What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-15 compared with 2022-11-14 · 96 added, 231 removed, 205 unchanged (61% of the section changed)

8 unchanged sentences

● tourism and weather conditions in the areas we serve;

● the impacts of the COVID-19 pandemic, particularly on our retail and manufacturing segments;

● the economic, political and social conditions of each country in which we conduct or plan to conduct business;

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and its subsidiaries.

Critical Accounting Estimates

Critical Accounting Policies and Estimates

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

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

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

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

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

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

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

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

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

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

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

Goodwill and Intangible Assets

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The events and circumstances assessed for each unit included macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, and other relevant events.

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

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

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

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

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

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

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

Approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit, for the year ended December 31, 2020 were generated from sales to one customer.

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Our updated sales estimate for this customer based on this new information was substantially below the sales we anticipated to this customer for 2022 and subsequent years that we used in the discounted cash flow projections we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020.

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

Furthermore, Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing

and new customers were adversely impacted by the negative economic conditions (caused in part by the COVID-19 pandemic).

These negative economic conditions also increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials, and adversely affected the overall financial condition of Aerex’s current and prospective customers.

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

Based upon this testing, we determined that the carrying value of our manufacturing reporting unit exceeded its fair value by $2.9 million, and we recorded an impairment loss to reduce our manufacturing reporting unit’s goodwill by this amount for the three months ended June 30, 2021.

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

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

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

If we determine in the future that Aerex’s discounted future cash inflows will be less than our present expectations, we may be required to record additional impairment losses to reduce the remaining carrying values as of September 30, 2022 of our manufacturing reporting unit’s goodwill of $1,985,211 and its remaining unamortized intangible assets balances of $777,778 recorded as a result of the acquisition of Aerex.

Based upon this testing, we determined that the carrying value of our manufacturing reporting unit exceeded its fair value by $2.9 million, and we recorded an impairment loss to reduce our manufacturing segment’s goodwill by this amount for the three months ended June 30, 2021.

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

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

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

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

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

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

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

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

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

However, if we determine in the future that Aerex’s discounted future cash inflows will be less than our present expectations, we may be required to record additional impairment losses to reduce the remaining carrying values of our manufacturing segment’s goodwill and its remaining unamortized intangible assets balances, which amounted to $1,985,211 and $731,111, respectively, as of March 31, 2023.

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

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As a result of the cancellation of this contract, we recorded an impairment loss for rights of way acquired for the contract’s proposed aqueduct of approximately ($3.0 million) in 2020.

Through our former subsidiary, PT Consolidated Water Bali (“CW-Bali”), we built and operated a seawater reverse osmosis plant with a productive capacity of approximately 264,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia.

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

In 2017 we determined, based upon probability-weighted scenarios for CW-Bali’s future undiscounted cash flows, that the carrying values of CW-Bali’s long-lived assets and our investment in CW-Bali

were not recoverable.

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

Construction and Manufacturing Contract Revenue Recognition

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

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

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

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

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

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

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

RESULTS OF OPERATIONS

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2022 Form 10-K.

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

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

Discontinued Operations – Mexico Project Development

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

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

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.

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This letter invited Mexico to seek a resolution of this investment dispute through consultation and negotiation, but stated that if the dispute cannot be resolved in this manner, CW-Cooperatief elects to refer the dispute to the International Centre for the Settlement of International Disputes for arbitration, as provided for in the Treaty.

On June 29, 2021, the Mexican Ministry of Economy responded to

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

On June 29, 2021, the Mexican Ministry of Economy responded to CW-Cooperatief’s letter and proposed to hold a consultation meeting.

Two such meetings were held on July 9, 2021 and August 2, 2021 on a confidential basis, without a resolution of our investment dispute.

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As a result of the cancellation of the APP Contract, in 2020 we discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project.

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

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

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

Our net losses from discontinued operations for the three months ended March 31, 2023 and 2022 were ($259,163) and ($607,314), respectively.

Consolidated Results

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stockholders for 2023 was $3,813,626 ($0.24 per share on a fully diluted basis), as compared to a net income of $1,716,815 ($0.11 per share on a fully diluted basis) for 2022.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 relates only to our continuing operations.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for 2023 as compared to 2022 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

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General and administrative (“G&A”) expenses on a consolidated basis increased to $6,036,662 for 2023 as compared to $4,866,117 for 2022.

