CADIZ INC - Quarter Report: 2009 September (Form 10-Q)
United
States
Securities
and Exchange Commission
Washington,
D. C. 20549
FORM 10-Q
(Mark
One)
[√]
Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
for the
quarterly period ended September 30, 2009
OR
[ ] Transition Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
for the transition period from ..... to .....
Commission
File Number 0-12114
Cadiz Inc.
(Exact name of registrant
specified in its charter)
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DELAWARE
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77-0313235
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
No.)
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550
South Hope Street, Suite 2850
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Los
Angeles, California
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90071
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (213) 271-1600
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes √ No
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
___ No___
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer," "accelerated
filer" and "smaller reporting company" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer
___ Accelerated filer √ Non-accelerated
filer ___ Smaller Reporting Company ___
Indicate
by check mark whether the Registrant is a shell company (as defined in Exchange
Act Rule 12b-2).
Yes ___ No √
As of
October 30, 2009, the Registrant had 13,283,188 shares of common stock, par
value $0.01 per share, outstanding.
Cadiz
Inc.
Index
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For
the Three and Nine Months ended September 30, 2009
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Page
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PART
I – FINANCIAL INFORMATION
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ITEM
1. Financial Statements
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Cadiz
Inc. Consolidated Financial Statements
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1
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2
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3
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4
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5
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6
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27
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27
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29
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ii
Cadiz
Inc.
Consolidated Statements of Operations
(Unaudited)
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For
the Three Months
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||||||||
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Ended
September 30,
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||||||||
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($
in thousands except per share data)
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2009
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2008
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||||||
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Revenues
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$ | 138 | $ | 247 | ||||
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Costs
and expenses:
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||||||||
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Cost of sales
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247 | 192 | ||||||
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General and
administrative
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1,963 | 2,349 | ||||||
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Depreciation
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85 | 87 | ||||||
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Total
costs and expenses
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2,295 | 2,628 | ||||||
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Operating
loss
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(2,157 | ) | (2,381 | ) | ||||
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Other
income (expense)
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||||||||
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Interest expense,
net
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(976 | ) | (1,103 | ) | ||||
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Other
income (expense), net
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(976 | ) | (1,103 | ) | ||||
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Loss
before income taxes
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(3,133 | ) | (3,484 | ) | ||||
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Income
tax provision
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1 | 2 | ||||||
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Net
loss
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$ | (3,134 | ) | $ | (3,486 | ) | ||
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Net
loss available to common stockholders
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$ | (3,134 | ) | $ | (3,486 | ) | ||
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Basic
and diluted net loss per common share
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$ | (0.25 | ) | $ | (0.29 | ) | ||
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Basic
and diluted weighted average shares outstanding
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12,649 | 11,958 | ||||||
See
accompanying notes to the consolidated financial statements.
1
Cadiz
Inc.
Consolidated Statements of Operations
(Unaudited)
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For
the Nine Months
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||||||||
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Ended
September 30,
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||||||||
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($
in thousands except per share data)
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2009
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2008
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Revenues
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$ | 186 | $ | 280 | ||||
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Costs
and expenses:
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Cost of sales
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348 | 209 | ||||||
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General and
administrative
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7,194 | 8,845 | ||||||
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Depreciation
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256 | 256 | ||||||
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Total
costs and expenses
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7,798 | 9,310 | ||||||
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Operating
loss
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(7,612 | ) | (9,030 | ) | ||||
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Other
income (expense)
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Interest expense,
net
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(3,300 | ) | (3,127 | ) | ||||
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Other income
(expense), net
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(3,300 | ) | (3,127 | ) | ||||
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Loss
before income taxes
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(10,912 | ) | (12,157 | ) | ||||
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Income
tax provision
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3 | 6 | ||||||
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Net
loss
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$ | (10,915 | ) | $ | (12,163 | ) | ||
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Net
loss available to common stockholders
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$ | (10,915 | ) | $ | (12,163 | ) | ||
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Basic
and diluted net loss per common share
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$ | (0.87 | ) | $ | (1.02 | ) | ||
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Basic
and diluted weighted average shares outstanding
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12,569 | 11,957 | ||||||
See accompanying notes to the
consolidated financial statements.
2
Cadiz
Inc.
Consolidated Balance
Sheet (Unaudited)
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September
30,
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December
31,
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|||||||
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($
in thousands)
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2009
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2008
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ASSETS
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Current
assets:
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Cash and cash
equivalents
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$ | 1,425 | $ | 2,014 | ||||
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Short-term
investments
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- | 4,500 | ||||||
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Accounts
receivable
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113 | 66 | ||||||
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Tax
receivable
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108 | - | ||||||
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Inventories
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266 | 172 | ||||||
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Prepaid expenses
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326 | 335 | ||||||
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Total current
assets
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2,238 | 7,087 | ||||||
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Property,
plant, equipment and water programs, net
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35,603 | 35,784 | ||||||
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Goodwill
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3,813 | 3,813 | ||||||
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Other
assets
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536 | 728 | ||||||
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Total Assets
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$ | 42,190 | $ | 47,412 | ||||
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts payable
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$ | 232 | $ | 247 | ||||
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Accrued
liabilities
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513 | 559 | ||||||
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Tax
liabilities
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320 | 216 | ||||||
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Current portion of long term
debt
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22 | 9 | ||||||
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Total current
liabilities
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1,087 | 1,031 | ||||||
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Long-term
debt, net
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35,661 | 33,975 | ||||||
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Total Liabilities
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36,748 | 35,006 | ||||||
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Stockholders’
equity:
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Common
stock - $.01 par value; 70,000,000 shares
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authorized;
shares issued and outstanding – 12,659,548 at
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September
30, 2009 and 12,453,210 at December 31, 2008
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127 | 125 | ||||||
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Additional
paid-in capital
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267,482 | 263,533 | ||||||
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Accumulated
deficit
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(262,167 | ) | (251,252 | ) | ||||
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Total stockholders’
equity
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5,442 | 12,406 | ||||||
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Total Liabilities and
Stockholders’ equity
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$ | 42,190 | $ | 47,412 | ||||
See
accompanying notes to the consolidated financial statements.
3
Cadiz
Inc.
Consolidated Statement of Cash
Flows (Unaudited)
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For
the Nine Months
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||||||||
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Ended
September 30,
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||||||||
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($
in thousands except per share data)
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2009
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2008
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Cash
flows from operating activities:
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Net loss
Adjustments to reconcile net loss
to
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$ | (10,915 | ) | $ | (12,163 | ) | ||
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net cash used for operating
activities:
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Depreciation
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255 | 256 | ||||||
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Amortization of debt discount
& issuance costs
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1,635 | 1,718 | ||||||
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Interest expense added to loan
principal
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1,696 | 1,507 | ||||||
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Compensation charge for stock
awards and share options
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1,833 | 3,451 | ||||||
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Issuance of stock for services
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500 | - | ||||||
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Changes
in operating assets and liabilities:
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Increase in accounts
receivable
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(155 | ) | (182 | ) | ||||
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Increase in prepaid
expenses
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(85 | ) | (824 | ) | ||||
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Decrease
in other assets
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145 | - | ||||||
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Increase (decrease) in accounts payable
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(15 | ) | 32 | |||||
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Increase in accrued
liabilities
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58 | 122 | ||||||
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Net cash used for operating
activities
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(5,048 | ) | (6,083 | ) | ||||
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Cash
flows from investing activities:
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Proceeds from sale of short-term
investments
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4,500 | - | ||||||
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Additions to property, plant and
equipment
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(74 | ) | (92 | ) | ||||
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Other
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- | (7 | ) | |||||
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Net cash provided by (used in)
investing activities
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4,426 | (99 | ) | |||||
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Cash
flows from financing activities:
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Proceeds from issuance of
long-term debt
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47 | - | ||||||
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Principal payments on long-term
debt
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(14 | ) | (7 | ) | ||||
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Net cash provided by (used in)
financing activities
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33 | (7 | ) | |||||
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Net
decrease in cash and cash equivalents
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(589 | ) | (6,189 | ) | ||||
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Cash
and cash equivalents, beginning of period
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2,014 | 8,921 | ||||||
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Cash
and cash equivalents, end of period
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$ | 1,425 | $ | 2,732 | ||||
See
accompanying notes to the consolidated financial statements.
