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Item 8. Financial Statements and Supplementary Data

2024-03-27 compared with 2023-03-30 · 248 added, 198 removed, 793 unchanged (36% of the section changed)

13 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet s of Consolidated Water Co.

We have audited the accompanying consolidated balance sheets of Consolidated Water Co.

(the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”).

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Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Evaluation of Goodwill for the Manufacturing Reporting Unit

As of December 31, 2022, the Manufacturing reporting unit's goodwill balance was $1,985,211.

Management’s goodwill impairment assessment for the Manufacturing reporting unit involves subjective management assumptions.

These assumptions are forward-looking and are effected by shifts in the evolving market landscape.

Changes in these assumptions can have a material effect on the determination of the fair value of this reporting unit.

Given the significant judgments made by management to estimate the fair value of the Manufacturing reporting unit, performing

audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of future operating results required a high degree of auditor judgment and an increased extent of effort.

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

The 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 the analysis.

The Company also estimated the fair value of the Manufacturing reporting unit for the year ended December 31, 2022 by applying the guideline public company method.

The Company weighted the fair values estimated for the Manufacturing reporting unit under each method and summed such weighted fair values to estimate the overall fair value for the reporting unit.

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

Our primary audit procedures to test management’s goodwill impairment evaluation for the manufacturing reporting unit included the following:

● We obtained an understanding and evaluated the design of the Company's internal controls over management’s annual goodwill impairment assessment, including controls addressing:

o Management’s assessment of potential triggering events indicating potential impairment.

o Management’s annual goodwill assessment and controls surrounding their qualitative and quantitative assessments.

● We obtained the Company's ASC 350 Goodwill impairment analysis memo and supporting workbook for the Manufacturing segment prepared by the Company's management which includes their goodwill evaluation and discounted cash flow model.

● We substantively tested the appropriateness of the prospective financial information and assumptions included in the valuation model associated with the projected balance sheets, income statements, capital expenditures, effective tax rates, and growth rates of the out years for contradictions to market factors and information, historical experiences, economic conditions, and the Company's objectives and business risks.

● In assessing the prospective financial information, we evaluated the reasonableness of management's revenue and operating projections included in their discounted cash flow model through testing of the Company’s contract backlogs and through performing a retrospective review comparing actual historical operations to projections.

● We obtained the Company's ASC 350 Goodwill impairment analysis report for the Manufacturing segment prepared by the Company's specialist and assessed the appropriateness and reasonableness of valuation methodologies, discount rates, and assumptions used.

● We traced all relevant financial data from the valuation workbook noted above to the inputs that were used in the goodwill valuation report to ensure the Company's projections were properly incorporated into the valuation model.

● We utilized our valuation specialist to verify that the valuation methodology used by the Company was appropriate.

Our valuation specialist tested the clerical accuracy of the valuation model and reperformed the calculation of the estimated fair value of the reporting unit using the methodologies in the valuation report to verify the Company's calculation of fair value is reasonable.

We compared our calculation to the carrying value of the company as of December 31, 2022 noting that there is no impairment.

● We assessed management's sensitivity analysis adjusting for changes to the projected cash flows and discount rate, noting significant fair value coverage.

Revenue Recognition - Estimated Costs to Complete

As described in Note 2 to the consolidated financial statements, the Company recognizes revenue for its construction and custom/specialized manufacturing contracts over time under the input method using costs incurred 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.

The cost estimation process for these contracts is based on the knowledge and experience of the Company's project managers, engineers, and financial professionals.

Changes in job performance, job conditions and management's assessment of expected variable

consideration are factors that influence estimates of the total contract transaction price, total costs to complete those contracts and the Company's revenue recognition.

We identified the estimated costs to complete on these revenue contracts as a critical audit matter.

The determination of the total estimated cost and progress toward completion requires management to make significant estimates and assumptions.

Total estimated costs to complete projects include various contracts costs that include labor, materials and subcontractor costs.

Due to the extended time it may take to complete many of the Company’s 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.

Changes in these estimates can have a significant impact on the revenue recognized each period.

Auditing these estimates involved especially challenging auditor judgment in evaluating the reasonableness of management's assumptions and estimates over the duration of these contracts.

The primary procedures we performed to address this critical audit matter included:

● We obtained an understanding and evaluated the design and implementation of the internal controls over management's process related to estimated costs to complete, including controls over management's review of:

(i) the development of project budgets and key cost inputs, (ii) the ongoing assessment and revisions to project budgets, and (iii) the ongoing review of project status, including the nature of activities to complete open projects.

● Evaluating management’s ability to generate reasonable estimated costs to complete through performing a retrospective review of budget to actual variances.

● Assessing the reasonableness of the estimated costs to complete by evaluating the reasonableness of projects budgets and the nature of costs required to complete the project.

Evaluation consists of investigating significant differences or unexpected results that take into consideration known changes in client operations, industry, and/or business conditions.

● Assessing the accuracy and the occurrence of the actual cost amount used in the percentage of completion by testing a sample of project costs incurred to date.

● Evaluating the reasonableness of project status by performing site visits and performing inquiries of project managers to assess the nature and costs of activities required to complete the project.

● Assessing the reasonableness of changes in estimated costs to complete by comparing project profitability estimates in the current period to historical estimates and actual performance including during the period under audit and subsequent to the period end and investigating reasons for changes in expected costs and project margins.

