What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-15 compared with 2021-08-16 · 118 added, 104 removed, 287 unchanged (44% of the section changed)

8 unchanged sentences

● tourism and weather conditions in the areas we serve;

● the impacts of the COVID-19 pandemic;

● the impacts of the COVID-19 pandemic, particularly on our retail and manufacturing segments;

● the economic, political and social stability of each country in which we conduct or plan to conduct business;

19 unchanged sentences

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.

22 unchanged sentences

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 81% and 84% of Aerex’s revenue, and 88% and 86% of Aerex’s gross profit, for the three and nine months ended September 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.

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.

1 unchanged sentence

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.

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 company 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.

4 unchanged sentences

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.

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 September 30, 2021 of our manufacturing reporting unit’s goodwill of $1,985,211 and the unamortized balance of its intangible assets of $871,111 associated with the acquisition of Aerex.

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

4 unchanged sentences

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 approximately ($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.

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 CW-Bali were not recoverable.

4 unchanged sentences

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

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

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

Discontinued Operations – Mexico Project Development

7 unchanged sentences

(“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.

(ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation.

In August 2016, NSC and NuWater incorporated a new company 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.

NSC initially owned 99.6% of the equity of AdR.

23 unchanged sentences

The investment dispute remains unresolved to date.

Should CW-Cooperatief elect to refer the dispute to international arbitration, CW-Cooperatief could incur legal and other expenses related to this arbitration that could be material to the Company’s consolidated results of operations.

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, 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.

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 effective as of the three months ended September 30, 2020.

Our net losses from discontinued operations for the three months ended September 30, 2021 and 2020 were ($1,078,367) and ($377,321), respectively.

Our net loss from discontinued operations 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 and a provision of $641,810 for potentially uncollectible value added taxes paid that are reimbursable/receivable from the Mexican federal government.

We recorded this provision as a result of the Mexican government’s rejection of our most recent request for repayment of these value added taxes paid.

We believe we are entitled to be repaid for these value added taxes and have engaged a firm to assist us in collecting these amounts from the Mexican government.

However, we ultimately may not be able to obtain such payment from the Mexican government and therefore may be

required in the future to record another provision to write off the remaining balance of these receivables, which amounted to approximately $645,000 as of September 30, 2021.

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

Consolidated Results

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

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

stockholders for 2021 was $1,363,960 ($0.09 per share on a fully diluted basis), as compared to net income from continuing operations of $1,812,156 ($0.12 per share on a fully diluted basis) for 2020.

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.

Revenue for 2021 decreased to $16,413,146 from $17,666,257 in 2020, reflecting a significant decline in manufacturing segment revenue and to a lesser extent, a drop in revenue for the services segment.

These declines were partially offset by increases in revenue generated by our bulk and retail segments.

Gross profit for 2021 was $5,690,599 (35% of total revenue) as compared to $6,215,636 (35% 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 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.

General and administrative (“G&A”) expenses on a consolidated basis decreased to $4,359,040 for 2021 as compared to $4,810,016 for 2020.

Other income, net, decreased to $152,168 for 2021 as compared to $245,492 for 2020 due to an unrealized loss of ($54,000) 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 $39,000 in 2020.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the three months ended September 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 .”

2 unchanged sentences

The retail segment incurred a loss from operations of ($565,838) for 2021 as compared to a loss from operations of ($961,634) 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.

Revenue generated by our retail water operations increased to $5,247,042 in 2021 from $4,993,069 in 2020 due to a 1% increase 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.

Retail segment gross profit increased to $2,501,246 (48% of retail revenue) for 2021 from $2,406,168 (48% of retail revenue) for 2020 as a result of the slight revenue increase.

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.

Retail G&A expenses decreased to $3,067,696 for 2021 as compared to $3,367,802 for 2020 due to reduced employee costs.

Bulk Segment:

1 unchanged sentence

Bulk segment revenue was $6,868,134 and $6,061,475 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.