4
Cadiz
Inc.
Consolidated Statement of Stockholders' Equity (Unaudited)
($ in thousands
except per share data)
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Additional
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Total
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Common Stock
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Paid-in
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Accumulated
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Stockholders’
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|||||||||||||||||
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Shares
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Amount
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Capital
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Deficit
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Equity
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Balance
as of December 31, 2008
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12,453,210 | $ | 125 | $ | 263,533 | $ | (251,252 | ) | $ | 12,406 | ||||||||||
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Stock
awards
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147,026 | 1 | - | - | 1 | |||||||||||||||
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Issuance
of common stock for services
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59,312 | 1 | 499 | - | 500 | |||||||||||||||
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Convertible
term loan conversion option
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- | - | 1,617 | - | 1,617 | |||||||||||||||
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Stock
based compensation expense
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- | - | 1,833 | - | 1,833 | |||||||||||||||
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Net
loss
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- | - | - | (10,915 | ) | (10,915 | ) | |||||||||||||
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Balance
as of September 30, 2009
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12,659,548 | $ | 127 | $ | 267,482 | $ | (262,167 | ) | $ | 5,442 | ||||||||||
See
accompanying notes to the consolidated financial statements.
5
Cadiz
Inc.
Notes to the Consolidated Financial
Statements (Unaudited)
NOTE 1 – DESCRIPTION OF
BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Consolidated Financial Statements have been prepared by Cadiz Inc., sometimes
referred to as “Cadiz” or “the Company”, without audit and should be read in
conjunction with the Consolidated Financial Statements and notes thereto
included in the Company’s Form 10-K for the year ended December 31,
2008.
Basis
of Presentation
The foregoing
Consolidated Financial Statements include the accounts of the Company and
contain all adjustments, consisting only of normal recurring adjustments, which
the Company considers necessary for a fair statement of the Company’s financial
position, the results of its operations and its cash flows for the periods
presented and have been prepared in accordance with generally accepted
accounting principles.
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and the accompanying
notes. Actual results could differ from those estimates and such
differences may be material to the financial statements. This quarterly report
on Form 10-Q should be read in conjunction with the Company’s Form 10-K for the
year ended December 31, 2008. The results of operations for the
nine months ended September 30, 2009, are not necessarily indicative of results
for the entire fiscal year ending December 31, 2009.
Liquidity
The financial
statements of the Company have been prepared using accounting principles
applicable to a going concern, which assumes realization of assets and
settlement of liabilities in the normal course of business. The
Company incurred losses of $10.9 million for the nine months ended September 30,
2009, and $12.2 million for the nine months ended September 30,
2008. The Company had working capital of $1.2 million at September
30, 2009, and used cash in operations of $5.2 million for the nine months ended
September 30, 2009 and $6.1 million for the nine months ended September 30,
2008. As further discussed below, in October 2009, the Company raised
$7.0 million with a private placement of 220,880 Units at $31.50 per
Unit. Working capital requirements are seasonally less in the second
half of the year as proceeds from agricultural operations are
realized. Currently, the Company's sole focus is the development of
its land and water assets.
In June 2006,
the Company raised $36.4 million through the private placement of a five year
zero coupon convertible term loan with Peloton Partners LLP (“Peloton”), as
administrative agent, and an affiliate of Peloton and another investor, as
lenders (the “Term Loan”). The proceeds of the new term loan were
partially used to repay the Company’s prior term loan facility with ING Capital
LLC (“ING”). On April 16, 2008, the Company was advised that
Peloton’s interest in the Term Loan had been assigned to an affiliate of Lampe,
Conway & Company LLC (“Lampe Conway”), and Lampe Conway subsequently
replaced Peloton as administrative agent of the loan. On June 4,
2009, the Company completed arrangements to amend the Term Loan and extend its
maturity to June of 2013.
6
In September
2006, $1.1 million was raised when certain holders of warrants to purchase the
Company’s common stock at $15.00 per share chose to exercise the warrants and
purchase 70,000 shares of common stock. Another $5.0 million was
raised in February 2007, when all remaining warrant holders chose to exercise
their rights to purchase 335,440 shares of the Company’s common stock for $15.00
per share. In November and December 2008, the Company raised $5.2
million with a private placement of 165,000 Units at $31.50 per
unit. Each unit consists of three (3) shares of the Company’s common
stock and two (2) stock purchase warrants. In October 2009, the
Company raised $7.0 million with a private placement of 220,880 Units at $31.50
per Unit. This includes 20,880 Units purchased by the Lenders of the
Term Loan pursuant to the Lenders’ Participation Rights under the Term
Loan. Each Unit consists of three (3) shares of the Company’s common
stock and one (1) stock purchase warrant.
The Company’s
current resources do not provide the capital necessary to fund a water
development project should the Company be required to do so. There is
no assurance that additional financing (public or private) will be available to
fund such projects on acceptable terms or at all. If the Company
issues additional equity or equity linked securities to raise funds, the
ownership percentage of the Company’s existing stockholders would be
reduced. New investors may demand rights, preferences or privileges
senior to those of existing holders of common stock. If the Company
cannot raise needed funds, it might be forced to make substantial reductions in
its operating expenses, which could adversely affect its ability to implement
its current business plan and ultimately its viability as a
company. Based upon the Company’s current and anticipated usage of
cash resources, it will require additional working capital commencing during the
first quarter of fiscal 2011 to meet its cash resource needs from that point
forward and to continue to finance its operations until such time as its asset
development programs produce revenues. If the Company is unable to
generate this from its current development activities, then it will need to seek
additional debt or equity financing in the capital markets.
Principles of
Consolidation
Effective
December 2003, the Company transferred substantially all of its assets (with the
exception of certain office furniture and equipment and any Sun World related
assets) to Cadiz Real Estate LLC, a Delaware limited liability company (“Cadiz
Real Estate”). The Company holds 100% of the equity interests of
Cadiz Real Estate, and therefore continues to hold 100% beneficial ownership of
the properties that it transferred to Cadiz Real Estate. Because the
transfer of the Company’s properties to Cadiz Real Estate has no effect on its
ultimate beneficial ownership of these properties, the properties owned of
record either by Cadiz Real Estate or by the Company are treated as belonging to
the Company. Cadiz Real Estate is consolidated in these financial
statements.
Cash
and Cash Equivalents
The Company
considers all short-term deposits with an original maturity of three months or
less to be cash equivalents. The Company invests its excess cash in
deposits with major international banks, government agency notes and short-term
commercial paper and, therefore, bears minimal risk. Such investments
are stated at cost, which approximates fair value, and are considered cash
equivalents for purposes of reporting cash flows.
7
Short-Term
Investments
The Company
considers all short-term deposits with an original maturity greater than three
months, but no greater than one year, to be short-term
investments. At September 30, 2009, the Company had no short-term
investments, and had $4.5 million invested in short-term investments at
September 30, 2008.
Recent
Accounting Pronouncements
On
January 1, 2008, the Financial Accounting Standards Board issued new
accounting guidance on fair value measurements. This new guidance defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. The
new guidance was effective for the Company beginning January 1, 2008, for
certain financial assets and liabilities. Refer to Note 8 for additional
information regarding our fair value measurements for financial assets and
liabilities. The new guidance is effective for non-financial assets and
liabilities recognized or disclosed at fair value on a non-recurring basis
beginning July 1, 2009. The new accounting guidance
describes how to measure fair value based on a three-level hierarchy of inputs,
of which the first two are considered observable and the last
unobservable.
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·
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Level
1 - Quoted prices in active markets for identical assets or
liabilities.
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·
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Level
2 - Inputs other than Level 1 that are observable, either directly or
indirectly, such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for
substantially the full term of the assets or
liabilities.
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·
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Level
3 - Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or
liabilities.
