Pure Cycle Corporation — Form 10-Q Summary
Business context and period. This unaudited quarterly report covers the three months ended November 30, 2015, Pure Cycle’s first fiscal quarter of 2016. The company provides wholesale water and wastewater services and, following its August 2015 farm-asset sale, continued managing farm leases only through December 31, 2015.
Key financial results
| Metric | Three months ended Nov. 30, 2015 | Prior-year quarter |
|---|---|---|
| Total revenue | $338,158 | $833,777 |
| Gross margin | $190,553 | $610,602 |
| Operating loss | $(440,670) | $(72,336) |
| Net income (loss) | $(97,541) | $10,308 |
| Net cash used in operating activities | $(860,461) | $(277,828) |
- Metered water revenue fell 88% to $56,780; water delivered declined 83% to 7.9 million gallons. No oil-and-gas fracking water was sold in the quarter.
- Farm revenue declined 20% to $212,248. Wastewater fees were $10,303; recognized tap and special-facility revenue totaled approximately $14,000.
- Water-delivery gross margin was negative 18%, versus positive 72% a year earlier. Management attributed the change chiefly to reduced demand and continuing ECCV system costs, about $9,900 monthly without production.
- Oil-and-gas lease income was $161,430 and royalty income was $122,146, compared with no royalty income in the prior-year quarter. Interest income rose to $63,821, primarily reflecting investment of proceeds from the farm sale.
- Cash and cash equivalents were $35.51 million at November 30, 2015, down from $37.09 million at August 31. Working capital was $37.8 million. Investing cash use was $717,654, including farm-land and equipment purchases.
- Total liabilities were $2.13 million, including $345,515 of recorded participating interests in Export Water Supply. A further $680,400 contingent portion was off balance sheet and payable only from Export Water sales; the filing says the remaining potential third-party obligation was approximately $1.03 million. No scheduled maturity is disclosed for the recorded participating-interest liability.
Material changes and outlook
- The sharp contraction in water deliveries and revenue reflects lower oil-and-gas drilling activity following the decline in oil prices. The company said it was not then selling water to the oil-and-gas industry.
- The company sold its Arkansas River farm assets for approximately $45.8 million in August 2015. After quarter-end, it received the $1.342 million escrow balance after resolving dry-up covenant issues. Farm operations were expected to end after December 31, 2015.
- Management believed available working capital was sufficient to fund operations for the next fiscal year. It had an effective shelf registration statement that could permit up to $15 million of stock sales.
- Planned spending included approximately $3 million over the next 12 months to connect the Lowry and Sky Ranch systems, and approximately $1.2 million annually for five years to fund the District’s WISE participation. The company projected about $5.8 million of WISE funding over five years; expected capacity upon completion in 2021 was approximately 3 million gallons per day and 500 acre-feet annually.
- Key risks include uncertain timing of development and water-tap sales, dependence on a concentrated customer base, oil-and-gas and crop-market conditions, construction and permitting costs, regulatory and water-court outcomes, and asset-impairment estimates. Sales to the District represented 70% of water and wastewater revenue; its largest end customer represented 61% of that revenue in the quarter.
- The filing describes ordinary-course litigation and contingencies but provides no clear quantified loss exposure. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether oil-and-gas water demand recovers and how long fixed ECCV costs continue to weigh on water margins.
- Collection and use of the post-quarter escrow proceeds, and completion and sale of the acquired farms. The filing gives differing acreage figures: the notes describe 700 acres acquired, while MD&A refers to approximately 465 acres.
- Timing, cost, and expected returns of the Lowry–Sky Ranch pipeline and WISE commitments, including the related-party funding arrangement with the District.
- Customer concentration and the District’s ability to pay; also verify the assumptions underlying future tap sales and management’s conclusion that water assets are not impaired.
- The amount and priority of Export Water proceeds subject to the recorded and contingent CAA obligations, and any material developments in litigation or other contingencies.