Pure Cycle Corporation (NASDAQ: PCYO) — FY2022 Form 10-K
Reporting period: Fiscal year ended August 31, 2022; this is an annual report, not a quarterly filing. Pure Cycle develops and supplies wholesale water and wastewater services in Colorado, develops the Sky Ranch master-planned community, and has begun building single-family rental homes.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $23.0 million | $17.1 million |
| Operating income | $10.1 million | $5.3 million |
| Net income | $9.6 million | $20.1 million |
| Diluted EPS | $0.40 | $0.83 |
| Cash from operating activities | $17.5 million | $3.5 million |
| Cash and cash equivalents at year-end | $34.9 million | $20.1 million |
| Total assets | $129.2 million | $117.2 million |
| Total shareholders’ equity | $113.0 million | $102.7 million |
- Revenue increased 34%, led by Sky Ranch lot sales of $12.2 million versus $5.8 million and commercial water sales of $4.1 million versus $3.3 million. Water and wastewater resource revenue was $10.1 million, up 4%.
- Gross profit was $16.4 million, or approximately 71% of revenue, compared with $10.7 million, or approximately 63%, in FY2021; these percentages are calculated from reported revenue and cost of revenue. Operating income rose 92%.
- Net income fell 52% because FY2021 included substantial recognition of Sky Ranch public-improvement reimbursables and related project-management fees and interest. FY2022 operating results improved, but did not include a comparable one-time recognition.
- Operating cash flow included $24.1 million of Sky Ranch Community Authority Board (CAB) reimbursements. Cash flow therefore benefited materially from CAB payments, including bond proceeds, and should not be viewed as solely recurring operating generation.
- Working capital was $27.0 million. Debt was approximately $4.0 million, primarily a $3.0 million fixed-rate Lost Creek water-rights loan and a rental-home loan; the $5.0 million working-capital line was undrawn. Restricted cash of $2.3 million secured construction letters of credit.
- The company reported no common dividends. The audited financial statements received an unqualified opinion; the auditor highlighted lot-sale revenue recognition and the existence and collectability of the related-party public-improvement receivable as critical audit matters.
Material changes and operating progress
- Phase 1 at Sky Ranch was complete. By year-end, 219 Phase 2A lots had been transferred to builders; the company reported Phase 2A approximately 76% complete for revenue-recognition purposes, with remaining construction and performance obligations expected to extend into FY2023.
- Pure Cycle delivered 404.9 million gallons of water, up 57%. Oil-and-gas operations accounted for 292.4 million gallons, up 89%; management cautioned that such sales are variable and depend on industry activity.
- The company acquired 370 acre-feet of Lost Creek water for $3.7 million and completed a $3.0 million well and pipeline extension in the Box Elder Creek basin, expanding its water assets.
- The rental business generated $82,000 of revenue. Three homes were completed and rented; construction began on eleven additional homes.
- The Sky Ranch CAB receivable was $17.2 million at year-end, including reimbursable public-improvement costs, project-management fees and accrued interest. The CAB’s repayment capacity depends on future taxes, fees and/or bond financing.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expected to complete Phase 2A in FY2023 and begin Phase 2B during FY2023. It estimated approximately $17.5 million of spending over the next 12 months on remaining Phase 2A and Phase 2B work, alongside expected $19.0 million of builder milestone payments and $3.1 million of tap fees.
- Management described sharply higher mortgage rates, inflation and macroeconomic uncertainty as moderating housing demand, with pressure expected to continue into 2023. It planned to monitor market conditions before committing to additional construction spending.
- Key risks include housing-market and interest-rate sensitivity; construction cost, labor and supply-chain volatility; dependence on builders and a concentrated customer base; variable oil-and-gas water demand and regulatory limits on drilling; drought and water-rights uncertainty; and the ability to collect CAB reimbursements.
- Lowry Range water rates are subject to contractual limits tied to nearby providers. Water-system expansion is capital intensive; management estimates full build-out of water and wastewater facilities could cost more than $900 million over many decades.
- Management stated that a FY2021 material weakness in spreadsheet controls was remediated in FY2022 through software and additional reviews. The auditor did not issue an opinion on internal-control effectiveness.
- The filing reports no pending legal proceedings and no contingencies assessed as probable or reasonably possible of material loss. A 2021 ransomware attack disrupted information systems, but the company reported no material information loss or customer or financial data compromise; water and wastewater operating systems were not affected.
Important facts for investors to verify
- Whether the $17.2 million CAB receivable is recoverable on the company’s projected timetable, and the sensitivity of that estimate to home values, development, taxes and bond access.
- Whether Phase 2A completion and Phase 2B spending, builder payments and tap-fee expectations remain achievable amid weaker housing demand and higher financing costs.
- The sustainability and margins of oil-and-gas water sales, which represented about 70% of gallons delivered, and the exposure to regulatory or commodity-driven declines.
- The terms, repayment schedule and covenants of the approximately $4.0 million debt, and whether financing for additional rental homes is secured.
- Progress in converting the new rental-home investment into recurring cash flow, including occupancy, rents, construction costs and returns.