Cadiz Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Cadiz is a land and water resource development company with approximately 45,000 acres in eastern San Bernardino County, California. Its principal proposed business is developing the Cadiz Valley Water Project; current reported revenue is mainly rental income.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $437,000 | $412,000 |
| Operating loss | $12.640 million | $9.210 million |
| Net loss | $33.864 million | $26.339 million |
| Basic and diluted loss per share | $1.50 | $1.41 |
| Cash used in operations | $10.466 million | $9.514 million |
| Cash and cash equivalents at year-end | $13.030 million | $12.172 million |
| Working capital at year-end | $7.0 million | Not stated here |
| Total assets | $66.505 million | $67.099 million |
Revenue remains immaterial relative to operating costs, and the company has not generated significant operating revenue from water development. FY2017 net loss increased by $7.525 million, primarily reflecting a $3.501 million debt-extinguishment/refinancing loss, $2.608 million in unrealized warrant losses, higher interest expense, increased compensation costs, and Water Project engineering activity. Net interest expense was $17.719 million, compared with $14.875 million in 2016.
At December 31, 2017, the balance sheet showed $1.408 million of current debt, $123.768 million of long-term debt, and $13.276 million of long-term lease obligations. The debt note reports $138.452 million of debt and lease obligations before deducting unamortized discounts and issuance costs. The company reported total liabilities of $145.204 million and a stockholders’ deficit of $78.699 million. Operating cash outflow was partly offset by $12.330 million of net financing cash flow; year-end cash increased by $858,000.
Business developments and material changes
- In May 2017, Cadiz refinanced prior secured borrowing through a $60 million Apollo-affiliated credit agreement, including $15 million of new senior debt. The secured loan carries 8% interest: 6% accrues to principal and 2% is cash interest; the lender also received a warrant for 362,500 shares. The refinancing resulted in a $3.501 million loss.
- Apollo-affiliated funds also issued a conditional commitment of up to $240 million for Water Project construction financing. Funding is subject to conditions, and Cadiz is not obligated to accept it.
- In October 2017, the Bureau of Land Management withdrew its earlier adverse guidance and concluded that the proposed pipeline use of the Arizona & California Railroad right-of-way fell within the existing grant and required no further BLM permitting or review.
- Common shares outstanding rose to 22,987,434 at year-end from 21,768,864 a year earlier. Weighted-average shares increased to 22.535 million from 18.719 million; additional conversion or financing-related dilution remains possible.
Outlook, risks, and contingencies
Phase I of the Water Project is permitted under California environmental review to recover and convey an average of up to 50,000 acre-feet annually for 50 years. Estimated construction cost is approximately $250 million. Cadiz says project reservations exceed capacity, but options and letters of intent still need to be converted into definitive purchase agreements. Construction had not begun by the filing date.
- Before construction, the project still needs final participant contracts, agreements for use of the Colorado River Aqueduct (CRA) with Metropolitan Water District, final design and engineering, and applicable state and local construction permits. The company expected a formal CRA application in 2018; Metropolitan’s approval and conveyance terms were not secured.
- The California State Lands Commission asserted that a lease and additional environmental review might be required for a one-mile strip beneath the railroad right-of-way. Cadiz said it could not determine whether a lease would be required. Proposed AB 1000, which could add permitting requirements, was not enacted in 2017 and its effect remained uncertain.
- Cash of $13.0 million at year-end was expected to fund working capital through April 2019, but the company anticipates needing additional capital before its development programs produce revenue. Management identified debt, equity, asset transactions, cost reductions, and conditional Apollo construction financing as possible sources; availability and terms are not assured.
- A separate option to buy a 124-mile Northern Pipeline extension required $20 million by December 2018. Cadiz stated it lacked the cash on hand to exercise the option and was pursuing financing alternatives. Failure to exercise would limit that opportunity to the 96-mile segment it already owns.
- The company reported approximately $133.6 million of lender indebtedness in its risk factors and warned that nonpayment or covenant breaches could expose assets to foreclosure. Secured debt is collateralized by company assets; the senior loan and convertible notes restrict, among other things, additional debt, liens, dividends, and certain asset transactions. Cadiz reported covenant compliance at year-end.
- Outstanding convertible notes bore 7% interest and included conversion features; the filing discussed potential dilution. After year-end, on March 5, 2018, lenders converted all principal and accrued interest under the notes due March 2018, removing $1.35 million of short-term debt. The 2020 notes remained outstanding.
- Phase II, offering up to one million acre-feet of imported-water storage, still requires project-level environmental review and permits and may require federal review. It is not equivalent to an approved, operating project.
- Management cited California water-supply variability and regulatory constraints as drivers of demand, while acknowledging regulatory, litigation, technical, financing, market, and timing risks. The company reported no material pending legal proceedings. Its audited statements received an unqualified opinion, and the auditor and management reported effective internal control over financial reporting.
Most important facts for investors to verify
- Whether the conditional Apollo construction financing satisfies its conditions and closes, and the final financing cost and security terms.
- Whether water agencies execute definitive purchase agreements and Metropolitan approves CRA access, conveyance capacity, fees, and delivery terms.
- Resolution of the State Lands Commission right-of-way issue and completion of remaining construction design, permits, easements, and approvals.
- Actual cash runway and financing needs, including the outcome of the $20 million Northern Pipeline option and debt maturities or refinancing requirements.
- Potential dilution from convertible notes, warrants, equity fundraising, and stock-based awards, alongside the company’s ability to turn permitted project capacity into operating revenue.