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The adoption of this new accounting guidance did not have a material impact
on our consolidated financial statements.
In December
2007, the Financial Accounting Standards Board issued new accounting guidance on
business combinations and non-controlling interests in consolidated financial
statements. The new guidance revises the method of accounting for a number of
aspects of business combinations and noncontrolling interests, including
acquisition costs, contingencies (including contingent assets, contingent
liabilities and contingent purchase price), the impacts of partial and
step-acquisitions (including the valuation of net assets attributable to
non-acquired minority interests) and post-acquisition exit activities of
acquired businesses. This new accounting guidance is effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15,
2008. The adoption of this accounting guidance has had no impact on
the Company’s financial position and results of operations.
In May 2008,
the Financial Accounting Standards Board issued new accounting guidance on
convertible debt instruments that may be settled in cash upon conversion,
including partial cash settlement. This new guidance requires an
issuer to allocate the initial proceeds from the issuance of a convertible debt
instrument between the instrument’s liability and equity components so that the
effective interest rate of the liability component equals the issuer’s
nonconvertible debt borrowing rate at issuance. The adoption of this
accounting guidance had no impact on the Company’s financial position and
results of operations.
8
In June 2008,
the Financial Accounting Standards Board issued new accounting guidance for
determining whether instruments granted in share-based payment transactions are
participating securities. This new accounting guidance addresses
whether unvested instruments granted in share-based payment transactions that
contain nonforfeitable rights to dividends or dividend equivalents are
participating securities subject to the two-class method of computing earnings
per share. This accounting guidance is effective for financial
statements issued for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2008. Earlier adoption
is prohibited. The adoption of this new accounting guidance had no impact
on the Company's financial position and results of operations.
In April
2009, the Financial Accounting Standards Board issued new guidance for interim
disclosures about the fair value of financial instruments. This new
guidance requires disclosures beginning in the second quarter of 2009 about the
fair value of all financial instruments, for which it is practicable to estimate
that fair value, for interim and annual reporting periods. Since this
guidance impacts disclosure only, the adoption will not have an impact on the
Company’s consolidated results of operations, financial position or cash
flows. This enhanced disclosure is provided in Note
3.
In May 2009,
the Financial Accounting Standards Board issued new guidance which establishes
general standards of accounting for and disclosure of events that occur after
the balance sheet date but before the financial statements are issued or are
available to be issued. The statement requires disclosure of the date through
which an entity has evaluated subsequent events and the basis for that date,
that is, whether that date represents the date the financial statements were
issued or available to be issued. This new guidance is effective for interim and
annual periods ending after June 15, 2009. This new guidance impacts
disclosure only. The Company has performed an evaluation of subsequent
events through November 9, 2009, which is the date the financial statements were
issued. Refer to subsequent events disclosures in Note
9.
In June 2009,
the Financial Accounting Standards Board issued an amendment to the accounting
and disclosure requirements for transfers of financial assets. This amendment
requires greater transparency and additional disclosures for transfers of
financial assets and the entity’s continuing involvement with them and changes
the requirements for derecognizing financial assets. In addition, this amendment
eliminates the concept of a qualifying special-purpose entity (QSPE). This
amendment is effective for financial statements issued for fiscal years
beginning after November 15, 2009. This amendment will not have a material
affect on our financial position, results of operations or
liquidity.
In June 2009,
the Financial Accounting Standards Board also issued an amendment to the
accounting and disclosure requirements for the consolidation of variable
interest entities (VIEs). The elimination of the concept of a QSPE, as discussed
above, removes the exception from applying the consolidation guidance within
this amendment. This amendment requires an enterprise to perform a qualitative
analysis when determining whether or not it must consolidate a VIE. The
amendment also requires an enterprise to continuously reassess whether it must
consolidate a VIE. Additionally, the amendment requires enhanced disclosures
about an enterprise’s involvement with VIEs and any significant change in risk
exposure due to that involvement, as well as how its involvement with VIEs
impacts the enterprise’s financial statements. Finally, an enterprise will be
required to disclose significant judgments and assumptions used to determine
whether or not to consolidate a VIE. This amendment is effective for financial
statements issued for fiscal years beginning after November 15, 2009. This
amendment will not have a material affect on our financial position, results of
operations or liquidity.
9
In June 2009,
the Financial Accounting Standards Board (FASB) issued the FASB Accounting
Standards Codification (Codification). The Codification will become the single
source for all authoritative GAAP recognized by the FASB to be applied for
financial statements issued for periods ending after September 15, 2009.
The Codification does not change GAAP and will not have an affect on our
financial position, results of operations or liquidity.
NOTE 2 - PROPERTY, PLANT,
EQUIPMENT AND WATER PROGRAMS
Property,
plant, equipment and water programs consist of the following (in
thousands):
|
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Land
and land improvements
|
$ | 21,998 | $ | 21,998 | ||||
|
Water
programs
|
14,274 | 14,274 | ||||||
|
Buildings
|
1,161 | 1,161 | ||||||
|
Leasehold
improvements
|
570 | 570 | ||||||
|
Furniture
and fixtures
|
422 | 407 | ||||||
|
Machinery
and equipment
|
911 | 854 | ||||||
|
Construction
in progress
|
3 | - | ||||||
| 39,339 | 39,264 | |||||||
|
Less
accumulated depreciation
|
(3,736 | ) | (3,480 | ) | ||||
| $ | 35,603 | $ | 35,784 | |||||
Depreciation
expense totaled $85,000 for the three months ended September 30, 2009, and
$87,000 for the three months ended September 20, 2008. Depreciation
expense totaled $256,000 for the nine months ended September 30, 2009 and
2008.
NOTE 3 – LONG-TERM
DEBT
The carrying
value of the Company's debt, before discount, approximates fair value, based on
interest rates available to the Company for debt with similar
terms.
At September
30, 2009, and December 31, 2008, the carrying amount of the Company’s
outstanding debt is summarized as follows (in thousands):
10
|
September
30,
|
December
31,
|
|||||||
|
2009
|
2008
|
|||||||
|
Zero
coupon secured convertible term loan due June 29, 2013. Interest
accruing at 5% per annum until June 29, 2009 and at 6% thereafter
|
$ | 42,973 | $ | 41,276 | ||||
|
Other
loans
|
46 | 13 | ||||||
|
Debt
discount, net of accumulated accretion
|
(7,336 | ) | (7,305 | ) | ||||
| 35,683 | 33,984 | |||||||
|
Less current
portion
|
22 | 9 | ||||||
| $ | 35,661 | $ | 33,975 | |||||
Pursuant to
the Company’s loan agreements, annual maturities of long-term debt outstanding
on September 30, 2009, are as follows:
|
12
Months
Ending
September 30,
|
(in
thousands)
|
|||
|
2010
|
22 | |||
|
2011
|
16 | |||
|
2012
|
8 | |||
|
2013
|
42,973 | |||
| $ | 43,019 | |||
In June 2006,
the Company entered into a $36.4 million five year zero coupon convertible term
loan with Peloton Partners LLP, as administrative agent for the loan, and with
an affiliate of Peloton and another investor, as lenders. Certain
terms of the loan were subsequently amended pursuant to Amendment #1 to the
Credit Agreement, which was effective September 2006. On April 16,
2008, the Company was advised that Peloton had assigned its interest in the loan
to an affiliate of Lampe Conway & Company LLC (“Lampe Conway”), and Lampe
Conway subsequently replace Peloton as administrative agent of the loan (the
“Lampe Conway Loan”). On June 4, 2009, the Company completed
arrangements to amend the Term Loan. The significant terms of the
amendment are as follows:
|
·
|
Maturity
date is extended from June 29, 2011, to June 29,
2013;
|
|
·
|
Interest
will continue to accrue at 6% per annum through maturity;
and
|
|
·
|
The
conversion feature has been modified to allow up to $4.55 million of
principal to be converted into 650,000 shares of Cadiz common stock
(“Initial Conversion Portion”) at a conversion price of $7 per share, and
the remaining principal and interest to be converted into shares of Cadiz
common stock at a conversion price of $35 per share. If fully
converted at June 29, 2013, this would result in Cadiz common stock
being issued at an average conversion price of $26 per share;
and
|
11
|
·
|
The
Company now has the right at any time prior to June 29, 2013 to prepay the
loan's outstanding principal (other than as to the Initial Conversion
Portion) plus all accrued interest in full without penalty, and may at the
same time prepay the Initial Conversion Portion either in stock at a 110%
conversion premium or, at the election of the lenders, in cash with an
equal value (but not less than $4.55
million).
|
As a result
of the modification of the convertible debt arrangement, the change in
conversion value between the original and modified instrument is approximately
$1.6 million which is recorded as an additional debt discount. Such debt
discount is accreted to the redemption value of the instrument over the
remaining term of the loan as additional interest expense.
