UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period
ended March 31, 2006
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)
DELAWARE 77-0313235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777 S. FIGUEROA STREET, SUITE 4250
LOS ANGELES, CALIFORNIA 90017
(Address of principal executive offices) (Zip Code)
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 X NO
--- ---
Indicate by check mark whether the Registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer (as defined in Exchange Act Rule 12b-2).
LARGE ACCELERATED FILER ACCELERATED FILER X NON-ACCELERATED FILER
--- --- ---
Indicate by check mark whether the Registrant is a shell company
(as defined in Exchange Act Rule 12b-2).
YES NO X
--- ---
As of May 8, 2006, the Registrant had 11,330,402 shares of common
stock, par value $0.01 per share, outstanding.
Page i
FOR THE THREE MONTHS ENDED MARCH 31, 2006
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CADIZ INC. CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Statements of Operations for the three months
ended March 31, 2006 and 2005. . . . . . . . . . . . . . . 1
Unaudited Balance Sheets as of March 31, 2006 and
December 31, 2005. . . . . . . . . . . . . . . . . . . . . 2
Unaudited Statements of Cash Flows for the three months
ended March 31, 2006 and 2005. . . . . . . . . . . . . . . 3
Unaudited Statement of Stockholders' Equity for the three
months ended March 31, 2006. . . . . . . . . . . . . . . . 4
Unaudited Notes to the Consolidated Financial Statements. .5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . .14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK. . . . . . . . . . . . . . . . . . . . . .20
ITEM 4. CONTROLS AND PROCEDURES. . . . . . . . . . . . . . . .20
PART II - OTHER INFORMATION. . . . . . . . . . . . . . . . . . 21
Page ii
CADIZ INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
---------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
($ IN THOUSANDS EXCEPT PER SHARE DATA) 2006 2005
---------------------------------------------------------------------
Revenues $ 252 $ 15
-------- --------
Costs and expenses:
Cost of Sales 211 -
General and administrative 1,567 954
Compensation costs from stock and
option awards 529 -
Depreciation and amortization 40 67
-------- --------
Total costs and expenses 2,347 1,021
-------- --------
Operating loss (2,095) (1,006)
Other income (expense)
Interest expense (525) (512)
Interest and other 394 54
-------- --------
Other (expense), net (131) (458)
-------- --------
Loss before income taxes (2,226) (1,464)
Income tax provision - 105
-------- --------
Net loss $ (2,226) $ (1,569)
======== ========
Net loss applicable to common stock $ (2,226) $ (1,569)
======== ========
Basic and diluted net loss per common share $ (0.20) $ (0.15)
======== ========
Basic and diluted weighted average
shares outstanding 11,330 10,335
======== ========
See accompanying notes to the consolidated financial statements.
Page 1
CADIZ INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
---------------------------------------------------------------------
MARCH 31, DECEMBER 31,
($ IN THOUSANDS) 2006 2005
---------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,395 $ 5,302
Accounts receivable 26 170
Prepaid interest expense 482 740
Prepaid expenses and other 218 34
-------- --------
Total current assets 5,121 6,246
Property, plant, equipment and water
programs, net 35,301 35,323
Goodwill 3,813 3,813
Other assets 657 664
-------- --------
Total Assets $ 44,892 $ 46,046
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 336 $ 369
Accrued liabilities 875 819
Current portion of long term debt 8 8
-------- --------
Total current liabilities 1,219 1,196
Long-term debt 26,403 25,883
-------- --------
Total Liabilities 27,622 27,079
-------- --------
Commitments and contingencies
Stockholders' equity:
Series F convertible preferred stock -
$.01 par value:
100,000 shares authorized; shares issued
and outstanding - 1,000 at March 31, 2006
and December 31, 2005 - -
Common stock - $.01 par value; 70,000,000
shares authorized; shares issued and
outstanding - 11,330,402 at March 31, 2006
and 11,330,463 at December 31, 2005 114 114
Additional paid-in capital 227,267 226,738
Accumulated deficit (210,111) (207,885)
-------- --------
Total stockholders' equity 17,270 18,967
-------- --------
Total Liabilities and Stockholders' equity $ 44,892 $ 46,046
======== ========
See accompanying notes to the consolidated financial statements.
