Cadiz Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Cadiz is a natural-resources development company focused on water, land, and agriculture in California. Its current revenue is primarily agricultural lease income; its major water project has not yet begun generating significant revenue.
Financial performance and liquidity
| Metric | Three months ended September 30, 2020 | Three months ended September 30, 2019 | Nine months ended September 30, 2020 | Nine months ended September 30, 2019 |
|---|---|---|---|---|
| Revenue | $139,000 | $110,000 | $401,000 | $330,000 |
| Operating loss | $2.5 million | $3.0 million | $9.5 million | $9.1 million |
| Net loss | $4.5 million | $7.4 million | $29.8 million | $22.2 million |
| Net loss per share | $0.13 | $0.28 | $0.89 | $0.85 |
| Net interest expense | $1.9 million | $4.4 million | $7.2 million | $12.9 million |
- Quarterly net loss improved year over year, mainly because convertible debt had been exchanged or converted in March 2020, reducing interest expense. Nine-month net loss worsened, principally due to a $12.4 million non-cash debt-extinguishment charge related to issuing preferred stock for convertible debt.
- Nine-month general and administrative expense, excluding stock compensation, fell to $7.8 million from $8.8 million, primarily due to lower Water Project legal and professional fees. Stock-based compensation increased to $1.8 million from $410,000.
- Cash and cash equivalents were $7.5 million at September 30, 2020, down from $15.7 million at December 31, 2019. Working capital was $5.1 million. Operating cash use was $10.3 million; investing cash use was $7.8 million; financing provided $9.9 million. Cash, cash equivalents, and restricted cash ended the period at $7.6 million.
- Balance-sheet long-term debt, net, was $75.2 million, with $54,000 current; lease obligations were $16.8 million. Total liabilities were $95.9 million against total assets of $73.4 million, leaving stockholders’ deficit of $22.5 million. The filing separately describes Apollo debt of approximately $75.7 million as of September 30.
- Reported costs substantially exceeded revenue; the filing does not present a meaningful revenue-based operating margin. The company continued to report material losses and negative operating cash flow.
Material changes and financing
- In March, holders exchanged $27.3 million payable under 7% convertible notes for 10,000 Series 1 preferred shares and converted a further $17.5 million into common shares. The remaining convertible notes were satisfied and cancelled. The preferred shares are convertible into common stock; the company also issued 5.8 million common shares in debt conversions during the nine-month period.
- Cadiz completed its prior $25 million ATM offering in March. Under a new $30 million ATM program launched in July, it had sold 602,324 shares for approximately $5.9 million net proceeds by September 30. Common shares outstanding at September 30 were 35.4 million, up from 28.5 million at year-end 2019.
- The company obtained an option to extend Apollo’s May 2021 debt maturity to May 2022. It reported covenant compliance at quarter-end and no financial maintenance covenants. Exercise of the extension option is at the company’s discretion, subject to the agreement terms.
Business outlook, risks, and contingencies
- Water Project: Phase I is authorized to conserve and deliver an annual average of up to 50,000 acre-feet for 50 years, with up to 150,000 acre-feet of carry-over storage. Construction is estimated to cost $310 million to $400 million and requires financing. Before construction, Cadiz must finalize participant contracts, transportation arrangements, design, and permits. The filing says a formal application for use of the Colorado River Aqueduct had not yet been filed with Metropolitan Water District; California State Lands Commission review under Water Code Section 1815 is also required. Phase II, offering up to one million acre-feet of storage, requires further project-level review and permitting.
- Northern Pipeline: Cadiz owns an existing 96-mile pipeline and has a purchase agreement for an additional 124-mile segment. A further $19 million payment is due within 180 days after specified conditions are met. EPNG had not yet met those conditions, and Cadiz stated it did not have the cash on hand for the payment. Without completing the purchase, pipeline opportunities remain limited to the 96-mile segment. Conversion of the full 220 miles is estimated to cost about $100 million.
- Liquidity and funding: Management expects near-term resources to meet needs but says additional financing will be required for ongoing operations and development. Potential sources include equity or debt financing, asset transactions, and cost reductions; availability and terms are not assured. Failure to raise funds could require significant expense reductions and impair execution of the business plan.
- Agriculture: Cadiz owns a 50% interest in SoCal Hemp JV LLC and recorded a $776,000 equity-method loss for the first nine months, versus $185,000 a year earlier. The JV lease currently covers 242 acres, with options for more acreage.
- Management described California’s water availability and drought conditions as supporting demand for supply and storage projects, but gave no quantified revenue or earnings guidance. The filing states risk factors were not materially changed from prior reports. Disclosure controls were assessed as effective, with no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Progress, timing, and financing for the Water Project, including participant purchase agreements, Metropolitan transportation arrangements, State Lands Commission review, and remaining permits.
- Whether EPNG satisfies the pipeline purchase conditions, how Cadiz would fund the $19 million payment, and the funding and economics of pipeline conversion.
- Cash burn, remaining ATM capacity and equity issuance, potential dilution from convertible preferred shares and warrants, and the timing or terms of future financing.
- Apollo debt maturity-extension requirements, any prepayment premium, and the company’s ability to service debt and lease obligations.
- Development and operating performance of SoCal Hemp JV and the company’s other agricultural leases, compared with their contribution to reported revenue and cash needs.