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Item 7. Management’s Discussion and Analysis

2024-03-27 compared with 2023-03-30 · 142 added, 112 removed, 223 unchanged (53% of the section changed)

9 unchanged sentences

(1) In millions of gallons per day.

Our water treatment and reuse facilities are conducted at 27 plants in the United States.

Effective October 1, 2023, the Company purchased, through its wholly-owned subsidiary PERC, a 100% ownership interest in Ramey Environmental Compliance, Inc., a Colorado company that operates and maintains water and wastewater treatment facilities and provides technical services to clients throughout the Rocky Mountain and Eastern Plains Regions of Colorado.

PERC acquired REC in November 2023 for approximately $4.1 million and recorded goodwill and intangible assets of $2,436,391 and $1,108,390, respectively, as of October 1, 2023 as a result of this acquisition.

The following table sets forth the comparative combined estimated production capacity of our services segment as of December 31 of each year.

3 unchanged sentences

(1) In estimated millions of gallons per day.

As of December 31, 2023, REC performed operations, maintenance, and monitoring services for 72 wastewater and water treatment plants located in the Rocky Mountain and Eastern Plains Regions of Colorado.

Cayman Islands

3 unchanged sentences

This license expired in January 2018 but as discussed in the following paragraph we continue to provide water under the terms of this license.

Our Grand Cayman operations consist of four company-owned seawater reverse osmosis desalination plants which provide water to approximately 7,950 retail residential and commercial connections within a government licensed area and three government-owned seawater reverse osmosis plants which supply bulk water to the WAC.

Our Grand Cayman operations consist of three company-owned seawater reverse osmosis desalination plants which provide water to approximately 8,095 retail residential and commercial connections within a government licensed area and three government-owned seawater reverse osmosis plants which supply bulk water to the WAC.

Our pipeline system on Grand Cayman Island covers the Seven Mile Beach and West Bay areas of Grand Cayman and consists of approximately 100 miles of potable water pipe.

1 unchanged sentence

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.

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.

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Representatives of the Bahamas government have informed us that their delays in paying our accounts receivables did/do not reflect any type of dispute with us with respect to the amounts owed.

To date, we have not been required to provide an allowance for any delinquent CW-Bahamas accounts receivable as such amounts were eventually paid in full.

Based upon our experience, we believe that the present accounts receivable from the WSC are fully collectible and therefore have not provided any allowance for possible non-payment of these receivables.

To date, all amounts due from CW-Bahamas were eventually paid in full, and we believe that the present accounts receivable from the WSC are fully collectible.

Such accounts receivable balances due from The Bahamas government amounted to $26.9 million as of December 31, 2023.

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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;

1 unchanged sentence

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.

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 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.

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 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 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 2021 were 80% to the discounted cash flow method and 20% to the guideline public company method.

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

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.

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

For 2023, 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 our reporting units.

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.

The events and circumstances assessed for each reporting 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 reporting units exceeded their carrying values as of December 31, 2023.

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, expected future results, 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.

Due to the factors discussed in the following paragraphs, we elected to test the goodwill associated with our manufacturing reporting unit for possible impairment for 2022 using the quantitative tests applied in prior years.

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.

While Aerex sells various products to this customer, Aerex’s revenue from this customer has historically been derived primarily from one specialized product.

While Aerex sells various products to this customer, Aerex’s revenue from this customer had historically been derived primarily from one specialized product.

In October 2020, this customer informed Aerex that, for inventory management purposes, it was suspending its purchases of the specialized product from Aerex following 2020 for a period of approximately one year.

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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.

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.

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.

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.

2 unchanged sentences

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 $754,444, respectively, as of December 31, 2022.

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

Long-lived Assets

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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

4 unchanged sentences

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 amounts payable to subcontractors.

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.

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.

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 comprise 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 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.

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

10 unchanged sentences

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

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

The APP Contract was

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

On June 29, 2020, AdR received a letter (the “Letter”) from the Director General of CEA and the Director General of CESPT terminating the APP Contract.

The Letter requested that AdR provide an inventory of the assets that currently comprise the “Project Works” (as defined in the APP Contract) for the purpose of acknowledging and paying the non-recoverable expenses made by AdR in connection with the Project, with such reimbursement to be calculated in accordance with the terms of the APP Contract.

The Letter requested that AdR provide an inventory of the assets that comprised the “Project Works” (as defined in the APP Contract) for the purpose of acknowledging and paying the non-recoverable expenses made by AdR in connection with the Project, with such reimbursement to be calculated in accordance with the terms of the APP Contract.

