Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended February 29, 2016. The interim financial statements are unaudited. Pure Cycle is primarily a wholesale water and wastewater provider serving governmental entities and their customers in Colorado. Its agricultural operations were sold in August 2015 and are reported as discontinued operations.
Financial performance and position
| Metric | Three months ended February 29, 2016 | Six months ended February 29, 2016 |
|---|---|---|
| Total revenue | $76,442, versus $371,988 | $202,352, versus $941,952 |
| Operating loss | $556,731, versus $324,127 | $1,055,509, versus $520,551 |
| Loss from continuing operations | $242,058, versus $151,397 | $397,707, versus $176,909 |
| Net loss | $270,699, versus $85,995 | $368,240, versus $75,687 |
| Cash flow from operations | Six-month net cash used: $225,177, versus $662,156 used |
- Water usage revenue fell 92% for the quarter and 90% for the six-month period, as deliveries dropped 91% and 86%, respectively. Management attributed the decline primarily to reduced oil-and-gas drilling and fracking demand amid lower oil prices. No fracking-water sales were reported in the 2016 periods.
- Water delivery gross margin was negative: approximately 114% negative for the quarter and 49% negative for the six months, compared with 72% positive in each prior-year period. Management cited the sharp fall in deliveries and ongoing ECCV system costs, including about $9,900 per month to maintain the system without production.
- At February 29, cash and cash equivalents were $6.18 million; short-term investments were $20.00 million and long-term investments $10.02 million. Working capital was $27.1 million. Total assets were $71.73 million and shareholders’ equity $69.84 million.
- Total recorded liabilities were $1.89 million; the filing reports no conventional borrowings on the balance sheet. A recorded participating-interest liability was $344,554. A further approximately $678,700 contingent obligation under the CAA is off balance sheet and payable only from Export Water sales.
- Six-month investing cash outflow was $30.68 million, largely reflecting purchases of short- and long-term investments totaling approximately $30.0 million. The company also spent about $270,100 on water and land assets and $411,900 on equipment.
Changes, outlook and risks
- Compared with the prior year, the substantial reduction in fracking-water sales drove the revenue decline and weaker water margins. Oil-and-gas royalties contributed $194,602 in the six-month period, versus none in the comparable 2015 period; interest income rose to $141,400 from $14,835, mainly due to investing proceeds from the farm sale.
- Pure Cycle received approximately $1.3 million of escrow proceeds after resolving dry-up covenant issues and acquired about 700 acres to address those issues. The land is held for sale, and management intends to sell it within the next fiscal year.
- Management said available working capital was sufficient to fund operations for the next fiscal year. It anticipated approximately $4 million of spending over the next 12 months to connect the Lowry and Sky Ranch systems, and approximately $1.2 million annually for five years to fund the District’s WISE participation. The company also disclosed an effective shelf registration under which it could sell up to $15 million of stock.
- Management expects the WISE project, scheduled for completion in 2021, to provide the company use of approximately three million gallons per day of pipeline capacity and 500 acre-feet per year of water. These are forward-looking estimates, not assured outcomes.
- Revenue and asset performance depend on development and new connections, customer demand, water delivery costs, oil-and-gas activity, permitting, construction, and regulatory and water-court outcomes. Water and wastewater revenues are concentrated: a District end-use customer accounted for 89% of water and wastewater revenue in the quarter and 76% for the six months. The company also reports related-party funding arrangements and related-party receivables.
- The CAA contingent obligation is dependent on Export Water sales, whose timing and amount are not reasonably determinable. The company stated it has rights to approximately $29.8 million of Export Water proceeds and that the remaining potential third-party obligation was about $1.0 million. Litigation and other ordinary-course claims are disclosed, but the filing text does not provide a clear quantified exposure.
- Management concluded disclosure controls were effective as of February 29, 2016, and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether water demand and new customer connections can recover after the sharp decline in oil-and-gas-related sales, and whether existing customer concentration changes.
- Actual timing and cost of the planned pipeline interconnection and WISE funding, and whether the projects generate the expected service capacity and revenue.
- Liquidity available after investment purchases, planned capital commitments, and any potential equity issuance under the shelf registration.
- Disposition proceeds and timing for the 700 acres held for sale, and the ultimate cash flows from the CAA and Export Water arrangements.
- Assumptions supporting water-asset recoverability, future tap sales, and management’s stated ability to fund operations for the next fiscal year.