Pure Cycle Corporation — Form 10-Q Summary
Business context and reporting period
For the first quarter of fiscal 2019, the three months ended November 30, 2018. The unaudited filing covers Pure Cycle’s wholesale water and wastewater operations and its Sky Ranch land development business in Colorado. The comparable period is the three months ended November 30, 2017.
Key financial metrics
| Metric | Quarter ended Nov. 30, 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $3.07 million | $1.01 million |
| Gross profit | $1.25 million | $515,000 |
| Operating income (loss) | $519,000 | ($200,000) |
| Net income (loss) | $634,000 | ($97,000) |
| Operating cash flow | ($5.73 million) | ($692,000) |
| Investing cash flow | ($4.80 million) | ($1.39 million) |
Revenue increased about 204%. Water usage revenue rose 48% to $1.37 million as deliveries increased 48% to 114.5 million gallons, largely reflecting demand from oil-and-gas fracking customers. Lot sales contributed $1.38 million; there were no land-development revenues in the prior-year quarter. Water delivery gross margin improved to 75% from 62%, while lot sales had a 6% gross margin. Overall gross margin was about 41%, compared with 51% a year earlier, reflecting the mix of lot-development activity.
At November 30, 2018, cash and cash equivalents were $1.12 million and short-term investments were $11.18 million, totaling $12.30 million. Working capital was $24.5 million. Total assets were $71.15 million and shareholders’ equity was $70.28 million. Total liabilities were $865,000, including $335,000 of recorded participating interests in Export Water Supply; the balance sheet reports no conventional borrowings. A further approximately $661,000 of the Export Water obligation is contingent and off balance sheet, payable only from Export Water sales.
Material changes versus the prior period
- The company moved from a quarterly net loss to net income, primarily as water revenue increased and Sky Ranch lot development began contributing recognized revenue.
- Water deliveries rose from 77.5 million to 114.5 million gallons. Management attributed the increase mainly to fracking demand; 86% of water delivered in the current quarter was used for oil-and-gas exploration.
- Cash used in operations increased to $5.73 million, principally reflecting Sky Ranch development spending, a $1.02 million contract asset, working-capital movements, and payments of payables and accrued liabilities.
- Inventories increased to $8.55 million from $5.20 million, mainly due to land development. Cash and cash equivalents fell from $11.57 million at August 31, 2018, while short-term investments rose.
Outlook, management commentary and risks
Management stated that available working capital was sufficient to fund operations for the next 12 months. It expects to complete Sky Ranch finished lots during fiscal 2019 and says phased construction and builder milestone payments should help fund development. The first phase covers 506 lots; estimated development capital is approximately $35 million, with about $27 million of costs potentially reimbursable by the CAB and approximately $36 million of lot-sale revenue. Management estimates a roughly $1 million lot margin before reimbursable costs.
Reimbursement of CAB-related advances and expenses depends on the CAB or Sky Ranch districts issuing sufficient bonds; until then, these costs remain in inventory. The company reported $7.4 million of advances to the CAB, including accrued interest, recorded in inventory. It also anticipates approximately $3.0 million of WISE-related investment in fiscal 2019 and $6.8 million over five fiscal years.
Important risks include dependence on oil-and-gas water demand and a small number of customers, construction costs and completion timing, builder payment milestones, the contingent timing and availability of CAB bond reimbursements, and uncertainty in regional development and water demand. Management reported no contingencies with a reasonably possible loss as of November 30, 2018. No specific earnings or revenue guidance was provided.
Investor verification points
- Verify Sky Ranch construction progress, remaining budget, lot closings and milestone collections against the fiscal 2019 schedule.
- Track CAB and district bond issuance, reimbursement timing, and the recoverability of the $7.4 million of advances included in inventory.
- Assess whether fracking-related water demand and revenue remain durable, given customer and industry concentration.
- Reconcile operating cash use with land-development spending, contract assets, inventory growth and future builder receipts.
- Review the approximately $661,000 off-balance-sheet contingent Export Water obligation and the terms and priority of future payouts.