What changed in this filing

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Item 2. Management’s Discussion and Analysis

2025-05-12 compared with 2024-11-14 · 80 added, 144 removed, 191 unchanged (54% of the section changed)

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

Goodwill and intangible assets recorded as a result of a business combination and

determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event.

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

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

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

Conditions that would necessitate an impairment

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

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

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

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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.

information set forth under Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2024 Form 10-K.

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

Three Months Ended March 31, 2025 Compared to Three Months Ended March 31, 2024

Discontinued Operations – Mexico Project Development

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(“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.

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.

In November 2015, the State of Baja California (the “State”) officially commenced the public tender for the Project, and in June 2016 a consortium comprised of NSC and two other parties was selected by the State as the winner of the tender process for the Project.

NSC subsequently formed AdR to pursue the completion of the Project.

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”).

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At the end of the operating period, ownership of the plant and aqueduct would have been transferred to CEA.

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.

On June 29, 2020, AdR received a letter (the “Letter”) from CEA and 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.

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”).

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”).

In May 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.

5 unchanged sentences

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 losses from discontinued operations for the three months ended September 30, 2024 and 2023 were ($502,854) and ($232,994), respectively.

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.

Our net losses from discontinued operations for the three months ended March 31, 2025 and 2024 were ($133,081) and ($467,066), respectively.

Consolidated Results

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stockholders for 2025 was $4,791,029 ($0.30 per share on a fully diluted basis), as compared to net income of $6,474,348 ($0.40 per share on a fully diluted basis) for 2024.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 relates only to our continuing operations.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended March 31, 2025 as compared to the three months ended March 31, 2024 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2025 was $4,924,110 ($0.31 per share on a fully diluted basis), as compared to net income from continuing operations of $6,941,414 ($0.43 per share on a fully diluted basis) for 2024.

Revenue for 2024 decreased to $33,390,557 from $49,854,075 in 2023, as a result of a significant revenue decrease in the services segment and a slight revenue decrease in the manufacturing segment.

Revenue for 2025 decreased to $33,715,385 from $39,689,390 in 2024, as a result of a significant decrease in services segment revenue.

Gross profit for 2025 was $12,306,287 (37% of total revenue) as compared to $13,878,023 (35% of total revenue) for 2024.

1 unchanged sentence

General and administrative (“G&A”) expenses on a consolidated basis increased to $7,723,959 for 2025 as compared to $6,564,029 for 2024.

The increase in G&A expenses for 2024 arises principally from additional G&A expenses of approximately $430,000 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 $374,000.

Other income, net, increased to $724,040 for 2024 as compared to $236,066 for 2023 primarily due to approximately $430,000 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 Water and Sewerage Corporation of The Bahamas (“WSC”).

The increase in G&A expenses for 2025 arises principally from (i) incremental legal costs and other professional fees totaling $491,174 (which includes $139,000 in costs related to a legal settlement);

(ii) added employee costs of $356,909 attributable to new hires, salary increases and a retirement payment of $158,000 made to a former executive;

and (iii) a net increase of approximately $135,000 in the provision for credit losses.

Other income, net, increased to $688,891 for 2025 as compared to $418,184 for 2024 primarily due to approximately $282,000 of additional interest income resulting from additional interest earned on higher balances of interest earning assets.

Results by Segment

Retail Segment:

The retail segment incurred a loss from operations of ($178,846) for 2024 compared to a loss from operations of ($381,142) for 2023.

The retail segment generated $4,946,443 in income from operations for 2025 compared to $4,306,896 for 2024.

Revenue generated by our retail water operations increased to $9,411,342 in 2025 from $8,624,938 in 2024 due to a 13% increase in the volume of water sold.

We believe the increase in the volume of water sold in 2024 resulted from a 4.8% increase in the number of customer accounts in our license area from September 30, 2023 to September 30, 2024.

Retail segment gross profit increased to $3,979,048 (52% of retail revenue) for 2024 from $3,844,683 (53% of retail revenue) for 2023 due to the revenue increase.

Gross profit as a percentage of revenue declined slightly in 2024 as compared to 2023 due to an increase in energy costs and repairs and maintenance expenses aggregating approximately $186,000.

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.

As a result of the revenue increase retail segment gross profit increased in both total dollars and as a percentage of revenue to $5,705,279 (61% of retail revenue) for 2025 from $5,073,594 (59% of retail revenue) for 2024.

Retail G&A expenses remained relatively consistent at $788,812 for 2025 as compared to $766,698 for 2024.

Bulk Segment:

The bulk segment contributed $2,416,646 and $2,305,110 to our income from operations for 2024 and 2023, respectively.

The bulk segment generated $2,481,546 and $2,432,695 in income from operations for 2025 and 2024, respectively.

Bulk segment revenue was $8,411,716 and $8,342,094 for 2025 and 2024, respectively.

