Pure Cycle Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended August 31, 2019. The filing also reports the quarter ended August 31, 2019; it is an annual report, not a standalone quarterly filing.
Business context
Pure Cycle operates wholesale water and wastewater services and develops the Sky Ranch master-planned community near Denver. Its water business includes domestic and commercial services and raw-water sales to oil and gas operators for hydraulic fracturing. Sky Ranch’s first phase covers 506 residential lots; the company had delivered and been paid for 255 by year-end.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $20.36 million | $6.96 million |
| Gross profit | $6.42 million | $2.80 million |
| Operating income (loss) | $3.00 million | $(0.31) million |
| Net income | $4.81 million | $0.41 million |
| Diluted earnings per share | $0.20 | $0.02 |
| Cash provided by operating activities | $3.53 million | $0.0005 million |
- Revenue increased 193%, primarily from Sky Ranch lot sales ($11.96 million) and water and wastewater tap fees ($3.54 million). Water usage revenue was $4.65 million; wastewater fees were $0.04 million.
- Water deliveries fell 12% to 356.3 million gallons, while water revenue rose 2%, primarily because industrial water prices increased. Water-delivery gross margin was 68%, versus 70% in FY2018; lot-sales gross margin was 5%, versus 6%.
- Net income included a $1.28 million deferred tax benefit from releasing the valuation allowance on deferred tax assets. This was a material contributor to the year-over-year earnings increase.
- Net cash used in investing activities was $10.80 million, reflecting water-system investment and net purchases of securities. Cash and cash equivalents were $4.48 million; short-term investments were $5.19 million. Working capital was $15.2 million.
- The company reported no debt at year-end. Total liabilities were $8.99 million and total assets were $83.72 million.
Changes, outlook and risks
- Sky Ranch lot-sale revenue rose to $11.96 million from $2.14 million. The company expects to deliver another 200 lots in FY2020 and the remaining 51 in early FY2021, subject to builder demand and completion.
- The company invested approximately $14.1 million in water and wastewater systems and $17.7 million in Sky Ranch during FY2019. A Sky Ranch wastewater reclamation facility was expected to be completed in FY2020 at an estimated total cost of approximately $12 million.
- About $20 million advanced to the Sky Ranch Community Authority Board (CAB) is reimbursable only if the CAB or districts issue sufficient bonds. The company expected to fund an additional estimated $8.4 million of first-phase buildout costs that it expects to be reimbursable. A preliminary bond offering filed after year-end contemplated approximately $10 million of net proceeds for reimbursement; completion depended on market conditions.
- Management said working capital was sufficient for the next 12 months and expected FY2020 working-capital needs to be funded primarily by lot and tap-fee receipts. Estimated WISE costs were approximately $2.83 million for FY2020, with roughly $1.0 million annually estimated for FY2021–FY2024.
- Water sales remain highly exposed to oil and gas activity: fracking represented 90% of water revenue in FY2019. The filing identifies customer concentration, oil and gas regulation (including Colorado SB181), housing-market conditions, construction costs, weather and water-rights development as significant risks. Two oil and gas customers accounted for approximately 72% and 16% of water and wastewater revenue, respectively.
- The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Material weaknesses concerned related-party cost accruals and income-tax provision controls; remediation was incomplete at filing, with management targeting completion before FY2020 year-end.
- No formal earnings guidance is provided. Management’s development and cost figures are estimates and forward-looking expectations, not assurances.
Important facts for investors to verify
- Progress and final terms of the proposed CAB bond financing, and the amount and timing of reimbursement of Pure Cycle’s advances.
- Sky Ranch lot closings, builder commitments, remaining development costs and realized margins, including whether expected deliveries occur on schedule.
- Fracking volumes, customer concentration, pricing and the effect of SB181 and subsequent rulemaking on water demand.
- Cash generation and liquidity after planned water, WISE and Sky Ranch spending; the company’s no-debt position does not remove its substantial investment requirements.
- Remediation and independent reassessment of the disclosed material weaknesses in financial reporting controls.
- Underlying earnings excluding the $1.28 million deferred tax benefit and the impact of lot-sale timing.