NOTE 5 – STOCK-BASED COMPENSATION PLANS AND WARRANTS
The Company has issued options and has granted stock awards pursuant to its 2003 Management Equity Incentive Plan, 2007 Management Equity Incentive Plan, and 2009 Equity Incentive Plan. The Company has also granted stock awards pursuant to its Outside Director Compensation Plan.
2003 Management Equity Incentive Plan
In December 2003, concurrently with the completion of the Company’s then current financing arrangements with ING, the Company’s board of directors authorized the adoption of a Management Equity Incentive Plan. As of September 30, 2012, a total of 315,000 common stock options remain outstanding under this plan.
Outside Director Compensation Plan
The Cadiz Inc. Outside Director Compensation Plan was approved by Cadiz shareholders in November 2006. Under the plan, each outside director receives $30,000 of cash compensation and receives a deferred stock award consisting of shares of the Company’s common stock with a value equal to $20,000 on June 30th of each year. The award accrues on a quarterly basis, with $7,500 of cash compensation and $5,000 of stock earned for each fiscal quarter in which a director serves. The deferred stock award vests automatically on the January 31st which first follows the award date.
2007 Management Equity Incentive Plan
The 2007 Management Equity Incentive Plan was approved by stockholders at the 2007 Annual Meeting. As of September 30, 2012, a total of 10,000 common stock options remain outstanding under this plan.
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. To date, 537,500 common stock purchase options have been issued under this plan and all remained outstanding as of September 30, 2012.
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 862,500 shares were unexercised and outstanding on September 30, 2012, under the three equity incentive plans.
The Company recognized stock option related compensation costs of $239,000 and $964,000 in the nine months ended September 30, 2012 and 2011, respectively. On September 30, 2012, there was $112,000 of unamortized compensation expense relating to option awards. This unamortized compensation expense is expected to be recognized through December 2013. No options were exercised during the nine months ended September 30, 2012.
Stock Awards to Directors, Officers, and Consultants
The Company has granted stock awards pursuant to its 2007 Management Equity Incentive Plan, 2009 Equity Incentive Plan and Outside Director Compensation Plan.
250,000 shares were issued under the 2007 Management Equity Incentive Plan. A 150,000 share award was issued that vested in three equal installments on January 1, 2008, January 1, 2009, and January 1, 2010. Of the remaining 100,000 shares reserved under the 2007 Management Equity Incentive Plan, 10,000 were issued as options as described above, and 90,000 were issued as shares that vested in May 2009 consistent with the terms of the agreements pursuant to which those executives provide services to the Company.
Of the total 850,000 shares reserved under the 2009 Equity Incentive Plan, a grant of 115,000 restricted shares of common stock became effective on January 14, 2010, and a grant of 140,000 restricted shares of common stock became effective on January 10, 2011, consistent with the terms of the agreements pursuant to which those executives provide services to the Company and which contemplate that such executives will participate in the Company’s long-term incentive plans. The recipients of these restricted shares have a contractual agreement not to sell any of these shares for a period of three years following the effective date. Of the remaining 595,000 shares reserved under the 2009 Equity Incentive Plan, 22,782 shares of common stock were awarded to directors, 537,500 were issued as options as described above and 34,718 are available for future distribution as of September 30, 2012.
Under the Outside Director Compensation Plan, 72,782 shares have been awarded for the plan years ended June 30, 2003, through June 30, 2012. Of the 72,782 shares awarded, 58,987 shares have vested and been issued. The remaining 13,795 shares will vest on January 31, 2013.
The Company recognized stock based compensation costs related to stock based awards of $74,000 and $1,105,000 in the nine months ended September 30, 2012 and 2011, respectively.
Stock Purchase Warrants Issued to Non-Employees
The Company accounts for equity securities issued to non-employees in accordance with the provisions of ASC 718 and ASC 505.
In October and November 2009, the Company raised $7.1 million with a private placement of 226,200 Units at $31.50 per Unit. This includes 20,880 Units purchased by the Lenders of the Term Loan pursuant to the Lenders’ Participation Rights under the Term Loan. Each Unit consists of three (3) shares of the Company’s common stock and one (1) stock purchase warrant. The warrant entitles the holder to purchase one (1) share of common stock at an exercise price of $15 per share. The warrant has a term of three (3) years, but is callable by the Company at any time following November 1, 2010, if the closing market price of the Company’s common stock exceeds $22.50 for 10 consecutive trading days.
On November 30, 2011, the Company raised $6 million in a private placement of 666,667 shares of Common Stock at a price of $9 per share. For every three (3) shares of Common Stock issued, the Company issued (1) Common Stock purchase warrant (collectively, the “Warrants”) entitling the holder to purchase, commencing 90 days from the date of the issuance and prior to December 8, 2014, one (1) share of Common Stock at an exercise price of $13 per share.
448,423 warrants remain outstanding as of September 30, 2012.
NOTE 6 – INCOME TAXES
As of September 30, 2012, the Company had net operating loss (“NOL”) carryforwards of approximately $125 million for federal income tax purposes and $86 million for California state income tax purposes. Such carryforwards expire in varying amounts through the year 2032. Use of the carryforward amounts is subject to an annual limitation as a result of ownership changes.
In addition, on August 26, 2005, a Settlement Agreement between Cadiz, on one hand, and Sun World and three of Sun World’s subsidiaries, on the other hand, was approved by the U.S. Bankruptcy Court, concurrently with the Court’s confirmation of the amended Plan. The Settlement Agreement provides that following the September 6, 2005, effective date of Sun World’s plan of reorganization, Cadiz will retain the right to utilize the Sun World net operating loss carryovers (“NOLs”). Sun World’s Federal NOLs are estimated to be approximately $58 million.
As of September 30, 2012, the Company possessed unrecognized tax benefits totaling approximately $3.3 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. Additionally, as of that date the Company had accrued approximately $321,000 for state taxes, interest and penalties related to income tax positions in prior returns. Income tax penalties and interest are classified as general and administrative expenses. The Company was not subject to any income tax penalties and interest during the nine months ended September 30, 2012.
The Company expects that the unrecognized tax benefits will decrease in the next 12 months by approximately $300,000 as a result of the expiration of statutes of limitation on December 31, 2012.
The Company's tax years 2009 through 2011 remain subject to examination by the Internal Revenue Service, and tax years 2008 through 2011 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.
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 balance sheet.
NOTE 7 – NET LOSS PER COMMON SHARE
Basic earnings per share (“EPS”) 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 diluted EPS because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 3,194,000 and 2,852,000 for the three months ended September 30, 2012 and 2011, respectively, and 3,170,000 and 2,778,000 for the nine months ended September 30, 2012 and 2011, respectively.
NOTE 8 - CONTINGENCIES
In California, third parties have the ability to file litigation challenging the approval of a project. As a result, the Company is and expects to continue to be party to various legal proceedings arising in the general course of its business, including, in particular, the development of the Water Project.
Following certification of the Water Project’s Environmental Impact Report ("EIR") in July 2012, the Company was named as a real party in interest in five lawsuits challenging the adequacy of the EIR, including four cases in California State Court and one in Federal Court. The State Court cases have since been consolidated and will be heard by one State Court judge. The Federal Court proceeding was dismissed in October 2012.
The Company cannot predict the outcome of any such proceedings, however, at present the Company does not believe that the ultimate resolution of these proceedings will have a material adverse effect on its business.
NOTE 9 – SUBSEQUENT EVENTS
On October 30, 2012 (the “Closing Date”), the Company increased the capacity of its existing Term Loan facility with an additional $5 million facility.
Under the terms of the additional facility, the Company drew $5 million on the Closing Date. All interest on the outstanding balance will accrue at 6%, with no principal or interest payments required before the maturity, which is identical to the maturity of the existing facility as it may be established from time to time (currently June 29, 2013 but subject to extension to November 1, 2013 pursuant to the Fifth Amendment to the Credit Agreement). Additionally, concurrently with the funding of the facility, the Company issued warrants to the lenders to purchase an aggregate of 250,000 shares of its common stock (“Warrants”). The Warrants have an exercise price of $10 per Warrant and must be exercised not later than two years from the date of issuance.
|
|
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 Cadiz, California 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, 2011.
Overview
Our primary asset consists of 45,000 acres of land in three areas of eastern San Bernardino County, California. Virtually all of this land is underlain by high-quality, naturally recharging groundwater resources, and is situated in proximity to the Colorado River and the Colorado River Aqueduct (“CRA”), the major source of imported water for Southern California. Our main objective is to realize the highest and best use of these land and water resources in an environmentally responsible way.
For more than 20 years, we have maintained an agricultural development at our property in the Cadiz Valley, relying upon groundwater from the underlying aquifer system for irrigation. In 1993, we secured permits for agricultural production on up to 9,600 acres of the 34,000-acre Cadiz Valley property and the withdrawal of more than one million acre-feet of groundwater from the underlying aquifer system. Since that time, we have maintained various levels of agricultural development at the property and this development has provided our principal source of revenue. Although sustainable agricultural development is an important and enduring component of our business, we believe that the long-term value of our assets can best be derived through the development of a combination of water supply and storage projects at our properties.
The primary factors that drive the value of water supply and storage projects are continued population growth and sustained pressure on water supplies throughout California, including environmental restrictions and regulatory shortages on each of the State’s three primary water sources: the State Water Project, the Colorado River and the Los Angeles Aqueduct. Southern California’s water providers rely on these imported sources for a majority of their water supplies. State Water Project deliveries are presently limited to just 60% of capacity for the year. Availability of supplies in California also differs greatly from year to year due to natural hydrological variability. For example, an historic drought from 2007 – 2009 was followed by above-average rainfall in 2010 and average rainfall in 2011 and 2012. With the region’s population expected to continue to grow, Southern California water providers are presently seeking new, reliable supply solutions to address anticipated fluctuations in traditional supplies and to plan for long-term water needs.
At present, our development efforts are primarily focused on the Cadiz Valley Water Conservation, Recovery and Storage Project (“Water Project” or “Project”), which proposes to capture and conserve millions of acre-feet of native groundwater currently being lost to evaporation from the aquifer system beneath our Cadiz Valley property and deliver it to water providers throughout Southern California (see “Water Resource Development”). We believe that the ultimate implementation of this Water Project will create the primary source of our future cash flow and, accordingly, our working capital requirements relate largely to the development activities associated with this Water Project.
Additionally, we are currently exploring opportunities to enter the water transportation market, and have executed two separate option agreements that, if exercised, would allow us to purchase a total of approximately 300 miles of existing, idle underground natural gas pipelines in Southern California for conversion to water transmission (see “Other Development Opportunities”). Initial feasibility studies indicate that the pipelines have excellent potential to be utilized by the Water Project and/or to move water into other areas of the region that currently lack access to water transportation infrastructure.
Further, we continue to explore additional uses of our land and water resource assets, including siting solar energy facilities and the development of a habitat mitigation bank. We plan to continue our current development efforts and also pursue strategic investments in complementary business or infrastructure to meet our objectives. We cannot predict with certainty when or if these objectives will be realized.
Water Resource Development
The Water Project is designed to capture and conserve billions of gallons of renewable native groundwater currently being lost annually to evaporation from the aquifer system underlying our Cadiz/Fenner Property and provide a reliable water supply to water users in Southern California. By implementing established groundwater management practices, the Water Project will create a new, sustainable water supply for Project participants without adversely impacting the aquifer system or the desert environment. The total quantity of groundwater to be recovered and conveyed to Project participants will not exceed a long-term annual average of 50,000 acre-feet per year. The Project also offers participants the ability to carry-over their annual supply, and store it in the groundwater basin from year to year, as well as approximately one million acre-feet of storage capacity that can be used to store imported water.
Water Project facilities would include, among other things:
|
·
|
High yield wells designed to efficiently recover available native groundwater from beneath the Water Project area;
|
|
·
|
A 43-mile conveyance pipeline to connect the well field to the CRA;
|
|
·
|
A pumping plant to pump water through the conveyance pipeline from the CRA to the Project well-field, if an imported water storage component of the project is ultimately implemented;
|
|
·
|
An energy source to provide power to the well-field, pipeline and pumping plant; and
|
|
·
|
Spreading basins, which are shallow settling ponds that will be configured to efficiently percolate water from the ground surface down to the water table using subsurface storage capacity for the storage of water, if an imported water storage component of the project is ultimately implemented.
|
In general, several elements are needed to implement such a project: (1) a water conveyance right-of-way or pipeline from the Water Project area to a delivery system; (2) storage and supply agreements with one or more public water agencies or private water utilities; (3) environmental permits; and (4) construction and working capital financing. As described below, the first three elements have been progressed on a concurrent basis. The fourth is dependent on actions arising from the completion of the first three.
|
(1)
|
A Water Conveyance Right-of-Way or Pipeline from the Water Project Area to a Delivery System
|
In September 2008, we secured a right-of-way for the Water Project’s water conveyance pipeline by entering into a lease agreement with the Arizona & California Railroad Company (“ARZC”). The agreement allows for the use of a portion of the railroad’s right-of-way to construct and operate a water conveyance pipeline for a period up to 99 years. The pipeline would be used to convey water between our Cadiz Valley property and the CRA. As part of the lease agreement, the ARZC would also receive water from the Project for fire suppression and other railroad purposes.
We are also exploring the potential to utilize one of the unused natural gas pipelines (as described in “Overview” above) that exist in the Project area, to which we hold an option right, as a means to access additional distribution systems. Initial feasibility studies indicate that this pipeline could be used as a component of the Project to distribute water to Project participants in Phase I or import water for storage at the Project area in Phase II. The potential use of this pipeline by the Project has been analyzed as part of the Project’s California Environmental Quality Act (“CEQA”) process (see “Other Development Opportunities”).
|
(2)
|
Storage and Supply Agreements with One or More Public Water Agencies or Private Water Utilities
|
In 2010 and 2011, we entered into option and environmental cost sharing agreements with six water providers: Santa Margarita Water District (“SMWD”), Golden State Water Company (a wholly-owned subsidiary of American States Water [NYSE: AWR]), Three Valleys Municipal Water District, Suburban Water Systems (a wholly owned subsidiary of SouthWest Water Company), Jurupa Community Services District and California Water Service Company, the third largest investor-owned American water utility. The six water providers serve more than one million customers in cities throughout California’s San Bernardino, Riverside, Los Angeles, Orange and Ventura Counties.
Under the terms of the agreements with the six water providers, upon completion of the Water Project’s CEQA review and certification of the Final Environmental Impact Report (“Final EIR”), which occurred on July 31, 2012, each agency has the right to acquire an annual supply of 5,000 acre-feet of water at a pre-determined formula competitive with their incremental cost of new water. In addition, the agencies have options to acquire storage rights in the Water Project to allow them to manage their supplies to complement their other water resources.
Following CEQA certification, SMWD was the first participant to adopt resolutions approving a Water Purchase and Sale Agreement for 5,000 acre-fee of water. The structure of the SMWD purchase agreement calls for an annually adjusted water supply payment of up to $500/AF including identified income streams, plus their 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.
