INTRODUCTION
The following Management’s Discussion and Analysis of Financial Condition and
Results of Operations (“MD&A”) is intended to help the reader understand our
Company. The MD&A should be read in conjunction with our consolidated financial
statements and the accompanying notes, presented later in this Annual Report on
Form 10-K. The MD&A includes the following sections:
•Company Summary, Recent Developments, and Future Outlook – a brief description
of our operations, the critical factors affecting them, and their future
prospects;
•Critical Accounting Policies, Estimates, and Judgments – a discussion of
accounting policies which require critical judgments and estimates. Our
significant accounting policies, including the critical accounting policies
discussed in this section, are summarized in the notes to the consolidated
financial statements;
•Results of Operations – an analysis of our consolidated results of operations
for the past two years, presented in our consolidated financial statements; and
•Liquidity and Capital Resources – an analysis of cash flows, sources and uses
of cash, contractual obligations and a discussion of factors affecting our
future cash flow.
COMPANY SUMMARY, RECENT DEVELOPMENTS, AND FUTURE OUTLOOK
Recent Developments:
Northern Nevada
The majority of our water resource assets are located in northern Nevada at FSR
and our Carson / Lyon project. FSR’s water credits are able to provide a
sustainable water supply in the North Valleys region of Reno, Washoe County,
Nevada, and the Carson / Lyon water rights are able to provide a sustainable
water supply in Lyon County, Nevada. As a result, we are dependent on new
residential or commercial development occurring in these regions in order for us
to monetize our water resources in northern Nevada. In turn, new development in
these regions is highly dependent on the continued robust economic and job
growth that is occurring in northern Nevada.
The economic development in the greater Reno region has been concentrated in the
Tahoe Reno Industrial Center business park (“TRIC”) which is a 107,000 acre
industrial park proximate to Interstate 80 and 15 miles east of Reno, Nevada.
Tesla Motors, Inc. (“Tesla”) built its Gigafactory facility in this business
park. Many other technology companies have also moved to the area including
Apple, Google, Jet.com, Battery Systems Inc., Tire Rack, U.S. Ordinance, Zulily,
Switch and Blockchains LLC.
According to a report by the Economic Development Agency of Western Nevada
(“EDAWN”) during 2021 the Northern Nevada economy was fueled by growth including
the relocation to Northern Nevada of 59 technology and manufacturing companies,
two of the fastest growing industry sectors in Northern Nevada. These two
industry sectors comprised over 60% of all companies that relocated and expanded
in the Reno area over the past two years during 2020 and 2021. The relocation of
these companies along with the influx of 29 Corporate Headquarters into Northern
Nevada is expected to result in 5600 new jobs over the next five years. Job
diversification in the Reno region has led to less volatility in the employment
base: at the end of 2021, the unemployment rate in the US was 4.8%, in Southern
Nevada was 7.4%, but only 3.5% in Northern Nevada.
The economic growth in the region has led to strong demand for housing.
According to University of Nevada (UNR), Reno Center for Regional Studies, year
over year values of new single family home values across the greater Reno-Sparks
area increased 15% in the fourth quarter of 2021 ($576,042). In the North
Valleys region, where our FSR water rights are utilized, the median sales price
of new single-family homes increased 28% year over year during the fourth
quarter of 2021 ($453,575). As of the end of the fourth quarter 2021 a total of
6,447 approved housing units across 45 developments of all types of housing
product remain to be constructed in the North Valleys. According to the same UNR
study the total households are projected to increase by 7.6% and housing is
unlikely to keep up with the same projected employment demand of over 5,600 new
jobs as noted in the EDAWN report.
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The Economic Development Authority of Western Nevada (“EDAWN”), comprised of
Reno, Sparks, and Tahoe areas, released an updated forecast (RCG Economics,
Technical Memorandum dated January 29, 2019) to its previous forecasts that
includes the latest historical data and a new five-year forecast from 2019
through 2023. This five-year forecast project a cumulative addition of 51,585
new jobs in the region which represents a 12.7% increase in employment. This job
growth leads to population growth. The report also projects the region’s
population to grow to 686,737 residents by the end of 2023, an increase of
54,470 residents (8.6%) in that five-year period. We believe that this increased
employment and population growth will create demand for new residential,
commercial and industrial development in the greater Reno area and in Lyon
County.