/s/ Marcum LLP

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Cash and cash equivalents

Certificate of deposit

Accounts receivable, net

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Contract assets

Net asset arising from put/call options

Current assets of discontinued operations

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Year Ended December 31,

Cost of revenue ( including purchases from related parties of $ 2,694,810 in 2022 and $ 437,857 in 2021)

General and administrative expenses ( including purchases from related parties of $ 96,924 in 2022 and $ 77,190 in 2021)

Cost of revenue ( including related party expense of $ 0 and $2,694,810 in 2023 and 2022)

General and administrative expenses ( including related party expense of $ 0 and $96,924 in 2023 and 2022)

Loss on asset dispositions and impairments, net

( 3,145,836 )

Income from operations

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Equity in the earnings of OC-BVI

Net gain (loss) on put/call options

Loss on put/call options

Other income, net

Income before income taxes

Provision (benefit) for income taxes

Provision for income taxes

Net income from continuing operations

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Net income from continuing operations attributable to Consolidated Water Co.

Total loss from discontinued operations

Loss from discontinued operations

( 1,086,744 )

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( 1,102,475 )

( 6,314,126 )

Stock-based compensation

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Buyback of preferred stock

Purchase of remaining non-controlling interest in PERC

( 3,667,305 )

( 2,440,027 )

Exercise of options

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( 5,684,270 )

( 6,314,126 )

Stock-based compensation

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Impairment loss for Mexico assets - discontinued operations

Depreciation and amortization - discontinued operations

Foreign currency transaction adjustment - discontinued operations

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Deferred income tax benefit

Loss (gain) on net put/call option

Provision for credit losses

Loss on net put/call option

Compensation expense relating to stock and stock option grants

Loss on asset dispositions and impairments, net

Gain on asset dispositions and impairments, net

Profit-sharing and equity in earnings of OC-BVI

Distribution of earnings from OC-BVI

Impairment of goodwill

Accounts receivable and contract assets

Accounts receivable

( 10,970,521 )

Contract assets

( 18,639,335 )

( 2,423,761 )

( 3,387,011 )

Prepaid expenses and other assets

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Contract liabilities

( 2,566,910 )

Operating lease liabilities

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( 2,518,493 )

( 2,500,000 )

Maturity of certificate(s) of deposit

Maturity of certificate of deposit

Additions to property, plant and equipment and construction in progress

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Proceeds from asset dispositions

Purchase of remaining non-controlling interest in PERC

( 2,440,027 )

Acquisition of REC, net of cash acquired

( 3,419,916 )

Net cash used in investing activities

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(“Aerex”), Aquilex, Inc.

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

(“Aquilex”), Cayman Water Company Limited (“Cayman Water”), Consolidated Water Cooperatief, U.A.

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

Holdings, Inc.

(“CW-Holdings”);

(“CW-Holdings”), DesalCo Limited (“DesalCo”), Kalaeloa Desalco LLC (“Kalaeloa Desalco”), Ocean Conversion (Cayman) Limited (“OC-Cayman”), PERC Water Corporation ("PERC") and Ramey Environmental Compliance, Inc.

and (ii) majority-owned subsidiaries Consolidated Water (Bahamas) Ltd.

(“CW-Bahamas”), N.S.C.

(“NSC”), Aguas de Rosarito S.A.P.I.

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

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

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

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

On January 4, 2023, as a result of CW-Holdings' exercise of a call option in October 2022, CW-Holdings purchased the remaining 39 % ownership interest in PERC for $ 2.4 million in cash and 368,383 shares of the Company’s common stock.

In January 2023, as a result of CW-Holdings' exercise of a call option in October 2022, CW-Holdings purchased the remaining 39 % ownership interest in PERC for $ 2.4 million in cash, and 368,383 shares of the Company’s common stock having a value of approximately $ 5.36 million based upon the opening trading price of the Company’s common stock on The Nasdaq Global Market on the date of the transaction.

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

In September 2021, Kalaeloa Desalco was formed to pursue a project in Oahu, Hawaii.

On June 2, 2023, Kalaeloa Desalco 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.

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 from this acquisition of $ 2,436,391 and $ 1,108,390 respectively.

Foreign currency:

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

Net foreign currency gains arising from transactions and re-measurements were $ 41,750 and $ 32,594 for the years ended December 31, 2022 and 2021, respectively, and are included in “Other income (expense) - Other” in the accompanying consolidated statements of income.

Net foreign currency gains arising from transactions and re-measurements were $ 84,678 and $ 41,750 for the years ended December 31, 2023 and 2022, respectively, and are included in “Other income - Other” in the accompanying consolidated statements of income.

Cash and cash equivalents:

Cash and cash equivalents consist of demand deposits at banks and certificates of deposit at banks with an original maturity of three months or less.

Cash and cash equivalents as of December 31, 2022 and 2021

include $ 5.0 million and $ 7.4 million, respectively, of certificates of deposit with an original maturity of three months or less.

Cash and cash equivalents as of December 31, 2023 and 2022 include $ 5.1 million and $ 5.0 million, respectively, of certificates of deposit with an original maturity of three months or less.

As of December 31, 2023, the Company had deposits in U.S.

