What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-16 compared with 2021-05-17 · 161 added, 91 removed, 230 unchanged (52% of the section changed)

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● 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;

● the impact of the estimates and assumptions on financial condition and results of operations is material.

● the impact of the estimates and assumptions on our financial condition and results of operations is material.

Our critical accounting estimates relate to the valuations of our (i) goodwill and intangible assets;

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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.

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.

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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 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 86% and 80% of Aerex’s revenue, and 78% and 89% of Aerex’s gross profit, for the three months ended March 31, 2020 and the year ended December 31, 2020, respectively, were generated from sales to one customer.

In October 2020, this customer informed Aerex that, for inventory management purposes, it was suspending its purchases from Aerex following 2020 for a period of approximately one year and Aerex did not generate any revenue from this customer during the three months ended March 31, 2021.

This customer has 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 the anticipated loss in revenue and gross profit 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.

Due to this shortfall in Aerex’s results of operations, we tested our manufacturing reporting unit’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 manufacturing reporting unit’s 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 performed during the fourth quarter, in 2017 we updated our projections for Aerex’s future cash flows, determined that the carrying value of our manufacturing reporting unit’s 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 87% and 86% of Aerex’s revenue, and 91% and 84% of Aerex’s gross profit, for the three and six months ended June 30, 2020, respectively, were generated from sales to one customer.

Approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit, for the year ended December 31, 2020 were generated from sales to this customer.

While Aerex sells various products to this customer, Aerex’s revenue from this customer has historically been derived primarily from one specialized product.

In October 2020, this customer informed Aerex that, for inventory management purposes, it was suspending its purchases of the specialized product from Aerex following 2020 for a period of approximately one year.

This customer informed Aerex at that time that it expected to recommence its purchases of the specialized product from Aerex beginning with the first quarter of 2022.

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.

Based upon these updated projections we tested our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 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 31% as of December 31, 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 our most current expectations.

Any such impairment loss could have a material adverse impact on our consolidated financial condition and results of operations.

Such projections assumed, in part, that Aerex’s major customer would recommence its purchases from Aerex in 2022 but at a reduced aggregate amount, as compared to 2020.

Based upon these updated projections, we tested our manufacturing reporting unit’s goodwill for possible impairment as of September 30, 2020 and December 31, 2020 using the discounted cash flow and guideline public companies methods, with a weighting of 80% and 20% applied to these two methods, respectively.

As a result of these impairment tests, we determined that the estimated fair value of our manufacturing reporting unit exceeded its carrying value by approximately 22% as of September 30, 2020 and 31% as of December 31, 2020.

In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases of the specialized product from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to the amounts it had purchased from Aerex in 2020 and prior years.

Our updated sales estimate for this customer based on this new information is substantially below the sales we anticipated to this customer for 2022 and subsequent years that we used in the discounted cash flow projections we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020.

Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic impacts of the COVID-19 pandemic, which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials and, we believe, also adversely affected the overall financial condition of Aerex’s current and prospective customer base.

Accordingly, in light of this new information from Aerex’s former major customer, and present weak economic conditions that we believe will continue into 2022, we updated our projections of future cash flows for the manufacturing reporting unit and tested its goodwill for possible impairment as of June 30, 2021 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively.

Based upon this testing, we determined that the carrying value of our manufacturing reporting unit exceeded its fair value by $2.9 million, and we recorded an impairment loss to reduce our manufacturing reporting unit’s goodwill by this amount for the three months ended June 30, 2021.

If we determine in the future that Aerex’s future cash inflows will be less than our present expectations, we may be required to record additional impairment losses to reduce the remaining carrying values as of June 30, 2021 of our manufacturing reporting unit’s goodwill of $1,985,211 and the unamortized balance of its intangible assets of $894,444 associated with the acquisition of Aerex.

Any such impairment losses could have a material adverse impact on our consolidated results of operations.

Long-lived assets

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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.

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 approximately ($3.0 million) for the three months ended June 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.

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2020 Form 10-K.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Discontinued Operations – Mexico Project Development

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(“CW-Cooperatief”), and our Mexico subsidiary, N.S.C.

(“NSC”), of a project (the “Project”) that 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.

