Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2022, ended May 31, 2022. The company provides wholesale water and wastewater services, develops the Sky Ranch community near Denver, and has started a single-family rental business. Financial amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Three months ended May 31, 2022 | Nine months ended May 31, 2022 | Comparable 2021 period |
|---|---|---|---|
| Revenue | $3.19; up 20% | $12.12; down 1% | $2.67 and $12.27 |
| Operating income | $0.62; up 90% | $3.61; up 8% | $0.33 and $3.34 |
| Net income | $0.84; up 34% | $4.04; down 78% | $0.62 and $18.28 |
| Diluted EPS | $0.03 | $0.17 | $0.03 and $0.76 |
| Operating cash flow | Not separately presented | $(11.93) | $0.19 |
- For the nine months, cash used in investing was $3.79 million and cash provided by financing was $1.03 million. Cash, cash equivalents and restricted cash totaled $7.75 million at May 31, versus $22.44 million at August 31, 2021; unrestricted cash was $5.42 million.
- Working capital was $18.6 million. The company reported $1.0 million of debt, principally the rental-home note, and an undrawn $5.0 million working-capital credit line.
- Total assets were $115.39 million and total liabilities $8.08 million. The company’s receivable from the Sky Ranch Community Authority Board (CAB), including reimbursable improvements, fees and accrued interest, was $35.32 million.
- Third-quarter water and wastewater resource development revenue was $2.01 million and land development revenue was $1.15 million. Nine-month segment profit was $2.78 million and $5.01 million, respectively. Single-family rental revenue was $0.06 million for the nine months.
Changes versus the prior period
- Third-quarter revenue growth primarily reflected higher Sky Ranch lot-sale revenue recognized as Phase 2A construction progressed, plus initial rental income. Water deliveries rose 262% to 59.8 million gallons, mainly due to oil-and-gas activity, while tap sales fell 24% to 45.
- For the nine months, lot-sale revenue increased 70% to $5.64 million, but tap-fee revenue declined to $2.45 million from $4.52 million as builder permit and closing timing shifted. Project-management revenue fell to $0.53 million from $1.57 million.
- Nine-month net income fell sharply because 2021 included $17.26 million of recognized public-improvement reimbursables and related items, including interest, after collection was deemed probable. The filing reports no comparable recognition in 2022; this makes the year-over-year net-income comparison unusual.
- Cash declined substantially as operations used $11.93 million, including funding Sky Ranch construction and public improvements, and the company paid $5.26 million of income taxes.
Outlook, risks and notable items
- Management said working capital and financing sources were sufficient for the next 12 months. It estimated $65 million of total infrastructure costs for Sky Ranch’s second phase, with $18.8 million of spending and an equal amount of builder milestone and lot-sale receipts anticipated over the next 12 months.
- Phase 2A was about 67% complete; 40 finished lots had been delivered and the remaining 189 were expected in summer 2022. Management anticipated construction of Phase 2B beginning in fall 2022 and completion and sale of the four second-phase subphases over about three years, subject to market conditions and permitting.
- Management expected a Sky Ranch CAB bond offering and related repayment of the company’s receivable. The filing cites an expected offering of at least $24 million in the MD&A, while the note describes an estimated $16 million available to repay the company. Bond timing, proceeds and CAB repayment are not assured; repayment depends on the CAB’s tax base, fees and financing.
- The company plans to expand rental operations, with a stated longer-term goal of more than 200 units. Three homes were leased; a fourth and ten additional homes were under construction or contracted, and 46 Phase 2 lots were reserved for rentals. Financing for the additional rental construction had not been finalized as of May 31.
- After quarter-end, the company acquired approximately 370 acre-feet of Lost Creek water rights for $3.6 million, funded in part by a new $3.0 million, 4.90% fixed-rate loan.
- Risks include construction and permitting delays, inflation and supply-chain constraints, housing and builder demand, drought or water-use restrictions, oil-and-gas activity, and uncertainty in collecting the substantial Sky Ranch CAB receivable. The company also disclosed a material weakness in spreadsheet-related controls over reimbursable public improvements and interest; disclosure controls were considered ineffective, and remediation was ongoing.
- A school-site agreement includes required public improvements and potential liquidated damages of up to $4.0 million if specified work is late. The company expected timely completion and believed the costs would be reimbursable by the CAB.
Important facts for investors to verify
- Whether and when Sky Ranch CAB bonds are issued, the amount available for repayment, and collection of the $35.32 million receivable.
- Actual Phase 2A lot deliveries, builder payments, tap sales, and progress and funding needs for later phases.
- Cash burn and liquidity as construction spending continues, including whether expected builder and CAB receipts arrive on schedule.
- Financing terms and execution for the planned rental-home expansion, and whether rental economics support management’s growth plan.
- Progress in remediating the disclosed material weakness and the timing of management’s conclusion that controls are effective.
- Performance and cash-flow effects of the post-quarter Lost Creek acquisition and related loan.