Good day ladies and gentlemen and thank you for joining us for this Pure Cycle Corporation's Fiscal Year-To-Date and Second Quarter Ended February 28, 2019 Earnings Call. As a reminder, today's meeting is being recorded and all participants will remain in a listen-only mode until we are ready for your questions. [Operator Instructions] And now, to get it started with opening remarks and introductions, I'm pleased to turn the floor to president and CEO, Mr. Mark Harding. Mr. Harding, the floor is yours.

Thank you very much and I'd like to welcome you all to our second quarter earnings call. So this earnings call will be for our six-month period ending February 28, 2019. As those of you who have followed the company, we do two earnings call a year, one at year end and then one at half-year end, so I'm delighted to be able to update you as to the status of the company. We do have a slide deck for this presentation. So, if you want to follow along with the descriptive part of that, you can log on to our website at purecyclewater.com. If you click over into the Investor Tab in there, you'll see the presentation in the center of the graphic there and you can click on that, extend that out, and that will allow you to kind of track the audio portion of this with some of the descriptive portions that we will have through this. I'll try and note the slide transitions as we move along, but for the most part welcome to our second quarter call. I'll get the lawyers out of the room first, so our Safe Harbor statement that this is really not intended to be guidance or provide historical facts or information. There will be descriptive details, some of which will be the details of our earnings release and some of that will be concepts and plans that the company is pursuing, both within our water utility as well as our development segments. So, with that, we'll go to Slide number 3, which really, pardon me, it will detail out really the kind of areas that we generate some revenue. What's new to this year's reporting that many of you will have not seen is kind of we've incorporated an additional…

Thank you, Mr. Harding. [Operator Instructions] We will take our first question from Bill Smith with William Smith and Company. Go ahead sir, your line is open.

Thank you. Hi, Mark, congratulations on your progress. Question on the third contract with the third builder where you get everything at the end, and you haven’t received any progress payments yet, do you have any idea when that might be and what the amount might be for that?

So, we’ll be delivering 25 finished lots in that March or that May timeframe, and then another, so that’s the one that's got two back-to-back deliveries. So, we’ll have those 25 lots that we get about 75,000 per lot and then another 28 lots in June, so those are going to be the corresponding numbers attributable to each of those. So, close to, say two, three, almost $3.8 million from those two lot deliveries on the finished lot delivery.

Okay, what – but there's one builder, right, where you don’t get the progress payments and it’s all at the end is that what you’re - that you’re including that in this calculation?

Yes, yes. I mean, they’ve got substantial investments in the project, so we were, you know - they just had preference for a particular structure and we priced that into the sales price of what it is that they are getting. They have paid for all of the over ex – so they’ve got substantial investments into each lot, separate and apart from us on a finished lot delivery. So, they’ve got, you know, probably $10,000 per lot for each - I’d say probably up to maybe close to 100 lots. So, they’re vested with the project so that it’s not just a finished lot delivery where all of that inventory is held by us.

And these numbers that you just gave, the deliveries for like June and May and late summer, are those just progress, the revenue numbers, were those progress-type numbers and not all in numbers?

No, those are, that’s actually - so it does not -- those numbers do not account for what we’ve already received to date. So, in total, if you look at what we’re looking to deliver in 2019, that’s closer to about $18 million in the land segment of what we’re doing.

Okay, and that’s just the land that we’re talking about?

That’s just the land, that’s right, that does – that's not tap fees and that's not what we're doing in the utility segment.

Alright, okay, thank you.

Thank you, Bill.

And we’ll take our next question from William Miller with Hartwell. Please go ahead sir, your line is open.

Mark, Hi, Will Miller.

Hi Will.

I was curious, good morning, good afternoon I guess for us and good morning to you, but anyway I’m just curious, if you looked out at the three years, could you give us the percentage of revenue that you would have coming from lot sales, oil and gas, and then just the water utilities? And you haven’t talked at all about the use of your cash and whether some of that is earmarked for acquisitions or stock buyback because you are going to be in the next 3 to 5 years flushed with cash, so could you comment on that as well?

