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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-29 · 147 added, 185 removed, 188 unchanged (64% of the section changed)

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(1) In millions of gallons per day.

(2) As of December 18, 2020, we ceased operations of our water production and supply business in South Bimini, The Bahamas.

Our water treatment and reuse facilities are conducted at 27 plants in the United States.

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Comparative Operations

United States

(1) In estimated millions of gallons per day.

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See further discussion of this matter at ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS - Material Commitments, Expenditures and Contingencies - Cayman Water Retail License .

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Material Commitments, Expenditures and Contingencies - Cayman Water Retail License .

CW-Bahamas produces potable water from two seawater reverse osmosis desalination plants.

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CW-Bahamas supplies water from these plants to the Water and Sewerage Corporation of The Bahamas (“WSC”) under long-term supply agreements.

During 2021, we supplied approximately 4.4 billion gallons (2020:

4.2 billion gallons) of water to the WSC from these plants.

During 2022, we supplied approximately 4.6 billion gallons of water to the WSC from these plants, as compared to 4.4 billion gallons during 2021.

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

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - LIQUIDITY AND CAPITAL RESOURCES - CW-Bahamas Liquidity .

Critical Accounting Estimates

Critical Accounting Policies and Estimates

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

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

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.

Our actual results could differ significantly from such estimates and assumptions.

Certain of our accounting estimates or assumptions constitute “critical accounting estimates” for us because:

The application of our critical accounting policies involve estimates or assumptions that constitute “critical accounting estimates” for us because:

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

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

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

and (ii) long-lived assets.

Goodwill and Intangible Assets

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

Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

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

Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment.

We evaluate the possible impairment of goodwill annually as part of our reporting process for the fourth quarter of each fiscal year.

Management identifies our reporting units, which consist of our retail, bulk, services and manufacturing operations, and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units.

Management identifies our reporting units for goodwill impairment testing purposes, which consist of Cayman Water, the bulk segment (which is comprised of CW-Bahamas and OC-Cayman), PERC, and the manufacturing segment (i.e., Aerex), and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units.

We determine the fair value of each reporting unit and compare these fair values to the carrying amounts of the reporting units.

To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded.

For the years ended December 31, 2021 and 2020, we estimated the fair value of our reporting units by applying the discounted cash flow method, which relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period.

These seven-year projections were

based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies.

For 2021, we estimated the fair value of our reporting units by applying the discounted cash flow method, which relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period.

These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies.

The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis.

We also estimated the fair value of each of our reporting units for the years ended December 31, 2021 and 2020 by applying the guideline public company method.

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

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

The respective weightings we applied to each method for the years ended December 31, 2021 and 2020 were 80% to the discounted cash flow method and 20% to the guideline public company method.

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

The fair values we estimated for our retail, bulk, and services reporting units exceeded their carrying amounts by 101%, 49%, and 17%, respectively, as of December 31, 2020.

The significant decline in excess of fair value over carrying value for our retail unit from 2020 to 2021 reflects new estimates for future capital expenditures for our Cayman Water operations.

While the fair value we estimated for our manufacturing reporting unit exceeded its carrying value by 31% as of December 31, 2020, due to new information we obtained in 2021, we were required to record an impairment loss for our manufacturing unit’s goodwill in 2021, as discussed in paragraphs that follow.

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

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

Aerex’s actual results of operations for the six months in 2016 following the acquisition fell significantly short of the projected results that were included in the cash flow projections we utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities.

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

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

As part of our annual impairment testing of goodwill performed during the fourth quarter, in 2017 we updated our projections for Aerex’s future cash flows, determined that the carrying value of our manufacturing reporting unit’s goodwill exceeded its fair value, and recorded an impairment loss of $1,400,000 for the three months ended December 31, 2017 to further reduce the carrying value of this goodwill to $4,885,211.

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

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

For 2022, we elected to assess qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment testing we have conducted in prior years for all goodwill reporting units other than the manufacturing unit.

