Pure Cycle Corporation — Form 10-Q
Reporting period: Fiscal quarter and nine months ended May 31, 2014. The interim financial statements are unaudited. Pure Cycle provides wholesale water and wastewater services and leases agricultural land and water.
Financial results and liquidity
| Metric | Three months ended May 31, 2014 | Nine months ended May 31, 2014 |
|---|---|---|
| Revenue | $678,549 | $1,992,926 |
| Gross margin | $504,389 | $1,453,961 |
| Operating loss | $351,094 | $729,343 |
| Net loss | $381,246 | $1,683,721 |
| Net loss per share, basic and diluted | $0.02 | $0.07 |
- Nine-month revenue increased 55% year over year; quarterly revenue increased 64%. Nine-month water revenue rose to $1.03 million, primarily from industrial water used in fracking. Water deliveries increased 237% for the nine-month period; water delivery gross margin was 70%, versus 43% a year earlier.
- Nine-month net loss narrowed from $3.04 million to $1.68 million. The quarter’s net loss narrowed from $1.05 million to $0.38 million. Lower imputed interest on the Tap Participation Fee (TPF) contributed to the improvement.
- Cash from operating activities was $711,722 for the nine months, compared with cash used of $1.33 million a year earlier. Cash was $2.88 million at May 31, 2014; working capital was $9.8 million. Operating cash flow benefited from the oil-and-gas lease payment and noncash adjustments, including $1.31 million of imputed TPF interest.
- Investing activities provided $3.00 million, largely reflecting $3.92 million in farm-land sale proceeds. Financing activities used $3.29 million, mainly for promissory-note repayments.
- Total assets were $106.66 million and total liabilities $22.43 million. Promissory notes payable totaled approximately $4.51 million, including current and long-term portions. The $13.16 million recorded TPF liability is separate from those notes; the company also disclosed a contingent export-water obligation.
Changes, outlook, and material items
- Water revenue growth was driven by fracking sales; one oil-and-gas customer represented 86% of water and wastewater revenues for the nine months. Farm revenue declined 11%, partly because the prior-year comparison included an additional month of farm operations.
- General and administrative expense rose 34% for the nine months to $2.15 million, chiefly due to increased legal and accounting fees associated with litigation and foreclosures.
- After foreclosures and related contractual remedies, the TPF was reduced by $47.95 million during the nine months as an equity transaction. The recorded liability fell from $59.81 million at August 31, 2013 to $13.16 million at May 31, 2014; 3,736 taps remained subject to the fee at quarter end.
- Management stated it believed working capital was sufficient to fund operations for the next fiscal year. The company was expanding water capacity for anticipated industrial demand, with an estimated total expansion cost of approximately $3.5 million. No specific revenue or earnings guidance was provided.
- Subsequent events: After quarter end, the company borrowed $1.75 million under a 20-year, 5.27% note secured by farm and water assets. Further foreclosures reduced the taps subject to the TPF; the filing gives differing figures for the reduction (1,655 in one note and 1,665 in another), leaving 2,071 taps and an estimated $7.5 million TPF. On July 10, 2014, the company, the District, and the Land Board settled litigation and arbitration claims, amended and restated agreements, and the Land Board assigned the company approximately $2.4 million of rights to future export-water proceeds.
- Key risks include dependence on concentrated industrial water demand, uncertain timing of Front Range development and tap sales, estimates underlying water-asset impairment and TPF valuation, and ongoing HP A&M litigation and foreclosure matters. Management reported no reasonably estimable or probable loss accrual for the disclosed lawsuits as of May 31, 2014. Disclosure controls were assessed as effective.
Investor facts to verify
- Whether industrial/fracking water sales and the concentrated customer relationship continued after the quarter.
- The July 2014 settlement’s detailed terms and the timing and amount of any export-water proceeds.
- The final post-quarter foreclosure count and TPF balance, given the inconsistent tap-reduction figures in the filing.
- Use of the $1.75 million borrowing, debt-service requirements, and remaining liquidity for the planned water-system expansion.
- Progress and outcomes in HP A&M litigation, remaining foreclosures, and recovery of amounts owed by HP A&M.