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" above. 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.
Overview
We are a natural resources development company dedicated to creating
sustainable water and agricultural opportunities in California. We own
approximately 45,000 acres of land with high-quality, naturally recharging
groundwater resources in three areas of Southern California's Mojave Desert.
These properties are located in eastern San Bernardino County situated in close
proximity to major highway, rail, energy and water infrastructure, including the
Colorado River Aqueduct ("CRA"), which is the primary transportation route for
water imported into Southern California from the Colorado River.
Our properties offer opportunities for a wide array of sustainable activities
including water supply projects, groundwater storage, large-scale agricultural
development and land conservation and stewardship programs. In addition to our
land and water assets, we also own pipeline and well infrastructure able to
irrigate existing agriculture and to convey water to and from other communities
and agricultural ventures that may be short of supply and/or storage.
Our main objective is to realize the highest and best use of our land, water
and infrastructure assets in an environmentally responsible way. We believe
that the highest and best use of our assets will be realized through the
development of a combination of water supply, water storage and agricultural
projects in accordance with a holistic land management strategy. Our present
activities are focused on developing our assets in ways that meet growing
long-term demand for access to sustainable water supplies and agricultural
products.
Upon our founding in 1983 as Cadiz Land Company, we began an agricultural
development on a portion of our primary property in Cadiz, California, which is
a 34,500-acre property at the base of the Fenner and Orange Blossom Wash
watersheds in eastern San Bernardino County (the "Cadiz/Fenner Property").
These watersheds span an area of more than 1,300 square miles and have 17 to 34
million acre-feet of fresh, high-quality groundwater in storage - an amount
comparable to Lake Mead, America's largest surface reservoir.
We have sustainably farmed portions of the Cadiz/Fenner Property since the late
1980s in accordance with permits from the County of San Bernardino, the public
agency responsible for groundwater use at the Cadiz/Fenner Property. The permits
authorize the development of upto 9,600 acres of the Cadiz/Fenner Property for
farming and the associated use of underlying groundwater for irrigation.
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The Cadiz/Fenner Property is well-suited for various permanent and seasonal
crops, and we have successfully grown citrus, organic table grapes and raisins,
and seasonal vegetables such as melons, squash and asparagus. Today, we are
engaged in agricultural joint ventures at the Cadiz/Fenner Property and are the
largest private agricultural operation in San Bernardino County. Presently, the
property has 2,100 acres leased to third parties for cultivation of citrus and
242 acres leased to our joint venture, SoCal Hemp JV LLC, for the cultivation of
industrial hemp (see "Agricultural Development", below).
In addition to our agricultural ventures, we are presently developing the Cadiz
Valley Water Conservation, Recovery and Storage Project ("Water Project" or
"Project"), which is approved to capture and conserve millions of acre-feet of
native groundwater currently being lost to evaporation from the aquifer system
beneath our Cadiz/Fenner Property, and provide 50,000 acre-feet of water per
year, enough water for 400,000 people, to water providers throughout Southern
California (see "Water Resource Development", below). A second phase of the
Water Project would offer storage in the aquifer system for up to one million
acre-feet of imported water. Following a multi-year California Environmental
Quality Act ("CEQA") review and permitting process, the Water Project received
permits that allow the capture and conservation of 2.5 million acre-feet of
groundwater over 50 years in accordance with the terms of a groundwater
management plan approved by San Bernardino County. We believe that the ultimate
implementation of the Cadiz Water Project would provide a significant return on
our investment and future cash flow.
By making new water supply and storage available in Southern California, we
believe we can be part of the solution to the State's persistent water
challenge. Available water supply in Southern California is constrained every
year by regulatory restrictions on each of the State's three main water
sources: (1) the CRA; (2) the State Water Project, which provides water
supplies from Northern California to the central and southern parts of the
state; and (3) the Los Angeles Aqueduct, which delivers water from the eastern
Sierra Nevada mountains to Los Angeles. Southern California's water providers
and farmers rely on imports from these systems to meet demand, but deliveries
from all three into the region are consistently below capacity, even in wet
years.
Further, the availability of supplies in California differs greatly from year
to year due to natural hydrological variability. Over the last decade,
California experienced an historic drought featuring record-low winter
precipitation, followed by record wet years. The 2018-2019 winter was a wet
year, with snowpack and rainfall well above average through the summer of 2019,
however 2020 is on track to be another dry year, with snowpack at 45% of normal
through February. The rapid swings between wet and dry years challenges
California's traditional supply system and supports the need for reliable
storage and local supply.