The applicable law required that this list of non-recoverable expenses made by AdR in connection with the Project be submitted to CEA and CESPT within 20 business days from the date of receipt of the Letter.

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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 could not 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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Our net losses from discontinued operations for 2023 and 2022 were ($1,086,744) and ($2,371,049), respectively.

Our net losses from discontinued operations for 2022 and 2021 includes provisions of $377,326 and $963,540, respectively, for uncollectible value added taxes paid to, and reimbursable by, the Mexican federal government.

Consolidated Results

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General and administrative expenses (“G&A expenses”) on a consolidated basis increased to $24,752,366 for 2023 as compared to $21,070,234 for 2022.

The most significant components of the increase in G&A expenses for 2022 were incremental bonus accruals and stock compensation expense aggregating $1,248,242 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 $399,268 due to salary increases and new hires;

(ii) professional and legal fees, which increased by $148,663;

(iii) insurance expense, which increased $254,599 due to higher premiums and (iv) incremental business development expenses of $170,461.

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 $464,810 in 2022, as compared to $1,623,595 in 2021 primarily due to a loss of ($128,000) recorded in 2022 for the valuation of the put/call options associated with the acquisition of PERC, as compared to a gain recorded on these options of $818,000 in 2021.

In addition, interest income decreased by approximately $238,000 for 2022 as compared to 2021 primarily due to the decrease in CW-Bahamas’ average delinquent accounts receivable balances due from the WSC.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $2,480,517 from 2022 to 2023 due to increased stock compensation, higher bonus accruals, pay raises and new hires.

Professional fees also increased by $251,813 from 2022 to 2023.

The remainder of the G&A increase is attributable to increases across a variety of categories including provision for credit losses of $408,489.

Other income, net, increased to $828,313 in 2023, as compared to $464,810 in 2022 due to an increase in interest income of approximately $249,000 primarily due to a higher balance of interest earning assets, and an increase of approximately $68,000 in the equity in earnings of and profit-sharing income from our affiliate, OC-BVI, and an unrealized loss recorded in 2022 of $128,000 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

1 unchanged sentence

The retail segment incurred a loss from operations of ($660,253) for 2023 as compared to a loss from operations of ($1,187,013) for 2022.

Revenue generated by our retail water operations increased to $25,954,013 in 2022 from $22,104,953 in 2021 in part due to a 12.5% 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 August 2022 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 August 2022 of such pandemic related travel restrictions.

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.

Revenue generated by our retail water operations increased to $30,158,051 in 2023 from $25,954,013 in 2022 principally due to a 15% increase in the volume of water sold.

The volume of water sold in the Cayman Water license area increased by 14% and the remaining 1% increase in the volume of water sold was due to water sales made by Cayman Water directly to the WAC in the first quarter 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 $1,014,639 due to higher energy costs which increased the energy pass-through component of our retail water rates.

Retail segment gross profit increased to $16,266,822 (54% of retail revenue) for 2023 as compared to $13,405,250 (52% of retail revenue) for 2022 due to the revenue increase.

1 unchanged sentence

Retail G&A expenses increased to $16,905,010 for 2023 as compared to $14,552,866 for 2022.

The most significant components of the increase in G&A expenses for 2022 were incremental bonus accruals and stock compensation expense of $976,501 arising from the improved financial performance of the Company.

Other components of the G&A expenses increase relate to (i) professional and legal fees, which increased by $167,445;

(ii) incremental business development expenses of $170,461 and (iii) insurance costs, which increased by $123,938.

The most significant increase in G&A expenses for 2023 relates to employee costs, which increased by $1,760,230 due to pay raises, increased stock compensation expense and higher bonus accruals.

Business development expenses increased by approximately $182,000 primarily due to the costs associated with the acquisition of REC (which was completed in November 2023).

Bulk Segment:

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Bulk segment revenue was $34,595,058 and $32,991,066 for 2023 and 2022, respectively.

The increase in bulk segment revenue from 2021 to 2022 is attributable to an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas’ rates.

Gross profit for the bulk segment was $9,958,854 (30% of bulk segment revenue) and $9,041,597 (34% of bulk segment revenue) for 2022 and 2021, respectively.

The increase in bulk segment revenue from 2022 to 2023 is attributable to a 6% increase in water volume and an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas’ rates.

Gross profit for the bulk segment was $10,466,926 (30% of bulk revenue) and $9,958,854 (30% of bulk revenue) for 2023 and 2022, respectively.

