Pure Cycle Corporation — FY2021 Form 10-K
Business context and reporting period. The fiscal year ended August 31, 2021. Pure Cycle develops water and wastewater resources and master-planned communities in Colorado’s Denver-area I-70 corridor. It also launched a build-to-rent business at Sky Ranch; the first three homes were nearing completion at year-end. The filing is an annual report, not a quarter-specific report.
Financial and operating results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $17.1 million | $25.9 million |
| Gross profit | $10.7 million | $7.5 million |
| Operating income | $5.3 million | $1.5 million |
| Income before taxes | $26.6 million | $8.9 million |
| Net income (audited statements) | $20.1 million | $6.8 million |
| Diluted EPS | $0.83 | $0.28 |
| Cash from operating activities | $3.5 million | $20.7 million |
| Cash and cash equivalents at year-end | $20.1 million | $21.8 million |
| Working capital at year-end | $26.3 million | Not stated here |
| Total assets / shareholders’ equity | $117.2 million / $102.7 million | $89.8 million / $82.0 million |
| Debt | No debt reported | No debt reported |
Gross margin was approximately 62.6% versus 29.2% in FY2020; operating margin was approximately 30.8% versus 5.9%. Net margin was unusually high at approximately 117.4%, principally because of a large, non-recurring recognition of Sky Ranch public-improvement reimbursements and related income.
- Water and wastewater revenue rose 40% to $9.7 million, including $2.8 million from oil and gas operations and $5.2 million from tap fees. Water deliveries increased to 257.8 million gallons from 76.2 million.
- Land development revenue fell 61% to $7.5 million as the first Sky Ranch phase neared completion; lot sales were $5.8 million versus $18.9 million. The company delivered 152 lots in Phase 2 and 22 remaining Phase 1 lots.
- Other income included $20.2 million of recognized public-improvement reimbursements and related interest. The company recorded a $24.8 million related-party note receivable from the Sky Ranch Community Authority Board (CAB).
- Investing cash outflow was $2.9 million; financing cash inflow was $0.1 million. Year-end restricted cash of $2.3 million secured construction letters of credit, in addition to $20.1 million unrestricted cash.
Material changes versus the prior year
- Revenue declined 34%, mainly because Phase 1 lot sales were substantially completed and Phase 2 revenue recognition began only in the fourth quarter.
- Operating income improved, despite lower revenue, as land-development costs fell with Phase 1 completion and water-sector activity increased.
- Net income rose substantially, but the increase was primarily driven by the $20.2 million reimbursement-related recognition, not recurring operating revenue. Operating cash flow fell 83%, to $3.5 million, partly reflecting lower lot-sale collections and the absence of the prior year’s $10.5 million CAB reimbursement.
- Oil and gas water revenue recovered to $2.8 million from $0.5 million, but remains volatile and dependent on industry activity and commodity conditions.
Outlook, risks and unusual items
- Management expected significant Phase 2 lot activity in FY2022. The first subphase comprises 229 lots; 804 lots across Phase 2 were contracted to homebuilders for a stated total sales price of $65.0 million, subject to potential price escalations. The company estimated approximately $16.4 million of spending over the next 12 months to complete the first subphase, alongside approximately $14.0 million of anticipated homebuilder milestone payments.
- Management expected the first three rental homes to be available in November 2021 and planned 46 additional rental homes in Phase 2. Construction costs and expected returns for the additional homes were not yet estimated.
- Management said working capital was sufficient for the next 12 months. Funding plans rely on cash, lot-sale milestone payments and CAB reimbursements; reimbursements depend on future tax and fee revenues or bond issuance. The CAB note bears 6% interest, but repayment timing and collectability remain sensitive to development, home values and the tax base.
- COVID-19-related permitting and inspection delays postponed Phase 2 lot deliveries. The filing also cites inflation and shortages in construction materials and labor, housing-market and interest-rate sensitivity, water supply and drought risks, oil and gas volatility, regulatory changes, and potential development delays.
- A material weakness in internal controls over financial reporting involved spreadsheet preparation and review for public-improvement reimbursements and related interest. Management was implementing additional review controls and considering automation, with remediation targeted before FY2022 year-end. The auditor did not audit or opine on internal controls.
- The company reported a July 2021 ransomware incident, with no material information loss or customer or financial data compromise identified; water and wastewater operating systems were not affected. It reported no material probable-loss contingencies and no legal proceedings.
- The audited financial statements report net income of $20.110 million and tax expense of $6.480 million. Some MD&A summary text instead states $20.683 million and $5.906 million, respectively. The filing does not reconcile this inconsistency; investors should use the audited statements and verify the discrepancy.
Important facts for investors to verify
- Whether the $24.8 million CAB receivable is ultimately collected, on what schedule, and whether its recognition assumptions remain supportable.
- Reconcile the conflicting FY2021 net income and income-tax figures in the MD&A against the audited financial statements.
- Track Phase 2 permits, construction costs, lot deliveries, contracted payments and any delays or margin pressure from cost inflation.
- Assess whether recurring water and wastewater revenues and rental operations grow enough to offset dependence on lot sales and volatile oil and gas demand.
- Monitor remediation of the material weakness and the effectiveness of enhanced financial-reporting and cybersecurity controls.