Cadiz Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Cadiz is a land and water resource development company; its agricultural operations were its only material revenue source during the year.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $0.301 million | $0.362 million |
| Cost of sales / gross result | $0.555 million / $(0.254) million | $0.521 million / $(0.159) million |
| Operating loss | $(13.972) million | $(13.068) million |
| Net loss | $(22.677) million | $(19.574) million |
| Basic and diluted loss per share | $(1.46) | $(1.27) |
| Cash used in operating activities | $(15.767) million | $(11.400) million |
Fourth-quarter 2013 revenue was $111,000 and net loss was $5.980 million, compared with $381,000 and $5.806 million, respectively, in Q4 2012. Annual interest expense, net, rose to $7.644 million from $6.817 million. FY2013 general and administrative expense increased to $13.464 million from $12.559 million, primarily reflecting Water Project litigation costs.
At year-end, cash was $11.887 million, current assets were $12.528 million, and current liabilities were $2.582 million (working capital of approximately $10.0 million). Total assets were $64.174 million; total liabilities were $100.672 million, leaving a stockholders’ deficit of $36.498 million. Long-term debt on the balance sheet was $96.417 million; contractual debt obligations were reported as $98.871 million. Debt is fixed-rate. No principal or interest payments on the main secured debt and convertible notes are due before maturity.
Material changes and business developments
- Revenue declined by $61,000 while net loss increased by $3.103 million year over year. Operating cash use increased by $4.367 million.
- In March 2013, Cadiz refinanced approximately $66 million of prior debt, issuing $30 million of senior secured debt at 8% due March 2016 and $53.5 million of convertible notes at 7% due March 2018; the transaction provided $17.5 million in working capital. In October, it added $10 million of secured debt at 8% due June 2017.
- Year-end debt carrying value included $32.055 million of March 2016 senior debt, $10.138 million of June 2017 senior debt, and $56.638 million of convertible notes, net of debt discount. The convertible notes are convertible at the lenders’ option at $8.05 per share.
- Cadiz issued 700,000 shares to its senior lender in connection with the October financing; the shares’ reported fair value was approximately $2.4 million. Common shares outstanding were 16.153 million at year-end.
Outlook, risks and contingencies
- The principal development opportunity is the Cadiz Valley Water Project, designed to deliver up to a long-term average of 50,000 acre-feet annually for 50 years, with a proposed second phase offering about one million acre-feet of storage. Approximately 80% of annual project supply was under purchase agreement or option; SMWD had a definitive agreement for 5,000 acre-feet.
- Project construction, revenues and financing remain contingent on further permitting and approvals, final agreements with participants, conveyance arrangements with Metropolitan, engineering, construction financing and resolution of litigation. Six CEQA-related lawsuits remained pending; final arguments concluded February 5, 2014, with rulings expected in Q2 2014. Outcomes are uncertain.
- Management said existing cash and the October financing were expected to fund working capital needs through Q1 2015. Additional capital will be needed over the longer term, and availability and terms are not assured; potential sources include debt, equity or asset sales. Failure to obtain funding could require substantial spending cuts.
- Project debt financing was expected to be secured by new facility assets. Cadiz reported compliance with debt covenants at year-end. Certain asset sales may require debt prepayment; dividends are prohibited by covenants.
- Key risks include the company’s limited revenues and continuing losses, project execution and regulatory risk, environmental litigation, groundwater and water-allocation uncertainty, financing needs, secured debt and potential dilution from convertible notes. The filing states potential dilution of up to 7.1 million shares as of March 5, 2014, and up to a further 2.3 million shares if the notes are held to maturity.
- As post-year-end context, management cited California’s January 2014 drought emergency and a 5% State Water Project allocation for 2014; these conditions may increase demand for water solutions but do not ensure project approval or profitability.
Important facts for investors to verify
- Current status and outcomes of the six CEQA cases, remaining approvals, and Metropolitan’s requirements for use of the Colorado River Aqueduct.
- Whether water-provider options become binding purchase agreements, and the project’s final construction costs, financing terms and timeline.
- Cash burn and funding runway against the stated Q1 2015 estimate, including subsequent financing or material changes in liquidity.
- Debt maturity, accrued interest, collateral and conversion terms, along with the potential effect of share issuance or conversion on existing holders.
- The reliability of the aquifer sustainability assumptions and the project’s groundwater monitoring and mitigation requirements.