What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-14 compared with 2024-05-15 · 117 added, 58 removed, 244 unchanged (42% of the section changed)

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

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Discontinued Operations – Mexico Project Development

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As such, the 20-day term for filing the list of non-recoverable expenses was suspended.

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.

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

We believe CW-Cooperatief, as a Netherlands company, has certain rights relating to its investments in NSC and AdR under the Agreement on Promotion, Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the United Mexican States entered into force as of October 1, 1999 (the “Treaty”).

Mexican pesos.

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

We believed CW-Cooperatief, as a Netherlands company, had certain rights relating to its investments in NSC and AdR under the Agreement on Promotion, Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the United Mexican States entered into force as of October 1, 1999 (the “Treaty”).

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.

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Two such meetings were held on July 9, 2021 and August 2, 2021 on a confidential basis, without a resolution of our investment dispute.

On February 9, 2022, CW-Cooperatief, filed a Request for Arbitration with the International Centre for Settlement of International Disputes requesting that the United Mexican States pay CW-Cooperatief damages in excess of US$51 million plus MXN$137 million (with the exact amount to be quantified in the proceedings), plus fees, costs and pre- and post-award interest.

CW-Cooperatief intends to pursue vigorously the relief sought in the arbitration, in addition to pursuing all other legal remedies and courses of action available under the operative contracts and applicable law with respect to its rights, damages, fees and expenses.

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

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

We cannot presently determine the outcome of the discussions and we have not terminated our efforts to obtain relief through the international arbitration process as a result of these discussions.

We cannot provide any assurances that we will be able to obtain reimbursement for any expenses or investments made with respect to the Project.

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 condensed consolidated financial statements.

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

In February 2022, CW-Cooperatief, filed a Request for Arbitration with the International Centre for Settlement of International Disputes requesting that the United Mexican States pay CW-Cooperatief damages in excess of US$51 million plus MXN$137 million (with the exact amount to be quantified in the proceedings), plus fees, costs and pre- and post-award interest.

On May 29, 2024, we, through CW-Cooperatief;

NSC, and AdR entered into a settlement agreement (the “Settlement Agreement”) with the State and Banco Nacional de Obras y Servicios Públicos, S.N.C., as trustee under the trust agreement for the trust named Fondo Nacional de Infraestructura (the “Trust”).

Under the Settlement Agreement, CW-Cooperatief requested that ICSID discontinue the arbitration and on May 31, 2024, ICSID issued an order discontinuing the arbitration.

Pursuant to the Settlement Agreement, the Trust purchased the 20.1 hectares of land on which the Project’s plant was to be constructed, including related rights of way (the “Land”), on an “as-is” basis, from NSC for MXN$596,144,000.

The sale of the Land to the Trust was closed on June 14, 2024 at which time the MXN$596,144,000 was paid to us and converted at the prevailing exchange rate on that date into US$31,959,685.

In connection with the Settlement Agreement on June 14, 2024, the State also paid NSC MXN$20,000,000 to purchase certain documentation owned by NSC relating to the Project.

As a result of the Settlement Agreement:

(i) the parties have been released from all obligations owed to each other in connection with the APP Contract and the arbitration;

and (ii) no party to the Settlement Agreement may institute any legal proceedings against another party thereto with respect to the matters which have been addressed by the Settlement Agreement.

We are presently in the process of legally terminating/dissolving CW-Cooperatief, NSC and AdR and will continue to incur expenses for these subsidiaries while such process is completed, but such expenses are not expected to be material to our consolidated results of operations.

Our net income from discontinued operations for the three months ended June 30, 2024 was $11,607,846 and the net loss from discontinued operations for the three months ended June 30, 2023 was ($207,701), respectively.

The net income reported from discontinued operations for 2024 reflects the gain generated from the sale of the Project land and project documentation under the Settlement Agreement.

Consolidated Results

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stockholders for 2024 was $15,850,257 ($0.99 per share on a fully diluted basis), as compared to net income of $7,323,771 ($0.46 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 March 31, 2024 as compared to the three months ended March 31, 2023 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 June 30, 2024 as compared to the three months ended June 30, 2023 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2024 was $4,242,411 ($0.26 per share on a fully diluted basis), as compared to net income from continuing operations of $7,531,472 ($0.47 per share on a fully diluted basis) for 2023.

