CADIZ INC 10-K

ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities   Our common stock is currently traded on The NASDAQ Global Market ("NASDAQ") under the symbol "CDZI." The following table reflects actual sales transactions for the dates that we were trading on NASDAQ, as reported by NASDAQ.   Quarter Ended   High Sales Price     Low Sales Price                     2020:                 March 31   $ 11.78     $ 11.38   June 30   $ 10.19     $ 9.92   September 30   $ 10.03     $ 9.87   December 31   $ 10.75     $ 10.57                     2021:                 March 31   $ 9.67     $ 9.35   June 30   $ 13.82     $ 13.50   September 30   $ 7.18     $ 6.63   December 31   $ 3.99     $ 3.59     On March 24, 2022, the high, low and last sales prices for the shares were $2.30, $2.13, and $2.15, respectively.   As of March 24, 2022, the number of stockholders of record of our common stock was 61.   To date, we have not paid a cash dividend on our common stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future.  Our senior secured term loan has covenants that prohibit the payment of dividends on our common stock.   Holders of Series A Preferred Stock, when and as authorized by the Company’s Board of Directors, are entitled to cumulative cash dividends at the rate of 8.875% of the $25,000.00 ($25.00 per Depositary Share) liquidation preference per year (equivalent to $2,218.75 per share per year or $2.21875 per Depositary Share per year). Dividends will be payable quarterly in arrears, on or about the 15th of January, April, July and October, beginning on or about October 15, 2021.    All securities sold by us during the three years ended December 31, 2021, which were not registered under the Securities Act of 1933, as amended, have been previously reported in accordance with the requirements of Rule 12b-2 of the Securities Exchange Act of 1934, as amended.     ITEM 6.  [Reserved]   21       ITEM 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations   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 water resources development company and agribusiness committed to sustainable water and farming projects in California.  We are one of the largest private landowners in the state and control significant water supply, storage and conveyance assets capable of being part of the solution to California’s systemic water challenges.   We own approximately 45,000 acres of land with high-quality, naturally recharging groundwater resources in three areas of Southern California’s Mojave Desert – the Cadiz Valley (35,000 acres), Danby Dry Lake (2,000 acres), and the Piute Valley (9,000 acres) (“Cadiz Property”). Our properties represent a unique private reserve of lands with vested water rights located in a remote area of eastern San Bernardino County that is at the crossroads of major highway, rail, energy, and water infrastructure supplying and delivering necessary resources to communities in California and across the Western United States.   California and the Western U.S. face a persistent challenge in meeting the water needs of all of its residents. While the State of California has recognized a Human Right to Water, competing municipal, agricultural and environmental demands outpace the State’s available supply limiting the ability to deliver on that promise.  Recent analysis from the California State Water Resources Control Board estimates that more than 1 million Californians lack reliable access to water and several communities are short of long-term reliable and affordable safe-drinking supply.    We are principally focused on developing the Cadiz Valley Water Conservation, Recovery and Storage Project (“Water Project”) at our Cadiz Valley property that can help address California’s persistent systemic water challenges and deliver new water access to California communities that presently lack reliable water supplies and infrastructure.  Through management of groundwater at the Cadiz Property, the Water Project would conserve groundwater otherwise used for agriculture to augment supply in California communities in need and utilize capacity available in the managed groundwater aquifer system at Cadiz to bank and store imported water for use in future dry years.   22       The Water Project has completed extensive environmental review in accordance with local, state and federal law and has secured permits to manage the groundwater aquifer in Cadiz to make available an average of 50,000 acre-feet of water per year for 50 years to communities off of the Cadiz Property. Permitting has also authorized the storage of imported water in the aquifer system to return in future dry years.  The Cadiz aquifer system has the capacity to store one million acre-feet of imported water.       To deliver conserved water to communities in need or to offer storage, the Water Project must provide conveyance facilities capable of delivering water to and from the Cadiz area for participating water providers.  We own a retired, 30” steel natural gas pipeline (“Northern Pipeline”) that extends 220-miles from California’s Central Valley near the California Aqueduct southeast across Kern and San Bernardino Counties terminating in Cadiz.  