UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[√]
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the fiscal year ended December 31, 2008
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
(State or other jurisdiction of
incorporation or organization)
77-0313235
(I.R.S. Employer
Identification No.)
550 S. Hope Street, Suite 2850
Los Angeles, CA
(Address of principal executive offices)
90071
(Zip Code)
(213) 271-1600
(Registrant’s telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each ClassName of Each Exchange on Which Registered
Common Stock, par value $0.01 per share
(Title of Class)
The NASDAQ Stock Market LLC
(Exchange)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in rule 405 under the Securities Act of 1933.
Yes __ No √_
Indicate by a check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes __ No √_
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§220.405 of this chapter) is not contained
herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment of this Form 10-K. □
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company (as defined in Exchange Act Rule 12b-2).
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 √_
The aggregate market value of the common stock held by nonaffiliates as of June 30, 2008 was approximately $182,690,120 based on
11,333,134 shares of common stock outstanding held by nonaffiliates and the closing price on that date. Shares of common stock held by each
executive officer and director and by each entity that owns more than 5% of the outstanding common stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of March 3, 2009, the Registrant had 12,510,236 shares of common stock outstanding.
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement to be filed for its 2009 Annual Meeting of Stockholders are incorporated by reference into
Part III of this Report. The Registrant is not incorporating by reference any other documents within this Annual Report on Form 10-K except
those footnoted in Part IV under the heading “Item 15. Exhibits, Financial Statement Schedules.
TABLE OF CONTENTS
Part I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
Submission of Matters to a Vote of Security Holders
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchase of Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Part III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director
Independence
Item 14. Principal Accounting Fees and Services
Part IV
Item 15. Exhibits, Financial Statement Schedules
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CADIZ INC.
PART I
ITEM 1. Business
This Form 10-K presents forward-looking statements with regard to financial projections,
proposed transactions such as those concerning the further development of our land and water
assets, information or expectations about our business strategies, results of operations,
products or markets, or otherwise makes statements about future events. Such 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, the
cautionary statements under the caption “Risk Factors”, as well as other cautionary language
contained in this Form 10-K. These cautionary statements identify important factors that could
cause actual results to differ materially from those described in the forward-looking statements.
When considering forward-looking statements in this Form 10-K, you should keep in mind the
cautionary statements described above.
Overview
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 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 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 publicly announced that they could impose mandatory
rationing in 2009 in order to meet anticipated demand. 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. 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.
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.
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(a)
General Development of Business
We are a Delaware corporation formed in 1992 to act as the surviving corporation in a
Delaware reincorporation merger with Pacific Agricultural Holdings, Inc., a California corporation
formed in 1983.
As part of our historical business strategy, we have conducted our land acquisition,
water development activities, agricultural operations, search for international water and
agricultural opportunities and real estate development initiatives to maximize the long-term
value of our properties and future prospects. See “Narrative Description of Business” below.
Our initial focus was on the acquisition of land and the assembly of contiguous land
holdings through property exchanges to prove the quantity and quality of water resources in the
region. We subsequently established agricultural operations on our properties in the Cadiz
Valley and sought to develop the water resources underlying that site.
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 identified
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.
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.
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. See “Narrative Description of
Business” below.
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. In October 2008,
the presiding Superior Court Judge held that any breach of duty that may have been committed
by Metropolitan is subject to the bar of Government immunity and thus there would be no
liability. Following the ruling, we were granted leave to amend our claim against Metropolitan.
On February 11, 2009, we and Metropolitan agreed to settle our differences and dismissed all
outstanding claims remaining against each other. See Item 3, “Legal Proceedings”.
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In order to continue to fund our working capital requirements, we refinanced our long
term debt in June 2006 with a $36.4 million zero coupon senior secured convertible term loan
that matures in June 2011. Additionally, in December 2008, we completed a private placement
(the “Placement”) to raise an additional $5.2 million, which, when used together with the cash
resources on hand, will allow us to continue to fund our development activities. These
transactions are described in more detail in Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operation.”
(b)
Financial Information about Industry Segments
Our primary business is to acquire and develop land and water resources. Our
agricultural operations are confined to limited farming activities at the Cadiz Valley property. As
a result, our financial results are reported in a single segment. See Consolidated Financial
Statements. See also Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations”.
(c)
Narrative Description of Business
Our business strategy is the development of our land holdings for their highest and best
uses. At present, our development activities are focused on water resource, agricultural and
renewable energy development.
Water Resource Development
Our portfolio of water resources is located in proximity to the Colorado River and the
Colorado River Aqueduct, the principal source of imported water for Southern California, and
provides us with the opportunity to participate in a variety of water storage and supply programs,
exchanges, and conservation programs with public agencies and other partners.
The Cadiz Valley Groundwater Storage and Dry-Year Supply Project
We own approximately 35,000 acres of land and related high-quality groundwater
resources in the Cadiz and Fenner valleys of eastern San Bernardino County. The aquifer
system underlying this property is naturally recharged by precipitation (both rain and snow)
within a watershed of approximately 1,300 square miles. See Item 2, “Properties – The
Cadiz/Fenner Property”.
In 1997, we commenced discussions with Metropolitan in order to develop a joint
venture groundwater storage and dry-year supply program on this land (the “Cadiz Project”).
The Cadiz Project would provide Southern California with a valuable increase in water supply
during periods of drought or other emergencies. Additionally, exchange agreements could be
used to transfer water from the Cadiz Project to California communities in the Central and
Northern portions of the Sate.
During wet years, surplus water from the Colorado River would be stored in the aquifer
system that underlies the Cadiz property. During dry years, the stored water and indigenous
groundwater could be returned to the Colorado River Aqueduct for distribution to water agencies
throughout six Southern California counties. The Colorado River Aqueduct provides water to
public water agencies and utilities serving approximately 18 million people.
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Cadiz Project facilities would include, among other things:
• Spreading basins, which are shallow ponds that percolate water from the ground
surface down to the water table;
• High yield wells designed to efficiently extract stored Colorado River water and
indigenous groundwater from beneath the Cadiz Project area;
• A 42-mile conveyance pipeline to connect the spreading basins and well field to
the Colorado River Aqueduct near the Iron Mountain pumping plant; and
• A pumping plant to pump water through the conveyance pipeline from the
Colorado River Aqueduct near the Iron Mountain pumping plant to the Cadiz
Project spreading basins.
In October 2001, the Final Environmental Impact Statement (“FEIS”) and Final
Environmental Impact Report (“FEIR”) were issued by Metropolitan and the U.S. Bureau of Land
Management, in collaboration with the U.S. Geological Survey and the National Park Service.
On August 29, 2002, the U.S. Department of Interior approved the FEIS for the Cadiz Project
and issued its Record of Decision (“ROD”), the final step in the federal environmental review
process for the Cadiz Project. The ROD amended the California Desert Conservation Area
Plan for an exception to the utility corridor element and offered to Metropolitan a right-of-way
grant for the pipeline from the Colorado River Aqueduct to the Cadiz Project.
With all federal approvals in place, on October 8, 2002, Metropolitan’s Board considered
acceptance of the terms and conditions of the right-of-way grant pursuant to the published ROD.
By a very narrow margin, the Board voted not to adopt Metropolitan staff’s recommendation to
approve the terms and conditions of the right-of-way grant issued by the Department of the
Interior. Instead, the Board voted for an alternative motion to reject the terms and conditions of
the right-of-way grant and to not proceed with the Cadiz Project. Subsequent to the
Metropolitan Board’s action, negotiations toward a final agreement for the Cadiz Project on the
basis of the previously approved definitive economic terms ceased. See Item 3 , “Legal
Proceedings”.
Meanwhile, the need for new water storage and dry-year supplies has not abated. The
population of California continues to grow rapidly, 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 is expected to result in a reduction
in water supplies from the State Water Project of 85% in 2009. Moreover, cities throughout
Southern California have endured extremely dry local conditions for more than two years
leaving supplies in storage at perilously low levels, while Colorado River deliveries to the State
remain at average levels.
These conditions have greatly challenged California’s water supplies. Water agencies
throughout California have publicly announced that they could impose mandatory rationing in
2009 in order to meet anticipated demand. Policy leaders and lawmakers are also working to
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improve the State’s water infrastructure, including the pursuit of public financing for new storage
and supply projects.
To meet the demand for new water storage and supplies, we have continued to pursue
the implementation of the Cadiz Project. To that end, we secured a new right-of-way for the
Project’s water conveyance pipeline and electrical powerline by entering into a lease agreement
with the Arizona & California Railroad Company in September 2008. 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.
We are currently in discussions with a number of public agencies and water utilities
regarding their interest in participating in the Cadiz Project.
Other Eastern Mojave Properties
Our second largest landholding is approximately 9,000 acres in the Piute Valley of
eastern San Bernardino County. This landholding is located approximately 15 miles from the
resort community of Laughlin, Nevada, and about 12 miles from the Colorado River town of
Needles, California. Extensive hydrological studies, including the drilling and testing of a full-
scale production well, have demonstrated that this landholding is underlain by high-quality
groundwater. The aquifer system underlying this property is naturally recharged by precipitation
(both rain and snow) within a watershed of approximately 975 square miles. Discussions with
potential partners have commenced with the objective of developing our Piute Valley assets.
Additionally, we own acreage located near Danby Dry Lake, approximately 30 miles
southeast of its landholdings in the Cadiz and Fenner valleys. The Danby Lake property is
located approximately 10 miles north of the Colorado River Aqueduct. Initial hydrological
studies indicate that it has excellent potential for an aquifer storage, recovery and supply
project.
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 recently 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 are expected to
include squash, corn, and beans.
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CADIZ INC.
Renewable Energy and Other Development Opportunities
In addition to the projects described above, we believe 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 engaged
in on-going discussions with energy companies interested in utilizing our landholdings for
various types of solar energy development.
Over the longer term, we believe that population growth in nearby desert communities in
Southern California, Nevada and Arizona will resume and that, in time, the economics of
commercial and residential development on our properties will also become attractive.
We remain committed to our land and water assets and will continue to explore all
opportunities for development of these assets. We cannot predict with certainty which of these
development initiatives will ultimately be realized.
Seasonality
Our water resource development activities are not seasonal in nature.
Our farming operations are limited to the cultivation of lemons and grapes/raisins and
spring plantings of vegetables on the Cadiz Valley properties. These operations are subject to
the general seasonal trends that are characteristic of the agricultural industry.
Competition
We face competition for the acquisition, development and sale of our properties from a
number of competitors. We may also face competition in the development of water resources
associated with our properties. Since California has scarce water resources and an increasing
demand for available water, we believe that location, price and reliability of delivery are the
principal competitive factors affecting transfers of water in California.
Employees
As of December 31, 2008, we employed 10 full-time employees (i.e. those individuals
working more than 1,000 hours per year). We believe that our employee relations are good.
Regulation
Our operations are subject to varying degrees of federal, state and local laws and
regulations. As we proceed with the development of our properties, including the Cadiz Project,
we will be required to satisfy various regulatory authorities that we are in compliance with the
laws, regulations and policies enforced by such authorities. Groundwater development, and the
export of surplus groundwater for sale to entities such as public water agencies, is subject to
regulation by specific existing statutes, in addition to general environmental statutes applicable
to all development projects. Additionally, we must obtain a variety of approvals and permits
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from state and federal governments with respect to issues that may include environmental
issues, issues related to special status species, issues related to the public trust, and others.
Because of the discretionary nature of these approvals and concerns which may be raised by
various governmental officials, public interest groups and other interested parties during both
the development and the approval process, our ability to develop properties and realize income
from its projects, including the Cadiz Project, could be delayed, reduced or eliminated.
Access To Our Information
Our annual, quarterly and current reports, proxy statements and other information are
filed with the Securities and Exchange Commission (“SEC”) and are available free of charge
through our web site, www.cadizinc.com, as soon as reasonably practical after electronic filing
of such material with the SEC.
Our SEC filings are also available to the public at the SEC website at www.sec.gov. You
may also read and copy any document we file at the SEC’s public reference room located at
100 F Street N.E., Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the operation of the public reference room.
ITEM 1A. Risk Factors
Our business is subject to a number of risks, including those described below.
Our Development Activities Have Not Generated Significant Revenues
At present, our activities are focused on water resource, agricultural, and renewable
energy development at our San Bernardino County properties. We have not received significant
revenues from our development activities to date and we do not know when, if ever, we will
receive operating revenues sufficient to offset the costs of our development activities. As a
result, we continue to incur a net loss from operations.
We May Never Generate Significant Revenues Or Become Profitable Unless We Are Able
To Successfully Implement Programs To Develop Our Land Assets And Related Water
Resources
We do not know the terms, if any, upon which we may be able to proceed with our water
and other development programs. Regardless of the form of our water development programs,
the circumstances under which transfers or storage of water can be made and the profitability of
any transfers or storage are subject to significant uncertainties, including the risk of variable
water supplies and changing water allocation priorities. Additional risks include our ability to
obtain all necessary regulatory approvals and permits, possible litigation by environmental or
other groups, unforeseen technical difficulties, general market conditions for real estate and
water supplies, and the time needed to generate significant operating revenues from such
programs after operations commence.
