What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-11 · 135 added, 87 removed, 301 unchanged (42% of the section changed)

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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, intangible assets and long-lived assets;

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

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

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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.

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

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

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

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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, such purchases may not recommence until 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.

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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.

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 September 30, 2022 of our manufacturing reporting unit’s goodwill of $1,985,211 and its remaining unamortized intangible assets balances of $777,778 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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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.

Construction or manufacturing contract costs that significantly exceed our initial estimates could have a material adverse 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 June 30, 2022 Compared to Three Months Ended June 30, 2021

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

Discontinued Operations – Mexico Project Development

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On April 16, 2021, CW-Cooperatief submitted a letter to the President of Mexico and other Mexican federal government officials alleging that the State’s termination of the APP Contract constituted a breach by Mexico of its international obligations under the Treaty, entitling CW-Cooperatief to full reparation, including monetary damages.

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.

This letter invited Mexico to seek a resolution of this investment dispute through consultation and negotiation, but stated 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

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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.

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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.

Our net losses from discontinued operations for the three months ended September 30, 2022 and 2021 were ($505,917) and ($1,078,367), respectively.

Consolidated Results

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

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.

stockholders for 2022 was $317,694 ($0.02 per share on a fully diluted basis), as compared to a net income of $285,593 ($0.02 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 September 30, 2022 as compared to the three months ended September 30, 2021 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

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.

stockholders for 2022 was $823,611 ($0.05 per share on a fully diluted basis), as compared to a net income from continuing operations of $1,363,960 ($0.09 per share on a fully diluted basis) for 2021.

Revenue for 2022 increased to $25,051,705 from $16,413,146 in 2021, reflecting revenue increases in all four of our segments.

Gross profit for 2022 was $6,843,773 (27% of total revenue) as compared to $5,690,599 (35% of total revenue) for 2021.

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

General and administrative (“G&A”) expenses on a consolidated basis remained relatively consistent at $4,926,691 for 2022 as compared to $4,724,304 for 2021.

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.

General and administrative (“G&A”) expenses on a consolidated basis increased to $5,610,650 for 2022 as compared to $4,359,040 for 2021.

The most significant increase in G&A expenses for 2022 relates to increased bonus accruals of $573,381 arising from the improved financial performance of the Company.

Other components of the G&A expenses increase relate to (i) other employee costs, which increased by $207,895 due to salary increases and new hires;

(ii) professional and legal fees, which increased by $134,154;

and (iii) incremental bank fees of approximately $120,000

arising from the transfer of funds from CW-Bahamas to our parent company in the Cayman Islands.

The rise in G&A for 2022 is also due in part to inflationary factors which have increased many of our G&A expenses.

Other income (loss), net, decreased to ($168,980) for 2022 as compared to $152,168 for 2021 primarily due to an unrealized loss of ($247,000) recorded for the valuation of the put/call options associated with the acquisition of PERC, as compared to an unrealized loss recorded on these options of ($54,000) in 2021.

In addition, interest income decreased by approximately $112,000 for 2022 as compared to 2021 primarily due to the decrease in CW-Bahamas’ accounts receivable balance.

The COVID-19 pandemic had a adverse impact on our consolidated results of operations for the three months ended September 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 retail segment recorded a loss from operations of ($774,283) for 2022 as compared to a loss from operations of ($565,838) for 2021.

Revenue generated by our retail water operations increased to $6,274,650 in 2022 from $5,247,042 in 2021 in part due to a 14% increase in the volume of water sold.

The sales volumes for both 2022 and 2021 were 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 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 businesses, which in general purchase higher volumes and therefore pay higher per gallon rates than other retail customers.

Retail segment gross profit increased to $3,042,677 (48% of retail revenue) for 2022 from $2,501,246 (48% 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.

Retail G&A expenses increased to $3,818,459 for 2022 as compared to $3,067,696 for 2021.

