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Each of these risks, as well as other risks and uncertainties not presently known to us or that we currently deem immaterial, could adversely affect our business, results of operations, cash flows and financial condition, and cause the value of our common stock to decline, which may result in the loss of part, or all, of your investment.
−Removed: The COVID-19 pandemic will likely continue to have a material adverse impact on our financial performance and financial condition in the future, to an extent and for a period of time that cannot presently be determined.
−Removed: The worldwide coronavirus (COVID-19) pandemic was formally recognized by the World Health Organization on March 11, 2020.
−Removed: In response to this pandemic, the governments of the countries in which we operate - the Cayman Islands, The Bahamas, and the United States - implemented preventative measures to slow the spread of COVID-19, measures which have had profound adverse consequences for the economies of those countries.
−Removed: Tourism, a major economic driver for the Cayman Islands, temporarily ceased due to closing of the country to tourist arrivals by air and sea travel.
−Removed: In November 2021, the Cayman Islands government eliminated certain travel restrictions for COVID-19 vaccinated travelers that allowed tourists to enter the Cayman Islands for the first time since March 2020.
−Removed: Our retail water revenues continue
−Removed: to be significantly lower than pre-pandemic levels.
−Removed: Tourists arrivals to The Bahamas by air and sea declined significantly due to the pandemic and continue to be lower than pre-pandemic numbers due to the continued reluctance of people to travel internationally.
−Removed: Overall economic activity in the United States has also declined.
−Removed: As a result of the impact of the COVID-19 pandemic on the economies of the countries in which we operate, we have experienced, and will continue to experience, decreases in our consolidated revenue, cash flows generated from operations, and overall liquidity as compared to comparable prior periods.
−Removed: Furthermore, the COVID-19 pandemic is adversely impacting our customers.
−Removed: Such adverse impacts, should they continue for a prolonged period, could require us to reassess the expected future cash flows from our four reporting units and could require us to record impairment losses to reduce the carrying values of one or more of these reporting units due to a decline in their fair values.
−Removed: Although we cannot presently quantify the future financial impacts of the COVID-19 pandemic on our company, we believe such impacts will likely continue to have a material adverse impact on our consolidated financial condition, results of operations, and cash flows.
−Removed: Given the uncertainty associated with the resolution of this pandemic, we cannot presently determine how long such adverse financial impacts may last.
Our exclusive license to provide water to retail customers in the Cayman Islands has not been expressly extended and we are presently unable to predict the outcome of our on-going negotiations relating to this license.
We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands government (the “1990 license”) that granted Cayman Water the exclusive right to provide potable water to customers within its licensed service area.
−Removed: Although the 1990 license was not expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as further discussed in the following paragraph.
+Added: Although the 1990 license was not expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as discussed in the following paragraphs.
Pursuant to the 1990 license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island:
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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.
−Removed: We continue to pay the royalty required under the 1990 license.
+Added: We continue to pay the royalty of 7.5% of revenue we collect required under the 1990 license.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”).
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OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets.
−Removed: Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for the economic regulation of the water utility sector and the negotiations with us for a new retail license from the Water Authority-Cayman to OfReg in May 2017.
+Added: Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for economic regulation of the water utility sector and the negotiations with us for a new retail license from the WAC to OfReg
We began license negotiations with OfReg in July 2017 and such negotiations are ongoing.
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As of December 31, 2022, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.
−Removed: Presently, Moody’s Investors Service and Standard & Poor’s have assigned a credit rating to The Bahamas of Ba3 and B+, respectively.
−Removed: If CW-Bahamas continues to be unable to collect a significant portion of its delinquent accounts receivable, one or more of the following events may occur:
+Added: 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.
+Added: Moody’s also lowered The Bahamas’ local currency ceiling to Baa3 from Baa2 and its foreign currency ceiling to Ba1 from Baa3.
+Added: If CW-Bahamas is unable to collect a significant portion of its delinquent accounts receivable, one or more of the following events may occur:
(i) CW-Bahamas may not have sufficient liquidity to meet its obligations;
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PERC, our principal services segment subsidiary, generates most of its revenue from contracts (“O&M contracts”) to operate and maintain water treatment and reuse facilities owned by third parties.
−Removed: For the year ended December 31, 2021, we generated revenue of approximately $12.4 million under these O&M contracts.
−Removed: PERC’s O&M contracts have terms ranging from one to five years, with varying renewal options exercisable solely at the discretion of the customer.
−Removed: Approximately 26% of PERC’s revenue for the year ended December 31, 2021 was generated under O&M contracts that expire at various dates through December 31, 2022.