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The Development Of Our Properties Is Heavily Regulated, Requires Governmental
Approvals And Permits That Could Be Denied And May Have Competing Governmental
Interests And Objectives
In developing our land assets and related water resources, we are subject to local, state,
and federal statutes, ordinances, rules and regulations concerning zoning, resource protection,
environmental impacts, infrastructure design, subdivision of land, construction and similar
matters. Our development activities are subject to the risk of adverse interpretations or changes
to U.S. federal, state and local laws, regulations and policies. Further, our development
activities require governmental approvals and permits that, if denied or granted subject to
unfavorable conditions or restrictions, would adversely impact our ability to successfully
implement our development programs.
The opposition of government officials may adversely affect our ability to obtain needed
government approvals and permits upon satisfactory terms in a timely manner. In this regard,
federal government appropriations currently preclude spending for any proposal to store water
for the purpose of export or for any activities associated with the approval of rights-of-way on
lands managed by the Needles Field Office of the Bureau of Land Management. As a result of
the new right-of-way with the Arizona & California Railroad Company, discussed further under
“Water Resource Development” above, we do not believe federal approval will be required to
implement the Cadiz Project.
A significant portion of our Cadiz Valley property is included in a study area as part of
the Environmental Impact Statement (“EIS”) process for the expansion of the Marine Corp Air
Ground Combat Center in Twentynine Palms, California. Our property is included in one of the
five different alternatives that will be studied for the base expansion during the EIS process over
the next three years. If any of the Cadiz Valley landholdings are included in the final expansion
area, then we will be entitled to full fair market value compensation for any property taken.
Additionally, the statutes, regulations and ordinances governing the approval processes
provide third parties the opportunity to challenge proposed plans and approvals. In California,
third parties have the ability to file litigation challenging the approval of a project, which they
usually do by alleging inadequate disclosure and mitigation of the environmental impacts of the
project. Opposition from environmental groups could cause delays and increase the costs of
our development efforts or preclude such development entirely. While we have worked with
representatives of various environmental interests and agencies to minimize and mitigate the
impacts of our planned projects, certain groups may remain opposed to our development plans.
Our Failure To Make Timely Payments Of Principal And Interest On Our Indebtedness
May Result In A Foreclosure On Our Assets
As of December 31, 2008, we had indebtedness outstanding to our senior secured
lenders of approximately $41.3 million. Our assets have been put up as collateral for this debt.
If we cannot generate sufficient cash flow to make principal and interest payments on this
indebtedness when due, or if we otherwise fail to comply with the terms of agreements
governing our indebtedness, we may default on our obligations. If we default on our obligations,
our lenders may sell off the assets that we have put up as collateral. This, in turn, would result
in a cessation or sale of our operations.
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The Conversion Of Our Outstanding Senior Indebtedness Into Common Stock Would
Dilute The Percentage Of Our Common Stock Held By Current Stockholders
Our senior indebtedness is convertible into common stock at the election of our lenders.
As of December 31, 2008, our senior indebtedness was convertible into 1,920,323 shares of
common stock, an amount equal to approximately 12% of the number of fully-diluted shares of
our common stock outstanding as of that date. An election by our lenders to convert all or a
portion of our senior secured indebtedness into common stock will dilute the percentage of our
common stock held by current stockholders.
We May Not Be Able To Obtain the Financing We Need To Implement Our Asset
Development Programs
We will require additional capital to finance our operations until such time as our asset
development programs produce revenues. We cannot assure you that our current lenders, or
any other lenders, will give us additional credit should we seek it. If we are unable to obtain
additional credit, we may engage in further equity financings. Our ability to obtain equity
financing will depend, among other things, on the status of our asset development programs
and general conditions in the capital markets at the time funding is sought. Liquidity in the
currently dislocated capital markets has been severely constrained since the beginning of the
credit crisis. Although we currently expect our capital sources to be sufficient to meet our near
term liquidity needs, there can be no assurance that our liquidity requirements will continue to
be satisfied. Any further equity financings would result in the dilution of ownership interests of
current stockholders.
The Issuance Of Equity Securities Under Management Equity Incentive Plans Will Impact
Earnings
Our compensation programs for management emphasize long-term incentives, primarily
through the issuance of equity securities and options to purchase equity securities. It is
expected that plans involving the issuance of shares, options, or both will be submitted from
time to time to our stockholders for approval. In the event that any such plans are approved and
implemented, the issuance of shares and options under such plans may result in the dilution of
the ownership interest of other stockholders and will, under currently applicable accounting
rules, result in a charge to earnings based on the value of our common stock at the time of
issue and the fair value of options at the time of their award. The expense would be recorded
over the vesting period of each stock and option grant.
ITEM 1B. Unresolved Staff Comments
Not applicable at this time.
ITEM 2. Properties
Following is a description of our significant properties.
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The Cadiz/Fenner Valley Property
Since 1983, we have acquired approximately 35,000 acres of largely contiguous land in
the Cadiz and Fenner Valleys of eastern San Bernardino County, California. This area is
located approximately 30 miles north of the Colorado River Aqueduct. In 1984, we conducted
investigations of the feasibility of agricultural development of this land. These investigations
confirmed the availability of high-quality groundwater in quantities appropriate for agricultural
development.
Additional independent geotechnical and engineering studies conducted since 1985
have confirmed that the Cadiz/Fenner property overlies an aquifer system that is ideally suited
for aquifer storage and use of indigenous groundwater, as contemplated in the Cadiz Project.
See Item 1, “Business – Narrative Description of Business – Water Resource Development”.
In November 1993, the San Bernardino County Board of Supervisors unanimously
approved a General Plan Amendment establishing an agricultural land use designation for
9,600 acres in the Cadiz Valley. This action also allows for the withdrawal of more than
1,000,000 acre-feet of groundwater from the aquifer system underlying our property.
Other Eastern Mojave Properties
We also own approximately 10,800 additional acres in the eastern Mojave Desert,
including the Piute and Danby Lake properties.
Our second largest property consists of approximately 9,000 acres in the Piute Valley of
eastern San Bernardino County. This landholding is located approximately 15 miles from the
resort community of Laughlin, Nevada, and about 12 miles from the Colorado River town of
Needles, California. Extensive hydrological studies, including the drilling and testing of a full-
scale production well, have demonstrated that this landholding is underlain by high-quality
groundwater. The aquifer system underlying this property is naturally recharged by precipitation
(both rain and snow) within a watershed of approximately 975 square miles. Discussions with
potential partners have commenced with the objective of developing our Piute Valley assets.
Additionally, we own acreage located near Danby Dry Lake, approximately 30 miles
southeast of our landholdings in the Cadiz and Fenner Valleys. Our Danby Lake property is
located approximately 10 miles north of the Colorado River Aqueduct. Initial hydrological
studies indicate that it has excellent potential for an aquifer storage, recovery and supply
project.
Executive Offices
We lease approximately 7,200 square feet of office space in Los Angeles, California for
our executive offices. The lease terminates in October 2012. Current base rent under the lease
is approximately $13,000 per month.
Cadiz Real Estate
In December 2003, we transferred substantially all of our assets (with the exception of
our office sublease, certain office furniture and equipment and any Sun World related assets) to
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Cadiz Real Estate LLC, a Delaware limited liability company (“Cadiz Real Estate”). We hold
100% of the equity interests of Cadiz Real Estate, and therefore we continue to hold 100%
beneficial ownership of the properties that we transferred to Cadiz Real Estate. Cadiz Real
Estate was created at the behest of our then existing senior secured lender, ING Capital LLC
(“ING”). The Board of Managers of Cadiz Real Estate currently consists of two managers
appointed by us.
Cadiz Real Estate is a co-obligor under our senior secured convertible term loan, for
which assets of Cadiz Real Estate have been pledged as security.
Because the transfer of our properties to Cadiz Real Estate has no effect on our ultimate
beneficial ownership of these properties, we refer throughout this Report to properties owned of
record either by Cadiz Real Estate or by us as “our” properties.
Debt Secured by Properties
Our assets have been pledged as collateral for $41.3 million of debt outstanding on
December 31, 2008. Information regarding interest rates and principal maturities is provided in
Note 6 to the consolidated financial statements.
ITEM 3. Legal Proceedings
Claim Against Metropolitan
On April 7, 2003, we filed an administrative claim against The Metropolitan Water District
of Southern California (“Metropolitan”), asserting the breach by Metropolitan of various
obligations specified in our 1998 Principles of Agreement with Metropolitan and other related
contracts. We believe that by failing to complete the environmental review process for the
Cadiz Project, failing to accept the right-of-way grant offered by the U.S. Department of the
Interior and for taking other actions inconsistent with their obligations, Metropolitan violated the
contracts between the parties, breached its fiduciary duties to us and interfered with our
prospective economic advantages. The filing was made with the Executive Secretary of
Metropolitan.
When settlement negotiations failed to produce a resolution, we filed a lawsuit against
Metropolitan in Los Angeles Superior Court on November 17, 2005 seeking recovery of
damages. Metropolitan counsel responded with a demurrer, seeking to have certain claims
disallowed. In an October 2006 ruling, the Court allowed the claims for breach of fiduciary duty,
breach of express contract, promissory estoppel, breach of implied contract and specific
performance. On October 19, 2007, the Court issued a ruling on Motions for Summary
Judgment/Adjudication that upheld our claim for breach of fiduciary duty and dismissed the
other four contractual and related claims.
In April 2008, the Court ordered that the parties attend a mandatory settlement
conference. The parties failed to reach an agreement through the settlement conference
process, and, in September 2008, Metropolitan filed a motion for judgment on the pleadings
against our claim for breach of fiduciary duty citing to a July 31, 2008 decision by the California
Supreme Court (Miklosy v. Regents of the University of California). On October 7, 2008, the
11
CADIZ INC.
Court issued a tentative ruling granting Metropolitan’s motion and indicated that the court
agreed with Metropolitan’s argument that any breach of duty alleged in our complaint was
subject to statutory immunity, such that, even if Metropolitan did breach its duty in failing to
accept the Right-of-Way or refusing to certify the FEIR, Metropolitan would have no liability as a
governmental entity. At a subsequent hearing on November 5, the Court heard oral arguments
for both parties and issued a final ruling granting our motion to amend our complaint in response
to the immunity contention. We filed a third amended complaint on November 26, 2008. On
December 24, 2008, Metropolitan responded by filing a motion for demurrer to the third
amended complaint. On February 11, 2009, we and Metropolitan agreed to settle our
differences and dismissed all outstanding claims remaining against each other in a filing with the
Superior Court of Los Angeles.
It was our view that recent developments favorable to us had likely reduced the
damages recoverable by us in the action, even had we ultimately prevailed in our claims. The
loss of the right-of-way to convey water between the Colorado River Aqueduct and our Cadiz
property had been a cornerstone of our claim for damages in the case. However, we entered
into a 99-year lease agreement in September 2008 with the Arizona and California Railroad
Company providing us with an alternative right-of-way for the construction of a conveyance
pipeline connecting the Cadiz Project to the Colorado River Aqueduct.
Other Proceedings
There is no other material pending legal proceedings to which we are a party or of which
any of our property is the subject.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of our stockholders during the fourth quarter of
2008.
12
CADIZ INC.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchase of Equity Securities
Our common stock is currently traded on The NASDAQ Global Market ("NASDAQ")
under the symbol "CDZI." The following table reflects actual sales transactions for the dates
that we were trading on NASDAQ, as reported by Bloomberg LP.
2007:
2008:
Quarter Ended
March 31
June 30
September 30
December 31
March 31
June 30
September 30
December 31
High
Low
Sales Price Sales Price
$
$
$
$
26.98 $
26.13 $
23.00 $
21.00 $
$
$
$
$
20.73
$
19.57 $
20.39 $
18.77 $
22.01
20.95
16.22
17.02
13.81
15.15
14.66
8.45
On March 3, 2009, the high, low and last sales prices for the shares, as reported by
Bloomberg, were $7.87, $7.05, and $7.26, respectively.
As of March 3, 2009, the number of stockholders of record of our common stock was
176.
To date, we have not paid a cash dividend on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. Our senior secured convertible term loan
has covenants that prohibit the payment of dividends.
On December 24, 2008, we sold 4,302 Units in consideration of consulting services
valued at $31.50 per Unit. These 4,302 Units were identical to the 160,698 Units sold by us in
November 2008 for $31.50 in cash per Unit, thereby resulting in our issuance of an aggregate of
165,000 Units during the fourth quarter of 2008.
The November 2008 sale, 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,
commencing 90 days from the date of issuance, one (1) share of common stock at an exercise
price of $12.50 per share. This warrant has a term of one (1) year, but is callable by us
commencing six months following completion of this 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, commencing 90 days from the date of issuance, one (1) share of
common stock at an exercise price of $12.50 per share. This warrant has a term of three (3)
years and is not callable by us.
13
CADIZ INC.
