Pure Cycle(PCYO) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements This section presents Pure Cycle Corporation's unaudited condensed consolidated financial statements and detailed notes for the period ended November 30, 2020 Condensed Consolidated Balance Sheets The balance sheet shows a slight decrease in total assets, primarily driven by a reduction in current assets, while total liabilities decreased, leading to an increase in total shareholders' equity | Metric | Nov 30, 2020 (unaudited) | Aug 31, 2020 | | :-------------------------------- | :----------------------- | :----------- | | Total Assets | $88,953 thousand | $89,761 thousand | | Total Liabilities | $5,978 thousand | $7,717 thousand | | Total Shareholders' Equity | $82,975 thousand | $82,044 thousand | - Current assets decreased from $25,991 thousand to $24,358 thousand, mainly due to reductions in cash, receivables, and land development inventories[9] - Total current liabilities decreased significantly from $6,218 thousand to $4,422 thousand, primarily due to decreases in deferred oil and gas lease payments, water sales payments, and accrued liabilities[9] Condensed Consolidated Statements of Operations and Comprehensive Income The company experienced a substantial decrease in net income for the three months ended November 30, 2020, primarily due to lower lot sales revenue and a significant reduction in income from reimbursement of construction costs | Metric | 3 Months Ended Nov 30, 2020 | 3 Months Ended Nov 30, 2019 | Change ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | :--------- | | Total Revenues | $4,868 thousand | $10,460 thousand | $(5,592) thousand | -53.5% | | Gross Profit | $2,123 thousand | $1,874 thousand | $249 thousand | 13.3% | | Operating Income | $953 thousand | $988 thousand | $(35) thousand | -3.5% | | Net Income | $845 thousand | $5,763 thousand | $(4,918) thousand | -85.3% | | Basic and Diluted EPS | $0.04 | $0.24 | $(0.20) | -83.3% | - Lot sales revenue decreased significantly from $8,542 thousand in 2019 to $2,356 thousand in 2020, contributing to the overall revenue decline[10] - Income from reimbursement of construction costs (related party) was $0 in 2020, down from $6,276 thousand in 2019, a major factor in the reduced net income[10] Condensed Consolidated Statements of Shareholders' Equity Shareholders' equity increased from $82,044 thousand at August 31, 2020, to $82,975 thousand at November 30, 2020, primarily driven by net income and share-based compensation | Metric | Nov 30, 2020 | Aug 31, 2020 | | :-------------------------- | :----------- | :----------- | | Total Shareholders' Equity | $82,975 thousand | $82,044 thousand | | Accumulated Deficit | $(90,118) thousand | $(90,963) thousand | | Additional Paid-in Capital | $173,013 thousand | $172,927 thousand | - Net income of $845 thousand contributed to the increase in shareholders' equity for the three months ended November 30, 2020[12] - Share-based compensation added $86 thousand to additional paid-in capital during the period[12] Condensed Consolidated Statements of Cash Flows Cash flows from operating activities significantly decreased in the three months ended November 30, 2020, primarily due to the absence of a bond payment reimbursement and lower lot sales revenues, while investing activities shifted from a net cash provider to a net cash user | Metric | 3 Months Ended Nov 30, 2020 | 3 Months Ended Nov 30, 2019 | Change ($) | Change (%) | | :-------------------------------- | :-------------------------- | :-------------------------- | :--------- | :--------- | | Net Cash Provided by Operating Activities | $6 thousand | $14,721 thousand | $(14,715) thousand | -100% | | Net Cash (Used) Provided by Investing Activities | $(499) thousand | $2,875 thousand | $(3,374) thousand | -117% | | Net Cash Used by Financing Activities | $(1) thousand | $(2) thousand | $1 thousand | 50% | | Net Change in Cash and Cash Equivalents | $(494) thousand | $17,594 thousand | $(18,088) thousand | -102.8% | - The substantial decrease in operating cash flow was mainly due to the $4.2 million proceeds from CAB reimbursement applied to land development inventories in 2019 and higher lot sales revenues in the prior year[15] - Investing activities used cash in 2020 due to investments in water, water systems, and land, contrasting with 2019 which saw cash provided by the sale of short-term investments[15] Notes to Condensed Consolidated Financial Statements These notes provide essential context and detailed accounting policies for the condensed consolidated financial statements, covering various financial aspects and disclosures NOTE 1 – PRESENTATION OF INTERIM INFORMATION This note clarifies that the interim financial statements are unaudited and prepared in accordance with GAAP, with certain disclosures condensed or omitted, and discusses the non-material impact of the CARES Act and ASU 