Cadiz Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018; filed March 18, 2019. The filing also reports unaudited fourth-quarter results. Cadiz is a land and water resource development company, with more than 45,000 acres in eastern San Bernardino County, California. Its principal prospective business is the Cadiz Valley Water Project; it had not begun project operations or generated significant development revenue.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue, primarily agricultural lease income | $0.44 million | $0.437 million |
| Operating loss | $11.22 million | $12.64 million |
| Interest expense | $15.27 million | $17.77 million |
| Net loss | $26.27 million | $33.86 million |
| Net loss per share | $1.09 | $1.50 |
| Cash used in operating activities | $12.19 million | $10.47 million |
| Cash used in investing activities | $3.73 million | $1.01 million |
| Cash provided by financing activities | $15.45 million | $12.33 million |
Revenue was negligible relative to operating costs; the filing does not present a meaningful operating business margin. Net loss narrowed mainly because 2017 included a $3.5 million debt-extinguishment loss, $2.6 million in net unrealized warrant losses, and higher stock compensation. In 2018, warrant remeasurement produced a $1.5 million gain recorded in interest expense. Fourth-quarter 2018 revenue was $0.111 million and net loss was $8.03 million.
At year-end, cash and cash equivalents were $12.56 million and working capital was $8.9 million. Total assets were $69.31 million, total liabilities $155.55 million, and stockholders’ deficit $86.24 million. The balance sheet reports long-term debt of $136.25 million, plus a $14.41 million related-party lease obligation; the debt note lists $67.40 million of senior secured debt, $73.16 million of convertible notes, and $14.83 million of lease obligation before debt discounts and other adjustments. The company said it lacked adequate resources to meet certain potential debt maturities and the pipeline purchase payment without additional capital or other actions.
Cadiz raised $15.5 million net through at-the-market stock offerings in 2018. Operating cash burn exceeded cash raised from financing and cash declined from $13.03 million to $12.56 million (cash-flow statement totals include restricted cash).
Business developments and changes
- The Water Project’s first phase is permitted for a long-term average of up to 50,000 acre-feet annually for 50 years, with up to 150,000 acre-feet of carry-over storage. A second phase could provide up to one million acre-feet of imported-water storage, but requires further review and permits.
- Estimated construction cost for Phase I facilities capable of delivering up to 75,000 acre-feet in a year is approximately $310 million. Construction financing, final participant contracts, water-transport arrangements through the Colorado River Aqueduct, final design, and additional construction permits remained outstanding.
- Cadiz reported that participant supply reservations exceeded project capacity and that it was working to convert options and letters of intent into definitive purchase agreements. Only Santa Margarita Water District had an executed purchase-and-sale agreement described in the filing, for 5,000 acre-feet.
- In December 2018, Cadiz exercised its option and agreed to acquire an additional 124-mile pipeline segment, paying $2 million initially. An additional $18 million is due after specified conditions are met; the company said it did not have cash on hand for that payment. Without completing the purchase, pipeline opportunities remain limited to the 96-mile segment it owns.
- A related-party agricultural lessee leases 2,100 acres for 99 years under an arrangement that generated a one-time $12 million payment in 2016; ongoing reported revenue is primarily rental income.
Outlook, risks, and unusual items
- Management expects to need further financing until development assets generate revenue; financing may involve debt, equity, asset dispositions, or cost reductions. Availability and terms are not assured, and equity issuance may dilute shareholders.
- Convertible notes carried a 7% rate and had approximately $79.6 million of principal and interest potentially due in March 2020 unless converted or maturity was extended. In March 2019, after year-end, Cadiz obtained options from holders of 95% of the notes to extend maturity to September 2021, exercisable at the company’s sole option before December 5, 2019.
- Senior secured debt was approximately $67.4 million at year-end. Its maturity could spring forward to December 2019 under specified conditions tied to the convertible notes and share price; otherwise, the stated maturity was May 2021. The company reported compliance with debt covenants at December 31, 2018.
- Water Project execution remains subject to Metropolitan’s approval of Colorado River Aqueduct conveyance arrangements and to final contracts, design, permitting, financing, and potential additional environmental review. California Senate Bill 307 was introduced in February 2019 and could create new review requirements if adopted.
- Environmental groups challenged the BLM’s right-of-way determination in federal court; Cadiz intervened. The filing says the outcome and effect are uncertain. It also describes possible State Lands Commission lease requirements and a Fish and Wildlife Department request concerning further review of localized streambed permits.
- In February 2019, Cadiz sold 782,814 shares under its ATM program for approximately $7.92 million net proceeds. This was a post-year-end event and increased the share count.
- The independent auditor expressed an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective.
Important facts for investors to verify
- Whether definitive water purchase agreements and Metropolitan conveyance arrangements are completed, and whether participant commitments support project financing.
- How the company will fund the estimated $310 million Phase I build, ongoing operating cash burn, potential debt maturities, and the $18 million pipeline payment.
- Whether the convertible-note extension options are exercised, notes convert, or refinancing is secured, and the resulting dilution and debt-service burden.
- Outcomes of regulatory reviews and litigation, including the federal BLM challenges, potential state legislation, and any additional permit or environmental-review requirements.
- Progress on final engineering, water-treatment requirements, construction permits, and any changes to project cost or schedule.