The issuance of Units 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 transactions did not involve public offerings,
the number of investors was limited, the investors were provided with information about us, and
we placed restrictions on the resale of the securities.
All other securities sold by us during the three years ended December 31, 2008, which
were not registered under the Securities Act, have previously been reported in our Annual,
Quarterly, and Current Reports on Forms 10K, 10-Q and 8K, respectively.
14
CADIZ INC.
STOCK PRICE PERFORMANCE
The stock price performance graph below compares the cumulative total return of Cadiz common
stock against the cumulative total return of the Standard & Poor’s Small Cap 600 NASDAQ U.S. index
and the Russell 2000® index for the past five fiscal years. The graph indicates a measurement point of
December 31, 2003, and assumes a $100 investment on such date in Cadiz common stock, the Standard
& Poor’s Small Cap 600 and the Russell 2000® indices. With respect to the payment of dividends, Cadiz
has not paid any dividends on its common stock, but the Standard & Poor’s Small Cap 600 and the
Russell 2000® indices assume that all dividends were reinvested. The stock price performance graph
shall not be deemed incorporated by reference by any general statement incorporating by reference this
annual report on Form 10-K into any filing under the Securities Act of 1933, as amended, except to the
extent that Cadiz specifically incorporates this graph by reference, and shall not otherwise be deemed
filed under such acts.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Cadiz, Inc., The S&P Smallcap 600 Index
And The Russell 2000 Index
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/03
12/04
12/05
12/06
12/07
12/08
Cadiz, Inc.
S&P Smallcap 600
Russell 2000
*$100 invested on 12/31/03 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.
15
CADIZ INC.
ITEM 6. Selected Financial Data
The following selected financial data insofar as it relates to the years ended December
31, 2008, 2007, 2006, 2005, and 2004, has been derived from our audited financial statements.
The information that follows should be read in conjunction with the audited consolidated
financial statements and notes thereto for the period ended December 31, 2008 included in Part
IV of this Form 10-K. See also Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
($ in thousands, except for per share data)
Statement of Operations Data:
Total revenues
Net loss
Year Ended December 31,
2008
2007
2006
2005
2004
$ 992 $ 426 $
614 $ 1,197 $
47
(15,909 )
(13,633)
(13,825 )
(23,025)
(16,037 )
-
-
-
-
-
-
-
-
-
-
Net loss applicable to common stock
$ (15,909 ) $
(13,633) $
(13,825 ) $
(23,025) $ (16,037 )
Per share:
Net loss (basic and diluted)
$
(1.32 ) $
(1.15) $
(1.21 ) $
(2.14) $
(2.32 )
Weighted-average common shares
outstanding
12,014
11,845
11,381
10,756
6,911
Balance Sheet Data:
Total assets
Long-term debt
Year Ended December 31,
2008
2007
2006
2005
2004
$
47,412 $
49,572 $
50,326 $ 46,046 $
51,071
$ 33,975 $
29,652 $
25,881 $
25,883 $ 25,000
Preferred stock, common stock and
additional paid-in capital
$ 263,658 $
254,102
1
$ 245,322 $
226,852 $ 209,718
Accumulated deficit
Stockholders' equity
$ (251,252 ) $
(235,343 ) $ (221,710 ) $ (207,885 ) $ (184,860 )
$
12,406 $
18,759 $
23,612 $
18,967 $
24,858
On October 20, 2003, we and holders of Series D and Series E Preferred Stock entered
into an agreement to exchange all outstanding shares of Series D and Series E Preferred Stock,
plus accrued and unpaid dividends, for an aggregate of 400,000 shares of common stock.
Holders of the remaining 100,000 shares of Series F Preferred Stock, which was convertible
into our common stock, were only entitled to dividends if common stock dividends are paid. At
the holder’s election, 99,000 shares of Series F Preferred Stock were converted into our
common stock in 2004, and the remaining 1,000 shares were converted in 2007. On December
31, 2008, there were no shares of preferred stock issued or outstanding.
16
Common shares issued and outstanding have increased from 10,324,339 in 2004 to
12,453,210 in 2008. The increase is primarily due to the issuance of shares to investors in
private placements, the issuance of shares to investors upon the conversion of preferred stock
and warrant exercises, and the issuance of shares to employees, vendors and lenders.
CADIZ INC.
17
CADIZ INC.
ITEM 7. 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 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” above.
Overview
Our operations (and, accordingly, our working capital requirements) relate primarily to
our water, agricultural, and renewable energy development activities.
Our primary asset consists 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 water storage and supply programs. The advantages
of underground storage relative to surface storage include minimal surface environmental
impacts, low capital investment, and minimal evaporative 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 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 publicly announced that they could impose mandatory
rationing in 2009 in order to meet anticipated demand. 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. 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.
Our objective is to realize the highest and best use for our assets in an environmentally
responsible way. We believe that this can best be achieved through a combination of water
storage and supply, the production of renewable energy, and sustainable agricultural
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 identified
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
CADIZ INC.
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.
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. See Item 3, “Legal Proceedings”.
Meanwhile, the need for new water storage and dry-year supplies has not abated. The
population of California continues to grow rapidly, 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 is expected to result in a reduction in water
supplies from the State Water Project of 85% in 2009. Moreover, cities throughout Southern
California have endured extremely dry local conditions for more than two years leaving supplies
in storage at perilously low levels, while Colorado River deliveries to the State remain at
average levels. These conditions have greatly challenged California’s water supplies. Water
agencies throughout California have publicly announced that they could impose mandatory
rationing in 2009 in order to meet anticipated demand. Policy leaders and lawmakers are also
working to improve the State’s water infrastructure, including the pursuit of public financing for
new storage and supply projects.
To meet the growing demand for new water storage and supplies, we have continued to
pursue the implementation of the Cadiz Project. In December 2008, we completed a private
placement (the “Placement”) of 165,000 Units at the price of $31.50 per Unit for proceeds of
$5.2 million. Each Unit consists of three (3) shares of our common stock and two (2) warrants
to each purchase common stock. The Placement, when used together with the cash resources
on hand, will allow us to continue to fund our development activities. See “Liquidity and Capital
Resources” below. We are currently in discussions with a number of public agencies and water
utilities regarding their interest in participating in the Cadiz Project.
In addition to the development projects described above, we believe that our land
holdings are suitable for other types of development, including solar energy generation. Both
19
CADIZ INC.
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 its 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.
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
(a)
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
We have not received significant revenues from our water resource and real estate
development activity to date. As a result, we continue to incur a net loss from operations. We
had revenues of $1.0 million for the year ended December 31, 2008, and $0.4 million for the
year ended December 31, 2007. The higher revenues were due to a larger lemon and raisin
harvest. The net loss totaled $15.9 million for the year ended December 31, 2008, compared
with a net loss of $13.6 million for the year ended December 31, 2007. The larger loss in 2008
resulted primarily from additional net interest expense of $1.1 million and additional amortization
expense related to stock based compensation of $0.8 million.
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. Revenue totaled $1.0 million during the year ended December 31, 2008,
compared to $0.4 million during the year ended December 31, 2007. 2008 revenues included
$0.7 million of revenues related to citrus crop sales, which were up $0.3 million from the prior
year and $0.3 million of revenues related to raisin sales compared with $0 in the prior year.
Increased lemon revenues related to increased production following a freeze in 2007, and
increased raisin revenues related to our farming the vineyard in 2008 compared with it being
leased to a third party in 2007.
Cost of Sales. Cost of Sales totaled $1.1 million during the year ended December 31,
2008, compared with $0.6 million during the year ended December 31, 2007. The higher costs
were a result of increased handling costs of lemons due to a larger crop in 2008 and the costs
of growing raisins, which were leased to a third party in 2007.
General and Administrative Expenses. General and administrative expenses during
the year ended December 31, 2008 totaled $11.2 million compared with $10.0 million for the
year ended December 31, 2007. Non-cash compensation costs related to stock and option
awards are included in general and administrative expenses.
20
CADIZ INC.
Compensation costs from stock and option awards for the year ended December 31,
2008 totaled $4.4 million compared with $3.6 million for the year ended December 31, 2007.
The expenses primarily relate to stock and options issued under the Cadiz 2007 Management
Equity Incentive Plans and the Outside Director Compensation Plan. 7,026 shares were
granted under the Plans in 2008, compared with 954,599 shares in 2007. Shares and options
issued under the Plans vest over varying periods from the date of issue to December 2011.
Other general and administrative expenses, exclusive of stock based compensation
costs, totaled $6.8 million in the year ended December 31, 2008, compared with $6.4 million for
the year ended December 31, 2007. Higher 2008 expenses were primarily due to additional
legal and consulting fees related to water development efforts, including our lawsuit against The
Metropolitan Water District of Southern California.
Depreciation. Depreciation expenses totaled $0.3 million for the year ended December
31, 2008, compared to $0.3 million for 2007.
Interest Expense, net. Net interest expense totaled $4.3 million during the year ended
December 31, 2008, compared to $3.2 million during 2007. Higher interest expense was
primarily due to the amortization of the debt discount related to the senior secured convertible
term loan arranged in June 2006. 2008 interest income dropped to approximately $107,000
from approximately $605,000 in the prior year due to lower short-term interest rates. The
following table summarizes the components of net interest expense for the two periods (in
thousands):
Interest on outstanding debt
Amortization of debt discount
Amortization of deferred loan costs
Interest income
Year Ended
December 31,
2008
2007
$
2,033 $
2,299
77
(107 )
1,929
1,852
62
(605 )
$
4,302 $
3,238
Debt Refinancing. Deferred loan costs, which are primarily legal fees, are amortized
over the life of each loan agreement. In June 2006, we refinanced our term loan with ING
Capital LLC (“ING”) with a new senior secured convertible term loan with a different lender. As
a result, $408,000 of legal fees were capitalized and will be amortized over the 5 year life of the
loan agreement.
Other Income (expense). We had no other income (expense) in the year ended
December 31, 2008, compared with $2,000 of losses on the disposition of assets during the
year ended December 31, 2007.
(b)
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
We had revenues of $0.4 million for the year ended December 31, 2007, and $0.6
million for the year ended December 31, 2006. The lower revenues were due to a below
21
CADIZ INC.
average lemon harvest. Our net loss totaled $13.6 million for the year ended December 31,
2007, compared with a net loss of $13.8 million for the year ended December 31, 2006. The
lower loss in 2007 resulted primarily from a $2.9 million expense incurred in 2006 related to a
change in the fair value of certain derivatives embedded in our long term debt. This reduction
was partially offset by $2.3 million higher general and administrative expenses relating to our
lawsuit against The Metropolitan Water District of Southern California and stock based
compensation in 2007.
Revenues. Revenue totaled $0.4 million during the year ended December 31, 2007,
compared to $0.6 million during the year ended December 31, 2006. 2007 revenues included
$0.4 million of revenues related to citrus crop sales, which were down $0.2 million from the prior
year. Lemon crop yields were adversely affected by a citrus freeze during the winter of 2007
Cost of Sales. Cost of Sales totaled $0.6 million during the year ended December 31,
2007, compared with $0.7 million during the year ended December 31, 2006. The lower cost of
sales in 2006 reflected lower lemon harvesting and processing costs, due to a smaller lemon
crop. There were no cost of sales related to raisin farming activities in 2007 as the vineyard
was leased to a third party.
General and Administrative Expenses. General and administrative expenses during
the year ended December 31, 2007 totaled $10.0 million compared with $7.7 million for the year
ended December 31, 2006. Non-cash compensation costs related to stock and option awards
are included in General and Administrative Expenses.
Compensation costs from stock and option awards for the year ended December 31,
2007 totaled $3.6 million compared with $2.3 million for the year ended December 31, 2006.
The expenses primarily relate to stock and options issued under the Cadiz 2003 and 2007
Management Equity Incentive Plans and the Outside Director Compensation Plan. 954,599
shares were granted under the Plans in 2007, compared with 14,701 shares in 2006. Shares
and options issued under the Plans vest over varying periods from the date of issue to
December 2011.
Other general and administrative expenses, exclusive of stock based compensation
costs, totaled $6.4 million in the year ended December 31, 2007, compared with $5.5 million for
the year ended December 31, 2006. Higher 2007 expenses were primarily due to additional
legal and consulting fees related to water development efforts, including our lawsuit against The
Metropolitan Water District of Southern California.
Depreciation. Depreciation expense totaled $0.3 million for the year ended December
31, 2007, compared to $0.2 million for 2006. The higher expense related to 2007 capital
expenditures.
Interest Expense, net. Net interest expense totaled $3.2 million during the year ended
December 31, 2007, compared to $2.4 million during 2006. Higher interest expense was
primarily due to the amortization of the debt discount related to the senior secured convertible
term loan. 2007 interest income increased to approximately $605,000 from approximately
$376,000 in the prior year due to higher short-term interest rates. The following table
summarizes the components of net interest expense for the two periods (in thousands):
22
Interest on outstanding debt
Amortization of debt discount
Amortization of deferred loan costs
Interest income
CADIZ INC.