2016-13 - The unaudited condensed consolidated financial statements include all necessary adjustments for fair presentation[18] - Management does not anticipate a material impact from the CARES Act on the financial statements[20] - The adoption of ASU 2016-13 (Credit Losses) is not expected to have a material impact on the Company's financial statements[22] NOTE 2 – REVENUE RECOGNITION AND REIMBURSABLE COSTS The company disaggregates revenue into water/wastewater and land development segments, with recognition varying by service type, and defers reimbursable public improvement costs and project management fees until cash receipt due to payment contingencies - Water and wastewater resource development revenue includes monthly usage fees and tap fees, both recognized at a point in time[26][27] - Land development revenue from finished lot sales is recognized at the point of sale, while revenue from lot development agreements is recognized over time based on costs incurred[28][29] | Reimbursable Cost Type | Costs Incurred to Date (Nov 30, 2020) | Payments Repaid by Sky Ranch CAB | Amounts Payable to Pure Cycle by Sky Ranch CAB | | :-------------------------------- | :------------------------------------ | :------------------------------- | :--------------------------------------------- | | Public Improvements | $28,008 thousand | $10,505 thousand | $17,503 thousand | | Accrued interest | $1,456 thousand | — | $1,456 thousand | | Project management services | $1,496 thousand | — | $1,496 thousand | | Construction support activities | $683 thousand | — | $683 thousand | | Total Reimbursable Costs | $31,643 thousand | $10,505 thousand | $21,138 thousand | NOTE 3 – FAIR VALUE MEASUREMENTS The company uses a three-level fair value hierarchy, with no Level 1 or Level 2 assets or liabilities as of November 30, 2020, and the only Level 3 liability being a contingent portion of the CAA with an undeterminable fair value - No assets or liabilities were measured at fair value on a recurring basis as of November 30, 2020, or August 31, 2020[46] - The contingent portion of the CAA is classified as a Level 3 liability but its fair value is not determinable[44] NOTE 4 – WATER AND LAND ASSETS The company's investments in water and water systems primarily consist of various water supplies, water rights, and infrastructure, with construction in progress for additional water facilities at Sky Ranch expected to be completed in fiscal 2021 | Investment Category | Costs (Nov 30, 2020) | Accumulated Depreciation and Depletion (Nov 30, 2020) | Net Investment (Nov 30, 2020) | | :-------------------------------- | :------------------- | :------------------------------------------ | :---------------------------- | | Rangeview water supply | $14,570 thousand | $(16) thousand | $14,554 thousand | | Sky Ranch water rights and other costs | $7,538 thousand | $(1,035) thousand | $6,503 thousand | | Rangeview water system | $16,049 thousand | $(929) thousand | $15,120 thousand | | Construction in progress | $1,454 thousand | — | $1,454 thousand | | Total Net Investments | $60,977 thousand | $(5,812) thousand | $55,165 thousand | - Construction in progress increased from $1,339 thousand to $1,454 thousand, primarily for additional water facilities at Sky Ranch, anticipated to be in service during fiscal 2021[48] NOTE 5 – LONG-TERM OBLIGATIONS AND OPERATING LEASE This note details the company's long-term obligations, including a contingent participating interest in export water supply, new contracts for 789 residential lots at Sky Ranch with a 30% price increase, WISE Partnership investments, and operating lease commitments - The recorded obligation of the CAA is $0.3 million, with a contingent off-balance sheet portion of $0.6 million as of November 30, 2020[52] - New contracts were signed in November 2020 to sell 789 residential lots at Sky Ranch, with lot prices increasing by 30% from $75,000 to $97,000 for a 50' lot[54] - The company, through the Rangeview District, purchased an additional 166 acre-feet of WISE water for $0.3 million during the three months ended November 30, 2020[56] NOTE 6 – SHAREHOLDERS' EQUITY The company maintains the 2014 Equity Incentive Plan, with 979,382 shares available for grant as of November 30, 2020, and has unrecognized compensation expense for non-vested options totaling $0.8 million - As of November 30, 2020, 979,382 shares were available for grant under the 2014 Equity Plan[62] | Stock Option Activity | Number of Options | Weighted Average Exercise Price | | :-------------------------------- | :---------------- | :------------------------------ | | Outstanding at August 31, 2020 | 661,500 | $7.23 | | Granted | 115,000 | $9.00 | | Net settlement exercised | (18,000) | $3.04 | | Outstanding at November 30, 2020 | 758,500 | $7.59 | - Unrecognized compensation expenses for non-vested options totaled $0.8 million at November 30, 