.
Current economic conditions have fostered new business openings, lower apartment
vacancies, and greater absorption of existing housing inventory. This activity
has resulted in multiple new housing projects entering the approval process with
local governments in Reno, Sparks, Carson City, Lyon County and Fernley.
Residential housing projects must demonstrate sustainable water supply to obtain
final map approval, and many projects in the North Valleys of Nevada are
currently in the process of seeking or have obtained master plan amendment/zone
change approvals. The next step for these developers is to obtain tentative map
and then final map approvals. Within the Reno-Sparks and Washoe County area of
Nevada, according to EDAWN, in 2021 there were over 4,800 new housing permits
issued. EDAWN’s goal is for at least 6,000 new housing permits to meet the
projected demand for housing. We believe the disparity in the issuance of
building permits is due to an interruption of the permitting process due to the
effects of the COVID-19 pandemic and the administrative process involved in
approving new developments. We expect the building permit activity to increase
in 2021, once the permit process is initiated on newly approved subdivisions. We
believe this increase in activity will lead to demand for our water resources,
as developers pursue their projects to provide housing for the population growth
in the region. However, the increased activity has strained governmental
agencies and has caused delays in processing permits as well as new projects’
planning approval process. The timing of future monetization of our water
resources in northern Nevada is directly correlated to the time it takes
residential developers to pursue their projects in the areas where our FSR and
Carson/Lyon assets are located, and the time it takes for those developers to
get the requisite planning approvals prior to obtaining final map approval or,
in the case of commercial development projects, final regulatory approvals.
Southern Nevada
In 1998, Lincoln County and Vidler Water Company filed applications with the
Nevada State Engineer seeking to extract approximately 14,480 acre-feet per year
from the Tule Desert Hydrographic Basin. The Nevada State Engineer initially
awarded Lincoln/Vidler 2,100 acre-feet per year of groundwater, holding 7,240
acre-feet of groundwater in abeyance until additional studies were performed.
Following an extensive exploratory drilling program and numerous scientific
study Lincoln/Vidler was awarded an additional 7,240 acre-feet for a total of
9,340 acre-feet in 2010. The Nevada State Engineer conditioned the additional
water rights on the staged pumping of the granted water rights allowing 5,000
acre-feet per year to be pumped initially. After groundwater has been pumped for
eight consecutive years additional water can be released to Lincoln/Vidler to
develop.
Lincoln/Vidler received a Record of Decision for the Lincoln County Land Act
Groundwater Development and Utility Right-of-Way grant from the BLM in 2010 for
the Tule Desert. The BLM grant allows Lincoln/Vidler to construct up to 16
production wells and necessary infrastructure to develop groundwater from the
Tule Desert to the Lincoln County Land Act area located north of the City of
Mesquite, NV.
The City of Mesquite is one of the fastest growing cities in Nevada. Mesquite is
a large retirement community; with nearly 40% of the population comprised of
retired individuals. Virgin Valley Water District is the water service provider
for the City of Mesquite and its neighboring community of Buckerville. During
2021, the City of Mesquite issued 492 single family residential building
permits, the highest permit issuance in the past four years. As the City of
Mesquite nears build-out current developers are looking to expand their projects
into the Lincoln County Land Act area.
A developer in the City of Mesquite who also owns a majority of the property in
the Lincoln County Land Act is nearing build out and is looking to expand its
business into their Lincoln County Land Act holdings. The developer has been
working with Lincoln/Vidler to explore funding options for a pipeline and
infrastructure to deliver groundwater from Tule Desert to the Lincoln County
Land Act area. Lincoln/Vidler have been approached by Virgin Valley Water
District, the local water utility in Mesquite, with an interest in purchasing
our water and assisting in funding the pipeline infrastructure.
