Pure Cycle Corporation — Form 10-Q Summary
Business context and period: Pure Cycle provides wholesale water and wastewater services and is developing the 931-acre Sky Ranch community east of Denver. This unaudited report covers the fiscal third quarter and nine months ended May 31, 2018; comparisons are with the corresponding 2017 periods.
Financial results and position
| Metric | Three months ended May 31, 2018 | Three months ended May 31, 2017 | Nine months ended May 31, 2018 | Nine months ended May 31, 2017 |
|---|---|---|---|---|
| Total revenue | $1.212 million | $134,000 | $3.067 million | $570,000 |
| Gross profit (loss) | $683,000 | $(33,000) | $1.894 million | $89,000 |
| Operating loss | $(88,000) | $(631,000) | $(302,000) | $(1.550 million) |
| Net income (loss) | $55,000 | $(554,000) | $58,000 | $(1.210 million) |
| Operating cash flow | Not separately presented for the quarter | $(1.356 million) | $(839,000) |
- Water usage revenue rose to $1.163 million for the quarter and $2.889 million year to date, largely reflecting increased oil-and-gas fracking demand. Water deliveries increased 1,494% and 477%, respectively. Water-delivery gross margin was 64% for the quarter and 69% year to date, compared with a 61% gross loss and 38% margin in the prior-year periods.
- At May 31, cash and cash equivalents were $2.876 million and short-term investments were $17.006 million. Working capital was $24.1 million. Total assets were $70.1 million; total liabilities were $1.123 million; shareholders’ equity was $69.0 million.
- The balance sheet reports $339,000 of participating interests in Export Water Supply. An additional approximately $669,000 is contingent on Export Water sales and is off balance sheet; the filing says the contingent obligation’s timing and amount are not reasonably determinable. No conventional bank debt is reported.
- Investing cash flow was $(1.632) million for the nine months, including $2.990 million invested in water, water systems and land, and a $1.490 million advance to the Sky Ranch Community Authority Board. Cash declined by $2.700 million from fiscal year-end.
Material changes and management commentary
- Revenue growth was driven principally by fracking water sales; those sales accounted for 87% of water and wastewater revenue in the quarter, while three oil-and-gas customers accounted for 91% for the nine-month period. This creates exposure to demand and customer concentration.
- Management began Sky Ranch lot construction in March 2018. No lot-sale revenue was recognized in the nine months ended May 31. For the first 506 lots, management estimates approximately $27.8 million of required capital and $35 million of gross proceeds, implying a projected lot margin of about $7.2 million. It expects to deliver approximately 250 initial lots over the next 12–18 months and believes phased construction and builder milestone payments will support funding.
- Sky Ranch off-site improvements are estimated to cost approximately $10.2 million; about $1.6 million of development costs had been incurred by May 31. The filing also describes approximately $8 million of estimated construction cost for the initial 250 lots.
- Management stated that available working capital was sufficient to fund operations for the next 12 months. It anticipates approximately $5.2 million of WISE-related funding over the next five fiscal years.
- The company early adopted ASC 606 on September 1, 2017, using the modified retrospective method. Adoption increased opening accumulated equity by $1.055 million and primarily changes the timing of tap and construction-fee revenue recognition. Prior-year comparisons were not restated; the filing reports that 2018 nine-month net income was $41,852 lower than it would have been under ASC 605.
- General and administrative expense increased 23% for the quarter and 29% year to date. The filing attributes increases mainly to employee and share-based compensation and higher professional fees. Management expects continued costs through calendar 2018 related to discontinued agricultural operations.
Risks, contingencies and other items
- Oil-and-gas water demand, oil and gas development timing, customer concentration, construction costs, permits, housing development and the ability to obtain or collect builder milestone payments could affect results and Sky Ranch cash needs.
- The CAA obligation is payable from Export Water sale proceeds; the contingent portion is not recorded as a liability. The company receives approximately 88% of Export Water proceeds after Land Board royalties under current arrangements.
- The company reported no probable or reasonably possible litigation claims requiring disclosure or accrual. It also reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
- No specific earnings or revenue guidance was provided. Management’s stated outlook includes the working-capital assessment and Sky Ranch and WISE estimates above; these are forward-looking and subject to the risks described in the filing.
Important facts for investors to verify
- Whether fracking-water demand and the highly concentrated customer base remain sustainable, and how changes affect water margins and cash generation.
- Sky Ranch construction spending, approvals, delivery milestones, builder payments, and eventual lot-sale revenue versus the company’s cost and margin estimates.
- Liquidity usage and the timing of expected collateral-deposit refunds, while operating cash flow remains negative.
- The effects of ASC 606 on future tap and construction-fee revenue, and the status and potential cash impact of the CAA obligation and WISE commitments.