SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
Cadiz Inc.
Cadiz Inc.
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cadiz Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated
balance sheets of Cadiz Inc. and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, stockholders’ deficit and cash flows for the years then ended, including
the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on
the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether
effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial
statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the
overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
March 13, 2020
We have served as the Company’s auditor since at least 1995. We have not been able to determine the specific year we began serving as auditor of the Company.
Cadiz Inc.
Consolidated Statements of Operations and Comprehensive Loss
See accompanying notes to the consolidated financial statements.
Cadiz Inc.
Consolidated Balance Sheets
See accompanying notes to the consolidated financial statements.
Cadiz Inc.
Consolidated Statements of Cash Flows
See accompanying notes to the consolidated financial statements.
Cadiz Inc.
Consolidated Statements of Stockholders' Deficit
See accompanying notes to the consolidated financial statements.
Cadiz Inc.
Notes to the Consolidated Financial Statements
NOTE 1 – DESCRIPTION OF BUSINESS
Cadiz Inc. (“Cadiz” or “the Company”) is a
natural resources development company dedicated to creating sustainable water and agricultural opportunities in California. The Company owns 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.
The Company’s 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 its land and water assets, Cadiz also owns 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.
The Company’s main objective is to realize the
highest and best use of its land, water and infrastructure assets in an environmentally responsible way. Cadiz believes that the highest and best use of its 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. The Company’s present activities are geared towards developing its assets in ways that meet growing long-term demand for access to sustainable water supplies
and agricultural products.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Consolidated Financial Statements of the
Company have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business.
The Company incurred losses of $29.5 million and
$26.3 million for the years ended December 31, 2019 and 2018, respectively. The Company had working capital of $11.3 million at December 31, 2019 and used cash in operations of $13.7 million for the year ended December 31, 2019. Cash requirements
during the year ended December 31, 2019 primarily reflect certain administrative costs related to the Company’s water project development efforts. Currently, the Company’s sole focus is the development of its land and water assets.
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”). 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, “Subsequent Events”).
In May 2017, the Company entered into a new $60
million credit agreement (“Credit Agreement”) with funds affiliated with Apollo Global Management, LLC (“Apollo”) that replaced and refinanced its then existing $45 million senior secured mortgage debt (“Prior Senior Secured Debt”) and provided $15
million of new senior debt to fund immediate construction related expenditures (“Senior Secured Debt”). The Company’s Senior Secured Debt and its convertible notes contain representations, warranties and covenants that are typical for agreements of
this type, including restrictions that would limit the Company’s 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 the Company’s 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 the Company’s operating and financial condition as it existed at the time the agreements were executed. At December 31, 2019, the Company was in compliance with its debt
covenants. Additionally, the Company entered into an agreement with Apollo that allows the Company to extend the maturity of the Apollo debt for an additional year from its current maturity of May 2021 to May 2022 at the Company’s option (see Note
14, “Subsequent Events”).
As of December 31, 2019, the Company had
principal and interest payments aggregating approximately $65.5 million coming due in March 2020 related to its 7.00% Convertible Senior Notes (“Convertible Senior Notes”). These Convertible Senior Notes were either converted into common stock
pursuant to the terms of the existing Indenture or exchanged for a new Preferred Stock (see Note 14, “Subsequent Events”). The Company’s acquisition of a 124-mile extension of its’ Northern Pipeline will require a $19 million payment within 180 days
upon completion of certain conditions precedent under the purchase agreement with EPNG. If the acquisition of the 124-mile segment is not completed, then the Company’s Northern Pipeline opportunities will be limited to the 96-mile segment it already
owns. The Company may meet its debt and working capital requirements through a variety of means, including extension, refinancing, equity placements, the sale or other disposition of assets, or reductions in operating costs.
Limitations on the Company’s liquidity and
ability to raise capital may adversely affect it. Sufficient liquidity is critical to meet the Company’s resource development activities. Although the Company currently expects its sources of capital to be sufficient to meet its near-term liquidity
needs, there can be no assurance that its liquidity requirements will continue to be satisfied. If the Company cannot raise needed funds, it might be forced to make substantial reductions in its operating expenses, which could adversely affect its
ability to implement its current business plan and ultimately impact its viability as a company.
Principles of Consolidation
The consolidated financial statements include
the accounts of Cadiz Inc. and all subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. We apply the equity method of accounting for investments in which we have significant influence but not a
controlling interest.
