Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our future revenue, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by use of the words or phrases “will,” “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “potential,” “believe,” “plan,” “anticipate,” “expect,” “intend,” or similar expressions and variations of such words. Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets related to our business.
The forward-looking statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Important factors which may affect these actual outcomes and results include, without limitation:
● tourism and weather conditions in the areas we serve;
● the impacts of the COVID-19 pandemic;
● the economic, political and social stability of each country in which we conduct or plan to conduct business;
● our relationships with the government entities and other customers we serve;
● regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman;
● our ability to successfully enter new markets; and
● other factors, including those “Risk Factors” set forth under Part II, Item 1A. “Risk Factors” in this Quarterly Report and in our 2019 Annual Report on Form 10-K.
The forward-looking statements in this Quarterly Report speak as of its date. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.
References herein to “we,” “our,” “ours” and “us” refer to Consolidated Water Co. Ltd. and its subsidiaries.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us 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 consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ significantly from such estimates and assumptions.
Certain of our accounting estimates or assumptions constitute “critical accounting estimates” for us because:
● the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
● the impact of the estimates and assumptions on financial condition and results of operations is material.
Our critical accounting estimates relate to the valuations of our (i) goodwill and intangible assets; and (ii) long-lived assets.
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Goodwill and intangible assets
Goodwill represents the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. We evaluate the possible impairment of goodwill annually as part of our reporting process for the fourth quarter of each fiscal year. Management identifies our reporting units, which consist of our retail, bulk, services and manufacturing operations, and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. We determine the fair value of each reporting unit and compare these fair values to the carrying amounts of the reporting units. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded.
For the year ended December 31, 2019 we estimated the fair value of our reporting units by applying the discounted cash flow method, the guideline public company method, and the mergers and acquisitions method.
The discounted cash flow method relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis.
We also estimated the fair value of each of our reporting units for the year ended December 31, 2019 through reference to the guideline companies and the market multiples implied by guideline merger and acquisition transactions.
We weighted the fair values estimated for each of our reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit. The respective weightings we applied to each method as of December 31, 2019 were consistent with those used as of December 31, 2018 and were as follows:
Method
Retail
Bulk
Manufacturing
Discounted cash flow
80
%
80
%
80
%
Guideline public company
10
%
10
%
10
%
Mergers and acquisitions
10
%
10
%
10
%
100
%
100
%
100
%
The fair values we estimated for our retail and bulk reporting units exceeded their carrying amounts by 74% and 58%, respectively, as of December 31, 2019. The assets and liabilities for our services reporting unit (with the exception of our investments in land and rights of way for our Mexico project) consist almost entirely of those for PERC, which was acquired at fair value on October 24, 2019, and therefore we estimated that the fair value of our services reporting unit closely approximated its carrying value at December 31, 2019. Our manufacturing reporting unit consists entirely of Aerex and the remaining 49% ownership interest of Aerex was purchased on January 24, 2020 for $8,500,000. We considered this purchase, the manufacturing reporting unit’s results of operations for the year ended December 31, 2019, the manufacturing reporting unit’s projected results of operations for the year ended December 31, 2020, and the amount by which the estimated fair value of the manufacturing reporting unit exceeded its carrying amount as of December 31, 2018 to determine that it is more likely than not that the fair value of our manufacturing reporting unit exceeded its carrying amount at December 31, 2019.
In February 2016, we acquired our initial 51% ownership interest in Aerex. In connection with this acquisition, we recorded goodwill of $8,035,211. Aerex’s actual results of operations for the six months in 2016 following the acquisition fell significantly short of the projected results that were included in the cash flow projections we utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities. Due to this shortfall in Aerex’s results of operations, we tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the discounted cash flow method. As a result of this impairment testing, we determined that the carrying value of our Aerex goodwill exceeded its fair value and recorded an impairment loss of $(1,750,000) for the three months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211. As part of our annual impairment testing of goodwill
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performed during the fourth quarter, in 2017 we updated our projections for Aerex’s future cash flows, determined that the carrying value of our Aerex goodwill exceeded its fair value, and recorded an impairment loss of $(1,400,000) for the three months ended December 31, 2017 to further reduce the carrying value of this goodwill to $4,885,211.
Approximately 84% and 68% of Aerex’s revenue, and 86% and 68% of Aerex’s gross profit, for the nine months ended September 30, 2020 and the year ended December 31, 2019, respectively, were generated from sales to one customer. In October 2020, this customer verbally informed Aerex that it expects (for inventory management purposes) to suspend its purchases from Aerex following the fourth quarter of 2020 for a period of approximately one year. This customer has verbally informed Aerex that it presently expects to recommence its purchases from Aerex beginning with the first quarter of 2022. However, we can offer no assurances that this customer will recommence its purchases from Aerex at that time. Furthermore, any such future purchases (should they occur) may not generate as much revenue and gross profit as Aerex has historically earned from this customer. We are seeking to replace this anticipated loss in revenue and gross profit for 2020 from this customer by increasing sales of other products that we manufacture to new and existing customers, however, we may not be able to do so.
As a result of this anticipated loss of revenue for Aerex, we updated our projections for our manufacturing reporting unit’s future cash flows. Such projections assume, in part, that Aerex’s major customer will recommence its purchases from Aerex in 2022 but at a reduced aggregate amount, as compared to 2020 and 2019. Based upon these updated projections we tested our manufacturing reporting unit’s goodwill for possible impairment as of September 30, 2020 using the discounted cash flow method. As a result of this impairment testing, we determined that the estimated fair value of our manufacturing reporting unit exceeded its carrying value by approximately 22% as of September 30, 2020. However, we may be required to record an impairment loss in the future to reduce the carrying value of our manufacturing reporting unit’s goodwill should we determine that Aerex’s future net cash inflows will be less than this most current estimate. Any such impairment loss could have a material adverse impact on our consolidated financial condition and results of operations.