Page 2
CADIZ INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
---------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
($ IN THOUSANDS EXCEPT PER SHARE DATA) 2006 2005
---------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (2,226) $ (1,569)
Adjustments to reconcile net loss to
net cash used for operating activities:
Depreciation and amortization 47 74
Interest expense added to loan principal 522 339
Compensation charge for stock awards and
share options 529 -
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable 144 -
Decrease (increase) in prepaid
borrowing expense 258 407
Decrease (increase) in prepaid expenses
and other (184) (79)
Increase (decrease) in accounts payable (33) 82
Increase (decrease) in accrued liabilities 56 88
-------- --------
Net cash used for operating activities (887) (658)
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (18) -
Decrease (increase) in other assets - (81)
-------- --------
Net cash provided by (used by)
investing activities (18) (81)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt (2) -
-------- --------
Net cash provided by (used by)
financing activities (2) -
-------- --------
Net decrease in cash and cash equivalents (907) (739)
Cash and cash equivalents, beginning of period 5,302 9,031
-------- --------
Cash and cash equivalents, end of period $ 4,395 $ 8,292
======== ========
See accompanying notes to the consolidated financial statements.
Page 3
CADIZ INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
--------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 2006
($ IN THOUSANDS)
--------------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK ADDITIONAL TOTAL
--------------- ------------ PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT EQUITY
------ ------ ------ ------ ------- ------- ------
Balance as of
December 31,
2005 1,000 $ - 11,330,463 $ 114 $ 226,738 $(207,885) $ 18,967
Stock
compensation
expense - - - - 529 - 529
Fractional
shares
retired - - (61) - - - -
Net loss - - - - - (2,226) (2,226)
------- ---- ---------- ------ --------- --------- ---------
Balance as of
March 31,
2006 1,000 $ - 11,330,402 $ 114 $ 227,267 $(210,111) $ 17,270
======= ==== ========== ====== ========= ========= =========
See accompanying notes to the consolidated financial statements.
Page 4
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
------------------------------
GENERAL
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, 2005.
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 presentation 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, 2005. The
results of operations for the three months ended March 31, 2006
are not necessarily indicative of results for the entire fiscal
year ending December 31, 2006.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
$2.2 million for the three months ended March 31, 2006 and $1.6
million for the three months ended March 31, 2005. The Company
had working capital of $3.9 million at March 31, 2006 and used
cash in operations of $0.9 million for the three months ended
March 31, 2006 and $0.7 million for the three months ended March
31, 2005. Currently, the Company's sole focus is the development
of its land and water assets.
During the year ended December 31, 2004, the Company raised
$21.3 million in cash through a private sale of common stock.
Based on current forecasts, the Company believes it has
sufficient resources to fund operations for approximately 1 year.
The Company's current resources do not provide the capital
necessary to fund a water or real estate development project
should the Company be required to do so. There is no assurance
that additional financing (public or private) will be available
on acceptable terms or at all. If the Company issues additional
equity 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 further 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. These financial
statements do not include any adjustments that might result from
these uncertainties.
Page 5
PRINCIPLES OF CONSOLIDATION
In December 2003, the Company transferred substantially all
of its assets with the exception of its office sublease, certain
office furniture and equipment and the investment in Sun World
International Inc.("Sun World") 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.
On January 30, 2003, Sun World and certain of its
subsidiaries filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code. The financial statements of Sun World
are no longer consolidated with those of Cadiz due to the
Company's loss of control over the operations of Sun World on
that date. Cadiz also wrote off its net investment in Sun World
of $195 thousand at the Chapter 11 filing date because it did not
anticipate being able to recover its investment.
Further, in February 2005, Sun World completed the sale of
substantially all of its assets. Sun World's consensual plan of
reorganization was confirmed by the U.S. Bankruptcy Court in
August, 2005 and became effective on September 6, 2005. Cadiz
also reached a settlement with Sun World regarding certain tax
matters that became effective on September 6, 2005. With the
final bankruptcy plan confirmation and settlement, Cadiz has no
further rights and obligations relating to Sun World assets or
indebtedness, and supplemental disclosure of Sun World
financial information will no longer be included in Cadiz
filings.
As discussed above, subsequent to the effective date of the
plan of reorganization of Sun World, the Company's primary
activities are limited to the development of its water resource
programs and related assets. From the effective date of the plan
of reorganization through March 31, 2006, the Company has
incurred losses of approximately $7.3 million and used cash in
operations of approximately $2.3 million.
GOODWILL
The Company has $3.8 million of goodwill which resulted from
a merger in May 1988 between two companies, which eventually
became known as Cadiz Inc. Goodwill is not amortized but is
tested for impairment annually in the first quarter, or earlier
if events occur which require an impairment analysis be
performed. The Company performed an impairment test of its
goodwill in the first quarter of 2006 and determined that its
goodwill was not impaired.
INTANGIBLE AND OTHER LONG-LIVED ASSETS
Property, plant and equipment, intangible and certain other
long-lived assets are amortized over their useful lives. Useful
lives are based on management's estimates of the period that the
assets will generate revenue. Long-lived assets are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Page 6
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
Number 123 (revised 2004), "Share Based Payment" ("SFAS 123R").