Engineering and technical assessments indicate that the Northern Pipeline can safely convey 25,000 acre-feet of water in either direction. We also maintain a 99-year lease with the Arizona & California Railroad Company (“ARZC”) to co-locate and construct a 43-mile approximately 55-85” steel water conveyance pipeline (“Southern Pipeline”) within the existing, active railroad right-of-way that intersects the Colorado River Aqueduct (“CRA”), one of Southern California’s primary sources of drinking water in Southern California.  The Southern Pipeline is designed to convey up to 75,000 acre-feet per year in either direction.    To utilize the Northern Pipeline for water conveyance related to the Water Project or to construct and operate the Southern Pipeline in coordination with existing water conveyance facilities, we must complete additional permitting and regulatory processes.   We expect to complete any necessary permitting in coordination with any contract to use the facility.   Our agricultural operations provide the Company’s current principal source of revenue, although our working capital needs are not fully supported by our agricultural lease and farming returns at this time. We believe that the ultimate implementation of the Water Project will provide a significant source of future cash flow for the business and our stockholders. We presently rely upon debt and equity financing to support our working capital needs and development of the Water Project (see “Liquidity and Capital Resources”, below).   Our current and future operations also include activities that further our commitments to sustainable stewardship of our land and water resources, good governance and corporate social responsibility. We believe these commitments are important investments that will assist in maintenance of sustained stockholder value.    23       Results of Operations   Year Ended December 31, 2021 Compared to Year Ended December 31, 2020   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 our agricultural leases (see “Sustainable Agricultural Development”, above). As a result, we have historically incurred a net loss from operations. The net loss totaled $31.2 million for the year ended December 31, 2021, compared with a net loss of $37.8 million for the year ended December 31, 2020. 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 certain conversion and exchange Agreements entered into in March 2020, offset by higher compensation costs in 2021 related to stock-based non-cash bonus awards to employees.   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 $564 thousand during the year ended December 31, 2021, compared to $541 thousand during the year ended December 31, 2020. 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, 2021, exclusive of stock-based compensation costs, totaled $12.9 million compared with $9.8 million for the year ended December 31, 2020. The higher general and administrative expenses in 2021 primarily related to legal fees and technical studies related to putting the Northern Pipeline into use.   Compensation costs from stock and option awards for the year ended December 31, 2021, totaled $4.7 million compared with $2.1 million for the year ended December 31, 2020. The higher 2021 expense was primarily due to stock-based non-cash bonus awards to employees.   Depreciation. Depreciation expense totaled $423 thousand for the year ended December 31, 2021, and $381 thousand for the year ended December 31, 2020.   Interest Expense . Interest expense totaled $11.4 million during the year ended December 31, 2021, compared to $11.5 million during the year ended December 31, 2020. The following table summarizes the components of net interest expense for the two periods (in thousands):       Year Ended December 31,       2021     2020                     Interest on outstanding debt   $ 8,485     $ 10,604   Unrealized gains on warrants     (573 )     (139 ) Amortization of debt discount     1,110       295   Amortization of deferred loan costs     2,364       766                         $ 11,386     $ 11,526     Other Income. Other income totaled $0 during the year ended December 31, 2021, and $33 thousand for the year ended December 31, 2020.   24       Loss from Equity-Method Investments. Loss from equity-method investments related to our 50% ownership in the SoCal Hemp JV LLC totaled $942 thousand during the year ended December 31, 2021, compared to $2.2 million during the year ended December 31, 2020 resulting from a reduction in acres planted in 2021 to 50 acres from 242 acres in 2020 and continued market price pressures on hemp biomass in 2021.     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, 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.  The Company completed the offering in July 2021, having issued a total of 2,748,339 shares of common stock in the July 2020 ATM Offering for gross proceeds of $30 million and 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.   On June 29, 2021, we entered into an Underwriting Agreement with BRS as representative of the several underwriters named therein, to issue and sell an aggregate of 2,000,000 depositary shares (the “Depositary Shares”), as well as up to 300,000 Depositary Shares that may be sold pursuant to the exercise of an option to purchase additional Depositary Shares, each representing 1/1000 th of a share of Series A Preferred Stock (“Depositary Share Offering”). The liquidation preference of each of each share of Series A Preferred Stock is $25,000 ($25.00 per Depositary Share). The Depositary Share Offering was completed on July 2, 2021 for net proceeds of approximately $54 million.   