Cadiz Inc. — Q2 2018 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2018. Financial statements are unaudited; amounts below are in U.S. dollars. Cadiz is a land and water-resource development company whose principal focus is developing its California land and water assets. Revenue remains limited, primarily to agricultural lease income.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $109,000 | $108,000 | $217,000 | $216,000 |
| Operating loss | $2.255 million | $2.105 million | $4.741 million | $6.218 million |
| Net loss | $6.032 million | $13.570 million | $12.003 million | $20.797 million |
| Net loss per share | $0.25 | $0.60 | $0.51 | $0.93 |
| Net interest expense | $3.822 million | $7.963 million | $7.338 million | $11.076 million |
Gross margin is not presented as a meaningful measure in the filing. Revenue was negligible relative to operating costs. Q2 general and administrative expense was $2.300 million, versus $2.141 million; six-month expense was $4.828 million, versus $6.291 million. Six-month 2017 costs included $1.9 million of stock-based compensation, largely from employee milestone-share vesting, compared with $227,000 in 2018.
Liquidity, cash flow and debt
- At June 30, 2018, cash and cash equivalents were $20.237 million; cash, cash equivalents and restricted cash totaled $20.370 million. Working capital was $17.7 million.
- For the first six months, operating cash use was $6.419 million, investing cash use was $927,000, and financing provided $14.553 million. Financing included $14.581 million of net proceeds from an at-the-market stock offering. Cash increased $7.207 million.
- Total liabilities were $148.647 million. Debt comprised $57,000 current and $129.937 million long-term, net; long-term lease obligations were $13.831 million. The filing reports convertible debt carrying value of approximately $67.2 million, including accreted interest.
- In March–May 2018, Cadiz completed a $15 million ATM offering, issuing 1,159,718 shares for approximately $14.6 million net proceeds. Shares outstanding were 24,425,296 at June 30, compared with 22,987,434 at year-end 2017.
- Interest on the senior secured debt is partly paid in cash: 25% of future quarterly interest payments are required in cash. The company paid approximately $630,000 of secured-debt interest in cash during the six-month period. Management reported covenant compliance at June 30. Debt bore fixed interest rates.
Material changes and unusual items
Net losses were lower than in 2017, primarily because the prior-year periods included a $3.5 million debt-extinguishment loss and a $3.9 million liability for other costs related to the 2017 senior debt refinancing. Six-month 2018 net interest expense also benefited from an $859,000 unrealized gain on warrant derivative liabilities, compared with a $3.983 million unrealized loss in 2017. These are noncash valuation effects; interest on outstanding debt increased year over year in the six-month period.
Cadiz’s cash position increased largely because of the 2018 equity offering, while cash used in operations rose to $6.4 million from $4.9 million. The balance sheet remained in stockholders’ deficit, totaling $73.938 million at June 30.
Business outlook, project status and risks
- Management said current cash was expected to fund working-capital needs for more than one year from the report’s issuance. This outlook does not remove the need for future financing; management noted that additional capital may be required and that availability and terms cannot be assured.
- The proposed Water Project is permitted for an average of up to 50,000 acre-feet annually over 50 years, but construction has not begun. The company estimates facilities capable of delivering up to 75,000 acre-feet in a year would cost approximately $310 million. Construction financing, final participant contracts, water-conveyance arrangements and design and permitting work remain necessary.
- Water supply reservations exceed project capacity; Cadiz said it was working with participants to address oversubscription and convert existing options and letters of intent to definitive purchase agreements. An application for use of the Colorado River Aqueduct had not yet been filed; discussions on conveyance arrangements were ongoing.
- The company’s option to buy an additional 124-mile Northern Pipeline segment requires a $20 million payment by December 2018. 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 those pipeline opportunities to the 96-mile segment it owns.
- Project risks include the need for further approvals and agreements, potential regulatory changes and third-party challenges. The filing describes a lawsuit by the Center for Biological Diversity challenging a Bureau of Land Management determination concerning the railroad right-of-way. The California State Lands Commission had asserted that a lease might be required for a parcel along the route; whether one would be required remained uncertain. Possible legislation concerning water conveyance was also discussed.
- Phase II, involving up to one million acre-feet of imported-water storage, requires additional project-level environmental review and permits and may require federal review. The filing gives no specific earnings or revenue guidance.
Most important facts for investors to verify
- Whether Cadiz secures the $20 million needed by December 2018 to exercise the Northern Pipeline option.
- Whether participant agreements, Metropolitan’s conveyance terms, remaining permits and approximately $310 million of construction financing are secured for the Water Project.
- Whether cash use and financing needs remain consistent with management’s stated runway, given limited revenue and ongoing development spending.
- The status and potential effect of the right-of-way litigation, State Lands Commission issue and other regulatory or third-party challenges.
- Potential dilution from future equity financing and the effects of debt balances, accrued interest and warrant or convertible-security terms.