The most significant increase in G&A expenses for 2022 relates increased bonus accruals of $560,881 arising from the improved financial performance of the Company.

Other components of the G&A expenses increase relate to (i) other employee costs, which increased by $98,349 due to salary increases;

and (ii) professional and legal fees, which increased by $72,766.

Bulk Segment:

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Gross profit for our bulk segment was $2,221,382 (26% of bulk revenue) and $2,239,748 (33% 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.

Gross profit decreased in 2022 as compared to 2021 principally due to incremental repairs and maintenance and supplies expenses for CW-Bahamas of approximately $361.000.

Bulk segment G&A expenses increased to $473,534 for 2022 as compared to $313,420 for 2021 primarily.as a result of incremental bank fees of approximately $120,000 attributable to cash transfers from CW-Bahamas to our parent company in the Cayman Islands.

Services Segment:

The services segment income from operations was $460,434 and $41,614 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.

Services segment revenue increased to $8,731,124 for 2022 from $3,210,584 for 2021 due to increases in both plant design and construction revenue and operating and maintenance revenue, with most of the revenue increase resulting from PERC’s progress on its contract with Liberty Utilities for the construction of a water treatment plant in Goodyear, Arizona.

Gross profit for the services segment was $1,397,142 (16% of services revenue) in 2022 as compared to $800,154 (25% 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.

The increase in gross profit dollars results from the increased revenue.

The decrease in gross profit as a percentage of revenue from 2021 to 2022 results from the relatively lower gross profit percentage earned on PERC’s contract with Liberty Utilities compared to that earned from PERC’s operating and maintenance contracts.

G&A expenses for the services segment increased to $936,708 for 2022 as compared to $758,540 for 2021 as a result of higher employee costs and increased insurance expense.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($199,377) for 2022 as compared to a loss from operations of ($69,933) 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 $1,378,000 and $1,087,386 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.

Manufacturing gross profit was $182,572 (13% of manufacturing revenue) for 2022 as compared to a gross profit of $149,451 (14% 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.

G&A expenses for the manufacturing segment were $381,949 for 2022 as compared to $219,384 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.

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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

Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021

Discontinued Operations – Mexico Project Development

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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.

Our net loss from discontinued operations for the nine months ended September 30, 2022 and 2021 was ($1,533,064) and ($1,542,540), 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

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stockholders for 2022 was $4,324,395 ($0.28 per share on a fully diluted basis), as compared to a loss of ($390,284) ( ($0.03) 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.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the nine months ended September 30, 2022 as compared to the nine months ended September 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.

stockholders for 2022 was $5,857,459 ($0.38 per share on a fully diluted basis), as compared to net income from continuing operations of $1,152,256 ($0.07 per share on a fully diluted basis) for 2021.

Revenue for 2022 increased to $65,676,737 from $50,217,987 in 2021, reflecting substantial revenue increases in our retail, services and bulk segments along with a minor revenue increase in our manufacturing segment.

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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.

G&A expenses on a consolidated basis increased to $15,403,458 for 2022 as compared to $13,847,830 for 2021.

The most significant increase in G&A expenses for 2022 relates to increased bonus accruals of $405,682 arising from the improved financial performance of the Company.

Other components of the 2022 G&A expenses increase relate to (i) other employee costs, which increased by $160,030 due to salary increases and new hires;

(ii) professional and legal fees, which increased by $201,606;

(iii) insurance expense, which increased by $249,247 due to higher premiums;

(iv) incremental business development expenses of $175,699;

(v) incremental bank fees of approximately $86,000 arising from the transfer of funds from CW-Bahamas to our parent company in the Cayman Islands;

and (vi) directors fees, which increased by $102,559.

The rise in G&A for 2022 is also due in part to inflationary factors which have increased many of our G&A expenses.

Other income, net, decreased to $548,729 for 2022 as compared to $699,890 for 2021 primarily due to an unrealized gain of $29,000 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 $108,000 in 2021.

