Cadiz Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial amounts below are in U.S. dollars; unless otherwise noted, amounts are in millions.
Business context
Cadiz is a land and water resource development company focused on its Southern California land and groundwater assets. It reported minimal revenue, primarily from an agricultural lease, and is still developing its proposed Cadiz Valley Water Project. The project is permitted for a long-term average of up to 50,000 acre-feet annually for 50 years, but still requires final participant contracts, conveyance arrangements, design and permits, and construction financing.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0.111 | $0.109 | $0.220 | $0.217 |
| Operating loss | $(3.240) | $(2.255) | $(6.121) | $(4.741) |
| Net loss | $(7.476) | $(6.032) | $(14.736) | $(12.003) |
| Net loss per share | $(0.28) | $(0.25) | $(0.57) | $(0.51) |
| Net interest expense | $4.303 | $3.822 | $8.537 | $7.338 |
Revenue was far below operating costs, so the filing does not present a meaningful operating margin. General and administrative expense was $3.285 million in Q2 and $6.209 million for the first half, up from $2.300 million and $4.828 million, respectively. Management attributed higher losses mainly to water-development and proxy-related costs, higher interest expense, and the absence of prior-year warrant-liability gains.
For the first half, operating cash use was $6.872 million, investing cash use was $0.818 million, and financing provided $14.613 million, primarily through stock issuance. Cash and cash equivalents were $19.481 million at June 30; cash, cash equivalents and restricted cash totaled $19.614 million. Working capital was $16.7 million.
At June 30, total liabilities were $157.294 million and stockholders’ deficit was $79.768 million. Balance-sheet long-term debt, net, was $137.988 million, plus $0.053 million current debt; long-term lease obligations were $15.045 million. These debt carrying values should be distinguished from the larger potential maturity payments described below. Shares outstanding rose from 24.655 million at December 31, 2018 to 26.942 million at June 30, reflecting ATM issuances and debt conversions.
Material changes and developments
- Six-month net loss increased by $2.733 million year over year; revenue was nearly unchanged. General and administrative expense and net interest expense both increased.
- Cadiz issued shares under its November 2018 at-the-market program. By June 30, the offering had generated approximately $16.1 million gross and $15.6 million net proceeds; the company said it could continue issuing shares under the program.
- During the first half, lenders converted approximately $5.44 million of convertible notes into 821,917 shares. The company also reclassified an $0.865 million warrant liability to equity upon adopting new accounting guidance.
- After quarter-end, on July 31, Cadiz’s 50%-owned SoCal Hemp JV entered a lease initially covering 1,280 acres, with options for up to 8,320 additional acres. Annual rent is $500 per leased acre, subject to CPI adjustment.
Outlook, risks and unusual items
- Debt maturities and funding: Approximately $73.9 million of principal and interest on 7% convertible notes was due in March 2020 unless converted or extended. Noteholders holding 99% of the notes had granted Cadiz an option, exercisable by December 5, 2019, to extend maturity to September 2021. Approximately $68.1 million of senior secured debt could become due as early as December 2019 under a springing-maturity provision if the notes are not converted or extended and the stock price is below 120% of the conversion rate. Cadiz stated it did not have adequate resources on hand to meet these obligations if due. It was in covenant compliance at June 30.
- Northern Pipeline: The company’s purchase of an additional 124-mile pipeline segment requires an $18 million deferred payment after specified conditions are met. Cadiz said it did not have the cash available to make that payment; without the purchase, opportunities would be limited to its existing 96-mile segment.
- Water Project execution: The company estimated construction costs of approximately $310 million for facilities capable of delivering up to 75,000 acre-feet in a year. Financing is expected to depend on definitive purchase-and-sale agreements and project assets. Participant reservations exceed project capacity, and final agreements and transportation terms remain to be resolved.
- Regulatory and legal uncertainty: In June 2019, a federal court remanded a BLM right-of-way evaluation for further explanation; it did not find the evaluation’s conclusions erroneous. Cadiz expected BLM to issue an amended evaluation. California SB 307, signed July 31 and effective January 1, 2020, will require State Lands Commission review of covered water conveyance projects, with a review period of up to 15 months and a possible extension.
- Other liquidity considerations: Management expected near-term capital sources to be sufficient but cautioned that financing availability and terms were uncertain. It may seek equity or debt financing, asset transactions, or cost reductions. Equity issuance could dilute shareholders. The company’s primary ongoing cash requirements relate to development activities.
- The filing reported no material changes to the risk factors in the 2018 Form 10-K. Management concluded disclosure controls were effective and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether Cadiz exercised the convertible-note extension option by its December 5, 2019 deadline, and whether any conversion or refinancing affected the senior debt springing-maturity condition.
- Availability and terms of financing for debt obligations, operating needs, Water Project construction, and the $18 million pipeline payment.
- Progress on definitive water purchase agreements, Metropolitan Water District conveyance arrangements, the State Lands Commission review, and BLM’s amended evaluation.
- Whether project costs, timing, permitted capacity, and participant reservations change as final design, approvals, and contracts advance.
- Hemp JV acreage actually leased and cultivated, related revenues, and the economics of Cadiz’s 50% interest.