CADIZ INC - Quarter Report: 2020 September (Form 10-Q)

Cadiz Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

Cadiz Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

Cadiz Inc.

Condensed Consolidated Balance Sheets (Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

Cadiz Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)  

See accompanying notes to the unaudited condensed consolidated financial statements.

Cadiz Inc.

Condensed Consolidated Statements of Stockholders’ Deficit (Unaudited)

For the three and nine months ended September 30, 2020 ($ in thousands, except share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

Cadiz Inc.

Condensed Consolidated Statements of Stockholders’ Deficit (Unaudited)

For the three and nine months ended September 30, 2019 ($ in thousands, except share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

NOTE 1 – BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements and notes have been prepared by Cadiz Inc., also referred to as “Cadiz” or “the Company”, without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The foregoing Condensed Consolidated Financial Statements include the accounts of the Company and contain all adjustments, consisting only of normal recurring adjustments, which management considers necessary for a fair statement of the Company’s financial position, the results of its operations and its cash flows for the periods presented and have been prepared in accordance with generally accepted accounting principles.

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of results for the entire fiscal year ending December 31, 2020.

Liquidity

The Condensed Consolidated Financial Statements of the Company have been prepared using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal course of business. The Company incurred losses of $29.8 million for the nine months ended September 30, 2020, compared to $22.2 million for the nine months ended September 30, 2019. $12.4 million of this higher loss was a non-cash charge recorded in the first quarter, reflecting the excess of the fair value of the new preferred stock issued over the historical book value of the related convertible debt retired pursuant to Conversion and Exchange Agreements (see Note 2 – “Long-Term Debt”). The Company had working capital of $5.1 million at September 30, 2020 and used cash in its operations of $10.30 million for the nine months ended September 30, 2020.

Cash requirements during the nine months ended September 30, 2020 primarily reflect certain administrative costs related to the Company’s water project development efforts and the further development of its land and agricultural assets, including its 50% equity investment in SoCal Hemp JV LLC.

In July 2020, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $30 million from time to time in an “at-the-market” offering (the “July 2020 ATM Offering”).  

In November 2018, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $25 million from time to time in an “at-the-market” offering (the “November 2018 ATM Offering”). The Company completed the offering during March 2020, having issued a total of 2,369,170 shares of common stock in the November 2018 ATM Offering for gross proceeds of $25 million and aggregate net proceeds of approximately $24.2 million.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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.   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 contractual maturity of May 2021 to May 2022 at the Company’s option. (see Note 2 – “Long-Term Debt”). At September 30, 2020, the Company was in compliance with its debt covenants.

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.

The Company’s acquisition of a 124-mile extension of its Northern Pipeline will require a $19 million payment upon completion of certain conditions precedent under the purchase agreement with El Paso Natural Gas Company (“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 its viability as a company.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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 nine months ended September 30, 2020, approximately $1.1 million in interest payments on the corporate secured debt was paid in cash. No other principal payments are due on the Senior Secured Debt or the Company’s convertible notes prior to their maturities.

During the nine months ended September 30, 2020, approximately $38.9 million in convertible notes were converted into common stock by certain of the Company’s lenders. As a result, 5,766,337 shares of common stock were issued to the lenders. This conversion activity represents a non-cash financing activity. Pursuant to the terms of Conversion and Exchange Agreements, as discussed above, approximately $27.3 million of Convertible Notes were exchanged for an aggregate of 10,000 shares of Series 1 Preferred Stock.

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.

Recent Accounting Pronouncements

Accounting Guidance Not Yet Adopted 

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.

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, 2023, 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.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

Accounting Guidance 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 adopted this guidance on January 1, 2020. The adoption of this update modified our disclosures, but had no impact on the Company’s condensed consolidated financial statements (see Note 7 – “Fair Value Measurements”).

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 adopted this guidance on January 1, 2020, and the new standard had no impact on the Company’s condensed consolidated financial statements.

NOTE 2 – LONG-TERM DEBT

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.

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. Each preferred share is convertible at any time at the option of the Holder into 405.05 shares of Common Stock. 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. Pursuant to applicable guidance, the Series 1 Preferred Stock was recorded in Stockholders’ Equity at fair value, which was determined using an option pricing model. A loss of $12.4 million was recorded in the Condensed Consolidated Statement of Operations and Comprehensive Income, representing the excess of the fair value of the Series 1 Preferred Stock over the historical book value of the related Convertible Notes.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

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 (“Extension Option”). The fee to acquire the Extension Option included the repricing of 362,500 warrants held by Apollo to $6.75 and the extension of their expiration date from May 2022 to May 2025 (“Warrant Modification”), together with an increase in the applicable prepayment premium of up to 7% of the accreted value of the loan. Additionally, if the Company exercises the Extension Option, the exercise price of the warrants automatically decreases to $0.01 per share and the expiration date of the warrants will automatically be extended by an additional 12 months.

At the time of the Warrant Modification, the Company recorded a warrant liability in the amount of $2.0 million, which was the carrying value of the warrant prior to modification in the amount of $0.9 million combined with the increase in fair value of the warrant in the amount of $1.1 million. This increase in fair value of the warrant at the time of the Warrant Modification was recorded to debt issuance costs and will be amortized over the remaining life of the Senior Secured Debt. The fair value of the warrant liability is remeasured each reporting period using an option pricing model, and the change in fair value is recorded as an adjustment to the warrant liability with the unrealized gains or losses reflected in interest expense.

