Cadiz (CDZI) 10-Q2023 Q3 Quarterly report

Cadiz Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss (Unaudited)

See accompanying notes to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements.

See accompanying notes to the unaudited condensed consolidated financial statements.

For the three and nine months ended September 30, 2023 ($ in thousands, except share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

For the three and nine months ended September 30, 2022 ($ in thousands, except share data)

See accompanying notes to the unaudited condensed consolidated financial statements.

NOTE 1 – BASIS OF PRESENTATION

The Condensed Consolidated Financial Statements and notes have been prepared by Cadiz Inc., also referred to as “Cadiz” or “the Company”, without audit and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

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

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates and such differences may be material to the financial statements. The results of operations for the nine months ended September 30, 2023, are not necessarily indicative of results for the entire fiscal year ending December 31, 2023.

Liquidity

The Condensed Consolidated Financial Statements of the Company have been prepared using accounting principles applicable to a going concern, which assumes realization of assets and settlement of liabilities in the normal course of business.

The Company incurred losses of $24.7 million for the nine months ended September 30, 2023, compared to $17.9 million for the nine months ended September 30, 2022. The Company had working capital of $10.7 million at September 30, 2023 and used cash in its operations of $15.4 million for the nine months ended September 30, 2023. The higher loss in 2023 was primarily due to a loss on early extinguishment of debt in the amount of $5.3 million and increased general and administrative expense related to community partnership and communications investments and corporate communications modernization expenses, offset by higher interest expense in 2022.

Cash requirements during the nine months ended September 30, 2023, primarily reflect certain operating and administrative costs related to development of the Company’s land, water, infrastructure and technology assets for water solutions including the Cadiz Water Conservation & Storage Project (“Water Project”), agricultural operations and water treatment business. The Company’s present activities are focused on the development of its assets in ways that meet an urgent need for groundwater storage capacity in Southern California and growing demand for affordable, reliable, long-term water supplies before the next drought strikes the Southwestern United States. 

On January 30, 2023, the Company completed the sale and issuance of 10,500,000 shares of the Company’s common stock to certain institutional investors in a registered direct offering ( “January 2023 Direct Offering”). The shares of common stock were sold at a purchase price of $3.84 per share, for aggregate gross proceeds of $40.32 million and aggregate net proceeds of approximately $38.5 million. A portion of the proceeds were used to repay the Company’s debt in the principal amount of $15 million, together with fees and interest required to be paid in connection with such repayment under the Credit Agreement. The remaining proceeds are being used for capital expenditures to accelerate development of the Company’s water supply project, working capital and development of additional water resources to meet increased demand on an accelerated timetable.

On February 2, 2023, the Company and its wholly-owned subsidiary, Cadiz Real Estate LLC, as borrowers (collectively, the “Borrowers”) entered into a First Amendment to Credit Agreement with BRF Finance Co., LLC (“Lenders”) and B. Riley Securities, Inc., (“BRS”) as administrative agent, to amend certain provisions of the Credit Agreement dated as of July 2, 2021 (“First Amended Credit Agreement”). Under the First Amended Credit Agreement, the lenders will have a right to convert up to $15 million of outstanding principal, plus any PIK interest and any accrued and unpaid interest (the “Convertible Loan”) into shares of the Company’s common stock at a conversion price of $4.80 per share (the “Conversion Price”)(see “Note 3 – Long-Term Debt”, below).

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 senior secured debt 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 asset 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, (iii) categorization of expenditures as discretionary versus non-discretionary and (iv) the ability to raise capital. 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 its viability as a company.

Supplemental Cash Flow Information

During the nine months ended September 30, 2023, approximately $1,248,000 in interest payments on the Company’s senior secured debt was paid in cash and approximately $711,000 was recorded as interest payable in kind. There are no scheduled principal payments due on the senior secured debt prior to its maturity.

At September 30, 2023, accruals for cash dividends payable on the Series A Preferred Stock was $1.27 million (see Note 9 – “Common and Preferred Stock”). The cash dividends were paid on October 14, 2023.

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 primarily represented funds deposited into a segregated account, representing an amount sufficient to pre-fund quarterly dividend payments on Series A Preferred Stock underlying the Depositary Shares issued in the Depositary Share Offering through July 2023.

ATEC Water Systems, LLC

On November 9, 2022, the Company completed the acquisition of the assets of ATEC Systems, Inc. into ATEC Water Systems, LLC (“ATEC”), a water filtration technology company, at a purchase price of up to $2.2 million (“ATEC Acquisition”). The final allocation of purchase consideration to assets and liabilities is ongoing as the Company continues to evaluate certain balances, estimates and assumptions during the measurement period. Consistent with the allowable time to complete the Company’s assessment, the valuation of certain acquired assets and liabilities, including environmental liabilities and income taxes, is currently pending finalization.

Revenue Recognition

The Company’s revenue is currently derived from rental revenue from its agricultural lease, sales of farm crops, and sales of water filtration systems by ATEC. The Company recognizes revenue by following the five-step model under ASC 606 to achieve the core principle that an entity recognizes revenue to depict the transfer of goods or services to customers at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The five-step model requires that the Company (i) identifies the contract with the customer, (ii) identifies the performance obligations in the contract, (iii) determines the transaction price, including variable consideration to the extent that it is probable that a significant future reversal will not occur, (iv) allocates the transaction price to the respective performance obligations in the contract, and (v) recognizes revenue when (or as) the Company satisfies the performance obligation.

Recent Accounting Pronouncements

Accounting Guidance 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, 2022, and for interim periods within those fiscal years, with early adoption permitted. The adoption of this new standard on January 1, 2023, had no impact on the Company’s consolidated financial statements.

