# Cadiz Inc: Form 10-Q for the period ended Mar 31, 2019 - Company: [Cadiz Inc](/companies/cdzi.md) (CIK 727273) - Form: 10-Q - Filed: 2019-05-09 - Accepted by EDGAR: May 9, 2019, 16:13 ET - Period: 2019-03-31 - Accession: 0000727273-19-000012 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/727273/000072727319000012/form10q_mar19.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/727273/000072727319000012/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2019-03-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2019-01-01 to 2019-03-31 | $109.0k | us-gaap:Revenues | | Operating income | 3 months, 2019-01-01 to 2019-03-31 | −$2.9m | us-gaap:OperatingIncomeLoss | | Interest expense | 3 months, 2019-01-01 to 2019-03-31 | $4.2m | us-gaap:InterestExpense | | Income tax | 3 months, 2019-01-01 to 2019-03-31 | $1.0k | us-gaap:IncomeTaxExpenseBenefit | | Net income | 3 months, 2019-01-01 to 2019-03-31 | −$7.3m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2019-01-01 to 2019-03-31 | −$0.29 | us-gaap:EarningsPerShareBasicAndDiluted | | Diluted shares (weighted) | 3 months, 2019-01-01 to 2019-03-31 | 25,327 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 3 months, 2019-01-01 to 2019-03-31 | −$4.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 3 months, 2019-01-01 to 2019-03-31 | $165.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Cash and equivalents | at 2019-03-31 | $16.2m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2019-03-31 | $16.9m | us-gaap:AssetsCurrent | | Total assets | at 2019-03-31 | $73.9m | us-gaap:Assets | | Current liabilities | at 2019-03-31 | $3.1m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2019-03-31 | $155.3m | us-gaap:Liabilities | | Long-term debt | at 2019-03-31 | $136.7m | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2019-03-31 | $60.0k | us-gaap:LongTermDebtCurrent | | Shareholders' equity | at 2019-03-31 | −$81.4m | us-gaap:StockholdersEquity | ## Management's discussion and analysis As filed, 38,979 characters. 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, 2018. ### Overview We are a land and water resource development company with over 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"), California's primary mode of water transportation for imports from the Colorado River into the State. Our properties are suitable for various uses, including large-scale agricultural development, groundwater storage and water supply projects. Our main objective is to realize the highest and best use of these land and water resources in an environmentally responsible way. We believe that the long-term highest and best use of our land and water assets will be realized through the development of a combination of water supply and storage projects at our properties. Therefore, we have primarily focused on the development of the Cadiz Valley Water Conservation, Recovery and Storage Project ("Water Project" or "Project"), which will capture and conserve millions of acre-feet1 of native groundwater currently being lost to evaporation from the aquifer system beneath our 34,500-acre property in the Cadiz and Fenner valleys of eastern San Bernardino County (the "Cadiz/Fenner Property"), and deliver it to water providers throughout Southern California (see "Water Resource Development"). A second phase of the Water Project would offer storage of up to one million acre-feet of imported water in the aquifer system. We believe that the ultimate implementation of this Water Project will provide a significant source of future cash flow. The primary factor driving the value of such projects is ongoing pressure on California's traditional water supplies and the resulting demand for new, reliable supply solutions that can meet both immediate and long-term water needs. Available water supply in Southern California is constrained by regulatory restrictions on each of the State's three main water sources: the CRA, the State Water Project, which provides water supplies from Northern California to the central and southern parts of the state, and the Los Angeles Aqueduct, which delivers water from the eastern Sierra Nevada mountains to Los Angeles. Southern California's water providers rely on imports from these systems for a majority of their water supplies, but deliveries from all three into the region are consistently below capacity, even in wet years. 1 One acre-foot is equal to approximately 326,000 gallons or the volume of water that will cover an area of one acre to a depth of one-foot. An acre-foot is generally considered to be enough water to meet the annual water needs of one average California household. Further, the availability of supplies in California differs greatly from year to year due to natural hydrological variability. Over the last decade, California struggled through a historic drought featuring record-low winter precipitation. Then, following a series of strong storms that delivered record amounts of rain and snow during the 2016-2017 winter, state officials declared an end to the drought. The 2017-2018 winter was abnormally dry for a majority of the State, yet the 2018-2019 winter was a wet year, with snowpack and rainfall well above average through April 2019. The rapid swings between wet and dry years challenges California's traditional supply system and supports the need for reliable storage and local supply. Given the variety of challenges and limitations faced by the State's existing infrastructure, Southern California water providers are presently pursuing investments in storage, supply and infrastructure to meet long-term demand. The Cadiz Water Project is a local supply option in Southern California that could help address the region's water supply challenges by providing new reliable supply and local groundwater storage opportunities (see "Water Resource Development" below) in both dry and wet years. 