Business context and reporting period
Pure Cycle Corporation filed this unaudited Form 10-Q for the quarter ended February 28, 2015, the second quarter of fiscal 2015. The company provides wholesale water and wastewater services and leases agricultural land and water. Its water assets and systems comprise the majority of its asset base.
Financial performance and position
| Metric | Three months ended Feb. 28, 2015 | Three months ended Feb. 28, 2014 | Six months ended Feb. 28, 2015 | Six months ended Feb. 28, 2014 |
|---|---|---|---|---|
| Revenue | $656,518 | $735,874 | $1,490,295 | $1,314,377 |
| Gross profit | $480,827 | $551,517 | $1,091,429 | $949,572 |
| Operating loss | $(180,042) | $(140,894) | $(252,378) | $(378,251) |
| Net loss | $(85,995) | $(455,975) | $(75,687) | $(1,302,477) |
| Gross margin | 73.2% | 75.0% | 73.2% | 72.3% |
For the quarter, revenue fell about 11%, with water deliveries down 14%, largely reflecting lower oil-and-gas fracking demand; six-month revenue rose about 13%, as water deliveries increased 7%. The quarterly operating loss widened, while the six-month operating loss narrowed. Net losses improved substantially in both comparisons, primarily because imputed interest expense on the Tap Participation Fee (TPF) was much lower and the TPF was eliminated in the HP A&M settlement. The six-month TPF interest expense was $23,816 versus $1,060,238 in the prior year.
Cash and cash equivalents were $834,311 at February 28, 2015, down from $1,749,558 at August 31, 2014. Working capital was a deficit of $193,584. Total assets were $102.96 million, total liabilities $9.98 million, and shareholders’ equity $92.98 million. Promissory notes totaled approximately $5.91 million, including $848,325 current and $5.06 million long-term. The company also recorded a $1.40 million WISE funding obligation, split between $280,000 current and $1.12 million long-term.
For the six months, operating cash use was $662,156, investing cash use was $1,174,093, and financing provided $921,002; cash declined by $915,247. Investing included $1.87 million in water, water systems, and land, partly offset by $699,826 of farm-land sale proceeds. The company reports that it believes working capital is sufficient to fund operations for the next fiscal year.
Material changes and notable items
- In January 2015, Pure Cycle settled remaining disputes with HP A&M. The settlement eliminated the TPF and the $7.13 million HP A&M receivable, assigned HP A&M’s 75% mineral interests to the company, and provided for sale of 300,000 HP A&M-owned shares with proceeds delivered to Pure Cycle. The filing records the shares, valued at $1.407 million, as contra-equity and reports a $2.926 million net equity decrease from the settlement accounting.
- In December 2014, the company committed to fund the District’s WISE participation. It expects to invest approximately $1.2 million annually over five years, in addition to funding a $1.4 million District borrowing repayable over three years. In return, Pure Cycle expects use of the District’s 7% share of WISE water and infrastructure; completion is expected in 2021.
- On March 11, 2015, after quarter-end, the company agreed to sell approximately 14,641 Arkansas Valley acres and associated water assets for about $53 million, subject to adjustments, shareholder approval, and due diligence. The assets had a book value of approximately $69 million at quarter-end; management estimated a loss of approximately $16 million upon completion. The transaction was expected to close in June 2015.
Outlook, risks and contingencies
The filing gives no formal earnings or revenue guidance. Management’s stated liquidity assessment is its belief that available working capital can fund operations for the next fiscal year; the proposed farm-asset sale is a significant additional potential source of liquidity, but is conditional. WISE requires continuing investment, and water demand and results are exposed to oil-and-gas activity, development timing, customer consumption, crop yields and prices, weather, regulation, construction costs, and access to capital.
A single oil-and-gas customer represented 85% of water and wastewater revenue for the quarter and 87% for the six-month period, creating substantial customer and industry concentration. The CAA also includes an off-balance-sheet contingent obligation: at February 28, 2015, the recorded participating-interest liability was approximately $347,500 and the additional contingent amount approximately $649,100; payment depends on future Export Water sales. The company disclosed no material change in disclosure controls and procedures and concluded they were effective.
Important facts for investors to verify
- Whether shareholders approve the Arkansas River Farms transaction, due diligence is completed, and the sale closes on the expected terms and timing; verify the final proceeds and recognized loss.
- Whether cash and working capital remain adequate, including the timing of farm-sale proceeds, debt service, and planned WISE funding.
- Whether water demand—particularly fracking demand from the concentrated oil-and-gas customer—recovers or declines further.
- The terms and remaining exposure associated with promissory notes, WISE obligations, and contingent CAA payments tied to Export Water sales.
- The effect of the HP A&M settlement and TPF elimination on reported equity and future expenses, distinguishing these items from recurring operating performance.