What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-05-15 compared with 2023-11-09 · 95 added, 178 removed, 207 unchanged (57% of the section changed)

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Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets related to our business.

The forward-looking statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict.

The forward-looking statements contained in this report are not guarantees of future performance and involve assumptions and certain risks and uncertainties which are difficult to predict.

Actual outcomes and results may differ materially from what is expressed in such forward-looking statements.

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

Management identifies our reporting units 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.

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, REC, 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 a reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded.

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

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.

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.

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.

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.

In 2020, approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit were generated from sales to one customer.

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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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 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.

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

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

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

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

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

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

However, if we determine in the future that Aerex’s discounted future cash inflows will be less than our present expectations, we may be required to record additional impairment losses to reduce the remaining carrying values of our manufacturing reporting unit’s goodwill and its remaining unamortized intangible assets balances, which amounted to $1,985,211 and $684,444, respectively, as of September 30, 2023.

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

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.

Long-lived Assets

We review the carrying amounts of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable.

Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

Conditions that would necessitate an impairment

assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.

For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the carrying amount and fair value.

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We design, construct, and sell desalination infrastructure through DesalCo, which serves customers in the Cayman Islands, The Bahamas, and the British Virgin Islands.

We design, construct, and sell wastewater and water reuse infrastructure in the U.S.

through PERC.

Aerex, is a custom and specialty manufacturer in the U.S.

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

We design, construct, and sell wastewater and water reuse infrastructure in the United States through PERC.

Aerex, is a custom and specialty manufacturer in the United States 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 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.

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

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

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.

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K.

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

Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023

Discontinued Operations – Mexico Project Development

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

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

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

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

NSC initially owned 99.6% of the equity of AdR.

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On 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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Therefore, on August 28, 2020, AdR submitted their list of non-recoverable expenses, including those of NSC, to CEA and CESPT which was comprised of 51,144,525 United States dollars and an additional 137,333,114 Mexican pesos.

In February 2021, AdR withdrew this amparo claim, and such withdrawal was accepted by the federal district court in Tijuana.

In February 2021, AdR withdrew this amparo claim, and such withdrawal was accepted by the federal

district court in Tijuana.

To date, AdR has not received a formal response from CEA or CESPT to its submission of non-recoverable expenses.

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

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

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

Our net losses from discontinued operations for the three months ended March 31, 2024 and 2023 were ($467,066) and ($259,163), respectively.

Consolidated Results

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stockholders for 2024 was $6,474,348 ($0.40 per share on a fully diluted basis), as compared to net income of $3,813,626 ($0.24 per share on a fully diluted basis) for 2023.

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

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

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General and administrative (“G&A”) expenses on a consolidated basis increased to $6,564,029 for 2024 as compared to $6,036,662 for 2023.

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

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

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

Other income (expense), net, increased to $236,066 for 2023 as compared to an expense of ($168,980) for 2022 in part due to an unrealized loss recorded in 2022 of $247,000 for the valuation of the put/call options associated with the initial acquisition of a controlling interest in PERC.

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

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

The increase in G&A expenses for 2024 relates primarily to additional G&A expenses of approximately $388,000 attributable to REC, which was acquired in the fourth quarter of 2023.

Other income (expense), net, increased to $418,184 for 2024 as compared to an expense of $157,059 for 2023 primarily due to interest income which increased by approximately $132,500 in 2024 primarily due to the increase in CW-Bahamas delinquent accounts receivable balances, on which we earn interest income.

The balance of the increase is due to higher earning on interest earning assets.

Results by Segment

Retail Segment:

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

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

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

Retail revenue also increased by approximately $92,000 due to higher energy costs which increased the energy pass-through component of our retail water rates.

The retail segment contributed $969,262 and $35,907 to our income from operations for 2024 and 2023, respectively.

Revenue generated by our retail water operations increased to $8,624,938 in 2024 from $7,771,095 in 2023 due to an overall 6% increase in the volume of water sold.

The volume of water sold to end consumers within our retail service area increased by 10%, but was partially offset by reduced volume sales to the WAC.

We believe the increase in the volume of water sold in 2024 resulted in part from a 2.8% increase in the number of customer accounts in our license area from 2023 to 2024.

In addition, significantly less rainfall on Grand Cayman in 2024 as compared to 2023 was also a likely contributor to the increase in water sold from 2023 to 2024.