The debt
covenants associated with the loan were negotiated by the parties with a view
towards our operating and financial condition as it existed at the time the
agreements were executed. At September 30, 2009, the Company was in
compliance with its debt covenants.
NOTE 4 – COMMON
STOCK
In October
2007, the Company agreed to the conditional issuance of up to 300,000 shares to
the former sole shareholder and successor in interest to Exploration Research
Associates, Inc. (“ERA”), who is now an employee of the Company. The
agreement settled certain claims by ERA against the Company and provided that
the 300,000 shares will be issued if and when certain significant milestones in
the development of the Company’s properties are achieved.
In November
2008, the Company arranged for certain legal and advisory services including
interim payments due upon completion of specified milestones with respect to the
Cadiz Project, with the fee payable in cash and/or stock. The first
such milestone was satisfied on June 4, 2009, resulting in an obligation by the
Company to pay a fee of $500,000, for which the parties agreed to payment in the
form of 59,312 shares of the Company’s common stock valued at $8.43 per share,
reflecting the fair market value of the stock on June 4. The number
of shares so issued represent less than one percent of the Company’s outstanding
common stock.
NOTE 5 – STOCK-BASED
COMPENSATION PLANS AND WARRANTS
The Company
has issued options and has granted stock awards pursuant to its 2003 and 2007
Management Equity Incentive Plans. The Company has also granted stock
awards pursuant to its Outside Director Compensation Plan.
Stock
Options Issued under the 2003 and 2007 Management Equity Incentive
Plans
The 2003
Management Equity Incentive Plan provided for the granting of options for the
purchase of up to 377,339 shares of common stock. Options issued
under the plan were granted during 2005 and 2006. The options have a
ten year term with vesting periods ranging from issuance date to three
years. Certain of these options have strike prices that were below
the fair market value of the Company’s common stock on the date of
grant. 365,000 options were granted under the plan during 2005, and
the remaining 12,339 options were granted in 2006.
12
The Company
recognized stock option related compensation costs of $0 and $82,000 in the nine
months ended September 30, 2009 and 2008, respectively. No options
were exercised during the nine months ended September 30, 2009.
Stock
Awards to Directors, Officers, and Consultants
The Company
has granted stock awards pursuant to its 2007 Management Equity Incentive Plan
and Outside Director Compensation Plan.
Of the total
1,050,000 shares reserved under the 2007 Management Equity Incentive Plan, a
grant of 950,000 shares became effective on July 25, 2007. The grant
consisted of two separate awards.
|
-
|
A
150,000 share award, that vests in three equal installments on January 1,
2008, January 1, 2009, and January 1, 2010. 100,000 shares have
been issued pursuant to this award as of January
2009.
|
|
-
|
800,000
of the shares were designated as Milestone – Based Deferred Stock, none of
which were ultimately issued. The shares were allocated for
issuance subject to the satisfaction of certain milestone conditions
relating to the trading price of our common stock during the period
commencing March 13, 2007, and ending March 12, 2009. The
milestone conditions were not satisfied by March 12, 2009, resulting in
the expiration of all 800,000
shares.
|
Of the
remaining 100,000 shares reserved under the 2007 Management Equity Incentive
Plan, 10,000 were issued as options as described above, and 90,000 were issued
as shares that vested in May 2009.
Under the
Outside Director Compensation Plan, 4,285 shares were awarded for service in the
plan year ended June 30, 2006, and were issued on January 31, 2007. A
4,599 share grant for service during the plan year ended June 30, 2007, was
awarded on that date, and the grant vested on January 31, 2008. 7,026
shares awarded for services rendered in the plan year ended June 30, 2008,
vested and were issued on January 31, 2009. An 11,775 share grant for
service during the plan year ended June 30, 2009, became effective on that
date. The award will vest on January 31, 2010.
13
The
compensation cost of stock grants without market conditions is measured at the
quoted market price of the Company’s stock on the date of grant. The
fair value of the two 2007 Management Equity Incentive Plan awards with market
conditions was calculated using a lattice model with the following weighted
average assumptions:
|
Risk
free interest rate
|
4.74%
|
|
Current
stock price
|
$19.74
|
|
Expected
volatility
|
38.0%
|
|
Expected
dividend yield
|
0.0%
|
|
Weighted
average vesting period
|
2.0
years
|
The lattice
model calculates a derived service period, which is equal to the median period
between the grant date and the date that the relevant market conditions are
satisfied. The derived service periods for the grants with $28 and
$35 per share market conditions are 0.72 years and 1.01 years,
respectively. The weighted average vesting period is based on the
later of the derived service period and the scheduled vesting dates for each
grant.
The
accompanying consolidated financial statements include $1,832,000 of stock based
compensation expense related to stock based awards in the nine months ended
September 30, 2009, and $3,369,000 in the nine months ended September 30,
2008. On September 30, 2009, there was $936,000 of unamortized
compensation expense relating to stock awards.
Stock
Purchase Warrants Issued to Non-Employees
In January
2007, the Company exercised a right to terminate certain warrants to purchase
the Company’s common stock for $15.00 per share on March 2, 2007, subject to a
30-day notice period. In response, the warrant holders exercised
their right to purchase 335,440 shares of the Company’s common stock during the
notice period, and the Company received $5.0 million from the sale of these
shares. Following this exercise, no warrants from the 2004 private
placement in which these warrants were originally issued remain
outstanding.
A private
placement was completed by the Company in November and December of 2008 of
165,000 Units at the price of $31.50 per unit for proceeds of
$5,197,500. Each Unit consists of three (3) shares of the Company’s
common stock and two (2) common stock purchase warrants. The first
warrant entitles the holder to purchase one (1) share of common stock at an
exercise price of $12.50 per share. This warrant has a term of one
year, but is callable by the Company commencing six months following completion
of the offering if the closing market price of the Company’s stock exceeds
$18.75 for 10 consecutive trading days. The second warrant entitles
the holder to purchase one (1) share of common stock at an exercise price of
$12.50 per share. This warrant has a term of three years and is not
callable by the Company. 330,000 warrants remain outstanding on
September 30, 2009.
14
NOTE 6 – INCOME
TAXES
As of
September 30, 2009, the Company had net operating loss (“NOL”) carryforwards of
approximately $102.0 million for federal income tax purposes and $47.7 million
for California state income tax purposes. Such carryforwards expire
in varying amounts through the year 2029. Use of the carryforward
amounts is subject to an annual limitation as a result of ownership
changes.
In addition,
on August 26, 2005, a Settlement Agreement between Cadiz, on one hand, and Sun
World and three of Sun World’s subsidiaries, on the other hand, was approved by
the U.S. Bankruptcy Court, concurrently with the Court’s confirmation of the
amended Plan. The Settlement Agreement provides that following the
September 6, 2005, effective date of Sun World’s plan of reorganization, Cadiz
will retain the right to utilize the Sun World net operating loss carryovers
(“NOLs”). Sun World Federal NOLs are estimated to be approximately
$58 million. If, in any year from calendar year 2005 through calendar
year 2011, the utilization of such NOLs results in a reduction of Cadiz’ tax
liability for such year, then Cadiz will pay to the Sun World bankruptcy estate
25% of the amount of such reduction, and shall retain the remaining 75% for its
own benefit. There is no requirement that Cadiz utilize these NOLs
during this reimbursement period, or provide any reimbursement to the Sun World
bankruptcy estate for any NOLs used by Cadiz after this reimbursement period
expires.