In February 2019, we sold CW-Belize. As a result of this sale, CW-Belize has been accounted for as discontinued operations in our consolidated financial statements, and bulk segment goodwill of approximately $380,000 as of December 31, 2018 associated with CW-Belize was reclassified to long-term assets of discontinued operations in our consolidated statements of financial condition and included in the calculation of our gain on sale of discontinued operations of $3.6 million for the nine months ended September 30, 2019.
Long-lived assets
We review the carrying amounts of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the carrying amount and fair value.
On June 29, 2020, our Mexico subsidiary, AdR, received a letter from the State of Baja California (the “State”) terminating AdR’s contract with the State involving the construction and operation of a desalination plant in Rosarito California and accompanying aqueduct to deliver the water produced by this plant to the Mexican public water system. As a result of the cancellation of this contract, we recorded an impairment loss for rights of way acquired for the contract’s proposed aqueduct of $(3.0 million) for the three months ended June 30, 2020, which is reflected in our loss from discontinued operations for the nine months ended September 30, 2020.
Through our former subsidiary, PT Consolidated Water Bali (“CW-Bali”), we built and operated a seawater reverse osmosis plant with a productive capacity of approximately 264,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We recorded operating losses for CW-Bali as the sales volumes for its plant were insufficient to cover its operating costs. In 2017 and 2016 we determined, based upon probability-weighted scenarios for CW-Bali’s future undiscounted cash flows, that the carrying values of CW-Bali’s long-lived assets and our investment in
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CW-Bali were not recoverable. Consequently, we recorded impairment losses of $(1.6 million) and $(2.0 million), in 2017 and 2016, respectively, to reduce the carrying values of these assets to their fair values.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Part I, Item 1. “Financial Statements” of this Quarterly Report and our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2019 (“2019 Form 10-K”) and the information set forth under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K.
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Discontinued Operations – Mexico Project Development
Beginning in 2010, we began the pursuit, through our Netherlands subsidiary, Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), and our Mexico subsidiary, N.S.C. Agua, S.A. de C.V. (“NSC”), of a project (the “Project”) that originally encompassed the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system.
Through a series of transactions that began in 2012, NSC purchased 20.1 hectares of land for approximately $21.1 million on which the proposed Project’s plant was to be constructed.
In November 2015, the State of Baja, California officially commenced the required public tender for the Project, the scope of which the State defined as a first phase to be operational in 2019 consisting of a 50 million gallon per day plant and an aqueduct that connects to the Mexican potable water infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million gallons per day of production capacity. A consortium (the “Consortium”) comprised of NSC, Suez Medio Ambiente México, S.A. de C.V. (“Suez MA”), a subsidiary of SUEZ International, S.A.S., and NuWater S.A.P.I. de C.V. (“Nuwater”) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of the tender process for the Project.
In August 2016, NSC and NuWater incorporated Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”) to pursue completion of the Project and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operation and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation. NSC initially owned 99.6% of the equity of AdR. In February 2018, we acquired the remaining 0.4% ownership in AdR from NuWater.
On August 22, 2016, the Public Private Partnership Agreement for the Project (the “APP Contract”) was executed between AdR, the Comisión Estatal del Agua de Baja California (“CEA”), the Government of Baja California as represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract required AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueduct) with a capacity of up to 100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California and the second phase with a capacity of 50 million gallons per day. The first phase was to be operational within 36 months of commencing construction and the second phase was to be operational by July 2024. The APP Contract further required AdR to operate and maintain the plant and aqueduct for a period of 37 years starting from the commencement of operation of the first phase. At the end of the operating period, ownership of the plant and aqueduct would have been transferred to CEA.
Both the exchange rate for the Mexican peso relative to the dollar and general macroeconomic conditions in Mexico varied since the execution of the APP Contract. These changes adversely impacted the estimated construction, operating and financing costs for the Project. The APP Contract and the APP Law allow for the parties to negotiate (but do not guarantee) modifications to the consideration (i.e. water tariff) under the APP Contract in the event of such significant macroeconomic
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condition changes. In February 2017, AdR submitted proposals to CEA requesting the definition of the mechanism required by the APP Contract to update the consideration under the APP Contract for changes in foreign exchange rates, lending rates and certain laws which have impacted the Project. On June 1, 2018, AdR and CEA executed an amendment to the APP Contract which, among other things, increased the scope of Phase 1 of the Project by including the aqueduct originally designated for Phase 2, and addressed AdR’s concerns regarding the impact on the Project for changes in the exchange rate for the peso relative to the dollar and changes in interest rates that have occurred subsequent to the submission of the Consortium’s bid for the Project. As a result of this amendment to the APP Contract, the final cost of Phase 1 and the related consideration to be charged by AdR under the APP Contract was to be determined based upon the bid submitted by the Consortium, the changes set forth in the amendment to the APP Contract and the economic conditions (e.g. interest rates and currency exchange rates) in effect on the financial closing date for Phase 1.