(“NSC”), of a project (the “Project”) that 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.

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In August 2016, NSC and NuWater incorporated Newco under the name Aguas de Rosarito S.A.P.I.

(“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.

(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.

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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;

(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.

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Therefore, on August 28, 2020, AdR submitted their list of non-recoverable expenses, including those of NSC, to CEA and CESPT which was comprised of 51,144,525 United States dollars and an additional 137,333,114 Mexican pesos.

In February 2021, AdR withdrew this

amparo claim, and such withdrawal was accepted by the federal district court in Tijuana.

In February 2021, AdR withdrew this amparo claim, and such withdrawal was accepted by the federal district court in Tijuana.

To date, AdR has not received a response from CEA or CESPT to its submission of non-recoverable expenses.

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This letter invites Mexico to seek a resolution of this investment dispute through consultation and negotiation, but states that if the dispute cannot be resolved in this manner, CW-Cooperatief elects to refer the dispute to the International Centre for the Settlement of International Disputes for arbitration, as provided for in the Treaty.

To date, CW-Cooperatief has not received a response to this letter.

On June 29, 2021, the Mexican Ministry of Economy responded to CW-Cooperatief’s letter and proposed to hold a consultation meeting.

Two such meetings were held on July 9, 2021 and August 2, 2021 on a confidential basis.

The investment dispute remains unresolved to date.

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 CW-Cooperatief, 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 consolidated financial statements as of and for the three months ended March 31, 2021 and 2020.

Our net losses from discontinued operations for the three months ended March 31, 2021 and 2020 of ($312,794) and ($316,365), respectively, consist of legal, accounting, engineering, administrative, consulting and other costs relating to Project development activities and, for 2021, our activities following the cancellation of the APP Contract to pursue reimbursement from the State of Baja California.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended March 31, 2021 as compared to the three months ended March 31, 2020 relates only to our continuing operations.

Accordingly, the assets and liabilities of CW-Cooperatief, NSC and AdR, as well as all Project development expenses, the impairment loss of approximately ($3.0 million) recorded during 2020 for Project assets, and the costs for our legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP contract, have been reclassified from the services segment to discontinued operations in the accompanying condensed consolidated financial statements as of and for the three months ended June 30, 2021 and 2020.

Our net losses from discontinued operations for the three months ended June 30, 2021 and 2020 were ($151,379) and ($3,755,112), respectively.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended June 30, 2021 as compared to the three months ended June 30, 2020 relates only to our continuing operations.

Consolidated Results

Net income from continuing operations attributable to Consolidated Water Co.

The net loss from continuing operations attributable to Consolidated Water Co.

stockholders for 2021 was ($1,513,270) (($0.10) per share on a fully diluted basis), as compared to net income from continuing operations of $2,627,270 ($0.17 per share on a fully diluted basis) for 2020.

Total revenue for 2021 decreased to $17,103,317 from $20,725,721 in 2020, as the retail and manufacturing segments experienced significant revenue declines.

The net loss for 2021 is attributable to an impairment loss recorded for our manufacturing segment of ($2,900,000), as discussed in paragraphs that follow.

Revenue for 2021 decreased to $16,701,524 from $19,087,247 in 2020, reflecting a significant decline in manufacturing segment revenue and to a lesser extent, a drop in revenue for the retail segment.

These declines were partially offset by an increase in revenue generated by our bulk segment.

Gross profit for 2021 was $6,064,853 (36% of total revenue) as compared to $7,303,143 (38% of total revenue) for 2020.

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 remained relatively consisted at $4,764,486 for 2021 as compared to $4,695,309 for 2020.

General and administrative (“G&A”) expenses on a consolidated basis remained relatively consistent at $4,724,304 for 2021 as compared to $4,557,613 for 2020.

Other income, net, decreased to $233,114 for 2021 as compared to $260,957 for 2020 due to (1) an unrealized gain of $31,000 recorded for the valuation of the put/call options arising from the acquisition of a majority interest in PERC, as compared to an unrealized gain recorded on these options of $80,000 in 2020;

and (2) a decrease in the equity earnings and profit-sharing income of $33,494 from our investment in OC-BVI.

