What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-12 compared with 2021-11-15 · 126 added, 190 removed, 215 unchanged (60% of the section changed)

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● 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;

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

● our relationships with the government entities and other customers we serve;

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● 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;

and (ii) long-lived assets.

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

and (ii) revenue recognition on our construction and manufacturing contracts.

Goodwill and intangible assets

Goodwill represents the excess cost over the fair value of the assets of an acquired business.

Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are tested for impairment at least annually.

Intangible assets with estimable useful lives are amortized over

their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment.

Goodwill represents the excess cost of an acquired business over the fair value of the assets and liabilities of the acquired business.

Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful

life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

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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We also estimated the fair value of each of our reporting units for the year ended December 31, 2021 by applying the guideline public company method.

We have, in years prior to 2020, also estimated the fair value of each of our reporting units by referencing the market multiples implied by guideline merger and acquisition transactions (the mergers and acquisition method).

We considered utilizing the mergers and acquisition method for the year ended December 31, 2020 but due to a lack of relevant meaningful mergers and acquisition activity during the year, such method was not utilized for 2020.

We weighted the fair values estimated for each of our reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit.

The respective weightings we applied to each method as of December 31, 2020 were as follows:

As of December 31, 2020

Manufacturing

Discounted cash flow

Guideline public company

Mergers and acquisitions

The respective weightings we applied to each method for the year ended December 31, 2021 were 80% to the discounted cash flow method and 20% to the guideline public company method.

The fair values we estimated for our retail, bulk, services and manufacturing reporting units exceeded their carrying amounts by 32%, 51%, 15% and 15%, respectively, as of December 31, 2021.

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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 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.

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 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.

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.

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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 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.

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 these updated projections, we tested our manufacturing reporting unit’s goodwill for possible impairment as of 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 31% as of December 31, 2020.

Our updated sales estimate for this customer based on this new information was 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 conditions (caused in part by 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 customers.

Accordingly, in light of this new information from Aerex’s former major customer, and the weak economic conditions that we believed would continue through 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 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.

We believe the inherent uncertainties associated with the accounting estimates and assumptions we use for our estimates of our reporting units’ fair values have increased due to the current, less predictable economic conditions, which have resulted in increasing raw material prices, extended and unexpected delays in the procurement and delivery of our raw materials, and have also, we believe, adversely affected our customers.

Should interest rates rise significantly in the future we would likely be required to increase the discount rate we use under the discounted cash flow method we use to estimate the fair values of our reporting units, and such increased discount rate in and of itself could decrease the estimated fair value of our reporting units under the discounted cash flow method.

Based upon our most recent estimation prepared as of December 31, 2021, the fair value of our manufacturing reporting unit exceeded its carrying value by only 15%.

If we determine in the future that Aerex’s discounted 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 March 31, 2022 of our manufacturing reporting unit’s goodwill of $1,985,211 and its remaining unamortized intangible assets balances of $824,445 recorded as a result of the acquisition of Aerex.

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

Based upon our most recent estimation prepared as of December 31, 2021, the fair value of our services reporting unit exceeded its carrying value by only 15%.

If we determine in the future that PERC’s discounted future cash inflows will be less than our present expectations, we may be required to record impairment losses to reduce the carrying values as of March 31, 2022 of our services reporting unit’s goodwill of $5,320,416 and its remaining unamortized intangible assets balances of $2,429,721 recorded as a result of the acquisition of PERC.

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 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.

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) in 2020.

Through our former subsidiary, PT Consolidated Water Bali (“CW-Bali”), we built and operated a seawater reverse osmosis plant with a productive capacity of approximately 264,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia.

We recorded operating losses for CW-Bali as the sales volumes for its plant were

insufficient to cover its operating costs.

In 2017 and 2016 we determined, based upon probability-weighted scenarios for CW-Bali’s future undiscounted cash flows, that the carrying values of CW-Bali’s long-lived assets and our investment in CW-Bali were not recoverable.

Consequently, we recorded impairment losses of ($1.6 million) and ($2.0 million), in 2017 and 2016, respectively, to reduce the carrying values of these assets to their fair values.

We recorded operating losses for CW-Bali as the sales volumes for its plant were insufficient to cover its operating costs.

In 2017 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.

Consequently, we recorded impairment losses of ($1.6 million) in 2017 to reduce the carrying values of these assets to their fair values.

