Cadiz Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2012; comparisons are to the corresponding 2011 periods. Financial statement amounts are in thousands of dollars unless otherwise noted. The filing is unaudited.
Business context
Cadiz’s principal assets are approximately 45,000 acres in California, with its strategy centered on developing land and groundwater resources. Its primary initiative is the Cadiz Valley Water Conservation, Recovery and Storage Project; agricultural sales, mainly raisins and lemons, were its reported revenue source. The company had not yet generated significant revenue from its development activities.
The project proposes annual groundwater recovery of up to 50,000 acre-feet, with approximately one million acre-feet of potential imported-water storage. The Final Environmental Impact Report was certified on July 31, 2012. San Bernardino County approved the project’s groundwater management plan on October 1, 2012. The company reported that approximately 80% of project water was under a purchase-and-sale agreement or remained under option.
Key financial results
| Metric | Three months ended September 30, 2012 | Three months ended September 30, 2011 | Nine months ended September 30, 2012 | Nine months ended September 30, 2011 |
|---|---|---|---|---|
| Revenue | $287 | $121 | $324 | $618 |
| Operating loss | $(3,068) | $(2,704) | $(8,939) | $(8,021) |
| Net loss | $(4,736) | $(4,105) | $(13,768) | $(12,087) |
| Loss per common share | $(0.31) | $(0.29) | $(0.89) | $(0.87) |
| Net interest expense | $1,665 | $1,451 | $4,821 | $4,169 |
For the third quarter, cost of sales was $293, producing a $6 gross loss; the comparable 2011 gross loss was $145. For the first nine months, cost of sales was $295 versus $716, yielding gross profit of $29 versus a gross loss of $98. The filing does not present a separate reported margin percentage.
- At September 30, 2012, cash and cash equivalents were $1,373, total current assets $3,271, and current liabilities $5,473, for a $2.2 million working-capital deficit.
- Long-term debt, net, was $56,831, with a further $11 current portion. Stockholders’ equity was a deficit of $11,561, compared with positive equity of $1,930 at December 31, 2011.
- Cash used in operating activities in the first nine months was $8,169, versus $5,344 in 2011. Investing activities used $1,877; financing activities provided $49. Cash fell from $11,370 at year-end 2011 to $1,373.
Changes and management commentary
Quarterly revenue increased mainly because of a larger raisin crop. Nine-month revenue declined principally because the 2011–2012 lemon harvest was shorter and smaller; the larger raisin crop partly offset the decline. Nine-month general and administrative expense increased to $8,683 from $7,650. Excluding stock-based compensation, it rose to $8.4 million from $5.6 million, primarily reflecting water-project legal and consulting work, litigation, and pipeline-conversion diligence. Net interest expense also increased, partly because of higher debt discount amortization.
On October 30, 2012, after quarter-end, Cadiz drew $5 million under an added working-capital facility. It bears interest at 6%, has no principal or interest payments before maturity, and has the same maturity framework as the existing facility, then June 29, 2013 with an option to extend to November 1, 2013. The company also issued lenders warrants to purchase 250,000 shares at $10 per share, exercisable for two years.
Outlook, liquidity and risks
- Management said additional working capital would be required beginning in the first quarter of 2013 to fund pre-construction work and operations until development projects generate revenue. The company expected to seek additional debt or equity financing; availability and terms were not assured.
- The existing secured term loan accrued interest at 6%. If lenders do not convert it before final maturity, Cadiz will need to refinance, extend or restructure it. Management cited possible conversion, water-project construction financing, other asset-development proceeds, or capital-market financing as potential repayment sources.
- The company stated that current resources are insufficient to fund implementation of the Water Project. Failure to raise funds could require substantial expense reductions or asset sales and could impair the business plan and viability. Additional equity could dilute existing holders.
- Five lawsuits challenged the EIR after its certification. The four state cases were consolidated; the federal case was dismissed in October 2012. The company said it could not predict outcomes but did not then expect a material adverse effect.
- Two pipeline purchase options, if both exercised, would require $50.5 million. The filing describes pipeline conversion, solar, and mitigation-bank opportunities as exploratory and does not provide assurance they will be realized.
- All debt bore fixed rates at September 30, 2012, limiting exposure to changes in market interest rates. Cadiz reported compliance with debt covenants and effective disclosure controls; it reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the October 30, 2012 $5 million facility and other financing plans provide adequate liquidity beyond the anticipated first-quarter 2013 funding need.
- The term-loan balance, conversion or extension terms, final maturity, and the company’s ability to refinance or repay it.
- Progress on remaining project approvals, permits, definitive water agreements, construction financing, and conversion of water-provider options into binding commitments.
- Developments and outcomes in the consolidated state EIR litigation and any other permitting or legal challenges.
- Whether project and agricultural plans can produce revenues on a timeline and scale sufficient to support operating costs and debt obligations.