We assessed the relevant events and circumstances to evaluate whether it is more likely than not that the fair values of such reporting units are less than their carrying values.

The events and circumstances assessed for each unit included

macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, and other relevant events.

Based upon this qualitative assessment we determined that it is more likely than not that the fair values of our Cayman Water and bulk segment reporting units exceeded their carrying values as of December 31, 2022.

Based upon our negotiated, arms-length purchase of the remaining 39% equity interest in PERC from its minority shareholders for $7.8 million in January 2023, the fair value of our PERC reporting unit exceeded its carrying value by 79% as of December 31, 2022.

Due to the factors discussed in the following paragraphs, we elected to test the goodwill associated with our manufacturing reporting unit for possible impairment using the quantitative tests applied in prior years.

In connection with our acquisition of Aerex in 2016, we recorded goodwill of $8,035,211.

Aerex’s actual results of operations for 2016 fell significantly short of the projected results that were included in the cash flow projections we utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities.

Due to this shortfall in Aerex’s results of operations, we tested our manufacturing segment’s goodwill for possible impairment and recorded an impairment loss of ($1,750,000) in 2016.

As part of our annual impairment testing of goodwill performed during the fourth quarter, in 2017 we updated our projections for Aerex’s future cash flows, determined that the carrying value of our manufacturing reporting unit exceeded its fair value, and recorded an impairment loss of ($1,400,000) for December 31, 2017 to further reduce the carrying value of our manufacturing segment goodwill to $4,885,211.

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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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).

we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020.

Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic impacts of the COVID-19 pandemic, which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials and, we believe, also adversely affected the overall financial condition of Aerex’s current and prospective customer base.

Accordingly, in light of this new information from Aerex’s former major customer, and present weak economic conditions that we believe will continue into 2022, we updated our projections of future cash flows for the manufacturing reporting unit and tested its goodwill for possible impairment as of June 30, 2021 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively.

Based upon 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.

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.

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 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.

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 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.

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.

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).

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 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 segment’s goodwill by this amount for the three months ended June 30, 2021.

For 2022, we estimated the fair value of our manufacturing reporting unit by applying the discounted cash flow method, which relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period.

These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and

operational strategies.

The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis.

We also estimated the fair value of our manufacturing reporting unit for the year ended December 31, 2022 by applying the guideline public company method.

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

The respective weightings we applied to each method for the year ended December 31, 2022 were 80% to the discounted cash flow method and 20% to the guideline public company method.

The fair value we estimated for our manufacturing reporting unit exceeded its carrying amount by 63% as of December 31, 2022.

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

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

As noted previously, based upon our estimation prepared as of December 31, 2022, the fair value of our manufacturing reporting unit exceeded its carrying value by 63%.

However, 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 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.

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

In 2017 and 2016 we determined, based upon probability-weighted scenarios for

CW-Bali’s future undiscounted cash flows, that the carrying values of CW-Bali’s long-lived assets and our investment in CW-Bali were not recoverable.

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

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

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

Construction and Manufacturing Contract Revenue Recognition

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

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

through PERC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Results of Operations

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

The applicable law requires this list of non-recoverable expenses made by AdR in

connection with the Project be submitted to CEA and CESPT within 20 business days from the date of receipt of the Letter.

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

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

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

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

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

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

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 CW-Cooperatief’s letter and proposed to hold a consultation meeting.

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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.

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 years ended December 31, 2021 and 2020 were ($2,574,079) and ($4,902,243), respectively.

Our net loss from discontinued operations for 2021 and 2020 also consists of provisions of $963,540 and $316,217, respectively, for potentially uncollectible value added taxes paid that are reimbursable/receivable from the Mexican federal government.

We recorded the 2021 provision as a result of the Mexican government’s rejection of our most recent request for repayment of these value added taxes paid.

We believe we are legally entitled to be repaid for these value added taxes and have engaged a firm to assist us in collecting the total amount of approximately $1.6 million from the Mexican government.