Retail segment gross profit increased to $5,073,594 (59% of retail revenue) for 2024 from $4,220,301 (54% of retail revenue) for 2023 due to the revenue increase.

Retail segment gross profit as a percentage of revenue increased in 2024 as compared to 2023 due to;

(i) the overall increase in water volume sold and (ii) the higher average rate we charged for water in 2024 due to significantly lower sales to the WAC which pays a lower rate for water compared to customers within our retail service area.

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

Retail G&A expenses increased to $4,225,825 for 2023 as compared to $3,818,459 for 2022.

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

Retail G&A expenses remained relatively consistent at $4,104,332 for 2024 as compared to $4,177,107 for 2023.

Bulk Segment:

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Bulk segment revenue was $8,342,094 and $9,004,373 for 2024 and 2023, respectively.

The impact of a 6% increase in the volume of water sold in 2023 on bulk segment revenue was more than offset by a decrease in the price of energy for CW-Bahamas, which decreased the energy pass-through component of CW-Bahamas’ rates.

The decrease in bulk revenue from 2023 to 2024 reflects a 2% decrease in the volume of water sold and a decrease in the price of energy for CW-Bahamas, which decreased the energy pass-through component of CW-Bahamas’ rates.

Gross profit for our bulk segment was $2,776,836 (33% of bulk revenue) and $2,761,227 (31% of bulk revenue) for 2024 and 2023, respectively.

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

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

Services Segment:

Gross profit as a percentage of revenue increased in 2024 as compared to 2023 due to a reduction in the price of energy and reductions in various operating expenses, most notably chemicals.

Bulk segment G&A expenses remained relatively consistent at $344,141 for 2024 as compared to $352,975 for 2023.

S ervices Segment:

The services segment contributed $3,150,818 and $1,588,951 to our income from operations for 2024 and 2023, respectively.

Services segment revenue increased to $17,417,611 for 2024 from $12,721,701 for 2023.

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

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

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

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

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

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

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

Gross profit for the services segment was $9,253,019 (31% of services revenue) in 2023 as compared to $1,397,142 (16% of services revenue) for 2022.

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

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

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

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

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

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

Construction revenue was $9,203,662 in 2024 as compared to $8,693,516 in 2023.

We recognized approximately $4.9 million and $6.4 million in construction revenue for the Liberty Utilities contract in 2024 and 2023, respectively.

This contract is substantially completed and we expect final completion of this contract by the end of the second quarter of 2024.

Revenue generated under operations and maintenance contracts increased to $7,099,354 in 2024 from $3,685,805 in 2023.

The acquisition of REC effective October 2023 constituted $1,818,039 of this operations and maintenance contracts revenue increase and the remainder of the increase related to new PERC contracts.

Gross profit for the services segment increased to $4,748,672 (27% of services revenue) in 2024 from $2,677,623 (21% of services revenue) in 2023 due to the increased revenue.

The increase in gross profit as a percentage of revenue from 2023 to 2024 reflects improved margins on both our construction and operations and maintenance activities.

G&A expenses for the services segment increased to $1,597,854 for 2024 as compared to $1,088,672 for 2023 primarily due to the addition of G&A expenses of aproximately $388,000 for REC, which was acquired in the fourth quarter of 2023.

Manufacturing Segment:

The manufacturing segment contributed $426,786 to our income from operations for 2023 as compared to a loss incurred from operations of ($199,377) in 2022.

The manufacturing segment contributed $761,219 and $483,956 to our income from operations in 2024 and 2023, respectively.

Manufacturing revenue was $5,304,747 and $3,371,821 for 2024 and 2023, respectively.

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.

The growth in manufacturing revenue for 2024 reflects increased production activity.

Manufacturing gross profit was $1,278,921 (24% of manufacturing revenue) for 2024 as compared to a gross profit of $899,931 (27% of manufacturing revenue) for 2023.

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.

Gross profit as a percentage of revenue decreased due to a lower margin product mix.

G&A expenses for the manufacturing segment remained relatively consistent at $517,702 for 2024 as compared to $417,908 for 2023.

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

Discontinued Operations – Mexico Project Development

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

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

Our net loss from discontinued operations for the nine months ended September 30, 2023 and 2022 was ($699,858) and ($1,533,064), respectively, and consists of the costs for our legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP Contract.