Given the variety of challenges and limitations presented by the State's
existing infrastructure, Southern California water providers and farmers are
presently pursuing investments in storage, supply and infrastructure to meet
long-term demand and pursuing sustainable water and agriculture sources. We
have a record of sustainable agricultural development and groundwater management
to support our continued integration into California's water and agriculture
portfolio.
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Our current working capital requirements relate largely to the final
development activities associated with the Water Project and those activities
consistent with the Water Project related to further development of our land and
agricultural assets. While we continue to believe that the ultimate
implementation of the Water Project will provide a significant source of future
cash flow, we also believe there is substantial value in our underlying
agricultural assets and in our current agricultural ventures and lease
arrangements.
We also continue to explore additional sustainable beneficial uses of our land
and water resource assets, including the marketing of our approved desert
tortoise land conservation bank, which is located on our properties outside the
Water Project area, and other long-term legacy uses of our properties, such as
land stewardship and conservation programs.
Water Resource Development
The Water Project is designed to capture and conserve renewable native
groundwater currently being lost to evaporation from the aquifer system
underlying our Cadiz/Fenner Property and provide a new reliable water supply for
approximately 400,000 people in Southern California. In this first phase, Phase
I, the total quantity of groundwater to be recovered and conveyed to Water
Project participants will not exceed a long-term annual average of 50,000
acre-feet per year for 50 years. The Water Project also offers participants in
Phase I the ability to carry-over their annual supply and store it in the
groundwater basin from year to year. Up to 150,000 acre-feet can be stored as
part of Phase I. A second phase of the Water Project, Phase II, will offer up
to one million acre-feet of storage capacity that can be used to hold water
supplies imported to the project area.
Water Project facilities required for Phase I primarily include, among other
things:
• High-yield wells designed to efficiently recover available native groundwater
at the Water Project area;
• A water conveyance pipeline to deliver water from the well-field to Project
participants;
• An energy source to provide power to the well-field, pipeline and pumping
facilities; and
• A water treatment facility at the wellfield to meet anticipated water quality
requirements set by the operator of the CRA.
If an imported water storage component of the Project is ultimately implemented
in Phase II, the following additional facilities would be required, among other
things:
• Facilities to pump water through the conveyance pipeline from the CRA to the
Water Project well-field and/or through our pipeline from Barstow, CA, to our
Cadiz Valley property; and
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• Spreading basins, which are shallow settling ponds that will be configured to
efficiently percolate water from the ground surface down to the water table
using subsurface storage capacity for the storage of water.
Phase I
Phase I has been fully reviewed and permitted in accordance with the California
Environmental Quality Act ("CEQA"). The Project was also separately reviewed
and approved by the County of San Bernardino in accordance with its local
ordinances regulating groundwater. The Project presently is permitted to
provide an average of 50,000 acre-feet of water for 50 years at Cadiz to meet
municipal and industrial (M&I) water needs in Southern California. The permits
also authorize up to 150,000 acre-feet of carry-over groundwater storage,
allowing water agencies to hold conserved water in the aquifer system for future
dry years.
Construction of the Water Project facilities that would allow for conservation,
carry-over storage and delivery of groundwater to public water providers is
expected to cost approximately $310 million and will require capital financing
that we expect will be secured by definitive Purchase and Sale Agreements with
Project participants and the new facility assets.
Prior to construction, the Water Project must (1) finalize contracts with
Project participating agencies, (2) finalize arrangements and secure necessary
permits and approvals to transport water conserved at Cadiz via water
transportation infrastructure and into each participant's service area, and (3)
complete final design and permitting. Below is a discussion of present
activities to advance these objectives.
(1) Contracts with Public Water Agencies or Private Water Utilities
We have executed Letters of Intent ("LOIs"), option agreements and purchase
agreements, or contracts (collectively, "Agreements") with public water agencies
and private water utilities in California during the Project's development.
These participating agencies serve more than one million customers in cities
throughout California's San Bernardino, Riverside, Los Angeles, Orange, Imperial
and Ventura Counties. Twenty percent of Water Project supplies have been
reserved for San Bernardino County-based agencies.