The slight increase in bulk revenue from 2024 to 2025 reflects the impact of OC-Cayman’s new Red Gate II contract and an amendment of its North Sound contract, both of which became effective May 1, 2024.

Gross profit for our bulk segment was $2,797,876 (32% of bulk revenue) and $2,652,778 (31% 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 costs and depreciation expense that slightly offset increased maintenance and insurance expenses.

Bulk segment G&A expenses remained relatively consistent at $381,230 for 2024 as compared to $347,668 for 2023.

S ervices Segment:

The services segment contributed $1,798,667 and $8,391,184 to our income from operations for 2024 and 2023, respectively.

Services segment revenue decreased to $12,677,837 for 2024 from $29,427,664 for 2023.

Construction revenue was $3,637,038 in 2024 as compared to $24,204,446 in 2023.

We recognized approximately $2.0 million and $20 million in construction revenue for the Liberty Utilities contract in 2024 and 2023, respectively.

This contract was substantially completed as of June 30, 2024.

Revenue generated under operations and maintenance contracts increased to $7,492,121 in 2024 from $5,021,081 in 2023.

Revenue from REC, which was acquired in October 2023, constituted $2,140,143 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 $3,268,512 (26% of services revenue) in 2024 from $9,253,019 (31% of services revenue) in 2023 due to the decreased revenue.

G&A expenses for the services segment increased to $1,469,845 for 2024 as compared to $861,835 for 2023 primarily due to the addition of REC’s G&A expenses of approximately $430,000 and incremental employee expenses for PERC of almost $101,000 due to an increase in staff.

Manufacturing Segment:

The manufacturing segment contributed $843,804 and $426,786 to our income from operations in 2024 and 2023, respectively.

Manufacturing revenue was relatively consistent at $4,359,560 and $4,721,222 for 2024 and 2023, respectively.

Manufacturing gross profit was $1,589,222 (36% of manufacturing revenue) for 2024 as compared to a gross profit of $863,948 (18% 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 $745,418 for 2024 as compared to $437,162 for 2023 due to a provision for credit losses of approximately $169,000 for 2024.

Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 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.

Our net income (loss) from discontinued operations for the nine months ended September 30, 2024 and 2023 was $10,637,926 and ($699,858), 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 $26,779,069 ($1.68 per share on a fully diluted basis), as compared to net income of $19,742,526 ($1.24 per share on a fully diluted basis) for 2023.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 relates only to our continuing operations.

Net income from continuing operations attributable to Consolidated Water Co.

stockholders for 2024 was $16,141,143 ($1.01 per share on a fully diluted basis), as compared to a net income from continuing operations of $20,442,384 ($1.28 per share on a fully diluted basis) for 2023.

Revenue for 2024 decreased to $105,559,105 from $126,960,328 in 2023, reflecting a significant decline in revenue from our services segment.

Gross profit for 2024 was $37,132,895 (35% of total revenue) as compared to $42,637,059 (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 $20,126,292 for 2024 as compared to $17,894,067 for 2023.

The increase in G&A expenses for 2024 relates to additional G&A expenses of approximately

$1,116,000 attributable to REC, which was acquired in the fourth quarter of 2023, and incremental audit, audit related and professional fees of approximately $721,000.

Other income, net, increased to $1,560,650 for 2024 from $522,256 for 2023 primarily due to $945,449 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 contributed $917,221 to our income from operations for 2024 and recorded a loss from operations of ($470,573) for 2023, respectively.

Revenue generated by our retail water operations increased to $24,392,814 in 2024 from $22,560,998 in 2023 due to a 6.9% increase in the volume of water sold.

We believe the increase in the volume of water sold in 2024 resulted in part from a 4.8% increase in the number of customer accounts in our license area from September 30, 2023 to September 30, 2024

Retail segment gross profit increased to $13,564,393 (56% of retail revenue) for 2024 from $12,205,181 (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 the overall increase in water volume sold.

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 $12,842,624 for 2024 as compared to $12,668,467 for 2023.

Bulk Segment:

The bulk segment contributed $6,836,571 and $6,896,492 to our income from operations for 2024 and 2023, respectively.

Bulk segment revenue was $25,557,220 and $25,975,483 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 remained consistent at $7,925,210 (31% of bulk revenue) and $7,964,765 (31% of bulk revenue) for 2024 and 2023, respectively.

The increase in revenue from both of these contracts offsets a decrease in revenue for CW-Bahamas resulting from lower energy prices, which decreased the pass-through energy component of CW-Bahamas rates.

Consistent with the increase in revenue, gross profit for our bulk segment increased slightly to $2,827,627 (34% of bulk revenue) for 2025 as compared to $2,776,836 (33% of bulk revenue) for 2024.

Bulk segment G&A expenses remained relatively consistent at $346,081 for 2025 as compared to $344,141 for 2024.