However, we ultimately may not be able to obtain such payment from the Mexican government and therefore may be required in the future to record another provision to write off the remaining balance of these receivables, which amounted to approximately $340,910 as of December 31, 2021.

Accordingly, the assets and liabilities of CW-Cooperatief, NSC and AdR, as well as the costs for our legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP Contract, are classified as discontinued operations in the accompanying consolidated financial statements.

Our net losses from discontinued operations for 2022 and 2021 were ($2,371,049) and ($2,574,079), respectively.

Our net losses from discontinued operations for 2022 and 2021 includes provisions of $377,326 and $963,540, respectively, for uncollectible value added taxes paid to, and reimbursable by, the Mexican federal government.

Consolidated Results

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stockholders for 2022 was $8,227,343 ($0.54 per share on a fully diluted basis), as compared to $3,449,658 ($0.23 per share on a fully diluted basis) for 2021.

Total revenue for 2021 decreased to $66,863,502 from $72,628,126 in 2020, as the manufacturing segment experienced a significant revenue decline, which was not fully offset by revenue increases in our other segments.

Revenue for 2022 increased to $94,104,972 from $66,863,502 in 2021, as all four segments experienced revenue increases.

Gross profit for 2022 was $30,355,123 (32% of total revenue) as compared to $23,507,191 (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 expenses (“G&A expenses”) on a consolidated basis remained relatively consistent at $18,350,359 for 2021 as compared to $18,434,898 for 2020.

Other income, net, increased to $1,623,595 in 2021, as compared to $1,082,946 in 2020.

This increase is primarily attributable to a gain of $818,000 in 2021 on the net put/call options associated with the acquisition of PERC as a result of the December 31, 2021 revaluation of these options.

This net gain was offset by a reduction in income generated from our investment in the profit-sharing plan of OC-BVI and our equity in the earnings of OC-BVI, which in the aggregate were approximately $428,000 higher in 2020 than in 2021.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the years ended December 31, 2021 and 2020, 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.”

General and administrative expenses (“G&A expenses”) on a consolidated basis increased to $21,070,234 for 2022 as compared to $18,350,359 for 2021.

The most significant components of the increase in G&A expenses for 2022 were incremental bonus accruals and stock compensation expense aggregating $1,248,242 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 $399,268 due to salary increases and new hires;

(ii) professional and legal fees, which increased by $148,663;

(iii) insurance expense, which increased $254,599 due to higher premiums and (iv) incremental business development expenses of $170,461.

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 $464,810 in 2022, as compared to $1,623,595 in 2021 primarily due to a loss of ($128,000) recorded in 2022 for the valuation of the put/call options associated with the acquisition of PERC, as compared to a gain recorded on these options of $818,000 in 2021.

In addition, interest income decreased by approximately $238,000 for 2022 as compared to 2021 primarily due to the decrease in CW-Bahamas’ average delinquent accounts receivable balances due from the WSC.

Results by Segment

Retail Segment:

The retail segment incurred a net loss from operations of ($2,044,094) as compared to a loss from operations of ($1,004,924) for 2020.

Revenue generated by our retail water operations decreased to $22,104,953 in 2021 from $22,952,370 in 2020.

The reduction in revenue reflects a 4% decrease in the volume of water sold by Cayman Water due to the closing of Grand Cayman Island to all tourist travel in March 2020 in response to the COVID-19 pandemic.

Retail segment gross profit decreased to $11,044,016 (50% of retail revenue) for 2021 as compared to $11,871,556 (52% of retail revenue) for 2020.

This decrease in gross profit dollars is attributable to the revenue decline.

The revenue decline also resulted in lower gross profit as a percentage of revenue for 2021 due to the resulting greater relative impact of fixed production and distribution costs.

The retail segment incurred a loss from operations of ($1,187,013) for 2022 as compared to a loss from operations of ($2,044,094) for 2021.

Revenue generated by our retail water operations increased to $25,954,013 in 2022 from $22,104,953 in 2021 in part due to a 12.5% 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 August 2022 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 August 2022 of such pandemic related travel restrictions.

