What changed in this filing

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Item 1. Financial Statements

2022-05-04 compared with 2021-11-09 · 146 added, 207 removed, 487 unchanged (42% of the section changed)

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(in thousands, except share and per share amounts)

September 30, 2021 December 31, 2020

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment 357,977 340,193

March 31, 2022 December 31, 2021

UTILITY PLANT:

Land 1,456 1,338

Depreciable property, plant and equipment 315,721 313,700

Other 697 697

Construction work-in-process 59,023 53,511

Less accumulated depreciation ( 117,088 ) ( 113,380 )

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Other noncurrent assets 34 10

Right of Use Asset - Finance Lease 50 —

Total other assets 19,778 19,221

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Accrued expenses 10,815 9,191

Deferred revenue — 4

Customer and meter deposits 1,732 1,646

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Other noncurrent liabilities 1,490 778

Right of Use Liability - Finance Lease 50 —

Total noncurrent liabilities 250,662 247,113

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Common stock, $ 0.01 par value, 60,000,000 shares authorized;

22,830,888 and 22,690,477 shares issued as of September 30, 2021 and December 31, 2020, respectively.

Treasury stock, 181,702 and 102,711 shares at September 30, 2021 and December 31, 2020, respectively.

22,832,263 and 22,832,013 shares issued as of March 31, 2022 and December 31, 2021, respectively.

Treasury stock, 182,445 and 182,445 shares at March 31, 2022 and December 31, 2021, respectively.

Paid in capital 29,414 29,803

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(in thousands, except share and per share amounts)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Water services 4,348 3,986

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Total other expense ( 131 ) ( 1,305 )

INCOME BEFORE INCOME TAXES 1,821 1,629 4,182 2,104

INCOME TAX EXPENSE ( 323 ) ( 498 ) ( 919 ) ( 741 )

NET INCOME $ 1,498 $ 1,131 $ 3,263 $ 1,363

Basic earnings per common share $ 0.07 $ 0.05 $ 0.14 $ 0.06

Diluted earnings per common share $ 0.07 $ 0.05 $ 0.14 $ 0.06

INCOME (LOSS) BEFORE INCOME TAXES 1,232 ( 262 )

INCOME TAX BENEFIT (EXPENSE) ( 343 ) 45

NET INCOME (LOSS) $ 889 $ ( 217 )

Basic earnings (loss) per common share $ 0.04 $ ( 0.01 )

Diluted earnings (loss) per common share $ 0.04 $ ( 0.01 )

Dividends declared per common share $ 0.07 $ 0.07

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Issuance of common stock — — — — — — —

Stock compensation — — — — 115 — 115

Net income (loss) — — — — — 354 354

BALANCE - March 31, 2020 22,636,420 $ 226 ( 99,039 ) $ ( 1 ) $ 34,809 $ — $ 35,034

Dividend declared $ 0.07 per share

— — — — ( 1,633 ) ( 1,633 )

Issuance of common stock 49,163 1 — — ( 3 ) — ( 2 )

Stock compensation — — — — 768 — 768

Net income (loss) — — — — — ( 122 ) ( 122 )

BALANCE - June 30, 2020 22,685,583 $ 227 ( 99,039 ) $ ( 1 ) $ 33,941 $ ( 122 ) $ 34,045

Dividend declared $ 0.07 per share

— ( 624 ) ( 1,009 ) $ ( 1,633 )

Treasury Stock — — ( 398 ) — — — —

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Stock compensation — — — — 271 — 271

Net income — — — — — 1,131 1,131

BALANCE - September 30, 2020 22,686,708 $ 227 ( 99,982 ) $ ( 1 ) $ 33,591 $ — $ 33,817

BALANCE - December 31, 2020 22,690,477 $ 227 ( 102,711 ) $ ( 1 ) $ 31,962 $ — $ 32,188

Dividend declared $ 0.07 per share

— — — — ( 1,650 ) — ( 1,650 )

Treasury Stock — — ( 398 ) — — — —

Stock option exercise 628 — — — — — —

Stock compensation — — — — 271 — 271

Net income (loss) — — — — — ( 217 ) ( 217 )

BALANCE - March 31, 2021 22,691,105 $ 227 ( 103,109 ) $ ( 1 ) $ 30,583 $ ( 217 ) $ 30,592

BALANCE - December 31, 2021 22,832,013 $ 228 ( 182,445 ) $ ( 2 ) $ 29,803 $ — $ 30,029

Dividend declared $ 0.07 per share

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Stock compensation — — — — 389 — 389

Net income (loss) — — — — — 1,982 1,982

BALANCE - June 30, 2021 22,748,143 $ 227 ( 127,708 ) $ ( 1 ) $ 30,955 $ ( 217 ) $ 30,964

Dividend declared $ 0.07 per share

( 151 ) ( 1,498 ) ( 1,649 )

Treasury Stock ( 53,994 ) ( 1 ) — ( 1 )