S ervices Segment:

The services segment contributed $7,219,793 and $16,921,397 to our income from operations for 2024 and 2023, respectively.

The services segment incurred a loss from operations of ($180,488) for 2025, as compared to generating income from operations of $3,150,818 for 2025.

Services segment revenue decreased to $10,078,268 for 2025 from $17,417,611 for 2024.

Construction revenue was $16,165,312 in 2024 as compared to $52,563,822 in 2023.

We recognized approximately $8.3 million and $44.1 million in construction revenue for the Liberty Utilities contract in 2024 and 2023, respectively.

This contract was substantially completed as of June 30, 2024.

Revenue generated under operations and maintenance contracts increased to $21,660,396 in 2024 from $12,750,902 in 2023.

The acquisition of REC effective October 2023 constituted $5,880,002 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 $11,481,116 (27% of services revenue) in 2024 from $19,776,464 (30% of services revenue) in 2023 due to the decreased revenue.

G&A expenses for the services segment increased to $4,264,323 for 2024 as compared to $2,855,067 for 2023 primarily due to the addition of REC’s G&A expenses of approximately $1,116,000.

Construction revenue declined to $2,218,230 for 2025 as compared to $9,203,662 for 2024.

Construction revenue for 2024 was significantly greater due to $4.8 million of additional revenue generated from PERC’s contract with Liberty Utilities.

Such contract was substantially completed in the second quarter of 2024.

Revenue generated under operations and maintenance contracts increased to $7,725,298 for 2025 as compared to $7,099,354 for 2024 as a result of incremental revenue generated by both PERC and REC.

Gross profit for the services segment decreased to $2,016,391 (20% of services revenue) in 2025 from $4,748,672 (27% of services revenue) in 2024 due to the substantial decline in construction revenue.

G&A expenses for the services segment increased to $2,195,338 for 2025 as compared to $1,597,854 for 2024 primarily due to incremental legal costs and other professional fees of $251,713 (which includes $139,000 in costs related to a legal settlement) and a net increase of approximately $183,000 in the provision for credit losses.

Manufacturing Segment:

The manufacturing segment contributed $1,092,912 and $761,219 to our income from operations in 2025 and 2024, respectively.

Manufacturing revenue was $13,591,154 and $12,180,519 for 2024 and 2023, respectively.

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

Manufacturing revenue increased to $5,814,059 from $5,304,747 for 2025 and 2024, respectively, due to increased production activity.

Manufacturing gross profit was $1,756,990 (30% of manufacturing revenue) for 2025 as compared to a gross profit of $1,278,921 (24% of manufacturing revenue) for 2024.

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

G&A expenses for the manufacturing segment increased to $1,930,706 for 2024 as compared to $1,289,990 for 2023 primarily due to provisions for credit losses of approximately $395,000 in 2024.

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

G&A expenses for the manufacturing segment remained relatively consistent at $664,078 for 2025 as compared to $517,702 for 2024.

Corporate G&A expenses increased to $3,729,650 for 2025 as compared to $3,337,634 for 2024 due to approximately $205,000 in incremental employee costs arising from pay raises and a retirement payment of $158,000 made to a former executive and incremental legal costs and other professional fees of $177,431.

FINANCIAL CONDITION

The significant changes in the components of our condensed consolidated balance sheet as of September 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 decreased by approximately $1.0 million primarily due to a $1.7 million decrease in CW-Bahamas’ accounts receivable and a decrease in retail segment accounts receivable of $706,000.

These decreases were slightly offset by an increase in Aerex’s accounts receivables.

Current inventory decreased by approximately $2.1 million primarily due to a decrease in Aerex’s inventory resulting from production activity.

Prepaid expenses and other current assets increased by approximately $1.6 million primarily due to an increase in prepaid insurance.

Contract assets decreased by approximately $19.6 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 $2.7 million primarily due to the scheduled depreciation of fixed assets.

Operating lease right-of-use assets increased by approximately $1.2 million due to the renewal of the corporate office lease in Cayman Islands.

Accounts payable, accrued expenses and other liabilities decreased by approximately $4.5 million primarily due to a $3.8 million decrease in subcontractor costs in the services segment.

Noncurrent operating leases increased by approximately $1.0 million due to the renewal of the corporate office lease in Cayman Islands.

The significant changes in the components of our condensed consolidated balance sheet as of March 31, 2025 as compared to December 31, 2024 (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 decreased by approximately $3.4 million primarily due to a $2.9 million decrease in CW-Bahamas’ accounts receivable as well as decreases in the services and manufacturing segments accounts receivable of $618,603 and $434,779, respectively.

These decreases were offset by an increase in the retail segment accounts receivable of $495,835.

Current inventory decreased by approximately $1.8 million primarily due to a decrease of $2.6 million in Aerex’s inventory resulting from production activity, which was partially offset by an increase in PERC’s current inventory of $658,848.

