Greetings and welcome to the Pure Cycle Corporation First Quarter 2021 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mark Harding.

Thank you. I'd like to welcome you all to our first quarter call for fiscal year 2021. For those of you that have been following the company, we typically do fewer calls. We've been typically on a platform where we do a couple calls a year. But I think what we'd like to do is given the level of interest in the new folks that have been expressing interest in the company, and then really just the quarter-over-quarter improvements and really changes to -- not changes, but execution to our business plan, we want to kind of be a little bit more descriptive and a little more timely in these calls. So we're going to get to that traditional 4 calls a year format for you all. So welcome, and this will be our first call. Well, we did this, I think, last year as well. So we're going to continue that context on that. What I want to do is for those that are on the call itself that haven't already done this. If you can go to our website, on the front page of our website will be a link on the front page that you can click to. We're on a new platform here. We're very excited about. It will allow me to be able to actually control the deck for our call ourselves so that we can walk this through and then allow me to be able to be descriptive about what our results are. So a new platform here. I think it's going to improve the call. I think it's going to improve the flow of the information for you all. So if you haven't done it, go ahead and do that. Jump on that purecyclewater.com, and on the home page, you'll see that link…

[Operator Instructions] And our first question comes from John Rosenberg with Loughlin Water Partners.

Anyway, Mark, I asked you this before, I just kind of -- I'm just trying to better understand you're obviously expensing a lot of the build-out of your system. You mentioned in your remarks about some greater contribution margin coming through as you go into Phase 2 as a lot of your system has been built out. Could you provide some more color on that as to what we might expect in terms of actual gross profits from the water utility and wastewater utility operations?

Sure. So when we took a look at that first segment, 506 lots we had, if you took a look at the tap fees, and the tap fees one single-family equivalent tap is really roughly translate to about 0.4 acre field of water a year. And that cost of that tap, I think our current tap fees are right around [ $27,000 -- 27 and some change ]. And so when you take a look at 506 lots and our forecast for those, that was going to generate about $15 million in total water, wastewater tap fee revenue. And the facilities that we spent on that were right around -- I'm going to say, around $13 million. So we spent about $10 million on our water reclamation, our wastewater treatment plant, which really takes water all the way back to a reuse potential and then another $3 million in water system improvements. And so what that will translate to into the second phase is, we're going to look to receive around $23 million in water and wastewater tap fee revenues with a $3 million additional investment. So you're looking at kind of that spread of how much cost do we have to incur to get that $22 million, given the fact that we've made that front-end investment on the Phase 1. So that will give you a bit of a margin on how the CapEx looks on our utility segment from Phase 1 to Phase 2 and where those revenue differentials and what our investments are looking like on that.

Okay. I see. So I'm just -- I'm sorry, I'm just not quite understanding like -- I can see -- I understand that there'll be improvement. But for example, the operating income of, let's say, in a typical water utility is somewhere like around 30%. Is that kind of what you guys are gunning for on an operating basis?

Yes. I would say that's true. So when we get that $1,500 per connection per year, that's what I would call that operating revenue margin. I would say our operating margins are going to be right in that range, maybe a little bit better. I think we have pretty efficient shop, where we're going to continue to run most of our systems on an automated fashion and technology does leverage yourself here. So what we think will have the supplies that we have, we have very clean water on the front end. So we have a minimal amount of treatment that we have to do that water supply in the front end and then wastewater reclamation. Those margins are a little bit thinner. So we'll have probably higher margins on the water side and sort of lower margins on the wastewater side. When you take a look at combined water and wastewater, margins on the operating side of it, it's probably closer to 40% margins, so slightly better than what you'd see in the utility industry as a whole.

Okay. Great. But you don't -- but towards that end, you don't expect to see like a huge step-up for that segment in SG&A or anything like that?

No.

You are sort of -- you're costing your revenue -- you're costing your base right now...

We are.

In terms of putting in the equipment.

We're adequately sized. That's right. We're adequately sized.

But you don't need to -- okay. Great.

I did get a question texted over to us about oil and gas. I neglected not to -- not neglected not to mention. I neglected to mention that we do sell water to the oil and gas industry. That's been a very light component over the last year, mostly because of the demand for oil and gas. In Q1 of this year, we did do a frac for our largest operator in the field and really kind of a 4-well frac, so they had a pad site that was drilled previously and then they did frac 1 of those pad sites. I think we did about $1.1 million, $1.2 million in water sales for that [ fractor ] in Q1. No guidance for that oil and gas industry. We sort of look at that as sort of optionality into the company. We like it when it's there because it's a good business. It's high-margin business, and we can dial our systems up and we can dial our systems down so that we don't incur pent-up demand or unrealized costs attributable to that industry and have the ability to kind of serve them when it's there and then not when that demand softens. So we'll wait to see. And as we get further guidance, we'll update you from the oil and gas operators in the field, we may or may not see a rig out there this year. There are still some wells that might still need yet to be fracked from operators, but we'll see how that guidance goes over time.

All right. It appears we have no further questions by phone. If you have any closing remarks, Mr. Harding.

You bet. So what I'd do is we will continue to really improve our investor outreach. So one of the things we're going to try to do is be a little bit more proactive. You'll see some updates to our website. You'll see some updates to social media and making sure that we're getting our information out. We're linking to what we're doing on a more timely basis, so that it's not just a quarter-over-quarter update. Certainly, we will do the quarter over to quarter updates. We want to make sure that you guys get that information, you get it disseminated correctly so that you have the opportunity to kind of understand how we're executing on these phases. And then also what's going on in between those phases so that what those important metrics are, and how you can evaluate the acceleration and the growth potential for the company. To the extent that you've got others that are interested, forward those contacts, we'll certainly reach out to them. Forward them opportunities and information on our website. There's a ton of information there. We'll continue to add more information there with these types of presentations as well as other metrics on there where we can get more video presentations and kind of a walk-through of how we're progressing with the development activity on a more progressive update rather than quarterly calls. If your technology didn't work and you wanted to ask a question, but didn't get an opportunity to do that don't hesitate to give me a call. I'd be happy to answer any questions you might have. And I want to thank you for your continued support and look forward to working with you in the future.

Perfect. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.