Pure Cycle Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended November 30, 2021. Comparative results are for the three months ended November 30, 2020. The filing is unaudited. Pure Cycle provides wholesale water and wastewater services, develops the Sky Ranch community, and has begun renting single-family homes.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Revenue | $4.273 million | $4.868 million |
| Operating income | $1.480 million | $0.953 million |
| Net income | $1.514 million | $0.845 million |
| Diluted EPS | $0.06 | $0.04 |
| Cash from operating activities | $(5.954) million | $0.006 million |
| Cash used in investing activities | $(2.248) million | $(0.499) million |
- Revenue fell 12%, while net income rose 79%. Operating margin was approximately 34.6%, compared with 19.6% a year earlier; net margin was approximately 35.4%, compared with 17.4%.
- Land development revenue increased 36% to $3.193 million, including $2.945 million of lot sales and $0.248 million of project management fees. Water and wastewater resource development revenue declined 57% to $1.072 million. Rental revenue was $8,000, reflecting the first month of rent from three homes.
- Cash and cash equivalents were $12.914 million at November 30, down from $20.117 million at August 31, 2021. Cash, cash equivalents and restricted cash totaled $15.242 million. Working capital was $22.4 million.
- Total debt was approximately $1.0 million, principally the new rental-home note; $7,000 was current and $993,000 long-term. Total liabilities were $11.985 million.
Material changes and operating drivers
- Net income benefited from higher lot-sale activity and margins, recognition of project management revenue, and $362,000 of related-party interest income. Management said margins improved in part because qualifying public improvement costs are now recorded as receivables from the Sky Ranch Community Authority Board (CAB), rather than as land development costs.
- Oil and gas water revenue declined to $386,000 from $1.199 million; management attributed the comparison partly to a prior-year prepaid water contract that expired unused, with revenue recognized then but not recurring this quarter. Total water deliveries fell 26%, and tap sales fell to 9 from 36.
- Operating cash flow was negative despite positive earnings, mainly reflecting a $4.723 million increase in the Sky Ranch CAB note receivable, $2.978 million of net tax payments, and timing of vendor payments. Investing cash outflow primarily supported Sky Ranch development.
- The Company recorded $29.517 million due from the Sky Ranch CAB for reimbursable improvements, project management fees and accrued interest, bearing 6% interest. Payment depends on the CAB’s tax base, fees and potential bond financing; amounts not repaid by specified contractual dates in 2058 or 2060 are discharged under the agreements.
Outlook, risks and unusual items
- Management stated it believes available working capital and financing sources are sufficient for the next 12 months. It estimates $20.5 million of Sky Ranch Phase 2 spending over that period and anticipates $17.9 million of milestone and completed-lot payments from builders. Management also expects CAB bond offerings of at least $16.0 million in the next 12 months, but cautioned there is no assurance bonds will be issued.
- The first Phase 2 subphase comprises 229 lots, including 10 retained for rentals; the first 219 contracted lots were expected to be delivered in summer 2022. Management estimates $65 million to complete all 850 Phase 2 lots and expects the phase to take about three years, subject to market conditions and permitting.
- The Company began renting three homes in November 2021, contracted for a fourth, and reserved 46 Phase 2 lots for rental homes. Management plans to grow the rental business to more than 200 units over several years.
- COVID-related delays in county approvals and permitting affected Phase 2 progress. Other cited risks include construction cost and material availability, housing and credit conditions, water demand and drought restrictions, oil and gas activity, and collectability and timing of CAB reimbursements.
- Disclosure controls were deemed ineffective because of a material weakness in controls over spreadsheets supporting reimbursable public improvement balances and related interest. Management is implementing additional review steps and considering automation; remediation had not yet been concluded as of the filing.
- A new $1.0 million rental-home note was entered into November 29, 2021, secured by the three rental homes. It carries a 3.75%–4.25% rate, matures December 2026, and includes a minimum annual debt-service coverage ratio of 1.10.
Key facts for investors to verify
- Whether the Sky Ranch CAB can repay the $29.5 million receivable on expected timelines, including whether anticipated bond offerings occur and on what terms.
- Whether Phase 2 permitting, construction, lot deliveries and builder payments meet management’s stated schedule and spending estimates.
- Whether water and tap revenue recover as development advances, given lower oil and gas demand and fewer taps sold in the quarter.
- Progress toward remediating the material weakness and whether controls over related-party receivables and interest are operating effectively.
- Rental-unit occupancy, rental economics and financing coverage as the single-family rental business expands.