Cadiz Inc. (NASDAQ: CDZI) — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are included below. Amounts are in U.S. dollars unless otherwise stated.
Business context
Cadiz is a California land and water resource development company with approximately 45,000 acres in eastern San Bernardino County. Its principal development focus is the Cadiz Valley Water Conservation, Recovery and Storage Project. The company had not generated significant development revenue by year-end; farming remained its principal revenue source.
Phase I is designed to deliver a long-term average of up to 50,000 acre-feet of groundwater annually for 50 years. Phase II is proposed to provide about one million acre-feet of underground storage capacity.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $336,000 | $301,000 |
| Cost of sales | $357,000 | $555,000 |
| Gross profit (loss) | ($21,000) | ($254,000) |
| Operating loss | ($10.36 million) | ($13.97 million) |
| Net loss | ($18.88 million) | ($22.68 million) |
| Net loss per share | ($1.15) | ($1.46) |
| Net cash used in operating activities | ($10.12 million) | ($15.77 million) |
Revenue was immaterial relative to expenses; the annual gross margin was negative. G&A declined to $10.08 million from $13.46 million, primarily due to lower Water Project litigation costs. Net interest expense rose to $8.52 million from $7.64 million, reflecting the larger, higher-rate debt structure. The lower net loss also reflects the absence of the $1.06 million debt-extinguishment loss recorded in 2013.
Cash and cash equivalents were $16.21 million at year-end, versus $11.89 million a year earlier; reported working capital was $14.9 million. Investing activities used $72,000, while financing provided $14.51 million, principally from a November 2014 stock offering. Management expected available cash to meet working-capital needs through the end of February 2016.
Debt carrying value was $104.38 million, compared with $96.42 million at year-end 2013; contractual principal obligations were reported as $106.20 million. Debt included $34.74 million of senior secured debt due March 2016, $10.99 million due June 2017, and $60.46 million of convertible notes due March 2018. Interest accrues at 8% on senior secured debt and 7% on convertible notes; no principal or interest payments are due before maturity. Stockholders’ deficit was $39.74 million.
For Q4 2014, revenue was $16,000, gross loss was $59,000, operating loss was $2.88 million, net loss was $5.11 million, and net loss per share was $0.30.
Changes and significant developments
- Annual net loss narrowed by $3.80 million from 2013; revenue increased modestly, while operating costs remained substantial.
- Cash from the $14.5 million net stock offering helped raise year-end cash. Shares outstanding increased to 17.68 million from 16.15 million.
- In December 2014, Cadiz signed a water purchase and sale agreement with San Luis Water District for 10,000 acre-feet per year at an initial $960 per acre-foot, subject to specified annual adjustments and delivery arrangements.
- In September 2014, the trial court rejected all claims in six lawsuits challenging Water Project approvals. Petitioners filed appeals in Q4; the appeals were expected to be heard in 2015.
Outlook, risks and contingencies
Management planned to continue Water Project engineering, finalize customer contracts, address conveyance arrangements with Metropolitan Water District, advance Phase II environmental review, and pursue Phase I construction financing. Construction financing was expected to be senior debt secured by project assets. The filing provides no quantified construction start date, total project cost, or formal earnings guidance.
Key risks include the pending appeals, unresolved federal review of the proposed use of the railroad right-of-way, required further approvals and permits, and the need to finalize conveyance and exchange terms. The company stated that it needed to extinguish, extend, or replace the $34.7 million debt due in March 2016 and would need additional capital over time; financing availability was not assured. Conversion of the notes could dilute existing holders: the filing estimates up to 7.6 million shares as of March 5, 2015, with up to 1.8 million additional shares if held to maturity.
Other notable items: EPNG could owe Cadiz $10 million if it files by December 2015 for regulatory approval of a new use of a related pipeline segment; receipt is contingent, not assured. After year-end, Limoneira paid approximately $1.2 million for young lemon trees and irrigation assets, and California approved a conservation bank covering approximately 7,500 acres. These are post-year-end developments.
Most important facts for investors to verify
- Outcome and timing of the six Water Project appeals, BLM right-of-way assessment, and remaining regulatory and transportation approvals.
- Whether customer letters of intent and options become binding purchase agreements, and how oversubscription to the project’s 50,000-acre-foot capacity is resolved.
- Availability and terms of construction financing and refinancing or repayment of the $34.7 million maturity due March 2016.
- Cash burn, subsequent financing needs, and potential share dilution from future equity issuance or convertible notes.
- Whether the contingent $10 million EPNG payment is triggered and whether the conservation bank generates material proceeds.