What changed in this filing

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Item 1. Financial Statements

2023-05-15 compared with 2022-11-14 · 125 added, 216 removed, 412 unchanged (45% of the section changed)

2 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

September 30,

Current assets

Cash and cash equivalents

Certificate of deposit

Accounts receivable, net

1 unchanged sentence

Contract assets

Net asset arising from put/call options

Current assets of discontinued operations

23 unchanged sentences

Other liabilities

Long-term liabilities of discontinued operations

Total liabilities

18 unchanged sentences

CONSOLIDATED WATER CO.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

Three Months Ended September 30,

Nine Months Ended September 30,

Cost of revenue (including purchases from related parties of $ 685,481 and $ 104,813 for the three months ended, and $ 2,165,850 and $ 390,196 for the nine months ended, September 30, 2022 and 2021, respectively)

General and administrative expenses (including purchases from related parties of $ 24,231 and $ 24,231 for the three months ended, and $ 72,693 and $ 52,959 for the nine months ended, September 30, 2022 and 2021, respectively)

Gain (loss) on asset dispositions and impairments, net

( 3,144,961 )

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Three Months Ended March 31,

Cost of revenue ( including purchases from related parties of $- in 2023 and $ 839,432 in 2022)

General and administrative expenses ( including purchases from related parties of $- in 2023 and $ 24,231 in 2022)

Gain on asset dispositions and impairments, net

Income from operations

4 unchanged sentences

Equity in the earnings of OC-BVI

Net unrealized gain (loss) on put/call options

Other income (expense), net

Net gain on put/call options

Other income, net

Income before income taxes

Income tax provision (benefit)

Provision for income taxes

Net income from continuing operations

1 unchanged sentence

Net income from continuing operations attributable to Consolidated Water Co.

Loss from discontinued operations

( 1,078,367 )

( 1,533,064 )

( 1,542,540 )

Net income (loss) attributable to Consolidated Water Co.

Total loss from discontinued operations

Net income attributable to Consolidated Water Co.

Basic earnings (loss) per common share attributable to Consolidated Water Co.

2 unchanged sentences

Discontinued operations

Basic earnings (loss) per share

Basic earnings per share

Diluted earnings (loss) per common share attributable to Consolidated Water Co.

2 unchanged sentences

Discontinued operations

Diluted earnings (loss) per share

Diluted earnings per share

Dividends declared per common and redeemable preferred shares

9 unchanged sentences

Issue of share capital

Dividends declared

( 1,303,014 )

Stock-based compensation

Balance as of March 31, 2022

Issue of share capital

Exercise of options

Dividends declared

Purchase of remaining non-controlling interest in PERC

( 3,667,305 )

( 2,440,027 )

Stock-based compensation

Balance as of June 30, 2022

Conversion of preferred stock

Exercise of options

Dividends declared

2 unchanged sentences

Stock-based compensation

Balance as of September 30, 2022

Balance as of March 31, 2023

preferred stock

2 unchanged sentences

Issue of share capital

Conversion of preferred stock

Buyback of preferred stock

Dividends declared

3 unchanged sentences

Balance as of March 31, 2022

Issue of share capital

Conversion of preferred stock

Buyback of preferred stock

Net income (loss)

( 1,664,649 )

( 1,467,511 )

Exercise of options

Dividends declared

( 1,294,697 )

Stock-based compensation

Balance as of June 30, 2021

Conversion of preferred stock

Exercise of options

Dividends declared

( 1,294,870 )

Stock-based compensation

Balance as of September 30, 2021

The accompanying notes are an integral part of these condensed consolidated financial statements.

1 unchanged sentence

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine Months Ended September 30,

Three Months Ended March 31,

Net cash provided by operating activities - continuing operations

Net cash used in operating activities - discontinued operations

( 1,123,193 )

Net cash provided by operating activities

2 unchanged sentences

( 2,518,493 )

( 2,500,000 )

Maturity of certificate of deposit

Maturity of certificate(s) of deposit

Additions to property, plant and equipment and construction in progress

1 unchanged sentence

Proceeds from asset dispositions

Net cash used in investing activities - continuing operations

Purchase of remaining non-controlling interest in PERC

( 2,440,027 )

Net cash used in investing activities

( 3,805,879 )

Cash flows from financing activities

3 unchanged sentences

Dividends paid to preferred shareholders

Dividends paid to non-controlling interests

( 1,102,475 )

