Cadiz Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; unaudited. Cadiz is focused on developing its land and water resources, principally the Cadiz Valley Water Conservation, Recovery and Storage Project. Current revenue is limited and is mainly agricultural; the company expects the Water Project to be its primary future cash-flow source.
Financial results and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $0.038m | $0.011m | $0.056m | $0.015m |
| General and administrative expense | $3.724m | $2.401m | $6.399m | $4.989m |
| Operating loss | $3.751m | $2.453m | $6.469m | $5.101m |
| Net loss | $5.990m | $4.515m | $10.832m | $9.209m |
| Net loss per share | $0.34 | $0.28 | $0.61 | $0.57 |
| Net interest expense | $2.238m | $2.061m | $4.431m | $4.106m |
- Six-month operating cash use was $5.348m, versus $6.557m in 2014. Investing cash use was $0.240m; financing cash use was $0.012m. Cash declined $5.600m to $10.606m.
- At June 30, cash was $10.606m and working capital deficit was $27.3m. Total assets were $63.284m, total liabilities $113.031m, and stockholders’ deficit $49.747m.
- Debt carrying value was approximately $108.8m: $36.194m classified as current and $72.585m long-term. The $36.2m first mortgage is due March 2016. The senior secured debt accrues interest at 8%; convertible notes accrue at 7%. No cash payments, including interest, are due before maturities; interest is added to principal.
Changes and notable items
- Compared with the first half of 2014, revenue increased but remained immaterial. Net loss widened by $1.623m, primarily from higher stock-based compensation and Water Project litigation costs; interest expense also increased.
- G&A included $0.510m of stock-based compensation for the first half, versus $0.061m in 2014. A $0.070m lease-modification fee from Limoneira was recorded as other income.
- The current debt balance increased from $0.011m at year-end 2014 to $36.194m, reflecting the upcoming mortgage maturity; total liabilities rose to $113.031m from $107.950m.
- Management said available cash was expected to cover working capital needs through the end of February 2016. The company was pursuing an alternative to extinguish, extend, or replace the first mortgage, and may need additional capital.
Business outlook, risks, and contingencies
- The Water Project was described as having completed California environmental permitting, but remained subject to key steps before construction: finalizing water-transport arrangements with Metropolitan Water District of Southern California (MWD), obtaining the Bureau of Land Management’s assessment of the railroad right-of-way use, and resolving appeals of project approvals. The company expected the appeals to be heard in Q4 2015 and BLM review results by the end of summer 2015.
- Phase I construction was estimated to cost $225m–$250m. Cadiz said financing would depend on definitive purchase and sale agreements and project assets. Project capacity is planned at up to 50,000 acre-feet annually for 50 years; Phase II could add about one million acre-feet of underground storage capacity.
- Some project wells had naturally occurring Chromium 6 levels slightly above California’s standard. Cadiz expected treatment would be required and believed it could be achieved cost-effectively; related costs were included in its estimates.
- Liquidity is a significant risk: if the company cannot raise funds or refinance the $36.2m mortgage before March 2016, it could default and impair its ability to execute its plan. Management cautioned that financing availability and terms were not assured. Debt covenants were reported in compliance at June 30, 2015; debt carries fixed interest rates.
- A putative shareholder class action filed in April 2015 alleges inadequate disclosures about the Water Project and seeks unspecified damages. Cadiz disputes the claims; the filing says potential loss was not estimable. Appeals of earlier project-related judgments were also pending.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Progress and terms of refinancing or replacing the $36.2m mortgage due March 2016, and the company’s cash runway.
- Completion of MWD transportation arrangements, BLM right-of-way review, and the outcomes of the project-approval appeals.
- Whether project participants convert options and letters of intent into definitive purchase agreements, and how construction financing will be secured.
- Any material developments in the shareholder litigation and the cost and feasibility of Chromium 6 treatment.