Stock option exercise 82,745 1 1

Stock compensation 112 112

Net income (loss) 1,498 1,498

BALANCE - September 30, 2021 22,830,888 $ 228 ( 181,702 ) $ ( 2 ) $ 30,916 $ ( 217 ) $ 30,925

Net income — — — — — 889 889

BALANCE - March 31, 2022 22,832,263 $ 228 ( 182,445 ) $ ( 2 ) $ 29,414 $ — $ 29,640

See accompanying notes to the condensed consolidated financial statements

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(Unaudited, in thousands)

Nine Months Ended September 30,

Three Months Ended March 31,

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 3,263 $ 1,363

Net income (loss) $ 889 $ ( 217 )

Adjustments to reconcile net income to net cash provided by operating activities:

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Cash paid for acquisitions, net of cash acquired ( 85 ) —

Other cash flows from investing activities — ( 9 )

Net cash used in investing activities ( 6,254 ) ( 3,269 )

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Principal payments under capital lease ( 28 ) ( 31 )

Refunds of advances for construction ( 968 ) ( 959 )

Loan repayments ( 1 ) ( 24 )

Proceeds from sale of stock — 11,739

Debt issuance costs paid — ( 53 )

Payments of offering costs for sale of stock — ( 221 )

Net cash (used) provided by financing activities ( 619 ) ( 694 )

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Supplemental disclosure of cash flow information:

September 30, 2021 September 30, 2020

March 31, 2022 March 31, 2021

Cash and cash equivalents $ 11,135 $ 18,209

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The condensed consolidated financial statements of Global Water Resources, Inc.

(the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of September 30, 2021 and for the three and nine months ended September 30, 2021 and 2020 are unaudited.

(the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of March 31, 2022 and for the three months ended March 31, 2022 and 2021 are unaudited.

The December 31, 2021 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S.

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In our opinion, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim period.

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the full year, due to the seasonality of our business.

The results of operations for the three months ended March 31, 2022 are not necessarily indicative of the results to be expected for the full year, due to the seasonality of our business.

The Company prepares its financial statements in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC").

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Actual results could differ from those estimates.

The Company qualifies as an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), under the rules and regulations of the SEC.

An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies.

The Company elected to take advantage of these provisions for up to five years or such earlier time that the Company is no longer an emerging growth company.

The Company has elected to take advantage of some of the reduced disclosure obligations regarding financial statements.

Also, as an emerging growth company the Company can elect to delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

The Company has chosen to take advantage of this extended accounting transition provision.

Corporate Transactions

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The City of Buckeye is obligated to pay the Company a growth premium equal to $ 3,000 for each new water meter installed within Valencia’s prior service areas in the City of Buckeye, for a 20 -year period ending December 31, 2034, subject to a maximum payout of $ 45.0 million over the term of the agreement.

The Company received growth premiums of $ 0.8 million and $ 0.1 million for the three months ended September 30, 2021 and 2020, respectively, and $ 0.9 million and $ 0.2 million for the nine months ended September 30, 2021 and 2020, respectively.

The increase in growth premiums was primarily driven by the receipt of a lump sum payment of $ 0.4 million from the City of Buckeye during the three months ended September 30, 2021, due to an internal audit of premiums that resulted in findings of past growth premiums that had not been remitted to the Company.

The increase was also due to increased meter connections in the area over the prior year period.

Private Letter Ruling

On June 2, 2016, the Company received a Private Letter Ruling from the Internal Revenue Service ("IRS") that, for purposes of deferring the approximately $ 19.4 million gain realized from the condemnation of the operations and assets of Valencia, determined that the assets converted upon the condemnation of such assets could be replaced through certain reclamation facility improvements contemplated by the Company under Internal Revenue Code §1033 as property similar or related in service or use.

As of December 31, 2020, the Company fully deferred this gain pursuant to Internal Revenue Code §1033.

Acquisition of Red Rock Utilities

On October 16, 2018, the Company completed the acquisition of Red Rock Utilities ("Red Rock"), an operator of a water and a wastewater utility with service areas in the Pima and Pinal counties of Arizona, for a purchase price of $ 5.9 million.

The acquisition added over 1,650 connections and approximately 9 square miles of service area.

The Company is obligated to pay to the seller a growth premium equal to $ 750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date.

The three specified growth premium areas are located in Pima County, Arizona where Red Rock has not yet begun operating, and where Red Rock is authorized to provide water utility services only.

As of September 30, 2021, no meters have been installed and no accounts have been established in any of the three growth premium areas.

The Company received growth premium of $ 1.1 million and less than $ 0.1 million for the three months ended March 31, 2022 and 2021.

The increase was due to increased meter connections in the area over the prior year period.

Arizona Corporation Commission (the “ACC”) Tax Docket

The Company had regulatory assets of $ 2.3 million and $ 2.0 million at September 30, 2021 and December 31, 2020, respectively, and regulatory liabilities of $ 0.7 million at both September 30, 2021 and December 31, 2020, related to the Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017.