+Added: For 2022, we generated revenue of approximately $13.7 million under these O&M contracts.
+Added: PERC’s O&M contracts have terms ranging from one to ten years, with varying renewal options exercisable solely at the discretion of the customer.
+Added: Approximately 16% of PERC’s revenue for 2022 was generated under O&M contracts that expire at various dates through December 31, 2023.
If we are unable to obtain extensions of these expiring O&M contracts or are unable to replace the revenue lost from contracts that expire with revenue from new O&M contracts, our consolidated financial condition, results of operations, and cash flows would be adversely affected.
−Removed: If the future financial performance of either Aerex or PERC falls short of our most recent financial projections for these subsidiaries, we may be required to record impairment losses to reduce the carrying values of the goodwill and intangible assets of our manufacturing and/or services reporting units.
+Added: If the future financial performance of Aerex falls short of our most recent financial projections for this subsidiary, we may be required to record impairment losses to reduce the carrying values of the goodwill and intangible assets of our manufacturing segment.
Approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit, for the year ended December 31, 2020 were generated from sales to one customer.
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Based upon these updated projections, we tested our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively.
−Removed: 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.
−Removed: 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).
−Removed: Our updated sales estimate for this customer based on this new information was also substantially below the anticipated sales to this customer for 2022 and subsequent years that we used in the discounted cash flow projections we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020.
−Removed: Furthermore, Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic impacts of the COVID-19 pandemic, which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials, and also adversely affected Aerex’s current and prospective customer base.
−Removed: Accordingly, in light of this new information from Aerex’s former major customer and the on-going weak economic conditions, 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.
−Removed: 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.
+Added: 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.
+Added: 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.
+Added: Our updated sales estimate for this customer based on this new information was substantially below the anticipated sales to this customer for 2022 and subsequent years that we used in the discounted cash flow projections we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020.
+Added: Furthermore, Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers were adversely impacted by the negative economic conditions (caused in part by the COVID-19 pandemic).
+Added: These negative economic conditions also increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials, and adversely affected the overall financial condition of Aerex’s current and prospective customer base.
+Added: 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.
+Added: 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 segment’s goodwill by this amount for the three months ended June 30, 2021.
The accounting estimates and assumptions we employ to estimate the fair values of our manufacturing and reporting units constitute “critical accounting estimates” for us because:
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● the impact of the estimates and assumptions on financial condition and results of operations is material.
−Removed: We believe the inherent uncertainties associated with the accounting estimates and assumptions we use for our estimates of our reporting units’ fair values have increased due to recent, less predictable economic conditions, which have resulted in increasing raw material prices, extended and unexpected delays in the procurement and delivery of our raw materials, and have also, we believe, adversely affected our customers.
−Removed: 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%.
−Removed: 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 December 31, 2021 of our manufacturing reporting unit’s goodwill of $1,985,211 and its remaining unamortized intangible assets balances of $847,778 recorded as a result of the acquisition of Aerex.
−Removed: Any such impairment losses could have a material adverse impact on our consolidated results of operations.
−Removed: 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%.
−Removed: 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 December 31, 2021 of our services reporting unit’s goodwill of $5,320,416 and its remaining unamortized intangible assets balances of $2,553,888 recorded as a result of the acquisition of PERC.
+Added: We believe the inherent uncertainties associated with the accounting estimates and assumptions we use for our estimates of our reporting units’ fair values have increased due to current, less predictable economic conditions, which have resulted in increasing raw material prices, extended and unexpected delays in the procurement and delivery of our raw materials, and have also, we believe, adversely affected our customers.
+Added: Based upon our estimation prepared as of December 31, 2022, the fair value of our manufacturing reporting unit exceeded its carrying value by 63%.
+Added: 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
+Added: of our manufacturing segment’s goodwill and its remaining unamortized intangible assets balances, which amounted to $1,985,211 and $754,444, respectively, as of December 31, 2022.
Any such impairment losses could have a material adverse impact on our consolidated results of operations.
Current economic conditions are adversely impacting the supply chain for our operations and could have a material adverse impact on our financial results.
−Removed: As a result of the economic conditions resulting from the COVID-19 pandemic and the Russian invasion of Ukraine, we are experiencing issues with our supply chain for the raw materials, components, chemicals, and capital expenditures used
−Removed: in our operations, including rapidly increasing prices, scarcities/shortages, and longer fulfillment times and unexpected delays for our orders to suppliers.
+Added: As a result of the current economic conditions, we are experiencing issues with our supply chain for the raw materials, components, chemicals, and capital expenditures used in our operations, including rapidly increasing prices, scarcities/shortages, and longer fulfillment times and unexpected delays for our orders to suppliers.