Gross profit in dollars increased in 2023 as compared to 2022 principally due to the increase in revenue.

Gross profit as a percentage of revenue decreased in 2022 as compared to 2021 principally due to incremental repairs and maintenance expenses for CW-Bahamas of approximately $361,000 and incremental chemical costs of approximately $554,000 arising from higher chemical prices and greater chemicals usage.

Bulk segment G&A expenses increased to $1,570,732 for 2022 as compared to $1,365,735 for 2021 primarily due to relatively small increases in a variety of expense categories.

Bulk segment G&A expenses increased to $1,737,264 for 2023 as compared to $1,570,732 for 2022 due to relatively small increases in a variety of expense categories.

Services Segment:

The services segment contributed $26,897,080 and $2,424,217 to our income from operations for 2023 and 2022, respectively.

Services segment revenue increased to $28,835,428 for 2022 compared to $13,884,857 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 which commenced in the third quarter of 2022.

Revenue recognized on this contract in 2022 was approximately $9.5 million.

The gross profit for the services segment was $5,861,794 (20% of services segment revenue) in 2022 as compared to $3,177,614 (23% of services revenue) for 2021.

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

The decrease in gross profit as a percentage of revenue from 2021 to 2022 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 $3,461,294 for 2022 as compared to $2,762,735 for 2021 as a result of increased bonus accruals of $235,204 arising from the improved financial performance of PERC, $385,156 in incremental other employee costs attributable to salary increases and new hires and increased insurance expense.

Services segment revenue increased to $97,966,650 for 2023 compared to $28,835,428 for 2022.

Construction revenue increased to $77,306,704 in 2023 from $11,616,274 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 $64.0 million in revenue for the Liberty Utilities contract in 2023.

This contract was certified substantially complete in January 2024 and the remaining work on the plant will be completed by June 2024.

Revenue generated under operations and maintenance contracts was $19,368,365 and $14,152,158 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 $1,291,581 and $3,066,996 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.

The gross profit for the services segment was $31,168,888 (32% of services revenue) in 2023 as compared to $5,861,794 (20% of services revenue) for 2022.

Gross profit increased from 2022 to 2023 due to the increase in revenue.

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.

During 2023, we adjusted our prior year 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 $2,356,439 for 2023 under the input method we use to account for construction contracts and were a contributing factor in the increase in gross profit as a percentage of services revenue from 2022 to 2023.

This adjustment increased basic and diluted earnings per share by $0.11 for the year ended December 31, 2023.

G&A expenses for the services segment increased to $4,271,808 for 2023 as compared to $3,461,294 for 2022 principally due to an increase of approximately $384,000 in employee costs attributable to pay raises, new hires and increased bonus accruals and the addition of approximately $366,000 in G&A expenses from REC as a result of our acquisition of this company effective October 1, 2023.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($358,748) for 2022 as compared to a loss of ($4,036,666) for 2021.

The loss from operations for 2021 reflects an impairment loss recorded for our manufacturing segment’s goodwill of $2,900,000 due to a decline in Aerex’s projected future cash flows.

The manufacturing segment contributed $2,188,418 to our income from operations for 2023 as compared to incurring an operating loss of ($358,748) for 2022.

Manufacturing segment revenue was $17,491,474 and $6,324,465 for 2023 and 2022, respectively.

Manufacturing segment revenue increased from 2021 to 2022 due to an increase in production activity that resulted from an easing of some of the supply change difficulties that restricted production for 2021 and most of 2022.

Manufacturing segment gross profit was $1,129,225 (18% of manufacturing segment revenue) and $243,964 (6% of manufacturing segment revenue) for 2022 and 2021, respectively.

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

Gross profit as a percentage of revenue increased due to the revenue increase and the resulting lesser relative impact of fixed factory overhead on this measure, as we elected to continue the employment of all of our highly skilled manufacturing personnel during 2022 and 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment remained relatively consisted at $1,485,342 for 2022 as compared to $1,380,630 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.

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 segment gross profit was $4,024,469 (23% of manufacturing revenue) and $1,129,225 (18% of manufacturing revenue) for 2023 and 2022, respectively.

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 $1,838,284 for 2023 as compared to $1,485,342 for 2022 principally due to an increase of approximately $129,000 in employee costs attributable to pay raises, new hires and increased bonus accruals.

FINANCIAL CONDITION

The significant changes in the components of our consolidated balance sheet as of December 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.

Current inventory increased by approximately $3.2 million primarily due to an increase in Aerex’s inventory, as Aerex began a major new contract in the fourth quarter of 2022.