Revenue for 2024 decreased to $32,479,158 from $44,237,263 in 2023, as a result of a significant revenue decrease in the services segment, consistent revenue in the bulk and manufacturing segments and a slight revenue increase in the retail segment.

Gross profit for 2024 was $11,620,214 (36% of total revenue) as compared to $15,463,549 (35% of total revenue) for 2023.

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 $6,606,294 for 2024 as compared to $5,984,915 for 2023.

The increase in G&A expenses for 2024 relates to additional G&A expenses of approximately $299,000 attributable to REC, which was acquired in the fourth quarter of 2023 and an increase in audit, audit related and other professional fees of approximately $293,000.

Other income, net, increased to $418,426 for 2024 as compared to $129,131 for 2023 primarily due to approximately $295,000 of additional interest income resulting from higher late payment charges to our CW-Bahamas customer on delinquent accounts receivable balances and additional interest earned on higher balances of interest earning assets.

Results by Segment

Retail Segment:

The retail segment contributed $126,805 to our income from operations for 2024.

The retail segment incurred a loss from operations of ($125,338) for 2023.

Revenue generated by our retail water operations increased to $8,181,884 in 2024 from $7,573,329 in 2023 due to a 10% increase in the volume of water sold.

We believe the increase in the volume of water sold in 2024 resulted in part from a 5.5% increase in the number of customer accounts in our license area from June 30, 2023 to June 30, 2024.

In addition, significantly less rainfall on Grand Cayman in 2024 for the months of April and May as compared to 2023 was also a contributor to the increase in water sold from 2023 to 2024.

Retail segment gross profit increased to $4,511,751 (55% of retail revenue) for 2024 from $4,140,197 (55% of retail revenue) for 2023 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 remained relatively consistent at $4,378,816 for 2024 as compared to $4,265,535 for 2023.

Bulk Segment:

The bulk segment contributed $1,987,230 and $2,171,860 to our income from operations for 2024 and 2023, respectively.

Bulk segment revenue was $8,447,958 and $8,482,495 for 2024 and 2023, respectively.

The slight decrease in bulk revenue from 2023 to 2024 reflects 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 $2,350,498 (28% of bulk revenue) and $2,550,760 (30% of bulk revenue) for 2024 and 2023, respectively.

Gross profit as a percentage of revenue decreased in 2024 as compared to 2023 due to a reduction in the price of energy and an increase in repairs and maintenance expenses of almost $243,000.

Bulk segment G&A expenses remained relatively consistent at $363,268 for 2024 as compared to $379,900 for 2023.

S ervices Segment:

The services segment contributed $2,270,308 and $6,941,262 to our income from operations for 2024 and 2023, respectively.

Services segment revenue decreased to $11,922,469 for 2024 from $24,093,963 for 2023.

Construction revenue was $3,324,610 in 2024 as compared to $19,827,827 in 2023.

We recognized approximately $1.4 million and $17.6 million in construction revenue for the Liberty Utilities contract in 2024 and 2023, respectively.

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

Revenue generated under operations and maintenance contracts increased to $7,068,922 in 2024 from $4,044,015 in 2023.

The acquisition of REC effective October 2023 constituted $1,921,819 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 decreased to $3,463,932 (29% of services revenue) in 2024 from $7,845,822 (33% of services revenue) in 2023 due to the decreased revenue.

G&A expenses for the services segment increased to $1,196,624 for 2024 as compared to $904,560 for 2023 primarily due to the addition of REC’s G&A expenses of approximately $299,000.

Manufacturing Segment:

The manufacturing segment contributed $626,447 and $491,850 to our income from operations in 2024 and 2023, respectively.

Manufacturing revenue was relatively consistent at $3,926,847 and $4,087,476 for 2024 and 2023, respectively.

Manufacturing gross profit was $1,294,033 (33% of manufacturing revenue) for 2024 as compared to a gross profit of $926,770 (23% of manufacturing revenue) for 2023.

The increase in manufacturing gross profit in dollars and as a percentage of revenue results from a higher margin product mix.

G&A expenses for the manufacturing segment remained relatively consistent at $667,586 for 2024 as compared to $434,920 for 2023.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

Discontinued Operations – Mexico Project Development

As discussed previously, on June 30, 2020 the State of Baja California cancelled its APP Contract with AdR for the Project.