Reclassifications
Certain amounts in the prior year’s Consolidated
Financial Statements have been reclassified to conform to the current year presentation.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in
conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management has made estimates with regard to goodwill and other long-lived assets, stock compensation and deferred tax
assets. Actual results could differ from those estimates.
Revenue Recognition
The Company recognizes rental income through its
lease with Fenner Valley Farms LLC.
Stock-Based Compensation
General and administrative expenses include $0.6
million and $0.5 million of stock-based compensation expenses in the years ended December 31, 2019 and 2018, respectively.
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. The Company is in a tax loss carryforward position and is not expected to realize a benefit from any additional compensation expense recognized under Topic 718 (see Note 7,
“Income Taxes").
Net Loss Per Common Share
Basic net loss per share is computed by dividing
the net loss by the weighted-average common shares outstanding. Options, deferred stock units, warrants, and the zero-coupon term loan convertible into or exercisable for certain shares of the Company’s common stock were not considered in the
computation of net loss per share because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 11,477,000 shares and 11,398,000
shares for the years ended December 31, 2019 and 2018, respectively.
Property, Plant, Equipment and Water Programs
Property, plant, equipment and water programs
are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally ten to forty-five years for land improvements and buildings, and five to fifteen years for machinery and equipment.
Leasehold improvements are amortized over the shorter of the term of the relevant lease agreement or the estimated useful life of the asset.
Water rights, storage and supply programs are
stated at cost. Certain costs directly attributable to the development of such programs have been capitalized by the Company. These costs, which are expected to be recovered through future revenues, consist of direct labor, drilling costs,
consulting fees for various engineering, hydrological, environmental and additional feasibility studies, and other professional and legal fees. We have not commenced depreciation of these assets as they are not yet in service. While interest on
borrowed funds is currently expensed, interest costs related to the construction of project facilities will be capitalized at the time construction of these facilities commences.
Goodwill and Other Assets
As a result of a merger in May 1988 between two
companies which eventually became known as Cadiz Inc., goodwill in the amount of $7,006,000 was recorded. Approximately $3,193,000 of this amount was amortized prior to the adoption of Accounting Standards Codification 350, “Intangibles – Goodwill
and Other” (“ASC 350”) on January 1, 2002. Since the adoption of ASC 350, there have been no goodwill impairments recorded. The Cadiz reporting unit to which $3.8 million of goodwill is allocated had a negative carrying amount on December 31, 2019
and 2018.
Deferred loan costs represent costs incurred to
obtain debt financing. Such costs are amortized over the life of the related loan using the effective interest method. At December 31, 2019, the deferred loan fees are not material.
Impairment 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 potential impairment charge 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). This quantitative assessment is performed at least annually in the fourth quarter 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.
Income Taxes
Income taxes are provided for using an asset and
liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable
enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Fair Value of Financial Instruments
Financial assets with carrying values
approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and accrued liabilities due to their short-term nature. The carrying
value of the Company’s secured debt approximates fair value, based on interest rates available to the Company for debt with similar terms. The fair value of the Company’s convertible debt exceeds its carrying value due to the increased value of its
conversion feature, which is determined using the Black-Scholes model. See Note 6, “Long-Term Debt”, for discussion of fair value of debt.
SoCal Hemp JV
On July 31, 2019, SoCal Hemp JV LLC (the “JV”)
was created by Cadiz Real Estate LLC (a fully owned subsidiary of Cadiz Inc.) and SoCal Hemp Co, LLC (a fully owned subsidiary of Glass House Farms, a division of California Cannabis Enterprises, Inc., which is an unrelated company to Cadiz Inc.)
when the two parties entered into a Limited Liability Company Agreement (“LLC Agreement”). The JV is 50% owned by Cadiz Real Estate LLC and 50% owned by SoCal Hemp Co., LLC. Pursuant to the LLC Agreement, the JV profits and losses are allocated to
the members based on their ownership share. The Company accounts for its investment in the JV using the equity method of accounting. Additionally, the LLC Agreement provides that, at the request of SoCal Hemp Co, LLC, their share of initial costs
could be funded by Cadiz in the form of a loan which would bear interest at 8% per annum (“Stage 1 Loan”). Repayment of the Stage 1 Loan would be through priority distribution from the JV. As of December 31st, 2019, the Company recorded a note
receivable in the amount of $377 thousand related to the Stage 1 Loan.
