What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-03-17 compared with 2024-03-27 · 160 added, 129 removed, 236 unchanged (55% of the section changed)

4 unchanged sentences

Comparative Operations

Cayman Islands

Water Production Plants

Cayman Islands

British Virgin Islands

(1) In millions of gallons per day.

1 unchanged sentence

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

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

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

Comparative Operations

United States

Water Treatment Plants

United States

(1) In estimated millions of gallons per day.

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

As of December 31, 2024 and 2023, REC performed operations, maintenance, and monitoring services for 64 and 72, respectively, wastewater and water treatment plants located in the Rocky Mountain and Eastern Plains Regions of Colorado.

Cayman Islands

2 unchanged sentences

We have an exclusive license from the Cayman Islands government to process potable water from seawater and then sell and distribute that water by pipeline to the Seven Mile Beach and West Bay areas of Grand Cayman.

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

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

Our Grand Cayman operations consist of three company-owned seawater reverse osmosis desalination plants which (as of December 31, 2024) provide water to 8,174 retail residential and commercial connections within a government licensed area and three

government-owned seawater reverse osmosis plants which supply bulk water to the WAC.

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

1 unchanged sentence

The most recent express extension of the license expired on January 31, 2018.

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

We continue to pay the royalty required under the 1990 license.

We have been informed during our retail license 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.

Our retail license negotiations have also been impacted by the passage of new legislation and the establishment of a new water regulatory body in the Cayman Islands.

From that date to February 18, 2025, we continued 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 continued to pay the royalty of 7.5% required under the 1990 license.

On February 18, 2025, we received a new concession from the Cayman Islands government that authorizes and maintains the terms of our previous license until a new license is negotiated and enacted.

We have been informed during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that they seek 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.

See further discussion of this matter at ITEM 7.

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The Windsor plant and the Blue Hills plant are located in Nassau, New Providence and have a total installed capacity of 14.8 million gallons per day.

CW-Bahamas supplies water from these plants to the Water and Sewerage Corporation of The Bahamas (“WSC”) under long-term supply agreements.

During 2023, we supplied approximately 4.8 billion gallons of water to the WSC from these plants, as compared to 4.6 billion gallons during 2022.

CW-Bahamas supplies water from these plants to the WSC under long-term supply agreements.

During 2024, we supplied approximately 4.8 billion gallons of water to the WSC from these plants, which is consistent with the 4.8 billion gallons supplied during 2023.

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

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

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

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

We determine the fair value of each reporting unit and compare these fair values to the carrying amounts of the reporting units.

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

For 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.

For 2024 and 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.

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, 2024 and 2023.

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

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

Approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit, for the year ended December 31, 2020 were generated from sales to one customer.

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.

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

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.

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.

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.

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

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

through PERC.

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

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

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

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.

Contract costs include labor, materials, subcontractor costs and other

We follow this method since we can make reasonably dependable estimates of the revenue and costs applicable to the various stages of a contract.

1 unchanged sentence

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.

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 comprised of estimated total contract costs.

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.

11 unchanged sentences

(“CW-Cooperatief”), and our Mexico subsidiary, N.S.C.

(“NSC”), of a project (the “Project”) that encompassed the construction, operation and minority ownership of a 100 million 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.

(“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 pipeline 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.

(“Suez MA”), a subsidiary of SUEZ International, S.A.S., and NuWater S.A.P.I.

(“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.

In November 2015, the State of Baja California (the “State”) officially commenced the public tender for the Project.

A consortium (the “Consortium”) comprised of NSC and two other parties 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 incorporated a new company under the name Aguas de Rosarito S.A.P.I.

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

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 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.

1 unchanged sentence

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 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”).

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.

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 consolidated financial statements.

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 (loss) from discontinued operations for 2024 and 2023 was $10,355,184 and ($1,086,744), 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 $28,237,554 ($1.77 per share on a fully diluted basis), as compared to $29,585,391 ($1.86 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 year ended December 31, 2024 as compared to the year ended December 31, 2023 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2024 was $17,882,370 ($1.12 per share on a fully diluted basis), as compared to $30,672,135 ($1.93 per share on a fully diluted basis) for 2023.

Revenue for 2024 decreased to $133,966,633 from $180,211,233 in 2023, due to a significant decrease in revenue from our services segment.

Gross profit for 2024 was $45,624,448 (34% of total revenue) as compared to $61,927,105 (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 expenses (“G&A expenses”) on a consolidated basis increased to $27,537,436 for 2024 as compared to $24,752,366 for 2023.