Should these economic conditions and issues continue, our operations could be adversely affected, which could have a material adverse impact on our consolidated financial condition, results of operations, and cash flows.
The profitability of our contracts is dependent upon our ability to accurately estimate construction and operating costs.
−Removed: The cost estimates we prepare in connection with the construction and operation of our plants are subject to inherent uncertainties.
+Added: The cost estimates we prepare in connection with the construction and operation of our water plants, the water infrastructure we construct and sell to third parties, and our manufacturing contracts, are subject to inherent uncertainties.
Additionally, the terms of our water supply contracts may require us to guarantee the price of water on a per unit basis, subject to certain annual inflation and monthly energy cost adjustments, and to assume the risk that the costs associated with producing this water may be greater than anticipated.
−Removed: Because we base our contract prices in part on our estimation of future construction and operating costs, the profitability of our plants and management contracts is dependent on our ability to estimate these costs accurately.
−Removed: The cost of materials and services and the cost of the delivery of such services may increase significantly after we submit our bid for a plant, which could cause the gross profit for a plant to be less than we anticipated when the bid was made.
−Removed: The profit margins we initially expect to generate from a plant could be further reduced if future operating costs for that plant exceed our estimates of such costs.
−Removed: These future operating costs could be affected by a variety of factors, including lower than anticipated production or treatment efficiencies and geo-hydrological conditions at the plant site that differ materially from those we believed would exist at the time we submitted our bid.
−Removed: Any construction and operating costs for our plants that significantly exceed our initial estimates could adversely impact our results of operations, financial condition and cash flows.
+Added: Because we base our contract prices in part on our estimation of future construction, manufacturing and operating costs, the profitability of our plants and our manufacturing and management contracts is dependent on our ability to estimate these costs accurately.
+Added: The cost of materials and services and the cost of the delivery of such services may increase significantly after we submit our bid for contract, which could cause the gross profit for a contract to be less than we anticipated when the bid was made.
+Added: The profit margins we initially expect to generate from a management contract could be further reduced if future operating costs for that contract exceed our estimates of such costs.
+Added: Any construction, manufacturing, and operating costs for our contracts that significantly exceed our initial estimates could have a material adverse impact our consolidated financial condition, results of operations, and cash flows.
+Added: Certain of PERC’s contracts with its customers may be terminated at any time at the customer’s convenience or with relatively short advance notice.
+Added: The termination of any of these contracts prior to their full performance may result in us realizing less than the full consideration payable under the contract and may negatively impact our financial results.
+Added: Certain of PERC’s contracts with its customers, and substantially all of its contracts with governments or municipalities, may be terminated at any time at the customer’s convenience with no or relatively short advance notice.
+Added: Our business is highly dependent on the purchase of our products and services by government and municipalities, and we believe that contracts with similar termination provisions will continue to be a source of a substantial portion of our revenue for the foreseeable future.
+Added: If a customer terminates one of our contracts for convenience, we generally may recover, at most, our incurred or committed costs, settlement expenses, and payment for on work completed or products delivered prior to the termination.
+Added: As such, the termination of any of these contracts prior to their stated term may result in us realizing less than the full consideration payable under the contract.
+Added: If any such contract is terminated prior to us performing a substantial portion of the work to be performed or delivering a substantial portion of the products to be delivered, prior to the termination, such termination may have a material adverse impact on our consolidated results of operations.
A significant portion of our consolidated revenue is derived from our water supply agreements with the WSC.
The loss of the WSC as a customer would adversely affect us.
−Removed: One bulk water customer, the WSC, accounted for approximately 36% of our consolidated revenue for the year ended December 31, 2021.
+Added: One bulk water customer, the WSC, accounted for approximately 32% of our consolidated revenue for 2022.
If, for financial or other reasons, the WSC does not comply with the terms of our water supply agreements our consolidated financial condition, results of operations, and cash flows could be materially adversely affected.
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A downturn in tourism or greater than expected rainfall in the locations we serve could adversely impact our results of operations and cash flows.
−Removed: The COVID-19 pandemic and the resulting cessation of tourism to the Cayman Islands through November 2021 have significantly reduced demand for our water.
+Added: The COVID-19 pandemic and the resulting cessation of tourism to the Cayman Islands through August 2022 significantly reduced demand for our water.
We are unable at this time to determine if or when demand for our water in the Cayman Islands will return to pre-pandemic levels.
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Membrane fouling or other technical problems could occur at any of our plants, and if we are unable to meet the guarantees due to such technical problems, we could be in default of the supply agreement and subject to various adverse consequences, including financial penalties or cancellation of the agreement.
