Cadiz Inc. 2016 Q1 Form 10-Q Summary
Business context and reporting period
Reports the unaudited three months ended March 31, 2016, compared with the same period in 2015. Cadiz is a land and water resource development company whose primary focus is developing the Cadiz Valley Water Project; it has not yet generated significant revenue from water or real-estate development.
Financial results and liquidity
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Revenue | $75,000 | $18,000 |
| Operating loss | $2.353 million | $2.718 million |
| Net loss | $8.795 million | $4.842 million |
| Basic and diluted loss per share | $0.49 | $0.27 |
| Cash used in operating activities | $1.480 million | $2.636 million |
Revenue remains very small relative to expenses, so operating margins are not meaningful as a measure of an established revenue-generating business. General and administrative expense was $2.355 million and depreciation was $73,000; cost of sales was zero. Net interest expense was $4.191 million, including $1.892 million of debt-discount amortization. A $2.25 million debt-extension fee was expensed as a loss on extinguishment/refinancing.
At March 31, cash was $2.103 million, current assets were $2.703 million and current liabilities were $2.932 million, a $229,000 working-capital deficit. Long-term debt, net, was $100.983 million, with $49,000 current debt; long-term lease obligations were $11.633 million. Total liabilities were $119.471 million and stockholders’ deficit was $64.966 million. Cash decreased $587,000 during the quarter; investing cash flow was zero and financing provided $893,000.
Material changes and unusual items
- Net loss rose by $3.953 million year over year, primarily because of debt-extension costs and higher debt-discount amortization. Operating loss narrowed, and reported revenue increased, mainly from rental income under the Fenner Valley Farm lease.
- In February, Cadiz entered a 99-year lease of 2,100 acres to related-party subsidiary Fenner Valley Farms (FVF) for a $12 million upfront payment. Cadiz recorded the payment as a long-term lease liability, not as revenue. FVF may lease up to 7,500 additional acres under staged options in 2016.
- Cadiz applied $10.5 million of the lease payment toward a senior-debt repayment condition. The lenders extended senior secured debt maturity to September 28, 2017; it bears 8% interest. A $2.25 million extension fee remained accrued at quarter-end, with lenders able to elect additional debt or Cadiz shares. Beginning with the June 5, 2016 interest payment, 50% of future quarterly interest is payable in cash.
- After quarter-end, on April 28, Cadiz issued 7% convertible senior notes due 2020 with approximately $10 million of principal and accrued interest; net proceeds were approximately $8 million before fees and expenses. The notes are convertible at approximately $6.75 per share.
Outlook, risks and contingencies
Management said cash at quarter-end plus the approximately $8 million raised in April was expected to fund working-capital needs through March 2017. Beyond then, the company expects to need further capital, potentially through debt or equity placements, asset leases or sales, or cost reductions. The filing also states there is currently substantial doubt about the company’s ability to continue as a going concern. Cadiz reported compliance with debt covenants at March 31 and no financial maintenance covenants.
The proposed Phase I Water Project is designed to deliver up to a long-term average of 50,000 acre-feet annually for 50 years. Estimated construction cost is $225–$250 million, requiring construction financing and definitive water purchase agreements. Progress depends on project approvals, infrastructure access and financing; no formal revenue or earnings guidance is provided.
- Federal right-of-way: BLM California guidance in October 2015 said the proposed pipeline use of the railroad right-of-way requires a new federal permit. Cadiz disputes the guidance and was pursuing reconsideration after meetings in March 2016; resolution and timing remain uncertain.
- Environmental appeals: Oral argument on appeals of CEQA approvals took place in March 2016, with a ruling expected before the end of Q2 2016. The required MWD action on use of the Colorado River Aqueduct and final project agreements also remain outstanding.
- Legal claims: A securities class action and a shareholder derivative suit were pending. The company disputes the claims; potential loss was not estimable. Separately, appeals remained pending in six CEQA cases.
- Liquidity and execution: The project’s scale, dependence on additional financing, limited current revenue, and reliance on regulatory, customer and infrastructure milestones create material uncertainty. The company said availability and terms of future financing were not assured.
Important facts for investors to verify
- Whether the April 2020-note financing proceeds, after fees, and expected runway are sufficient to fund operations through March 2017.
- How lenders elect to receive the $2.25 million extension fee and the resulting debt, dilution and cash-interest burden.
- Outcomes and timing of BLM reconsideration, CEQA appeals, MWD action and definitive water-purchase agreements.
- Whether FVF exercises its options for additional acreage and what payments or development obligations result.
- Whether the company secures construction financing for the estimated $225–$250 million Phase I project and obtains further liquidity beyond March 2017.