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The equivalent United States dollar cash balances for deposits held in The Bahamas as of December 31, 2023 and 2022 were approximately $ 3.0 million and $ 5.7 million, respectively.

Certificate of deposit:

As of December 31, 2022 and 2021, the Company held a certificate of deposit in The Bahamas with an original maturity of six months in the amount of zero and $ 2.5 million, respectively.

Accounts receivable and allowance for doubtful accounts:

Accounts receivable:

Accounts receivable are recorded at invoiced amounts based on meter readings, contractual amounts, fixed fees plus reimbursables or time and materials per contractual agreements.

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Billed contract receivables have been invoiced to customers based on contracted amounts.

The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable balance.

The Company determines the allowance for doubtful accounts based on historical write-off experience and monthly review of delinquent accounts.

Allowance for credit losses :

The allowance for credit losses is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable and contract assets balances.

The Company determines the current expected credit losses based on historical loss experience, current conditions, and reasonable and supportable forecasts.

The Company also considers the nature of the financial asset, the credit quality of the counterparty, and other relevant factors.

Past due balances are reviewed individually for collectability.

Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered by management to be remote.

Inventory primarily consists of raw materials purchased for specific manufacturing contracts that are valued at cost on the first-in, first-out basis.

Inventory also includes (i) consumables stock and spare parts stock that are valued at cost, less an allowance for obsolescence, with cost determined on the first-in, first-out basis;

Account balances are charged off against the allowance for credit losses after all means of collection have been exhausted and the potential for recovery is considered by management to be remote.

Inventory primarily consists of consumables stock and spare parts stock that are valued at cost, less an allowance for obsolescence, with cost determined on the first-in, first-out basis.

Inventory also includes (i) raw materials purchased for specific manufacturing contracts that are valued at cost on the first-in, first-out basis;

and (ii) potable water held in the Company’s reservoirs that is valued at the lower of the average cost of producing water during the year or its net realizable value.

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Billing practices for the Company’s contracts are governed by the contract terms of each project based upon costs incurred, achievement of milestones or predetermined schedules.

Billings do not necessarily correlate with revenue, which is recognized over time using the direct inputs method of accounting.

Billings do not necessarily correlate with revenue, which is recognized over time using the input method based on cost incurred.

The Company records contract assets and contract liabilities to account for these differences in timing.

Contract assets, which include costs and estimated earnings in excess of billings on uncompleted contracts, arise when the Company recognizes revenue for services performed under its construction and manufacturing contracts, but the Company is not yet entitled to bill the customer under the terms of the contract.

Contract liabilities, which include billings in excess of costs and estimated earnings on uncompleted contracts, represent the Company's obligation to transfer goods or services to a customer for which the Company has been paid by the customer or for which the Company has billed the customer under the terms of the contract.

Contract liabilities, which include billings in excess

of costs and estimated earnings on uncompleted contracts, represent the Company's obligation to transfer goods or services to a customer for which the Company has been paid by the customer or for which the Company has billed the customer under the terms of the contract.

Revenue for future services reflected in this account is recognized, and the liability is reduced, as the Company subsequently satisfies the performance obligation under the contract.

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Goodwill and intangible assets:

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

Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

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

Goodwill and intangible assets recorded as a result of a business combination and determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

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

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

The Company determines the fair value of each reporting unit and compares these fair value to the carrying amount of the reporting units.

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

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

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

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

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

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

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

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

For the year ended December 31, 2022, the Company elected to assess qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment testing conducted in prior years for all goodwill reporting units other than the manufacturing reporting unit.

The Company determines the fair value of each reporting unit and compares these fair values to the carrying amounts of the reporting units.

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

For the year ended December 31, 2023, the Company elected to assess qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment testing that was conducted in prior years for the reporting units.

The Company 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 reporting unit included macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, and other relevant events.

Based upon this qualitative assessment, the Company determined that it is more likely than not that the fair values of its reporting units exceeded their carrying values as of December 31, 2023.

For the year ended December 31, 2022, the Company elected to assess qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment testing conducted in prior years for all reporting units other than the manufacturing reporting unit.

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

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

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

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

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

In connection with its acquisition of Aerex in 2016, the Company 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 the Company 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, the Company tested its manufacturing reporting unit’s goodwill for possible impairment and recorded an impairment loss of $ 1,750,000 in 2016.

As part of its annual impairment testing of goodwill performed during the fourth quarter, in 2017 the Company updated its projections for Aerex’s future cash flows, determined that the carrying value of its 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 the manufacturing segment goodwill to $ 4,885,211 .

Due to the factors discussed in the following paragraphs, the Company elected to test the goodwill associated with its 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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In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases of the specialized product from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to the amounts it had purchased from Aerex in 2020 and prior years.

The Company’s updated sales estimate for this customer based on this new information was substantially below the anticipated sales to this customer for 2022 and subsequent years that the Company used in the discounted cash flow

projections it prepared for purposes of testing its Manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020.

The Company’s updated sales estimate for this customer based on this new information was substantially below the

anticipated sales to this customer for 2022 and subsequent years that the Company used in the discounted cash flow projections it prepared for purposes of testing its 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).

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

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

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

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

However, if the Company determines in the future that Aerex’s discounted future cash inflows will be less than its present expectations, the Company may be required to record additional impairment losses to reduce the remaining carrying values of its manufacturing segment’s goodwill and its remaining unamortized intangible assets balances, which amounted to $ 1,985,211 and $ 754,444 , respectively, as of December 31, 2022.

