Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended May 31, 2013. Financial statements are unaudited. The company provides wholesale water and wastewater services and leases agricultural land and water.
Financial results and position
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Revenue | $413,444 (2013); $57,567 (2012) | $1.286 million (2013); $175,098 (2012) |
| Net loss | $1.053 million (2013); $1.420 million (2012) | $3.045 million (2013); $4.145 million (2012) |
| Loss per common share | $0.04 (2013); $0.06 (2012) | $0.13 (2013); $0.17 (2012) |
- Gross margin was $298,929 for the quarter and $974,551 for the nine-month period. Nine-month operating loss was $792,887.
- Nine-month operating cash use was $1.326 million, compared with $1.594 million a year earlier. Investing activities provided $4.184 million; financing activities used $1.411 million. Cash rose to $3.069 million from $1.624 million at August 31, 2012.
- At May 31, working capital was approximately $4.6 million. Current assets were $10.202 million and current liabilities $5.630 million.
- Promissory notes payable totaled approximately $7.931 million, including $4.836 million current. The separate Tap Participation Fee liability was $70.686 million, a discounted estimate; the company reported a gross estimated obligation of $112.958 million before $42.272 million of future imputed interest discount.
- Total assets were $108.968 million, total liabilities $81.852 million, and shareholders’ equity $27.116 million.
Material changes versus the comparable periods
- Revenue increased substantially, principally because the company began recognizing farm lease income after terminating HP A&M’s farm-management agreement in August 2012, and because water deliveries to oil and gas drilling and hydraulic-fracturing customers increased. Farm revenue was $296,085 for the quarter and $963,935 for nine months; it was zero in the 2012 comparisons.
- Water deliveries increased 79% for the quarter and 80% for nine months. Water revenue rose 178% and 145%, respectively. Water delivery gross margin declined to 34% for the quarter from 48%, and to 43% for nine months from 51%, primarily due to higher ECCV system costs. Wastewater revenue declined 11% and 10%, respectively, as demand from the sole wastewater customer fell.
- Net losses narrowed year over year, in part as farm income increased and general and administrative expenses fell. Nine-month loss nevertheless included $2.417 million of noncash imputed interest on the Tap Participation Fee.
- The company sold pledged shares for approximately $3.415 million net and used cash and company-issued notes to acquire approximately $6.9 million of HP A&M’s defaulted third-party notes. It was negotiating to acquire the remaining approximately $2.7 million.
Outlook, risks and unusual items
- Management stated it believed working capital was sufficient to fund operations for the next fiscal year. No specific revenue or earnings guidance was provided. A proposed $15 million equity shelf registration filed June 7, 2013 was not effective as of the filing; an existing shelf allowing up to $4.45 million of common stock was due to expire July 28, 2013.
- HP A&M defaulted on notes secured by company land and water rights. Foreclosure proceedings covered 37 properties as of May 31, with one additional proceeding commenced afterward. The properties represent approximately 40% of the company’s FLCC shares and over 45% of its Arkansas River land. Management expected no material adverse effect, but stated there was no assurance it could retain all affected properties.
- Litigation with the Colorado Land Board includes disputes referred to binding arbitration in June 2013 concerning wastewater royalties and rights-of-way, Export Water royalty calculations, and water blending. Timing and outcomes were unknown. The company also continues to dispute claims by HP A&M. No loss accrual was recorded because losses were not considered reasonably estimable or likely.
- The Tap Participation Fee valuation depends on estimated housing development and future tap fees; actual outcomes could differ materially. The liability may be accelerated in certain transactions or insolvency events. The company had not sold taps in the reported periods.
- Water revenue is concentrated: one customer represented approximately 49% of water and wastewater revenue for the quarter and 50% for nine months. The District and its largest end customer also account for significant portions of water and wastewater revenue.
- Management reported effective disclosure controls as of May 31, 2013, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether HP A&M note acquisitions, foreclosure proceedings, or recovery actions affect the company’s land, water rights, liquidity, or obligations.
- Progress and potential financial effects of the Land Board arbitration and HP A&M litigation, including any recoverable reduction to the Tap Participation Fee.
- Sustainability and margins of water sales to oil and gas customers, and the extent to which farm revenue continues under direct management.
- Cash runway, potential equity financing, and scheduled payments on promissory notes; distinguish these from the contingent, tap-linked participation obligation.
- Assumptions underlying the $70.686 million recorded Tap Participation Fee liability and the recoverability of the company’s water assets.