Repurchase of redeemable preferred stock

Proceeds received from exercise of stock options

Payments on note payable

Principal repayments on long-term debt

Net cash used in financing activities

1 unchanged sentence

( 1,313,996 )

Net increase (decrease) in cash and cash equivalents

( 3,514,361 )

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of period

3 unchanged sentences

Non-cash transactions:

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

Issuance of 44,873 and 41,830 , respectively, shares of common stock for services rendered

Conversion (on a one-to-one basis) of 6,585 and 9,439 , respectively, shares of redeemable preferred stock to common stock

Dividends declared but not paid

Transfers from (to) inventory to (from) property, plant and equipment and construction in progress

Net transfers from construction in progress to property, plant and equipment

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

Purchase of equipment through issuance of long-term debt

Issuance of 368,383 and 0 , respectively, shares of common stock for the purchase of non-controlling interest in PERC

Transfers from inventory to property, plant and equipment and construction in progress

Transfers from construction in progress to property, plant and equipment

Transfers from prepaids to property, plant and equipment

Transfers from prepaids to inventory

The accompanying notes are an integral part of these condensed consolidated financial statements.

11 unchanged sentences

(“Aerex”), Aquilex, Inc.

(“Aquilex”), Cayman Water Company Limited (“Cayman Water”), Ocean Conversion (Cayman) Limited (“OC-Cayman”), DesalCo Limited (“DesalCo”), Consolidated Water Cooperatief, U.A.

(“Aquilex”), Cayman Water Company Limited (“Cayman Water”), Ocean Conversion (Cayman) Limited (“OC-Cayman”), PERC Water Corporation ("PERC"), DesalCo Limited (“DesalCo”), Consolidated Water Cooperatief, U.A.

(“CW-Cooperatief”), Consolidated Water U.S.

3 unchanged sentences

(“CW-Bahamas”), N.S.C.

(“NSC”), Aguas de Rosarito S.A.P.I.

(“AdR”), and PERC Water Corporation ("PERC").

(“NSC”), and Aguas de Rosarito S.A.P.I.

The Company’s investment in its affiliate Ocean Conversion (BVI) Ltd.

1 unchanged sentence

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

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, having a value of approximately $ 5.36 million based upon the opening trading price of the Company’s common stock on The Nasdaq Global Market on the date of the transaction.

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

The accompanying interim condensed consolidated financial statements are unaudited.

11 unchanged sentences

The exchange rates for conversion of Mexican pesos and euros into US$ vary based upon market conditions.

Net foreign currency gains (losses) arising from transactions and re-measurements were ($ 8,068 ) and $ 15,302 for the three months ended September 30, 2022 and 2021, respectively, and $ 20,966 and $ 29,353 for the nine months ended September 30, 2022 and 2021 and are included in “Other income (expense) - Other” in the accompanying condensed consolidated statements of income (loss).

Net foreign currency gains arising from transactions and re-measurements were $ 25,779 and $ 22,046 for the three months ended March 31, 2023 and 2022, respectively, and are included in “Other income (expense) - Other” in the accompanying condensed consolidated statements of income.

Cash and cash equivalents:

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 September 30, 2022 and December 31, 2021 include approximately $ 7.5 million and $ 7.4 million, respectively, of certificates of deposits with an original maturity of three months or less.

Cash and cash equivalents as of March 31, 2023 and December 31, 2022 include approximately $ 5.1 million and $ 7.4 million, respectively, of certificates of deposits with an original maturity of three months or less.

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.

The equivalent United States dollar cash balances for deposits held in The Bahamas as of September 30, 2022 and December 31, 2021 were approximately $ 4.7 million and $ 3.9 million, respectively.

Certificate of deposit:

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

The equivalent United States dollar cash balances for deposits held in The Bahamas as of March 31, 2023 and December 31, 2022 were approximately $ 7.3 million and $ 5.7 million, respectively.

Goodwill and intangible assets:

3 unchanged sentences

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.

As of 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.

As of 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.

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.

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 its reporting units as of 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 as of 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 retail, bulk, services and manufacturing reporting units exceeded their carrying amounts by 32 %, 51 %, 15 %, and 15 % respectively, as of December 31, 2021.

Based upon its 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 September 30, 2022 of its manufacturing reporting unit’s goodwill of $ 1,985,211 and its remaining unamortized intangible assets balances of $ 777,778 recorded as a result of the acquisition of Aerex.