I love your optimism. So, I will reiterate Slide 2 on the presentation which is, you know, the crystal ball of what it is that we’re doing, you know what I think most of our builders are fairly optimistic about what it is that we’re doing at Sky Ranch, and it’s really because of price point. We have - you know, this is a pretty flat piece of property, so development costs are pretty predictable, pretty tangible, so we’re developing and delivering lots at a reasonable price which allows them to put up an entry level home. Now, entry level homes here in Colorado are - it’s stunning that you can say $300,000, an entry level home in the same sentence, but that’s kind of where the market is here in the Denver area and there's none of it out there. So, we are really one of the few projects that can deliver a home for something in the low 300s. I mean, a lot of times people will advertise low 300s, but by the time you get there and get it bought and get it done, it somehow creeps up into 400,000. So, I think the builders look at this as a terrific opportunity and they wanted to - -I think they wanted to have enough inventory where they can put their marketing machines together and really be aggressive about their sales so that they’re delivering call it 7 to 10 homes a month. And their early months will probably not be quite that volume, but as they keep going and we start to get into the second season of that, I think that’s what they’re going to take a look at. So, if you look at with three builders that probably put this first phase into a matter…

That's great Mark, thank you. But if you looked out say three years, what do you think the recurring revenue would be? That's one thing and the second thing is given the State of Denver real estate in general with no capacity around, why should thinking of raising prices for the second phase of waste development and for your other activities?

All of those are clearly opportunities. I'll do the latter first. You know, we do think that there's some opportunity to participate with our builders in this. We want to make sure that we continue to get high absorptions in this and so we don't want to overburden the property, but by the same token, we want to participate to the upside from builders as they continue to find value in what it is that they're building as well. So we might take a look at our participations in fixing a certain pricing point and then participate above a certain sale price for the house as well as a little bit more favorable lot prices to us in the equation. On the recurring revenue, I think within three years the first days of Sky Ranch will be built out. So we'll have a good $7.5 million in annual revenue coming in from the water sewer fees from that. We'll have the other phases coming online, so those will be rapidly growing. I think we still have a very attractive industrial frac sale that will be contributing in that $4 million to $8 million depending on the number of operators that are in the field. So if you look at us two years ago, we had you know maybe a million dollars in recurring revenue. If you look at us three years from now, so within a five year span maybe going from $1 million to $15 million is not unreasonable. But I refer back to my slide 2.

Well great job. All right thanks very much.

Thanks.

[Operator Instructions] We'll move next to John Rosenberg with Loughlin Water.

Yes, hi Mark. Good morning and thanks for taking my question.

You bet.

I have a couple of – well, I have a question pertaining to your relationship with the CAB, Community Authority Board. As I read through at some point in the future, they will be, do they have, do you have a note receivable out to them now? Have you performed activities for which they will later - that entity will reimburse Pure Cycle in the future? Yes?

Yes. So let me describe that for a little bit.

Thank you. Yes. I have to read.

And it doesn't come across all that well in the disclosure. I mean we try and do as good a job as we can. What that is, so it - Colorado is a growth pays its own way state. And so what happens is every new development has to have their own tax structure for that development. So they set their own mill levies for that little development. They may be part of a bigger comprehensive city, county or otherwise, but all of their infrastructure that they need to deliver, those citizens that are going to live there are going to pay for those infrastructures and we deliver a lot of public improvements as part of being a developer. We're going to deliver roads, curbs, gutter, drainage ways, parks, open space, rec centers, all that stuff are public assets. They will be owned by the public. In some cases they're owned by the county, in some cases they'll be owned by that CAB, that Community Authority Board. And so, what happens is, we're advancing those moneys. They receive those assets. We have a note receivable from them. And when they get assessed value, when they have homes, when they have property tax mill levies and customers that are living there, that will provide what we call bonding capacity to repay those advances, so it's an advancement.

