Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2017; comparative period is the three months ended November 30, 2016. The filing was signed January 9, 2018. The financial statements are unaudited.
Business context
Pure Cycle provides wholesale water and wastewater services and is developing the 931-acre Sky Ranch community east of Denver. It also receives oil and gas lease and royalty income. The company’s principal operating focus is water service, including increased industrial demand for water used in oil and gas operations.
Financial performance
| Metric | Quarter ended Nov. 30, 2017 | Quarter ended Nov. 30, 2016 | Change |
|---|---|---|---|
| Total revenue | $1.010 million | $199,098 | Up $811,034 |
| Gross profit | $579,933 | $53,591 | Up $526,342 |
| Gross margin | 57.4% | 26.9% | Improved |
| Operating loss | $200,090 | $463,636 | Loss narrowed $263,546 |
| Net loss | $96,611 | $337,972 | Loss narrowed $241,361 |
| Net cash used in operations | $692,014 | $258,536 | Use increased $433,478 |
- Metered water revenue rose 554% to $922,573; deliveries increased 333% to 77.5 million gallons. Management attributed growth mainly to oil and gas water demand and the acquisition of the Wild Pointe system. Water delivery gross margin improved to 62% from 43%.
- Wastewater fees were $11,189, down 9%. Tap fees recognized were $49,948; no special-facility revenue was recognized in the quarter.
- General and administrative expense increased 49% to $660,983, including higher salary-related and professional expenses. Depreciation and depletion totaled $174,985 across cost of revenue and operating expenses.
- Other income included $54,462 interest income, $41,762 oil and gas royalties, and $9,289 oil and gas lease income. Royalties fell 39%, principally because one producing well was taken out of service for work.
Financial position and liquidity
- At November 30, 2017, cash and cash equivalents were $3.704 million and short-term investments were $20.941 million; working capital was $26.0 million. Management said available working capital was sufficient for operations over the next 12 months.
- Total assets were $69.616 million and shareholders’ equity was $68.564 million. Total liabilities were $1.052 million, including $340,606 of recorded participating interests in Export Water Supply. The filing reports no conventional interest-bearing corporate debt.
- Cash declined $1.871 million during the quarter. Investing activities used $1.394 million, including $482,082 invested in water, water systems and land and $885,586 used to purchase short-term investments.
- Trade receivables increased to $1.445 million from $663,762. Operating cash use included a $781,217 increase in trade receivables and payments of accounts payable and accrued liabilities.
Material changes, outlook and risks
- Sky Ranch: Three builders agreed to proceed with contracts covering 506 lots after completing due diligence on November 10, 2017. The company estimated approximately $27.8 million of capital required for the first phase and approximately $35 million in lot sales, implying a projected margin of about $7.2 million. It expected to begin off-site improvements estimated at $10.2 million and to deliver about 250 initial lots over 12–18 months. These are estimates, not guaranteed results; funding depends in part on construction milestones and builder payments.
- Revenue accounting: The company early adopted ASC 606 effective September 1, 2017, using the modified retrospective method. The adoption increased opening equity by $1.055 million through a reduction in accumulated deficit. Tap and construction fees may be recognized earlier under the new rules; prior-period figures were not restated. The filing’s comparison indicates the quarter’s net loss would have been $82,660 under the prior standard versus $96,611 as reported.
- Other commitments and contingencies: The company expects to invest approximately $5.2 million over five years to fund Rangeview’s participation in the WISE water project. The CAA includes a contingent obligation payable only from Export Water sale proceeds; the filing estimates approximately $671,200 of remaining contingent exposure and $1.012 million total potential third-party obligation, including the recorded portion. Timing and amounts of Export Water sales are uncertain.
- Concentration and execution risks: One oil and gas customer represented 54% of water and wastewater revenue. The filing also reports that two other customers accounted for approximately 85% of trade receivables at quarter-end. Results and cash generation may be affected by oil and gas activity, customer concentration, construction costs and delays, permitting, development demand, water availability, and the timing of Sky Ranch lot deliveries.
- The company said it was analyzing the potential effects of the Tax Cuts and Jobs Act and did not expect an impact on net deferred tax assets because it maintained a full valuation allowance. Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether oil and gas water demand and the improved 62% water delivery margin are sustainable, given the customer concentration and well-service variability.
- Sky Ranch construction costs, builder milestone payments, delivery schedule, and the basis for the estimated $7.2 million first-phase margin.
- The timing and amount of the WISE funding commitment and the contingent CAA obligation tied to Export Water proceeds.
- How ASC 606 affects future tap and construction fee recognition and comparability with prior periods.
- Collection of the increased receivables, particularly given the disclosed customer concentration.