NOTE 2 – REPORTABLE SEGMENTS

The Company currently operates in two segments based upon its organizational structure and the way in which its operations are managed and evaluated. The Company’s largest segment is Land and Water Resources, which comprises all activities regarding its properties in the eastern Mojave Desert including development of the Water Project, and agricultural operations. The Company’s second operating segment is its water treatment business, ATEC Water Systems LLC (“ATEC”) which provides innovative water filtration solutions for impaired or contaminated groundwater sources. The Company acquired the assets of ATEC Systems, Inc. in November 2022 into its new subsidiary ATEC.  There were intersegment sales of $311 thousand during the nine months ended September 30, 2023, which resulted in an intercompany elimination of profits in the amount of $102 thousand.

We evaluate our performance based on segment operating (loss). Interest expense, income tax expense and losses related to equity method investments are excluded from the computation of operating (loss) for the segments. Segment net revenue, segment operating expenses and segment operating (loss) information consisted of the following for the three and nine months ended September 30, 2023:

The Company only operated in one segment during the nine months ended September 30, 2022, as the water treatment segment did not exist prior to the ATEC Acquisition in November 2022.

Assets by operating segment are as follows (dollars in thousands):

Goodwill by operating segment is as follows (dollars in thousands):

Property, plant, equipment and water programs consist of the following (dollars in thousands):

NOTE 3 – LONG-TERM DEBT

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

On July 2, 2021, the Company entered into a new $50 million senior secured credit agreement (“Credit Agreement”) with Lenders and BRS, as administrative agent for the Lenders (“Senior Secured Debt”). The obligations under the Senior Secured Debt are secured by substantially all the Company’s assets on a first-priority basis (except as otherwise provided in the Credit Agreement). In connection with any repayment or prepayment of the debt, the Company is required to pay a repayment fee equal to the principal amount being repaid or prepaid, multiplied by (i) 4.0%, if such repayment or prepayment is made on or after the eighteen-month anniversary of the closing of the debt and prior to the thirty-month anniversary of the closing of the debt, and (ii) 6.0%, if such repayment or prepayment is made at any time after the thirty-month anniversary of the closing of the debt. At any time, the Company will be permitted to prepay the principal of the debt, in whole or in part, provided that such prepayment is accompanied by any accrued interest on such principal amount being prepaid plus the applicable repayment fee described above.

On February 2, 2023, the Company entered into a First Amendment to Credit Agreement to amend certain provisions of the Credit Agreement (“First Amended Credit Agreement”). In connection with the First Amended Credit Agreement, the Company repaid $15 million of the Senior Secured Debt together with fees and interest required to be paid in connection with such repayment under the Credit Agreement. Under the First Amended Credit Agreement, the lenders have a right to convert up to $15 million of outstanding principal, plus any PIK interest and any accrued and unpaid interest (the “Convertible Loan”) into shares of the Company’s common stock at a conversion price of $4.80 per share (the “Conversion Price”). Additionally, the maturity date of the Credit Agreement was extended from July 2, 2024, to June 30, 2026. The annual interest rate remains unchanged at 7.00%. Interest on $20 million of the principal amount will be paid in cash. Interest on the $15 million principal amount of the Convertible Loan will be paid in kind on a quarterly basis by addition such amount to the outstanding principal amount of the outstanding Convertible Loan. The amendment was recorded as a debt extinguishment.

As a result of the First Amended Credit Agreement, the Company bifurcated the new conversion option from the debt and recorded a derivative liability. As of the effective date of the First Amended Credit Agreement, the derivative liability had a fair value of approximately $2.4 million which was recorded as loss on early extinguishment of debt. In addition, the loss on early extinguishment of debt included $2.0 million of repayment fees for both repaid and amended principal and $980 thousand of unamortized debt issuance costs.

The fair value of the derivative liability was remeasured each reporting period using an option pricing model, and the change in fair value was recorded as an adjustment to the derivative liability with the change in fair value recorded as income or expense. On August 14, 2023, the Credit Agreement was further amended to remove a conversion exchange cap provision (“Conversion Option Modification”). As a result of the Conversion Option Modification, the Company reclassified the carrying value of the bifurcated conversion option at the time of the modification from a derivative liability in the amount of $2.57 million to additional paid-in capital. Total unrealized losses of derivative liabilities accounted for as derivatives prior to the Conversion Option Modification were $0 and $220 thousand for the three and nine months ended September 30, 2023, respectively.

In the event of certain asset sales, the incurrence of indebtedness or a casualty or condemnation event, in each case, under certain circumstances as described in the Credit Agreement, the Company will be required to use a portion of the proceeds to prepay amounts under the debt. In the event of any additional issuance of depositary receipts (“Depositary Receipts”) representing interests in shares of 8.875% Series A Cumulative Perpetual Preferred Stock (“Series A Preferred Stock”) by the Company, the Company will be required to, within five business days after the receipt of the net cash proceeds, apply 75% of the net cash proceeds to prepay amounts due under the debt (including the applicable repayment fee described above). 

The Credit Agreement includes customary affirmative and negative covenants, including delivery of financial statements and other reports. The negative covenants limit the ability of the Company to, among other things, incur debt, incur liens, make investments, sell assets, pay dividends and enter into transactions with affiliates. In addition, the Credit Agreement includes customary events of default and remedies.

While any amount remains outstanding under the debt, the Lenders will have the right to convert the outstanding principal, plus unpaid interest, on the debt into Depositary Receipts at the per share exchange price of $25.00 at any time up to 100% of the principal and unpaid interest on the debt may be exchanged for Depositary Receipts.

In connection with the issuance of the Senior Secured Debt, on July 2, 2021 (the “Original Issue Date”) the Company issued to the Lenders two warrants (“A Warrants” and “B Warrants”), each granting an option to purchase 500,000 shares of our common stock (collectively, the “Warrants”). The A Warrants may be exercised any time prior to July 2, 2024 (the “Expiration Date”) and have an exercise price of $17.38 equal to 120% of the closing price per share of our common stock on the Original Issue Date. The B Warrants may be exercised in the period from 180 days after the Original Issue Date to the Expiration Date and have an exercise price of $21.72 equal to 150% of the closing price of our common stock on the Original Issue Date.

