Business Context and Reporting Period
Cadiz Inc. filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2013. The company develops land and water resources in California; its principal focus is the Cadiz Valley Water Conservation, Recovery and Storage Project. Current revenue is limited to agriculture, and the company has not yet generated significant revenue from water development.
The proposed Water Project is designed to supply up to a long-term average of 50,000 acre-feet annually for 50 years, with a possible second phase for imported-water storage. The company reported that approximately 80% of annual project supply was under purchase agreement or option.
Financial and Operating Results
Amounts below are in millions of dollars, except per-share data and where noted.
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $0.004 | $0.006 | $0.008 | $0.037 |
| General and administrative expense | $2.811 | $2.895 | $6.695 | $5.718 |
| Operating loss | $(2.871) | $(2.986) | $(6.815) | $(5.871) |
| Net loss | $(4.461) | $(4.584) | $(11.900) | $(9.032) |
| Net loss per share | $(0.29) | $(0.30) | $(0.77) | $(0.59) |
Gross margin is not meaningful given negligible revenue. Six-month net interest expense was $4.026 million, versus $3.156 million a year earlier. The six-month 2013 loss also included a $1.055 million debt-extinguishment and refinancing loss.
Operating cash use was $10.551 million for the six months, versus $6.064 million in 2012; investing cash use was $0.167 million, versus $1.286 million. Financing provided $16.252 million, primarily from $17.5 million of new debt proceeds, partly offset by $1.243 million of issuance costs. Cash rose to $7.219 million from $1.685 million at year-end 2012. Working capital was $6.9 million.
At June 30, total assets were $60.148 million, total liabilities $88.364 million, and stockholders’ deficit $28.216 million. Long-term debt, net, was $85.460 million; current debt was $0.011 million. The filing states that no principal or interest payments are due on the new corporate debt before maturity. Total contractual obligations, including interest and operating leases, were $117.404 million.
Material Changes Versus Prior Period
- Six-month net loss increased by $2.868 million, while revenue fell from $37,000 to $8,000.
- G&A increased by $0.977 million, driven primarily by Water Project litigation costs and higher non-cash stock compensation, including compensation tied to the Brownstein legal-services agreement.
- Interest expense increased by $0.870 million, mainly due to interest on a larger refinanced debt facility. Quarterly net loss improved slightly year over year.
- On March 5, 2013, Cadiz refinanced approximately $66 million of prior term debt with $30 million of senior secured debt at 8% due March 2016 and a $53.5 million convertible bond at 7% due March 2018. The bond is convertible at $8.05 per share; the refinancing included $17.5 million of new working capital.
Outlook, Risks, and Unusual Items
- Management said the new working capital was expected to cover needs until mid-2014. Additional capital will be required during 2014 or to fund project implementation; possible sources include debt, equity, or asset sales. Management cautioned that financing availability and terms are not assured.
- The company is a party to seven coordinated lawsuits challenging Water Project approvals under CEQA. Trial was scheduled for December 3, 2013; the company said it could not predict the outcome. Two other cases had been dismissed.
- Project development depends on resolving litigation, completing permits and definitive water-supply agreements, and securing construction financing. The company said project construction financing was expected to be senior to the convertible bond. Debt covenants restrict certain actions, but there are no financial maintenance covenants; Cadiz reported compliance at June 30.
- On July 1, 2013, Cadiz entered a lease with Limoneira for up to 1,280 acres of lemon orchards over five years, including base rent and a share of crop cash flow. On July 31, Cadiz filed a shelf registration statement for up to $40 million of securities, creating potential financing flexibility and dilution risk.
- The filing disclosed a non-material correction to the first-quarter cash-flow presentation related to the March financing; it did not change net cash flows or ending cash. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether the company secures additional funding before the expected mid-2014 liquidity horizon, and the resulting cost or dilution.
- Outcomes and timing of the seven CEQA lawsuits and any resulting impact on project approvals.
- Conversion of participant options into definitive supply agreements, remaining regulatory approvals, and project construction financing and costs.
- Debt terms, accrued interest, maturity obligations, and potential dilution from the convertible bond and any securities issued under the shelf registration.
- Whether Limoneira’s orchard development proceeds as planned and generates the expected lease payments.