Cadiz Inc. — Q2 2012 Form 10-Q
Business and period: This unaudited report covers the quarter and six months ended June 30, 2012. Cadiz’s primary assets are approximately 45,000 acres in California, with agricultural operations and a longer-term focus on developing water supply, storage and transportation projects. The Water Project was in pre-construction development and had not generated significant revenue.
Financial performance
Amounts below are in millions of dollars except per-share data. Margins are not meaningful given the very low revenue.
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2012 / 2011 | $0.006 / $0.040 | $0.037 / $0.497 |
| Operating loss, 2012 / 2011 | $2.986 / $2.288 | $5.871 / $5.317 |
| Net loss, 2012 / 2011 | $4.584 / $3.728 | $9.032 / $7.982 |
| Loss per share, 2012 / 2011 | $0.30 / $0.27 | $0.59 / $0.58 |
| Net interest expense, 2012 / 2011 | $1.596 / $1.374 | $3.156 / $2.718 |
- Six-month operating cash use was $6.064 million, versus $2.814 million in 2011. Investing cash use was $1.286 million, compared with $2.109 million; financing used $0.004 million, versus $1.992 million provided in 2011. Cash fell by $7.354 million to $4.016 million.
- At June 30, cash was $4.016 million and working capital was approximately $1.3 million. Total assets were $53.715 million. Long-term debt, net of discount, was $55.146 million; contractual principal before discount was $58.406 million. Stockholders’ equity was a deficit of $6.891 million.
- Revenue fell mainly because the 2011–2012 lemon harvest was smaller and shorter. Six-month G&A rose to $5.718 million from $5.183 million, largely due to legal and consulting costs for the Water Project’s environmental review and due diligence on potential pipeline conversion. Interest expense increased as debt interest and debt-discount accretion rose.
Developments, outlook and risks
- After quarter-end, on July 31, 2012, the Santa Margarita Water District certified the Water Project’s Final Environmental Impact Report. Cadiz stated that approximately 80% of annual project water was under purchase-and-sale agreement or option. Certification is a project milestone, not assurance that permits, financing, construction or revenues will follow.
- On August 8, 2012, Cadiz obtained an option to extend its term-loan maturity from June 29 to November 1, 2013. The option required a $0.1 million payment and, if exercised, a further $0.5 million payment in cash or securities. The loan bears 6% interest, is secured by substantially all company assets, and has no cash principal or interest payments due before maturity. Cadiz said it was in covenant compliance at June 30.
- Management expected additional working capital to be needed beginning in Q4 2012 and said the company would need debt or equity financing to fund operations and development until projects produce revenue. The filing gives no assurance that financing or refinancing will be available on acceptable terms. Potential alternatives include project construction financing, debt or equity issuance, loan conversion, or asset sales; equity issuance could dilute existing holders.
- Cadiz’s pipeline options, if both exercised, would require $50.5 million in payments. The company also identified potential water transportation, solar and mitigation-bank opportunities, but said timing and realization were uncertain. California project approvals may face litigation; the company reported ongoing or anticipated legal proceedings but did not expect their resolution to have a material adverse effect. It reported no material change in the risk factors from its 2011 Form 10-K.
- The company had federal and California tax-loss carryforwards, but recorded a full valuation allowance against deferred tax assets. The filing also disclosed $3.3 million of unrecognized tax benefits and a $0.321 million accrued state tax liability.
Investor verification points
- Verify the status of project permits, agreements with participating water agencies, and the remaining steps and timeline to construction and revenue.
- Assess cash runway and the availability, terms and dilution implications of required financing; verify whether the term-loan extension option was exercised and how the loan will be refinanced, converted or repaid.
- Review the costs and commitments associated with the Water Project and the potential $50.5 million pipeline-option exercise requirement.
- Track water-project litigation and other environmental or regulatory challenges, and verify subsequent developments after the filing date.