NOTE 4 – STOCK-BASED COMPENSATION PLANS

The Company has issued options and has granted stock awards pursuant to its 2019 Equity Incentive Plan, as described below.

2019 Equity Incentive Plan

The 2019 Equity Incentive Plan (“2019 EIP”) was originally approved by stockholders at the July 10, 2019, Annual Meeting, with an amendment to the plan approved by stockholders at the July 12, 2022, Annual Meeting. The plan, as amended, provides for the grant and issuance of up to 2,700,000 shares and options to the Company’s employees, directors and consultants.

Effective July 1, 2021, under the 2019 EIP, each outside director receives $75,000 of cash compensation and receives a deferred stock award consisting of shares of the Company’s common stock with a value equal to $25,000 on June 30 of each year. The award accrues on a quarterly basis, with $18,750 of cash compensation and $6,250 of stock earned for each fiscal quarter in which a director serves. The deferred stock award vests automatically on the January 31^st that first follows the award date.

Stock Awards to Directors, Officers, and Consultants

The Company has granted stock awards pursuant to its 2019 EIP.

Of the total 2,700,000 shares reserved under the 2019 Equity Incentive Plan, as amended, 2,312,925 shares and restricted stock units (“RSUs”) have been awarded to the Company directors, employees and consultants as of September 30, 2023. Of the 2,312,925 shares and RSUs awarded, 46,744 shares were awarded to the Company’s directors for services performed during the plan year ended June 30, 2023. These shares will vest and be issued on January 31, 2024.

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 were scheduled to vest upon completion of certain milestones, including (a) 255,000 RSUs which vested in July 2021 upon completion of refinancing of the Company’s then existing senior secured debt and funding to complete the purchase of the Northern Pipeline (“ Northern Pipeline Vesting Event”), 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 vested and were issued on January 3, 2023, and 255,000 RSUs vested and were issued on March 1, 2023. Additionally, in July 2022, 60,000 RSUs were granted to employees as long-term equity incentive awards ( “July 2022 RSU Grant”). The RSUs granted under the July 2022 RSU Grant are scheduled to vest on January 2, 2024. The RSU incentive awards are subject in each case to continued employment with the Company through the vesting date.

Of the 255,000 RSUs earned upon the Northern Pipeline Vesting Event, the Company issued 158,673 shares net of taxes withheld and paid in cash by the Company. Of the 255,000 RSUs issued on March 1, 2023, the Company issued 158,673 shares net of taxes withheld and paid in cash by the Company.

Upon the change of the Company’s Executive Chair on February 4, 2022, a total of 170,000 unvested RSUs were accelerated and became fully vested as a result of an amended employee agreement, which included 85,000 RSUs scheduled to vest upon completion of final binding water supply agreement(s) and 85,000 RSUs scheduled to vest on March 1, 2023.

The Company issued 450,000 of performance stock units (“PSUs”) upon achievement of certain performance events. The PSUs vest upon the Company’s common stock achieving price hurdles (“Price Hurdles”) but not sooner than three years from date of grant, including (a) 200,000 PSUs to vest upon a Price Hurdle of $7 per share, (b) 150,000 PSUs to vest upon a Price Hurdle of $9 per share, (c) 50,000 PSUs to vest upon a Price Hurdle of $11 per share, and (d) 50,000 PSUs to vest upon a Price Hurdle of $13 per share and are payable, at the option of the Compensation Committee, in either common stock or cash. The PSU incentive award is subject to continue employment with the Company through the vesting date.

Additionally, 400,000 RSUs were granted to a consultant on July 1, 2023 ( “July 2023 RSU Grant). Of the 400,000 RSUs granted under the July 2023 RSU Grant, 200,000 RSUs are scheduled to vest upon completion of certain milestone events. Of the remaining 200,000 RSUs granted, 100,000 RSUs vested and were issued on October 1, 2023, and 100,000 are scheduled to vest on February 1, 2024.

The accompanying consolidated statements of operations and comprehensive loss include stock-based compensation expense of approximately $652,000 and $492,000 in the three months ended September 30, 2023 and 2022, respectively; and, $1,142,000 and $1,348,000 in the nine months ended September 30, 2023 and 2022, respectively.

NOTE 5 – INCOME TAXES

As of September 30, 2023, the Company had net operating loss (“NOL”) carryforwards of approximately $350 million for federal income tax purposes and $300 million for California state income tax purposes. Such carryforwards expire in varying amounts through the year 2037 and 2042 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 a previous ownership change and an ownership change that occurred in June of 2021.

As of September 30, 2023, the Company’s unrecognized tax benefits were immaterial.

The Company's tax years 2020 through 2022 remain subject to examination by the Internal Revenue Service, and tax years 2019 through 2022 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 all deferred assets. Accordingly, no deferred tax asset has been reflected in the accompanying condensed consolidated balance sheet.

NOTE 6 – NET LOSS PER COMMON SHARE

Basic net loss per common 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 5,534,000 and 2,033,000 for the three months ended September 30, 2023 and 2022, respectively; and 5,237,000 and 1,702,000 for the nine months ended September 30, 2023 and 2022, respectively.

NOTE 7 – LEASES & PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS

The Company has operating leases for right-of-way agreements, corporate offices, vehicles and office equipment. The Company’s leases have remaining lease terms of 1 month to 37 months as of September 30, 2023, some of which include options to extend or terminate the lease. However, the Company is not reasonably certain to exercise options to renew or terminate, and therefore renewal and termination options are not included in the lease term. The Company does not have any finance leases.

