Cadiz Inc. (NASDAQ: CDZI) — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Cadiz is a land and water resource development company; it reported limited revenue and is principally funding development of its land, agricultural assets and proposed water projects.
Financial results and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $110,000 | $112,000 | $330,000 | $329,000 |
| Operating loss | $3.0 million | $2.5 million | $9.1 million | $7.2 million |
| Net loss | $7.4 million | $6.2 million | $22.2 million | $18.2 million |
| Loss per share, basic and diluted | $0.28 | $0.26 | $0.85 | $0.77 |
| Net cash used in operations | Not stated for quarter | Not stated for quarter | $10.7 million | $8.6 million |
- Revenue was primarily rental income from the Fenner Valley Farms lease. The filing reports no significant revenue from water development.
- Nine-month general and administrative expense, including stock compensation, was $9.2 million, up from $7.4 million. Net interest expense was $12.9 million, compared with $11.2 million.
- At September 30, cash and cash equivalents were $15.3 million; working capital was $13.3 million. Total current assets were $15.9 million and current liabilities $2.6 million.
- Balance-sheet long-term debt, net, was $141.4 million, plus $42,000 current portion; long-term lease obligations were $15.4 million. Stockholders’ deficit was $86.6 million.
- Operating cash use and $1.4 million of investing cash use were more than offset by $14.8 million of financing cash, primarily from ATM stock sales. Cash, cash equivalents and restricted cash rose to $15.4 million from $12.7 million at year-end 2018.
Material changes and unusual items
- Nine-month net loss increased by $3.9 million year over year, reflecting higher administrative and water-development costs, proxy costs, interest expense, and a $185,000 equity-method investment loss. The comparison also reflects $1.3 million of warrant-related unrealized gains in 2018 that did not recur.
- Cadiz issued shares through its ATM program and debt conversions. Through September 30, ATM issuance under the November 2018 agreement generated approximately $16.0 million in net proceeds; shares outstanding were approximately 27.0 million at quarter-end.
- Adoption of lease accounting increased recognized lease assets and liabilities. Adoption of warrant accounting guidance reclassified an $865,000 warrant liability to equity; the filing also records an opening accumulated-deficit adjustment related to prior warrant gains.
- In July, Cadiz formed a 50%-owned hemp joint venture and leased it 1,280 acres initially, with options for further acreage. The company recorded a $185,000 equity-method loss during the period.
Outlook, risks and contingencies
- Near-term debt exposure: Approximately $73.7 million of principal and interest on 7.00% convertible senior notes was due in March 2020 unless converted or extended. Holders can convert at $6.75 per share. Agreements with holders of 99% of the notes gave Cadiz an option to extend maturity to September 5, 2021; a November 8, 2019 amendment moved the option notice deadline to March 5, 2020.
- Approximately $69.2 million of senior secured debt could become due as early as December 2019 under a springing-maturity provision, depending on note conversion/extension and the share-price condition described in the filing. Management said it did not have adequate resources on hand to meet these obligations if they became due. The company was in covenant compliance at September 30.
- Cadiz also lacked cash on hand for the $18 million deferred payment to acquire an additional 124-mile pipeline segment. Failure to complete the purchase would limit pipeline opportunities to the 96-mile segment it already owns.
- Management expects to address liquidity through possible debt or equity financing, asset transactions, extensions or cost reductions, but gives no assurance financing will be available on acceptable terms. The filing provides no earnings or revenue guidance.
- The proposed Water Project is designed to deliver a long-term average of up to 50,000 acre-feet annually, but construction is contingent on final participant contracts, transportation arrangements through the Colorado River Aqueduct, design and permits, and financing. Estimated construction cost is approximately $310 million.
- California SB 307, effective January 1, 2020, requires State Lands Commission review before covered projects can convey water through public facilities. The review may take 15 months, with a possible nine-month extension. Separately, a federal court remanded a BLM right-of-way evaluation for further explanation; it did not find the evaluation’s conclusions erroneous.
- Management described near-term liquidity as dependent on capital access. It also cautioned that limited financing could force substantial reductions in expenses and impair execution of its business plan.
Important facts for investors to verify
- Whether the convertible-note extension option was exercised by the revised March 5, 2020 deadline, and the resulting maturity and repayment terms.
- Whether the senior secured debt’s springing-maturity condition was triggered or otherwise resolved.
- Availability and terms of financing for operating needs, debt obligations and the $18 million pipeline payment.
- Progress on Water Project participant contracts, Colorado River Aqueduct conveyance arrangements, State Lands Commission review, permits and construction financing.
- Whether the hemp venture expanded and generated revenue, and how its performance affected Cadiz’s reported results.