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 $13,405,250 (52% of retail revenue) for 2022 as compared to $11,044,016 (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 decreased to $12,841,259 for 2021 as compared to $12,879,445 for 2020.

Retail G&A expenses increased to $14,552,866 for 2022 as compared to $12,841,259 for 2021.

The most significant components of the increase in G&A expenses for 2022 were incremental bonus accruals and stock compensation expense of $976,501 arising from the improved financial performance of the Company.

Other components of the G&A expenses increase relate to (i) professional and legal fees, which increased by $167,445;

(ii) incremental business development expenses of $170,461 and (iii) insurance costs, which increased by $123,938.

Bulk Segment:

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Bulk segment revenue was $32,991,066 and $26,800,869 for 2022 and 2021, respectively.

The increase in bulk segment revenue from 2020 to 2021 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, a 5% increase in the volume of water sold by CW-Bahamas.

The increase in bulk segment revenue from 2021 to 2022 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 the bulk segment was $9,958,854 (30% of bulk segment revenue) and $9,041,597 (34% of bulk segment revenue) for 2022 and 2021, respectively.

Gross profit in dollars and as a percentage of revenue increased in 2021 as compared to 2020 principally due to the increase in revenue.

Bulk segment G&A expenses remained relatively consistent at $1,365,735 for 2021 as compared to $1,260,062 for 2020.

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

Gross profit as a percentage of revenue decreased in 2022 as compared to 2021 principally due to incremental repairs and maintenance expenses for CW-Bahamas of approximately $361,000 and incremental chemical costs of approximately $554,000 arising from higher chemical prices and greater chemicals usage.

Bulk segment G&A expenses increased to $1,570,732 for 2022 as compared to $1,365,735 for 2021 primarily due to relatively small increases in a variety of expense categories.

Services Segment:

The services segment contributed $2,424,217 and $414,394 to our income from operations for 2022 and 2021, respectively.

Services segment revenue increased to $13,884,857 for 2021 compared to $12,937,859 for 2020 due to an increase of approximately $3.2 million from operating and maintenance contracts attributable to new contracts, which served to more than offset a decline in plant construction revenue.

Services segment revenue increased to $28,835,428 for 2022 compared to $13,884,857 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 which commenced in the third quarter of 2022.

Revenue recognized on this contract in 2022 was approximately $9.5 million.

The gross profit for the services segment was $5,861,794 (20% of services segment revenue) in 2022 as compared to $3,177,614 (23% of services revenue) for 2021.

The slight decrease in gross profit as a percentage of revenue reflects a shift in the contract mix.

G&A expenses for the services segment remained consistent at $2,762,735 for 2021 as compared to $2,834,917 for 2020.

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 $3,461,294 for 2022 as compared to $2,762,735 for 2021 as a result of increased bonus accruals of $235,204 arising from the improved financial performance of PERC, $385,156 in incremental other employee costs attributable to salary increases and new hires and increased insurance expense.

Manufacturing Segment:

The manufacturing segment incurred a loss of ($4,036,666) for 2021 as compared to generating an income from operations of $2,843,815 for 2020.

Approximately 80% of our manufacturing segment revenue and 89% of our manufacturing segment gross profit for 2020 were generated from sales to one customer.

While Aerex sells various products to this customer, Aerex’s revenue from this customer has historically been derived from one specialized product.

In October 2020, this customer informed Aerex that, for inventory management purposes, it was suspending its purchases of the specialized product from Aerex following 2020 for a period of approximately one year.

This customer informed Aerex at that time that it presently expected to recommence its purchases from Aerex beginning with the first quarter of 2022.

In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases of the specialized product from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to both the amounts it had purchased from Aerex in 2020 and prior years and the amounts we had anticipated the customer would purchase (based upon the most recent communications from the customer, we now expect such purchases to recommence in late 2022 or early 2023).

Our efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic conditions, which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials and, we believe, also adversely affected the overall financial condition of Aerex’s current and prospective customer base.