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, the public agency responsible for groundwater use at the project area. In addition to our Water Project proposal, we are engaged in agricultural joint ventures at the Cadiz/Fenner Property that put some of the groundwater currently being lost to evaporation from the underlying aquifer system to immediate beneficial use. We have farmed portions of the Cadiz/Fenner Property since the late 1980s relying on groundwater from the aquifer system for irrigation. The site is well-suited for various permanent and seasonal crops. Presently, the property has 2,100 acres leased for cultivation of citrus. 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. While we continue to believe that the ultimate implementation of the Water Project will provide the primary source of our future cash flow, we also believe there is significant additional value in our underlying agricultural assets. We also continue to explore additional uses of our land and water resource assets, including renewable energy development, 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 habitat conservation and cultural development. ### 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 an additional 850,000 acre-feet of capacity that can store imported water supplies at the project area for future dry years. Water Project facilities required for Phase I primarily include, among other things: - High-yield wells designed to efficiently recover available native groundwater at the Water Project area; - A water conveyance pipeline to deliver water from the well-field to the CRA for further delivery to Project participants; - An energy source to provide power to the well-field, pipeline and pumping facilities; and - A water treatment facility at the wellfield to meet anticipated water quality requirements set by the operator of the CRA. 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: - Facilities to pump water through the conveyance pipeline from the CRA to the Water Project well-field and/or through the Company's pipeline from Barstow, CA, to Cadiz; 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. #### Phase I Phase I has been fully reviewed and permitted in accordance with the California Environmental Quality Act (CEQA). In May 2016, all permits and approvals were sustained in the California Court of Appeal and are no longer subject to further litigation. As a result, the Project presently is permitted to provide an average of 50,000 acre-feet of water for 50 years to meet municipal and industrial (M&I) water needs in Southern California. In October 2017, the US Bureau of Land Management ("BLM") provided a letter finding that the Project's proposed use of a portion of the Arizona & California Railroad Company ("ARZC") right-of-way from Cadiz to Freda, California to construct and operate the Water Project's water conveyance pipeline and related railroad improvements is within the scope of the original right-of-way grant and not subject to additional permitting. The buried pipeline would be constructed parallel to the railroad tracks and be used to convey water between our Cadiz Valley property and the CRA. Construction of Water Project facilities that would allow for the delivery of up to 75,000 acre-feet in any one year is expected to cost approximately $310 million 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. In addition to finalizing construction financing terms, prior to construction, the Water Project must (1) finalize contracts with Project participating agencies, (2) secure transportation arrangements to deliver water into each participant's service area, and (3) complete final design, engineering and construction permitting. Below is a discussion of present activities to advance these objectives. #### (1) Contracts with Public Water Agencies or Private Water Utilities The Company has 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. Agreements entered into prior to the beginning of the CEQA review process provide the 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 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 own 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. Presently, total reservations of supplies from the Water Project via these Agreements are in excess of Water Project capacity. Prior to construction of the Water Project, we expect to convert existing option agreements and LOIs to purchase agreements. We are working collaboratively with the participating water agencies to account for any oversubscription in the final definitive Purchase and Sale Agreements and allow for inclusive participation across Southern California. #### (2) Conveyance Arrangements Prior to construction of the Water Project, and in coordination with final participation contracts described in (1) above, an agreement and terms for moving water supplies in the CRA must be negotiated with Metropolitan Water District of Southern California ("Metropolitan"), which owns and controls the CRA. 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 take action 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. Discussions with Metropolitan regarding conveyance of Project water in the CRA have been led by SMWD, the Water Project's CEQA lead agency, and are ongoing. 