What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-09 compared with 2023-08-10 · 96 added, 67 removed, 289 unchanged (36% of the section changed)

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

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

The application of our critical accounting policies involves 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;

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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.

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.

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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 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.

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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.

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

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

Contract costs include labor, materials and subcontractor costs.

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 the 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, subcontractor costs and other expenses.

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

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

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

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

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

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.

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 are 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.

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

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

Discontinued Operations – Mexico Project Development

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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 2023 and 2022 were ($207,701) and ($419,833), respectively.

Our net losses from discontinued operations for the three months ended September 30, 2023 and 2022 were ($232,994) and ($505,917), respectively.

Consolidated Results

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stockholders for 2023 was $8,605,129 ($0.54 per share on a fully diluted basis), as compared to net income of $317,694 ($0.02 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.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2023 was $8,838,123 ($0.55 per share on a fully diluted basis), as compared to a net income from continuing operations of $823,611 ($0.05 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.

Revenue for 2023 increased to $49,854,075 from $25,051,705 in 2022, reflecting revenue increases in all segments except for the bulk segment which had a slight decrease.

Gross profit for 2023 was $16,614,428 (33% of total revenue) as compared to $6,843,773 (27% of total revenue) for 2022.

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General and administrative (“G&A”) expenses on a consolidated basis increased to $5,872,490 for 2023 as compared to $5,610,650 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.

The most significant increase in G&A expenses for 2023 relates to insurance expense, which increased by almost $339,000.

Employee costs also increased by approximately $318,000 from 2022 to 2023 due to pay raises, new hires, and increased stock compensation expense.

Decreases in various other G&A expense categories served to partially offset these increases in insurance expense and employee costs.

Other income (expense), net, increased to $236,066 for 2023 as compared to an expense of ($168,980) for 2022 in part due to an unrealized loss recorded in 2022 of $247,000 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.

In addition, interest income increased by approximately $140,000 in 2023 primarily due to the increase in CW-Bahamas delinquent accounts receivable balances, on which we earn interest income.

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.

The retail segment recorded a loss from operations of ($381,142) for 2023 as compared to loss from operations of ($774,283) for 2022.

Revenue generated by our retail water operations increased to $7,216,574 in 2023 from $6,274,650 in 2022 due to a 16% increase in the volume of water sold.

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Retail G&A expenses increased to $4,225,825 for 2023 as compared to $3,818,459 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.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $260,000 due to pay raises and increased stock compensation expense.

Bulk Segment:

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Bulk segment revenue was $8,488,615 and $8,667,931 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.

The impact of a 6% increase in the volume of water sold in 2023 on bulk segment revenue was more than 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 $2,652,778 (31% of bulk revenue) and $2,221,382 (26% 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.

Gross profit as a percentage of revenue increased in 2023 as compared to 2022 due to a reduction in repairs and maintenance expenses of almost $417,000.

Bulk segment G&A expenses decreased to $347,668 for 2023 as compared to $473,534 for 2022 as a result of incremental bank fees of approximately $123,000 in 2022 attributable to cash transfers from CW-Bahamas to our parent company in the Cayman Islands.

Services Segment:

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Services segment revenue increased to $29,427,664 for 2023 from $8,731,124 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.

Construction revenue increased to $24,204,446 in 2023 from $4,781,613 in 2022 with this increase resulting from (i) PERC’s progress on its contract with Liberty (Litchfield Park Water & Sewer) Corp.

(“Liberty Utilities”) for the construction of a water treatment plant in Goodyear, Arizona;

and (ii) progress on our contract with the WAC for the construction of its Red Gate plant.

We recognized approximately $20.0 million in revenue for the Liberty Utilities contract in 2023.

This contract is expected to be substantially completed by the end of the second quarter of 2024.

Revenue generated under operations and maintenance contracts was $5,021,081 and $3,394,142 in 2023 and 2022, respectively.

The increase in operations and maintenance revenue from 2022 to 2023 is attributable to new contracts and increased revenue on existing contracts.

Gross profit for the services segment was $9,253,019 (31% of services revenue) in 2023 as compared to $1,397,142 (16% 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.

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

These changes in accounting estimates primarily arose as a result of actual construction costs and efficiencies for the Liberty Utilities contract that differed favorably from our previous expectations.

These changes in accounting estimates resulted in an increase in the services segment’s revenue, gross profit and income from operations of $1,787,275 for 2023 under the input method we use to account for construction contracts and was a significant contributing

factor in the increase in gross profit as a percentage of services revenue from 2022 to 2023.

The remainder of the increase in gross profit as a percentage of revenue from 2022 to 2023 reflects improved margins on both our construction and operations and maintenance activities.

G&A expenses for the services segment remained relatively consistent at $861,835 for 2023 as compared to $936,708 for 2022.

Manufacturing Segment:

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Manufacturing revenue was $4,721,222 and $1,378,000 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.

The growth in manufacturing revenue for 2023 reflects increased production activity due to relief in supply chain and economic conditions that had resulted in significant product delivery delays in 2022.

Manufacturing gross profit was $863,948 (18% of manufacturing revenue) for 2023 as compared to a gross profit of $182,572 (13% 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.

