In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the following discussion contains trend analysis
and other forward-looking statements. Forward-looking statements can be
identified by the use of words such as "intends", "anticipates", "believes",
"estimates", "projects", "forecasts", "expects", "plans" and "proposes".
Although we believe that the expectations reflected in these forward-looking
statements are based on reasonable assumptions, there are a number of risks and
uncertainties that could cause actual results to differ materially from these
forward-looking statements. These include, among others, our ability to maximize
value from our land and water resources and our ability to obtain new financings
as needed to meet our ongoing working capital needs. See additional discussion
under the heading "Risk Factors" in Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2021. Our forward-looking statements are made
only as of the date hereof. We assume no duty to update these forward-looking
statements to reflect new, changed or unanticipated events or circumstances,
other than as may be required by law.
We are a water solutions company and agribusiness committed to sustainable water
and farming projects in California. We are one of the largest private landowners
in the state and control significant water supply, storage and conveyance assets
capable of being part of the solution to California's systemic water challenges.
We own approximately 45,000 acres of land with high-quality,
naturally-recharging groundwater resources in three areas of Southern
California's Mojave Desert - the Cadiz Valley (35,000 acres), Danby Dry Lake
(2,000 acres), and the Piute Valley (9,000 acres) ("Cadiz Property"). Our
properties represent a unique private reserve of lands with vested water rights
located in a remote area of eastern San Bernardino County that is at the
crossroads of major highway, rail, energy, and water infrastructure capable of
supplying and delivering necessary resources to communities in California and
across the Western United States.
California and the Western United States face a persistent challenge in meeting
the water needs of all of its residents. While the State of California has
recognized a Human Right to Water, competing municipal, agricultural and
environmental demands outpace the State's available supply limiting the ability
to deliver on that promise. Recent analysis from the California State Water
Resources Control Board estimates that approximately 1 million Californians lack
reliable access to water and several communities are short of long-term safe,
reliable and affordable drinking water supplies.
We are principally focused on developing the Cadiz Valley Water Conservation and
Storage Project ("Water Project") at our Cadiz Valley property that can help
address California's persistent systemic water challenges and deliver new water
access to California communities that presently lack reliable water supplies and
infrastructure. Through management of groundwater at the Cadiz Property, the
Water Project would conserve groundwater otherwise used for agriculture or lost
to evaporation to augment supply available in California communities and also
make available capacity in the managed groundwater aquifer system at Cadiz to
bank and store imported water for future dry years.
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The Water Project has completed extensive environmental review in accordance
with local, state and federal law and has secured permits to manage the
groundwater aquifer in Cadiz to make available an average of 50,000 acre-feet of
water per year for 50 years to communities off of the Cadiz Property. Permitting
has also authorized the storage of imported water in the aquifer system for
return in dry years. The Cadiz aquifer system has the capacity to store one
million acre-feet of imported water.
To deliver water to and from the Cadiz Property for participating water
providers, the Water Project must provide conveyance facilities capable of
connecting Cadiz and areas in need. We own a retired, 30" steel pipeline
("Northern Pipeline") previously used to convey oil that extends 220-miles from
California's Central Valley near the California Aqueduct southeast across Kern
and San Bernardino Counties terminating in Cadiz. This pipeline crosses the Los
Angeles Aqueduct and facilities of the State Water Project. Engineering and
technical assessments indicate that the Northern Pipeline can safely convey
25,000 acre-feet of water in either direction. We also maintain a 99-year lease
with the Arizona & California Railroad Company ("ARZC") to co-locate and
construct a 43-mile, approximately 55-85" steel water conveyance pipeline
("Southern Pipeline") within the existing, active railroad right-of-way that
intersects the Colorado River Aqueduct ("CRA"), one of Southern California's
primary sources of drinking water in Southern California. The Southern Pipeline
would have a maximum capacity to convey up to 150,000 acre-feet per year in
either direction.
To utilize the Northern Pipeline for water conveyance related to the Water
Project or to construct and operate the Southern Pipeline in coordination with
existing water conveyance facilities, we must complete additional permitting and
regulatory processes.
We expect to complete any necessary permitting in coordination with any contract
by a third party to use the facilities.
Our agricultural operations currently provide the Company's principal source of
revenue, although our working capital needs are not fully supported by our
agricultural lease and farming returns at this time. We believe that the
ultimate implementation of the Water Project will provide a significant source
of future cash flow for the business and our stockholders. We presently rely
upon debt and equity financing to support our working capital needs and
development of the Water Project (see "Liquidity and Capital Resources", below).
Our current and future operations also include activities that further our
commitments to sustainable stewardship of our land and water resources, good
governance and corporate social responsibility. We believe these commitments are
important investments that will assist in maintenance of sustained stockholder
value.
Results of Operations
Three Months Ended June 30, 2022, Compared to Three Months Ended June 30, 2021
We have not received significant revenues from our water resource and real
estate development activity to date. Our revenues have been limited to rental
income from our agricultural leases. As a result, we have historically incurred
a net loss from operations. We incurred a net loss of $5.5 million in the three
months ended June 30, 2022, compared to a $11.6 million net loss during the
three months ended June 30, 2021. The higher 2021 loss was primarily due to
stock-based non-cash bonus awards to employees and higher interest expense in
that period.
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Our primary expenses are our ongoing overhead costs associated with the
development of the Water Project (i.e., general and administrative expense) and
our interest expense. We will continue to incur non-cash expenses in connection
with our management and director equity incentive compensation plans.
Revenues Revenue totaled $185,000 during the three months ended June 30, 2022,
compared to $141,000 for the three months ended June 30, 2021. Revenues
primarily related to rental income from our agricultural leases.
General and Administrative Expenses General and Administrative Expenses,
exclusive of stock-based compensation costs, totaled $3.0 million in the three
months ended June 30, 2022, compared to $3.1 million in the three months ended
June 30, 2021.
Compensation costs for stock and option awards for the three months ended June
30, 2022, were $0.4 million, compared to $3.3 million for the three months ended
June 30, 2021. The higher 2021 expense was primarily due to stock-based non-cash
bonus awards to employees.
Depreciation Depreciation expense totaled $172,000 during the three months ended
June 30, 2022, compared to $103,000 during the three months ended June 30, 2021.
The higher 2022 depreciation expense is primarily due to construction in
progress placed into service in June 2022, which included stand establishment
and land improvements related to the planting of 760 acres of alfalfa.
Interest Expense, net Net interest expense totaled $2.1 million during the three
months ended June 30, 2022 compared to $4.9 million during the same period in
2021. The following table summarizes the components of net interest expense for
the two periods (in thousands):
Three Months Ended
June 30,
2022 2021
Interest on outstanding debt $ 1,463 $ 2,939
Amortization of debt discount
592 6
Amortization of deferred loan costs - 1,913
$ 2,055 $ 4,858Loss from Equity-Method Investments Loss from equity-method investments related
to our 50% ownership in the SoCal Hemp JV LLC totaled $35,000 for the three
months ended June 30, 2022, compared to $366,000 for the three months ended June
30, 2021.
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Six Months Ended June 30, 2022, Compared to Six Months Ended June 30, 2021
We incurred a net loss of $11.4 million in the six months ended June 30, 2022,
compared to a $17.5 million net loss during the six months ended June 30, 2021.
The higher 2021 loss was primarily due to stock-based non-cash bonus awards to
employees and higher interest expense in that period.
Revenues Revenue totaled $328,000 during the six months ended June 30, 2022,
compared to $280,000 for the six months ended June 30, 2021. Revenues primarily
related to rental income from our agricultural leases.
General and Administrative Expenses General and Administrative Expenses,
exclusive of stock-based compensation costs, totaled $6.3 million in the six
months ended June 30, 2022, compared to $6.2 million in the six months ended
June 30, 2021.
Compensation costs for stock and option awards for the six months ended June 30,
2022, were $0.9 million, compared to $3.4 million for the six months ended June
30, 2021. The higher 2021 expense was primarily due to stock-based non-cash
bonus awards to employees.
Depreciation Depreciation expense totaled $293,000 during the six months ended
June 30, 2022, compared to $206,000 during the six months ended June 30, 2021.
The higher 2022 depreciation expense is primarily due to construction in
progress placed into service in June 2022, which included land development and
stand establishment related to the planting of 760 acres of alfalfa.
Interest Expense, net Net interest expense totaled $4.0 million during the six
months ended June 30, 2022 compared to $7.4 million during the same period in
2021. The following table summarizes the components of net interest expense for
the two periods (in thousands):
Six Months Ended
June 30,
2022 2021
Interest on outstanding debt $ 2,887 $ 5,601
Unrealized (gains) losses on warrants, net - (573 )
Amortization of debt discount 1,160 12
Amortization of deferred loan costs - 2,360
$ 4,047 $ 7,400Loss from Equity-Method Investments Loss from equity-method investments related
to our 50% ownership in the SoCal Hemp JV LLC totaled $169,000 for the six
months ended June 30, 2022, compared to $569,000 for the six months ended June
30, 2021.
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Liquidity and Capital Resources
Current Financing Arrangements
As we have not received significant revenues from our development activities to
date, we have been required to obtain financing to bridge the gap between the
time water resource and other development expenses are incurred and the time
that revenue will commence. Historically, we have addressed these needs
primarily through secured debt financing arrangements and private equity
placements.
On June 7, 2021, we completed the sale and issuance of 1,219,512 shares of the
Company's common stock to certain institutional investors under a placement
agent agreement with B. Riley Securities, Inc. ("BRS"). The shares of common
stock were sold at a purchase price of $12.30 per share, for aggregate gross
proceeds of $15 million and aggregate net proceeds of approximately $14.1
million. We used the net proceeds from this offering, together with cash on
hand, to fund the $19 million payment made on June 30, 2021 to complete the
acquisition of a 124-mile extension of the Northern Pipeline.
On June 29, 2021, we entered into an Underwriting Agreement with BRS as
representative of the several underwriters named therein, to issue and sell an
aggregate of 2,000,000 depositary shares (the "Depositary Shares"), as well as
up to 300,000 Depositary Shares that may be sold pursuant to the exercise of an
option to purchase additional Depositary Shares, each representing 1/1000th of a
share of Series A Preferred Stock ("Depositary Share Offering"). The liquidation
preference of each of each share of Series A Preferred Stock is $25,000 ($25.00
per Depositary Share). The Depositary Share Offering was completed on July 2,
2021 for net proceeds of approximately $54 million.
On July 2, 2021, we entered into a $50 million new credit agreement ("Credit
Agreement") (see Note 2 to the Condensed Consolidated Financial Statements -
"Long-Term Debt"). The proceeds of the Credit Agreement, together with the
proceeds from the Depositary Share Offering, were used to (a) to repay all our
outstanding obligations under the then existing senior secured debt in the
amount of approximately $77.5 million (b) to deposit approximately $10.2 million
into a segregated account, representing an amount sufficient to pre-fund eight
quarterly dividend payments on the Series A Preferred Stock underlying the
Depositary Shares issued in the Depositary Share Offering, and (c) to pay
transaction related expenses. The remaining proceeds are being used for working
capital needs and for general corporate purposes.
On March 23, 2022, we completed the sale and issuance of 6,857,140 shares of the
Company's common stock to certain institutional and individual investors in a
registered direct offering. The shares of common stock were sold at a purchase
price of $1.75 per share, for aggregate gross proceeds of $12 million and
aggregate net proceeds of approximately $11.7 million. The proceeds are being
used for working capital needs and for general corporate purposes.
Limitations on our liquidity and ability to raise capital may adversely affect
us. Sufficient liquidity is critical to meet our resource development
activities. To the extent additional capital is required, we may increase
liquidity through a variety of means, including equity or debt placements,
through the lease, sale or other disposition of assets or reductions in
operating costs. If additional capital is required, no assurances can be given
as to the availability and terms of any new financing.
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As we continue to actively pursue our business strategy, additional financing
will continue to be required. See "Outlook" below. The covenants in the Senior
Secured Debt do not prohibit our use of additional equity financing and allow us
to retain 100% of the proceeds of any equity financing. We do not expect the
loan covenants to materially limit our ability to finance our water and
agricultural development activities.
Cash Used in Operating Activities. Cash used in operating activities totaled
$7.6 million and $6.0 million for the six months ended June 30, 2022 and 2021,
respectively. The cash was primarily used to fund general and administration
expenses related to our water development efforts and agricultural development
efforts.
Cash Used in Investing Activities. Cash used in investing activities totaled
$1.8 million for the six months ended June 30, 2022, and $20.4 million for the
six months ended June 30, 2021. The cash used in the 2022 period primarily
related to development costs for the initial planting of 760 acres of alfalfa.
The 2021 period included additions to well development and water quality and
structural testing of a five-mile segment of pipeline.
Cash Provided by Financing Activities. Cash provided by financing activities
totaled $9.1 million for the six months ended June 30, 2022, compared with cash
provided of $30.3 million for the six months ended June 30, 2021. Proceeds from
financing activities for both periods reported are primarily related to the
issuance of shares under direct and at-the-market offerings.
Outlook
Short-Term Outlook. In March 2022, the registered direct offering of common
stock provided net cash proceeds of approximately $11.7 million. These net cash
proceeds, together with cash on hand, provide us with sufficient funds to meet
our short-term working capital needs.
Long-Term Outlook. In the longer term, we will need to raise additional capital
to finance working capital needs and capital expenditures (see "Current
Financing Arrangements", above). Our future working capital needs will depend
upon the specific measures we pursue in the entitlement and development of our
water resources and other developments. Future capital expenditures will depend
on the progress of the Water Project and further expansion of our agricultural
assets.
We are evaluating the amount of cash needed, and the manner in which such cash
will be raised, on an ongoing basis. We may meet any future cash requirements
through a variety of means, including equity or debt placements, or through the
sale or other disposition of assets. Equity placements will be undertaken only
to the extent necessary, so as to minimize the dilutive effect of any such
placements upon our existing stockholders. No assurances can be given, however,
as to the availability or terms of any new financing. Limitations on our
liquidity and ability to raise capital may adversely affect us. Sufficient
liquidity is critical to meet our resource development activities.
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Recent Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements - "Basis of
Presentation".
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