In 2019 Lincoln/Vidler submitted a Plan of Development to the BLM. The Plan of
Development, which has yet to be approved, is necessary to gain the approval to
begin construction of the infrastructure needed to deliver groundwater from the
Tule Desert to the Lincoln County Land Act.
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Arizona
Several market catalysts continue to emerge with respect to our Arizona LTSCs,
including the on-going “mega-drought” in the south-western United States,
continued structural deficits on the Colorado River system, Indian Firming and
Settlement obligations by the state of Arizona, increased water demand, from
both residential and commercial developers, from overall growth in Arizona,
especially in the Pinal AMA, and the Lower Basin Drought Contingency Planning
(“DCP”) effort by Arizona.
Arizona has an obligation to “firm” Indian water supplies as negotiated through
various Indian Water Settlement Agreements. Section 105 of the Settlements Act
(S. 437) titled “Firming of Central Arizona Project Indian Water,” authorizes
the Secretary of Interior and the State of Arizona to develop a firming program
to ensure that of a total 197,500 acre-feet of non-Indian agricultural water
reallocated to the Arizona Indian Tribes, 60,648 acre-feet must be delivered
over a 100 year period in the same manner as water with a municipal and
industrial priority during water shortages. It is estimated that over the
100-year period, the total shortfall of the Indian Firming obligation is
approximately 550,000 acre-feet. To date approximately 140,000 acre-feet has
been secured by Arizona for the firming obligations shortfall. The US Bureau of
Reclamation also has an Indian firming obligation for existing and future
Arizona Indian settlements of approximately 950,000 acre-feet. We believe our
LTSCs can be used to help Arizona and the US Bureau of Reclamation meet these
obligations.
A shortage on the Colorado River system will be declared by the Secretary of the
Interior when on January 1, of any year, Lake Mead’s surface water elevation is
at or below 1,075 ft. This determination is made in August of the previous year
based on a rigorous modeling evaluation of the hydrologic system of the Upper
Colorado Basin by the U.S. Bureau of Reclamation. Under the Drought Contingency
Plan (DCP), a new tier, “Tier 0”, applies when Lake Mead is at an elevation
between 1,075 ft. and 1,090 ft. and a shortage declaration has been made that
went into effect January 1, 2021. This requires Arizona to cut-back its
allocations by 192,000 acre-feet, and Nevada by 9,000 acre-feet. When Lake Mead
is at an elevation between 1,050 ft. and 1,075 ft., Nevada’s share of the
shortage is 13,000 acre-feet and Arizona’s cut-back to its allocation is 320,000
acre-feet. In contrast, California suffers no loss to its allocation from the
Colorado River (2007 Shortage Sharing Guidelines).
A Tier 1 shortage was declared on August 16, 2021, which reduced Arizona’s
Colorado deliveries by 512,000 acre-feet annually for the 2022 water year
operations. It is probable that the next level of delivery reductions, which
would make the total reductions to Arizona 592,000 acre-feet, will be declared
for calendar year 2023. This is due to the continued “mega-drought” occurring
throughout the south-western United States. These mega-drought conditions cause
low levels of inflow to Lake Powell that, in turn, cause reductions to inflows
to Lake Mead, which affect critical lake level triggers. The US Bureau of
Reclamation has already changed the system operations of Glenn Canyon Dam to
retain additional water in Lake Powell until spring runoff occurs in an effort
to stave off Lake Powell level reductions that would cause additional discharge
reductions to Lake Mead.
It has been determined that the Colorado River system suffers from a structural
deficit of 1.2 million acre-feet annually. This means that in an average annual
water year, Lake Mead will lose 1.2 million acre-feet to the system, due to
evaporation, treaty obligations with Mexico, and allocations of water to
Arizona, Nevada and California that exceed what the system yields. We continue
to believe that Vidler’s LTSCs are well positioned to buffer Arizona through
times of water shortage and our LTSCs could be purchased by state entities
and/or municipalities located in the Phoenix AMA to be used directly or to help
sustain water levels in Lake Mead.