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

Investments where the Company does not exercise significant influence over the operating and financial policies of the investee and holds less than 20% of the voting stock are recorded at cost.

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Other assets:

lost by the public water distribution system on New Providence Island, The Bahamas, over a one-year period by 438 million gallons, a requirement CW-Bahamas met during 2007.

Under the terms of CW-Bahamas’ contract with the Water and Sewerage Corporation of The Bahamas (“WSC”) to supply water from its Blue Hills desalination plant, CW-Bahamas was required to reduce the amount of water lost by the public water distribution system on New Providence Island, The Bahamas, over a one-year period by 438 million gallons, a requirement CW-Bahamas met during 2007.

The Company was solely responsible for the engineering, labor and materials costs incurred to reduce the amount of lost water, which were capitalized and are being amortized on a straight-line basis over the original remaining life of the Blue Hills contract.

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

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

The effect on deferred tax assets and liabilities of a change in tax rates is recognized

in income in the period that includes the enactment date.

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

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Total revenue

Services revenue consists of the following:

Year Ended December 31,

Construction revenue

Operations and maintenance revenue

Design and consulting revenue

Total services revenue

Retail revenue

The Company produces and supplies water to end-users, including residential, commercial and governmental customers in the Cayman Islands under an exclusive retail license issued to Cayman Water by the Cayman Islands government to provide water in two of the three most populated areas on Grand Cayman Island.

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

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All retail water contracts are month-to-month contracts.

The Company has elected the “right to invoice” practical expedient for revenue recognition on its retail water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice, recognizing this revenue from the transfer of goods or services to customers at a point in time.

The Company produces and supplies water to government-owned utilities in the Cayman Islands and The Bahamas.

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The WAC in turn distributes such water to properties in Grand Cayman outside of Cayman Water’s retail license area.

The Company sells bulk water in The Bahamas through its majority-owned subsidiary, CW-Bahamas, under two agreements with the WSC, which distributes such water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence.

The Company sells bulk water in The Bahamas through its majority-owned subsidiary, CW-Bahamas, under two agreements with the Water and Sewerage Corporation of The Bahamas (“WSC”), which distributes such water through its own pipeline system to residential, commercial and tourist properties on the island of New Providence.

The Company has elected the “right to invoice” practical expedient for revenue recognition on its bulk water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice, recognizing this revenue from the transfer of goods or services to customers at a point in time.

Services and Manufacturing revenue

The Company provides design, engineering, management, procurement and construction services for desalination infrastructure through DesalCo, which serves customers in the Cayman Islands, The Bahamas and the British Virgin Islands.

The Company also designs, builds, sells, operates and manages water, wastewater and water reuse infrastructure through PERC.

All of PERC's customers are companies or governmental entities located in the U.S.

The Company designs, builds, sells, operates and maintains, and provides consulting services related to water, wastewater and water reuse infrastructure through PERC.

All of PERC's customers are companies or governmental entities located in the United States.

Effective October 2023, PERC acquired REC, a company that provides operations and maintenance and consulting services to companies and governmental entities located in the United States.

The Company also provides design, engineering, management, procurement and construction services for desalination infrastructure through DesalCo, which serves customers in the Cayman Islands, The Bahamas and the British Virgin Islands.

The Company, through Aerex, is a custom and specialty manufacturer of systems and products applicable to commercial, municipal and industrial water production and treatment.

Substantially all of Aerex’s customers are U.S.

The Company generates construction and services revenue from DesalCo and PERC and generates manufacturing revenue from Aerex.

The Company recognizes revenue for its construction and custom/specialized manufacturing contracts over time under the input method using costs incurred (which represents work performed) to date relative to total estimated costs at completion to measure progress toward satisfying 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.

The Company generates construction, operations and maintenance, design and consulting revenue from PERC and DesalCo and generates manufacturing revenue from Aerex.

The Company also generates operations and maintenance and consulting revenue from REC.

The Company recognizes revenue for its construction and custom/specialized manufacturing contracts over time under the input method using costs incurred (which represents work performed) to date relative to 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.

The Company follows this method since it can make reasonably dependable estimates of the revenue and costs applicable to the various stages of a contract.

Under this input method, the Company records revenue and recognizes profit or loss as work on the contract progresses.

The Company estimates total project costs and profit to be earned on each long-term, fixed price contract prior to commencement of work on the contract and updates these estimates as work on the contract progresses.

The Company estimates 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 updates 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.

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

Due to the extended time it may take to complete many of the Company’s 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.

The Company recognizes the full amount of any estimated loss on a contract at the time the estimates indicate such a loss.

1 unchanged sentence

Contract liabilities on uncompleted contracts, if any, are classified as current liabilities.

The Company has elected the “right to invoice” practical expedient for revenue recognition on its services agreements and recognizes revenue in the amount to which the Company has a right to invoice.

During the year ended December 31, 2023, the Company adjusted its prior year estimates of the total contract costs for two of its construction contracts.

These changes in accounting estimates resulted in an increase in the services segment’s income from operations and the Company’s consolidated net income by $ 2,356,439 and $ 1,750,750 , respectively, for the year ended December 31, 2023.