Year Ended
December 31,
2007
2006
$
1,929 $
1,852
62
(605 )
1,987
783
40
(376 )
$
3,238 $
2,434
Loss on Extinguishment of Debt and Debt Refinancing. Deferred loan costs, which
are primarily legal fees, are amortized over the life of each loan agreement. In June 2006 we
entered into a new loan agreement related to a $36.4 million zero coupon senior secured loan.
As a result, $408,000 of legal fees were capitalized and will be amortized over the 5 year life of
the loan agreement. At the same time, $868,000 of deferred loan costs and prepaid interest
associated with the prior loan agreement with ING Capital LLC (“ING”) were fully expensed. No
comparable expense was incurred in fiscal 2007.
Change in Fair Value of Derivative Liability. We prepaid our existing indebtedness
with ING in June 2006 with the proceeds of a new senior secured convertible term loan. The
new loan contained certain “embedded derivatives” which were bifurcated from the host debt
instrument and were recorded at fair values on our consolidated balance sheet under GAAP.
These embedded derivatives were subject to periodic revaluation based on changes in the fair
market value of our common stock. On September 29, 2006, certain terms and conditions of
the credit agreement and embedded derivatives were amended. The fair value of the equity
conversion options were recalculated, and a $2.9 million expense was recognized due to an
increase in fair value. The primary reason for the increase in fair value was the increase in the
trading price of our common stock from June 30, 2006 to September 29, 2006. Following the
September 29, 2006 amendment, bifurcation of the embedded equity conversion option is no
longer required. As a result, the fair value of the embedded derivatives has been transferred
from the liability accounts to stockholder’s equity, and no further fair value adjustments were
required after September 30, 2006. As a result, there was no comparable expense in the prior
year ending December 31, 2007.
Other Income. Other expenses during the year ended December 31, 2007 totaled
$2,000, related to losses on the disposition of assets, compared with $373,000 of other income
in during the year ended December 31, 2006. The 2006 income primarily related to payments
received from a stockholder. In March 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 us
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 us to settle the entire
short swing profit liability owed as a consequence of these trades.
23
CADIZ INC.
Liquidity and Capital Resources
(a)
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 development of the Cadiz Project and minimize the dilution of the ownership
interests of common stockholders. In June 2006, we entered into a new $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”). The Term Loan provided for:
• a final maturity date of June 29, 2011;
• a zero coupon structure, which requires no cash interest payments prior to the final
maturity date; and
• a 5% interest rate for the first 3 years, with a 6% interest rate thereafter.
At each lender’s option, principal plus accrued interest on each of the two loan tranches
is convertible into our $0.01 par value common stock at a fixed conversion price per share. The
conversion prices are subject to downward adjustment in the event of a change in control.
On or after June 29, 2007, principal and interest accrued on each of the two loan
tranches can be prepaid on 30 days notice either if our stock price exceeds the tranche’s
conversion price by 40% for 20 consecutive trading days in a 30 trading day period or if we
complete the Cadiz Water Program entitlement process, acquire a right-of-way for the project
pipeline and arrange sufficient financing to repay the loan and build the Cadiz Project. The
conversion prices of the two loan tranches are $18.15 and $23.10, respectively, so the $10
million Tranche A prepayment option would become available at a share price above $25.41 per
share and the $26.4 million Tranche B prepayment option would become available at a share
price above $32.34 per share.
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 December 31, 2008, we were in compliance with our debt covenants.
The Term Loan provided us with $9.3 million of additional working capital and deferred
all interest payments until the June 29, 2011 final maturity date. Furthermore, the Term Loan,
permits us to retain any proceeds received from the issuance of common stock including
common stock issued pursuant to the exercise of stock options and warrants.
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.
24
CADIZ INC.
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
day 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.
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 December 31, 2008, we had no outstanding credit facilities other than the Convertible
Term Loan.
Cash Used for Operating Activities. Cash used for operating activities totaled $7.1
million for the year ended December 31, 2008, and $5.3 million for the year ended December
31, 2007. The cash was primarily used to fund general and administrative expenses related to
our water development efforts, including legal costs associated with our lawsuit against The
Metropolitan Water District of Southern California.
Cash Used for Investing Activities. Cash used for investing activities in the year
ended December 31, 2008 was $4.8 million, compared with $1.4 million during the same period
in 2007. Investing activities reflect investments in deposits, a $250 thousand restricted cash
investment to secure a letter of credit, and the acquisition of equipment at the Cadiz Ranch.
There have been no drawdowns to restricted cash. 2008 capital expenditures were $1.0 million
lower than the prior year, which included leasehold improvements, furniture and fixtures at our
corporate offices.
Cash Provided by Financing Activities. Cash provided by financing activities totaled
$5.1 million for the year ended December 31, 2008, compared with $5.2 million for the year
ended December 31, 2007. The 2008 cash provided included $5.1 million of proceeds from a
private placement discussed above in “Current Financing Arrangements”. The 2007 result
reflects $5.0 million of proceeds from the issuance of 335,440 shares of $0.01 par value
common stock at $15.00 per share when certain holders chose to exercise their warrants.
25
CADIZ INC.
(b)
Outlook
Short Term Outlook. The proceeds remaining from our $5.2 million private placement
in 2008 and the sale of common shares, pursuant to the exercise of certain warrants in 2007,
provide us with sufficient funds to meet our expected working capital needs for the next 12
months. Within the next 12 months we will need to identify financing for our 2010 working
capital needs. 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.
(c)
Critical Accounting Policies
As discussed in Note 2 to the Consolidated Financial Statements of Cadiz, the
preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires management to make estimates and assumptions that affect
amounts reported in the accompanying consolidated financial statements and related footnotes.
In preparing these financial statements, management has made its best estimates and
judgments of certain amounts included in the financial statements based on all relevant
information available at the time and giving due consideration to materiality. We do not believe
there is a great likelihood that materially different amounts would be reported related to the
accounting policies described below. However, application of these policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual
results could differ from these estimates. Management has concluded that the following critical
accounting policies described below affect the most significant judgments and estimates used in
the preparation of the consolidated financial statements.
(1) Intangible and Other Long-Lived Assets. Property, plant and equipment,
intangible and certain other long-lived assets are depreciated or amortized over their useful
26
CADIZ INC.
lives. Useful lives are based on management’s estimates of the period over which 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.
The Company reevaluates the carrying value of its water program annually and has confirmed
that the carrying value of the water program is not impaired as of December 31, 2008.
(2) Goodwill. As a result of a merger in May 1988 between two companies, which
eventually became known as Cadiz Inc., goodwill in the amount of $7,006,000 was recorded.
Approximately $3,193,000 of this amount was amortized until the adoption of Financial
Accounting Standards No. 142, (“SFAS No. 142”) “Goodwill and Other Intangible Assets” on
January 1, 2002. Goodwill is tested for impairment annually, or if events occur which require an
impairment analysis be performed. The Company has confirmed that the carrying value of the
goodwill is not impaired as of December 31, 2008.
(3) Deferred Tax Assets and Valuation Allowances. To date, the Company has not
generated significant revenue from its water development programs, and it has a history of net
operating losses. As such, the Company has generated significant deferred tax assets,
including large net operating loss carry forwards for federal and state income taxes for which it
has recorded a full valuation allowance. Management is currently working on water and real
estate development projects, including the Cadiz Project, that are designed to generate future
taxable income, although there can be no guarantee that this will occur. If taxable income is
generated in future years, some portion or all of the valuation allowance will be reversed, and an
increase in net income would consequently be reported.
(d)
New Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies”
(e)
Off Balance Sheet Arrangements
Cadiz does not have any off balance sheet arrangements at this time.
(f)
Certain Known Contractual Obligations
Contractual Obligations
Total
Less than 1 year 1-3 years 3-5 years After 5 years
Payments Due by Period
Long term debt obligations
$
41,289
$
9
$
41,280 $
Interest payable
Operating leases
6,470
-
6,470
1,069
48,828
$
$
365
374
566
48,316 $
$
138
138 $
- $
-
-
-
-
-
Long-term debt included in the table above primarily reflects the Convertible Term Loan,
which is described above in Item 7, Management’s Discussion and Analysis of Financial
Condition and Results of Operation; Liquidity and Capital Resources. Operating leases include
the lease of the Company’s executive offices, as described in Item 2, Properties.
27
CADIZ INC.
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, subject to stockholder approval of an equity compensation program covering
such an issuance. Interim payments of $500,000 and $1.0 million, applicable to the final total,
would be made upon the achievement of certain specified milestones. 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 8. Financial Statements and Supplementary Data
The information required by this item is submitted in response to Part IV below. See the
Index to Consolidated Financial Statements.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not applicable.
ITEM 9A. 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 December 31, 2008, 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.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under
the supervision and with the participation of our management, including our Principal Executive
Officer and Principal Financial Officer, we evaluated the effectiveness of our internal control
over financial reporting based on the criteria in the Internal Control-Integrated Framework
28
CADIZ INC.
issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
our evaluation under that framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2008. The effectiveness of our internal
control over financial reporting as of December 31, 2008, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in
their report which is included herein.
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.
ITEM 9B. Other Information
Not applicable.
29
CADIZ INC.
PART III
ITEM 10. Directors, Executive Officers and Corporate Governance
The information called for by this item is incorporated herein by reference to the
definitive proxy statement involving the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120
days after December 31, 2008.
ITEM 11. Executive Compensation
The information called for by this item is incorporated herein by reference to the
definitive proxy statement involving the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120
days after December 31, 2008.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information called for by this item is incorporated herein by reference to the
definitive proxy statement involving the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120
days after December 31, 2008.
ITEM 13. Certain Relationships and Related Transactions, and Director Independence
The information called for by this item is incorporated herein by reference to the
definitive proxy statement involving the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120
days after December 31, 2008.
ITEM 14. Principal Accounting Fees and Services
The information called for by this item is incorporated herein by reference to the
definitive proxy statement involving the election of directors which we intend to file with the SEC
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 not later than 120
days after December 31, 2008.
30
PART IV
ITEM 15. Exhibits, Financial Statement Schedules
CADIZ INC.
1.
2.
Financial Statements. See Index to Consolidated Financial Statements.
Financial Statement Schedule. See Index to Consolidated Financial
Statements.
3.
Exhibits.
The following exhibits are filed or incorporated by reference as part of this Form 10-K.
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
4.1
Cadiz Certificate of Incorporation, as amended(1)
Amendment to Cadiz Certificate of Incorporation dated November 8, 1996(2)
Amendment to Cadiz Certificate of Incorporation dated September 1,
1998(3)
Amendment to Cadiz Certificate of Incorporation dated December 15,
2003(4)
Certificate of Elimination of Series D Preferred Stock, Series E-1 Preferred
Stock and Series E-2 Preferred Stock of Cadiz Inc. dated December 15,
2003(4)
Certificate of Elimination of Series A Junior Participating Preferred Stock of
Cadiz Inc., dated March 25, 2004(4)
Amended and Restated Certificate of Designations of Series F Preferred
Stock of Cadiz Inc.(5)
Cadiz Bylaws, as amended (6)
Second Amended and Restated Certificate of Designations of Series F
Preferred Stock of Cadiz Inc. dated June 30, 2006, as corrected by
Certificate of Correction dated March 14, 2007(15)
Certificate of Elimination of Series F Preferred Stock of Cadiz Inc. (as filed
August 3, 2007)(17)
Form of Subscription Agreement used for issuance of Units in November
2008(7)
4.2 Form of Subscription Agreement used for issuance of Units in December
2008(7)
31
CADIZ INC.
4.3 Form of Warrant Agreement (Callable Warrant)(7)
4.4 Form of Warrant Agreement ( Non-Callable)(7)
10.1
Agreement Regarding Employment Between Cadiz Inc. and Keith
Brackpool dated July 5, 2003(8)
10.2
Limited Liability Company Agreement of Cadiz Real Estate LLC dated
December 11, 2003(4)
10.3
10.4
10.5
10.6
10.7
10.8
Amendment No. 1, dated October 29, 2004, to Limited Liability Company
Agreement of Cadiz Real Estate LLC(9)
Consulting Agreement dated August 1, 2002 by and between Richard
Stoddard and Cadiz Inc., and Extension of Consulting Agreement dated
January 1, 2004 by and between Richard Stoddard and Cadiz Inc.(9)
Employment Agreement dated September 12, 2005 between O'Donnell
Iselin II and Cadiz Inc.(10)
Settlement Agreement dated as of August 11, 2005 by and between Cadiz
Inc., on the one hand, and Sun World International, Inc., Sun Desert, Inc.,
Coachella Growers and Sun World/Rayo, on the other hand(11)
$36,375,000 Credit Agreement among Cadiz Inc. and Cadiz Real Estate
LLC, as Borrowers, the Several Lenders from time to time parties thereto,
and Peloton Partners LLP, as Administrative Agent, dated as of June 26,
2006(12)
Amendment No. 1 dated September 29, 2006 to the $36,375,000 Credit
Agreement among Cadiz Inc. and Cadiz Real Estate LLC, as Borrowers,
the Several Lenders from time to time parties thereto and Peloton Partners
LLP, as Administrative Agent, dated as of June 26, 2006(13)
10.9
Outside Director Compensation Plan(14)
10.10 Resolutions adopted by the Cadiz Inc. Board of Directors on March 13,
2007, increasing the annual salary paid to Keith Brackpool and the monthly
consulting fees paid to Richard E. Stoddard(15)
10.11
2007 Management Equity Incentive Plan(16)
10.12 Amendment No. 2 dated October 1, 2007 to Reorganization Plan and
Agreement for Purchase and Sale of Assets dated as of February 18, 1998
among Cadiz Inc. and Mark A. Liggett in his capacity as successor in
interest to Exploration Research Associates, Incorporated., a California
corporation (“ERA”) and in his individual capacity as former sole
shareholder of ERA and as the successor in interest to ERA(18)
32
CADIZ INC.
