Pure Cycle Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended August 31, 2013; filed November 27, 2013. This is an annual filing, not a standalone fourth-quarter report. Pure Cycle provides wholesale water and wastewater services in Colorado and leases agricultural land.
Key financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1.857 million | $284,000 |
| Gross profit | $1.464 million | $96,000 |
| Operating loss | $1.090 million | $14.500 million |
| Net loss | $4.150 million | $17.419 million |
| Basic and diluted loss per share | $0.17 | $0.72 |
| Cash used in operating activities | $1.757 million | $1.887 million |
Revenue growth mainly reflected the start of reporting farm operations as a separate business, which contributed $1.242 million, and increased water sales to oil and gas operations. Water revenue was $503,000, up 175%; wastewater revenue declined 9% to $42,000. Water deliveries approximately doubled to 69.2 million gallons. The filing reports water-delivery gross margin as 63% in one summary table and 67% in the narrative; investors should verify the applicable calculation.
Net loss narrowed substantially, but FY2012 included $12.0 million of impairment charges. FY2013 also included $3.275 million of noncash imputed interest expense on the Tap Participation Fee (TPF), equal to about 79% of the reported net loss.
Financial position and liquidity
- At August 31, 2013, cash and cash equivalents were $2.448 million; working capital was $4.5 million. Current assets included a $6.655 million HP A&M receivable, so liquidity depends in part on collecting amounts from a defaulting related party.
- Total assets were $108.6 million; total liabilities were $70.8 million; shareholders’ equity was $37.8 million.
- Mortgage obligations totaled $7.758 million, including $4.547 million classified as current. The company also reported a $59.8 million discounted TPF liability, payable as qualifying water taps are sold, with no scheduled maturity date.
- Operating cash outflow was $1.757 million. Investing activities provided $4.098 million, substantially including $3.415 million from the foreclosure sale of pledged shares. Financing activities used $1.517 million, mainly for mortgage payments.
- Management said available working capital was sufficient for the next fiscal year and disclosed an effective shelf registration allowing up to $15 million of additional stock sales.
Material changes, outlook and risks
- Growth and customer mix: FY2013 water sales to the oil and gas industry drove much of the increase in deliveries. A customer associated with this activity represented 59% of water revenues; the filing states there is no contractual commitment ensuring these sales continue. The Rangeview District represented 34% of total revenue, versus 86% in FY2012.
- HP A&M defaults and TPF: Pure Cycle acquired about $7 million of HP A&M’s defaulted notes to protect farm and water assets. Foreclosures reduced taps subject to the TPF to 17,194 at year-end and reduced its discounted liability by about $11.7 million. Subsequent foreclosures reduced the count to 13,830 and the liability by a further approximately $11.9 million. Collection of the HP A&M receivable and title to affected assets remain important uncertainties.
- Legal matters: Disputes with the Colorado Land Board include royalties on wastewater revenue, whether Export Water royalties apply to net or gross proceeds, and water blending. These claims were referred to binding arbitration; timing was unknown. HP A&M’s separate lawsuit was stayed pending the Land Board matter. The filing recorded no litigation-loss accrual because losses were not considered reasonably estimable or likely. A separate HP A&M challenge to four foreclosures was dismissed with prejudice in November 2013, subject to appeal.
- Operating plans: Management planned to expand oil-and-gas water delivery capacity from about 500,000 to 1 million gallons per day during FY2014, subject to demand and investment. It anticipated $400,000–$500,000 of wastewater-facility improvements in calendar 2014 for tighter discharge requirements. The District’s preliminary WISE-project capital estimate was $6.7 million over seven years; Pure Cycle’s eventual participation and funding were not certain.
- Long-term development: Sky Ranch remained undeveloped, and its timing depended on real estate conditions and developer interest. The company’s Arkansas River water requires a water-court change-of-use approval and major infrastructure; the contemplated pipeline and facilities were estimated to cost more than $500 million. The company did not plan to begin that process in the near term.
- Other significant exposures: Housing and development delays, political and regulatory decisions, drought and water quality, construction costs, concentration in a small customer base, and financing needs could affect results. The company expected to lose the $5.5 million Paradise Water Supply asset after recording a full impairment in FY2012. It reported no FY2013 impairment of its remaining long-lived assets.
Most important facts for investors to verify
- Whether the $6.655 million HP A&M receivable is recoverable and whether remaining foreclosure proceedings preserve the company’s farm and water interests.
- The assumptions supporting the $59.8 million TPF valuation, including future tap sales and tap-fee growth, and the effect of subsequent foreclosures.
- The outcomes and potential costs of Land Board arbitration and related litigation, including royalty treatment and exclusive service rights.
- Whether oil-and-gas water sales persist, given customer concentration and the absence of a continuing sales commitment.
- Cash runway and financing needs, considering recurring operating cash outflows, current mortgage maturities, and planned capital spending.
- The water-delivery margin calculation: the filing gives both 63% and 67% for FY2013.