Partially offsetting the decrease in these other income amounts was an increase for 2021 in interest income of $64,827, which results from a higher balance of interest earning assets.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the three months ended June 30, 2021 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 ($422,232) for 2021 as compared to a loss from operations of ($69,983) for 2020.

Revenue generated by our retail water operations decreased to $5,674,790 in 2021 from $5,966,296 in 2020 due to a 2% decrease in the volume of water sold.

The sales volumes for both 2021 and 2020 are significantly below the historical volumes for the retail segment prior to 2020 due to the continuing cessation of tourism on Grand Cayman resulting from border restrictions initiated in March 2020 in response to the COVID-19 pandemic.

Retail segment gross profit decreased to $2,892,881 (51% of retail revenue) for 2021 from $3,196,799 (54% of retail revenue) for 2020 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 consistent at $3,318,473 for 2021 as compared to $3,266,782 for 2020.

Bulk Segment:

The bulk segment contributed $2,021,321 and $1,663,988 to our income from operations for 2021 and 2020, respectively.

Bulk segment revenue was $6,711,971 and $5,866,397 for 2021 and 2020, respectively.

The increase in bulk segment revenue is attributable to a 9% increase in CW-Bahamas’ volume of water sold and an increase in energy costs for CW-Bahamas, which increased the energy pass through component of CW-Bahamas’ rates.

Gross profit for our bulk segment was $2,325,177 (35% of bulk revenue) and $1,925,088 (33% of bulk revenue) for 2021 and 2020, respectively.

Gross profit in dollars and as a percentage of revenue increased in 2021 as compared to 2020 principally due to the revenue increase.

Bulk segment G&A expenses remained relatively consistent at $303,856 for 2021 as compared to $261,100 for 2020.

Services Segment:

The services segment income from operations was $213,245 and $138,342 for 2021 and 2020, respectively.

Services segment revenue increased to $3,763,239 for 2021 from $3,476,000 for 2020 due to an increase of approximately $926,000 in revenue from operating and maintenance contracts attributable to new contracts, which served to more than offset a decline in plant construction revenue of approximately $672,000.

Gross profit for the services segment was $884,830 (24% of services revenue) in 2021 as compared to $844,487 (24% of services revenue) for 2020.

G&A expenses for the services segment remained consistent at $671,585 for 2021 as compared to $711,350 for 2020.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($3,368,425) for 2021 as compared to generating income from operations of $1,018,388 in 2020.

The loss incurred for 2021 results from decreased revenue and an impairment loss, as discussed in paragraphs that follow.

Approximately 87% and 80% of our manufacturing segment revenue, and 91% and 89% of our manufacturing segment gross profit, for the three months ended June 30, 2020 and the year ended December 31, 2020, respectively, were generated from sales to one customer.

While Aerex sells various products to this customer, Aerex’s revenue from this customer has historically been derived primarily from one specialized product.

This customer informed Aerex at that time that it presently expected to recommence its purchases from Aerex beginning with the first quarter of 2022.

In late July 2021 this former major customer communicated to Aerex that it expected to recommence its purchases of the specialized product from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to both the amounts it had purchased from Aerex in 2020 and prior years and the amounts we had anticipated the customer would purchase.

Our efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic impacts of the COVID-19 pandemic, which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials and, we believe, also adversely affected the overall financial condition of Aerex’s current and prospective customer base.

Accordingly, in light of this new information from Aerex’s former major customer, and present weak economic conditions that we believe will continue into 2022, we tested the carrying value of our manufacturing

reporting unit for possible impairment as of June 30, 2021.

Manufacturing revenue was $551,524 and $3,778,554 for 2021 and 2020, respectively.

Manufacturing revenue decreased from 2020 to 2021 due to the loss of orders from Aerex’s former largest customer, and to date we have not been successful in replacing this lost revenue.

Manufacturing gross profit (loss) was ($38,035) ((7)% of manufacturing revenue) and $1,336,769 (35% of manufacturing revenue) for 2021 and 2020, respectively.

The decrease in manufacturing gross profit in dollars reflects the decrease in revenue.

