What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-03-30 compared with 2022-03-29 · 201 added, 235 removed, 790 unchanged (36% of the section changed)

34 unchanged sentences

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of Goodwill for All Reporting Units

At December 31, 2021, the Company’s goodwill balance was $10,425,013.

As discussed in Note 2 to the consolidated financial statements, the Company evaluates the possible impairment of goodwill at least annually, or upon a triggering event, for each of its four reporting units – retail, bulk, services, and manufacturing.

The Company estimated the fair value of their 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.

The 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.

The Company also estimated the fair value of each reporting units by applying the guideline public company method.

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

The weighted approach applied 80% to the discounted cash flow method and 20% to the guideline public company method.

Management identified a triggering event, which required an evaluation of the fair value of goodwill recorded in the manufacturing reporting unit as of June 30, 2021.

The fair value of the manufacturing reporting unit did not exceed its carrying value as of this measurement date and, therefore, an impairment expense of $2,900,000 was recognized as of June 30, 2021.

The Company also evaluated the fair value of goodwill recorded for all four reporting units as of December 31, 2021 noting that the fair value of the reporting units exceeded its carrying value as of this measurement date and, therefore, no additional impairment was recognized.

Management’s goodwill impairment assessments for the separate reporting units involves subjective management assumptions.

These assumptions are forward-looking and are affected by shifts in the evolving market landscape.

Changes in these assumptions can have a material effect on the determination of the fair value of each reporting unit.

The most subjective and significant assumptions used in the valuing each reporting unit are the estimated discount rates, selection of guideline companies, and future operating projections.

Given the significant judgments made by management to estimate the fair value of each reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the projections of future operating results required a high degree of auditor judgment and an increased extent of effort.

Our audit procedures to test management’s goodwill impairment evaluations included the following, among others:

● We utilized our internal valuation specialists to assess the valuation methodologies and significant assumptions discussed above.

This includes assessing the discount rates and guideline public companies.

● We evaluated the reasonableness of management’s revenue and operating projections for all reporting units by comparing the projections to the Company’s historical operating results, reviewing internal communications between management and prospective customers, and comparing to underlying source documents (if available) such as customer contracts included within the Company's backlogs.

● We recalculated and tested the estimated fair values of the Company’s reporting units.

● We assessed management's sensitivity analysis regarding the significant assumptions used in the valuation.

● We reviewed the results of our audit procedures performed throughout the course of the engagement and compared our results to the goodwill impairment analysis to verify that there is no contradictory evidence that would result in a change to the overall assumptions or conclusions reached by management.

Evaluation of Goodwill for the Manufacturing Reporting Unit

As of December 31, 2022, the Manufacturing reporting unit's goodwill balance was $1,985,211.

Management’s goodwill impairment assessment for the Manufacturing reporting unit involves subjective management assumptions.

These assumptions are forward-looking and are effected by shifts in the evolving market landscape.

Changes in these assumptions can have a material effect on the determination of the fair value of this reporting unit.

Given the significant judgments made by management to estimate the fair value of the Manufacturing reporting unit, performing

audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future operating results required a high degree of auditor judgment and an increased extent of effort.

The Company estimated the fair value of the 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.

The 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 the analysis.

The Company also estimated the fair value of the Manufacturing reporting unit for the year ended December 31, 2022 by applying the guideline public company method.

The Company weighted the fair values estimated for the 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 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.

Our primary audit procedures to test management’s goodwill impairment evaluation for the manufacturing reporting unit included the following:

● We obtained an understanding and evaluated the design of the Company's internal controls over management’s annual goodwill impairment assessment, including controls addressing:

o Management’s assessment of potential triggering events indicating potential impairment.

o Management’s annual goodwill assessment and controls surrounding their qualitative and quantitative assessments.

● We obtained the Company's ASC 350 Goodwill impairment analysis memo and supporting workbook for the Manufacturing segment prepared by the Company's management which includes their goodwill evaluation and discounted cash flow model.

● We substantively tested the appropriateness of the prospective financial information and assumptions included in the valuation model associated with the projected balance sheets, income statements, capital expenditures, effective tax rates, and growth rates of the out years for contradictions to market factors and information, historical experiences, economic conditions, and the Company's objectives and business risks.

● In assessing the prospective financial information, we evaluated the reasonableness of management's revenue and operating projections included in their discounted cash flow model through testing of the Company’s contract backlogs and through performing a retrospective review comparing actual historical operations to projections.

● We obtained the Company's ASC 350 Goodwill impairment analysis report for the Manufacturing segment prepared by the Company's specialist and assessed the appropriateness and reasonableness of valuation methodologies, discount rates, and assumptions used.

● We traced all relevant financial data from the valuation workbook noted above to the inputs that were used in the goodwill valuation report to ensure the Company's projections were properly incorporated into the valuation model.

● We utilized our valuation specialist to verify that the valuation methodology used by the Company was appropriate.

Our valuation specialist tested the clerical accuracy of the valuation model and reperformed the calculation of the estimated fair value of the reporting unit using the methodologies in the valuation report to verify the Company's calculation of fair value is reasonable.

We compared our calculation to the carrying value of the company as of December 31, 2022 noting that there is no impairment.

● We assessed management's sensitivity analysis adjusting for changes to the projected cash flows and discount rate, noting significant fair value coverage.

/s/ Marcum LLP

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Contract assets

Net asset arising from put/call options

Current assets of discontinued operations

6 unchanged sentences

Operating lease right-of-use assets

Net asset arising from put/call options

Long-term assets of discontinued operations

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Noncurrent operating leases

Net liability arising from put/call options

Other liabilities

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General and administrative expenses ( including purchases from related parties of $ 96,924 in 2022 and $ 77,190 in 2021)

Gain (loss) on asset dispositions and impairments, net

Loss on asset dispositions and impairments, net

( 3,145,836 )

5 unchanged sentences

Equity in the earnings of OC-BVI

Net unrealized gain (loss) on put/call options

Net gain (loss) on put/call options

Other income, net

36 unchanged sentences

( 5,833,112 )

Acquisitions of non-controlling interests

( 2,579,882 )

( 6,820,118 )

( 9,400,000 )

Stock-based compensation

7 unchanged sentences

( 1,102,475 )

( 6,314,126 )

