Business context and reporting period
Pure Cycle Corporation’s unaudited Form 10-Q covers the quarter and nine months ended May 31, 2017, compared with the corresponding 2016 periods. The company principally provides wholesale water and wastewater services in Colorado and is developing water infrastructure and its Sky Ranch property. Its former agricultural operations are presented as discontinued operations.
Financial results and position
| Metric | Three months ended May 31 | Nine months ended May 31 |
|---|---|---|
| Revenue, 2017 | $134,008 | $570,186 |
| Revenue, 2016 | $100,852 | $303,204 |
| Operating loss, 2017 | $631,054 | $1,550,104 |
| Net loss, 2017 | $554,416 | $1,209,680 |
| Net loss, 2016 | $422,270 | $790,510 |
| Cash used in operating activities, 2017 | — | $839,244 |
Quarterly revenue increased 33% year over year; nine-month revenue increased 88%. The nine-month gross result improved to a profit of $88,949 from a loss of $84,534, while the quarter remained at a gross loss of $33,041. Nine-month water deliveries rose to 42.0 million gallons from 14.8 million, primarily reflecting fracking demand. Net losses widened in both comparative periods.
At May 31, 2017, cash and cash equivalents were $5.75 million and short-term investments were $20.23 million; an additional $1.43 million was held in long-term investments. Working capital was $26.7 million. Total assets were $69.87 million and total liabilities were $1.94 million. The balance sheet reports no conventional bank borrowings; it includes a $341,864 participating-interest liability, while a further $673,600 contingent CAA obligation is off balance sheet and payable only from Export Water proceeds.
For the nine months, operating cash use was $839,244, compared with $214,980 in 2016. Investing activities provided $1.89 million, largely due to sales of investments, while the company invested approximately $6.4 million in water systems and related assets. Cash rose by $1.05 million from August 31, 2016, to $5.75 million.
Material changes versus the prior comparable period
- Nine-month metered water revenue increased to $379,462 from $119,832, with deliveries up 184%; fracking sales contributed $221,700 in the 2017 period.
- Quarterly water deliveries rose 49%, but water service costs exceeded metered water revenue; management attributed the stronger nine-month water margin to higher industrial and oil-and-gas demand.
- Nine-month general and administrative expenses rose 9% to $1.41 million. The quarter’s increase was 20%, including higher salary-related and professional costs.
- Oil and gas lease income and royalties declined substantially year over year for the nine-month period, including lower royalties as one well underwent maintenance.
- Water and water-system investments increased to $34.34 million from $28.32 million, including Wild Pointe service rights and Sky Ranch construction in progress.
Outlook, commentary, risks and unusual items
- Management stated that working capital was sufficient to fund operations for the next 12 months. This is management’s assessment, not formal earnings guidance.
- The Sky Ranch transmission pipeline was completed in May and placed in service in June 2017. In June, the company signed agreements with three home builders for 506 first-phase lots at prices of $67,500–$75,000 per lot. The agreements included earnest-money deposits and a 60-day due-diligence period; Pure Cycle is responsible for delivering finished lots and expects to fund the required improvements.
- Management reported renewed drilling activity and said a new well-stimulation design more than doubled water use per well, increasing estimated revenue potential from about $100,000 to $200,000 per well. Actual demand, drilling schedules and revenue remain uncertain.
- The company expected to fund approximately $5.5 million of Rangeview’s WISE participation over five years, including about $1.2 million annually. It also spent approximately $4.3 million on the Sky Ranch pipeline during the nine-month period.
- Water and wastewater revenue is concentrated: Rangeview represented 75% of water and wastewater revenue in the quarter and 33% for the nine months; one Rangeview customer represented 59% and 26%, respectively. Oil-and-gas demand, development timing, water prices, construction costs, regulation and weather are among the stated risks.
- The CAA’s contingent repayment depends on Export Water sales, whose timing and amount are not reasonably determinable. The company also disclosed a roughly $4.2 million pipeline construction award to an entity affiliated with a company director; the audit committee and board approved it, with the interested director abstaining.
- Pure Cycle anticipated continuing costs related to discontinued agricultural operations through calendar 2017. No specific litigation loss amount is provided in the filing text.
- Management was assessing the impact of the forthcoming revenue-recognition standard, particularly for tap and construction fees. Disclosure controls were concluded to be effective, and no material change in internal control was reported.
Important facts for investors to verify
- Whether the Sky Ranch lot agreements complete due diligence and what capital is required to deliver finished lots.
- Whether fracking demand and drilling activity persist, and how customer concentration affects water revenue and margins.
- Cash availability after planned Sky Ranch development and WISE funding commitments.
- The timing and potential impact of Export Water sales and the associated recorded and contingent CAA obligations.
- How tap-fee revenue recognition, asset-recoverability assumptions and the related-party pipeline contract affect reported results.