Cadiz Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Unless stated otherwise, amounts are in thousands of dollars. Cadiz is focused on developing its land and water assets, particularly its proposed Cadiz Valley Water Project; agricultural operations remain its principal current revenue source.
Financial results and position
| Metric | Three months ended June 30, 2011 | Three months ended June 30, 2010 | Six months ended June 30, 2011 | Six months ended June 30, 2010 |
|---|---|---|---|---|
| Revenue | $40 | $4 | $497 | $7 |
| Cost of sales | $18 | $0 | $450 | $0 |
| General and administrative expense | $2,218 | $2,015 | $5,183 | $6,092 |
| Operating loss | $(2,288) | $(2,094) | $(5,317) | $(6,267) |
| Net interest expense | $1,374 | $1,049 | $2,718 | $2,082 |
| Net loss | $(3,728) | $(3,144) | $(7,982) | $(8,351) |
| Loss per share | $(0.27) | $(0.23) | $(0.58) | $(0.61) |
Revenue growth reflected a larger and longer lemon harvest. Six-month cost of sales was $450, leaving $47 of revenue over cost of sales; Q2 was $22. Revenue remains immaterial relative to operating costs, so operating margins are deeply negative. Q2 net loss increased year over year, while the six-month net loss narrowed, primarily because stock-based compensation expense declined.
- Cash flow: Six-month operating cash use was $2,814, investing cash use was $2,109 (principally Water Project well-field and environmental work), and financing provided $1,992, including a $2,000 loan draw. Cash declined from $5,911 at year-end 2010 to $2,980 at June 30, 2011.
- Liquidity: Working capital was $1,800, with $3,000 of additional capacity then available under the working-capital facility. Management said seasonal agricultural proceeds typically reduce second-half working-capital needs.
- Debt and equity: Long-term debt, net of discount, was $49,080, versus $44,403 at December 31, 2010. The secured convertible term loan’s stated balance before discount was $54,975 and matures June 29, 2013; interest accrues at 6%, with no cash payments due before maturity. The company reported compliance with debt covenants. Stockholders’ equity moved from $946 to a deficit of $(4,907).
- Other: Total assets were $47,908. Six-month stock- and option-based compensation totaled approximately $1,793. Federal and California net operating loss carryforwards were approximately $110 million and $68 million, respectively, subject to limitations and a full valuation allowance.
Material changes, outlook and risks
- Cadiz drew $2,000 of the working-capital facility’s second tranche on June 30. The draw changed certain loan conversion terms: $4,000 of debt became convertible into 320,000 shares, while approximately $10,000 previously convertible was no longer convertible.
- After quarter-end, on July 8, Cadiz raised $4,000 by selling 363,636 shares at $11 per share. It then elected not to draw the remaining $3,000 facility capacity; an amendment effective July 25 eliminated that availability.
- Management expected to need additional working capital beginning in the first quarter of fiscal 2012 to fund operations until development programs generate revenue. It stated that additional debt or equity financing may be needed and gave no assurance financing would be available on acceptable terms.
- The Water Project remained in environmental review: the lead agency issued a Notice of Preparation in February 2011, scoping meetings were held in March, and the draft environmental impact report was in preparation. Five water providers had option agreements, generally for 5,000 acre-feet per year each after completion of CEQA review; one provider had an option for an additional 10,000 acre-feet. Project construction financing and final economic agreements remained ahead.
- Management described the project as a potential future source of primary cash flow, but timing and realization were uncertain. Risks include permitting and environmental review, obtaining construction and operating capital, future financing availability and possible dilution. The company’s resources were not sufficient to fund a water development project if required.
- Contractual obligations included $54,987 of debt principal, $7,055 of stated interest expense and $448 of operating leases. A separate potential legal/advisory fee of up to 1% of the Water Project’s net present value is not included in that table and depends on specified project milestones and approvals.
- No material change to previously disclosed risk factors or material pending legal proceedings was reported. Management concluded disclosure controls were effective; no material change in internal controls was identified. Debt was fixed-rate, so management reported no interest-rate market exposure.
Important facts for investors to verify
- Cash runway and financing needs after the July equity raise, including the effect of removing the remaining facility capacity.
- Current status, schedule and costs of CEQA review, water-provider agreements, permits and construction financing for the Water Project.
- Debt maturity and conversion terms, accrued interest, collateral and potential dilution from convertible debt, options and warrants.
- Whether agricultural receipts remain seasonal and sufficient to moderate working-capital use as management anticipates.
- Conditions and potential amount of the project-related legal/advisory fee, and any changes to tax carryforward limitations or contingencies.