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

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

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

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

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

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

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

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

The COVID-19 pandemic had a adverse impact on our consolidated results of operations for the three months ended September 30, 2022 and we believe the COVID-19 pandemic will continue to adversely impact our results of operations in future periods.

See further discussion herein and at “LIQUIDITY AND CAPITAL RESOURCES – Material Commitments, Expenditures and Contingencies – COVID-19 .”

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $945,571 from 2022 to 2023 due to pay raises, new hires, and higher bonus accruals.

Professional fees also increased by $107,339 from 2022 to 2023.

Other income, net, decreased to $157,059 for 2023 as compared to $319,727 for 2022 in part due to an unrealized gain recorded in 2022 of $75,000 for the valuation of the put/call options associated with the initial acquisition of a controlling interest in PERC.

We exercised our call option in the fourth quarter of 2022 and acquired the remaining 39% of PERC in January 2023.

We also generated approximately $67,000 less interest income in 2023 due to a decrease in CW-Bahamas’ average interest earning accounts receivable balances.

Results by Segment

Retail Segment:

The retail segment recorded a loss from operations of ($774,283) for 2022 as compared to a loss from operations of ($565,838) for 2021.

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

The sales volumes for both 2022 and 2021 were below the historical volumes for the retail segment prior to 2020 due to the cessation of tourism on Grand Cayman resulting from border restrictions that lasted from March 2020 through November 2021 in response to the COVID-19 pandemic.

The increase in the volume of water sold in 2022 as compared to 2021 resulted from the lifting in November 2021 of travel restrictions to the Cayman Islands for vaccinated individuals, which allowed the resumption of tourism to the Cayman Islands and the reopening of many tourist properties that we serve in Grand Cayman.

Retail revenue also increased due to higher energy costs which increased the energy pass-through component of our water rates and a more favorable rate mix, as much of the volume increase for the quarter was due to higher sales volumes to tourist industry related businesses, which in general purchase higher volumes and therefore pay higher per gallon rates than other retail customers.

The retail segment recorded a gain from operations of $35,907 for 2023 as compared to a loss from operations of ($190,946) for 2022.

Revenue generated by our retail water operations increased to $7,771,095 in 2023 from $6,313,200 in 2022 due to a 20% increase in the volume of water sold.

Approximately 26% of this volume increase was attributable to direct water sales to the WAC.

The remainder of the sales volume increase reflects increased tourist activity on Grand Cayman as tourism on the island in 2022 was lower than historical levels due to the lingering impact of the COVID-19 pandemic.

Retail revenue also increased by approximately $453,000 due to higher energy costs which increased the energy pass-through component of our water rates.

Retail segment gross profit increased to $4,220,301 (54% of retail revenue) for 2023 from $3,259,460 (52% of retail revenue) for 2022 due to the revenue increase.

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Retail G&A expenses increased to $4,177,107 for 2023 as compared to $3,450,406 for 2022.

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

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

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

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $577,585 due to pay raises and increased bonus accruals.

Professional fees also increased by approximately $63,000 from 2022 to 2023.

Bulk Segment:

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Bulk segment revenue was $9,004,373 and $7,350,644 for 2023 and 2022, respectively.

The increase in bulk segment revenue is attributable to an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas’ rates.

The increase in bulk segment revenue is attributable to an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas’ rates, and to a 9% increase in the volume of water sold.

Gross profit for our bulk segment was $2,761,227 (31% of bulk revenue) and $2,663,525 (36% of bulk revenue) for 2023 and 2022, respectively.

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

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

Gross profit as a percentage of revenue decreased in 2023 as compared to 2022 due to incremental chemicals and repairs and maintenance expenses of approximately $297,000.

Bulk segment G&A expenses remained consistent at $352,975 for 2023 as compared to $310,303 for 2022.

Services Segment:

The services segment income from operations was $1,588,951 and $327,124 for 2023 and 2022, respectively.

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

Services segment revenue increased to $12,721,701 for 2023 from $4,743,820 for 2022 due to an increase in plant design and construction revenue, with most of this increase resulting from PERC’s progress on its contract with Liberty Utilities for the construction of a water treatment plant in Goodyear, Arizona.

We recognized approximately $6.4 million in revenue for the Liberty Utilities contract in 2023.

Gross profit for the services segment was $2,677,623 (21% of services revenue) in 2023 as compared to $1,094,640 (23% of services revenue) for 2022.

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The decrease in gross profit as a percentage of revenue from 2022 to 2023 results from the relatively lower gross profit percentage earned on PERC’s contract with Liberty Utilities compared to that earned from PERC’s operating and maintenance contracts.

