Pure Cycle Corporation — Q1 FY2021 Form 10-Q
Reporting period: Three months ended November 30, 2020; statements are unaudited. Pure Cycle develops water and wastewater resources and the Sky Ranch master-planned community in Colorado. Dollar amounts below are in millions unless noted.
Financial performance and position
- Revenue: $4.87, down 53% from $10.46 a year earlier. Water and wastewater resource development revenue was $2.51; land development revenue was $2.36.
- Profitability: Gross profit was $2.12 versus $1.87; operating income was $0.95 versus $0.99. Net income fell to $0.85 from $5.76, and diluted EPS was $0.04 versus $0.24. The filing reports no separate adjusted-profit measure.
- Margins: Gross margin was approximately 44% versus 18%; operating margin was approximately 20% versus 9%. Comparisons are affected by the prior-year $6.28 related-party construction reimbursement recorded in other income.
- Cash flow: Operating cash flow was $0.006 versus $14.72; investing activities used $0.50 versus generating $2.88. Cash declined $0.49 to $21.30.
- Liquidity: Working capital was $19.9. Current assets were $24.36 and current liabilities $4.42; management said resources were sufficient for operations over the next 12 months.
- Assets and obligations: Total assets were $88.95 and total liabilities $5.98. The balance sheet shows no conventional borrowings; it includes $0.33 of participating interests in export water supply. A further approximately $0.6 of CAA obligations is contingent and off balance sheet.
Material changes versus prior year
- Lot-sale revenue declined 72% to $2.36, primarily from the timing and progress of the first Sky Ranch filing. Land-development gross margin nevertheless increased to 27% from 6% as related costs were lower.
- Metered water revenue rose to $1.37 from $0.14, driven mainly by oil-and-gas/fracking deliveries; total water delivered increased to 104 million gallons from 16 million. Management noted fracking water has higher margins and changing delivery mix can materially affect results.
- Tap-fee revenue fell 35% to $1.08, reflecting timing of home closings; the company sold 36 taps compared with 58.
- General and administrative expense rose 36% to $1.09, primarily due to higher staffing, compensation and professional fees.
- The prior-year quarter included $6.28 of construction-cost reimbursement income from the Sky Ranch Community Authority Board (CAB), which did not recur. Operating cash flow also benefited in the prior year from the CAB bond reimbursement and higher lot sales.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expected to begin construction on Sky Ranch’s second filing in January 2021, planned for 895 residential lots. Contracts signed in November covered 789 lots; the remaining 106 were retained for future use. The first subphase’s 50-foot lots were priced at $97,000, up 30% from $75,000 in phase one.
- Management expected approximately $1.3 of remaining first-filing costs through fiscal 2021 and anticipated funding near-term needs with cash, tap fees and builder progress payments. It also projected $1.1 of 2021 investment and $7.5 over fiscal 2022–2025 for WISE-related water and infrastructure commitments.
- The CAB owed Pure Cycle $21.1 of reimbursable costs, including public-improvement costs, accrued interest and project-related amounts. Repayment depends on future bond issuance or property-tax receipts; management expects full repayment, but timing and realization are uncertain. The company also expected to incur another $1.3 of public-improvement costs through calendar 2021.
- COVID-19 had caused governmental permitting and inspection delays, and management expected possible further delays to Sky Ranch’s second filing. Builder customers reported housing-order declines earlier in the pandemic followed by increases after stay-at-home restrictions eased.
- Oil-and-gas royalty income declined 72% to $0.08 amid lower production and pandemic-related market effects. Fracking-water revenue increased sharply, making results sensitive to activity and customer demand in that market.
- Management reported no litigation or contingencies with a reasonably possible material loss. It stated disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether and when the CAB can repay the $21.1 balance, and whether any additional bonds or property-tax receipts materialize.
- Permitting, construction progress, lot delivery milestones and realized pricing for Sky Ranch’s second filing.
- Sustainability and margins of the oil-and-gas water business, along with trends in royalties and municipal water demand.
- Timing of tap-fee receipts, WISE funding requirements and the company’s forecast liquidity needs.
- How much of reported earnings and cash generation reflects recurring operations versus lot-delivery timing, reimbursements and other variable items.