Cadiz Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results; amounts below are in U.S. dollars. Cadiz is a land and water-resource development company, focused principally on developing its Cadiz Valley Water Project. Its current revenue is limited, and it has not yet generated significant revenue from water-resource development.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $108,000 | $75,000 |
| General and administrative expense | $4.150 million | $2.355 million |
| Operating loss | $4.113 million | $2.353 million |
| Net interest expense | $3.113 million | $4.191 million |
| Net loss | $7.227 million | $8.795 million |
| Basic and diluted loss per share | $0.33 | $0.49 |
| Cash used in operations | $2.635 million | $1.480 million |
- Revenue increased by $33,000, but remained immaterial relative to operating costs. The filing does not present a meaningful gross margin.
- Net loss narrowed by $1.568 million, largely reflecting lower interest expense and the absence of the prior-year $2.250 million debt-extinguishment loss. The 2016 comparison also included approximately $3.6 million of fees associated with extending a mortgage.
- G&A included $1.816 million of stock-based compensation, versus $165,000 in Q1 2016; approximately $1.7 million related to a management milestone award tied to obtaining construction financing. Excluding stock compensation, G&A was approximately $2.3 million versus $2.2 million.
- At March 31, cash was $9.407 million, down from $12.172 million at year-end 2016. Working capital was $7.1 million. Total assets were $61.979 million; total liabilities were $119.654 million, leaving a stockholders’ deficit of $57.675 million.
- Debt consisted of $1.503 million current and $101.847 million long-term, net, at quarter-end. Long-term lease obligations were a separate $12.519 million. Debt carried fixed interest rates; the company reported covenant compliance.
- Operating cash use was $2.635 million, investing cash use was $116,000, and financing cash use was $14,000. Cash-flow movements included a $3.127 million decrease in accrued liabilities and a $2.728 million decrease in prepaid expenses and other.
Business developments, outlook and risks
- The company owns approximately 45,000 acres in eastern San Bernardino County. Its proposed Phase I Water Project is permitted under CEQA to supply an average of up to 50,000 acre-feet annually for 50 years; Phase II could provide up to one million acre-feet of storage. Phase I construction was estimated to cost approximately $250 million.
- On May 1, 2017, after quarter-end, Cadiz signed a $60 million Apollo-affiliated credit agreement intended to refinance its existing $45 million senior secured mortgage debt and provide $15 million of additional debt for immediate construction-related expenditures. Closing was expected within 45 days, subject to conditions.
- A separate Apollo commitment letter conditionally offered up to $240 million for Phase I construction. It is subject to conditions, some outside Cadiz’s control, and Cadiz is not obligated to accept it. If the credit agreement or construction financing does not close, Cadiz said it would need to seek financing elsewhere.
- Management said cash resources and the expected Apollo transaction should cover near-term working-capital needs. Longer-term funding may require construction financing, equity or debt placements, asset dispositions, or spending reductions; the filing gives no firm revenue or earnings guidance.
- Key project execution issues remained: securing the pipeline right-of-way, finalizing definitive water-purchase agreements with participating agencies, arranging conveyance through the Colorado River Aqueduct, and securing construction financing. The BLM’s 2015 determination that the proposed railroad-corridor pipeline needed a new federal right-of-way remained unresolved. A March 2017 BLM memorandum rescinded earlier agency instructions, but the company reported no subsequent BLM contact on its request concerning the project.
- Water-supply reservations exceeded planned project capacity, and Cadiz said it was working with participants to address oversubscription in final agreements. The company also reported that the 2017 appropriations law did not include proposed railroad-right-of-way language.
- A shareholder derivative lawsuit was dismissed with prejudice in March 2017 following a settlement requiring corporate-governance reforms and plaintiffs’ legal fees. The cash settlement was paid under the company’s insurance policy, not from its cash resources.
Most important facts for investors to verify
- Whether the $60 million Apollo credit agreement closed on the stated terms and whether its proceeds were received.
- Whether the conditional commitment for up to $240 million became available, and whether all conditions and construction-financing requirements were satisfied.
- The status of the BLM right-of-way determination, pipeline access, conveyance arrangements, and definitive agreements with project participants.
- How Cadiz plans to fund ongoing development and eventual debt obligations if project financing is delayed or unavailable, and the potential effect of future equity issuance.
- Whether the project’s estimated construction cost, capacity, schedule, and water-sale economics remain achievable given the outstanding execution and financing conditions.