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

G&A expenses for the services segment increased to $1,088,672 for 2023 as compared to $779,974 for 2022 principally due to an increase of approximately $289,000 in employee costs attributable to pay raises, new hires and increased bonus accruals.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($199,377) for 2022 as compared to a loss from operations of ($69,933) in 2021.

The manufacturing segment contributed $483,956 to our income from operations for 2023 as compared to a loss incurred from operations of ($197,295) in 2022.

Manufacturing revenue was $3,371,821 and $1,150,241 for 2023 and 2022, respectively.

Certain manufacturing contracts have been delayed due to current supply chain and economic conditions, which have resulted in significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

The growth in manufacturing revenue for 2023 reflects increased production activity due to improvement in the supply chain and economic conditions in 2022 that resulted in significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

Manufacturing gross profit was $899,931 (27% of manufacturing revenue) for 2023 as compared to a gross profit of $128,139 (11% of manufacturing revenue) for 2022.

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

Gross profit as a percentage of revenue has remained low due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we have elected not to furlough or terminate the employment of our highly skilled manufacturing personnel in 2022 and 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment were $381,949 for 2022 as compared to $219,384 for 2021.

The results of our manufacturing segment have been adversely affected by current economic conditions including but not limited to increasing raw materials prices, rising human resources costs, tight labor markets, and extended and unexpected delays in the procurement and delivery of raw materials.

We believe these economic conditions have also resulted in product order delays from Aerex’s existing and prospective customers.

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

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

Discontinued Operations – Mexico Project Development

As previously discussed, on June 29, 2020, the State of Baja California cancelled its APP Contract with AdR for the Project.

As a result of the cancellation of the APP Contract, during the three months ended June 30, 2020, we discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project.

Our net loss from discontinued operations for the nine months ended September 30, 2022 and 2021 was ($1,533,064) and ($1,542,540), respectively, and consists of the costs for our legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP Contract, and for 2022, a provision of $377,326 for potentially uncollectible value added tax refunds.

Consolidated Results

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

stockholders for 2022 was $4,324,395 ($0.28 per share on a fully diluted basis), as compared to a loss of ($390,284) ( ($0.03) per share on a fully diluted basis) for 2021.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

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

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

Gross profit for 2022 was $21,465,034 (33% of total revenue) as compared to $17,881,962 (36% of total revenue) for 2021.

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

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

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

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

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

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

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

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

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

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

Other income, net, decreased to $548,729 for 2022 as compared to $699,890 for 2021 primarily due to an unrealized gain of $29,000 recorded for the valuation of the put/call options associated with the acquisition of a majority interest in PERC, as compared to an unrealized gain recorded on these options of $108,000 in 2021.

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

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the nine months ended September 30, 2022, and we believe the COVID-19 pandemic will continue to adversely impact our results of operations in future periods.

See further discussion herein and at “LIQUIDITY AND CAPITAL RESOURCES – Material Commitments, Expenditures and Contingencies – COVID-19 .”

Results by Segment

Retail Segment:

The retail segment incurred a loss from operations of ($900,747) for 2022 as compared to a loss from operations of ($1,605,769) for 2021.

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

Retail revenue also increased due to higher energy costs which increased the energy pass-through component of our water rates and a more favorable rate mix, as much of

the volume increase for the quarter was due to higher sales volumes to tourist industry related businesses, which in general purchase higher volumes and therefore pay higher per gallon rates than other retail customers.

Retail segment gross profit increased to $9,710,529 (51% of retail revenue) for 2022 from $8,397,438 (50% of retail revenue) for 2021 due to the revenue increase.

Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business segments.

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

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

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

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

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

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

Bulk Segment:

The bulk segment contributed $6,475,164 and $5,662,463 to our income from operations for 2022 and 2021, respectively.

Bulk segment revenue was $24,442,324 and $19,826,075 for 2022 and 2021, respectively.

The increase in bulk segment revenue is primarily attributable to an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas’ rates and, to a lesser extent, an increase of 4% in the volume of water sold by CW-Bahamas.

Gross profit for our bulk segment was $7,661,073 (31% of bulk revenue) and $6,655,742 (34% of bulk revenue) for 2022 and 2021, respectively.

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

Bulk segment G&A expenses remained relatively consistent at $1,187,909 for 2022 as compared to $994,779 for 2021.

