Pure Cycle Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended August 31, 2020. Although the request references 2020 Q4, this filing reports annual results; it does not provide a clear standalone fourth-quarter financial summary. Pure Cycle combines wholesale water and wastewater services with land development, principally its Sky Ranch community in the Denver region.
Financial performance and position
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $25.9 million | $20.4 million |
| Gross profit | $7.5 million | $6.4 million |
| Operating income | $1.5 million | $3.0 million |
| Income before taxes | $8.9 million | $3.5 million |
| Net income | $6.8 million | $4.8 million |
| Diluted EPS | $0.28 | $0.20 |
| Cash provided by operating activities | $20.7 million | $3.5 million |
- Revenue rose 27%, led by Sky Ranch lot sales of $18.9 million, up 58%, and water and wastewater tap fees of $5.6 million, up 55%.
- Metered water revenue fell 77% to $1.0 million; oil-and-gas water revenue declined 88% to $0.5 million. Water deliveries fell 79% to 76.2 million gallons. Water-delivery gross margin contracted to 22% from 67%.
- Lot-sale gross margin improved to 16% from 5%. Wastewater services generated a $104,000 gross loss, versus a $8,000 gross profit in FY2019.
- Reported operating income declined despite higher revenue, reflecting higher general and administrative costs and a $1.4 million non-cash impairment of Arkansas Valley mineral interests. Net income included $6.3 million of income from a Sky Ranch public-improvement reimbursement. Consolidated gross margin was about 29% and operating margin about 6%, calculated from reported figures; net income also included the reimbursement and other non-operating items.
- At August 31, cash was $21.8 million, working capital was $19.8 million, total assets were $89.8 million, and shareholders’ equity was $82.0 million. The company reported no debt. Lease liabilities totaled approximately $194,000; a contingent Export Water obligation was not recorded on the balance sheet.
- Operating cash flow benefited from lot and tap receipts and the CAB reimbursement. Investing activities used $3.4 million, including $8.0 million invested in water, water systems and land, partly offset by net proceeds from securities. Financing activities provided $45,000.
Material changes and business developments
- Sky Ranch’s initial 506-lot filing was substantially completed: 483 finished lots had been delivered by year-end, and the remaining lots were sold on November 3, 2020. Builders had sold more than 315 homes by October 31, 2020.
- After year-end, Pure Cycle contracted with four builders for 789 finished lots in the next filing for $63.4 million, subject to contract conditions and price escalations. Management estimated development costs of $65.6 million and potential total sales of $72.6 million if the retained lots were sold at comparable prices.
- Management expected to start second-filing construction by December 2020, spend up to $15 million on it in FY2021, and receive about $12 million in builder milestone payments during that year. The full second filing is expected to take about three years to complete, depending on market conditions.
- In November 2019, Sky Ranch’s Community Authority Board issued bonds and reimbursed Pure Cycle $10.5 million of advances. The company recognized $6.3 million as other income and applied $4.2 million against capitalized land-development costs. Further reimbursement depends on available funds or future bond issuance.
- The company invested $2.8 million in FY2020 to fund the Rangeview District’s WISE obligations and purchased an additional 400 acre-feet of WISE water for $582,000. It projected further WISE-related funding of $1.1 million in FY2021 and $7.5 million in FY2022–2025.
Outlook, risks and unusual items
- Management stated that available working capital and expected phased builder payments were sufficient to fund operations for the next 12 months. It estimated second-filing development costs at $65.6 million; financing and timing remain dependent on execution, permitting, home sales and collections.
- COVID-19 and lower oil and gas prices sharply reduced fracking-water demand. Management reported a recovery in builder orders after stay-at-home restrictions eased, while noting permitting delays at Arapahoe County and uncertainty about the pandemic’s continuing effects.
- Sky Ranch public-improvement advances are not payable unless the CAB or districts have funds or issue bonds. The company reported $15.9 million of net public-improvement costs outstanding after the FY2020 reimbursement; repayment is not assured and unpaid amounts may ultimately be discharged under the agreement.
- Other key risks include housing-market weakness, construction cost or labor increases under fixed-price contracts, dependence on a small number of home builders and oil-and-gas customers, water-supply and regulatory risks, potential restrictions on oil and gas operations, and concentration in Colorado.
- Pure Cycle recorded a $1.4 million impairment of Arkansas Valley mineral rights. It also recognized $425,800 of prepaid industrial-water revenue when a customer failed to use the reserved water by the deadline. No material-loss contingencies or legal proceedings were reported.
- Management said previously identified material weaknesses in expense accruals and tax-provision controls had been remediated by year-end. The auditor issued an unqualified opinion on the financial statements; it did not opine on internal-control effectiveness.
Important facts for investors to verify
- Whether second-filing builder contracts satisfy due-diligence, entitlement and closing conditions, and whether construction and lot deliveries meet the schedule and cost estimates.
- The timing and amount of CAB bond issuances and recovery of outstanding public-improvement costs, accrued interest and deferred project-management fees.
- Whether Sky Ranch’s projected margins and builder demand hold up as the next filing progresses.
- Whether water-service growth can offset continued volatility in industrial oil-and-gas demand, and how changing regulations affect drilling and water sales.
- The company’s cash requirements for Sky Ranch, WISE and water infrastructure, including whether additional financing could be needed if builder payments or reimbursements are delayed.
- Related-party governance and exposure: company officers and employees also serve on the Rangeview and Sky Ranch district and CAB boards.