Gross profit as a percentage of revenue declined due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we elected to continue the employment of all of our manufacturing personnel in 2021 (despite the decrease in production activity) based upon the expectation that production activity would increase significantly in the latter half of the year.

G&A expenses for the manufacturing segment increased to $430,390 for 2021 as compared to $318,381 for 2020.

The rise in G&A expenses for 2021 results from a provision for doubtful accounts receivable of $120,000.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Discontinued Operations – Mexico Project Development

As previously discussed, on June 29, 2020, the State of Baja California cancelled its APP Contract with AdR for the Project.

Our net loss from discontinued operations of ($464,173) for 2021 consists of the costs for our legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP contract.

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 approximately ($3.0 million) for the three months ended June 30, 2020 for these rights of way.

Our net loss from discontinued operations of ($4,071,447) for 2020 consists of this impairment loss and the development expenses incurred for the Project.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the six months ended June 30, 2021 as compared to the six months ended June 30, 2020 relates only to our continuing operations.

Consolidated Results

Net loss from continuing operations attributable to Consolidated Water Co.

stockholders for 2021 was ($211,704) (($0.01) per share on a fully diluted basis), as compared to net income from continuing operations of $5,832,242 ($0.38 per share on a fully diluted basis) for 2020.

Revenue for 2021 decreased to $33,804,841 from $39,812,968 in 2020, as the retail and manufacturing segments experienced significant revenue declines.

Gross profit for 2021 was $12,191,363 (36% of total revenue) as compared to $15,743,464 (40% of total revenue) for 2020.

For further discussion of revenue and gross profit see the “Results by Segment” discussion and analysis that follows.

G&A expenses on a consolidated basis remained relatively consistent at $9,488,790 for 2021 as compared to $9,252,922 for 2020.

Other income, net, increased to $547,722 for 2021 as compared to $288,218 for 2020 due to an unrealized gain of $162,000 recorded for the valuation of the put/call options arising from the acquisition of a majority interest in PERC, as compared to an unrealized loss recorded on these options of ($81,000) in 2020.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the three months ended March 31, 2021 and we believe the COVID-19 pandemic will continue to adversely impact our results of operations

in future periods.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the six months ended June 30, 2021, 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 .”

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Revenue generated by our retail water operations decreased to $11,386,095 in 2021 from $13,223,728 in 2020 due to a 12% 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.

This sales volume decrease is due to the continuing cessation of tourism on Grand Cayman resulting from border restrictions initiated in March 2020 in response to the COVID-19 pandemic.

Retail segment gross profit decreased to $5,896,192 (52% of retail revenue) for 2021 from $7,467,611 (56% of retail revenue) for 2020 as a result of the revenue decline.

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Bulk segment revenue was $12,957,941 and $12,306,681 for 2021 and 2020, respectively.

The decrease in bulk segment revenue is attributable to a decrease in CW-Bahamas’ revenue of approximately $166,000 for 2021 due to lower energy costs, which correspondingly decreased the energy pass-through component of CW-Bahamas’ rates.

The increase in bulk segment revenue is attributable to an increase of 7% in the volume of water sold by CW-Bahamas and an increase in energy costs for CW-Bahamas, which increased the energy pass through component of CW-Bahamas’ rates.

Gross profit for our bulk segment was $4,415,994 (34% of bulk revenue) and $3,800,792 (31% of bulk revenue) for 2021 and 2020, respectively.

Gross profit in dollars and as a percentage of revenue increased in 2021 as compared to 2020 principally due to a decrease in operating expenses (primarily repairs and maintenance costs) for CW-Bahamas of approximately $188,000.

Gross profit in dollars and as a percentage of revenue increased in 2021 as compared to 2020 principally due to the increase in revenue and a decrease of approximately $226,000 in non energy-related operating expenses.

Bulk segment G&A expenses remained relatively consistent at $681,359 for 2021 as compared to $553,146 for 2020 .

Services Segment:

The services segment income from operations of $96,465 and $168,183 for 2021 and 2020, respectively.

Services segment revenue increased to $3,540,846 for 2021 from $3,114,813 for 2020 due to an increase of approximately $1.3 million in revenue from operating and maintenance contracts attributable to new contracts, which served to more than offset a decline in plant construction revenue of approximately $913,000.

The services segment income from operations was $309,710 and $306,525 for 2021 and 2020, respectively.

Services segment revenue increased to $7,304,085 for 2021 from $6,590,813 for 2020 due to an increase of approximately $2.3 million in revenue from operating and maintenance contracts attributable to new contracts, which served to more than offset a decline in plant construction revenue of approximately $1.6 million.

Gross profit for the services segment was $1,703,748 (23% of services revenue) in 2021 as compared to $1,685,780 (26% of services revenue) for 2020.

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The manufacturing segment incurred a loss from operations of ($3,448,914) for 2021 as compared to generating income from operations of $2,114,166 in 2020.

The loss incurred for 2021 results from decreased revenue and an impairment loss, as discussed in paragraphs that follow.

Approximately 86% and 80% of our manufacturing segment revenue, and 84% and 89% of our manufacturing segment gross profit, for the six months ended June 30, 2020 and the year ended December 31, 2020, respectively, were generated from sales to one customer.

While Aerex sells various products to this customer, Aerex’s revenue from this customer has historically been derived from one specialized product.

This customer informed Aerex at that time that it presently expected to recommence its purchases from Aerex beginning with the first quarter of 2022.

Manufacturing revenue was $2,156,720 and $7,691,746 for 2021 and 2020, respectively.

Manufacturing revenue decreased from 2020 to 2021 due to the loss of orders from Aerex’s former largest customer.

Manufacturing revenue decreased from 2020 to 2021 due to the loss of orders from Aerex’s former largest customer, and to date we have not been successful in replacing this lost revenue.

Manufacturing gross profit was $175,429 (8% of manufacturing revenue) and $2,789,281 (36% of manufacturing revenue) for 2021 and 2020, respectively.

The decrease in manufacturing gross profit in dollars reflects the decrease in revenue.

Gross profit as a percentage of revenue declined due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease.

G&A expenses for the manufacturing segment dropped to $293,953 for 2021 as compared to $356,734 for 2020.

This customer has 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.

Consequently, our manufacturing segment revenue and gross profit for 2021 may decline as compared to the two prior years.

Gross profit as a percentage of revenue declined due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we elected to continue the employment of all of our manufacturing personnel during 2021 (despite the decrease in production activity) based upon the expectation that production activity would increase significantly in the latter half of the year.

G&A expenses for the manufacturing segment remaining relatively consistent at $724,343 for 2021 as compared to $675,115 for 2020.

FINANCIAL CONDITION

The significant changes in the components of our condensed consolidated balance sheet as of March 31, 2021 as compared to December 31, 2020 (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.

The significant changes in the components of our condensed consolidated balance sheet as of June 30, 2021 as compared to December 31, 2020 (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 $4.6 million.

This net increase reflects an increase in CW-Bahamas’ accounts receivable of approximately $4.5 million – see discussion at “CW-Bahamas Liquidity.”

Current inventory decreased by $894,089 primarily due to a decline in orders for Aerex.

Property, plant and equipment, net decreased by $1.6 million due to scheduled depreciation of fixed assets.

Current inventory decreased by approximately $714,000 primarily due to a decline in orders for Aerex.

Prepaid expenses and other current assets increased by approximately $960,000 primarily due to annual insurance premiums that were paid in June 2021.

Property, plant and equipment, net decreased by approximately $3.0 million due to scheduled depreciation of fixed assets.

Operating lease right-of-use assets increased by approximately $1.6 million, with a related increase in operating lease liabilities of approximately $1.6 million, due to a new office lease for Aquilex that began in March 2021.

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Our liquidity requirements may also include future quarterly dividends if such dividends are declared by our Board.

Our dividend payments amounted to approximately $1.9 million for the three months ended March 31, 2021 and approximately $5.1 million for the year ended December 31, 2020.

As of March 31, 2021, we had cash and cash equivalents of $42.8 million and working capital of $67.4 million.

Our dividend payments amounted to approximately $3.2 million for the six months ended June 30, 2021 and approximately $5.1 million for the year ended December 31, 2020.

As of June 30, 2021, we had cash and cash equivalents of $41.2 million and working capital of $68.8 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 $19.5 million as of March 31, 2021 and $16.8 million as of December 31, 2020.

Approximately 78% of the March 31, 2021 accounts receivable balance was delinquent as of that date.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the Water and Sewerage Corporation of The Bahamas (“WSC”) amounted to $21.3 million as of June 30, 2021 and $16.8 million as of December 31, 2020.

Approximately 78% of the June 30, 2021 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 April 30, 2021, CW-Bahamas’ accounts receivable from the WSC totaled an all-time high of approximately $21.7 million

As of July 31, 2021, CW-Bahamas’ accounts receivable from the WSC totaled an all-time high of approximately $23.5 million.

However, CW-Bahamas received $5.7 million in payments on these receivables during August 2021.

From time to time (including presently), CW-Bahamas has experienced delays in collecting its accounts receivable from the WSC.

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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 March 31, 2021, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.

As of June 30, 2021, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.

The Bahamas government and the WSC continue to make intermittent payments on these accounts receivable, and such payments totaled approximately $14.4 million for the period from January 1, 2021 through August 16, 2021.

We believe the delays we have experienced in collecting CW-Bahamas’ receivables have been extended by the severe adverse impact of the COVID-19 pandemic on The Bahamas government’s revenue sources .

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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 Three Months Ended March 31, 2021

Our cash and cash equivalents decreased to $42,782,527 as of March 31, 2021 from $43,794,150 as of December 31, 2020.

Discussion of Cash Flows for the Six Months Ended June 30, 2021

Our cash and cash equivalents decreased to $41,210,143 as of June 30, 2021 from $43,794,150 as of December 31, 2020.

Cash Flows from Operating Activities

Net cash provided by our operating activities from continuing operations was $1,662,873.

This net cash reflects net income generated for the three months ended March 31, 2021 of $1,117,565 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

This net cash reflects net loss generated for the six months ended June 30, 2021 of ($349,946) 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 $1,864,043, a loss from discontinued operations of $312,794, an increase in accounts receivable of $3,244,456 and an decrease in current inventory of $818,656.

The more significant of such items and changes in working capital components included depreciation and

amortization of $3,677,422, a loss from discontinued operations of $464,173, an increase in accounts receivable of $4,764,561, a decrease in current inventory of $714,108 and an increase in prepaids of $1,062,782.

Cash Flows from Investing Activities

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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.

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.

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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.

In July 2021, this quarantine period was reduced to five days for fully vaccinated travelers who are able to provide proof of vaccination from Cayman Islands government approved sources.

Recently, the Cayman Islands’ government announced its plan to reopen the country’s borders in six phases.

According to this plan, the borders will not be fully reopened before January 2022, and such date is subject to achieving a vaccination target of 80% for the country’s population.

Recent data published by the Chief Medical Officer of the Cayman Islands indicates that approximately 68% the country’s population has received both doses of the vaccine.

It cannot presently be determined if or when the 80% target will be achieved and the borders reopened.

As a result of these measures taken by the Cayman Islands government, tourism in the Cayman Islands has temporarily ceased.

The preventative measures taken by the Cayman Islands government in response to the COVID-19 pandemic commenced in the latter half of March 2020.

Consequently, our retail sales volume for the year ended December 31, 2020 declined by approximately 13% from the year ended December 31, 2019 and our retail sales volume for the first quarter of 2021 declined 20% from our retail sales volume for the first quarter of 2020.

Consequently, our retail sales volume for the year ended December 31, 2020 declined by approximately 13% from the year ended December 31, 2019 and our retail sales volume for the first half of 2021 declined 12% from our retail sales volume for the first half of 2020.

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.

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Therefore, unlike Cayman Water, OC-Cayman’s revenue is not as directly affected by tourism on Grand 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 year ended December 31, 2020 was approximately 1% less than that provided for the year ended December 31, 2019.

The amount of water provided by OC-Cayman to the WAC for the year ended December 31, 2020 was approximately 1% less than that provided for the year ended December 31, 2019 and the first half of 2021 was 1.9% less than the first half of 2020.

We cannot presently determine to what extent OC-Cayman’s future revenue will be impacted by the COVID-19 pandemic.

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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.