Accordingly, in light of this new information from Aerex’s former major customer, and present weak economic conditions that we believe will continue into 2022, we tested the carrying value of our manufacturing reporting unit for possible impairment as of June 30, 2021.

The manufacturing segment incurred a loss from operations of ($358,748) for 2022 as compared to a loss of ($4,036,666) for 2021.

The loss from operations for 2021 reflects an impairment loss recorded for our manufacturing segment’s goodwill of $2,900,000 due to a decline in Aerex’s projected future cash flows.

Manufacturing segment revenue was $6,324,465 and $4,072,823 for 2022 and 2021, respectively.

Manufacturing segment revenue decreased from 2020 to 2021 due to the loss of orders from Aerex’s former largest customer, and to date we have not been successful in replacing all of this lost revenue.

Manufacturing revenue under certain contracts has been deferred due to significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

Manufacturing segment revenue increased from 2021 to 2022 due to an increase in production activity that resulted from an easing of some of the supply change difficulties that restricted production for 2021 and most of 2022.

Manufacturing segment gross profit was $1,129,225 (18% of manufacturing segment revenue) and $243,964 (6% of manufacturing segment revenue) for 2022 and 2021, respectively.

The decrease in manufacturing segment gross profit in dollars reflects the decrease in revenue.

Gross profit as a percentage of revenue declined due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we elected to continue the employment of all of our manufacturing personnel during 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment dropped to $1,380,630 for 2021 as compared to $1,460,474 for 2020 as a result of a decrease of $115,000 in the amortization expenses resulting from the completion of the amortization period for certain intangible assets recorded in connection with the acquisition of Aerex.

As noted previously, the results of our manufacturing segment have been adversely affected by recent economic conditions which have resulted in increasing raw materials prices, extended and unexpected delays in the procurement and delivery of raw materials and, we believe, have also adversely affected its existing and prospective customer base.

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

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

Gross profit as a percentage of revenue increased due to the revenue increase and the resulting lesser relative impact of fixed factory overhead on this measure, as we elected to continue the employment of all of our highly skilled manufacturing personnel during 2022 and 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment remained relatively consisted at $1,485,342 for 2022 as compared to $1,380,630 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.

FINANCIAL CONDITION

The significant changes in the components of our consolidated balance sheet as of December 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.

Accounts receivable increased by approximately $5.9 million.

This net increase reflects an increase in CW-Bahamas’ accounts receivable of approximately $4.7 million from the WSC and an increase of approximately $770,000 of manufacturing accounts receivable due to timing.

Current inventory decreased by approximately $709,000 primarily due to a decline in orders for Aerex.

Property, plant and equipment, net decreased by approximately $4.7 million due to scheduled depreciation of fixed assets.

Operating lease right-of-use assets increased by approximately $1.3 million, with a related increase in operating lease liabilities of approximately $1.3 million, primarily due to a new office lease for Aquilex that began in March 2021.

Current inventory increased by approximately $3.2 million primarily due to an increase in Aerex’s inventory, as Aerex began a major new contract in the fourth quarter of 2022.

Some of Aerex’s manufacturing contracts have also been delayed, resulting in extended retention times for various inventory items purchased for these contracts.

Prepaid expenses and other current assets increased by approximately $3.1 million primarily due to advance payments to contractors and suppliers and the cost of PERC’s construction bond for the Liberty Utilities project.

Contract assets increased by approximately $2.4 million due to an increase in the Red Gate plant construction and Aerex's manufacturing activities.

Construction in progress increased by approximately $3.0 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 $5.6 million primarily due to an increase in subcontractor costs for PERC’s contract with Liberty Utilities and Aerex’s manufacturing projects.

Contract liabilities increased by $8.3 million primarily due to approximately $7.0 million in billings made by the services segment in connection with PERC’s new contract with Liberty Utilities.

Aerex also had an increase of approximately $1.3 million in billings in the manufacturing segment.

LIQUIDITY AND CAPITAL RESOURCES

Certain transfers from our Bahamas bank accounts to our bank accounts in other countries require the approval of the Central Bank of The Bahamas.