10.13 Amendment dated October 1, 2007 to Employment Agreement between
O’Donnell Iselin II and Cadiz Inc.(18)
10.14 Consulting Agreement dated January 1, 2008 by and between Timothy J.
Shaheen and Cadiz Inc.(18)
10.15 Longitudinal Lease Agreement dated September 17, 2008 between Arizona
& California Railroad Company and Cadiz Real Estate, LLC(19)
21.1
Subsidiaries of the Registrant
23.1
Consent of Independent Registered Public Accounting Firm
31.1
31.2
32.1
32.2
Certification of Keith Brackpool, Chairman and Chief Executive Officer of
Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of Timothy J. Shaheen, Chief Financial Officer and Secretary
of Cadiz Inc. pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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
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
________________________________________________________________________
(1)
(2)
(3)
(4)
(5)
(6)
Previously filed as an Exhibit to our Registration Statement of Form S-1
(Registration No. 33-75642) declared effective May 16, 1994 filed on
February 23, 1994
Previously filed as an Exhibit to our Report on Form 10-Q for the quarter
ended September 30, 1996 filed on November 14, 1996
Previously filed as an Exhibit to our Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998 filed on November 13, 1998
Previously filed as an Exhibit to our Annual Report on Form 10-K for the
year ended December 31, 2003 filed on November 2, 2004
Previously filed as an Exhibit to our Current Report on Form 8-K dated
November 30, 2004 filed on December 2, 2004
Previously filed as an Exhibit to our Quarterly Report on Form 10-Q for
the quarter ended June 30, 1999 filed on August 13, 1999
(7) Previously filed as an exhibit to Amendment No.1 to our Registration
(8)
Statement on Form S-3 (Registration No. 333-156502) filed on January
27, 2009
Previously filed as an Exhibit to our Report on Form 10-Q for the quarter
ended September 30, 2003 filed on November 2, 2004
33
CADIZ INC.
(9)
(10)
(11)
Previously filed as an Exhibit to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2004 filed on March 31, 2005
Previously filed as an Exhibit to our Current Report on Form 8-K dated
October 3, 2005 filed on October 3, 2005
Previously filed as an Exhibit to our Report on Form 10-Q for the quarter
ended September 30, 2005 filed on November 14, 2005
(12) Previously filed as an Exhibit to our registration statement on Form S-3
(Registration No. 333-126117) filed on July 28, 2006
(13) Previously filed as an Exhibit to our current report on Form 8-K dated
October 4, 2006 and filed October 4, 2006
(14) Previously filed as appendix B to our definitive proxy dated October 10,
(15)
2006 and filed October 10, 2006
Previously filed as an Exhibit to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2006 filed on March 16, 2007
(16) Previously filed as appendix A to our definitive proxy dated April 27, 2007
(17)
and filed April 27, 2007
Previously filed as an Exhibit to our Report on Form 10-Q for the quarter
ended June 30, 2007 filed on August 6, 2007
(18) Previously filed as an Exhibit to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2007 filed on March 16, 2008
(19) Previously filed as an Exhibit to our Report on Form 10-Q for the quarter
ended September 30, 2008 on November 10, 2008
34
CADIZ INC.
INDEX TO FINANCIAL STATEMENTS
CADIZ INC. CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the three years ended December 31,
2008
Consolidated Balance Sheets as of December 31, 2008 and 2007
Consolidated Statements of Cash Flows for the three years ended December 31,
2008
Consolidated Statements of Stockholders’ Equity for the three years ended
December 31, 2008
Notes to the Consolidated Financial Statements
Financial Statement Schedule
Page
36
38
39
40
41
42
67
(Schedules other than those listed above have been omitted since they are either not required,
inapplicable, or the required information is included on the financial statements or notes thereto.)
35
CADIZ INC.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Cadiz Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Cadiz Inc. and its subsidiaries at
December 31, 2008 and 2007, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the accompanying index presents fairly, in all material
respects, the information set forth therein when read in conjunction with the related consolidated
financial statements. Also in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008, based on criteria
established in Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The Company's management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Management’s Report on Internal Control
Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on
these financial statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our integrated audits. We conducted our audits in
accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the financial statements included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial
statement presentation. Our audit of internal control over financial reporting included obtaining
an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with
36
CADIZ INC.
authorizations of management and directors of the company; and (iii) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
Los Angeles, California
March 11, 2009
37
CONSOLIDATED STATEMENTS OF OPERATIONS
CADIZ INC.
(In thousands, except per share data)
Total revenues
Costs and expenses:
Year Ended December 31,
2007
2008
2006
$
992 $
426 $
614
Cost of sales (exclusive of depreciation shown below)
General and administrative
Depreciation and amortization
1,098
11,154
341
566 721
7,710
154
9,988
261
Total costs and expenses
12,593
10,815
8,585
Operating loss
Interest expense, net
Loss on extinguishment of debt and debt refinancing
Change in fair value of derivative liability
Other income (expense)
(11,601)
(10,389)
(7,971)
(4,302)
-
-
(3,238)
-
-
(2)
(2,434)
(868)
(2,919)
373
Other income (expense), net
(4,302)
(3,240)
(5,848)
Net loss before income taxes
(15,903)
(13,629)
(13,819)
Income tax expense
6
4
6
Net loss
Net loss applicable to common stock
Basic and diluted net loss per share
(15,909)
(13,633 )
(13,825)
(15,909) $
(13,633) $
(13,825)
(1.32) $
(1.15) $
(1.21)
$
$
Weighted-average shares outstanding
12,014
11,845
11,381
See accompanying notes to the consolidated financial statements.
38
CONSOLIDATED BALANCE SHEETS
($ in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts Receivable
Prepaid expenses and other
Total current assets
Property, plant, equipment and water programs, net
Goodwill
Other assets
CADIZ INC.
December 31,
2008
2007
$
$
2,014
4,500
66
507
7,087
8,921
-
20
216
9,157
35,784
3,813
728
36,032
3,813
570
Total assets
$
47,412
$
49,572
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Current portion of long term debt
Total current liabilities
Long-term debt
Total liabilities
Commitments and contingencies (Note 12)
Stockholders' equity:
Common stock - $0.01 par value; 70,000,000 shares
authorized; shares issued and outstanding: 12,453,210 at
December 31, 2008 and 11,903,611 at December 31, 2007
Additional paid-in capital
Accumulated deficit
Total stockholders' equity
$
247
775
9
$
408
744
9
1,031
33,975
35,006
-
125
263,533
(251,252)
12,406
1,161
29,652
30,813
-
119
253,983
(235,343)
18,759
Total liabilities and stockholders' equity
$
47,412
$
49,572
See accompanying notes to the consolidated financial statements.
39
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation
Amortization of deferred loan costs
Amortization of debt discount
Loss on extinguishment of debt and debt refinancing
Interest added to loan principal
Net (gain) loss on disposal of assets
Change in value of derivative liability
Compensation charge for stock awards and share options
Issuance of stock for services
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable
Decrease (increase) in prepaid borrowing expense
Decrease (increase) in prepaid expenses and other
(Decrease) increase in accounts payable
(Decrease) increase in accrued liabilities
CADIZ INC.
Year Ended December 31,
2008
2007
2006
$
(15,909) $
(13,633) $
(13,825 )
341
77
2,299
-
2,033
-
4,358
135
(46)
-
(291)
(161)
31
261
62
1,852
-
1,928
2
-
3,609
-
154
40
783
868
1,463
(21 )
2,919
2,260
-
281
-
27
(36)
364
(131 )
523
(209 )
75
(175 )
Net cash used for operating activities
(7,133)
(5,283)
(5,276 )
Cash flows from investing activities:
Investment in short-term deposits
Additions to property, plant and equipment
Proceeds from sale of marketable securities
Proceeds from asset disposition
Other assets
(4,500)
(93)
-
(235)
(8,819)
(1,105)
8,819
-
(250)
Net cash used for investing activities
(4,828)
(1,355)
-
(22 )
-
22
-
-
Cash flows from financing activities:
Proceeds from exercise of stock options
Net proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Deferred loan costs
Principal payments on long-term debt
-
5,063
-
139
5,032
-
-
1,050
36,375
-
(9)
-
(9)
(408 )
(26,646 )
Net cash provided by financing activities
5,054
5,162
10,371
Net increase (decrease) in cash and cash equivalents
(6,907)
(1,476)
5,095
Cash and cash equivalents, beginning of period
8,921
10,397
5,302
Cash and cash equivalents, end of period
$
2,014
$
8,921 $
10,397
See accompanying notes to the consolidated financial statement.
40
CADIZ INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2008, 2007, and 2006
($ in thousands)
Preferred Stock
Common Stock
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Stockholders’
Deficit
Equity
Total
Balance as of December 31, 2005
1,000
$
Convertible term loan conversion option
Stock compensation expense and issuance
of management incentive and outside
director shares
Common stock issued due to warrant
exercise
Fractional shares retired
Net loss
-
-
-
-
-
Balance as of December 31, 2006
1,000
$
Issuance of shares pursuant to warrant
exercise
Issuance of shares pursuant to stock awards
and option exercise
Issuance of shares upon conversion of Series
F Preferred Stock
Stock compensation expense
-
-
(1,000 )
-
Net Loss
Balance as of December 31, 2007
Issuance of shares pursuant to stock awards
Issuance of shares pursuant to Private
Placement
Stock compensation expense
Net Loss
$
-
-
-
-
-
-
Balance as of December 31, 2008
- $
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
11,330,463
$
114 $
226,738
$
(207,885 ) $
-
-
15,160
136,195
70,000
(61 )
-
1
1
-
-
2,259
1,049
-
-
-
-
-
-
(13,825 )
11,536,597
$
116 $
245,206
$
(221,710 ) $
335,440
3
5,029
14,285
17,289
-
-
-
-
-
-
139
-
3,609
-
-
-
-
-
(13,633 )
11,903,611
$
119 $
253,983
$
(235,343 ) $
54,599
495,000
-
-
1
5
-
-
-
5,192
4,358
-
-
-
-
(15,909 )
12,453,210 $
125
$
263,533 $
(251,252 ) $
18,967
15,160
2,260
1,050
-
(13,825 )
23,612
5,032
139
-
3,609
(13,633 )
18,759
1
5,197
4,358
(15,909 )
12,406
See accompanying notes to the consolidated financial statements.
41
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
The Company’s primary asset consists 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 water storage and supply programs.
The advantages of underground 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 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 publicly announced that they could impose mandatory
rationing in 2009 in order to meet anticipated demand. 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. The Company therefore believes that a
competitive advantage exists for companies that can provide high-quality, reliable, and
affordable water to major population centers.
The Company’s objective is to realize the highest and best use for these assets in an
environmentally responsible way. The Company believes that this can best be achieved
through a combination of water storage and supply, the production of renewable energy, and
sustainable agricultural development.
In 1993, Cadiz acquired 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 aquifer
system underlying the property. The Company believes that the location, geology and
hydrology of this property is uniquely suited for both agriculture and the development of an
aquifer storage, recovery and supply program to augment the water supplies available to
Southern California. To this end, in 1997, Cadiz 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, Metropolitan and the Company 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”).
Upon completion of the federal environmental review and permitting process, Cadiz
expected Metropolitan to certify the completed Final Environmental Impact Report (“FEIR”). As
California Environmental Quality Act (“CEQA”) lead agency for the Project, Metropolitan had
42
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
planned to hold a CEQA hearing, certify the FEIR and accept the right-of-way offered to the
Project by the U.S. Department of the Interior. In October 2002, prior to the CEQA hearing,
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. The Metropolitan Board took this action before it had certified
the FEIR, which was a necessary action to authorize implementation of the Cadiz Project in
accordance with CEQA. As a result, the CEQA process for the Project was not completed by
Metropolitan.
It was the Company’s position that the actions by Metropolitan breached various
contractual and fiduciary obligations to the Company and interfered with the economic
advantage it would have obtained from the Cadiz Project. In April 2003, Cadiz filed a claim
against Metropolitan seeking compensatory damages. When settlement negotiations failed to
produce a resolution, the Company filed a lawsuit against Metropolitan in Los Angeles Superior
Court on November 17, 2005.
On February 11, 2009, the Company and Metropolitan agreed to settle their differences
and dismissed all outstanding claims remaining against each other in a filing with the Superior
Court of Los Angeles. Recent developments favorable to the Company had likely reduced the
damages recoverable by the Company in the action, even had the Company ultimately
prevailed in its claim. The loss of the right-of-way to convey water between the Colorado River
Aqueduct and Cadiz had been a cornerstone of the Company’s claim for damages in the case.
However, the Company entered into a 99-year lease agreement in September 2008 with the
Arizona and California Railroad Company providing the Company with an alternative right-of-
way for the construction of a conveyance pipeline connecting the Cadiz Project to the Colorado
River Aqueduct.
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 supplies by nearly 30%. This restriction is expected to
result in a reduction in water deliveries of 85% in 2009. Moreover, cities throughout Southern
California have endured extremely dry local conditions for more than two years leaving supplies
in storage at perilously low levels, while Colorado River deliveries to the State remain at
average levels. Policy leaders and lawmakers are also working to improve the State’s water
infrastructure, including the pursuit of public financing for new storage and supply projects,
including aquifer storage, recovery and supply projects such as the Cadiz Project.
To meet the growing demand for new water storage and supplies, the Company has
continued to pursue the implementation of the Cadiz Project.
In addition to agriculture and water development, the Company believes that its
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
43
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
proximity of the Company’s properties to utility corridors are well-suited for solar energy
generation. An additional advantage the Company can provide is the availability of the water
supply needed by solar thermal power plant designs. The Company is presently in discussions
with energy companies interested in utilizing the Company’s landholdings for various types of
solar energy development.
Over the longer term, the Company believes 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 the Company’s properties will become attractive.
The Company remains committed to its land and water assets and will continue to
explore all opportunities for development of these assets. The Company cannot predict with
certainty which of these various opportunities will ultimately be utilized.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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 $15.9 million,
$13.6 million and $13.8 million for the years ended December 31, 2008, 2007 and 2006,
respectively. The Company had working capital of $6.1 million at December 31, 2008, and used
cash in operations of $7.1 million for the year ended December 31, 2008. 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 proceeds of the new
term loan were partially used to repay the Company’s prior term loan facility with ING Capital
LLC (“ING”). In September 2006, an additional $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. A further $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 after receiving a
termination notice from the Company. In November and December 2008, the Company raised
an additional $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.
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 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 further substantial
44
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
reductions in its operating expenses, which could adversely affect its ability to implement its
current business plan and ultimately its viability as a company.
The proceeds remaining from our $5.2 million private placement in 2008 and the sale of
common shares, pursuant to the exercise of certain warrants in 2007, provide us with sufficient
funds to meet our expected working capital needs for the next 12 months. Within the next 12
months we will need to identify financing for our 2010 working capital needs. 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.
The Chapter 11 Reorganization Plan of the Company’s Sun World International Inc.
subsidiary became effective in 2005, and the Company has no further liabilities related to the
business or operations of Sun World. Subsequent to the effective date of the Chapter 11
reorganization plan of Sun World, the Company’s primary activities are limited to the
development of its water resources and related assets. From the effective date of the
reorganization plan through December 31, 2008, the Company has incurred losses of
approximately $48.6 million and used cash in operations of $19.1 million.
Principles of Consolidation
In December 2003, the Company transferred substantially all of its assets (with the
exception of an office sublease, 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.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the
reporting period. In preparing these financial statements, management has made estimates
with regard to goodwill and other long-lived assets, and deferred tax assets. Actual results
could differ from those estimates.
Revenue Recognition
The Company recognizes crop sale revenue upon shipment and transfer of title to
customers.
45
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock-Based Compensation
General and administrative expenses include $4.4 million, $3.6 million and $2.3 million
of stock based compensation expenses in the fiscal years ended December 31, 2008, 2007 and
2006, respectively.
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.
In December 2004, the FASB issued SFAS No. 123R (revised 2004), “Share-Based
Payment”, which requires all share-based payments to employees, 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. 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 fiscal 2006 included: 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 or modified subsequent to
January 1, 2006, based on the grant date fair value estimated in accordance with the provisions
of SFAS No. 123R.
The Company applies 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. 12,339 options were granted under the Company’s 2003 Management
Equity Incentive Plan in 2006. 7,661 options were granted under the Company’s 2007
Management Equity Incentive Plan in 2007, and 10,000 options were granted in 2008. Options
totaling 20,000 that were granted in 2006 and 2007 were made to one individual, and were
subsequently forfeited. The Options have a ten year term with vesting periods ranging from the
issuance date to three years. The 2006, 2007, and 2008 options had strike prices equal to the
fair market value of the Company’s common stock on the respective grant dates.
As a result of the adoption of SFAS 123R, the Company recorded expense in the
amount of $877,000 in 2006 related to the fair value of options. $831,000 of this amount was
related to options 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 7,
“Income Taxes".
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
46
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
outstanding. Options, deferred stock units, warrants, participating and redeemable preferred
stock and the zero coupon term loan convertible into or exercisable for certain 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 instruments been included, the fully diluted
weighted average shares outstanding would have increased by approximately 2,372,000
shares, 2,208,000 shares and 1,583,000 shares for the years ended December 31, 2008, 2007
and 2006, respectively.
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.
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 December 31,
2008, the Company was invested in a 91-day, $1.5 million deposit, and a six month, $3 million
deposit. Both deposits are held with the Certificate of Deposit Account Registry Service® which
is FDIC insured.
Property, Plant, Equipment and Water Programs
Property, plant, equipment and water programs are stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the assets, generally
ten to forty-five years for land improvements and buildings and five to fifteen years for
machinery and equipment. Leasehold improvements are depreciated over the shorter of the
initial term of the relevant lease agreement or the estimated useful life of the asset.
Water rights and water storage and supply programs are stated at cost. Certain costs
directly attributable to the development of such programs have been capitalized by the
Company. These costs, which are expected to be recovered through future revenues, consist
of direct labor, drilling costs, consulting fees for various engineering, hydrological, environmental
and feasibility studies, and other professional and legal fees.
Impairment of Long-Lived Assets
The Company evaluates its long-lived assets, including intangibles, for potential
impairment when circumstances indicate that the carrying amount of the asset may not be
recoverable. This evaluation is based upon estimated future cash flows. In the event that the
undiscounted cash flows are less than the net book value of the assets, the carrying value of the
assets will be written down to their estimated fair value. As a result of the actions taken by
Metropolitan in the fourth quarter of 2002 as described in Note 1, the Company evaluated the
carrying value of its water program and determined that the asset was not impaired and that the
costs were estimated to be recovered through implementation of the Cadiz Project with other
47
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
government organizations, water agencies and private water users. Beginning in 2004, the
Company has reviewed the valuation of the water program annually and has concluded that the
carrying amount of the program was not impaired. The Company’s analysis could be impacted
by changes in plans related to the Cadiz Project.
CADIZ INC.
Goodwill and Other Assets
As a result of a merger in May 1988 between two companies which eventually became
known as Cadiz Inc., goodwill in the amount of $7,006,000 was recorded. Approximately
$3,193,000 of this amount was amortized prior to the adoption of Statement of Financial
Accounting Standards No. 142, (“SFAS No. 142”) “Goodwill and Other Intangible Assets” on
January 1, 2002. Goodwill is tested for impairment annually in the first quarter of each year, or
if events occur which require an impairment analysis be performed. As a result of the actions
taken by Metropolitan in the fourth quarter of 2002 as described in Note 1, the Company
performed an impairment test of its goodwill and determined that its goodwill was not impaired.
Beginning in 2002, the Company has performed an annual impairment test of goodwill in the
first quarter of each year and has determined that the goodwill was not impaired.
Balance at December 31, 2006
Adjustments
Balance at December 31, 2007
Adjustments
Balance at December 31, 2008
Amounts
(in thousands)
$
$
3,813
-
3,813
-
3,813
Deferred loan costs represent costs incurred to obtain debt financing. Such costs are
amortized over the life of the related loan. At December 31, 2008, the deferred loan fees relate
to the zero coupon secured convertible term loan with Lampe Conway & Company LLC
(“Lampe Conway”), as described in Note 6.
Income Taxes
Income taxes are provided for using an asset and liability approach which requires the
recognition of deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial statement and tax bases of assets and liabilities at
the applicable enacted tax rates. A valuation allowance is provided when it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Effective January 1, 2007, the Company adopted FIN 48 “Accounting for Uncertainty in
Income Taxes.” The adoption of FIN 48 did not have a significant impact on the financial
statements of the Company. In connection with the adoption of FIN 48, the Company elected to
classify income tax penalties and interest as general and administrative and interest expenses,
respectively. See Note 7, “Income Taxes”.
48
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Financial Instruments
Financial assets with carrying values approximating fair value include cash and cash
equivalents and accounts receivable. Financial liabilities with carrying values approximating fair
value include accounts payable and accrued liabilities due to their short-term nature. 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.
Supplemental Cash Flow Information
Cash interest payments due on the ING loan during 2006 were credited against a $2.4
million prepaid interest account that had been established for this purpose. No cash payments
are due on the loan with Lampe Conway prior to the June 29, 2011 final maturity date.
Cash payments for income taxes were $6,400, $7,300 and $128,200 in the years ended
December 31, 2008, 2007, and 2006, respectively.
Recent Accounting Pronouncements
Effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value
Measurements (“SFAS 157”). In February 2008, the FASB issued FASB Staff Position No. FAS
157-2, Effective Date of FASB Statement No. 157, which provides a one-year deferral of the
effective date of SFAS 157 for non-financial assets and non-financial liabilities, except for those
that are recognized or disclosed in the financial statements at fair value at least annually.
Therefore, the Company has adopted the provisions of SFAS 157 only with respect to financial
assets and liabilities, as well as any other assets and liabilities carried at fair value. SFAS 157
defines fair value, establishes a framework for measuring fair value under generally accepted
accounting principles and enhances disclosures about fair value measurements. Fair value is
defined under SFAS 157 as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date.
Valuation techniques used to measure fair value under SFAS 157 must maximize the use of
observable inputs and minimize the use of unobservable inputs. The standard 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.
• Level 1 - Quoted prices in active markets for identical assets or liabilities.
• 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.
• 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.
The adoption of SFAS 157 did not have a material impact on our consolidated financial
statements.
49
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In February 2007, the FASB released Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of
FASB Statement No. 115” (“SFAS 159”). SFAS 159 permits entities to choose to measure
certain financial assets and liabilities at fair value and is effective for the first fiscal year
beginning after November 15, 2007. The Company adopted SFAS 159 on January 1, 2008, as
required. The adoption of SFAS 159 has no impact on the Company’s consolidated financial
statements.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business Combinations” ("SFAS 141(R)"), which establishes principles
and requirements for how the acquirer shall recognize and measure in its financial statements
the identifiable assets acquired, liabilities assumed, any noncontrolling interest in the acquiree
and goodwill acquired in a business combination. This statement 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 SFAS 141(R) has
no impact on the Company’s financial position and results of operations.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an Amendment of
ARB No. 51” ("SFAS 160"), which establishes and expands accounting and reporting standards
for minority interests, which will be recharacterized as noncontrolling interests, in a subsidiary
and the deconsolidation of a subsidiary. SFAS 160 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. This statement is effective for fiscal years beginning
on or after December 15, 2008. The adoption of SFAS 160 has no impact on the Company’s
financial position and results of operations.
In May 2008, the FASB issued FSP Accounting Principles Board Opinion (“APB”) No.
14-1, “Accounting for Convertible Deb Instruments That May be Settled in Cash Upon
Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). Under FSP APB 14-1, an
issuer must 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
Company expects to adopt FSP APB 14-1 during the first quarter of 2009. The Company
believes that FSP APB 14-1 will have no material impact on the financial statements.
50
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – PROPERTY, PLANT, EQUIPMENT AND WATER PROGRAMS
Property, plant, equipment and water programs consist of the following (dollars in
thousands):
CADIZ INC.
Land and land improvements
Water programs
Buildings
Leasehold improvements
Furniture and fixtures
Machinery and equipment
Construction in progress
Less accumulated depreciation
$
December 31,
2008
2007
$
21,998
14,274
1,161
570
407
854
-
39,264
(3,480)
21,998
14,274
1,161
570
334
807
27
39,171
(3,139)
$
35,784
$
36,032
Depreciation expense during the years ended December 31, 2008, 2007 and 2006 was
approximately $341,000, $261,000 and $154,000 respectively.
NOTE 4 – OTHER ASSETS
Other assets consist of the following (dollars in thousands):
Deferred loan costs, net
Prepaid rent
Security deposits
December 31,
2008
2007
$
$
244
226
258
728
$
$
320
-
250
570
Deferred loan costs consist of legal and other fees incurred to obtain debt financing.
Amortization of deferred loan costs was approximately $77,000, $62,000 and $40,000 in 2008,
2007 and 2006, respectively. Prepaid rent consists of rental and other fees incurred to obtain
the right-of-way for the Cadiz Project water conveyance pipeline, as discussed in Note 1.
Amortization of prepaid rent was approximately $64,400 in 2008.
51
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consist of the following (dollars in thousands):
CADIZ INC.
Payroll, bonus, and benefits
Consulting and legal expenses
Income and other taxes
Deferred rent
Other accrued expenses
NOTE 6 – LONG-TERM DEBT
December 31,
2008
2007
$
$
170
77
233
189
106
775
$
$
24
102
221
224
173
744
At December 31, 2008 and 2007, the carrying amount of the Company’s outstanding
debt is summarized as follows (dollars in thousands):
Zero coupon secured convertible term loan due
June 29, 2011. Interest accruing at 5% per
annum until June 29, 2009 and at 6% thereafter
$
Other loans
Debt discount
Less current portion
December 31,
2008
2007
$
41,276
13
(7,305 )
33,984
9
39,244
22
(9,605 )
29,661
9
$
33,975
$
29,652
Pursuant to the Company’s loan agreements, annual maturities of long-term debt
outstanding on December 31, 2008, are as follows:
Year
2009
2010
2011
2012
2013
$
000’s
9
4
41,276
-
-
41,289
$
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
52
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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”).
Under the terms of the loan, interest accrues at a 5% annual rate for the first 3 years and
6% thereafter, calculated on the basis of a 360 day year and actual days elapsed. The entire
amount of accrued interest is due at the final maturity of the loan in June, 2011. The term loan
is collateralized by substantially all of the assets of the Company, which contains
representations, warranties and covenants that are typical for agreements of this type, including
restrictions that would limit the Company’s ability to incur additional indebtedness, incur liens,
pay dividends or make restricted payments, dispose of assets, make investments and merge or
consolidate with another person. However, there are no financial maintenance covenants and
no restrictions on the Company’s ability to issue additional common stock to fund future working
capital needs.
At the lender’s option, principal plus accrued interest is convertible into the Company’s
$0.01 par value common stock. The loan is divided into two tranches: the $10 million Tranche A
is convertible at $18.15 per share, and the $26.4 million Tranche B is convertible at $23.10 per
share. A maximum of 2,221,909 shares are issuable pursuant to these conversion rights, with
this maximum number applicable if the loan is converted on the final maturity date. The
Company has more than sufficient authorized common shares available for this purpose and
has filed a registration statement on Form S-3 covering the resale of all the securities issuable
upon conversion of the loan.
In the event of a change in control, the conversion prices are adjusted downward by a
discount that declines over time such that, under a change in control scenario, both the Tranche
A and Tranche B conversion prices are initially $16.50 per share and increase in a linear
manner over time to the full $18.15 Tranche A conversion price and $23.10 Tranche B
conversion price on the final maturity date. In no event does the maximum number of shares
issuable to lenders pursuant to these revised conversion formulas exceed the 2,221,909 shares
that would be issued to lenders pursuant to a conversion in full on the final maturity date in the
absence of a change in control.
Each of the loan tranches can be prepaid if the price of the Company’s stock on the
NASDAQ Global Market exceeds the conversion price of the tranche by 40% for 20 consecutive
trading days in a 30 day trading period or if the Company obtains a certified environmental
impact report for the Cadiz groundwater storage and dry year supply program, a pipeline right-
of-way and permits for pipeline construction and financing commitments sufficient to construct
the project.
The Company has analyzed all of the above provisions of the convertible loan and
related agreements for embedded derivatives under FASB Statement No. 133, Accounting for
Derivative Instruments and Hedging Activities and related Emerging Issues Task Force (EITF)
interpretations and SEC rules. The Company concluded that certain provisions of the
convertible loan agreement, which were in effect prior to the first amendment date, may be
deemed to be derivatives for purposes of the application of FASB Statement No. 133 and EITF
53
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
00-19: Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock. Therefore, in accordance with FASB Statement No. 133, these
embedded instruments were bifurcated from the host debt instrument and classified as a liability
in the Company’s financial statements. The Company prepared valuations for each of the
deemed derivatives using a Black-Scholes option pricing model and recorded a liability of
approximately $12.2 million on the June 30, 2006 loan funding date, with an offsetting discount
to the convertible term loan.
On June 30, 2006, the derivative liability was classified and recorded as part of long term
debt in the balance sheet. The debt discount will be amortized to interest expense over the life
of the loan using the effective interest amortization method. The principal valuation
assumptions are as follows:
Loan balance available for conversion:
Expected term:
Cadiz common share price:
Volatility:
Risk-free Interest Rate:
Change in control probability:
$36.4 million
5 years
$17.01
46%
5.18%
10%
On September 29, 2006, the terms of the loan were amended, and it was determined
that bifurcation of the embedded equity conversion option is no longer required. The derivative
liability was adjusted to fair value on the amendment date, and the $2,919,000 increase in fair
value was recorded as an “Other Expense” item in the Consolidated Statement of Operations.
The $15.2 million fair value of the derivative liability was then transferred to the Additional Paid-
in Capital component of Stockholder’s Equity.
The Company incurred $408,000 of outside legal expenses related to the negotiation
and documentation of the loan, which will be amortized over the life of the loan.
The proceeds of the Lampe Conway Loan were applied to repay in full the Company’s
term loan facility with ING on June 29, 2006. As a result, ING retained the $762,000 remaining
balance of the prepaid interest credit account, and the write-off of this asset was reflected in the
“Other Expense” caption of the Statement of Operations. The write-off of $106,000 of
unamortized debt issuance costs related to the ING loan was also reflected under “Other
Expense”.
At December 31, 2008, the Company was in compliance with its debt covenants under
the Lampe Conway Loan.
54
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – INCOME TAXES
Deferred taxes are recorded based upon differences between the financial statement
and tax bases of assets and liabilities and available carryforwards. Temporary differences and
carryforwards which gave rise to a significant portion of deferred tax assets and liabilities as of
December 31, 2008 and 2007, are as follows (in thousands):
CADIZ INC.
Deferred tax assets:
Net operating losses
Fixed asset basis difference
Contributions carryover
Deferred compensation
Accrued liabilities
Total deferred tax assets
December 31,
2008
2007
$
$
35,303
7,312
1
3,603
108
32,345
7,484
3
2,150
198
46,400
42,180
Valuation allowance for deferred tax assets
(46,400)
(42,180)
Net deferred tax asset
$
-
$
-
The valuation allowance increased $4,220,000 and $7,979,000 in 2008 and 2007,
respectively, due to an increase in the net operating loss category of deferred tax assets. The
change in deferred tax assets resulted from current year net operating losses, expiration of prior
year loss carryovers, and new annual limitation amounts.
As of December 31, 2008, the Company had net operating loss (NOL) carryforwards of
approximately $93.6 million for federal income tax purposes and $39.3 million for California
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.
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 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.
55
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
As of the January 1, 2007, adoption of FIN 48, the Company possessed unrecognized
tax benefits totaling approximately $3.3 million. A schedule of changes for the 24 month ended
December 31, 2008 is shown below:
CADIZ INC.
Balance at January 1, 2007
Additions or reductions for tax positions of prior years
Additions or reductions for tax positions of current year
Changes related to current year settlements
Changes due to expirations of the statute of limitations
Balance at December 31, 2007
Additions or reductions for tax positions of prior years
Additions or reductions for tax positions of current year
Changes related to current year settlements
Changes due to expirations of the statute of limitations
Amounts
(in millions)
$
3.3
-
-
-
-
3.3
-
-
-
-
Balance at December 31, 2008
$
3.3
None of these tax benefits, 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 December 31, 2008, the Company had accrued a total of $200,000 for state
taxes, interest and penalties related to income tax positions in prior returns. In connection with
the adoption of FIN 48, the Company elected to classify income tax penalties and interest as
general and administrative and interest expenses, respectively. For the twelve months ended
December 31, 2008, general and administrative and interest expenses included approximately
$0 of income tax penalties.
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.
A reconciliation of the income tax benefit to the statutory federal income tax rate is as
follows (dollars in thousands):
56
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CADIZ INC.
Year Ended December 31,
2007
2008
2006
Expected federal income tax benefit at 34%
Loss with no tax benefit provided
State income tax
Stock Options
Losses utilized against unconsolidated subsidiary
taxable income
Non-deductible expenses and other
$
$
(5,379)
4,492
6
86
-
801
$
(4,638)
3,983
4
-
-
655
(4,700)
3,426
6
(21)
-
1,295
Income tax expense
$
6
$
4
$
6
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.
NOTE 8 – EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan for its salaried employees. The Company matches
100% of the first three percent of annual base salary and 50% of the next two percent of annual
base salary contributed by an employee to the plan. The Company contributed approximately
$47,000, $38,000, and $20,000 to the plans for fiscal years 2008, 2007 and 2006, respectively.
NOTE 9 – PREFERRED AND COMMON STOCK
Series F Convertible Preferred Stock
On December 15, 2003, the Company issued 100,000 shares of Series F Convertible
Preferred Stock in conjunction with the extension of the Company’s senior term loan maturity
date. The 100,000 preferred shares were initially convertible into 1,728,955 shares of common
stock of the Company. The estimated value of the Series F Preferred Stock was recorded as a
debt discount and was amortized over the initial term of the senior term loans through March 31,
2005.
On November 30, 2004, the senior term loans were amended. 99,000 shares of the
Series F Preferred Stock were converted into 1,711,665 shares of common stock of the
Company, and the remaining debt discount of $1.4 million was written off. In June 2007, ING
elected to covert the remaining 1,000 preferred shares into 17,289 shares of the Company’s
common stock, and the Company subsequently filed a Certification of Elimination of Series F
Convertible Preferred Stock with the State of Delaware. As a result, no Series F Preferred
Stock was issued or outstanding on December 31, 2008.
57
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Common Stock and Warrants
On November 30, 2004, the Company completed a private placement of 400,000 Units
at the price of $60.00 per Unit. 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, commencing 180 days from the date of issuance, one (1) share of common stock
at an exercise price of $15.00 per share. Each warrant had a term of three (3) years. In
September 2006, certain warrant holders exercised their right to purchase 70,000 common
shares. In 2007, the Company exercised its right to terminate the remaining warrants on March
2, 2007, subject to a 30 day notice period. In response, the remaining warrant holders
exercised their right to purchase 335,440 shares of the Company’s common stock during the
notice period. Following this exercise, no warrants from this 2004 private placement remain
outstanding.
On October 1, 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.
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.
As discussed in Note 6, principal and accrued interest on the Lampe Conway Loan is
convertible into common shares of the Company at the Lender’s option. The terms of the loan
include optional prepayment provisions that could result in an early conversion of the loan under
certain circumstances, and a preferred conversion formula is provided upon a change in control
of the Company.
NOTE 10 – STOCK-BASED COMPENSATION PLANS AND WARRANTS
The Company has issued options pursuant to its 2003 and 2007 Management Equity
Incentive Plans. The Company also has granted stock awards pursuant to its 2003
Management Equity Incentive Plan, 2007 Management Equity Incentive Plan and Outside
Director Compensation Plan, as described below.
58
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2003 Management Equity Incentive Plan
In December 2003, concurrently with the completion of the Company’s then current
financing arrangements with ING, the Company’s board of directors authorized the adoption of a
Management Equity Incentive Plan (the “Incentive Plan”). Under the Incentive Plan, a total of
1,472,051 shares of common stock and common stock options were granted to key personnel.
The Board formed allocation committees to direct the initial allocation of 717,373 of these
shares and a subsequent allocation of 377,339 shares of common stock and 377,339 options to
purchase common stock. All the stock and options were granted prior to December 31, 2006,
and all vesting conditions were satisfied prior to December 31, 2007.
Outside Director Compensation Plan
The Cadiz Inc. Outside Director Compensation Plan was approved by Cadiz
shareholders in November 2006. Under the plan, each outside director receives $30,000 of
cash compensation and receives a deferred stock award consisting of shares of the Company’s
common stock with a value equal to $20,000 on June 30th of each year. The award accrues on
a quarterly basis, with $7,500 of cash compensation and $5,000 of stock earned for each fiscal
quarter in which a director serves. The deferred stock award vests automatically on the January
31st which first follows the award date.
2007 Management Equity Incentive Plan
The 2007 Management Equity Incentive Plan was approved by stockholders at the June
15, 2007 Annual Meeting. The plan provides for the grant and issuance of up to 1,050,000
shares and options to the Company’s employees and consultants. The plan became effective
when the Company filed a registration statement on Form S-8 on July 25, 2007, and grants of
950,000 shares of common stock and options to purchase 7,661 shares of common stock
became effective on that date. Options to purchase 10,000 shares of common stock were
granted in January 2008. As discussed below, all grants are subject to vesting conditions, and
certain grants are subject to additional market conditions.
Stock Options Issued under the 2003 and 2007 Management Equity Incentive Plans
The 2003 Management Equity Incentive Plan provides for the granting of 377,339
options for the purchase of one share of common stock. Options issued under the Management
Equity Incentive 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 had
strike prices that were below the fair market value of the Company’s common stock on the date
of grant. All options have been granted to officers, employees and consultants of the Company.
365,000 options were granted under the plan during 2005, and the remaining 12,339 options
were granted in 2006.
