Cadiz Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The unaudited statements are prepared on a going-concern basis. Cadiz’s principal assets are approximately 45,000 acres in eastern San Bernardino County, California; its primary strategy is developing land and water resources, especially the Cadiz Valley Water Conservation, Recovery and Storage Project. Agricultural operations remain its main current revenue source.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $0.121 million | $0.274 million | $0.618 million | $0.281 million |
| Operating loss | $2.704 million | $2.086 million | $8.021 million | $8.353 million |
| Net loss | $4.105 million | $3.179 million | $12.087 million | $11.530 million |
| Net loss per share | $0.29 | $0.23 | $0.87 | $0.84 |
| Net interest expense | $1.451 million | $1.092 million | $4.169 million | $3.174 million |
- Cost of sales exceeded revenue in both periods: by $0.145 million in Q3 and $0.098 million for the first nine months of 2011. The company reported no significant revenue from water or real-estate development.
- At September 30, cash was $3.452 million, versus $5.911 million at December 31, 2010. Working capital was $2.5 million; current assets were $4.334 million and current liabilities $1.789 million.
- Nine-month operating cash use was $5.344 million, investing cash use was $3.103 million, and financing provided $5.988 million. Financing included $4.0 million from a share sale and a $2.0 million loan draw.
- Long-term debt, net of discount, was $50.517 million, compared with $44.403 million at year-end 2010. The secured convertible term loan’s stated principal and accrued balance was $55.817 million and is due June 29, 2013; interest accrues at 6%, with no cash principal or interest payments due before maturity. Total liabilities were $54.050 million, and stockholders’ equity was a deficit of $4.729 million.
- Cadiz had 14,192,874 common shares outstanding at September 30, 2011. It issued 363,636 shares at $11 each in July for $4.0 million net proceeds.
Material changes versus prior periods
- Q3 revenue fell 56% year over year, primarily due to a smaller raisin crop. Nine-month revenue increased to $0.618 million, mainly from a larger and longer lemon harvest, partly offset by lower raisin revenue.
- Q3 general and administrative expense increased to $2.467 million from $2.023 million, reflecting higher legal and consulting costs for water development, partly offset by lower stock-based compensation. For the nine months, G&A declined to $7.650 million from $8.115 million, principally because stock-based compensation was lower.
- Higher interest expense contributed to greater net losses: debt interest and amortization of debt discount increased. Nine-month capital investment rose to $3.103 million from $0.743 million, including well-field and environmental work for the Water Project.
- The company drew $2 million from the second tranche of its working-capital facility in June. In July it amended the facility to eliminate the unused $3 million availability; the related derivative liability was no longer recorded. A $0.108 million nine-month derivative-related gain was reported as other income.
Outlook, developments and risks
- Liquidity: Management stated that additional working capital would be required beginning in Q2 fiscal 2012 to fund operations until development programs generate revenue. Additional debt or equity financing may be needed; availability and terms are not assured. Failure to raise funds could require substantial spending cuts and impair the business plan and viability.
- Water Project: Five water providers have options for annual supplies totaling at least 25,000 acre-feet, with Santa Margarita Water District holding an option for an additional 10,000 acre-feet. These options depend on completion of the CEQA environmental review. The draft environmental impact report was expected to be released for public review in the coming weeks. A groundwater expert panel reported in October 2011 that the project could proceed without environmental harm, while recommending a groundwater protection program.
- Project financing and permits: Construction financing and final economic agreements remain outstanding, and the company said its current resources cannot fund implementation of the Water Project if required to do so. Project development depends on environmental approvals, participant agreements and financing.
- Pipeline options: In September, Cadiz obtained options to buy more than 300 miles of idle natural-gas pipelines and assess conversion for water transport. Exercising both options would require $50 million; option terms expire in April and December 2012. Feasibility and funding are unresolved.
- Other opportunities: The company continues to explore solar development and other uses of its land, but gave no timing or assurance that these opportunities will be realized. Agricultural revenue is expected to vary with crop acreage, yields and prices.
- The term loan is secured by substantially all company assets and restricts certain activities, but has no financial maintenance covenants; Cadiz reported compliance with its debt covenants at September 30. All indebtedness bore fixed interest rates.
- There were no material changes to previously disclosed risk factors and no material pending legal proceedings reported. Management concluded disclosure controls were effective and reported no material change in internal controls over financial reporting.
Investor verification points
- Confirm the company’s financing plan and cash runway against its stated need for working capital beginning in Q2 2012.
- Track CEQA review milestones, environmental approvals, water-provider commitments and the timing and terms of construction financing.
- Verify whether pipeline-conversion feasibility justifies the options and whether Cadiz can fund potential $50 million exercise payments.
- Review the June 2013 debt maturity, conversion rights and potential refinancing or dilution implications. The filing’s contractual-obligations table appears to show a debt amount inconsistent with the debt maturity schedule; confirm the correct amount in the underlying filing.
- Assess whether agricultural revenue and operating cash use are consistent with the company’s liquidity projections, and monitor further equity issuance and dilution.