Some of Aerex’s manufacturing contracts have also been delayed, resulting in extended retention times for various inventory items purchased for these contracts.

Prepaid expenses and other current assets increased by approximately $3.1 million primarily due to advance payments to contractors and suppliers and the cost of PERC’s construction bond for the Liberty Utilities project.

Contract assets increased by approximately $2.4 million due to an increase in the Red Gate plant construction and Aerex's manufacturing activities.

Construction in progress increased by approximately $3.0 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 $5.6 million primarily due to an increase in subcontractor costs for PERC’s contract with Liberty Utilities and Aerex’s manufacturing projects.

Contract liabilities increased by $8.3 million primarily due to approximately $7.0 million in billings made by the services segment in connection with PERC’s new contract with Liberty Utilities.

Aerex also had an increase of approximately $1.3 million in billings in the manufacturing segment.

Accounts receivable increased by approximately $11.2 million primarily due to a $10.3 million increase in CW-Bahamas’ accounts receivable.

Contract assets increased by approximately $18.6 million primarily due to a $8.2 million increase for the construction of the Red Gate plant for the WAC and a $8.4 million increase for PERC which relates primarily to the Liberties Utilities contract.

Property, plant and equipment, net, increased by approximately $3.4 million primarily due to the commissioning of the West Bay seawater desalination plant at the end of the year.

Construction in progress decreased by approximately $3.2 million primarily due to the commissioning of the West Bay seawater desalination plant at the end of the year.

Goodwill and intangible assets increased due to the acquisition of REC.

Other assets increased by $1.7 million primarily due to prepaid insurance associated with Kalaeloa Desalco’s contract with the Board of Water Supply of the City and County of Honolulu, Hawaii.

Accounts payable, accrued expenses and other current liabilities increased by approximately $3.2 million primarily due to a $4.0 million increase in subcontractor costs payable for 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 .

Contract liabilities decreased by approximately $2.6 million primarily due to a $6.9 million reduction by the services segment in connection with PERC’s contract with Liberty Utilities and a decrease in Aerex’s contract liabilities of $1.6

These decreases were offset by an increase of $6.0 million with Kalaeloa Desalco’s contract with the Board of Water Supply of the City and County of Honolulu, Hawaii.

LIQUIDITY AND CAPITAL RESOURCES

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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.

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

Liquidity Position

Our projected liquidity requirements for 2023 include capital expenditures for our existing operations of approximately $14.1 million, which includes $2.8 million to be incurred in 2023 for the replacement of the West Bay seawater desalination plant and approximately $7.5 million for construction of the WAC’s new Red Gate plant.

Our projected liquidity requirements for 2024 include capital expenditures for our existing operations of approximately $9.5 million, which includes $2.8 million to be incurred in 2024 for our new West Bay plant.

We paid approximately $1.6 million for dividends in January 2024.

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

On January 4, 2023, we purchased the remaining 39% of PERC from its minority shareholders for approximately $2.44 million in cash and 368,383 shares of the Company’s common stock.

As of December 31, 2023, we had cash and cash equivalents of $42.6 million and working capital of $88.8 million.

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The delay in collecting these accounts receivable has adversely impacted the liquidity of this subsidiary.

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

CW-Bahamas has been unable to pay a dividend to its shareholders since August 2022 due to liquidity constraints.

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

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

All previous delinquent accounts receivable from the WSC, including accrued interest thereon, were eventually paid in full.

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

As of December 31, 2022, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC.

In February 2022, we received correspondence from the Ministry of Finance of the Government of the Bahamas that stated that the Government intends to return all of CW-Bahamas’ accounts receivable from the WSC to current status.

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

Based upon this payment history, we have not provided for a material allowance for credit losses for CW-Bahamas’ accounts receivable from the WSC as of December 31, 2023.

As of February 29, 2024, this receivable amounted to $24.6 million.

CW-Bahamas held discussions with the WSC in March 2024 during which the WSC stated that the Government intends to substantially reduce CW-Bahamas’ accounts receivable from the WSC over the course of 2024.

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.

Moody’s iterated these ratings in April and October 2023, noting that such ratings are “stable.” Based upon our review of this Moody’s correspondence, we continue to believe that no material allowance for credit losses is required for CW-Bahamas’ accounts receivable from the WSC.

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

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

(ii) 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 a material allowance for credit losses 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 Year Ended December 31, 2023

Our cash and cash equivalents increased to $50,711,751 as of December 31, 2022 from $40,358,059 as of December 31, 2021.