Currently the Pinal AMA, a largely agricultural area located in between the
Phoenix and Tucson AMAs, is experiencing a physical shortage of water supplies
for new developments within this AMA. This area, like the Phoenix metropolitan
area, is increasingly under pressure to grow from new residential, commercial,
and industrial users; however, according to the Arizona Department of Water
Resources analyses, there is “…insufficient, groundwater in the Pinal Active
Management Area to support all existing uses and issued assured water supply
determinations.” Proposed projects have been denied until new assured water
supply sources can be found to sustain this new development. The use of our
banked water in Harquahala could be used to help satisfy this need.
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CRITICAL ACCOUNTING POLICIES, ESTIMATES, AND JUDGMENTS
This section describes the most important accounting policies affecting our
assets and liabilities, and the results of our operations. Since the estimates,
assumptions, and judgments involved in the accounting policies described below
have the greatest potential impact on our financial statements, we consider
these to be our critical accounting policies:
•how we determine the fair value and carrying value of our tangible and
intangible water assets, and real estate;
•how and when we recognize revenue when we sell water assets and real estate;
and
•how we determine our income tax provision, deferred tax assets and liabilities,
and reserves for unrecognized tax benefits, as well as the need for valuation
allowances on our deferred tax assets.
We believe that an understanding of these accounting policies will help the
reader to analyze and interpret our financial statements.
Our consolidated financial statements, and the accompanying notes, are prepared
in accordance with GAAP, which requires us to make estimates, using available
data and our judgment, for things such as valuing assets, accruing liabilities,
recognizing revenues, and estimating expenses. Due to the uncertainty inherent
in these matters, actual results could differ from the estimates we use in
applying the critical accounting policies. We base our estimates on historical
experience, and various other assumptions, which we believe to be reasonable
under the circumstances.
The following are the significant subjective estimates used in preparing our
financial statements:
1. Fair value and carrying value of our tangible and intangible water assets and
real estate
Our primary long-lived assets include tangible and intangible water assets and
real estate. At December 31, 2021, the total carrying value of such assets was
$154.5 million, or approximately 73% of our total assets. These assets are
carried at cost, less any recorded impairments and depreciation.
Tangible water assets and real estate
We review our long-lived tangible water assets and real estate as circumstances
change, or if there are indications of impairment present, to ensure that the
estimated undiscounted future cash flows, excluding interest charges, from the
use and eventual disposition of these assets will at least recover their
carrying value. Cash flow forecasts are prepared for each discrete asset. We
engage in a rigorous process to prepare and review the cash flow models which
utilize the most recent information available to us. However, the process
inevitably involves the use of significant estimates and assumptions, especially
the estimated current and future demand for these assets, the estimated future
market values of our assets, the timing of the disposition of these assets, the
ongoing cost of maintenance and improvement of the assets, and the current and
projected income earned and other uncertain future events. As a result, our
estimates are likely to change from period to period. In addition, our estimates
may change as unanticipated events transpire which would cause us to reconsider
the current and future use of the assets. If we use different assumptions, if
our plans change, or if the conditions in future periods differ from our
forecasts, our financial condition and results of operations could be materially
impacted.
There were no material impairment losses recorded on our tangible water assets
or real estate during the years ended December 31, 2021, and 2020.
Intangible water assets
Our intangible water assets are accounted for as indefinite-lived intangible
assets. Accordingly, until an asset is sold, it is not amortized, that is, its
value is not charged as an expense in our consolidated statement of operations
over time, but the asset is carried at cost and reviewed for impairment, at
least annually during the fourth quarter, and more frequently if a specific
event occurs or there are changes in circumstances which suggest that the asset
may be impaired. Such events or changes may include lawsuits, court decisions,
regulatory mandates, and economic conditions, including interest rates, demand
for residential and commercial real estate, changes in population, and increases
or decreases in prices of similar assets. If the carrying value of an asset
exceeds the fair value, an impairment loss is recognized equal to the
difference. Once an asset is sold, the value is charged to cost of real estate
and water assets sold in our consolidated statement of operations and
comprehensive income or loss.
