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, 2020. 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.
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 supplying and delivering necessary resources to
communities in California and across the Western United States. 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 managing 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 safely,
sustainably and reliably meet the water needs for all of its communities. 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 at our
properties in ways that are sustainable and responsive to California's resource
needs.
We are principally focused on developing a water project at our Cadiz Valley
property 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 ("Water Project"). 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.
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--------------------------------------------------------------------------------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 arrange for facility construction, improvements, and financing.
We anticipate using two separate pipeline routes to convey water between the
service areas of our participating agencies and the Cadiz Property. The first
route, or the Southern Pipeline, requires the construction of a 43-mile,
approximately 55-85" steel water conveyance pipeline within a portion of the
Arizona & California Railroad Company's railroad right-of-way that crosses the
Cadiz Property and intersects with the Colorado River Aqueduct ("CRA") in Rice,
California. The CRA is owned by the Metropolitan Water District of Southern
California ("MWD") and serves water providers in six southern California
counties. The second route, or the Northern Pipeline, contemplates the use of
an existing 220-mile, 30" steel pipeline that we acquired from El Paso Natural
Gas ("EPNG") to convey water to the Cadiz Property for storage or between
parties along the extensive 220-mile route. The Northern Pipeline extends from
the Cadiz Property north-west to California's Central Valley, crossing the
Mojave River Pipeline and the Los Angeles Aqueduct before terminating near the
California State Water Project in Wheeler Ridge.
In December 2020, the U.S. Bureau of Land Management ("BLM") issued two
right-of-way permits to our subsidiary Cadiz Real Estate LLC that assigned and
granted rights to operate the Northern Pipeline and transport water consistently
across the route over BLM-managed lands. The first right-of-way was issued
pursuant to an assignment of a portion of an existing right-of-way held by EPNG
and granted 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, conditions precedent in our Purchase & Sale Agreement
with EPNG were principally satisfied allowing for completion of the Company's
acquisition of the remaining 124-mile segment of the Northern Pipeline. We made
final payment to EPNG of $19 million on June 30, 2021 and have completed payment
for the asset. 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.
We also remain engaged with parties interested in taking deliveries from the
Water Project using the Southern Pipeline route and the CRA. Prior to
construction of the Southern Pipeline, we must secure authorizations required to
convey water in the CRA, including an agreement with MWD and authorization from
the California State Lands Commission under Water Code Sections 1810 - 1815. We
expect to pursue these approvals once definitive contracts with water providers
are finalized.
Our agricultural operations 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).
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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, 2021, Compared to Three Months Ended June 30, 2020
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 $11.6 million in the three
months ended June 30, 2021, compared to a $4.8 million net loss during the three
months ended June 30, 2020. The higher 2021 loss was primarily due to
stock-based non-cash bonus awards to employees, together with an increase in
interest expense related to our senior secured term loan.
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 $141 thousand during the three months ended June 30,
2021, compared to $148 thousand for the three months ended June 30, 2020.
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 $3.1 million in the three
months ended June 30, 2021, compared to $2.8 million in the three months ended
June 30, 2020.
Compensation costs for stock and option awards for the three months ended June
30, 2021, were $3.3 million, compared to $0.3 million for the three months ended
June 30, 2020. The higher 2021 expense was primarily due to stock-based non-cash
bonus awards to employees.
Depreciation Depreciation expense totaled $103 thousand during the three months
ended June 30, 2021, compared to $96 thousand during the three months ended June
30, 2020.
Interest Expense, net Net interest expense totaled $4.9 million during the three
months ended June 30, 2021 compared to $1.7 million during the same period in
2020. The following table summarizes the components of net interest expense for
the two periods (in thousands):
Three Months Ended
June 30,
2021 2020
Interest on outstanding debt $ 2,939 $ 1,950
Unrealized gains on warrants, net
- (510 )
Amortization of debt discount 6 6
Amortization of deferred loan costs 1,913 228
$ 4,858 $ 1,674
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Income Taxes Income tax expense was $1 thousand for each of the three months
ended June 30, 2021 and 2020, and were related to state income taxes. See Note 5
to the Condensed Consolidated Financial Statements - "Income Taxes".
Loss from Equity-Method Investments Loss from equity-method investments related
to our 50% ownership in the SoCal Hemp JV LLC totaled $366 thousand for the
three months ended June 30, 2021, compared to $73 thousand for the three months
ended June 30, 2020.
Six Months Ended June 30, 2021, Compared to Six Months Ended June 30, 2020
We incurred a net loss of $17.5 million in the six months ended June 30, 2021,
compared to a $25.3 million net loss during the six months ended June 30, 2020.