In February 2018, AdR executed a subscription agreement (the “Subscription Agreement”) for the equity funding required for the Project. The Subscription Agreement called for NSC to retain a minimum of 25% of the equity in AdR. One or more affiliates of Greenfield SPV VII, S.A.P.I. de C.V. (“Greenfield”), a Mexico company managed by an affiliate of a leading U.S. asset manager, would acquire a minimum of 55% of the equity of AdR. The Subscription Agreement also provided Suez MA with the option to purchase 20% of the equity of AdR. If Suez MA did not exercise this option, NSC would retain 35% of the equity of AdR and Greenfield will acquire 65% of the equity of AdR. The Subscription Agreement became effective when the additional conditions precedent related to the Project were met. The aggregate funding to be provided by AdR’s shareholders for the Project, in the form of equity and subordinated shareholder loans, was estimated at approximately 20% of the total cost of Phase 1 of the Project. This Subscription Agreement was scheduled to expire on September 30, 2020. NSC expected to generate a portion of its additional future equity investment in AdR through the sale to AdR of the land it had purchased for the Project.
On June 29, 2020, AdR received a letter (the “Letter”) from the Director General of CEA and the Director General of CESPT terminating the APP Contract. The reasoning provided in the Letter for the decision to terminate the APP Contract is that the Project (a) is not financially feasible due to increases in the construction, operating and financing costs for the Project in addition to negative changes in economic conditions (e.g. interest rates and currency exchange rates); (b) is not sustainable for CEA and CESPT given its financial unfeasibility; (c) puts pressure to increase the rates charged to customers; (d) would force the Government of the State to cover a deficit of CEA and CESPT, thus preventing the State Government from spending on investment programs or social expenditures; and (e) negatively affects the general interest. The Letter requested that AdR provide an inventory of the assets that currently comprise the “Project Works” (as defined in the APP Contract) for the purpose of acknowledging and paying the non-recoverable expenses made by AdR in connection with the Project, with such reimbursement to be calculated in accordance with the terms of the APP Contract. The applicable law requires this list of non-recoverable expenses made by AdR in connection with the Project be submitted to CEA and CESPT within 20 business days from the date of receipt of the Letter. On August 28, 2020, AdR and NSC submitted their list of non-recoverable expenses to CEA and CESPT which was comprised of 51,144,525 United States dollars and an additional 137,333,114 Mexican pesos.
We plan to vigorously pursue all legal remedies and courses of action available under the APP Contract and applicable law (including international treaties and agreements) with respect to any rights we may have upon termination of the APP Contract, including the reimbursement of expenses and investments. However, we cannot provide any assurances that we will be able to obtain reimbursement for any expenses or investments made with respect to the Project.
As a result of the cancellation of the APP Contract, during the three months ended September 30, 2020, we discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project. Accordingly, the assets and liabilities of NSC and AdR, as well as all Project development expenses and the impairment loss these subsidiaries incurred, have been reclassified from the services segment to discontinued operations in the accompanying condensed financial statements as of and for the three months ended September 30, 2020. Our net losses from discontinued operations for the three months ended September 30, 2020 and 2019 of $(377,321) and $(532,710), respectively, consist of legal, accounting, engineering, administrative, consulting and other costs relating to Project development activities and, for 2020, our activities following the cancellation of the APP Contract to pursue reimbursement from the State of Baja California.
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The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended September 30, 2020 as compared to the three months ended September 30, 2019 relates only to our continuing operations.
Consolidated Results
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders for 2020 was $1,812,156 ($0.12 per share on a fully diluted basis), as compared to net income from continuing operations of $2,259,762 ($0.15 per share on a fully diluted basis) for 2019.
Total revenue for 2020 increased to $17,666,257 from $15,889,239 in 2019, as a result of the addition of PERC’s revenue to our services segment and a small increase in the manufacturing segment, while the revenue for our retail and bulk segments decreased from 2019. Gross profit for 2020 was $6,215,636 (35% of total revenue) as compared to $6,708,980 (42% of total revenue) for 2019. For further discussion of revenue and gross profit see the “Results by Segment” discussion and analysis that follows.
General and administrative (“G&A”) expenses on a consolidated basis increased to $4,810,016 for 2020 as compared to $4,279,972 for 2019 due to PERC’s expenses of approximately $728,000 for 2020.
Other income-net, remained relatively consistent at $245,492 for 2020 as compared to $216,896 for 2019.
The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the three months ended September 30, 2020 and we believe the COVID-19 pandemic will continue to adversely impact our results of operations in future periods. See further discussion herein and at “LIQUIDITY AND CAPITAL RESOURCES – Material Commitments, Expenditures and Contingencies – COVID-19 .”
Results by Segment
Retail Segment:
The retail segment incurred a loss from operations of $(961,634) for 2020 compared to a loss from operations of $(165,168) for 2019.
Revenue generated by our retail water operations decreased to $4,993,069 in 2020 from $6,271,220 in 2019 due to an 18% decrease in the volume of water sold. This sales volume decrease is due to the temporary cessation of tourism on Grand Cayman resulting from the closing of all Cayman Islands airports and seaports in March 2020 in response to the COVID-19 pandemic.
Retail segment gross profit decreased to $2,406,168 (48% of retail revenue) for 2020 from $3,325,634 (53% of retail revenue) for 2019 as a result of the revenue decline.
Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business segments. Retail G&A expenses remained relatively consistent at $3,367,802 for 2020 as compared to $3,497,320 for 2019.
Bulk Segment:
The bulk segment contributed $1,278,096 and $1,886,329 to our income from operations for 2020 and 2019, respectively .
Bulk segment revenue was $6,061,475 and $6,449,757 for 2020 and 2019, respectively. The decrease in bulk segment revenue is attributable to a decrease in CW-Bahamas’ revenue of approximately $431,000 for 2020 due to lower energy costs, which correspondingly decreased the energy pass-through component of CW-Bahamas’ rates.