Santa Margarita Water District ("SMWD"), Orange County's second largest water
provider, was the first participant to convert its option agreement and adopt
resolutions approving a Water Purchase and Sale Agreement for 5,000 acre-feet of
water. The structure of the SMWD purchase agreement calls for an annually
adjusted water supply payment, plus a pro rata portion of the capital recovery
charge and operating and maintenance costs. The capital recovery charge is
calculated by amortizing the total capital investment by the Company over a
30-year term.
Agreements entered into prior to the beginning of the CEQA review process
provide to participants the right to acquire an annual supply of 5,000 acre-feet
of water at $775 per acre-foot (2010 dollars, subject to adjustment), which is
competitive with the incremental cost of new water. In addition, these agencies
received options to acquire storage rights in the Water Project to allow for the
management of their Water Project supplies in complement with their own water
resources. Up to 150,000 acre-feet of carry-over storage is available for
reservation by the agencies prior to construction commencement. Participants
that elect to achieve year-to-year flexibility in their use of Project water by
utilizing carry-over storage will reserve storage capacity for $1,500 per
acre-foot prior to construction.
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LOIs that have been entered into since completion of the CEQA review process
reserve supplies from the Water Project at $960 per acre-foot (2014 dollars,
subject to adjustment). These LOIs also include the option to reserve
carry-over storage capacity for $1,500 per acre-foot prior to construction.
Prior to construction of the Water Project, we expect to convert existing
option agreements and LOIs to purchase agreements. We will work collaboratively
with the participating water agencies to allow for inclusive participation
across Southern California.
(2) Transportation Infrastructure and Conveyance Arrangements
a. Southern Route
Prior to construction of the Water Project, and in coordination with final
participation contracts described in (1) above, we must obtain approvals from
government agencies for conveyance of water from our property in Cadiz to water
users via the Colorado River Aqueduct ("CRA"). These approvals include:
(i) arrangements with the US Bureau of Land Management ("BLM") to construct a
43-mile water conveyance pipeline within a portion of the Arizona &
California Railroad Company ("ARZC") right-of-way that intersects with the
CRA (Southern Pipeline");
(ii) an agreement for moving water supplies in the CRA with Metropolitan Water
District of Southern California ("Metropolitan"), which owns and controls
the CRA; and
(iii) a review and finding by the California State Lands Commission of an
application filed under newly established Water Code Section 1815 that
conveying water in the CRA will not adversely affect the desert
environment.
i. BLM Approval of Southern Pipeline
In October 2017, the BLM provided a letter finding that the Project's proposed
use of a portion of the ARZC right-of-way from our Cadiz Valley property to
Freda, California to construct and operate the Water Project's water conveyance
pipeline and related railroad improvements is within the scope of the original
right-of-way grant and not subject to additional permitting. The buried
pipeline would be constructed parallel to the railroad tracks and be used to
convey water between our Cadiz Valley property and the CRA. The letter was
challenged in Los Angeles Central District Federal Court in 2018 by national
environmental organizations, which claimed it violated the law. In a June 2019
procedural ruling, the Court remanded the letter back to BLM, concluding that
the agency needed to explain more explicitly why it withdrew and reversed
specific findings previously made in 2015 on the same issue. However, the Court
did not find that the conclusions of the 2017 evaluation were in error.
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On February 7, 2020 we received from the BLM a revised evaluation responsive to
the Court's remand ("2020 Evaluation"). The 2020 Evaluation reaffirmed that the
Project's proposed use of the ARZC right-of-way for the Southern Pipeline and
related railroad improvements furthers a railroad purpose and is within the
scope of the right-of-way, consistent with BLM's conclusion in October 2017.
The 2020 Evaluation references an extensive record and sets forth the factual
basis for its conclusions in detail while reaffirming the agency's 2017 finding.
We expect the Court will review the 2020 Evaluation this year per its remand
order.
ii. Aqueduct Transportation via MWD
Water supplies conserved by the Project would enter the CRA at the termination
of the project's conveyance pipeline near Rice, CA. The CEQA process considered
a variety of options to enter the CRA and assumed final entry into the CRA would
be determined by MWD in consultation with the Project's participating agencies.
Once arrangements are reached, the Metropolitan Board would take action as a
responsible agency under CEQA regarding the terms and conditions of the Water
Project's use of the CRA to transport water to its participating agencies.
There is no application yet before Metropolitan related to entry and
transportation of Project supplies, but we expect such a formal application will
be filed by SMWD, the Project's lead agency, when the Project's contractual
arrangements with participants are finalized. Any agreement as to the terms and
conditions of the Water Project's use of the CRA will be negotiated between and
entered into by Metropolitan and the Project participating agencies, not the
Company.
Water Project supplies entering the CRA will comply with Metropolitan's
published engineering, design and water quality standards and will be subject to
all applicable fees and charges routinely established by Metropolitan for the
conveyance of water within its service territory. Groundwater at Cadiz
presently meets all state and federal water quality requirements without
treatment and total dissolved solids or salts in the Cadiz water supply are
substantially lower than the water in the CRA, offering a water quality
benefit. Cadiz water also has no PFAs, a recently added constituent of concern
by California water regulators, improving its attractiveness for the service
area. Some naturally occurring constituents are lower than State and Federal
standards but potentially higher than the water in the CRA; however, based on
extensive pilot testing, they can be lowered via treatment to ambient levels or
removed entirely. This year-long pilot testing of treatment options at the
Project area confirmed the capability of cost-effective treatment technologies.
We believe there are multiple benefits that can be realized by MWD and water
users throughout its service area, such as water quality improvements, upon
making space reasonably available for the Cadiz water supplies and providing the
region the flexibility of relying on the Water Project in both wet and dry
years.
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iii. State Lands Commission Review under Water Code Section 1815
On July 31, 2019, California Governor Gavin Newsom signed into law Senate Bill
307 ("SB 307"), which added terms to the section of the California Water Code
known as the "wheeling statutes" that regulate the conveyance of water by third
parties in facilities such as the CRA. Effective January 1, 2020, the wheeling
statutes now include Water Code Section 1815 which requires water projects in a
section of the Mojave Desert where our Cadiz Valley property is located to apply
for a review by the California State Lands Commission ("SLC") prior to
transporting water in public conveyance facilities. Upon receiving an
application, this review will determine whether such projects would have
"unreasonable effects on the environment and water dependent ecosystems in the
surrounding watersheds." The review by SLC must be conducted within 15 months of
any filed application, with an option to extend an additional 9 months upon
public notice and explanation. Any application to the SLC for review of the
Water Project's plans to convey water in the CRA from the Cadiz/Fenner Property
will be accompanied by evidence of the Project's extensive record of
environmental sustainability as well as data and reports that can withstand
critical scrutiny.
b. Northern Pipeline
In addition to the conveyance arrangements described above, we currently own a
96-mile long, 30-inch wide existing idle natural gas pipeline that extends
northwest from the Cadiz/Fenner Property terminating in Barstow, California, and
have entered into a purchase agreement to a further 124-mile segment connecting
this line from Barstow to Wheeler Ridge, California. The pipeline crosses San
Bernardino, Los Angeles and Kern counties, including the Barstow and Bakersfield
areas, which serve as a hubs for water delivered from northern and central
California to communities in Southern California.
Initial feasibility studies indicated that, upon conversion, the 30-inch
pipeline could transport between 18,000 and 30,000 acre-feet of water per year
between the Water Project area and the Central and Northern California water
transportation network. As a result, this pipeline could diversify delivery
opportunities for the Water Project and our broader water resource development
efforts.
If this pipeline were to become operational, then the Water Project would link
the CRA and State Water Project systems - two of Southern California's main
water delivery systems - providing flexible opportunities for both supply and
storage. The Northern Pipeline could deliver Phase I supplies, either directly
or via exchange, to existing and potential customers of Phase I of the Project.
Any use of the pipeline would be conducted in conformity with the Water
Project's groundwater management plan and is subject to further CEQA evaluation
and potentially federal environmental permitting.
In December 2018, we entered into an amendment (the "Amendment") to our option
agreement ("Option Agreement") with El Paso Natural Gas Company ("EPNG") to
purchase the 124-mile segment of the pipeline. The Option Agreement, as amended,
allowed us to purchase the 124-mile pipeline segment with an initial payment of
$2 million and a subsequent payment of $18 million ("Deferred Payment").
