What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-08-11 compared with 2022-05-12 · 121 added, 74 removed, 267 unchanged (42% of the section changed)

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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.

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 (based upon the most recent communications from the customer, we now expect such purchases to recommence in late 2022 or early 2023).

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.

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 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 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 on-going 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.

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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.

Based upon our 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 June 30, 2022 of our manufacturing reporting unit’s goodwill of $1,985,211 and its remaining unamortized intangible assets balances of $801,111 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.

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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) in 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 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.

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.

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

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

Discontinued Operations – Mexico Project Development

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

In February 2021, AdR withdrew this amparo claim, and such withdrawal was accepted by the federal

district court in Tijuana.

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

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

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

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

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, without a resolution of our investment dispute.

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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.

During July 2022, the State initiated discussions with us to potentially resolve the issues related to the cancellation by the government of the Rosarito desalination plant contract as well as potentially addressing the State’s acute water shortage issues.

We cannot presently determine the outcome of the discussions and we have not terminated our efforts to obtain relief through the international arbitration process as a result of these discussions.

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, 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.

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 consolidated financial statements.

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.

Accordingly, the assets and liabilities of CW-Cooperatief, NSC and AdR, as well as all Project development expenses 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 consolidated financial statements.

Our net losses from discontinued operations for the three months ended June 30, 2022 and 2021 were ($419,833) and ($151,379), respectively.

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.

stockholders for 2022 was $2,289,886 ($0.15 per share on a fully diluted basis), as compared to a net loss of ($1,664,649) (($0.11) 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 June 30, 2022 as compared to the three months ended June 30, 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 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.

stockholders for 2022 was $2,709,719 ($0.18 per share on a fully diluted basis), as compared to a net loss from continuing operations of ($1,513,270) (($0.10) per share on a fully diluted basis) for 2021.

Revenue for 2022 increased to $21,067,127 from $16,701,524 in 2021, reflecting revenue increases in all of our four segments.

Gross profit for 2022 was $7,475,497 (35% of total revenue) as compared to $6,064,853 (36% of total revenue) for 2021.

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General and administrative (“G&A”) expenses on a consolidated basis remained relatively consistent at $4,926,691 for 2022 as compared to $4,724,304 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.

Other income, net, increased to $397,982 for 2022 as compared to $233,114 for 2021 primarily due to an unrealized gain of $201,000 recorded for the valuation of the put/call options associated with the acquisition of a majority interest in PERC, as compared to an unrealized gain recorded on these options of $31,000 in 2021.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the three months ended June 30, 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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Retail Segment:

The retail segment recorded income from operations of $64,483 for 2022 as compared to a loss from operations of ($422,232) for 2021.

Revenue generated by our retail water operations increased to $6,526,803 in 2022 from $5,674,790 in 2021 in part 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 2022 as compared to 2021 resulted from the lifting in November 2021 of travel restrictions to the Cayman Islands for vaccinated individuals, which allowed the resumption of tourism to the Cayman Islands and the reopening of many tourist properties that we serve in Grand Cayman.

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

Retail revenue also increased due to higher energy costs which increased the energy pass-through component of our water rates and a more favorable rate mix, as much of the volume increase for the quarter was due to higher sales volumes to tourist industry related customers, which pay higher per gallon rates than other retail customers.

Retail segment gross profit increased to $3,408,392 (52% of retail revenue) for 2022 from $2,892,881 (51% 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 remained relatively consistent at $3,345,109 for 2022 as compared to $3,318,473 for 2021.

Bulk Segment:

The bulk segment contributed $2,372,094 and $2,021,321 to our income from operations for 2022 and 2021, respectively.

Bulk segment revenue was $8,423,749 and $6,711,971 for 2022 and 2021, 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 $2,776,166 (33% of bulk revenue) and $2,325,177 (35% of bulk revenue) for 2022 and 2021, respectively.

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

Bulk segment G&A expenses remained relatively consistent at $404,072 for 2022 as compared to $303,856 for 2021.

Services Segment:

The services segment income from operations was $355,656 and $213,245 for 2022 and 2021, respectively.

Services segment revenue increased to $5,055,483 for 2022 from $3,763,239 for 2021 due to increases in both plant design and construction revenue and operating and maintenance revenue.

Gross profit for the services segment was $1,189,616 (24% of services revenue) in 2022 as compared to $884,830 (24% of services revenue) for 2021.

G&A expenses for the services segment remained relatively consistent at $838,040 for 2022 as compared to $671,585 for 2021.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($238,147) for 2022 as compared to a loss from operations of ($3,368,425) in 2021.