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

The Company has elected the “right to invoice” practical expedient for revenue recognition on its operations and maintenance, design and consulting contracts and recognizes revenue in the amount to which the Company has a right to invoice, recognizing this revenue from the transfer of goods or services to customers at a point in time.

During the years ended December 31, 2023 and 2022, the Company recognized $ 77,411,792 and $ 14,146,271 , respectively, of its services revenue from the transfer of goods or services to customers over time.

The remaining services revenue of $ 20,554,858 and $ 14,689,157 , respectively, was recognized from the transfer of goods or services to customers at a point in time.

During the years ended December 31, 2023 and 2022, the Company recognized all of its manufacturing revenue from the transfer of goods or services to customers over time.

Practical Expedients and Exemptions

19 unchanged sentences

Other accounts receivable

Allowance for doubtful accounts

Allowance for credit losses

Accounts receivable, net

The activity for the allowance for doubtful accounts consisted of:

Opening allowance for doubtful accounts

Provision for doubtful accounts

The activity for the allowance for credit losses consisted of:

Opening allowance for credit losses

Provision for credit losses

Accounts written off during the year

Recovery of accounts written off

Ending allowance for doubtful accounts

Ending allowance for credit losses

Significant concentrations of credit risk are disclosed in Note 18.

Consumables stock

Spare parts stock

Raw materials

Consumables stock

Total inventory

7 unchanged sentences

( 33,407,182 )

Net contract liability

Net contract asset/(liability)

( 5,890,199 )

3 unchanged sentences

( 6,237,011 )

Net contract liability

( 8,803,921 )

The significant increase in contract liabilities from December 31, 2021 to December 31, 2022 is primarily attributable to billings on PERC’s construction contract with Liberty Utilities for a water treatment facility in Arizona.

Net contract asset/(liability)

( 5,890,199 )

The significant increase in contract assets from December 31, 2022 to December 31, 2023 is attributable to the construction contract with the WAC for the Red Gate plant in Grand Cayman and the construction contract with Liberty Utilities for a water treatment facility in Arizona.

During the year ended December 31, 2023, the Company adjusted its prior year estimates of the total contract costs for two of its construction contracts.

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

As of December 31, 2023, the Company had unsatisfied or partially unsatisfied performance obligations for contracts in progress representing approximately $ 162.2 million in aggregate transaction price for contracts with an original expected length of greater than one year.

The Company expects to earn revenue as it satisfies its performance obligations under those contracts in the amount of approximately $ 22.2 million during the year ending December 31, 2024 and $ 140 million thereafter.

In addition, the Company recognized revenue of $ 468,000 in the year ended December 31, 2022, that was included in the contract liability balance as of December 31, 2021.

In addition, the Company recognized revenue of approximately $ 8.7 million in the year ended December 31, 2023, that was included in the contract liability balance as of December 31, 2022.

Property, plant and equipment and construction in progress

7 unchanged sentences

Construction in progress

As of December 31, 2022, the Company had outstanding capital commitments of approximately $ 2.0 million.

As of December 31, 2023, the Company had outstanding capital commitments of approximately $ 455,000 .

The Company maintains insurance for loss or damage to all fixed assets that it deems susceptible to loss.

14 unchanged sentences

In February 2018, CW-Holdings acquired the remaining 0.4 % ownership in AdR from NuWater.

On August 22, 2016, the Public Private Partnership Agreement for the Project (the “APP Contract”) was executed between AdR, the State Water Commission of Baja California (“CEA”), the Government of Baja California, as represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”).

On August 22, 2016, the Public Private Partnership Agreement for the Project (the “APP Contract”) was executed between AdR, the State Water Commission of Baja California (“CEA”), and the Government of Baja California, as represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”).

The APP Contract required AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueduct) with a capacity of up to 100 million gallons per day in two phases:

the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican public water system in Tijuana, Baja California and the second phase with a capacity of 50 million gallons per day.

The first phase was to be operational within 36 months of commencing construction and the

second phase was to be operational by January 2025.

The first phase was to be operational within 36 months of commencing construction and the second phase was to be operational by January 2025.

The APP Contract further required AdR to operate and maintain the plant and aqueduct for a period of 37 years starting from the commencement of operation of the first phase.

12 unchanged sentences

On April 16, 2021, CW-Cooperatief submitted a letter to the President of Mexico and other Mexican federal government officials alleging that the State’s termination of the APP Contract constituted a breach by Mexico of its international obligations under the Treaty, entitling CW-Cooperatief to full reparation, including monetary damages.

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

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

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

2 unchanged sentences

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 their rights, damages, fees and expenses.

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

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

During July 2022, the State initiated discussions with the Company 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.

4 unchanged sentences

The Company’s net losses from discontinued operations for the years ended December 31, 2023 and 2022 were ($ 1,086,744 ) and ($ 2,371,049 ), respectively.

The Company’s 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 from, the Mexican federal government.

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

1 unchanged sentence

Prepaid expenses and other current assets

Value added taxes receivable (net of allowance of $ 1,711,234 and $ 1,279,757 , respectively)

Total assets of discontinued operations

1 unchanged sentence

Year Ended December 31,

Provision for uncollected value added taxes

Loss from discontinued operations

Depreciation expense

Mexico Project litigation

a) EWG request of precautionary measures

In January 2018, EWG Water LLC (“EWG”) initiated an ordinary mercantile claim against, among others, N.S.C.

