Cadiz Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in thousands unless noted. Cadiz is a natural-resources development company focused on water, land and agricultural opportunities in California. Its principal revenue to date is agricultural lease income; water-project development has not generated significant revenue.
Financial performance and position
- Q2 revenue: $141,000, versus $148,000 a year earlier. Six-month revenue: $280,000, versus $262,000. Revenue was primarily agricultural rent.
- Q2 net loss: $11.6 million, or $0.30 per share, versus $4.8 million, or $0.14 per share. Six-month net loss: $17.5 million, or $0.46 per share, versus $25.3 million, or $0.77 per share.
- Operating loss: $6.3 million for Q2 and $9.5 million for the first half, compared with $3.0 million and $7.0 million, respectively, in 2020. With minimal revenue and development-stage operations, conventional operating margins are not meaningful.
- Expenses: Q2 general and administrative expense was $6.4 million, including $3.3 million of stock compensation; first-half expense was $9.6 million, including $3.4 million of stock compensation. Net interest expense was $4.9 million for Q2 and $7.4 million for the first half.
- Cash flow, first half: $6.0 million used in operating activities and $20.4 million used in investing activities, primarily for the Northern Pipeline acquisition. Financing provided $30.3 million, mainly from equity offerings. Cash and cash equivalents were $11.2 million at June 30; cash, cash equivalents and restricted cash totaled $11.3 million.
- Liquidity: Working capital was $10.1 million at June 30. Total assets were $101.6 million and total liabilities were $106.7 million, leaving a $5.1 million stockholders’ deficit.
- Debt and obligations: At June 30, long-term debt, net, was $82.5 million, with $43,000 current. The company also reported $18.0 million of long-term related-party lease obligations. It was in compliance with debt covenants at quarter-end.
Material changes and notable transactions
- Q2 loss increased year over year, primarily from higher stock-based employee awards and interest expense. First-half loss improved from 2020 because the prior-year period included a $12.4 million non-cash debt-extinguishment loss.
- On June 30, Cadiz completed payment of $19 million for a 124-mile Northern Pipeline extension, increasing property, plant, equipment and water programs to $76.1 million from $53.5 million at year-end 2020.
- During the first half, Cadiz raised approximately $29.2 million net through its $30 million ATM program and approximately $14.1 million net from a June common-stock offering. Common shares outstanding rose to 40.6 million at June 30 from 36.9 million at December 31, 2020.
- Subsequent financing (July 2): Cadiz completed a depositary-share offering for approximately $54 million net and entered a new $50 million senior secured loan, due July 2024, with interest at 7% per year. These proceeds were used to repay approximately $77.5 million of the former senior secured debt, prefund approximately $10.2 million for eight quarterly preferred dividends, and pay transaction costs; remaining proceeds were designated for working capital and general purposes. The new preferred shares carry an 8.875% dividend rate when declared.
Outlook, risks and contingencies
- Management said the July financing transactions provided approximately $20 million of net cash proceeds and, together with June 30 cash, were sufficient for short-term working-capital needs. Longer term, Cadiz expects to need additional capital for working capital and development; financing availability and terms are not assured.
- No specific revenue or earnings guidance was provided. Management’s strategy depends on developing its water, pipeline and agricultural assets; the Water Project is approved to deliver up to 50,000 acre-feet annually for 50 years, but requires customer contracts, conveyance arrangements, construction and financing before implementation.
- Cadiz acquired the Northern Pipeline extension and is discussing potential conveyance, storage and supply uses. Required permits may be needed for specific uses. The proposed Southern Pipeline route also requires conveyance approvals, including an agreement with the Metropolitan Water District and authorization from the California State Lands Commission.
- Two lawsuits filed in March 2021 challenge federal permits authorizing water conveyance through the Northern Pipeline across BLM-managed lands and seek to vacate the permits and require further federal review. Cadiz sought to intervene, considers the suits without merit, but says the outcome cannot be predicted.
- Liquidity and the ability to raise capital remain important risks. The company relies on financing while project development costs precede material operating revenue. Its filings warn that inability to obtain needed capital could require substantial expense reductions and impair its business plan.
- Other notable items include $3.4 million of first-half non-cash stock compensation and a $573,000 first-half gain on remeasurement of warrant liabilities. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress on binding water-supply contracts, required conveyance approvals, permits, construction arrangements and project financing.
- Status and potential effect of the lawsuits challenging the BLM Northern Pipeline permits.
- Post-quarter cash available after debt repayment, preferred-dividend prefunding and transaction expenses, and the pace of future cash use.
- Terms and covenants of the July 2021 loan, preferred-share dividend obligations, and potential dilution from equity issuances and warrants.
- Whether agricultural and pipeline-related activities can generate sufficient cash flow before additional external financing is required.