Cadiz Inc.

Notes to the Condensed Consolidated Financial Statements 

On June 7, 2021, the Company completed the sale and issuance of 1,219,512 shares of the Company’s common stock to certain institutional investors under a placement agent agreement with B. Riley Securities, Inc. (“BRS”). The shares of common stock were sold at a purchase price of $12.30 per share, for an aggregate gross purchase price of approximately $15 million. The Company used the net proceeds from this offering together with cash on hand to fund the $19 million payment made on June 30, 2021 to complete the acquisition of a 124-mile extension of its Northern Pipeline.

On June 29, 2021, the Company entered into an Underwriting Agreement with BRS as representative of the several underwriters named there, to issue and sell an aggregate of 2,000,000 depositary shares (the “Depository Shares”), as well as up to 300,000 Depository Shares that may be sold pursuant to the exercise of an option to purchase additional Depositary Shares, each representing 1/1000^th of a share of Series A Preferred Stock (“Depositary Share Offering”). The liquidation preference of each share of Series A Preferred Stock is $25,000.00 ($25.00 per Depositary Share). The Depositary Share Offering was completed on July 2, 2021 for net proceeds of approximately $54 million (see Note 10 – “Subsequent Events”).

In May 2017, the Company entered into a new $60 million credit agreement (“Credit Agreement”) with funds affiliated with Apollo Global Management, LLC (“Apollo”) that replaced and refinanced its then existing $45 million senior secured mortgage debt (“Prior Senior Secured Debt”) and provided $15 million of new senior debt to fund immediate construction related expenditures (“Senior Secured Debt”).  The Company’s Senior Secured Debt contains representations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit the Company’s ability to incur additional indebtedness, incur liens, pay dividends or make restricted payments, dispose of assets, make investments and merge or consolidate with another person.  However, while there are affirmative covenants, there are no financial maintenance covenants and no restrictions on the Company’s ability to issue additional common stock to fund future working capital needs. The Company entered into two further agreements with Apollo which provideprovided it with the right, at its option, to extend the maturity of the Senior Secured Debt from its then current maturity of May 25, 2021 to May 25, 2022, and to November 25, 2022, respectively. TheOn May 18, 2021, the Company currently intends to exerciseexercised its first extension option to extend the maturity date to May 25, 2022. At March 31,June 30, 2021, the Company was in compliance with its debt covenants.

The Company’s acquisition of aOn 124-mile extension of its Northern Pipeline will require a $19 million payment by June 30,July 2, 2021, under the purchaseCompany entered into a new $50 million senior secured credit agreement with El Paso Natural Gas Companylenders party thereto from time to time (“EPNG”Lenders”) and BRS, as administrative agent for the Lenders (“New Loan”) (see Note 10 – “Subsequent Events”). If the acquisitionThe proceeds of the 124-mile segments isNew Loan, together with the proceeds from the Depositary Share Offering, were used (a) to repay all our outstanding obligations under our existing Senior Secured Debt in the amount of approximately $77.5 million, (b) to deposit approximately $10.2 million into a segregated account, representing an amount sufficient to pre-fund noteight completed, thenquarterly dividend payments on the Company's Northern Pipeline opportunitiesSeries A Preferred Stock underlying the Depositary Shares issued in the Depositary Share Offering, and (c) to pay transaction related expenses. The remaining proceeds will be limited to the 96-mile segment it already owns. used for working capital needs and for general corporate purposes.

The Company may meet its debt and working capital requirements through a variety of means, including extension, refinancing, equity placements, the sale or other disposition of assets, or reductions in operating costs. The covenants in the New Loan do not prohibit the Company’s use of additional equity financing and allow the Company to retain 100% of the proceeds of any common equity financing.  The Company does not expect the loan covenants to materially limit its ability to finance its water and agricultural development activities.

Management assesses whether the Company has sufficient liquidity to fund its costs for the next twelve months from each financial statement issuance date. Management evaluates the Company’s liquidity to determine if there is a substantial doubt about the Company’s ability to continue as a going concern. In the preparation of this liquidity assessment, management applies judgement to estimate the projected cash flows of the Company including the following: (i) projected cash outflows (ii) projected cash inflows and (iii) categorization of expenditures as discretionary versus non-discretionary. The cash flow projections are based on known or planned cash requirements for operating costs as well as planned costs for project development.  

Cadiz Inc.

Notes to the Condensed Consolidated Financial Statements 

Limitations on the Company’s liquidity and ability to raise capital may adversely affect it. Sufficient liquidity is critical to meet the Company’s resource development activities. Although the Company currently expects its sources of capital to be sufficient to meet its near-term liquidity needs, there can be no assurance that its liquidity requirements will continue to be satisfied. If the Company cannot raise needed funds, it might be forced to make substantial reductions in its operating expenses, which could adversely affect its ability to implement its current business plan and ultimately its viability as a company.

