Cadiz Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Cadiz is a land and water-resource development company whose principal focus is developing the Cadiz Valley Water Conservation, Recovery and Storage Project. Current revenue is minimal and primarily rental income. All dollar amounts below are in U.S. dollars; financial statement amounts are in thousands unless noted.
Key financial results
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Revenue | $108 | $108 |
| Operating loss | $(2,486) | $(4,113) |
| Net loss | $(5,971) | $(7,227) |
| Basic and diluted loss per share | $(0.26) | $(0.33) |
| Cash used in operating activities | $(3,937) | $(2,635) |
| Cash and cash equivalents at period end | $8,577 | $13,030 at Dec. 31, 2017 |
- General and administrative expense was $2.528 million, including $105,000 of stock-based compensation; depreciation was $66,000. Revenue is too small relative to expenses for a meaningful operating margin assessment.
- Net interest expense was $3.484 million, up from $3.113 million. It included $3.040 million of interest on debt, partly offset by a $516,000 unrealized warrant gain.
- Cash, cash equivalents and restricted cash totaled $8.710 million at quarter end. Cash used in investing was $502,000, primarily for Water Project engineering and design; financing cash outflow was $14,000. Cash and restricted cash declined $4.453 million during the quarter.
- Working capital was approximately $5.6 million. Long-term debt, net, was $126.782 million, with a further $57,000 current portion; long-term lease obligations were $13.544 million. Stockholders’ deficit was $82.894 million. The filing reports fixed-rate indebtedness and no interest-rate market risk from changes in rates.
Changes versus the prior comparable period
- Net loss narrowed by $1.256 million, chiefly because Q1 2017 included $1.816 million of stock-based compensation tied primarily to employee milestone awards; Q1 2018 expense was $105,000.
- Revenue was unchanged at $108,000. General and administrative expense excluding stock compensation was $2.4 million in Q1 2018 versus $2.3 million in Q1 2017.
- Net interest expense increased by $371,000, reflecting higher interest on outstanding debt and debt-discount amortization, partly offset by the warrant-related gain.
- Operating cash use increased by $1.302 million, in part as accrued liabilities declined. Investing outflows rose from $116,000 to $502,000.
Outlook, risks and notable matters
- Management stated that quarter-end cash was expected to cover near-term working capital needs for more than one year from the report’s issuance, while acknowledging that future liquidity depends on financing, asset dispositions, cost reductions or other capital sources. The company continues to incur losses and operating cash outflows and has not generated significant development revenue.
- The Water Project’s Phase I is permitted for a long-term average of up to 50,000 acre-feet annually for 50 years. Construction is estimated to cost approximately $250 million. Before construction, Cadiz still needs to finalize participant purchase agreements, arrange conveyance through the Colorado River Aqueduct with Metropolitan Water District, complete design and obtain applicable construction permits.
- Apollo-affiliated funds provided a conditional commitment of up to $240 million for construction financing, subject to conditions precedent; Cadiz is not required to accept it. The filing does not describe this as committed, unconditional funding.
- Cadiz entered into a $15 million at-the-market equity sales agreement on March 27, 2018; no shares had been sold under it as of April 30. The company also reported compliance with debt covenants at March 31.
- The option to buy an additional 124-mile Northern Pipeline segment requires $20 million by December 2018. Cadiz said it did not have the cash on hand to exercise the option and was pursuing financing alternatives; failure to exercise would limit its Northern Pipeline opportunities to its existing 96-mile segment.
- Water Project supply reservations exceed project capacity, and the company expects to address oversubscription in definitive agreements. Metropolitan conveyance discussions were ongoing; the filing said no application had yet been submitted. Phase II storage would require further project-level environmental review and permitting, and may require federal review.
- Potential dilution and capital-raising needs remain relevant: shares outstanding rose to 23,216,535 from 22,987,434 at year-end, including 215,852 shares issued in conversion of approximately $1.68 million of convertible notes. The filing reports convertible debt carrying value of approximately $70.5 million; its estimated fair value exceeded carrying value by approximately $46.6 million due to the conversion feature.
- The company reported $292 million of federal and $172 million of California net operating loss carryforwards, subject to limits and expiration dates, and a full valuation allowance against deferred tax assets. The filing’s Part II states legal proceedings and risk factors are “not applicable”; management points readers to risk factors in the 2017 Form 10-K.
Important facts for investors to verify
- Whether Apollo’s conditional construction-financing commitment can be converted into definitive, available funding, and on what terms.
- Progress and timing for final participant contracts, Metropolitan conveyance arrangements, project design and remaining permits, as well as how supply reservations will be reconciled with project capacity.
- How Cadiz will fund ongoing cash needs and the $20 million pipeline-option payment before the December 2018 deadline, including any ATM issuance or resulting dilution.
- Debt maturities, cash-interest obligations and the effect of continued losses and operating cash use on liquidity; the filing says no other payments on senior secured debt or convertible notes were due before maturity, apart from required cash interest.
- Whether project development milestones and financing assumptions support management’s stated liquidity outlook; actual project revenue and construction timing remain uncertain.