Pure Cycle Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2024, the three months ended November 30, 2023; comparisons are with the three months ended November 30, 2022. Pure Cycle provides wholesale water and wastewater services, develops the Sky Ranch community, and operates a small single-family rental business. Unless noted otherwise, amounts below are in millions of dollars.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Revenue | $5.386 | $1.340 |
| Operating income (loss) | $1.756 | $(1.489) |
| Net income | $2.065 | $0.159 |
| Basic and diluted EPS | $0.09 | $0.01 |
| Cash used in operating activities | $(1.228) | $(0.758) |
| Cash used in investing activities | $(2.389) | $(17.179) |
| Cash used in financing activities | $(0.206) | $(0.114) |
Revenue increased 302%, led by commercial water sales to oil and gas operators and higher lot-sale revenue recognized as construction progressed. Commercial water revenue rose to $2.132 million from $0.392 million; lot sales rose to $1.896 million from $0.513 million. Water deliveries increased to 623 acre-feet from 207 acre-feet. Management said oil and gas water sales generated higher profits because this was lower-cost water than traditional domestic supply.
Operating margin was approximately 32.6% of revenue and net margin approximately 38.3% (calculated from reported figures). Net income increased to $2.065 million from $0.159 million. Other income, net, was $1.046 million versus $1.778 million, including related-party interest income of $0.724 million versus $0.247 million. The filing does not clearly explain the prior-period “Other, net” amount of $1.218 million, compared with $0.070 million this quarter.
Financial position and liquidity
- At November 30, 2023, cash and cash equivalents were $21.784 million, restricted cash was $2.880 million, and short-term investments were $0.167 million. Working capital was $20.4 million.
- Total assets were $137.329 million and total liabilities were $17.147 million. Debt principal was $6.974 million, with $0.034 million current and $6.874 million of debt, net of financing costs, reported as long-term.
- The company reported a $5.0 million working-capital line of credit and said it was undrawn. Its stated two-year maturity from January 31, 2022 would fall in January 2024; the filing does not state whether it was extended.
- Operating cash use was driven in part by a $3.686 million increase in trade receivables, development spending, and advances for reimbursable Sky Ranch public improvements. Cash, cash equivalents and restricted cash declined $3.823 million during the quarter.
Business developments, outlook and risks
- Sky Ranch Phase 2A was approximately 95% complete and Phase 2B approximately 43% complete. Phase 2B was expected to be completed by the end of fiscal 2024; Phase 2C was scheduled to start in fiscal 2024’s second quarter.
- Management estimated up to $15.5 million of Sky Ranch Phase 2 spending over the next 12 months and approximately $19 million of builder milestone payments, finished-lot payments and tap fees during that period. It estimated total infrastructure costs for all 850 Phase 2 lots at $74.6 million.
- Pure Cycle expected to spend approximately $6 million to build 17 additional rental homes in calendar 2024. It had 14 homes rented and said it reserved 91 Phase 2 lots for rentals; its longer-term plan is to expand the rental business to more than 200 units.
- The Sky Ranch Community Authority Board owed Pure Cycle $28.270 million for reimbursable public improvements, project management fees and accrued interest. The balance accrues interest at 6%; repayment timing depends on the CAB’s available cash, tax base, fees or bond proceeds. The company anticipated advancing approximately $15.5 million more for public improvements during the remainder of fiscal 2024.
- Management cited elevated mortgage rates, inflation, economic uncertainty, construction delays, labor and material costs, and housing-market weakness as risks. It said lot delivery and development timing are being managed with homebuilder partners. Water revenues also depend on customer growth and usage; oil and gas sales are a notable source of quarterly revenue.
- Management stated that working capital was sufficient to fund operations for the next 12 months. This is not formal earnings guidance; interim results are not necessarily indicative of full-year results.
- The company adopted the CECL credit-loss standard on September 1, 2023, with no material reported effect. Seven construction-related letters of credit totaling $2.9 million were secured by restricted cash. The filing reported no material changes to internal control over financial reporting and said disclosure controls were effective.
Important facts for investors to verify
- Reconcile cash-flow figures: the consolidated cash-flow statement reports operating cash use of $1.228 million and investing cash use of $2.389 million, while the MD&A cash-flow summary reports $1.440 million and $2.177 million, respectively.
- Check the status and renewal or replacement of the $5.0 million working-capital line, given its stated January 2024 maturity.
- Assess collection timing and credit exposure on the $28.270 million related-party CAB receivable, as well as planned additional advances and dependence on CAB revenues or bond financing.
- Evaluate sustainability of the quarter’s unusually strong oil and gas water sales and customer concentration: two oil and gas operators generated 37% of revenue.
- Track Sky Ranch construction progress, builder payment milestones, remaining costs, and sensitivity to housing demand, interest rates and construction costs.
- Seek clarification on the large year-over-year change in “Other, net” income and its effect on comparability.