This is kind of like a Water Authority in California, I'm somewhat analogous to that, it can issue tax increment financing?

Yes, that's exactly right.

It will be able to issue municipal bonds then against that once it's established as a as a cash flowing entity?

That's right.

Okay.

So and pulling the trigger on that you can do it early and pay higher interest rates and have more capitalized interest or you can do it when it's more mature, you get lower interest rates and a higher bonding capacity. And so, we have chosen to do that at a later date to have a little bit more bonding capacity to squeeze, every dollar that we can out of that mill levy and the taxable bonding capacity of that community.

All right, I see. And that's presently carried on the balance sheet under note receivable?

Well yes. So, there'll be some in the note receivable and then as we finish the delivery of those lots, what you'll see is numbers will roll out of our inventory and they'll go into the P&L and then we'll have a footnote that will describe what total amounts are still owed to us as part of that note receivable from the CAB?

I see. And thank you very much. And my next question pertains to SB181.

Yep.

Do you - could you - your thoughts on what that on the ground on what that could do for development of oil and gas, I believe northeast of you right now?

Well, I'm interested in what happens northeast of them, I'm more interested in what happens on top of where we're at.

I see, Okay I didn't know where the Niobrara, I'm not so up on my geography, my apologies.

No, that's okay. The overall Niobrara is exactly the same portion, same field that the operators that are working in our area are developing.

I see.

And so, there's a couple schools of thought on 181, one of them being, okay we have a very vocal minority, a very strong conservation contingency out of Boulder that really wants to limit oil and gas development in Boulder. And in so doing wants to say well, we in Boulder know what we're doing and we want to limit that and we want to limit it for the rest of the state and the rest of the state is not so keen on doing that. And so, most of 181 was as I understood it to transfer more authority, more control to the local jurisdictions which on its face fine, if Boulder doesn't want to have oil and gas development Boulder should not get oil and gas development and the rest of the state can continue to do oil and gas development. So that's a local control level I think that that's probably within reach. One of the things that we didn't want to see happen is we didn't want to have different standards. We didn't want to have Boulder develop under standard A and Arapahoe County develop on standard B. We want to have a unified standard. It is a binary issue. If you don't want a development then don't develop, but if you are going to develop you know how that is going to be and you have a central agency that's regulating that.

Makes sense.

And so, part of it was local control, part of it was strengthening some of that statewide controls that make it predictable and definable for communities that want to continue to encourage oil and gas development, so both of those things have happened. I think we'll wait and see as to what the statewide regulations do that either work with industry which I think is the tenor is to find ways to work with industry to address the concerns that maybe some of the public might or the regulatory claimant has, but then continue to allow those jurisdictions that have had active oil and gas development to continue oil and gas development. And so, that's what I can tell you about it. What I don't know that I have a good crystal ball is to say, well what kind of influence is that going to have as the state as the industry as a whole. Colorado is an oil and gas state. We're an oil and gas producer. And so, it would be hard for me to envision Colorado not being an oil and gas producer. Boulder may not be an oil and gas producer, but the State of Colorado I think will continue to be an oil and gas producer.

Thank you.

That's - I can give you.

Thanks for the clarification.

[Operator Instructions] We'll go next to Bill Cunningham.

Hi, Mark, how are you?

I'm great Bill. How are you?

I'm doing good. I actually have a question is actually has to do with the table in the 10-Q on segment operating margins, which I was looking at for starters the lot fee revenue and the lot fee gross margin which surprised me at being so small at 6%, but this kind of ties into the car discussion where I saw the paragraph on that where, when that first phase is finished you expect a total of $36 million from the builder is with a cost of $35 million so that would be I presume the same kind of calculation is what you're doing here for the part that's completed so far, but then there is another $27 million coming in. So you're going to be from that first segment collecting a total of $63 million and the $35 million estimated expense. So I come up with when all is said and done and the dust has settled that you're going to have a gross margin in excess of 40% there. Am I looking at that correctly?

You are

Okay.

So now, I will caveat that with one caveat. Those are the correct numbers and so this concept of bonding capacity and so the mill levies that we set and the AV that gets defined pursuant to the sale price of the house, when you take a look at a standard residential development and just have the mill levies available from residential because – and to remind - I will recall that we're a sales tax incentive state. And so, the bulk of our revenue we get almost four times the amount of revenue from commercial retail sales tax as we do from residential sales tax. So if our project were just limited to residential, we might get half of that $27 million back on the reimbursable that qualify because we wouldn't have the bonding capacity for it. But because we have 160 acres of commercial, we'll actually have excess revenues over our reimbursable. So we believe we'll get 100% of our reimbursable back. It may be in phases, it may be over several phases. But you're right, that's the margin that we're going to get because of how those reimbursable are and the type of development that we have.

Okay. And then when do you expect to be, you said you're going to defer the issuance of the bonds until the last moment possible. What's your kind of timeframe you're thinking when that's going be happening?

Yes, I might hold you back from that. I'm not so sure that I'm going to - I don't think I said to the last no. It's certainly the later in the Cycle that you develop those bonds, the cheaper the interest rate is, but there's a certain window where it's kind of like a flat yield curve. So, as you get a certain number of units on, it doesn't matter how many more units, just going to still have the same interest rate. And so, we will be issuing our bond kind of at the start of that flat yield curve for the AV within the community after and we're working with several different bonding firms right now as a matter of fact to kind of propose out how that process would work and the number of connections that we have, that gives the bond market enough comfort level and a tradeoff between maturity of development and interest rate. And so, you know, and I'll just throw numbers at you just to illustrate this. If we've got no homes out there and we want to finance all that infrastructure we can do that. So the bond market is accustomed to doing that type of financing. Maybe you pay a higher interest rate, maybe your interest rates are at 8 percent. If you've got 50 homes out there and then the next 500 are coming, then your interest rate might be 7.5%. If you've got 500 homes out there and you want to have 500 homes financed, may be your interest rate is 3.5%. So somewhere between 3.5% and 5% to 6% is kind of that sweet spot on where you want to do that. And is that a 100 homes, is that 150 homes and that's what we're getting that question answered. But you know it may be you may see some bonding later this year. We may choose to pull that trigger later this year.

Okay, very good. My one other question on the segments on the operating gross margins was when the tap fees I see for the quarter there's 467,000 of revenue there, but no cost allocated against it. No gross margin reported. So it appears you're reporting a 100% gross margin on that.

No we do add that into it. I think how we might be taking a look at that reporting, it's going to be consolidated into the overall water utility segment and so we might - you bring up a good point there Bill. It might be incumbent on us to be able to kind of describe those costs a little bit more in the footnotes because it does get lost in the overall water segment. And so, I hadn't thought of that, but that might be another table that we could add to help clarify for the reader what those cost of goods sold are going to be for each of the incremental taps that are coming online because they're not reported as 100%, but it does get lost in the overall utility segment.

Yes, that would be great because what I first - when I first saw the small margin on the home lots and then saw the tap fees, I was thinking that maybe the tap fee revenue was part of what I should be looking at in the lot fee adding that to the lot fee income to come up with a reasonable margin. But then of course when I saw the footnote, so that was something totally different.

I know, we do. We do want to segment those, right, yes, that's exactly right. So, very good point. Thank you. We will clarify that in the next filing.

Okay, very good. Thank you very much.

[Operator Instructions]

Well let me jump back in and what I'll do is, if you all had a question that technology wasn't allowing you to get in. Don't hesitate to just give me a call and I can clarify some of that. We will post this replay up to our website by end of day, so that you can kind of listen in it again. And if it spurs another question that maybe you didn't get the first time don't hesitate to give us a call. With that, I will sign out and I thank you all for your continued support and look forward to continued results for all of our valuable assets and thanks again.

Ladies and gentlemen, this does conclude today's teleconference and we thank you all for your participation. You may now disconnect your line and we hope that you enjoy the rest of your day.