Construction and Manufacturing Contract Revenue Recognition

We design, construct, and sell desalination infrastructure through DesalCo, which serves customers in the Cayman Islands, The Bahamas, and the British Virgin Islands.

We design, construct, and sell wastewater and water reuse infrastructure in the U.S.

through PERC.

Aerex, is a custom and specialty manufacturer in the U.S.

of water treatment-related systems and products applicable to commercial, municipal and industrial water production.

We recognize revenue for our construction and our specialized/custom manufacturing contracts over time under the input method using costs incurred (which represents work performed) to date relative to total estimated costs at completion to measure progress toward satisfying its performance obligations as such measure best reflects the transfer of control of the promised good to the customer.

Contract costs include labor, materials and amounts payable to subcontractors.

We follow this method since we can make reasonably dependable estimates of the revenue and costs applicable to the various stages of a contract.

Under this input method, we record revenue and recognize profit or loss as work on the contract progresses.

We estimate total project or manufacturing costs and profit to be earned on each long-term, fixed price contract prior to commencement of work on the contract and update these estimates as work on the contract progresses.

The cumulative amount of revenue recorded on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to date comprises of estimated total contract costs.

If, as work progresses, the actual contract costs exceed estimates, the profit recognized on revenue from that contract decreases.

We recognize the full amount of any estimated loss on a contract at the time the estimates indicate such a loss.

The cost estimates we prepare in connection with our construction and manufacturing contracts are subject to inherent uncertainties.

Because we base our contract prices on our estimation of future construction and manufacturing costs, the profitability of our construction and manufacturing contracts is highly dependent on our ability to estimate these costs accurately, as almost all of our construction and manufacturing contracts are fixed-price contracts.

The cost of materials, labor and subcontractors could increase significantly after we sign a construction or manufacturing contract, which could cause the gross profit for a contract to decline from our previous estimates, adversely affecting our recognition of revenue and gross profit for the contract.

Construction or manufacturing contract costs that significantly exceed our initial estimates could have a material adversely impact our consolidated financial condition, results of operations, and cash flows.

RESULTS OF OPERATIONS

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K.

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

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Discontinued Operations – Mexico Project Development

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The Letter requested that AdR provide an inventory of the assets that currently comprise the “Project Works” (as defined in the APP Contract) for the purpose of acknowledging and paying the non-recoverable expenses made by AdR in connection with the Project, with such reimbursement to be calculated in accordance with the terms of the APP Contract.

The applicable law requires this list of non-recoverable expenses made by AdR in connection with the Project be submitted to CEA and CESPT within 20 business days from the date of receipt of the Letter.

The applicable law required that this list of non-recoverable expenses made by AdR in connection with the Project be submitted to CEA and CESPT within 20 business days from the date of receipt of the Letter.

AdR initiated an amparo claim before a federal district court in Tijuana, Baja California, to challenge the provision of the applicable law requiring submittal of the list of non-recoverable expenses within the 20 business days term, as AdR considered such term to be unreasonably short due to the magnitude of the Project and the scope of supporting documentation required to be provided with respect to the non-recoverable expenses.

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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.

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

We plan to vigorously pursue all legal remedies and courses of action available under the APP Contract and applicable law (including international treaties and agreements) with respect to any rights we may have upon termination of the APP Contract, including the reimbursement of expenses and investments.

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 formal response from CEA or CESPT to its submission of non-recoverable expenses.

We believe CW-Cooperatief, as a Netherlands company, has certain rights relating to its investments in NSC and AdR under the Agreement on Promotion, Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the United Mexican States entered into force as of October 1, 1999 (the “Treaty”).

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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.

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.

Two such meetings were held on July 9, 2021 and August 2, 2021 on a confidential basis, without a resolution of our investment dispute.

On February 9, 2022, CW-Cooperatief, filed a Request for Arbitration with the International Centre for Settlement of International Disputes requesting that the United Mexican States pay CW-Cooperatief damages in excess of US$51 million plus MXN$137 million (with the exact amount to be quantified in the proceedings), plus fees, costs and pre- and post-award interest.

CW-Cooperatief intends to pursue vigorously the relief sought in the arbitration, in addition to pursuing all other legal remedies and courses of action available under the operative contracts and applicable law with respect to their rights, damages, fees and expenses.

We cannot provide any assurances that CW Cooperatief will be able to obtain the relief sought in the arbitration, and we will incur legal and other arbitration-related expenses that we expect will be material to our consolidated results of operations and cash flows.

