Business context and reporting period
Cadiz Inc. is a land and water-resource development company focused primarily on developing the Cadiz Valley Water Conservation, Recovery and Storage Project in California. It has not yet generated significant revenue from development activities; reported revenue has mainly come from agricultural operations and related land rent. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2016, with comparisons to the corresponding 2015 periods. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Key financial results and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $0.108 | $0.038 | $0.183 | $0.056 |
| Operating loss | $(2.606) | $(3.751) | $(4.959) | $(6.469) |
| Net loss | $(5.645) | $(5.990) | $(14.440) | $(10.832) |
| Net loss per share, basic and diluted | $(0.31) | $(0.34) | $(0.81) | $(0.61) |
| Net interest expense | $3.038 | $2.238 | $7.229 | $4.431 |
| Cash used in operations | Not separately stated for the quarter | $4.821 | $5.348 |
At June 30, 2016, cash and cash equivalents were $5.918 million; working capital was $4.7 million. Total assets were $58.122 million and total liabilities were $124.830 million, leaving a stockholders’ deficit of $66.708 million. Debt was $109.285 million, net, including $0.167 million current; the balance sheet also reported $11.849 million of long-term related-party lease obligations. The filing states that all indebtedness bore fixed rates.
Material changes versus the prior comparable period
- Quarterly net loss narrowed by $0.345 million, principally as lower Water Project litigation costs and general and administrative expenses more than offset higher interest expense.
- Six-month net loss increased by $3.608 million. The principal unusual item was a $2.25 million debt-extinguishment loss; higher interest expense and debt-discount amortization also contributed, partly offset by lower litigation costs.
- Revenue rose from a low base, primarily due to rental income under the February 2016 agricultural lease. The company reported no cost of sales in either comparison period.
- Six-month operating cash use decreased to $4.821 million from $5.348 million. Financing activities provided $8.049 million, including approximately $11.5 million of lease-related proceeds and $7.6 million of convertible-note proceeds, offset in part by approximately $11.0 million of debt principal payments.
Financing, outlook, risks and contingencies
- Liquidity and going concern: Management expected existing capital sources to cover working-capital needs through February 2017. Beyond then, the company expects to seek capital through debt or equity placements, asset leases or sales, or cost reductions. It cautioned that financing or asset dispositions may not be available on acceptable terms and disclosed substantial doubt about its ability to continue as a going concern.
- Debt terms: Senior secured debt bears interest at 8% and requires 50% of future quarterly interest payments in cash beginning with the June 5, 2016 payment. The first mortgage maturity was extended to June 2017, with a further extension to September 28, 2017 described in the filing. The company issued approximately $10.0 million aggregate principal and accrued interest of 7% convertible notes due March 2020; approximately $8.0 million of proceeds before fees and expenses was available for working capital. The notes are convertible at $6.75 per share. Cadiz reported compliance with debt covenants at June 30.
- Agricultural lease: A related-party subsidiary paid $12 million for a 99-year lease of 2,100 acres. Cadiz recorded the payment as a long-term lease liability. Cadiz may terminate the lease during the first 20 years subject to specified repayment and reimbursement terms; following that period, or upon specified debt acceleration, the lessee may purchase the land for $1. The lessee’s option to lease up to 7,500 additional acres expired unexercised June 30, 2016.
- Water Project execution: The filing estimated Phase I construction costs at $225–$250 million, dependent on financing and definitive purchase and sale agreements. The project’s proposed pipeline use of a railroad right-of-way faced unresolved Bureau of Land Management guidance requiring a new federal right-of-way permit; the company was seeking reconsideration. Metropolitan Water District conveyance terms and project financing also remained necessary.
- Regulatory milestone: In May 2016, an appellate panel unanimously upheld the Water Project’s environmental review and approvals. After the petitioners did not seek further review, the California Supreme Court’s opportunity to review the cases on its own motion passed on July 16, 2016. This post-quarter development left the project no longer subject to those CEQA court challenges, but did not resolve the separate pipeline right-of-way issue.
- Litigation: A securities class action had a proposed settlement pending preliminary court approval; the company said potential future losses would be covered by insurance. A shareholder derivative case was stayed pending dismissal with prejudice of the class action. The company reported no other material legal proceedings.
- Project and dilution risks: Project implementation depends on regulatory, conveyance, customer-contract, construction-financing and working-capital outcomes. Options, deferred stock units, warrants and convertible instruments representing approximately 10.2 million potential shares for the six-month period were excluded from diluted loss per share as antidilutive.
Important facts for investors to verify
- Whether Cadiz can secure sufficient financing beyond the stated February 2017 liquidity horizon, and the resulting cost and dilution.
- Current status of the railroad right-of-way dispute, any required federal permit, MWD conveyance arrangements, and definitive customer agreements.
- Updated Phase I construction budget, financing plan and schedule, including whether projected customer commitments support the required capital.
- Cash-interest and maturity requirements under the senior secured debt, and the terms and potential dilution of convertible notes and other equity-linked instruments.
- Status and accounting implications of the related-party agricultural lease, including its termination and land-purchase provisions.
- Final court action on the proposed securities class-action settlement and subsequent status of the stayed derivative action.