Cadiz Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Cadiz is a California land and water-resource development company. Its revenue remains limited, principally to agricultural lease income, while it develops its water, pipeline and agricultural assets.
Financial results and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Revenue | $114,000 | $109,000; up $5,000 |
| Operating loss | $3.942 million | $2.881 million loss |
| Net loss | $20.514 million; $0.66 per share | $7.260 million; $0.29 per share |
| Net interest expense | $3.572 million | $4.234 million |
| Cash used in operations | $4.379 million | $4.035 million |
| Cash used in investing | $4.693 million | $0.165 million |
| Cash provided by financing | $3.908 million | $7.877 million |
General and administrative expense was $3.977 million, including $1.250 million of stock-based compensation (versus $122,000 a year earlier). Excluding stock compensation, G&A was approximately $2.7 million, compared with $2.8 million. The filing does not present a meaningful gross-margin measure given the company’s limited revenue and development-stage activities.
At March 31, cash and cash equivalents were $10.518 million; cash, cash equivalents and restricted cash totaled $10.652 million. Working capital was $6.7 million. Total assets were $74.071 million and total liabilities were $93.758 million, leaving a stockholders’ deficit of $19.687 million. Long-term debt, net, was $72.397 million, plus a $20,000 current portion; long-term lease obligations were $16.060 million. The company reported compliance with debt covenants.
Material changes and significant transactions
- Net loss increased by $13.254 million, primarily because of a $12.394 million non-cash loss on extinguishment of debt. The charge reflected the fair value of preferred shares issued exceeding the historical book value of the convertible debt exchanged.
- In March, holders exchanged approximately $27.3 million payable under 7% convertible notes for 10,000 Series 1 preferred shares and converted approximately $17.5 million into common stock. The remaining convertible notes were converted at maturity; the notes were satisfied and cancelled. The preferred shares are convertible into 405.05 common shares each.
- Cadiz issued 5.766 million common shares in debt conversions and 409,000 shares through its at-the-market offering in the quarter. The ATM offering, capped at $25 million gross, was completed in March; cumulative net proceeds were approximately $24.2 million.
- Cadiz obtained an option to extend its Apollo senior debt maturity from May 2021 to May 2022. The associated warrant modification resulted in a $2.547 million warrant derivative liability at quarter-end and a $561,000 unrealized loss during the quarter.
Outlook, risks and contingencies
- Liquidity and financing: Management expected available sources to meet near-term needs, but cautioned that future liquidity is not assured. Cadiz expects continued financing needs for working capital, development and debt repayment. It may seek equity or debt financing, dispose of assets, or reduce costs.
- Northern Pipeline acquisition: A further $19 million payment is due within 180 days after specified conditions are met to complete the purchase of a 124-mile pipeline extension. Cadiz stated it did not have the cash on hand to make the payment; if the acquisition is not completed, pipeline opportunities are limited to the 96-mile segment it owns.
- Water Project: Phase I is permitted for an average of up to 50,000 acre-feet annually for 50 years, but construction is estimated to cost approximately $310 million and requires financing, finalized participant contracts, conveyance arrangements, and final design and permits. The filing reports no completed Metropolitan Water District application for use of the Colorado River Aqueduct. California’s new Water Code Section 1815 requires State Lands Commission review of the project’s proposed conveyance.
- Regulatory and execution risk: The Bureau of Land Management’s February 2020 evaluation reaffirmed its prior conclusion supporting use of the railroad right-of-way for the proposed Southern Pipeline after a court remand. Other conveyance, permitting, financing and construction steps remain outstanding. Phase II storage also requires further project-level environmental review and permits.
- COVID-19: The company warned that the pandemic could disrupt workforce and supply availability and adversely affect operations; the ultimate effect was uncertain.
- Other project activity: The SoCal Hemp JV lease was amended to reduce initially leased acreage from 1,280 to 242 acres and extend options to 2023. Three new agricultural production wells added stated capacity of 12,500 acre-feet per year.
Most important facts for investors to verify
- Cash runway, future operating cash use and the availability and terms of financing, particularly for the $19 million pipeline payment and the Water Project’s estimated $310 million construction cost.
- Whether the Northern Pipeline extension conditions are satisfied and whether Cadiz completes the acquisition and payment.
- Progress on Water Project participant contracts, Metropolitan conveyance arrangements, State Lands Commission review, permits and financing.
- Terms and potential dilution from the preferred shares, warrants, future equity issuance and any further debt restructuring.
- Whether COVID-19 or other developments materially affect project execution, funding, operations or the company’s liquidity outlook.