The Company had a regulatory asset of $ 2.8 million and $ 2.3 million at March 31, 2022 and December 31, 2021, respectively, and regulatory liabilities of $ 0.8 million at March 31, 2022 and December 31, 2021, respectively, related to the Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017.

Under ASC 740, Income Taxes , the tax effects of changes in tax laws must be recognized in the period in which the law is enacted.

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74364 enacted in February 2014.

In 2020, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities was approximately $ 1.0 million.

In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities will be approximately $ 415,000 , $ 669,000 , $ 16,000 , and $ 5,000 , respectively.

The ACC also approved a carrying cost of 4.25 % on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the phased-in rates refunded in the years leading up to 2021 (i.e., 2018 through 2020).

In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities was approximately $ 415,000 ,

$ 669,000 , $ 16,000 , and $ 5,000 , respectively.

The ACC also approved a carrying cost of 4.25 % on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the years leading up to 2021 (i.e., 2018 through 2020).

Rate Decision No.

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The Company's utilities have adopted the hybrid sharing method for income tax on CIAC and AIAC.

Effective January 1, 2021, CIAC and AIAC for regulated water and sewage disposal facility companies were excluded from income under Internal Revenue Code Section 118.

Due to the 2021 IRC Section 118 amendment, the Company refunded $ 1.4 million in developer taxes paid for contributions made after December 31, 2020.

For more details regarding the ruling, refer to "— Corporate Transactions — ACC Tax Docket."

ACC Rate Case

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Certain of our utilities, including Santa Cruz and Palo Verde, have also requested that the rate increases be phased in over three years, beginning January 1, 2022.

A final decision is not expected until the first quarter of 2022;

therefore, any phase-in will likely not begin as requested on January 1, 2022 and may be shorter or longer than three years, if a revenue increase is approved.

A final decision is not expected until the second quarter of 2022;

therefore, any phase-in did not begin as requested on January 1, 2022 and may be shorter or longer than three years, if a revenue increase is approved.

We also requested the consolidation of water and/or wastewater rates for our Red Rock, Santa Cruz, Palo Verde, Picacho Water, and Picacho Utilities located in Pinal County.

These utilities make up approximately 97 % of the Company's active service connections;

Of our utilities filing a rate case, these utilities make up approximately 96 % of the Company's active service connections;

provide or will provide water, wastewater, and recycled water services;

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There can also be no assurance as to the timing of when an approved rate increase (if any) would go into effect.

2020 Common Stock Offering

On January 21, 2020, the Company completed a public offering of 870,000 shares of common stock at a public offering price per share of $ 12.50 , for gross proceeds of $ 10.9 million.

On January 30, 2020, an additional 130,000 shares of common stock were issued at the public offering price of $ 12.50 per share, for gross proceeds of $ 1.6 million, resulting in total proceeds from the offering of approximately $ 12.5 million.

The issuance of the additional shares was completed pursuant to the exercise in full of the underwriter's over-allotment option.

Total net proceeds of approximately $ 11.5 million were received after deducting underwriting discounts and commissions and offering expenses paid by us, which collectively totaled approximately $ 1.0 million.

Revolving Credit Line

On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation, for a two -year revolving line of credit up to $ 10.0 million with an initial maturity date of April 30, 2022.

This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, bears an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00 % and has no unused line fee.

This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in April 2020.

As of March 31, 2022, we had no outstanding borrowings under this credit line.

On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the loan agreement pursuant to which, among other things, the maturity date for the Company’s revolving line of credit was extended to April 30, 2024.

Recent Events

Acquisition of Rincon Water Company, Inc.

On January 20, 2022, the Company acquired the assets of Rincon Water Company, Inc., a water utility in Pima County, Arizona.

The acquisition added an additional 73 connections and approximately 8.6 square miles of service area at the time of acquisition.

Acquisition of Twin Hawks Utility, Inc.

On January 13, 2022, Santa Cruz acquired the assets of Twin Hawks Utility, Inc., a water utility in Pinal County, Arizona.

The acquisition added an additional 18 connections and approximately 0.5 square miles of service area at the time of acquisition to the assets of Santa Cruz.

Significant Accounting Policies

Basic and Diluted Earnings per Common Share

Diluted EPS is based upon the weighted average number of common shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock awards granted.

As of September 30, 2021, the Company had 537,731 options outstanding to acquire an equivalent number of shares of GWRI common stock.

The 320,321 options outstanding from the 2017 option grant equated to 171,669 and 167,320 common share equivalents for the three and nine months ended September 30, 2021, respectively, which were included within the calculation of diluted earnings per share for the three and nine months ended September 30, 2021.

The remaining 217,410 options outstanding from the 2019 option grant equated to 70,674 and 61,755 common share equivalents for the three and nine months ended September 30, 2021, respectively, which were included within the calculation of diluted earnings per share for the three and nine months ended September 30, 2021.

As of September 30, 2021, there were 74,164 and 143,800 restricted stock awards outstanding from the 2020 grant and 2021 grant, respectively.