Stock-based compensation

14 unchanged sentences

Deferred income tax benefit

Provision for doubtful accounts

Unrealized (gain) loss on net put/call option

Loss (gain) on net put/call option

Compensation expense relating to stock and stock option grants

Loss (gain) on asset dispositions and impairments, net

Loss on asset dispositions and impairments, net

Profit-sharing and equity in earnings of OC-BVI

3 unchanged sentences

( 2,120,636 )

( 5,878,771 )

( 3,387,011 )

Prepaid expenses and other assets

Accounts payable (including related parties), accrued expenses and other current liabilities, and contract liabilities

( 3,365,747 )

Accounts payable (including related parties), accrued expenses and other current liabilities

Contract liabilities

Operating lease liabilities

8 unchanged sentences

( 2,518,493 )

( 2,500,000 )

Maturity of certificate(s) of deposit

Additions to property, plant and equipment and construction in progress

2 unchanged sentences

Proceeds from asset dispositions

Purchase of non-controlling interest in Aerex

( 8,500,000 )

Purchase of non-controlling interest in PERC

Net cash used in investing activities

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Dividends paid to non-controlling interests

Repurchase of redeemable preferred stock

( 1,102,475 )

Buyback of redeemable preferred stock

Proceeds received from exercise of stock options

3 unchanged sentences

( 5,862,031 )

Net (decrease) increase in cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

( 2,840,173 )

8 unchanged sentences

Consolidated Water Co.

and its subsidiaries (collectively, the “Company”) supply potable water, treat water for reuse and provide water-related products and services to customers in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands.

and its subsidiaries (collectively, the “Company”) supply potable water, treat wastewater and water for reuse, and provide water-related products and services to customers in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands.

The Company produces potable water from seawater using reverse osmosis technology and sells this water to a variety of customers, including public utilities, commercial and tourist properties, residential properties and government facilities.

5 unchanged sentences

Use of estimates:

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

Significant items subject to estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, goodwill and put/call options.

Significant items subject to estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, goodwill and revenue recognition on construction and manufacturing contracts.

Actual results could differ significantly from such estimates.

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All significant intercompany balances and transactions have been eliminated in consolidation.

On January 24, 2020, as a result of CW-Holdings' exercise of a call option, CW-Holdings purchased the remaining 49 % ownership interest in Aerex for $ 8,500,000 in cash.

After giving effect to this purchase, CW-Holdings owns 100 % of the outstanding capital stock of Aerex.

On August 11, 2020, CW-Holdings purchased an additional 10 % of the ownership of PERC for $ 900,000 , increasing its ownership of this subsidiary to 61 % .

On January 4, 2023, as a result of CW-Holdings' exercise of a call option in October 2022, CW-Holdings purchased the remaining 39 % ownership interest in PERC for $ 2.4 million in cash and 368,383 shares of the Company’s common stock.

After giving effect to this purchase, CW-Holdings owns 100 % of the outstanding capital stock of PERC.

Foreign currency:

The Company’s reporting currency is the United States dollar (“US$”).

The functional currency of the Company and its subsidiaries (other than NSC, AdR and CW-Cooperatief) is the currency for each respective country.

The functional currency of the Company and its foreign operating subsidiaries (other than NSC, AdR and CW-Cooperatief) is the currency for each respective country.

The functional currency for NSC, AdR and CW-Cooperatief is the US$.

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Cash and cash equivalents:

Cash and cash equivalents consist of demand deposits at banks and highly liquid deposits at banks with an original maturity of three months or less.

Cash and cash equivalents consist of demand deposits at banks and certificates of deposit at banks with an original maturity of three months or less.

Cash and cash equivalents as of December 31, 2022 and 2021

include $ 7.4 million and $ 8.5 million, respectively, of certificates of deposits with an original maturity of three months or less.

include $ 5.0 million and $ 7.4 million, respectively, of certificates of deposit with an original maturity of three months or less.

As of December 31, 2022, the Company had deposits in U.S.

banks in excess of federally insured limits of approximately $ 12.5 million.

As of December 31, 2021, the Company held cash in foreign bank accounts of approximately $ 33.1 million, which includes a $ 2.5 million certificate of deposit with an original maturity of six months.

As of December 31, 2022, the Company held cash in foreign bank accounts of approximately $ 36.6 million.

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

As of December 31, 2021, the equivalent United States dollar cash balances for deposits held in The Bahamas were approximately $ 6.4 million.

The equivalent United States dollar cash balances for deposits held in The Bahamas as of December 31, 2022 and 2021 were approximately $ 5.7 million and $ 3.9 million, respectively.

Certificate of deposit:

As of December 31, 2022 and 2021, the Company held a certificate of deposit in The Bahamas with an original maturity of six months in the amount of zero and $ 2.5 million, respectively.

Accounts receivable and allowance for doubtful accounts:

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The Company determines the allowance for doubtful accounts based on historical write-off experience and monthly review of delinquent accounts.

Past due balances are reviewed individually for collectability and disconnection.

Past due balances are reviewed individually for collectability.

Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered by management to be remote.

Inventory primarily includes consumables stock and spare parts stock that are valued at cost, less an allowance for obsolescence, with cost determined on the first-in, first-out basis.

Inventory also includes potable water held in the Company’s reservoirs.

The carrying amount of the water inventory is the lower of the average cost of producing water during the year or its net realizable value.

Inventory primarily consists of raw materials purchased for specific manufacturing contracts that are valued at cost on the first-in, first-out basis.

Inventory also includes (i) consumables stock and spare parts stock that are valued at cost, less an allowance for obsolescence, with cost determined on the first-in, first-out basis;

and (ii) potable water held in the Company’s reservoirs that is valued at the lower of the average cost of producing water during the year or its net realizable value.

Contract assets and liabilities:

Billing practices for the Company’s contracts are governed by the contract terms of each project based upon costs incurred, achievement of milestones or predetermined schedules.

Billings do not necessarily correlate with revenue recognized over time using the direct inputs method of accounting.

Billings do not necessarily correlate with revenue, which is recognized over time using the direct inputs method of accounting.

The Company records contract assets and contract liabilities to account for these differences in timing.