Gross profit for our bulk segment was $1,660,758 (27% of bulk revenue) and $2,180,018 (34% of bulk revenue) for 2020 and 2019, respectively. Gross profit in dollars and as a percentage of revenue decreased in 2020 as compared to 2019
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principally due to the decline in 2020 revenue and increased operating expenses (primarily chemicals and repairs and maintenance costs) incurred for CW-Bahamas of approximately $364,000.
Bulk segment G&A expenses remained relatively consistent at $382,662 for 2020 as compared to $294,189 for 2019.
Services Segment:
The services segment income from from operations of $108,850 and $63,830 for 2020 and 2019, respectively.
Services segment revenue increased to $3,351,935 for 2020 from $95,980 for 2019 due to the addition of $3,240,390 in revenue from PERC as a result of our acquisition of a controlling interest in this company in late October 2019.
Gross profit for the services segment improved to $838,663 (25% of services revenue) in 2020 as a result of the addition of PERC. The services segment generated a gross profit of $64,379 (67% of services revenue) for 2019.
G&A expenses for the services segment increased to $728,829 for 2020 as compared to $549 for 2019 primarily due to the addition of PERC’s G&A expenses.
Manufacturing Segment:
The manufacturing segment contributed $979,324 to our income from operations in 2020 as compared to $651,035 in 2019.
Manufacturing revenue was $3,259,778 and $3,072,282 for 2020 and 2019, respectively. Manufacturing revenue increased from 2019 to 2020 due to a shift in the production mix to higher revenue projects.
Manufacturing gross profit was $1,310,047 (40% of manufacturing revenue) and $1,138,949 (37% of manufacturing revenue) for 2020 and 2019, respectively. The increase in manufacturing gross profit as a percentage of revenue stems from a mix of higher margin projects.
G&A expenses for the manufacturing segment dropped to $330,723 for 2020 as compared to $487,914 for 2019 as a result of a decrease of $125,000 in amortization expenses due to the completion of the amortization of certain intangible assets recorded in connection with the Aerex acquisition.
Approximately 81% and 53% of our manufacturing segment revenue, and 88% and 43% of our manufacturing segment gross profit, for 2020 and 2019, respectively, were generated from sales to one customer. In October 2020, this customer verbally informed Aerex that it expects (for inventory management purposes) to suspend its purchases from Aerex following the fourth quarter of 2020 for a period of approximately one year. This customer has verbally informed Aerex that it presently expects to recommence its purchases from Aerex beginning with the first quarter of 2022. However, we can offer no assurances that this customer will recommence its purchases from Aerex at that time. Furthermore, any such future purchases (should they occur) may not generate as much revenue and gross profit as Aerex has historically earned from this customer. We are seeking to replace this anticipated loss in revenue and gross profit by increasing sales of other products that we manufacture to new and existing customers, however, we may not be able to do so. Consequently, our manufacturing segment revenue and gross profit for 2021 may decline as compared to the two prior years.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Discontinued Operations – Mexico Project Development
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As previously discussed, on June 29, 2020 the State of Baja California cancelled its APP Contract with AdR for the Project. As a result of the cancellation of the APP Contract, during the three months ended September 30, 2020 we discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project. Accordingly, the assets and liabilities of NSC and AdR, as well as all Project development expenses these subsidiaries incurred, have been reclassified to discontinued operations in the accompanying condensed financial statements as of and for the nine months ended September 30, 2020.
Through the date the APP Contract was cancelled, NSC had paid approximately $3.0 million to acquire rights of way for the aqueduct to be constructed for the Project to deliver water to the Mexico public water system. As a result of the cancellation of the APP Contract, we recorded an impairment loss of $(3.0 million) for the three months ended June 30, 2020 for these rights of way. Our net loss from discontinued operations of $(4,448,798) for 2020 consists of this impairment loss and the development expenses incurred for the Project. Our net loss from discontinued operations of $(1,786,873) for 2019 consists of the development expenses incurred for the Project.
In late December 2018, our Board of Directors formally approved the sale of our subsidiary, CW-Belize and on February 14, 2019, we completed the sale (which was effective as of January 1, 2019) of CW-Belize. The gain we realized on the sale of CW-Belize in 2019 of $3,621,170 is reflected in our 2019 consolidated results of operations as gain on sale from discontinued operations.
The following discussion and analysis of our consolidated results of operations and results of operations by segment for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019 relates only to our continuing operations.
Consolidated Results
The net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders for 2020 was $7,644,398 ($0.50 per share on a fully diluted basis). The net income from operations attributable to Consolidated Water Co. Ltd. shareholders was $8,555,448 ($0.57 per share on a fully diluted basis) for 2019.
Total revenue for 2020 increased to $57,479,225 from $51,183,023 in 2019, primarily as a result of the addition of PERC’s revenue to our services segment. Gross profit for 2020 was $21,959,100 (38% of total revenue) as compared to $21,224,032 (41% of total revenue) for 2019. For further discussion of revenue and gross profit see the “Results by Segment” discussion and analysis that follows.
In June 2019, we completed the sales of our CW-Bali assets and its stock for $365,000 and $25,000, respectively. Such sales generated primarily all of the $448,088 gain on asset dispositions for 2019.
G&A expenses on a consolidated basis increased to $14,062,938 for 2020 as compared to $12,389,547 for 2019 due to the addition in 2020 of PERC’s G&A expenses of approximately $2,111,000.
Other income-net, remained relatively consistent at $533,710 for 2020 and $518,031 for 2019.