The increase in bulk segment revenue is attributable to 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 $2,239,748 (33% of bulk revenue) and $1,660,758 (27% 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.

Gross profit in dollars and as a percentage of revenue increased in 2021 as compared to 2020 principally due to the revenue increase and a decrease in depreciation expense for assets that became fully depreciated during the second quarter of 2021 but continue to be used in operations.

Bulk segment G&A expenses remained relatively consistent at $313,420 for 2021 as compared to $382,662 for 2020.

1 unchanged sentence

The services segment income from operations was $41,614 and $108,850 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.

Services segment revenue decreased to $3,210,584 for 2021 from $3,351,935 for 2020 due to a decline in plant construction revenue of approximately $525,000.

An increase of approximately $385,000 in revenue from operating and maintenance contracts attributable to new contracts served to partially offset the decline in plant construction revenue.

Gross profit for the services segment was $800,154 (25% of services revenue) in 2021 as compared to $838,663 (25% of services revenue) for 2020.

2 unchanged sentences

The manufacturing segment incurred a loss from operations of ($69,933) for 2021 as compared to generating income from operations of $979,324 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 $1,087,386 and $3,259,778 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.

Manufacturing revenue under certain contracts has been deferred due to significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

Manufacturing gross profit was $149,451 (14% of manufacturing revenue) and $1,310,047 (40% 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

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 have elected to continue the employment of all of our manufacturing personnel in 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment decreased to $219,384 for 2021 as compared to $330,723 for 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

Discontinued Operations – Mexico Project Development

1 unchanged sentence

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.

Our net loss from discontinued operations of ($1,542,540) 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 and a provision of $650,897 for potentially uncollectible value added tax refunds that are reimbursable/receivable from the Mexican federal government.

We believe we are entitled to be repaid for these value added taxes and have engaged a firm to assist us in collecting these amounts from the Mexican government.

However, we ultimately may not be able to obtain such payment from the Mexican government and therefore may be required in the future to record another provision to

write off the remaining balance of these receivables, which amounted to approximately $645,000 as of September 30, 2021.

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.

1 unchanged sentence

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.

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.

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

Consolidated Results

Net loss from continuing operations attributable to Consolidated Water Co.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2021 was $1,152,256 ($0.07 per share on a fully diluted basis), as compared to net income from continuing operations of $7,644,398 ($0.50 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.

Revenue for 2021 decreased to $50,217,987 from $57,479,225 in 2020, as the retail and manufacturing segments experienced significant revenue declines, which were not fully offset by revenue increases in the bulk and services segments.

Gross profit for 2021 was $17,881,962 (36% of total revenue) as compared to $21,959,100 (38% of total revenue) for 2020.

1 unchanged sentence

G&A expenses on a consolidated basis remained relatively consistent at $13,847,830 for 2021 as compared to $14,062,938 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 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.

Other income, net, increased to $699,890 for 2021 as compared to $533,710 for 2020 due to an unrealized gain of $108,000 recorded in 2021 for the valuation of the put/call options arising from the acquisition of PERC, as compared to an unrealized loss recorded on these options of ($42,000) in 2020.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the nine months ended September 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 .”

1 unchanged sentence

Retail Segment:

The retail segment incurred a loss from operations of ($1,039,931) for 2021 as compared to generating income from operations of $826,990 for 2020.

The retail segment incurred a loss from operations of ($1,605,769) for 2021 as compared to a loss from operations of ($134,644) for 2020.

Revenue generated by our retail water operations decreased to $16,633,137 in 2021 from $18,216,797 in 2020 due to a 9% decrease in the volume of water sold.

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.

Retail segment gross profit decreased to $8,397,438 (50% of retail revenue) for 2021 from $9,873,779 (54% of retail revenue) for 2020.

This decrease in gross profit dollars is attributable to the revenue decline.

The revenue decline also resulted in lower gross profit as a percentage of revenue for 2021 due to the resulting greater relative impact of fixed production and distribution costs.

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 $6,689,483 for 2021 as compared to $6,640,621 for 2020.

Retail G&A expenses decreased to $9,757,179 for 2021 as compared to $10,008,423 for 2020.

Bulk Segment:

3 unchanged sentences

Gross profit for our bulk segment was $6,655,742 (34% of bulk revenue) and $5,461,550 (30% 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 increase in revenue and a decrease of approximately $226,000 in non energy-related operating expenses.

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 $476,000 in non-energy operating expenses.

Bulk segment G&A expenses remained relatively consistent at $994,779 for 2021 as compared to $935,808 for 2020.

3 unchanged sentences

Gross profit for the services segment was $2,503,902 (24% of services revenue) in 2021 as compared to $2,524,443 (25% of services revenue) for 2020.

The decrease in gross profit as a percentage of revenue reflects a shift in the contract mix.

The slight decrease in gross profit as a percentage of revenue reflects a shift in the contract mix.

G&A expenses for the services segment remained consistent at $2,152,145 for 2021 as compared to $2,112,869 for 2020.

2 unchanged sentences

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.

Approximately 84% and 80% of our manufacturing segment revenue, and 86% and 89% of our manufacturing segment gross profit, for the nine months ended September 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.

6 unchanged sentences

Manufacturing revenue was $3,244,106 and $10,951,524 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 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 $324,880 (10% of manufacturing revenue) and $4,099,328 (37% 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 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.

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.

G&A expenses for the manufacturing segment remaining relatively consistent at $943,727 for 2021 as compared to $1,005,838 for 2020.

FINANCIAL CONDITION

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.

The significant changes in the components of our condensed consolidated balance sheet as of September 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 $4.9 million.

1 unchanged sentence

Current inventory decreased by approximately $668,000 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.

Prepaid expenses and other current assets increased by approximately $889,000 due to annual insurance premiums that were paid in June 2021.

Property, plant and equipment, net decreased by approximately $4.0 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.

Operating lease right-of-use assets increased by approximately $1.4 million, with a related increase in operating lease liabilities of approximately $1.4 million, primarily due to a new office lease for Aquilex that began in March 2021.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Position

Our projected liquidity requirements for the balance of 2021 include capital expenditures for our existing operations of approximately $2.9 million (which includes $1.9 million for the replacement of the 26-year old West Bay seawater desalination plant in Grand Cayman) and approximately $1.3 million for dividends payable.

Our projected liquidity requirements for the balance of 2021 include capital expenditures for our existing operations of approximately $1.9 million (which includes $855,000 for the replacement of the 26-year old West Bay seawater desalination plant in Grand Cayman) 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 $3.2 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.

Our dividend payments amounted to approximately $4.5 million for the nine months ended September 30, 2021 and approximately $5.1 million for the year ended December 31, 2020.

As of September 30, 2021, we had cash and cash equivalents of $40.4 million and working capital of $69.3 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 $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.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the Water and Sewerage Corporation of The Bahamas (“WSC”) amounted to $21.4 million as of September 30, 2021 and $16.8 million as of December 31, 2020.

Approximately 78% of the September 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 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.

As of October 31, 2021, CW-Bahamas’ accounts receivable from the WSC totaled approximately $21.3 million.

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 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.

As of September 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 $18.0 million for the period from January 1, 2021 through October 31, 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 .

Presently, Moody’s Investors Service and Standard & Poor’s have assigned a credit rating to The Bahamas of Ba3 and B+, respectively.

Based upon our discussions and collection history with The Bahamas government, we believe that our accounts receivable from the WSC are fully collectible.

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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 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.

Discussion of Cash Flows for the Nine Months Ended September 30, 2021

Our cash and cash equivalents decreased to $40,397,593 as of September 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 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;

Net cash provided by our operating activities was $4,464,672.

This net cash reflects the net loss incurred for the nine months ended September 30, 2021 of ($390,284) 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 $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.