As a lessor, in February 2016, the Company entered into a lease agreement with Fenner Valley Farms LLC (“FVF”) (the “lessee”), pursuant to which FVF is leasing, for a 99-year term, 2,100 acres owned by Cadiz in San Bernardino County, California, to be used to plant, grow and harvest agricultural crops (“FVF Lease Agreement”). As consideration for the lease, FVF paid the Company a one-time payment of $12.0 million upon closing. The Company expects to record rental income of $420,000 annually over the next five years related to the FVF Lease Agreement.

During the nine months ended September 30, 2023, $1,751,000 on construction in progress was placed into service, which included land development, irrigation systems and stand establishment related to the planting of 150 acres of alfalfa.

Depreciation expense on land improvements, buildings, leasehold improvements, machinery and equipment and furniture and fixtures was $942,000 and $473,000 for the nine months ended September 30, 2023 and 2022, respectively.

NOTE 8 – FAIR VALUE MEASUREMENTS

Fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities. The Company considers a security that trades at least weekly to have an active market. Fair values determined by Level 2 inputs utilize data points that are observable, such as quoted prices, interest rates and yield curves. Fair values determined by Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.  

In 2022, the Company recorded a contingent consideration liability in the amount of $1.45 million related to the purchase price of the ATEC Acquisition for amounts payable upon the sale of a requisite number of water filtration units under an asset purchase agreement.

NOTE 9 – COMMON AND PREFERRED STOCK

Common Stock

The Company is authorized to issue 85 million shares of Common Stock at a $0.01 par value. As of September 30, 2023, the Company had 66,604,981 shares issued and outstanding.

In January 2013, the Company revised its then existing agreement with the law firm of Brownstein Hyatt Farber Schreck LLP (“Brownstein”), a related party. Under this agreement, the Company is to issue up to a total of 400,000 shares of the Company’s common stock, with 200,000 shares earned to date and 100,000 shares to be earned upon the achievement of each of two remaining milestones as follows:

All shares earned upon achievement of any of the remaining two milestones will be payable three years from the date earned.  

Series 1 Preferred Stock

The Company has issued a total of 10,000 shares of Series 1 Preferred Stock (“Series 1 Preferred Stock”) to certain holders (“Holders”) under certain conversion and exchange agreements entered into in March 2020. Each share of Series 1 Preferred Stock is convertible at any time at the option of the Holder into 405.05 shares of Common Stock. As of September 30, 2023, Holders of Series 1 Preferred Stock had exercised their option to convert 9,671 shares of Series 1 Preferred Stock into 3,917,235 shares of Common Stock. The Company has 329 shares of Series 1 Preferred Stock issued and outstanding as of September 30, 2023.

Series A Preferred Stock

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 “Depositary Shares”), as well as up to 300,000 Depositary Shares sold pursuant to the exercise of an option to purchase additional Depositary Shares (“Depositary Share Offering”), each representing 1/1000^th of a share of the 8.875% Series A Cumulative Perpetual Preferred Stock (the “Series A Preferred Stock”). The Depositary Share Offering was completed on July 2, 2021 for net proceeds of approximately $54 million.

On July 1, 2021, the Company filed the Certificate of Designation (“Certificate of Designation”) for the Series A Preferred Stock with the Secretary of State of the State of Delaware, which became effective upon acceptance for record. The Certificate of Designation classified a total of 7,500 shares of the Company’s authorized shares of preferred stock, $0.01 par value per share, as Series A Preferred Stock.

As set forth in the Certificate of Designation, the Series A Preferred Stock will rank, as to dividend rights and rights upon the Company’s liquidation, dissolution or winding up: (i) senior to Common Stock of the Company; (ii) junior to the Series 1 Preferred Stock with respect to the distribution of assets upon the Company’s voluntary or involuntary liquidation, dissolution or winding up; (iii) senior to the Series 1 Preferred Stock with respect to the payment of dividends and (iv) effectively junior to all the Company’s existing and future indebtedness (including indebtedness convertible into Common Stock or preferred stock) and to the indebtedness and other liabilities of (as well as any preferred equity interests held by others in) the Company’s existing or future subsidiaries.

Holders of Series A Preferred Stock, when and as authorized by the Company’s Board of Directors, are entitled to cumulative cash dividends at the rate of 8.875% of the $25,000.00 ($25.00 per Depositary Share) liquidation preference per year (equivalent to $2,218.75 per share per year or $2.21875 per Depositary Share per year). Dividends will be payable quarterly in arrears, on or about the 15^th of January, April, July and October, beginning on or about October 15, 2021. As of September 30, 2023, the Company has paid aggregate cash dividends of $10,396,000. On September 21, 2023, the Company’s Board of Directors declared that holders of Series A Preferred stock will receive a cash dividend equal to $550.00 per whole share; therefore, holders of Depositary Shares will receive a cash dividend equal to $0.55 per Depositary Share. The dividend was paid on October 14, 2023 to respective holders of record as of the close of business on October 4, 2023.  

At the issuance of the Series A Preferred Stock, the Company pre-funded eight quarterly payments through July 2023 in a segregated account which appeared as Restricted Cash on the Balance Sheet. Dividends on the Series A Preferred Stock underlying the depositary shares will continue to accumulate whether or not (i) any of our agreements prohibit the current payment of dividends, (ii) we have earnings or funds legally available to pay the dividends, or (iii) our Board of Directors does not declare the payment of the dividends.

Holders of depositary shares representing interests in the Series A Preferred Stock generally will have no voting rights. However, if we do not pay dividends on any outstanding shares of Series A Preferred Stock for six or more quarterly dividend periods (whether or not declared or consecutive), holders of the Series A Preferred Stock (voting separately as a class with all other outstanding series of preferred stock upon which like voting rights have been conferred and are exercisable) will be entitled to elect two additional directors to the Board of Directors to serve until all unpaid dividends have been fully paid or declared and set apart for payment.