Approximately 80% of the water to be conserved annually by the Project is now either under a Purchase and Sale Agreement or remains under option. We are currently working with the other participating agencies to convert their option agreements to definitive economic agreements and also continue to work with additional water providers interested in acquiring rights to the remaining available Project supplies. We are also in discussions with third parties regarding the imported storage aspect of this Project.
|
(3)
|
Environmental Permits
|
In order to properly develop and quantify the sustainability of the Water Project, and prior to initiating the formal permitting process for the Water Project, we commissioned internationally recognized environmental consulting firm CH2M HILL to complete a comprehensive study of the water resources at the Project area. Following more than a year of analysis, CH2M HILL released its study of the aquifer system in February 2010. Utilizing new models produced by the U.S. Geological Survey in 2006 and 2008, the study estimated the total groundwater in storage in the aquifer system to be between 17 and 34 million acre-feet, a quantity on par with Lake Mead, the nation’s largest surface reservoir. The study also identified a renewable annual supply of native groundwater in the aquifer system currently being lost to evaporation. CH2M HILL’s findings, which were peer reviewed by leading groundwater experts, confirmed that the aquifer system could sustainably support the Water Project.
Prior to beginning the formal environmental permitting process, we entered into a Memorandum of Understanding with the Natural Heritage Institute (“NHI”), a leading global environmental organization committed to protecting aquatic ecosystems, to assist with our efforts to sustainably manage the development of our Cadiz/Fenner Property. As part of this “Green Compact”, we will follow stringent plans for groundwater management and habitat conservation, and create a groundwater monitoring plan for the Water Project.
As discussed in (2), above, we have entered into environmental cost sharing agreements with all participating water providers. The environmental cost sharing agreements created a framework for funds to be committed by each participant to share in the costs associated with the CEQA review work. SMWD served as the lead agency for the review process. ESA Associates, a leading environmental consulting firm, was retained to prepare the Water Project’s environmental review documentation.
The CEQA process began in February 2011 with the issuance of a Notice of Preparation (“NOP”) of a Draft Environmental Impact Report (“Draft EIR”) by SMWD. SMWD held two public scoping meetings in March 2011 and released the Draft EIR in December 2011. The Draft EIR analyzed potential impacts to environmental resources at the Project area, including critical resources of the desert environment such as vegetation, mountain springs, and water and air quality. The analysis of the Project considered peer-reviewed technical reports, independently collected data, existing reports and the Project’s state of the art Groundwater Management, Monitoring and Mitigation Plan (“GMMMP”).
SMWD conducted a 100-day public comment period for the Draft EIR, hosting two public comment meetings and an informational workshop in January and February 2012. The public comment period concluded in March 2012.
On July 13, 2012, SMWD released the Final EIR and responses to comments. The Final EIR summarized that, with the exception of unavoidable short-term construction emissions, by implementing the measures developed in the GMMMP, the Project will avoid significant impacts to desert resources. A public hearing was held on July 25, 2012 by the SMWD Board of Directors to take public testimony and consider certification of the Final EIR. On July 31, 2012, the SMWD Board of Directors certified the Final EIR.
Following SMWD’s certification of the Final EIR, the San Bernardino County Board of Supervisors voted on October 1, 2012 to approve the GMMMP for the Project and adopted certain findings under CEQA, becoming the first Responsible Agency to take an approving action pursuant to the certified EIR. San Bernardino County served as a Responsible Agency in the CEQA review process as the local government entity responsible for oversight over groundwater resources in the Cadiz Valley. Earlier this year, the Company entered into a Memorandum of Understanding with the County and SMWD, creating the framework for finalizing the GMMMP in accordance with the County’s desert groundwater ordinance.
The remaining Responsible Agencies, including the Metropolitan Water District of Southern California (“Metropolitan”), will also take action as part of the CEQA process prior to construction. Project water supplies will enter Metropolitan’s CRA in accordance with its published engineering and design standards and subject to all applicable fees and charges routinely established by Metropolitan for the conveyance of water within its service territory.
|
(4)
|
Construction and Working Capital
|
Within the Purchase and Sale Agreement with SMWD referred to in (2), above, SMWD is further authorized to continue next steps with the Company, which includes final permitting, design, and construction.
As described above, construction would primarily consist of well-field facilities at the Water Project site, a conveyance pipeline extending approximately 43 miles along the right-of-way described in (1), above, from the well-field to the CRA, and an energy source to pump water through the conveyance pipeline between the Project well-field and the CRA. Construction financing is expected to be entirely provided with lower-cost senior debt, secured by the new facility assets.
Should the Water Project ultimately include the use of an existing natural gas pipeline as to which we hold option rights, then we will also incur costs associated with the exercise of this option and the conversion of the pipeline (see “Other Development Opportunities”, below).
Agricultural Development
Within the Cadiz Valley property, 9,600 acres have been zoned for agriculture. The infrastructure includes seven wells that are interconnected within this acreage, with total annual production capacity of approximately 13,000 acre-feet of water. Additionally, there are housing and kitchen facilities that support up to 300 employees. The underlying groundwater, fertile soil, and desert temperatures are well suited for a wide variety of fruits and vegetables.
Permanent crops currently in commercial production include certified-organic, dried-on-the-vine raisins and lemons on a total of approximately 500 acres. Both of these crops are farmed using sustainable agricultural practices.
We currently derive our agricultural revenues through the sale of our products in bulk or through independent packing facilities. We incur all of the costs necessary to produce and harvest our organic raisin crop. These raisins are then sold in bulk to a raisin processing facility. We also incur all of the costs necessary to produce our lemon crop. Once harvested, the lemons are shipped in bulk to a packing and sales facility.