The carrying value of the investment was $729
thousand at December 31, 2019. During the year, we made contributions to the JV of $741 thousand through payment of JV expenses, capitalized $162 thousand of direct start-up costs and recorded $490 thousand of losses. In addition, $315 thousand of
contributions to the JV were recorded in accrued expenses at December 31, 2019, and are expected to be paid in the first fiscal quarter of 2020.
Supplemental Cash Flow Information
Under the terms of the Senior Secured Debt, the
Company is required to pay 25% of all future quarterly interest payments in cash. During the year ended December 31, 2019, approximately $1.37 million in interest payments on the Senior Secured Debt was paid in cash. No other payments are due on
the Senior Secured Debt or the Company’s Convertible Senior Notes prior to their maturities.
During the year ended December 31, 2019,
approximately $12.7 million in convertible notes were converted by certain of the Company’s lenders. As a result, 1,918,444 shares of common stock were issued to the lenders.
At December 31, 2019, accruals for purchases of
PP&E received was $3.2 million, and are expected to be paid in the first fiscal quarter of 2020. At December 31, 2018, this amount was immaterial.
The balance of cash, cash equivalents, and
restricted cash as shown in the condensed consolidated statements of cash flows is comprised of the following:
The restricted cash amounts included in Other
Assets primarily represent a deposit from a water project participant related to a cost-sharing agreement.
Cash payments for income taxes were $6,000 for
each of the years ended December 31, 2019 and 2018.
Recent Accounting Pronouncements
Accounting Guidance Not Yet Adopted
In August 2018, the Financial Accounting
Standards Board (“FASB”) issued an accounting standards update which modifies the disclosure requirements for fair value measurements. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those
fiscal years, with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial statements.
In August 2018, the FASB issued an accounting
standards update on a customer’s accounting for implementation costs incurred in a cloud computing arrangement. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with
early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial statements.
In June 2016, FASB issued an accounting
standards update which introduces new guidance for the accounting for credit losses on certain financial instruments. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years,
with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial statements.
In December 2019, FASB issued an accounting standards update
which reduces complexity in accounting standards by removing certain exceptions to the general principles in Topic 740. This update is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years,
with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial statements.
Accounting Guidance Adopted
In February 2016, the FASB issued ASU 2016-02,
Leases (“Topic 842”), which supersedes the existing guidance for lease accounting (“Topic 840”). The new standard requires lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The Company adopted the
provisions of Topic 842 on January 1, 2019, using the modified retrospective approach and the option presented under ASU 2018-11 to transition only active leases as of January 1, 2019, with a cumulative effect adjustment as of that date. All
comparative periods prior to January 1, 2019, retain the financial reporting and disclosure requirements of Topic 840.
The Company elected to utilize the transition
package of practical expedients permitted within the new standard, which among other things, allowed the Company to carryforward the historical lease classification. The Company made an accounting policy election that will keep leases with an
initial term of 12 months or less off the Company’s Consolidated Balance Sheets which resulted in recognizing those lease payments in the Consolidated Statements of Operations and Comprehensive Loss on a straight-line basis over the lease term. The
Company did not elect the hindsight practical expedient when determining the lease terms.
The adoption of the new standard resulted in the
recording of additional net right-of-use assets and corresponding lease liabilities of approximately $151 thousand and $100 thousand, respectively, as of January 1, 2019. The difference between the right-of-use assets and the lease liabilities was
recorded to eliminate existing accrued rent balances recorded under Topic 840. The adoption of the new standard did not impact the Company’s consolidated net earnings and had no impact on cash flows.
In June 2018, the FASB issued an accounting
standards update which simplifies the accounting for share-based payments granted to nonemployees for goods and services. This update is effective for fiscal years beginning after December 15, 2018, and for interim periods within those fiscal
years. The Company adopted this guidance on January 1, 2019, and the new standard had no impact on the Company’s condensed consolidated financial statements.