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We calculate the fair value of intangible water assets, using a discounted cash
flow model, under which the future net cash flows from the asset are forecasted
and then discounted back to their present value, using a weighted average cost
of capital approach to determine the appropriate discount rate. Preparing these
cash flow models requires us to make significant assumptions about revenues and
expenses as well as the specific risks inherent in the assets. We conduct
extensive reviews utilizing the most recent information available to us;
however, the review process inevitably involves the use of significant estimates
and assumptions, especially the estimated current asset pricing, potential price
escalation, income tax rates, discount rates, absorption rates and timing, and
demand for these assets. These models are sensitive to minor changes in any of
the input variables.
In summary, the cash flow models used for our most significant indefinite-lived
intangible assets forecast initial sales to begin within approximately one year,
and then increase until the assets are mostly sold over the next four decades.
We have assumed sale proceeds for the assets that are based on our estimates of
the likely future sales price per acre-foot. These per-unit sale prices are
estimated based on the demand and supply fundamentals in the markets which these
assets serve. If we use different assumptions, if our plans change, or if the
conditions in future periods differ from our forecasts, our financial condition
and results of operations could be materially impacted.
There were no material impairment losses recorded on our intangible water assets
during the years ended December 31, 2021 and 2020.
2. Revenue recognition
Sale of real estate and water assets
We recognize revenue when there is a legally binding sale contract, the profit
is determinable (the collectability of the sales price is reasonably assured, or
any amount that will not be collectible can be estimated), the earnings process
is virtually complete (we are not obliged to perform significant activities
after the sale to earn the profit, meaning we have transferred all risks and
rewards to the buyer), and the buyer’s initial and continuing investment is
adequate to demonstrate a commitment to pay for the property.
Unless all of these conditions are met, we use the deposit method of accounting.
Under the deposit method of accounting, until the conditions to fully recognize
a sale are met, payments received from the buyer are recorded as a liability on
our balance sheet, and no gain is recognized.
3. Income taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for
unrecognized tax benefits reflect our best assessment of estimated future taxes
to be paid. We are subject to federal and various state income taxes. We have
multiple state filing groups with different income tax generating abilities.
Significant judgments and estimates are required in determining the consolidated
income tax expense.
We recognize deferred income taxes for tax attributes and for differences
between the financial statement and tax basis of assets and liabilities at
enacted statutory tax rates in effect for the years in which the deferred tax
liability or asset is expected to be settled or realized. A valuation allowance
is provided to offset deferred tax assets if, based upon the available evidence,
it is more likely than not that some or all of the deferred tax assets will not
be realized. Future realization of deferred tax assets depends on the existence
of sufficient taxable income of the appropriate character. Sources of taxable
income considered in the evaluation of deferred tax asset realization include
future reversals of deferred tax assets and liabilities, expected future taxable
income, taxable income in prior carryback years if permitted under the tax law,
and tax planning strategies. We have recorded valuation allowances for those
deferred tax assets not expected to be realized. As we have achieved a
sufficient history of sustained profitability, including taxable income in
appropriate jurisdictions, a portion of the valuation allowance was reduced by
$9.3 million during the year ended December 31, 2020. We have determined that it
is more likely than not that sufficient taxable income will be generated in the
future to realize certain of our deferred tax assets. We maintain valuation
allowances of $36.4 million as of December 31, 2021 for deferred tax assets not
expected to be realized in the future. In 2021, the Company added $18.2 million
to the deferred tax asset, due to the valuation allowance release of $21.7
million offset by a reduction of $3.7 million due to the Company’s taxable
income for 2021.
The calculation of our tax liabilities involves dealing with uncertainties in
the application of complex tax laws and regulations in a multitude of
jurisdictions.
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The accounting guidance for income taxes provides that a tax benefit from an
uncertain tax position may be recognized when it is more likely than not that
the position will be sustained upon examination, including resolution of any
related appeals or litigation, based on the technical merits. The guidance also
provides information on measurement, de-recognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition.
We recognize tax liabilities in accordance with accounting guidance on income
taxes, and we adjust these liabilities when our judgment changes as a result of
the evaluation of new information not previously available. Due to the
complexity of some of these uncertainties, the ultimate resolution may result in
a payment that is materially different from our current estimate of the tax
liabilities. These differences will be reflected as increases or decreases to
income tax expense in the period in which they are determined. Currently, we
have no material unrecognized tax benefits on any open tax years.
