Cadiz Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Cadiz is a land and water-resource development company focused on its California properties and the proposed Cadiz Valley Water Project. It reported no significant revenue from development activity; revenue was primarily rental income.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Revenue | $109,000 | $108,000 |
| Operating loss | $2.881 million | $2.486 million |
| Net loss | $7.260 million | $5.971 million |
| Net loss per share | $0.29 | $0.26 |
| Cash used in operations | $4.035 million | $3.937 million |
| Cash and cash equivalents | $16.235 million | $12.558 million at Dec. 31, 2018 |
| Working capital | $13.8 million | Not stated for comparable period |
| Total liabilities | $155.347 million | $155.549 million at Dec. 31, 2018 |
General and administrative expense was $2.924 million, up from $2.528 million; depreciation was $66,000 in both periods. Net interest expense rose to $4.234 million from $3.516 million. The filing does not provide a meaningful operating-margin comparison given minimal revenue and ongoing project-development costs.
Investing activities used $165,000, mainly for project engineering and design. Financing activities provided $7.877 million, primarily net proceeds from ATM share sales; cash increased by $3.677 million, including restricted cash. The company issued 782,814 shares under the ATM during the quarter for $7.891 million net proceeds. It also issued 485,020 shares in conversion of approximately $3.06 million of convertible notes.
Material changes and unusual items
- Net loss increased by $1.289 million year over year, reflecting higher G&A and interest expense, a $197,000 debt-conversion expense, and the absence of $516,000 in unrealized warrant gains recorded in Q1 2018.
- Convertible-note conversions and ATM sales increased shares outstanding; 25.94 million shares were outstanding at March 31, versus 24.65 million at December 31, 2018.
- Adoption of ASU 2017-11 reclassified an $865,000 warrant liability to equity and recorded a $2.031 million cumulative adjustment to opening equity and accumulated deficit. Adoption of the new lease standard recorded additional right-of-use assets and lease liabilities, with no earnings or cash-flow impact.
Business outlook, risks and contingencies
- The proposed Water Project is permitted for a long-term average of up to 50,000 acre-feet annually for 50 years, but remains subject to final participant contracts, arrangements for use of the Colorado River Aqueduct, final design, construction permits and financing. The company estimates construction of required Phase I facilities would cost approximately $310 million. Management gave no revenue or earnings guidance.
- Management said current resources were not adequate to meet certain potential debt obligations if due. Approximately $76.3 million of principal and interest on 7% convertible notes was scheduled for March 2020 if not converted or extended. Holders of 99% of the notes had granted options allowing the company, at its discretion before December 5, 2019, to extend maturity to September 5, 2021.
- Approximately $67.1 million of senior secured debt could become due as early as December 2019 under specified springing-maturity conditions, including the status of the convertible notes and the company’s share price. The company reported covenant compliance at quarter-end, but no assurance that future financing would be available.
- Completing the purchase of a further 124-mile Northern Pipeline segment requires an $18 million deferred payment when specified conditions are met. The company said it did not have cash on hand to make that payment; failure to complete the purchase would limit pipeline opportunities to its existing 96-mile segment.
- In April 2019, Water Asset Management notified Cadiz of plans to nominate five directors and submit a bylaw proposal at the 2019 annual meeting. The company warned that a proxy contest or related litigation could divert resources, disrupt operations and affect its stock price.
- Management’s strategy depends on developing land and water assets and obtaining capital. The filing identifies liquidity, project execution, financing, permitting and water-conveyance arrangements as key uncertainties.
Most important facts for investors to verify
- Progress and timing for definitive water-purchase contracts, Metropolitan conveyance arrangements, final permits, project financing and the estimated $310 million Phase I buildout.
- Whether the convertible-note maturity extension is exercised, whether the springing maturity conditions apply to secured debt, and how the company will fund obligations.
- Funding and conditions for the $18 million Northern Pipeline payment and the resulting effect if the acquisition is not completed.
- Cash burn, remaining capacity under the $25 million ATM offering, and potential dilution from further equity issuance or note conversions.
- Outcome and costs of the announced proxy contest, and any resulting effect on governance or project execution.