The principal factors for the increase in G&A expenses for 2024 relates to additional G&A expenses of approximately $1,321,000 attributable to REC, which was acquired in the fourth quarter of 2023, and incremental audit, legal and audit related and other professional fees of approximately $1,357,000.

Other income, net, increased to $2,393,676 in 2024, as compared to $828,313 in 2023 primarily due to $1,397,782 of additional interest income resulting from additional interest earned on higher balances of interest earning assets and higher late payment charges on delinquent accounts receivable balances due from the WSC.

Results by Segment

Retail Segment:

The retail segment generated $14,280,948 of income from operations for 2024 as compared to $13,266,942 for 2023.

Revenue generated by our retail water operations increased to $31,741,343 in 2024 from $30,158,051 in 2023 due to a 4.5% increase in the volume of water sold.

We believe the increase in the volume of water sold in 2024 resulted in part from a 4.3% increase in the number of customer accounts in our license area from December 31, 2023 to December 31, 2024.

Retail segment gross profit increased to $17,542,255 (55% of retail revenue) for 2024 as compared to $16,266,822 (54% of retail revenue) for 2023 due to the revenue increase.

Retail segment gross profit as a percentage of revenue increased slightly in 2024 as compared to 2023 due to the overall increase in water volume sold.

Retail G&A expenses remained relatively consistent at $3,263,593 for 2024 as compared to $2,978,164 for 2023.

Bulk Segment:

The bulk segment contributed $8,748,052 and $8,742,382 to our income from operations for 2024 and 2023, respectively.

Bulk segment revenue was $33,673,387 and $34,595,058 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 $10,313,027 (31% of bulk revenue) and $10,466,926 (30% of bulk revenue) for 2024 and 2023, respectively.

Gross profit as a percentage of revenue increased slightly in 2024 as compared to 2023 due to higher revenue, efficiency improvements at OC-Cayman, and decreases in electricity and fuel costs and depreciation expense that more than offset increased maintenance and insurance expenses.

Bulk segment G&A expenses remained relatively consistent at $1,564,975 for 2024 as compared to $1,737,264 for 2023 .

Services Segment:

The services segment contributed $6,392,259 and $26,897,080 to our income from operations for 2024 and 2023, respectively.

Services segment revenue decreased to $50,956,489 for 2024 compared to $97,966,650 for 2023.

Construction revenue was $17,637,432 in 2024 as compared to $77,306,704 in 2023.

We recognized approximately $8.5 million and $64 million in construction revenue for the Liberty Utilities contract for the construction of a water treatment plant in Goodyear, Arizona in 2024 and 2023, respectively.

This contract was completed in mid-2024.

Revenue generated under operations and maintenance contracts increased to $29,307,405 in 2024 from $19,368,365 in 2023.

Revenue from REC, which was acquired in October 2023, constituted $6,069,342 of this operations and maintenance contracts revenue increase and the remainder of the increase related to new PERC contracts.

Design and consulting revenue increased to approximately $4.0 million in 2024 from approximately $1.3 million in 2023.

The gross profit for the services segment decreased to $12,444,954 (24% of services revenue) in 2024 as compared to $31,168,888 (32% of services revenue) for 2023 due to the decrease in construction revenue.

G&A expenses for the services segment increased to $6,055,409 for 2024 as compared to $4,271,808 for 2023 primarily due to incremental G&A expenses of REC (which was acquired in the fourth quarter of 2023) of approximately $1,321,000.

Manufacturing Segment:

The manufacturing segment contributed $2,867,405 and $2,188,418 to our income from operations in 2024 and 2023, respectively.

Manufacturing revenue remained relatively consistent at $17,595,414 and $17,491,474 for 2024 and 2023, respectively.

Manufacturing gross profit was $5,324,212 (30% of manufacturing revenue) for 2024 as compared to a gross profit of $4,024,469 (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 increased to $2,456,807 for 2024 as compared to $1,838,284 for 2023 principally due to an increase in the provision for credit losses of approximately $336,000 in 2024.

Corporate G&A expenses increased slightly to $14,196,652 for 2024 as compared to $13,926,846 for 2023.

This increase reflects almost $1.2 million incremental audit, consulting and legal fees arising primarily from the Company’s change in S.E.C.

filing status from a small reporting company to an accelerated filer.

Year Ended December 31, 2023 Compared to Year Ended December 31, 2022

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.