The 74,164 restricted stock awards outstanding from the 2020 grant equated to 42,362 and 56,777 common share equivalents for the three and nine months ended September 30, 2021, respectively, which were included within the calculation of diluted earnings per share for the three and nine months ended September 30, 2021.

The 143,800 restricted stock awards outstanding from the 2021 grant equated to 20,472 for the three months ended September 30, 2021, which were included within the calculation of diluted earnings per share for the three months ended September 30, 2021.

The 143,800 restricted stock awards outstanding from the 2021 grant were not included within the dilutive earnings per share calculation for the nine months ended September 30, 2021, as to do so would be antidilutive.

As of September 30, 2020, the Company had 631,375 options outstanding to acquire an equivalent number of shares of GWRI common stock.

The 385,771 options outstanding from the 2017 option grant equated to 32,339 and 34,696 common share equivalents for the three and nine months ended September 30, 2020, respectively, which were included within the calculation of diluted earnings per share for the three and nine months ended September 30, 2020.

The remaining 245,604 options outstanding from the 2019 option grant were not included within the dilutive earnings per share calculation for the three and nine months ended September 30, 2020, as to do so would be antidilutive.

As of September 30, 2020, the 128,327 restricted stock awards outstanding from the 2020 grant equated to 14,206 and zero common share equivalents for the three and nine months ended September 30, 2020, respectively.

The 14,206 common share equivalents were included within the calculation of diluted earnings per share for the three months ended September 30, 2020.

Diluted earnings per share is based upon the weighted average number of common shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock awards granted.

As of March 31, 2022, the Company had 563,213 options outstanding to acquire an equivalent number of shares of GWRI common stock.

The 320,321 options outstanding from the 2017 option grant equated to 128,375 common share equivalents, which were included within the calculation of diluted earnings per share for the three months ended March 31, 2022.

The 242,892 options outstanding from the 2019 option grant equated to 51,431 common share equivalents, which were included within the calculation of diluted earnings per share for the three months ended March 31, 2022.

As of March 31, 2022, there were 74,164 and 147,250 restricted stock awards outstanding from the 2020 grant and 2021 grant.

The 74,164 restricted stock awards outstanding from the 2020 grant equated to 57,566 common share equivalents for the three months ended March 31, 2022, respectively, which were included within the calculation of diluted earnings per share for the three months ended March 31, 2022.

The 147,250 restricted stock awards outstanding from the 2021 grant equated to 14,646 common share equivalents for the three months ended March 31, 2022, which were included within the calculation of diluted earnings per share for the three months ended March 31, 2022.

As of March 31, 2021, the Company had 623,351 options outstanding to acquire an equivalent number of shares of GWRI common stock.

For the three months ended March 31, 2021, the 623,351 options outstanding were not included within the dilutive earnings per share calculation as the Company incurred losses in this period and to do so would be antidilutive.

As of March 31, 2021, the 128,327 restricted stock awards outstanding from the 2020 grant were not included within the calculation of diluted earnings per share as the Company incurred losses in this period and to do so would be antidilutive.

Refer to Note 13 – “Deferred Compensation Awards” for additional information regarding the option and restricted stock grants.

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Recent Accounting Pronouncements

Recently Adopted Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”, or "ASC 842").

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In August 2018, the FASB issued ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract (Topic 350) ("ASU 2018-15").

ASU 2018-15 amends ASC 350 to include in its scope implementation costs of a Cloud Computing Arrangement ("CCA") that is a service contract and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered a service contract.

a service contract.

The Company implemented Topic 350 on January 1, 2021.

The implementation did not result in material changes to our consolidated financial statements.

Future Adoption of Accounting Standards

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350):

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ASU 2019-10 extended the effective date for this ASU.

Due to qualifying as an emerging growth company, the Company is required to adopt the ASU on January 1, 2023.

The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.

The Company implemented ASU 2017-04 on January 1, 2021.

The implementation did not result in material changes to our consolidated financial statements.

REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES

Our regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within Accounting Standards Codification 980, Regulated Operations ("ASC 980").

Our regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within ASC 980, Regulated Operations .

In accordance with ASC 980, rates charged to utility customers are intended to recover the costs of the provision of service plus a reasonable return in the same period.

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2021 335 3,645

Whereas this phase-in of additional revenues was determined using a 2011 test year, to the extent that the number of active service connections increases from 2011 levels, the additional revenues may be greater than the amounts set forth above.

On the other hand, if active connections decrease or we experience declining usage per customer, we may not realize all of the anticipated revenues.

• Full reversal of the imputation of CIAC balances associated with funds previously received under infrastructure coordination and financing agreements ("ICFAs"), as required in the Company’s last rate case.

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76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirements under Rate Decision No.

to Note 1 — "Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC Tax Docket" for details regarding Rate Decision No.

On August 28, 2020, 12 of our 17 regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities.

Refer to Note 1 — "Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC Tax Docket" for details regarding Rate Decision No.

On August 28, 2020, 12 of our 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water rates, as well as the consolidation of water and/or wastewater rates for certain of the utilities using the twelve

months ending December 31, 2019 as the test year for the rate case.