In July 2017, the FASB issued an accounting standards update
to provide new guidance for the classification analysis of certain equity-linked financial instruments, or embedded features, with down round features, as well as clarify existing disclosure requirements for equity-classified instruments. When
determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. The
Company adopted this guidance on January 1, 2019. As a result, the Company reclassified a warrant liability in the amount of $865 thousand to additional paid-in capital, as the Company’s Warrant no longer met the definition of a derivative. In
addition, during the years ended December 31, 2018 and 2017, the Company recognized annual gains of $1.5 million and $0.5 million, respectively, related to the historical remeasurement of the warrant derivative liability at fair value. Upon adoption
of this guidance as of January 1, 2019, the Company recorded $2.0 million in additional paid-in capital with a corresponding adjustment to the opening balance of accumulated deficit related to these previously recorded gains.
NOTE 3 – PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
Property, plant, equipment and water programs
consist of the following (dollars in thousands):
NOTE 4 – OTHER ASSETS
Other assets consist of the following (dollars
in thousands):
Prepaid rent primarily consists of fees incurred
to obtain the right-of-way for the Water Project. Amortization of prepaid rent was approximately $115,000 for each of the years ended December 31, 2019 and 2018.
NOTE 5 – ACCRUED LIABILITIES
At December 31, 2019 and 2018, accrued
liabilities consist of the following (dollars in thousands):
NOTE 6 – LONG-TERM DEBT
At December 31, 2019 and 2018, the carrying
amount of the Company’s outstanding debt is summarized as follows (dollars in thousands):
The carrying value of the Company’s Senior
Secured Debt approximates fair value. The fair value of the Company’s Senior Secured Debt (Level 2) is determined based on an estimation of discounted future cash flows of the debt at rates currently quoted or offered to the Company by its lenders
for similar debt instruments of comparable maturities by its lenders.
The fair value of the Company’s convertible debt
exceeds its carrying value of approximately $65.2 million, which includes accreted interest, by approximately $41.4 million due to the increased value of its conversion feature. The conversion feature’s fair value increases as the Company’s common
stock price increases. The fair value of the conversion feature (Level 3) is determined using the Black-Scholes model. Significant inputs to the model were the conversion price ($6.75), the number of shares of common stock that could be acquired
upon conversion as of December 31, 2019, the Company’s stock price as of December 31, 2019 of $11.02 and stock volatility of 32%, which was determined using our publicly-traded stock price over the last year.
Pursuant to the Company’s loan agreements, annual maturities
of long-term debt outstanding on December 31, 2019, are as follows:
Credit Agreement
On May 25, 2017 (“Closing Date”), the Company
entered into a new $60 million credit agreement with funds affiliated with Apollo Global Management, LLC (“Apollo”) that replaced and refinanced the Company’s then existing $45 million senior secured mortgage debt and provided $15 million of new
senior debt to fund immediate construction related expenditures. Further, in March 2020, the Company entered into an agreement with Apollo that allows the Company to extend the maturity of the Apollo debt for an additional year from May 2021 to May
2022 at the Company’s option (“Extension Option”) (see Note 14, “Subsequent Events”).
Interest on the Senior Secured Debt is due
quarterly on each March 31, June 30, September 30 and December 31 (each an “Interest Date”) beginning on June 30, 2017. Interest on the Senior Secured Debt will (i) accrete to the outstanding principal amount at a rate per annum equal to 6% (the
“PIK Rate”) compounded quarterly on each Interest Date and (ii) accrue on the outstanding principal amount at a rate per annum equal to 2% (the “Cash Rate”). The Company, in its discretion, may make any quarterly interest payment in cash on the
applicable Interest Date at the PIK Rate, in lieu of accretion of such interest to the principal amount at the PIK Rate.
The Accreted Loan Value plus the Applicable
Prepayment Premium will be due and payable on the Maturity Date. “Accreted Loan Value” means, as of the date of determination, the outstanding principal amount of the applicable Loan, plus all accreted interest as of the calendar day immediately
prior to such date of determination. “Applicable Prepayment Premium” means with respect to any repayment of the Senior Secured Debt (a) the Accreted Loan Value of the Senior Secured Debt being prepaid or repaid, as applicable, multiplied by (b)
3.00%. The Applicable Prepayment Premium was further modified in connection with the Extension Option described above (see Note 14, “Subsequent Events”).
The Company paid Apollo an upfront fee of 2.00%
of the aggregate principal amount of the Senior Secured Debt funded on the Closing Date. This amount was recorded as additional debt discount and is being amortized over the remaining term of the loan.
