Cadiz Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed March 16, 2017. The filing also provides unaudited fourth-quarter results. Cadiz is a land and water resource development company, principally pursuing its Cadiz Valley Water Project, alongside agricultural leasing and other land-related opportunities. It reported one business segment.
Business context and project status
- The company owns approximately 45,000 acres in eastern San Bernardino County, including approximately 34,000 acres overlying the Cadiz/Fenner aquifer system.
- The Water Project is permitted under California environmental review to conserve and convey up to 2.5 million acre-feet over 50 years, with a long-term average withdrawal cap of 50,000 acre-feet annually. A possible second phase could provide up to one million acre-feet of imported-water storage.
- In 2016, California appellate rulings upheld the project’s environmental review and approvals; the opportunity for further state-court review passed in July. The project was not yet ready for construction: railroad right-of-way clearance, final participant and conveyance arrangements, and construction financing remained outstanding.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $0.412 million | $0.304 million |
| Operating loss | $9.210 million | $14.009 million |
| Net loss | $26.339 million | $24.013 million |
| Net loss per share | $1.41 | $1.35 |
| Net cash used in operations | $9.514 million | $12.568 million |
| Cash and equivalents at year-end | $12.172 million | $2.690 million |
- Revenue remained minimal and was primarily related to the Fenner Valley Farms lease. Cost of sales was zero in 2016, versus $0.334 million in 2015.
- General and administrative expense decreased to $9.330 million from $13.709 million, mainly because of lower Water Project litigation costs. Net interest expense increased to $14.875 million from $10.070 million; the company also recorded a $2.250 million loss on debt extinguishment/refinancing.
- Fourth-quarter 2016 revenue was $109,000, operating loss was $2.321 million, and net loss was $6.724 million, or $0.34 per share.
- Financing activities provided net cash of $18.996 million in 2016, including the $12 million agricultural lease payment, $10.510 million of stock proceeds and $8 million of net convertible-note proceeds, offset in part by debt repayment and issuance costs. Investing cash flow was zero.
- At year-end, current assets were $15.602 million and current liabilities $4.562 million, implying working capital of approximately $11.040 million. Total assets were $67.099 million, total liabilities $121.416 million, and stockholders’ deficit $54.317 million.
- Debt principal outstanding was approximately $112.5 million, according to the filing’s risk disclosure. The balance sheet separately reported $102.374 million of long-term debt and a $12.287 million long-term lease obligation; Note 6 reports debt and lease obligations net of discounts and other adjustments. Senior secured debt carried 8% interest and was extended to September 2019; convertible notes carried 7% interest, with maturities in 2018 and 2020. The company reported covenant compliance.
Material changes and notable items
- Net loss increased by approximately $2.326 million year over year, despite lower operating expenses, largely reflecting higher interest expense and the $2.250 million debt-refinancing charge.
- In February 2016, the company entered a 99-year, related-party lease of 2,100 acres for a one-time $12 million payment. The payment is recorded as a long-term lease liability, not as ordinary revenue. Cadiz has a 20-year termination option subject to specified repayment and reimbursement terms; if it is not exercised within that period, or certain debt defaults occur, the lessee may purchase the property for $1.
- In November 2016, senior lenders extended secured debt maturity to September 2019 and allowed interest obligations to be met through common-stock issuance. The company issued lenders 357,500 shares and warrants for another 357,500 shares in connection with the amendment.
- Common shares outstanding rose to 21.769 million from 17.876 million during 2016. The filing warns that note conversion could further dilute shareholders.
Outlook, risks, and contingencies
- Management estimated that $12.2 million of year-end cash would cover expected working-capital needs through April 2018. Additional capital will be needed for later operating needs, debt obligations and development; management identified debt or equity financing, asset dispositions, and cost reductions as possible sources. It gave no assurance that financing would be available on acceptable terms and warned that a failure to raise funds could threaten implementation of its plan and raise substantial doubt about continued operations.
- Phase I construction was estimated to cost approximately $250 million; financing had not been secured. Management said existing debt arrangements could accommodate up to $300 million of Water Project construction financing, subject to project and financing conditions.
- The Bureau of Land Management’s 2015 guidance said the proposed pipeline use of the railroad right-of-way required a new federal permit. Cadiz disputed that position. Legislative language intended to clarify third-party railroad right-of-way use had passed the House but remained pending; timing and outcome were uncertain.
- Final contracts with participating agencies and arrangements to use Metropolitan Water District’s Colorado River Aqueduct were still required. Project reservations exceeded planned capacity, and the company was working with participants to resolve oversubscription.
- The federal securities class action was finalized and dismissed on February 8, 2017; the company recorded a $3 million liability at year-end and said insurance would fund the cash settlement. A shareholder derivative settlement received preliminary approval in January 2017, remained subject to final court approval, and included governance reforms and insured plaintiffs’ fees and expenses.
- The company reported no off-balance-sheet arrangements, no material interest-rate exposure because its debt bore fixed rates, and effective disclosure controls and internal control over financial reporting.
Key investor verification points
- Confirm the status of federal railroad right-of-way clearance, any required BLM permitting, and the related legislative process.
- Verify execution of definitive water purchase agreements, resolution of oversubscribed reservations, Metropolitan conveyance arrangements, and all remaining regulatory approvals.
- Assess whether the approximately $250 million construction plan can be financed and whether the stated liquidity runway remains adequate.
- Review debt balances, interest and maturity terms, potential conversion dilution, and the stock-and-warrant provisions granted to senior lenders.
- Examine the accounting and related-party terms of the 99-year agricultural lease, including its termination and property-purchase provisions.
- Check final disposition and insurance coverage of the derivative settlement, and confirm that the securities-class-action settlement liability was eliminated after insurer payment.