The more significant of such items and changes in working capital components included depreciation and amortization of $5,338,581, an impairment loss for Aerex goodwill of $2,900,000, $650,897 provision for partially uncollected value added taxes, an increase in accounts receivable of $4,921,874 (principally attributable to CW-Bahamas) and an increase in prepaid expenses and other current assets of $859,396.

Cash Flows from Investing Activities

Net cash used by our investing activities was $452,436 primarily from additions to property, plant and equipment and construction in progress.

Net cash used by our investing activities was $3,427,710.

Cash used was primarily to purchase a certificate of deposit of $2.5 million and for additions to property, plant and equipment and construction in progress.

Cash Flows from Financing Activities

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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.

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.

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

Recently, the Cayman Islands’ government announced that the country’s borders would be reopened on November 20, 2021.

After this date, according to government sources, vaccinated visitors will be allowed into the country without the need to quarantine.

However, with the recent COVID-19 outbreaks and the increasing infection rate, the Center for Disease Control and Prevention placed the Cayman Islands on its high-risk list.

Consequently, it is unclear as to when the reopening of the borders will translate into increased tourism to the Cayman Islands.

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 half of 2021 declined 12% from our retail sales volume for the first half 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 nine months ended September 30, 2021 declined 8.5% from our retail sales volume for the nine months ended September 30, 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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We believe Cayman Water has adequate spare parts and supplies in stock to continue normal operations.

However, Cayman Water’s operations could be adversely affected should a significant number of its operations personnel be required to miss work due to illness or a requirement to quarantine.

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.

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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 and the first half of 2021 was 1.9% less than the first half of 2020.

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 nine months ended September 30, 2021 was also approximately 1.0% less than the nine months ended September 30, 2020.

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.

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.

However, OC-Cayman’s operations could be adversely affected should a significant number of its operations personnel be required to miss work due to illness or a requirement to quarantine.

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.

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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.

In November 2020, shelter-in-place regulations were loosened, and commercial and retail operations were permitted to open with limited capacity although working from home was still encouraged.

The Emergency Powers Regulations expired on November 13, 2021 and the government then enacted new rules to prevent and manage community spread of COVID-19.

Restrictions on economic activity have largely been lifted subject to businesses adhering to social distancing protocols, requiring customers to wear face masks and practicing regular sanitization.

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.

Any visitor who is not fully vaccinated 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.

Persons entering The Bahamas via cruise ship must be fully vaccinated prior to embarkation.

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.

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Aerex presently has 13 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.

Should a number of these employees become ill or be required to enter quarantine because 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.

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.

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.

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.

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

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.

Approximately 76% of PERC’s revenue of $10.2 million for the nine months ended September 30, 2021 was generated in California under contracts with government entities.

The State of California has publicly acknowledged on-going difficulties due to 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 facilities in California and Arizona.

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Seven Mile Beach and West Bay.

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.

For the three months ended September 30, 2021 and 2020, we generated approximately 32% and 28%, respectively, of our consolidated revenue and 44% and 39%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the nine months ended September 30, 2021 and 2020, the Company generated approximately 33% and 32%, respectively, of its consolidated revenue and 47% and 45%, 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 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.

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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.”

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.

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 loss 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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● 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.

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

● On August 24, 2021, our Board declared a dividend of $0.085 payable on October 29, 2021 to shareholders of record on October 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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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 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.

Therefore, the impact of inflation on

our gross profit, measured in consistent dollars, historically has not been material.

However, we have not increased our retail water rates since January 2018 (despite the inflation that has occurred since that date) due to the lack of a resolution of our negotiations with OfReg for a new retail license.

This lack of a rate increase has contributed to a decline in the gross profit generated by our retail segment.

Furthermore, our manufacturing segment has been adversely impacted by recent significant increases in raw material costs.

Should the current inflationary trend continue, our results of operations and cash flows could be materially adversely affected.

Increases in fuel and energy costs and other items could create additional credit risks for us, as our customers’ ability to pay our invoices could be adversely affected by such increases.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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What changed 10-Q

Item 2. Management’s Discussion and Analysis