Pure Cycle Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended August 31, 2018; filed November 13, 2018. This is an annual report, not a standalone fourth-quarter filing. The filing also provides unaudited quarterly data, including Q4 FY2018.
Business context
Pure Cycle operates wholesale water and wastewater services and land development businesses in Colorado’s Denver-area Front Range. Its activities include supplying water to governmental, commercial, industrial, and oil-and-gas customers, and developing its 931-acre Sky Ranch community. The company reported water assets it owns or controls totaling approximately 28,634 acre-feet and estimated capacity to serve about 60,000 single-family-equivalent units.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Total revenue | $6.96 million | $1.23 million |
| Gross profit | $2.80 million | $424,000 |
| Operating loss | $309,000 | $2.13 million |
| Income (loss) from continuing operations, before tax | $133,000 | ($1.68 million) |
| Net income (loss) | $415,000 | ($1.71 million) |
| Cash provided by (used in) operating activities | $482 | ($1.05 million) |
| Cash and cash equivalents | $11.57 million | $5.58 million |
| Short-term investments | $8.72 million | $20.06 million |
| Working capital | $25.9 million | — |
| Total liabilities | $2.45 million | $2.28 million |
Water revenue rose to $4.56 million from $825,000, primarily on oil-and-gas water sales. Water-delivery gross margin, excluding depletion, increased to 70% from 60%. Sky Ranch generated $2.14 million of recognized lot revenue, with $2.01 million of related construction costs. Overall gross margin was approximately 40% of revenue.
Net income included a $282,000 income-tax benefit associated with an alternative minimum tax credit; income from continuing operations before tax was $133,000. The company reported no debt at year-end. It had a $339,000 recorded participating-interest obligation tied to Export Water sales and a further $668,000 contingent obligation not recorded on the balance sheet. The reported cash-flow figure reflects operations that were essentially cash-neutral; investing cash inflow of $5.70 million included net marketable-security transactions.
Material changes and quarterly results
- Water deliveries increased 330% to 406.6 million gallons. Fracking-related water revenue reached $4.04 million, up from $478,500, and accounted for 89% of total water revenue. One customer represented approximately 68% of water and wastewater revenue.
- Pure Cycle began developing Sky Ranch lots in March 2018. In July, two builders paid $2.5 million for the first milestone covering 150 platted lots and posted letters of credit totaling $7.775 million. The company recognized $2.139 million of lot revenue using percentage-of-completion accounting.
- Unaudited Q4 FY2018 revenue was $3.892 million and net income was $357,000, compared with $658,000 revenue and a $501,000 net loss in Q4 FY2017. Q4 FY2018 included $1.423 million of fracking-related water sales.
- The company early-adopted ASC 606 in FY2018. The modified-retrospective adoption increased opening accumulated equity by approximately $1.055 million and changed the timing of recognition for tap and construction fees; prior-year comparisons were not restated.
Outlook, risks, and unusual items
Management said working capital was sufficient for operations over the following 12 months. It expected to deliver about 150 finished lots in early 2019 and another 100 in mid-2019, with the balance dependent on builder sales. Management estimated first-phase Sky Ranch development capital of approximately $35 million, including about $27 million of costs potentially reimbursable by the Community Authority Board (CAB); lot sales were estimated at $36 million, implying an estimated $1 million margin before reimbursements. CAB repayment depends principally on future bond issuance and development, and advances may remain unpaid for an extended period or be discharged under the agreement in 2058.
Management estimated approximately $3.0 million of WISE-related spending in FY2019 and $3.8 million over FY2020–2023. Key risks include dependence on volatile fracking demand and a concentrated customer base; Sky Ranch construction costs, timing, and home-builder demand; conditional water rights and development approvals; water supply, drought, and regulatory risks; and the ability to obtain reimbursement for CAB-funded improvements. The company also disclosed potential environmental-cleanup requirements on the former military Lowry Range, though no material legal proceeding was reported. No formal earnings or revenue guidance was provided.
Most important facts for investors to verify
- Whether fracking-water demand and customer concentration persist, and how much of FY2018’s revenue increase is repeatable.
- Sky Ranch lot delivery milestones, remaining development costs, expected margins, and the conditions and timing for CAB reimbursements or bond issuance.
- Cash and investment availability after planned capital spending, including WISE commitments and Sky Ranch construction needs.
- The status of Land Board documentation for the water-right substitution, conditional surface-water decrees, and relevant permits and approvals.
- The effect of ASC 606 and the $282,000 tax benefit when assessing recurring earnings and comparability.