(“NSC”) and Consolidated Water Cooperatief, U.A.

(“CW-Cooperatief”) (with Aguas de Rosarito S.A.P.I.

(“AdR”) being named as a third party to be called to trial) before the Tenth Civil Judge in Tijuana, Baja California for Mercantile Matters (the “Tenth Civil Judge”).

In such claim, EWG challenged, among other things, the transactions contemplated under a certain option agreement (entered into in 2012), and therefore, the capital investment transactions occurring in May 2013 that increased the ownership interest of CW-Cooperatief in NSC to 99.99 %.

On October 1, 2020, and following an order from a Federal Judge obtained by NSC, the Tenth Civil Judge resolved to (i) move the claim of EWG to arbitration, and (ii) suspend the corresponding ordinary mercantile procedure.

Within the above-mentioned claim, the Tenth Civil Judge granted EWG certain preliminary measures against NSC, which were later overturned by an Upper Court.

In July 2023, EWG filed a motion before a local court in Playas de Rosarito, Baja California (the “Rosarito Court”) to obtain precautionary measures consisting of the securing of assets owned by NSC (particularly real estate), as a procedure prior to the commencement of an arbitration that allegedly would be initiated by EWG against NSC to claim the payment of an indemnification for damages derived from a so-called simulation of legal acts.

In the opinion of the Rosarito Court, such motion did not require notification to NSC or the presentation of counterarguments by NSC to the motion prior to securing the assets of NSC.

On July 28, 2023, the Rosarito Court issued a resolution in which it:

(i) granted the precautionary measures requested by EWG, subject to the posting of a bond in the amount of MXN$ 1,500,000 (One Million Five Hundred Thousand Mexican Pesos), and (ii) ordered that once the precautionary measures were executed, EWG would have three business days counted as from the posting of the bond, to initiate and prove to the Rosarito Court that it initiated the arbitration.

To the Company’s knowledge EWG has not posted the bond.

Consequently, NSC has not been summoned to an arbitration procedure.

As EWG has apparently not posted the bond set by the Rosarito Court (i) the precautionary measures have not been enforced, (ii) no securing or attachment has been registered against the real estate of NSC;

and (iii) NSC has not been formally summoned to this procedure.

As stated previously, NSC is unaware of any arbitration commenced by EWG regarding this matter.

b) NSC amparo lawsuit

On August 16, 2023, NSC filed an amparo suit (i.e.

application for constitutional relief) before the Eleventh Federal District Court in Tijuana (“Federal District Court in Tijuana”) against the precautionary measures granted to EWG by the Rosarito Court.

In its amparo suit, NSC also requested the Federal District Court in Tijuana to grant an order to put on hold said precautionary measures.

A preliminary order to stay was granted by the Federal District Court in Tijuana, followed by a definitive injunction, subject to the posting of a guarantee.

NSC has submitted the guarantee to the court.

NSC subsequently filed an extension of the amparo suit introducing new arguments aiming to strengthen NSC´s position.

The amparo extension was admitted through a resolution published on November 7, 2023.

The Federal District Court in Tijuana has not been able to summon EWG on this amparo suit, as it has not been able to determine nor obtain information on an address where EWG can be summoned.

As such, the Federal District Court in Tijuana has requested various authorities to provide information on any domicile where EWG can be summoned.

The responses of some authorities are in process of being received by the Federal District Court in Tijuana.

NSC is waiting until all the authorities provide their official response to determine if there is a viable alternative for summoning EWG.

NSC offered certain evidence consisting of the docket of amparo file number 74/2020, which was processed by the Twelfth Civil District Court in Tijuana.

The Amparo Law provides that any documentary evidence offered by the parties shall be issued without any cost.

Therefore, NSC requested the Court to grant the expedition of said copies for free.

However, this request was denied by the Federal District Court in Tijuana.

Therefore, NSC filed an appeal for review against said decision, which was admitted by the Federal District Court in Tijuana and sent to the Second Collegiate Circuit Court in Tijuana, acting as Court of Appeals, which confirmed the admission of the appeal remedy through a resolution published on January 26, 2024.

The judgment is still pending resolution.

The Company cannot presently determine what impact the resolution of this matter may have on its consolidated financial statements.

Intangible assets

1 unchanged sentence

The remaining intangible assets and their respective useful lives are as follows:

non-compete agreements ( 3 and 5 years ), trade names ( 15 years ), and facility management contracts ( 6 years ).

trade names ( 15 years ) and facility management contracts ( 6 years ).

Effective October 2023, the Company purchased a 100% ownership interest in REC.

The purchase transaction identified certain intangible assets with a fair value of $ 1,108,390 and useful lives as follows:

non-compete ( 5 years ), trade name ( 15 years ) and customer relationships ( 15 years ).

The costs and accumulated amortization for these assets were as follows:

Non-compete agreements

Customer relationships

Facility management contracts

1 unchanged sentence

Non-compete agreements

( 1,106,615 )

Customer relationships

Facility management contracts

2 unchanged sentences

( 2,655,205 )

( 2,081,112 )

Intangible assets, net

10 unchanged sentences

Lease costs for such short-term leases are expensed on a straight-line basis over the lease term.