SFAS 123R requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on their grant date fair values.
SFAS 123R replaces SFAS No. 123, "Accounting for Stock Based
Compensation," ("SFAS 123") and supersedes APB Opinion No. 25,
"Accounting for Stock Issued to Employees."
In January 2006, the Company adopted the new requirements
using the modified prospective transition method in the first
quarter of fiscal 2006, and, as a result, will not retroactively
adjust the results from prior periods. Under this transition
method, compensation expense associated with stock options
recognized in the first quarter of fiscal 2006 included $221,000
related to the remaining unvested portion of all stock option
awards granted prior to January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions
of SFAS 123. The Company applied the Black-Scholes valuation
model in determining the fair value of share-based payments to
employees, which is then amortized on a straight-line basis over
the requisite service period. In addition to the $221,000 of
stock option related expense due to the adoption of SFAS 123R,
the Company recognized $308,000 of expense related to stock
awards previously granted under the Management Equity Incentive
Plan.
STOCK-BASED COMPENSATION
Prior to the January 2006 adoption of SFAS 123R, the
Company accounts for grants of options to employees to purchase
its common stock using the intrinsic value method in accordance
with APB Opinion No. 25 and FIN No. 44, "Accounting for Certain
Transactions Involving Stock Compensation". As permitted by SFAS
123 and as amended by SFAS No. 148, the Company chose to
continue to account for such option grants under APB Opinion No.
25 and provide the expanded disclosures specified in SFAS 123, as
amended by SFAS No. 148.
Had compensation cost for the Company's option grants been
determined based on their fair value at the grant date for awards
consistent with the provisions of SFAS 123R, the Company's net
loss per share for the three months ended March 31, 2005 would
have been the adjusted pro forma amounts indicated below (dollars
in thousands):
THREE MONTHS ENDED
MARCH 31, 2005
(UNAUDITED)
-----------
Net loss applicable to common stock,
as reported $ (1,569)
Stock based employee compensation cost,
net of tax effects, included in the
determination of net income, as reported -
Page 7
Stock based employee compensation cost,
net of tax effects, under the fair value
method if the fair value method had
been applied -
--------
Proforma net loss if the fair value method
had been applied $ (1,569)
========
THREE MONTHS ENDED
MARCH 31, 2005
(UNAUDITED)
-----------
Net loss applicable to common stock:
as reported per basic and diluted
common share $ (0.15)
Stock based employee compensation
cost, net of tax effects, included in
the determination of net income
as reported -
Stock based employee compensation
cost, net of tax effects, under the
fair value method if the fair value
method had been applied -
--------
Proforma net loss if the fair value
method had been applied $ (0.15)
========
For purposes of computing the pro forma disclosures required
by SFAS 123, the fair value of each option granted to employees
and directors is estimated using the Black-Scholes option pricing
model.
The Company has issued options pursuant to its 2003
Management Equity Incentive Plan. Options issued under the
Management Equity Incentive Plan were granted during 2005 and
have a ten year term with vesting periods ranging from issuance
date to three years. Certain of these options have strike prices
that are below the fair market value of the stock on the date of
grant. All options have been issued to directors, officers,
consultants and employees of the Company.
The Management Equity Incentive Plan provides for the
granting of up to 377,339 options to purchase one share of common
stock. 365,000 options were granted under the plan during 2005.
These options remain unexercised and outstanding on March 31,
2006. There were no additional option grants during the 3 month
period ended March 31, 2006.
In December 2004, the FASB issued SFAS No. 123R (revised
2004), "Share-Based Payment", in which requires all share-based
payments to employee, including grants of employee stock options,
be recognized in the financial statements based on their grant
date fair values. SFAS No. 123R replaces SFAS No. 123,
"Accounting for Stock-based Compensation," ("SFAS 123") and
supercedes APB Opinion No. 25, "Accounting for Stock Issued to
Page 8
Employees." The Company adopted the new requirements using the
modified prospective transition method during the first quarter
of 2006, and as a result, will not retroactively adjust results
from prior periods. Under this transition method, compensation
expense associated with stock options recognized in the first
quarter of fiscal 2006 will include: 1) expenses related to the
remaining unvested portion of all stock option awards granted
prior to January 1, 2006, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No.
123; and 2) expenses related to all stock option awards granted
subsequent to January1, 2006, based on the grant date fair value
estimated in accordance with the provisions of SFAS No. 123R.
The Company will apply the Black-Scholes valuation model in
determining the fair value of share-based payments to employees,
which will then be amortized on a straight-line basis over the
requisite service period. No stock options were granted during
the first quarter of 2006.