In 2009, we entered into a lease agreement with a third party to develop 500 additional acres of lemon orchards; approximately one-third of the new orchard acreage has been planted to date. We expect to receive lease income once the new lemon orchards reach commercial production through a profit sharing agreement within the lease.
Although we plan to maintain our agricultural development, revenues will continue to vary from year to year based on acres in development, crop yields, and prices. Further, we do not believe that our agricultural revenues are likely to be material to our overall results of operations once we begin to receive revenues from the Water Project.
Other Development Opportunities
Water Transportation
As described above (see “Overview”), we are currently evaluating the feasibility of converting existing idle natural gas pipelines for the transportation of water, either exclusively for the distribution of third party water or, in certain segments, in conjunction with the Water Project. In September 2011, we entered into two separate agreements with El Paso Natural Gas (“EPNG”) and Questar Corporation (“Questar”) providing us with options to purchase two separate underground natural gas pipelines. In February 2012, we made a $1,000,000 payment to extend our option agreement with EPNG to April 2013. In June 2012, the option agreement with Questar was amended to extend the option period to continue through April 2013. If both purchase options are exercised they would require payments totaling $50.5 million. Initial feasibility studies indicate that, upon conversion, the two pipelines would have a combined average capacity to distribute up to 40,000 acre-feet of water per year per segment in markets that currently lack multiple pick-up and delivery water distribution segments.
Currently, the vast majority of potential water transfers in Southern California are difficult to implement because of location or the lack of space available in the existing distribution system, thereby creating a demand for additional water transfer capacity. If we are ultimately able to utilize the natural gas pipelines to provide new water transmission lines in key markets, we intend to access existing demand for water transfers and allow agencies to do so outside of the few existing systems. Further, we believe a conversion of the pipelines for water transfer use, if feasible, will allow remote water supplies to reach the urban market and could also help link Southern California groundwater systems that have been historically inaccessible.
The EPNG line, which originates in Cadiz, California, and extends 220 miles into the Central Valley, could potentially be used in conjunction with the Water Project. This potential use was evaluated in the Project’s CEQA environmental documents described above (see “Water Resource Development”).
Solar Energy Production
In addition to the development projects described above, we believe that our landholdings are suitable for other types of development, including solar energy production. Located in an area with strong solar irradiation, proximity to existing utility corridors, appropriate topography, and access to water supplies, our properties could provide an ideal setting for solar energy generation. State, federal and local government entities, along with environmental organizations, have issued compelling calls to increase the production of renewable energy to reduce greenhouse gas emissions and the consumption of imported fossil fuels. Solar energy development on private land, particularly in the Mojave Desert region where our properties are located, is being encouraged as an alternative to the use of federal desert lands.
We believe that our significant, contiguous private landholdings in the Mojave Desert could provide an alternative to the use of federal lands for new solar facilities in the region. Up to 20,000 acres at our Cadiz Valley property could potentially be made available for solar energy projects.
Other Property Development
Approximately 15,000 acres of our properties not currently being developed are located within areas designated by the federal government as Critical Desert Tortoise Habitat and/or Desert Wilderness Areas. We are currently exploring the potential to make certain of these properties available in a mitigation bank, which provides credits that can be acquired by entities that must acquire land to mitigate or offset development in other areas. For example, this bank could potentially service the mitigation requirements of numerous utility-scale solar development projects being considered throughout Riverside and San Bernardino County, including projects within the recently approved federal Riverside-East Solar Energy Zone.
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 of our properties may become attractive. Moreover, other opportunities in business or infrastructure complementary to our current objectives could provide new opportunities for our business.
We remain committed to the sustainable use of our land and water assets, and will continue to explore all opportunities for environmentally-responsible development of these assets. We cannot predict with certainty which of these various opportunities will ultimately be realized.
Results of Operations
Three Months Ended September 30, 2012, Compared to Three Months Ended September 30, 2011
We have not received significant revenues from our water resource and real estate development activity to date. As a result, we have historically incurred a net loss from operations. We had revenues of $287 thousand for the three months ended September 30, 2012, and $121 thousand for the three months ended September 30, 2011. We incurred a net loss of $4.7 million in the three months ended September 30, 2012, compared with a $4.1 million net loss during the three months ended September 30, 2011.
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 We had revenues of $287 thousand for the three months ended September 30, 2012, and $121 thousand for the three months ended September 30, 2011. The increase in revenue in 2012 was primarily due to a larger raisin crop in 2012 in comparison to the 2011 raisin crop.
Cost of Sales Cost of sales was $293 thousand for the three months ended September 30, 2012, and $266 thousand for the three months ended September 30, 2011. The higher cost of sales reflects the higher raisin harvesting costs due to a larger raisin crop in 2012 in comparison to the 2011 raisin crop.
General and Administrative Expenses General and administrative expenses were $3.0 million during the three months ended September 30, 2012, and $2.5 million during the three months ended September 30, 2011. Non-cash compensation costs for stock and option awards are included in General and Administrative Expenses.
General and Administrative Expenses, exclusive of stock based compensation costs, totaled $2.9 million and $2.2 million for the three months ended September 30, 2012 and 2011, respectively. The higher 2012 expenses were primarily due to additional legal and consulting fees related to water development efforts in connection with the certification of the Final Environmental Impact Report, litigation costs and due diligence costs associated with the feasibility of converting the natural gas pipelines, which we currently have an option to purchase, to water transportation facilities (see “Other Development Opportunities”).
Compensation costs from stock and option awards for the three months ended September 30, 2012, were $82 thousand, compared with $276 thousand for the three months ended September 30, 2011. The expense reflects the vesting schedules of the stock and option awards under the 2009 Equity Incentive Plan. The lower 2012 expense was primarily due to lower stock based non-cash compensation costs related to stock and options issued in 2011 under the 2009 Equity Incentive Plan.
Depreciation Depreciation expense totaled $97 thousand for the three months ended September 30, 2012, and $92 thousand for the three months ended September 30, 2011.
Interest Expense, net Net interest expense totaled $1.7 million during the three months ended September 30, 2012, compared to $1.5 million during the same period in 2011. The following table summarizes the components of net interest expense for the two periods (in thousands):
| |
Three Months Ended
|
| |
September 30,
|
| |
2012
|
|
2011
|
| |
|
|
|
|
|
Interest on outstanding debt
|
|
$ |
895 |
|
|
$ |
843 |
|
|
Amortization of financing costs
|
|
|
23 |
|
|
|
13 |
|
|
Amortization of debt discount
|
|
|
748 |
|
|
|
595 |
|
|
Interest income
|
|
|
(1 |
) |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
| |
|
$ |
1,665 |
|
|
$ |
1,451 |
|
See Notes to the Consolidated Financial Statements: Note 3 – Long-term Debt.
Other Income, net Net other income for the three months ended September 30, 2012 was $0 and $52 thousand for the three months ended September 30, 2011. The amount recorded in 2011 relates to the derivative liability associated with certain of the Term Loan’s conversion options. See Notes to the Consolidated Financial Statements: Note 3 – Long-term Debt.
Income Taxes Income tax expense for the three months ended September 30, 2012 was $3 thousand and $2 thousand for the three months ended September 30, 2011. See Notes to the Consolidated Financial Statements: Note 6 – Income Taxes.
Nine Months Ended September 30, 2012, Compared to Nine Months Ended September 30, 2011
We had revenues of $324 thousand for the nine months ended September 30, 2012, and $618 thousand for the nine months ended September 30, 2011. We incurred a net loss of $13.8 million in the nine months ended September 30, 2012, compared with a $12.1 million net loss during the nine months ended September 30, 2011.
Revenues We had revenues of $324 thousand for the nine months ended September 30, 2012, and $618 thousand for the nine months ended September 30, 2011. The decrease in revenue in 2012 was primarily due to a smaller and shorter 2011-2012 lemon harvest season in comparison to the 2010-2011 lemon harvest year, and was partially off-set by a larger 2012 raisin crop in comparison to the 2011 raisin crop.
Cost of Sales Cost of sales totaled $295 thousand during the nine months ended September 30, 2012, and $716 thousand during the nine months ended September 30, 2011. The lower cost of sales in 2012 primarily reflects the lower lemon harvesting and marketing costs due to the shorter harvest season and smaller size of the 2011-2012 lemon crop.
General and Administrative Expenses General and administrative expenses during the nine months ended September 30, 2012, totaled $8.7 million compared to $7.7 million for the nine months ended September 30, 2011. Non-cash compensation costs for stock and option awards are included in General and Administrative Expenses.
General and Administrative Expenses, exclusive of stock based compensation costs, totaled $8.4 million in the nine months ended September 30, 2012, compared with $5.6 million for the nine months ended September 30, 2011. The higher 2012 expenses were primarily due to additional legal and consulting fees related to water development efforts in connection with the certification of the Final Environmental Impact Report, litigation costs and due diligence costs associated with the feasibility of converting the natural gas pipelines, which we currently have an option to purchase, to water transportation facilities (see “Other Development Opportunities”).
Compensation costs from stock and option awards for the nine months ended September 30, 2012, were $314 thousand compared with $2.1 million for the nine months ended September 30, 2011. The expense reflects the vesting schedules of the stock and option awards under the 2009 Equity Incentive Plan. The lower 2012 expense was primarily due to lower stock based non-cash compensation costs related to stock and options issued in 2011 under the 2009 Equity Incentive Plan.
Depreciation Depreciation expense totaled $285 thousand for the nine months ended September 30, 2012, and $273 thousand for the nine months ended September 30, 2011.
Interest Expense, net Net interest expense totaled $4.8 million during the nine months ended September 30, 2012, compared to $4.2 million during the same period in 2011. The following table summarizes the components of net interest expense for the two periods (in thousands):
| |
Nine Months Ended
|
|
| |
September 30,
|
|
| |
2012
|
|
|
2011
|
|
| |
|
|
|
|
|
|
Interest on outstanding debt
|
|
$ |
2,628 |
|
|
$ |
2,406 |
|
|
Amortization of financing costs
|
|
|
67 |
|
|
|
52 |
|
|
Amortization of debt discount
|
|
|
2,129 |
|
|
|
1,713 |
|
|
Interest income
|
|
|
(3 |
) |
|
|
(2 |
) |
| |
|
|
|
|
|
|
|
|
| |
|
$ |
4,821 |
|
|
$ |
4,169 |
|
See Notes to the Consolidated Financial Statements: Note 3 – Long-term Debt.
Other Income, net Net other income for the nine months ended September 30, 2012, was $0 and $108 thousand for the nine months ended September 30, 2011. The amount recorded in 2011 is in connection to the derivative liability related to certain of the Term Loan’s conversion options. See Notes to the Consolidated Financial Statements: Note 3 – Long-term Debt.
Income Taxes Income tax expense was $8 thousand for the nine months ended September 30, 2012, and $5 thousand for the nine months ended September 30, 2011. See Notes to the Consolidated Financial Statements: Note 6 – Income Taxes.
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, private equity placements and the exercise of outstanding stock options and warrants.
Based upon our current and anticipated usage of cash resources, in connection with pre-construction activities following approval of the Final Environmental Impact Report, we will require additional working capital commencing during the first quarter of 2013 to meet our cash resource needs from that point forward and to continue to finance our operations until such time as our asset development programs produce revenues. To meet working capital requirements, we will need to seek additional debt or equity financing in the capital markets. Furthermore, to the extent the Term Loan is not converted into common stock by the lenders prior to the final maturity date, we will be required to refinance, extend or otherwise restructure the Term Loan.
We have worked with our secured lenders to structure our debt in a way which allows us to continue our development of the Water Project and minimize the dilution of the ownership interests of common stockholders. In June 2006, we entered into a $36.4 million five year zero coupon senior secured convertible term loan with Peloton Partners LLP (through an affiliate) and another lender (the “Term Loan”). On April 16, 2008, we were advised that Peloton had assigned its interest in the Term Loan to an affiliate of Lampe Conway & Company LLC (“Lampe Conway”), and Lampe Conway subsequently replaced Peloton as administrative agent of the loan. On June 4, 2009, we completed arrangements to amend the Term Loan with Lampe Conway which modified certain of the conversion features and extended the maturity date to June 29, 2013, with interest continuing to accrue at 6% per annum though maturity. Further, the conversion feature was modified to allow up to $4.55 million of principal to be converted into 650,000 shares of our Common Stock (“Common Stock”) at a conversion price of $7 per share, and the remaining principal and interest to be converted into shares of Common Stock at a conversion price of $35 per share.
On October 19, 2010, we closed a new $10 million working capital facility with Lampe Conway and our other participating lender (“the Lenders”). Under the terms of the new $10 million facility, we drew the first $5 million at closing (“First Tranche”). Also upon closing, we were granted the option to draw up to an additional $5 million over the subsequent 12 months (“Second Tranche”). We drew a total of $2 million on the Second Tranche prior to its expiration. All interest on outstanding balances accrues at 6%, with no principal or interest payments required before the new facility’s maturity date, consistent with our existing term loan facility.
The First Tranche (including accrued interest) is convertible at any time Common Stock at a price of $13.50 per share, and the Second Tranche (including accrued interest) is convertible Common Stock at $12.50 per share.
Also on October 19, 2010, our existing debt facility with the Lenders was modified as to certain of its conversion features. $20.62 million of the existing convertible debt was changed to allow for up to $2.5 million of this amount to be converted at any time into Common Stock at the price of $13.50 per share, with the remaining amount becoming non-convertible. On June 30, 2011, $2 million of the $5 million available Second Tranche was drawn. As a result of the Second Tranche draw, $4 million of the outstanding loan became convertible into 320,000 shares of Common Stock. Further, approximately $10 million of the loan that was previously convertible into approximately 290,000 shares of Cadiz common stock is no longer convertible.
In order to provide additional alternatives in connection with our structuring of financing for pre-construction activities, on August 8, 2012, we entered into an agreement with our existing Lenders providing the Company an option to extend the maturity date of our Term Loan from June 29, 2013, to November 1, 2013. As it is our intent to refinance the existing debt facility on a long-term basis, the debt continues to be classified as non-current in the consolidated balance sheet.
On October 30, 2012, we increased the capacity of our existing Term Loan facility with an additional $5 million facility. See Notes to the Consolidated Financial Statements: Note 9 – Subsequent Event.
The Term Loan is collateralized by substantially all of the assets of the Company, and contains representations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit our 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 our ability to issue additional common stock to fund future working capital needs. The debt covenants associated with the loan were negotiated by the parties with a view towards our operating and financial condition as it existed at the time the agreements were executed. At September 30, 2012, we were in compliance with its debt covenants.
On July 8, 2011, we sold 363,636 shares of Common Stock at a price of $11 per share for total proceeds of $4 million. The proceeds were used to replace the unutilized portion of our working capital facility and for general corporate purposes.
On November 30, 2011, we raised $6 million in a private placement of 666,667 shares of Common Stock at a price of $9 per share. For every three (3) shares of Common Stock issued, we issued (1) Common Stock purchase warrant (collectively, the “Warrants”) entitling the holder to purchase, commencing 90 days from the date of the issuance and prior to December 8, 2014, one (1) share of Common Stock at an exercise price of $13 per share.
On December 14, 2011, we sold 570,000 shares of Common Stock at a price of $9 per share for total proceeds of $5.1 million.
As we continue to actively pursue our business strategy, additional financing will be required. See “Outlook”, below. The covenants in the Term Loan 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 development activities.
At September 30, 2012, we had no outstanding credit facilities other than the Convertible Term Loan.
Cash Used for Operating Activities. Cash used for operating activities totaled $8.2 million and $5.3 million for the nine months ended September 30, 2012 and 2011, respectively. The cash was primarily used to fund: (i) general and administrative expenses related to our water development efforts including the certification of the Final Environmental Impact Report; (ii) litigation costs; (iii) due diligence costs associated with exploring the feasibility of converting the natural gas pipelines, which we currently have an option to purchase, to water transportation facilities; and (iv) $1.0 million in cash payments related to the extension of an option agreement with El Paso Natural Gas (see “Other Development Opportunities”).
Cash Used for Investing Activities. Cash used for investing activities during the nine months ended September 30, 2012 was $1.9 million compared with $3.1 million during the same period in 2011. The 2011 period included additional investments in well-field and environmental work related to progressing the Water Project.
Cash Provided by Financing Activities. Cash provided by financing activities for the nine months ended September 30, 2012 was $49 thousand compared with $6.0 million during the same period in 2011. The 2011 period included $4 million of proceeds by way of takedown from the Company’s shelf registration, and $2 million drawn by the Company on the second tranche of its Term Loan.
Outlook
Short Term Outlook. Based on our current and anticipated usage of cash resources, in connection with pre-construction activities following the certification of the Final Environmental Impact Report, we will require additional working capital commencing during the first quarter of 2013 to meet our cash resource needs from that point forward and to continue to finance our operations until such time as our asset development programs produce revenues. To meet working capital requirements, we will need to seek additional debt or equity financing in the capital markets. Furthermore, payments will be due under the Term Loan only to the extent that the Lenders elect not to exercise equity conversion rights prior to the Term Loan’s final maturity date. We currently expect to satisfy amounts due under the Term Loan through one or more of (a) equity conversion pursuant to the terms outlined in Note 3 to the Consolidated Financial Statements - Long-Term Debt; (b) construction financing associated with the Water Project; (c) cash generated from further development of our other properties, such as a mitigation bank; and (d) debt or equity financing in the capital markets. As previously announced by the Company in February 2012, we have engaged an investment bank specializing in infrastructure financing to lead the Company through the construction financing process for the Water Project.
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. 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 convertible term loan at maturity. See “Current Financing Arrangements” above. Our future working capital needs will depend upon the specific measures we pursue in the development of our water resources and other development. Future capital expenditures will depend primarily on the progress of the Water Project.
We will evaluate 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 debt or equity placements, or through the sale or other disposition of assets. Equity placements would be undertaken only to the extent necessary, so as to minimize the dilutive effect of any such placements upon our existing stockholders. Limitations on our liquidity and ability to raise capital may adversely affect us. Sufficient liquidity is critical to meet our resource development activities. Although we currently expect our sources of capital to be sufficient to meet our near term liquidity needs, there can be no assurance that our liquidity requirements will continue to be satisfied. If we cannot raise needed funds, we might be forced to make substantial reductions in our operating expenses and/or sell certain of our real estate assets, which could adversely affect our ability to implement our current business plan and ultimately our viability as a company.
Recent Accounting Pronouncements
See Notes to the Consolidated Financial Statements: Note 1 - Description of Business and Summary of Significant Accounting Policies.
Certain Known Contractual Obligations
| |
|
Payments Due by Period
|
|
|
Contractual Obligations
|
|
Total
|
|
|
1 year or less
|
|
|
2-3 years
|
|
|
4-5 years
|
|
|
After 5 years
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$ |
59,354 |
|
|
$ |
59,312 |
|
|
$ |
22 |
|
|
$ |
20 |
|
|
$ |
- |
|
|
Interest Expense
|
|
|
2,729 |
|
|
|
2,729 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Operating leases
|
|
|
799 |
|
|
|
250 |
|
|
|
368 |
|
|
|
181 |
|
|
|
- |
|
| |
|
$ |
62,882 |
|
|
$ |
62,291 |
|
|
$ |
390 |
|
|
$ |
201 |
|
|
$ |
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* The above table does not reflect unrecognized tax benefits of $3.3 million, the timing of which is uncertain. Refer to Note 7 to our Annual Report on Form 10-K for the year ended December 31, 2011.
|
|
Not included in the table above is a potential obligation to pay an amount of up to 1% of the net present value of the Water Project in consideration of certain legal and advisory services to be provided to us by Brownstein Hyatt Farber Schreck LLP. The primary services being provided are advising us as to Water Project design and implementation, permit approvals, environmental compliance, negotiation and drafting of agreements related to the Water Project. This fee would be payable upon receipt of all environmental approvals and permits and the execution of binding agreements for at least 51% of the Water Project’s annual capacity. A portion of this fee may be payable in stock. Interim payments of up to $1.5 million, to be credited against the final total, would be made upon the achievement of certain specified milestones. $500 thousand of these interim payments was earned and paid in June 2009 in consideration for the legal and advisory services previously provided. This arrangement may be terminated by either party upon 60 days notice, with any compensation earned but unpaid prior to termination payable following termination.
|
|
Quantitative and Qualitative Disclosures About Market Risk
|
As of September 30, 2012, all of the Company's indebtedness bore interest at fixed rates; therefore, the Company is not exposed to market risk from changes in interest rates on long-term debt obligations.
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 Chairman and 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, 2012, 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.