Cadiz Inc. — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Cadiz is a land and water-resource development company focused primarily on its Cadiz Valley Water Conservation, Recovery and Storage Project; agricultural operations generated its reported revenue. Financial amounts below are in millions of dollars unless noted.
Financial results and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $0.182 | $0.287 | $0.190 | $0.324 |
| Operating loss | $(3.107) | $(3.068) | $(9.922) | $(8.939) |
| Net loss | $(4.797) | $(4.736) | $(16.697) | $(13.768) |
| Net loss per share | $(0.31) | $(0.31) | $(1.08) | $(0.89) |
- Cost of sales exceeded revenue in both periods: gross loss was $0.110 million in Q3 2013 versus $0.006 million in Q3 2012, and $0.102 million for the first nine months of 2013 versus $0.029 million in 2012.
- Nine-month general and administrative expense rose to $9.629 million from $8.683 million, mainly due to Water Project litigation costs and higher stock-based compensation. Net interest expense rose to $5.715 million from $4.821 million. The 2013 period also included a $1.055 million loss on debt extinguishment and refinancing.
- Operating cash use was $12.626 million, compared with $8.169 million in the prior-year period. Investing cash use was $0.167 million; financing provided $16.249 million. Cash rose from $1.685 million at year-end 2012 to $5.141 million at September 30, 2013.
- At September 30, cash was $5.141 million, working capital was $3.987 million, total assets were $57.978 million, and total liabilities were $90.961 million. Stockholders’ deficit was $32.983 million.
- Debt carrying value was $87.101 million, comprising $31.412 million senior secured debt and $55.647 million convertible bonds, plus other loans, less the current portion. Both principal and interest were generally payable at maturity, not currently; the instruments accrue at 8% and 7%, respectively. The convertible bond is convertible at $8.05 per share.
Material changes and business developments
- Revenue fell year over year, which management attributed principally to a smaller raisin crop. Cadiz reported no significant revenue from water-resource or real-estate development activity.
- On March 5, 2013, Cadiz refinanced approximately $66 million of existing term debt with a $30 million senior secured loan due March 2016 and a $53.5 million convertible bond due March 2018. The refinancing provided $17.5 million of working capital and generated a reported $1.055 million extinguishment/refinancing loss.
- After quarter-end, on October 30, 2013, Cadiz added a $10 million secured working-capital tranche at 8%, with no principal or interest due before its June 2017 maturity. The company also issued the lender 700,000 restricted common shares. Cadiz said the additional facility and existing cash were expected to cover working-capital needs until mid-2015.
- The Water Project is designed to recover and convey up to a long-term average of 50,000 acre-feet annually for 50 years, with a potential second phase providing about one million acre-feet of storage. Cadiz reported that approximately 80% of annual project supply was under purchase agreements or options; one participant had converted its option into a definitive purchase agreement.
Outlook, risks and contingencies
- Management said future liquidity needs depend on Water Project progress and may require additional capital during 2015 or later. Potential sources include debt, equity or asset dispositions; the filing cautions that financing availability and terms are not assured.
- Management expects project construction financing to be secured by new project assets and structured ahead of the convertible bond in priority. The project’s eventual implementation and timing are uncertain.
- Six lawsuits challenging Water Project approvals under CEQA remained pending, coordinated in Orange County Superior Court, with trial scheduled to begin December 3, 2013. Three other cases had been dismissed, including one in October 2013. The company could not predict the outcomes.
- Cadiz reported compliance with debt covenants at September 30, 2013. Its debt bore fixed interest rates, so it reported no interest-rate market risk. The company had approximately $197 million of federal and $107 million of California net operating loss carryforwards, subject to limitations, and a full valuation allowance against deferred tax assets.
- Management identified liquidity, access to financing, and the ability to realize value from its land and water assets as important uncertainties. Failure to obtain funding could require spending cuts that might impair the business plan.
Important facts for investors to verify
- Whether the six CEQA lawsuits and other required approvals affect project timing, scope or viability.
- Whether the reported 80% of project supply under agreements or options converts into binding, economically viable purchase and storage arrangements.
- Whether available cash and the October 2013 financing are sufficient through mid-2015, and what additional financing may be needed thereafter.
- The debt’s maturity and refinancing burden, the security over company land and infrastructure, and potential dilution from the convertible bond and the 700,000 shares issued after quarter-end. The filing reported 16,152,756 common shares outstanding as of November 5, 2013.