The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the nine months ended September 30, 2020 and we believe the COVID-19 pandemic will continue to adversely impact our results of operations in future periods. See further discussion herein and at “LIQUIDITY AND CAPITAL RESOURCES – Material Commitments, Expenditures and Contingencies – COVID-19 .”
Results by Segment
Retail Segment:
The retail segment incurred a net loss from operations for 2020 of $(134,644) compared to $1,568,516 to our income from operations for 2019.
Revenue generated by our retail water operations decreased to $18,216,797 in 2020 from $19,941,395 in 2019 due to an 8% decrease in the volume of water sold. This sales volume decrease is due to the temporary cessation of tourism on Grand
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Cayman resulting from the closing of all Cayman Islands airports and seaports in March 2020 in response to the COVID-19 pandemic.
Retail segment gross profit decreased to $9,873,779 (54% of retail revenue) for 2020 from $11,187,447 (56% of retail revenue) for 2019 principally as a result of the drop in revenue.
Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business segments. Retail G&A expenses remained relatively consistent at $10,008,423 for 2020 as compared to $10,020,019 for 2019.
In June 2019, we completed the sales of our CW-Bali assets and its stock for $365,000 and $25,000, respectively. Such sales generated primarily all of the $401,088 gain on asset dispositions for 2019.
Bulk Segment:
The bulk segment contributed $4,525,942 and $5,656,097 to our income from operations for 2020 and 2019, respectively.
Bulk segment revenue was $18,368,156 and $20,502,121 for 2020 and 2019, respectively. OC-Cayman experienced a decline in revenue of approximately $1.3 million for 2020 as a result of the two new contracts (at lower rates) with the Water Authority-Cayman (the “WAC”) for water supplied from (1) the Red Gate and North Sound plants which commenced in February 2019 and (2) the North Side Water Works plant, which commenced in July 2019. CW-Bahamas’ revenue dropped approximately $879,000 for 2020 due to lower energy costs, which correspondingly decreased the energy pass-through component of CW-Bahamas’ rates.
Gross profit for our bulk segment was $5,461,550 (30% of bulk revenue) and $6,509,669 (32% of bulk revenue) for 2020 and 2019, respectively. Gross profit decreased in 2020 as compared to 2019 due to repairs and maintenance expenses for CW-Bahamas for 2020 that exceeded those incurred in 2019 and lower margins earned by OC-Cayman on its new contracts (as compared to its previous contracts) with the WAC.
Bulk segment G&A expenses remained relatively consistent at $935,808 for 2020 as compared to $900,572 for 2019.
Services Segment:
The services segment contributed $415,375 and $85,870 to our income from operations for 2020 and 2019, respectively.
Services segment revenue increased to $9,942,748 for 2020 from $287,349 for 2019 due to the addition of $9,614,892 in revenue from PERC as a result of our acquisition of a contolling interest in this company in late October 2019.
Gross profit for the services segment improved to $2,524,443 (25% of services revenue) in 2020 as a result of the addition of PERC. The services segment generated a gross profit of $88,735 (31% of services revenue) for 2019.
G&A expenses for the services segment increased to $2,112,869 for 2020 as compared to $2,865 for 2019 due to the addition of PERC.
Manufacturing Segment:
The manufacturing segment contributed $3,093,490 to our income from operations in 2020 as compared to $1,972,090 in 2019.
Manufacturing revenue was $10,951,524 and $10,452,158 for 2020 and 2019, respectively. Manufacturing revenue increased from 2019 to 2020 due to a shift in the production mix to higher revenue projects.
Manufacturing gross profit was $4,099,328 (37% of manufacturing revenue) and $3,438,181 (33% of manufacturing revenue) for 2020 and 2019, respectively. The increase in manufacturing gross profit in dollars and as a percentage of revenue stems from a mix of higher margin projects, coupled with overall higher production activity that led to improved plant efficiency.
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G&A expenses for the manufacturing segment dropped to $1,005,838 for 2020 as compared to $1,466,091 for 2019 as a result of a decrease of approximately $389,000 in amortization expenses due to the completion of the amortization of certain intangible assets recorded in connection with the Aerex acquisition.
Approximately 84% and 67% of our manufacturing segment revenue, and 86% and 64% of our manufacturing segment gross profit, for 2020 and 2019, respectively, were generated from sales to one customer. In October 2020, this customer verbally informed Aerex that it expects (for inventory management purposes) to suspend its purchases from Aerex following the fourth quarter of 2020 for a period of approximately one year. This customer has verbally informed Aerex that it presently expects to recommence its purchases from Aerex beginning with the first quarter of 2022. However, we can offer no assurances that this customer will recommence its purchases from Aerex at that time. Furthermore, any such future purchases (should they occur) may not generate as much revenue and gross profit as Aerex has historically earned from this customer. We are seeking to replace this anticipated loss in revenue and gross profit by increasing sales of other products that we manufacture to new and existing customers, however, we may not be able to do so. Consequently, our manufacturing segment revenue and gross profit for 2021 may decline as compared to the two prior years.
FINANCIAL CONDITION
The significant changes in the components of our consolidated balance sheet as of September 30, 2020 as compared to December 31, 2019 (other than the change in our cash and cash equivalents, which is discussed later in “LIQUIDITY AND CAPITAL RESOURCES”) and the reasons for these changes are discussed in the following paragraphs.
Accounts receivable increased by approximately $1.2 million. This net increase reflects an increase in Aerex’s accounts receivable of approximately $1.3 million due to an extension of invoice due dates (unrelated to the COVID-19 pandemic) for Aerex’s largest customer and approximately $595,000 in incremental accounts receivable arising from the addition of PERC.
Prepaid expenses and other current assets increased by approximately $1.4 million due to the prepayment of insurance policies.
Construction in progress decreased by approximately $862,000 primarily due to the completion of the renovation of the North Side Water Works plant on Grand Cayman.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
Our projected liquidity requirements for the balance of 2020 include capital expenditures for our existing operations of approximately $150,000 and approximately $1.3 million for dividends payable. Our liquidity requirements may also include future quarterly dividends if such dividends are declared by our Board. Our dividend payments amounted to approximately $3.9 million for the nine months ended September 30, 2020 and approximately $5.1 million for the year ended December 31, 2019.
As of September 30, 2020, we had cash and cash equivalents of $38.2 million and working capital of $63.8 million. With the possible exception of the liquidity matter relating to CW-Bahamas that is discussed in the paragraphs that follow, we are not presently aware of anything that would lead us to believe that we will not have sufficient liquidity to meet our needs.
CW-Bahamas Liquidity
CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the Water and Sewerage Corporation of The Bahamas (“WSC”) amounted to $18.4 million as of September 30, 2020 and $18.4 million as of December 31, 2019. Approximately 77% of the September 30, 2020 accounts receivable balance was delinquent as of that date. The delay in collecting these accounts receivable has adversely impacted the liquidity of this subsidiary. As of October 31, 2020, CW-Bahamas’ accounts receivable from the WSC totaled approximately $15.1 million.
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Historically, CW-Bahamas has experienced delays in collecting its accounts receivable from the WSC. When these delays occur, we hold discussions and meetings with representatives of the WSC and The Bahamas government, and as a result, payment schedules are developed for WSC’s delinquent accounts receivable. All previous delinquent accounts receivable from the WSC were eventually paid in full. Based upon this payment history, CW-Bahamas has never been required to provide an allowance for doubtful accounts for any of its accounts receivable, despite the periodic accumulation of significant delinquent balances. As of September 30, 2020, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.
We believe the delays we have experienced in collecting CW-Bahamas’ receivables were extended due to the impact of Hurricane Dorian, which devastated the northern Bahamas in September 2019 and the severe economic impact of the COVID-19 pandemic on The Bahamas government’s revenue sources.
If CW-Bahamas continues to be unable to collect a significant portion of its delinquent accounts receivable, one or more of the following events may occur: (i) CW-Bahamas may not have sufficient liquidity to meet its obligations; (ii) we may be required to cease the recognition of revenue on CW-Bahamas’ water supply agreements with the WSC; and (iii) we may be required to provide an allowance for doubtful accounts for CW-Bahamas’ accounts receivable. Any of these events could have a material adverse impact on our consolidated financial condition, results of operations, and cash flows.
Discussion of Cash Flows for the Nine Months Ended September 30, 2020
Our cash and cash equivalents decreased to $38,179,414 as of September 30, 2020 from $42,071,083 as of December 31, 2019.
Cash Flows from Operating Activities
Net cash provided by our operating activities from continuing operations was $11,909,538. This net cash reflects net income generated for the nine months ended September 30, 2020 of $3,837,889 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year; and (ii) changes in the other components of working capital. The more significant of such items and changes in working capital components included depreciation and amortization of $5,562,483, a loss from discontinued operations of $4,448,798, an increase in accounts receivable of $1,290,015 and an increase in prepaid expenses and other current assets (primarily in the bulk segment) of $1,169,195.
Cash Flows from Investing Activities
Net cash used by our investing activities was $10,971,000. In January 2020, we acquired the remaining 49% ownership in Aerex for $8,500,000 in cash. In August 2020, we acquired an additional 10% of PERC for $900,000. Additions to property, plant and equipment and construction in progress used $1,571,450 in cash.
Cash Flows from Financing Activities
Net cash used by our financing activities was $3,872,112, almost all of which related to the payment of dividends.
Material Commitments, Expenditures and Contingencies
COVID-19
The worldwide coronavirus (COVID-19) pandemic, which was formally recognized by the World Health Organization on March 11, 2020, has had a profound negative impact on the economies of the countries in which we operate. Consequently, the COVID-19 pandemic has had, and will continue to have, a material adverse impact on our consolidated financial condition, results of operations, and cash flows.
A discussion of the current effects of the COVID-19 pandemic on each of our operating subsidiaries is provided in the following paragraphs. However, as the worldwide impact of COVID-19 continues to develop and expand, its future effects on our company could differ materially from the information we are providing herein.
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Cayman Water
As preventative measures to combat the possible spread of COVID-19, the Cabinet of the Cayman Islands (“the Cabinet”) closed all Cayman Islands sea ports to international passenger arrivals effective March 13, 2020; and closed all Cayman Islands airports to international passenger arrivals effective March 22, 2020. Effective March 28, 2020, the Cabinet and Cayman Islands law enforcement enacted various ‘stay-at-home’ regulations and curfews, which closed all businesses not deemed essential by the government and required citizens to stay at home unless they were purchasing necessities or engaged in an essential errand. In May 2020, the Cabinet started the phased relaxation of the shelter-in-place regulations and on October 1, 2020, the Cayman Islands reopened its borders for residents or individuals who own property in the Cayman Islands that provide evidence of a negative COVID-19 test performed within three days prior to arrival in the Cayman Islands and agree to remain in quarantine for 14 days after arrival. No date has yet been set for the planned reopening of the Cayman Islands to tourists.