Services Segment:

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

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

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

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

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

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

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

and (ii) increased insurance expense.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($634,819) for 2022 as compared to a loss from operations of ($3,518,847) in 2021.

The net loss from operations in 2021 included a $2.9 million impairment loss due to decline in Aerex’s projected future cash flows.

Manufacturing revenue was $3,589,333 and $3,244,106 for 2022 and 2021, respectively.

Certain manufacturing contracts have been delayed due to significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

Manufacturing gross profit was $412,034 (11% of manufacturing revenue) and $324,880 (10% of manufacturing revenue) for 2022 and 2021, respectively.

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

Gross profit as a percentage of revenue has remained relatively low due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we have elected not to furlough or terminate the employment of our highly skilled manufacturing personnel in 2022 and 2021 despite the decrease in production activity.

Gross profit as a percentage of revenue increased due to the lesser impact of fixed factory overhead on this measure resulting from the revenue increase, as we elected not to furlough or terminate the employment of our highly skilled manufacturing personnel in 2022 despite the decrease in production activity.

G&A expenses for the manufacturing segment remained relatively consistent at $417,908 for 2023 as compared to $325,434 for 2022.

We believe these economic conditions have also resulted in product order delays from Aerex’s existing and prospective customers.

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

FINANCIAL CONDITION

The significant changes in the components of our condensed consolidated balance sheet as of September 30, 2022 as compared to December 31, 2021 (other than the change in our cash and cash equivalents, which is discussed later in “LIQUIDITY AND CAPITAL RESOURCES”) and the reasons for these changes are discussed in the following paragraphs.

Accounts receivable decreased by approximately $3.0 million due to the collection by CW-Bahamas of significant delinquent receivables balances owed by the WSC.

This decrease in CW-Bahamas’ accounts receivable balance was partially offset by an increase in PERC’s accounts receivables.

Current inventory increased by approximately $1.5 million primarily due to an increase in Aerex’s inventory, as certain of its manufacturing contracts have been delayed, resulting in extended retention times for various inventory items purchased for these contracts.

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

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

The significant changes in the components of our condensed consolidated balance sheet as of March 31, 2023 as compared to December 31, 2022 (other than the change in our cash and cash equivalents, which is discussed later in “LIQUIDITY AND CAPITAL RESOURCES”) and the reasons for these changes are discussed in the following paragraphs.

Accounts receivable increased by approximately $2.5 million due to an increase of (i) approximately $1.2 million for PERC primarily due to the Liberties Utilities project;

and (ii) an increase in Aerex’s accounts receivable of approximately $700,000 due to increased project activities in this quarter.

Current inventory increased by approximately $3.4 million primarily due to an increase of $1.7 million in Aerex’s inventory due to current projects and an increase of $1.6 million in PERC’s inventory as a result of the Liberties Utilities and other projects.

Contract assets increased by approximately $3.2 million primarily due to Aerex's manufacturing projects and the Red Gate plant construction for the WAC.

Property, plant and equipment, net decreased by approximately $1.0 million due to the scheduled depreciation of fixed assets.

Construction in progress increased by approximately $1.9 million due to construction activity for Cayman Water’s replacement of its West Bay desalination plant.

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

Contract liabilities increased by $3.2 million due to billings made by the services segment in connection with PERC’s new contract with Liberty Utilities to construct a wastewater treatment facility in Arizona.

Construction in progress increased by approximately $1.2 million primarily due to construction activity for Cayman Water’s replacement of its West Bay desalination plant.

Accounts payable, accrued expenses and other liabilities increased by approximately $1.4 million primarily due to increases in (i) subcontractor costs for PERC’s contract with Liberty Utilities;

and (ii) accrued compensation.

Contract liabilities increased by $6.7 million primarily due to billings made by the services segment in connection with PERC’s new contract with Liberty Utilities and to a lesser extent billings made by Aerex.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Position

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

new Red Gate plant.

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

Our projected liquidity requirements for the balance of 2023 include capital expenditures for our existing operations of approximately $12.0 million which includes approximately $2.3 million to be incurred for the replacement of the West Bay seawater desalination plant and approximately $6.2 million for construction of the WAC’s new Red Gate plant.

paid approximately $1.4 million in dividends in April 2023.

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

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

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

We are not presently aware of anything that would lead us to believe that we will not have sufficient liquidity to meet our needs.

As of March 31, 2023, we had cash and cash equivalents of $51.1 million and working capital of $70.6 million.

