Pure Cycle(PCYO) - 2025 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Consolidated Financial Statements Net income rose 40% to $7.0 million on higher royalty income, despite an 8% revenue drop, while assets and operating cash flow grew Consolidated Balance Sheet Highlights (in thousands) | Account | May 31, 2025 | August 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Assets | | | | | Cash and cash equivalents | $14,392 | $21,946 | ($7,554) | | Land under development | $8,068 | $3,647 | $4,421 | | Reimbursable public improvements (Net) | $40,600 | $40,964 | ($364) | | Investments in water and water systems, net | $64,954 | $60,486 | $4,468 | | Total assets | $151,739 | $147,354 | $4,385 | | Liabilities & Equity | | | | | Total liabilities | $15,064 | $17,652 | ($2,588) | | Total shareholders' equity | $136,675 | $129,702 | $6,973 | Consolidated Income Statement Highlights (in thousands) | Account | Nine Months Ended May 31, 2025 | Nine Months Ended May 31, 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Total revenues | $14,887 | $16,187 | -8% | | Cost of revenues | $6,437 | $6,202 | +4% | | Operating income | $1,726 | $4,456 | -61% | | Oil and gas royalty income, net | $5,857 | $479 | +1123% | | Net income | $7,002 | $5,008 | +40% | | Diluted EPS | $0.29 | $0.21 | +38% | Consolidated Cash Flow Highlights (in thousands) | Activity | Nine Months Ended May 31, 2025 | Nine Months Ended May 31, 2024 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $3,799 | ($793) | $4,592 | | Net cash used in investing activities | ($8,350) | ($3,991) | ($4,359) | | Net cash used in financing activities | ($350) | ($462) | $112 | Notes to Consolidated Financial Statements The notes detail segment performance, revenue drivers, related-party transactions, and debt obligations Revenue Analysis A surge in tap fee revenue to $5.3 million was offset by declines in lot sales and commercial water usage revenue - For the nine months ended May 31, 2025, the company sold 130 water taps and 127 wastewater taps, generating $5.3 million in revenue, a significant increase from 35 water and 33 wastewater taps sold for $1.2 million in the prior year period[33] - Metered water sales revenue for the nine months ended May 31, 2025, decreased to $2.1 million from $5.8 million in the prior year, primarily due to a drop in water sold to industrial users like oil and gas companies[34] - Lot sales revenue, recognized using the percent-of-completion method for the Sky Ranch development, was $6.0 million for the nine months ended May 31, 2025, compared to $7.9 million in the same period of 2024[35] - The company is expanding its single-family rental portfolio, with 14 homes currently rented and has reserved an additional 84 lots in Sky Ranch for future rentals, aiming for a total of 98 units[38][39] Segment Information The Water segment's profit grew while Land Development profit declined, with assets concentrated in the Water segment Segment Profit (Loss) (in thousands) | Segment | Nine Months Ended May 31, 2025 | Nine Months Ended May 31, 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Water and wastewater resource development | $4,142 | $3,883 | +7% | | Land development | $4,068 | $5,906 | -31% | | Single-family rental | $240 | $196 | +22% | Total Assets by Segment (in thousands) | Segment | May 31, 2025 | August 31, 2024 | | :--- | :--- | :--- | | Water and wastewater resource development | $68,588 | $64,616 | | Land development | $11,497 | $8,521 | | Single-family rental | $5,272 | $5,371 | | Corporate | $66,382 | $68,846 | | Total assets | $151,739 | $147,354 | Debt and Other Long-Term Obligations Total debt stood at $6.9 million, with an undrawn $5.0 million credit line and $6 million in letters of credit Outstanding Debt Principal (in thousands) | Loan | May 31, 2025 | | :--- | :--- | | Single-Family Rental Home Note Payable | $3,908 | | Lost Creek Note Payable | $3,000 | | Total outstanding principal | $6,908 | - On January 31, 2024, the company entered into a $5.0 million working capital line of credit, which was undrawn as of May 31, 2025[60] - The company has $6 million in outstanding Irrevocable Letters of Credit to guarantee performance on construction projects at Sky Ranch, secured by restricted cash[61] Related Party Transactions The company holds a $40.6 million net receivable from the Sky Ranch CAB for public infrastructure advancements - The note receivable from the Sky Ranch CAB, for reimbursable