Cadiz Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Unaudited results. Cadiz is a land and water resource development company whose principal focus is developing its Cadiz Valley Water Project; current revenue remains minimal and primarily reflects agricultural lease income.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $108,000 | $108,000 | $216,000 | $183,000 |
| Operating loss | $2.1 million | $2.6 million | $6.2 million | $5.0 million |
| Net loss | $13.6 million | $5.6 million | $20.8 million | $14.4 million |
| Net loss per share | $0.60 | $0.31 | $0.93 | $0.81 |
| Net interest expense | $8.0 million | $3.0 million | $11.1 million | $7.2 million |
At June 30, 2017, cash was $19.4 million, working capital was $12.2 million, total assets were $72.2 million, and stockholders’ deficit was $70.7 million. Current and long-term debt totaled approximately $119.2 million; long-term lease obligations were $12.8 million. Cash used in operations for the first half was $4.9 million, versus $4.8 million in 2016. Investing activities used $161,000; financing activities provided $12.3 million. Cash increased by $7.3 million from year-end 2016.
Material changes and unusual items
- First-half revenue rose $33,000 year over year, primarily from increased rental income under the agricultural lease. Revenue remained very small relative to development costs.
- First-half net loss increased $6.4 million year over year. The quarter and half-year included a $3.5 million loss on extinguishment/refinancing of debt, approximately $4.0 million of unrealized warrant-liability losses recorded in interest expense, and a $4.6 million liability associated with the new debt financing, as described in MD&A.
- General and administrative expense for the first half included $1.9 million of stock-based compensation, including approximately $1.7 million for milestone shares that vested in June 2017.
- On May 25, 2017, Cadiz refinanced its prior $45 million secured debt with a $60 million Apollo-affiliated credit agreement, including $15 million of new funding. The loan carries 6% quarterly-compounding PIK interest plus 2% cash interest, and matures in four years or potentially earlier under a springing-maturity provision. Cadiz also issued Apollo warrants for 357,500 shares at $14.94 per share.
Business outlook, risks, and contingencies
Management stated that cash resources should cover working-capital needs for more than one year from the report’s issuance, but acknowledged that future capital may be required. Apollo conditionally committed up to $240 million for Phase I construction financing; the commitment is subject to conditions, some outside Cadiz’s control, and Cadiz is not required to accept it. The company said it was in compliance with debt covenants at June 30, 2017.
The planned Water Project is permitted to recover and deliver an average of up to 50,000 acre-feet annually for 50 years, but construction requires progress on pipeline rights-of-way, definitive customer agreements and water-conveyance arrangements, and financing. The company reported that supply reservations exceed project capacity and that it is working with participating agencies on the final agreements.
Important uncertainties include the BLM’s unresolved review of whether the proposed pipeline is within the railroad right-of-way; obtaining Metropolitan Water District approval and conveyance terms; and potential effects of California AB 1000, which had advanced in the state legislature but was not enacted as of the filing. Regulatory, litigation, permitting, construction-financing, and capital-raising risks could delay or prevent development. Management also cautioned that liquidity may not remain sufficient if the company cannot raise funds. The company reported no significant legal proceedings under Part II and stated that disclosure controls were effective.
Investor verification priorities
- Confirm the status and conditions of Apollo’s conditional construction-financing commitment, and the availability of alternative funding if it does not close.
- Track BLM’s response on the railroad right-of-way, Metropolitan’s conveyance arrangements, and the legislative status and possible impact of AB 1000.
- Review whether final water purchase agreements resolve the stated oversubscription and provide sufficient support for the estimated $250 million Phase I construction cost.
- Monitor cash burn, debt maturities and springing-maturity terms, interest accretion, warrant-liability remeasurement, and potential future equity dilution.