Pure Cycle Corporation — Form 10-Q Summary
Business and period: Pure Cycle provides wholesale water and wastewater services and develops the approximately 930-acre Sky Ranch community near Denver. This unaudited report covers the quarter and six months ended February 29, 2020; comparisons are to the periods ended February 28, 2019.
Financial performance
| Metric | Three months ended Feb. 29, 2020 | Six months ended Feb. 29, 2020 | Comparable 2019 period |
|---|---|---|---|
| Revenue | $3.52 million | $13.98 million | $2.63 million / $5.70 million |
| Gross profit | $1.07 million | $2.95 million | $0.37 million / $1.62 million |
| Operating income (loss) | $(61,825) | $926,779 | $(275,708) / $243,391 |
| Net income (loss) | $273,918 | $6.04 million | $(96,025) / $537,947 |
| Operating cash flow | Not presented for quarter | $16.54 million | $(3.49) million for six months |
- Six-month revenue growth was led by Sky Ranch lot sales ($10.81 million, up 225%) and water and wastewater tap fees ($2.85 million, up 294%).
- Six-month net income included a one-time $6.28 million gain from reimbursement of Sky Ranch public-improvement costs after the CAB’s bond sale. Approximately $4.2 million of proceeds reduced capitalized inventory costs; the remaining approximately $6.3 million was recognized as other income.
- Oil and gas water demand fell sharply: water deliveries declined 85% for the six months and metered water revenue declined 87%. The resulting water-delivery gross margin was negative 134%, versus positive 63% in the prior-year period. Lower fracking demand and associated fixed system costs also weighed on quarterly results.
- Cash and cash equivalents were $19.89 million and short-term investments were $1.72 million at February 29, 2020, together $21.61 million. Working capital was $16.9 million. Management said it believed available working capital was sufficient for at least 12 months.
- Total liabilities were $10.45 million; the filing does not report conventional bank borrowings. The balance sheet includes $328,330 of participating-interest liability. A further CAA obligation is contingent on Export Water sales and is not recorded; the filing estimates the remaining potential third-party obligation at approximately $977,000, including the recorded liability.
Changes, outlook, and risks
- Compared with the prior-year six months, revenue and profit increased substantially, but reported earnings were materially boosted by the CAB reimbursement gain. Excluding this unusual item, underlying profitability was considerably lower than reported net income suggests.
- The CAB reimbursed approximately $10.5 million of public-improvement advances from municipal bond proceeds. At February 29, the company reported $16.96 million of net reimbursable costs incurred to date, including accrued interest; reimbursement depends on future bond issuance or other available CAB funds. The CAB’s repayment obligation is conditional, and advances not repaid by December 31, 2058 are discharged under the agreement.
- Management expected approximately $4.5 million of additional public-improvement construction costs and approximately $18.5 million of additional reimbursement. It said the reimbursement had increased the expected margin from land development revenues to approximately 27%.
- Sky Ranch open contracts totaled $13.70 million, primarily for 506 lots, with approximately 89% expected to be recognized over the next 12 months. The company said it was working to deliver the remaining contracted lots ahead of original deadlines by year-end 2020. Permitting for the next phase was expected to take at least six months, potentially longer, in part because of county staffing and COVID-19 disruption.
- COVID-19 had not significantly affected operations as of the financial-statement issuance date, but management could not estimate potential future effects. The filing identifies risks to development schedules, permitting, materials, homebuilder activity, oil-and-gas demand, financing, and liquidity. Oil-and-gas water demand was already described as nearly nonexistent amid low prices and pandemic-related disruption.
- Revenue and customer concentration are notable: three homebuilders represented all land-development revenue, and water revenue depends on a limited number of customers. The company is reducing consulting work and expects consulting fees to be minimal in future periods.
- Disclosure controls were concluded to be ineffective. Management identified material weaknesses involving related-party expense accruals and preparation of the income-tax provision; remediation was underway, with completion targeted before fiscal year-end 2020. No material litigation or reasonably possible material-loss contingency was reported.
Important facts for investors to verify
- How much of reported earnings and operating cash flow reflects the nonrecurring CAB reimbursement, and how much future reimbursement is realistically collectible and when?
- Whether Sky Ranch lot deliveries, homebuilder purchases, and next-phase permits remain on schedule given COVID-19 and local permitting delays.
- How reduced oil-and-gas activity affects water volumes, margins, and customer concentration, and whether municipal and development-related demand offsets the decline.
- Whether the company’s $21.61 million of cash and short-term investments remains adequate for planned water-system investment, WISE commitments, and development obligations.
- Progress in remediating the material weaknesses and any subsequent changes to disclosure controls or financial reporting.
- The tax provision and remaining deferred tax assets: the six-month tax expense was $1.97 million, and the company used its remaining approximately $2.5 million of net operating loss carryforwards.