Cadiz Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Cadiz is a land and water resource development company whose principal focus is the Cadiz Valley Water Project; reported revenue to date has been limited and largely agricultural or lease-related.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $0.120 million | $0.227 million | $0.303 million | $0.283 million |
| Operating loss | $1.930 million | $3.651 million | $6.889 million | $10.120 million |
| Net loss | $5.175 million | $5.965 million | $19.615 million | $16.797 million |
| Net loss per share | $0.28 | $0.33 | $1.07 | $0.95 |
| Net interest expense | $3.244 million | $2.313 million | $10.473 million | $6.744 million |
Cost of sales was zero in 2016 for both periods; the filing does not provide a clear gross-margin measure. Revenue was immaterial relative to operating costs. General and administrative expense declined, principally due to lower Water Project litigation costs. Nine-month loss nevertheless increased, reflecting higher interest and debt-discount amortization and a $2.25 million debt-extinguishment loss.
Cash flow and liquidity: Cash was $3.893 million at September 30, 2016, versus $2.690 million at December 31, 2015. Operating cash use was $6.410 million for the first nine months, compared with $9.433 million in 2015; investing cash use was zero. Financing provided $7.613 million, including approximately $11.5 million related to the agricultural lease and $7.6 million of net convertible-note proceeds, partly offset by debt principal payments. The company reported a $39.7 million working-capital deficit.
Debt: Balance-sheet debt, net, totaled approximately $110.4 million ($42.6 million current and $67.8 million long-term); a further $12.1 million related-party lease liability was recorded. The first mortgage obligation was approximately $43.1 million and due in September 2017. In April 2016, Cadiz issued approximately $10.0 million principal and accrued interest of 7.00% convertible notes due 2020, generating about $8.0 million before fees. The notes are convertible at $6.75 per share. Debt carried fixed rates, and the company reported covenant compliance at quarter-end.
Material changes and unusual items
- In February, Cadiz entered a 99-year lease of 2,100 acres to related-party subsidiary Fenner Valley Farms for a one-time $12 million payment, recorded as a long-term lease liability. The payment helped satisfy a senior-debt extension condition.
- Cadiz extended its first-mortgage maturity to September 2017; the extension involved a $2.25 million fee recorded as a debt-extinguishment loss. Lenders elected to receive the extension fee in Cadiz shares.
- Approximately $1.5 million of convertible notes were converted during the nine-month period, and 224,854 shares were issued to lenders. Shares outstanding were 19,014,953 at September 30.
- A court preliminarily approved settlement of the securities class action on September 30. Cadiz accrued $3.0 million in liabilities and recorded a matching $3.0 million insurance-related asset; final settlement approval was scheduled for February 6, 2017. A related derivative action remained stayed while settlement discussions resumed.
Outlook, risks and contingencies
Management said available cash and the 2020-note financing were expected to fund working-capital needs through the end of February 2017. The company expected to require additional working capital during 2017 and was pursuing refinancing, extension or extinguishment of the first mortgage. It was evaluating equity, debt or asset dispositions as possible funding sources; no assurance of financing availability or terms was given. Management warned that failure to raise funds or refinance before the mortgage maturity could result in default and substantial doubt about the company’s ability to continue as a going concern.
The proposed Water Project is designed to deliver up to a long-term average of 50,000 acre-feet annually for 50 years. Management estimated Phase I construction costs at approximately $250 million and said construction financing would depend on definitive purchase-and-sale agreements and project assets. California environmental litigation challenging project approvals was dismissed in 2016, and the county’s approval became final. However, the pipeline right-of-way remains a major uncertainty: the BLM’s California office had indicated that a separate federal right-of-way permit may be needed, a position Cadiz disputes. Final conveyance terms involving the Metropolitan Water District and definitive customer agreements also remained to be completed. The filing reported no material change to risk factors disclosed in the 2015 Form 10-K.
Important facts for investors to verify
- Progress, terms and timing of refinancing or otherwise addressing the approximately $43.1 million mortgage due in September 2017, and funding for operations after February 2017.
- Whether Cadiz secures the required pipeline right-of-way and resolves remaining conveyance, permitting and customer-contract requirements for the Water Project.
- Whether definitive water agreements and construction financing support the estimated $250 million Phase I build-out.
- Final court approval and insurance coverage for the $3.0 million class-action settlement, and developments in the derivative action.
- Actual costs, obligations and potential consequences of the related-party agricultural lease and its termination and repurchase provisions.