Refer to Note 1 — "Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions— ACC Rate Case" for additional information.

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The Company will record 30 % of the funds received, up until the HUF liability is fully funded, as deferred revenue, which is to be recognized as revenue once the obligations specified within the ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred.

As of September 30, 2021 and December 31, 2020, ICFA deferred revenue recorded on the consolidated balance sheet totaled $ 18.9 million and $ 17.8 million, respectively, which represents deferred revenue recorded for ICFA funds received on contracts that had become due prior to Rate Decision No.

Refer to Note 3 — "Revenue Recognition" of the notes to the unaudited condensed consolidated financial statements for additional discussion regarding ICFA revenue.

As of March 31, 2022 and December 31, 2021, ICFA deferred revenue recorded on the consolidated balance sheet totaled $ 20.1 million and $ 19.0 million, respectively, which represents deferred revenue recorded for ICFA funds received on contracts.

Intangible assets / Regulatory liability – Pursuant to Rate Decision No.

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The recognition of amortization expense will be partially offset by a corresponding reduction of the regulatory liability.

As of September 30, 2021, regulatory liability recorded on the consolidated balance sheet totaled $ 7.6 million, of which $ 6.1 million relates to the offset of intangible assets related to ICFA contracts obtained in connection with our Santa Cruz, Palo Verde, and Sonoran acquisitions, and the remaining $ 1.5 million relates to the TCJA rate reduction mandated by the ACC pursuant to Rate Decision No.

As of March 31, 2022, regulatory liability recorded on the consolidated balance sheet totaled $ 7.4 million, of which $ 5.9 million relates to the offset of intangible assets related to ICFA contracts obtained in connection with our Santa Cruz, Palo Verde, and Sonoran acquisitions, and the remaining $ 1.5 million relates to the TCJA rate reduction mandated by the ACC pursuant to Rate Decision No.

REVENUE RECOGNITION

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The Company applies judgment, based principally on historical payment experience, in estimating its customers' ability to pay.

The Company has elected to apply the sales tax practical expedient, whereby qualifying excise and other taxes collected from customers and remitted to governmental authorities are not included in reported revenues.

The Company has elected to present sales taxes on a net basis and as such, sales taxes are included in Accounts Payable and Accrued Liabilities until remitted to the taxing authorities.

Unregulated Revenue

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Disaggregated Revenues

For the three months ended September 30, 2021 and 2020, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands):

Three Months Ended September 30,

For the three months ended March 31, 2022 and 2021, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands):

Three Months Ended March 31,

REGULATED REVENUE

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UNREGULATED REVENUE

ICFA revenues 692 —

Rental revenues — 29

Other Miscellaneous revenues — 1

TOTAL UNREGULATED REVENUE — 29

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Our contract assets and liabilities consist of the following (in thousands):

September 30, 2021 December 31, 2020

March 31, 2022 December 31, 2021

CONTRACT ASSETS

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Total contract assets $ 2,084 $ 2,126

$ 2,063 $ 2,352

CONTRACT LIABILITIES

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Refund liability - regulated 769 762

Deferred revenue - other — 4

Total contract liabilities $ 20,877 $ 19,797

(1) The decrease in accounts receivable was primarily due to the reimplementation of disconnection notices and disconnections during the nine months ended September 30, 2021, which had previously been temporarily suspended due to the COVID-19 pandemic.

(2) The increase in refund liability is due to the phase-in approach approved in Rate Decision No.

Refer to Note 1—"Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — ACC Tax Docket" of the notes to the unaudited condensed consolidated financial statements for further details.

Remaining Performance Obligations

Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods.

Contracted revenue expected to be recognized in future periods was approximately $ 18.9 million and $ 17.8 million at September 30, 2021 and December 31, 2020, respectively.

Contracted revenue expected to be recognized in future periods was approximately $ 20.1 million and $ 19.0 million at March 31, 2022 and December 31, 2021, respectively.

Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred.

Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA.

Deferred revenue - other is recognized as revenue once the obligations specified with the rental contract are met.

The Company expects to recognize the full amount in the next three months.

On January 1, 2021, the Company adopted ASC 842 using the modified retrospective method.

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The Company notes that this practical expedient applies to all expired or existing contracts as of the effective date of the Company's adoption.

The Company elected this practical expedient package for all lessee and lessor arrangements.

In addition, the Company’s leases do not provide an implicit borrowing rate (“IBR”), and as such, we applied judgment when estimating our IBR.

We assessed and reviewed factors related to our credit risk, recent debt issuances, and publicly available data for instruments with similar characteristics.

The Company elected to use the portfolio approach and applied a single discount rate of approximately 5 % to the portfolio.

This election was based on the fact that all leases are of similar terms and our credit rating and interest rate environment are stable.

ASC 842 requires the Company to record a right-of-use asset (“ROU”) and a corresponding lease obligation for all operating leases with a term greater than twelve months.