Supplemental Cash Flow Information

Under the terms of the Senior Secured Debt, the Company is required to pay 25% of all future quarterly interest payments in cash.  During the threesix months ended March 31,June 30, 2021, approximately $373$819 thousand in interest payments on the corporate secured debtSenior Secured Debt was paidpayable in cash.

On May 18, 2021, the Company exercised its first extension option to extend the maturity date of its then Senior Secured Debt from May 25, 2021 to May 25, 2022 (“First Option Election Notice”). At the time of the First Option Election Notice, the Company paid an extension option fee equal to 1% of the aggregate amount of the accreted loan value as of the date of such notice (“Extension Option Fee”). The Extension Option Fee was payable in cash or in shares of the Company’s common stock, at the option of the Company in its sole discretion. The Company opted to pay the Extension Option Fee in common stock, and as a result issued 64,356 shares of common stock to its lenders.

The balance of cash, cash equivalents, and restricted cash as shown in the condensed consolidated statements of cash flows is comprised of the following:

The restricted cash amounts included in Other Assets primarily represent a deposit from a water project participant related to a cost-sharing agreement.

Recent Accounting Pronouncements

Accounting Guidance Not Yet Adopted

In June 2016, Financial Accounting Standards Board (“FASB”) issued an accounting standards update which introduces new guidance for the accounting for credit losses on certain financial instruments. This update is effective for fiscal years beginning after December 15, 2023, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial statements.

Cadiz Inc.

Notes to the Condensed Consolidated Financial Statements 

Accounting Guidance Adopted

In December 2019, FASB issued an accounting standards update which reduces complexity in accounting standards by removing certain exceptions to the general principles in Topic 740. This update is effective for fiscal years beginning after December 15, 2020, and for interim periods within those fiscal years, with early adoption permitted. The adoption of this guidancenew standard on January 1, 2021 and the new standard had no impact on the Company’s condensed consolidated financial statements.

In August 2020, the FASB issued an accounting standards update which simplifies accounting for convertible instruments by removing major separation models required under current U.S. GAAP (“ASU 2020-6”). Consequently, more convertible debt instruments will be reported as a single liability instrument and more convertible preferred stock as a single equity instrument with no separate accounting for embedded conversion features. ASU 2020-06 also removes certain settlement conditions required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to be eligible for it. The ASU also simplifies the diluted earnings per share (EPS) calculation in certain areas.  ASU 2020-06 is effective for public business entities, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for annual reporting periods beginning after December 15, 2020.  The Company early adopted the provisions of ASU 2020-06 effective January 1, 2021, on the modified retrospective transition method, to take advantage of the removal of certain conditions required for equity contracts to qualify for the derivative scope exception.  Adopting ASU 2020-06 did not result in a cumulative impact of adoption during the quartersix months ended March 31,June 30, 2021.

NOTE 2 – LONG-TERM DEBT

The carrying value of the Company’s Senior Secured Debt approximates fair value. The fair value of the Company’s Senior Secured Debt (Level 2) is determined based on an estimation of discounted future cash flows of the debt at rates currently quoted or offered to the Company by its lenders for similar debt instruments of comparable maturities by its lenders.

In March 2020, the Company entered into an agreement that providesprovided it the right, at its option, to extend the contractual May 25, 2021 maturity of its Senior Secured Debt of approximately $80.7$83.1 million as of March 31,June 30, 2021 until May 25, 2022.  On March 24, 2021, the Company entered into an additional agreement which providesprovided it the right, at its option, to further extend the maturity date of its Senior Secured Debt to November 25, 2022. The fee to acquire this second extension option was the adjustment of the exercise price of 362,500 warrants held by Apollo from $6.75 to $0.01 (“Warrant Modification”).  The Company currently intends to exercise its first extension option to extend the maturity date to May 25, 2022.

As a result of the Warrant Modification, the Company reclassified the carrying value of the warrant prior to the modification from a warrant liability in the amount of $1.3$1.3 million to additional paid-in capital. In addition, the Company recorded debt issuance costs in the amount of $1.9 million, which was the increase in fair value of the warrant at the time of the modification, with a corresponding adjustment to additional paid-in capital.  The debt issuance costs will be amortized over the remaining life of the Senior Secured Debt. Prior to the Warrant Modification, the fair value of the warrant was remeasured each reporting period using an option pricing model, and the change in fair value was recorded as an adjustment to the recorded warrant liability with the unrealized gains or losses reflected in interest expense. On May 10, 2021, Apollo exercised all of its 362,500 warrants, which allowed them to purchase 362,500 shares of common stock at $0.01 per share.

As ofFor the March 31,six months ended June 30, 2021, the Company recognized a gain of $573 thousand related to the remeasurement of the warrant liability prior to the Warrant Modification.

Cadiz Inc.