In conjunction with the closing of the Senior Secured Debt in
May 2017, the Company issued to its lender a warrant to purchase an aggregate 362,500 shares of its common stock (“Warrant”). The warrant has a five-year term and had an initial exercise price of $14.94 per share, subject to adjustment. The warrant
exercise price was further modified in connection with the Extension Option described above (see Note 14, “Subsequent Events”).
The Company recorded a debt discount at the time
of the closing of the Senior Secured Debt in the amount of $2.9 million which was the fair value of the Warrant at the time it was issued. The debt discount was amortized through December 2019.
On January 1, 2019, the Company adopted ASU
2017-11. As a result, the Company reclassified a warrant liability in the amount of $865 thousand to additional paid-in capital, as the Company’s Warrant no longer met the definition of a derivative. In addition, during the years ended December 31,
2018 and 2017, the Company recognized annual gains of $1.5 million and $0.5 million, respectively, related to the historical remeasurement of the warrant derivative liability at fair value. Upon adoption of this guidance as of January 1, 2019, the
Company recorded $2.0 million in additional paid-in capital with a corresponding adjustment to the opening balance of accumulated deficit related to these previously recorded gains.
During 2019, the Company sold shares of common
stock under the November 2018 ATM at a per-share price less than the Warrant’s initial exercise price, which triggered a down-round, reset provision and resulted in an adjusted exercise price of $14.54 as of December 31, 2019. In addition, the
Company recorded an adjustment of $30 thousand in additional paid-in capital related to the increase in the value of the effect of the down-round feature as of December 31, 2019.
Convertible Notes
The Convertible Notes accrue interest at 7.00%
per year, with no principal or interest payments due prior to maturity on March 5, 2020. The Convertible Senior Notes were either converted into common stock pursuant to the terms of the existing Indenture or exchanged for a new Preferred stock
prior to their maturity in March 2020 (see Note 14, “Subsequent Events”).
The Company’s Senior Secured Debt and its
Convertible Senior Notes contain representations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit the Company’s 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 the Company’s 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 the Company’s operating and financial condition as it existed at the
time the agreements were executed. At December 31, 2019, the Company was in compliance with its debt covenants.
NOTE 7 – INCOME TAXES
Deferred taxes are recorded based upon
differences between the financial statement and tax bases of assets and liabilities and available carryforwards. Temporary differences and carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of December
31, 2019 and 2018 are as follows (dollars in thousands):
The valuation allowance increased $4,148,000 and $5,563,000 in
2019 and 2018, respectively. The change in deferred tax assets resulted from current year net operating losses and changes to future tax deductions resulting from expiring net operating losses, terms of stock compensation plans, fixed assets, and
accrued liabilities. One of the tax law changes in the 2017 Tax Reform Act was to reduce the effective federal corporate tax rate to 21%, effective January 1, 2018.
As of December 31, 2019, the Company had net
operating loss (NOL) carryforwards of approximately $322 million for federal income tax purposes and $213 million for California income tax purposes. Such carryforwards expire in varying amounts through the year 2038. For federal losses arising in
tax years ending after December 31, 2017, the NOL carryforwards are allowed indefinitely. Use of the carryforward amounts is subject to an annual limitation as a result of a previous ownership change.
As of December 31, 2019, the Company possessed
unrecognized tax benefits totaling approximately $1.5 million. None of these, if recognized, would affect the Company’s effective tax rate because the Company has recorded a full valuation allowance against these tax assets.
The Company’s tax years 2016 through 2019 remain
subject to examination by the Internal Revenue Service, and tax years 2015 through 2019 remain subject to examination by California tax jurisdictions. In addition, the Company’s loss carryforward amounts are generally subject to examination and
adjustment for a period of three years for federal tax purposes and four years for California purposes, beginning when such carryovers are utilized to reduce taxes in a future tax year.
A reconciliation of the income tax benefit to
the statutory federal income tax rate is as follows (dollars in thousands):
Because it is more likely than not that the
Company will not realize its net deferred tax assets, it has recorded a full valuation allowance against these assets. Accordingly, no deferred tax asset has been recorded in the accompanying balance sheet.
NOTE 8 – COMMON STOCK
The Company is authorized to issue 70 million
shares at a $0.01 par value. As of December 31, 2019, and December 31, 2018, the Company had 28,480,567 and 24,654,911 shares issued and outstanding, respectively.
In January 2013, the Company revised its then
existing agreement with the law firm of Brownstein Hyatt Farber Schreck LLP (“Brownstein”), a related party. Under this agreement, the Company is to issue up to a total of 400,000 shares of the Company’s common stock, with 100,000 shares earned upon
the achievement of each of four enumerated milestones as follows:
All shares earned upon
achievement of any of the four milestones will be payable three years from the date earned.
Additionally, the Company
incurred direct expenses to Brownstein of approximately $2.3 million and $1.9 million in 2019 and 2018, respectively.
NOTE 9 – STOCK-BASED COMPENSATION PLANS AND WARRANTS
The Company has issued options and has granted
stock awards pursuant to its 2009 Equity Incentive Plan, 2014 Equity Incentive Plan and 2019 Equity Incentive Plan, as described below.
2009 Equity Incentive Plan
The 2009 Equity Incentive Plan was approved by
stockholders at the 2009 Annual Meeting. The plan provides for the grant and issuance of up to 850,000 shares and options to the Company’s employees and consultants. The plan became effective when the Company filed a registration statement on Form
S-8 on December 18, 2009. All options issued under the 2009 Equity Incentive Plan have a ten-year term with vesting periods ranging from issuance date to 24 months.
2014 Equity Incentive Plan
The 2014 Equity Incentive Plan was approved by
stockholders at the June 10, 2014 Annual Meeting. The plan provides for the grant and issuance of up to 675,000 shares and options to the Company’s employees, directors and consultants. Upon approval of the 2014 Equity Incentive Plan, all shares of
common stock that remained available for award under the 2009 Equity Incentive Plan were cancelled.
2019 Equity Incentive Plan
The 2019 Equity Incentive Plan was approved by
stockholders at the July 10, 2019 Annual Meeting. The plan provides for the grant and issuance of up to 1,200,000 shares and options to the Company’s employees, directors and consultants. Upon approval of the 2019 Equity Incentive Plan, all shares
of common stock that remained available for award under the 2014 Equity Incentive Plan were cancelled.
Under the 2019 Equity Incentive Plan, each
outside director receives $50,000 of cash compensation and receives a deferred stock award consisting of shares of the Company’s common stock with a value equal to $25,000 on June 30 of each year. The award accrues on a quarterly basis, with $12,500
of cash compensation and $6,250 of stock earned for each fiscal quarter in which a director serves. The deferred stock award vests automatically on the January 31 that first follows the award date.
All options that have been issued under the
above plans have been issued to officers, employees and consultants of the Company. In total, options to purchase 492,500 shares were unexercised and outstanding on December 31, 2019 under the equity incentive plans.
For consultants of the Company, the fair value of each option
granted under the 2009 Equity Incentive Plan is estimated at each reporting period using the Black-Scholes option pricing model and recorded as a liability until the award is settled.
For officers and employees of the Company, the
fair value of each option granted under the plans was estimated on the date of grant using the Black-Scholes option pricing model.
The risk-free interest rate is assumed to be
equal to the yield of a U.S. Treasury bond of comparable maturity, as published in the Federal Reserve Statistical Release for the relevant date. The expected life estimate is based on an analysis of the employees receiving option grants and the
expected behavior of each employee. The expected volatility is derived from an analysis of the historical volatility of the trading price per share of the Company’s common stock on the NASDAQ Global Market. The Company does not anticipate that it
will pay dividends to common stockholders in the future.
The Company recognized no stock-option-related
compensation costs for the years ended December 31, 2019 and 2018 relating to these options. No stock options were exercised during 2019.
No options were granted in 2019 and 2018. A
summary of option activity under the plans as of December 31, 2019, and changes during the year ended December 31, 2018 are presented below:
Stock Awards to Directors, Officers, Consultants and Employees
The Company has granted stock awards pursuant to
its 2009 Equity Incentive Plan, 2014 Equity Incentive Plan and 2019 Equity Incentive Plan.
Of the total 850,000 shares reserved under the
2009 Equity Incentive Plan, 297,265 shares were issued as share grants and 507,500 were issued as options. Upon approval of the 2014 Equity Incentive Plan in June 2014, 45,235 shares remaining available for award under the 2009 Equity Incentive Plan
were cancelled.