The current portion of the ROU asset is included in the “ Prepaid expenses and other current assets ” line item on the Company’s consolidated balance sheet.

The remaining noncurrent balance of the ROU asset is included in the line item “Other noncurrent assets” on the Company’s consolidated balance sheet.

In addition, the corresponding lease liabilities current and noncurrent portion are included on the Company’s consolidated balance sheet line items “Other current liabilities” and “ Other noncurrent liabilities ,” respectively.

The adoption of ASC 842 resulted in the initial recognition of ROU assets of $ 189,000 and related lease liabilities of $ 210,000 .

As of September 30, 2021, ROU assets and liabilities totaled $ 81 ,000 and $ 102 ,000, respectively, of which relate to office rent.

The Company elected this practical expedient package for all lessee arrangements.

On January 10, 2022, the Company entered into a five-year finance lease for office equipment which expires on January 31, 2027.

There is no purchase option in the lease agreement but the Company controls and obtains substantially all of the benefit from the identified asset.

The lease does not provide an implicit borrowing rate (“IBR”), and as such, we used an estimate IBR of 2.39 % which was based on The Treasury High Quality Market Corporate Bond Yield Curve.

The right-of-use ("ROU") asset recorded represents the Company’s right to use an underlying asset for the lease term and lease liability represents the Company’s obligation to make lease payments arising from the lease.

Lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

As of March 31, 2022, ROU assets and liabilities totaled $ 50,409 and $ 50,334 , respectively.

As of March 31, 2022, the Company has not entered into any operating leases.

Refer to Note 15 — "Commitments and Contingencies" for additional information.

PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment at September 30, 2021 and December 31, 2020 consist of the following (in thousands):

September 30, 2021 December 31, 2020 Average Depreciation Life (in years)

Mains/lines/sewers $ 163,820 $ 145,910 49

Plant 79,869 96,654 31

Equipment 45,397 37,347 14

Meters 14,475 14,548 13

Furniture, fixture and leasehold improvements 765 1,650 27

Computer and office equipment 975 1,108 6

Software 241 241 3

Land and land rights 1,260 1,159

Other 752 699

Construction work-in-process 50,423 40,877

Property, plant, and equipment at March 31, 2022 and December 31, 2021 consist of the following (in thousands):

March 31, 2022 December 31, 2021

Plant, equipment, and water and sewer lines $ 313,053 $ 311,041

Computers, office equipment and software 2,668 2,659

Total property, plant and equipment 315,721 313,700

Less accumulated depreciation ( 108,235 ) ( 101,302 )

Net property, plant and equipment $ 249,742 $ 238,891

Depreciation of property, plant, and equipment is computed based on the estimated useful lives as follows:

Plant, equipment, and water and sewer lines 5 to 50 years

Computers, office equipment and software 3 to 15 years

ACCOUNTS RECEIVABLE

Accounts receivable as of September 30, 2021 and December 31, 2020 consist of the following (in thousands):

September 30, 2021 December 31, 2020

Accounts receivable as of March 31, 2022 and December 31, 2021 consist of the following (in thousands):

March 31, 2022 December 31, 2021

Billed receivables $ 2,084 $ 2,126

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GOODWILL AND INTANGIBLE ASSETS

As of September 30, 2021, the goodwill balance of $ 4.6 million related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, and Lyn Lee acquisitions.

As of March 31, 2022, the goodwill balance of $ 5.8 million related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon and Twin Hawks.

There were no indicators of impairment identified as a result of the Company's review of events and circumstances related to its goodwill subsequent to the acquisitions.

Based on our annual impairment testing performed on November 1st, no impairment was recorded.

Based on our annual impairment testing completed on February 14, 2022, no impairment was recorded.

Intangible Assets

As of September 30, 2021 and December 31, 2020, intangible assets consisted of the following (in thousands):

September 30, 2021 December 31, 2020

As of March 31, 2022 and December 31, 2021, intangible assets consisted of the following (in thousands):

March 31, 2022 December 31, 2021

Amount Accumulated

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The CP Water CC&N intangible asset was acquired through the acquisition of CP Water Company in 2006.

CC&N permits are expected to be renewable indefinitely.

This CC&N permit has no outstanding conditions that would require renewal.

Franchise contract rights and organizational costs relate to our 2018 acquisition of Red Rock.

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Due to the uncertainty of the timing of when cash will be received under ICFA agreements and contract rights, we cannot reliably estimate when the remaining intangible assets' amortization will be recorded.

Amortization in the amounts of $ 0.1 million and $ 0.6 million were recorded for these balances for the three and nine months ended September 30, 2021, respectively.

For the three and nine months ended September 30, 2020, amortization in the amount of $ 0.6 million and $ 0.8 million were recorded, respectively.

There was no amortization recorded for these balances for both the three months ended March 31, 2022 and 2021.

TRANSACTIONS WITH RELATED PARTIES

The Company provides medical benefits to our employees through our participation in a pooled plan sponsored by an affiliate of a shareholder and director of the Company.