public improvements and other fees, had a balance of $40.6 million as of May 31, 2025[30][79] - During the nine months ended May 31, 2025, the company advanced $9.4 million for public improvements and received payments of $11.4 million from the Sky Ranch CAB[28] - Significant customers for the nine months ended May 31, 2025, included homebuilders Lennar (21% of total revenue) and KB Home (20%), and two oil & gas operators (6%)[83][84] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Net income grew 40% to $7.0 million driven by royalty income, with sufficient liquidity to navigate housing market headwinds Business Overview and Strategy The company's strategy integrates water services, land development, and rentals at its Sky Ranch community - The company operates a cohesive business model combining water/wastewater services, land development at the Sky Ranch master-planned community, and a single-family rental business[97][104] - The Sky Ranch development is being built in phases; as of May 31, 2025, Phase 2A is 100% complete, Phase 2B is 96% complete, Phase 2C is 68% complete, and Phase 2D is 29% complete[113][114][115][116] - The company is expanding its single-family rental business, with 14 homes completed and rented, and plans to build on an additional 84 reserved lots in Phase 2 of Sky Ranch[120] - For Phase 2 of Sky Ranch, the company estimates total water and wastewater tap fees will exceed $20.0 million[119] Results of Operations Net income rose 40% to $7.0 million, driven by a 220% surge in other income that offset an 8% revenue decline Consolidated Results of Operations (in thousands) | Account | Nine Months Ended May 31, 2025 | Nine Months Ended May 31, 2024 | Change (%) | | :--- | :--- | :--- | :--- | | Total revenue | $14,887 | $16,187 | -8% | | Operating income | $1,726 | $4,456 | -61% | | Other income, net | $7,551 | $2,357 | +220% | | Net income | $7,002 | $5,008 | +40% | - Water and wastewater tap fee revenue increased 355% to $5.3 million for the nine months ended May 31, 2025, due to the timing of lot deliveries at Sky Ranch[131][133] - Commercial water usage revenue decreased 74% to $1.3 million for the nine months ended May 31, 2025, due to a decline in water sales to oil and gas operators[131] - Lot sales revenue decreased 24% to $6.0 million for the nine months ended May 31, 2025, due to the timing of construction activities recognized under the percentage of completion method[134] Liquidity and Capital Resources The company holds $18.1 million in working capital and generated $3.8 million in operating cash flow - As of May 31, 2025, the company had working capital of $18.1 million, including $14.4 million in cash and cash equivalents, which is considered sufficient to fund operations for the next 12 months[137] - For the next 12 months, the company anticipates spending up to $18.4 million on Sky Ranch infrastructure and receiving approximately $28.0 million in milestone and finished lot payments from builders[138] Summary of Cash Flows (in thousands) | Activity | Nine Months Ended May 31, 2025 | Nine Months Ended May 31, 2024 | | :--- | :--- | :--- | | Operating activities | $3,799 | ($793) | | Investing activities | ($8,350) | ($3,991) | | Financing activities | ($350) | ($462) | PART II - OTHER INFORMATION Legal Proceedings A court denied the company's application for new water rights, though existing rights were unaffected - On February 7, 2025, a Colorado Water Court denied the company's application for 1,635 acre-feet of new water rights from the Box Elder Creek Alluvial aquifer and the consolidation and enlargement of certain reservoirs[52][147] - The court's ruling did not impact the company's existing water rights or reservoir storage sites, and the company is working towards a settlement on three outstanding claims[147] Share Repurchases The company repurchased 2,000 shares in the quarter, with 112,074 shares remaining under the buyback program Common Stock Repurchases (Quarter Ended May 31, 2025) | Period | Total Shares Purchased | Average Price Paid per Share | Shares Remaining in Program | | :--- | :--- | :--- | :--- | | April 2025 | 2,000 | $10.19 | 112,074 | | Total | 2,000 | $10.19 | 112,074 | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Management concluded that as of May 31, 2025, the company's disclosure controls and procedures were effective[144] - No material changes were made to internal control over financial reporting during the quarter[145]