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 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 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.

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 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 .”

Results by Segment

Retail Segment:

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 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 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 decreased to $3,067,696 for 2021 as compared to $3,367,802 for 2020 due to reduced employee costs.

Bulk Segment:

The bulk segment contributed $1,926,328 and $1,278,096 to our income from operations for 2021 and 2020, respectively.

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 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 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.

Services Segment:

The services segment income from operations was $41,614 and $108,850 for 2021 and 2020, respectively.

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.

G&A expenses for the services segment remained consistent at $758,540 for 2021 as compared to $728,829 for 2020.

Manufacturing Segment:

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.

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 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 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

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 ($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.

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 ($4,448,798) 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 nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 relates only to our continuing operations.

As a result of the cancellation of the APP Contract, in 2020 we discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project.

Our net losses from discontinued operations for the three months ended March 31, 2022 and 2021 were ($607,314) and ($312,794), respectively.

Our net loss from discontinued operations for 2022 includes a provision of $377,326 for uncollected value added taxes.

Consolidated Results

Including discontinued operations, net income attributable to Consolidated Water Co.

stockholders for 2022 was $1,716,815 ($0.11 per share on a fully diluted basis), as compared to $988,772 ($0.06 per share on a fully diluted basis) for 2021.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2022 was $2,324,129 ($0.15 per share on a fully diluted basis), as compared to net income from continuing operations of $1,301,566 ($0.08 per share on a fully diluted basis) for 2021.

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.

Revenue for 2022 increased to $19,557,905 from $17,103,317 in 2021, reflecting revenue increases in our retail, services and bulk segments.

These increases were partially offset by a decrease in revenue generated by our manufacturing segment.

Gross profit for 2022 was $7,145,764 (37% of total revenue) as compared to $6,126,510 (36% of total revenue) for 2021.

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 $13,847,830 for 2021 as compared to $14,062,938 for 2020.

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.

General and administrative (“G&A”) expenses on a consolidated basis remained relatively consistent at $4,866,117 for 2022 as compared to $4,764,486 for 2021.

Other income, net, remained consistent at $319,727 for 2022 as compared to $314,608 for 2021.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the three months ended March 31, 2022 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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The retail segment incurred a loss from operations of ($190,946) for 2022 as compared to a loss from operations of ($617,699) for 2021.

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 $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.

Revenue generated by our retail water operations increased to $6,313,200 in 2022 from $5,711,305 in 2021 due to an 8% increase in the volume of water sold.

The sales volumes for both 2022 and 2021 are significantly below the historical volumes for the retail segment prior to 2020 due to the cessation of tourism on Grand Cayman resulting from border restrictions that lasted from March 2020 through November 2021 in response to the COVID-19 pandemic.

The increase in the volume of water sold in 2021 as compared to 2020 reflects the lifting in November 2021 of travel restrictions to the Cayman Islands for vaccinated individuals, which resulted in the resumption of tourism to the Cayman Islands.

However, we believe it will be an extended period of time before tourism to the Cayman Islands approaches pre-pandemic levels.

Retail segment gross profit increased to $3,259,460 (52% of retail revenue) for 2022 from $3,003,311 (53% of retail revenue) for 2021 due to the 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 decreased to $9,757,179 for 2021 as compared to $10,008,423 for 2020.

Retail G&A expenses remained relatively consistent at $3,450,406 for 2022 as compared to $3,371,010 for 2021.

Bulk Segment:

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Bulk segment revenue was $7,350,644 and $6,245,970 for 2022 and 2021, respectively.

The increase in bulk segment revenue is attributable to an increase of 3% 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.

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 and, to a lesser extent, an increase of 6% in the volume of water sold by CW-Bahamas.

Gross profit for our bulk segment was $2,663,525 (36% of bulk revenue) and $2,090,817 (33% of bulk revenue) for 2022 and 2021, 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 $476,000 in non-energy operating expenses.

Gross profit in dollars and as a percentage of revenue increased in 2022 as compared to 2021 principally due to the revenue increase.

Bulk segment G&A expenses remained relatively consistent at $310,303 for 2022 as compared to $377,503 for 2021.

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The services segment income from operations was $327,124 and $96,465 for 2022 and 2021, respectively.

Services segment revenue increased to $10,514,669 for 2021 from $9,942,748 for 2020 due to an increase of approximately $2.7 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 $2.1 million.