As a result of the cancellation of the Project we discontinued all development activities associated with the Project, commenced marketing efforts to sell the land NSC purchased for the Project, and initiated international arbitration against the Government of Mexico to recover the costs we had incurred for the Project.

In May 2024, we executed a Settlement Agreement with the State pursuant to which we discontinued the arbitration in exchange for the purchase by the State (i) of the land for the Project for MXN$596,144,000;

and (ii) certain documentation for the Project for MXN$20,000,000.

We received the proceeds from the sale of the land and documentation in June 2024 and the MXN$596,144,000 received for the land was converted into US$31,959,685.

Our net income from discontinued operations for the six months ended June 30, 2024 was $11,140,780 and the net loss from discontinued operations for the three months ended June 30, 2023 was ($466,864), respectively.

The net income reported from discontinued operations for 2024 reflects the gain generated from the sale of the Project land and documentation under the Settlement Agreement.

Consolidated Results

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

stockholders for 2024 was $22,324,605 ($1.40 per share on a fully diluted basis), as compared to net income of $11,137,397 ($0.70 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 six months ended June 30, 2024 as compared to the six months ended June 30, 2023 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2024 was $11,183,825 ($0.70 per share on a fully diluted basis), as compared to a net income from continuing operations of $11,604,261 ($0.73 per share on a fully diluted basis) for 2023.

Revenue for 2024 increased to $39,689,390 from $32,868,990 in 2023, reflecting revenue increases in all segments except for the bulk segment which had a slight decrease.

Revenue for 2024 decreased to $72,168,548 from $77,106,253 in 2023, reflecting a decrease in the services segment.

Gross profit for 2024 was $25,498,237 (35% of total revenue) as compared to $26,022,631 (34% of total revenue) for 2023.

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General and administrative (“G&A”) expenses on a consolidated basis increased to $13,170,323 for 2024 as compared to $12,021,577 for 2023.

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.

The increase in G&A expenses for 2024 relates to additional G&A expenses of approximately $687,000 attributable to REC, which was acquired in the fourth quarter of 2023 and incremental audit, audit related and professional fees of approximately $348,000.

Other income, net, increased to $836,610 for 2024 from $286,190 for 2023 primarily due to approximately $515,000 of additional interest income resulting from higher late payment charges to our CW-Bahamas customer on delinquent accounts receivable balances and additional interest earned on higher balances of interest earning assets.

Results by Segment

Retail Segment:

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.

The retail segment contributed $1,096,067 to our income from operations for 2024 and recorded a loss from operations of ($89,431) for 2023, respectively.

Revenue generated by our retail water operations increased to $16,806,822 in 2024 from $15,344,424 in 2023 due to an 8% increase in the volume of water sold.

We believe the increase in the volume of water sold in 2024 resulted in part from a 5.5% increase in the number of customer accounts in our license area from June 30, 2023 to June 30, 2024.

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

Retail segment gross profit increased to $9,585,345 (57% of retail revenue) for 2024 from $8,360,498 (54% of retail revenue) for 2023 due to the revenue increase.

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Bulk segment revenue was $16,790,052 and $17,486,868 for 2024 and 2023, respectively.

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.

The decrease in bulk revenue from 2023 to 2024 reflects 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 $5,127,334 (31% of bulk revenue) and $5,311,987 (30% of bulk revenue) for 2024 and 2023, respectively.

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.

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

Bulk segment G&A expenses remained relatively consistent at $707,409 for 2024 as compared to $732,875 for 2023.

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The services segment contributed $5,421,126 and $8,530,213 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.

Services segment revenue decreased to $29,340,080 for 2024 from $36,815,664 for 2023.

Construction revenue was $12,528,274 in 2024 as compared to $28,521,342 in 2023.

We recognized approximately $6.3 million and $24.1 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.

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

Revenue generated under operations and maintenance contracts increased to $14,168,275 in 2024 from $7,729,821 in 2023.

The acquisition of REC effective October 2023 constituted $3,739,859 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.

Gross profit for the services segment decreased to $8,212,604 (28% of services revenue) in 2024 from $10,523,445 (29% of services revenue) in 2023 due to the decreased revenue.

