Cadiz Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; filed November 8, 2018. Cadiz is a land and water resource development company focused on developing its California land and groundwater assets. Revenue remains minimal and is primarily rental income under an agricultural lease.
Financial results
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $0.112M | $0.111M | $0.329M | $0.327M |
| Operating loss | $(2.488)M | $(2.414)M | $(7.229)M | $(8.632)M |
| Net loss | $(6.240)M | $(5.992)M | $(18.243)M | $(26.789)M |
| Net loss per share | $(0.26) | $(0.26) | $(0.77) | $(1.19) |
| Net interest expense | $3.829M | $3.586M | $11.167M | $14.662M |
| Operating cash used | Not separately presented for the quarter | $8.644M | $7.726M |
Revenue is too small relative to expenses for operating margins to be meaningful. Q3 net loss widened modestly year over year. Nine-month net loss improved, primarily because 2017 included a $3.5M debt-extinguishment loss and higher stock compensation; 2018 also benefited from a $1.268M unrealized warrant gain recorded in interest expense.
Balance sheet at September 30, 2018: Cash and cash equivalents were $17.667M (cash, cash equivalents and restricted cash totaled $17.800M); working capital was $15.2M. Total assets were $72.324M and total liabilities $152.233M, resulting in a $79.909M stockholders’ deficit. Long-term debt was $133.287M, plus $0.058M current debt; long-term lease obligations were $14.121M. The company reported compliance with debt covenants.
Cash flows, nine months: Investing activities used $1.258M, primarily for Water Project engineering and development. Financing activities provided $14.539M, including $14.581M net proceeds from stock issuance. Cash increased by $4.637M from the start of the year.
Material changes and business developments
- Cadiz raised approximately $14.6M net through its ATM stock offering, issuing 1,159,718 shares. Shares outstanding were 24,453,358 at September 30, versus 22,987,434 at December 31, 2017.
- During the first nine months, lenders converted approximately $2.11M of convertible notes into 279,480 shares.
- General and administrative expense for nine months was $7.364M, down from $8.747M, largely reflecting stock compensation of $0.350M versus $2.027M in 2017. Excluding stock compensation, G&A increased to $7.0M from $6.7M.
- Cadiz’s main proposed Water Project is permitted for an average of up to 50,000 acre-feet annually over 50 years; construction of facilities designed to deliver up to 75,000 acre-feet in a year is estimated at approximately $310M. Final participant contracts, conveyance arrangements with Metropolitan Water District, design and additional construction permitting remained in progress.
- Cadiz reported participant supply reservations exceeding project capacity, but said it still expected to convert existing options and letters of intent into definitive purchase agreements and address oversubscription.
Outlook, risks and contingencies
- Management said cash resources were expected to cover working-capital needs for more than one year from the report’s issuance, but gave no revenue or earnings guidance. The company continues to incur losses and depends on external financing to develop its assets.
- A $20M option payment was due by December 2018 to acquire an additional 124-mile Northern Pipeline segment. Cadiz said it lacked cash on hand to exercise the option and had engaged an investment banker to pursue funding alternatives. Failure to exercise would limit its pipeline opportunities to the 96-mile segment already owned.
- Convertible Senior Notes could require approximately $80.3M of principal and interest in March 2020 if not converted at $6.75 per share. Approximately $65.1M of senior secured debt could become due as early as December 2019 under specified conditions if the notes remain unconverted. Management said refinancing, extension or additional capital would be needed to address these obligations if they are not converted or otherwise resolved.
- Phase I requires substantial construction financing and agreements for project participation and water conveyance; the filing does not report that this financing or all required arrangements were finalized. Phase II storage remains subject to further environmental review and permitting.
- Management cited risks to achieving value from its land and water assets and to obtaining financing. It stated that cash was sufficient for near-term needs, while warning that financing availability and terms were not assured.
Key facts for investors to verify
- Whether Cadiz exercised or otherwise resolved the $20M pipeline option before its December 2018 expiration.
- Progress on definitive Water Project participant contracts, Metropolitan conveyance arrangements, final permits and the estimated $310M construction financing.
- Available liquidity and the plan for the conditional December 2019 secured-debt maturity and March 2020 convertible-note payment.
- Future cash burn, financing needs and potential dilution following the 2018 ATM issuance.
- The filing states that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.