Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended February 29, 2024; comparisons are to the periods ended February 28, 2023. Amounts below are in U.S. dollars unless noted.
Business context
Pure Cycle provides wholesale water and wastewater services, develops the Sky Ranch master-planned community near Denver, and operates a growing single-family rental business. Its principal activities are reported in water and wastewater resource development and land development. The interim financial statements are unaudited.
Financial results and position
| Metric | Three months ended Feb. 29, 2024 | Six months ended Feb. 29, 2024 |
|---|---|---|
| Revenue | $3.20 million, up 7% | $8.58 million, up 98% |
| Operating income (loss) | $(0.37) million | $1.39 million |
| Net income | $0.12 million, versus $0.19 million | $2.18 million, versus $0.35 million |
| Basic and diluted EPS | $0.00, versus $0.01 | $0.09, versus $0.01 |
| Net cash used by operating activities | Not provided for the quarter | $(1.69) million |
Six-month revenue growth was led by commercial water sales, particularly to oil and gas operators, and higher lot-sale revenue as construction progressed at Sky Ranch. Water and wastewater resource development revenue rose 127% to $5.10 million; land development revenue rose 60% to $3.25 million. Quarterly revenue increased, but net income declined as lower lot-sale and tap-fee revenue recognition and higher general and administrative expense outweighed growth in commercial water sales.
At February 29, 2024, cash and cash equivalents were $20.42 million, restricted cash was $2.88 million, working capital was $19.9 million, and total assets were $135.23 million. Total debt principal was $6.96 million, including $6.87 million reported as long-term debt net of financing costs and current maturities. The company had a new $5.0 million two-year working-capital line of credit, undrawn at period-end. The current ratio was not stated in the filing.
Six-month cash flows were $(1.69) million from operations, $(3.19) million from investing, and $(0.31) million from financing, producing a $5.19 million decrease in cash, cash equivalents and restricted cash. Operating cash use included Sky Ranch development spending and an increase in receivables. The filing reports total cost of revenue of $1.42 million for the quarter and $3.46 million for six months.
Material changes versus prior period
- Commercial water revenue for the six months rose to $3.61 million from $0.45 million; water deliveries increased to 1,028 acre-feet from 243 acre-feet, primarily reflecting oil and gas demand.
- Six-month lot-sale revenue increased to $3.11 million from $1.90 million, while tap-fee revenue fell to $0.58 million from $1.14 million. No water or wastewater taps were sold in the current quarter, compared with 35 water and 32 wastewater taps a year earlier.
- Six-month operating results moved from a $1.73 million loss to $1.39 million of income. Net income also benefited from the comparison with the prior-year period’s higher “other, net” income ($1.22 million versus $0.13 million); the filing text does not clearly identify the specific source of that prior-year amount.
- Six-month general and administrative expense plus depreciation rose 12% to $3.73 million. Management cites, among other factors, Employee Retention Credits received in 2023 and additional fixed assets in 2024.
- Cash and cash equivalents decreased from $26.01 million at August 31, 2023, to $20.42 million. The Sky Ranch CAB related-party receivable increased from $25.0 million to $28.9 million.
Outlook, commentary and risks
The filing gives no formal earnings or revenue guidance. Management says it believes available working capital and financing sources are sufficient for the next 12 months. For Sky Ranch Phase 2, it estimates up to $15.8 million of spending over the next 12 months and expects approximately $20.9 million in builder milestone and completed-lot payments, plus tap-fee receipts. Management says timing depends on construction progress and market conditions.
Phase 2A was approximately 96% complete and Phase 2B approximately 52% complete at period-end; Phase 2C construction had begun but had not yet met revenue-recognition criteria. Management expects Phase 2B to be completed by the end of fiscal 2024. It anticipated starting construction on 17 additional rental homes in Phase 2B, with availability expected in fiscal 2025; the filing also describes plans for further rental development.
Management identifies elevated mortgage rates, inflation and macroeconomic uncertainty as housing-market headwinds, alongside construction labor, materials and delivery delays. Other key exposures include changes in oil and gas activity, weather and drought, water regulation and availability, and the timing and cost of development. The company expects to advance approximately $13.3 million for Sky Ranch public improvements during the remainder of fiscal 2024. Repayment of its $28.9 million Sky Ranch CAB receivable depends on the CAB’s tax base, fee-generating activity or bond proceeds; unpaid advances are subject to contractual discharge dates extending to 2058 or 2060.
Customer concentration is notable: two oil and gas operators generated 40% of six-month revenue, and 87% of trade receivables was owed by the Rangeview Metropolitan District. The company also had seven construction letters of credit totaling $2.9 million, secured by restricted cash. Management reported effective disclosure controls and no material change in internal control over financial reporting. Adoption of the CECL credit-loss standard had no material financial-statement impact.
Important facts for investors to verify
- Whether oil and gas water demand and its contribution to revenue persist; the filing reports a substantial year-over-year increase in this activity.
- Sky Ranch builder payment and tap-fee timing, remaining construction costs, and progress toward the Phase 2 schedule.
- The collectability and timing of repayment of the $28.9 million Sky Ranch CAB receivable, including the CAB’s funding capacity and the company’s additional planned advances.
- Customer concentration, including Rangeview’s share of receivables and the two oil and gas operators’ share of revenue.
- Liquidity and funding needs for Sky Ranch and rental-home construction, considering operating cash outflows, restricted cash, debt maturities and the undrawn credit line.
- Housing-market, interest-rate, construction-cost, water-supply and regulatory developments that could affect demand, project timing or margins.