Pure Cycle Corporation (NASDAQ: PCYO) — Q1 FY2023 10-Q
Reporting period: Three months ended November 30, 2022; balance-sheet comparisons are to August 31, 2022. Financial statement amounts below are in U.S. dollars; unless stated otherwise, amounts are in millions. The interim financial statements are unaudited.
Business context
Pure Cycle combines wholesale water and wastewater services, development and sale of finished lots at the Sky Ranch community, and a growing single-family rental business. Its results are closely linked to Sky Ranch construction and homebuilder demand, which also drive water taps and usage.
Financial results and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Revenue | $1.340 million | $4.273 million | Down 69% |
| Operating income (loss) | $(1.489) million | $1.480 million | Turned to loss |
| Income before taxes | $0.289 million | $1.991 million | Down 85% |
| Net income | $0.159 million | $1.514 million | Down 89% |
| Diluted EPS | $0.01 | $0.06 | Down $0.05 |
| Cash from operations | $(0.758) million | $(5.954) million | Less cash used |
- Revenue and segment performance: Lot-sale revenue fell 83% to $0.513 million; water and wastewater resource revenue declined 26% to $0.794 million. Water and wastewater taps sold fell to 4 from 9, and total water deliveries decreased 13%. Land development segment profit was $0.306 million, down from $2.662 million; the water and wastewater segment recorded a $0.307 million loss versus $0.223 million profit.
- Margins and costs: Total cost of revenue was $1.326 million, close to the prior-year $1.383 million despite much lower sales. Water-service costs rose, including from higher WISE purchases and payroll allocations; management also noted that newer systems are not yet operating at full capacity. General and administrative expense and depreciation totaled $1.503 million, up 7%.
- Non-operating items: Other income, net was $1.778 million, versus $0.511 million. It included approximately $0.9 million of oil-and-gas right-of-way and surface-use payments, interest income on the Sky Ranch Community Authority Board (CAB) receivable, and a gain from acquiring remaining export-water contractual interests. These items helped produce positive net income despite the operating loss.
- Cash, liquidity and debt: At November 30, cash and cash equivalents were $16.843 million, Treasury bills were $15.113 million, and restricted cash was $2.328 million. Working capital was approximately $24.0 million. Debt was approximately $3.96 million, net of deferred financing costs; the company also had an undrawn $5.0 million working-capital line of credit. Management said working capital was sufficient for the next 12 months.
- Cash flows and investment: Cash, cash equivalents and restricted cash decreased $18.051 million during the quarter. Investing activities used $17.179 million, primarily reflecting a $15.0 million Treasury-bill purchase, alongside rental-home construction and water-system investments. Operating activities used $0.758 million, including funding for Sky Ranch public improvements.
- Balance sheet and receivables: Total assets were $128.037 million and total liabilities were $14.789 million. The Sky Ranch CAB receivable for reimbursable public improvements, fees and accrued interest reached $18.487 million; no payments were received during the quarter.
Changes versus the prior comparable period
- Revenue and net income fell sharply, chiefly because less Sky Ranch lot-sale revenue was recognized as construction slowed and Phase 2B had not begun.
- Water-service revenue also declined, reflecting lower usage associated with fewer new homes and reduced construction activity; lower tap sales reflected timing of builder permits and closings.
- Other income increased substantially, partly offsetting the operating deterioration through oil-and-gas payments, CAB-note interest and the export-water-interest acquisition gain.
- Operating cash use improved from $5.954 million to $0.758 million, while investing cash use increased because of the Treasury-bill purchase and ongoing capital projects.
Outlook, commentary and risks
- Management described a rapidly weakening housing market, rising mortgage rates, inflation, supply-chain delays, labor shortages and construction-cost volatility. The company delayed the start of Phase 2B and said it expects to monitor demand before committing further development spending.
- Phase 2A was just under 80% complete at the filing date; management expected completion before the end of FY2023. It indicated Phase 2B construction could begin in summer 2023, subject to market conditions and permitting.
- For the next 12 months, management estimated $18.8 million of Sky Ranch Phase 2 infrastructure spending and $18.8 million of builder milestone and lot-payment receipts; both depend on when Phase 2B begins. It expected approximately $1.8 million more in FY2023 spending to complete 11 rental homes.
- The company expects to fund approximately $1.0 million of WISE-related obligations in 2023 and up to $6.0 million in total during FY2024–2025. It also anticipated about $4.3 million of additional advances for Sky Ranch public improvements during the rest of FY2023.
- Key risks include housing demand and financing conditions, construction delays and costs, customer and builder concentration, weather and potential drought restrictions, regulatory and permitting delays, and whether the Sky Ranch CAB can repay its substantial receivable from a sufficient tax base or other revenues. The filing provides no formal earnings or revenue guidance.
- Four construction-related letters of credit totaled $2.3 million and were secured by restricted cash. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Sky Ranch housing demand and builder activity support Phase 2A completion, Phase 2B commencement, and the anticipated development cash flows.
- How and when the $18.5 million Sky Ranch CAB receivable will be collected, including the CAB’s ability to establish adequate tax or fee revenues.
- Whether the unusual oil-and-gas payments and other non-operating income recur; operating results were negative before other income.
- Whether lower water deliveries and tap sales reverse as construction and home occupancy progress, and how water-system operating costs behave before capacity utilization improves.
- Whether rental-home construction, planned WISE funding and Sky Ranch infrastructure commitments remain within management’s liquidity and financing assumptions.