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. Total dissolved solids or salts in the Cadiz water supply are substantially lower than the water in the CRA. Other constituents that are already lower than State and Federal standards but potentially higher than the water in the CRA will be lowered via treatment to ambient levels or removed entirely. Extensive pilot testing of treatment options at the Project area in 2018 confirmed the capability of cost-effective treatment technologies to successfully remove such constituents. We believe there are multiple benefits that can be realized by MWD and 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 Cadiz project in both wet and dry years. #### Northern Pipeline 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 for 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 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 networks. As a result, this pipeline could diversify delivery opportunities for the Water Project and the Company's broader water resource development efforts. If this pipeline were to become operational, then the Water Project would link the Colorado River Aqueduct 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, the Company entered into an amendment (the "Amendment") to its 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, allows the Company to purchase the 124-mile pipeline segment with an initial payment of $2 million and a subsequent payment of $18 million ("Deferred Payment"). Following entry into the Amendment, the Company exercised the option and entered into a purchase agreement for the 124-mile pipeline, providing to EPNG the initial consideration of $2 million. Under our purchase agreement with EPNG, the Deferred Payment is due to EPNG within 30 days of satisfaction of certain conditions precedent by EPNG. We do not currently have the cash resources on hand to satisfy the Deferred Payment. If we do not complete the purchase of the additional 124-mile pipeline, then our Northern Pipeline opportunities will be limited to the 96-mile segment that we own. #### (3) Final Design and Permitting As a component of completing contract terms with participating agencies and related wheeling arrangements with Metropolitan, we must also finalize design of Project facilities and acquire relevant construction permits with state and local agencies. Together with SMWD we have engaged engineering and environmental consultants to complete design plans for the 43-mile pipeline, Project wellfield, any necessary water treatment facilities, and facilities required to connect to the Metropolitan system at and near the CRA. This work is ongoing and expected to proceed in coordination with the negotiation of contracts and wheeling arrangements. Once facility design and layout near completion, we will need to obtain additional permits and approvals from state or local entities prior to construction. This may include but is not limited to confirmation of existing access rights, easements and right-of-ways, for areas that may be crossed by Project facilities in the Project area subject to final pipeline configuration. #### Phase II In a second phase of the Water Project, we expect to make available up to one million acre-feet of capacity in the aquifer system for storage of surplus water conveyed to the Project area. Under the Imported Water Storage Component, or Phase II, water from the Colorado River or the State Water Project, via some or all of an existing 220-mile pipeline that extends from Wheeler Ridge, California southeast to Barstow and there onwards to our Cadiz/Fenner property (see "Northern Pipeline", above), 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 Project's 43-mile conveyance pipeline to the CRA, described above, or the Northern Pipeline. 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 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 agriculture 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"), a subsidiary of Water Asset Management LLC, a related party, 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. The acreage that was historically farmed by us and the acreage that is leased to a third party to develop lemons was included within the leased acreage. Following entry into this lease, we are no longer directly involved in the current agricultural operations at the site and all agricultural revenue is derived pursuant to the FVF Lease. As part of the agricultural development to be conducted under the lease arrangements, the groundwater production capacity of the property's existing well-field is expected to be enhanced through infrastructure improvements that are complementary to the Water Project. While any additional well-field development for agricultural use would be financed by our agricultural partners as provided under our agricultural lease arrangements, we retained a call feature that allows us, at any time in the initial 20 years, to acquire the well-field and integrate any new agricultural well-field infrastructure developed into the Water Project's facilities. ### Additional Eastern Mojave Properties We also own approximately 11,000 acres outside of the Cadiz/Fenner Valley area in two locations within the Mojave Desert in eastern San Bernardino County. Our primary landholding outside of the Cadiz 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 acreage 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 have 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 our 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, 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 pipeline crosses California's major water infrastructure as well as urban and agricultural centers and can be utilized 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. ### 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 and water assets and will continue to explore all opportunities for environmentally responsible development of these assets. We cannot estimate which of these opportunities will ultimately be utilized. ### Results of Operations ### Three Months Ended March 31, 2019, Compared to Three Months Ended March 31, 2018 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 the FVF Lease (see "Agricultural Development", above). As a result, we have historically incurred a net loss from operations. We had revenues of $109 thousand for the three months ended March 31, 2019 and $108 thousand for the three months ended March 31, 2018. We incurred a net loss of $7.3 million in the three months ended March 31, 2019, compared to a $6.0 million net loss during the three months ended March 31, 2018. The higher 2019 loss was primarily due to higher general and administrative expenses, higher interest expense, and a recorded debt conversion expense, combined with $0.5 million in unrealized gains recorded for warrant liabilities in 2018. 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 $109 thousand for the three months ended March 31, 2019 and $108 thousand for the three months ended March 31, 2018. Revenues primarily related to rental income from the FVF Lease (see "Agricultural Development", above). ***General and Administrative Expenses*** General and Administrative Expenses, exclusive of stock-based compensation costs, totaled $2.8 million in the three months ended March 31, 2019, compared to $2.4 million in the three months ended March 31, 2018. Compensation costs for stock and option awards for the three months ended March 31, 2019, were $122 thousand, compared to $105 thousand for the three months ended March 31, 2018. ***Depreciation*** Depreciation expense totaled $66 thousand during each of the three months ended March 31, 2019 and 2018. ***Interest Expense, net*** Net interest expense totaled $4.2 million during the three months ended March 31, 2019 compared to $3.5 million during the same period in 2018. The following table summarizes the components of net interest expense for the two periods (in thousands): | | Three Months Ended March 31, 2019 | 2018 | | --- | ---: | ---: | | Interest on outstanding debt | $3,225 | $3,040 | | Unrealized gains on warrants, net | - | (516) | | Amortization of debt discount | 988 | 953 | | Amortization of deferred loan costs | 21 | 39 | | | $4,234 | $3,516 | ***Income Taxes*** Income tax expense was $1 thousand for each of the three months ended March 31, 2019 and 2018. See Note 4 to the Condensed Consolidated Financial Statements – "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. In November 2018, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $25 million from time to time in an "at-the-market" offering (the "November 2018 ATM Offering"). As of March 31, 2019, the Company issued 879,920 shares of common stock in the November 2018 ATM Offering for gross proceeds of $9.14 million and aggregate net proceeds of approximately $8.81 million. The Company has and may continue to issue equity securities pursuant to the November 2018 ATM Offering. In March 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 $15 million from time to time in an "at the market" offering (the "March 2018 ATM Offering"). The Company completed the offering during May 2018, having issued 1,159,718 shares of common stock in the March 2018 ATM Offering for gross proceeds of $15 million and aggregate net proceeds of approximately $14.6 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"). The Senior Secured Debt and the 7.00% Convertible Senior Notes due March 2020 ("Convertible Senior Notes") contain 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 Senior Secured Debt 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 March 31, 2019, 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 meet the obligations related to the (1) Senior Secured Debt which could come due as early as December 2019 or (2) the Convertible Senior Notes coming due in March 2020 to the extent these notes are not converted. However, we have entered into option agreements with parties holding 99% of the Convertible Senior Notes that allow us, at our sole option, at any time prior to December 5, 2019, to extend the maturity date of the Convertible Senior Notes to September 5, 2021. Additionally, the completion of the acquisition of the 124-mile extension of our Northern Pipeline will require an $18 million payment within thirty days of satisfaction of certain conditions precedent under our purchase agreement with EPNG. We do not currently have the cash resources on hand to make this payment in full. To the extent additional capital is required, we may increase liquidity through a variety of means, including equity or debt placements, through the lease, sale or other disposition of assets or reductions in operating costs. If additional capital is required, no assurances can be given as to the availability and terms of any new financing. As we continue to actively pursue our business strategy, additional financing may 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 development activities. At March 31, 2019, we had no outstanding credit facilities other than the Senior Secured Debt and the convertible notes. **Cash Used in Operating Activities.** Cash used in operating activities totaled $4.0 million and $3.9 million for the three months ended March 31, 2019 and 2018, respectively. The cash was primarily used to fund general and administration expenses related to our water development efforts. **Cash Used in Investing Activities.** Cash used in investing activities totaled $165 thousand for the three months ended March 31, 2019, and $502 thousand for the three months ended March 31, 2018. The costs primarily consisted of engineering and design related to the development of the Water Project. **Cash Provided by (Used in) Financing Activities.** Cash provided by financing activities totaled $7.9 million for the three months ended March 31, 2019, compared with cash used for financing activities of $14 thousand for the three months ended March 31, 2018. The 2019 results include $7.9 million of net proceeds from the issuance of shares under an at-the-market offering. ### Outlook ***Short-Term Outlook.*** We have principal and interest payments aggregating approximately $76.3 million as of March 31, 2019 coming due in March 2020 relating to our Convertible Senior Notes to the extent the noteholders, who have the right to convert at any time into our common stock at a conversion rate of $6.75 per share, do not convert prior to March 2020 or we do not exercise the option agreements we currently have with parties holding 99% of our Convertible Senior Notes that allow us, at our sole option, at any time prior to December 5, 2019, to extend the maturity date of the Convertible Senior Notes to September 5, 2021. Our Senior Secured Debt of approximately $67.1 million as of March 31, 2019 could also become due as early as December 2019 if we have not exercised the option agreements or the Convertible Senior Notes have not been converted by that time and the Company's stock price is less than 120% of the conversion rate. We do not currently have adequate resources on hand to meet these obligations should they come due. Additionally, to complete our acquisition of an additional 124-mile extension of our Northern Pipeline, we will require a further $18 million to fund the payment that will be due 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. 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 or our Convertible Senior Notes 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 primarily on the progress of the Water Project. We are evaluating the amount of cash needed, and the manner in which such cash will be raised, on an ongoing basis. We may meet any future cash requirements through a variety of means, including equity or debt placements, or through the sale or other disposition of assets. Equity placements would be undertaken only to the extent necessary, so as to minimize the 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". ## Market risk As filed, 171 characters. 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. ## Controls and procedures As filed, 1,635 characters. ### 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 March 31, 2019, 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. ## Risk factors As filed, 4,330 characters. ***We could be negatively affected as a result of a proxy contest or related litigation.*** In April 2019, we received notice that TRF Master Fund (Cayman) LP, an affiliate of Water Asset Management, LLC (which we refer to, collectively with all its affiliates, including TRF Master Fund (Cayman) LP, as "WAM") intends to nominate five candidates to the Board for election as directors in opposition to three of the nominees recommended by the Board and submit a proposal for stockholder vote at the 2019 Annual Meeting of the Stockholders (the "2019 Annual Meeting"), which, if approved, would amend the Bylaws to expand the notice requirements for stockholder business to be timely brought before an annual meeting. These WAM nominated directors are comprised of the two Company incumbent directors currently serving in connection with a cooperation agreement entered into by WAM and the Company in 2018 and three new nominees (the "Additional WAM Nominees"). Although our Board has not made its recommendation with respect to the director elections or proposal submitted by WAM for our 2019 Annual Meeting, it is possible that a proxy contest involving WAM will ensue. Our Board and management strive to maintain constructive, ongoing communications with all of the Company's stockholders. While we welcome stockholder views and opinions with the goal of enhancing value for all stockholders and intend to engage in constructive dialogue with WAM and the Company's other stockholders, any proxy contest or related litigation could negatively affect the Company for a number of reasons, including but not limited to the following: - Responding to proxy contests, litigation and other actions by dissident stockholders is costly and time-consuming, disrupting our operations and diverting the attention of management and our employees; - Perceived uncertainties as to our future direction as a result of changes to the composition of our Board may damage morale, create instability among our management and employees, be exploited by opponents of the Water Project or adversely impact existing and potential strategic and operational relationships and opportunities; - We may experience difficulties in hiring, retaining and motivating personnel during the resulting uncertainty; - The uncertainty created by any delay in certifying the election results of our 2019 Annual Meeting could further negatively impact the stability and morale of our management and employees; - If individuals are elected or appointed to our Board with a specific dissident agenda, it may adversely affect our ability to effectively and timely implement our current business plan and new strategies, which could have a material adverse effect on our results of operations and financial condition; - Increases in legal fees, insurance, or proxy solicitation, administrative and associated costs incurred in responding to proxy contests and any related litigation may be substantial; - A successful election outcome by a dissident stockholder who is also engaged in litigation against us could also potentially adversely affect the Company by resulting in an "insured v. insured exclusion" under our D&O insurance policy, which may exclude indemnification for claims against directors and officers alleged by other directors and officers or by other policyholders under the same policy. There may be a risk that our insurer would decline to cover claims, or that defense costs advanced by the Company during the pendency of the claim would later be determined to be not covered under the policy and would not be repaid or recovered. We cannot assure you that an adverse determination would not be made by our insurer which may have a material adverse effect on our business, financial condition and results of operations. Any proxy contest, threat of a proxy contest or related litigation may adversely affect our financial condition and results of operations or cause our stock price to experience periods of volatility or stagnation, based on temporary or speculative market perceptions or other factors that do not necessarily reflect the underlying prospects of our business. 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, 2018, other than as set forth above. Filed May 9, 2019. Source: SEC EDGAR, the filing index for accession 0000727273-19-000012. Last ingested by Listed: Oct 29, 2026, 16:21 ET. No prices; not investment advice.