Good day, ladies and gentlemen, and welcome to the Pure Cycle Corporation Fiscal Year and Fourth Quarter Ended 2019 Fiscal Result Call. All lines have been placed in a listen-only mode, and the floor will be opened for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Mark Harding, President, CFO and Director. Sir, the floor is yours.

Thank you. I’d like to welcome you all to our fiscal year-end 2019 earnings call. Some housekeeping matters. We do have a slide deck for this presentation. So if you log on to our website at purecyclewater.com, if you go into the Investor tab and then you’ll see there a slide deck that will show you the fiscal year-end slides and then you can follow along and track with me as I work through the presentation. So I’ll try and note the transition of the slides as we progress through the presentation. So with that, we’ll start with our first slide, which is the second – actual our second slide, which is our Safe Harbor statement, which is a forward-looking statement that references the discussions in this presentation, which will include some forward-looking forecasts and also some reports of our filings that we had just recently today. So I think most of you are familiar with the Safe Harbor statement. What I’d like to do is just for a quick overview for those new to the company or listening in for the first time, give you kind of a brief overview of the company, what it is that we do, kind of where we get some of the revenue from our assets and then drill down specific on some of the year-end activity and maybe look forward as to what we’re going to hope to get accomplish in 2020. We generate revenue really from two business segments. And while they have two different distinct segments at a DNA level, we’re a water utility that owns a substantial portfolio of water-in at water-short region. In addition to what we do on the utility side, we also developed land and mixed use Master Planned Community, what we really identify as one of…

Yes, of course. Thank you. The floor is now open for questions. [Operator Instructions] And we do have our first question from Anthony Polak [ph]. Please state your questions.

Hi, Mark. Congratulations on the numbers. A couple of quick questions. First, can you describe the legal relationship between Pure Cycle and the municipalities that are going to be paying you back for this reimbursables? Are they the ones that are in direct contact with the customers? Do they do the billing? Do you do the billing yourself? How does that work?

So let me bifurcate that out between the utility side as well as the land development side. So we’re a wholesaler of water to a quasi municipal political subdivision called the Rangeview Metro District. And then the Rangeview district contracts with us to operate, maintain and do all the rebilling. So we do all of that billing to those customers and we get 100% of the tap fee revenue and 98% of the usage revenue. So that’s how that relationship works with the water side. On the land development side, what we have is what we call in Colorado developer districts. So we have Sky Ranch metropolitan districts and we have a number of those. And then those districts consolidate into the Sky Ranch community authority board, so that’s the Sky Ranch cab. When you read through our financial statements, you’ll see references to those. And we control the Board of Directors for that, but it is a political subdivision of the State of Colorado. And we sit on those Boards by virtue of a land ownership provision. So we own the land within Sky Ranch that allows us to sit on those Boards. And that’s the taxing entity. And so in Colorado what we have is a mechanism whereby growth must pay its own way. So every development area will have something like what we have here, where it will have the jurisdictional areas and it will build the roads, the curbs, the gutters, the drainage, everything that’s going to be attributable to providing homes in that area. And then those mill levees from the homes and the value, the assessed value for those improvements, then are qualified for public improvement reimbursables. And so that’s the relationship where we’re not the legal entity, it’s a taxing legal entity from the customers and those customers as the municipality, as the community builds out, then they have an electorate and then they can become elected officials of those districts and participate in that governance with us on those districts. And then have the ability and our mill levees are set on a predetermined area. If we need to increase them, we have to go back to the voter electric to increase those. And so that’s kind of the relationship on the land development side between us and the municipalities.

And when do they reimburse you when they start charging the real estate taxes and then they can raise debt against that? Is there a timing lag? What’s – how can we understand that a little bit better?

That’s a great question. And so there’s kind of – I’ll break it up into three areas where people look at this. They can be very early in those financings, where oftentimes the developer doesn’t have the capital to start to development. And so the way they would do that is they would say, I’m going to build this and I’m going to have assessed value in a couple of years. So what they do is they go to the bond market early and they get very high interest rate because that would be a high risk bond. And then they use those proceeds to plow that into some of that infrastructure. So I would say that’s an early financing. And then there’s kind of a late-stage financing, where a developer would wait until the project is built out. They’ve got all the homes built, they’ve got all the assessed value, and then they bonded and then they would get a very low interest rate. And so somewhere between those is the optimum one. And so that’s where we looked at it is to say, okay, we’re the optimum scale for being far enough along into your development that you’ll get a very favorable interest rate while at the same time be able to leverage the total assessed value that’s going to be from your build out. And so, what we saw was that this thing was going very successful. The district retained City Corp, the municipal division of City Corp to be able to come in and give a financial analysis of what the opportunity for bonding is. And they came back and said, listen, this is a terrific, absorption here. You can go to market at any time and you’re not going to improve your interest rate by holding a couple of years just because you’ve got a lot of momentum going. And so the Board of Directors sort of elected to have them go ahead and engage them to start that process. And they’re in that process right now. So, pending a successful conclusion of that process, you’ll see an announcement about some of those reimbursables coming back to us within this fiscal year.