2020, with a weighted-average vesting period of approximately three years[67] NOTE 7 – RELATED PARTY TRANSACTIONS The company has significant related party transactions with the Rangeview Metropolitan District and the Sky Ranch Community Authority Board (CAB), involving funding for water infrastructure, loans, and advances for public improvements, with reimbursements contingent on bond issuances or property tax assessments - The Company's total investment in WISE assets as of November 30, 2020, is $6.1 million, funding the Rangeview District's participation[70] - Advances for improvements to the Sky Ranch CAB, including interest, totaled $21.1 million as of November 30, 2020, with interest income deferred until bonds are issued[75] - Notes receivable from related parties, primarily the Rangeview District, amounted to $1.1 million at November 30, 2020, including $0.4 million in accrued interest[71] NOTE 8 – SIGNIFICANT CUSTOMERS Significant customers for the water and wastewater resource development segment include Sky Ranch homes and Crestone Peak Resources, while key customers for the land development segment and tap fees are homebuilders such as Taylor Morrison, KB Home, and Richmond Homes - Sky Ranch homes and Crestone Peak Resources are significant end users for water and wastewater services[78] - Taylor Morrison, KB Home, and Richmond Homes are significant customers for land development and water/wastewater tap fees[78] NOTE 9 – ACCRUED LIABILITIES Total accrued liabilities decreased from $2,603 thousand at August 31, 2020, to $2,180 thousand at November 30, 2020, with key components including amounts due to the Sky Ranch CAB, other operating payables, and WISE water obligations | Accrued Liability | Nov 30, 2020 | Aug 31, 2020 | | :-------------------------------- | :----------- | :----------- | | Due to the Sky Ranch CAB - related party | $823 thousand | $1,169 thousand | | Accrued compensation | $146 thousand | $767 thousand | | WISE water | $326 thousand | $69 thousand | | Land development - warranty and other - related party | $321 thousand | — | | Total | $2,180 thousand | $2,603 thousand | - A significant decrease in accrued compensation and amounts due to the Sky Ranch CAB contributed to the overall reduction in accrued liabilities[79] NOTE 10 – COMMITMENTS AND CONTINGENCIES The company was not involved in any litigation or legal proceedings, nor did it have any contingencies with a reasonably possible risk of material loss as of November 30, 2020, or August 31, 2020 - No material loss contingencies were identified as probable or reasonably estimable[80] NOTE 11 – SEGMENT INFORMATION The company operates in two reportable segments: water and wastewater resource development, and land development, with oil and gas operations considered a passive activity, and both reportable segments showing improved gross margins despite varying revenue performance | Segment | Total Revenue (Nov 30, 2020) | Gross Margin (Nov 30, 2020) | Pretax Operating Income (Nov 30, 2020) | | :-------------------------------- | :--------------------------- | :-------------------------- | :------------------------------------- | | Water and wastewater resource development | $2,512 thousand | $1,486 thousand | $1,486 thousand | | Land development | $2,356 thousand | $637 thousand | $637 thousand | | Corporate | $0 | $0 | $(1,170) thousand | | Total | $4,868 thousand | $2,123 thousand | $953 thousand | | Segment | Total Assets (Nov 30, 2020) | Total Assets (Aug 31, 2020) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Water and wastewater resource development | $55,376 thousand | $56,267 thousand | | Land development | $6,598 thousand | $6,975 thousand | | Corporate | $26,979 thousand | $26,519 thousand | | Total | $88,953 thousand | $89,761 thousand | - Water and wastewater resource development revenue increased from $1,918 thousand in 2019 to $2,512 thousand in 2020, while land development revenue decreased from $8,542 thousand to $2,356 thousand[84] NOTE 12 – INCOME TAXES Income tax expense for the three months ended November 30, 2020, was $0.3 million, significantly lower than the prior year, with a stable effective income tax rate and an increased net deferred tax liability | Metric | 3 Months Ended Nov 30, 2020 | 3 Months Ended Nov 30, 2019 | | :-------------------- | :-------------------------- | :-------------------------- | | Income Tax Expense | $0.3 million | $1.9 million | | Effective Tax Rate | 24.6% | 24.7% | | Deferred Tax Component | Nov 30, 2020 | Aug 31, 2020 | | :----------------------- | :----------- | :----------- | | Depreciation and depletion | $(1,672) thousand | $(1,701) thousand | | Non-qualified stock options | $505 thousand | $491 thousand | | Net deferred tax liability | $(1,012) thousand | $(886) thousand | - No taxes were paid during the three months ended November 30, 2020, or 2019[88] NOTE 13 – EARNINGS PER SHARE Basic