The Cayman Islands does not have a tax treaty with the United States.

Consequently, should we be required (or elect) to transfer any profits generated by our U.S.

operations to our parent company in the Cayman Islands, the amount of any such profits transferred would be subject to a 30% withholding tax.

Liquidity Position

Our projected liquidity requirements for 2022 include capital expenditures for our existing operations of approximately $9.5 million, which includes $5.6 million to be incurred in 2022 for the replacement of the 26-year old West Bay seawater desalination plant in Grand Cayman which is expected to be completed in 2023 at a total cost of $7.2 million, and approximately $1.3 million for dividends payable.

Our projected liquidity requirements for 2023 include capital expenditures for our existing operations of approximately $14.1 million, which includes $2.8 million to be incurred in 2023 for the replacement of the West Bay seawater desalination plant and approximately $7.5 million for construction of the WAC’s new Red Gate plant.

We paid approximately $1.4 million for dividends in January 2023.

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

Our dividend payments amounted to approximately $5.8 million for the year ended December 31, 2021 and approximately $5.1 million for the year ended December 31, 2020.

On January 4, 2023, we purchased the remaining 39% of PERC from its minority shareholders for approximately $2.44 million in cash and 368,383 shares of the Company’s common stock.

As of December 31, 2022, we had cash and cash equivalents of $50.7 million and working capital of $69.9 million.

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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.

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.

Our most recent such discussions occurred during the week of March 7, 2022.

All previous delinquent accounts receivable from the WSC, including accrued interest thereon, were eventually paid in full.

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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.

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 February 28, 2022, CW-Bahamas’ accounts receivable from the WSC totaled $26.4 million.

During the first three weeks of March 2022, we received $7.6 million in payments on these accounts receivable.

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:

(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 .

In February 2022, we received correspondence from the Ministry of Finance of the Government of the Bahamas that stated that the Government intends to return all of CW-Bahamas’ accounts receivable from the WSC to current status.

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 Baa3.

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 Year Ended December 31, 2022

Our cash and cash equivalents decreased to $40,358,059 as of December 31, 2021 from $43,794,150 as of December 31, 2020.

Our cash and cash equivalents increased to $50,711,751 as of December 31, 2022 from $40,358,059 as of December 31, 2021.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $21,331,805.

This net cash provided reflects net income generated for the year ended December 31, 2021 from continuing and discontinued operations of $1,508,494 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 provided reflects net income generated for the year ended December 31, 2022 of $6,969,207 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 $6,921,233, an impairment loss for Aerex of $2,900,000, a $963,540 provision for potentially uncollectible value added tax receivables, and an increase in accounts receivable of $5,878,771 (principally attributable to CW-Bahamas).

The more significant of such items and changes in working capital components included depreciation and amortization of $6,187,308, an increase in contract liabilities of $8,290,043, an increase in accounts payable and accrued expenses of $6,756,433, an increase in inventory of $3,387,011, an increase in prepaid expenses and other assets of $3,365,747 and an increase in contract assets of $2,423,761.

Cash Flows from Investing Activities

Net cash used by our investing activities was $4,981,036.

Cash used was primarily to purchase a certificate of deposit of $2,500,000 and for additions to property, plant and equipment and construction in progress of $1,490,012.

Cash used was primarily for additions to property, plant and equipment and construction in progress of $7,542,761.

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

Cash Flows from Financing Activities

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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.

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.

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

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

Effective March 28, 2020, the Cabinet and Cayman Islands law enforcement enacted various ‘stay-at-home’ regulations and curfews, which closed all businesses not deemed essential by the government and required citizens to stay at home unless they were purchasing necessities or engaged in an essential errand.

In May 2020, the Cabinet started the phased relaxation of the shelter-in-place regulations and on October 1, 2020, the Cayman Islands reopened its borders for residents or individuals who own property in the Cayman Islands that provide evidence of a negative COVID-19 test performed within three days prior to arrival in the Cayman Islands and agree to remain in quarantine for 14 days after arrival.