Following entry into the Amendment, we exercised the option and entered into a
purchase agreement for the 124-mile pipeline, providing to EPNG the initial
consideration of $2 million. On February 3, 2020, we entered into a First
Amendment to the Amended Option Agreement. As amended, the Option Agreement (i)
extended the time period within which we must complete the purchase of the
pipeline segment contemplated by the Agreement from 30 to up to 180 days
following the satisfaction by EPNG of certain conditions precedent, with the
actual time period depending upon the date upon which such conditions are
satisfied, and (ii) increased the balance of the Deferred Payment from $18
million to $19 million.
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We do not currently have the cash resources on hand to satisfy the Deferred
Payment. If we do not complete the purchase of the additional 124-mile
pipeline, then our Northern Pipeline opportunities will be limited to the
96-mile segment that we own.
(3) Final Design and Permitting
Prior to final construction of the Water Project facilities, we must also
finalize facility design and acquire relevant construction permits with state
and local agencies. Together with SMWD we have engaged engineering and
environmental consultants to complete design plans for a water conveyance
pipeline, Project wellfield, any necessary water treatment facilities, and
facilities required to connect to the Metropolitan system at and near the CRA.
This work is ongoing and expected to proceed in coordination with the
negotiation of contracts and conveyance arrangements.
In coordination with facility design and layout, we may need to obtain
additional permits and approvals from state or local entities prior to
construction. This may include, but is not limited to, confirmation of existing
access rights, easements and rights-of-way, for areas that may be crossed by
Project facilities in the Project area subject to final pipeline configuration.
Phase II
In a second phase of the Water Project ("Phase II"), we expect to make
available up to one million acre-feet of capacity (an additional 850,000
acre-feet from Phase I) in the aquifer system at the Project area for storage of
imported surplus water. Under Phase II, or the Imported Water Storage
Component, water from the Colorado River or the State Water Project, via the
Southern Pipeline and the Northern Pipeline could be conveyed to spreading
basins that would be constructed on our private property to percolate into the
aquifer system and held in storage. When needed, previously stored water would
be returned to Phase II participating agencies via the Southern Pipeline or the
Northern Pipeline.
Phase II has already been the subject of programmatic environmental review in
accordance with CEQA, but still requires project-level environmental review and
permitting once participating agencies are identified. Phase II may also require
federal permits subject to the National Environmental Policy Act, or NEPA.
Agricultural Development
Farming is a main driver of the California economy. According to the
California Department of Food and Agriculture, more than one-third of the U.S.'s
vegetable crops and two-thirds of its fruits and nuts are grown in California.
Additionally, California is the leading U.S. state for cash farm receipts,
accounting for over 13% of national agricultural value.
Our Cadiz/Fenner Property, consisting of approximately 34,500 acres of desert
land is zoned for agricultural development. In 1993, we secured conditional use
permits to develop agricultural facilities on up to 9,600 acres of the property
and withdraw groundwater from the underlying aquifer system for irrigation. We
have since maintained various levels of crops on the Property as we developed
the Water Project. In 2013, we entered into a lease agreement with a third
party to develop up to 1,480 acres of lemons at the site, 640 acres of which
have been planted to date.
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In February 2016, we entered into a lease agreement with Fenner Valley Farms
LLC ("FVF"), a subsidiary of Water Asset Management LLC (at the time a related
party), pursuant to which FVF leased, for a 99-year term, 2,100 acres at the
Cadiz/Fenner property to be used to plant, grow and harvest agricultural crops
("FVF Lease"). As consideration for the lease, FVF paid us a one-time payment
of $12,000,000 in February 2016. Acreage that has been historically farmed and
includes infrastructure for farming and the acreage that is leased to a third
party to develop lemons was included within the acreage leased to FVF.
In July 2019, we entered into a joint venture ("JV") that operates under the
name SoCal Hemp JV LLC to sustainably cultivate organic, sun-grown, industrial
hemp on up to 9,600 acres at our Cadiz Valley property. In compliance with all
state, federal and local regulatory requirements, the JV is currently under
contract to lease 242 acres and has entered into option agreements to utilize up
to 9,600 acres over the next four years.
As part of the agricultural development to be conducted under the lease
arrangements, the groundwater production capacity of the property's existing
well-field will be enhanced through infrastructure improvements that are
complementary to the Water Project. All agricultural production is fully
compatible with the Cadiz Water Project. Overlying farming demands will be
coordinated with project operations and existing Court-validated permits.
Additional Eastern Mojave Properties
In addition to the Cadiz/Fenner Property, we also own approximately 11,000
acres in two additional locations within the Mojave Desert in eastern San
Bernardino County.
Our primary landholding outside of the Cadiz/Fenner area is approximately 9,000
acres in the Piute Valley. This landholding is located approximately 15 miles
from the resort community of Laughlin, Nevada, and about 12 miles from the
Colorado River town of Needles, California. Extensive hydrological studies,
including the drilling and testing of a full-scale production well, have
demonstrated that this landholding is underlain by high-quality groundwater.
The aquifer system underlying this property is naturally recharged by
precipitation (both rain and snow) within a watershed of approximately 975
square miles and could be suitable for a water supply project, agricultural
development or solar energy production. These private properties are proximate
to or border areas designated by the federal government as National Monument,
Critical Desert Tortoise Habitat and/or Desert Wilderness Areas and are suitable
candidates for preservation and conservation (see "Land Conservation Bank",
below).
Additionally, we own approximately 2,000 acres located near Danby Dry Lake in
Ward Valley, approximately 30 miles southeast of our Cadiz/Fenner Valley
properties. The Danby Dry Lake property is located approximately 10 miles north
of the CRA. Initial hydrological studies indicate that the area has excellent
potential for a water supply project. Certain of the properties in this area may
also be suitable for agricultural development and/or preservation and
conservation.
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Land Conservation Bank
Approximately 7,500 acres of our properties outside of the Cadiz/Fenner Valley
area in the Piute Valley are located within terrain designated by the federal
government as Critical Desert Tortoise Habitat and/or Desert Wilderness Areas
and offer limited development opportunities. In February 2015, the California
Department of Fish and Wildlife approved our establishment of the Fenner Valley
Desert Tortoise Conservation Bank ("Fenner Bank"), a land conservation bank that
makes available these properties for mitigation of impacts to tortoise and other
sensitive species that would be caused by development across the Southern
California desert. Under its enabling documents, the Fenner Bank offers credits
that can be acquired by entities that must mitigate or offset impacts linked to
planned development. For example, this bank can service the mitigation
requirements of renewable energy, military, residential and commercial
development projects being considered throughout the desert. Credits sold by the
Fenner Bank will fund the permanent preservation of the land as well as research
by outside entities, including San Diego Zoo Global, into desert tortoise health
and species protection.
Northern Pipeline
The Northern Pipeline asset, described above, also represents new opportunities
for the Company independent of the Water Project to offer water transportation
to locations along the 220-mile pipeline route that are not presently
interconnected by existing water infrastructure. The existing pipeline crosses
California's major water infrastructure as well as urban and agricultural
centers and can be re-purposed to transport water, independent of the Water
Project, between users who presently lack direct interconnections along the
pipeline route. We are presently engaged in discussions with parties that may be
interested in such transportation. The ability to serve points along the
124-mile portion of the pipeline from Barstow to Wheeler Ridge is dependent upon
completion of certain conditions precedent under our purchase agreement with
EPNG, described above. If the acquisition of the 124-mile segment is not
completed, then our Northern Pipeline opportunities will be limited to the
96-mile segment that we own.
Professional water quality and structural testing of a five-mile segment of the
pipeline has been conducted. The testing resulted in a determination that there
were no residual petroleum products in the tested segment and that the pipeline
is structurally sound to transport water between Cadiz and Barstow.
Other Opportunities
Other opportunities in the water and agricultural or related infrastructure
business complementary to our current objectives could provide new opportunities
for our Company.
Over the longer-term, we believe the population of Southern California, Nevada
and Arizona will continue to grow, and that, in time, the economics of
commercial and residential development at our properties may become attractive.
We remain committed to the sustainable use of our land, water and
infrastructure assets and will continue to explore all opportunities for
sustainable development in an environmentally responsible way. We cannot
estimate which of these opportunities will ultimately be realized.
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Results of Operations
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
We have not received significant revenues from our water resource and real
estate development activities to date. Our revenues have been limited to rental
income from the FVF Lease (see "Agricultural Development", above). As a result,
we have historically incurred a net loss from operations. The net loss totaled
$29.5 million for the year ended December 31, 2019, compared with a net loss of
$26.3 million for the year ended December 31, 2018. The higher loss in 2019 was
primarily related to higher general and administrative expenses related to our
water development efforts, higher proxy costs, higher interest expense and a
recorded loss on investment related to a new joint venture (see "Agricultural
Development", above), partially offset by $1.5 million in unrealized gains
recorded for warrant liabilities in 2018. The underlying warrants were
reclassified to equity on January 1, 2019 upon adoption of the related
accounting standard (see Note 2 to our Consolidated Financial Statements,
"Summary of Significant Accounting Policies").
