What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-10 compared with 2023-05-15 · 111 added, 56 removed, 245 unchanged (41% of the section changed)

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Goodwill and Intangible Assets

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

Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful

life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

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

Goodwill and intangible assets recorded as a result of a business combination and

determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

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

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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.

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

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.

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

Furthermore, Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers were adversely impacted by the negative economic conditions (caused in part by the COVID-19 pandemic).

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

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

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

Based upon this testing, we determined that the carrying value of our manufacturing

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

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

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

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

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

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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.

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 reporting unit’s goodwill and its remaining unamortized intangible assets balances, which amounted to $1,985,211 and $707,778, respectively, as of June 30, 2023.

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

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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.

Contract costs include labor, materials and subcontractor costs.

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

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

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

Due to the extended time it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimations of total revenue and costs at completion is complicated and subject to many variables and, accordingly, are subject to changes.

When adjustments in estimated total contract revenue or estimated total contract costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes.

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

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

Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022

Discontinued Operations – Mexico Project Development

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(“CW-Cooperatief”), and our Mexico subsidiary, N.S.C.

(“NSC”), of a project (the “Project”) that encompassed the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system.

(“NSC”), of a project (the “Project”) that encompassed the construction, operation and minority ownership of a 100 million gallons per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system.

Through a series of transactions that began in 2012, NSC purchased 20.1 hectares of land for approximately $21.1 million on which the proposed Project’s plant was to be constructed.

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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.

In August 2016, NSC and NuWater incorporated a new company under the name Aguas de Rosarito S.A.P.I.

(“AdR”) to pursue completion of the Project and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operation and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation.

(“AdR”) to pursue completion of the Project and executed a shareholders agreement for AdR agreeing among other things

that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operation and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation.

NSC initially owned 99.6% of the equity of AdR.

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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 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 would refer the dispute to the International Centre for the Settlement of International Disputes for arbitration, as provided for in the Treaty.

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

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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.

We cannot provide any assurances that CW Cooperatief will be able to obtain the relief sought in the arbitration, and we will incur legal and other arbitration-related expenses that we expect will be material to our consolidated results of operations and cash flows.

We cannot provide any assurances that CW Cooperatief will be able to obtain the relief sought in the arbitration, and we have incurred and will continue to incur legal and other arbitration-related expenses that are material to our consolidated results of operations and cash flows.

During July 2022, the State initiated discussions with us to potentially resolve the issues related to the cancellation by the government of the Rosarito desalination plant contract as well as potentially addressing the State’s acute water shortage issues.

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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.

Our net losses from discontinued operations for 2023 and 2022 were ($207,701) and ($419,833), respectively.

Consolidated Results

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

stockholders for 2023 was $7,323,771 ($0.46 per share on a fully diluted basis), as compared to net income of $2,289,886 ($0.15 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 June 30, 2023 as compared to the three months ended June 30, 2022 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2023 was $7,531,472 ($0.47 per share on a fully diluted basis), as compared to a net income from continuing operations of $2,709,719 ($0.18 per share on a fully diluted basis) for 2022.

Revenue for 2023 increased to $44,237,263 from $21,067,127 in 2022, reflecting revenue increases in all four of our segments.

Gross profit for 2023 was $15,463,549 (35% of total revenue) as compared to $7,475,497 (35% of total revenue) for 2022.

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

General and administrative (“G&A”) expenses on a consolidated basis increased to $5,984,915 for 2023 as compared to $4,926,691 for 2022.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $850,535 from 2022 to 2023 due to pay raises, new hires, increased stock compensation expense, and higher bonus accruals.

Other income, net, decreased to $129,131 for 2023 as compared to $397,982 for 2022 in part due to an unrealized gain recorded in 2022 of $201,000 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.

Results by Segment

Retail Segment:

The retail segment recorded a loss from operations of ($125,338) for 2023 as compared to income from operations of $64,483 for 2022.

Revenue generated by our retail water operations increased to $7,573,329 in 2023 from $6,526,803 in 2022 due to a 14% increase in the volume of water sold.

This 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 $355,000 due to higher energy costs which increased the energy pass-through component of our retail water rates.

Retail segment gross profit increased to $4,140,197 (55% of retail revenue) for 2023 from $3,408,392 (52% of retail revenue) for 2022 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 $4,265,535 for 2023 as compared to $3,345,109 for 2022.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $693,398 due to pay raises, increased stock compensation expense and higher bonus accruals.

Professional fees also increased by approximately $72,000 from 2022 to 2023.

Bulk Segment:

The bulk segment contributed $2,171,860 and $2,372,094 to our income from operations for 2023 and 2022, respectively.

Bulk segment revenue was $8,482,495 and $8,423,749 for 2023 and 2022, respectively.

The impact of an 8% increase in the volume of water sold in 2023 on bulk segment revenue was offset by a decrease in the price of energy for CW-Bahamas, which decreased the energy pass-through component of CW-Bahamas’ rates.

Gross profit for our bulk segment was $2,550,760 (30% of bulk revenue) and $2,776,166 (33% of bulk revenue) for 2023 and 2022, respectively.

Gross profit as a percentage of revenue decreased in 2023 as compared to 2022 due to incremental chemicals, repairs and maintenance, and other miscellaneous operating expenses of approximately $342,000.

Bulk segment G&A expenses remained consistent $379,900 for 2023 as compared to $404,072 for 2022.

Services Segment:

The services segment contributed $6,941,262 and $355,656 to our income from operations for 2023 and 2022, respectively.

Services segment revenue increased to $24,093,963 for 2023 from $5,055,483 for 2022.

Plant design and construction revenue increased to $18,521,650 in 2023 from $1,272,753 in 2022 with 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 $17.6 million in revenue for the Liberty Utilities contract in 2023.

Revenue generated under operations and maintenance contracts was $3,920,613 and $3,542,021 in 2023 and 2022, respectively.

Gross profit for the services segment was $7,845,822 (33% of services revenue) in 2023 as compared to $1,189,616 (24% of services revenue) for 2022.

During 2023, we adjusted our previous estimates of the total costs to be incurred for the Liberty Utilities contract and one other construction contract.

These changes in accounting estimates resulted in an increase in the services segment’s revenue, gross profit and income from operations of $1,761,753 for 2023 under the input method we use to account for construction contracts and was the primary factor in the increase in gross profit as a percentage of services revenue from 2022 to 2023.

G&A expenses for the services segment increased to $904,560 for 2023 as compared to $838,040 for 2022 principally due to an increase in employee costs.

Manufacturing Segment:

The manufacturing segment contributed $491,850 to our income from operations for 2023 as compared to a loss incurred from operations of ($238,147) in 2022.

Manufacturing revenue was $4,087,476 and $1,061,092 for 2023 and 2022, respectively.

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 $926,770 (23% of manufacturing revenue) for 2023 as compared to a gross profit of $101,323 (10% 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 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 $434,920 for 2023 as compared to $339,470 for 2022.

Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022

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 six months ended June 30, 2023 and 2022 was ($466,864) and ($1,027,147), 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 2023 was $11,137,397 ($0.70 per share on a fully diluted basis), as compared to a net income of $4,006,701 ($0.26 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 2023 as compared to 2022 relates only to our continuing operations.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the six months ended June 30, 2023 as compared to the six months ended June 30, 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 $12,021,577 for 2023 as compared to $9,792,808 for 2022.

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.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased

by $1,796,104 from 2022 to 2023 due to pay raises, new hires, increased stock compensation, and higher bonus accruals.

Professional fees also increased by $190,699 from 2022 to 2023.

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Retail Segment:

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.

The retail segment recorded a loss from operations of ($89,431) for 2023 as compared to a loss from operations of ($126,463) for 2022.

Revenue generated by our retail water operations increased to $15,344,424 in 2023 from $12,840,003 in 2022 due to a 17% 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.

The volume of water sold in the Cayman Water license area increased by 15% and the remaining 2% increase in the volume of water sold was due to water sales made by Cayman Water directly to the WAC in January and February of 2023.

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 $807,000 due to higher energy costs which increased the energy pass-through component of our retail water rates.

Retail segment gross profit increased to $8,360,498 (54% of retail revenue) for 2023 from $6,667,852 (52% of retail revenue) for 2022 due to the revenue increase.

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Retail G&A expenses increased to $8,442,642 for 2023 as compared to $6,795,515 for 2022.

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.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $1,270,981 due to pay raises, increased stock compensation expense and higher bonus accruals.

Professional fees also increased by approximately $134,000 from 2022 to 2023.

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Bulk segment revenue was $17,486,868 and $15,774,393 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, and to a 9% increase in the volume of water sold.

The increase in bulk segment revenue is attributable to a 9% increase in the volume of water sold.

Gross profit for our bulk segment was $5,311,987 (30% of bulk revenue) and $5,439,691 (34% of bulk revenue) for 2023 and 2022, respectively.

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.

Gross profit as a percentage of revenue decreased in 2023 as compared to 2022 due to incremental chemicals, repairs and maintenance and other miscellaneous operating expenses of approximately $639,000.

Bulk segment G&A expenses remained consistent at $732,875 for 2023 as compared to $714,375 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 $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.

The services segment contributed $8,530,213 and $682,780 to our income from operations for 2023 and 2022, respectively.