Medical claims paid to the plan were approximately $ 0.2 million for both the three months ended September 30, 2021 and 2020.

Medical claims paid to the plan were approximately $ 0.5 million for both the nine months ended September 30, 2021 and 2020.

The Company provides medical benefits to our employees through our participation in a pooled plan sponsored by an affiliate of a significant shareholder and director of the Company.

Medical claims paid to the plan were approximately $ 0.1 million and $ 0.2 million for the three months ended March 31, 2022 and 2021, respectively.

ACCRUED EXPENSES

Accrued expenses at September 30, 2021 and December 31, 2020 consist of the following (in thousands):

September 30, 2021 December 31, 2020

Accrued expenses at March 31, 2022 and December 31, 2021 consist of the following (in thousands):

March 31, 2022 December 31, 2021

Deferred compensation $ 1,130 $ 1,211

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Fair Value of Financial Instruments

FASB ASC 820 establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company's assumptions (unobservable inputs).

FASB ASC 820, Fair Value Measurement , establishes a fair value hierarchy that distinguishes between assumptions based on market data (observable inputs) and the Company's assumptions (unobservable inputs).

The hierarchy consists of three levels, as follows:

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• Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that the Company believes market participants would use.

Financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 were as follows (in thousands):

September 30, 2021 December 31, 2020

Financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2022 and December 31, 2021 were as follows (in thousands):

March 31, 2022 December 31, 2021

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total

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year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate.

The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of September 30, 2021 and December 31, 2020 are as follows (in thousands):

September 30, 2021 December 31, 2020

The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of March 31, 2022 and December 31, 2021 are as follows (in thousands):

March 31, 2022 December 31, 2021

Short-term Long-term Short-term Long-term

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3,833 80,500 3,833 80,500

4.65 % Harquahala Loan, maturing January 2021 (1)

3,833 109,250 3,833 109,250

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Total debt $ 3,981 $ 108,911 $ 3,975 $ 108,933

(1) Represents a loan that was payable to Harquahala Valley Community Benefits Foundation, which was assumed in connection with the Company’s acquisition of Eagletail Water Company in May 2017.

The loan was paid off in January 2021.

2016 Senior Secured Notes

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The senior secured notes are collateralized by a security interest in the Company’s equity interest in its subsidiaries, including all payments representing profits and qualifying distributions.

Debt issuance costs as of September 30, 2021 and December 31, 2020 were $ 0.5 million and $ 0.6 million, respectively.

Debt issuance costs totaled $ 0.5 million as of March 31, 2022 and December 31, 2021, respectively.

The senior secured notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

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The senior secured notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25 .

However, for the quarter ended June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20 .

However, for the quarter ended June 30, 2021 through the quarter ending March 31, 2024, the debt service ratio drops to 1.20 .

The debt service ratio increases to 1.25 for any fiscal quarter during the period from and after June 30, 2024.

As of September 30, 2021, the Company was in compliance with its financial debt covenants.

As of March 31, 2022, the Company was in compliance with its financial debt covenants.

Revolving Credit Line

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On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern Trust Loan Agreement pursuant to which, among other things, the maturity date for the Company's revolving credit line was extended from April 30, 2022 to April 30, 2024.

As of September 30, 2021, the Company had no outstanding borrowings under this credit line.

There were $ 19 ,000 and $ 46,000 unamortized debt issuance costs as of September 30, 2021 and December 31, 2020, respectively.

As of March 31, 2022, the Company had no outstanding borrowings under this credit line.

There were $ 15 ,000 and $ 17 ,000 unamortized debt issuance costs as of March 31, 2022 and December 31, 2021, respectively.

The Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25 .

However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20 .

As of September 30, 2021, the Company was in compliance with its financial debt covenants.

At September 30, 2021, the remaining aggregate annual maturities of debt and minimum lease payments under capital lease obligations for the years ended December 31 are as follows (in thousands):

Debt Capital Lease

Remaining three months of 2021 $ 1,917 $ 43

2022 3,833 142

However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the debt service ratio drops to 1.20 .

As of March 31, 2022, the Company was in compliance with its financial debt covenants.

At March 31, 2022, the remaining aggregate annual maturities of debt and minimum lease payments under capital lease obligations for the years ended December 31 are as follows (in thousands):

Debt Capital Lease Obligations

Remaining nine months of 2022 $ 3,833 $ 100

2023 3,833 106

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Total $ 113,083 $ 284

During the three months ended September 30, 2021, the Company recorded tax expense of $ 0.3 million on pre-tax income of $ 1.8 million compared to a tax expense of $ 0.5 million on pre-tax income of $ 1.6 million for the three months ended September 30, 2020.

During the nine months ended September 30, 2021, the Company recorded a tax expense of $ 0.9 million on pre-tax income of $ 4.2 million, compared to a tax expense of $ 0.7 million on pre-tax income of $ 2.1 million.

During the three months ended March 31, 2022, the Company recorded tax expense of $ 0.3 million on pre-tax income of $ 1.2 million compared to a tax benefit of less than $ 0.1 million on pre-tax loss of $ 0.3 million for the three months ended March 31, 2021.