On and after July 2, 2026, the shares of Series A Preferred Stock will be redeemable at the Company’s option, in whole or in part, at a redemption price equal to $25,000.00 per share ($25.00 per Depositary Share), plus any accrued and unpaid dividends. Furthermore, upon a change of control or delisting event (each as defined in the Certificate of Designation), the Company will have a special option to redeem the Series A Preferred Stock at $25,000.00 per share ($25.00 per Depositary Share), plus any accrued and unpaid dividends.

Shares of Series A Preferred Stock are convertible into shares of Common Stock if, and only if, a change of control or delisting event (each as defined in the Certificate of Designation) has occurred, and the Company has not elected to redeem the Series A Preferred Stock prior to the applicable conversion date. Upon any conversion, each share of Series A Preferred Stock will be converted into that number of shares of Common Stock equal to the lesser of (i) the quotient obtained by dividing (A) the sum of (x) the $25,000 liquidation preference per share plus (y) the amount of an accrued and unpaid dividends to, but not including, the conversion date by (B) the Common Stock Purchase Price (as defined in the Certificate of Designation), and (ii) 3,748.13 (the “Share Cap”), subject to certain adjustments.

The Company has 2,300 shares of Series A Preferred Stock issued and outstanding as of September 30, 2023.

NOTE 10 – COMMITMENTS AND CONTINGENCIES

In the normal course of its agricultural operations, the Company handles, stores, transports and dispenses products identified as hazardous materials. Regulatory agencies periodically conduct inspections and, currently, there are no pending claims with respect to hazardous materials.

Pursuant to cost-sharing agreements that have been entered into by participants in the Company’s Water Project, $750,000 in funds have been received in order to offset costs incurred in the environmental analysis of the Water Project. These funds may either be reimbursed or credited to participants’ participation in the Water Project and, accordingly, are fully reflected as deferred revenue as of September 30, 2023 and September 30, 2022.

The Company recorded a contingent consideration liability in the amount of $1.45 million related to the purchase price of the ATEC Acquisition for amounts payable upon the sale of a requisite number of water filtration units under an asset purchase agreement.

The Company is from time to time involved in various lawsuits and legal proceedings that arise in the ordinary course of business. At this time, the Company is not aware of any pending or threatened litigation that it expects will have a material adverse effect on its business, financial condition, liquidity, or operating results. Legal claims are inherently uncertain, however, and it is possible that the Company’s business, financial condition, liquidity and/or operating results could be adversely affected in the future by legal proceedings.

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

In connection with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, the following discussion contains trend analysis and other forward-looking statements. Forward-looking statements can be identified by the use of words such as “intends”, “anticipates”, “believes”, “estimates”, “projects”, “forecasts”, “expects”, “plans” and “proposes”. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from these forward-looking statements. These include, among others, our ability to maximize value from our land and water resources and our ability to obtain new financings as needed to meet our ongoing working capital needs. See additional discussion under the heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022. Our forward-looking statements are made only as of the date hereof. We assume no duty to update these forward-looking statements to reflect new, changed or unanticipated events or circumstances, other than as may be required by law.

We are a water solutions provider dedicated to delivering clean, reliable, and affordable water for people through a variety of innovative water supply, storage, conveyance and treatment projects. We are advancing human access to clean water with our unique combination of land, water, infrastructure and technology assets, cutting-edge innovation, and industry-leading standards of environmental stewardship.

We own approximately 46,000 acres of land with access to high-quality, naturally-recharging groundwater resources in three areas of Southern California’s Mojave Desert – the Cadiz Valley (35,000 acres), Danby Dry Lake (2,000 acres), and the Piute Valley (9,000 acres) (“Cadiz Property”). Our land holdings with vested water rights were primarily assembled by our founders in the early 1980s, relying on NASA imagery that identified a unique desert aquifer system at the base of a vast Southern California watershed. This watershed underlying our property in the Cadiz Valley (“Cadiz Ranch”) presently holds 17-34 million acre-feet of groundwater in storage – comparable in size to the capacity of the largest reservoir in the United States, Lake Mead. The aquifer system is part of a closed-basin watershed in which all water flows downgradient to desert playas where it evaporates at the surface forming what are known as “desert dry lakes”.

Water Supply – We own vested water rights to withdraw 2.5 million acre-feet of groundwater to support farming at the Cadiz Ranch, one of the largest farming operations in San Bernardino County, and off property uses. Because all water in the aquifer system will eventually be lost to evaporation, surplus water that is captured and withdrawn before it evaporates is a new water supply known as “conserved” water. We have completed extensive environmental review in accordance with local, state and federal laws authorizing the management of the groundwater aquifer underlying the Cadiz Ranch to conserve an average of 50,000 acre-feet of water per year (“AFY”) for 50 years for use in communities.

Groundwater Storage - The alluvium aquifer that lies beneath the Cadiz Property is also large enough for conjunctive use as a water “banking” facility, capable of storing an additional 1 million acre-feet of imported surplus water for return during drought periods.

Pipeline Conveyance – We own a 30” steel natural gas pipeline (“Northern Pipeline”) that extends 220-miles from the Cadiz Ranch across San Bernardino and Kern Counties, terminating in California’s Central Valley. The pipeline, originally constructed to transport fossil fuels, is idle and capable of transporting water. The route of the Northern Pipeline crosses several underserved, rural low-income areas of California and intersects three major water conveyance facilities that deliver water to communities across Southern California - the California Aqueduct, the Los Angeles Aqueduct, and the Mojave River Pipeline. The estimated annual capacity of the Northern Pipeline for water conveyance is 25,000 AFY. In addition, we hold a 99-year lease with the Arizona & California Railroad (“ARZC”) to construct a 43-mile, 55-85” steel pipeline south from Cadiz within the ARZC’s existing railroad right-of-way to the Colorado River Aqueduct, one of Southern California’s primary sources of drinking water. The capacity of this pipeline (“Southern Pipeline”) ranges from 75,000 AFY to 150,000 AFY depending on the pipeline diameter selected to accommodate imported water storage.