Our net losses from discontinued operations for 2023 and 2022 were ($1,086,744) and ($2,371,049), respectively.

9 unchanged sentences

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

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

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

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

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

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

Other income, net, increased to $828,313 in 2023, as compared to $464,810 in 2022 due to an increase in interest income of approximately $249,000 primarily due to a higher balance of interest earning assets, and an increase of approximately $68,000 in the equity in earnings of and profit-sharing income from our affiliate, OC-BVI, and an unrealized loss recorded in 2022 of $128,000 for the valuation of the put/call options associated with the initial acquisition of a controlling interest in PERC.

2 unchanged sentences

Retail Segment:

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

The retail segment generated $13,266,942 in income from operations for 2023 compared to $10,756,282 for 2022.

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

3 unchanged sentences

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

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

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

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

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

Retail G&A expenses increased to $2,978,164 for 2023 as compared to $2,609,571 for 2022 primarily due to an increase in employee costs of approximately $164,000 due to pay raises and new hires.

Bulk Segment:

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

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

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

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

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We recognized approximately $64.0 million in revenue for the Liberty Utilities contract in 2023.

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

Revenue generated under operations and maintenance contracts was $19,368,365 and $14,152,158 in 2023 and 2022, respectively.

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

The growth in manufacturing revenue for 2023 reflects increased production activity due to relief in supply chain and economic conditions that had resulted in significant product delivery delays in 2022.

The growth in manufacturing revenue for 2023 reflected increased production activity due to relief in supply chain and economic conditions that had resulted in significant product delivery delays in 2022.

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

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

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

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

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

Corporate G&A expenses increased to $13,926,846 in 2023 as compared to $11,943,295 in 2022.

Primarily as a result of an increase in employee costs of almost $1.6 million.

This increase in employee costs is attributable to pay raises as well as increased stock compensation and bonus accruals arising from the Company’s improved financial results from 2022 to 2023.

FINANCIAL CONDITION

The significant changes in the components of our consolidated balance sheet as of December 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 $11.2 million primarily due to a $10.3 million increase in CW-Bahamas’ accounts receivable.

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

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

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

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

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

Accounts payable, accrued expenses and other current liabilities increased by approximately $3.2 million primarily due to a $4.0 million increase in subcontractor costs payable for PERC’s contract with Liberty Utilities and Kalaeloa Desalco’s contract with the Board of Water Supply of the City and County of Honolulu, Hawaii .

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

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

Accounts receivable increased by approximately $1.4 million primarily due to an increase in CW-Bahamas’ accounts receivable.

Current inventory increased by $2.9 million primarily due to an increase in Aerex’s inventory arising from production activity.

Contract assets decreased by approximately $17.1 million primarily due to a $16.5 million decrease in the services segment contract assets attributable to the completion of the Liberty Utilities and the Red Gate II projects.

Property, plant and equipment, net, decreased by approximately $3.5 million due to the scheduled depreciation of fixed assets.

Construction in progress increased by approximately $4.6 million primarily due to $2.1 million spent on the CW-Bahamas Cat Island plant construction and $1.7 million spent on the new West Bay plant in Cayman Islands.

Operating lease right-of-use assets increased by approximately $1.1 million due to the renewal of the corporate office lease in Cayman Islands.

Accounts payable, accrued expenses and other current liabilities decreased by approximately $2.5 million primarily due to a $4.9 million decrease in subcontractor and other project costs payable for the services segment.

This decrease was offset by an increase in Aerex’s accounts payable of approximately $1.4 million as well as an increase in CW-Bahamas’ accrued expenses and purchase orders of approximately $1.2 million.

Contract liabilities increased by approximately $2.9 million primarily due to a $2.6 million increase in the services segment in connection with Kalaeloa Desalco’s contract with the Board of Water Supply of the City and County of Honolulu, Hawaii.

LIQUIDITY AND CAPITAL RESOURCES

Certain transfers from our Bahamas bank accounts to our bank accounts in other countries require the approval of the Central Bank of The Bahamas.

Certain transfers from our bank accounts in The Bahamas 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.

subsidiaries from U.S.

operations to our company in the Cayman Islands, we would be required to pay a withholding tax of 30% on the amount of any such funds transferred.

Liquidity Position

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

Our projected liquidity requirements for 2025 include capital expenditures for our existing operations of approximately $10.3 million, which includes $926,000 to be incurred in 2025 for our new West Bay plant and $1.8 million for the expansion of Aerex’s manufacturing facility.

We paid approximately $1.8 million for dividends in January 2025.