Consolidated Results

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

stockholders for 2023 was $19,742,526 ($1.24 per share on a fully diluted basis), as compared to a net income of $4,324,395 ($0.28 per share on a fully diluted basis) for 2022.

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

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2023 was $20,442,384 ($1.28 per share on a fully diluted basis), as compared to a net income from continuing operations of $5,857,459 ($0.38 per share on a fully diluted basis) for 2022.

Revenue for 2023 increased to $126,960,328 from $65,676,737 in 2022, reflecting revenue increases in all four of our segments.

Gross profit for 2023 was $42,637,059 (34% of total revenue) as compared to $21,465,034 (33% of total revenue) for 2022.

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

General and administrative (“G&A”) expenses on a consolidated basis increased to $17,894,067 for 2023 as compared to $15,403,458 for 2022.

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

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

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

Results by Segment

Retail Segment:

The retail segment recorded a loss from operations of ($470,573) for 2023 as compared to a loss from operations of ($900,747) for 2022.

Revenue generated by our retail water operations increased to $22,560,998 in 2023 from $19,114,653 in 2022 due to a 17% increase in the volume of water sold.

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

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

Retail revenue also increased by approximately $899,000 due to higher energy costs which increased the energy pass-through component of our retail water rates.

Retail segment gross profit increased to $12,205,181 (54% of retail revenue) for 2023 from $9,710,529 (51% of retail revenue) for 2022 due to the revenue increase.

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

Retail G&A expenses increased to $12,668,467 for 2023 as compared to $10,613,975 for 2022.

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

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

Bulk Segment:

The bulk segment contributed $6,896,492 and $6,475,164 to our income from operations for 2023 and 2022, respectively.

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

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

Gross profit for our bulk segment was $7,964,765 (31% of bulk revenue) and $7,661,073 (31% of bulk revenue) for 2023 and 2022, respectively.

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

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

Services Segment:

The services segment contributed $16,921,397 and $1,143,215 to our income from operations for 2023 and 2022, respectively.

Services segment revenue increased to $66,243,328 for 2023 from $18,530,427 for 2022.

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

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

We recognized approximately $44.1 million in revenue for the Liberty Utilities contract in 2023.

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

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

2022, respectively.

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

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

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

Gross profit for the services segment was $19,776,464 (30% of services revenue) in 2023 as compared to $3,681,398 (20% of services revenue) for 2022.

During the three months ended June 30, 2023 and the three months ended September 30, 2023, we adjusted our previous estimates of the total costs to be incurred for the Liberty Utilities contract and one other construction contract.

These changes in accounting estimates arose as a result of actual construction costs and efficiencies that differed favorably from our previous expectations.

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

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

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

Manufacturing Segment:

The manufacturing segment contributed $1,402,592 to our income from operations for 2023 as compared to a loss incurred from operations of ($634,819) in 2022.

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

Manufacturing gross profit was $2,690,649 (22% of manufacturing revenue) for 2023 as compared to a gross profit of $412,034 (11% of manufacturing revenue) for 2022.

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

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

G&A expenses for the manufacturing segment increased to $1,289,990 for 2023 as compared to $1,046,853 for 2022 principally due to an increase of approximately $155,000 in employee costs attributable to pay raises, new hires and increased bonus accruals.

FINANCIAL CONDITION

The significant changes in the components of our condensed consolidated balance sheet as September 30, 2023 as compared to December 31, 2022 (other than the change in our cash and cash equivalents, which is discussed later in “LIQUIDITY AND CAPITAL RESOURCES”) and the reasons for these changes are discussed in the following paragraphs.

Accounts receivable increased by approximately $11.1 million primarily due to a $6.9 million increase in CW-Bahamas’ accounts receivable as well as a $3.3 million increase in Kalaeloa Desalco accounts receivable related to the construction of the Kalaeloa Seawater Desalination facility in Oahu, Hawaii.

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

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

The significant changes in the components of our condensed consolidated balance sheet as of March 31, 2024 as compared to December 31, 2023 (other than the change in our cash and cash equivalents, which is discussed later in “LIQUIDITY AND CAPITAL RESOURCES”) and the reasons for these changes are discussed in the following paragraphs.