Services segment revenue increased to $4,743,820 for 2022 from $3,540,846 for 2021 due to increases in both plant design revenue and operating and maintenance revenue.

Gross profit for the services segment was $1,094,640 (23% of services revenue) in 2022 as compared to $818,918 (23% of services revenue) for 2021.

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.

G&A expenses for the services segment remained relatively consistent at $779,974 for 2022 as compared to $722,020 for 2021.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($3,518,847) for 2021 as compared to generating income from operations of $3,093,490 in 2020.

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

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.

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.

The manufacturing segment incurred a loss from operations of ($197,295) for 2022 as compared to a loss from operations of ($80,489) in 2021.

Manufacturing revenue was $1,150,241 and $1,605,196 for 2022 and 2021, 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.

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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.

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

G&A expenses for the manufacturing segment remained relatively consistent at $325,434 for 2022 as compared to $293,953 for 2021.

The results of our manufacturing segment have been adversely affected by global economic conditions including but not limited to increasing raw materials prices, increasing human resources costs, tight labor markets, and extended and unexpected delays in the procurement and delivery of raw materials.

We believe these global economic conditions have also resulted in product order delays from Aerex’s existing and prospective customers.

The current economic conditions could continue (or further deteriorate) and therefore could continue to adversely impact the future results of our manufacturing segment.

FINANCIAL CONDITION

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.

This net increase reflects an increase in CW-Bahamas’ accounts receivable of approximately $4.7 million – see discussion at “CW-Bahamas Liquidity.”

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 $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 $1.4 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.

The significant changes in the components of our condensed consolidated balance sheet as of March 31, 2022 as compared to December 31, 2021 (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.

Current inventory increased by approximately $597,000 primarily due to the receipt of materials by Aerex for projects for which production has not commenced.

Property, plant and equipment, net decreased by approximately $1.2 million due to the scheduled depreciation of fixed assets.

Construction in progress increased by approximately $615,000 primarily due to the construction of our new West Bay seawater desalination plant.

Accounts payable, accrued expenses and other liabilities increased by approximately $587,000 primarily due to an increase in subcontractor costs in the services segment.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Position

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 projected liquidity requirements for the balance of 2022 include capital expenditures for our existing operations of approximately $10.8 million which includes $5.3 million to be incurred for the balance of 2022 for the replacement of the

West Bay seawater desalination plant, approximately $1.9 million for construction of the WAC’s new Red Gate plant 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 $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.

Our dividend payments amounted to approximately $1.3 million for the three months ended March 31, 2022 and approximately $5.8 million for the year ended December 31, 2021.

As of March 31, 2022, we had cash and cash equivalents of $43.1 million and working capital of $70.9 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 $21.4 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.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the Water and Sewerage Corporation of The Bahamas (“WSC”) amounted to $21.2 million as of March 31, 2022 and $21.5 million as of December 31, 2021.

Approximately 77% of the March 31, 2022 accounts receivable balance was delinquent as of that date.

The delay in collecting these accounts receivable has adversely impacted the liquidity of this subsidiary.

As of October 31, 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 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.

If CW-Bahamas continues to be unable to collect a significant portion of its delinquent accounts receivable, one or more of the following events may occur:

As of March 31, 2022, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.

In February 2022, we received correspondence from the Ministry of Finance of the Government of the Bahamas that set forth a payment schedule providing for the gradual reduction over the course of 2022 of the CW-Bahamas' delinquent accounts receivable due from the WSC.

Such correspondence also indicated that the Government intends to return all of CW-Bahamas’ accounts receivable from the WSC to current status.

As of April 30, 2022, CW-Bahamas’ accounts receivable from the WSC totaled $18.7 million.

If CW-Bahamas is ultimately unable to collect a significant portion of its delinquent accounts receivable, one or more of the following events may occur:

(i) CW-Bahamas may not have sufficient liquidity to meet its obligations;

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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 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.

Discussion of Cash Flows for the Three Months Ended March 31, 2022

Our cash and cash equivalents increased to $43,144,541 as of March 31, 2022 from $40,358,059 as of December 31, 2021.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $4,622,054.

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;

This net cash reflects the net income incurred for the three months ended March 31, 2022 of $1,958,245 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

and (ii) changes in the other components of working capital.

The more significant of such items and changes in working capital components included depreciation and amortization of $5,338,581, 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.

The more significant of such items and changes in working capital components included depreciation and amortization of $1,548,151, a provision for uncollected value added taxes of $377,326 and an increase in inventory of $792,165.

