Cadiz Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance sheet compared with December 31, 2016. Amounts below are U.S. dollars. The company is a land and water resource development business, focused on its proposed Cadiz Valley Water Project; reported revenue remains minimal and primarily relates to agriculture and lease income.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $111,000 | $120,000 | $327,000 | $303,000 |
| Operating loss | $2.414 million | $1.930 million | $8.632 million | $6.889 million |
| Net loss | $5.992 million | $5.175 million | $26.789 million | $19.615 million |
| Net loss per share | $0.26 | $0.28 | $1.19 | $1.07 |
| Net interest expense | $3.577 million | $3.244 million | $14.653 million | $10.473 million |
- General and administrative expense was $2.456 million in Q3 and $8.747 million for the nine months, versus $1.977 million and $6.973 million, respectively, in 2016. Management attributed the increase primarily to Water Project pre-construction engineering. Nine-month stock-based compensation rose to $2.027 million from $974,000, including expense related to milestone shares.
- Cash and cash equivalents were $16.055 million at September 30, 2017, versus $12.172 million at year-end 2016. Working capital was $7.6 million. Current assets were $16.636 million and current liabilities $9.035 million.
- Operating cash use was $7.726 million for the nine months, compared with $6.410 million in 2016; investing cash use was $671,000, primarily for Water Project engineering and design. Financing provided $12.280 million, and cash increased $3.883 million.
- Long-term debt, net, was $120.929 million, with $1.378 million current; long-term lease obligations were $13.023 million. Total liabilities were $145.180 million, exceeding total assets of $68.889 million; stockholders’ deficit was $76.291 million.
- The filing does not report operating or net margins as a separate metric. Given very low revenue relative to expenses, the company continued to report substantial losses.
Material changes and financing
- On May 25, 2017, Cadiz refinanced its prior $45 million secured debt with a $60 million Apollo-affiliated credit agreement, including $15 million of additional senior debt. The new debt bears 6% annual interest that accrues to principal, compounded quarterly, plus 2% annual cash interest. It matures in four years or earlier under a specified springing-maturity provision tied to the 2020 convertible notes. Debt issuance discounts and fees contribute to reported interest expense.
- The refinancing generated a $3.501 million loss on extinguishment of debt. Nine-month interest expense also included $3.562 million of net unrealized warrant-liability losses. These items, alongside higher compensation expense, contributed to the larger year-to-date net loss.
- At September 30, warrant liabilities totaled $6.642 million. In October, Cadiz agreed to issue prior lenders 264,096 shares valued at $3.3 million under a payoff arrangement; the 2016 warrants were to be cancelled upon share delivery. The company expected to eliminate the related $4.5 million liability and recognize a $1.2 million gain in Q4. Apollo’s 2017 warrant was increased from 357,500 to 362,500 shares.
- Common shares outstanding were 22.530 million at September 30, up from 21.769 million at year-end 2016; 22.802 million were outstanding as of November 3, 2017.
Business outlook, risks, and contingencies
- Cadiz says cash resources should cover working capital needs for more than one year from the report’s issuance, while acknowledging that additional capital may be needed for longer-term operations, project development, and debt obligations. Management identifies equity or debt placements, construction financing, asset transactions, and cost reductions as potential funding sources. No assurance is given that additional financing will be available on acceptable terms.
- Apollo provided a conditional commitment of up to $240 million for Phase I construction financing. Cadiz is not obligated to accept it, and the commitment remains subject to conditions. The company estimates Phase I construction costs at approximately $250 million.
- Phase I is permitted, according to the company, to provide a long-term average of up to 50,000 acre-feet annually for 50 years. Construction still depends on final participant purchase agreements, arrangements to convey water through the Metropolitan Water District’s Colorado River Aqueduct, and completion of design and additional permitting. The company expected a formal application concerning aqueduct conveyance to be filed in 2018. Existing reservations exceed project capacity, and final participation remains to be resolved.
- In October, the Bureau of Land Management determined that the proposed pipeline use of a portion of the Arizona & California Railroad right-of-way was within the original grant’s scope. Separately, the California State Lands Commission asserted potential state ownership of a parcel along the planned route and indicated a lease and additional environmental review might be required; Cadiz was conducting due diligence and could not determine whether a lease would be necessary.
- AB 1000, which could create additional permitting requirements for water conveyance, was held on the California Senate Appropriations Committee suspense file in September 2017. Its eventual status and effect were uncertain. The company also identified possible delays, added costs, or impediments from permitting decisions and third-party challenges.
- Phase II imported-water storage, with proposed capacity of up to one million acre-feet, requires further project-level environmental review and permitting and may require federal review. The company also owns an option, expiring December 2018, to purchase an additional 124-mile pipeline segment for $20 million.
- The company reported compliance with debt covenants at September 30. Its debt bears fixed rates, so management stated it was not exposed to interest-rate market risk on long-term debt. Disclosure controls were reported effective, with no material quarterly change in internal controls identified.
Most important facts for investors to verify
- Whether Apollo’s conditional construction financing becomes available, and on what final terms, and how the remaining Phase I funding requirement will be met.
- Whether Cadiz and participating agencies finalize purchase agreements, resolve oversubscription, and secure Metropolitan’s approval and conveyance arrangements.
- Whether the State Lands Commission parcel requires a lease or further environmental review, and whether other permits or legal or legislative developments delay construction.
- Whether cash, financing, or other resources remain sufficient as operating cash use and debt-related costs continue before meaningful project revenue begins.
- The terms and timing of the October lender settlement, cancellation of the 2016 warrants, and the expected Q4 accounting gain; these were subsequent events, not September 30 balance-sheet outcomes.