Principles of Consolidation

The consolidated financial statements of the Company include the accounts of Pure Cycle Corporation and its majority-owned and controlled subsidiaries. Intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid debt instruments with original maturities of three months or less. The Company's cash equivalents are comprised entirely of money market funds maintained at a high quality financial institution in an account which as of August 31, 2015 exceeded federally insured limits. At various times during the year ended August 31, 2015, the Company's main operating account exceeded federally insured limits.

Financial Instruments – Concentration of Credit Risk and Fair Value

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company places its cash equivalents with high quality financial institutions. At various times throughout the year ended August 31, 2015, cash deposits have exceeded federally insured limits. The Company historically has invested its idle cash primarily in certificates of deposit, money market instruments, commercial paper obligations, corporate bonds and US government treasury obligations. To date, the Company has not experienced significant losses on any of these investments.

HP A&M Receivable

In conjunction with High Plains A&M, LLC ("HP A&M"), defaulting on certain promissory notes in fiscal year 2012, the Company had the right to collect from HP A&M any amounts the Company spent to cure the defaulted notes. Accordingly, through the date of the settlement, the Company had recorded the entire amount of the HP A&M notes at default as well as expenses incurred to cure the defaults as a receivable from HP A&M less proceeds received from the sale of shares pledged by HP A&M as security. As described further in Note 12 – Litigation Loss Contingencies, the Company has settled its claims against HP A&M relating to the defaults on these promissory notes and the Company has written off the receivable from HP A&M to additional paid in capital.

Mortgages Payable

During fiscal year 2013, the Company began acquiring the defaulted and non-defaulted promissory notes that were payable by HP A&M. The Company used cash and issued notes to acquire the HP A&M notes, the majority of which had a five-year term, bore interest at an annual rate of five percent and required semi-annual payments with a straight-line amortization schedule. The carrying value of the notes payable approximated the fair value as the rates were comparable to market rates.

In October 2014, the Company borrowed $4,450,000 from the First National Bank of Las Animas. The note had a 20-year term, required semi-annual payments, and carries a 5.27% per annum rate for the first five years. After the first five years, the interest rate on the note was subject to change (no more often than annually) based on the changes in the First National Bank of Las Animas Ag/Real Estate Rate. The Company had the right to pay the note in full at any time without penalty. The carrying value of this note approximated the fair value as the rate was comparable to market rates. On August 18, 2015, in conjunction with the sale of the farm assets, the Company repaid the note in full.

As described further in Note 14 – Related Party Transactions, in December 2014, the District entered into an agreement to finance approximately $1.4 million of the purchase of certain WISE (defined in Note 7 below) infrastructure. The $1.4 million was repayable in equal annual installments over the next three years and accrued interest at the rate of 3%. The carrying value of this obligation approximated the fair value as the rate was comparable to market rates.  On August 28, 2015, the Company repaid this obligation in full pursuant to the Company's obligations under the WISE Financing Agreement (defined in Note 7 below).

Cash Flows

The Company paid $441,400, $310,400 and $123,500 in interest during the fiscal years ended August 31, 2015 2014, and 2013, respectively.

The Company did not pay any income taxes during the fiscal years ended August 31, 2015, 2014 and 2013. The Company has accrued $292,700 for alternative minimum tax the Company will owe as a result of the sale of the Company's farm assets.

Trade Accounts Receivable

The Company records accounts receivable net of allowances for uncollectible accounts. Included in trade accounts receivable are balances due from farm operations. The Company recorded an allowance for uncollectible accounts in the amount of $26,300 for each of the periods ended August 31, 2015 and 2014. The allowance for uncollectible accounts was determined based on specific review of all past due accounts.

Long-Lived Assets

The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the eventual use of the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Based on the Company's procedures, the Company determined that land and water rights held for sale related to the Arkansas River assets were impaired as of August 31, 2014, and the Company recorded an impairment of $402,700. The Company determined that no impairment of such assets existed at August 31, 2015, or August 31, 2013.

Capitalized Costs of Water and Wastewater Systems and Depreciation and Depletion Charges

Costs to construct water and wastewater systems that meet the Company's capitalization criteria are capitalized as incurred, including interest, and depreciated on a straight-line basis over their estimated useful lives of up to 30 years. The Company capitalizes design and construction costs related to construction activities, and it capitalizes certain legal, engineering and permitting costs relating to the adjudication and improvement of its water assets.

The Company depletes its water assets that are being utilized on the basis of units produced (i.e., thousands of gallons sold) divided by the total volume of water adjudicated in the water decrees.

Tap Participation Fee Liability and Imputed Interest Expense

This note should be read in conjunction with Note 7 – Long-Term Debt and Operating Lease and Note 12 – Litigation Loss Contingencies below.

Pursuant to the Asset Purchase Agreement dated May 10, 2006 (the "Arkansas River Agreement") between the Company and HP A&M, the Company was obligated to pay HP A&M a defined percentage of a defined number of water tap fees the Company receives after the date of the Arkansas River Agreement (the "Tap Participation Fee" or "TPF"). The Tap Participation Fee was due and payable once the Company had sold a water tap and received the consideration due for such water tap. The Company did not sell any water taps during the fiscal years ended August 31, 2015, 2014, or 2013. As further discussed in Note 12 – Litigation Loss Contingencies, the Company has settled its claims against HP A&M relating to the defaults, and the TPF has been eliminated.

Prior to the settlement, the Company imputed interest expense on the unpaid TPF using the effective interest method over an estimated period that was utilized in the valuation of the liability. The Company imputed interest of $23,800, $1.4 million and $3.3 million during the years ended August 31, 2015, 2014 and 2013, respectively.

As a result of the Company's settlement with HP A&M, no water taps remain subject to the TPF as of August 31, 2015. As of August 31, 2014, there were 2,184 water taps subject to the TPF.

Revenue Recognition

The Company generates revenues through two separate lines of businesses. Its revenues are derived through its wholesale water and wastewater business and its farming operations, which are described below.

Wholesale Water and Wastewater Business – The Company generates revenues through its wholesale water and wastewater segment predominately from three sources: (i) monthly wholesale water usage fees and wastewater service fees, (ii) one time water and wastewater tap fees and construction fees, and (iii) consulting fees. Because these items are separately delivered, the Company accounts for each of the items separately, as described below.

The Company recognizes wastewater processing revenues monthly based on usage. The monthly wastewater service fees are shown net of amounts retained by the District. Amounts recognized for water and wastewater services during the fiscal years ended August 31, 2015, 2014 and 2013 are presented in the statements of operations. Costs of delivering water and providing wastewater service to customers are recognized as incurred.

The Company delivered 97.5 million, 190.1 million and 69.2 million gallons of water to customers during the fiscal years ended August 31, 2015, 2014 and 2013, respectively.

Proceeds from tap fees and construction fees are deferred upon receipt and recognized in income either upon completion of construction of infrastructure or ratably over time, depending on whether the Company owns the infrastructure constructed with the proceeds or a customer owns the infrastructure constructed with the proceeds.

Tap and construction fees derived from agreements in which the Company will not own the assets constructed with the fees are recognized as revenue using the percentage-of-completion method. Costs of construction of the assets when the Company will not own the assets are recorded as construction costs.

Tap and construction fees derived from agreements for which the Company will own the infrastructure are recognized as revenues ratably over the estimated accounting service life of the facilities constructed, starting at completion of construction, which could be in excess of 30 years. Costs of construction of the assets when the Company will own the assets are capitalized and depreciated over their estimated economic lives.

From time to time, the Company enters into water service agreements to provide water service to customers. The Company owns the facilities which store, treat, and deliver the water and amortizes the cost of these facilities over their useful lives. In each of the three fiscal years ended August 31, 2015, 2014 and 2013, the Company recognized $14,300 of tap fee revenue. At August 31, 2015, $313,300 of these tap fees are still deferred. The Company recognized $41,500 of "Special Facilities" funding as revenue in each of the three fiscal years ended August 31, 2015, 2014, and 2013 respectively. As of August 31, 2015, the Company has deferred recognition of $1.1 million of tap and construction fee revenue from customer agreements, which will be recognized as revenue ratably through 2036.

In addition to the tap fee revenues and the construction revenues, the Company also recorded interest income from Arapahoe County using the effective interest method. Pursuant to the Arapahoe County agreement, the county made payments to the Company totaling $82,200 per year through 2013 for the construction of the Special Facilities at the Fairgrounds. These payments include interest at 6% per annum. In April 2013, the county paid the balance on the note. The Company recognized $5,500 of interest income from the county during the fiscal year ended August 31, 2013.

Agricultural Farming Operations – Prior to the sale of its Arkansas River water and land, the Company leased its Arkansas River water and land to area farmers who actively farmed the properties. Pursuant to the terms of the purchase and sale agreement, the Company will continue to manage and receive the lease income until December 31, 2015. Therefore, the farm revenues and expenses are presented within operations for the years ended August 31, 2015, 2014, and 2013, respectively. Pursuant to the farm lease agreements, the Company bills the lessees semi-annually in March and November. The lease billings include minimum billings and adjustments based on actual water deliveries by the Fort Lyon Canal Company ("FLCC") or are based on crop yields. The Company records farm lease income ratably each month based on estimated annual lease income the Company anticipates collecting from its land and water leases. The Company recorded these amounts as receivables, less an estimated allowance for uncollectible accounts. The allowance as of August 31, 2015, was determined by the Company's specific review of all past due accounts. The Company has recorded allowances for doubtful accounts totaling $26,300 for each of the periods ended August 31, 2015 and 2014. As of August 31, 2015 and 2014, the Company has accrued deferred revenue of $361,400 and $256,500, respectively, of farm income related to billings for future periods. The Company manages the farm lease business as a separate line of business from the wholesale water and wastewater business.

Royalty and Other Obligations

Revenues from the sale of "Export Water" are shown gross of royalties payable to the Land Board. Revenues from the sale of water on the "Lowry Range" are shown net of the royalties to the Land Board and the amounts retained by the District. See further description of "Export Water" and the "Lowry Range" in Note 4 under "Rangeview Water Supply and Water System."

Oil and Gas Lease Payments

As further described in Note 4 below, on March 10, 2011, the Company entered into a Paid-Up Oil and Gas Lease (the "O&G Lease") and a Surface Use and Damage Agreement (the "Surface Use Agreement") with Anadarko E&P Company, L.P. ("Anadarko"), a wholly owned subsidiary of Anadarko Petroleum Company. Pursuant to the O&G Lease on March 10, 2011, the Company received an up-front payment of $1,243,400 from Anadarko for the purpose of exploring for, developing, producing and marketing oil and gas on approximately 634 acres of mineral estate owned by the Company at its Sky Ranch property. In December 2012, the O&G Lease was purchased by a wholly owned subsidiary of ConocoPhillips Company. The Company received an additional payment of $1,243,400 during February 2014 to extend the O&G Lease an additional two years through February 2016, which will be recognized as income on a straight-line basis over two years (the extension term of the O&G Lease). In addition, during the fiscal years ended August 31, 2015 and 2014, the Company received up-front payments of $72,000 and $12,540, respectively, for the purpose of exploring for, developing, producing, and marketing oil and gas on 40 acres of mineral estate the Company owns adjacent to the Lowry Range (the "Rangeview Lease"). The Company recognizes the up-front payments on a straight-line basis over the terms of the respective leases. During the years ended August 31, 2015, 2014 and 2013, the Company recognized $645,700, $525,400, and $416,000, respectively, of income related to the up-front payments received pursuant to these leases.

As of August 31, 2015, the Company has deferred recognition of $379,800 of income related to the O&G Lease, which will be recognized as income ratably through July 2017.

Share-based Compensation

The Company maintains a stock option plan for the benefit of its employees and directors. The Company records share-based compensation costs which are measured at the grant date based on the fair value of the award and are recognized as expense over the applicable vesting period of the stock award using the straight-line method. The Company has adopted the alternative transition method for calculating the tax effects of share-based compensation which allows for a simplified method of calculating the tax effects of employee share-based compensation. Because the Company has a full valuation allowance on its deferred tax assets, the granting and exercise of stock options during the fiscal years ended August 31, 2015 and 2014 had no impact on the income tax provisions.

The Company recognized $240,000, $251,900, and $66,800 of share-based compensation expenses during the fiscal years ended August 31, 2015, 2014 and 2013, respectively.

Income Taxes

The Company uses a "more-likely-than-not" threshold for the recognition and de-recognition of tax positions, including any potential interest and penalties relating to tax positions taken by the Company. The Company does not have any significant unrecognized tax benefits as of August 31, 2015.

The Company files income tax returns with the Internal Revenue Service and the State of Colorado. The tax years that remain subject to examination are fiscal 2011 through fiscal 2014. The Company does not believe there will be any material changes in its unrecognized tax positions over the next 12 months.

The Company's policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. At August 31, 2015, the Company did not have any accrued interest or penalties

associated with any unrecognized tax benefits, nor was any interest expense recognized during the fiscal years ended August 31, 2015, 2014 or 2013.

Loss per Common Share

Loss per common share is computed by dividing net loss by the weighted average number of shares outstanding during each period. Common stock options and warrants aggregating 312,100, 315,100, and 347,600 common share equivalents as of August 31, 2015, 2014 and 2013, respectively, have been excluded from the calculation of loss per common share as their effect is anti-dilutive.

Recently Issued Accounting Pronouncements

The Company continually assesses any new accounting pronouncements to determine their applicability. Where it is determined that a new accounting pronouncement affects the Company's financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and assures that there are proper controls in place to ascertain that the Company's financials properly reflect the change. A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, the Company has not determined whether implementation of such proposed standards would be material to the Company's financial statements. During the current period, there were no new accounting pronouncements issued that will significantly impact the Company's financial reporting.