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 $ 731,111 , respectively, as of March 31, 2023.

Any such impairment losses could have a material adverse impact on the Company’s consolidated results of operations.

Income taxes:

The Company accounts for the income taxes arising from the operations of its United States subsidiaries under the asset and liability method.

Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance is provided to the extent any deferred tax asset may not be realized.

The Company is not presently subject to income taxes in the other countries in which it operates.

Revenue recognition:

1 unchanged sentence

The following table presents the Company’s revenue disaggregated by revenue source.

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Retail revenue

5 unchanged sentences

Customers are billed on a monthly basis based on metered consumption and bills are typically collected within 30 to 45 days after the billing date.

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

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

14 unchanged sentences

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 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 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.

9 unchanged sentences

Revenue recognized and amounts billed on contracts in progress are summarized as follows:

September 30,

Revenue recognized to date on contracts in progress

4 unchanged sentences

( 9,371,573 )

( 5,890,199 )

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

September 30,

Contract assets

1 unchanged sentence

( 15,499,160 )

( 8,803,921 )

Net contract liability

( 9,371,573 )

As of September 30, 2022 , the Company had unsatisfied or partially unsatisfied performance obligations for contracts in progress representing approximately $ 104.8 million in aggregate transaction price for contracts with an original expected length of greater than one year .

( 5,890,199 )

The significant increase in contract liabilities from December 31, 2022 to March 31, 2023 is primarily attributable to billings on PERC’s construction contract with Liberty Utilities for a water treatment facility in Arizona.

As of March 31, 2023, the Company had unsatisfied or partially unsatisfied performance obligations for contracts in progress representing approximately $ 86.2 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 $ 70.8 million during the remainder of the year ending December 31, 2023 and approximately $ 15.4 million thereafter .

In addition, the Company recognized revenue of $ 396,000 in the nine months ended September 30, 2022, that was included in the contract liability balance as of December 31, 2021.

In addition, the Company recognized revenue of $ 666,368 in the three months ended March 31, 2023, that was included in the contract liability balance as of December 31, 2022.

Practical Expedients and Exemptions

14 unchanged sentences

The Company’s segments are strategic business units that are managed separately because each segment sells different products and/or services, serves customers with distinctly different needs and generates different gross profit margins.

Three Months Ended September 30, 2022

Three Months Ended March 31, 2023

Manufacturing

1 unchanged sentence

General and administrative expenses

Gain on asset dispositions

Income (loss) from operations

Other income (loss), net

(Loss) gain on asset dispositions and impairments, net

Income from operations

Other income, net

Income before income taxes

Income tax provision

Provision for income taxes

Net income from continuing operations

1 unchanged sentence

Net income from continuing operations attributable to Consolidated Water Co.

Loss from discontinued operations

Net loss from discontinued operations

Net income attributable to Consolidated Water Co.

Depreciation and amortization expenses for the three months ended September 30, 2022 for the retail, bulk, services and manufacturing segments were $ 567,086 , $ 707,788 , $ 175,732 and $ 71,734 , respectively.

Three Months Ended September 30, 2021

Depreciation and amortization expenses for the three months ended March 31, 2023 for the retail, bulk, services and manufacturing segments were $ 626,637 , $ 728,129 , $ 171,349 and $ 67,963 , respectively.

Three Months Ended March 31, 2022

Manufacturing

1 unchanged sentence

General and administrative expenses

Gain on asset dispositions

Gain on asset dispositions and impairments, net

Income (loss) from operations

1 unchanged sentence

Income before income taxes

Income tax benefit

Provision for income taxes

Net income from continuing operations

1 unchanged sentence

Net income from continuing operations attributable to Consolidated Water Co.

Loss from discontinued operations

( 1,078,367 )

Net income attributable to Consolidated Water Co.

Depreciation and amortization expenses for the three months ended September 30, 2021 for the retail, bulk, services and manufacturing segments were $ 625,640 , $ 761,429 , $ 203,411 and $ 70,679 , respectively.

Nine Months Ended September 30, 2022

Manufacturing

Cost of revenue

General and administrative expenses

Gain on asset dispositions

Income (loss) from operations

Other income, net

Income before income taxes

Income tax provision

Net income from continuing operations

Income from continuing operations attributable to non-controlling interests

Net income from continuing operations attributable to Consolidated Water Co.

Loss from discontinued operations

( 1,533,064 )

Net loss from discontinued operations

Net income attributable to Consolidated Water Co.

Depreciation and amortization expenses for the nine months ended September 30, 2022 for the retail, bulk, services and manufacturing segments were $ 1,820,567 , $ 2,114,888 , $ 502,809 and $ 213,249 , respectively.

Nine Months Ended September 30, 2021

Manufacturing

Cost of revenue

General and administrative expenses

Gain (loss) on asset dispositions and impairments, net

( 2,900,000 )

( 3,144,961 )

Income (loss) from operations

( 1,605,769 )

( 3,518,847 )

Other income, net

Income before income taxes

Income tax benefit

Net income from continuing operations

Income from continuing operations attributable to non-controlling interests

Net income from continuing operations attributable to Consolidated Water Co.

Loss from discontinued operations

( 1,542,540 )

Net loss attributable to Consolidated Water Co.

Depreciation and amortization expenses for the nine months ended September 30, 2021 for the retail, bulk, services and manufacturing segments were $ 1,892,848 , $ 2,621,481 , $ 607,906 and $ 216,346 , respectively.

As of September 30, 2022

Depreciation and amortization expenses for the three months ended March 31, 2022 for the retail, bulk, services and manufacturing segments were $ 615,685 , $ 702,259 , $ 158,999 and $ 71,208 , respectively.

As of March 31, 2023

Manufacturing

17 unchanged sentences

Earnings per share (“EPS”) is computed on a basic and diluted basis.

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.

Basic EPS is computed by dividing net income (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 following summarizes information related to the computation of basic and diluted EPS:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Net income from continuing operations attributable to Consolidated Water Co.

1 unchanged sentence

Net income from continuing operations available to common shares in the determination of basic earnings per common share

Loss from discontinued operations

( 1,078,367 )

( 1,533,064 )

( 1,542,540 )

Net income (loss) available to common shares in the determination of basic earnings per common share

Total loss from discontinued operations

Net income available to common shares in the determination of basic earnings per common share

Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co.

11 unchanged sentences

A consortium (the “Consortium”) comprised of NSC, Suez Medio Ambiente México, S.A.

a subsidiary of SUEZ International, S.A.S., and NuWater S.A.P.I.

(“Suez MA”), a subsidiary of SUEZ International, S.A.S., and NuWater S.A.P.I.

(“NuWater”) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of the tender process for the Project.

7 unchanged sentences

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.

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, the plant and aqueduct would have been transferred to CEA.

11 unchanged sentences

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 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.

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.

1 unchanged sentence

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 its rights, damages, fees and expenses.

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.

3 unchanged sentences

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 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 classified as 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 condensed consolidated financial statements.

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

September 30,

Accounts receivable

Prepaid expenses and other current assets

2 unchanged sentences

Total liabilities of discontinued operations

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Provision for uncollected value added taxes

1 unchanged sentence

Depreciation expense

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

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.

1 unchanged sentence

When available, the lease payments are discounted using the rate implicit in the lease;

Company’s current leases do not provide a readily determinable implicit rate.

however, the Company’s current leases do not provide a readily determinable implicit rate.

Therefore, the Company’s incremental borrowing rate is estimated to discount the lease payments based on information available at the lease commencement.

2 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 condensed 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 condensed consolidated balance sheets.

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

2 unchanged sentences

The following table presents the lease-related assets and liabilities and their respective classification on the condensed consolidated balance sheets:

September 30,

Prepaid expenses and other current assets

1 unchanged sentence

Operating lease right-of-use assets

Long-term assets of discontinued operations

Total lease right-of-use assets

2 unchanged sentences

Noncurrent operating leases

Noncurrent liabilities of discontinued operations

Total lease liabilities

6 unchanged sentences

The components of lease costs were as follows:

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended March 31,

Operating lease costs

3 unchanged sentences

Supplemental cash flow information related to leases is as follows:

Nine Months Ended September 30,

Three Months Ended March 31,

Cash paid for amounts included in measurement of liabilities:

1 unchanged sentence

Operating cash outflows for operating leases - discontinued operations

Future lease payments relating to the Company’s operating lease liabilities from continuing operations as of September 30, 2022 were as follows:

Future lease payments relating to the Company’s operating lease liabilities from continuing operations as of March 31, 2023 were as follows:

Years ending December 31,

4 unchanged sentences

Noncurrent lease obligations

As of September 30, 2022 and December 31, 2021, the carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued expenses, accrued compensation, dividends payable and other current liabilities approximate their fair values due to the short-term maturities of these instruments.

