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.
We are a natural resources development company committed to providing
sustainable water and agricultural opportunities in California.
Our main objective is to realize the highest and best use of our land, water and
related infrastructure assets in an environmentally responsible way. Our present
activities are focused on developing our assets to meet growing long-term demand
for access to sustainable water supplies and agricultural products. California
faces systemic water challenges and is not able to ensure that all people in
California can reliably access safe, clean drinking water. We believe that the
highest and best use of our assets will be realized by offering a combination of
water supply, water storage and agricultural projects in ways that are
responsive to California's resource needs.
The Cadiz Property is currently home to our primary development activities,
including water supply and storage project development and active agricultural
operations.
We are focused on developing a water project that can help address California's
persistent systemic water challenges and deliver new water to California
communities in need of reliable water supplies and water infrastructure.
Through management of groundwater at the Cadiz Property, the Water Project
would, in its first phase, or Phase 1, conserve and supply new water for
approximately 400,000 people in communities in Southern California. A second
phase of the Water Project, or Phase 2, would bank and store imported water for
use in future dry years.
The Water Project has completed extensive permitting and environmental review in
accordance with local, state and federal law and is approved to deliver a
reliable supply of 50,000 acre-feet of water per year for 50 years to
communities off of the Cadiz Property. Prior to construction and implementation,
the Water Project must complete contracts with participating water agencies,
conveyance arrangements to deliver water supplies to contracting water agencies,
and also arrange for facility construction, improvements, and financing.
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We anticipate using two separate pipeline routes to convey water from the Cadiz
Property to the service areas of our participating agencies. The first route, or
the Southern Pipeline, requires the construction of a 43-mile 55-85" steel water
conveyance pipeline within a portion of the Arizona & California Railroad
Company right-of-way that crosses the Cadiz Property and intersects with the CRA
in Rice, California. The CRA is owned by the Metropolitan Water District and
serves water providers in six southern California counties. The second route,
or the Northern Pipeline, contemplates the use of an existing 30" natural gas
pipeline that we optioned and acquired from El Paso Natural Gas ("EPNG") as a
potential facility to convey water to the Cadiz Property for storage, or from
the Cadiz Property to parties along the route. The Northern Pipeline extends
220-miles from the Cadiz Property to Wheeler Ridge, California and crosses the
Mojave River Pipeline, the Los Angeles Aqueduct and terminates near the State
Water Project.
In December 2020, BLM granted to our subsidiary Cadiz Real Estate LLC two
right-of-way permits that now enable us to transport water through the entire
Northern Pipeline over BLM-managed lands. The first right-of-way was issued
pursuant to an assignment in October 2020 of a portion of an existing
right-of-way held by EPNG and renewed by BLM under the Mineral Leasing Act that
enables the continued transportation of natural gas. The second right-of-way was
issued under the Federal Land Policy and Management Act and authorizes the
conveyance of water in the pipeline over BLM-managed lands.
With these BLM grants, the conditions precedent were principally satisfied
allowing for completion of the Company's acquisition of the remaining 124-mile
segment of the Northern Pipeline upon final payment to EPNG of $19 million,
which is required to be made no later than June 30, 2021. We are presently
engaged in discussions with parties interested in using the Northern Pipeline
for conveyance, storage and supply. Prior to conveyance of water through the
Northern Pipeline, we must secure permits required by any definitive agreement
to use the facility. All conveyance of water via the Northern Pipeline would be
conducted in accordance with applicable local, state and federal laws.
Our agricultural operations provide the Company's principal source of revenue,
although our working capital needs are not fully supported by our lease and
farming returns. The development of the agricultural operations in 2020
included the construction of three wells that doubled our irrigation capacity to
total 25,000 acre-feet per year, an initial commercial planting of 242 acres of
industrial hemp by SoCal Hemp JV LLC, our 50/50 joint venture partnership with
Glass House Farms, and initial preparation of 1,000 acres of land for the
farming of grain crops expected to be planted during 2021.
We believe that the ultimate implementation of the Water Project will provide a
significant source of future cash flow for the business and our shareholders.
Our current and future operations 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 shareholder
value.
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Results of Operations
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
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 "Sustainable Agricultural Development", above).
As a result, we have historically incurred a net loss from operations. The net
loss totaled $37.8 million for the year ended December 31, 2020, compared with a
net loss of $29.5 million for the year ended December 31, 2019. The higher loss
in 2020 was primarily due to a loss on early extinguishment of debt in the
amount of $12.4 million, which was a non-cash charge, reflecting the excess of
the fair value of the new preferred stock issued over the historical book value
of the related convertible debt retire pursuant to Conversion and Exchange
Agreements (see Note 6 to the Condensed Consolidated Financial Statements,
"Long-Term Debt"). If the related convertible debt had been recorded at fair
value and market to market over the term of the debt, the excess of the fair
value of the new preferred stock issued over the value of the related
convertible debt would not have been significant. The higher 2020 loss also
reflects a higher loss on equity-method investments, partially offset by a
higher interest expense recorded in 2019.
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 $541 thousand during the year ended December 31, 2020,
compared to $441 thousand during the year ended December 31, 2019. The revenue
is primarily related to rental income from our agricultural leases (see
"Sustainable Agricultural Development", above).
General and Administrative Expenses. General and administrative expenses during
the year ended December 31, 2020, exclusive of stock-based compensation costs,
totaled $9.8 million compared with $11.6 million for the year ended December 31,
2019. The decrease in general and administrative expenses in 2020 primarily
relates to fewer legal and professional fees related to the Water Project.
Compensation costs from stock and option awards for the year ended December 31,
2020, totaled $2.1 million compared with $0.6 million for the year ended
December 31, 2019. The higher 2020 expense was primarily due to stock-based
non-cash bonus awards to employees.
Depreciation. Depreciation expense totaled $381 thousand for the year ended
December 31, 2020, and $265 thousand for the year ended December 31, 2019.
Interest Expense. Interest expense totaled $11.5 million during the year ended
December 31, 2020, compared to $17.1 million during the year ended December 31,
2019. The following table summarizes the components of net interest expense for
the two periods (in thousands):
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Year Ended
December 31,
2020 2019
Interest on outstanding debt $ 10,604 $ 13,097
Unrealized gains on warrants
(139 ) -
Amortization of debt discount 295 3,894
Amortization of deferred loan costs 766 81
$ 11,526 $ 17,072The decrease of interest on outstanding debt is primarily due to a lower
long-term debt balance following the exchange and conversion of our Convertible
Senior Notes in March 2020. See Note 6 to the Consolidated Financial Statements,
"Long-Term Debt".
Other Income. Other income totaled $33 thousand during the year ended December
31, 2020, and $226 thousand for the year ended December 31, 2019.
Loss from Equity-Method Investments. Loss from equity-method investments related
to our 50% ownership in the SoCal Hemp JV LLC totaled $2.2 million during the
year ended December 31, 2020, compared to $490 thousand during the year ended
December 31, 2019. The losses resulted from higher growing costs and lower
yields in this initial startup year of commercial hemp production coupled with a
reserve for valuing inventory at lower of cost or market by the JV due to the
significant market price reductions for hemp biomass experienced in 2020.
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 July 2020, the Company 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 $30 million from time to time in an
"at-the-market" offering (the "July 2020 ATM Offering"). As of December 31,
2020, the Company issued 1,099,021 shares of common stock in the July 2020 ATM
Offering for gross proceeds of $11.2 million and aggregate net proceeds of
approximately $10.8 million. During the first quarter of fiscal year 2021, the
Company has issued an additional 1,368,362 shares of common stock for gross
proceeds of $15.2 million and net proceeds of $14.9 million. The Company has
and may continue to issue equity securities pursuant to the July 2020 ATM
Offering.
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In November 2018, the Company 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"). The Company
completed the offering in March 2020, having issued a total of 2,369,170 shares
of common stock in the November 2018 ATM Offering for gross proceeds of $25
million and aggregate net proceeds of approximately $24.2 million.
In May 2017, we entered into a $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"). Additionally, we entered into an agreement
with Apollo that allows us to extend the maturity of the Apollo debt from its
current maturity of May 2021 to November 2022 at our option (see Note 14 to the
Consolidated Financial Statements, "Subsequent Events"). At December 31, 2020,
we were in compliance with our debt covenants.
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 may not have adequate
resources on hand to complete the acquisition of the 124-mile extension of our
Northern Pipeline, which requires a $19 million payment prior to June 30, 2021.
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.
Cash Used for Operating Activities. Cash used for operating activities totaled
$13.4 million for the year ended December 31, 2020, and $13.7 million for the
year ended December 31, 2019. The cash was primarily used to fund general and
administrative expenses related to our water development efforts and
agricultural development efforts.
Cash Used For Investing Activities. Cash used for investing activities in the
year ended December 31, 2020, was $9.8 million, compared with $2.5 million for
the year ended December 31, 2019. The 2020 period included additions to our
interest in SoCal Hemp JV LLC, investments in the Northern Pipeline, well
development and professional water quality and structural testing of a five-mile
segment of pipeline.
Cash Provided by Financing Activities. Cash provided by financing activities
totaled $14.9 million for the year ended December 31, 2020, compared with cash
provided by financing activities of $19.3 million for the year ended December
31, 2019. Proceeds from financing activities for both periods reported are
primarily related to the issuance of shares under at-the-market offerings.
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(b) Outlook
Short-Term Outlook. In March 2020, we entered into an agreement that allows us
to extend the contractual May 2021 maturity of our Senior Secured Debt of
approximately $78.5 million as of December 31, 2020 until May 2022 at our
option. Additionally, on March 24, 2021, we entered into an agreement to
further extend, in our sole discretion, the maturity date of our Senior Secured
Debt to November 2022 (see Note 14 to the Consolidated Financial Statements,
"Subsequent Events").
Accordingly, we currently have no short-term portion of long-term debt
obligations coming due subject to the exercise of this option which is entirely
in the Company's control. 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 June 30, 2021. 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). In July 2020, the Company 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 $30 million from time to time
in an "at-the-market" offering (the "July 2020 ATM Offering") to provide an
alternative to raise capital for the Northern Pipeline acquisition payment, for
further development of our land and agricultural assets, and for working capital
purposes. During the first quarter of fiscal year 2021, the Company has issued a
total of 1,368,362 shares of common stock in the July 2020 ATM Offering for
gross proceeds of $15.2 million and net proceeds of $14.9 million. 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 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 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 Long-Lived Assets. The Company assesses long-lived assets 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. No impairment
charge was recorded during the current fiscal year.
(3) Accounting for Debt and Equity Instruments. Amendments and changes to debt
and equity instruments are analyzed for correct accounting application based
upon our financial condition and the changes in the debt or equity instrument
features and terms. Accounting guidance used in the analysis includes ASC
470-60 Troubled Debt Restructuring, ASC 470-50 Modifications and Extinguishments
and ASC 470-20 Accounting for Debt with Conversion or Other Options.
In March 2020, the Company entered into conversion and exchange agreements
regarding its convertible notes as well as an amendment to its senior secured
debt which included an option for the Company to extend the maturity date and a
modification to existing warrants (see "Note 6 - Long Term Debt"). Pursuant to
applicable guidance, Series 1 Preferred Stock issued in the exchange was
recorded at fair value, using the option-pricing model. A loss of $12.4 million
was recorded representing the excess of fair value of the Series 1 Preferred
Stock over the historical book value of the related Convertible Notes.
The warrant modification included both a repricing of warrants and extension of
their expiration date. Pursuant to applicable guidance, the Company recorded a
warrant liability based upon fair value using the option-pricing model. The fair
value of the warrant liability is remeasured each reporting period and the
change in fair value is recorded as an adjustment to the warrant liability with
the unrealized gains or losses reflected in interest expense.
(4) Liquidity. Management assesses whether the Company has sufficient
liquidity to fund its costs for the next twelve months from the financial
statement issuance date. Management evaluates the Company's liquidity to
determine if there is a substantial doubt about the Company's ability to
continue as a going concern. In the preparation of this liquidity assessment,
management applies judgement to estimate the projected cash flows of the Company
including the following: (i) projected cash outflows (ii) projected cash inflows
and (iii) categorization of expenditures as discretionary versus
non-discretionary. The cash flow projections are based on known or planned cash
requirements for operating costs as well as planned costs for project
development.
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(d) New Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements, "Summary of Significant
Accounting Policies".
(e) Off Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements at this time.
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CADIZ INC. 
