Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our future revenue, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by use of the words or phrases “will,” “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “potential,” “believe,” “plan,” “anticipate,” “expect,” “intend,” or similar expressions and variations of such words. 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 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. Important factors which may affect these actual outcomes and results include, without limitation:
● tourism and weather conditions in the areas we serve ;
● the economic, political and social conditions of each country in which we conduct or plan to conduct business;
● our relationships with the government entities and other customers we serve;
● regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman;
● our ability to successfully enter new markets; and
● other factors, including those “Risk Factors” set forth under Part II, Item 1A. “Risk Factors” in this Quarterly Report and in our 2023 Annual Report on Form 10-K.
The forward-looking statements in this Quarterly Report speak as of its date. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.
References herein to “we,” “our,” “ours” and “us” refer to Consolidated Water Co. Ltd. and its subsidiaries.
Critical Accounting Policies and Estimates
Our critical accounting policies relate to (i) the valuations of our goodwill, intangible assets and long-lived assets; and (ii) revenue recognition on our construction and manufacturing contracts.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ significantly from such estimates and assumptions.
The application of our critical accounting policies involves estimates or assumptions that constitute “critical accounting estimates” for us because:
● the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
● the impact of the estimates and assumptions on financial condition and results of operations is material.
Goodwill and Intangible Assets
Goodwill represents the excess cost of an acquired business over the fair value of the assets and liabilities of the acquired business as of the date of acquisition. Goodwill and intangible assets recorded as a result of a business combination and
24
Table of Contents
determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. We evaluate the possible impairment of goodwill annually as part of our reporting process for the fourth quarter of each fiscal year. Management identifies our reporting units for goodwill impairment testing purposes, which consist of Cayman Water, the bulk segment (which is comprised of CW-Bahamas and OC-Cayman), PERC, 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 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 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. This customer informed Aerex at that time that it expected to recommence its purchases of the specialized product from Aerex beginning with the first quarter of 2022. As a result of this anticipated loss of revenue for Aerex, we updated our projections for our manufacturing reporting unit’s future cash flows. Such projections assumed, in part, that Aerex’s major customer would recommence its purchases from Aerex in 2022 but at a reduced aggregate amount, as compared to 2020. Based upon these updated projections, we tested our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. As a result of these impairment tests, we determined that the estimated fair value of our manufacturing reporting unit exceeded its carrying value by approximately 31% as of December 31, 2020.
In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases of the specialized product from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to the amounts it had purchased from Aerex in 2020 and prior years. Our updated sales estimate for this customer based on this new information was substantially below the sales we anticipated to this customer for 2022 and subsequent years that we used in the discounted cash flow projections we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020. Furthermore, Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers were adversely impacted by negative economic conditions (caused in part by the COVID-19 pandemic). These negative economic conditions also increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials, and adversely affected the overall financial condition of Aerex’s current and prospective customers. Accordingly, in light of this new information from Aerex’s former major customer, and the on-going weak economic conditions that we believed would continue through 2022, we updated our projections of future cash flows for the manufacturing reporting unit and tested its goodwill for possible impairment as of June 30, 2021 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. 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
25
Table of Contents
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.
On June 29, 2020, our Mexico subsidiary, AdR, received a letter from the State of Baja California (the “State”) terminating AdR’s contract with the State involving the construction and operation of a desalination plant in Rosarito California and accompanying aqueduct to deliver the water produced by this plant to the Mexican public water system. As a result of the cancellation of this contract, we recorded an impairment loss for rights of way acquired for the contract’s proposed aqueduct of approximately ($3.0 million) in 2020.
Construction and Manufacturing Contract Revenue Recognition
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 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. Contract costs include labor, materials, subcontractor costs and other expenses. We follow this method since we can make reasonably dependable estimates of the revenue and costs applicable to the various stages of a contract. Under this input method, we record revenue and recognize profit or loss as work on the contract progresses. We estimate total costs to be incurred and profit to be earned on each long-term, fixed price contract prior to commencement of work on the contract and update these estimates as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to date comprise of estimated total contract costs. Due to the extended time it may take to complete many of our contracts and the scope and nature of the work required to be performed on those contracts, the estimations of total revenue and costs at completion are complicated and subject to many variables and, accordingly, are subject to changes. When adjustments in estimated total contract revenue or estimated total contract costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. We recognize the full amount of any estimated loss on a contract at the time the estimates indicate such a loss.