In July 2021, this quarantine period was reduced to five days for fully vaccinated travelers who can provide proof of vaccination from Cayman Islands government approved sources.

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

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

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

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

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

We expect that our retail segment revenue and cash flows will continue to be materially adversely impacted until such time as tourism and the economy in the Cayman Islands fully recover from the impact and effects of the COVID-19 pandemic.

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

Presently, the day-to-day operations of Cayman Water’s water production facilities and distribution network have not been materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the demand for water in our retail license area.

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

Although it operates on Grand Cayman - and therefore is also affected by the preventative measures enacted by government that have been discussed previously - OC-Cayman sells water on a bulk basis to the WAC, which in turn provides this water to areas of Grand Cayman that are more residential, and less tourist related, than the license area served by Cayman Water.

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

Therefore, unlike Cayman Water, OC-Cayman’s revenue is not as directly affected by tourism on Grand Cayman and, due to the structure of the underlying water supply agreements, is not as acutely sensitive to declines in water demand.

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

Presently, OC-Cayman’s day-to-day operations have not been materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the requirements of our two water supply agreements with the WAC.

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.

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.

Initially, these regulations closed all businesses not deemed essential by the government, encouraged the employees of non-essential businesses to work remotely and imposed 24-hour shelter-in-place curfew on all residents of The Bahamas other than those engaged in essential or pre-approved activities.

On March 24, 2020, the government banned all international travel to The Bahamas by closing all airports and seaports.

As a result of the measures taken by The Bahamas government, tourism on New Providence Island, where CW-Bahamas operates, temporarily ceased and economic activity in The Bahamas slowed dramatically.

During the summer of 2020, travel restrictions were briefly lifted then reimposed.

In November 2020, shelter-in-place regulations were loosened, and commercial and retail operations were permitted to open with limited capacity although working from home was still encouraged.

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 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.

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.

CW-Bahamas sells the water produced by its plants on a bulk basis to the WSC, which in turn provides water to the residences, businesses, and other end users on New Providence.

Under the terms of each of its water supply agreements with the WSC, CW-Bahamas charges the WSC a fixed monthly amount, an amount each month that is based upon the amount of water supplied during the month, and pass-through energy charges, therefore CW-Bahamas’ revenue is impacted by changes in water demand and energy prices.

To date, the volume of water CW-Bahamas sells to the WSC has not been adversely impacted by the COVID-19 pandemic notwithstanding the downturn in economic activity on New Providence due to preventative measures taken by the government in March 2020 and continuing thereafter in various forms.

In addition, the adverse impact of the COVID-19 pandemic on The Bahamas government’s revenue sources may further delay the collection of CW-Bahamas’ delinquent accounts receivable from the WSC.

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.

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

Aerex presently has 13 manufacturing employees.

Should a number of these employees become ill or be required to enter quarantine because of COVID-19, Aerex could be required to reduce or cease its manufacturing activities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.

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.

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.

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.

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

Approximately 76% of PERC’s revenue of $13.4 million for the year ended December 31, 2021 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.

Cayman Water Retail 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.

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.

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.

We continue to pay the royalty required under the 1990 license.

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.

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 retail license negotiations from the WAC to OfReg in May 2017.

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 retail license negotiations from the WAC to OfReg in May 2017.

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.

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

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Effect of newly issued but not yet effective accounting standards

In March 2020, the FASB issued ASU No.

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

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

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

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

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

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

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However, we have not increased our retail water rates since January 2018 (despite the inflation that has occurred since that date) due to the lack of a resolution of our negotiations with OfReg for a new retail license.

This lack of a rate increase has contributed to a decline in the gross

profit generated by our retail segment.

Furthermore, our manufacturing segment has been adversely impacted by recent significant increases in raw material costs.

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

This lack of a rate increase has contributed to a decline in the gross profit generated by our retail segment.

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

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

In general, our operating and maintenance contracts are adjusted annually for the impacts of inflation.

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.

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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-K

Item 7. Management’s Discussion and Analysis