Initially, 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 the measures taken by The Bahamas government, tourism on New Providence Island, where CW-Bahamas operates, temporarily ceased and economic activity in The Bahamas 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 were loosened and commercial and retail operations were permitted to open with limited capacity;

additional economic activity (including the operation of restaurants and bars with outdoor and limited indoor seating) has since been permitted.

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 RT-PCR 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.

It is anticipated that a limited number of cruise ship departures from the Port of Nassau may commence in June 2021, but a date for cruise ship arrivals has not yet been set.

During the summer of 2020, travel restrictions were briefly lifted then reimposed.

Since November 2020, shelter-in-place regulations have been loosened and commercial and retail operations have been permitted to open with limited capacity although working from home is still encouraged;

additional economic activity (including the operation of restaurants and bars for takeaway or outdoor seating;

limited indoor seating is permitted for fully vaccinated persons only) has also been permitted.

International travel to The Bahamas is permitted and individuals that wish to travel to The Bahamas must obtain a health travel visa which will be issued upon receipt of a negative COVID-19 test five days in advance of travel;

the nature of the test depends on whether the individual travelling is fully vaccinated or not.

All visitors 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.

Home port cruise ship departures from the Port of Nassau commenced in June 2021 and cruise ship arrivals into The Bahamas commenced in July 2021.

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.

To date, the volume of water CW-Bahamas sells to the WSC has not been adversely impacted by the COVID-19 pandemic notwithstanding the downturn in economic activity on New Providence due to preventative measures taken by the government in March 2020 and continuing thereafter in various forms.

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.

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We believe CW-Bahamas has sufficient spare parts and consumables inventories to continue normal operations.

To date, the COVID-19 pandemic has not materially impeded Aerex’s day-to-day operations.

Aerex presently has 14 plant employees.

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As a result of current economic conditions (resulting in part from the COVID-19 pandemic), in late March 2021 Aerex began experiencing issues with its supply chain for the raw materials and components used in its manufacturing operations, including higher prices, scarcities/shortages, and longer fulfillment times for its orders to suppliers.

Should these economic conditions and issues continue, Aerex could have difficulty completing its orders from its customers, which could have a material adverse impact on our consolidated revenue, results of operations and cash flows, and could require us to record an impairment loss to reduce the carrying value of the goodwill recorded for our manufacturing segment.

Any such impairment loss could have a material adverse impact on our consolidated financial condition and results of operations.

These conditions, and a decline in projected future sales to Aerex’s former largest customer, required us to record an impairment loss of ($2.9 million) for the three months ended June 30, 2021 to reduce the carrying value of our manufacturing reporting unit’s goodwill.

While these economic conditions and issues continue, Aerex could have difficulty completing its orders from its customers and obtaining new business, which could have a material adverse impact on our consolidated revenue, results of operations and cash flows, and could require us to record additional impairment losses to reduce the carrying value of the goodwill recorded for our manufacturing reporting unit.

Any such impairment losses could have a material adverse impact on our consolidated financial condition and results of operations.

PERC’s operations are considered essential services by the states within which it operates.

Presently, the COVID-19 pandemic has not materially impeded PERC’s day-to-day operations.

Approximately 70% of PERC’s revenue of $3.4 million for the three months ended March 31, 2021 was generated in California under contracts with government entities.

Approximately 76% of PERC’s revenue of $7.1 million for the six months ended June 30, 2021 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.

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Seven Mile Beach and West Bay.

For the three months ended March 31, 2021 and 2020, we generated approximately 33% and 35%, respectively, of our consolidated revenue and 49% and 51%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the three months ended June 30, 2021 and 2020, we generated approximately 34% and 31%, respectively, of our consolidated revenue and 48% and 44%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the six months ended June 30, 2021 and 2020, the Company generated approximately 34% and 33%, respectively, of its consolidated revenue and 48% and 47%, respectively, of its 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.

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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.”

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 .

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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.

If the 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.

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● On April 30, 2021, we paid a dividend of $0.085 to shareholders of record on April 1, 2021.

● On May 25, 2021, our Board declared a dividend of $0.085 payable on July 30, 2021 to shareholders of record on July 1, 2021.

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.

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

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis