Note 2 - Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2020

Notes to Financial Statements

Significant Accounting Policies [Text Block]

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The Consolidated Financial Statements of the Company have been prepared on a going concern basis, which contemplates the continuity of operations, the realization of assets and the satisfaction of liabilities in the normal course of business.

The Company incurred losses of $37.8 million and $29.5 million for the years ended December 31, 2020 and 2019, respectively. The Company had working capital of $4.9 million at December 31, 2020 and used cash in operations of $13.4 million for the year ended December 31, 2020. Cash requirements during the year ended December 31, 2020 primarily reflect certain administrative costs related to the Company’s water project development efforts and the further development of its land and agricultural assets, including its 50% equity investment in SoCal Hemp JV LLC. The Company’s present activities are focused on development of its assets in ways that meet growing long-term demand for access to sustainable water supplies and agricultural products.

In July 2020, the Company entered into an At Market Issuance Sales Agreement under which the Company could issue and sell shares of its common stock having an aggregate offering price of up to $30 million from time to time in an “at-the-market” offering (the “July 2020 ATM Offering”). As of December 31, 2020, the Company issued 1,099,021 shares of common stock in the July 2020 ATM Offering for gross proceeds of $11.2 million and aggregate net proceeds of approximately $10.8 million. The Company has and may continue to issue equity securities pursuant to the July 2020 ATM Offering.

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

In May 2017, the Company entered into a $60 million credit agreement (“Credit Agreement”) with funds affiliated with Apollo Global Management, LLC (“Apollo”) that replaced and refinanced its then existing $45 million senior secured mortgage debt (“Prior Senior Secured Debt”) and provided $15 million of new senior debt to fund immediate construction related expenditures (“Senior Secured Debt”). The Company’s Senior Secured Debt and its convertible notes contain representations, warranties and covenants that are typical for agreements of this type, including restrictions that would limit the Company’s ability to incur additional indebtedness, incur liens, pay dividends or make restricted payments, dispose of assets, make investments and merge or consolidate with another person.  However, while there are affirmative covenants, there are no financial maintenance covenants and no restrictions on the Company’s ability to issue additional common stock to fund future working capital needs.  The debt covenants associated with the Senior Secured Debt were negotiated by the parties with a view towards the Company’s operating and financial condition as it existed at the time the agreements were executed.  In March 2020, the Company entered into an agreement with Apollo that allows the Company to extend the maturity of the Apollo debt for an additional year from its current maturity of May 2021 to May 2022 at the Company’s option.  Additionally, on March 24, 2021, the Company entered into an agreement to further extend, in its sole discretion, the Apollo debt to November 2022 (see Note 14 – “Subsequent Events”).

On March 5, 2020, the Company entered into Conversion and Exchange Agreements (the “Exchange Agreements”) with certain holders (the “Holders”) of the Company’s 7% Convertible Senior Notes due 2020 (the “Convertible Notes”) having an aggregate original principal amount of $27.4 million. Pursuant to the terms of the Exchange Agreements, the Holders exchanged an aggregate amount payable of $27.3 million under the Convertible Notes for an aggregate of 10,000 shares of Series 1 Preferred Stock and the Holders converted the remaining aggregate amount payable of $17.5 million of Convertible Notes into 2.6 million shares of common stock in accordance with the terms of the existing Indenture. Following the transactions, all of the Convertible Notes held by the Holders, as well as all the remaining Convertible Notes held by others that were converted in accordance with the existing Indenture at maturity have been satisfied in full and cancelled.

The Company’s acquisition of a 124-mile extension of its’ Northern Pipeline will require a $19 million payment by June 30, 2020 under the purchase agreement with El Paso Natural Gas Company (“EPNG”). If the acquisition of the 124-mile segment is not completed, then the Company’s Northern Pipeline opportunities will be limited to the 96-mile segment it already owns (see Note 11 – “Commitments and Contingencies”).

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.

Management assesses whether the Company has sufficient liquidity to fund its costs for the next twelve months from the 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.  

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

Principles of Consolidation

The consolidated financial statements include the accounts of Cadiz Inc. and all subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. We apply the equity method of accounting for investments in which we have significant influence but not a controlling interest.

