Pure Cycle Corp. 10-Q Summary: Quarter Ended November 30, 2009
Business Context and Reporting Period
Pure Cycle Corporation is a water and wastewater service provider operating in the southeastern Denver metropolitan area. The company designs, constructs, and maintains water systems, generating revenue through tap fees (connection charges) and monthly service fees. This report covers the three-month period ended November 30, 2009. The company reported 20,206,566 shares of common stock outstanding as of January 7, 2010.
Key Financial Metrics
| Metric | Q1 2010 (Nov 30, 2009) | Q1 2009 (Nov 30, 2008) |
|---|---|---|
| Total Revenues | $59,573 | $63,842 |
| Net Loss | $(1,278,687) | $(1,712,055) |
| Net Loss Per Share | $(0.06) | $(0.08) |
| Cash and Cash Equivalents | $408,283 | $5,238,973 (Beginning of period) |
| Marketable Securities | $3,010,473 | $3,002,208 |
| Total Assets | $107,685,666 | $108,091,081 |
| Total Liabilities | $61,174,216 | $60,321,893 |
| Working Capital | $3,568,111 | $3,852,300 |
Revenue Breakdown: Metered water usage was $28,878; wastewater treatment fees were $16,744; and recognized deferred revenues totaled $13,951.
Major Expense Items: The primary driver of the net loss was imputed interest on the Tap Participation Fee payable to HP A&M, totaling $884,000 for the quarter. General and administrative expenses were $357,410.
Material Changes vs. Prior Period
- Net Loss Reduction: The net loss decreased by approximately 25% ($433,368) compared to the prior year quarter. This improvement was driven by a 33% reduction in general and administrative expenses and a decrease in imputed interest expense.
- Revenue Decline: Total revenues decreased by 7% ($4,269). Water delivery volumes dropped 28% (from 8.1 to 5.8 million gallons) due to reduced usage by the company's largest customer, Ridgeview Youth Services Center, following funding cuts.
- Expense Management: General and administrative expenses fell from $531,305 to $357,410. This was largely due to a 77% reduction in professional fees and a 63% reduction in consulting fees, attributed to the withdrawal of a developer from the Lowry Range project and general cost-cutting measures.
- Imputed Interest: Imputed interest on the Tap Participation Fee liability decreased from $1.163 million to $884,000, reflecting updated valuation assumptions made in February 2009 regarding the weak housing market.
Outlook, Risks, and Contingencies
Guidance and Outlook: Management believes current working capital of approximately $3.6 million is sufficient to fund operations for the next fiscal year. However, the company has an effective shelf registration to sell up to $5.7 million of stock if needed. Future capital for development relies on the sale of water taps to developers, which is contingent on housing market recovery.
Key Risks and Contingencies:
- Tap Participation Fee Liability: The company has a significant liability of $58.4 million (net of discount) related to a 10% royalty on the sale of the next 38,937 water taps to HP A&M. This liability is valued using discounted cash flow models based on housing development projections. Actual development and tap fees may vary significantly from estimates.
- HP A&M Promissory Notes: Certain properties are subject to promissory notes totaling approximately $12.0 million held by HP A&M. While Pure Cycle is not responsible for payments, a default by HP A&M could result in the loss of properties and water rights unless Pure Cycle cures the default.
- Paradise Water Rights: The Paradise Water Supply is subject to a "Finding of Reasonable Diligence" review every six years by the Colorado Water Court. Failure to meet stipulations could result in the loss of these rights and a required impairment of the asset.
- Customer Concentration: Two customers (Ridgeview Youth Services Center and Schmidt Aggregates) accounted for 69% of water and wastewater revenues in the quarter.
Investor Verification Checklist
- Valuation Assumptions: Verify the assumptions used to value the $58.4 million Tap Participation Fee liability, specifically regarding future housing development rates and tap fee pricing in the Denver metro area.
- HP A&M Solvency: Monitor the financial status of HP A&M regarding the $12.0 million in promissory notes secured by Pure Cycle's properties to assess the risk of default.
- Development Pipeline: Assess the status of the Lowry Range and Sky Ranch projects, as delays or withdrawals directly impact the ability to sell taps and generate revenue.
- Regulatory Compliance: Confirm progress on the stipulations required to maintain the Paradise Water Supply rights ahead of the next Water Court diligence review.
- Liquidity Runway: Review cash burn rates against the $3.6 million working capital to determine if additional equity financing will be required before significant tap sales occur.