We hold multiple binding agreements with public water systems and government agencies and are currently in discussions with other public water systems to enter into additional agreements that will enable project participants to manage, lease, own, finance and operate the Northern Pipeline and lease up to 25,000 AFY of annual water supply from the Water Project. In accordance with such agreements, we expect that we will contribute the Northern Pipeline and an annual supply of 25,000 AFY of water into Fenner Gap Mutual Water Company, comprised of shareholder public water systems that will receive water from the Water Project. In addition, we expect that Fenner Valley Water Authority, a public agency – joint powers agency with oversight over the Water Project - will represent the public water systems purchasing 25,000 AFY of water at our wellhead, take or pay, at an agreed upon net market price estimated to start at approximately $850/AFY and subject to annual adjustment. Through the JPA, which includes San Bernardino County, it is anticipated the public water agencies would fund capital costs for conversion of the pipeline from gas to water, construction of pumping stations and appurtenant facilities, and would be able to seek infrastructure funding and grants to achieve their lowest possible cost for delivered water. Any contracts and off take facility construction will be subject to standard environmental review and a project level permitting process. We expect that similar agreements will be negotiated and entered into for water supplies and storage delivered via the Southern Pipeline.  

On November 2, 2023, we signed a binding agreement amending the 2012 Memorandum of Understanding (“MOU”) between the Company, San Bernardino County, Santa Margarita Water District and Fenner Gap Mutual Water Company governing groundwater management for the Water Project. The amendment to the MOU creates a new priority right for San Bernardino County that requires Water Project water supply not already subject to a binding contract to be offered to public water systems serving San Bernardino County communities, prior to exporting Project water for beneficial use outside of San Bernardino County. Five public water systems serving communities in San Bernardino County have expressed intent to receive supply from the Water Project.

Treatment – In the fourth quarter of 2022, we completed the acquisition of the assets of ATEC Systems, Inc. into ATEC Water Systems, LLC (“ATEC”). ATEC is a leader in developing innovative water filtration solutions for impaired or contaminated groundwater sources. ATEC’s specialized filtration media provide cost-effective, high-rate of removal for common groundwater impairments and contaminants that pose health risks in drinking water including iron, manganese, arsenic, Chromium-6, nitrates, and other constituents of concern. ATEC filters have been installed in over 400 water treatment systems in the U.S, including 50 in California. In March, ATEC was awarded a $10 million contract to provide all wellhead filters required by the Central Utah Water Conservancy District Vineyard Wellfield Groundwater Polishing Project, a treatment facility that will deliver 60 million gallons per day or approximately 54,000 AFY. Delivery of filters under this contract is expected to begin in the first quarter of 2024.

Our ATEC and Cadiz Ranch agricultural operations provide the Company’s current principal source of revenue, although our working capital needs are not fully supported by our treatment or agricultural lease and farming returns at this time. We believe that as we enter contracts for water supply, treatment, storage, and pipeline conveyance, these assets will provide a significant source of future cash flow for the business and our stockholders.

To fund our working capital needs and development of our water solutions we rely on debt and equity financing. In February 2023, we completed a direct offering for net proceeds of $38 million led by our largest equity shareholders to fund capital expenditures to accelerate the development of water supply, storage and conveyance infrastructure, reduce our outstanding debt from $50 million to $35 million and provide working capital to the Company (see, “Liquidity and Capital Resources”, below).

Our current and future operations also include activities that further our commitments to sustainable stewardship of our land and water resources, good governance and corporate social responsibility. We believe these commitments are important investments that will assist in maintenance of sustained stockholder value.

Results of Operations

Three Months Ended September 30, 2023, Compared to Three Months Ended September 30, 2022

We have not received significant revenues from our water supply, storage, conveyance or treatment assets to date. Our revenues have been limited to rental income from our agricultural leases, sales from our alfalfa plantings beginning in 2022 and ATEC sales beginning in 2023. As a result, we have historically incurred a net loss from operations. The reporting segments have been combined as the revenue and operating results for the water treatment business were not material to the Company’s consolidated operations during the three months ended September 30, 2023. We incurred a net loss of $6.9 million in the three months ended September 30, 2023, compared to a $6.5 million net loss during the three months ended September 30, 2022.

Our primary expenses are our ongoing overhead costs associated with the development of our water supply, storage, conveyance and treatment assets (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 $0.4 million during the three months ended September 30, 2023, primarily related to rental income from our agricultural leases totaling $0.1 million, sales from the harvest from our 760 acres of commercial alfalfa crop totaling $0.1 million and ATEC sales totaling $0.2 million. Revenue totaled $0.6 million for the three months ended September 30, 2022, primarily related to rental income from our agricultural leases and sales from the harvest from our 610 acres of commercial alfalfa crop.

Cost of Sales Cost of sales totaled $0.7 million during the three months ended September 30, 2023, which comprised of $0.5 million related to our alfalfa crop harvest and $0.2 million related to ATEC. The 2023 alfalfa crop harvest loss primarily relates to a lower of cost or market adjustment recorded due to increased diesel costs for farming, as well as suppressed market conditions for alfalfa on the West Coast. Cost of sales totaled $1.2 million during the three months ended September 30, 2022. In June 2022, the Company converted 610 acres of agricultural development to alfalfa commercial production. The 2022 loss was primarily due to non-recurring start-up costs for the initial short year of commercial production.

General and Administrative Expenses General and administrative expenses, exclusive of stock-based compensation costs, totaled $4.5 million in the three months ended September 30, 2023, compared to $3.2 million in the three months ended September 30, 2022. The increase in 2023 was primarily a result of community partnership and communications investments, including $0.6 million in water quality and infrastructure costs in coordination with community partners that will improve access to clean water in disadvantaged communities in the Coachella Valley and $0.4 million in corporate communications modernization expenses to the Company’s online, print, digital and social materials.  

Compensation costs for stock and option awards for the three months ended September 30, 2023, were $0.7 million, compared to $0.5 million for the three months ended September 30, 2022.