The Company granted options to purchase 7,661 common shares at a price of $20.00
per share under the 2007 Management Equity Incentive Plan on July 25, 2007, and options to
purchase 10,000 common shares at a price of $18.99 on January 9, 2008. The options have
strike prices that were slightly above the fair market value of the Company’s common stock on
the date that the grant became effective. The options have a ten year term with vesting periods
59
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ranging from issuance date to two years. In August 2008, unexercised options to purchase
20,000 shares were forfeited, and previously recognized expenses of $66,000 related to the
unvested portion of these awards was credited against stock based compensation expense in
the current year. Stock compensation expense related to these awards that was recognized in
prior periods was reversed in the current year. 7,661 of the forfeited options are available for
future awards under the terms of the 2007 Management Equity Incentive Program.
The fair value of each option was estimated on the date of grant using the Black Scholes
option pricing model based on the following weighted average assumptions:
Risk free interest rate
Expected life
Expected volatility
Expected dividend yield
Weighted average vesting period
4.21%
9.5 years
46%
0.0%
0.8 years
The risk free interest rate was assumed to be equal to the yield of a U.S. Treasury bond
of comparable maturity, as published in the Federal Reserve Statistical Release for the relevant
date. The expected life estimate is based on an analysis of the employees receiving option
grants and the expected behavior of each employee. The expected volatility was derived from
an analysis of the historical volatility of the trading price per share of the Company’s common
stock on the NASDAQ Global Market. The Company does not anticipate that it will pay
dividends to common shareholders in the future, and the weighted average vesting period is
based on the option vesting schedule, assuming no options are forfeit prior to the initial vesting
date.
The Company recognized stock option related compensation costs of $82,000 and
$180,000 in fiscal 2008 and 2007, respectively, relating to these options. The remaining
$35,000 of unamortized expense was recognized in 2008. No stock options were exercised
during fiscal 2008. Options to purchase 10,000 shares were exercised in 2007.
A summary of option activity under the plans as of December 31, 2008, and changes
during the current fiscal year is presented below:
Options
Shares
Weighted-
Average
Exercise
Price
Average
Remaining
Contractual
Term
Intrinsic
Value
($000’s)
Aggregate
Outstanding January 1, 2008
Granted
Exercised
Forfeited or expired
Outstanding at December 31, 2008
Exercisable at December 31, 2008
375,000
10,000
-
(20,000 )
365,000
365,000
$
$
$
$
13.06
18.99
-
-
12.85
12.85
7.5
7.3
-
-
6.4
6.4
$
$
$
3,970
112
-
(197 )
3,885
3,885
60
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The weighted-average grant-date fair value of options granted during the years ended
December 31, 2008, 2007 and 2006 were $11.18, $9.43 and $10.08 per share, respectively.
The following table summarizes stock option activity for the periods noted.
CADIZ INC.
Amount
Weighted-
Average
Exercise Price
Outstanding at December 31, 2006
Granted
Expired or canceled
Exercised
Outstanding at December 31, 2007
Granted
Expired or canceled
Exercised
377,339
7,661
-
(10,000 )
375,000
10,000
(20,000 )
-
$
$
$
$
$
$
$
Outstanding at December 31, 2008
365,000 (a)
$
12.95
20.00
-
13.95
13.06
18.99
20.00
-
12.85
Options exercisable at December 31, 2008
365,000
$
12.85
Weighted-average years of remaining
contractual life of options outstanding at
December 31, 2008
6.4
(a)
Exercise prices vary from $12.00 to $18.99, and expiration dates vary from May 2015 to
December 2016.
Stock Awards to Directors, Officer, Consultants and Employees
The Company has also granted stock awards pursuant to its 2003 and 2007
Management Equity Incentive Plans and its Outside Director Compensation Plan.
The 2003 Management Equity Incentive Plan provided for the granting of 1,094,712
shares of common stock in May 2005, the 2007 Management Equity Incentive Plan provides for
the granting of up to 1,050,000 shares of stock and stock options, and the Outside Director
Compensation Plan provides for the granting of up to 50,000 shares. Compensation cost for
stock granted to employees and directors is measured at the quoted market price of the
Company's stock on the date of grant.
All of the shares issuable under the 2003 Management Equity Incentive Plan were
awarded in May 2005. At that time, 717,373 initial allocation shares and 377,339 subsequent
allocation shares were awarded. 604,029 shares were issued on the award date, 364,904
shares were issued in December 2005, and the remaining 125,779 shares were issued in
December 2006. On December 31, 2006, no additional shares were issuable under the 2003
Management Equity Incentive Plan.
61
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
A grant of 950,000 shares under the 2007 Management Equity Incentive Plan became
effective on July 25, 2007. The grant consists of three separate awards. Two of the awards are
subject to market conditions.
CADIZ INC.
− A 150,000 share award that vests in three equal installments on January 1, 2008,
January 1, 2009 and January 1, 2010.
− A 400,000 share award that is available if the trading price of the Company’s stock is
at least $28 per share for 10 trading days within any period of 30 consecutive trading
days on or before March 12, 2009. This award would vest in four equal installments
on January 1, 2008, January 1, 2009, January 1, 2010 and January 1, 2011.
− A 400,000 share award that is available if the trading price of the Company’s stock is
at least $35 per share for 10 trading days within any period of 30 consecutive trading
days on or before March 12, 2009. This award would also vest in four equal
installments on January 1, 2008, January 1, 2009, January 1, 2010 and January 1,
2011.
The initial Outside Director Compensation Plan award was made on November 14, 2006
and included 10,416 shares for service rendered during the 12 month service period ended
June 30, 2004 and 2005 and 4,285 shares for services rendered during the 12 month service
period ended June 30, 2006. 10,416 shares were issued immediately upon shareholder
approval in November 2006, and the remaining 4,285 shares vested and were issued in
January 2007. A 4,599 share award for service during the plan year ended June 30, 2007
became effective on that date, and this award vested on January 31, 2008. A 7,206 share
award for service during the plan year ended June 30, 2008 became effective on that date, and
this award will vest on January 31, 2009.
The compensation cost of stock grants without market conditions is measured at the
quoted market price of the Company’s stock at 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 using the following weighted average assumptions:
Risk free interest rate
Current stock price
Expected volatility
Expected dividend yield
Weighted average vesting period
4.74%
$19.74
38.0%
0.0%
2.0 years
The risk free interest rate was assumed to be equal to the yield of a U.S. Treasury bond
of comparable maturity, as published in the Federal Reserve Statistical Release for the relevant
date. The current stock price is the closing price of the Company’s common stock quoted on
the NASDAQ Global Market on the grant date. The expected volatility was derived from an
analysis of the historical volatility of the trading price per share of the Company’s common stock
on the NASDAQ Global Market. The Company does not anticipate that it will pay dividends in
the future.
62
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
latter of the derived service period and the scheduled vesting dates for each grant.
The accompanying consolidated statements include approximately $4,276,000,
$3,429,000, and $1,383,000 of stock based compensation expense related to these stock
awards in the fiscal year ended December 31, 2008, 2007 and 2006, respectively. On
December 31, 2008, the unamortized compensation expense relating to these stock awards
was $2,063,188.
A summary of stock awards activity under the plans during the fiscal year ended
December 31, 2008 and 2007 is presented below:
Nonvested at December 31, 2006
Granted
Forfeited or canceled
Vested
Nonvested at December 31, 2007
Granted
Forfeited or canceled
Vested
Weighted-
Average
Grant-date
Fair Value
($000’s)
82
9,620
-
(82)
9,620
120
-
(1,090)
Shares
$
$
4,285
954,599
-
(4,285)
954,599
7,026
-
(54,599)
Nonvested at December 31, 2008
907,026
$
8,650
Stock Purchase Warrants Issued to Non-Employees
The Company accounts for equity securities issued to non-employees in accordance
with the provisions of SFAS 123 and Emerging Issues Task Force 96-18. On November 30,
2004, the Company completed a private placement of 400,000 units, each Unit consisting of five
(5) shares of the Company’s common stock and one (1) common stock purchase warrant. Each
of the 400,000 warrants entitle the holder to purchase one (1) share of common stock at an
exercise price of $15.00 per share. An additional 5,440 warrants were issued to an individual
who assisted the company in identifying participants in the November 30, 2004 private
placement and elected to receive a commission for the services in stock rather than cash. Each
warrant had a term of three (3) years and was callable at the Company’s option.
During 2006, certain warrant holders exercised their rights to purchase 70,000 shares,
and the Company received $1,050,000 from the sale of that common stock. In 2007, the
Company exercised a right to terminate the remaining warrants on March 2, 2007, subject to a
30 day notice period. In response, the remaining warrant holders exercised their rights to
63
CADIZ INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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 this 2004 private placement 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 December 31, 2008.
NOTE 11 – SEGMENT INFORMATION
With Sun World’s 2003 filing of voluntary petitions for relief under Chapter 11 of the
bankruptcy code as further described in Note 1, the primary business of the Company is to
acquire and develop land and water resources. As a result, the Company’s financial results are
reported in a single segment.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
The Company leases equipment and office facilities under operating leases that expire
through 2012. Aggregate rental expense under all operating leases was approximately
$236,000, $140,000 and $116,000 in the years ended December 31, 2008, 2007 and 2006,
respectively. At December 31, 2008, the future minimum rental commitments under existing
non-cancelable operating leases are as follows:
Year
2009
2010
2011
2012
$
000’s
365
356
210
138
$
1,069
In the normal course of its agricultural operations, the Company handles, stores,
transports and dispenses products identified as hazardous materials. Regulatory agencies
periodically conduct inspections and, currently, there are no pending claims with respect to
hazardous materials.
64
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company is involved in other legal and administrative proceedings and claims. In
the opinion of management, the ultimate outcome of each proceeding or all such proceedings
combined will not have a material adverse impact on the Company's financial statements.
CADIZ INC.
NOTE 13 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands except per share data)
March 31,
2008
June 30,
2008
Quarter Ended
September 30, December 31,
2008
2008
Revenues
Operating loss
Net loss applicable to common stock
Basic and diluted
net loss per common share
$
$
$
17
(4,008)
(4,979)
$
16
(2,641)
(3,698)
$
247
(2,381)
(3,486)
712
(2,571)
(3,746)
(0.42)
$
(0.31)
$
(0.29)
$
(0.30)
March 31,
2007
June 30,
2007
Quarter Ended
September 30, December 31,
2007
2007
Revenues
Operating loss
Net loss applicable to common stock
Basic and diluted
net loss per common share
$
$
$
352
(1,808)
(2,576)
$
5
(1,390)
(2,158)
$
6
(3,399)
(4,218)
63
(3,792)
(4,681)
(0.22)
$
(0.18)
$
(0.35)
$
(0.40)
NOTE 14 – FAIR VALUE MEASUREMENTS
The following table presents information about our assets and liabilities that are
measured at fair value on a recurring basis as of December 31, 2008, 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. We consider 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.
(in thousands)
Level 1
Level 2
Level 3
Total
Investments at Fair Value as of December 31, 2008
Certificates of Deposit
$
4,500 $
Total investments at fair value $
4,500 $
- $
- $
- $
- $
4,500
4,500
65
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 – SUBSEQUENT EVENT
On February 11, 2009, the Company and Metropolitan agreed to settle their differences
and dismissed all outstanding claims remaining against each other in a filing with the Superior
Court of Los Angeles.
CADIZ INC.
66
SCHEDULE 1 – VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 2008, 2007 and 2006 ($ in thousands)
Year ended
December 31, 2008
Balance at
Beginning Costs and
Additions Charged to
Other
Balance
at End
of Period
Expenses Accounts Deductions of Period
Tax valuation allowance
$
42,180
$
4,220
$
-
$
-
$
46,400
CADIZ INC.
Year ended
December 31, 2007
Tax valuation allowance
$
34,201
$
7,979
$
-
$
-
$
42,180
Year ended
December 31, 2006
Tax valuation allowance
$
31,614
$
2,587
$
-
$
-
$
34,201
67
CADIZ INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized.
CADIZ INC.
By:
/s/ Keith Brackpool
Keith Brackpool,
Chairman and Chief Executive Officer
Date: March 11, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has
been signed by the following persons in the capacities and on the dates indicated.
Date
March 11, 2009
March 11, 2009
March 11, 2009
March 11, 2009
March 11, 2009
March 11, 2009
March 11, 2009
March 11, 2009
Name and Position
/s/ Keith Brackpool
Keith Brackpool, Chairman and
Chief Executive Officer
(Principal Executive Officer)
/s/ Timothy J. Shaheen
Timothy J. Shaheen, Chief Financial Officer
(Principal Financial and Accounting Officer)
/s/ Stephen J. Duffy
Stephen J. Duffy, Director
/s/ Geoffrey Grant
Geoffrey Grant, Director
/s/ Winston H. Hickox
Winston H. Hickox, Director
/s/ Murray H. Hutchison
Murray H. Hutchison, Director
/s/ Raymond J. Pacini
Raymond J. Pacini, Director
/s/ Stephen E. Courter
Stephen E. Courter, Director
68