Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended February 28, 2013; filed April 12, 2013. Interim financial statements are unaudited.
Business context
Pure Cycle provides wholesale water and wastewater services and leases Arkansas Valley land and water for farming. Water deliveries to oil and gas drilling and hydraulic-fracturing customers increased substantially. The company began managing its farm operations directly in August 2012 after terminating its agreement with High Plains A&M (HP A&M) following HP A&M’s defaults.
Financial performance and position
- Revenue: Second-quarter revenue was $434,505, versus $49,972 a year earlier. Six-month revenue was $872,923, versus $117,531. Growth reflected new farm-lease revenue and increased water sales for drilling and fracking.
- Margins and losses: Gross margin was $309,154 for the quarter and $675,622 for six months, compared with $10,728 and $31,109, respectively. Net loss improved to $914,692 for the quarter and $1,992,133 for six months, from $1,363,599 and $2,725,334. Six-month loss per share was $0.08, versus $0.11.
- Cash flow: Operating activities used $816,792 in the first six months. Investing activities provided $4,334,018, including $3.415 million from selling pledged shares and proceeds from marketable securities. Financing activities used $774,810, including $806,097 of promissory-note payments. Cash increased by $2,742,416 to $4,365,933.
- Liquidity: Current assets were $11.56 million and current liabilities $6.26 million, for working capital of approximately $5.3 million. Cash and marketable securities totaled approximately $4.43 million. Management said available working capital was sufficient to fund operations for the next fiscal year; the company also had capacity to sell up to $4.45 million of stock under an effective shelf registration statement.
- Debt and obligations: Promissory notes payable totaled approximately $8.85 million, of which $5.23 million was current. The balance sheet also included a $69.81 million Tap Participation Fee liability, valued using estimated future development and tap sales, and $1.20 million of recorded participating interests in export water. The Tap Participation Fee has no scheduled maturity and is generally payable as water taps are sold; imputed interest was $1.54 million for the six-month period.
- Assets and equity: Total assets were $110.32 million and shareholders’ equity was $28.15 million at February 28, 2013. Approximately $5.75 million of land and water was classified as held for sale.
Changes versus the prior comparable period
- Water delivered rose 229% for the quarter and 79% for six months, primarily from sales to oil and gas drilling and fracking customers. Water revenue increased 327% and 129%, respectively. Six-month water-delivery gross margin declined to 48% from 52%, partly because of costs associated with the ECCV system.
- Farm operations contributed $305,188 of quarterly revenue and $667,850 for six months; there was no comparable farm revenue in 2012 because HP A&M then managed the operations.
- Wastewater revenue declined 9% for the quarter and 10% for six months, attributed to lower demand from the company’s sole wastewater customer.
- General and administrative expense decreased 4% for both the quarter and six-month period. Lower salary and professional-fee costs were partly offset by property taxes now borne by the company.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management expects to continue developing water assets, serving customers, and managing farm leases. WISE regional water-supply negotiations were ongoing, and the company could not estimate its share of project costs.
- HP A&M defaulted on notes secured by company land and water rights. Pure Cycle had acquired approximately $5.8 million of the defaulted notes by period-end and purchased an additional $385,100 afterward. It had sold pledged HP A&M shares for approximately $3.42 million net and intended to pursue further remedies, including possible reduction of the Tap Participation Fee.
- Foreclosure proceedings involved properties representing approximately 31% of the company’s Arkansas River assets. Management expected no material adverse effect, but stated there was no assurance it would retain all affected properties. No loss accrual was recorded because management did not consider losses probable or reasonably estimable.
- Litigation with the Colorado Land Board concerns the company’s claimed exclusive right to provide water service at the Lowry Range. HP A&M also sued the company over alleged breaches related to that dispute. The company considered HP A&M’s claims without merit; no litigation loss accrual was recorded.
- Tap Participation Fee valuation depends on uncertain assumptions about housing development, future tap sales, and tap fees; actual outcomes could materially differ. Its imputed interest is a significant noncash expense.
- Wholesale water revenue is concentrated: the filing reports that a separate customer represented approximately 71% of water and wastewater revenues for the quarter and 50% for six months. The District and its largest customer also accounted for substantial portions of those revenues.
Key facts for investors to verify
- Whether fracking-related water demand and associated customer concentration persist, and whether related delivery costs continue to pressure margins.
- Progress and financial impact of HP A&M note acquisitions, foreclosure proceedings, and recovery efforts.
- Assumptions behind the $69.81 million Tap Participation Fee liability and the potential effect of development or tap-fee changes.
- Cash needs, scheduled note payments, and whether management’s stated liquidity runway remains adequate.
- Developments in the Land Board and HP A&M litigation and in regional water-supply project negotiations.