Pure Cycle Corporation — Q3 FY2020 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended May 31, 2020; statements are unaudited. Pure Cycle provides wholesale water and wastewater services and develops residential lots at Sky Ranch in Colorado.
Financial results and liquidity
| Metric | Three months ended May 31, 2020 | Nine months ended May 31, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $1.85 million | $15.83 million | $5.18 million; $10.89 million |
| Operating income (loss) | ($143,000) | $784,000 | $1.16 million; $1.40 million |
| Net income | $27,000 | $6.06 million | $1.26 million; $1.80 million |
| Gross profit | $744,000 | $3.69 million | $1.92 million; $3.54 million |
| Operating cash flow | Not stated for the quarter | $15.20 million | ($2.74 million) for nine months |
Quarterly revenue fell 64% year over year, while nine-month revenue rose 45%. Nine-month net income included $6.28 million of related-party construction-cost reimbursement income from Sky Ranch bond proceeds; this materially boosted reported earnings. Quarterly gross margin was about 40%, versus 37% a year earlier; nine-month gross margin was about 23%, versus 33%.
At May 31, cash and cash equivalents were $17.07 million, up from $4.48 million at August 31, 2019. Working capital was $16.7 million; current assets were $23.00 million and current liabilities $6.26 million. Total assets were $88.21 million and shareholders’ equity $81.27 million. The balance sheet reports no conventional borrowings; it includes $328,000 of participating-interest liabilities and $211,000 of total operating lease liabilities. A further $648,000 contingent CAA obligation is off balance sheet and payable only from Export Water sales.
Key changes and operating drivers
- Oil and gas water demand contracted sharply: water deliveries fell 87% in the quarter and 86% for nine months. Oil-and-gas water revenue declined 99% and 97%, respectively, reflecting low oil prices, a major customer’s shutdown and sale of leases, and COVID-19-related demand and regulatory effects.
- Sky Ranch lot sales drove year-to-date growth: nine-month lot revenue increased 91% to $11.50 million, with 136 lots sold versus 83. Quarterly lot revenue declined 74% to $696,000; no finished lots were delivered under the ready-to-build format during the quarter.
- Water taps increased: 139 water and wastewater taps were sold in the nine months, compared with 60 a year earlier; tap revenue rose 113% to $3.85 million. Municipal water use revenue also grew, supported by Sky Ranch development.
- Service margins were pressured: nine-month water-delivery gross margin was negative 79%, reflecting the collapse in higher-margin oil-and-gas volume. Wastewater margins were also negative as staffing and facility costs preceded customer occupancy.
- Operating cash flow benefited from the CAB reimbursement, oil-and-gas advance payments and working-capital movements. Investing activities used $2.64 million, including $7.30 million invested in water, water systems and land, partly offset by investment maturities.
Outlook, risks and unusual items
- Management expected to deliver the remaining lots in the initial 506-lot Sky Ranch filing by the end of calendar 2020, later than its earlier acceleration expectation but still ahead of original builder-contract delivery dates. It expected approximately 98% of $12.96 million in contracted, unrecognized revenue to be recognized over the next 12 months.
- Management reported sufficient working capital for operations for the next 12 months. It expected no significant capital expenditures until permits for the next Sky Ranch filing are obtained; county staffing shortages and COVID-19 could delay permitting.
- The company expected to incur a further $3.5 million of public-improvement construction costs through calendar 2020 and estimated $21.6 million of additional reimbursement. CAB repayment depends on available funds or future municipal bond issuance; the timing and amount are uncertain. At May 31, total unreimbursed reimbursable costs were $17.93 million, including deferred interest and project-management fees.
- Management expected wastewater margins to improve after all 506 initial homes were occupied, anticipated by the end of fiscal 2022. It also noted oil-and-gas water demand is volatile and may remain weak.
- The company received a $390,000 PPP loan in April and repaid the full $390,278 balance in May; the lender waived interest. Management had not quantified any material financial-statement effects from the CARES Act.
- Disclosure controls were judged ineffective. Material weaknesses remained in related-party expense accruals and income-tax provision controls; management said remediation was underway and targeted before fiscal year-end. A separate CFO began in April 2020.
- The filing reported no litigation or contingencies with a reasonably possible material loss. Customer concentration and reliance on CAB reimbursements, future bond issuance, homebuilder demand, permits and oil-and-gas activity remain important risks.
Important facts for investors to verify
- Whether the remaining Sky Ranch lots were delivered on the revised schedule and whether the next filing’s permits and construction proceed as planned.
- Whether the CAB obtains additional bond financing and reimburses the $17.93 million of outstanding reimbursable costs, including the timing and collectability of deferred interest and fees.
- Whether oil-and-gas water demand recovers and whether municipal water, tap and wastewater revenues can offset lost industrial activity.
- How much of nine-month earnings and operating cash flow reflects the one-time CAB bond reimbursement and other timing or advance-payment effects.
- Whether management remediates the disclosed material weaknesses and improves the effectiveness of disclosure controls.