CADIZ INC quarterly report, Q3 FY2021

Cadiz Inc. — Q3 2021 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial statement figures are in thousands unless otherwise noted.

Business context

Cadiz is a natural-resources development company focused on water, conveyance infrastructure and agriculture in California. Its current revenue is principally agricultural lease income; water-resource development has not generated significant revenue. The company is developing a water project at its Cadiz Valley property and acquired a 124-mile Northern Pipeline extension in June 2021. Management says the project still requires customer contracts, conveyance arrangements, construction planning and financing before implementation.

Financial results and position

• Q3 general and administrative expense was $4.2 million, up from $2.5 million; the filing attributes the increase to Northern Pipeline legal and technical work and higher stock-based compensation. Nine-month G&A was $13.8 million versus $9.6 million.
• Net interest expense was $2.0 million for Q3 and $9.4 million for the nine months, compared with $1.9 million and $7.2 million, respectively, in 2020. Q3 2021 also included a $1.4 million debt-extinguishment loss.
• At September 30, cash and cash equivalents were $18.6 million; restricted cash was $10.3 million, largely set aside for preferred dividends. Working capital was $16.2 million. Total assets were $120.1 million and total liabilities were $73.0 million.
• Long-term debt, net, was $45.9 million, plus $0.1 million current debt. The company also reported $18.4 million of long-term related-party lease obligations and $3.2 million of long-term operating lease liabilities.
• For the nine months, operating cash use was $9.6 million, investing cash use was $21.5 million and financing provided $52.7 million. Capital additions to property, equipment and water programs were $21.1 million. Ending cash, cash equivalents and restricted cash totaled $28.9 million.
• The company reported no gross margin measure; revenue remains small relative to operating costs.

Changes versus comparable periods

Q3 net loss widened to $7.8 million from $4.5 million, mainly due to the debt-extinguishment charge and higher G&A, including stock-based awards. Nine-month net loss improved to $25.3 million from $29.8 million, largely because 2020 included a $12.4 million non-cash debt-extinguishment loss; higher 2021 compensation and interest costs partly offset that comparison. Revenue increased modestly in both comparisons. Nine-month investing cash use rose, primarily reflecting the Northern Pipeline acquisition.

Financing, outlook and risks

• In July 2021, Cadiz refinanced prior senior secured debt with a new $50 million secured credit agreement, maturing July 2, 2024, at 7% annual interest. Proceeds and preferred-share proceeds funded repayment of about $77.5 million of prior debt, transaction costs and a segregated account for eight quarterly preferred dividends. The company reported covenant compliance at quarter-end.
• The July offering of 8.875% Series A preferred depositary shares generated approximately $54 million net. Dividends are cumulative and quarterly; $1.45 million was accrued at September 30 and paid October 15, 2021. Common shares outstanding increased to 42.5 million at September 30 from 36.9 million at December 31, 2020.
• Management said the financing provided approximately $20 million of net cash proceeds and, with cash on hand, was sufficient for short-term working capital needs. It expects to need additional capital over the longer term for working capital and development; future financing availability and terms are not assured.
• The Northern Pipeline’s federal right-of-way permits are challenged in two lawsuits. Cadiz intervened in the cases. In October 2021, the Bureau of Land Management indicated it intended to seek voluntary remand to reconsider the permits. Cadiz says it will oppose the motion, but cannot predict the outcome.
• Other material execution dependencies include obtaining water customers and conveyance arrangements, required permits and authorizations, and arranging construction and financing. The company cautions that inability to raise capital could require spending reductions and impair its business plan.
• Management reported disclosure controls and procedures were effective as of September 30, 2021, and no material change in internal control over financial reporting occurred during the quarter.

Important facts for investors to verify

• Whether water-supply contracts, conveyance access and required approvals are secured, and whether the Northern Pipeline permits withstand litigation or remand.
• How long available unrestricted cash will fund operations and project costs, and the amount, timing and terms of additional financing required.
• The credit agreement’s repayment, prepayment, conversion and collateral terms, including potential dilution and any mandatory debt prepayments.
• The ongoing cost of preferred dividends and the distinction between unrestricted cash and restricted funds reserved for dividend payments.
• Whether project spending, lease obligations and development milestones translate into material revenue and cash flow; the filing provides no specific revenue or profitability guidance.