Cash Flows from Investing Activities

Net cash used by our investing activities was $735,375.

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 used was primarily for additions to property, plant and equipment and construction in progress.

Cash Flows from Financing Activities

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However, as the worldwide impact of COVID-19 continues to develop and expand, its future effects on our company could differ materially from the information we are providing herein.

As preventative measures to combat the possible spread of COVID-19, the Cabinet of the Cayman Islands (“the Cabinet”) closed all Cayman Islands sea ports to international passenger arrivals effective March 13, 2020;

As preventative measures to combat the possible spread of COVID-19, the Cabinet of the Cayman Islands (“the Cabinet”) closed all of Cayman Islands’ seaports to international passenger arrivals effective March 13, 2020;

and closed all Cayman Islands airports to international passenger arrivals effective March 22, 2020.

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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 nine months ended September 30, 2021 declined 8.5% from our retail sales volume for the nine months ended September 30, 2020.

In November 2021, the Cayman Islands began allowing vaccinated travelers to visit the islands without the need to quarantine.

However, the testing requirements upon arrival on the islands, and the fact that families with unvaccinated children were still required to quarantine, continued to restrict the number of overseas visitors.

Recently, the Cayman Islands began allowing children to take the vaccination status of their parents and eliminated the testing requirements upon arrival for vaccinated visitors.

This easing of restrictions has positively impacted tourism to the Cayman Islands.

However, tourism to the Cayman Islands continues to be well below pre-COVID-19 levels.

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.

The monthly amounts OC-Cayman charges the WAC for water supplied under its water supply agreements consist of fixed amounts that constitute the majority of the amounts charged, and lesser amounts that vary with the volume of water supplied.

The monthly amounts OC-Cayman charges the WAC for water supplied under its water supply agreements consist of fixed amounts that constitute most of the amounts charged, and lesser amounts that vary with the volume of water supplied.

Therefore, unlike Cayman Water, OC-Cayman’s revenue is not as directly affected by tourism on Grand 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 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.

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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;

International travel to The Bahamas is permitted and individuals that wish to travel to The Bahamas must obtain a travel health visa which will be issued upon receipt of a negative COVID-19 test taken no more than three days prior to the date of arrival;

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

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.

Any visitor who is not fully vaccinated must complete a mandatory daily health questionnaire during their stay.

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.

Cruise ships are no longer required to disclose passenger and crew vaccination status.

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 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.

The volume of water CW-Bahamas sells to the WSC has not adversely impacted by the COVID-19 pandemic notwithstanding the significant downturn in economic activity on New Providence in 2021 and 2020, and water volume sales remain steady as economic activity has increased in 2022.

However, the adverse impact of the COVID-19 pandemic on The Bahamas government’s revenue in 2021 and 2020 may continue to delay the collection of CW-Bahamas’ delinquent accounts receivable from the WSC.

CW-Bahamas’ operations have been designated as essential services by the government of The Bahamas.

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

Aerex presently has 13 plant employees.

Aerex presently has 13 manufacturing employees.

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.

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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.

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.

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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 $10.2 million for the nine months ended September 30, 2021 was generated in California under contracts with government entities.

Approximately 62% of PERC’s revenue of $4.6 million for the three months ended March 31, 2022 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.

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Seven Mile Beach and West Bay.

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.

For the three months ended March 31, 2022 and 2021, we generated approximately 32% and 33%, respectively, of our consolidated revenue and 46% and 49%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

The 1990 license was originally scheduled to expire in July 2010 but was extended several times by the Cayman Islands government to provide the parties with additional time to negotiate the terms of a new license agreement.

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Effect of Newly Issued but not yet Effective Accounting Standards

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions to the current guidance on contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates.

The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

We are currently evaluating the impact of the new guidance on our consolidated financial statements, however the adoption of this standard is not expected to have a material impact on our financial position, results of operations or cash flows .

● On February 1, 2021, we paid a dividend of $0.085 to shareholders of record on January 4, 2021.

● On January 31, 2022, we paid a dividend of $0.085 to shareholders of record on January 3, 2022.

● On April 29, 2022, we paid a dividend of $0.085 to shareholders of record on April 1, 2022.

● 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.

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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.

Therefore, the impact of inflation on

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

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.

Furthermore, our manufacturing segment has been adversely impacted by recent significant increases in raw material costs and our services segment could suffer similar adverse impacts in the future.

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

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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