The higher 2020 loss 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 new preferred stock issued over the historical book
value of the related convertible debt retired pursuant to certain conversion and
exchange agreements entered into in March 2020, offset primarily by higher
stock-based non-cash bonus awards to employees in 2021.
Revenues Revenue totaled $280 thousand during the six months ended June 30,
2021, compared to $262 thousand for the six months ended June 30, 2020. 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 $6.2 million in the six
months ended June 30, 2021, compared to $5.5 million in the six months ended
June 30, 2020.
Compensation costs for stock and option awards for the six months ended June 30,
2021, were $3.4 million, compared to $1.6 million for the six months ended June
30, 2020. The higher 2021 expense was primarily due to stock-based non-cash
bonus awards to employees.
Depreciation Depreciation expense totaled $206 thousand during the six months
ended June 30, 2021, compared to $175 thousand during the six months ended June
30, 2020.
Interest Expense, net Net interest expense totaled $7.4 million during the six
months ended June 30, 2021 compared to $5.2 million during the same period in
2020. The following table summarizes the components of net interest expense for
the two periods (in thousands):
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Six Months Ended
June 30,
2021 2020
Interest on outstanding debt $ 5,601 $ 4,608
Unrealized (gains) losses on warrants, net (573 ) 51
Amortization of debt discount
12 283
Amortization of deferred loan costs 2,360 304
$ 7,400 $ 5,246Income Taxes Income tax expense was $3 thousand for each of the six months ended
June 30, 2021 and 2020. See Note 5 to the Condensed Consolidated Financial
Statements - "Income Taxes".
Loss from Equity-Method Investments Loss from equity-method investments related
to our 50% ownership in the SoCal Hemp JV LLC totaled $569 thousand for the six
months ended June 30, 2021, compared to $699 thousand for the six months ended
June 30, 2020.
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.
In July 2020, 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 $30 million from time to time in an "at-the-market"
offering (the "July 2020 ATM Offering") for further development of our land and
agricultural assets, and for working capital purposes. As of June 30, 2021, we
have sold the full $30 million in common stock authorized in the July 2020 ATM
Offering through the sale of 2,748,339 shares resulting in aggregate net
proceeds of approximately $29.2 million.
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.
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On June 29, 2021, we entered into an Underwriting Agreement with BRS as
representative of the several underwriters named there, to issue and sell an
aggregate of 2,000,000 depositary shares (the "Depository Shares"), as well as
up to 300,000 Depository 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 (see Note 10 to the Condensed
Consolidated Financial Statements - "Subsequent Events").
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"). We entered into two further agreements
with Apollo which provided us with the right, at our option, to extend the
maturity of the Senior Secured Debt from its then current maturity of May 25,
2021 to May 25, 2022, and to November 25, 2022, respectively. On May 18, 2021,
we exercised our first extension option to extend the maturity date to May 25,
2022. At June 30, 2021, we were in compliance with our debt covenants.
On July 2, 2021, we entered into the $50 million New Loan (see Note 10 to the
Condensed Consolidated Financial Statements - "Subsequent Events"). The proceeds
of the New Loan, together with the proceeds from the Depositary Share Offering,
were used to (a) to repay all our outstanding obligations under our 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
will be 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.
As we continue to actively pursue our business strategy, additional financing
will continue to be required. See "Outlook" below. The covenants in the New Loan
do not prohibit our use of additional equity financing and allow us to retain
100% of the proceeds of any common 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
$6.0 million and $7.0 million for the six months ended June 30, 2021 and 2020,
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
$20.4 million for the six months ended June, 2021, and $7.0 million for the six
months ended June 31, 2020. The cash used in the 2021 period primarily related
to the Northern Pipeline acquisition. The 2020 period included additions to our
interests in SoCal Hemp JV LLC, well development and professional water quality
and structural testing of a five-mile segment of pipeline.
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Cash Provided by Financing Activities. Cash provided by financing activities
totaled $30.3 million for the six months ended June 30, 2021, compared with cash
provided of $3.9 million for the six months ended June 30, 2020. Proceeds from
financing activities for both periods reported are related to the issuance of
shares under at-the-market and direct offerings.
Outlook
Short-Term Outlook. The completion of both the Depositary Share Offering and the
New Loan (see Note 10 to the Condensed Consolidated Financial Statements -
"Subsequent Events"), provided the Company with net cash proceeds of
approximately $20 million. These net cash proceeds, together with cash on hand
of approximately $11.2 million as of June 30, 2021, 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.
Recent Accounting Pronouncements
See Note 1 to the Condensed Consolidated Financial Statements - "Basis of
Presentation".
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