Pure Cycle Corporation — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended May 31, 2015. The interim financial statements are unaudited. Pure Cycle provides wholesale water and wastewater services and leases agricultural land and water.
Financial performance
| Metric | Three months ended May 31, 2015 | Nine months ended May 31, 2015 | Comparison |
|---|---|---|---|
| Revenue | $390,942 | $1,881,237 | Down 42% and 6%, respectively |
| Gross margin | $228,049 (58% of revenue) | $1,319,478 (70% of revenue) | Prior-year gross margins were $504,389 and $1,453,961 |
| Operating loss | $(341,345) | $(593,723) | Prior-year losses were $(351,094) and $(729,343) |
| Net income (loss) | $30,247 | $(45,440) | Prior-year losses were $(381,246) and $(1,683,721) |
| Operating cash flow | Not presented for the quarter | $(455,611) | Prior-year nine-month inflow was $711,722 |
Quarterly water usage revenue fell 77% to $73,477, primarily reflecting sharply lower oil-and-gas fracking demand; water delivered declined 77%. Nine-month metered water revenue fell 13% to $893,746 as deliveries declined 19%. Water-delivery gross margin was zero in the quarter versus 70% a year earlier, partly because ECCV system costs continue without production; there had been no production through that system since November 2014. Farm revenue declined 18% in the quarter and 4% year to date. Reduced professional and litigation expenses helped lower G&A.
Balance sheet, liquidity and cash flows
- At May 31, 2015, cash was $743,388, total assets $102.9 million, and working capital was a $452,500 deficit. Management stated it believed working capital was sufficient to fund operations for the next fiscal year.
- Total liabilities were $9.8 million, down from $17.1 million at August 31, 2014. Promissory notes totaled approximately $5.6 million; the WISE funding obligation was $1.4 million. The balance sheet also included $347,000 of participating interests in export water supply.
- Nine-month cash used in operations was $455,611; investing used $1.22 million, largely for water-system investments; financing provided $667,068, including $2.31 million in borrowings. Cash declined $1.01 million from $1.75 million at fiscal year-end.
- Pure Cycle expects to fund approximately $1.2 million annually for five years for WISE infrastructure, in addition to funding a District obligation of approximately $1.4 million repayable over three years.
Material changes, outlook and risks
- Proposed Arkansas River asset sale: The company agreed to sell approximately 14,641 acres and related water assets. After quarter-end, the purchase price was amended from approximately $53 million to $45.8 million, subject to adjustments and closing conditions. The assets had a book value of about $69 million—68% of total assets—and management expected a loss of approximately $23 million at closing. Shareholders approved the sale, but due diligence and other conditions remained; the filing described an anticipated August 2015 closing.
- HP A&M settlement: A January 2015 settlement eliminated the Tap Participation Fee and the related HP A&M receivable, and transferred mineral interests to Pure Cycle. It also involved 300,000 company shares to be sold for the company’s benefit; $1.407 million was recorded as contra-equity collateral stock. The settlement materially changed reported liabilities and equity.
- Oil and gas income: Two wells began producing in March 2015. Pure Cycle reported $262,097 of royalty income for the quarter and nine months; gas collection infrastructure was connected in May, with gas royalties expected to begin in the next reporting period.
- Customer and demand concentration: One oil-and-gas customer accounted for 83% of nine-month water and wastewater revenues. Fracking demand is sensitive to oil prices and drilling activity. Lower demand can materially affect revenue and margins while fixed system costs remain.
- Other obligations and estimates: The contingent portion of the export-water agreement is off balance sheet because payment depends on future export-water sales; the filing estimated the remaining third-party obligation at approximately $995,000. Development timing, tap-fee assumptions, impairment estimates, transaction completion, crop yields and commodity prices are among the stated uncertainties.
- No specific earnings or revenue guidance was provided. Management’s outlook includes the planned asset sale and continued WISE investment; both depend on conditions and estimates described in the filing.
Investor facts to verify
- Whether the Arkansas River transaction closed, final proceeds and adjustments, and the recognized loss versus the approximately $23 million estimate.
- Whether management’s liquidity assessment remained adequate given the working-capital deficit, cash decline, debt service and planned WISE funding.
- Whether oil-and-gas water demand and royalties continued, and how customer concentration affected subsequent revenue and margins.
- The final accounting and cash/equity effects of the HP A&M settlement and sale of the 300,000 shares.
- Actual future obligations and receipts under the export-water agreement, including the contingent off-balance-sheet portion.