What changed in this filing

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Item 1A. Risk Factors

2022-05-12 compared with 2021-11-15 · 41 added, 32 removed, 54 unchanged (57% of the section changed)

6 unchanged sentences

In response to this pandemic, the governments of the countries in which we operate - the Cayman Islands, The Bahamas, and the United States - implemented preventative measures to slow the spread of COVID-19, measures which have had profound adverse consequences for the economies of those countries.

Tourism, a major economic driver for the Cayman Islands, has temporarily ceased due to closing of the country to tourist arrivals by air and sea travel.

Tourists arrivals to The Bahamas by air and sea have declined significantly due to the pandemic and continue to be only a small fraction of pre-pandemic numbers due to travel restrictions within and outside of The Bahamas, as well the continued

reluctance of people to travel internationally.

Overall economic activity in the United States has also declined precipitously.

Tourism, a major economic driver for the Cayman Islands, temporarily ceased due to closing of the country to tourist arrivals by air and sea travel.

In November 2021, the Cayman Islands government eliminated certain travel restrictions for COVID-19 vaccinated travelers that allowed tourists to enter the Cayman Islands for the first time since March 2020.

Our retail water revenues continue to be significantly lower than pre-pandemic levels.

Tourists arrivals to The Bahamas by air and sea declined significantly due to the pandemic and continue to be lower than pre-pandemic numbers due to the continued reluctance of people to travel internationally.

Overall economic activity in the United States has also declined.

As a result of the impact of the COVID-19 pandemic on the economies of the countries in which we operate, we have experienced, and will continue to experience, decreases in our consolidated revenue, cash flows generated from operations, and overall liquidity as compared to comparable prior periods.

8 unchanged sentences

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 in order to provide the parties with additional time to negotiate the terms of a new license agreement.

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We are presently unable to determine what impact the resolution of our retail license negotiations will have on our cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our retail operations and could require us to record impairment losses to reduce the carrying values of our retail segment assets.

Such impairment losses could have a material adverse impact on our consolidated financial condition, results of operations, and cash flows .

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

Periodically, our Bahamas subsidiary experiences substantial delays in the collection of its accounts receivable.

As a result, our Bahamas subsidiary could have insufficient liquidity to continue operations, and our consolidated results of operations could be materially adversely affected.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the 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 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.

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

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

2 unchanged sentences

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.

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

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

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:

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;

5 unchanged sentences

PERC, our principal services segment subsidiary, generates most of its revenue from contracts (“O&M contracts”) to operate and maintain water treatment and reuse facilities owned by third parties.

For the three and nine months ended September 30, 2021, we generated revenue of approximately $3.0 million and $9.3 million, respectively, under these O&M contracts.

For the three months ended March 31, 2022, we generated revenue of approximately $3.6 million under these O&M contracts.

PERC’s O&M contracts have terms ranging from one to five years, with varying renewal options exercisable solely at the discretion of the customer.

Approximately 44% of PERC’s revenue for the nine months ended September 30, 2021 was generated under O&M contracts that expire at various dates through December 31, 2022.

If we are unable to obtain extensions of these expiring O&M contracts, or are unable to replace the revenue lost from contracts that expire with revenue from new O&M contracts, our consolidated financial condition, results of operations, and cash flows could be adversely affected.

If Aerex’s future financial performance falls short of our most recent financial projections for this subsidiary, we may be required to record an impairment loss to reduce the carrying values of the goodwill and intangible assets of our manufacturing reporting unit.

In February 2016, we acquired a 51% ownership interest in Aerex.

In connection with this acquisition, we recorded initial goodwill of $8,035,211.

Aerex’s actual results of operations in the six months following our acquisition of this company fell significantly short of the projected results that were included in the overall cash flow projections we utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities.

Due to this shortfall in Aerex’s results of operations, we updated our projections for Aerex’s future cash flows and tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the discounted cash flow method.

As a result of this impairment testing, we determined that the carrying value of our Aerex goodwill exceeded its fair value and recorded an impairment loss of $1,750,000 for the three months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211.

As part of our annual impairment testing of goodwill performed during the fourth quarter of each

year, we updated our projections for Aerex’s future cash flows, determined that the carrying value of our Aerex goodwill exceeded its fair value, and recorded an impairment loss of $1,400,000 for the three months ended December 31, 2017 to further reduce the carrying value of this goodwill to $4,885,211.

Approximately 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 19% of PERC’s revenue for the three months ended March 31, 2022 was generated under O&M contracts that expire at various dates through December 31, 2022.

If the future financial performance of either Aerex or PERC falls short of our most recent financial projections for these subsidiaries, we may be required to record impairment losses to reduce the carrying values of the goodwill and intangible assets of our manufacturing and/or services reporting units.

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.

3 unchanged sentences

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 also substantially below the anticipated sales 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.

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 also substantially below the anticipated sales 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.

Furthermore, 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 also adversely affected Aerex’s current and prospective customer base.

1 unchanged sentence

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 expectation, 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 intangible assets balances of $871,111 recorded as a result of the acquisition of Aerex.

The accounting estimates and assumptions we employ to estimate the fair values of our manufacturing and reporting units constitute “critical accounting estimates” for us because:

● the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change (for example, 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);

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

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 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.

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.

Current economic conditions are adversely impacting the supply chain for our operations and could have a material adverse impact on our financial results.

As a result of the economic conditions resulting from the COVID-19 pandemic, we are experiencing issues with our supply chain for the raw materials, components, chemicals, and capital expenditures used in our operations, including rapidly increasing prices, scarcities/shortages, and longer fulfillment times for our orders to suppliers.

Should these economic conditions and issues continue, our operations could be adversely affected, which could have a material adverse impact on our consolidated revenue, results of operations and cash flows, and financial condition.

As a result of the economic conditions resulting from the COVID-19 pandemic, the Russian invasion of Ukraine, and other factors, we are experiencing issues with our supply chain for the raw materials, components, chemicals, and capital expenditures used in our operations, including rapidly increasing prices, scarcities/shortages, and longer fulfillment times and unexpected delays for our orders to suppliers.

Should these economic conditions and issues continue, our operations could be adversely affected, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.

The profitability of our contracts is dependent upon our ability to accurately estimate construction and operating costs.

The cost estimates we prepare in connection with the construction and operation of our water plants, the water infrastructure we construct and sell to third parties, and our manufacturing contracts, are subject to inherent uncertainties.

Additionally, the terms of our water supply contracts may require us to guarantee the price of water on a per unit basis, subject to certain annual inflation and monthly energy cost adjustments, and to assume the risk that the costs associated with producing this water may be greater than anticipated.

Because we base our contract prices in part on our estimation of future construction, manufacturing and operating costs, the profitability of our plants and our manufacturing and management contracts is dependent on our ability to estimate these costs accurately.

The cost of materials and services and the cost of the delivery of such services may increase significantly after we submit our bid for contract, which could cause the gross profit for a contract to be less than we anticipated when the bid was made.

The profit margins we initially expect to generate from a management contract could be further reduced if future operating costs for that contract exceed our estimates of such costs.

Any construction, manufacturing, and operating costs for our contracts that significantly exceed our initial estimates could adversely impact our consolidated financial condition, results of operations, and cash flows.

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 1A. Risk Factors