Prepaid expenses and other current assets decreased by approximately $980,000 primarily due to a decrease in prepaid insurance.

Contract assets increased by approximately $5.0 million primarily due to a $4.9 million increase in the manufacturing segment contract assets attributable to work started in the first quarter for one major client.

Property, plant and equipment, net, increased by approximately $1.1 million primarily due to the expansion of the new West Bay plant in Cayman Islands.

Contract liabilities increased by $3.3 million primarily due to one PERC construction project.

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 the balance of 2024 include capital expenditures for our existing operations of approximately $3.8 million, which includes approximately $872,000 to be incurred for our new West Bay plant.

In addition, we plan to spend approximately $3.1 million during the balance of 2024 for a project in the Bahamas.

We paid approximately $1.8 million for dividends in October 2024.

Our projected liquidity requirements for 2025 include capital expenditures for our existing operations of approximately $9.1 million, which includes approximately $800,000 to be incurred during 2025 for a project in The Bahamas and $1.2 million for the expansion of Aerex's manufacturing facility.

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

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

As of September 30, 2024, we had cash and cash equivalents of $104.9 million and working capital of $133.9 million.

As of March 31, 2025, we had cash and cash equivalents of $107.9 million and working capital of $136.2 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 $25.1 million and $26.9 million as of September 30, 2024 and December 31, 2023, respectively.

Approximately 77% and 80% of the accounts receivable balances were delinquent as of those dates, respectively.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $25.5 million and $28.4 million as of March 31, 2025 and December 31, 2024, respectively.

Approximately 78% and 81% 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.

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.

When these delays occur, we hold discussions and meetings with representatives of the WSC and The Bahamas government.

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 September 30, 2024.

CW-Bahamas held discussions with the WSC in March 2024 and with representatives of The Bahamas Government in April 2024 during which CW-Bahamas was informed that the Government intends to substantially reduce CW-Bahamas’ accounts receivable from the WSC before the end of 2024.

Based upon this payment history, we have not provided for a material allowance for credit losses for CW-Bahamas’ accounts receivable from the WSC as of March 31, 2025.

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

Moody’s has maintained these ratings through the date of its most current report issued in April 2025.

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.

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

Discussion of Cash Flows for the Nine Months Ended September 30, 2024

Our cash and cash equivalents increased to $104,869,627 as of September 30, 2024 from $42,621,898 as of December 31, 2023.

Discussion of Cash Flows for the Three Months Ended March 31, 2025

Our cash and cash equivalents increased to $107,852,232 as of March 31, 2025 from $99,350,121 as of December 31, 2024.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $11,760,251.

This net cash reflects the net income generated for the nine months ended September 30, 2024 of $27,227,793 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year;

This net cash reflects the net income generated for the three months ended March 31, 2025 of $4,956,456 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 $5,020,410, a decrease in accounts receivable of $637,162, a decrease in contract assets of $19,594,696, and a decrease in accounts payable, accrued expenses and other current liabilities of $3,908,157.

The more significant of such items and changes in working capital components included depreciation and amortization of $1,692,546, a decrease in accounts receivable of $3,075,968, an increase in contract assets of $5,047,425 and an increase in contract liabilities of $3,275,143.

Cash Flows from Investing Activities

Net cash provided by our investing activities was $29,960,751 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.

Net cash used in our investing activities was $1,568,281 primarily for additions to property, plant and equipment and construction in progress.

Cash Flows from Financing Activities

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

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

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

Seven Mile Beach and West Bay.

For the three months ended September 30, 2024 and 2023, we generated approximately 23% and 14%, respectively, of our consolidated revenue and 34% and 23%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the nine months ended September 30, 2024 and 2023, we generated approximately 23% and 18%, respectively, of our consolidated revenue and 36% and 29%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license.

For the three months ended March 31, 2025 and 2024, we generated approximately 28% and 22%, respectively, of our consolidated revenue and 46% and 37%, 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.

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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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 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.

Under the new regulatory legislation passed in October 2016, Cayman Water was required to 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.

Negotiations between Cayman Water and OfReg for the new license have recently recommenced.

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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Adoption of New Accounting Standards

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):

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Early adoption is permitted.

The adoption of ASU 2023-09 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.

We are currently evaluating the impact of this guidance.

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.

● On January 31, 2025, we paid a dividend of $0.11 to shareholders of record on January 2, 2025.

● On April 30, 2025, we paid a dividend of $0.11 to shareholders of record on April 1, 2025.

● On July 31, 2024, we paid a dividend of $0.095 to shareholders of record on July 1, 2024.

● On August 20, 2024, our Board declared a dividend of $0.11 payable on October 31, 2024 to shareholders of record on October 1, 2024.

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

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What changed 10-Q

Item 2. Management’s Discussion and Analysis