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 expense in connection
with our management and director equity incentive compensation plans.
Revenues. Revenue totaled $441 thousand during the year ended December 31,
2019, compared to $440 thousand during the year ended December 31, 2018. The
revenue is primarily related to rental income from the FVF Lease (see
"Agricultural Development", above).
General and Administrative Expenses. General and administrative expenses
during the year ended December 31, 2019, totaled $12.2 million compared with
$11.4 million for the year ended December 31, 2018. Non-cash compensation costs
related to stock and option awards are included in general and administrative
expenses.
Compensation costs from stock and option awards for the year ended December 31,
2019, totaled $0.6 million compared with $0.5 million for the year ended
December 31, 2018.
Depreciation. Depreciation expense totaled $265 thousand for the year ended
December 31, 2019, and $258 thousand for the year ended December 31, 2018.
Interest Expense. Interest expense totaled $17.1 million during the year ended
December 31, 2019, compared to $15.3 million during the year ended December 31,
2018. The following table summarizes the components of net interest expense for
the two periods (in thousands):
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Year Ended
December 31,
2019 2018
Interest on outstanding debt $ 13,097 $ 12,594
Unrealized gains on warrants
- (1,522 )
Amortization of debt discount 3,894 4,095
Amortization of deferred loan costs 81 103
$ 17,072 $ 15,270
The interest on outstanding debt increased from $12.6 million to $13.1 million
due to compounded interest on a larger credit facility associated with our May
2017 debt refinancing. Additionally, during the year ended December 31, 2018,
the Company recorded net unrealized gains on warrants of $1.5 million (see Note
6 to the Consolidated Financial Statements, "Long-Term Debt)". The underlying
warrants were reclassified to equity on January 1, 2019 upon adoption of the
related accounting standard (see Note 2 to the Consolidated Financial
Statements, "Summary of Significant Accounting Policies").
Interest Income. Interest income totaled $226 thousand during the year ended
December 31, 2019, and $223 thousand for the year ended December 31, 2018.
Liquidity and Capital Resources
(a) 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.
In November 2018, we entered into an At Market Issuance Sales Agreement under
which the Company could issue and sell shares of its common stock having an
aggregate offering price of up to $25 million from time to time in an
"at-the-market" offering (the "November 2018 ATM Offering"). As of December 31,
2019, the Company issued 1,960,178 shares of common stock in the November 2018
ATM Offering for gross proceeds of $21.0 million and aggregate net proceeds of
approximately $20.3 million. The November 2018 ATM offering was completed in
March 2020 (see Note 14 to the Consolidated Financial Statements, "Subsequent
Events").
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In May 2017, we entered into a new $60 million credit agreement with funds
affiliated with Apollo Global Management, LLC ("Apollo") that replaced and
refinanced our 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 Senior Secured Debt and the 7.00%
Convertible Senior Notes due March 2020 ("Convertible Senior Notes") contain
representations, warranties and covenants that are typical for agreements of
this type, including restrictions that would limit our 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 no financial
maintenance covenants and no restrictions on our 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
our operating and financial condition as it existed at the time the agreements
were executed. At December 31, 2019, we were in compliance with our debt
covenants. In March 2020, all Convertible Senior Notes were either converted
into common stock pursuant to the terms of the existing Indenture or exchanged
for a new Preferred Stock. Additionally, we entered into an agreement with
Apollo that allows us to extend the maturity of the Apollo debt for an
additional year from its current maturity of May 2021 to May 2022 at our option
(see Note 14 to the Consolidated Financial Statements, "Subsequent Events").
Limitations on our liquidity and ability to raise capital may adversely affect
us. Sufficient liquidity is critical to meet our resource development
activities. As discussed further in "Outlook" below, we do not have adequate
resources on hand to complete the acquisition of the 124-mile extension of our
Northern Pipeline, which will require a $19 million payment within one hundred
and eighty days of satisfaction of certain conditions precedent under our
purchase agreement with EPNG. 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.
As we continue to actively pursue our business strategy, additional financing
will continue to be required (see "Outlook", below). The covenants in the term
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 development
activities.