Awesome. And then one unrelated – first of all, thank you and much clear. And then unrelated question, did I hear you say that in fiscal 2020 we should expect 200 tap connections?

Yes.

Okay. All right. Thanks. That concludes my questions.

Thank you. And our next question comes from Dorsey Gardner [ph]. Please state your questions.

Hi, Mark, it’s Dorsey.

Hi, Dorsey.

Hi. Will you comment on the tax situation? You have a loss carry forward or what’s the situation there?

We’re in that high quality problem. We’re going to have to start using some of those. So, yes, we do have some NOLs that carry forward. We have about $7 million, is that about right? $7 million? $2 million left? Okay. So we’ve been willing net tax provision down over the last few years. And I think so carrying forward, we’ll be using some of that in 2019 and then in 2020 we’ll have the $2 million left. Yes. Okay. So we’ll – I think we’re going to use up the $4 million almost $5 million. So that’s got some like $7 million, that’s where I had that placeholders that we had $7 million, we’re going to use about $5 million of them up for the 2019, and then we’ll have about $2 million left. And then we’ll send our checks over to our less just president.

Okay. Thank you.

Thank you. [Operator Instructions] And we do have our next question from John Rosenberg [Loughlin Water]. Please state your questions.

Yes. Hi. Good afternoon. Hi, Mark. Thanks for taking my question.

Hi, John.

Getting back to the CAB, you guys had announced – congratulations on what you’re in process financing. I pulled up some information. Could you tell me a little bit about what are we – what are you looking at or what will the CAB be issuing? I’m seeing some issues like a – looks like a seven and five eighths and a 5% coupon issue. Are you allowed to talk about that now or?

Yes, yes, I can tell you what’s been filed in the public market.

Yes.

So there’s a preliminary limited offering memorandum. So you’ve got to have acronyms in here. So we’ve got a form that’s been filed. And the initial forecast was to be something like $10.8 million in senior bond and then about $1.7 million in subordinate bonds. And the ways the subordinate bond works, excuse me, in cascading revenue flows as the mill levees go to fund the senior bonds. Then once those debt services are fully funded, then they go to fund the subordinate bonds. And the relationship between the senior bonds and the subordinate bonds really are a function of buildup. So if you issued late-stage bonds, where the community was fully built out, those would all be senior bonds. If you issued early-stage bonds, they would almost all be subordinate bonds because there’s no senior bonds that had existing mill levy. So that’s where we found ourselves kind of in that area that allowed us to have a good senior position than a relatively small subordinate position because of a very good visibility to build out and the number of connections and then the total assessed value. So, then they go, they build all these things and once they’d got them, they put together that marketing memorandum, they go to the market and they see kind of where the market demand is for that. And so the interest rate sensitivities there are kind of estimates. And so if I look in my world to say, if we got 5%, that’s kind of at expectations and I’d be satisfied if we got more than 5% interest rate, then maybe I look at it and say the market was a little weak and they were dialing back on the risk factor. And then if we got less than 5%, I’d say the market really looked at our project with some favor and we’re willing to pay a premium. And so we’ll see how that prices out. And you’ll see final numbers come to that plum and those will be the actual interest rates.

Okay. I see. Thank you. So I was looking – I’m looking at the coupons or the prospective coupons or two different structures. I don’t know if they’re the same ones. One has a call with a sinking fund provision, the others is to call provision and one is a seven and five eighths, one’s 5%. I was wondering what – they’re dated…

The seven and five eighths.

The 19th of this month in the memorandum.

Yes. Right.

And I was wondering what you intend to come to market with if you’re looking at 5% money or maybe even a little bit less if the bonds trade up, if they did come issued above par or if you’re looking at having the go-to-market for seven and five eighths. But those – you’re telling me those are basically kind of markers out there right now.