With the exception of the liquidity matter relating to CW-Bahamas that is discussed in the paragraphs that follow, we are not presently aware of anything that would lead us to believe that we will not have sufficient liquidity to meet our needs.

CW-Bahamas Liquidity

As of 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 balance (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, respectively.

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, we received correspondence from the Ministry of Finance of the Government of the Bahamas that set forth a payment schedule providing for the gradual reduction over the course of 2022 of the CW-Bahamas' delinquent accounts receivable due from the WSC.

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

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

As of March 31, 2023, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.

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

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

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

Discussion of Cash Flows for the Three Months Ended March 31, 2023

Our cash and cash equivalents increased to $51,104,268 as of March 31, 2023 from $50,711,751 as of December 31, 2022.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $5,346,545.

This net cash reflects the net income incurred for the nine months ended September 30, 2022 of $5,015,437 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

This net cash reflects the net income generated for the three months ended March 31, 2023 of $3,976,747 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

and (ii) changes in the other components of working capital.

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

The more significant of such items and changes in working capital components included depreciation and amortization of $1,594,078, an increase in accounts receivable of $2,502,421, an increase in contract assets of $3,213,865, an increase in inventory of $3,382,870, and an increase in contract liabilities of $6,695,239.

Cash Flows from Investing Activities

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

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

Net cash used by our investing activities was $3,805,879.

On January 4, 2023, we purchased the remaining 39% ownership interest in PERC for $2,440,027 and 368,383 shares of the Company’s common stock.

We also used $1,381,796 for additions to property, plant and equipment and construction in progress.

Cash Flows from Financing Activities

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Material Commitments, Expenditures and Contingencies

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

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

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

However, its future effects on our company could differ materially from the information we are providing herein.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Home port cruise ship departures from the Port of Nassau commenced in June 2021 and cruise ship arrivals into The Bahamas commenced in July 2021.

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

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

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

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

and (iii) pass-through energy charges, therefore CW-Bahamas’ revenue is impacted by changes in energy prices and, to a lesser extent, changes in demand.

The volume of water CW-Bahamas sells

to the WSC was not adversely impacted by the COVID-19 pandemic despite the reduced economic activity on New Providence in 2021, and water volume sales remain steady as economic activity has increased in 2022.

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

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

Aerex presently has 15 manufacturing employees.

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

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

These conditions, and a decline in projected future sales to Aerex’s former largest customer, required us to record an impairment loss of ($2.9 million) for the three months ended June 30, 2021 to reduce the carrying value of our manufacturing reporting unit’s goodwill.

While these economic conditions and issues continue, Aerex could have difficulty completing its orders from its customers and obtaining new business, which could have a material adverse impact on our consolidated revenue, results of operations and cash flows, and could require us to record additional impairment losses to reduce the carrying value of the goodwill recorded for our manufacturing reporting unit.

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

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

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

Approximately 46% of PERC’s revenue of $17.8 million for the nine months ended September 30, 2022 was generated in California under contracts with government entities.

The State of California has publicly acknowledged on-going difficulties due to the COVID-19 pandemic, and such difficulties presently, or could in the future, extend to the various counties, municipalities, and other government-related entities in California, including PERC’s customers, which could adversely impact PERC’s revenue and the collection of its accounts receivable.

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

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

Cayman Water Retail License

We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands government (the “1990 license”) that granted Cayman Water the exclusive right to provide potable water to customers within its licensed service area.

Although the 1990 license was not expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as further discussed in the following paragraph.

Although the 1990 license was not expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as discussed in the following paragraphs.

Pursuant to the 1990 license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island:

Seven Mile Beach and West Bay.

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

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

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

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

The most recent

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

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

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

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

We continue to pay the royalty of 7.5% of revenue we collect required under the 1990 license.

In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”).

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OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets.

Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for the economic regulation of the water utility sector and the retail license negotiations from the WAC to OfReg in May 2017.

Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for economic regulation of the water utility sector and the retail license negotiations from the WAC to OfReg in May 2017.

We began license negotiations with OfReg in July 2017 and such negotiations are continuing.

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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.

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

The impact of this adoption was not material to our consolidated financial statements.

Effect of Newly Issued but not yet Effective Accounting Standards

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● On April 28, 2023, we paid a dividend of $0.085 to shareholders of record on April 3, 2023.

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

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

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

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

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

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

Dividend Reinvestment and Common Stock Purchase Plan

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

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

Increases in fuel and energy costs and other items could create additional credit risks for us, as our customers’ ability to pay our invoices could be adversely affected by such increases.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis