NOTE

– SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Consolidated Financial Statements of the Company have been prepared

using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal course of business. The Company incurred losses of

$33.9

million,

$26.3

million and

$24.0

million for the years ended

December 31, 2017,

2016

and

2015,

respectively. The Company had working capital of

$7.0

million at

December 31, 2017,

and used cash in operations of

$10.5

million for the year ended

December 31, 2017.

Cash requirements during the year ended

December 31, 2017

primarily reflect certain administrative costs related to the Company’s water project development efforts. Currently, the Company’s sole focus is the development of its land and water assets.

May 2017,

the Company entered into a new

$60

million credit agreement (“Credit Agreement”) with funds affiliated with Apollo Global Management, LLC (“Apollo”) that replaced and refinanced its then existing

$45

million senior secured mortgage debt (“Prior Senior Secured Debt”) and provided

$15

million of new senior debt to fund immediate construction related expenditures (“New Senior Secured Debt”). The Company’s New Senior Secured Debt and its convertible notes contain representations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit the Company’s ability to incur additional indebtedness, incur liens, pay dividends or make restricted payments, dispose of assets, make investments and merge or consolidate with another person. However, while there are affirmative covenants, there are

financial maintenance covenants and

restrictions on the Company’s ability to issue additional common stock to fund future working capital needs. The debt covenants associated with the New Senior Secured Debt were negotiated by the parties with a view towards the Company’s operating and financial condition as it existed at the time the agreements were executed. At

December 31, 2017,

the Company was in compliance with its debt covenants.

The Company

’s cash resources provide the Company with sufficient funds to meet its working capital needs for a period beyond

one

year from this annual report issuance date. The Company

may

meet working capital requirements beyond this period through a variety of means, including construction financing, equity or debt placements, through the sale or other disposition of assets or reductions in operating costs. Equity placements

may

be made using our existing shelf registration. Equity placements, if made, would be undertaken only to the extent necessary, so as to minimize the dilutive effect of any such placements upon the Company’s existing stockholders.

Limitations on

the Company’s liquidity and ability to raise capital

may

adversely affect it. Sufficient liquidity is critical to meet the Company’s resource development activities. Although the Company currently expects its sources of capital to be sufficient to meet its near-term liquidity needs, there can be

assurance that its liquidity requirements will continue to be satisfied. If the Company cannot raise needed funds, it might be forced to make substantial reductions in its operating expenses, which could adversely affect its ability to implement its current business plan and ultimately its viability as a company.

Principles of Consolidation

The consolidated financial statements include the accounts of Cadiz Inc. and all subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles 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. In preparing these financial statements, management has made estimates with regard to goodwill and other long-lived assets, stock compensation and deferred tax assets. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes

rental income through its lease with Fenner Valley Farms LLC.

Stock-Based Compensation

General and administrative expenses include $

2.3

million,

$1.3

million and

$1.1

million of stock-based compensation expenses in the years ended

December 31, 2017,

2016

and

2015,

respectively.

The Company applies the Black-Scholes valuation model in determining the fair value of options granted to employees and consultants. For employees, the fair value is then charged to expense on the straight-line basis over the requisite service period. For consultants, the fair value is remeasured at each reporting period and recorded as a liability until the award is settled.

Accounting Standards Codification Topic

718,

“Compensation – Stock Compensation” (“Topic

718”

) also requires the Company to estimate forfeitures in calculating the expense related to stock-based compensation as opposed to only recognizing forfeitures and the corresponding reduction in expense as they occur. As of

December 31, 2017,

all options outstanding are fully vested; therefore, there is

potential impact of forfeitures. The Company is in a tax loss carryforward position and is

not

expected to realize a benefit from any additional compensation expense recognized under Topic

718.

See Note

“Income Taxes".

Net Loss Per Common Share

Basic

net loss per share is computed by dividing the net loss by the weighted-average common shares outstanding. Options, deferred stock units, warrants, and the

zero

coupon term loan convertible into or exercisable for certain shares of the Company’s common stock were

not

considered in the computation of net loss per share because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately

10,894,000

shares,

11,070,000

shares and

8,453,000

shares for the years ended

December 31, 2017,

2016

and

2015,

respectively.

