Pure Cycle Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended November 30, 2014; comparable period is the three months ended November 30, 2013. The interim financial statements are unaudited. Pure Cycle provides wholesale water and wastewater services and leases agricultural land and water.
Key financial results
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Total revenue | $833,777 | $578,503 |
| Gross profit | $610,602 | $398,055 |
| Operating loss | $(72,336) | $(237,357) |
| Net income (loss) | $10,308 | $(846,502) |
| Net income (loss) per common share | Less than $0.01 | $(0.04) |
| Net cash used in operating activities | $(277,828) | $(120,851) |
- Revenue rose 44%, led by metered water usage revenue of $491,823, up 53%, and farm revenue of $263,813, up 20%. Water deliveries increased 34% to 46.5 million gallons.
- Water-delivery gross margin improved to 72% from 68%; overall gross margin was approximately 73% versus 69%. Management attributed water margin improvement to higher volumes and tiered pricing. Farm revenue benefited from the absence of drought-related lease discounts provided in the prior-year quarter.
- General and administrative expense increased 4% to $647,529. Operating results improved, but the company remained loss-making at the operating level.
- Net income turned positive mainly as imputed interest expense on the Tap Participation Fee (TPF) fell to $23,816 from $657,235. The prior-period expense was substantially higher; the current-quarter result should not be viewed as solely reflecting recurring operating performance.
- Cash and cash equivalents were $1.93 million at November 30, 2014, compared with $1.75 million at August 31, 2014. Working capital was $932,100. Total assets were $108.1 million and total liabilities were $10.7 million.
- Cash declined by $277,828 from operations and $454,427 from investing, offset by $910,238 of financing inflows; ending cash was $1.93 million. Investing included $1.15 million for water, water systems and land, partly offset by $699,826 from farmland sales.
- Promissory notes payable totaled approximately $5.85 million, including $848,325 current and $5.01 million long-term. The company borrowed $4.45 million from First National Bank of Las Animas, at 5.27% for the first five years of a 20-year term, to consolidate mortgage debt and provide working capital. The loan is secured by land, water-company shares and assigned notes.
Changes, outlook and significant items
- Management stated that available working capital was sufficient to fund operations for the next fiscal year. The company also had an effective shelf registration statement allowing it to offer up to an additional $15 million of stock; no specific earnings or revenue guidance was provided.
- The TPF liability fell to $1.73 million from $7.94 million at August 31, 2014, after foreclosures reduced the taps subject to the fee from 2,184 to 383. The $6.23 million liability reduction was recorded as an equity transaction and was noncash. The remaining obligation represents 20% of proceeds from the next 383 water taps sold.
- The company invested approximately $535,200 in WISE infrastructure during the quarter. Following a post-quarter waiver of project contingencies, the WISE financing arrangement is expected to require approximately $7 million over five years, including about $1.2 million annually and repayment funding for a related $1.4 million obligation. In exchange, Pure Cycle expects rights to use the District’s 7% share of WISE water and infrastructure; expected capacity upon completion in 2021 is approximately 3 million gallons per day and 500 acre-feet annually.
- Water revenue was highly concentrated: oil-and-gas industry sales accounted for 88% of water and wastewater revenue, compared with 87% in the prior-year quarter. Management linked increased water demand to hydraulic fracturing activity, making results exposed to oil-and-gas activity and pricing.
- Pure Cycle settled and dismissed with prejudice HP A&M’s 2012 lawsuit against the company. A separate company lawsuit against HP A&M seeks damages estimated at not less than $8 million; the company recorded no loss accrual because a loss was not considered probable or reasonably estimable. An appeal involving four foreclosed properties remained pending, and one property remained subject to foreclosure proceedings.
- Key risks include development and homebuilding timing, future tap fees, oil-and-gas demand, crop and weather conditions, ability to raise capital, litigation outcomes and estimates used to value water assets and the TPF. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether oil-and-gas water demand and the unusually high customer concentration are sustainable.
- Cash needs and funding capacity for planned WISE commitments and ongoing water-system expansion, including whether management’s working-capital assessment remains valid.
- Terms, amortization and collateral of the $4.45 million bank loan, alongside the company’s total promissory-note balance and scheduled maturities.
- Whether TPF estimates remain supportable given reliance on projected development and tap fees, and how remaining foreclosure or legal proceedings could affect assets and obligations.
- Progress on HP A&M litigation and the appeal concerning four properties; potential losses were not accrued and could not be estimated in the filing.