In addition, interest income decreased by approximately $156,000 for 2022 as compared to 2021 primarily due to the decrease in CW-Bahamas’ accounts receivable balance.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the nine months ended September 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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The retail segment incurred a loss from operations of ($900,747) for 2022 as compared to a loss from operations of ($1,605,769) for 2021.

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.

Revenue generated by our retail water operations increased to $19,114,653 in 2022 from $16,633,137 in 2021 in part due to a 10% increase in the volume of water sold.

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 businesses, which in general purchase higher volumes and therefore pay higher per gallon rates than other retail customers.

Retail segment gross profit increased to $9,710,529 (51% of retail revenue) for 2022 from $8,397,438 (50% 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 $6,795,515 for 2022 as compared to $6,689,483 for 2021.

Retail G&A expenses increased to $10,613,975 for 2022 as compared to $9,757,179 for 2021.

The more significant increases in G&A expenses for 2022 relate to (i) employee costs, which increased by $188,769 primarily due to increased bonus accruals, and to a lesser extent salary increases;

(ii) professional and legal fees, which increased by $103,765:

(iii) insurance expense, which increased by $123,636 due to higher premiums;

(iv) incremental business development expenses of $175,699;

and (v) directors fees, which increased by $86,196.

Bulk Segment:

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The services segment income from operations was $1,143,215 and $351,324 for 2022 and 2021, respectively.

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.

Services segment revenue increased to $18,530,427 for 2022 from $10,514,669 for 2021 due to increases in both plant design and construction revenue and operating and maintenance revenue, with most of the revenue increase resulting from PERC’s progress on its contract with Liberty Utilities for the construction of a water treatment plant in Goodyear, Arizona.

Gross profit for the services segment was $3,681,398 (20% of services revenue) in 2022 as compared to $2,503,902 (24% of services revenue) for 2021.

G&A expenses for the services segment remained relatively consistent at $1,618,014 for 2022 as compared to $1,393,605 for 2021.

The increase in gross profit dollars resulted from the increased revenue.

The decrease in gross profit as a percentage of revenue from 2021 to 2022 resulted from the relatively lower gross profit percentage earned on PERC’s contract with Liberty Utilities compared to that earned from PERC’s operating and maintenance contracts.

G&A expenses for the services segment increased to $2,554,721 for 2022 as compared to $2,152,145 for 2021.

as a result of (i) higher employee costs attributable to increased bonus accruals, new hires and pay raises;

and (ii) increased insurance expense.

Manufacturing Segment:

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FINANCIAL CONDITION

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.

The significant changes in the components of our condensed consolidated balance sheet as of September 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 $3.0 million due to the collection by CW-Bahamas of significant delinquent receivables balances owed by the WSC.

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Current inventory increased by approximately $1.5 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.

Prepaid expenses and other current assets increased by approximately $2.1 million primarily due to approximately $1.0 million in advance payments to contractors, approximately $646,000 in annual insurance premiums principally paid in June 2022 and approximately $340,000 for the cost of PERC’s construction bond for the Liberty Utilities project.

Contract assets increased by approximately $1.2 million primarily due to Aerex's manufacturing projects.

Property, plant and equipment, net decreased by approximately $2.7 million due to the scheduled depreciation of fixed assets.

Construction in progress increased by approximately $1.9 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.

Accounts payable, accrued expenses and other liabilities increased by approximately $3.5 million primarily due to an increase in subcontractor costs for PERC’s contract with Liberty Utilities.

Contract liabilities increased by $3.2 million due to billings made by the services segment in connection with PERC’s new contract with Liberty Utilities 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 $10.1 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.

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

Our projected liquidity requirements for the balance of 2022 include capital expenditures for our existing operations of approximately $6.0 million which includes approximately $837,000 to be incurred for the balance of 2022 for the replacement of the West Bay seawater desalination plant and approximately $2.4 million for construction of the WAC’s

new Red Gate plant.

