Cadiz Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparative period is Q1 2012. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Cadiz is a land and water resource development company with approximately 45,000 acres in California. Its principal focus is developing the Cadiz Valley Water Conservation, Recovery and Storage Project; current revenue is primarily agricultural and remains minimal. The planned first phase would deliver up to a long-term average of 50,000 acre-feet annually for 50 years, using a proposed 43-mile conveyance pipeline. The company also operates agricultural properties and is pursuing other land and water opportunities.
Financial performance and position
| Metric | Q1 2013 | Q1 2012 / prior date |
|---|---|---|
| Revenue | $0.004 million | $0.031 million |
| General and administrative expense | $3.884 million | $2.823 million |
| Operating loss | $3.944 million | $2.885 million |
| Net loss | $7.439 million | $4.448 million |
| Basic and diluted loss per share | $0.48 | $0.29 |
| Net interest expense | $2.437 million | $1.560 million |
| Cash used in operating activities | $6.722 million | $4.020 million |
| Cash and cash equivalents | $11.051 million | $1.685 million at Dec. 31, 2012 |
| Working capital | $9.6 million | Not provided as a comparative figure |
| Long-term debt, net | $83.925 million | $63.250 million at Dec. 31, 2012 |
| Total assets / total liabilities | $64.116 million / $87.886 million | $50.518 million / $67.286 million at Dec. 31, 2012 |
Revenue was too small to provide a meaningful margin measure. Investing cash outflow was $0.167 million, and financing provided $16.255 million. Cash increased by $9.366 million during the quarter. The company reported a stockholders’ deficit of $23.770 million at March 31, 2013.
Material changes and financing
- On March 5, 2013, Cadiz refinanced approximately $66 million of prior term debt. The new financing comprises $30 million of senior secured debt bearing 8% interest and a $53.5 million convertible bond bearing 7% interest, plus $17.5 million of new working capital.
- Neither instrument requires principal or interest payments before maturity: March 5, 2016 for the senior debt and March 5, 2018 for the convertible bond. The bond is convertible at $8.05 per share and is junior to the senior debt. The senior debt is secured by company assets.
- The refinancing was accounted for as a debt extinguishment and generated a $1.055 million reported loss. The company incurred approximately $1.2 million in legal and placement costs to be amortized over the bond’s life.
- General and administrative expense rose by about $1.1 million, principally due to Water Project litigation costs. Stock-based compensation increased to $0.439 million from $0.159 million, largely reflecting shares awarded to the company’s legal and advisory firm.
- Net interest expense increased by $0.877 million, including higher interest on debt and amortization of financing costs and debt discount.
Outlook, risks and contingencies
- Management expected the $17.5 million of new working capital to fund anticipated needs until mid-2014. It stated that additional working capital would be required during 2014 and that longer-term financing will be needed for operations, project capital spending and debt maturities. No assurance was given that financing will be available on acceptable terms.
- Management said construction financing for the Water Project is expected to be provided by lower-cost senior debt; project financing needs remain dependent on permitting, agreements and project progress. Approximately 80% of planned annual water supplies were under purchase agreements or options; the company was working to convert remaining options into definitive agreements.
- Eight lawsuits brought by four plaintiffs challenge Water Project approvals under CEQA. The cases were coordinated in Orange County Superior Court and were expected to proceed to administrative trial later in 2013. Management could not predict the outcomes, but did not expect the proceedings, individually or collectively, to materially adversely affect the company.
- Cadiz paid $3.3 million in March to commence the construction and operation term of its railroad right-of-way lease for the proposed pipeline. Operating cash use also reflected project administration and litigation costs.
- Debt covenants restrict certain actions, including additional debt, liens, asset dispositions and dividends; there are no financial maintenance covenants, and the company reported compliance at March 31, 2013. All debt bore fixed interest rates, limiting exposure to interest-rate changes.
- Management identified liquidity and access to capital, project development and the ability to realize value from its land and water assets as key uncertainties. It warned that inability to raise funds could require substantial expense reductions and impair the business plan. The filing reported no material changes to the risk factors in the 2012 Form 10-K.
Most important facts for investors to verify
- Availability and timing of additional capital after the company’s stated mid-2014 working-capital runway, including funding for Water Project construction.
- Outcomes and timing of the eight CEQA lawsuits and any remaining regulatory approvals, including Metropolitan’s action regarding use of the Colorado River Aqueduct.
- Conversion of water-provider options into binding purchase and storage agreements, and the economics and terms of those agreements.
- Debt terms, accrued interest, collateral and maturity obligations, including the potential dilution from conversion of the $53.5 million bond at $8.05 per share.
- Project costs, construction schedule and financing assumptions, as the filing does not provide a clear total construction funding requirement.