Total unrealized gains of $259 thousand for warrant liabilities accounted for as derivatives have been recorded in interest expense in the nine months ended September 30, 2020.     

NOTE 3– STOCK-BASED COMPENSATION PLANS

The Company has outstanding options and stock awards pursuant to its 2009 Equity Incentive Plan, 2014 Equity Incentive Plan and 2019 Equity Incentive Plan.

Stock Options to Directors, Officers and Consultants

In total, options to purchase 115,000 shares were unexercised and outstanding on September 30, 2020 under these equity incentive plans. The Company recognized no stock option related compensation costs in each of the nine months ended September 30, 2020 and 2019. Additionally, no options were exercised during the nine months ended September 30, 2020.

Stock Awards to Directors, Officers, and Consultants

The Company has granted stock awards pursuant to its 2014 Equity Incentive Plan and 2019 Equity Incentive Plan.

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. These shares became effective on that date and vested on January 31, 2020. Upon approval of the 2019 Equity Incentive Plan in July 2019, the 13 shares remaining available for award under the 2014 Equity Incentive Plan were cancelled.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

Of the total 1,200,000 shares reserved under the 2019 Equity Incentive Plan, 265,801 shares have been awarded to the Company directors, employees and consultants as of September 30, 2020. Of the 265,801 shares awarded, 19,279 shares were awarded to the Company’s directors for services performed during the plan year ended June 30, 2020. These shares will vest and be issued on January 31, 2021.

The accompanying consolidated statements of operations and comprehensive loss include approximately $1,824,000 and $410,000 of stock-based compensation expense related to stock awards in the nine months ended September 30, 2020 and 2019, respectively.

NOTE 4– INCOME TAXES

As of September 30, 2020, the Company had net operating loss (“NOL”) carryforwards of approximately $338 million for federal income tax purposes and $229 million for California state income tax purposes.  Such carryforwards expire in varying amounts through the year 2040. 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 ownership changes.

As of September 30, 2020, 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 assets.

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 reflected in the accompanying condensed consolidated balance sheet.

NOTE 5 – 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, convertible debt, convertible preferred shares and warrants 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 4,525,000 and 11,288,000 for the three months ended September 30, 2020 and 2019, respectively; and 3,528,000 and 11,469,000 for the nine months ended September 30, 2020 and 2019, respectively.

NOTE 6– LEASES

The Company has operating leases for corporate offices, vehicles and office equipment. The Company’s leases have remaining lease terms of 6 months to 14 months as of September 30, 2020, 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 from 2020 through 2021. The Company does not have any finance leases.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

From a lessor standpoint, in February 2016, the Company entered into a lease agreement with Fenner Valley Farms LLC (“FVF”) (the “lessee”), 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. 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 Lease Agreement was amended in March 2020 to reduce the initially leased acreage to 242 and extend the options to lease the remaining acreage until 2023. 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 commenced on March 1, 2020 when the Company completed certain activities to bring the property to the specification required by the JV. Assuming no further options are exercised, the Company expects to receive rental income of approximately $121 thousand annually over the next five years related to the JV Lease Agreement.

NOTE 7– FAIR VALUE MEASUREMENTS

The following table presents information about warrant derivative liabilities, and indicates 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. We consider a security that trades at least weekly to have an active market. 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.  

On March 5, 2020, the Company entered into an amendment to a warrant agreement with its senior lender which, among other provisions, repriced 362,500 warrants held by the senior lender to $6.75 (the “Warrant”) (see Note 2 – “Long-Term Debt”, above). As a result, the Company reclassified the carrying value of the Warrant prior to the modification from additional paid-in capital in the amount of $865 thousand to a warrant liability, as the Warrant met the definition of a derivative. In addition, the Company recorded debt issuance costs in the amount of $1.1 million, which was the increase in fair value of the warrant at the time of the modification. The fair value of the warrant liability is remeasured each reporting period using an option pricing model, and the change in fair value is recorded as an adjustment to the warrant liability with the unrealized gains or losses reflect in interest expense. The Company recognized an unrealized gain of $259 thousand related to the remeasurement of the warrant derivative liability at fair value during the nine month ended September 30, 2020.

Cadiz Inc.

Notes to the Unaudited Condensed Consolidated Financial Statements

The following table presents a reconciliation of Level 3 activity for the nine month period ended September 30, 2020:

Cadiz Inc.

ITEM 2. 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” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019. 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.

Overview

We are a natural resources development company dedicated to creating 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.  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.

Our 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 our land and water assets, we also own pipeline and well infrastructure that is able to irrigate existing agriculture and convey water to and from other communities and agricultural ventures that may be short of supply and/or storage.

Our main objective is to realize the highest and best use of our land, water and infrastructure assets in an environmentally responsible way. We believe that the highest and best use of our 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. Our present activities are focused on developing our assets in ways that meet growing long-term demand for access to sustainable water supplies and agricultural products.

