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 that supply and deliver necessary resources to
communities in California and across Western 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 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
demands for water are safely and reliably met. 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.
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.
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We anticipate using two separate pipeline routes to convey water between the
Cadiz Property and the service areas of our participating agencies. 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" 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 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") granted to our
subsidiary Cadiz Real Estate LLC two right-of-way permits that grant us 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 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.
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 March 31, 2021, Compared to Three Months Ended March 31, 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 (see "Agricultural Development", above). As
a result, we have historically incurred a net loss from operations. We incurred
a net loss of $5.9 million in the three months ended March 31, 2021, compared to
a $20.5 million net loss during the three months ended March 31, 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.
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 $139 thousand during the three months ended March 31,
2021, compared to $114 thousand for the three months ended March 31, 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 March 31, 2021, compared to $2.7 million in the three months ended
March 31, 2020.
Compensation costs for stock and option awards for the three months ended March
31, 2021, were $0.1 million, compared to $1.3 million for the three months ended
March 31, 2020. The higher 2020 expense was primarily due to stock-based
non-cash bonus awards to employees.
Depreciation Depreciation expense totaled $103 thousand during the three months
ended March 31, 2021, compared to $79 thousand during the three months ended
March 31, 2020.
Interest Expense, net Net interest expense totaled $2.5 million during the
three months ended March 31, 2021 compared to $3.6 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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Three Months Ended
March 31,
2021 2020
Interest on outstanding debt $ 2,662 $ 2,658
Unrealized (gains) losses on warrants, net (573 ) 561
Amortization of debt discount
6 277
Amortization of deferred loan costs 447 76
$ 2,542 $ 3,572The decrease of interest on outstanding debt is primarily due to unrealized
gains recorded related to warrant liabilities.
Income Taxes Income tax expense was $2 thousand for each of the three months
ended March 31, 2021 and 2020, and were related to state income taxes. See Note
4 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 $203 thousand for the
three months ended March 31, 2021, compared to $626 thousand for the three
months ended March 31, 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 March 31, 2021, we
issued 2,467,383 shares of common stock in the July 2020 ATM Offering for gross
proceeds of $26.4 million and aggregate net proceeds of approximately $25.7
million. We have and may continue to issue equity securities pursuant to the
July 2020 ATM Offering.
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 have entered into two further
agreements with Apollo which provide us with the right, at our option, to extend
the maturity of the Senior Secured Debt from its current maturity of May 25,
2021 to May 25, 2022, and to November 25, 2022, respectively. We currently
intend to exercise our first extension option to extend the maturity date to May
25, 2022. At March 31, 2021, we were in compliance with our debt covenants.
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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 Senior
Secured Debt do not prohibit our use of additional equity financing and allow us
to retain 100% of the proceeds of any equity financing. We do not expect the
loan covenants to materially limit our ability to finance our water and
agricultural development activities.
Cash Used in Operating Activities. Cash used in operating activities totaled
$2.8 million and $4.4 million for the three months ended March 31, 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
$0.7 million for the three months ended March 31, 2021, and $4.7 million for the
three months ended March 31, 2020. 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.
Cash Provided by Financing Activities. Cash provided by financing activities
totaled $14.9 million for the three months ended March 31, 2021, compared with
cash provided of $3.9 million for the three months ended March 31, 2020.
Proceeds from financing activities for both periods reported are related to the
issuance of shares under at-the-market offerings.
Outlook
Short-Term Outlook. In March 2020, we entered into an agreement that provides
us the right, at our option, to extend the contractual May 25, 2021 maturity of
our Senior Secured Debt of approximately $80.7 million as of March 31, 2021
until May 25, 2022. On March 24, 2021, we entered into an additional agreement
which provides us the right, at our option, to further extend the maturity date
of our Senior Secured Debt to November 25, 2022. We currently intend to exercise
our first extension option to extend the maturity date to May 25, 2022.
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Accordingly, we currently have no-near-term debt obligations coming due subject
to the exercise of these options, which is entirely in the Company's control.
However, in order to complete our acquisition of the 124-mile extension of our
Northern Pipeline, we have a $19 million final payment due June 30, 2021. We
are seeking, but do not yet have, adequate resources on hand to complete this
acquisition. 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, 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") 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. 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 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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