The net loss from operations in 2021 included a $2.9 million impairment loss due to decline in Aerex’s projected future cash flows.

Manufacturing revenue was $1,061,092 and $551,524 for 2022 and 2021, respectively.

Certain manufacturing contracts have been delayed due to current supply chain and economic conditions, which have resulted in significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

Manufacturing gross profit was $101,323 (10% of manufacturing revenue) for 2022 as compared to a gross loss of ($38,035) ((7)% of manufacturing revenue) for 2021.

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

Gross profit as a percentage of revenue has remained low due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we have elected not to furlough or terminate the employment of our highly-skilled manufacturing personnel in 2022 and 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment remained relatively consistent at $339,470 for 2022 as compared to $430,390 for 2021.

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

We believe these 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.

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

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.

As a result of the cancellation of the APP Contract, during the three months ended June 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.

Our net loss from discontinued operations for the six months ended June 30, 2022 and 2021 was ($1,027,147) and ($464,173), respectively, and 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 for 2022, a provision of $377,326 for potentially uncollectible value added tax refunds.

Consolidated Results

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

stockholders for 2022 was $4,006,701 ($0.26 per share on a fully diluted basis), as compared to a loss of ($675,877) (($0.04) 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 six months ended June 30, 2022 as compared to the six months ended June 30, 2021 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2022 was $5,033,848 ($0.33 per share on a fully diluted basis), as compared to net loss from continuing operations of ($211,704) (($0.01) per share on a fully diluted basis) for 2021.

Revenue for 2022 increased to $40,625,032 from $33,804,841 in 2021, reflecting substantial revenue increases in our retail, services and bulk segments along with a minor revenue increase in our manufacturing segment.

Gross profit for 2022 was $14,621,261 (36% of total revenue) as compared to $12,191,363 (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 $9,792,808 for 2022 as compared to $9,488,790 for 2021.

Other income, net, increased to $717,709 for 2022 as compared to $547,722 for 2021 primarily due to an unrealized gain of $276,000 recorded for the valuation of the put/call options associated with the acquisition of a majority interest in PERC, as compared to an unrealized gain recorded on these options of $162,000 in 2021.

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

Results by Segment

Retail Segment:

The retail segment incurred a loss from operations of ($126,463) for 2022 as compared to a loss from operations of ($1,039,931) for 2021.

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.

Revenue generated by our retail water operations increased to $12,840,003 in 2022 from $11,386,095 in 2021 in part due to an 8% increase in the volume of water sold.

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 $6,667,852 (52% of retail revenue) for 2022 from $5,896,192 (52% of retail revenue) for 2021 due to the revenue increase.

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Bulk segment revenue was $15,774,393 and $12,957,941 for 2022 and 2021, 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 and, to a lesser extent, an increase of 6% in the volume of water sold by CW-Bahamas.

The increase in bulk segment revenue is primarily 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 4% in the volume of water sold by CW-Bahamas.

Gross profit for our bulk segment was $5,439,691 (34% of bulk revenue) and $4,415,994 (34% of bulk revenue) for 2022 and 2021, respectively.

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

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

Bulk segment G&A expenses remained relatively consistent at $714,375 for 2022 as compared to $681,359 for 2021.

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The services segment income from operations was $682,780 and $309,710 for 2022 and 2021, respectively.

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.

Services segment revenue increased to $9,799,303 for 2022 from $7,304,085 for 2021 due to increases in both plant design and construction revenue and operating and maintenance revenue.

Gross profit for the services segment was $2,284,256 (23% of services revenue) in 2022 as compared to $1,703,748 (23% of services revenue) for 2021.

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The manufacturing segment incurred a loss from operations of ($435,442) for 2022 as compared to a loss from operations of ($3,448,914) in 2021.

The net loss from operations in 2021 included a $2.9 million impairment loss due to decline in Aerex’s projected future cash flows.

Manufacturing revenue was $2,211,333 and $2,156,720 for 2022 and 2021, 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.

Certain manufacturing contracts have been delayed 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 $229,462 (10% of manufacturing revenue) and $175,429 (8% of manufacturing revenue) for 2022 and 2021, 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 2022 despite the decrease in production activity.

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

Gross profit as a percentage of revenue has remained relatively low due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we have elected not to furlough or terminate the employment of our highly-skilled manufacturing personnel in 2022 and 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment remained relatively consistent at $664,904 for 2022 as compared to $724,343 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.

We believe these 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 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.

The significant changes in the components of our condensed consolidated balance sheet as of June 30, 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.

Accounts receivable decreased by approximately $4.7 million due to the collection by CW-Bahamas of significant delinquent receivables balances owed by the WSC.

This decrease in CW-Bahamas’ accounts receivable balance was partially offset by an increase in PERC’s accounts receivables.

Current inventory increased by approximately $1.0 million primarily due to an increase in Aerex’s inventory, as certain of its manufacturing contracts have been delayed, resulting in extended retention times for various inventory items purchased for these contracts.

Prepaid expenses and other current assets increased by approximately $1.4 million primarily due to annual insurance premiums that were paid in June 2022.

Property, plant and equipment, net decreased by approximately $2.0 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.

Construction in progress increased by approximately $1.3 million due to construction activity for Cayman Water’s replacement of its West Bay desalination plant.

Accounts payable, accrued expenses and other liabilities increased by approximately $1.2 million primarily due to an increase in subcontractor costs in the services segment.

Contract liabilities increased by $2.7 million due to billings made by the services segment in connection with PERC’s new contract to construct a wastewater treatment facility in Arizona.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Position

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 projected liquidity requirements for the balance of 2022 include capital expenditures for our existing operations of approximately $10.1 million which includes $3.3 million to be incurred for the balance of 2022 for the replacement of the West Bay seawater desalination plant and approximately $3.5 million for construction of the WAC’s new Red Gate plant.

We paid approximately $1.3 million in dividends in July 2022.

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

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.

As of June 30, 2022, we had cash and cash equivalents of $49.1 million and working capital of $71.6 million.

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 $21.2 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.

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

As of March 31, 2022 and December 31, 2021, 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 and $21.5 million, respectively.

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

When these delays occur, we hold discussions and meetings with representatives of the WSC and The Bahamas government, and as a result, payment schedules are developed for WSC’s delinquent accounts receivable.

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Based upon this payment history, CW-Bahamas has never been required to provide an allowance for doubtful accounts for any of its accounts receivable, despite the periodic accumulation of significant delinquent balances.

As of March 31, 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;

(ii) we may be required to cease the recognition of revenue on CW-Bahamas’ water supply agreements with the WSC;

and (iii) we may be required to provide an allowance for doubtful accounts for CW-Bahamas’ accounts receivable.

Any of these events could have a material adverse impact on our consolidated financial condition, results of operations, and cash flows .

Discussion of Cash Flows for the 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.

During the three months ended June 30, 2022, CW-Bahamas received approximately $16.4 million in payments on its accounts receivable from the WSC.

As of June 30, 2022, CW-Bahamas’ accounts receivable from the WSC had been reduced to $13.5 million.

Discussion of Cash Flows for the Six Months Ended June 30, 2022

Our cash and cash equivalents increased to $49,093,162 as of June 30, 2022 from $40,358,059 as of December 31, 2021.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $13,213,167.

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;

This net cash reflects the net income incurred for the six months ended June 30, 2022 of $4,480,328 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

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

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

significant of such items and changes in working capital components included depreciation and amortization of $3,129,173, an increase in billings in excess of cost and estimated earnings and accounts payable and accrued expenses of $4,335,001, a decrease in overall accounts receivable of $4,671,827 and a provision for uncollected value added taxes of $377,326.

Cash Flows from Investing Activities

17 unchanged sentences

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.

However, tourism to the Cayman Islands continues to be approximately one-half of 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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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 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 complete a mandatory daily health questionnaire during their stay.

International travel to The Bahamas is permitted to individuals with proof of vaccination against COVID-19 or documentation of a negative COVID-19 test completed within 72 hours of arrival 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.

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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 energy prices and, to a lesser extent, changes in demand.

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.

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

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

5 unchanged sentences

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 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.

Approximately 60% of PERC’s revenue of $9.4 million for the six months ended June 30, 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 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.

For the three months ended June 30, 2022 and 2021, we generated approximately 31% and 34%, respectively, of our consolidated revenue and 46% and 48%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the six months ended June 30, 2022 and 2021, the Company generated approximately 32% and 34%, respectively, of its consolidated revenue and 46% and 48%, 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.

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We began license negotiations with OfReg in July 2017 and such negotiations are continuing.

We have been informed during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license.

We have been informed

during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license.

The Cayman Islands government could seek to grant a third party a license to service some or all of Cayman Water’s present service area.

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.”

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 loss to reduce the carrying value of our retail segment assets.

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

● On May 24, 2022, our Board declared a dividend of $0.085 payable on July 29, 2022 to shareholders of record on July 1, 2022.

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.

1 unchanged sentence

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.

Should the current inflationary trend continue, our consolidated 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.

2 unchanged sentences

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