Use of Estimates in Preparation of Financial Statements

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. In preparing these financial statements, management has made estimates with regard to goodwill and other long-lived assets, stock compensation and deferred tax assets. Actual results could differ from those estimates.

Revenue Recognition

The Company recognizes rental income through its agricultural leases with Fenner Valley Farms LLC and SoCal Hemp JV LLC.

Stock-Based Compensation

General and administrative expenses include $2.1 million and $0.6 million of stock-based compensation expenses in the years ended December 31, 2020 and 2019, respectively.

Stock-based compensation is generally based upon grants of stock awards or restricted stock units (“RSU”) to its employees and consultants under the 2019 Equity Incentive Plan.  For stock awards or RSUs granted, the Company determines the fair value of the stock award or RSU at the date of the grant and recognizes the compensation expense over the vesting period.

Net Loss Per Common Share

Basic net loss per share is computed by dividing the net loss by the weighted-average common shares outstanding. Options, deferred stock units, convertible debt, convertible preferred shares and warrants were not considered in the computation of net loss per share because their inclusion would have been antidilutive. Had these instruments been included, the fully diluted weighted average shares outstanding would have increased by approximately 2,956,081 shares and 11,477,000 shares for the years ended December 31, 2020 and 2019, respectively.

Property, Plant, Equipment and Water Programs

Property, plant, equipment and water programs are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, generally ten to forty-five years for land improvements and buildings, and five to fifteen years for machinery and equipment. Leasehold improvements are amortized over the shorter of the term of the relevant lease agreement or the estimated useful life of the asset.

Water rights, storage and supply programs are stated at cost. Certain costs directly attributable to the development of such programs have been capitalized by the Company. These costs, which are expected to be recovered through future revenues, consist of direct labor, drilling costs, consulting fees for various engineering, hydrological, environmental and additional feasibility studies, and other professional and legal fees. We have not commenced depreciation of these assets as they are not yet in service. While interest on borrowed funds is currently expensed, interest costs related to the construction of project facilities will be capitalized at the time construction of these facilities commences.

Goodwill and Other Assets

As a result of a merger in May 1988 between two companies which eventually became known as Cadiz Inc., goodwill in the amount of $7,006,000 was recorded. Approximately $3,193,000 of this amount was amortized prior to the adoption of Accounting Standards Codification 350, “Intangibles – Goodwill and Other” (“ASC 350”) on January 1, 2002. Since the adoption of ASC 350, there have been no goodwill impairments recorded. The Cadiz reporting unit to which $3.8 million of goodwill is allocated had a negative carrying amount on December 31, 2020 and 2019.

Deferred loan costs represent costs incurred to obtain debt financing. Such costs are amortized over the life of the related loan using the effective interest method. At December 31, 2020, the deferred loan fees are not material.

Impairment of Goodwill and Long-Lived Assets

The Company assesses long-lived assets, excluding goodwill, for recoverability whenever events or changes in circumstances indicate that their carrying value may not be recoverable through the estimated undiscounted future cash flows resulting from the use of the assets. If it is determined that the carrying value of long-lived assets may not be recoverable, the potential impairment charge is measured by using the projected discounted cash-flow method.  No impairment charge was recorded during the current fiscal year.

The Company performs an annual impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any).  This quantitative assessment is performed at least annually in the fourth quarter and compares a reporting unit’s fair value to its carrying amount to determine if there is a potential impairment.  An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit. No impairment charge was recorded during the current fiscal year.

Income Taxes

Income taxes are provided for using an asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement and tax bases of assets and liabilities at the applicable enacted tax rates. A valuation allowance is provided when it is more likely than not that some portion or all of the deferred tax assets will not be realized.

Fair Value of Financial Instruments

Financial assets with carrying values approximating fair value include cash and cash equivalents and accounts receivable. Financial liabilities with carrying values approximating fair value include accounts payable and accrued liabilities due to their short-term nature. The carrying value of the Company’s secured debt approximates fair value, based on interest rates available to the Company for debt with similar terms. See Note 6 – “Long-Term Debt”, for discussion of fair value of debt.