Accounts receivable increased by approximately $3.5 million primarily due to a $2.3 million increase in the services segment and a $2.2 million increase in Aerex accounts receivables offset by a $1.3 million decrease in CW-Bahamas’ accounts receivable.

Current inventory decreased by approximately $1.9 million primarily due to a decrease in Aerex’s inventory due to the delivery of work orders that increased Aerex’s accounts receivable.

Prepaid expenses and other current assets decreased by approximately $1.3 million primarily due to a reduction of approximately $900,000 in prepaid insurance and a reduction of approximately $163,000 in prepaid taxes.

Contract assets increased by approximately $1.8 million primarily due to a $1.5 million increase in Aerex’s contract assets.

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

Construction in progress increased by approximately $2.7 million primarily due to construction activity for Cayman Water’s replacement of its West Bay desalination plant.

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

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

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

Accrued compensation increased by approximately $1.2 million primarily due to accrued salaries and accrued staff and project bonuses for the three months ended March 31, 2024.

Contract liabilities decreased by approximately $778,000 primarily due to a $724,000 decrease in billings made by the services segment in connection 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

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

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

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

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

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

Our projected liquidity requirements for the balance of 2024 include capital expenditures for our existing operations of approximately $9.0 million , which includes approximately $2.8 million to be incurred for our new West Bay plant.

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

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

As of March 31, 2024, we had cash and cash equivalents of $46.2 million and working capital of $95.0 million.

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

CW-Bahamas Liquidity

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

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $25.6 million and $26.9 million as of March 31, 2024 and December 31, 2023, respectively.

Approximately 79% and 80% of the accounts receivable balances were delinquent as of those dates, respectively.

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

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

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

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

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

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 March 31, 2024.

CW-Bahamas held discussions with the WSC in March 2024 and with representatives of The Bahamas Government in April 2024 during which CW-Bahamas was informed 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 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.

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

Moody’s iterated these ratings in April and October 2023 and April 2024, 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 an allowance for doubtful accounts for CW-Bahamas’ accounts receivable.

(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 Nine Months Ended September 30, 2023

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

Discussion of Cash Flows for the Three Months Ended March 31, 2024

Our cash and cash equivalents increased to $46,177,641 as of March 31, 2024 from $42,621,898 as of December 31, 2023.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $5,950,002.

This net cash reflects the net income generated for the nine months ended September 30, 2023 of $20,206,301 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

This net cash reflects the net income generated for the three months ended March 31, 2024 of $6,643,416 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

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

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

The more significant of such items and changes in working capital components included depreciation and amortization of $1,674,699, an increase in accounts receivable of $3,715,214, an increase in contract assets of $1,787,438, an increase in accrued compensation of $1,177,819, offset by decreases in inventory of $1,746,438 and prepaid expenses and other assets of $1,275,345.

Cash Flows from Investing Activities

Net cash used by our investing activities was $6,542,387.

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

We also used $4,123,770 for additions to property, plant and equipment and construction in progress.

Net cash used by our investing activities was $531,452 for additions to property, plant and equipment and construction in progress.

Cash Flows from Financing Activities

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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:

Seven Mile Beach and West Bay.

For the three months ended September 30, 2023 and 2022, we generated approximately 14% and 25%, respectively, of our consolidated revenue and 23% and 44%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the nine months ended September 30, 2023 and 2022, we generated approximately 18% and 29%, respectively, of our consolidated revenue and 29% and 45%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the three months ended March 31, 2024 and 2023, we generated approximately 22% and 24%, respectively, of our consolidated revenue and 37% and 40%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

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

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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, 2024, we paid a dividend of $0.095 to shareholders of record on January 2, 2024.

● On April 30, 2024, we paid a dividend of $0.095 to shareholders of record on April 1, 2024.

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

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

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

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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.

This lack of a rate increase has contributed to a decline in the gross profit generated by our retail segment.

Furthermore, our manufacturing segment has been adversely impacted by recent significant increases in raw material costs and our services segment could suffer similar adverse impacts in the future.

This lack of a rate increase over the long-term could adversely affect the profitability of our retail segment.

Furthermore, our manufacturing segment has in the past been adversely impacted by significant increases in raw material costs and our services segment could suffer similar adverse impacts in the future.

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

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

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

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

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, construct, 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-Q

Item 2. Management’s Discussion and Analysis