Gross profit as a percentage of revenue increased due to increased revenue and the resulting reduced impact of fixed factory overhead on this financial measure.

G&A expenses for the manufacturing segment remained relatively consistent at $437,162 for 2023 as compared to $381,949 for 2022.

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

Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

Discontinued Operations – Mexico Project Development

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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.

Our net loss from discontinued operations for the nine months ended September 30, 2023 and 2022 was ($699,858) and ($1,533,064), 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.

Consolidated Results

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stockholders for 2023 was $19,742,526 ($1.24 per share on a fully diluted basis), as compared to a net income of $4,324,395 ($0.28 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 six months ended June 30, 2023 as compared to the six months ended June 30, 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 nine months ended September 30, 2023 as compared to the nine months ended September 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 $17,894,067 for 2023 as compared to $15,403,458 for 2022.

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.

Other income, net, decreased to $286,190 for 2023 as compared to $717,709 for 2022 in part due to an unrealized gain recorded in 2022 of $276,000 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 $92,000 less interest income in 2023 due to a decrease in CW-Bahamas’ average interest earning accounts receivable balances.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $2,114,275 from 2022 to 2023 due to increased stock compensation, higher bonus accruals, pay raises and new hires, Insurance expense and professional fees also increased by $607,444 and $212,685, respectively, from 2022 to 2023.

These increases were partially offset by decreases in various other G&A expense categories.

Other income, net, remained relatively consistent at $522,256 for 2023 as compared to $548,729 for 2022.

Results by Segment

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The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $1,531,132 due to pay raises, increased stock compensation expense and higher bonus accruals.

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

Business development expenses increased by approximately $152,000 primarily due to the costs associated with the acquisition of Ramey Environmental Compliance (which was completed in November 2023).

Bulk Segment:

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Bulk segment revenue was $25,975,483 and $24,442,324 for 2023 and 2022, respectively.

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

The increase in bulk segment revenue is attributable to an 8% increase in the volume of water sold.

Gross profit for our bulk segment was $7,964,765 (31% of bulk revenue) and $7,661,073 (31% 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 $639,000.

Gross profit dollars increased from 2022 to 2023 due to the incremental revenue.

Bulk segment G&A expenses remained consistent at $1,080,543 for 2023 as compared to $1,187,909 for 2022.

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Services segment revenue increased to $66,243,328 for 2023 from $18,530,427 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.

Construction revenue increased to $52,563,822 in 2023 from $5,347,023 in 2022 with this increase resulting from (i) PERC’s progress on its contract with Liberty Utilities for the construction of a water treatment plant in Goodyear, Arizona;

and (ii) progress on our contract with the WAC for the construction of its Red Gate plant.

We recognized approximately $44.1 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.

This contract is expected to be substantially completed by the end of the second quarter of 2024.

Revenue generated under operations and maintenance contracts was $12,750,902 and $10,740,623 in 2023 and

2022, respectively.

The increase in operations and maintenance revenue from 2022 to 2023 is attributable to new contracts and increased revenue on existing contracts.

Design and consulting revenue generated by the services segment was $928,604 and $2,442,781 in 2023 and 2022, respectively.

The decrease in design and consulting revenue from 2022 to 2023 is attributable to the work performed in 2022 on the design contract for the Liberty Utilities plant currently under construction.

Gross profit for the services segment was $19,776,464 (30% of services revenue) in 2023 as compared to $3,681,398 (20% 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.

During the three months ended June 30, 2023 and the three months ended September 30, 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 arose as a result of actual construction costs and efficiencies that differed favorably from our previous expectations.

These changes in accounting estimates resulted in an increase in the services segment’s revenue, gross profit and income from operations of $3,549,028 for 2023 under the input method we use to account for construction contracts and was a significant contributing factor in the increase in gross profit as a percentage of services revenue from 2022 to 2023.

The remainder of the increase in gross profit as a percentage of revenue reflects improved margins on both our construction and operations and maintenance activities.

G&A expenses for the services segment increased to $2,855,067 for 2023 as compared to $2,554,721 for 2022 principally due to an increase of approximately $407,000 in employee costs attributable to pay raises, new hires and increased bonus accruals.

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Manufacturing revenue was $12,180,519 and $3,589,333 for 2023 and 2022, respectively.

Manufacturing gross profit was $2,690,649 (22% of manufacturing revenue) for 2023 as compared to a gross profit of $412,034 (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 increased due to increased revenue and the resulting reduced impact of fixed factory overhead on this financial measure.

G&A expenses for the manufacturing segment increased to $1,289,990 for 2023 as compared to $1,046,853 for 2022 principally due to an increase of approximately $155,000 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 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.

The significant changes in the components of our condensed consolidated balance sheet as September 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 $11.1 million primarily due to a $6.9 million increase in CW-Bahamas’ accounts receivable as well as a $3.3 million increase in Kalaeloa Desalco accounts receivable related to the construction of the Kalaeloa Seawater Desalination facility in Oahu, Hawaii.

