PURE CYCLE CORPORATION — FY2015 Form 10-K
Reporting period: Fiscal year ended August 31, 2015. This is an annual filing, not a standalone fourth-quarter report; quarterly data are unaudited. Pure Cycle provides wholesale water and wastewater services in the Denver area and sold its southeastern Colorado farm and related water assets during the year.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Total revenue | $2.324 million | $3.091 million |
| Gross profit | $1.438 million | $2.228 million |
| Operating loss | $1.436 million | $1.578 million |
| Net loss | $23.128 million | $0.311 million |
| Net loss per share | $0.96 | $0.01 |
| Cash from operating activities | $(0.974) million | $0.052 million |
| Cash and cash equivalents at year-end | $37.089 million | $1.750 million |
| Working capital at year-end | $38.1 million | Not provided here |
| Total liabilities at year-end | $2.975 million | $17.143 million |
| Debt at year-end | No debt | $4.958 million mortgages payable |
The $22.108 million loss on sale of land and water assets drove the large FY2015 net loss. Water gross margin, excluding depletion, fell to 52% from 71%; wastewater operations had a negative 10% gross margin. Operating cash flow was negative. Investing activities provided $42.532 million, principally from the farm-asset sale, while financing activities used $6.218 million.
Material changes versus FY2014
- Revenue declined about 25%, primarily as water deliveries fell 49% to 97.5 million gallons. Fracking-water revenue decreased to $782,700 from $1.717 million; the company reported no oil and gas drilling rigs in its service area and no water sales to that industry as of the filing.
- Farm and associated water assets were sold on August 18, 2015, for approximately $45.8 million, producing a reported loss of approximately $22.1 million. About $1.342 million of consideration remained in escrow pending resolution of dry-up covenant issues. The company repaid farm-related debt and had no debt at year-end.
- The HP A&M settlement eliminated the Tap Participation Fee liability and the related receivable; the settlement also transferred mineral interests to Pure Cycle. Farm operations were to continue only through December 31, 2015.
- Cash increased substantially following the asset sale. The company held $37.1 million in cash and said it believed available working capital was sufficient to fund operations for the next fiscal year.
Outlook, risks and unusual items
- Management’s strategy centers on developing Denver-area water assets and serving future residential, commercial and industrial demand. The company reported 258 water and 157 wastewater SFE connections through the Rangeview Metropolitan District; it had not sold water or wastewater taps in FY2015, FY2014 or FY2013.
- Pure Cycle anticipated investing about $1.2 million annually in WISE for the next five years. In exchange for funding the District’s participation, it expects rights to use the District’s 7% share, including approximately 500 acre-feet per year and 3 million gallons per day of transmission capacity upon expected project completion in 2021.
- The company expected to spend $400,000–$500,000 in FY2016 on wastewater-treatment improvements to meet tighter discharge requirements. Full build-out of Lowry Range water facilities was estimated to cost more than $340 million over an extended period; management expects tap fees to fund infrastructure, but timing and development are uncertain.
- Key risks include reliance on a small customer base, concentration in oil-and-gas water demand, housing and development delays, water-rights and permitting uncertainty, weather and drought, construction cost overruns, and regulatory changes. A customer directly and indirectly accounted for approximately 75% of water and wastewater revenues in FY2015. Fracking-water sales essentially ceased in March 2015.
- The company flagged possible Investment Company Act issues if proceeds from the sale are invested in securities that cause the relevant asset threshold to be exceeded. Cash was held in money-market accounts at year-end, which the filing says are not investment securities for this purpose. The filing also reports a $646,400 contingent CAA obligation payable upon Export Water sales; timing and amount of such sales are uncertain.
- No formal earnings or revenue guidance was provided. Management cautioned that forward-looking plans depend on development, financing, water demand and regulatory outcomes. The Land Board minimum annual water-production fee was still under negotiation and estimated at no more than $140,000. The auditor reported fairly presented financial statements and effective internal control over financial reporting.
Important facts for investors to verify
- Escrow release conditions and timing for the approximately $1.342 million withheld from the farm-asset sale, including the subsequent acquisition of three farms to address dry-up covenant issues.
- Actual post-March 2015 oil-and-gas water demand, customer concentration and any resumption of fracking-related sales.
- Progress, total funding obligations and expected delivery timing for WISE, and whether the planned annual contributions remain accurate.
- Cash deployment and investment policy, including continued compliance with the Investment Company Act and the company’s liquidity needs as water-system spending increases.
- Whether wastewater-treatment upgrades meet the April 2016 permit deadline and remain within the disclosed cost estimate.
- Development progress at Sky Ranch and the Lowry Range, future tap sales, and the status of the Land Board production fee and contingent CAA payments.