At December 31, 2019, we had no outstanding credit facilities other than the
Senior Secured Debt and the Convertible Senior Notes.
Cash Used for Operating Activities. Cash used for operating activities totaled
$13.7 million for the year ended December 31, 2019, and $12.2 million for the
year ended December 31, 2018. The cash was primarily used to fund general and
administrative expenses related to our water development efforts.
Cash Used For Investing Activities. Cash used for investing activities in the
year ended December 31, 2019, was $2.5 million, compared with $3.7 million for
the year ended December 31, 2018. The costs consisted of engineering and design
related to the development of the Water Project. In addition, the 2019 period
included additions to our interest in SoCal Hemp JV LLC (see "Agricultural
Development", above) and the 2018 period included investments in the Northern
Pipeline (see "Water Resource Development", above).
Cash Provided by Financing Activities. Cash provided by financing activities
totaled $19.3 million for the year ended December 31, 2019, compared with cash
provided by financing activities of $15.4 million for the year ended December
31, 2018. Proceeds from financing activities for both periods reported are
related to the issuance of shares under at-the-market offerings.
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(b) Outlook
Short-Term Outlook. Principal and interest payments aggregating approximately
$65.5 million at December 31, 2019 that were due in March 2020 were either
converted into common stock pursuant to the terms of the existing Indenture or
exchanged for a new Preferred Stock (see Note 14 to the Consolidated Financial
Statements, "Subsequent Events"). Additionally, we entered into an agreement
that allows us to extend the contractual May 2021 maturity of our Senior Secured
Debt of approximately $72.3 million as of December 31, 2019 until May 2022 at
our option (see Note 14 to the Consolidated Financial Statements, "Subsequent
Events"). As such, we currently have no near-term debt maturity obligations.
However, in order to complete our acquisition of an additional 124-mile
extension of our Northern Pipeline, we will require a further $19 million
payment that will be due within 180 days upon completion of certain conditions
precedent under our purchase agreement with EPNG (see "Water Resource
Development", above). If the acquisition of the 124-mile segment is not
completed, then our Northern Pipeline opportunities will be limited to the
96-mile segment we already own. As we require additional working capital to
fund operations, we expect to continue our historical practice of structuring
our financing arrangements to match the anticipated needs of our development
activities (see "Long-Term Outlook", below). No assurances can be given,
however, as to the availability or terms of any new financing.
Long-Term Outlook. In the longer term, we will need to raise additional
capital to finance working capital needs, capital expenditures and any payments
due under our Senior Secured Debt at maturity (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
primarily on the progress of the Water Project.
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 would be undertaken only
to the extent necessary, so as to minimize the dilution 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.
(c) Critical Accounting Policies
As discussed in Note 2 to our Consolidated Financial Statements, "Summary of
Significant Accounting Policies", the preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect amounts
reported in the accompanying consolidated financial statements and related
footnotes. In preparing these financial statements, management has made its
best estimates and judgments of certain amounts included in the financial
statements based on all relevant information available at the time and giving
due consideration to materiality. However, application of these policies
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. Management has concluded that the following critical accounting
policies described below affect the most significant judgments and estimates
used in the preparation of the consolidated financial statements.
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(1) Intangible and Other Long-Lived Assets. Property, plant and equipment,
intangible and certain other long-lived assets are depreciated or amortized over
their useful lives. Useful lives are based on management's estimates of the
period over which the assets will generate revenue.
(2) Valuation 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 performs an annual 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 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. No impairment charge was recorded during the current fiscal year.
(3) Deferred Tax Assets and Valuation Allowances. To date, the Company has
not generated significant revenue from its water development programs, and it
has a history of net operating losses. As such, the Company has generated
significant deferred tax assets, including large net operating loss
carryforwards for federal and state income taxes for which it has recorded a
full valuation allowance. Management is currently working on water storage,
water supply, and agricultural projects, including the Water Project, that are
designed to generate future taxable income, although there can be no guarantee
that this will occur. If taxable income is generated in future years, some
portion or all of the valuation allowance will be reversed, and an increase in
net income would consequently be reported.
(4) Stock-Based Compensation. 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.
As of December 31, 2019, all options outstanding are fully vested; therefore,
there is no potential impact of forfeitures.
(d) New Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements, "Summary of Significant
Accounting Policies".
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(e) Off Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements at this time.
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CADIZ INC. 