Current inventory increased by approximately $2.2 million primarily due to an increase of $2.5 million in PERC’s inventory primarily as a result of its contract with Liberty Utilities.

Contract assets increased by approximately $6.1 million primarily due to the construction of the Red Gate plant for the WAC.

Property, plant and equipment, net, decreased by approximately $2.5 million due to the scheduled depreciation of fixed assets.

Construction in progress increased by approximately $2.7 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 $1.7 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.

Accounts payable, accrued expenses and other liabilities increased by approximately $3.0 million primarily due to a $1.5 million increase in subcontractor costs for PERC’s contract with Liberty Utilities, and a $1.9 million increase in taxes payable offset by a $1.5 million decrease in Aerex’s accrued expenses.

Contract liabilities increased by approximately $725,000 primarily due to $1.8 million increase in billings made by the services segment in connection with PERC’s contract with Liberty Utilities and Kalaeloa Desalco’s contract with the Board of Water Supply of the City and County of Honolulu, Hawaii.

These increases were offset by a $1.1 million reduction in Aerex’s contract liabilities.

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

Liquidity Position

Our projected liquidity requirements for 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 June 30, 2023, we had cash and cash equivalents of $47.7 million and working capital of $75.5 million.

We paid approximately $3.85 million in November 2023 to acquire Ramey Environmental Compliance.

Our remaining projected liquidity requirements for the fourth quarter of 2023 include capital expenditures for our existing operations of approximately $5.1 million, which includes approximately $292,000 to be incurred for the replacement of the West Bay seawater desalination plant and approximately $2.5 million for construction of the WAC’s new Red Gate plant.

Additionally, approximately $4.7 million in raw materials purchase commitments were outstanding as of September 30, 2023.

We paid approximately $4.0 million in dividends in 2023 and our liquidity requirements may include future quarterly dividends if such dividends are declared by our Board.

As of September 30, 2023, we had cash and cash equivalents of $48.8 million and working capital of $83.1 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 $16.4 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.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $23.2 million and $16.3 million as of September 30, 2023 and December 31, 2022, respectively.

Approximately 76% and 65% of the accounts receivable balances were delinquent as of those dates, respectively.

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.

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.

As of September 30, 2023, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.

CW-Bahamas recently held discussions with the Ministry of Finance of the Government of the Bahamas which stated that the Government intends to return all of CW-Bahamas’ accounts receivable from the WSC to current status.

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.

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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.

If CW-Bahamas is unable to collect a sufficient portion of its delinquent accounts receivable, one or more of the following events may occur:

(i) CW-Bahamas may not have sufficient liquidity to meet its obligations;

(ii) we may be required to cease the recognition of revenue on CW-Bahamas’ water supply agreements with the WSC;

and (iii) we may be required to provide an allowance for doubtful accounts for CW-Bahamas’ accounts receivable.

Any of these events could have a material adverse impact on our consolidated financial condition, results of operations, and cash flows.

Discussion of Cash Flows for the Nine Months Ended September 30, 2023

Our cash and cash equivalents decreased to $48,845,606 as of September 30, 2023 from $50,711,751 as of December 31, 2022.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $8,395,625.

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;

This net cash reflects the net income generated for the nine months ended September 30, 2023 of $20,206,301 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 $3,269,859, an increase in accounts receivable of $3,259,462, an increase in contract assets of $5,279,048, an increase in inventory of $4,290,778, and an increase in contract liabilities of $4,124,569.

The more significant of such items and changes in working capital components included depreciation and amortization of $4,862,781, an increase in accounts receivable of $11,062,456, an increase in contract assets of $6,059,018, an increase in inventory of $2,671,769, and an increase in accounts payable and accrued expenses of $2,925,670.

Cash Flows from Investing Activities

23 unchanged sentences

Seven Mile Beach and West Bay.

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.

For the three months ended September 30, 2023 and 2022, we generated approximately 14% and 25%, respectively, of our consolidated revenue and 23% 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, 2023 and 2022, we generated approximately 18% and 29%, respectively, of our consolidated revenue and 29% and 45%, 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.

11 unchanged sentences

We are presently unable to determine what impact the resolution of our retail license negotiations will have on our cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our retail operations and could require us to record impairment losses to reduce the carrying value of our retail segment assets.

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

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

CW-Bahamas Performance Guarantees

12 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.

● On July 31, 2023, we paid a dividend of $0.085 to shareholders of record on July 3, 2023.

● On August 22, 2023, our Board declared a dividend of $0.095 payable on October 31, 2023 to shareholders of record on October 2, 2023.

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

10 unchanged sentences

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

While PERC’s operations and maintenance contracts are generally adjusted for inflation on an annual basis, such adjustment for some of these contracts is limited to 3% annually.

Kalaeloa Desalco, which is jointly owned by PERC and CW-Holdings, has signed a definitive agreement with the Honolulu Board of Water Supply to design, build, operate and maintain a 1.7 million gallons per day seawater reverse osmosis desalination plant in Oahu, Hawaii.

More than 90% of the costs we expect to incur to construct this plant are subject to inflationary increases based upon changes in inflation indices from the date the contract was executed to the date construction begins.

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.

2 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