Cadiz Inc. 10-Q Summary: Period Ended June 30, 2007
Business Context and Reporting Period
This is an unaudited quarterly report (Form 10-Q) for Cadiz Inc. for the three and six months ended June 30, 2007. Cadiz is a development company focused on land and water assets in eastern San Bernardino County, California. The company's primary asset is the Cadiz Project, a proposed aquifer storage and supply program, alongside 45,000 acres of land suitable for agricultural, residential, and commercial development. The company is currently in a development phase with minimal operating revenues, relying on financing to fund operations.
Key Financial Metrics
| Metric ($ in thousands) | 3 Months Ended 6/30/07 | 6 Months Ended 6/30/07 | 6 Months Ended 6/30/06 |
|---|---|---|---|
| Revenues | $5 | $357 | $409 |
| Net Loss | $(2,158) | $(4,734) | $(5,376) |
| Net Loss Per Share (Basic/Diluted) | $(0.18) | $(0.40) | $(0.47) |
| Operating Cash Flow | N/A | $(2,632) | $(2,268) |
| Cash and Cash Equivalents | $4,098 | $4,098 | $10,397 (Dec 31, 2006) |
| Marketable Securities | $8,658 | $8,658 | $0 |
| Total Debt (Long-term + Current) | $27,690 | $27,690 | $25,890 |
| Working Capital | $12,126 | $12,126 | N/A |
Note: Working Capital calculated as Current Assets ($13,289) minus Current Liabilities ($1,163).
Material Changes vs. Prior Period
- Reduced Net Loss: The net loss for the six months ended June 30, 2007, decreased to $4.7 million from $5.4 million in the prior year period. This improvement was primarily driven by a significant reduction in non-cash stock-based compensation expenses ($102k in 2007 vs. $1.1 million in 2006).
- Revenue Decline: Revenues decreased slightly to $357k from $409k year-over-year, attributed to a smaller lemon harvest in late 2006 due to weather conditions.
- Increased Interest Expense: Net interest expense rose to $1.5 million (6-month 2007) from $977k (6-month 2006). This increase is due to the amortization of debt discount related to embedded derivatives in the 2006 refinancing, partially offset by higher interest income from cash balances.
- Capital Structure Changes: The company received $5.0 million in proceeds from the exercise of remaining stock warrants in early 2007. Additionally, 1,000 shares of Series F convertible preferred stock were converted into common stock, leaving no preferred shares outstanding.
- Investment Activity: The company invested $8.7 million in marketable securities (auction rate securities) during the period, reducing cash equivalents from $10.4 million to $4.1 million.
Guidance, Outlook, and Risks
Outlook: Management believes current resources (cash, marketable securities, and the $36.4 million zero-coupon convertible term loan) are sufficient to fund operations for more than one year. However, the company explicitly states it does not have the capital necessary to fund a water or real estate development project if required. Future financing will be needed to meet working capital needs and to repay the term loan at maturity in June 2011, unless lenders elect to convert debt to equity.
Legal Proceedings: The company is engaged in litigation against the Metropolitan Water District of Southern California (Metropolitan) regarding the termination of the Cadiz Project in 2002. The company seeks compensatory damages for breach of contract and fiduciary duty. Summary judgment motions were scheduled for August 30, 2007, with a trial expected in late 2007.
Risks:
- Financing Risk: There is no assurance that additional financing will be available on acceptable terms. Failure to raise funds could force substantial expense reductions or impact viability.
- Project Uncertainty: The Cadiz Project remains in the entitlement and environmental review phase. The company is working with the County of San Bernardino to complete the review process.
- Debt Covenants: While currently in compliance, the company is subject to covenants limiting additional indebtedness, liens, and asset dispositions.
Investor Verification Checklist
- Debt Maturity: Verify the terms of the $36.4 million zero-coupon convertible term loan maturing June 29, 2011, and the conditions under which lenders may convert debt to equity.
- Litigation Status: Monitor the outcome of the lawsuit against Metropolitan Water District, as a favorable ruling could significantly impact the company's valuation and project viability.
- Liquidity Runway: Confirm the company's ability to fund operations beyond the 12-month horizon without raising new capital, given the lack of significant operating revenue.
- Stock-Based Compensation: Review the impact of the new 2007 Management Equity Incentive Plan on future non-cash expenses, as grants under this plan became effective in July 2007.
- Marketable Securities: Assess the liquidity and valuation of the $8.7 million in auction rate securities held by the company.