Our cash and cash equivalents decreased to $42,621,898 as of December 31, 2023 from $50,711,751 as of December 31, 2022.

Cash Flows from Operating Activities

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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 $6,187,308, an increase in contract liabilities of $8,290,043, an increase in accounts payable and accrued expenses of $6,756,433, an increase in inventory of $3,387,011, an increase in prepaid expenses and other assets of $3,365,747 and an increase in contract assets of $2,423,761.

The more significant of such items and changes in working capital components included depreciation and amortization of $6,576,454, an increase in accounts receivable of $10,970,521 attributable principally to CW-Bahamas, an increase in contract assets of $18,639,335 due primarily to the Red Gate and Liberty Utilities construction contracts, a decrease in contract liabilities of $2,566,910 and an increase in accounts payable, accrued expenses and accrued compensation of $3,161,386.

Cash Flows from Investing Activities

Net cash used by our investing activities was $10,887,019.

Cash used was primarily for additions to property, plant and equipment and construction in progress of $7,542,761.

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

Cash used for additions to property, plant and equipment and construction in progress was $5,047,884.

We purchased the remaining 39% ownership interest in PERC for $2,440,027 and 368,383 shares of the Company’s common stock, and we acquired REC for a net cash outflow (i.e.

the purchase price paid in cash less the cash held by REC at the acquisition date) of $3,419,916.

Cash Flows from Financing Activities

Net cash used by our financing activities was $5,524,565, almost all of which related to the payment of dividends.

Revolving Credit Facility

In September 2022, Cayman Water entered into an agreement (the “Credit Agreement”) with Scotiabank & Trust (Cayman) Ltd.

(the “Bank”) for a revolving credit facility in an aggregate principal amount of up to $10.0 million (the “Credit Facility”).

We expect to utilize the funds obtained from the Credit Facility for general working capital purposes.

The Credit Facility matures two years following the date of the initial advance (the “Maturity Date”).

All amounts outstanding under the Credit Facility are due and payable upon the earlier of the Maturity Date, demand from the bank or the acceleration of the Credit Facility upon an event of default.

The principal balance of the Credit Facility bears interest at a rate of 2.0% plus the secured overnight financing rate (“SOFR”) as determined by the SOFR Administrator for a one-month period on the day that is two days prior to the first day of the interest period.

All interest calculations will be made based on a 360-day year.

So long as the Bank has not demanded repayment, interest will be payable monthly, commencing one month from the initial advance, with the outstanding balance due on the Maturity Date, unless the Bank agrees to renew the Credit Facility for an additional period.

Cayman Water’s obligations under the Credit Agreement are secured by a first priority lien on all its fixed and floating assets and an assignment of insurance proceeds with respect to its fixed assets.

Further, the Company has guaranteed the repayment of all of Cayman Water’s present and future debts and liabilities owed to the Bank.

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

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

Material Commitments, Expenditures and Contingencies

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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 discussed in the following paragraphs.

Although the 1990 license has not been 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:

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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”).

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

We have been informed during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands

government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license.

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

The Cayman Islands government could seek to grant a third party a license to service some or all of Cayman Water’s present service area.

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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

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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

In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures .

This ASU updates reportable segment disclosure requirements by requiring disclosures of significant reportable segment expenses that are regularly provided to the Chief Operating Decision Maker (“CODM”) and included within each reported measure of a segment's profit or loss.

This ASU also requires disclosure of the title and position of the individual identified as the CODM and an explanation of how the CODM uses the reported measures of a segment’s profit or loss in assessing segment performance and deciding how to allocate resources.

The ASU is effective for annual periods beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

We are currently evaluating the impact of this guidance.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures .

The ASU requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional information on income taxes paid.

The ASU is effective on a prospective basis for annual periods beginning after December 15, 2024.

Early adoption is permitted.

We are currently evaluating the impact of this guidance.

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

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Under the terms of our Cayman Islands license and our water sales agreements in The Bahamas and the British Virgin Islands, our water rates are automatically adjusted for inflation on an annual basis.

Therefore, the impact of inflation on our gross profit, measured in consistent dollars, historically has not been material.

Therefore, the impact of inflation on

our gross profit, measured in consistent dollars, historically has not been material.

However, we have not increased our retail water rates since January 2018 (despite the inflation that has occurred since that date) due to the lack of a resolution of our negotiations with OfReg for a new retail license.

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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.

Approximately 80% of the $150 million price for the construction of this plant is subject to adjustment 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.

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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-K

Item 7. Management’s Discussion and Analysis