On July 2, 2021, we entered into a $50 million new credit agreement (“Credit Agreement”) (see Note 6 to the Condensed Consolidated Financial Statements – “Long-Term Debt”). The proceeds of the Credit Agreement, together with the proceeds from the Depositary Share Offering, were used to (a) to repay all our outstanding obligations under the Prior 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.   25       On March 23, 2022, the Company completed the sale and issuance of 6,857,140 shares of the Company’s common stock to certain institutional and individual investors in a registered direct offering. The shares of common stock were sold at a purchase price of $1.75 per share, for aggregate gross proceeds of $12 million and aggregate net proceeds of approximately $11.8 million. The proceeds will be used for working capital needs and for general corporate purposes.  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. 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 Credit Agreement 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 for Operating Activities . Cash used for operating activities totaled $15.3 million for the year ended December 31, 2021, and $13.4 million for the year ended December 31, 2020. 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, 2021, was $23.5 million, compared with $9.8 million for the year ended December 31, 2020. The cash used in the 2021 period primarily related to the Northern Pipeline acquisition totaling $19 million and development costs for the initial planting of 760 acres of alfalfa. The 2020 period included additions to our interests in SoCal Hemp JV LLC, well development costs for three new wells 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 $51.2 million for the year ended December 31, 2021, compared with cash provided by financing activities of $14.9 million for the year ended December 31, 2020. Proceeds from financing activities for the 2021 period are related to the completion of the Depositary Share Offering, issuance of shares under at-the market and direct offerings and refinancing of the Company’s Prior Senior Secured Debt. Proceeds from financing activities for the 2020 period are related to the issuance of shares under at-the-market offerings.   (b)            Outlook   Short-Term Outlook. The completion of both the Depositary Share Offering and the Credit Agreement (see Note 6 and Note 8 to the Consolidated Financial Statement – “Long-Term Debt” and “Common and Preferred Stock”) in July 2021, provided the Company with net cash proceeds of approximately $21 million. In March 2022, the registered direct offering of common stock (see Note 14 to the Consolidated Financial Statements – “Subsequent Events”) provided additional net cash proceeds of approximately $11.8 million. These net cash proceeds, together with cash on hand, provide us with sufficient funds to meet our short-term working capital needs.       26       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 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.   (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 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.       27       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).  In performing the impairment test, we have the option to first assess qualitative factors to determine whether it is necessary to perform a quantitative assessment for goodwill impairment.  If the qualitative assessment indicates that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value, we perform a quantitative assessment.   This impairment assessment is performed at least annually in the fourth quarter.  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.  In our annual impairment analysis for the fourth quarter 2021, the goodwill was evaluated utilizing a qualitative assessment.  Based on this assessment, we determined that the fair value of the reporting unit was more-likely-than-not greater than its respective carrying value; therefore, 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.   On July 2 2021 (the “Original Issue Date”), the Company entered into a new $50 million senior secured credit agreement with lenders party thereto from time to time (“Lenders”) and BRS, as administrative agent for the Lenders (“Current Senior Secured Debt”) (see Note 2 to the Consolidated Financial Statements – “Long-Term Debt”).  In connection with the issuance of the Current Senior Secured Debt, on the Original Issue Date the Company issued to the Lenders two warrants (“A Warrants” and “B Warrants”), each granting an option to purchase 500,000 shares of our common stock (collectively, the “Warrants”). As a result of the issuance of the Warrants, the Company recorded additional paid-in capital in the amount of $1.9 million which was the fair value of the Warrants on the issuance date.  In addition, the fair value of the Warrants was recorded as debt discount and is being amortized over the term of the Current Senior Secured Debt.    (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.         28       (d)            New Accounting Pronouncements   See Note 2 to the Consolidated Financial Statements, “Summary of Significant Accounting Policies”.