As of
September 30, 2009, the Company possessed unrecognized tax benefits totaling
approximately $3.3 million. None of these, if recognized, would
affect the Company's effective tax rate because the Company has recorded a full
valuation allowance against these assets. Additionally, as of that
date the Company had accrued approximately $320,000 for state taxes, interest
and penalties related to income tax positions in prior
returns. Income tax penalties and interest are classified as general
and administrative expenses. The Company was not subject to any
income tax penalties and interest during the nine months ended September 30,
2009.
The Company
does not expect that the unrecognized tax benefits will significantly increase
or decrease in the next 12 months.
The Company's
tax years 2005 through 2008 remain subject to examination by the Internal
Revenue Service, and tax years 2004 through 2008 remain subject to examination
by California tax jurisdictions. In addition, the Company's loss
carryforward amounts are generally subject to examination and adjustment for a
period of three years for federal tax purposes and four years for California
purposes, beginning when such carryovers are utilized to reduce taxes in a
future tax year.
Because it is
more likely than not that the Company will not realize its net deferred tax
assets, it has recorded a full valuation allowance against these
assets. Accordingly, no deferred tax asset has been reflected in the
accompanying balance sheet.
15
NOTE 7 – NET LOSS PER COMMON
SHARE
Basic
earnings per share (EPS) is computed by dividing the net loss, after deduction
for preferred dividends either accrued or imputed, if any, by the
weighted-average common shares outstanding. Options, deferred stock
units, warrants and convertible debt were not considered in the computation of
diluted EPS because their inclusion would have been antidilutive. Had
these instruments been included, the fully diluted weighted average shares
outstanding would have increased by approximately 2,464,000 and 2,345,000 for
the nine months ended September 30, 2009 and 2008, respectively.
NOTE 8 – FAIR VALUE
MEASUREMENTS
The following tables
present information about the Company’s assets and liabilities that are measured
at fair value on a recurring basis as of December 31, 2008 and September 30,
2009, and indicate the fair value hierarchy of the valuation techniques we
utilized to determine such fair value. In general, fair values determined by
Level 1 inputs utilize quoted prices (unadjusted) in active markets for
identical assets or liabilities. The Company considers a security that trades at
least weekly to have an active market. Fair values determined by Level 2
inputs utilize data points that are observable, such as quoted prices, interest
rates and yield curves. Fair values determined by Level 3 inputs are
unobservable data points for the asset or liability, and include situations
where there is little, if any, market activity for the asset or liability.
|
Investments
at Fair Value as of December 31, 2008
|
||||||||||||||
|
(in
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||
|
Certificates
of deposit
|
$
|
4,500
|
$
|
-
|
$
|
-
|
$
|
4,500
|
||||||
|
Total
investments at fair value
|
$
|
4,500
|
$
|
-
|
$
|
-
|
$
|
4,500
|
||||||
|
Investments
at Fair Value as of September 30, 2009
|
||||||||||||||
|
(in
thousands)
|
Level
1
|
Level
2
|
Level
3
|
Total
|
||||||||||
|
Certificates
of deposit
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Total
investments at fair value
|
$
|
-
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
16
NOTE 9 – SUBSEQUENT
EVENT
In October
2009, the Company raised $7.0 million with a private placement of 220,880 Units
at $31.50 per Unit. This includes 20,880 Units purchased by the
Lenders of the Term Loan pursuant to the Lenders’ Participation Rights under the
Term Loan. Each Unit consists of three (3) shares of the Company’s
common stock and one (1) stock purchase warrant. The warrant entitles
the holder to purchase one (1) share of common stock at an exercise price of
$15.00 per share. The warrant has a term of three (3) years, but is
callable by the Company at any time following November 1, 2010 if the closing
market price of the Company’s common stock exceeds $22.50 for 10 consecutive
trading days.
In connection
with the "safe harbor" provisions of the Private Securities Litigation Reform
Act of 1995, the following discussion contains trend analysis and other
forward-looking statements. Forward-looking statements can be
identified by the use of words such as "intends", "anticipates", "believes",
"estimates", "projects", "forecasts", "expects", "plans" and
"proposes". Although we believe that the expectations reflected in
these forward-looking statements are based on reasonable assumptions, there are
a number of risks and uncertainties that could cause actual results to differ
materially from these forward-looking statements. These include,
among others, our ability to maximize value from our Cadiz, California land and
water resources; and our ability to obtain new financings as needed to meet our
ongoing working capital needs. See additional discussion under the
heading “Risk Factors” in Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2008.
Overview
Our
operations (and, accordingly, our working capital requirements) relate primarily
to our water, agricultural, and renewable energy development
activities.
Our primary
assets consist of 45,000 acres of land in three areas of eastern San Bernardino
County, California. Virtually all of this land is underlain by
high-quality groundwater resources that are suitable for a variety of uses,
including water storage and supply programs. The advantages of
underground water storage relative to surface storage include minimal surface
environmental impacts, low capital investment, and minimal evaporative water
loss. The properties are located in proximity to the Colorado River and the
Colorado River Aqueduct, the major source of imported water for Southern
California.
The
value of these assets derives from a combination of projected population
increases and limited water and energy supplies throughout Southern
California. California is facing the very real possibility that
current and future supplies of water will not be able to meet
demand. Water agencies throughout California have imposed mandatory
rationing in 2009 in order to meet anticipated demand. Moreover,
through a series of policy initiatives, the State of California and the United
States government have issued compelling calls for increased renewable energy
production, including California’s mandate to acquire 33% of the state’s
electricity from renewable sources by 2020. As a result, we believe
that a competitive advantage exists for companies that can provide high-quality,
reliable, and affordable water to major population centers as well as for
companies that can site solar energy facilities.
Our objective
is to realize the highest and best use for these assets in an environmentally
responsible way. We believe this can best be achieved through a
combination of water storage and supply, the production of renewable energy, and
sustainable agricultural development.
Water
Resource Development
In 1993, we
secured permits for up to 9,600 acres of agricultural development in the Cadiz
Valley and the withdrawal of more than 1 million acre-feet of groundwater from
the underlying aquifer system. Once the agricultural development was
underway, we also established that the location, geology and hydrology of this
property is uniquely suited for both agricultural development and the
development of an aquifer storage, recovery, and dry-year supply project to
augment the water supplies available to Southern California.
18
In 1997, we
entered into the first of a series of agreements with the Metropolitan Water
District of Southern California (“Metropolitan”) to jointly design, permit and
build such a project (the “Cadiz Project” or “Project”). In general, several
elements are needed to complete the development: (1) federal and state
environmental permits; (2) a pipeline right of way from the Colorado River
Aqueduct to the project area; (3) a storage and supply agreement with one or
more public water agencies or private water utilities; and (4) construction and
working capital financing.
Between 1997
and 2002, we and Metropolitan received substantially all of the state and
federal approvals required for the permits necessary to construct and operate
the Project, including a Record of Decision (“ROD”) from the U.S. Department
of the Interior, which endorsed the Cadiz Project and offered a right-of-way for
construction of project facilities. The ROD also approved a Final
Environmental Impact Statement (“FEIS”) in compliance with the National
Environmental Policy Act (“NEPA”).
In October
2002, Metropolitan’s staff brought the right-of-way matter before the
Metropolitan Board of Directors. By a very narrow margin, the
Metropolitan Board voted not to accept the right-of-way grant and not to proceed
with the Project.
In April
2003, we filed a claim against Metropolitan seeking compensatory
damages. When settlement negotiations failed to produce a resolution,
we filed a lawsuit against Metropolitan in Los Angeles Superior Court on
November 17, 2005, seeking compensatory damages for a breach of various
contractual and fiduciary obligations to us, and interference with the economic
advantage we would have obtained from the Cadiz Project. On February
11, 2009, we and Metropolitan agreed to settle our differences and dismissed all
outstanding claims remaining against each other.
Meanwhile,
the need for new water storage and dry-year supplies has not
abated. The population of California continues to grow, while water
supplies are being challenged by drought, lack of infrastructure and
environmental protections. Indeed, California is facing the very real
possibility that current and future supplies of water will not be able to meet
demand. In 2007, a federal judge limited deliveries out of California’s State
Water Project, reducing Southern California’s water supply. This restriction has
reduced available supplies from California’s State Water Project to just 40% of
capacity in 2009. Moreover, cities throughout Southern
California have endured dry local conditions for three years leaving supplies in
storage at perilously low levels, while Colorado River deliveries to the State
have remained at average levels.
These
conditions have greatly challenged California’s water
supplies. Approximately 49 water agencies throughout California have
imposed mandatory rationing in 2009 in order to meet anticipated demand and at
least 60 water agencies have imposed voluntary conservation
measures. Policy leaders and lawmakers have introduced legislation to
improve the State’s water infrastructure and are pursuing public financing for
new storage and supply projects.
19
To meet the
growing demand for new water storage and supplies, we have continued to pursue
the implementation of the Cadiz Project. To that end, in September
2008, we secured a new right-of-way for the Project’s water conveyance pipeline
by entering into a lease agreement with the Arizona & California Railroad
Company. The agreement allows Cadiz to utilize a portion of the
railroad’s right-of-way for the Cadiz Project water conveyance pipeline for a
period up to 99 years.
In June 2009,
we executed Letters of Intent (LOI) with five Southern California water
providers, including four public municipal water agencies and Golden State Water
Company, California’s second largest publicly-traded water utility. As part of
the LOIs, Cadiz and the five water providers will develop a cost-sharing
agreement, finalize terms of pricing, design and capital allocation and work
towards implementation of the Project. These providers serve more
than 3 million customers in California’s San Bernardino, Riverside, Los Angeles,
Orange and Ventura Counties. The Company expects to add additional participants
for other aspects of the project as the environmental review
proceeds.
Agricultural
Development
Within the
Cadiz Valley property, 9,600 acres have been zoned for
agriculture. The infrastructure includes seven wells that are
interconnected within this acreage, with total annual production capacity of
approximately 13,000 acre feet of water. Additionally, there are
housing and kitchen facilities that support up to 300 employees. The
underlying groundwater, fertile soil, and desert temperatures are well suited
for a wide variety of fruits and vegetables.
Permanent
crops currently in production include 160 acres of certified organic vineyards
and 260 acres of lemons. Both of these crops are farmed using
sustainable agricultural practices. Additionally, we entered into an
agreement with a third party to develop up to another 500 acres of
lemons.
Seasonal
vegetable crops are all grown organically and 2009 plantings include squash and
beans.
Other
Development Opportunities
In addition
to the development projects described above, we believe that our landholdings
are suitable for other types of development, including solar energy
generation. Both federal and state initiatives support alternative
energy facilities to reduce greenhouse gas emissions and the consumption of
imported fossil fuels. The locations, topography, and proximity of our
properties to utility corridors are well-suited for solar energy generation. An
additional advantage we can offer is the availability of the water supply needed
by solar thermal power plant designs. We are presently in discussions with
energy companies interested in utilizing our landholdings for various types of
solar energy development.
Over the
longer term, we believe that the population of Southern California, Nevada,
and Arizona will continue to grow, and that, in time, the economics of
commercial and residential development of our properties will become
attractive.
20
We remain
committed to our land and water assets and we continue to explore all
opportunities for development of these assets. We cannot predict with
certainty which of these various opportunities will ultimately be
utilized.
Results
of Operations
Three Months Ended September
30, 2009, Compared to Three Months Ended September 30, 2008
We have not
received significant revenues from our water resource activity to
date. As a result, we have historically incurred a net loss from
operations. We had revenues of $138 thousand for the three months
ended September 30, 2009, and $247 thousand for the three months ended September
30, 2008. We incurred a net loss of $3.1 million in the three months
ended September 30, 2009, compared with a $3.5 million net loss during the three
months ended September 30, 2008. The higher 2008 loss was primarily
due to higher stock based compensation related to shares issued under the 2007
Management Equity Incentive Plan.
Our primary
expenses are our ongoing overhead costs (i.e. general and administrative
expense) and our interest expense. We will continue to incur non-cash
expenses in connection with our management and director equity incentive
compensation plans.
Revenues Cadiz had revenues of $138 thousand for the three
months ended September 30, 2009, and $247 thousand for the three months ended
September 30, 2008. The decrease in revenue in 2009 was primarily due
to a smaller raisin harvest in 2009 in comparison to 2008.
Cost of Sales Cost of sales totaled $247 thousand during the
three months ended September 30, 2009, and $192 thousand during the three months
ended September 30, 2008. The harvest for the 2009 raisin crop was
smaller than the prior year, which required a higher allocation of fixed growing
costs in 2009 to a smaller crop. This resulted in an increase in cost
of sales in 2009 versus 2008.
General and Administrative
Expenses General
and administrative expenses during the three months ended September 30, 2009,
totaled $2 million compared to $2.3 million for the three months ended September
30, 2008. Non-cash compensation costs for stock and option awards are
included in General and Administrative Expenses.
Compensation
costs from stock and option awards for the three months ended September 30,
2009, were $440 thousand, compared with $907 thousand for the three months ended
September 30, 2008. The expense reflects the vesting schedule of 2007
Management Equity Incentive Plan stock awards that became effective in July
2007. Of these amounts, $289 thousand in 2009 and $628 thousand in
2008 relate to Milestone-Based Deferred Stock, none of which were ultimately
issued. Shares and options issued under the Plans vest over varying periods from
the date of issue to January 2011. See Notes to the Consolidated
Financial Statements: Note 5 – Stock Based Compensation Plans and
Warrants.
Other General
and Administrative Expenses, exclusive of stock based compensation costs,
totaled $1.5 million in the three months ended September 30, 2009, compared with
$1.4 million for the three months ended September 30, 2008.
21
Depreciation Depreciation expense totaled $85 thousand for the three
months ended September 30, 2009, and $87 thousand for the three months ended
September 30, 2008.
Interest Expense,
net Net interest expense totaled $976 thousand during
the three months ended September 30, 2009, compared to $1.1 million during the
same period in 2008. The following table summarizes the components of
net interest expense for the two periods (in thousands):
|
Three Months Ended
|
||||||||
|
September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Interest
on outstanding debt
|
$ | 650 | $ | 514 | ||||
|
Amortization
of financing costs
|
8 | 20 | ||||||
|
Amortization
of debt discount
|
320 | 586 | ||||||
|
Interest
income
|
(2 | ) | (17 | ) | ||||
| $ | 976 | $ | 1,103 | |||||
The decrease
in net interest expense is primarily due to the amortization of the debt
discount related to the senior secured convertible term loan, and is partially
offset by the increase in interest on the term loan due to the interest rate
increase from 5% to 6% per annum in the prior period. 2009 interest
income decreased from $17 thousand in 2008 to $2 thousand in 2009, due to lower
cash balances and lower short-term interest rates. See Notes to
the Consolidated Financial Statements: Note 3 – Long-term Debt.
Income Taxes Income
tax expense for the three months ended September 30, 2009, was $1 thousand,
compared with $2 thousand during the prior year period. See Notes to
the Consolidated Financial Statements: Note 6 – Income Taxes.
Nine Months Ended September
30, 2009, Compared to Nine Months Ended September 30, 2008
We had
revenues of $186 thousand for the nine months ended September 30, 2009, and $280
thousand for the nine months ended September 30, 2008. We incurred a
net loss of $10.9 million in the nine months ended September 30, 2009, compared
with a $12.2 million net loss during the nine months ended September 30,
2008. The higher loss in the 2008 period primarily related to higher
non-cash expenses related to stock and option awards and expenses related to the
Company’s lawsuit against the Metropolitan Water District of Southern California
that was settled in the first quarter of 2009.
Revenues Cadiz had
revenues of $186 thousand for the nine months ended September 30, 2009, and $280
thousand for the nine month ended September 30, 2008. The
decrease in revenue in 2009 was primarily due to a smaller raisin harvest in
2009 in comparison to 2008.
Cost of Sales Cost
of sales totaled $348 thousand during the nine months ended September 30, 2009,
and $209 thousand during the nine months ended September 30, 2008. The harvest
for the 2009 raisin crop was smaller than the prior year, which required a
higher allocation of fixed growing costs in 2009 to a smaller
crop. This resulted in an increase in cost of sales in 2009 versus
2008.
22
General and Administrative
Expenses General and administrative expenses during the nine
months ended September 30, 2009, totaled $7.2 million compared to $8.8 million
for the nine months ended September 30, 2008. Non-cash compensation
costs for stock and option awards are included in General and Administrative
Expenses.
Compensation
costs from stock and option awards for the nine months ended September 30, 2009,
were $1.8 million, compared with $3.5 million for the nine months ended
September 30, 2008. The expense reflects the vesting schedule of 2007
Management Equity Incentive Plan stock awards that became effective in July
2007. Of these amounts, $868 thousand in 2009 and $2.5 million in
2008 relate to Milestone Based Deferred Stock, none of which were ultimately
issued. Shares and options issued under the Plans vest over varying periods from
the date of issue to January 2011. See Notes to the Consolidated
Financial Statements: Note 5 – Stock Based Compensation Plans and
Warrants.
Other General
and Administrative Expenses, exclusive of stock based compensation costs,
totaled $5.4 million in the nine months ended September 30, 2009, compared with
$5.4 million for the nine months ended September 30, 2008.
Depreciation and
Amortization Depreciation and amortization expense for the nine months
ended September 30, 2009 and 2008 was $256 thousand.
Interest Expense, net Net interest expense
totaled $3.3 million during the nine months ended September 30, 2009, compared
to $3.1 million during the same period in 2008. The following table
summarizes the components of net interest expense for the two periods (in
thousands):
|
Nine
Months Ended
|
||||||||
|
September 30,
|
||||||||
|
2009
|
2008
|
|||||||
|
Interest
on outstanding debt
|
$ | 1,697 | $ | 1,507 | ||||
|
Amortization
of financing costs
|
47 | 56 | ||||||
|
Amortization
of debt discount
|
1,588 | 1,662 | ||||||
|
Interest
income
|
(32 | ) | (98 | ) | ||||
| $ | 3,300 | $ | 3,127 | |||||
The increase
in net interest expense is primarily due to the increase in interest rate from
5% to 6% per annum on the senior secured convertible term loan, and is partially
offset by the amortization of the debt discount related to the conversion option
embedded in the term loan. 2009 interest income decreased to $32
thousand from $98 thousand in the prior year, due to lower cash balances, lower
short-term interest rates and a more conservative investment
policy. See Notes to the Consolidated Financial Statements: Note 3 –
Long-term Debt.
Income Taxes Income tax expense for the nine months ended
September 30, 2009 was $3 thousand, compared with $6 thousand of income tax
expense during the nine months ended September 30, 2008. See Note 6
of the Notes to the Consolidated Financial Statements – Income
Taxes.
23
Liquidity and Capital
Resources
Current Financing
Arrangements
As we have
not received significant revenues from our water resource, agricultural and
renewable energy development activity to date, we have been required to obtain
financing to bridge the gap between the time water resource and other
development expenses are incurred and the time that revenue will
commence. Historically, we have addressed these needs primarily
through secured debt financing arrangements, private equity placements and the
exercise of outstanding stock options and warrants.
We have
worked with our secured lenders to structure our debt in a way which allows us
to continue our development of the Cadiz Project and minimize the dilution of
the ownership interests of common stockholders. In June 2006, we
entered into a $36.4 million five year zero coupon senior secured convertible
term loan with Peloton Partners LLP (through an affiliate) and another lender
(the “Term Loan”). On April 16, 2008, we were advised that Peloton
had assigned its interest in the Term Loan to an affiliate of Lampe Conway &
Company LLC (“Lampe Conway”), and Lampe Conway subsequently replaced Peloton as
administrative agent of the loan. On June 4, 2009, we completed
arrangements to amend the Term Loan. The significant terms of the
amendment are as follows:
|
·
|
Maturity
date is extended from June 29, 2011, to June 29,
2013;
|
|
·
|
Interest
will continue to accrue at 6% per annum through maturity;
and
|
|
·
|
The
conversion feature has been modified to allow up to $4.55 million of
principal to be converted into 650,000 shares of Cadiz common stock
(“Initial Conversion Portion”) at a conversion price of $7 per share, and
the remaining principal and interest to be converted into shares of Cadiz
common stock at a conversion price of $35 per share. If fully
converted at June 29, 2013, this would result in Cadiz common stock
being issued at an average conversion price of $26 per share;
and
|
|
·
|
We
now have the right at any time prior to June 29, 2013 to prepay the loan's
outstanding principal (other than as to the Initial Conversion Portion)
plus all accrued interest in full without penalty, and may at the same
time prepay the Initial Conversion Portion either in stock at a 110%
conversion premium or, at the election of the lenders, in cash with an
equal value (but not less than $4.55
million).
|
As a result
of the modification of the convertible debt arrangement, the change in
conversion value between the original and modified instrument of approximately
$1.6 million was recorded as an additional debt discount. Such debt
discount is accreted to the redemption value of the instrument over the
remaining term of the loan as additional interest expense.
The debt
covenants associated with the loan were negotiated by the parties with a view
towards our operating and financial condition as it existed at the time the
agreements were executed. At September 30, 2009, we were in
compliance with its debt covenants.
24
A private
placement which we completed in November 30, 2004, included the issuance of
warrants to purchase shares of our common stock at an exercise price of $15.00
per share. During 2006, holders of 70,000 of the warrants exercised
their warrants, resulting in our issuance of 70,000 shares of common stock with
net proceeds of $1,050,000. In January 2007, we exercised our right
to terminate all unexercised warrants on March 2, 2007, subject to a 30 days
notice period. In response, holders of all 335,440 warrants then
outstanding exercised their warrants during February 2007. As a
result, we issued 335,440 shares of our common stock and received net proceeds
of $5,031,000. Following these exercises, no warrants from this 2004
private placement remain outstanding.
We completed
a private placement in November and December of 2008, an issuance of 165,000
Units at the price of $31.50 per unit for proceeds of
$5,197,500. Each Unit consists of three (3) shares of our common
stock and two (2) common stock purchase warrants. The first warrant
entitles the holder to purchase one (1) share of common stock at an exercise
price of $12.50 per share. This warrant has a term of one year, but
is callable by us commencing six months following completion of the offering if
the closing market price of our common stock exceeds $18.75 for 10 consecutive
trading days. The second warrant entitles the holder to purchase one
(1) share of common stock at an exercise price of $12.50 per
share. This warrant has a term of three years and is not callable by
us.
In October
2009, the Company raised $7.0 million with a private placement of 220,880 Units
at $31.50 per Unit. This includes 20,880 Units purchased by the
Lenders of the Term Loan pursuant to the Lenders’ Participation Rights under the
Term Loan. Each Unit consists of three (3) shares of the Company’s
common stock and one (1) stock purchase warrant. The warrant entitles
the holder to purchase one (1) share of common stock at an exercise price of
$15.00 per share. The warrant has a term of three (3) years, but is
callable by the Company at any time following November 1, 2010, if the closing
market price of the Company’s common stock exceeds $22.50 for 10 consecutive
trading days.
As we
continue to actively pursue our business strategy, additional financing will be
required. See “Outlook”, below. The covenants in the Term
Loan do not prohibit our use of additional equity financing and allow us to
retain 100% of the proceeds of any equity financing. We do not expect
the loan covenants to materially limit our ability to finance our water
development activities.
At September
30, 2009, we had no outstanding credit facilities other than the Convertible
Term Loan.