SoCal Hemp JV

On July 31, 2019, SoCal Hemp JV LLC (the “JV”) was created by Cadiz Real Estate LLC (a fully owned subsidiary of Cadiz Inc.) and SoCal Hemp Co, LLC (a fully owned subsidiary of Glass House Farms, a division of California Cannabis Enterprises, Inc., which is an unrelated company to Cadiz Inc.) when the two parties entered into a Limited Liability Company Agreement (“LLC Agreement”). The JV is 50% owned by Cadiz Real Estate LLC and 50% owned by SoCal Hemp Co., LLC. Pursuant to the LLC Agreement, the JV profits and losses are allocated to the members based on their ownership share. The Company accounts for its investment in the JV using the equity method of accounting. Additionally, the LLC Agreement provides that, at the request of SoCal Hemp Co, LLC, their share of initial costs could be funded by Cadiz in the form of a loan which would bear interest at 8% per annum (“Stage 1 Loan”). Repayment of the Stage 1 Loan would be through priority distribution from the JV. As of December 31^st, 2020, the Company recorded a note receivable in the amount of $190 thousand related to the Stage 1 Loan.

The carrying value of the investment was $1.4 million at December 31, 2020, and $0.7 million at December 31, 2019.  During 2020, the Company made contributions to the JV of $2.8 million and recorded $2.2 million of losses.  The losses resulted from higher growing costs and lower yields in this initial startup year of commercial production coupled with a reserve for valuing inventory at lower of cost or market by the JV due to the significant market price reductions for hemp biomass experienced in 2020.

Supplemental Cash Flow Information

Under the terms of the Senior Secured Debt, the Company is required to pay 25% of all quarterly interest payments in cash. During the year ended December 31, 2020, approximately $1.46 million in interest payments on the Senior Secured Debt was paid in cash. No other payments are due on the Senior Secured Debt or the Company’s Convertible Senior Notes prior to their maturities.

During the year ended December 31, 2020, approximately $38.9 million in convertible notes were converted into common stock by certain of the Company’s lenders. As a result, 5,766,337 shares of common stock were issued to the lenders. This conversion activity represents a non-cash financing activity. Pursuant to the terms of the Conversion and Exchange Agreements, as discussed above, approximately $27.3 million of Convertible Notes were exchanged for an aggregate of 10,000 shares of Series 1 Preferred Stock. As of December 31, 2020, holders of Series 1 Preferred Stock exercised their option to convert 2,469 shares of Series 1 Preferred Stock into 1,000,068 shares of common stock.

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

Cash, Cash Equivalents and Restricted Cash	December 31, 2020		December 31, 2019
(in thousands)
Cash and Cash Equivalents	$	7,290	$	15,682
Restricted Cash included in Other Assets		134		134
Cash, Cash Equivalents and Restricted Cash in the Consolidated Statement of Cash Flows	$	7,424	$	15,816

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

Cash payments for income taxes were $7 thousand and $6 thousand for the years ended December 31, 2020 and 2019, respectively.

Recent Accounting Pronouncements

Accounting Guidance Not Yet Adopted

In December 2019, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which reduces complexity in accounting standards by removing certain exceptions to the general principles in Topic 740. This update is effective for fiscal years beginning after December 15, 2021, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial statements.

In June 2016, FASB issued an accounting standards update which introduces new guidance for the accounting for credit losses on certain financial instruments. This update is effective for fiscal years beginning after December 15, 2022, and for interim periods within those fiscal years, with early adoption permitted. The Company is currently assessing this new guidance and expects this new standard will not have a material impact on the consolidated financial statements.

Accounting Guidance Adopted

In August 2018, the FASB issued an accounting standards update which modifies the disclosure requirements for fair value measurements. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance on January 1, 2020. The adoption of this update modified our disclosures, but had no impact on the Company’s condensed consolidated financial statements (see Note 13 – “Fair Value Measurements”).

In August 2018, the FASB issued an accounting standards update on a customer’s accounting for implementation costs incurred in a cloud computing arrangement. This update is effective for fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years, with early adoption permitted. The Company adopted this guidance on January 1, 2020, and the new standard had no impact on the Company’s condensed consolidated financial statements.