CADIZ INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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, 2021. 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 company and agribusiness committed to sustainable water
and farming projects in California. We are one of the largest private landowners
in the state and control significant water supply, storage and conveyance assets
capable of being part of the solution to California’s systemic water challenges.

We own approximately 45,000 acres of land with 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
properties represent a unique private reserve of lands with vested water rights
located in a remote area of eastern San Bernardino County that is at the
crossroads of major highway, rail, energy, and water infrastructure capable of
supplying and delivering necessary resources to communities in California and
across the Western United States.

California and the Western United States face a persistent challenge in meeting
the water needs of all of its residents. While the State of California has
recognized a Human Right to Water, competing municipal, agricultural and
environmental demands outpace the State’s available supply limiting the ability
to deliver on that promise. Recent analysis from the California State Water
Resources Control Board
estimates that approximately 1 million Californians lack
reliable access to water and several communities are short of long-term safe,
reliable and affordable drinking water supplies.

We are principally focused on developing the Cadiz Valley Water Conservation and
Storage Project
(“Water Project“) at our Cadiz Valley property that can help
address California’s persistent systemic water challenges and deliver new water
access to California communities that presently lack reliable water supplies and
infrastructure. Through management of groundwater at the Cadiz Property, the
Water Project would conserve groundwater otherwise used for agriculture or lost
to evaporation to augment supply available in California communities and also
make available capacity in the managed groundwater aquifer system at Cadiz to
bank and store imported water for future dry years.

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The Water Project has completed extensive environmental review in accordance
with local, state and federal law and has secured permits to manage the
groundwater aquifer in Cadiz to make available an average of 50,000 acre-feet of
water per year for 50 years to communities off of the Cadiz Property. Permitting
has also authorized the storage of imported water in the aquifer system for
return in dry years. The Cadiz aquifer system has the capacity to store one
million acre-feet of imported water.

To deliver water to and from the Cadiz Property for participating water
providers, the Water Project must provide conveyance facilities capable of
connecting Cadiz and areas in need. We own a retired, 30″ steel pipeline
(“Northern Pipeline”) previously used to convey oil that extends 220-miles from
California’s Central Valley near the California Aqueduct southeast across Kern
and San Bernardino Counties terminating in Cadiz. This pipeline crosses the Los
Angeles Aqueduct and facilities of the State Water Project. Engineering and
technical assessments indicate that the Northern Pipeline can safely convey
25,000 acre-feet of water in either direction. We also maintain a 99-year lease
with the Arizona & California Railroad Company (“ARZC”) to co-locate and
construct a 43-mile, approximately 55-85″ steel water conveyance pipeline
(“Southern Pipeline”) within the existing, active railroad right-of-way that
intersects the Colorado River Aqueduct (“CRA”), one of Southern California’s
primary sources of drinking water in Southern California. The Southern Pipeline
would have a maximum capacity to convey up to 150,000 acre-feet per year in
either direction.

To utilize the Northern Pipeline for water conveyance related to the Water
Project
or to construct and operate the Southern Pipeline in coordination with
existing water conveyance facilities, we must complete additional permitting and
regulatory processes.

We expect to complete any necessary permitting in coordination with any contract
by a third party to use the facilities.

We believe that the ultimate implementation of the Water Project will provide a
significant source of future cash flow for the business and our stockholders. We
presently rely upon debt and equity financing to support our working capital
needs and development of the Water Project (see “Liquidity and Capital
Resources”, below).

Our agricultural operations currently provide the Company’s principal source of
revenue, although our working capital needs are not fully supported by our
agricultural lease and farming returns at this time.

In November 2022, the Company completed an asset acquisition from ATEC Systems
(“ATEC”), a privately held water filtration technology company. The acquisition
from ATEC will enable us to assist water agencies in increasing supplies of
potable water from contaminated groundwater sources. Increasing supplies of
treated groundwater in California will expand water supplies available for
exchange and transfer utilizing our storage and conveyance facilities when the
Water Project is operational.

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.




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Results of Operations


Three Months Ended September 30, 2022, Compared to Three Months Ended September
30, 2021

We have not received significant revenues from our water resource and real
estate development activity to date. Our revenues have been limited to rental
income from our agricultural leases and from sales from our alfalfa plantings
beginning in 2022. As a result, we have historically incurred a net loss from
operations. We incurred a net loss of $6.5 million in the three months ended
September 30, 2022, compared to a $7.8 million net loss during the three months
ended September 30, 2021. The higher 2021 loss was primarily due to stock-based
non-cash bonus awards to employees and higher interest expense in that period.

Our primary expenses are our ongoing overhead costs associated with the
development of the Water Project (i.e., general and administrative expense) and
our interest expense. We will continue to incur non-cash expenses in connection
with our management and director equity incentive compensation plans.

Revenues Revenue totaled $599 thousand during the three months ended September
30, 2022
, compared to $142 thousand for the three months ended September 30,
2021
. Revenue primarily related to rental income from our agricultural leases
and our alfalfa crop harvest.

Cost of Sales Cost of sales totaled $1.2 million during the three months ended
September 30, 2022, compared to $0 for the three months ended September 30,
2021
. 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 $3.2 million in the three
months ended September 30, 2022, compared to $3.5 million in the three months
ended September 30, 2021.

Compensation costs for stock and option awards for the three months ended
September 30, 2022, were $492 thousand, compared to $696 thousand for the three
months ended September 30, 2021. The higher 2021 expense was primarily due to
stock-based non-cash bonus awards to employees.

Depreciation Depreciation expense totaled $180 thousand during the three months
ended September 30, 2022, compared to $107 thousand during the three months
ended September 30, 2021. The higher 2022 depreciation expense is primarily due
to construction in progress placed into service in June 2022, which included
stand establishment and land improvements related to the planting of 610 acres
of alfalfa.

