongside management’s stated liquidity needs.