The land used by the Company to operate its seawater desalination plants in the Cayman Islands and The Bahamas is owned by the Company or leased to the Company for immaterial annual amounts and is not included in the lease amounts presented in the consolidated balance sheets.

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

5 unchanged sentences

Operating lease right-of-use assets

Long-term assets of discontinued operations

Total lease right-of-use assets

2 unchanged sentences

Noncurrent operating leases

Noncurrent liabilities of discontinued operations

Total lease liabilities

5 unchanged sentences

Operating leases - discontinued operations

The components of lease cost were as follows:

The components of lease costs were as follows:

Year Ended December 31,

18 unchanged sentences

Foreign (not subject to income taxes)

( 1,767,915 )

United States

( 2,952,265 )

Less discontinued operations

The Company’s provision (benefit) for income taxes for the years ended December 31, 2022 and 2021, which related to U.S.

operations, consists of the following:

Discontinued operations

The Company’s provision for (benefit from) income taxes for the years ended December 31, 2023 and 2022, which related to U.S.

operations, consisted of the following:

Year Ended December 31,

Total provision (benefit)

Total current income tax expense (benefit)

Total deferred income tax expense (benefit)

Total provision for (benefit from) income taxes

A reconciliation of the U.S.

3 unchanged sentences

State taxes, net of federal effect

Nontaxable foreign income

Research & development tax credit

Foreign rate differential

Research and development tax credit

Permanent items

Goodwill impairment

Valuation allowance for deferred tax assets

Change in valuation allowance

The tax effects of significant items comprising the Company’s net long-term deferred tax liability as of December 31, 2023 and 2022 were as follows:

1 unchanged sentence

Deferred tax assets:

Research & development tax credits

Loss carryforward

Accrued compensation

Research and development credit carryforwards

Net operating loss carryforwards

Accruals and reserves

Operating lease liabilities

Capitalized research expenditures

Valuation allowances

3 unchanged sentences

Operating lease right-of-use assets

Net deferred tax liability

Net deferred tax liabilities

Discontinued Operations

8 unchanged sentences

Discontinued operations has a net loss carryforward of $ 19.5 million that will begin to expire, if unused, in various amounts between 2024 and 2033.

The unused research & development tax credit carryforwards from continuing operations of $ 58,069 as of December 31, 2022 have an indefinite expiration date.

Earnings per share

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

Basic EPS is computed by dividing net income (loss) (less preferred stock dividends) available to common stockholders by the weighted average number of common shares outstanding during the period.

Basic EPS is computed by dividing net income (less preferred stock dividends) available to common stockholders by the weighted average number of common shares outstanding during the period.

The computation of diluted EPS assumes the issuance of common shares for all potential

5 unchanged sentences

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

Total loss from discontinued operations

Loss from discontinued operations

( 1,086,744 )

15 unchanged sentences

retail, bulk, services and manufacturing.

The retail segment operates the water utility for the Seven Mile Beach and West Bay areas of Grand Cayman Island pursuant to an exclusive license granted by the Cayman Islands government.

The retail segment operates the water utility for the Seven Mile Beach and West Bay areas of Grand Cayman pursuant to an exclusive license granted by the Cayman Islands government.

The bulk segment supplies potable water to government utilities in Grand Cayman and The Bahamas under long-term contracts.

1 unchanged sentence

The manufacturing segment manufactures and services a wide range of custom and specialized water-related products applicable to commercial, municipal and industrial water production, supply and treatment.

Consistent with prior periods, the Company records all non-direct general and administrative expenses in its retail business segment and does not allocate any of these non-direct expenses to its other three business segments.

Consistent with prior periods, the Company records all non-direct general and administrative expenses in its retail segment and does not allocate any of these non-direct expenses to its other three business segments.

The accounting policies of the segments are consistent with those described in Note 2.

8 unchanged sentences

Income (loss) from operations

( 1,187,013 )

Other income, net

4 unchanged sentences

Net income from continuing operations attributable to Consolidated Water Co.

Net loss from discontinued operations

Loss from discontinued operations

( 1,086,744 )

5 unchanged sentences

Inventory, current and non-current

Contract assets

Property, plant and equipment, net

8 unchanged sentences

Gain (loss) on asset dispositions and impairments, net

( 2,900,000 )

( 3,145,836 )

Income (loss) from operations

( 1,187,013 )

( 4,036,666 )

Other income, net

Income before income taxes

Benefit from income taxes

Provision for income taxes

Net income from continuing operations

1 unchanged sentence

Net income from continuing operations attributable to Consolidated Water Co.

Net loss from discontinued operations

Loss from discontinued operations

( 2,371,049 )

5 unchanged sentences

Inventory, current and non-current

Contract assets

Property, plant and equipment, net

3 unchanged sentences

Assets of discontinued operations

Revenue earned by major geographic region were:

Revenue earned by major geographic region was:

Year ended December 31,

2 unchanged sentences

Revenue earned from management services agreement with OC-BVI

Revenue earned from major customers were:

Revenue earned from major customers was:

Year ended December 31,

3 unchanged sentences

Percentage of consolidated revenue earned from the one service segment customer

Property, plant and equipment, net by major geographic region were:

Property, plant and equipment, net by major geographic region was:

Cayman Islands

6 unchanged sentences

Retail license royalties

Cost of plant sales

Year Ended December 31,

4 unchanged sentences

Amortization of intangible assets

Investor relations

Business development expenses

Provision for credit losses

Computer supplies, software licenses

Stock-based compensation

73 unchanged sentences

Retirement benefits

Retirement plans are offered to all employees in California, Florida, the Cayman Islands and The Bahamas.