As a result of the adoption of SFAS 123R, the Company
recorded expense in the amount of $221,000 in the first quarter
of 2006 related to the fair value of options, all of which were
granted in 2005. SFAS 123R also requires the Company to estimate
forfeitures in calculating the expense related to stock-based
compensation as opposed to only recognizing these forfeitures and
the corresponding reduction in expense as they occur. The
remaining vesting periods are relatively short, and the potential
impact of forfeitures is not material. The Company is in a tax
loss carryforward position and is not expected to realize a
benefit from any additional compensation expense recognized under
SFAS 123R. See Note 4 - Income Taxes.
All outstanding stock options were issued in May and October
of fiscal 2005 under the Management Equity Incentive Plan. The
fair value of each option grant was estimated on the date of
grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
Risk free interest rate 4.20%
Expected life 9.6 years
Expected volatility 46%
Expected dividend yield 0.0%
Weighted average vesting period 0.7 years
The Company recognized stock option related compensation
costs of $221,000 in the first quarter of fiscal 2006 relating to
these options. At March 31, 2006, the unamortized compensation
expense related to these options amounted to $ 627,000. No stock
options were exercised during fiscal 2005 and during the first
quarter of fiscal 2006.
Page 9
A summary of option activity under the plan as of March 31,
2006 and changes during the current fiscal year is presented
below:
WEIGHTED-
WEIGHTED- AVERAGE AGGREGATE
AVERAGE REMAINING INTRINSIC
EXERCISE CONTRACTUAL VALUE
OPTIONS SHARES PRICE TERM ($000'S)
------- ------ --------- ----------- ---------
Outstanding
January 1, 2006 365,000 $ 12.71 9.6 $ 3,752
Granted - - - -
Exercised - - - -
Forfeited
or expired - - - -
------- ------- --- -------
Outstanding on
March 31, 2006 365,000 $ 12.71 9.6 $ 3,752
Exercisable at
March 31, 2006 238,335 $ 12.50 9.4 $ 2,404
The weighted-average grant-date fair value of options
granted during the year 2005 was $10.28.
The Company has also granted stock awards pursuant to its
Management Equity Incentive Plan and 2004 Management Bonus Plan.
The Management Equity Incentive Plan provided for the granting of
1,094,712 shares of common stock in May 2005, and the 2004
Management Bonus Plan provided for the granting of 10,000 shares
of common stock valued at $12.00 per share in December 2004.
Compensation cost for stock granted to employees is measured at
the quoted market price of the Company's stock at the date of the
grant. For the three months ended March 31, 2006, the
accompanying consolidated statement of operations include
approximately $308,000 of stock based compensation expense
related to these stock awards. At March 31, 2006, the
unamortized compensation expense relating to these stock awards
was $821,000 and will be fully amortized by December 31, 2006.
A summary of stock awards activity under the plan as of
March 31, 2006 and changes during the current quarter is
presented below:
WEIGHTED-
AVERAGE
GRANT-DATE
FAIR VALUE
SHARES ($000's)
------ ----------
Nonvested at December 31, 2005 125,779 $ 1,950
Granted - -
Forfeited or canceled - -
Vested - -
------- -------
Nonvested at March 31, 2006 125,779 $ 1,950
See Note 2 to the Consolidated Financial Statements included
in the Company's Form 10-K for further discussion of the
Company's accounting policies.
Page 10
NOTE 2 - PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
------------------------------------------------------
Property, plant, equipment and water programs consist of the
following (in thousands):
MARCH 31, DECEMBER 31,
2006 2005
---- ----
Land and land improvements $ 21,986 $ 21,986
Water programs 14,274 14,274
Buildings 1,191 1,191
Machinery and equipment 2,120 2,103
-------- --------
39,571 39,554
Less accumulated depreciation (4,270) (4,231)
-------- --------
$ 35,301 $ 35,323
======== ========
Depreciation expense totaled $40 thousand and $67 thousand
during the three months ended March 31, 2006 and 2005,
respectively.
NOTE 3 - DEBT
-------------
On November 30, 2004 the Company entered into an amendment
of its senior term loan agreement with ING whereby it repaid in
full the senior term loan portion of the facility with ING of $10
million and reduced to $25 million the outstanding principal
balance under the existing revolving portion of the loan. The
terms and conditions of the loan facility with ING were amended
in order to extend the maturity date of the debt until March 31,
2010, with a $10 million mandatory principal repayment due
on or before March 31, 2008, and an interest rate through March 31,
2008 of 4% cash plus 4% paid in kind ("PIK") increasing to 4%
cash plus 6% PIK for interest periods commencing on and after
April 1, 2008.
Interest is payable semiannually on March 31 and September
30 each year. The PIK portion is added to the outstanding
principal balance.
As part of the private sale of common shares on November 30,
2004, the Company issued to its lender $2.4 million of units as
prepaid interest under the Company's $25 million borrowing from
ING. The current portion of this interest is included in Prepaid
Interest Expense and the non-current portion is included in Other
Assets in the Consolidated Balance Sheet. The total amount of
prepaid interest was $1,026,000 and $2,064,000 on March 31, 2006
and 2005, respectively.
On March 31, 2005, September 30, 2005 and March 31, 2006,
the 4% cash interest in the aggregate amount of $1.4 million was
paid by applying it to the $2.4 million prepaid interest account.
On the same dates, the accrued 4% PIK interest portion in amounts
totaling $1.4 million was added to the principal balance of the
loan.
Page 11
The terms of the loan facilities require certain mandatory
prepayments from the cash proceeds of future equity issuances by
the Company and prohibit the payment of dividends.
The senior term loan is secured by substantially all of the
assets of the Company. At March 31, 2006, the Company was in
compliance with its debt covenants.
NOTE 4 - INCOME TAXES
---------------------
As of March 31, 2006, the Company had net operating loss (NOL)
carryforwards of approximately $59.0 million for federal income
tax purposes. Such carryforwards expire in varying amounts
through the year 2026. This amount reflects the effective reduction
of the NOL carryforward as a result of ownership change annual
limitation amounts.
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 recorded in the accompanying balance
sheet.
In February 2005, our wholly owned subsidiary Sun World
completed the sale of substantially all of its assets.
The sale generated a total gain at Sun World of
approximately $11.3 million and $45.2 million for federal and
state income tax purposes, respectively. For regular income tax
purposes this gain is not expected to generate a tax liability,
in that Sun World and Cadiz file a consolidated tax return and
the companies have sufficient net operating loss carryovers
(NOLs) to offset the gain from Sun World. However, because of
state apportionment factors and the Alternative Minimum Tax (AMT)
rules, Cadiz is expected to have a tax liability of approximately
$336 thousand, which amount has been accrued as of December 31,
2005 and March 31, 2006.
On August 26, 2005, a Settlement Agreement between Cadiz, on
the 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 a
consensual plan of reorganization for Sun World and its debtor
affiliates. 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 NOLs. Sun World Federal NOLs are approximately $52
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.
NOTE 5 - 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,
convertible debt, and preferred stock that are convertible into
shares of the Company's common stock were not considered in the
computation of diluted EPS because their inclusion would have
been antidilutive. Had these
Page 12
instruments been included, the fully diluted weighted average shares
outstanding would have increased by approximately 908,000 and
421,000 shares for the three months ended March 31, 2006 and 2005,
respectively.
NOTE 6 - PREFERRED AND COMMON STOCK
-----------------------------------
During the quarter ended March 31, 2005, we issued 27,200
shares of common stock in consideration for services valued at
$326,400. The shares were issued at $12 per share, the price of
the November 2004 private placement at which time the issue of
the shares was authorized, the services rendered and the amounts
accrued.
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 "Certain Trends and Uncertainties"
in Item 7 of our Annual Report on Form 10-K for the year ended
December 31, 2005.
OVERVIEW
The Company's primary asset consists of land holdings
located in three areas of eastern San Bernardino County,
California totaling approximately 45,000 acres. Virtually all of
this land is underlain by high-quality groundwater resources with
demonstrated potential for various applications, including water
storage and supply programs and recreational, residential, and
agricultural development. Two of the three properties are
located in proximity to the Colorado River Aqueduct, the major
source of imported water for southern California. The third
property is located near the Colorado River.
The value of these assets derives from a combination of
projected population increases and limited water supplies
throughout southern California. In addition, most of the major
population centers in southern California are not located where
significant precipitation occurs, requiring the importation of
water from other parts of the state. We therefore believe that a
competitive advantage exists for companies that can provide high
quality, reliable, and affordable water to major population
centers.
In 1997 we commenced discussions with the Metropolitan Water
District of Southern California ("Metropolitan") in order to
develop a long-term agreement for a joint venture groundwater
storage and supply program on our land in the Cadiz and Fenner
Valleys of eastern San Bernardino County (the "Cadiz Project").
Under the Cadiz Project, surplus water from the Colorado River
would be stored in the aquifer system underlying our land during
wet years. When needed, the stored water, together with
indigenous groundwater, could be returned to the Colorado River
Aqueduct for distribution to Metropolitan's member agencies
throughout six southern California counties.
Between 1997 and 2002, Metropolitan staff and the Company
received substantially all of the various permits required to
construct and operate the project, including a federal Record of
Decision from the U.S. Department of Interior, which endorsed the
Cadiz Project and granted a right-of-way for construction of
project facilities. The federal government also approved a Final
Environmental Impact Statement ("FEIS") in compliance with the
National Environmental Policy Act ("NEPA").
Page 14
Despite the significant progress made in the federal
environmental review process, in October 2002 Metropolitan's
Board refused to consider whether or not to certify the Final
Environmental Impact Report ("FEIR"), which was a necessary
action to authorize implementation of the Cadiz Project in
accordance with the California Environmental Quality Act
("CEQA").
Regardless of the Metropolitan Board's actions in October
2002, Southern California's need for water storage and supply
programs has not abated. Therefore we continue to pursue the
completion of the environmental review process for the Cadiz
Project. To that end we are now in advanced discussions with a
third party public agency that would assume the role of CEQA lead
agency and complete the state of California environmental review
process. We are also working directly with the U.S. Department
of Interior to have the permits that were approved during the
federal environmental review process, including the right-of-way
granted in the Record of Decision to Metropolitan, issued
directly to the Company. Additionally, we are in discussions
with several other public agencies regarding their interest in
participating in the Cadiz Project. All of these agencies have
access to independent sources of supply that can be stored by the
Cadiz Project.
Due to significant population growth in Southern California,
where our properties are located, we have also begun to explore
additional uses of our land assets. To this end, we have
retained outside services to conduct a detailed analysis of our
land assets and assess the opportunities for these properties.
We expect that these alternative scenarios will have
different capital requirements and implementation periods than
those previously established for the Cadiz Project. Therefore,
following Metropolitan's actions in 2002, we have entered into a
series of agreements with our senior secured lender, ING Capital
LLC ("ING") pursuant to which we reduced our debt to ING to $25
million and extended the maturity date of the ING debt until
March 31, 2010, with a $10 million mandatory principal repayment
due on or before March 31, 2008. In addition, we have raised
approximately $35 million in equity through private placements
completed in 2003 and 2004. Most recently we completed a private
placement of 400,000 Units at the price of $60.00 per Unit on
November 30, 2004. Each Unit consisted of five (5) shares of the
Company's common stock and one (1) common stock purchase warrant.
Each Warrant entitled the holder to purchase one (1) share of
common stock at an exercise price of $15.00 per share. Each
Warrant has a term of three (3) years, but is callable by us if
the closing market price of our common stock exceeds $18.75 for
10 consecutive trading days. We used approximately half of the
proceeds of the placement to reduce our senior debt to ING. The
balance of the proceeds are being used by the Company for working
capital.
With the implementation of these steps, we have been able to
retain ownership of all of our land assets and assets relating to
our water programs and also to obtain working capital needed to
continue our efforts to develop our water programs. Because many
of our pre-existing common stockholders have participated in the
2003 and 2004 private placements, our base of common stockholders
remains largely the same as before these placements.
Further, in 2005 the U.S. Bankruptcy Court confirmed a
consensual plan of reorganization for our wholly owned subsidiary
Sun World International, Inc. ("Sun World"). The plan became
effective on September 6, 2005, and Cadiz has no further interest
in the business or operations of Sun World. Cadiz retains the
rights to use certain Sun World net operating loss
Page 15
carryovers for income tax purposes. See Note 4 to the Consolidated
Financial Statements - Income Taxes.
We conduct limited agricultural operations on our Cadiz
Valley properties, where there are approximately 1,060 acres of
vineyards and lemon groves. Historically, we have leased these
crops to Sun World and other third parties. In the fourth
quarter of 2004, the lease with Sun World expired. We leased
approximately 800 acres of vineyards to a third party for the
2005 growing season, and the amount of acreage under lease was
reduced to 160 acres in 2006. The remaining crop lease is
renewable on a year to year basis with annual revenues of
approximately $12,000. We operate the remaining vineyards and
lemon groves, subcontracting the labor, harvesting and marketing
of these crops to third parties. Agriculture related revenues
and expenses will be higher in 2006 than in prior years because
the Company is operating a larger portion of the property.
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, if any, of these
various opportunities will ultimately be realized.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THREE MONTHS ENDED
MARCH 31, 2005
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 $252
thousand for the three months ended March 31, 2006 and $15
thousand for the three months ended March 31, 2005. The higher
loss in the 2006 period resulted primarily from non-cash
compensation expenses of $529 thousand from stock and option
awards under our Management Equity Incentive Plan. No such
expense was incurred in the first three months of 2005. General
and administrative expenses were also higher in the 2006 period.
Our primary expenses are our ongoing costs to develop our
real estate and water assets and to secure the remaining
entitlements needed to continue developing the Cadiz Program.