Interest Expense, net Net interest expense totaled $2.1 million during the three
months ended September 30, 2022 compared to $2.0 million during the same period
in 2021. The following table summarizes the components of net interest expense
for the two periods (in thousands):

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                                        Three Months Ended
                                           September 30,
                                         2022          2021

Interest on outstanding debt $ 1,480 $ 1,461
Amortization of debt discount

                617          535
Amortization of deferred loan costs            -            4

                                      $    2,097      $ 2,000



Loss from Equity-Method Investments Loss from equity-method investments related
to our 50% ownership in the SoCal Hemp JV LLC (“Joint Venture”) totaled $2
thousand
for the three months ended September 30, 2022, compared to $271
thousand
for the three months ended September 30, 2021. No plantings of hemp
were made by the Joint Venture during 2022 due to market conditions.

Nine Months Ended September 30, 2022, Compared to Nine Months Ended September
30, 2021

We incurred a net loss of $17.9 million in the nine months ended September 30,
2022
, compared to a $25.3 million net loss during the nine months ended
September 30, 2021. The higher 2021 loss was primarily due to stock-based
non-cash bonus awards to employees and higher interest expense in that period.

Revenues Revenue totaled $927 thousand during the nine months ended September
30, 2022
, compared to $422 thousand for the nine months ended September 30,
2021
. Revenues primarily related to rental income from our agricultural leases
and our alfalfa crop harvest.

Cost of Sales Cost of sales totaled $1.2 million during the nine months ended
September 30, 2022, compared to $0 for the nine months ended September 30,
2021
. 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 $9.6 million in the nine
months ended September 30, 2022, compared to $9.7 million in the nine months
ended September 30, 2021.

Compensation costs for stock and option awards for the nine months ended
September 30, 2022, were $1.3 million, compared to $4.1 million for the nine
months ended September 30, 2021. The higher 2021 expense was primarily due to
stock-based non-cash bonus awards to employees.

Depreciation Depreciation expense totaled $473 thousand during the nine months
ended September 30, 2022, compared to $313 thousand during the nine months ended
September 30, 2021. The higher 2022 depreciation expense is primarily due to
construction in progress placed into service in June 2022, which included land
development and stand establishment related to the planting of 760 acres of
alfalfa.




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Interest Expense, net Net interest expense totaled $6.1 million during the nine
months ended September 30, 2022 compared to $9.4 million during the same period
in 2021. The following table summarizes the components of net interest expense
for the two periods (in thousands):



                                               Nine Months Ended
                                                 September 30,
                                                2022         2021

Interest on outstanding debt                 $    4,367     $ 7,062
Unrealized (gains) losses on warrants, net            -        (573 )
Amortization of debt discount                     1,777         547
Amortization of deferred loan costs                   -       2,364

                                             $    6,144     $ 9,400



Loss from Equity-Method Investments Loss from equity-method investments related
to our 50% ownership in the SoCal Hemp JV LLC (“Joint Venture”) totaled $171
thousand
for the nine months ended September 30, 2022, compared to $840 thousand
for the nine months ended September 30, 2021. No plantings of hemp were made by
the Joint Venture during 2022 due to market conditions.

Liquidity and Capital Resources

Current Financing Arrangements

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

On June 7, 2021, we 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 aggregate gross
proceeds of $15 million and aggregate net proceeds of approximately $14.1
million
. We 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 the Northern Pipeline.

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

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On July 2, 2021, we entered into a $50 million new credit agreement (“Credit
Agreement”) (see Note 2 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 obligations under the then 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 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 are being used for working
capital needs and for general corporate purposes.

On March 23, 2022, we completed the sale and issuance of 6,857,140 shares of the
Company’s 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 $11.7 million. The proceeds are being
used for working capital needs and for general corporate purposes.

On November 14, 2022, the Company completed the sale and issuance of 5,000,000
shares of the Company’s common stock to certain institutional investors in a
registered 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 $9.85 million. The Company plans to use
the net cash proceeds for capital expenditures to accelerate development of the
Water Project, working capital and development of additional water resources to
meet increased demand on an accelerated timetable.

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 Senior
Secured Debt do not prohibit our use of additional equity financing and allow us
to retain 100% of the proceeds of any equity financing. We do not expect the
loan covenants to materially limit our ability to finance our water and
agricultural development activities.

Cash Used in Operating Activities. Cash used in operating activities totaled
$13.4 million and $9.6 million for the nine months ended September 30, 2022 and
2021, respectively. The cash used in the 2022 period was primarily used to
fund: (i) general and administration expenses related to our water development
efforts, (ii) legal expenses and (iii) commercial production of our alfalfa
crops.

Cash Used in Investing Activities. Cash used in investing activities totaled
$2.5 million for the nine months ended September 30, 2022, and $21.5 million for
the nine months ended September 30, 2021. The cash used in the 2022 period
primarily related to development costs for the initial planting of 760 acres of
alfalfa. The 2021 period included additions to well development and water
quality and structural testing of a five-mile segment of pipeline.

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Cash Provided by Financing Activities. Cash provided by financing activities
totaled $8.1 million for the nine months ended September 30, 2022, compared with
cash provided of $52.7 million for the nine months ended September 30, 2021.
Proceeds from financing activities for both periods reported are primarily
related to the issuance of shares under direct and at-the-market offerings.



Outlook


Short-Term Outlook. The registered direct offerings of common stock in March
2022
and November 2022 provided net cash proceeds of approximately $21.5
million
. These net cash proceeds, together with cash on hand, provide us with
sufficient funds to meet our short-term working capital needs.

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 resources and other developments. Future capital expenditures will depend
on the progress of the Water Project and further expansion of our agricultural
assets.

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”.

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