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Approximately 81% of the December 31, 2024 accounts receivable balance was delinquent as of that date.

As of February 28, 2025, this receivable amounted to $22.5 million, of which 77% was delinquent.

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.

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Based upon this payment history, we have not provided for a material allowance for credit losses for CW-Bahamas’ accounts receivable from the WSC as of December 31, 2024.

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

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

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

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 intended to substantially reduce CW-Bahamas’ accounts receivable from the WSC before the end of 2024.

This anticipated substantial reduction in CW-Bahamas accounts receivable did not occur over the course of 2024.

We continue to be in frequent contact with officials of the Bahamas government, who continue to express their intention to significantly reduce CW-Bahamas accounts receivable balances in the near future, however we cannot provide any assurance as to when such reduction will occur.

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, 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.

Moody’s has maintained these ratings through the date of its most current report issued in October 2024.

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;

(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.

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Discussion of Cash Flows for the Year Ended December 31, 2024

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

Our cash and cash equivalents increased to $99,350,121 as of December 31, 2024 from $42,621,898 as of December 31, 2023.

Cash Flows from Operating Activities

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

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

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 $6,691,658, an increase in accounts receivable of $1,796,919 attributable principally to CW-Bahamas, a decrease in contract assets of $17,082,814 due primarily to the Red Gate and Liberty Utilities construction contracts, an increase in contract liabilities of $2,889,643 and a decrease in accounts payable, accrued expenses and other current liabilities of $2,370,274.

Cash Flows from Investing Activities

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

Net cash provided by our investing activities was $26,961,421 primarily due to the sale of land and project documentation from discontinued operations in Mexico.

Cash used for additions to property, plant and equipment and construction in progress was $6,696,580.

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

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

Cash Flows from Financing Activities

Net cash used by our financing activities was $6,712,154, almost all of which related to the payment of dividends.

Revolving Credit Facility

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

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

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

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

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

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

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

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

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

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

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

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

Material Commitments, Expenditures and Contingencies

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

Although the 1990 license has not been expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as discussed in the following paragraphs.

Pursuant to the 1990 license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island:

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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.

From that date until February 18, 2025, we continued 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 continued to pay a royalty of 7.5% of the revenue we collect as required under the 1990 license.

In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”).

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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.

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.”

Under the new regulatory legislation passed in October 2016, Cayman Water must first be granted a concession by the government before obtaining a new (or renewing the old) retail operations license.

On February 18, 2025, Cayman Water received a new concession from the government that authorizes and maintains the terms of the 1990 license until a new license is negotiated and enacted.

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.

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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.

We have been in compliance with the performance guarantees under these contracts for all periods since the inception of the contracts.

Adoption of New Accounting Standards

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

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

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

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

The impact of this adoption was not material to our consolidated financial statements.

Effect of Newly Issued but not yet Effective Accounting Standards

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

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

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

Early adoption is permitted.

The adoption of ASU 2023-07 did not have a material impact on our consolidated financial position, results of operations or cash flows.

Effect of Newly Issued but not yet Effective Accounting Standards

In November 2024, the FASB issued ASU 2024-03, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40):

Disaggregation of Income Statement Expenses.

The ASU requires public companies to disclose, in the notes to financial statements, specific information about certain costs and expenses at each interim and annual reporting period.

The ASU is effective on a prospective basis for annual periods beginning after December 15, 2026, and interim reporting periods beginning after December 15, 2027.

In January 2025, the FASB issued ASU 2025-01, Income Statement – Reporting Comprehensive Income – Expense Disaggregation Disclosures (Subtopic 220-40):

Clarifying the Effective Date.

The ASU amends the effective date of ASU 2024-03 to clarify that all business entities are required to adopt the guidance in annual periods beginning after December 15, 2026, and interim periods within annual reporting periods beginning after December 15, 2027.

We are currently evaluating the impact of this guidance.

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Early adoption is permitted.

We are currently evaluating the impact of this guidance.

The adoption of ASU 2023-09 is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

● On January 31, 2024, we paid a dividend of $0.095 to shareholders of record on January 2, 2024.

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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.

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

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

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, build, operate and maintain a 1.7 million gallons per day seawater reverse osmosis desalination plant in Oahu, Hawaii.

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 manufacturing and services segments could suffer similar adverse impacts in the future.

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.

In periods of high inflation, our consolidated results of operations and cash flows could be materially adversely affected.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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What changed 10-K

Item 7. Management’s Discussion and Analysis