RESULTS OF OPERATIONS — YEARS ENDED DECEMBER 31, 2021 AND 2020
Overview of Economic Conditions and Impact on Results of Operations
We believe that current trends in housing inventory, home prices, and low
interest rates, in the markets in which our major water assets are located and
serve, primarily northern Nevada and Arizona, will have a positive impact on our
operating performance. Individual markets continue to experience varying
results, as local home inventories, affordability, and employment factors
strongly influence each local market. A change or deterioration in economic
conditions in the markets where we operate, whether due to the impact of the
COVID-19 pandemic or other factors that cause the growth in our markets to slow
or decline, could impair our ability to generate revenue, cause our expenses to
exceed projections, or result in operating losses; result in impairment losses
of our water assets and adversely affect our liquidity.
Our revenues and results of operations fluctuate from period to period. For
example, we recognize revenue from the sale of water assets when specific
transactions close; as a result, sales of water assets for any individual period
are not necessarily indicative of revenues for future periods or the full
financial year.
Vidler Water Resources, Inc. Shareholders’ Equity (in thousands):
December 31,
2021 2020 Change
Shareholders’ equity $ 208,596 $ 178,270 $ 30,326
Shareholders’ equity per share $ 11.39 $ 9.59 $ 1.80
The increase in shareholders’ equity during 2021 of $30.3 million was due
primarily to a combination of monetization of water and real estate assets
generating a gross margin of $22.2 million, $1 million of other income less $8.4
million of net operating and sales costs, a tax benefit of $18.1 million, mainly
due to a release of $21.7 million in our valuation allowance, and the repurchase
of 273,112 shares of our common stock for $2.6 million.
Total Assets and Liabilities (in thousands):
December 31,
2021 2020 Change
Total assets $ 212,658 $ 180,446 $ 32,212
Total liabilities $ 4,062 $ 2,176 $ 1,886
Total assets increased during the year ended December 31, 2021, primarily due to
the increase in cash from sale of water rights and water assets, and the partial
release of our valuation allowance to the deferred tax asset; less operating
costs and share repurchases.
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Results of Operations (in thousands):
Year Ended December 31,
2021 2020 Change
Total revenue and other income (loss) $ 29,220 $ 9,612 $ 19,608
Total costs and expenses $ 14,420 $ 8,944 $ 5,476
Revenue and other income (loss)
The majority of our revenue recorded for the year ended December 31, 2021 was
from the sale of 55,000 acre-feet of long-term water credits at Harquahala,
Arizona, for total proceeds of $22 million, 296 acre-feet of water rights at
Dodge Flat, Nevada for $2.1 million and the sale of 68 acre-feet of water rights
from our Fish Springs Ranch inventory for $2.7 million.
The majority of our revenue recorded for the year ended December 31, 2020 was
from the sale of 612 acre-feet of water rights at Dodge Flat, Nevada, for total
proceeds of $4.1 million and the sale of 77 acre-feet of water rights from our
Fish Springs Ranch inventory for $3.1 million.
Costs and Expenses
Cost of water assets and real estate sold:
During the year ended December 31, 2021, we recorded a total of $6.1 million in
cost of real estate and water assets of which $4.4 million related to our sale
of 55,000 acre-feet of our long-term water credits from the Harquahala Basin in
Arizona as well as the cost of water assets sold of $56,000 and $697,000 related
to our Dodge Flat and Fish Springs Ranch sales, respectively.
During the year ended December 31, 2020, we recorded a total of $1.9 million in
cost of real estate and water assets of which $950,000 related to our sale of 65
acre-feet of our water rights from the Middle Rio Grande Basin in New Mexico as
well as the cost of water assets sold of $115,000 and $788,000 related to our
Dodge Flat and Fish Springs Ranch sales, respectively.
General, Administrative and Other Costs:
During the years ended December 31, 2021, and 2020, we recorded general and
administrative and project costs of $8.4 million and $7 million, respectively.