−Removed: Our operations could be harmed by natural disasters such as hurricanes, tropical storms or earthquakes.
+Added: Our operations could be harmed by natural disasters such as hurricanes or earthquakes.
A natural disaster could cause major damage to our equipment and properties and the properties of our customers, including the large tourist properties in our areas of operation.
−Removed: For example, in January 2020, Grand Cayman experienced an earthquake which damaged our storage tanks.
+Added: For example, in January 2020, Grand Cayman experienced an earthquake which damaged three of our eight storage tanks.
Any future disaster could cause us to lose use of our equipment and properties and incur additional repair costs.
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In addition, we may incur significant costs in order to treat contaminated feed or processed water through expansion of our current treatment facilities, or development of new treatment methods.
−Removed: An inability by us to substitute feed water from an uncontaminated water source or to adequately treat the contaminated plant feed water or our processed water in a cost-effective manner may have an adverse effect on our consolidated financial condition, results of operations, and cash flows.
+Added: An inability by us to substitute feed water from an uncontaminated water source or to adequately treat the contaminated plant feed water or our processed water in a cost-effective manner may have a material adverse impact on our consolidated financial condition, results of operations, and cash flows.
Potential government decisions, actions and regulations could negatively affect our operations.
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The amount and timing of costs to comply with environmental laws are difficult to predict.
−Removed: addition, any complaints or lawsuits against us based on water quality and contamination may receive negative publicity that can damage our reputation and adversely affect our business and trading price of our common stock.
+Added: In addition, any complaints or lawsuits against us based on water quality and contamination may receive negative publicity that can damage our reputation and adversely affect our business and trading price of our common stock.
If we fail to abide by laws, rules and regulations relating to human and workers’ rights, we could be subject to suit and our reputation could be harmed, which could result in losses in our business and financial results.
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We are incorporated under the laws of the Cayman Islands and most of our assets are located outside of the United States.
−Removed: In addition, seven of our 17 Directors and Executive Officers reside outside the United States.
−Removed: As a result, it may be difficult for investors to execute service of process within the United States upon us and such other persons, or to enforce judgments obtained against such persons in United States courts, and bring any action, including actions predicated upon the civil liability provisions of the United States securities laws.
+Added: In addition, six of our 14 Directors and Officers reside outside the United States.
+Added: As a result, it may be difficult for investors to execute service of process within the United States upon us and such other persons, or to enforce judgments obtained against such persons in United States courts, and bring any action, including actions predicated upon the civil liability
+Added: provisions of the United States securities laws.
In addition, it may be difficult for investors to enforce, in original actions brought in courts or jurisdictions located outside of the United States, rights predicated upon the United States securities laws.
Based on the advice of our Cayman Islands legal counsel, we believe no reciprocal statutory enforcement of foreign judgments exists between the United States and the Cayman Islands, and that foreign judgments originating from the United States are not directly enforceable in the Cayman Islands.
−Removed: A prevailing party in a United States proceeding against us or our Officers or Directors would have to initiate a new proceeding in the Cayman Islands using the United States judgment as evidence of the party’s claim.
+Added: A prevailing party in a United States proceeding against us or our Directors and Officers would have to initiate a new proceeding in the Cayman Islands using the United States judgment as evidence of the party’s claim.
A prevailing party could rely on the summary judgment procedures available in the Cayman Islands, subject to available defenses in the Cayman Islands courts, including, but not limited to, the lack of competent jurisdiction in the United States courts, lack of due service of process in the United States proceeding and the possibility that enforcement or recognition of the United States judgment would be contrary to the public policy of the Cayman Islands.
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The relatively low trading volume of our stock may adversely impact the ability to sell our shares.
−Removed: For the year ended December 31, 2021, the average daily trading volume of our common stock was approximately 89,500 shares, a much lower trading volume than that of many other companies listed on the NASDAQ Global Select Market.
+Added: The average daily trading volume of our common stock in 2022 was approximately 102,300 shares, a much lower trading volume than that of many other companies listed on the NASDAQ Global Select Market.
A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common stock at any given time.
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Due to the limited volume of trading in our common stock, an investor in our stock may have difficulty selling larger volumes of our common stock in the manner, or at the price, that might be attainable if our common stock were more actively traded.
−Removed: The election process for our Board of Directors may discourage or delay a change in the composition of our Board.
−Removed: We have a classified Board of Directors that consists of three groups.
−Removed: Only one group of Directors is elected each year.
−Removed: The classified nature of our Board may increase the length of time necessary to change the composition of our Board, should an investor desire to do so.
UNRESOLVED STAFF COMMENTS
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.