Pure Cycle(PCYO) - 2023 Q1 - Quarterly Report

Forward-Looking Statements Forward-Looking Statements Summary This section outlines the company's forward-looking statements, including plans, financial projections, and associated risks - Key forward-looking statements relate to the development of the Sky Ranch property, including the number of units, timing of construction, and anticipated financial results from lot sales and tap fees[8] - The company identifies significant risks that could impact future performance, including deterioration in the homebuilding industry, rising interest rates, population growth changes, supply chain disruptions, and changes in governmental policies[10] - The company explicitly states it has no obligation to update forward-looking statements, and all such statements are qualified by the cautionary language provided[12] PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements This section presents the unaudited consolidated financial statements for the three months ended November 30, 2022, including balance sheets, statements of operations, statements of shareholders' equity, and cash flows Consolidated Balance Sheets The consolidated balance sheet shows total assets decreased slightly to $128.0 million, while total liabilities decreased and shareholders' equity slightly increased Consolidated Balance Sheet Highlights (in thousands) | Account | Nov 30, 2022 (unaudited) | Aug 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $16,843 | $34,894 | | Investments in U.S. Treasury Bills | $15,113 | $0 | | Total current assets | $33,510 | $37,786 | | Total assets | $128,037 | $129,229 | | Total current liabilities | $9,557 | $10,823 | | Total liabilities | $14,789 | $16,233 | | Total shareholders' equity | $113,248 | $112,996 | Consolidated Statements of Operations Total revenues significantly decreased to $1.3 million from $4.3 million year-over-year, primarily due to a sharp decline in lot sales, leading to a net income of $0.16 million Consolidated Statement of Operations Summary (in thousands, except per share data) | Metric | Three Months Ended Nov 30, 2022 | Three Months Ended Nov 30, 2021 | | :--- | :--- | :--- | | Total revenues | $1,340 | $4,273 | | Lot sales | $513 | $2,945 | | Operating (loss) income | $(1,489) | $1,480 | | Net income | $159 | $1,514 | | Diluted EPS | $0.01 | $0.06 | Consolidated Statements of Cash Flows Net cash used by operating activities improved to $0.8 million, while investing activities used $17.2 million, primarily for U.S. Treasury Bills, resulting in an $18.1 million decrease in cash Consolidated Statement of Cash Flows Summary (in thousands) | Cash Flow Activity | Three Months Ended Nov 30, 2022 | Three Months Ended Nov 30, 2021 | | :--- | :--- | :--- | | Net cash used by operating activities | $(758) | $(5,954) | | Net cash used by investing activities | $(17,179) | $(2,248) | | Net cash (used) provided by financing activities | $(114) | $1,000 | | Net change in cash, cash equivalents and restricted cash | $(18,051) | $(7,202) | Notes to Condensed Consolidated Financial Statements These notes detail the company's investment in U.S. Treasury Bills, the growing note receivable from Sky Ranch CAB, revenue sources, debt obligations, and segment performance - The company invested $15.1 million in U.S. Treasury Bills classified as held-to-maturity with maturity dates in March 2023[27] - The note receivable from the Sky Ranch CAB for reimbursable public improvements, project management fees, and interest grew to $18.5 million as of November 30, 2022, up from $17.2 million at the start of the quarter[32] - During the quarter, the company acquired the remaining obligation related to the 'CAA' for $0.1 million in cash, resulting in a recorded gain of $0.2 million[57] Significant Customer Revenue Concentration | Customer/Group | % of Total Revenue (Q1 FY23) | % of Total Revenue (Q1 FY22) | | :--- | :--- | :--- | | Sky Ranch homes and Sky Ranch CAB | 19% | 12% | | Two oil & gas operators | 15% | 10% | | KB Home | 13% | 16% | | Lennar | 9% | 25% | | Challenger | 9% | 23% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the housing market's deterioration, an 89% decrease in net income, and the company's diversified business strategy and sufficient liquidity Recent Developments and Economic Conditions The housing market rapidly deteriorated in Q3 2022 due to inflation and