Cadiz Inc. — FY2020 Form 10-K
Reporting period: Year ended December 31, 2020; filed March 26, 2021. This is an annual report, not a standalone fourth-quarter filing. Cadiz is a California land and water resources developer. Its principal potential growth project is the Cadiz Valley Water Project; agriculture currently provides its main revenue source.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue, primarily agricultural lease income | $541,000 | $441,000 |
| Operating loss | $11.8 million | $12.0 million |
| Net loss | $37.8 million | $29.5 million |
| Net loss per share | $1.11 | $1.11 |
| Interest expense, net | $11.5 million | $17.1 million |
| Cash used in operating activities | $13.4 million | $13.7 million |
| Cash used in investing activities | $9.8 million | $2.5 million |
| Cash provided by financing activities | $14.9 million | $19.3 million |
- At year-end, cash and cash equivalents were $7.3 million, working capital was $4.9 million, and total assets were $74.4 million.
- Total debt was $78.6 million, primarily senior secured debt. The debt is secured by company assets and bears 8% interest, including 6% that accretes to principal. The contractual May 2021 maturity could be extended at the company’s option; a subsequent agreement provided an option to extend to November 2022.
- Revenue remains very small relative to operating costs; the filing does not provide a clear gross margin measure. No cash dividends are anticipated, and debt covenants prohibit dividends.
Material changes versus 2019
- Net loss increased by $8.3 million, mainly because of a $12.4 million non-cash loss on extinguishment of debt and a larger loss from the hemp joint venture. Lower interest expense partly offset these charges.
- General and administrative expense excluding stock compensation declined to $9.8 million from $11.6 million, primarily due to fewer Water Project legal and professional fees. Stock-based compensation rose to $2.1 million from $0.6 million.
- Interest expense fell following the conversion and exchange of convertible notes. In 2020, approximately $38.9 million of convertible notes converted into common shares, and approximately $27.3 million was exchanged for preferred stock.
- Common shares outstanding rose to 36.9 million at year-end from 28.5 million a year earlier. The July 2020 at-the-market offering generated $10.8 million net proceeds during 2020.
Business, outlook, risks and unusual items
- Water Project: Phase 1 is approved to conserve and supply an average 50,000 acre-feet annually for 50 years. The company estimates approximately $400 million to construct required facilities. Before implementation it still needs definitive participant contracts, conveyance arrangements and approvals, final design, construction and financing. Phase 2 storage requires further project-level environmental review and permits.
- Pipeline developments: BLM issued rights-of-way in December 2020 for water conveyance along the full 220-mile Northern Pipeline route. Cadiz still needed to pay EPNG $19 million by June 30, 2021 to acquire the remaining 124-mile segment; failure to do so would limit its opportunities to the 96-mile segment already owned. Two lawsuits filed in March 2021 challenge the BLM permits. Cadiz was not named as a party, said it believed the suits lacked merit, and could not predict their outcome.
- Southern conveyance requirements: Use of the Colorado River Aqueduct requires agreement with the Metropolitan Water District and a California State Lands Commission finding. The company had not completed these arrangements at filing.
- Agriculture: Lease revenue was approximately $420,000 annually from lemon and other crop acreage and $121,000 annually from the hemp joint venture. The venture recorded a $2.2 million equity-method loss in 2020, attributed to startup costs, lower yields and falling hemp biomass prices. One thousand acres prepared for grain crops were expected to be planted in 2021.
- Funding and outlook: Cadiz stated it would continue to need additional capital to fund operations and development, with potential sources including equity, debt or asset dispositions; availability and terms were not assured. In the first quarter of 2021, the ATM offering generated $14.9 million net proceeds from 1.37 million shares. No formal revenue, earnings or project-completion guidance was provided.
- Key risks: The company has not generated significant development revenue and continues to incur losses. Project execution depends on contracts, conveyance approvals, financing, construction and regulatory outcomes. Additional equity funding could dilute shareholders. Management identified liquidity assessment as a critical audit matter; the financial statements were prepared on a going-concern basis.
- Other: The 2020 loss includes a $12.4 million non-cash debt extinguishment charge related to the preferred-stock exchange. The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- Whether Cadiz can fund and complete the $19 million Northern Pipeline acquisition payment, and whether subsequent financing remains available.
- Progress on definitive Water Project contracts, the MWD conveyance agreement and the required State Lands Commission finding.
- Outcomes and timing of the lawsuits challenging BLM permits, and any effect on pipeline rights or project schedules.
- Updated project construction costs, financing terms and a credible timeline for first operating revenue against the company’s ongoing cash burn and debt obligations.
- Whether agricultural operations and the hemp venture can generate sustainable returns, given their limited lease revenue and the joint venture’s 2020 losses.