NOTE

– BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements have been prepared by Cadiz Inc., also referred to as “Cadiz” or “the Company”, without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Form

-K for the year ended

December 31, 2017.

The foregoing Condensed Consolidated Financial Statements include the accounts of the Company and contain all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair statement of the Company’s financial position, the results of its operations and its cash flows for the periods presented and have been prepared in accordance with generally accepted accounting principles.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences

may

be material to the financial statements. The results of operations for the

three

and

nine

months ended

September 30, 2018

are

not

necessarily indicative of results for the entire fiscal year ending

December

31,

2018.

Liquidity

The Condensed 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

$18.2

million for the

nine

months ended

September 30, 2018,

compared to

$26.8

million for the

nine

months ended

September 30, 2017.

The Company had working capital of

$15.2

million at

September 30, 2018

and used cash in its operations of

$8.6

million for the

nine

months ended

September 30, 2018.

Cash requirements during the

nine

months ended

September 30, 2018

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.

March 2018,

the Company entered into an At Market Issuance Sales Agreement with B. Riley FBR, Inc., under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to

$15

million from time to time in an “at the market” offering (the “ATM Offering”) through B. Riley FBR acting as its sales agent. The Company completed the offering during

May 2018,

having issued

1,159,718

shares of common stock in the ATM Offering for gross proceeds of

$15

million and aggregate net proceeds of approximately

$14.6

million.

May 2017,

the Company entered into a

$60

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

$45

million senior secured mortgage debt and provided

$15

million of new senior debt to fund immediate construction related expenditures ("Senior Secured Debt").

The Company’s 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 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

September 30, 2018,

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 quarterly report issuance date. Additionally, the Company has principal and interest payments aggregating approximately

$80.3

million coming due in

March 2020

related to its Convertible Senior Notes to the extent the noteholders, who have the right to convert at any time into the Company’s common stock at a conversion rate of

$6.75

per share, do

not

convert prior to

March 2020.

The Company’s Senior Secured Debt of approximately

$65.1

million as of

September 30, 2018,

could also become due as early as

December 2019,

if the Convertible Senior Notes have

not

been converted by that time and the Company’s stock price is less than

120%

of the conversion rate and according to additional terms of the debt agreement as further disclosed in the Company’s

2017

Form

-K. The Company

may

meet working capital requirements beyond this

one

year period as well as the payment due under the terms of the Convertible Senior Notes through a variety of means, including construction financing, equity placements, through the sale or other disposition of assets, extension or refinancing of the Senior Secured Debt or the Convertible Senior Notes due

March 2020,

or reductions in operating costs. Equity placements 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. Further, the Company’s option to acquire an additional

124

-mile extension of its Northern Pipeline will require a

$20

million payment by

December 2018.

The Company does

not

currently have the cash resources on hand to exercise this option and has engaged an investment banker to pursue alternatives intended to provide the resources to allow the Company to exercise this option. If the Company is unable to exercise this option, then its Northern Pipeline opportunities will be limited to the

-mile segment it currently owns.

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. Specifically, the Company does

not

have adequate resources currently to meet the obligations related to the (

) Senior Secured Debt which could come do as early as

December 2019

as described above or (

) the Convertible Senior Notes coming due in

March 2020

to the extent these notes are

not

converted. Accordingly, the Company will need to refinance or extend the maturity date of these debt obligations or raise additional capital from other sources. 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.

Supplemental Cash Flow Information

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

25%

of all future quarterly interest payments in cash. During the

nine

months ended

September 30, 2018,

approximately

$958

thousand in interest payments on the corporate secured debt was paid in cash.

other payments are due on the Senior Secured Debt or the Company’s convertible notes prior to their maturities.

During the

nine

months ended

September 30, 2018,

approximately

$2.11

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

279,480

shares of common stock were issued to the lenders.

Recent Accounting Pronouncements

Accounting Guidance

Not

Yet Adopted

August 2018,

the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which modifies the disclosure requirements for fair value measurements. This update is effective for fiscal years beginning after

December 15, 2019,

and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating this new guidance and cannot determine the impact of this standard at this time.

June 2018,

the FASB issued an accounting standards update which simplifies the accounting for share-based payments granted to nonemployees for goods and services. This update is effective for fiscal years beginning after

December 15, 2018,

and for interim periods within those fiscal years. The Company is currently evaluating this new guidance and cannot determine the impact of this standard at this time.

February 2016,

the FASB issued an accounting standards update related to lease accounting, which establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than

months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition. Similarly, lessors will be required to classify leases as sales-type, finance or operating, with classification affecting the pattern of income recognition. Classification for both lessees and lessors will be based on an assessment of whether risks and rewards as well as substantive control have been transferred through a lease contract. 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.

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

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. The Company adopted this guidance on

January 1, 2018,

and the new standard did

not

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

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. The Company adopted this guidance on

January 1, 2018,

and the new standard had

impact on the Company’s condensed consolidated financial statements.

November 2016,

the FASB issued an accounting standards update which requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. The Company adopted this guidance in the

first

quarter of

2018.

The balance of cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows is comprised of the following:

Cash, Cash Equivalents and Restricted Cash	September 30 , 2018		December 31, 2017		September 30 , 2017
(in thousands)

Cash and Cash Equivalents	$	17,667	$	13,030	$	16,055
Restricted Cash included in Other Assets		133		133		133
Cash, Cash Equivalents and Restricted Cash in the Consolidated Statement of Cash Flows	$	17,800	$	13,163	$	16,188

The restricted cash amounts included in Other Assets primarily represent a deposit from a water project participant related to a cost-sharing agreement.

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

218.

This guidance is effective for annual periods beginning after

December 15, 2017,

and interim periods within those. The Company adopted this guidance on

January 1, 2018,

and the new standard had

impact on the Company’s condensed consolidated financial statements.