Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2023; comparisons are to the periods ended May 31, 2022. Amounts below are in U.S. dollars. The company provides wholesale water and wastewater services, develops the Sky Ranch community, and operates a growing single-family rental business.
Financial results and position
| Metric | Three months ended May 31, 2023 | Three months ended May 31, 2022 | Nine months ended May 31, 2023 | Nine months ended May 31, 2022 |
|---|---|---|---|---|
| Revenue | $6.879 million | $3.187 million | $11.209 million | $12.123 million |
| Operating income | $3.757 million | $0.624 million | $2.028 million | $3.611 million |
| Net income | $3.295 million | $0.837 million | $3.643 million | $4.044 million |
| Diluted EPS | $0.14 | $0.03 | $0.15 | $0.17 |
| Operating margin | 54.6% | 19.6% | 18.1% | 29.8% |
| Net margin | 47.9% | 26.3% | 32.5% | 33.4% |
Q3 revenue rose 116% and net income rose 294% year over year, primarily on higher Sky Ranch lot-sale revenue and a surge in water sales to oil and gas operators. For the nine-month period, revenue fell 8% and net income fell 10%; operating income declined 44%. Nine-month other income was higher, partly offsetting lower operating income.
- Revenue mix and activity: Q3 lot sales were $3.160 million, up 195%; commercial water usage revenue was $2.145 million, up 291%. Water deliveries increased 207% in Q3 to 183.6 million gallons, mostly from oil and gas operations. Nine-month lot sales were $5.064 million, down 10%; total water deliveries were down 5% to 262.6 million gallons. Tap sales were broadly steady: 85 water taps and 79 wastewater taps in the nine-month period.
- Cash flow: Operating activities used $2.970 million in the nine months, versus $11.933 million used a year earlier. Investing activities used $5.801 million; financing activities used $0.119 million. Cash, cash equivalents and restricted cash declined $8.890 million to $28.332 million, including $26.000 million of unrestricted cash at May 31.
- Liquidity and debt: Working capital was $23.8 million. Total debt principal was $3.987 million, primarily a $3.0 million Lost Creek note and rental-home borrowing; the company had not drawn its $5.0 million working-capital line. Management said existing working capital should fund operations for at least 12 months.
- Balance sheet: Total assets were $128.165 million and total liabilities were $10.967 million at May 31, 2023. The $23.118 million receivable from the related-party Sky Ranch Community Authority Board (CAB) includes reimbursable public improvements, management fees and accrued interest.
Material changes and operating developments
- Management delayed Phase 2B Sky Ranch construction amid housing-market challenges, then began construction in March 2023. At May 31, Phase 2A was approximately 90% complete and Phase 2B approximately 21% complete.
- Q3 land-development revenue and segment profit increased substantially as activity covered both phases. Nine-month land-development revenue and segment profit declined from the prior year, reflecting slower early-period construction and higher development costs.
- Q3 water-segment operating income increased to $2.493 million from $0.914 million, driven by oil and gas water demand. Nine-month water-segment operating income declined 10% to $2.511 million.
- The company had four rented single-family homes at May 31 and was building 10 more. Five additional units were rented after quarter-end. It has reserved 65 Phase 2 lots for rentals and expects to build and rent the planned units over three to five years; management’s longer-term strategy targets more than 200 rental units.
Outlook, commentary, risks and unusual items
- Management estimates: For the next 12 months, the company estimated up to $18.0 million of Phase 2 infrastructure spending and approximately $20.0 million of builder milestone, completed-lot and tap-fee receipts. It expected to spend approximately $4.3 million more on CAB public improvements during the remainder of fiscal 2023. These are estimates dependent on construction pace, demand and other conditions, not assured results.
- Sky Ranch pipeline: Management expected $13.0 million of remaining Phase 2B payments over the following 12 months and most of the remaining $1.8 million of Phase 2A revenue before fiscal year-end. It estimated total Phase 2 infrastructure costs of $74.3 million and approximately $20.0 million in Phase 2 water and wastewater tap fees.
- Housing and execution risks: Management cited elevated mortgage rates, inflation, macroeconomic uncertainty, lending availability, contractor delays, labor shortages and material costs. It views long-term housing supply-demand fundamentals as favorable but cautions that market conditions may adversely affect development schedules, lot sales and rental growth.
- Receivable and concentration risks: CAB repayment depends on sufficient tax revenues or other fee-generating activity. The $23.1 million CAB receivable is due under agreements with long-dated contractual terms; the filing notes collection timing is dependent on the CAB’s funding capacity. A large share of accounts receivable was owed by the Rangeview District, but the company reported that the balance was collected after quarter-end. Builder and oil-and-gas customers are significant revenue sources.
- Water and other risks: Drought restrictions could reduce usage revenues; customer additions and tap demand affect growth. The filing also identifies water supply and regulatory uncertainty, construction-cost estimates, interest-rate exposure and dependence on oil-and-gas activity as risks.
- Unusual items: Nine-month other income included $0.9 million from oil-and-gas right-of-way and surface-use agreements and a $0.2 million gain from acquiring remaining export-water contractual interests. Q3 general and administrative expense benefited from $0.5 million of employee retention credits; $0.7 million was received in the nine-month period. Nine-month results also included $1.257 million of “other, net,” for which the filing text does not provide a clear itemized value beyond the disclosures noted.
- Controls: Management concluded disclosure controls were effective as of May 31, 2023 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress, remaining costs and cash receipts for Sky Ranch Phases 2A and 2B, including whether projected builder payments and tap fees arrive on schedule.
- Collectability and repayment timing of the $23.1 million CAB receivable, and the CAB’s ability to fund reimbursable improvements.
- Whether the Q3 surge in oil-and-gas water sales and related fees persists, and the effect of customer concentration on revenue and margins.
- Actual rental-home completion, occupancy, financing and returns compared with management’s expansion plans.
- Cash use, planned infrastructure and WISE-related funding needs, and whether the stated 12-month liquidity assessment remains adequate.