and diluted net income per common share for the three months ended November 30, 2020, was $0.04, a significant decrease from $0.24 in the prior year, with certain outstanding options excluded from diluted EPS as they were anti-dilutive | Metric | 3 Months Ended Nov 30, 2020 | 3 Months Ended Nov 30, 2019 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Net Income | $845 thousand | $5,763 thousand | | Basic EPS | $0.04 | $0.24 | | Diluted EPS | $0.04 | $0.24 | | Weighted Average Common Shares Outstanding – Basic | 23,866,740 | 23,826,598 | | Weighted Average Shares Applicable to Diluted EPS | 24,036,479 | 24,050,695 | - 180,000 outstanding options were excluded from the diluted EPS calculation for the three months ended November 30, 2020, as they were anti-dilutive[90] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of the company's financial condition and operating performance, discussing revenue and expense changes, liquidity, and future investments OVERVIEW Pure Cycle Corporation operates as a diversified land and water resource development company, integrating wholesale water and wastewater services with master planned community development at Sky Ranch - Pure Cycle is a vertically integrated wholesale water and wastewater service provider and land developer, primarily at its Sky Ranch Master Planned Community[94][95] - The company owns or controls 29,500 acre-feet of groundwater and surface water supplies and 26,000 acre-feet of adjudicated reservoir sites, providing a competitive advantage in the water-limited Denver region[96] - Sky Ranch is zoned for up to 3,200 homes and over two million square feet of commercial space, with land development activities generating revenue from lot sales and reimbursements for public improvements[98] Recent Developments The company has signed new contracts for 789 lots at Sky Ranch, achieving a 30% price increase for comparable lots, with the first filing nearing completion and the second filing expected to begin construction in January 2021, despite COVID-19 related delays - New contracts for 789 residential lots at Sky Ranch's second development phase resulted in a 30% increase in lot prices, from $75,000 to $97,000 for a 50' lot[102] - The first filing at Sky Ranch is nearly complete, with $1.3 million remaining obligations, and the second filing (895 lots) is expected to begin construction in January 2021[101][102] - COVID-19 has caused delays in governmental inspections and permitting processes, but the company still delivered remaining lots for the first filing ahead of original contract dates[103] Results of Operations The company's net income significantly decreased by 85% for the three months ended November 30, 2020, primarily due to lower lot sales revenue and the absence of a large reimbursement for construction costs received in 2019, while water usage revenues saw substantial growth Executive Summary The executive summary highlights a substantial increase in metered water usage revenues, particularly from oil and gas operations, and a significant decrease in lot sales revenue and other income from construction cost reimbursements, leading to an 85% drop in net income | Metric | 3 Months Ended Nov 30, 2020 | 3 Months Ended Nov 30, 2019 | $ Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Total Metered Water Usage Revenues | $1,366 thousand | $140 thousand | $1,226 thousand | 876% | | Lot Sales Revenue | $2,356 thousand | $8,542 thousand | $(6,186) thousand | -72% | | Water Delivery Gross Margin | $821 thousand | $(114) thousand | $935 thousand | 820% | | Net Income | $845 thousand | $5,763 thousand | $(4,918) thousand | -85% | - Water deliveries increased by 549% (88 million gallons) year-over-year, primarily driven by oil and gas operations[105] - Land development gross margin improved from 6% to 27% despite lower revenue, indicating better cost control or higher-margin sales[105] Discussion of Changes in Summary Results Metered water usage revenues surged by 876%, mainly due to increased fracking water sales at higher margins, while wastewater treatment revenues grew but with decreased gross margin, and lot sales revenue declined by 72% due to timing | Customer Type (Water Sales) | 3 Months Ended Nov 30, 2020 Sales | 3 Months Ended Nov 30, 2019 Sales | % Change | | :---------------------------- | :-------------------------------- | :-------------------------------- | :------- | | Fracking | $1,199 thousand | $37 thousand | 3,141% | | Sky Ranch | $99 thousand | $9 thousand | 1,000% | | Total Metered Water Usage | $1,366 thousand | $140 thousand | 876% | - Wastewater treatment revenues increased by 110% but gross margin decreased by 733% due to increased staff and startup costs for the new water reclamation facility at Sky Ranch[105][108] - Lot sales revenues decreased by 72% as the first filing at Sky Ranch neared completion, with most revenue already recognized[109] General and Administrative Expenses General and administrative (G&A) expenses increased by 36% for the three months ended November 30, 2020, primarily driven by higher salary and salary-related expenses due to increased headcount, bonus accruals, and a new 401K match policy, as well as increased professional fees | G&A Expense Category | 3 Months Ended Nov 30, 2020 | 3 Months Ended Nov 30, 2019 | $ Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Salary and salary-related (incl. share-based comp) | $685 thousand | $412 thousand | $273 thousand | 66% | | Professional fees | $186 thousand | $145 thousand | $41 thousand | 28% | | Total G&A Expenses | $1,086 thousand | $801 thousand | $285 thousand | 36% | - The increase in salary and salary-related expenses was attributed to a headcount increase of 5, fiscal 2021 bonus accrual, and the addition of a 401K match policy[111] Other Income and Expense Items Other income items saw a significant decrease, primarily due to the absence of the $6.3 million income from reimbursement of construction costs received in November 2019, alongside declines in oil and gas royalty/lease income and interest income | Other Income Item | 3 Months Ended Nov 30, 2020 | 3 Months Ended Nov 30, 2019 | $ Change | % Change | | :------------------------------------ | :-------------------------- | :-------------------------- | :------- | :------- | | Oil and gas royalty income, net | $75 thousand | $270 thousand | $(195) thousand | -72% | | Oil and gas lease income, net | $52 thousand | $62 thousand | $(10) thousand | -16% | | Interest income | $15 thousand | $54 thousand | $(39) thousand | -72% | | Income from reimbursement of construction costs (related party) | $0 | $6,276 thousand | $(6,276) thousand | -100% | - The 100% decrease in income from reimbursement of construction costs was due to the Sky Ranch CAB issuing $13.2 million in bonds in November 2019, of which $6.3 million was recognized as income in that period[117][118] - Decreased oil and gas production and the expiration of a lease with Bison Oil and Gas, LLP, led to declines in royalty and lease income[114][115] Liquidity, Capital Resources and Financial Position As of November 30, 2020, the company had $19.9 million in working capital, including $21.3 million in cash and cash equivalents, deemed sufficient for the next 12 months, with future obligations for Sky Ranch development and WISE partnership investments expected to be funded by future revenues and existing cash - Working capital was $19.9 million, with $21.3 million in cash and cash equivalents, considered sufficient for the next 12 months[119] - The company anticipates investing $1.1 million in 2021 and $7.5 million through 2025 in the WISE partnership for water and infrastructure, funded by future revenues and cash balances[122] - Cash provided by operating activities decreased by 100% (from $14.7 million to $6 thousand) year-over-year, primarily due to the 2019 bond payment reimbursement and increased lot sales revenues in the prior period[123][124] Disclosure Regarding Forward-Looking Statements This section provides a cautionary statement regarding forward-looking statements, highlighting inherent risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from projected results[129] - Readers are cautioned to read forward-looking statements in conjunction with 'Risk Factors' in the company's most recent Annual Report on Form 10-K[130] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there are no quantitative and qualitative disclosures about market risk applicable to the company for the reported period - The company has no applicable quantitative and qualitative disclosures about market risk[132] Item 4. Controls and Procedures The company's disclosure controls and procedures were evaluated and deemed effective as of November 30, 2020, with no material changes made to internal control over financial reporting during the most recently completed fiscal quarter - Disclosure controls and procedures were evaluated and concluded to be effective as of November 30, 2020[133] - No material changes to internal control over financial reporting occurred during the quarter[134] PART II. OTHER INFORMATION Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including articles of incorporation, bylaws, certifications from principal executive and financial officers, and XBRL instance and taxonomy documents - Includes certifications from principal executive and financial officers as required by the Sarbanes-Oxley Act of 2002[137] - XBRL Instance Document and Taxonomy Extension documents are filed herewith[137] SIGNATURES This section contains the required signatures for the Form 10-Q, certifying its submission on behalf of Pure Cycle Corporation by its Vice President and Chief Financial Officer - The report was signed by Kevin B. McNeill, Vice President and Chief Financial Officer, on January 5, 2021[141]