CADIZ INC. — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed March 15, 2012. The filing also presents unaudited quarterly results. Cadiz develops land and water resources in eastern San Bernardino County, California. Its principal prospective business is the Cadiz Valley Water Conservation, Recovery and Storage Project; current revenue is primarily from farming.
Financial performance and position
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Revenue | $1.019 million | $1.023 million |
| Cost of sales | $1.441 million | $0.927 million |
| Gross result (revenue less cost of sales) | $(0.422) million | $0.096 million |
| Operating loss | $(11.234) million | $(11.049) million |
| Net loss | $(16.837) million | $(15.899) million |
| Basic and diluted loss per share | $(1.20) | $(1.16) |
| Cash used in operating activities | $7.514 million | $6.761 million |
| Cash used in investing activities | $4.140 million | $1.184 million |
| Cash provided by financing activities | $17.113 million | $4.978 million |
At December 31, 2011, cash and cash equivalents were $11.370 million, working capital was $9.7 million, total assets were $57.998 million and stockholders’ equity was $1.930 million. The balance sheet reported $52.032 million of long-term debt, net of debt discount; gross debt obligations were approximately $56.673 million. Debt is secured by substantially all company assets, accrues interest at 6%, and matures June 29, 2013. No principal or interest payments are due before maturity under the loan terms. Cadiz reported compliance with debt covenants at year-end.
The company reported no significant conventional operating margin: cost of sales exceeded revenue in 2011. Operating loss was approximately 11 times revenue, reflecting the small revenue base and substantial development, overhead and financing costs. Cash-flow runway depends on continued access to capital.
Material changes and quarterly performance
- Annual revenue was nearly unchanged, but net loss increased $0.938 million. Management attributed the wider loss principally to higher legal and consulting costs for water development and increased net interest expense, partly offset by lower stock-based compensation.
- Net interest expense rose to $5.704 million from $4.734 million, including $2.372 million of debt-discount amortization. General and administrative expense was $10.447 million, including $2.376 million of stock-based compensation.
- 2011 fourth-quarter revenue was $401,000 versus $742,000 in Q4 2010; quarterly net loss was $4.750 million versus $4.369 million. Quarterly results are unaudited.
- Cash increased from $5.911 million to $11.370 million, supported by $15.129 million of net common-stock proceeds and $2.0 million of debt proceeds. The company issued shares through shelf offerings and a private placement; shares outstanding rose to 15.430 million from 13.678 million at year-end 2010.
Outlook, project status and key risks
- Liquidity outlook: Management expected available funds to cover working-capital needs through FY 2012 and anticipated needing additional working capital beginning in Q1 2013. It expected to pursue financing, including construction financing, but gave no assurance that funding would be available on acceptable terms or at all.
- Water Project: The planned project would recover and deliver no more than a long-term annual average of 50,000 acre-feet per year and may include about one million acre-feet of imported-water storage capacity. Six water providers held options for supplies; approximately 80% of planned annual supply was under option. These are options, not completed sales or realized revenue.
- The Draft Environmental Impact Report was released in December 2011; its public comment period ended March 14, 2012. A Final EIR, certification and project approval remained outstanding. Construction financing and final economic agreements were also pending.
- Pipeline options: Options to purchase two idle natural-gas pipelines could require $50 million in total if exercised. The company paid $1 million in February 2012 to extend the El Paso Natural Gas option to April 2013; the Questar option expired in December 2012 unless otherwise extended. Conversion feasibility and project use remained under evaluation.
- Principal risks: The company had not generated significant development revenue and continued to incur losses. Project execution depends on environmental approvals, permits, participant agreements, financing and the ability to withstand possible litigation or opposition. Failure to refinance or convert secured debt could expose assets to foreclosure; conversion or new equity financing could dilute shareholders. Water-resource sustainability and project economics remain subject to uncertainty.
- Contingencies and unusual items: A Layne Christensen agreement could require $923,000 or 125% of that balance, depending on project and service-provider decisions by December 31, 2012. A legal/advisory arrangement could result in a fee of up to 1% of the Water Project’s net present value if specified approvals and contracts are achieved; no further milestones had been met by year-end. The company disclosed $3.3 million in unrecognized tax benefits, with timing uncertain. Management reported no material pending legal proceedings; other proceedings were not expected by management to have a material adverse impact.
Most important facts for investors to verify
- Whether the Final EIR was certified and all required permits and approvals obtained, and whether any challenges delayed or changed the project.
- Whether participant options became binding supply and storage contracts, and the actual pricing, volume commitments and expected timing of revenue.
- Available cash, subsequent cash burn, financing commitments and construction-cost estimates; confirm whether liquidity extends beyond FY 2012.
- Debt payoff, conversion and refinancing terms ahead of the June 29, 2013 maturity, including collateral exposure and potential share dilution.
- Current status and economics of the pipeline purchase options, conversion feasibility and any required capital beyond the stated option payments.