Cash Used for Operating
Activities. Cash used for operating activities totaled
$5 million and $6.1 million for the nine months ended September 30, 2009 and
2008, respectively. Working capital requirements are seasonally less
in the second half of the year as proceeds from agricultural operations are
realized. The cash was primarily used to fund general and
administrative expenses related to the Company’s resource development
efforts.
Cash Provided by (Used for) Investing
Activities. Cash provided by investing activities in
the nine months ended September 30, 2009, was $4.4 million, compared with $99
thousand of cash used for investing activities during the same period in
2008. The 2009 period included $4.5 million of short term
deposits that matured, which were not considered cash equivalents.
25
Cash Provided by (Used for) Financing
Activities. Cash provided by financing activities was
$33 thousand during the nine months ended September 30, 2009, compared with $7
thousand of cash used for financing activities during the prior year
period.
Outlook
Short Term
Outlook. The $7.0 million of proceeds from our October 2009
private placement provide us with sufficient funds to meet our expected working
capital needs through fiscal year 2010. Based on our current and anticipated
usage of cash resources, we will continue to require additional working capital
to meet our cash resource needs until such time as our asset development
programs produce revenues. If we are unable to generate this
from our current development activities, than we will need to seek additional
debt or equity financing in the capital markets. We expect to
continue our historical practice of structuring our financing arrangements to
match the anticipated needs of our development activities. See "Long
Term Outlook", below. No assurances can be given, however, as to the
availability or terms of any new financing.
Long Term
Outlook. In the
longer term, we will need to raise additional capital to finance working capital
needs, capital expenditures and any payments due under our senior secured
convertible term loan at maturity. See “Current Financing
Arrangements” above. Payments will be due under the term loan only to
the extent that lenders elect not to exercise equity conversion rights prior to
the loan’s final maturity date. Our future working capital needs will
depend upon the specific measures we pursue in the entitlement and development
of our water resources and other development. Future capital
expenditures will depend primarily on the progress of the Cadiz
Project. We will evaluate the amount of cash needed, and the manner
in which such cash will be raised, on an ongoing basis. We may meet
any future cash requirements through a variety of means, including equity or
debt placements, or through the sale or other disposition of
assets. Equity placements would be undertaken only to the extent
necessary, so as to minimize the dilutive effect of any such placements upon our
existing stockholders. Limitations on our liquidity and ability to
raise capital may adversely affect us. Sufficient liquidity is
critical to meet our resource development activities. However,
liquidity in the currently dislocated capital markets has been severely
constrained since the beginning of the credit crisis. Although we
currently expect our sources of capital to be sufficient to meet our near term
liquidity needs, there can be no assurance that our liquidity requirements will
continue to be satisfied. If the Company cannot raise needed funds,
it might be forced to make substantial reductions in its operating expenses,
which could adversely affect its ability to implement its current business plan
and ultimately its viability as a company.
Recent Accounting
Pronouncements
See Note 1 to
the Consolidated Financial Statements – Description of Business and Summary of
Significant Accounting Policies.
26
Certain Known Contractual
Obligations
|
Payments Due by Period
|
||||||||||||||||||||
|
Contractual Obligations
|
Total
|
1 year or less
|
2-3 years
|
4-5 years
|
After 5 years
|
|||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Long
term debt obligations
|
$ | 43,019 | $ | 22 | $ | 24 | $ | 42,973 | $ | - | ||||||||||
|
Interest
Expense
|
10,914 | 1 | 1 | 10,912 | - | |||||||||||||||
|
Operating
leases
|
807 | 364 | 443 | - | - | |||||||||||||||
| $ | 54,740 | $ | 387 | $ | 468 | $ | 53,885 | $ | - | |||||||||||
Not
included in the table above is a potential obligation to pay an amount of up to
1% of the net present value of the Cadiz Project in consideration of certain
legal and advisory services to be provided to us. This fee would be
payable upon completion of binding agreements for at least 51% of the Cadiz
Project’s annual capacity and receipt of all environmental approvals and permits
necessary to start construction of the Cadiz Project. A portion of
this fee may be payable in stock. Interim payments of up to $1.5
million, applicable to the final total, would be made upon the achievement of
certain specified milestones. $500 thousand of these interim payments
was earned in June 2009. This arrangement may be terminated by either
party upon 60 days notice, with any compensation earned but unpaid prior to
termination payable following termination.
ITEM 3. Quantitative and Qualitative Disclosures about
Market Risk
As of
September 30, 2009, all of our indebtedness bore interest at fixed rates;
therefore, we are not exposed to market risk from changes in interest rates on
long-term debt obligations.
ITEM 4. Controls and Procedures
Disclosure
Controls and Procedures
We have
established disclosure controls and procedures to ensure that material
information related to the Company, including its consolidated entities, is
accumulated and communicated to senior management, including the Chairman and
Chief Executive Officer (the “Principal Executive Officer”) and Chief Financial
Officer (the “Principal Financial Officer”) and to our Board of
Directors. Based on their evaluation as of September 30, 2009, our
Principal Executive Officer and Principal Financial Officer have concluded that
the Company's disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure
that the information required to be disclosed by the Company in the reports that
it files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and such information is
accumulated and communicated to management, including the principal executive
and principal financial officers as appropriate, to allow timely decisions
regarding required disclosures.
27
Changes
in Internal Controls Over Financial Reporting
In connection with the evaluation
required by paragraph (d) of Rule 13a-15 under the Exchange Act, there was no
change identified in the Company's internal controls over financial reporting
that occurred during the last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
28
PART II - OTHER INFORMATION
ITEM
1. Legal Proceedings
There are no
material pending legal proceedings to which we are a party or of which any of
our property is the subject.
ITEM
1A. Risk Factors
There have
been no material changes to the factors disclosed in Item 1A. Risk Factors in
our Annual Report on Form 10-K for the year ended December 31,
2008.
ITEM
2. Unregistered Sales of Equity Securities and Use of
Proceeds
As previously
reported, on October 23, 2009 the Company completed a private placement (the
"Placement") of 200,000 Units at the price of $31.50 per Unit. On
October 29, 2009 the Company issued an additional 20,880 Units, with identical
terms, pursuant to the exercise of Participation Rights held by the lenders
under the Company's Term Loan. Each Unit consists of three (3) shares
of the Company's common stock and one (1) common stock purchase
warrant. The Warrant entitles the holder to purchase, commencing 90
days from the date of issuance, one (1) share of Common Stock at an exercise
price of $15 per share. This Warrant has a term expiring October 30, 2012, but
is callable by the Company commencing November 1, 2010 if the closing market
price of the Company's Common Stock exceeds $22.50 for 10 consecutive trading
days.
The issuance
of securities was not registered under the Securities Act of 1933, as amended
(the "Securities Act"), but was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act as the
transaction did not involve a public offering, the number of investors was
limited, the investors were provided with information about us, and the Company
placed restrictions on the resale of the securities.
ITEM 3. Defaults Upon Senior
Securities
Not applicable.
ITEM 4. Submission of Matter to a Vote of
Security Holders
Not applicable.
ITEM 5. Other Information
Not
applicable.
29
ITEM
6. Exhibits
The following
exhibits are filed or incorporated by reference as part of this Quarterly Report
on Form 10-Q.
|
|
31.1
|
Certification
of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
31.2
|
Certification
of Timothy J. Shaheen, Chief Financial Officer and Secretary of Cadiz Inc.
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
|
|
|
32.1
|
Certification
of Keith Brackpool, Chairman and Chief Executive Officer of Cadiz Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
|
|
32.2
|
Certification
of Timothy J. Shaheen, Chief Financial Officer and Secretary of Cadiz Inc.
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
30
SIGNATURE
Pursuant to
the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Cadiz
Inc.
| By: | /s/ Keith Brackpool | November 6, 2009 |
| Keith Brackpool | Date | |
| Chairman of the Board and Chief Executive Officer | ||
| (Principal Executive Officer) |
| By: | /s/ Timothy J. Shaheen | November 6, 2009 |
| Timothy J. Shaheen | Date | |
| Chief Financial Officer and Secretary | ||
| (Principal Financial Officer) |
31