The increase in these costs was primarily due to a year over year increase of
$1.8 million in total compensation due to increased bonus accruals in 2021
compared to 2020, resulting from increased level of assets sales in 2021
compared to the sales recorded in 2020.
Stock-Based Compensation Expense
Stock-based compensation expense is calculated based on the fair value of the
award on the grant date and is recognized over the vesting period of the awards.
As of December 31, 2021, there was no unrecognized stock-based compensation
expense related to restricted stock units (“RSU”). The stock-based compensation
grant to management in 2021 was accrued at December 31, 2020 comprising the
total management bonus for 2020 performance.
The stock-based compensation expense consisted primarily of the following awards
(in thousands):
Year Ended December 31,
2021 2020
RSU – Directors 87 87
RSU – Management 21 453
Total stock-based compensation expense $ 108 $ 540
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Income Taxes
For the year ended December 31, 2021, we recorded a tax benefit of $18.1 million
primarily due to the reversal of another portion of the valuation allowance of
$21.7 million due to the increased likelihood that we will be able to utilize a
significant portion of our Net Operating Losses prior to their expiration. As at
December 31, 2020 we reversed a portion of the valuation allowance of
$9.3 million on our net deferred tax assets and accordingly recorded a deferred
tax asset and benefit of $9.3 million This resulted in an effective tax rate of
0% for the years ended December 31, 2021, and 2020 respectively. The effective
tax rate differed from our federal corporate income tax rate of 21% due
primarily to the valuation allowance changes recorded on our net deferred tax
assets in 2021 and 2020.
LIQUIDITY AND CAPITAL RESOURCES — YEARS ENDED DECEMBER 31, 2021 and 2020
A substantial portion of our historical revenue and cash flow has, and is
expected in the future, to come from one-time sales of our assets which are
primarily long-term water resource development projects that we expect to
support economic growth in the local markets where the assets are located. The
timing and amount of sales and cash flows depend on a number of factors that are
difficult to predict and cannot be directly compared from one period to another.
However, given our cash balances at December 31, 2021, we currently believe that
we have sufficient resources to cover our expenses for at least the next 12
months. In the long-term, we estimate that cash from operations will provide us
with adequate funding for future operations. However, if additional funding is
needed, we could defer significant expenditures, including our share repurchase
program, obtain a line of credit, or complete a debt or equity offering. Any
additional equity offerings may be dilutive to our shareholders and any
additional debt offerings may include operating covenants that could restrict
our business. We are not currently subject to any debt covenants which might
limit our ability to obtain additional financing through debt or equity
offerings. We classify the sale of and costs incurred to acquire and develop our
water assets as operating activities in our consolidated statement of cash
flows.
Our Operations
The majority of our cash inflows for the year ended December 31, 2021, was from
$28.8 million in sales of various water rights assets and other income received.
This was offset by $7.3 million of cash used for overhead and various project
expenses. Additionally we used $2.6 million in cash to repurchase shares of our
common stock during the year ended December 31, 2021.
The majority of our cash inflows for the year ended December 31, 2020, was from
$9.6 million in sales of various real estate and water rights assets. This was
offset by $7.8 million of cash used for overhead, various project expenses.
Additionally, we used $10.4 million in cash to repurchase shares of our common
stock during the year ended December 31, 2020.
Consolidated Cash and Securities
We have adequate working capital reserves. At December 31, 2021 and 2020, we had
unrestricted and available cash and securities of $28.2 million and $9.4
million, respectively, that could be used for general corporate purposes and the
exercise of options held by us for the acquisition of groundwater rights in Lyon
County, Nevada.
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Cash Flow
Our cash flows from operating, investing, and financing activities were as
follows (in thousands):
Year Ended December 31,
2021 2020
Cash provided by (used in):
Operating activities $ 21,462 $ 1,785
Total operating activities 21,462 1,785
Investing activities 23 (40)
Total investing activities 23 (40)
Financing activities (2,692) (10,526)
Total financing activities $ (2,692) $ (10,526)
Increase (decrease) in cash and cash equivalents $ 18,793 $ (8,781)
Cash Flows From Operating Activities
During 2021, we generated cash of $21.5 million from our operations. This was
primarily derived from $27.8 million in cash receipts from sales of various real
estate and water rights assets and $994,000 of lease and other revenue. This was
offset by approximately $7.3 million of cash used for overhead and various
project expenses.
