Cadiz Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in millions except per-share data. Cadiz is a natural-resources development company focused on its California land, water and agricultural assets. It reported limited revenue, primarily agricultural lease income; its water projects were still in development.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $0.148 | $0.111 | $0.262 | $0.220 |
| Operating loss | $(3.046) | $(3.240) | $(6.988) | $(6.121) |
| Net loss | $(4.793) | $(7.476) | $(25.307) | $(14.736) |
| Net loss per share | $(0.14) | $(0.28) | $(0.77) | $(0.57) |
| Net interest expense | $1.674 | $4.303 | $5.246 | $8.537 |
- Six-month operating cash use was $7.019 million, versus $6.872 million a year earlier. Investing used $6.995 million, including $4.712 million for property, water programs and pipeline work, and $2.283 million for equity-method investments. Financing provided $3.900 million, mainly from ATM stock sales. Cash and cash equivalents fell to $5.568 million from $15.682 million at year-end 2019; cash, cash equivalents and restricted cash totaled $5.702 million.
- At June 30, current assets were $6.335 million and current liabilities $4.190 million, or reported working capital of $2.1 million. Total liabilities were $95.112 million, including $73.739 million of long-term debt, net, and $16.431 million of long-term lease obligations. Stockholders’ deficit was $24.180 million.
- The company said its senior secured debt was approximately $74.6 million at June 30. It had no other outstanding credit facilities and was in compliance with debt covenants. The Apollo loan’s May 2021 maturity can, at Cadiz’s option, be extended to May 2022. Under the debt terms, 25% of future quarterly interest is payable in cash.
Material changes and unusual items
- Q2 net loss improved year over year, principally as interest expense declined following conversion or exchange of convertible notes; operating loss also narrowed. Revenue remained small relative to overhead and financing costs.
- First-half net loss increased by $10.571 million year over year, primarily because Cadiz recorded a $12.394 million non-cash loss on extinguishment of debt in Q1. The charge reflected the fair value of Series 1 Preferred Stock issued in exchange for convertible debt exceeding the debt’s historical book value.
- In March, holders exchanged $27.3 million payable under convertible notes for 10,000 preferred shares and converted a further $17.5 million into common shares. The notes were satisfied and cancelled. The preferred shares are convertible into 405.05 common shares each. Common shares outstanding rose to 34.797 million at June 30 from 28.481 million at year-end.
- Interest expense declined, but stock-based compensation rose to $1.551 million for the first half from $0.245 million. Cadiz also recorded a $0.699 million first-half loss from its 50%-owned SoCal Hemp JV.
Business outlook, risks and contingencies
- The company’s primary development effort is the Cadiz Valley Water Project, permitted for a long-term average of up to 50,000 acre-feet per year for 50 years, with up to 150,000 acre-feet of Phase I carry-over storage. Phase I construction is estimated to cost $310–$400 million; financing, participant contracts, conveyance arrangements, final design and permits remain necessary before construction.
- Cadiz has not filed a formal application with the Metropolitan Water District for use of the Colorado River Aqueduct. The Southern Pipeline’s federal right-of-way determination was reaffirmed by BLM in February 2020 after court remand; the project also faces California State Lands Commission review under Water Code Section 1815 before water conveyance. Phase II storage would require further project-level review and permitting.
- Cadiz’s purchase of a 124-mile Northern Pipeline extension requires a further $19 million payment after specified conditions precedent, due within 180 days. Management said it did not have the cash on hand to make this payment. If the purchase is not completed, pipeline opportunities are limited to the 96-mile segment already owned. Conversion of the extended pipeline is estimated to require about $100 million.
- In July 2020, after quarter-end, Cadiz entered a new ATM agreement allowing up to $30 million of common-stock sales, intended as a potential source of working capital and funding for the pipeline payment. The filing gives no assurance that financing will be available on acceptable terms; additional equity could dilute shareholders. Management also identified asset sales, debt or equity placements, and cost reductions as possible funding measures.
- Management said it expects near-term capital sources to be sufficient, but cautioned that liquidity and access to capital may not remain adequate. The filing reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether Cadiz can raise sufficient capital, including through the July 2020 ATM, to fund operations and the $19 million pipeline-extension payment.
- Whether the Northern Pipeline acquisition conditions are met and the payment deadline is triggered; otherwise, the company’s pipeline plans are materially narrower.
- Progress on Water Project participant contracts, Metropolitan conveyance arrangements, State Lands Commission review, permits and financing for the estimated $310–$400 million Phase I build.
- Cash burn, remaining liquidity, debt and cash-interest requirements, and potential dilution from common-stock issuance and convertible preferred shares.
- Whether agricultural leases and the SoCal Hemp JV generate meaningful income; first-half revenue remained only $0.262 million while development costs continued.