GEO Investing

cadizi dilutionFor those not familiar with our take on Cadiz Inc. (NASDAQ:CDZI), you can read our two critical articles of the company here and here. It had previously been our argument that the company was heading towards either bankruptcy or dilutive financing due to an inability to meet its short-term debt obligations and inability to monetize its one major project.

The company operates with an insolvent balance sheet and has hit a multitude of barriers on its sole water project that we believe will prevent it from ever becoming a cash generating, profitable company.

What we clearly have now is a company that is “keeping the dream alive” by selling equity to pay down debt. We believe the company’s creditors have no option but to accept a refinance under these circumstances. Essentially what you have with CDZI is an executive compensation ATM machine paid for by issuing stock. The company is giving the appearance of paying down debt, but shareholders are really the ones “paying”.

How long can the company keep the stock up simply for the purpose of paying down debt?

Cadiz Refinancing of Debt

On the morning of November 24, the company issued a release which states that the company refinanced some of its short term debt by paying a $2.25 million fee and that it plans to make a $9 million payment before the original March 2016 maturity to its lender. We’ve emphasized the important parts of the PR in bold:

Cadiz Inc. (“Cadiz”, “the Company”) is pleased to announce today that it has entered into an agreement with its senior lenders, including MSD Credit Opportunity Master Fund, L.P., (“Senior Lenders”), which grants the Company the right to extend the maturity date of the $40 million first tranche of its mortgage debt (“First Mortgage”) from March 2016 to June 2017.  Additionally, the Company has also entered into agreements with a majority of its convertible note holders to exchange a minimum of $40 million in outstanding convertible notes presently due in March 2018 for substantially similar convertible notes due in March 2020 (“Convertible Notes” or “Notes”).

Under the agreement with the Senior Lenders, if the Company elects to extend the First Mortgage, it must make a $9 million payment to the lenders prior to March 5, 2016, which will also reduce the Company’s outstanding mortgage balance. The Company may fund this $9 million payment with the proceeds of a possible future equity offering or, alternatively, the Company may replace or extinguish the mortgage debt prior to the March 2016 due date in connection with a potential expansion of the Cadiz Valley agricultural operations. Negotiations with third parties related to such an agricultural expansion are ongoing.

The Company paid its Senior Lenders an amendment fee of $2.25 million in additional debt for the right to extend the maturity date of the First Mortgage to June 2017, which is concurrent with the existing due date of the remaining $12 million second tranche of its mortgage debt. Should the Company opt to extend the First Mortgage maturity date, then it will incur an additional fee of $2.25 million payable in either additional term debt or shares of common stock at the Lenders’ option. Interest will continue to accrue on the First Mortgage at 8%.

It appears that they’re going to do this by issuing shares to pay for the $2.25 million in fees, and then they state they are going to make the $9 million payment by either issuing equity or by expanding operations of their Cadiz Valley Agriculture Operations. We think it is unlikely that the company will be able to make this payment by expanding agricultural operations, as this segment only generated slightly over $200K last quarter. This segment also operates at a loss.

The company is offering up to $2.25 million worth of shares of its common stock, as stated in the Form 424(b)(5) filed on November 23, 2015. This is for the $2.25 million in debt the company is taking on to pay the lenders fee disclosed in the PR.

The company will still have more than $100M in total debt obligations after making its $9M payment in March. We see the only reasonable scenario in paying down this debt to be issuance of stock. If the company wanted to pay down all of its debt at current prices, it would have to issue about 26 million shares, which would more than double the outstanding share count of 17.8M. With a share count of about 40 million shares, today’s market cap would put the stock at a price of about $1.50.

This generously assumes a best case scenario with the equity priced at $3.50 and does not include interest payments and financing for the company’s alleged growth.

GeoInvesting Knew This Would Happen

We said several times over in our two articles that we believe the company is going to dilute shareholders. This transaction proves our point and we believe that we are going to continue to see dilutive financing take place. This is what we said in our first article on CDZI:

Investors in this company need to consider several things. The first is that they need to consider that the company has an enormous amount of debt coming due in the beginning of 2016 that they cannot pay as they currently stand. Second, they need to consider that the company is burning about $10 million in cash per year which, without considering their debt, gives them roughly another 2 to 3 quarters to operate. Lastly, investors need to realize that there is no more room for give on the company’s balance sheet and that any financing moving forward is likely to be extremely toxic, resulting in the issuance of even more shares potentially coupled with warrants and other instruments that could further dilute the company.

The long and short of this transaction is that it seems to only stave off bankruptcy for another year. The company is operating with cash burn of about $3 million per quarter, and we predict the company will need $15 million to make it to the end of 2016. We believe the company has no choice but to issue equity in order to meet these obligations and keep the business running.

We continue to stand by our analysis that Cadiz Inc. is worth $0.

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