Notes to the Condensed Consolidated Financial Statements 

On May 18, 2021, the Company exercised its first extension option to extend the maturity date to May 25, 2022 (“First Option Election Notice”). At the time of the First Option Election Notice, the Company was required to pay an extension option fee equal to 1% of the aggregate amount of the accreted loan value as of the date of such notice (“Extension Option Fee”). The Extension Option Fee was payable in cash or in shares of the Company’s common stock, at the option of the Company in its sole discretion. The Company opted to pay the Extension Option Fee in common stock, and as a result issued 64,356 shares of common stock to its lenders.

On June 28, 2021, an affiliate of BRS entered into an assignment and assumption agreement (“Assignment”) whereby it agreed to purchase all outstanding obligations under the Senior Secured Debt for $77.5 million. This Assignment closed on July 2, 2021. In conjunction with the closing of the Assignment, the Company issued 363,566 shares of the Company’s common stock to Apollo.

On July 2, 2021, the Company entered into the $50 million New Loan (see Note 10 – “Subsequent Events”). The proceeds from the New Loan, together with the proceeds from the Depositary Share Offering, were used to repay all of the Company's outstanding obligations under its existing Senior Secured Debt in the amount of approximately $77.5 million.

Cadiz Inc.

Notes to the Condensed Consolidated Financial Statements 

NOTE 3 – PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS

On June 30, 2021, the Company recorded the acquisition of a 124-mile pipeline (“Pipeline”). The Pipeline will be depreciated and amortized over its useful life of 30 years.

Property, plant, equipment and water programs consist of the following (dollars in thousands) as of June 30, 2021 and December 31, 2020:

Depreciation expense was $206 thousand for the six months ended June 30, 2021.

NOTE 4– STOCK-BASED COMPENSATION PLANS

The Company has issued options and has granted stock awards pursuant to its 2009 Equity Incentive Plan and 2019 Equity Incentive Plan.

Stock Options to Directors, Officers and Consultants

In total, options to purchase 115,00015,000 shares were unexercised and outstanding on March 31,June 30, 2021 under these equity incentive plans. The Company recognized 0 stock option related compensation costs in each of the threesix months ended March 31,June 30, 2021 and 2020. Additionally, 0 options were exercised during the threesix months ended March 31,June 30, 2021.

Stock Awards to Directors, Officers, and Consultants

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

Of the total 1,200,000 shares reserved under the 2019 Equity Incentive Plan, 273,1271,116,261 shares and restricted stock units (“RSUs”) have been awarded to the CompanyCompany’s directors, employees and consultants as of March 31,June 30, 2021. Of the 1,116,261 shares and RSUs awarded, 14,243 shares were awarded to the Company’s directors for services performed during the plan year ended June 30, 2021 and are scheduled to vest on January 31, 2022, and 825,000 RSUs were granted to employees in April 2021 as long-term equity incentive awards ( “April 2021 RSU Grant”). Of the 825,000 RSUs granted under the April 2021 RSU Grant, 510,000 RSUs vest upon completion of certain milestones, including (a) 255,000 RSUs which vested in July 2021 upon completion of refinancing of the Company’s existing Senior Secured Debt and funding to complete the purchase of the Northern Pipeline, and (b) 255,000 RSUs scheduled to vest upon completion of final binding water supply agreement(s) for the delivery of at least 9,500 acre-feet of water per annum to customers. Of the remaining 315,000 RSUs granted under the April 2021 RSU Grant, 60,000 RSUs are scheduled to vest on January 3, 2023, and 255,000 RSUs are scheduled to vest on March 1, 2023. The RSU incentive awards are subject in each case to continued employment with the Company through the vesting date.

Cadiz Inc.

Notes to the Condensed Consolidated Financial Statements 

The compensation expense recognized in the six month period ending June 30, 2021 was based on the fair value of the RSUs on grant date.  The accompanying consolidated statements of operations and comprehensive loss include approximately $146,000$3,440,000 and $1,250,000$1,551,000 of stock-based compensation expense related to stock awards in the threesix months ended March 31,June 30, 2021 and 2020, respectively.

As of June 30, 2021, 83,739 shares remain available for award under the 2019 Equity Incentive Plan.

NOTE 45 – INCOME TAXES

As of March 31,June 30, 2021, the Company had net operating loss (“NOL”) carryforwards of approximately $333$341 million for federal income tax purposes and $244$252 million for California state income tax purposes. Such carryforwards expire in varying amounts through the year 2038 and 2041 for federal and California purposes, respectively. For federal losses arising in tax years ending after December 31, 2017, the NOL carryforwards are allowed indefinitely. Use of the carryforward amounts is subject to an annual limitation as a result of ownership changes.

As of March 31,June 30, 2021, the Company possessed unrecognized tax benefits totaling approximately $1.2 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.

The Company's tax years 20172018 through 2020 remain subject to examination by the Internal Revenue Service, and tax years 2016 through 2020 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 condensed consolidated balance sheet.