The cost estimates we prepare in connection with our construction and manufacturing contracts are subject to inherent uncertainties. Because we base our contract prices on our estimation of future construction and manufacturing costs, the profitability of our construction and manufacturing contracts is highly dependent on our ability to estimate these costs accurately, as almost all of our construction and manufacturing contracts are fixed-price contracts. The cost of materials, labor and subcontractors could increase significantly after we sign a construction or manufacturing contract, which could cause the gross profit for a contract to decline from our previous estimates, adversely affecting our recognition of revenue and gross profit for the contract. Construction or manufacturing contract costs that significantly exceed our initial estimates could have a material adverse impact on our consolidated financial condition, results of operations, and cash flows.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Part I, Item 1. “Financial Statements” of this Quarterly Report and our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2023 (“2023 Form 10-K”) and the information set forth under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2023 Form 10-K.
26
Table of Contents
Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023
Discontinued Operations – Mexico Project Development
In 2010, we began the pursuit, through our Netherlands subsidiary, Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), and our Mexico subsidiary, N.S.C. Agua, S.A. de C.V. (“NSC”), of a project (the “Project”) that encompassed the construction, operation and minority ownership of a 100 million gallons per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system.
Through a series of transactions that began in 2012, NSC purchased 20.1 hectares of land for approximately $21.1 million on which the proposed Project’s plant was to be constructed.
Following an assessment by the State of Baja, California (the “State”) of the need for such a desalination plant and the passage of enabling legislation in November 2015, the State officially commenced the required public tender for the Project. A consortium (the “Consortium”) comprised of NSC, Suez Medio Ambiente México, S.A. de C.V. (“Suez MA”), a subsidiary of SUEZ International, S.A.S., and NuWater S.A.P.I. de C.V. (“NuWater”) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of the tender process for the Project.
In August 2016, NSC and NuWater incorporated a new company under the name Aguas de Rosarito S.A.P.I. de C.V. (“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. In February 2018, we acquired the remaining 0.4% ownership in AdR from NuWater.
On August 22, 2016, the Public Private Partnership Agreement for the Project (the “APP Contract”) was executed between AdR, the State Water Commission of Baja California (“CEA”), the Government of Baja California as represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract required AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueduct) with a capacity of up to 100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California and the second phase with a capacity of 50 million gallons per day. The first phase was to be operational within 36 months of commencing construction and the second phase was to be operational by July 2024. The APP Contract further required AdR to operate and maintain the plant and aqueduct for a period of 37 years starting from the commencement of operation of the first phase. At the end of the operating period, ownership of the plant and aqueduct would have been transferred to CEA. The APP Contract was subsequently amended by the parties in June 2018 to increase the scope of Phase 1 and to allow for changes in the water tariff due to the changes in the exchange rate for the peso, interest rates and construction costs that had and would occur from the date the APP Contract was signed to the date construction commenced.
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 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. AdR initiated an amparo claim before a federal district court in Tijuana, Baja California, to challenge the provision of the applicable law requiring submittal of the list of non-recoverable expenses within the 20 business days term, as AdR considered such term to be unreasonably short due to the magnitude of the Project and the scope of supporting documentation required to be provided with respect to the non-recoverable expenses. AdR obtained an initial provisional suspension of the lapsing of such 20-day term from the court, and on August 10, 2020 the court made such suspension definitive until the completion of the amparo trial. 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
27
Table of Contents
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. 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. Two such meetings were held on July 9, 2021 and August 2, 2021 on a confidential basis, without a resolution of our investment dispute.
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
Including discontinued operations, net income attributable to Consolidated Water Co. Ltd. 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.
28
Table of Contents
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. Ltd. 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.
29
Table of Contents
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.
30
Table of Contents
Consolidated Results
Including discontinued operations, net income attributable to Consolidated Water Co. Ltd. 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. Ltd. 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 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. 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 $13,170,323 for 2024 as compared to $12,021,577 for 2023. 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 $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. 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 remained relatively consistent at $8,483,148 for 2024 as compared to $8,442,642 for 2023.
Bulk Segment:
The bulk segment contributed $4,419,925 and $4,591,382 to our income from operations for 2024 and 2023, respectively.
31
Table of Contents
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 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 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.
S ervices Segment:
The services segment contributed $5,421,126 and $8,530,213 to our income from operations for 2024 and 2023, respectively.
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 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 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:
The manufacturing segment contributed $1,387,666 and $975,806 to our income from operations in 2024 and 2023, respectively.
Manufacturing revenue was $9,231,594 and $7,459,297 for 2024 and 2023, respectively. The growth in manufacturing revenue for 2024 reflects increased production activity.
Manufacturing gross profit was $2,572,954 (28% of manufacturing revenue) for 2024 as compared to a gross profit of $1,826,701 (24% 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 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 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.
