Business context and reporting period
Pure Cycle Corporation’s Form 10-K covers the fiscal year ended August 31, 2017; it is an annual filing, not a standalone quarterly report. The company provides wholesale water and wastewater services in Colorado, sells untreated water to commercial and oil-and-gas customers, and is developing its 931-acre Sky Ranch community east of Denver.
The company reported 391 water and 157 wastewater connections in its Rangeview service area. Its stated water portfolio totals approximately 28,634 acre-feet, and management estimates it could serve about 60,000 single-family-equivalent units.
Financial and operating metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Total revenue | $1.228 million | $452,000 |
| Operating loss | $2.131 million | $2.180 million |
| Loss from continuing operations | $1.679 million | $1.230 million |
| Net loss | $1.711 million; $0.07 per share | $1.311 million; $0.06 per share |
| Gross margin | $424,000 | $(77,000) |
| Cash used in operating activities | $1.053 million | $271,000 |
| Cash and cash equivalents | $5.576 million | $4.697 million |
| Short-term investments | $20.055 million | $23.176 million |
| Working capital | $26.2 million | Not clearly stated as a comparable figure |
| Total liabilities | $2.281 million; no debt | $1.882 million; no debt |
FY2017 water deliveries rose to 94.6 million gallons from 33.9 million. Water revenue was $825,000, including approximately $478,500 from oil-and-gas activity and $65,600 from Wild Pointe. Water delivery gross margin, excluding depletion, was approximately 59%–60%, compared with negative 20% in FY2016. Wastewater revenue was $45,000, with a 37% gross margin. General and administrative expense increased 19% to $2.202 million.
For the fiscal fourth quarter ended August 31, 2017, the quarterly table reports revenue of $658,000 and net loss of $501,000. Quarterly results are volatile, and the filing attributes the fourth-quarter revenue increase in part to oil-and-gas water sales.
Material changes versus the prior comparable period
- Revenue increased 172% year over year, driven primarily by a rebound in fracking-related water demand and the addition of Wild Pointe service rights. Water deliveries rose 179%; FY2016 had been unusually weak for industrial water sales.
- Gross margin improved from a loss to a profit, but net loss widened by $400,000. Increased operating revenue and lower operating loss were offset by lower oil-and-gas lease and royalty income and higher G&A and depreciation.
- Operating cash use increased to $1.053 million. Investing cash flow was positive $1.934 million, largely reflecting $9.8 million of marketable-security sales, while the company invested in water systems, pipelines, and Sky Ranch.
- Water-system assets increased to $34.6 million from $28.3 million. Total assets declined to $69.8 million from $70.9 million; liabilities remained low and the company reported no debt.
Outlook, management commentary, risks and unusual items
Sky Ranch: In June 2017, the company contracted with three national homebuilders to sell 506 finished lots. The builders completed due diligence and elected to proceed on November 10, 2017, after year-end. Management estimated first-phase development capital of $27.8 million, lot-sale proceeds of $35 million, and a projected lot margin of $7.2 million. The company expected initial construction in early 2018, subject to approvals and engineering; approximately $10.2 million of off-site infrastructure costs were estimated. These are projections, not FY2017 realized revenue; the company reported no real-estate revenue for the year.
WISE and investment needs: Pure Cycle had funded approximately $3.1 million of Rangeview District participation in the WISE regional water project. It estimated about $5.2 million of WISE-related costs over FY2018–FY2022, including $645,500 in FY2018. The company stated it had sufficient working capital for the next 12 months, while also warning that operating cash flows have not historically funded operations and that additional capital could be needed if cash and future receipts prove inadequate.
Concentration and execution risks: Revenues depend on a small customer base, housing and development activity, and volatile oil-and-gas drilling. Two industrial customers together represented approximately 55% of FY2017 water and wastewater revenue. Sky Ranch contracts are fixed-price and expose the company to construction cost overruns, labor and material shortages, permitting delays, and delivery penalties. Water availability, drought, weather, regulation, and the ability to recover costs through rates are additional material risks.
Contingencies and unusual items: The company disclosed a $673,000 off-balance-sheet contingent CAA obligation payable only upon Export Water sales, in addition to a recorded $342,000 participating-interest liability. The broader remaining potential third-party obligation was reported at approximately $1.015 million. Lowry Range surface-water decrees require a finding of reasonable diligence, with the next review due in February 2018. Land Board royalty and minimum production-fee terms were subject to clarification or negotiation. The company reported no legal proceedings. The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting.
Management provided no formal earnings guidance. Its disclosed outlook consists of project estimates and expectations described above. It intends to retain earnings and has not paid common dividends.
Most important facts for investors to verify
- Whether Sky Ranch obtains required entitlements and meets construction, lot-delivery, and projected cost and margin assumptions; review the builders’ takedown schedules and contract conditions.
- Whether cash, marketable securities, and operating receipts can fund Sky Ranch, WISE, and ongoing operations without new financing.
- How sustainable FY2017’s recovery in fracking water sales is, given oil-and-gas exposure and customer concentration.
- Progress on the February 2018 water-court diligence review, the Land Board fee negotiations, and completion/documentation of the Export Water substitution.
- Reconcile the recorded and contingent CAA obligations, related-party receivables and loans, and the district governance conflicts disclosed in the filing.