As a result of these measures taken by the Cayman Islands government, tourism in the Cayman Islands has temporarily ceased and economic activity on Grand Cayman has slowed dramatically. The preventative measures taken by the Cayman Islands government in response to the COVID-19 pandemic did not commence until the latter half of March 2020 and thus affected our retail sales volumes for only the last six months of the nine months ended September 30, 2020. Consequently, our retail sales volume for the nine months ended September 30, 2020 declined by only 8% from the same nine month period in 2019. However, the retail sales volume for the three months ended September 30, 2020 was 18% less than that for the three months ended September 30, 2019. We expect that our retail segment revenue and cash flows will continue to be materially adversely impacted until such time as tourism and the economy in the Cayman Islands fully recover from the impact and effects of the COVID-19 pandemic.
During the quarter ended March 31, 2020, the Cayman Islands government requested Cayman Water to temporarily suspend all disconnections for non-payment of its water services to ensure that all residents continued to have access to potable water during the COVID-19 pandemic, and to give customers that experienced financial hardship additional time to make their payments. We complied with this request. We temporarily closed our customer service office on March 30, 2020 to comply with the government’s shelter-in-place regulations and consequently our customers could not pay their bills by visiting our office until it reopened in June 2020. Postal service on Grand Cayman was suspended from late March through April 2020, which prevented us from invoicing our customers in the customary manner and we were required to employ alternative methods (including electronic mail and phone text messaging) to deliver our retail water invoices to our customers. The closure of the post office also inhibited our customers from paying us as they could not mail their payments. As as result of these circumstances, Cayman Water’s total balance of delinquent accounts receivable as of June 30, 2020 increased from historical norms and from March 30, 2020, and consequently we recorded a provision for doubtful accounts of approximately $80,000 for the three months ended June 30, 2020 for uncollectible accounts receivable. In July 2020, Cayman Water reinstituted its disconnection policy, but we expect to agree to payment plans with those delinquent customers we consider credit worthy in lieu of disconnecting their service. During the three months ended September 30, 2020, we reduced our allowance for uncollectible retail accounts receivable by $49,483 due to an improvement in collections .
Cayman Water’s operations have been designated as essential services by the Cayman Islands government. Presently, the day-to-day operations of Cayman Water’s water production facilities and distribution network have not been materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the demand for water in our retail license area. We believe Cayman Water has adequate spare parts and supplies in stock to continue normal operations for the remainder of 2020 and into 2021.
OC-Cayman
Although it operates on Grand Cayman - and therefore is also affected by the preventative measures enacted by government that have been discussed previously - OC-Cayman sells water on a bulk basis to the WAC, which in turn provides this water to areas of Grand Cayman that are more residential, and less tourist related, than the license area served by Cayman Water. The monthly amounts OC-Cayman charges the WAC for water supplied under its water supply agreements consist of fixed amounts that constitute the majority of the amounts charged, and lesser amounts that vary with the volume of water supplied. Therefore, unlike Cayman Water, OC-Cayman’s revenue is not as directly affected by tourism on Grand
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Cayman and, due to the structure of the underlying water supply agreements, is not as acutely sensitive to declines in water demand.
The amount of water provided by OC-Cayman to the WAC for the three months ended September 30, 2020 was 5% less than that provided for the three months ended September 30, 2019 but was 1% more for the nine months ended September 30, 2020 as compared to the nine months ended September 30, 2019. We cannot presently determine to what extent OC-Cayman’s future revenue will be impacted by the COVID-19 pandemic.
OC-Cayman’s operations have been designated as essential services by the Cayman Islands government. Presently, OC-Cayman’s day-to-day operations have not been materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the requirements of our two water supply agreements with the WAC. We believe OC-Cayman has adequate spare parts and supplies in stock to continue normal operations for the remainder of 2020 and into 2021.
CW-Bahamas
The government of The Bahamas enacted Emergency Powers Regulations which became effective March 18, 2020 in an effort to combat the spread of COVID-19. These regulations closed all businesses not deemed essential by the government, encouraged the employees of non-essential businesses to work remotely and imposed 24 hour shelter-in-place curfew on all residents of The Bahamas other than those engaged in essential or pre-approved activities. On March 24, 2020, the government banned all international travel to The Bahamas by closing all airports and seaports. As a result of these measures taken by The Bahamas government, tourism on New Providence Island, where CW-Bahamas operates, has temporarily ceased and economic activity in The Bahamas has slowed dramatically. In May 2020, the Bahamian government relaxed some of the shelter-in-place regulations and in July 2020, the government of The Bahamas enacted a limited reopening of The Bahamas to air travel. However, increased travel restrictions were reimposed shortly thereafter due to an increase in COVID-19 cases. As of November 2020, shelter-in-place regulations have been loosened and commercial and retail operations are permitted to open with limited capacity. Conditions for travel to The Bahamas have also been loosened and individuals that wish to travel to The Bahamas must obtain a health travel visa which will be issued upon receipt of a negative RTPCR COVID-19 test five days in advance of travel; they must submit to a mandatory COVID-19 rapid antigen test five days after arrival in The Bahamas or upon exhibiting symptoms of COVID-19 while in The Bahamas. The Bahamian government has yet to set a date for the reopening of The Bahamas to cruise ship arrivals.
CW-Bahamas sells the water produced by its plants on a bulk basis to the WSC, which in turn provides water to the residences, businesses, and other end users on New Providence. Under the terms of each of its water supply agreements with the WSC, CW-Bahamas charges the WSC a fixed monthly amount, an amount each month that is based upon the amount of water supplied during the month, and pass-through energy charges, therefore CW-Bahamas’ revenue is impacted by changes in water demand and energy prices. To date, the volume of water CW-Bahamas sells to the WSC has not been adversely impacted by the COVID-19 pandemic despite the downturn in economic activity on New Providence that began in April 2020 stemming from the preventative measures taken by the government in March 2020. In addition, the adverse impact of the COVID-19 pandemic on The Bahamas government’s revenue sources may further delay the collection of CW-Bahamas’ delinquent accounts receivable from the WSC.