Property, Plant, Equipment and Water Programs

Property, plant, equipment and water programs are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally

ten

forty-five

years for land improvements and buildings, and

five

fifteen

years for machinery and equipment. Leasehold improvements are amortized over the shorter of the term of the relevant lease agreement or the estimated useful life of the asset.

Water rights, storage and supply programs are stated at cost. Certain costs directly attributable to the development of such programs have been capitalized by the Company. These costs, which are expected to be recovered through future revenues, consist of direct labor, drilling costs, consulting fees for various engineering, hydrological, environmental and additional feasibility studies, and other professional and legal fees. While interest on borrowed funds is currently expensed, interest costs related to the construction of project facilities will be capitalized at the time construction of these facilities commences.

Goodwill and Other Assets

As a result of a merger in

May 1988

between

two

companies which eventually became known as Cadiz Inc., goodwill in the amount of

$7,006,000

was recorded. Approximately

$3,193,000

of this amount was amortized prior to the adoption of

Accounting Standards Codification

350,

“Intangibles – Goodwill and Other” (“ASC

350”

) on

January 1, 2002.

Since the adoption of ASC

350,

there have been

goodwill impairments recorded. The Cadiz reporting unit to which

$3.8

million of goodwill is allocated had a negative carrying amount on

December 31, 2017,

2016

and

2015.

Deferred loan costs represent costs incurred to obtain debt financing. Such costs are amortized over the life of the related loan

using the interest method. At

December 31, 2017,

the deferred loan fees relate to the corporate term loan, as described in Note

“Long-Term Debt”.

Impairment of Goodwill and Long-Lived Assets

The Company assesses long-lived assets, excluding goodwill, for recoverability whenever events or changes in circumstances indicate that their carrying value

may

not

be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If it is determined that the carrying value of long-lived assets

may

not

be recoverable, the impairment is measured by using the projected discounted cash-flow method.

The Company uses a

one

-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any) for the Company. This quantitative assessment is performed at least annually in the

fourth

quarter and compares a reporting unit’s fair value to its carrying amount to determine if there is a potential impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value,

not

to exceed the carrying amount of goodwill in that reporting unit.

Income Taxes

Income taxes are provided for using an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided when it is more likely than

not

that some portion or all of the deferred tax assets will

not

be realized.

Fair Value of Financial Instruments

Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable.

Financial liabilities with carrying values approximating fair value include accounts payable and accrued liabilities due to their short-term nature. The carrying value of the Company’s secured debt approximates fair value, based on interest rates available to the Company for debt with similar terms. The fair value of the Company’s convertible debt exceeds its carrying value due to the increased value of its conversion feature, which is determined using the Black-Scholes model. See Note

“Long-Term Debt”, for discussion of fair value of debt.

Supplemental Cash Flow Information

Under the terms of the Prior Senior Secured Debt, the Company was required to pay

50%

of all quarterly interest payments in cash or stock on the Prior Senior Secured Debt, rather than in accretion to principal.

Under the terms of the New Senior Secured Debt, the Company is required to pay

25%

of all future quarterly interest payments in cash. During the year ended

December 31, 2017,

approximately

$748

thousand in interest payments on corporate debt was paid in cash, and approximately

$433

thousand in interest payments on the corporate secured debt was paid in stock. As a result of the interest payments paid in stock,

29,706

shares of common stock were issued to the lenders.

other payments are due on the corporate secured debt or convertible notes prior to their maturities.

In connection with the New Senior Secured Debt, the Company issued a warrant to purchase an aggregate of

362,500

shares of its common stock (

“2017

Warrant”). The Company recorded a debt discount at the time of the closing of the New Senior Secured Debt in the amount of

$2.9

million which was the fair value of the

2017

Warrant issued. The fair value of the

2017

Warrant is remeasured each reporting period, and the change in warrant value is recorded as an adjustment to the derivative liability and interest expense.

During the year ended

December 31, 2017,

approximately

$2.93

million in convertible notes were converted by certain of the Company’s lenders. As a result,

413,335

shares of common stock were issued to the lenders.

Cash payments for income taxes were $

4,000

for each of the years ended

December 31, 2017,

2016,

and

2015.

Recent Accounting Pronouncements

Accounting Guidance

Not

Yet Adopted

February

2016,

the Financial Accounting Standards Board (“FASB”) issued an accounting standards update related to lease accounting including enhanced disclosures. Under the new standard, a lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified assets for a period of time in exchange for consideration. Lessees will classify leases with a term of more than

one

year as either operating or finance leases and will need to recognize a right-of-use asset and a lease liability. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. This guidance is effective

January 1, 2019,

but early adoption is permitted. The Company is currently evaluating this new guidance and cannot determine the impact of this standard at this time.

August 2016,

the FASB issued

an accounting standards update which eliminates the diversity in practice related to the classification of certain cash receipts and payments in the statement of cash flows, by adding or clarifying guidance on

eight

specific cash flow issues. This guidance is effective for fiscal years beginning after

December 15, 2017,

and interim periods within those fiscal years, but early adoption is permitted. While the Company continues to asses all potential impacts of this standard, the Company does

not

currently expect the adoption of this standard to have a material impact on the Company’s condensed consolidated financial statements.

January 2017,

the FASB issued an accounting standards update which clarifies the definition of a business and provides guidance on evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This guidance is effective for annual periods beginning after

December 15, 2017,

and interim periods within those periods, with early adoption permitted. While the Company continues to asses all potential impacts of this standard, the Company does

not

currently expect the adoption of this standard to have a material impact on the Company’s condensed consolidated financial statements.

May 2017,

the FASB issued an accounting standards update which clarifies which changes to terms or conditions of a share-based payment award require an entity to apply modification accounting, in accordance with Topic

718

. An entity should account for the effect of a modification unless all of the following are met:

The fair value of the modified award is the same as the fair value of the original award immediately before the original award is modified. If the modification does

not

affect any of the inputs of the valuation technique that the entity uses to value the award, the entity is

not

required to estimate the value immediately before and after the modification.


	2.	The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified.

The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified.

This guidance

is effective for annual periods beginning after

December 15, 2017,

and interim periods within those periods with early adoption permitted. While the Company continues to asses all potential impacts of this standard, the Company does

not

currently expect the adoption of this standard to have a material impact on the Company’s condensed consolidated financial statements.

July 2017,

the FASB issued an accounting standards update to provide new guidance for the classification analysis of certain equity-linked financial instruments, or embedded features, with down round features, as well as clarify existing disclosure requirements for equity-classified instruments. When determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature

longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The guidance is effective for fiscal years beginning after

December 15, 2019,

and interim periods within fiscal years beginning after

December 15, 2020,

with early adoption permitted. The Company is currently evaluating this new guidance and cannot determine the impact of this standard at this time.

Accounting Guidance Adopted

March

2016,

the FASB issued an accounting standards update to simplify the accounting for share-based payments. Under this new guidance, the tax effects related to share based payments are recorded through the income statement. Previously, tax benefits in excess of compensation cost ("windfalls") are recorded in equity, and tax deficiencies ("shortfalls") are recorded in equity to the extent of previous windfalls, and then to the income statement. This guidance is effective

January 1, 2017,

and early adoption was permitted. The new standard also revised reporting on the statement of cash flows. The Company adopted this guidance on

January 1, 2017,

and the new standard did

not

have a material impact on the Company’s condensed consolidated financial statements.

January 2017,

the FASB issued an accounting standards update which eliminates Step

from the goodwill impairment test. Entities should perform their goodwill impairment tests by comparing the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit

’s fair value. The amendments in this update are effective prospectively during interim and annual periods beginning after

December 15, 2019,

with early adoption permitted. The Company adopted this guidance on

September 30, 2017,

and the new standard did

not

have a material impact on the Company’s condensed consolidated financial statements.

May 2014,

the FASB issued an accounting standards update on revenue recognition including enhanced disclosures. Under the new standard, revenue is recognized when (or as) a good or service is transferred to the customer and the customer obtains control of the good or service. On

July 9, 2015,

the FASB approved a

one

-year deferral, updating the effective date to

January 1, 2018.

The Company adopted this guidance on

January 1, 2018,

and the new standard did

not

have a material impact on the Company’s consolidated financial statements.