rising interest rates, leading to delayed construction at Sky Ranch, though long-term fundamentals remain positive - The housing market deteriorated rapidly in Q3 2022, caused by inflation and rising mortgage rates, leading many buyers to pause home purchases[86] - In response to market conditions, the company has delayed the start of construction on Phase 2B of the Sky Ranch development to avoid incurring costs amid declining demand[87] Our Business Strategy The company operates a cohesive business model across Water and Wastewater, Land Development, and Single-Family Rentals, with plans to expand its rental portfolio at Sky Ranch - The company's primary land asset, Sky Ranch, is being developed into a master-planned community with up to 3,200 homes and over two million square feet of commercial space[99] - Construction on Phase 2A of Sky Ranch (229 lots) is approximately 80% complete as of the report date, with contracts to sell 804 lots in the second development phase and 46 lots retained for its single-family rental business[102][105] - The company is expanding its single-family rental business, with 3 homes leased, 1 completed in December 2022, and 10 more under construction in Phase 2A, expected to be ready for rental throughout fiscal 2023[108] Results of Operations Net income for Q1 FY23 decreased by 89% to $0.2 million, primarily due to an 83% drop in lot sales and a 26% decline in water and wastewater revenue, partially offset by increased other income Consolidated Results of Operations (in thousands) | Metric | Three Months Ended Nov 30, 2022 | Three Months Ended Nov 30, 2021 | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $1,340 | $4,273 | $(2,933) | (69)% | | Lot sales | $513 | $2,945 | $(2,432) | (83)% | | Total cost of revenue | $1,326 | $1,383 | $(57) | (4)% | | Net income | $159 | $1,514 | $(1,355) | (89)% | - Water and wastewater tap sales declined from 9 in Q1 FY22 to 4 in Q1 FY23 due to the timing of home closings and building permit applications at Sky Ranch[117][120] - Land development segment operating income plummeted to $0.3 million from $2.7 million year-over-year, reflecting the slowdown in construction activities at Sky Ranch[124] Liquidity, Capital Resources and Financial Position The company maintains $24.0 million in working capital, including $16.8 million in cash and $15.0 million in treasury notes, deemed sufficient for the next 12 months, with significant future capital commitments for Sky Ranch development and rental units - The company has working capital of $24.0 million as of November 30, 2022, and believes it is sufficient to fund operations for the next 12 months[127] - Future capital needs include completing the $65.0 million second phase of Sky Ranch, with $18.8 million expected to be spent in the next 12 months, and an additional $1.8 million to complete contracted single-family rental units[128][131] Summary Cash Flows (in thousands) | Cash Flow Activity | Three Months Ended Nov 30, 2022 | Three Months Ended Nov 30, 2021 | | :--- | :--- | :--- | | Operating activities | $(758) | $(5,954) | | Investing activities | $(17,179) | $(2,248) | | Financing activities | $(114) | $1,000 | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company states that this item is not applicable - No quantitative or qualitative disclosures about market risk are provided as the company deems them not applicable[139] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of November 30, 2022, with no material changes to internal control over financial reporting - The President and CFO concluded that the company's disclosure controls and procedures were effective as of November 30, 2022[141] - No material changes were made to internal control over financial reporting during the quarter[142] PART II. OTHER INFORMATION Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, primarily consisting of certifications by the principal executive and financial officers and Inline XBRL documents - Exhibits filed include Sarbanes-Oxley Act certifications (Sections 302 and 906) and Inline XBRL instance and taxonomy documents[144] Signatures Signatures Summary The report is duly signed on behalf of Pure Cycle Corporation by Kevin B. McNeill, Vice President and Chief Financial Officer, on January 13, 2023 - The Form 10-Q was signed by Kevin B. McNeill, Vice President and Chief Financial Officer, on January 13, 2023[149]