Of the total 675,000 shares reserved under the
2014 Equity Incentive Plan, 674,987 shares have been awarded to the Company’s directors, consultants and employees. Of the 674,987 shares awarded, 15,312 shares were awarded for service during the plan year ended June 30, 2019, became effective on
that date and vested on January 31, 2020. Upon approval of the 2019 Equity Incentive Plan in July 2019, 13 shares remaining available for award under the 2014 Equity Incentive Plan were cancelled.
Of the total 1,200,000 shares reserved under the
2019 Equity Incentive Plan, 15,909 shares have been awarded to the Company directors and consultants as of December 31, 2019.
The accompanying consolidated statements of
operations and comprehensive loss include approximately $562,000 and $473,000 of stock-based compensation expense related to stock awards in the years ended December 31, 2019 and 2018, respectively.
A summary of stock awards activity under the
plans during the years ended December 31, 2018 and 2019 is presented below:
NOTE 10 – SEGMENT INFORMATION
The primary business of the Company is to
acquire and develop land and water resources. As a result, the Company’s financial results are reported in a single segment.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
In the normal course of its agricultural
operations, the Company handles, stores, transports and dispenses products identified as hazardous materials. Regulatory agencies periodically conduct inspections and, currently, there are no pending claims with respect to hazardous materials.
Pursuant to cost-sharing agreements that have been
entered into by participants in the Company’s Water Project, $750,000 in funds have been received in order to offset costs incurred in the environmental analysis of the Water Project. These funds may either be reimbursed or credited to participants
participation in the Water Project and, accordingly, are fully reflected as deferred revenue as of December 31, 2019 and December 31, 2018.
There are no material legal proceedings pending
to which the Company is a party or of which any of the Company’s property is the subject.
NOTE 12 – LEASES
The Company has operating leases for corporate
offices, vehicles and office equipment. The Company’s leases have remaining lease terms of 8 months to 20 months, some of which include options to extend or terminate the lease. However, the Company is not reasonably certain to exercise options to
renew or terminate, and therefore renewal and termination options are not considered in the lease term or the right-of-use asset and lease liability balances. The Company’s current lease arrangements expire in 2021. The Company does not have any
finance leases.
The Company’s lease population does not include
any residual value guarantees, and therefore none were considered in the calculation of the lease balances. The Company has leases with variable payments, most commonly in the form of common area maintenance charges which are based on actual costs
incurred. These variable payments were excluded from the right-of-use asset and lease liability balances since they are not fixed or in-substance fixed payments.
The Company elected to utilize the transition
package of practical expedients permitted within the new standard, including the practical expedient not to reassess existing land easements, which among other things, allows the Company to carryforward the historical lease classification. The
Company has lease agreements with lease and non-lease components and has elected the practical expedient to account for lease and non-lease components as a single lease component for real-estate class of leases only. For leases with terms greater
than 12 months, the Company records the related asset and lease liability at the present value of lease payments over the lease term. Leases with an initial term of 12 months or less with purchase options or extension options that are not reasonably
certain to be exercised are not recorded on the Consolidated Balance Sheets; the Company recognizes lease expense for these leases on a straight-line basis over the term of the lease.
Lease balances. Amounts recognized in the
accompanying consolidated balance sheet as of December 31, 2019 are as follows (in thousands):
Lease cost. The Company’s operating lease cost
for the year ended December 31, 2019 was $97 thousand.
Lease commitments. The table below summarizes
the Company’s scheduled future minimum lease payments under operating, recorded on the balance sheet as of December 31, 2019 (in thousands):
Most of our lease agreements do not provide a
readily determinable implicit rate nor is it available to us from our lessors. Instead, we estimate the Company’s incremental borrowing rate based on information available at either the implementation date of Topic 842 or at lease commencement for
leases entered into thereafter in order to discount lease payments to present value. The table below presents additional information related to our leases as of December 31, 2019:
From a lessor standpoint, in February 2016, the
Company entered into a lease agreement with Fenner Valley Farms LLC (“FVF”) (the “lessee”), a subsidiary of Water Asset Management LLC, a related party, pursuant to which FVF is leasing, for a 99-year term, 2,100 acres owned by Cadiz in San
Bernardino County, California, to be used to plant, grow and harvest agricultural crops (“FVF Lease Agreement”). As consideration for the lease, FVF paid the Company a one-time payment of $12.0 million upon closing.