We paid approximately $1.4 million in dividends in October 2022.

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

Our future liquidity requirements also will include the funds necessary to purchase the 39% minority interest in PERC, as in October 2022 we exercised our option to purchase these shares at a price to be determined by an independent valuation.

As of September 30, 2022, we had cash and cash equivalents of $51.1 million and working capital of $71.1 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

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.

As of 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 $21.5 million.

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

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

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.

As of September 30, 2022, CW-Bahamas’ accounts receivable from the WSC amounted to $15.2 million.

In its latest report dated October 6, 2022, Moody’s Investor Services (“Moody’s) downgraded the Government of The Bahamas’ long-term issuer and senior unsecured ratings to B1 from Ba3.

Moody’s also lowered The Bahamas’ local currency ceiling to Baa3 from Baa2 and its foreign currency ceiling to Ba1 from Baa.

Based upon our review of this Moody’s report, we continue to believe no allowance for doubtful accounts is required for CW-Bahamas’ accounts receivable from the WSC.

Discussion of Cash Flows for the Nine Months Ended September 30, 2022

Our cash and cash equivalents increased to $51,085,289 as of September 30, 2022 from $40,358,059 as of December 31, 2021.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $15,803,236.

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;

This net cash reflects the net income incurred for the nine months ended September 30, 2022 of $5,015,437 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.

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.

The more significant of such items and changes in working capital components included depreciation and amortization of $4,651,513, an increase in billings in excess of cost and estimated earnings and accounts payable and accrued expenses of $7,771,062, an increase in prepaid expenses and other current assets of $2,663,516, a decrease in overall accounts receivable of $1,851,369 and a provision for uncollected value added taxes of $377,326.

Cash Flows from Investing Activities

Net cash used by our investing activities was $1,790,329.

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

Net cash used by our investing activities was $416,756, primarily for additions to property, plant and equipment and construction in progress.

We did not renew our CW-Bahamas $2.5 million certificate of deposit.

Cash Flows from Financing Activities

Net cash used by our financing activities was $4,977,296, almost all of which related to the payment of dividends.

Revolving Credit Facility

In September 2022, Cayman Water entered into an agreement (the “Credit Agreement”) with Scotiabank & Trust (Cayman) Ltd.

(the “Bank”) for a revolving credit facility in an aggregate principal amount of up to $10.0 million (the “Credit Facility”).

We expect to utilize the funds obtained from the Credit Facility for general working capital purposes.

The Credit Facility matures two years following the date of the initial advance (the “Maturity Date”).

All amounts outstanding under the Credit Facility are due and payable upon the earlier of the Maturity Date, demand from the bank or the acceleration of the Credit Facility upon an event of default.

The principal balance of the Credit Facility bears interest at a rate of 2.0% plus the secured overnight financing rate (“SOFR”) as determined by the SOFR Administrator for a one-month period on the day that is two days prior to the first day of the interest period.

All interest calculations will be made based on a 360-day year.

So long as the Bank has not demanded repayment, interest will be payable monthly, commencing one month from the initial advance, with the outstanding balance due on the Maturity Date, unless the Bank agrees to renew the Credit Facility for an additional period.

Cayman Water’s obligations under the Credit Agreement are secured by a first priority lien on all its fixed and floating assets and an assignment of insurance proceeds with respect to its fixed assets.

Further, the Company has guaranteed the repayment of all of Cayman Water’s present and future debts and liabilities owed to the Bank.

The Credit Agreement requires Cayman Water to meet certain financial covenants.

Cayman Water has not yet utilized its available borrowings under the Credit Facility.

Material Commitments, Expenditures and Contingencies

The worldwide coronavirus (COVID-19) pandemic, which was formally recognized by the World Health Organization on March 11, 2020, has had a profound negative impact on the economies of the countries in which we operate.

Consequently, the COVID-19 pandemic has had, and will continue to have, a material adverse impact on our consolidated financial condition, results of operations, and cash flows.

Consequently, the COVID-19 pandemic has had, and will continue to have, an adverse impact on our consolidated financial condition, results of operations, and cash flows.

A discussion of the current effects of the COVID-19 pandemic on each of our operating subsidiaries is provided in the following paragraphs.

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.

However, 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 of Cayman Islands’ seaports to international passenger arrivals effective March 13, 2020;

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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.

Effective August 24, 2022, the COVID-19 restrictions for entry to the Cayman Islands were lifted by the government of the Cayman Islands.

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

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.

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

We expect that our retail segment revenue and cash flows will continue to be 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.

Cayman Water’s operations have been designated as essential services by the Cayman Islands government.

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We believe OC-Cayman has adequate spare parts and supplies in stock to continue normal operations.

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

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

The government of The Bahamas enacted Emergency Powers Regulations which became effective March 18, 2020 in an effort to combat the spread of COVID-19.

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

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

International travel to The Bahamas is permitted 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.

Most of such rules have since been lifted and there are no longer significant restrictions on economic activity.

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.

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

Effective September 20, 2022, all COVID-related travel restrictions to The Bahamas were eliminated by the Bahamian government.

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 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 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.

Presently, CW-Bahamas’ 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 agreements with the WSC.

Under the terms of each of its water supply agreements with the WSC, CW-Bahamas charges the WSC (i) a fixed monthly amount;

(ii) an amount each month that is based upon the amount of water supplied during the month;

and (iii) 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 was 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’ day-to-day operations were not materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the requirements of our two water agreements with the WSC.

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

Aerex presently has 15 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.

Should a number of these employees become ill, Aerex could be required to reduce or cease its manufacturing activities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.

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

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

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

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

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

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.

Approximately 46% of PERC’s revenue of $17.8 million for the nine months ended September 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.

PERC employs state-certified water and wastewater operators to operate various water treatment facilities in California and Arizona.

Should a number of these employees become ill or be required to enter quarantine as a result of COVID-19, PERC could have difficulty meeting its contractual and statutory obligations for operating these water treatment facilities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.

Should a number of these employees become ill as a result of COVID-19, PERC could have difficulty meeting its contractual and statutory obligations for operating these water treatment facilities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.

Cayman Water Retail License

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Seven Mile Beach and West Bay.

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.

For the three months ended September 30, 2022 and 2021, we generated approximately 25% and 32%, respectively, of our consolidated revenue and 44% and 44%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the nine months ended September 30, 2022 and 2021, the Company generated approximately 29% and 33%, respectively, of its consolidated revenue and 45% and 47%, respectively, of its consolidated gross profit from the retail water operations conducted under the 1990 license.

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

The most recent express extension of the license expired on January 31, 2018.

The most recent

express extension of the license expired on January 31, 2018.

We continue to operate under the terms of the 1990 license, providing water services to the level and quality specified in the 1990 license and in accordance with our understanding of its legal obligations, treating those obligations set forth in the 1990 license as operative notwithstanding the expiration of the express extension.

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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.

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.

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 value of our retail segment assets.

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

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● On April 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.

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

● On September 1, 2022, our Board declared a dividend of $0.085 payable on October 31, 2022 to shareholders of record on October 3, 2022.

We have paid dividends to owners of our common stock and redeemable preferred stock since we began declaring dividends in 1985.

Our payment of any future cash dividends will depend upon our earnings, financial condition, cash flows, capital requirements and other factors our Board of Directors deems relevant in determining the amount and timing of such dividends.

Our payment of any future cash dividends will depend upon our earnings, financial condition, cash

flows, capital requirements and other factors our Board of Directors deems relevant in determining the amount and timing of such dividends.

Dividend Reinvestment and Common Stock Purchase Plan

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Under the terms of our Cayman Islands license and our water sales agreements in The Bahamas and the British Virgin Islands, our water rates are automatically adjusted for inflation on an annual basis.

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.

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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