Depreciation Depreciation expense totaled $0.3 million during the three months ended September 30, 2023, compared to $0.2 million during the three months ended September 30, 2022. The higher depreciation expense in the 2023 period is primarily due to construction in progress placed into service in 2023, which included land development and stand establishment related to the planting of alfalfa, as well as $31,000 of depreciation for ATEC assets in 2023.

Interest Expense, net Net interest expense totaled $1.2 million during the three months ended September 30, 2023 compared to $2.1 million during the same period in 2022. The following table summarizes the components of net interest expense for the two periods (in thousands):

Interest income primarily relates to interest on investments in short-term deposits.

Nine Months Ended September 30, 2023, Compared to Nine Months Ended September30, 2022

We incurred a net loss of $24.7 million in the nine months ended September 30, 2023, compared to a $17.9 million net loss during the nine months ended September 30, 2022. The higher 2023 loss was primarily due to a loss on extinguishment of debt in the amount of $5.3 million resulting from issuance of a conversion instrument, a repayment fee and elimination of debt discount associated with the paydown of $15 million of senior secured debt in February 2023.

Revenues Revenue totaled $1.3 million during the nine months ended September 30, 2023, primarily related to rental income from our agricultural leases totaling $0.3 million, sales from the harvest from our 760 acres of commercial alfalfa crop totaling $0.4 million and ATEC sales totaling $0.6 million. Revenue totaled $0.9 million for the nine months ended September 30, 2022 primarily related to rental income from our agricultural leases and sales from the harvest from our 610 acres of commercial alfalfa crop.

Cost of Sales Cost of sales totaled $1.5 million during the nine months ended September 30, 2023, which comprised of $1.0 million related to our alfalfa crop harvest and $0.5 million related to ATEC. The 2023 alfalfa crop harvest loss primarily relates to a lower of cost or market adjustment recorded due to increased diesel costs for farming, as well as suppressed market conditions for alfalfa on the West Coast. Cost of sales totaled $1.2 million during the nine months ended September 30, 2022. In June 2022, the Company converted 610 acres of agricultural development to alfalfa commercial production. The 2022 loss was primarily due to non-recurring start-up costs for the initial short year of commercial production.

General and Administrative Expenses General and administrative expenses, exclusive of stock-based compensation costs, totaled $13.2 million in the nine months ended September 30, 2023, compared to $9.6 million in the nine months ended September 30, 2022. The increase in 2023 was primarily a result of community partnership and communications investments, including $1.8 million in water quality and infrastructure costs in coordination with community partners that will improve access to clean water in disadvantaged communities in the Coachella Valley and $1.0 million in corporate communications modernization expenses to the Company’s online, print, digital and social materials.  

Compensation costs for stock and option awards for the nine months ended September 30, 2023, were $1.1 million, compared to $1.3 million for the nine months ended September 30, 2022.

Depreciation Depreciation expense totaled $0.9 million during the nine months ended September 30, 2023, compared to $0.5 million during the nine months ended September 30, 2022. The higher 2023 depreciation expense is primarily due to construction in progress placed into service in 2023, which included land development and stand establishment related to the planting of 150 acres of alfalfa, as well as $0.1 million of depreciation for ATEC assets in 2023.

Interest Expense, net Net interest expense totaled $3.6 million during the nine months ended September 30, 2023 compared to $6.1 million during the same period in 2022. The following table summarizes the components of net interest expense for the two periods (in thousands):

Interest income primarily relates to interest on investments in short-term deposits.

Losses on Derivative Liabilities Losses on derivative liabilities totaled $220 thousand during the nine months ended September 30, 2023 compared to $0 in the nine months ended September 30, 2022. The losses recorded in 2023 were a result of a remeasurement of a conversion option under the Company’s senior secured debt.

Loss on Early Extinguishment of Debt Loss on early extinguishment of debt totaled $5.3 million during the nine months ended September 30, 2023 compared to $0 in the nine months ended September 30, 2022. The 2023 loss on early extinguishment of debt was a result of a conversion instrument, a repayment fee and elimination of debt discount associated with the paydown of $15 million of senior secured debt in February 2023.

Liquidity and Capital Resources

Current Financing Arrangements

As we have not received sufficient revenues from our water, agriculture or treatment activities to date, we have been required to obtain financing to bridge the gap between the time water resource and other development expenses are incurred and the time that revenue will commence. Historically, we have addressed these needs primarily through secured debt financing arrangements and private equity placements.

On January 30, 2023, we completed the sale and issuance of 10,500,000 shares of our common stock to certain institutional investors in a registered direct offering (“January 2023 Direct Offering”). The shares of common stock were sold at a purchase price of $3.84 per share, for aggregate gross proceeds of $40.32 million and aggregate net proceeds of approximately $38.5 million. A portion of the net proceeds were used to repay our debt in the principal amount of $15 million, together with fees and interest required to be paid in connection with such repayment.

The remaining proceeds from the January 2023 Direct Offering will be used for capital expenditures to accelerate development of water supply, storage, conveyance and treatment assets, working capital and development of additional water resources to meet increased demand on an accelerated timetable.

On March 23, 2022, we completed the sale and issuance of 6,857,140 shares of our common stock to certain institutional and individual investors in a registered direct offering. The shares of common stock were sold at a purchase price of $1.75 per share, for aggregate gross proceeds of $12 million and aggregate net proceeds of approximately $11.8 million. The proceeds were used for working capital needs and for general corporate purposes.

On November 14, 2022, we completed the sale and issuance of 5,000,000 shares of our common stock to certain institutional investors in a registered direct offering (“November 2022 Direct Offering”). The shares of common stock were sold at a purchase price of $2.00 per share, for aggregate gross proceeds of $10 million and aggregate net proceeds of approximately $9.9 million.

