Cadiz Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. Cadiz is focused on developing its land and water assets, particularly the Cadiz Valley Water Conservation, Recovery and Storage Project. Current revenue remains minimal and primarily comes from agriculture.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $11,000 | $4,000 | $15,000 | $8,000 |
| Operating loss | $2.453 million | $2.871 million | $5.101 million | $6.815 million |
| Net loss | $4.515 million | $4.461 million | $9.209 million | $11.900 million |
| Net loss per share | $0.28 | $0.29 | $0.57 | $0.77 |
| Net interest expense | $2.061 million | $1.589 million | $4.106 million | $4.026 million |
| Cash used in operating activities | Not separately stated | Not separately stated | $6.557 million | $10.551 million |
Operating costs were largely general and administrative expenses; cost of sales was zero. Revenue is too small relative to expenses for operating margins to be informative. Six-month G&A fell to $4.989 million from $6.695 million, mainly reflecting lower project litigation costs and lower stock-based compensation. The six-month 2013 net loss included a $1.055 million debt extinguishment and refinancing loss.
At June 30, cash and cash equivalents were $5.311 million, down from $11.887 million at December 31, 2013. Working capital was $4.7 million. Total assets were $57.857 million and total liabilities were $103.503 million, leaving a stockholders’ deficit of $45.646 million. Long-term debt, net, was $100.409 million, plus an $11,000 current portion. The company reported fixed-rate debt and no exposure to market interest-rate changes on that debt. No cash payments, including interest, are due on corporate secured debt or convertible notes before maturity; interest is accruing, including amounts added to loan principal.
Material developments and outlook
- In May 2014, the California Superior Court denied six challenges to the Water Project’s environmental review and approvals. The ruling remained appealable; the company could not determine whether petitioners would appeal. Management expected ongoing litigation-related cash needs to be lower for the rest of 2014.
- The Water Project is designed to deliver a long-term average of up to 50,000 acre-feet of groundwater annually for 50 years; a proposed second phase would provide approximately one million acre-feet of storage capacity. About 80% of the annual water supply was under purchase agreements or remained under option. Final permitting, design and construction work was ongoing; construction financing had not been secured or reported as completed.
- Cadiz acquired ownership of the 96-mile Cadiz–Barstow segment of an idle natural-gas pipeline in April 2014 for $1 plus prior option payments. Conversion to water use would require further environmental review. The agreement provides for a potential $10 million payment from the former owner if it seeks regulatory approval for a new use of the western pipeline segment by December 2015.
- Management said $5.3 million of cash was expected to fund working-capital needs through the end of Q1 2015. Additional funding may be required during 2015, depending on project progress. Potential sources include debt, equity or asset dispositions; management gave no assurance financing would be available on acceptable terms. Long-term funding will also be needed for development and debt maturities.
- Debt arrangements described by management include $40 million of senior secured term debt accruing interest at 8% and due in 2016 and $53.5 million of convertible notes accruing interest at 7% and due in 2018, with a further $10 million secured tranche due in 2017. The company reported compliance with debt covenants at June 30, 2014.
- Management cited California drought conditions and constrained conventional water supplies as market context, but stated that project implementation and future development opportunities remained uncertain. No material changes to the prior annual report’s risk factors were reported.
Key investor verification points
- Whether the CEQA ruling was appealed and whether any remaining legal or regulatory action affects project approvals.
- Progress on definitive water supply and storage agreements, final permits, construction plans, and the availability, cost and priority of project financing.
- Cash burn and funding runway relative to the stated Q1 2015 estimate, including any subsequent financing or asset-sale activity.
- Debt balances, accruing interest, maturity terms and the company’s ability to refinance or repay obligations.
- Whether the potential $10 million pipeline-related payment condition is met and whether pipeline conversion receives required approvals.