Pure Cycle Corporation — Q2 FY2019 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2019. The interim financial statements are unaudited. Pure Cycle develops wholesale water and wastewater services and the Sky Ranch master-planned community east of Denver.
Financial performance and position
- Quarter revenue: $2.63 million, versus $844,661 in the prior-year quarter. Sky Ranch land-development revenue contributed $1.95 million; wholesale water and wastewater revenue was $684,038.
- Quarter earnings: Gross profit was $374,292; operating loss was $275,708; net loss was $96,025. The prior-year quarter reported net income of $100,162. The loss reflected weaker water usage and higher water-service operating costs, partly offset by lot and tap-fee revenue and higher interest income.
- Six-month results: Revenue was $5.70 million versus $1.85 million; gross profit was $1.62 million versus $1.08 million; operating income was $243,391 versus an operating loss of $214,403; and net income was $537,947 versus $3,551. Basic and diluted earnings were $0.02 per share for the six-month period.
- Water economics: Quarter water deliveries fell to 13.8 million gallons from 62.7 million, and metered water revenue fell 80% to $159,018. Water-delivery gross margin was negative 44%, versus positive 83%, due partly to lower oil-and-gas demand, WISE water purchases, and fixed system costs. For six months, deliveries declined 3% and metered revenue declined 12%; water gross margin was 63% versus 72%.
- Cash flow: Operating cash use was $3.49 million and investing cash use was $4.20 million for the six months; financing provided $109,089. Cash and cash equivalents declined to $3.98 million from $11.57 million at August 31, 2018.
- Liquidity and assets: Short-term investments were $7.14 million; cash plus short-term investments totaled $11.11 million. Working capital was $21.2 million. Total assets were $74.35 million and total liabilities $4.13 million. Management said available working capital was sufficient to fund operations for the next 12 months.
- Debt and obligations: The filing reports no conventional borrowing balance. The recorded Participating Interests in Export Water Supply liability was $333,275; a further approximately $658,000 was contingent, for a remaining potential third-party obligation of about $991,000. The contingent obligation is payable only from Export Water proceeds and is not recorded on the balance sheet.
Changes, outlook, and principal risks
- The major year-over-year change was the start of Sky Ranch lot construction and revenue recognition: no land-development revenue was reported in the comparable 2018 periods. Quarter lot revenue was $1.95 million with $1.83 million of related construction costs; six-month lot revenue was $3.33 million with $3.13 million of costs.
- Pure Cycle had contracts for 506 Sky Ranch lots and reported $29.4 million of contracted revenue not yet recognized; it expects to recognize approximately 54% over the next 12 months. It had delivered 150 platted lots and was targeting completion of the first finished lots in fiscal 2019.
- Management estimated first-phase Sky Ranch development capital of approximately $35 million, including about $27 million expected to be reimbursable by the Community Authority Board (CAB) through municipal-bond proceeds. Lot sales were estimated to generate about $36 million of revenue and a roughly $1 million margin before reimbursements. Reimbursement is contingent on bond issuance; timing and amount are uncertain. The CAB advances accrue interest, but amounts unpaid by December 31, 2058 are discharged.
- Management planned to phase further lot investment to builder commitments and payments, and anticipated investing approximately $3.0 million in WISE during 2019 and $6.8 million over five fiscal years. These are estimates, not guaranteed outcomes.
- Key exposures include oil-and-gas water-demand volatility and customer concentration, fixed water-system costs, construction and completion risks, and the timing of CAB bond issuance and reimbursement. Sky Ranch and utility customers are concentrated among a small number of builders and industrial customers. Certain district and CAB boards include company employees.
- The filing disclosed no contingencies considered reasonably possible as of February 28, 2019. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether Sky Ranch finished-lot deliveries, builder payments, and the expected recognition of contracted revenue occur on schedule.
- Whether the CAB or Sky Ranch districts issue bonds and reimburse the company for development advances, and how delays affect cash needs.
- Whether oil-and-gas water demand recovers and water-service margins improve despite fixed system and WISE costs.
- The use and maturity profile of cash and investments, and whether liquidity remains adequate for planned development and WISE spending.
- The terms, priority, and eventual payment of the recorded and contingent Export Water obligations.