32
Table of Contents
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
Certain transfers from our Bahamas bank accounts to our bank accounts in other countries require the approval of the Central Bank of The Bahamas.
The Cayman Islands does not have a tax treaty with the United States. Consequently, should we be required (or elect) to transfer any profits generated by our U.S. operations to our parent company in the Cayman Islands, the amount of any such funds transferred would be subject to a 30% withholding tax.
Liquidity Position
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. 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 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 $25.4 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. 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, we have not provided for a material allowance for credit losses for CW-Bahamas’ accounts receivable from the WSC as of June 30, 2024.
33
Table of Contents
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 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 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 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 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 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 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
Net cash used by our financing activities was $3,133,273, almost all of which related to the payment of dividends.
Revolving Credit Facility
In September 2022, Cayman Water entered into an agreement (the “Credit Agreement”) with Scotiabank & Trust (Cayman) Ltd. (the “Bank”) for a revolving credit facility in an aggregate principal amount of up to $10.0 million (the “Credit Facility”). We expect to utilize the funds obtained from the Credit Facility for general working capital purposes.
The Credit Facility matures two years following the date of the initial advance (the “Maturity Date”). All amounts outstanding under the Credit Facility are due and payable upon the earlier of the Maturity Date, demand from the bank or the acceleration of the Credit Facility upon an event of default.
The principal balance of the Credit Facility bears interest at a rate of 2.0% plus the secured overnight financing rate (“SOFR”) as determined by the SOFR Administrator for a one-month period on the day that is two days prior to the first day of the interest period. All interest calculations will be made based on a 360-day year. So long as the Bank has not demanded repayment, interest will be payable monthly, commencing one month from the initial advance, with the outstanding balance due on the Maturity Date, unless the Bank agrees to renew the Credit Facility for an additional period.
34
Table of Contents
Cayman Water’s obligations under the Credit Agreement are secured by a first priority lien on all its fixed and floating assets and an assignment of insurance proceeds with respect to its fixed assets. Further, the Company has guaranteed the repayment of all of Cayman Water’s present and future debts and liabilities owed to the Bank.
The Credit Agreement requires Cayman Water to meet certain financial covenants.
Cayman Water has not yet utilized any of its available borrowings under the Credit Facility.
Material Commitments, Expenditures and Contingencies
Cayman Water Retail License
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 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 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. The most recent express extension of the license expired on January 31, 2018. We continue to operate under the terms of the 1990 license, providing water services to the level and quality specified in the 1990 license and in accordance with our understanding of its legal obligations, treating those obligations set forth in the 1990 license as operative notwithstanding the expiration of the express extension. We continue to pay a royalty of 7.5% of the revenue we collect as required under the 1990 license.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for economic regulation of the water utility sector and the retail license negotiations from the WAC to OfReg in May 2017. We began license negotiations with OfReg in July 2017 and such negotiations are continuing. We have been informed during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license.
The Cayman Islands government could seek to grant a third party a license to service some or all of Cayman Water’s present service area. However, as set forth in the 1990 license, “the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence Area without having first offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.”
We are presently unable to determine what impact the resolution of our retail license negotiations will have on our cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our retail operations and could require us to record impairment losses to reduce the carrying value of our retail segment assets. Such impairment losses could have a material adverse impact on our consolidated financial condition and results of operations .
35
Table of Contents
CW-Bahamas Performance Guarantees
Our contracts to supply water to the WSC from our Blue Hills and Windsor plants require us to guarantee delivery of a minimum quantity of water per week. If the WSC requires the water and we do not meet this minimum, we are required to pay the WSC for the difference between the minimum and actual gallons delivered at a per gallon rate equal to the price per gallon that WSC is currently paying us under the contract. The Blue Hills contract expires in 2032 and requires us to deliver 63.0 million gallons of water each week. The Windsor contract expires in 2033 and requires us to deliver 16.8 million gallons of water each week.
Adoption of New Accounting Standards
None.
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.
Dividends
● 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 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. Our payment of any future cash dividends will depend upon our earnings, financial condition, cash flows, capital requirements and other factors our Board of Directors deems relevant in determining the amount and timing of such dividends.
Dividend Reinvestment and Common Stock Purchase Plan
This plan is available to our shareholders, who may reinvest all or a portion of their common stock dividends into shares of common stock at prevailing market prices and may also invest optional cash payments to purchase additional shares at prevailing market prices as part of this plan.
Impact of Inflation
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
36
Table of Contents
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 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 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk from December 31, 2023 to the end of the period covered by this report.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.