Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2016, compared with the three months ended November 30, 2015. The interim financial statements are unaudited. The filing’s period is not calendar-year 2017 Q1.
Business context
Pure Cycle provides wholesale water and wastewater services, principally in Colorado’s Front Range. Its agricultural operations were discontinued after the 2015 sale of substantially all Arkansas River farm assets; remaining land and receivables are being liquidated. Water and wastewater service is now its sole operating segment.
Key financial results
| Metric | Three months ended Nov. 30, 2016 | Three months ended Nov. 30, 2015 |
|---|---|---|
| Revenue | $199,098 | $125,910 |
| Gross profit (loss) | $53,591 | $(6,063) |
| Operating loss | $(463,636) | $(481,335) |
| Net loss | $(337,972) | $(97,541) |
| Operating cash flow | $(258,536) | $(860,491) |
- Water usage revenue rose 148% to $141,101 as delivered volume increased 127% to 17.9 million gallons, primarily due to oil-and-gas fracking demand. Water delivery gross margin improved to 43% from negative 18%. Wastewater revenue increased 19% to $12,323; its gross margin was 38%, versus 31%.
- Revenue growth did not prevent a larger net loss. Oil-and-gas lease income fell to $5,265 from $161,430 and royalty income declined to $68,128 from $122,146. Continuing-operations net loss was $319,292, versus $136,601. Discontinued operations generated a loss of $18,680, compared with income of $39,060, as prior-year results included farm activity.
- Cash from operations improved year over year, mainly because the prior-year quarter included substantial payments of accounts payable, accrued liabilities and income taxes. Investing cash flow was $1.14 million, largely reflecting $1.42 million of short-term investments reaching maturity; financing cash outflow was $1,543. Cash and cash equivalents increased $883,681 during the quarter.
- At November 30, cash and cash equivalents were $5.58 million, short-term investments $21.76 million, and long-term investments $6.85 million. Working capital was $28.1 million. Total assets were $70.53 million and shareholders’ equity was $68.68 million.
- Total liabilities were $1.85 million, including $342,423 of recorded participating interests in Export Water Supply. The filing also describes approximately $674,600 of contingent CAA obligations off balance sheet, payable only from Export Water sales; the total remaining potential third-party obligation was approximately $1.02 million. The filing reports no scheduled maturity for the recorded participating-interest obligation.
- Comprehensive loss was $360,183, including a $22,211 unrealized investment holding loss. Basic and diluted net loss per share was $0.01.
Changes, outlook and risks
- Water deliveries and usage revenue increased sharply from the prior-year quarter, but depended significantly on oil-and-gas activity. One oil-and-gas customer accounted for 52% of water and wastewater revenues in the quarter; the filing notes drilling activity had been reduced amid lower oil prices.
- Management said working capital was sufficient to fund operations for the next fiscal year. The filing provides no formal revenue or earnings guidance.
- Management anticipated approximately $5 million of pipeline spending in the next three months. Subsequent to quarter-end, the company contracted for construction of the Sky Ranch transmission line for approximately $4.5 million; construction began December 12, 2016.
- The company expects to fund approximately $5.6 million of the District’s WISE project participation over the next five fiscal years. At full capacity, management expected the company to have access to about three million gallons per day of pipeline capacity and 500 acre-feet of water annually.
- A December 15, 2016 water service agreement for Wild Pointe Ranch could give the company the right to provide service in exchange for $1.6 million cash. Closing was expected no later than February 23, 2017; it was not yet completed at the filing date.
- The company expected continued expenses related to discontinued agricultural operations through calendar 2017. It also identified development timing, water demand and pricing, oil-and-gas activity, construction costs and delays, regulation, weather, and access to capital among risks to its forward-looking estimates.
- The company stated disclosure controls were effective as of November 30, 2016 and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether elevated fracking-related water demand continues and how customer concentration affects revenue and margins.
- Actual timing, cost and completion of the approximately $4.5 million Sky Ranch pipeline, and progress on WISE investments and expected water capacity.
- Whether the Wild Pointe Ranch agreement closes and the $1.6 million payment is received.
- Cash and investment balances, operating cash burn, and the distinction between recorded CAA liabilities and contingent obligations payable from Export Water proceeds.
- Progress in selling remaining agricultural land and collecting receivables, including related carrying costs and expenses.