During 2020, we generated cash of $1.8 million from our operations. This was
primarily derived from $9.0 million in cash receipts from sales of various real
estate and water rights assets and $583,000 of lease and other revenue. This was
offset by approximately $7.8 million of cash used for overhead and various
project expenses.
Cash Flows From Investing Activities
We had no material cash flows from investing activities during the years ended
December 31, 2021 and 2020.
Cash Flows From Financing Activities
During the years ended December 31, 2021 and 2020, we used $2.6 million and
$10.4 million in cash, respectively, to repurchase shares of our common stock.
We had no other significant financing activities during the years.
Off-Balance Sheet Arrangements
As of December 31, 2021, we had no off-balance sheet arrangements, other than
those discussed throughout this document, that have, or are reasonably likely to
have, a material current or future effect on our consolidated financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources.
Legal Developments
The Company, in the normal course of its business, frequently encounters
government or private challenges to its water rights. As previously disclosed,
the Company, through its subsidiary, Vidler, has invested substantial sums to
develop water resources in the Kane Springs Valley Basin, located in Lincoln
County, Nevada. Vidler, together with the Lincoln County Water District
(“Lincoln/Vidler”) in 2005, received a permit from the Nevada State Engineer to
appropriate 1,000 acre feet of water in the Kane Springs Valley Basin.
Lincoln/Vidler have several other applications pending to appropriate additional
groundwater in the Kane Springs Valley Basin, although the quantity of water
that may be appropriated under these applications cannot be accurately
predicted. These permitted water rights have senior priority and the pending
applications have next in priority in the Kane Springs Valley Basin.
Lincoln/Vidler entered into an agreement to sell water to Coyote Springs
Investments (“CSI”); CSI is the developer of Coyote Springs, a new planned
residential and commercial development 60 miles north of Las Vegas. Vidler
agreed to sell all of its remaining permitted water rights (500 acre-feet) to
CSI pursuant to a purchase option agreement.
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Following hearings conducted by the Nevada State Engineer in late-September
early-October of 2019 to determine the boundaries of the Lower White River Flow
System (LWRFS) in Southern Nevada, the Nevada State Engineer, on June 20, 2020,
issued Order No.1309, finding for the first time that Kane Springs Valley was
included as part of the LWRFS. This Order results in subordinating the senior
priority water right date of Lincoln/Vidler’s current permitted water rights in
Kane Springs Valley to the respective priority dates in relation to all other
water rights in the new multi-basin area “Super Basin.” If the Order stands, it
will likely impede Vidler from pursuing its existing permitted water rights and
applications in the Kane Springs Valley Basin and will adversely affect its
contracts with CSI.
Vidler believes that the Kane Springs Valley Basin is not a part of the LWRFS
and presented evidence to this effect at the State Engineer’s hearings. Vidler
believes there is no legal authority in existing Nevada water law statutes that
allows the State Engineer to create a “Super Basin” and to disregard existing
individual basin boundaries and water right priorities within those individual
basin boundaries.
Lincoln/Vidler have filed a Petition for Judicial review appealing Order No.
1309, as well as a ‘takings’ claim against the State of Nevada for the
subordination of Vidler’s water right priority. CSI, as well as others, have
also appealed this Order. and it is difficult to evaluate the ultimate outcome
of our appeal of the Order. In February, 2022 we participated in a hearing
before the state district court in Las Vegas on our Petition for Judicial
review. The judge in this case stated that she would rule within 60 days of the
hearing. An adverse ruling would materially and adversely affect Vidler’s
investment in the Kane Springs Valley Basin and its contracts with CSI. If there
is an adverse ruling on the appeal, the current option agreement with CSI could
result in forgone revenue of up to $3.5 million.
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