1 unchanged sentence

Contract liabilities, which include billings in excess of costs and estimated earnings on uncompleted contracts, represent the Company's obligation to transfer goods or services to a customer for which the Company has been paid by the customer or for which the Company has billed the customer under the terms of the contract.

Revenue for future services reflected in this account are recognized, and the liability is reduced, as the Company subsequently satisfies the performance obligation under the contract.

Revenue for future services reflected in this account is recognized, and the liability is reduced, as the Company subsequently satisfies the performance obligation under the contract.

Costs and estimated earnings in excess of billings on uncompleted contracts and billings in excess of costs and estimated earnings on uncompleted contracts are typically resolved within one year and are not considered significant financing components.

29 unchanged sentences

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.

The Company evaluates the possible impairment of goodwill annually as part of its reporting process for the fourth quarter of each fiscal year.

Management identifies the Company’s reporting units, which consist of retail, bulk, services, and manufacturing, 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.

The Company determines the fair value of each reporting unit and compares the fair value to the carrying amount of the reporting unit.

Management identifies the Company’s 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.

The Company determines the fair value of each reporting unit and compares these fair value to the carrying amount 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, the Company estimated the fair value of its 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.

For the year ended December 31, 2021, the Company estimated the fair value of its 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.

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

The Company also estimated the fair value of each of its reporting units for the year ended December 31, 2021 by applying the guideline public company method.

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

The respective weightings the Company

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 the Company estimated for its 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 the Company estimated for its retail, bulk, and services reporting units exceeded their carrying amounts by 101 %, 49 % and 17 %, respectively, as of December 31, 2020.

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

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

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

For the year ended December 31, 2022, the Company elected to assess qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment testing conducted in prior years for all goodwill reporting units other than the manufacturing reporting unit.

The Company assessed 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 the Company determined that it was more likely than not that the fair values of its Cayman Water and bulk segment reporting units exceeded their carrying values as of December 31, 2022.

Based upon the Company’s 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 the Company’s PERC reporting unit exceeded its carrying value by 79% as of December 31, 2022.

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

In connection with its acquisition of Aerex in 2016, the Company 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 the Company 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, the Company tested its manufacturing reporting unit’s goodwill for possible impairment and recorded an impairment loss of $ 1,750,000 in 2016.

As part of its annual impairment testing of goodwill performed during the fourth quarter, in 2017 the Company updated its projections for Aerex’s future cash flows, determined that the carrying value of its 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 the 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.

7 unchanged sentences

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.

The Company’s updated sales estimate for this customer based on this new information was substantially below the sales the Company anticipated to this customer for 2022 and subsequent years that the Company used in the discounted cash flow projections the Company prepared for purposes of testing its 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 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, the Company believes, 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 the Company believes will continue into 2022, the Company updated its 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, the Company determined that the carrying value of its manufacturing reporting unit exceeded its fair value by $ 2.9 million, and the Company recorded an impairment loss to reduce its manufacturing reporting unit’s goodwill by this amount for the three months ended June 30, 2021.

Based upon its most recent estimation prepared as of December 31, 2021, the fair value of the Company’s manufacturing reporting unit exceeded its carrying value by only 15 %.

If the Company determines in the future that Aerex’s discounted future cash inflows will be less than its present expectation, the Company may be required to record additional impairment losses to reduce the remaining carrying values as of December 31, 2021 of its 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 the Company’s consolidated results of operations.

Based upon its most recent estimation prepared as of December 31, 2021, the fair value of the Company’s services reporting unit exceeded its carrying value by only 15 %.

If the Company determines in the future that PERC’s discounted future cash inflows will be less than its present expectation, the Company may be required to record impairment losses to reduce the carrying values as of December 31, 2021 of its 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.

The Company’s 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 the Company used in the discounted cash flow

projections it prepared for purposes of testing its 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 the Company believed would continue through 2022, the Company updated its 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, the Company determined that the carrying value of its manufacturing reporting unit exceeded its fair value by $ 2.9 million, and the Company recorded an impairment loss to reduce its manufacturing segment’s goodwill by this amount for the three months ended June 30, 2021.

For the year ended December 31, 2022, the Company estimated the fair value of its 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.

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

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

The Company weighted the fair values estimated for its 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 the Company 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 the Company estimated for its manufacturing reporting unit exceeded its carrying amount by 63 % as of December 31, 2022.

The Company believes the inherent uncertainties associated with the accounting estimates and assumptions it uses for its estimates of its 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 its raw materials, and have also, the Company believes, adversely affected its customers.

Should interest rates rise significantly in the future the Company would likely be required to increase the discount rate it uses under the discounted cash flow method 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 the manufacturing reporting unit under the discounted cash flow method.

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

However, if the Company determines in the future that Aerex’s discounted future cash inflows will be less than its present expectations, the Company may be required to record additional impairment losses to reduce the remaining carrying values of its 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 the Company’s consolidated results of operations.

3 unchanged sentences

Other assets:

Under the terms of CW-Bahamas’ contract with the Water and Sewerage Corporation of The Bahamas (“WSC”) to supply water from its Blue Hills desalination plant, CW-Bahamas was required to reduce the amount of water lost by the public water distribution system on New Providence Island, The Bahamas, over a one-year period by 438 million gallons, a requirement CW-Bahamas met during 2007.

lost by the public water distribution system on New Providence Island, The Bahamas, over a one-year period by 438 million gallons, a requirement CW-Bahamas met during 2007.

The Company was solely responsible for the engineering, labor and materials costs incurred to reduce the amount of lost water, which were capitalized and are being amortized on a straight-line basis over the original remaining life of the Blue Hills contract.

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Receivables not collected within 45 days subject the customer to disconnection from water service.

In 2021 and 2020, bad debts represented less than 1 % of the Company’s total retail sales.

The Company recognizes revenue from water sales at the time water is supplied to the customer’s premises.

2 unchanged sentences

The Company has elected the “right to invoice” practical expedient for revenue recognition on its retail water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice.

The Company produces and supplies water to government-owned distributors in the Cayman Islands and The Bahamas.

The Company produces and supplies water to government-owned utilities in the Cayman Islands and The Bahamas.

OC-Cayman provides bulk water to the Water Authority-Cayman (“WAC”), a government-owned utility and regulatory agency, under two agreements.

The WAC in turn distributes such water to properties in Grand Cayman outside of Cayman Water’s retail license area.

The Company sells bulk water in The Bahamas through its majority-owned subsidiary, CW-Bahamas, under two agreements with the Water and Sewerage Corporation of The Bahamas (“WSC”), which distributes such water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence.

CW-Bahamas also sold water to a private resort on Bimini through December 18, 2020, which generated revenue of approximately $ 127,000 for the year ended December 31, 2020.

The Company sells bulk water in The Bahamas through its majority-owned subsidiary, CW-Bahamas, under two agreements with the WSC, which distributes such water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence.

The Company has elected the “right to invoice” practical expedient for revenue recognition on its bulk water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice.

3 unchanged sentences

All of PERC's customers are companies or governmental entities located in the U.S.

The Company, through Aerex, is a custom and specialty manufacturer of water treatment-related systems and products applicable to commercial, municipal and industrial water production.

The Company, through Aerex, is a custom and specialty manufacturer of systems and products applicable to commercial, municipal and industrial water production and treatment.

Substantially all of Aerex’s customers are U.S.

The Company generates construction and services revenue from DesalCo and PERC and generates manufacturing revenue from Aerex.

The Company recognizes revenue for its construction and its 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 its performance obligations as such measure best reflects the transfer of control of the promised good to the customer.

The Company recognizes revenue for its construction and custom/specialized 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.

2 unchanged sentences

The Company estimates total project costs and profit to be earned on each long-term, fixed price contract prior to commencement of work on the contract and updates 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.

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 comprise of estimated total contract costs.

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

15 unchanged sentences

Bahamian dollar

Bermudian dollar

Short term deposits:

1 unchanged sentence

Cayman Islands dollar

Bahamian dollar

Total cash and cash equivalents

24 unchanged sentences

( 6,370,855 )

Net contract asset (liability)

Net contract liability

( 5,890,199 )

The above net balances are reflected in the accompanying consolidated balance sheet as follows:

1 unchanged sentence

Contract liabilities

Net contract asset (liability)

( 8,803,921 )

Net contract liability

( 5,890,199 )

The significant increase in contract liabilities from December 31, 2021 to December 31, 2022 is primarily attributable to billings on PERC’s construction contract with Liberty Utilities for a water treatment facility in Arizona.

As of December 31, 2022, the Company had unsatisfied or partially unsatisfied performance obligations for contracts in progress representing approximately $ 97.9 million in aggregate transaction price for contracts with an original expected length of greater than one year.

The Company expects to earn revenue as it satisfies its performance obligations under those contracts in the amount of approximately $ 75.3 million during the year ending December 31, 2023 and $ 22.6 million thereafter .

In addition, the Company recognized revenue of $ 468,000 in the year ended December 31, 2022, that was included in the contract liability balance as of December 31, 2021.

Property, plant and equipment and construction in progress

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Depreciation expense was $ 5,425,177 and $ 5,995,213 for the years ended December 31, 2022 and 2021, respectively.

Discontinued operations

Mexico project development

Discontinued operations – Mexico project development

In 2010, the Company began the pursuit, through its Netherlands subsidiary, Consolidated Water Cooperatief, U.A.

12 unchanged sentences

The APP Contract required AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueduct) with a capacity of up to 100 million gallons per day in two phases:

the first with a capacity of 50 million gallons per day

and an aqueduct to the Mexican potable water system in Tijuana, Baja California and the second phase with a capacity of 50 million gallons per day.

The first phase was to be operational within 36 months of commencing construction and the second phase was to be operational by July 2024.

the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican public water system in Tijuana, Baja California and the second phase with a capacity of 50 million gallons per day.

The first phase was to be operational within 36 months of commencing construction and the

second phase was to be operational by January 2025.

The APP Contract further required AdR to operate and maintain the plant and aqueduct for a period of 37 years starting from the commencement of operation of the first phase.

At the end of the operating period, ownership of the plant and aqueduct would have been transferred to CEA.

At the end of the operating period, the plant and aqueduct would have been transferred to CEA.

The APP Contract was subsequently amended by the parties in June 2018 to increase the scope of Phase 1 and to allow for changes in the water tariff due to the changes in the exchange rate for the peso, interest rates and construction costs that had and would occur from the date the APP Contract was signed to the date construction commenced.

1 unchanged sentence

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.

The Company believes 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 invites 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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The Company cannot provide any assurances that CW-Cooperatief will be able to obtain the relief sought in the arbitration, and CW-Cooperatief will incur legal and other arbitration-related expenses that the Company expects will be material to its consolidated results of operations and cash flows.

During July 2022, the State initiated discussions with the Company 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.

The Company cannot presently determine the outcome of the discussions and the Company has not terminated its efforts to obtain relief through the international arbitration process as a result of these discussions.

The Company cannot provide any assurances that it 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 the Company 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 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.

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

The Company’s net losses from discontinued operations for the years ended December 31, 2022 and 2021 were ($ 2,371,049 ) and ($ 2,574,079 ), respectively.

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

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

The Company believes it is legally entitled to be repaid for these value added taxes and has engaged a firm to assist it in collecting these amounts from the Mexican government.

However, the Company 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 $ 340,910 as of December 31, 2021.

The Company’s 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 from, the Mexican federal government.

Summarized financial information for the discontinued Mexico project development operation is as follows:

Accounts receivable

Prepaid expenses and other current assets

Value added taxes receivable (net of allowance of $ 1,711,234 and $ 1,279,757 , respectively)

Property, plant and equipment, net

Total assets of discontinued operations

1 unchanged sentence

Year Ended December 31,

Income from operations

Net loss from discontinued operations

Provision for uncollected value added taxes

Loss from discontinued operations

Depreciation expense

Project Litigation

Immediately following CW-Cooperatief’s acquisition of its initial 50 % ownership in NSC, the remaining 50 % ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S.

NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (“EWG”) and the other half of its shares in NSC to an individual (the “individual shareholder”).

In February 2012, CW-Cooperatief paid $ 300,000 to enter into an agreement (the “Option Agreement”) that provided it with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of $ 1.0 million along with an immediate usufruct and power of attorney to vote those shares.

Such shares constituted 25 % of the ownership of NSC as of February 2012.

In May 2013, NSC repaid a $ 5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock.

As a result of this share issuance to CW-Cooperatief, the Company indirectly acquired 99.99 % of the ownership of NSC.

The Option Agreement contained an anti-dilution provision that required CW-Cooperatief to transfer or otherwise cause the individual shareholder to acquire, for a total price of $ 1 (regardless of their par or market value), shares in NSC of an amount sufficient to maintain the individual shareholder’s 25 % ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement (causing the individual shareholder’s 25 % ownership interest in NSC to be decreased);

and (ii) CW-Cooperatief did not exercise its share purchase option by February 7, 2014 .

Cooperatief exercised its option and paid the $ 1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.

In January 2018, EWG initiated an ordinary mercantile claim against the individual shareholder, NSC and CW-Cooperatief, (with AdR being named as a third party to be called to trial) before the Tenth Civil Judge in Tijuana, Baja California for Mercantile Matters (the “Tenth Civil Judge”).

In the ordinary mercantile claim, EWG challenged, among other things, the transactions contemplated under the Option Agreement, and therefore, the capital investment transactions that increased the ownership interest of CW-Cooperatief in NSC to 99.99 % as a consequence of the Option Agreement.

EWG requested that the court, as a preliminary matter (a) suspend the effectiveness of the challenged transactions;

(b) order certain public officials in Mexico to record the pendency of the lawsuit in the public records (including a special request to register a lien over the real estate owned by NSC);

and (d) order public officials in Mexico and credit institutions abroad to refrain from authorizing or executing any legal act related with the activities of the plaintiff, the co-defendants and the third party called to trial to avoid damages to third parties, including those with whom negotiations or any form of commercial or administrative activities, or activities of any other nature related with the “Rosarito” water desalination project, are being conducted.

The Tenth Civil Judge granted, ex-parte, the preliminary relief sought by EWG, which resulted in the issuance of official writs to several governmental and public entities involved with the “Rosarito” water desalination project, including the registration of the pendency of the lawsuit in certain public records.

On October 16, 2018, NSC was served with the ordinary mercantile claim.

On November 7, 2018, NSC filed a legal response to the claim, vigorously opposing the claims made by EWG.

In addition to such legal response, NSC filed (i) a request to submit the claim to arbitration, based on certain provisions of the by-laws of NSC, (ii) an appeal remedy against the preliminary relief (which was resolved in December 2019, and ordered the revocation of the order of the Tenth Civil Judge granting EWG the preliminary relief), and (iii) a request for the setting of a guarantee to release the preliminary relief granted in favor of EWG.

On October 1, 2020 and following an order from a Federal Judge obtained by NSC, the Tenth Civil Judge resolved to (i) move the claim of EWG to arbitration, and (ii) suspend the corresponding ordinary mercantile procedure.

EWG challenged such resolution, arguing that its notification was not lawful.

The Tenth Civil Judge dismissed such challenge, and thereafter EWG filed a remedy against such dismissal.

NSC appeared before the court to vigorously oppose such remedy, which has been dismissed.

To date, the referral to arbitration has not occurred and, as such, the procedure is currently suspended.

Notwithstanding the resolution of the Tenth Civil Judge to move to arbitration, subparagraphs a) and b) that follow describe certain separate amparo claims, and appeal remedies arising from or relating to such ordinary mercantile claim and amparo claims, all in chronological order.

Due to the global COVID-19 pandemic, most tribunals in Mexico suspended their activities intermittently since March 2020, with certain such tribunals partially restarting on different dates and with different special rules.

As such, several resolutions are pending issuance.

a) Amparo filed by EWG against a resolution of the Tenth Civil Judge.

In July 2021, EWG filed an amparo claim against the resolution of the Tenth Civil Judge dismissing the remedy filed by EWG against the October 1, 2020 resolution within the mentioned ordinary mercantile claim.

NSC has filed before the corresponding amparo court a writ vigorously opposing this claim.

Considering the foregoing, and that AdR was only named as a third party with interest, it is unnecessary for it to submit arguments against EWG in this claim.

Further, CW-Cooperatief has not been notified of this amparo claim.

Within this amparo claim, the Third District Court in Tijuana granted a suspension in favor of EWG, merely for the effect of holding in place the referral to arbitration subject matter of the October 1, 2020 resolution mentioned above.

Such suspension was conditioned on the posting by EWG of a guarantee in the amount of 50,000 Mexican pesos, which has not been posted.

Regardless of the effects of the suspension and the lack of the posting of a guarantee, NSC has filed an appeal remedy against its granting.

To date, and following a final hearing that took place in March 2022, a resolution to this claim is pending issuance.

b) Appeal filed by NSC against the suspension granted in favor of EWG.

The appeal remedy mentioned in the second paragraph of item a) immediately above was admitted by the superior court on October 18, 2021 and has yet to be resolved.

Notwithstanding the resolution to move to arbitration mentioned previously, CW-Cooperatief has not been officially served with the ordinary mercantile claim, and AdR has not been notified that it has to appear for such trial.

In any event, AdR is only a named third party called to trial in this claim, and no claims have been made by EWG against AdR.

The Company cannot presently determine what impact the resolution of this litigation may have on its consolidated financial condition, results of operations or cash flows.

Intangible assets

1 unchanged sentence

The remaining intangible assets and their respective useful lives are as follows:

non-compete agreements ( 3 and 5 years ), trade names ( 15 years ), customer backlog ( 2 years ), and facility management contracts ( 6 years ).

non-compete agreements ( 3 and 5 years ), trade names ( 15 years ), and facility management contracts ( 6 years ).

The costs and accumulated amortization for these assets were as follows:

Non-compete agreements

Customer backlogs

Facility management contracts

1 unchanged sentence

Non-compete agreements

Customer backlogs

Facility management contracts

1 unchanged sentence

( 2,611,112 )

( 2,028,334 )

Intangible assets, net

1 unchanged sentence

Amortization expense was $ 582,778 and $ 746,667 for the years ended December 31, 2022 and 2021, respectively.

The Company leases property and equipment under operating leases, primarily office and warehouse locations.

The Company’s leases consist primarily of leases for office and warehouse space.

For leases with terms greater than twelve months, the related asset and obligation are recorded at the present value of the lease payments over the term.

6 unchanged sentences

Lease costs for such short-term leases are expensed on a straight-line basis over the lease term.

The land used by the Company to operate its seawater desalination plants in the Cayman Islands and The Bahamas is owned by the Company or leased to the Company for immaterial annual amounts and are not included in the lease amounts presented in the consolidated balance sheets.

The land used by the Company to operate its seawater desalination plants in the Cayman Islands and The Bahamas is owned by the Company or leased to the Company for immaterial annual amounts and is not included in the lease amounts presented in the consolidated balance sheets.

All lease assets denominated in a foreign currency are measured using the exchange rate at the commencement of the lease.

All lease liabilities denominated in a foreign currency are remeasured using the exchange rate as of the consolidated balance sheet date.

Effective March 9, 2021, the Company entered into a new office lease for the existing office located in Coral Springs, Florida under similar terms compared to the prior lease.

This new lease expires, including all renewal options, on March 8, 2031.

Lease assets and liabilities

27 unchanged sentences

Operating cash outflows for operating leases - discontinued operations

Future lease payments relating to the Company's operating lease liabilities from continuing operations as of December 31, 2021 were as follows:

Future lease payments relating to the Company's operating lease liabilities from continuing operations as of December 31, 2022 are as follows:

Years ending December 31,

8 unchanged sentences

( 1,767,915 )

( 4,903,988 )

United States

2 unchanged sentences

The Company’s provision (benefit) for income taxes for the years ended December 31, 2022 and 2021, which related to U.S.

operations, consisted of the following:

operations, consists of the following:

Year Ended December 31,

14 unchanged sentences

Research & development tax credits

Loss carry forward

Loss carryforward

Accrued compensation

Operating lease liabilities

Valuation allowances

2 unchanged sentences

Intangible assets

Operating lease right-of-use assets

Net deferred tax liability

9 unchanged sentences

Discontinued operations has a net loss carryforward of $ 17.9 million that will begin to expire, if unused, in various amounts between 2023 and 2032.

The unused research & development tax credit carryforwards from continuing operations of $ 58,069 as of December 31, 2022 have an indefinite expiration date.

Earnings per share

1 unchanged sentence

Basic EPS is computed by dividing net income (loss) (less preferred stock dividends) available to common stockholders by the weighted average number of common shares outstanding during the period.

The computation of diluted EPS assumes the issuance of common shares for all potential common shares outstanding during the reporting period and, if dilutive, the effect of stock options as computed under the treasury stock method.

The computation of diluted EPS assumes the issuance of common shares for all potential

common shares outstanding during the reporting period and, if dilutive, the effect of stock options as computed under the treasury stock method.

The following summarizes information related to the computation of basic and diluted EPS:

35 unchanged sentences

Gain (loss) on asset dispositions and impairments, net

( 2,900,000 )

( 3,145,836 )

Income (loss) from operations

( 1,187,013 )

( 4,036,666 )

Other income, net

Income before income taxes

Benefit from income taxes

Provision for income taxes

Net income from continuing operations

18 unchanged sentences

General and administrative expenses

Gain on asset dispositions and impairments, net

Gain (loss) on asset dispositions and impairments, net

( 2,900,000 )

( 3,145,836 )

Income (loss) from operations

( 2,044,094 )

( 4,036,666 )

Other income, net

Income before income taxes

Provision for income taxes

Benefit from income taxes

Net income from continuing operations

14 unchanged sentences

Assets of discontinued operations

Revenues earned by major geographic region were:

Revenue earned by major geographic region were:

Year ended December 31,

1 unchanged sentence

United States

Revenues earned from management services agreement with OC-BVI

Revenues earned from major customers were:

Revenue earned from management services agreement with OC-BVI

Revenue earned from major customers were:

Year ended December 31,

Revenue earned from the Water and Sewerage Corporation ("WSC")

Revenue earned from the WSC

Percentage of consolidated revenue earned from the WSC

Revenue earned from one manufacturing segment customer

Percentage of consolidated revenue earned from the one manufacturing segment customer

Revenue earned from one service segment customer

Percentage of consolidated revenue earned from the one service segment customer

Property, plant and equipment, net by major geographic region were:

4 unchanged sentences

Cost of revenue consist of:

Subcontractor and other project costs

Employee costs

Retail license royalties

Cost of plant sales

Year Ended December 31,

7 unchanged sentences

Employee Share Incentive Plan (Preferred Stock)

Employees (i.e.

other than Directors and Officers), after four consecutive years of employment, become eligible to receive shares of the Company’s preferred stock for $nil consideration under its Employee Share Incentive Plan.

Once an individual becomes eligible, these shares of preferred stock are awarded each subsequent year of the individual's employment (the grant date) for as long as the individual remains employed with the Company.

If these employees remain with the Company through the fourth anniversary of a grant date, the preferred stock can be converted into shares of the Company’s common stock on a one for one basis.

In addition, at the time the preferred stock is granted, the employees receive options to purchase an equal number of shares of preferred stock at a discount to the average trading price of the Company’s common stock for the first seven days of the October immediately preceding the date of the preferred stock grant.

If these options are exercised, the shares of preferred stock obtained may also be converted to shares of common stock if the employee remains with the Company through the fourth anniversary of a grant (or option exercise) date.

Employees (i.e., other than Directors and Officers), after four consecutive years of employment, become eligible to receive shares of the Company’s preferred stock for $nil consideration under the Company’s Employee Share Incentive Plan.

Once an individual becomes eligible for this plan, they are awarded shares of preferred stock in the month of June following their date of eligibility for the plan (the “grant date”) and in June of each subsequent year of the individual's employment for as long as the individual remains employed with the Company.

If the employee remains with the Company through the fourth anniversary of a grant date, the preferred stock can be converted into shares of the Company’s common stock on a one for one basis.

In addition, at the time the preferred stock is granted, the employee receives options to purchase an equal number of shares of preferred stock at a discount to the average trading price of the Company’s common stock for the first seven days of the October immediately preceding the date of the preferred stock grant.

Each employee’s option to purchase shares of preferred stock must be exercised within 30 days of the grant date, which is the 90 th day after the date of the independent registered public accountants’ audit opinion on the Company’s consolidated financial statements.

Shares of preferred stock not subsequently converted to shares of common stock are redeemable only at the discretion of the Company.

Shares of preferred stock granted under this plan during the years ended December 31, 2021 and 2020 totaled 8,632 and 6,123 , respectively, and an equal number of preferred stock options was granted in each of these years.

Shares of preferred stock granted under this plan during the years ended December 31, 2022 and 2021 totaled 9,295 and 8,632 , respectively, and an equal number of preferred stock options were granted in each of these years.

Employee Share Option Plan (Common Stock Options)

The Company has an employee stock option plan for certain long-serving employees of the Company.

The Company has an employee stock option plan for four long-serving employees of the Company.

Under the plan, these employees are granted in each calendar year, as long as the employee is a participant in the Employee Share Incentive Plan, options to purchase common shares.

1 unchanged sentence

The number of options each employee is granted is equal to five times the sum of (i) the number of shares of preferred stock that employee receives for $nil consideration and (ii) the number of preferred stock options that employee exercises in that given year.

Options may be exercised during the period commencing on the fourth anniversary of the grant date and ending on the thirtieth day after the fourth anniversary of the grant date.

Options may be exercised during the period commencing on the fourth anniversary of the grant date and ending on the 30 th day after the fourth anniversary of the grant date.

Options granted under this plan during the years ended December 31, 2022 and 2021 totaled 3,665 and 3,400 , respectively.

1 unchanged sentence

Expected volatilities are based on historical volatilities of the Company’s common stock.

The Company uses historical data to estimate option exercise and post-vesting termination behavior.

The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding.

5 unchanged sentences

All Directors, executives and key employees of the Company or its affiliates are eligible for participation in the 2008 Plan which provides for the issuance of options, restricted stock and stock equivalents at the discretion of the Board.

Non-Executive Directors’ Share Plan

This stock grant plan provides part of Directors’ remuneration.

Under this plan, non-Executive Directors receive a combination of cash and common stock for their participation in Board meetings.

The number of shares of common stock granted is calculated based upon the market price of the Company’s common stock on October 1 of the year preceding the grant.

Common stock granted under this plan during the years ended December 31, 2021 and 2020 totaled 30,911 and 19,712 shares, respectively.

The Company recognized stock-based compensation for these share grants of $ 319,002 and $ 318,991 for the years ended December 31, 2021 and 2020, respectively.

The Company measures and recognizes compensation expense at fair value for all share-based payments, including stock options.

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The total remaining unrecognized compensation costs related to unvested stock-based arrangements were $ 23,609 as of December 31, 2022 and are expected to be recognized over a weighted average period of 2.37 years.

As of December 31, 2021, unrecognized compensation costs relating to redeemable preferred stock rights outstanding were $ 147,074 and are expected to be recognized over a weighted average period of 1.17 years.

The following table summarizes the weighted average fair value of options at the date of grant and the intrinsic value of options exercised during the years ended December 31, 2022 and 2021:

11 unchanged sentences

Total intrinsic value of options exercised

Executive Long-Term Incentive Compensation

The Board of Directors approved changes to the long-term incentive compensation for the Company’s Executive Officers effective for 2015 and thereafter to better align the interests of its Executive Officers with those of its shareholders.

The revised long-term compensation plan includes a combination of performance and non-performance-based grants of common stock from the shares of Company stock provided for issuance under the 2008 Equity Incentive Plan.

Senior Management Long-Term Incentive Compensation

The Board of Directors has established the long-term incentive compensation for the Company’s senior management to better align the interests of its senior management with those of its shareholders.

The long-term compensation plan includes a combination of performance and non-performance-based grants of common stock from the shares of Company stock provided for issuance under the 2008 Equity Incentive Plan.

The non-performance-based stock grant rights, which are issued on January 1 of each year, vest in one-third increments at the end of each year over a three-year period.

The number of non-performance-based stock grant rights issued on January

1, 2021 and 2020 were 26,403 and 23,458 , respectively.

The number of non-performance-based stock grant rights issued on January 1, 2022 and 2021 were 32,265 and 26,403 , respectively.

These stock grant rights vest in one-third increments over the three-year periods ending December 31, 2024 and 2023, respectively.

2 unchanged sentences

The performance-based grants may be earned at the end of each year based upon the Company's three-year cumulative financial performance relative to three-year cumulative financial performance targets.

A total of 18,419 stock grant rights were earned as of December 31, 2021 based upon the Company’s actual financial performance relative to the cumulative financial performance targets for the three-year period ended December 31, 2021, and the Company recognized $ 214,765 in stock-based compensation for the year ended December 31, 2021 related to these grants.

The shares associated with these grants will be issued in 2022.

A total of 31,788 stock grant rights were earned as of December 31, 2020 based upon the Company’s actual financial performance relative to the cumulative financial performance targets for the three -year period ended December 31, 2020, and the Company recognized $ 373,843 in stock-based compensation for the year ended December 31, 2020 related to these grants.

The Company recognized $ 335,964 and $ 214,675 in stock-based compensation for the year ended December 31, 2022 and 2021, respectively, related to these grants.

A total of 13,797 stock grant rights were earned as of December 31, 2022 based upon the Company’s actual financial performance relative to the cumulative financial performance targets for the three-year period ended December 31, 2022 The shares associated with these grants will be issued in 2023.

The shares associated with these grants were issued in 2022 .

Non-Executive Directors’ Share Plan

This stock grant plan provides part of the Directors’ remuneration.

Under this plan, non-Executive Directors receive a combination of cash and common stock for their participation in Board meetings.

The number of shares of common stock granted is calculated based upon the market price of the Company’s common stock on October 1 of the year preceding the grant.

Common stock granted under this plan during the years ended December 31, 2022 and 2021 totaled 30,767 and 30,911 shares, respectively.

The Company recognized stock-based compensation for these share grants of $ 369,678 and $ 319,002 for the years ended December 31, 2022 and 2021, respectively.

Retirement benefits

Retirement plans are offered to all employees in California, Florida, Cayman Islands and Bahamas.

Retirement plans are offered to all employees in California, Florida, the Cayman Islands and The Bahamas.

The plans are administered by third parties and are defined contribution plans pursuant to which the Company matches participating employees’ contributions up to certain amounts.

4 unchanged sentences

The Company is not exposed to significant credit risk on its retail customer accounts as its policy is to cease supply of water to customers’ accounts that are more than 45 days overdue.

The Company’s exposure to credit risk is concentrated on receivables from its bulk water, services, and manufacturing customers.

The Company’s exposure to credit risk is concentrated

on receivables from its bulk water, services, and manufacturing customers.

The Company considers these receivables fully collectible and therefore has not recorded an allowance for these receivables.

23 unchanged sentences

December 31, 2021

Net liability arising from put/call options

Certificate of deposit

Net asset arising from put/call options

The activity for the Level 3 asset for the year ended December 31, 2022:

Net (liability)/asset arising from put/call options

Net asset arising from put/call options

Balance as of December 31, 2021

Unrealized gain

Exercise of option

Balance as of December 31, 2022

Put/call options are reported at fair value as either assets or liabilities in the consolidated balance sheets.

These fair values are calculated using discounted cash flow analysis valuation techniques that incorporate unobservable inputs, such as future cash flows, weighted-average cost of capital, and expected future volatility.

The put/call options are reported at fair value at their net asset or liability balance in the consolidated balance sheets.

The underlying asset and liability fair values are calculated using discounted cash flow analysis valuation techniques that incorporate unobservable inputs, such as future cash flows, weighted-average cost of capital, and expected future volatility.

The inputs to these valuations are considered Level 3 inputs.

3 unchanged sentences

Contingencies

The worldwide coronavirus (COVID-19) pandemic was formally recognized by the World Health Organization on March 11, 2020.

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

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

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

Overall economic activity in the United States has also declined.

As a result of the impact of the COVID-19 pandemic on the economies of the countries in which the Company operates, the Company has experienced, and could continue to experience, decreases in consolidated revenue, cash flows generated from operations, net income and overall liquidity as compared to pre-pandemic periods.

Furthermore, the prolonged extension of the economic downturn created by the COVID-19 pandemic could further adversely affect the markets for the Company’s products and services.

Such adverse market effects could further adversely impact the Company’s expected future cash flows from its four reporting units and could require the Company 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.

Although the Company cannot presently quantify the future financial impacts of the COVID-19 pandemic, such impacts will likely continue to have a material adverse impact on the Company’s consolidated financial condition, results of operations, and cash flows.

Given the uncertainty associated with the resolution of this pandemic, the Company cannot presently determine how long such adverse financial impacts may last.

The Company sells water through its 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, the Company continues 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, the Company continues 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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The Company continues 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 its understanding of its legal obligations, treating those obligations set forth in the 1990 license as operative notwithstanding the expiration of the express extension.

The Company continues to pay the royalty required under the 1990 license.

The Company continues to pay the royalty of 7.5% of revenue it collects 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 negotiations with the Company for a new retail license 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 negotiations with the Company for a new retail license from the WAC to OfReg in May 2017.

The Company began license negotiations with OfReg in July 2017 and such negotiations are ongoing.

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

The Company is presently unable to determine what impact the resolution of its retail license negotiations will have on its 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 the Company has historically generated from Cayman Water’s retail operations and could require the Company to record impairment losses to reduce the carrying values of its retail segment assets.

The Company is presently unable to determine what impact the resolution of its retail license negotiations will have on its consolidated 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 the Company has historically generated from Cayman Water’s retail operations and could require the Company to record impairment losses to reduce the carrying values of its retail segment assets.

Such impairment losses could have a material adverse impact on the Company’s consolidated financial condition and results of operations.

CW-Bahamas’ accounts receivable balances (including accrued interest) due from the WSC amounted to $ 21.5 million and $ 16.8 million as of December 31, 2021 and 2020.

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

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $ 16.3 million and $ 21.5 million as of December 31, 2022 and 2021.

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

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

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

As of December 31, 2021, the Company has not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.

The Bahamas government and the WSC continue to make intermittent payments on these accounts receivable, and such payments amounted to approximately $ 22.9 million for the year ended December 31, 2021.

In February 2022, CW-Bahamas 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 its review of this Moody’s report, the Company continues to believe no allowance for doubtful accounts is required for CW-Bahamas’ accounts receivable from the WSC.

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:

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The Company, through PERC and the services segment, purchases engineering and technology support services from various companies with a minority shareholder who is also a minority shareholder of PERC.

During the years ended December 31, 2021 and 2020, the Company made total purchases of services of approximately $ 438,000 and $ 1,349,000

from these companies, respectively.

During the years ended December 31, 2022 and 2021, the Company made total purchases of services of approximately $ 2,695,000 and $ 438,000 from these companies, respectively.

These total purchases are included in the Company’s cost of revenue in the accompanying consolidated statements of income .

On February 1, 2021, PERC entered into a sublease agreement with a related company commencing March 14, 2021 and ending August 31, 2021.

PERC has entered into a lease agreement with one of these related companies that commenced on March 14, 2021 and ended August 31, 2021.

This lease has been extended on a month-to-month basis subsequent to August 31, 2021.

During the year ended December 31, 2021, the Company recognized approximately $ 77,000 of expense related to this lease.

This lease amount is included in the Company's general and administrative expenses in the accompanying consolidated statements of income.

During the years ended December 31, 2022 and 2021, the Company recognized approximately $ 97,000 and $ 77,000 of expense related to this lease, respectively.

This lease expense is included in the Company's general and administrative expenses in the accompanying consolidated statements of income.

The total amount of accounts payable outstanding to these companies as of December 31, 2022 and 2021, was approximately $ 404,000 and $ 164,000 , respectively.

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Interest paid in cash

Income taxes paid in cash

Non-cash transactions:

Issuance of 9,295 and 8,632 , respectively, shares of redeemable preferred stock for services rendered

Issuance of 72,597 and 88,488 , respectively, shares of common stock for services rendered

Conversion (on a one-to-one basis) of 6,585 and 11,522 , respectively, shares of redeemable preferred stock to common stock

Dividends declared but not paid

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Right-of-use assets obtained in exchange for new operating lease liabilities

Purchases of equipment through issuance of long-term debt

Purchase of equipment through issuance of long-term debt

Impact of recent accounting standards

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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.

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

Subsequent events

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Other than as disclosed in these consolidated financial statements, the Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on its consolidated financial statements.

After giving effect to this purchase, CW-Holdings owns 100 % of the outstanding capital stock of PERC.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data