Cadiz Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Cadiz is a land and water-resource development company whose primary focus is the proposed Cadiz Valley Water Conservation, Recovery and Storage Project. The company also operates agricultural activities, which historically generated its limited revenue.
Financial results and position
Amounts below are in millions, except per-share data.
| Metric | Q1 2015 | Q1 2014 / prior balance |
|---|---|---|
| Revenue | $0.018 | $0.004 |
| Operating loss | $(2.718) | $(2.648) |
| Net loss | $(4.842) | $(4.694) |
| Net loss per share | $(0.27) | $(0.29) |
| Net cash used in operations | $(2.636) | $(4.434) |
| Cash and equivalents | $13.548 | $16.206 at Dec. 31, 2014 |
| Total assets | $66.032 | $68.212 at Dec. 31, 2014 |
| Total liabilities | $110.148 | $107.950 at Dec. 31, 2014 |
| Stockholders’ deficit | $(44.116) | $(39.738) at Dec. 31, 2014 |
Current assets were $14.441 million and current liabilities $37.389 million, a reported working-capital deficit of $22.9 million. Long-term debt, net, was $71.086 million; the balance sheet classified $35.441 million as current, principally reflecting the first mortgage due in March 2016. Interest expense was $2.193 million, including $1.971 million of interest added to loan principal. The company reported no cash interest payments due before debt maturities. Cash declined $2.658 million during the quarter. Gross margin is not meaningful given the very small revenue base and zero cost of sales.
Changes versus the prior comparable period
- Revenue rose by $14,000 but remained immaterial. Net loss increased by $148,000, and operating loss widened by $70,000.
- Net interest expense rose $148,000, to $2.193 million. General and administrative expense was approximately $2.7 million in both periods; excluding stock-based compensation, it declined to $2.4 million from $2.6 million, primarily due to lower Water Project litigation costs.
- Stock-based compensation increased to $260,000 from $30,000, mainly reflecting vesting schedules under the 2014 equity plan.
- Operating cash use improved by $1.798 million, primarily because litigation costs were lower. Cash at quarter-end was $6.098 million below year-end 2014.
- Loss per share improved to $(0.27) from $(0.29), despite the larger net loss, as weighted-average shares increased to 17.707 million from 16.166 million.
Outlook, developments and risks
- Liquidity and debt: Management said March 31 cash was expected to fund working-capital needs through the end of February 2016. The $35.4 million first mortgage matures in March 2016 and must be extinguished, extended or replaced. The company was pursuing alternatives with an investment bank, but gave no assurance that financing would be available on acceptable terms. Additional capital may be needed in 2016; potential sources include debt, equity or asset dispositions. The company reported compliance with debt covenants.
- Water Project: Phase I is designed to deliver up to a long-term average of 50,000 acre-feet annually for 50 years. The project remains in development and requires construction financing, permits and agreements. Six CEQA judgments upholding project approvals were appealed; hearings were expected in Q4 2015, and management said the appeals were not expected to affect ongoing pre-construction activities.
- Right-of-way and transportation: The Bureau of Land Management was evaluating whether the proposed pipeline use of the railroad right-of-way serves railroad purposes; the agency expected to send its evaluation to its Washington office by the end of summer 2015. Metropolitan Water District action on transportation terms was also expected later in 2015.
- Water quality: Some wells reportedly contain naturally occurring Chromium 6 slightly above California’s new standard. Cadiz said treatment or blending would be needed and believed this could be achieved cost-effectively; estimated costs were included in project assumptions.
- Commercial arrangements: The company had purchase, option and letter-of-intent arrangements representing water demand above project capacity. One 2014 letter of intent was converted to a 10,000-acre-foot-per-year purchase agreement with San Luis Water District, subject to an exchange arrangement to be finalized before construction.
- Other developments: California remained in its fourth year of drought; mandatory urban-use reductions and imported-water rationing were announced in April 2015. California approved the company’s Fenner Valley Desert Tortoise Conservation Bank in February 2015, but the filing gives no projected revenue from credit sales. Limoneira paid approximately $1.2 million for young lemon trees and irrigation lines in January 2015; the lease modification generated $70,000 of other income in Q1.
- Contingency: A putative securities class action was filed April 24, 2015, after quarter-end, alleging false or misleading statements about Cadiz’s business and prospects. The company said it believed the case lacked merit and intended to defend it; potential loss was not estimable.
- Going-forward risks: Cadiz reported quarterly losses and operating cash use, limited revenue, and substantial working-capital and financing needs. It warned that failure to raise funds or refinance the mortgage before maturity could impair project implementation and the company’s viability. It also reported approximately $225 million of federal and $132 million of California net operating loss carryforwards, subject to limitations, and a full valuation allowance against deferred tax assets.
Important facts for investors to verify
- Progress, timing and terms of refinancing or replacing the $35.4 million mortgage due March 2016, and the company’s cash runway.
- Whether the BLM approves the proposed railroad right-of-way use, and the status and outcome of the CEQA appeals.
- Required Metropolitan Water District approvals, final water-delivery and exchange terms, Chromium 6 compliance costs, and construction financing.
- Conversion of water-provider options and letters of intent into definitive agreements, including how oversubscription is resolved.
- Developments and any potential financial exposure from the securities class action.