These costs consist primarily of project management, legal,
consulting, engineering and administrative expenses, which are
characterized as general and administrative expenses for
financial statement reporting purposes. We also have expenses
related to the limited farming activities that we conduct at the
Cadiz Ranch. Other costs include interest expense and
compensation costs resulting from the grant of options under the
Cadiz 2003 Management Equity Incentive Plan.
REVENUES Cadiz had revenues of $252 thousand for the three
months ended March 31, 2006 and $15 thousand for the three months
ended March 31, 2005. Higher revenues resulted primarily from
the sale of citrus crops, as during 2006 we farmed certain lemon
groves at the Cadiz Ranch that had been leased to a third party
during 2005.
COST OF SALES. Cost of Sales totaled $211 thousand during
the three months ending March 31, 2006, reflecting the
production, harvesting and sale of citrus crops at the Cadiz
Ranch property. Cadiz leased these crops to Sun World during the
growing season ending in early 2005 and did not include Sun
World's cost of sales in the consolidated financial statements
because Sun World was in bankruptcy.
Page 16
GENERAL AND ADMINISTRATIVE EXPENSES. General and
administrative expenses during the three months ended March 31,
2006 totaled $1.6 million compared to $954 thousand for the three
months ended March 31, 2005. The increase in expenses is
primarily due to higher legal and consulting costs related to the
ongoing Cadiz Program entitlement process and the lawsuit the
Company has filed against the Metropolitan Water District of
Southern California. Accounting and audit expenses were higher,
due to the documentation and additional audit work required by
Section 404 of the Sarbanes Oxley Act of 2002.
COMPENSATION COSTS FROM STOCK AND OPTION AWARDS. During the
three months ended March 31, 2006, the Company recognized $529
thousand of expenses relating to stock and options previously
issued under the Cadiz 2003 Management Equity Incentive Plan.
Shares and options issued under the Plan vest over varying
periods from the date of issue to October 2007. These expenses
reflect the adoption and application of Statement of Financial
Accounting Standards No. 123(R), "Share -Based Payments"
effective January 1, 2006.
DEPRECIATION AND AMORTIZATION. Depreciation and
amortization expense for the three months ended March 31, 2006
and 2005 totaled $40 thousand and $67 thousand, respectively.
INTEREST EXPENSE, NET. Net interest expense totaled $481
thousand during the three months ended March 31, 2006, compared
to $458 thousand during the same period in 2005. The following
table summarizes the components of net interest expense for the
two periods (in thousands):
THREE MONTHS ENDED
MARCH 31,
2006 2005
---- ----
Interest on outstanding debt $ 518 $ 505
Amortization of financing costs 7 7
Interest income (44) (54)
-------- --------
$ 481 $ 458
======== ========
The increase in net interest expense is primarily due to the
larger principal amount outstanding on the ING loan in 2006, as a
portion of the interest due on the loan is periodically added to
the principal balance pursuant to the loan's 4% paid in kind
("PIK") feature. See Notes to the Consolidated Financial
Statements: Note 3 - Long-term Debt.
OTHER INCOME. During the three month period ended March 31,
2006, one of our stockholders determined that it had, at a time
when it was the beneficial holder of more than 10% of our
outstanding equity securities, inadvertently engaged in trades
which resulted in automatic short swing profit liability to the
Company pursuant to Section 16(b) of the Securities Exchange Act
of 1934. After becoming aware of the situation, the stockholder
promptly made payments totaling $350,000 to the Company to settle
the entire short swing profit liability owed as a consequence of
these trades.
INCOME TAXES. In February 2005, our wholly owned subsidiary
Sun World completed the sale of substantially all of its assets.
The sale generated a total gain at Sun World of approximately
$11.3 million and $45.2 million for federal and state income tax
purposes,
Page 17
respectively. For regular income tax purposes this gain is not
expected to generate a tax liability, in that Sun World and Cadiz
file a consolidated tax return and the companies have sufficient
net operating loss carryovers (NOLs) to offset the gain from Sun
World. However, because of state apportionment factors and the
Alternative Minimum Tax (AMT) rules, Cadiz is expected to have a
tax liability of approximately $336 thousand that has been accrued
as of December 31, 2005 and March 31, 2006. Cadiz retains the
right to utilize a portion of certain Sun World NOLS pursuant to a
settlement agreement among the companies. There was no similar
taxable gain in the 2006 period. See Note 4 of the Notes to the
Consolidated Financial Statements - Income Taxes.
LIQUIDITY AND CAPITAL RESOURCES
(A) CURRENT FINANCING ARRANGEMENTS
------------------------------
As we have not received significant revenues from our water
resource and real estate development activities to date, we have
been required to obtain financing to bridge the gap between the
time development expenses are incurred and the time that revenue
will commence. Historically, we have addressed these needs
primarily through secured debt financing arrangements with our
lenders, private equity placements and the exercise of
outstanding stock options.