Services segment revenue increased to $36,815,664 for 2023 from $9,799,303 for 2022.

Plant design and construction revenue increased to $26,145,390 in 2023 from $2,321,556 in 2022 with 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 $24.1 million in revenue for the Liberty Utilities contract in 2023.

Revenue generated under operations and maintenance contracts was $7,482,326 and $7,118,150 in 2023 and 2022, respectively.

Gross profit for the services segment was $10,523,445 (29% of services revenue) in 2023 as compared to $2,284,256 (23% of services revenue) for 2022.

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

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.

During 2023, we adjusted our previous estimates of the total costs to be incurred for the Liberty Utilities contract and one other construction contract.

G&A expenses for the services segment increased to $1,993,232 for 2023 as compared to $1,618,014 for 2022 principally due to an increase of approximately $393,000 in employee costs attributable to pay raises, new hires and increased bonus accruals.

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

G&A expenses for the manufacturing segment increased to $852,828 for 2023 as compared to $664,904 for 2022 principally due to an increase of approximately $117,000 in employee costs attributable to pay raises, new hires and increased bonus accruals.

FINANCIAL CONDITION

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.

The significant changes in the components of our condensed consolidated balance sheet as of June 30, 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 $3.3 million primarily due to an increase in PERC’s accounts receivable relating to the Liberty Utilities project.

Current inventory increased by approximately $4.1 million primarily due to an increase of $2.4 million in PERC’s inventory as a result of the Liberty Utilities and other projects and a $1.4 million increase in Aerex’s inventory due to current projects.

Contract assets increased by approximately $5.3 million primarily due to Aerex's manufacturing projects and the Red Gate plant construction for the WAC.

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Construction in progress increased by approximately $2.2 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.

Accounts payable, accrued expenses and other liabilities increased by approximately $1.7 million primarily due to a $2.4 million increase in subcontractor costs for PERC’s contract with Liberty Utilities and taxes payable offset by a $1.4 million decrease in Aerex’s accrued payables.

Contract liabilities increased by $4.1 million primarily due to billings made by the services segment in connection with PERC’s 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 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 projected liquidity requirements for the balance of 2023 include capital expenditures for our existing operations of approximately $7.6 million, which includes approximately $600,000 to be incurred for the replacement of the West Bay seawater desalination plant and approximately $4.3 million for construction of the WAC’s new Red Gate plant.

We paid approximately $2.6 million in dividends in 2023.

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

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

As of June 30, 2023, we had cash and cash equivalents of $47.7 million and working capital of $75.5 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

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.

CW-Bahamas’ accounts receivable balance (which include accrued interest) due from the WSC amounted to $16.4 million and $16.3 million as of June 30, 2023 and December 31, 2022, respectively.

Approximately 64% of these accounts receivable balances were delinquent as of both of those dates.

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

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

As of June 30, 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.

In a report dated October 6, 2022, Moody’s Investor Services (“Moody’s”) downgraded the Government of The Bahamas’ long-term issuer and senior unsecured ratings to B1 from Ba3.

Moody’s also lowered The Bahamas’ local currency ceiling to Baa3 from Baa2 and its foreign currency ceiling to Ba1 from Baa3.

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

Discussion of Cash Flows for the 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.

Moody’s iterated these ratings in April 2023, noting that such ratings are “stable.” Based upon our review of this Moody’s correspondence, 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 Six Months Ended June 30, 2023

Our cash and cash equivalents decreased to $47,691,699 as of June 30, 2023 from $50,711,751 as of December 31, 2022.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $4,973,550.

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;

This net cash reflects the net income generated for the six months ended June 30, 2023 of $11,437,744 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.

18 unchanged sentences

The Credit Agreement requires Cayman Water to meet certain financial covenants.

Cayman Water has not yet utilized its available borrowings under the Credit Facility.

Cayman Water has not yet utilized any of its available borrowings under the Credit Facility.

Material Commitments, Expenditures and Contingencies

4 unchanged sentences

Seven Mile Beach and West Bay.

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.

For the three months ended June 30, 2023 and 2022, we generated approximately 17% and 31%, respectively, of our consolidated revenue and 27% and 46%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the six months ended June 30, 2023 and 2022, we generated approximately 20% and 32%, respectively, of our consolidated revenue and 32% 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.

1 unchanged sentence

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 of 7.5% of revenue we collect required under the 1990 license.

We continue to pay a royalty of 7.5% of the revenue we collect as 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”).

22 unchanged sentences

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

● On May 24, 2023, our Board declared a dividend of $0.085 payable on July 31, 2023 to shareholders of record on July 3, 2023.

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

14 unchanged sentences

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