Upon our founding in 1983, we began an agricultural development on a portion of our primary property in Cadiz, California, which is a 34,500-acre property at the base of the Fenner and Orange Blossom Wash watersheds in eastern San Bernardino County (the “Cadiz/Fenner Property”). These watersheds span an area of more than 1,300 square miles and have an estimated 17 to 34 million acre-feet of fresh, high-quality groundwater in storage – an amount comparable to Lake Mead, America’s largest surface reservoir.

Cadiz Inc.

We have sustainably farmed portions of the Cadiz/Fenner Property since the late 1980s in accordance with permits from the County of San Bernardino, the public agency responsible for groundwater use at the Cadiz/Fenner Property. The permits authorize the development of up to 9,600 acres of the Cadiz/Fenner Property for farming and the associated use of underlying groundwater for irrigation.

The Cadiz/Fenner Property is well-suited for various permanent and seasonal crops, and we have successfully grown citrus, organic table grapes and raisins, and seasonal vegetables such as melons, squash and asparagus. Today, we are engaged in agricultural joint ventures at the Cadiz/Fenner Property and are the largest private agricultural operation in San Bernardino County. Presently, the property has 2,100 acres leased to third parties for cultivation of citrus and 242 acres leased to our joint venture, SoCal Hemp JV LLC, for the cultivation of industrial hemp (see “Agricultural Development”, below).

In addition to our agricultural ventures, we are presently developing the Cadiz Valley Water Conservation, Recovery and Storage Project (“Water Project” or “Project”), which is approved to capture and conserve millions of acre-feet of native groundwater currently being lost to evaporation from the aquifer system beneath our Cadiz/Fenner Property, and provide 50,000 acre-feet of water per year, enough water for 400,000 people, to water providers throughout Southern California (see “Water Resource Development”, below). A second phase of the Water Project would offer storage in the aquifer system for up to one million acre-feet of imported water. Following a multi-year California Environmental Quality Act (“CEQA”) review and permitting process, the Water Project received permits that allow the capture and conservation of 2.5 million acre-feet of groundwater over 50 years in accordance with the terms of a groundwater management plan approved by San Bernardino County.  We believe that the ultimate implementation of the Cadiz Water Project would provide a significant return on our investment and future cash flow.

By making new water supply and storage available in Southern California, we believe we can be part of the solution to the State’s persistent water challenge. Available water supply in Southern California is constrained every year by regulatory restrictions on each of the region’s three main water sources: (1) the CRA; (2) the State Water Project, which provides water supplies from Northern California to the central and southern parts of the state; and (3) the Los Angeles Aqueduct, which delivers water from the eastern Sierra Nevada mountains to Los Angeles. Southern California’s water providers and farmers rely on imports from these systems to meet demand, but deliveries from all three into the region are consistently below capacity, even in wet years.

Further, the availability of supplies in California differs greatly from year to year due to natural hydrological variability. Over the last decade, California experienced a historic drought featuring record-low winter precipitation, followed by abundant wet years and also average years.  While Water Year 2019 (October 1, 2018 - September 30, 2019) was a wet year, with snowpack and rainfall well above average through the summer of 2019, Water Year 2020 finished relatively dry.  With a La Nina hydrological condition forecast by experts for this winder, Water Year 2021 is expected to also be dry and could accelerate drought conditions in parts of the state. The rapid swings between wet and dry years challenges California’s traditional supply system and supports the need for reliable storage and access to local supplies.

Cadiz Inc.

Given the variety of challenges and limitations presented by the State’s existing infrastructure, Southern California water providers and farmers are presently pursuing investments in storage, supply and infrastructure to meet long-term demand from sustainable water and agriculture sources. Cadiz has a record of sustainable agricultural development and groundwater management which supports our continued integration into California’s water and agriculture portfolio.

Our current working capital requirements relate largely to the final development activities associated with the Water Project and those activities consistent with the Water Project related to further development of our land and agricultural assets, including our 50% equity investment in SoCal Hemp JV LLC. While we continue to believe that the ultimate implementation of the Water Project will provide a significant source of future cash flow, we also believe there is substantial value in further expansion of our underlying agricultural assets and in our current agricultural ventures and lease arrangements.

We also continue to explore additional sustainable beneficial uses of our land and water resource assets, including the marketing of our approved desert tortoise land conservation bank, which is located on our properties outside the Water Project area, and other long-term legacy uses of our properties, such as land stewardship and conservation programs.

Water Resource Development

The Water Project is designed to capture and conserve renewable native groundwater currently being lost to evaporation from the aquifer system underlying our Cadiz/Fenner Property and provide a new reliable water supply for approximately 400,000 people in Southern California. In this first phase, Phase I, the total quantity of groundwater to be recovered and conveyed to Water Project participants will not exceed a long-term annual average of 50,000 acre-feet per year for 50 years. The Water Project also offers participants in Phase I the ability to carry-over their annual supply and store it in the groundwater basin from year to year. Up to 150,000 acre-feet can be stored as part of Phase I. A second phase of the Water Project, Phase II, will offer up to one million acre-feet of storage capacity that can be used to hold water supplies imported to the project area.

Water Project facilities required for Phase I primarily include, among other things:

Cadiz Inc.