As of March 31, 2023 and December 31, 2022, the carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued expenses, accrued compensation, dividends payable and other current liabilities approximate their fair values due to the short-term maturities of these instruments.

Under US GAAP, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date.

1 unchanged sentence

Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company.

Unobservable inputs are inputs that reflect the Company’s

assumptions about the factors market participants would use in valuing the asset or liability.

Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability.

The guidance establishes three levels of inputs that may be used to measure fair value:

7 unchanged sentences

Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value as of September 30, 2022 and December 31, 2021:

September 30, 2022

Certificate of deposit

Net asset arising from put/call options

December 31, 2021

Certificate of deposit

Net asset arising from put/call options

The activity for the Level 3 asset for the nine months ended September 30, 2022:

Net asset arising from put/call options

Balance as of December 31, 2021

Unrealized gain

Balance as of September 30, 2022

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

As of March 31, 2023 and December 31, 2022, the Company does not have assets and liabilities measured at fair value to present in the fair value hierarchy.

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 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.

Overall economic activity in the United States was adversely affected by COVID-19.

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

The economic downturn arising initially from the COVID-19 pandemic and furthered by the Russian invasion of Ukraine and other factors has further adversely affected the Company’s supply chain and the markets for the Company’s products and services.

A continuation of the current weak economic conditions could have a material adverse impact on the Company’s consolidated financial condition, results of operations and cash flows.

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.

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Seven Mile Beach and West Bay.

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

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

For the three months ended March 31, 2023 and 2022, the Company generated approximately 24 % and 32 %, respectively, of its consolidated revenue and 40 % and 46 %, respectively, of its consolidated gross profit from the retail water operations conducted under the 1990 license.

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

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

As December 31, 2021, CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the Water and Sewerage Corporation of The Bahamas (“WSC”) amounted to $ 21.5 million.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $ 16.6 million and $ 16.3 million as of March 31, 2023 and December 31, 2022.

Approximately 65% of these accounts receivable balances were delinquent as of both of those dates.

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

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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.

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

CW-Bahamas has received correspondence from the Ministry of Finance of the Government of The Bahamas that stated 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.

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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 is unable to collect a sufficient 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) the Company may be required to cease the recognition of revenue on CW-Bahamas’ water supply agreements with the WSC;

and (iii) the Company 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 the Company’s consolidated financial condition, results of operations, and cash flows.

Related party transactions

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

During the three months ended September 30, 2022 and 2021, the Company made total purchases of services from these companies of approximately $ 685,000 and $ 105,000 , respectively, and approximately $ 2,166,000 and $ 390,000 during the nine months ended September 30, 2022 and 2021, respectively.

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

PERC has entered into a sublease 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 three months ended September 30, 2022 and 2021, the Company recognized approximately $ 24,000 and $ 24,000 of expense related to this lease, respectively, and approximately $ 73,000 and $ 53,000 during the nine months ended September 30, 2022 and 2021, respectively.

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

The total amount of accounts payable outstanding to these companies as of September 30, 2022 and December 31, 2021, was approximately $ 569,000 and $ 164,000 , respectively.

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

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.

After giving effect to this purchase, CW-Holdings owns 100 % of the outstanding capital stock of PERC and there are no longer any minority shareholders of PERC, and therefore no longer any related party transactions.

During the three months ended March 31, 2022, the Company made total purchases of services from these companies of approximately $ 839,000 .

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

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

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

During the three months ended March 31, 2022, the Company recognized approximately $ 24,000 of expense related to this lease.

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

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

Impact of recent accounting standards

Adoption of new accounting standards:

Financial Accounting Standard Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, and related amendments, introduces new guidance which makes substantive changes to the accounting for credit losses.

This guidance introduces the current expected credit losses (“CECL”) model which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures.

The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions, and reasonable and supportable forecasts and is generally expected to result in earlier recognition of credit losses.

The Company adopted this guidance as of January 1, 2023 using the modified retrospective approach.

The impact of this adoption was not material to the Company’s consolidated financial statements.

Effect of newly issued but not yet effective accounting standards:

Subsequent events

In October 2022, the Company exercised its option to purchase the shares constituting the remaining 39 % minority interest in PERC at a price to be determined by an independent valuation, which is currently in-process.

The Company evaluated subsequent events through the time of the filing of this report on Form 10-Q.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements