Cadiz Inc. 10-Q Summary: Period Ended September 30, 2008
Business Context and Reporting Period
This is an unaudited quarterly report (Form 10-Q) for Cadiz Inc. for the three and nine months ended September 30, 2008. Cadiz is a development company focused on realizing the value of its 45,000 acres of land and underlying groundwater resources in eastern San Bernardino County, California. The company's primary objective is the development of the "Cadiz Project," a groundwater storage and dry-year supply program, alongside agricultural operations at the Cadiz Ranch. The company is currently in a pre-revenue stage regarding its core water development strategy and relies on financing to fund operations.
Key Financial Metrics
| Metric ($ in thousands) | 9 Months Ended Sep 30, 2008 | 9 Months Ended Sep 30, 2007 | 3 Months Ended Sep 30, 2008 | 3 Months Ended Sep 30, 2007 |
|---|---|---|---|---|
| Revenues | $280 | $363 | $247 | $6 |
| Net Loss | $(12,163) | $(8,952) | $(3,486) | $(4,218) |
| Operating Loss | $(9,030) | $(6,597) | $(2,381) | $(3,399) |
| Net Cash Used in Operating Activities | $(6,083) | $(3,207) | N/A | N/A |
| Cash and Cash Equivalents (End of Period) | $2,732 | $2,340 | $2,732 | N/A |
| Total Debt (Long-term + Current) | $32,823 | $29,661 | $32,823 | N/A |
| Working Capital | $2,659 | $7,996 | $2,659 | N/A |
Note: Working Capital calculated as Total Current Assets ($3,974) minus Total Current Liabilities ($1,315) for Sep 30, 2008.
Material Changes vs. Prior Period
- Revenue Fluctuation: Nine-month revenues decreased by 23% to $280,000, primarily due to a smaller lemon harvest in the 2007-08 season caused by freezing weather. However, three-month revenues surged to $247,000 (from $6,000 in 2007) due to the sale of raisins grown on company-owned vineyards, which were leased to a third party in the prior year.
- Increased Net Loss: The nine-month net loss widened to $12.2 million from $9.0 million. This increase was driven by higher non-cash stock-based compensation ($3.4 million vs. $1.5 million) and increased legal expenses related to litigation against the Metropolitan Water District of Southern California.
- Cash Burn: Cash used in operating activities increased to $6.1 million for the nine-month period, up from $3.2 million in the prior year, reflecting higher legal and farming costs.
- Debt Structure: The company's primary debt is a $36.4 million zero-coupon convertible term loan due in June 2011. In April 2008, the administrative agent for this loan changed from Peloton Partners LLP to an affiliate of Lampe, Conway & Company LLC.
Guidance, Outlook, and Risks
Outlook: Management states that additional working capital will be needed within the next twelve months to fund development activities. The company is exploring financing options, intending to minimize dilution to existing shareholders. Long-term capital will be required to fund the Cadiz Project and repay the term loan at maturity (June 2011) if lenders do not convert to equity.
Management Commentary:
- Cadiz Project: The company secured a new 99-year lease for a pipeline right-of-way with the Arizona & California Railroad Company in September 2008. While more expensive than previous routes, it is considered more environmentally friendly. The company continues to process permit applications with the County of San Bernardino.
- Litigation: The company is engaged in a lawsuit against the Metropolitan Water District of Southern California regarding the 2002 decision not to proceed with the Cadiz Project. In October 2008, the court granted the company's motion to amend its complaint in response to a statutory immunity argument raised by the defendant.
Risks and Contingencies:
- Liquidity Risk: The company has an accumulated deficit of $247.5 million and relies on external financing. There is no assurance that additional financing will be available on acceptable terms.
- Project Execution: The realization of value depends on obtaining environmental permits, securing a pipeline right-of-way, and obtaining financing commitments, all of which are subject to regulatory and market uncertainties.
- Legal Uncertainty: The outcome of the lawsuit against the Metropolitan Water District is uncertain and could impact the company's financial position.
Key Facts for Investor Verification
- Cash Runway: Verify the sufficiency of the $2.7 million cash balance against the stated need for additional working capital within the next 12 months.
- Debt Maturity: Confirm the terms of the $36.4 million convertible term loan maturing in June 2011, specifically the conversion prices ($18.15 and $23.10) and the conditions under which the company can prepay the loan.
- Stock-Based Compensation: Review the $3.4 million non-cash expense for the nine months ended September 30, 2008, and the $3.0 million of unamortized compensation expense remaining as of the period end.
- Litigation Status: Monitor the progress of the lawsuit against the Metropolitan Water District, particularly the court's handling of the statutory immunity defense.
- Project Milestones: Track the status of the new railroad right-of-way lease and the subsequent permitting process required to advance the Cadiz Project.