Cadiz Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. Cadiz is focused on developing its land and water assets, particularly the proposed Cadiz Valley Water Conservation, Recovery and Storage Project. Agricultural sales remain a small, variable source of revenue.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $31,000 | $457,000 |
| Cost of sales | $0 | $432,000 |
| General and administrative expense | $2.823 million | $2.965 million |
| Operating loss | $2.885 million | $3.029 million |
| Net interest expense | $1.560 million | $1.343 million |
| Net loss | $4.448 million | $4.253 million |
| Basic and diluted loss per share | $0.29 | $0.31 |
| Cash used in operating activities | $4.020 million | $1.986 million |
| Cash and cash equivalents, March 31 | $6.861 million | $2.811 million at March 31, 2011 |
Revenue fell mainly because the 2011–2012 lemon harvest was smaller and shorter than the prior season. G&A excluding stock-based compensation increased to $2.7 million from $1.7 million, primarily due to legal, consulting, water-development and pipeline-feasibility costs. Stock and option compensation declined to $159,000 from $1.2 million. The filing does not provide a clear, useful operating-margin comparison given the very low revenue base.
At March 31, 2012, total assets were $55.433 million and total liabilities were $57.805 million, resulting in a $2.372 million stockholders’ deficit. Working capital was $6.2 million. Long-term debt had a $53.572 million carrying value, net of discount; its stated principal was $57.533 million. The secured loan accrues interest at 6% and matures June 29, 2013. No principal or interest cash payments are due before maturity; interest and debt discount accretion contribute to reported interest expense. Debt is secured by substantially all company assets. The company reported compliance with its debt covenants.
Changes, liquidity and outlook
- Net loss increased by $195,000 year over year despite a lower operating loss, as net interest expense rose and 2011 included $121,000 of other income from a derivative liability.
- Operating cash use more than doubled year over year, reflecting development and administrative spending, pipeline-conversion due diligence, and a $1.0 million payment to extend the El Paso Natural Gas option. Cash declined $4.509 million from year-end 2011.
- Management said additional working capital will be required beginning in Q1 fiscal 2013 to fund operations until development programs generate revenue. Financing may require additional debt or equity; availability and terms are not assured, and equity issuance could dilute existing holders.
- Longer-term funding needs include development expenditures and the 2013 loan maturity. Management said it expects to address the loan through possible conversion, project construction financing, cash from other asset development, or capital-markets financing. The company had engaged an infrastructure-financing investment bank for the Water Project.
Project developments, contingencies and risks
- The Water Project proposes to recover and deliver up to a long-term average of 50,000 acre-feet of groundwater annually, with about one million acre-feet of potential imported-water storage. The company said about 80% of annual project supply was under option with six water providers; these options are not equivalent to completed binding supply agreements.
- The Draft Environmental Impact Report public-comment period ended March 14, 2012; the Final EIR was still being compiled. On May 1, 2012, after quarter-end, the County Board of Supervisors approved an MOU concerning its role in enforcing the groundwater management plan. Project certification, approvals, financing and construction remained outstanding.
- Cadiz held options on two idle natural-gas pipelines. Exercising both would require payments totaling $50 million; the EPNG option was extended to April 2013 after a $1.0 million payment, and the Questar option was due to expire in December 2012. Feasibility, approvals and funding remain uncertain.
- Management identified potential uses for other land, including solar development and a mitigation bank, but gave no assurance that these opportunities would proceed. Agricultural revenue is expected to vary with crop area, yields and prices.
- Contractual obligations included $57.533 million of debt principal and $4.497 million of interest, largely due within two to three years, plus $285,000 of operating leases. A potential project-related legal/advisory fee of up to 1% of the project’s net present value was not included in that table and is contingent on specified approvals and agreements.
- The filing reported no material pending legal proceedings and no material changes to the risk factors in the 2011 Form 10-K. Disclosure controls were assessed as effective, with no material quarter-specific change in internal controls reported.
Important facts for investors to verify
- Cash runway and the timing and terms of financing needed from Q1 fiscal 2013 onward, including the June 2013 debt maturity.
- Progress toward Final EIR certification, project approvals, binding water-supply and storage agreements, and construction financing.
- Whether the pipeline options are exercised, their total acquisition and conversion costs, and the feasibility and permitting of water transportation.
- Actual project economics, funding requirements and potential dilution; the filing does not provide a committed construction-financing package or a definitive project completion schedule.
- Crop revenues and costs, and the status and terms of the contingent project-related legal/advisory fee.