That’s right. Those are placeholders.

Okay, great. All right. Well, thank you very much and best of luck going forward. Thank you very much.

Thank you.

Thank you. Our next question comes from Bill Cunningham [Private Investor]. Please state your questions

Hi, Mark. Yes.

Hi, Bill.

I have some questions on the bonds as well the interest rate. How does that impact Pure Cycle? I assume the bonds are being serviced by the taxes by the homeowners. So it seems if I’m understanding things correctly, that the interest rate doesn’t really directly affect Pure Cycle in any manner. Is that correct?

That is correct. So that’s not our debt interest rate. That’s going to be the municipality’s debt interest rate. And it does have a indirect effect to us because if they get a lower interest rate on the same assessed value, then they have more bonding capacity. And so if the interest rate goes down, then they can go for more money with the same assessed value and pay more of the reimbursables.

Okay.

And if you look at it, in this particular first phase, and that kind of – let me drill down in a question that I’m pretty sure you’re going to ask the next question, which is, how much of the first phase of reimbursables are we going to get back with this bond. We won’t get them all back. We think we’ll have about $25 million worth of reimbursables in this first phase and we may only get back $10 million in this first phase. And that’s because when you look at property taxes in Colorado, Colorado is what we call a sales tax incentive state. And so we have very modest property tax, very modest income tax, but relatively high sales tax. And so when you look at where that revenue comes from for cities and municipalities, it’s weighted to commercial development. In fact, we get four times the amount of revenue from the same AV in commercial than we do in residential. And so while this first phase is just residential and it really won’t allow us to pay back all of the public improvements, we have a very large commercial that pays four times the amount of tax money on the same AV that will then catch up and pay for the residential components that were on funded by property taxes.

All right.

So we’ll still have that balance accruing. So that’s $25 million as we build out that first phase. And I’m just speaking hypothetically, if we get $10 million back on this first phase, just because they’re round numbers, if we get $10 million back on this first phase, we will still have that $15 million that will continue to crew inches as a reimbursable for future phases and future bond offerings.

Okay. And now this first $10 million, when you – when the bonds are sold and you get reimbursed, is all of that reported as income to Pure Cycle?

To the extent that we haven’t already taken it out of inventory, it is. If we still have money’s left in inventory, then we met it out against the inventory amount. So you’ll see some of that tax advantage there. But looking through, if we’re going to – it really will wash out period over period because if it comes in and are all physical year, it all becomes taxable.

Okay. So the full $25 million ultimately will stay whatever the exact number ends up being in totality will be income to Pure Cycle, right?

Correct. Particularly, if you look at the second 15, so the second 15 we’ll have recorded all of our bases in that first 506 lots, so that next 15 is 100% income. It drops to the bottom line.

Okay. Okay. Thank you.

Thank you. [Operator Instructions] And there appears to be no more questions at this time.

Okay. Well, I certainly want to encourage all of you if you think of a question that you didn’t get in or you had some technical difficulties dialing in, don’t hesitate to give me a call. Or if you’re listening to this on the replay, certainly reach out some upcoming news. We’ll have our shareholder meeting coming up in January. So January 15 you’ll see our proxy statement. We’ll file that probably within the next couple of weeks. So you’ll see an announcement on our proxy about the shareholder meeting, the time, the location, and those sorts of things. And if you’re headed anywhere by Dodge, through Dodge, come by and see us. We’d love to meet you. And then I just want to say, I want to really thank our Board. I want to thank our management team for a really a strong effort putting together a great year-end. We’ve executed very well. I think certainly the builder market has been very biased. If the number of interests that I get from builders that locked in our first phase or any indication of this, certainly Sky Ranch has made a significant splash in the Denver MSA and we look to continue that success with our next filing. We’re in the late stages of our permits with that and we’d like to get those and kind of be in a position to start breaking ground on that sometime late next spring to be able to work the dirt, get those lots delivered, and then be in a position of delivering finished lots for spring of 2020, which should carry through sort of the build out of all the homes. We’re going to deliver lots in 2020, but just take the builders a little bit to finish out building 506 homes out there. But we’d like to have a seamless transition and be able to carry forward to the next day. So very exciting for the company, very exciting and rewarding for all of our shareholders. So I want to thank you all for your support. So with that, I’ll go ahead and sign out and look forward to catching up with you all soon.

Thank you. This does conclude today’s teleconference. We thank you for your participation. You may disconnect your lines at this time and have a great day.