CW-Bahamas’ operations have been designated as essential services by the government of The Bahamas. Presently, CW-Bahamas’ day-to-day operations have not been materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the requirements of our two water agreements with the WSC. We believe CW-Bahamas has sufficient spare parts and consumables inventories to continue normal operations for the remainder of 2020 and into 2021.
Aerex
Presently, the COVID-19 pandemic has not materially impeded Aerex’s day-to-day operations.
Aerex presently has 15 plant employees. Should a number of these employees become ill or be required to enter quarantine as a result of COVID-19, Aerex could be required to reduce or cease its manufacturing activities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.
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PERC
PERC’s operations are considered essential services by the State of California. Presently, the COVID-19 pandemic has not materially impeded PERC’s day-to-day operations.
Approximately 73% of PERC’s revenue of $9.6 million for the nine months ended September 30, 2020 was generated in California under contracts with government entities. The State of California has publicly acknowledged its on-going financial difficulties as a result of the COVID-19 pandemic, and such difficulties presently, or could in the future, extend to the various counties, municipalities and other government-related entities in California, including PERC’s customers, which could adversely impact PERC’s revenue and the collection of its accounts receivable.
PERC employs state-certified water and wastewater operators to operate various water treatment facilties in California and Arizona. Should a number of these employees become ill or be required to enter quarantine as a result of COVID-19, PERC could have difficulty meeting its contractual and statutory obligations for operating these water treatment facilities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows .
Cayman Water Retail License
We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands government (the “1990 license”) that granted Cayman Water the exclusive right to provide potable water to customers within its licensed service area. Although the 1990 license was not expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as further discussed in the following paragraph. Pursuant to the 1990 license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island: Seven Mile Beach and West Bay. For the three months ended September 30, 2020 and 2019, we generated approximately 28% and 39%, respectively, of our consolidated revenue and 39% and 50%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license. For the nine months ended September 30, 2020 and 2019, we generated approximately 32% and 39%, respectively, of our consolidated revenue and 45% and 53%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.
The 1990 license was originally scheduled to expire in July 2010 but was extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent express extension of the license expired on January 31, 2018. We continue to operate under the terms of the 1990 license, providing water services to the level and quality specified in the 1990 license and in accordance with our understanding of its legal obligations, treating those obligations set forth in the 1990 license as operative notwithstanding the expiration of the express extension. We continue to pay the royalty required under the 1990 license.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for economic regulation of the water utility sector and the negotiations with us for a new retail license from the WAC to OfReg in May 2017. We began license negotiations with OfReg in July 2017 and such negotiations are ongoing. We have been informed during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license.
The Cayman Islands government could seek to grant a third party a license to service some or all of Cayman Water’s present service area. However, as set forth in the 1990 license, “the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence Area without having first offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.”
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We are presently unable to determine what impact the resolution of our retail license negotiations will have on our cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our retail operations and could require us to record an impairment losses to reduce the carrying value of our retail segment assets. Such impairment losses could have a material adverse impact on our consolidated financial condition, results of operation and cash flows.
CW-Bahamas Performance Guarantees
Our contracts to supply water to the WSC from our Blue Hills and Windsor plants require us to guarantee delivery of a minimum quantity of water per week. If WSC requires the water and we do not meet this minimum, we are required to pay the WSC for the difference between the minimum and actual gallons delivered at a per gallon rate equal to the price per gallon that WSC is currently paying us under the contract. The Blue Hills contract expires in 2032 and requires us to deliver 63.0 million gallons of water each week. The Windsor contract expires in 2033 and requires us to deliver 16.8 million gallons of water each week.
Adoption of New Accounting Standards:
None.
Effect of newly issued but not yet effective accounting standards:
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions to the current guidance on contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating the impact of the new guidance on our consolidated financial statements, however the adoption of this standard is not expected to have a material impact on our financial position, results of operations or cash flows.
Dividends
● On January 31, 2020, we paid a dividend of $0.085 to shareholders of record on January 2, 2020.
● On April 30, 2020, we paid a dividend of $0.085 to shareholders of record on April 1, 2020.
● On May 20, 2020, our Board declared a dividend of $0.085 payable on July 31, 2020 to shareholders of record on July 1, 2020.
● On August 18, 2020, our Board declared a dividend of $0.085 payable on October 30, 2020 to shareholders of record on October 1, 2020.
We have paid dividends to owners of our common stock and redeemable preferred stock since we began declaring dividends in 1985. Our payment of any future cash dividends will depend upon our earnings, financial condition, cash flows, capital requirements and other factors our Board of Directors deems relevant in determining the amount and timing of such dividends.
Dividend Reinvestment and Common Stock Purchase Plan
This plan is available to our shareholders, who may reinvest all or a portion of their common stock dividends into shares of common stock at prevailing market prices and may also invest optional cash payments to purchase additional shares at prevailing market prices as part of this plan.
Impact of Inflation
Under the terms of our Cayman Islands license and our water sales agreements in The Bahamas and the British Virgin Islands, our water rates are automatically adjusted for inflation on an annual basis. We, therefore, believe that the impact
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of inflation on our gross profit, measured in consistent dollars, should not be material. However, significant increases in items such as fuel and energy costs could create additional credit risks for us, as our customers’ ability to pay our invoices could be adversely affected by such increases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk from December 31, 2019 to the end of the period covered by this report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.