Pure Cycle(PCYO) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents Pure Cycle Corporation's unaudited consolidated financial statements, detailing financial position, operational results, and cash flows for the periods ended May 31, 2022 Consolidated Balance Sheets As of May 31, 2022, total assets slightly decreased to $115.4 million, while total liabilities substantially decreased to $8.1 million, resulting in an increase in total shareholders' equity to $107.3 million Consolidated Balance Sheet Highlights (in thousands) | Account | May 31, 2022 (unaudited) | August 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $5,422 | $20,117 | | Notes receivable - related party, reimbursable public improvements (non-current) | $19,320 | $8,794 | | Total assets | $115,386 | $117,177 | | Total current liabilities | $5,337 | $12,460 | | Total liabilities | $8,077 | $14,437 | | Total shareholders' equity | $107,309 | $102,740 | Consolidated Statements of Operations For the nine months ended May 31, 2022, total revenues remained flat at $12.1 million, while net income significantly decreased to $4.0 million due to a non-recurring prior-year gain Key Operational Results (unaudited, in thousands, except EPS) | Metric | Three Months Ended May 31, 2022 | Three Months Ended May 31, 2021 | Nine Months Ended May 31, 2022 | Nine Months Ended May 31, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $3,187 | $2,666 | $12,123 | $12,273 | | Operating income | $624 | $328 | $3,611 | $3,338 | | Net income | $837 | $624 | $4,044 | $18,276 | | Basic EPS | $0.03 | $0.03 | $0.17 | $0.77 | | Diluted EPS | $0.03 | $0.03 | $0.17 | $0.76 | - The significant decrease in net income for the nine-month period is primarily due to the recognition of $17.3 million in public improvement reimbursables from a related party in the prior year period, which did not recur in 2022[19] Consolidated Statements of Shareholders' Equity For the nine months ended May 31, 2022, total shareholders' equity increased to $107.3 million, primarily driven by net income and share-based compensation Changes in Shareholders' Equity (Nine Months Ended May 31, 2022, in thousands) | Description | Amount | | :--- | :--- | | Balance at August 31, 2021 | $102,740 | | Net income | $4,044 | | Share-based compensation | $332 | | Stock granted for services | $159 | | Stock option exercises | $34 | | Balance at May 31, 2022 | $107,309 | Consolidated Statements of Cash Flows For the nine months ended May 31, 2022, the company experienced a significant net cash outflow of $14.7 million, primarily due to cash used in operating and investing activities Cash Flow Summary (Nine Months Ended, in thousands) | Activity | May 31, 2022 | May 31, 2021 | | :--- | :--- | :--- | | Net cash (used) provided by operating activities | $(11,933) | $193 | | Net cash used by investing activities | $(3,794) | $(2,253) | | Net cash provided by financing activities | $1,033 | $59 | | Net change in cash, cash equivalents and restricted cash | $(14,694) | $(2,001) | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of accounting policies, significant transactions, and financial statement components, including public improvement reimbursements, new business ventures, and subsequent events - The company determined in fiscal 2021 that reimbursement for public improvements, project management fees, and interest from the Sky Ranch Community Authority Board (CAB) was probable of collection, leading to the recognition of these items as a note receivable and related income[30][35] Note Receivable from Sky Ranch CAB (in thousands) | Component | Balance at Aug 31, 2021 | Activity during 9-mos ended May 31, 2022 | Balance at May 31, 2022 | | :--- | :--- | :--- | :--- | | Reimbursable public improvements and other | $20,580 | $8,845 | $29,425 | | Accrued interest | $2,559 | $1,152 | $3,711 | | Project management services | $1,655 | $529 | $2,184 | | Total reimbursable costs | $24,794 | $10,526 | $35,320 | - The company has begun a single-family rental business, completing three homes in November 2021 and planning to expand with an additional 46 lots reserved in Sky Ranch Phase 2[44][57][61] - Subsequent to the quarter end, on June 27, 2022, the company acquired approximately 370 acre-feet of water rights in the Lost Creek basin for $3.6 million, funded partially by a new $3.0 million loan[102][103] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's diversified business model, operational results, liquidity, and capital resources, highlighting segment performance and future commitments for the periods ended May 31, 2022 Business Strategy and Overview The company's strategy leverages its water rights and land, integrating wholesale water/wastewater services, Sky Ranch land development, and a new single-family rental business to create a cohesive ecosystem - The business model integrates three segments: Water and Wastewater Resource Development, Land Development (primarily Sky Ranch), and a new Single-Family Rental business[105][108] - The second development phase at Sky Ranch includes contracts to sell 804 residential lots to four homebuilders, with an approximate 40% increase in average lot prices compared to Phase 1[116] - The company is expanding its single-family rental business, with three homes completed, a fourth under construction, and 46 lots reserved in Sky Ranch Phase 2 for future rental units[107][123] Results of Operations For the nine months ended May 31, 2022, operating income increased 8% to $3.6 million, while net income significantly decreased 78% to $4.0 million due to a non-recurring prior-year gain, with varied performance across segments Consolidated Results Summary (Nine Months Ended May 31) | (In thousands) | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $12,123 | $12,273 | $(150) | (1)% | | Operating income | $3,611 | $3,338 | $273 | 8% | | Net income | $4,044 | $18,276 | $(14,232) | (78)% | Water and Wastewater Segment Operating Income (Nine Months Ended May 31, in thousands) | Metric | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total segment revenue | $5,891 | $7,386 | $(1,495) | (20)% | | Segment operating income | $2,782 | $4,524 | $(1,742) | (39)% | Land Development Segment Operating Income (Nine Months Ended May 31, in thousands) | Metric | 2022 | 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $6,173 | $4,887 | $1,286 | 26% | | Segment operating income | $5,013 | $2,800 | $2,213 | 79% | Liquidity, Capital Resources and Financial Position As of May 31, 2022, the company maintained $18.6 million in working capital, with significant future capital commitments for Sky Ranch infrastructure and the WISE water partnership, expected to be funded by homebuilder payments and bond offerings - Working capital was $18.6 million as of May 31, 2022, including $5.4 million in cash and cash equivalents[160] - The company anticipates spending $18.8 million on Sky Ranch infrastructure in the next twelve months, expecting to receive an equivalent amount in payments from homebuilders[161] - The company anticipates receiving at least $16.0 million from a Sky Ranch CAB bond offering expected to be completed before August 31, 2022[115] - Future capital commitments include funding the Rangeview District's participation in the WISE water project, with an anticipated investment of $1.0 million in 2022 and $5.8 million in total for fiscal years 2023-2025[163] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company has indicated that this item is not applicable - Not applicable[171] Item 4. Controls and Procedures As of May 31, 2022, disclosure controls and procedures were deemed ineffective due to a material weakness in internal controls related to tracking public improvement reimbursables, with remediation efforts underway - Disclosure controls and procedures were deemed not effective as of May 31, 2022[173] - A material weakness was identified in internal controls related to ineffective management review of spreadsheets used to track public improvement reimbursables and interest income[173] - Remediation efforts include adding more review steps for complex schedules and considering the implementation of an automated software system[173] PART II. OTHER INFORMATION Item 1A. Risk Factors The company states that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the year ended August 31, 2021 - There have been no material changes during the three and nine months ended May 31, 2022, to the risk factors discussed in the 2021 Annual Report[177] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including officer certifications pursuant to the Sarbanes-Oxley Act and Inline XBRL data files - The exhibits include certifications from the principal executive officer and principal financial officer as required by Sections 302 and 906 of the Sarbanes-Oxley Act[178] SIGNATURES - The report was duly signed on July 11, 2022, by Kevin B. McNeill, Vice President and Chief Financial Officer of Pure Cycle Corporation[181][182]