In November 2004 we entered into our most recent series of
agreements with ING Capital LLC (ING) which amended the terms and
conditions of our secured revolving credit facility to extend the
maturity date to March 31, 2010, with a $10 million mandatory
principal reduction on or before March 31, 2008, and reduce the
interest rate through March 31, 2008 to 4% cash plus 4% PIK
(increasing to 4% cash plus 6% PIK for interest periods
commencing on and after April 1, 2008). With the addition of the
accrued PIK interest portions on March 31, 2005, September 30,
2005 and March 31, 2006, the outstanding balance of the credit
facility as of March 31, 2006 was $26.4 million. Additional
details concerning the history and terms of this credit facility
are included in our annual report on Form 10-K for the year ended
December 31, 2005.
As we continue to actively pursue our business strategy,
additional financing specifically in connection with our water
programs will be required. As the parties anticipated this need
at the time of our credit restructuring, the restrictive
covenants in our credit facility were crafted in a way that, in
our view, should not materially limit our ability to undertake
debt or equity financing in order to finance our water
development activities.
We have no outstanding credit facilities or preferred stock
other than the Series F preferred stock held by ING as described
in our 10-K for the year ended December 31, 2005.
CASH USED FOR OPERATING ACTIVITIES. Cash used for operating
activities was $887 thousand for the three months ended March 31,
2006, as compared to $658 thousand for the three months ended
March 31, 2005. The increased cash usage is primarily due to
higher general and administrative expenses, which are primarily
due to higher legal and consulting costs related to the
entitlement of the Cadiz Program. Accounting expenses were also
higher, as the 2005 year-end audit included a Sarbanes-Oxley
Section 404 review for the first time.
Page 18
CASH FLOW FROM INVESTING ACTIVITIES. During the three
months ended March 31, 2006, net cash flow used for investing
activities was $18 thousand, primarily for the acquisition of
plant & equipment at the Cadiz Ranch.
OUTLOOK
SHORT TERM OUTLOOK. The proceeds of our 2003 and 2004
private placements, in which we raised approximately $35
million, provide us with sufficient funds to meet our expected
working capital needs for the next 12 months. The Company
contemplates continuing with its historical practice of
structuring its financing arrangements to match the anticipated
needs of its development activities and, in that vein, is
currently engaged in negotiations with third parties that are
intended to provide additional funds for working capital and
debt service requirements in the longer term. 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 and
payments due under our loan with ING. See "Current Financing
Arrangements" above. Our future working capital needs will
depend upon the specific measures we pursue in the entitlement
and development of our real estate and water resources. 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 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board
issued SFAS No. 123 (revised 2004), "Share-Based Payment"
which amends SFAS Statement 123 and was effective for the Company
beginning January 1, 2006. The new standard requires the Company
to recognize compensation costs in its financial statements in an
amount equal to the fair value of share-based payments granted to
employees and directors. The Company recognized $221,000 of
stock based compensation expense in connection with the adoption
of SFAS No. 123R.
Page 19
CERTAIN KNOWN CONTRACTUAL OBLIGATIONS
-------------------------------------
PAYMENTS DUE BY PERIOD
CONTRACTUAL 1 YEAR
OBLIGATIONS TOTAL OR LESS 2-3 YEARS 4-5 YEARS AFTER 5 YEARS
----------- ----- ------- --------- --------- -------------
Long term debt
obligations $ 26,411 $ 8 $ 10,019 $ 16,384 $ -
Interest
Expense 2,739 614 1,726 399 -
Operating
leases 29 29 - - -
-------- -------- -------- -------- --------
$ 29,179 $ 651 $ 11,745 $ 16,783 $ -
======== ======== ======== ======== ========
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about market risks for the three months ended
March 31, 2006 does not differ materially from that discussed
under Item 7A of Cadiz' Annual Report on Form 10-K for the year
ended December 31, 2005.
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 March
31, 2006, 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.
CHANGES IN INTERNAL CONTROL 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 control 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 control over financial reporting.
Page 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Legal Proceedings" included in the Company's latest
Form 10-K for a complete discussion.
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, 2005.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Not applicable.
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.
Page 21
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 O'Donnell Iselin II, 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 O'Donnell Iselin II, 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
Page 22
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 May 10, 2006
------------------------------ ------------------------
Keith Brackpool Date
Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
By: /s/ O'Donnell Iselin II May 10, 2006
------------------------------ ------------------------
O'Donnell Iselin II, Date
Chief Financial Officer and Secretary
(Principal Financial Officer)
Page 23