If an imported water storage component of the Project is ultimately implemented in Phase II, the following additional facilities would be required, among other things:

Phase I

Phase I has been fully reviewed and permitted in accordance with the California Environmental Quality Act (“CEQA”), including a judicially validated Final Environmental Impact Report ("FEIR") that was sustained by the California Court of Appeal in 2016. The Project was also separately reviewed and approved by the County of San Bernardino in accordance with its local ordinances regulating groundwater. The County's Groundwater Monitoring, Management and Mitigation Plan for the Project was also judicially validated in 2016.  Under these vested permits, the Project presently is authorized to capture and conserve an average of 50,000 acre-feet of water per year for 50 years to meet municipal and industrial (M&I) water needs in Southern California. The permits also authorize up to 150,000 acre-feet of carry-over groundwater storage, allowing water agencies to hold conserved water in the aquifer system for future dry years. In addition, the Project has secured authorizations to construct a 43-mile water conveyance pipeline ("Southern Pipeline") within the Arizona & California Railroad's right-of-way, which extends from Cadiz to the CRA in Rice, California. 

Construction of the Water Project facilities that would allow for conservation, carry-over storage and delivery of groundwater to public water providers is expected to cost approximately $310 - $400 million (depending on the diameter of the pipe used) and will require capital financing that we expect will be secured by definitive Purchase and Sale Agreements with Project participants and the new facility assets.

Prior to construction, the Water Project must (1) finalize contracts with Project participating agencies, (2) finalize arrangements and secure necessary permits and approvals to transport water conserved at Cadiz via water transportation infrastructure and into each participant’s service area, and (3) complete final design and permitting. Below is a discussion of present activities to advance these objectives.

(1) Contracts with Public Water Agencies or Private Water Utilities

We have executed Letters of Intent (“LOIs”), option agreements and purchase agreements, or contracts (collectively, “Agreements”) with public water agencies and private water utilities in California during the Project’s development. These participating agencies serve more than one million customers in cities throughout California’s San Bernardino, Riverside, Los Angeles, Orange, Imperial and Ventura Counties. Twenty percent of Water Project supplies have been reserved for San Bernardino County-based agencies.

Santa Margarita Water District (“SMWD”), Orange County’s second largest water provider, was the first participant to convert its option agreement and adopt resolutions approving a Water Purchase and Sale Agreement for 5,000 acre-feet of water. The structure of the SMWD purchase agreement calls for an annually adjusted water supply payment, plus a pro rata portion of the capital recovery charge and operating and maintenance costs. The capital recovery charge is calculated by amortizing the total capital investment by the Company over a 30-year term.

Cadiz Inc.

Agreements entered into prior to the beginning of the CEQA review process provide to participants the right to acquire an annual supply of 5,000 acre-feet of water at $775 per acre-foot (2010 dollars, subject to adjustment), which when adjusted is competitive with the incremental cost of new water. In addition, these agencies received options to acquire storage rights in the Water Project to allow for the management of their Water Project supplies in complement with their other water resources. Up to 150,000 acre-feet of carry-over storage is available for reservation by the agencies prior to construction commencement. Participants that elect to achieve year-to-year flexibility in their use of Project water by utilizing carry-over storage will reserve storage capacity for $1,500 per acre-foot prior to construction.

LOIs that have been entered into since completion of the CEQA review process reserve supplies from the Water Project at $960 per acre-foot (2014 dollars, subject to adjustment). These LOIs also include the option to reserve carry-over storage capacity for $1,500 per acre-foot prior to construction.

Prior to construction of the Water Project, we expect to convert existing option agreements and LOIs into purchase agreements. We will work collaboratively with the participating water agencies to allow for inclusive participation across Southern California.

(2) Transportation Infrastructure and Conveyance Arrangements

Prior to construction of the Water Project, and in coordination with final participation contracts described in (1) above, we must obtain approvals from government agencies for conveyance of water from our property in Cadiz to Southern California water users via the Colorado River Aqueduct (“CRA”). These approvals include:

Cadiz Inc.

Water supplies conserved by the Project would enter the CRA at the termination of the project’s conveyance pipeline near Rice, CA. The CEQA process considered a variety of options to enter the CRA and assumed final entry into the CRA would be determined by MWD in consultation with the Project’s participating agencies. Once arrangements are reached, the Metropolitan Board would act as a responsible agency under CEQA regarding the terms and conditions of the Water Project’s use of the CRA to transport water to its participating agencies.

There is no application yet before Metropolitan related to entry and transportation of Project supplies, but we expect such a formal application will be filed by SMWD, the Project’s lead agency, when the Project’s contractual arrangements with participants are finalized.  Any agreement as to the terms and conditions of the Water Project's use of the CRA will be negotiated between and entered into by Metropolitan and the Project participating agencies, not the Company.    

Water Project supplies entering the CRA will comply with Metropolitan’s published engineering, design and water quality standards and will be subject to all applicable fees and charges routinely established by Metropolitan for the conveyance of water within its service territory. Groundwater at Cadiz presently meets all state and federal water quality requirements without treatment and total dissolved solids or salts in the Cadiz water supply are substantially lower than the water in the CRA, offering a water quality benefit. Cadiz water also has no PFAs, a recently added constituent of concern by California water regulators, improving its attractiveness for the service area. Some naturally occurring constituents are lower than State and Federal standards but potentially higher than the water in the CRA; however, based on extensive pilot testing, they can be lowered via treatment to ambient levels or removed entirely. This year-long pilot testing of treatment options at the Project area confirmed the capability of cost-effective treatment technologies.  We believe there are multiple benefits that can be realized by MWD and water users throughout its service area, such as water quality improvements, upon making space reasonably available for the Cadiz water supplies and providing the region the flexibility of relying on the Water Project in both wet and dry years.

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On July 31, 2019, California Governor Gavin Newsom signed into law Senate Bill 307 (“SB 307”), which added terms to the section of the California Water Code known as the “wheeling statutes” that regulate the conveyance of water by third parties in facilities such as the CRA. Effective January 1, 2020, the wheeling statutes now include Water Code Section 1815, which requires water projects in a section of the Mojave Desert where our Cadiz Valley property is located to apply for a review by the California State Lands Commission (“SLC”) prior to transporting water in public conveyance facilities. Upon receiving an application, this review will determine whether such projects would have “unreasonable effects on the environment and water dependent ecosystems in the surrounding watersheds.” The review by SLC must be conducted within 15 months of any filed application, with an option to extend an additional 9 months upon public notice and explanation. Any application to the SLC for review of the Water Project’s plans to convey water in the CRA from the Cadiz/Fenner Property will be accompanied by evidence of the Project’s extensive record of environmental sustainability as well as data and reports that can withstand critical scrutiny.

In addition to the conveyance arrangements described above, we currently own a 96-mile long, 30-inch wide existing idle natural gas pipeline that extends northwest from the Cadiz/Fenner Property terminating in Barstow, California, and have entered into a purchase agreement to a further 124-mile segment connecting this line from Barstow to Wheeler Ridge, California. The pipeline crosses San Bernardino, Los Angeles and Kern counties, including the Barstow and Bakersfield areas, which serve as a hubs for water delivered from northern and central California to communities in Southern California.

Initial feasibility studies indicated that, upon conversion, the 30-inch pipeline could transport between 18,000 and 30,000 acre-feet of water per year between the Water Project area and the Central and Northern California water transportation network. As a result, this pipeline could diversify delivery opportunities for the Water Project and our broader water resource development efforts.

If this pipeline were to become operational, then the Water Project would link the CRA and State Water Project systems – two of Southern California’s main water delivery systems – providing flexible opportunities for both supply and storage. The Northern Pipeline could deliver Phase I supplies, either directly or via exchange, to existing and potential customers of Phase I of the Project.  Any use of the pipeline would be conducted in conformity with the Water Project’s groundwater management plan and is subject to further CEQA evaluation and potentially federal environmental permitting.

In December 2018, we entered into an amendment (the "Amendment") to our option agreement ("Option Agreement") with El Paso Natural Gas Company (“EPNG”) to purchase the 124-mile segment of the pipeline. The Option Agreement, as amended, allowed us to purchase the 124-mile pipeline segment with an initial payment of $2 million and a subsequent payment of $18 million ("Deferred Payment") upon satisfaction of certain conditions precedent by EPNG that would allow us to accept ownership of and utilize the pipeline. Following entry into the Amendment, we exercised the option and entered into a purchase agreement for the 124-mile pipeline, providing to EPNG the initial consideration of $2 million. On February 3, 2020, we entered into a First Amendment to the Amended Option Agreement. As amended, the Option Agreement (i) extended the time period within which we must complete the purchase of the pipeline segment contemplated by the Agreement from 30 days to up to 180 days following the satisfaction by EPNG of certain conditions precedent, with the actual time period depending upon the date upon which such conditions are satisfied, and (ii) increased the balance of the Deferred Payment from $18 million to $19 million. We do not currently have the cash resources on hand to satisfy the Deferred Payment.

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EPNG has not yet satisfied the conditions precedent necessary to complete our acquisition of the pipeline segment. If we do not complete the purchase of the additional 124-mile pipeline segment, then our Northern Pipeline opportunities will be limited to the 96-mile segment that we already own.

The cost to convert the entire 220-mile Northern Pipeline to make it operational for delivery of groundwater is estimated at approximately $100 million and will require capital financing that we expect will be secured by definitive Purchase and Sale Agreements and the facility assets.

(3) Final Design and Permitting

Prior to final construction of the Water Project facilities, we must also finalize facility design and acquire relevant construction permits and easements from local, state and/or federal regulatory authorities. Together with SMWD we have engaged engineering and environmental consultants to complete design plans for a water conveyance pipeline, wellfield, any necessary water treatment facilities, and facilities required to interconnect this infrastructure with Southern California’s water supply distribution system. This work is ongoing and expected to proceed in coordination with the negotiation of contracts and conveyance arrangements.

In coordination with facility design and layout, we may need to obtain additional permits and approvals from regulatory authorities prior to construction. This may include, but is not limited to, confirmation of existing access rights, easements and rights-of-way, for areas that may be crossed by Project facilities in the Project area subject to final pipeline configuration. In December 2018, the California Department of Fish and Wildlife advised us of permit requirements under the agency's Land and Streambed Alteration program related to dry ephemeral stream bed crossings along the pipeline route.  This permit application would be filed subsequent to any SLC and MWD review outlined above.

Phase II

In a second phase of the Water Project (“Phase II”), we expect to make available up to one million acre-feet of capacity (an additional 850,000 acre-feet from Phase I) in the aquifer system at the Project area for storage of imported surplus water. Under Phase II, or the Imported Water Storage Component, water from the Colorado River or the State Water Project, via the Southern Pipeline and the Northern Pipeline could be conveyed to spreading basins that would be constructed on our private property to percolate into the aquifer system and held in storage. When needed, previously stored water would be returned to Phase II participating agencies via the Southern Pipeline or the Northern Pipeline.

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Phase II has already been the subject of programmatic environmental review in accordance with CEQA, but still requires project-level environmental review and permitting once participating agencies are identified. Phase II may also require federal permits subject to the National Environmental Policy Act, or NEPA.

Agricultural Development

Farming is a main driver of the California economy. According to the California Department of Food and Agriculture, more than one-third of the U.S.’s vegetable crops and two-thirds of its fruits and nuts are grown in California. Additionally, California is the leading U.S. state for cash farm receipts, accounting for over 13% of national agricultural value.

Our Cadiz/Fenner Property, consisting of approximately 34,500 acres of desert land is zoned for agricultural development.  In 1993, we secured conditional use permits to develop agricultural facilities on up to 9,600 acres of the property and withdraw groundwater from the underlying aquifer system for irrigation. We have since maintained various levels of crops on the Property as we developed the Water Project.  In 2013, we entered into a lease agreement with a third party to develop up to 1,480 acres of lemons at the site, 640 acres of which have been planted to date.

In February 2016, we entered into a lease agreement with Fenner Valley Farms LLC ("FVF"),  pursuant to which FVF leased, for a 99-year term, 2,100 acres at the Cadiz/Fenner property to be used to plant, grow and harvest agricultural crops ("FVF Lease"). As consideration for the lease, FVF paid us a one-time payment of $12,000,000 in February 2016. Acreage that has been historically farmed and includes infrastructure for farming and the acreage that is leased to a third party to develop lemons was included within the acreage leased to FVF.

In July 2019, we entered a joint venture (“JV”) that operates under the name SoCal Hemp JV LLC to sustainably cultivate sun-grown, industrial hemp on up to 9,600 acres at our Cadiz Valley property. In compliance with all state, federal and local regulatory requirements, the JV is currently under contract to lease 242 acres for industrial hemp cultivation and has entered into option agreements to utilize up to 9,600 acres over the next four years.

As part of the agricultural development to be conducted under the lease arrangements, the groundwater production capacity of the property’s existing well-field will be enhanced through infrastructure improvements that are complementary to the Water Project. Three new production wells were added to our agricultural infrastructure in the first quarter of 2020, which together have the capacity to produce an additional 12,500 acre-feet per annum. All agricultural production is fully compatible with the Cadiz Water Project. Overlying farming demands will be coordinated with project operations and existing Court-validated permits to utilize available water for its highest and best use.

Additional Eastern Mojave Properties

In addition to the Cadiz/Fenner Property, we also own approximately 11,000 acres in two additional locations within the Mojave Desert in eastern San Bernardino County.

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Our primary landholding outside of the Cadiz/Fenner area is approximately 9,000 acres in the Piute Valley. This landholding is located approximately 15 miles from the resort community of Laughlin, Nevada, and about 12 miles from the Colorado River town of Needles, California. Extensive hydrological studies, including the drilling and testing of a full-scale production well, have demonstrated that this landholding is underlain by high-quality groundwater. The aquifer system underlying this property is naturally recharged by precipitation (both rain and snow) within a watershed of approximately 975 square miles and could be suitable for a water supply project, agricultural development, or solar energy production. These private properties are proximate to or border areas designated by the federal government as National Monument, Critical Desert Tortoise Habitat and/or Desert Wilderness Areas and are suitable candidates for preservation and conservation (see “Land Conservation Bank”, below).

Additionally, we own approximately 2,000 acres located near Danby Dry Lake in Ward Valley, approximately 30 miles southeast of our Cadiz/Fenner Valley properties. The Danby Dry Lake property is located approximately 10 miles north of the CRA. Initial hydrological studies indicate that the area has excellent potential for a water supply project. Certain of the properties in this area may also be suitable for agricultural development and/or preservation and conservation.

Land Conservation Bank

Approximately 7,500 acres of our properties outside of the Cadiz/Fenner Valley area in the Piute Valley are located within terrain designated by the federal government as Critical Desert Tortoise Habitat and/or Desert Wilderness Areas and offer limited development opportunities. In February 2015, the California Department of Fish and Wildlife approved our establishment of the Fenner Valley Desert Tortoise Conservation Bank (“Fenner Bank”), a land conservation bank that makes available these properties for mitigation of impacts to tortoise and other sensitive species that would be caused by development across the Southern California desert. Under its enabling documents, the Fenner Bank offers credits that can be acquired by entities that must mitigate or offset impacts linked to planned development. For example, this bank can service the mitigation requirements of renewable energy, military, residential and commercial development projects being considered throughout the desert. Credits sold by the Fenner Bank will fund the permanent preservation of the land as well as research by outside entities, including San Diego Zoo Global, into desert tortoise health and species protection.

Northern Pipeline

The Northern Pipeline asset, described above, also represents new opportunities for the Company independent of the Water Project to offer water transportation to locations along the 220-mile pipeline route that are not presently interconnected by existing water infrastructure.  The existing pipeline crosses California's major water infrastructure as well as urban and agricultural centers and can be re-purposed to transport water, independent of the Water Project, between users who presently lack direct interconnections along the pipeline route. We are presently engaged in discussions with parties that may be interested in such transportation. The ability to serve points along the 124-mile portion of the pipeline from Barstow to Wheeler Ridge is dependent upon completion of certain conditions precedent under our purchase agreement with EPNG, described above. If the acquisition of the 124-mile segment is not completed, then our Northern Pipeline opportunities will be limited to the 96-mile segment that we own.

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Professional water quality and structural testing of a five-mile segment of the pipeline has been conducted. The testing resulted in a determination that there were no residual petroleum products in the tested segment and that the pipeline is structurally sound to transport water between Cadiz and Barstow.

Other Opportunities

Other opportunities in the water and agricultural or related infrastructure business complementary to our current objectives could provide new opportunities for our Company.

Over the longer-term, we believe the population of Southern California, Nevada and Arizona will continue to grow, and that, in time, the economics of commercial and residential development at our properties may become attractive.

We remain committed to the sustainable use of our land, water and infrastructure assets and will continue to explore all opportunities for sustainable development in an environmentally responsible way. We cannot estimate which of these opportunities will ultimately be realized.

Results of Operations

Three Months Ended September 30, 2020,Compared to Three Months Ended September 30, 2019

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 $4.5 million in the three months ended September 30, 2020, compared to a $7.4 million net loss during the three months ended September 30, 2019. The higher 2019 loss was primarily due to higher interest expenses associated with convertible debt outstanding which was either exchanged or converted during the first quarter of 2020. See Note 2 to the Condensed Consolidated Financial Statements – “Long-Term Debt”.

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 September 30, 2020, compared to $110 thousand for the three months ended September 30, 2019. Revenues primarily related to rental income from our agricultural leases (see “Agricultural Development”, above).

General and Administrative Expenses General and Administrative Expenses, exclusive of stock-based compensation costs, totaled $2.3 million in the three months ended September 30, 2020, compared to $2.8 million in the three months ended September 30, 2019.

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Compensation costs for stock and option awards for the three months ended September 30, 2020, were $273 thousand, compared to $165 thousand for the three months ended September 30, 2019. The higher 2020 expense was primarily due to stock-based non-cash bonus awards to employees.

Depreciation Depreciation expense totaled $106 thousand during the three months ended September 30, 2020, compared to $68 thousand during the three months ended September 30, 2019.

Interest Expense, net Net interest expense totaled $1.9 million during the three months ended September 30, 2020 compared to $4.4 million during the same period in 2019. The following table summarizes the components of net interest expense for the two periods (in thousands):

The decrease of interest on outstanding debt is primarily due to a lower long-term debt balance following the exchange and conversion of our Convertible Senior Notes in March 2020. See Note 2 to the Condensed Consolidated Financial Statements – “Long-Term Debt”.

Income Taxes Income tax expense was $2 thousand for the three months ended September 30, 2020, compared to $1 thousand for the three months ended September 30, 2019. 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 $77 thousand for the three months ended September 30, 2020, compared to $185 thousand for the three months ended September 30, 2019.

Nine Months Ended September 30, 2020, Compared to Nine Months Ended September 30, 2019

We incurred a net loss of $29.8 million in the nine months ended September 30, 2020, compared to a $22.2 million net loss during the nine months ended September 30, 2019. 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 one-time 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 retired pursuant to Conversion and Exchange Agreements (see Note 2- “Long-Term Debt”). If the related convertible debt had been recorded at fair value and marked to market over the term of the debt, the excess of the fair value of the new preferred stock issued over the value of the related convertible debt would not have been significant.

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Revenues Revenue totaled $401 thousand during the nine months ended September 30, 2020, compared to $330 thousand for the nine months ended September 30, 2019. Revenues primarily related to rental income from our agricultural leases (see “Agricultural Development”, above).

General and Administrative Expenses General and Administrative Expenses, exclusive of stock-based compensation costs, totaled $7.8 million in the nine months ended September 30, 2020, compared to $8.8 million in the nine months ended September 30, 2019. The decrease in general and administrative expenses in 2020 primarily relates to fewer legal and professional fees related to the Water Project.

Compensation costs for stock and option awards for the nine months ended September 30, 2020, were $1.8 million, compared to $410 thousand for the nine months ended September 30, 2019. The higher 2020 expense was primarily due to stock-based non-cash bonus awards to employees.

Depreciation Depreciation expense totaled $281 thousand during the nine months ended September 30, 2020, compared to $200 thousand during the nine months ended September 30, 2019.

Interest Expense, net Net interest expense totaled $7.2 million during the nine months ended September 30, 2020 compared to $12.9 million during the same period in 2019. The following table summarizes the components of net interest expense for the two periods (in thousands):

The decrease of interest on outstanding debt is primarily due to a lower long-term debt balance following the exchange and conversion of our Convertible Senior Notes in March 2020. See Note 2 to the Condensed Consolidated Financial Statements – “Long-Term Debt”.

Income Taxes Income tax expense was $5 thousand for the nine months ended September 30, 2020, compared to $4 thousand for the nine months ended September 30, 2019. 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 $776 thousand for the nine months ended September 30, 2020, compared to $185 thousand for the nine months ended September 30, 2019.

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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 November 2018, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $25 million from time to time in an “at-the-market” offering (the “November 2018 ATM Offering”). The Company completed the offering during March 2020, having issued a total of 2,369,170 shares of common stock in the November 2018 ATM Offering for gross proceeds of $25 million and aggregate net proceeds of approximately $24.2 million.

In May 2017, we entered into a 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”).  Additionally, we entered into an agreement with Apollo that allows us to extend the maturity of the Apollo debt for an additional year from its current maturity of May 2021 to May 2022 at our option (see Note 2 to the Consolidated Financial Statements, “Long-Term Debt”). At September 30, 2020, we were in compliance with our debt covenants.

Limitations on our liquidity and ability to raise capital may adversely affect us. Sufficient liquidity is critical to meet our resource development activities. As discussed further in “Outlook” below, we do not have adequate resources on hand to complete the acquisition of the 124-mile extension of our Northern Pipeline, which will require a $19 million payment within 180 days of satisfaction of certain conditions precedent under our purchase agreement with EPNG. 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.

In July 2020, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $30 million from time to time in an “at-the-market” offering (the “July 2020 ATM Offering”) to provide an alternative to raise capital for the Northern Pipeline acquisition payment, for further development of our land and agricultural assets, and for working capital purposes. As of September 30, 2020, the Company issued 602,324 shares of common stock in the July 2020 ATM Offering for gross proceeds of $6.1 million and aggregate net proceeds of approximately $5.9 million.  The Company has and may continue to issue equity securities pursuant to the July 2020 ATM Offering.

As we continue to actively pursue our business strategy, additional financing will continue to be required.  See “Outlook” below.  The covenants in the term debt do not prohibit our use of additional equity financing and allow us to retain 100% of the proceeds of any equity financing.  We do not expect the loan covenants to materially limit our ability to finance our water and agricultural development activities.

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 At September 30, 2020, we had no outstanding credit facilities other than the Senior Secured Debt.

Cash Used inOperating Activities. Cash used in operating activities totaled $10.3 million and $10.7 million for the nine months ended September 30, 2020 and 2019, respectively. The cash was primarily used to fund general and administration expenses related to our water and agricultural development efforts.

Cash UsedinInvesting Activities. Cash used in investing activities totaled $7.8 million for the nine months ended September 30, 2020, and $1.4 million for the nine months ended September 30, 2019. The 2020 period included additions to our interests in SoCal Hemp JV LLC (see “Agricultural Development”, above), 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 $9.9 million for the nine months ended September 30, 2020, compared with cash provided of $14.8 million for the nine months ended September 30, 2019. 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 allows us to extend the contractual May 2021 maturity of our Senior Secured Debt of approximately $75.7 million as of September 30, 2020 until May 2022 at our option (see Note 2 to the Consolidated Financial Statements, “Long-Term Debt”). Accordingly, we currently have no-near-term debt obligations coming due subject to the exercise of this option which is entirely in the Company's control. However, in order to complete our acquisition of an additional 124-mile extension of our Northern Pipeline, we will require a further $19 million payment that will be due within 180 days upon completion of certain conditions precedent under our purchase agreement with EPNG (See “Water Resource Development”, above). If the acquisition of the 124-mile segment is not completed, then our Northern Pipeline opportunities will be limited to the 96-mile segment we already own. As we require additional working capital to fund operations, we expect to continue our historical practice of structuring our financing arrangements to match the anticipated needs of our development activities (see “Long-Term Outlook”, below). In July 2020, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $30 million from time to time in an “at-the-market” offering (the “July 2020 ATM Offering”) to provide an alternative to raise capital for the Northern Pipeline 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, capital expenditures and any payments due under our Senior Secured Debt at maturity (see “Current Financing Arrangements”, above). Our future working capital needs will depend upon the specific measures we pursue in the entitlement and development of our water resources and other developments. Future capital expenditures will depend on the progress of the Water Project and further expansion of our agricultural assets.

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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”.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

We are a smaller reporting company as defined by Reg. 240.12b-2 of the Securities and Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

The Company established disclosure controls and procedures to ensure that material information related to the Company, including its consolidated entities, is accumulated and communicated to senior management, including the Chief Executive Officer (the “Principal Executive Officer”) and Chief Financial Officer (the “Principal Financial Officer”) and to its Board of Directors. Based on their evaluation as of September 30, 2020, the Company's Principal Executive Officer and Principal Financial Officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and such information is accumulated and communicated to management, including the principal executive and principal financial officers as appropriate, to allow timely decisions regarding required disclosures.

Changes in Internal Controls Over Financial Reporting

In connection with the evaluation required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no change identified in the Company's internal controls over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal controls over financial reporting.

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PART II - OTHER INFORMATION

Not applicable.

There have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2019, and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2020.

Not applicable.

Not applicable.

Not applicable.

Not applicable.

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ITEM 6.      Exhibits

The following exhibits are filed or incorporated by reference as part of this Quarterly Report on Form 10-Q.

__________________________

* Filed concurrently herewith.

**  Previously filed.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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