Retirement plans are offered to all employees in California, Florida, Colorado, the Cayman Islands and The Bahamas.

The plans are administered by third parties and are defined contribution plans pursuant to which the Company matches participating employees’ contributions up to certain amounts.

The Company matches contributions of up to 5 % of a maximum salary amount of $ 104,400 for Cayman Islands employees, fully matches all contributions made by employees in The Bahamas, and matches contributions of up to 6 % of salary for Florida employees.

For California employees, the Company matches contribution amounts up to 2 % of the employee's salary and matches 25 % of contributions above this 2 % threshold, up to 10 % of the employee’s salary.

The Company’s expense for these plans was $ 771,616 and $ 624,798 for the years ended December 31, 2023 and 2022, respectively.

1 unchanged sentence

The Company is not exposed to significant credit risk on its retail customer accounts as its policy is to cease supply of water to customers’ accounts that are more than 45 days overdue.

The Company’s exposure to credit risk is concentrated

on receivables from its bulk water, services, and manufacturing customers.

The Company considers these receivables fully collectible and therefore has not recorded an allowance for these receivables.

The Company’s exposure to credit risk is concentrated on receivables from its bulk water, services, and manufacturing customers.

The Company considers these receivables fully collectible and therefore has not recorded a material allowance for these receivables.

Interest rate risk:

17 unchanged sentences

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

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

December 31, 2022

Certificate of deposit

Net asset arising from put/call options

December 31, 2021

Certificate of deposit

Net asset arising from put/call options

The activity for the Level 3 asset for the year ended December 31, 2022:

Net asset arising from put/call options

Balance as of December 31, 2021

Exercise of option

Balance as of December 31, 2022

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

The underlying asset and liability fair values are calculated using discounted cash flow analysis valuation techniques that incorporate unobservable inputs, such as future cash flows, weighted-average cost of capital, and expected future volatility.

The inputs to these valuations are considered Level 3 inputs.

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

Commitments and contingencies

2 unchanged sentences

Contingencies

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

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

The Company sells water through its Cayman Water 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 has not been expressly extended after January 2018, the Company continues to supply water under the terms of the 1990 license, as further discussed in the following paragraph.

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:

4 unchanged sentences

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

The Company continues to pay the royalty of 7.5% of revenue it collects required under the 1990 license.

The Company continues to pay the royalty of 7.5% of the revenue that Cayman Water collects 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”).

1 unchanged sentence

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

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

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

The Company began license negotiations with OfReg in July 2017 and such negotiations are ongoing.

3 unchanged sentences

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $ 26.9 million and $ 16.3 million as of December 31, 2023 and 2022.

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

Approximately 80 % and 65 % of the accounts receivable balances were delinquent as of those dates, respectively.

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

When these delays occur, the Company holds 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.

In February 2022, CW-Bahamas 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, CW-Bahamas has not provided for a material allowance for credit losses for its accounts receivable from the WSC as of December 31, 2023.

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 its review of this Moody’s report, the Company continues to believe no allowance for doubtful accounts is required for CW-Bahamas’ accounts receivable from the WSC.

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

Moody’s iterated these ratings in April and October 2023, noting that such ratings are “stable.”

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

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

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

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

and (iii) the Company may be required to provide an additional allowance for credit losses for CW-Bahamas’ accounts receivable.

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

Related party transactions

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

During the years ended December 31, 2022 and 2021, the Company made total purchases of services of approximately $ 2,695,000 and $ 438,000 from these companies, respectively.

The Company, through PERC, purchased engineering and technology support services from various companies formerly affiliated with PERC, as a minority shareholder in these companies was also a minority shareholder of PERC.

On January 4, 2023, as a result of CW-Holdings' exercise of a call option in October 2022, CW-Holdings purchased the remaining 39 % ownership interest in PERC.

After giving effect to this purchase, CW-Holdings owns 100 % of the outstanding capital stock of PERC and, consequently, transactions with the formerly affiliated companies no longer constitute related party transactions.

During the year ended December 31, 2022, the Company made total purchases of services from these companies of approximately $ 2,695,000 .

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

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

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

During the years ended December 31, 2022 and 2021, the Company recognized approximately $ 97,000 and $ 77,000 of expense related to this lease, respectively.

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

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

During the year ended December 31, 2022, the Company recognized approximately $ 97,000 of expense related to this lease.

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

The total amount of accounts payable outstanding to these companies as of December 31, 2022 and 2021, was approximately $ 404,000 and $ 164,000 , respectively.

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

Supplemental disclosure of cash flow information

7 unchanged sentences

Dividends declared but not paid

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

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

4 unchanged sentences

Adoption of new accounting standards:

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

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

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

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

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

Effect of newly issued but not yet effective accounting standards:

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.

The Company is 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.

The Company is currently evaluating the impact of this guidance.

Subsequent events

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Other than as disclosed in these consolidated financial statements, the Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on its consolidated financial statements.

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

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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 8. Financial Statements and Supplementary Data