In July 2021, we completed the sale of 2,300,000 depositary shares each representing 1/1000^th of a share of Series A Preferred Stock (“Depositary Share Offering”) for net proceeds of approximately $54 million.

Concurrently in July 2021, we entered into a $50 million new credit agreement (“Credit Agreement”) (see Note 3 to the Condensed Consolidated Financial Statements – “Long-Term Debt”). The proceeds of the Credit Agreement, together with the proceeds from the Depositary Share Offering, were used to (a) to repay all our outstanding senior secured debt obligations in the amount of approximately $77.6 million, (b) to deposit approximately $10.2 million into a segregated account, representing an amount sufficient to pre-fund eight quarterly dividend payments on the Series A Preferred Stock underlying the Depositary Shares issued in the Depositary Share Offering, and (c) to pay transaction related expenses. The remaining proceeds were used for working capital needs and for general corporate purposes.

On February 2, 2023, we entered into a First Amendment to Credit Agreement to amend certain provisions of the Credit Agreement (“First Amended Credit Agreement). Under the First Amended Credit Agreement, the lenders have a right to convert up to $15 million of outstanding principal, plus any PIK interest and any accrued and unpaid interest (the “Convertible Loan”) into shares of our common stock at a conversion price of $4.80 per share (the “Conversion Price”). In addition, prior to the maturity of the Credit Agreement, we will have the right to require that the lenders convert the outstanding principal amount, plus any PIK Interest and accrued and unpaid interest, of the Convertible Loan if the following conditions are met: (i) the average VWAP of the Company’s common stock on The Nasdaq Stock Market, or such other national securities exchange on which the shares of common stock are listed for trading, over 30 consecutive trading dates exceeds 115% of the then Conversion Price, (ii) a registration statement registering the resale of the shares issuable upon conversion of the Convertible Loan has been declared effective by the Securities and Exchange Commission, (iii) the Stockholder Approval has been obtained, and (iv) there is no event of default under certain provisions of the Credit Agreement.

Under the First Amended Credit Agreement, the maturity date of the Credit Agreement has been extended from July 2, 2024, to June 30, 2026. The annual interest rate will remain unchanged at 7.00%. Interest on $20 million of the remaining principal amount will be paid in cash. Interest on the $15 million principal amount of the Convertible Loan will be paid in kind on a quarterly basis by addition such amount to the outstanding principal amount of the outstanding Convertible Loan.

Limitations on our liquidity and ability to raise capital may adversely affect us. Sufficient liquidity is critical to meet our resource development activities. 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 will continue to be required (see “Outlook”, below). The covenants in the Credit Agreement do not prohibit our use of additional equity financing and allow us to retain 100% of the proceeds of any common equity financing. We do not expect the loan covenants to materially limit our ability to finance our water and agricultural development activities.

Cash Used in Operating Activities. Cash used in operating activities totaled $15.4 million and $13.4 million for the nine months ended September 30, 2023, and 2022, respectively. The cash was primarily used to fund general and administration expenses related to our water development efforts and agricultural development efforts.

Cash Used in Investing Activities. Cash used in investing activities totaled $3.8 million for the nine months ended September 30, 2023, and $2.5 million for the nine months ended September 30, 2022. The cash used in the 2023 period primarily related to the development of three new wells. The cash used in the 2022 period primarily related to development costs for the initial planting of 760 acres of alfalfa.

Cash Provided by Financing Activities. Cash provided by financing activities totaled $18.9 million for the nine months ended September 30, 2023, compared with cash provided of $8.1 million for the nine months ended September 30, 2022. Proceeds from financing activities for both periods reported are primarily related to the issuance of shares under direct offerings, offset by the paydown of $15 million of senior secured debt in February 2023.

Outlook

Short-Term Outlook. The January 2023 Direct Offering provided net cash proceeds of approximately $38.5 million. A portion of these net proceeds were used to repay our debt in the principal amount of $15 million, together with fees and interest required to be paid in connection with such repayment. The remaining proceeds, together with cash on hand, provide us with sufficient funds to meet our short-term working capital needs. The Company’s agricultural and ATEC water treatment operations is expected to be funded using existing capital and cash profits generated from operations.

Long-Term Outlook. In the longer term, we will need to raise additional capital to finance working capital needs and capital expenditures (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 supply, storage, conveyance and treatment solutions and other developments. Future capital expenditures will depend on the progress of the Water Project and any further expansion of our agricultural development.

We are evaluating the amount of cash needed, and the manner in which such cash will be raised, on an ongoing basis. We may meet any future cash requirements through a variety of means, including equity or debt placements, or through the sale or other disposition of assets. Equity placements will be undertaken only to the extent necessary, so as to minimize the dilutive effect of any such placements upon our existing stockholders. No assurances can be given, however, as to the availability or terms of any new financing. Limitations on our liquidity and ability to raise capital may adversely affect us. Sufficient liquidity is critical to meet our resource development activities.

Recent Accounting Pronouncements

See Note 1 to the Condensed Consolidated Financial Statements – “Basis of Presentation”.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

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

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

The Company established disclosure controls and procedures to ensure that material information related to the Company, including its consolidated entities, is accumulated and communicated to senior management, including the Chief Executive Officer (the “Principal Executive Officer”) and Chief Financial Officer (the “Principal Financial Officer”) and to its Board of Directors. Based on their evaluation as of September 30, 2023, 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, excluding the acquisition of the assets of ATEC Systems, Inc. into ATEC Water Systems, LLC, there was no change identified in the Company's internal control 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 control over financial reporting.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in

conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PART II - OTHER INFORMATION

ITEM 1.         Legal Proceedings

There have been no material changes to legal proceedings described in our Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 1A.       Risk Factors

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, 2022.

ITEM 2.         Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

ITEM 3.          Defaults Upon Senior Securities

Not applicable.

ITEM 4.         Mine Safety Disclosures

Not applicable.

ITEM 5.         Other Information

Not applicable.