G&A expenses for the services segment increased to $2,794,478 for 2024 as compared to $1,993,232 for 2023 primarily due to the addition of REC’s G&A expenses of approximately $687,000.

Manufacturing Segment:

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

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

Gross profit as a percentage of revenue increased due to a higher margin product mix.

G&A expenses for the manufacturing segment remained relatively consistent at $1,185,288 for 2024 as compared to $852,828 for 2023.

FINANCIAL CONDITION

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.

The significant changes in the components of our condensed consolidated balance sheet as of June 30, 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 $1.4 million primarily due to a $2.6 million increase in Aerex accounts receivables offset by a $1.4 million decrease in CW-Bahamas’ accounts receivable.

Current inventory decreased by approximately $1.5 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.

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.

Prepaid expenses and other current assets decreased by approximately $1.1 million primarily due to a reduction of prepaid insurance and other expenses offset by an increase of approximately $436,000 in prepaid taxes.

Contract assets decreased by approximately $16.1 million primarily due to a $16.0 million decrease in the services segment contract assets.

Property, plant and equipment, net, decreased by approximately $1.5 million primarily due to the scheduled depreciation of fixed assets offset by new additions.

Operating lease right-of-use assets increased by approximately $1.4 million due to the renewal of the corporate office lease in Cayman Islands.

Accounts payable, accrued expenses and other liabilities decreased by approximately $3.5 million primarily due to a $4.8 decrease in subcontractor costs in the services segment.

Noncurrent operating leases increased by approximately $1.1 million due to the renewal of the corporate office lease in Cayman Islands.

LIQUIDITY AND CAPITAL RESOURCES

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Our projected liquidity requirements for the balance of 2024 include capital expenditures for our existing operations of approximately $7.1 million, which includes approximately $2.5 million to be incurred for our new West Bay plant.

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

In addition, we plan to spend approximately $3.9 million during the balance of 2024 for other projects.

We paid approximately $1.6 million for dividends in July 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.

As of June 30, 2024, we had cash and cash equivalents of $96.7 million and working capital of $131.2 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 $25.6 million and $26.9 million as of March 31, 2024 and December 31, 2023, respectively.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $25.4 million and $26.9 million as of June 30, 2024 and December 31, 2023, respectively.

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

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

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.

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 June 30, 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.

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(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;

(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 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.

Discussion of Cash Flows for the Six Months Ended June 30, 2024

Our cash and cash equivalents increased to $96,670,206 as of June 30, 2024 from $42,621,898 as of December 31, 2023.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $26,905,891.

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;

This net cash reflects the net income generated for the six months ended June 30, 2024 of $22,616,545 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 $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.

The more significant of such items and changes in working capital components included the gain from the sale of land and project documentation from discontinued operations of $12,134,766, depreciation and amortization of $3,342,337, an increase in accounts receivable of $1,672,589, a decrease in contract assets of $16,139,277, and a decrease in accounts payable, accrued expenses and other current liabilities of $3,503,625.

Cash Flows from Investing Activities

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

Net cash provided by our investing activities was $31,539,511 primarily due to the sale of land and project documentation from discontinued operations in Mexico.

The balance of our investing activities consisted of additions to property, plant and equipment and construction in progress.

Cash Flows from Financing Activities

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Seven Mile Beach and West Bay.

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.

For the three months ended June 30, 2024 and 2023, we generated approximately 25% and 17%, respectively, of our consolidated revenue and 39% and 27%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the six months ended June 30, 2024 and 2023, we generated approximately 23% and 20%, respectively, of our consolidated revenue and 38% and 32%, 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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● On April 30, 2024, we paid a dividend of $0.095 to shareholders of record on April 1, 2024.

● On May 29, 2024, our Board declared a dividend of $0.095 payable on July 31, 2024 to shareholders of record on July 1, 2024.

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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Impact of Inflation

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

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

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.

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

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

However, while we have received annual inflation adjustments for the rates we charge under our bulk water agreements, we have not increased the retail water rates for Cayman Water 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 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.

Furthermore, our manufacturing segment has in the past been adversely impacted by significant increases in raw material costs and our manufacturing and services segments 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.

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

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

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

While our 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 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 $147 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.

3 unchanged sentences

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What changed 10-Q

Item 2. Management’s Discussion and Analysis