Pure Cycle Corporation — Form 10-Q Summary
Business context and reporting period
For the fiscal quarter and six months ended February 28, 2018. Pure Cycle provides wholesale water and wastewater services and is developing its 931-acre Sky Ranch community in Colorado. The unaudited interim statements compare with the corresponding 2017 periods; 2017 amounts were not restated for the company’s early adoption of ASC 606.
Key financial metrics
| Metric | Three months ended Feb. 28, 2018 | Six months ended Feb. 28, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $844,661 | $1,854,793 | $237,078 and $436,177, respectively |
| Gross profit | $630,850 | $1,210,782 | $68,398 and $121,990, respectively |
| Operating income (loss) | $(14,313) | $(214,403) | $(455,414) and $(919,052), respectively |
| Net income (loss) | $100,162 | $3,551 | $(317,290) and $(655,263), respectively |
| Cash used in operations | $1,039,745 for six months | $536,299 for six months |
Revenue growth was principally driven by increased oil-and-gas-related water demand: metered water revenue rose 321% for the quarter and 420% for the six-month period. Water deliveries increased 254% and 294%, respectively. Management reported water-delivery gross margins of 83% for the quarter and 72% for six months, versus 59% and 53% in 2017. Wastewater gross margin was 6% for the quarter and 28% for six months, down from 34% and 36%.
At February 28, 2018, cash and cash equivalents were $3.09 million and short-term investments were $17.13 million. Working capital was $22.2 million; total assets were $69.9 million, total liabilities $1.04 million, and shareholders’ equity $68.8 million. The filing reports no conventional borrowings. It does report a $339,937 participating-interest liability related to Export Water, plus an approximately $670,000 contingent portion of the remaining third-party obligation, payable only from Export Water sales. Long-term notes receivable from related parties were $2.34 million.
Material changes versus the prior comparable period
- Quarterly net income improved to $100,162 from a $317,290 loss; six-month net income was $3,551 versus a $655,263 loss.
- Higher water sales substantially improved gross profit, while general and administrative expense increased 16% in the quarter and 32% for six months.
- For the six months, operating cash use increased to $1.04 million from $536,299. Investing activities used $247,138, compared with $2.59 million provided in 2017; financing activities used $1.20 million, largely reflecting a $1.49 million advance to the Sky Ranch Community Authority Board, partly offset by collections and stock-option proceeds.
- Cash and short-term investments totaled $20.22 million, down from $25.63 million at August 31, 2017. The company also held $1.43 million in long-term investments.
- Adoption of ASC 606 reduced opening accumulated deficit by $1.06 million, principally by recognizing previously deferred tap and construction fee revenue earlier. The standard reduced six-month 2018 net income by $27,901 versus the amount that would have been reported under the prior standard.
Outlook, commentary, and risks
- Management said available working capital was sufficient to fund operations for the next 12 months.
- For Sky Ranch’s first 506 lots, management estimated total development capital of about $28 million, gross lot-sale proceeds of about $35 million, and a projected margin of about $7 million. Off-site improvements were estimated at $10.2 million; the company expected to phase construction and use builder milestone payments. It planned to deliver about 250 initial lots over 12–18 months. Lot construction began March 1, 2018, after the reporting date.
- The company expected to invest approximately $5.2 million over five years to fund Rangeview’s participation in the WISE water project. It had invested about $3.1 million as of February 28, 2018.
- Water-sales concentration is significant: oil-and-gas customers accounted for 95% of water and wastewater revenue in the quarter and 93% for six months. Results therefore depend on variable oil-and-gas activity and demand. The company also identifies development timing, construction costs and delays, permits, water availability, housing growth, weather, regulation, and access to capital as risks.
- Oil-and-gas royalties fell 30% for the quarter and 34% for six months, attributed to lower production from wells on company mineral interests. The filing states that no probable or reasonably possible litigation claims requiring accrual or disclosure were known.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No formal earnings guidance is provided.
Most important facts for investors to verify
- Whether elevated oil-and-gas water demand and customer concentration persist, and how changes in activity affect revenue and margins.
- Sky Ranch construction costs, builder milestone collections, delivery schedule, and whether projected lot proceeds and margin are achieved.
- Cash deployment, operating cash burn, and the recoverability and timing of repayment of related-party notes and advances.
- The terms and potential payments under the Export Water participating-interest obligation, including its contingent off-balance-sheet component.
- The effect of ASC 606 on reported revenue and earnings when comparing periods, since prior-year figures were not restated.