Under the FVF Lease Agreement, the Company has a repurchase
option to terminate the lease at any time during the twenty (20) year period following the effective date of the lease (“Termination Option Period”) upon (1) repayment of the one-time $12 million lease payment plus a ten percent (10%) compounded annual
return (provided that the amount of such payment shall be not less than $14,400,000), (2) reimbursement of water-related infrastructure on the leased property plus 8% per annum as well as the actual costs of any farming-related infrastructure installed
on the leased property and (3) reimbursement of certain pipeline-related development expenses, working in coordination with Cadiz, not to exceed $3,000,000 (such payments, the “ Termination Payments “). If (x) Cadiz does not exercise its termination
right within such 20-year period or (y) the Agent under Cadiz’s credit agreement declares an event of default under Cadiz’s Senior Secured Debt and accelerates the indebtedness due and owing thereunder by Cadiz (or such indebtedness automatically
accelerates under the terms of Cadiz’s Senior Secured Debt), then the lessee may purchase the leased property for $1.00. The Company has recorded the one-time payment of $12 million, before legal fees, paid by FVF as a long-term lease liability. The
Company’s consolidated statement of operations reflects a net charge equal to a 10% finance charge compounding annually over the 20-year Termination Option Period. The net charge to the consolidated statement of operations reflects (1) rental income
associated with the use of the land by FVF over the 20-year termination option period and (2) interest expense at a market rate reflective of a 20-year secured loan transaction. As a result of this transaction, the Company incurred approximately $490
thousand of legal fees which was recorded as a debt discount and is being amortized over the 20-year Termination Option Period.
The Company expects to receive rental income of
$420 thousand annually over the next five years related to the FVF Lease Agreement.
On July 31, 2019, the JV entered into a lease
agreement (the “Lease Agreement”) with
the Company whereby the JV will cultivate industrial hemp on up to 9,600 acres at the Company’s agricultural property in eastern San Bernardino County, California (“Cadiz Ranch”). Under the terms of the Agreement, the JV initially leased 1,280
acres at the Cadiz Ranch and holds options to lease up to 8,320 additional acres by 2022. The Agreement has an initial term of five years and the JV has the option to extend the term for three successive periods of five years each. In consideration
for the lease arrangement, the JV will provide the Company an annual rental payment equal to $500 per acre of leased property, subject to periodic CPI adjustment. The lease commencement date is contingent on the Company performing certain activities
to bring the property to the specifications required by the JV. We expect the lease commencement date to be in the first quarter of 2020.
NOTE 13 – FAIR VALUE MEASUREMENTS
The following table presents information about
warrant derivative liabilities that are measured at fair value on a recurring basis as of December 31, 2018 and indicate the fair value hierarchy of the valuation techniques we utilized to determine such fair value. In general, fair values determined
by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair
values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
The following table presents a reconciliation of
Level 3 activity for the years ended December 31, 2018 and 2019:
NOTE 14 – SUBSEQUENT EVENTS
On March 5, 2020, the Company entered into
Conversion and Exchange Agreements (the “Exchange Agreements”) with certain holders (the “Holders”) of the Company’s 7% Convertible Senior Notes due 2020 (the “Convertible Notes”) having an aggregate original principal amount of $27.4 million.
Pursuant to the terms of the Exchange Agreements, the Holders exchanged an aggregate amount payable of $27.3 million under the Convertible Notes for an aggregate of 10,000 shares of Series 1 Preferred Stock and the Holders converted the remaining
aggregate amount payable of $17.5 million of Convertible Notes into 2.6 million shares of common stock in accordance with the terms of the existing Indenture. Following the transactions, all of the Convertible Notes held by the Holders, as well as
all the remaining Convertible Notes held by others that were converted in accordance with the existing Indenture at maturity have been satisfied in full and cancelled.
On March 5, 2020, the Company entered into an
agreement with its senior lender, Apollo Global Management LLC (“Apollo”), in which the Company acquired the option to extend the current May 2021 maturity date of its loan to May 2022. The fee to acquire this option included the repricing of
362,500 warrants held by Apollo to $6.75 and an increase in the applicable prepayment premium of up to 7% of the accreted value of the loan.
During the first quarter of fiscal year 2020,
the Company issued 408,992 shares of common stock in its November 2018 ATM Offering for gross proceeds of $4.0 million. As of March 6, 2020, the Company completed its November 2018 At the Market Offering of up to $25 million.
NOTE 15 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)