Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended February 28, 2017; comparable periods ended February 29, 2016. Financial statements are unaudited. Pure Cycle provides wholesale water and wastewater services and develops water, infrastructure and land assets, primarily in Colorado’s Front Range.
Financial performance and position
- Revenue: Second-quarter revenue was $237,078, up from $76,442; six-month revenue was $436,177, up from $202,352. The increase was driven mainly by water sales to oil-and-gas customers for hydraulic fracturing.
- Profit and margins: Second-quarter gross profit was $68,398, compared with a $44,486 gross loss a year earlier; six-month gross profit was $121,990, compared with a $50,549 gross loss. Management reported water-delivery gross margins of 59% for the quarter and 53% for six months, versus negative margins in the comparable periods. Net loss was $317,290 for the quarter and $655,263 for six months, compared with $270,699 and $368,240, respectively. Six-month continuing-operations loss increased to $633,934 from $397,707.
- Cash flow: Six-month operating cash flow was negative $536,299, including $647,479 used by continuing operations and $111,180 provided by discontinued operations. Investing activities provided $2,592,411, principally reflecting investment-security sales, partly offset by spending on water assets. Cash increased $2,054,203 to $6,751,491.
- Liquidity: Working capital was approximately $27.8 million. Cash, cash equivalents and short-term available-for-sale securities totaled approximately $28.1 million; long-term investments were approximately $1.4 million. Management said working capital was sufficient to fund operations for the next fiscal year.
- Debt and liabilities: Total liabilities were $2,799,147, including $342,058 of recorded participating interests in Export Water Supply. The filing does not report conventional bank borrowings. A further approximately $673,900 CAA obligation is contingent on Export Water sales and is off balance sheet; total potential third-party obligation was approximately $1.016 million.
- Assets and equity: Total assets were $71.2 million and shareholders’ equity was $68.4 million at February 28, 2017. Investments in water and water systems, net, increased to $33.7 million from $28.3 million at August 31, 2016.
Changes versus the prior comparable period
- Water delivered rose to 17.7 million gallons in the quarter from 2.7 million, and to 35.6 million gallons for six months from 10.6 million. Management attributed the rise primarily to oil-and-gas fracking demand; fracking sales were $141,500 in the quarter.
- Water-service gross margins improved as higher deliveries absorbed fixed system costs. However, net loss widened for both the quarter and six-month period. Lower recognition of oil-and-gas lease income was a major offset to operating improvement: six-month lease income fell to $11,265 from $322,860.
- Oil-and-gas royalties declined to $139,403 for six months from $194,602, which the company attributed to lower production. General and administrative expense was nearly unchanged at $892,787 for six months.
- Investments in water and water systems rose largely due to Sky Ranch construction and acquisition of Wild Pointe service rights. Short-term investments declined, while cash increased.
Outlook, commentary and risks
- No quantified revenue or earnings guidance was provided. Management’s outlook is conditional on development, customer demand and project execution; it cautioned that interim results are not necessarily indicative of full-year results.
- The company paid $1.6 million for exclusive water-service rights at Wild Pointe, serving about 120 existing SFE connections, with potential growth to more than 300. Water-service revenue from this agreement began during the period.
- The Sky Ranch water-line project was estimated to cost approximately $4.2 million. About $3.5 million had been incurred by February 28, with approximately $700,000 expected over the following two months; completion was anticipated in April 2017.
- Pure Cycle expects to fund approximately $5.6 million of Rangeview’s WISE participation over five years. Upon anticipated completion in 2021, the company expects access to about three million gallons per day of pipeline capacity and 500 acre-feet of water annually.
- Revenue is exposed to volatile oil-and-gas activity: one oil-and-gas customer represented 70% of water and wastewater revenue for the quarter and 62% for six months. Rangeview and its largest customer also represented substantial portions of revenue and receivables.
- Other matters to monitor include development and tap-sale timing, construction costs, water-rights and regulatory uncertainty, asset-impairment assumptions, and ongoing costs for discontinued agricultural operations. The company expected those operations to generate expenses through calendar 2017 and intended to sell remaining agricultural land during fiscal 2017.
- A director with an ownership and executive relationship to the contractor had an interest in the approximately $4.1 million Sky Ranch pipeline bid. The Audit Committee and board approved the lowest bid; the interested director abstained. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts investors should verify
- Whether oil-and-gas water demand and the associated customer concentration persist, and how they affect revenue and margins.
- Actual Sky Ranch pipeline cost and completion timing, and progress on the WISE project and its expected funding obligations.
- Cash burn and liquidity against planned water-asset investment, including management’s one-year funding assessment.
- CAA payment priorities and the distinction between the recorded liability and contingent off-balance-sheet obligation.
- Development, tap-sale and impairment assumptions supporting the carrying value of water assets, alongside related-party receivables and transactions.