The income tax provision was computed based on the Company’s estimated effective tax rate and forecasted income expected for the full year, including the impact of any unusual, infrequent, or non-recurring items.

The Company's effective tax rate decreased during the three and nine months ended September 30, 2021 due to the exercise and vesting of stock-based compensation in 2021, resulting in windfall tax benefits.

The Company's effective tax rate decreased during the three months ended March 31, 2022 due to the exercise and vesting of stock-based compensation in 2021, resulting in windfall tax benefits.

DEFERRED COMPENSATION AWARDS

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2017 stock option grant

Stock-based compensation expense of $ 29 ,000 and $ 67 ,000 was recorded for the three months ended September 30, 2021 and 2020, respectively, and $ 160 ,000 and $ 200 ,000 was recorded for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, 30,980 options have been exercised and 113,699 options have been forfeited with 320,321 outstanding.

Stock-based compensation expense of $ 0 and $ 65 ,000 was recorded for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, there are 320,321 options outstanding and no options were exercised or forfeited during the three months ended March 31, 2022.

2019 stock option grant

Stock-based compensation expense of $ 23 ,000 and $ 49 ,000 was recorded for the three months ended September 30, 2021 and 2020, respectively, and $ 118 ,000 and $ 146 ,000 was recorded for the nine months ended September 30, 2021 and 2020, respectively.

As of September 30, 2021, 10,619 options have been exercised and 21,971 options have been forfeited with 217,410 options outstanding.

Stock-based compensation expense of $ 45 ,000 and $ 47 ,000 was recorded for the three months ended March 31, 2022 and 2021, respectively.

As of March 31, 2022, 250 options have been exercised and no options have been forfeited with 242,892 options outstanding during the three months ended March 31, 2022.

Phantom stock/Restricted stock units compensation

The following table details total awards granted and the number of units outstanding as of September 30, 2021 along with the amounts paid to holders of the phantom stock units ("PSUs") and/or restricted stock units ("RSUs") for the three and nine months ended September 30, 2021 and 2020 (in thousands, except unit amounts):

Amounts Paid For the Three Months Ended September 30, Amounts Paid For the Nine Months Ended September 30,

The following table details total awards granted and the number of units outstanding as of March 31, 2022 along with the amounts paid to holders of the phantom stock units ("PSUs") and/or restricted stock units ("RSUs") for the three months ended March 31, 2022 and 2021 (in thousands, except unit amounts):

Amounts Paid For the Three Months Ended March 31,

Grant Date Units Granted Units Outstanding 2022 2021

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Q1 2020 22,481 7,297 31 28

Q1 2020 22,481 11,241 31 19 91 38

27,403 17,849 38 —

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Stock appreciation rights compensation

The following table details the recipients of the stock appreciation rights (“SARs”) awards, the grant date, units granted, exercise price, outstanding units as of September 30, 2021 and amounts paid during the three and nine months ended September 30, 2021 and 2020 (in thousands, except unit and per unit amounts):

Amounts Paid For the Three Months Ended September 30, Amounts Paid For the Nine Months Ended September 30,

The following table details the recipients of the stock appreciation rights (“SARs”) awards, the grant date, units granted, exercise price, outstanding units as of March 31, 2022 and amounts paid during the three months ended March 31, 2022 and 2021 (in thousands, except unit and per unit amounts):

Amounts Paid For the Three Months Ended March 31,

Recipients Grant Date Units Granted Exercise Price Units Outstanding 2022 2021

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(6) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of March 12, 2018.

For the three months ended September 30, 2021 and 2020, the Company recorded approximately $ 0.4 million and $ 0.2 million of compensation expense related to the PSUs/RSUs and SARs, respectively.

For the nine months ended September 30, 2021 and 2020, the Company recorded approximately $ 1.1 million of compensation expense and $ 0.3 million of negative compensation expense related to the PSUs/RSUs and SARs, respectively.

Based on GWRI’s closing share price on September 30, 2021 (the last trading date of the quarter), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands):

Remaining three months of 2021 $ 126 $ 6

For the three months ended March 31, 2022 and 2021, the Company recorded approximately $ 0.1 million and $ 0.3 million of compensation expense related to the PSUs/RSUs and SARs, respectively.

Based on GWRI’s closing share price on March 31, 2022 (the last trading date of the quarter), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands):

Remaining nine months of 2022 $ 291 $ —

Total $ 681 $ —

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The Company assumes that forfeitures will be minimal and recognizes forfeitures as they occur, which results in a reduction in compensation expense.

During the three and nine months ended September 30, 2021, 164,950 RSAs were issued.

For the three and nine months ended September 30, 2021, the Company recorded approximately $ 0.3 million and $ 0.8 million of compensation expense related to the RSAs, respectively.

For the three and nine months ended September 30, 2020, the Company recorded approximately $ 0.2 million and $ 0.8 million of compensation expense related to the grant and partial vesting of RSAs.

The following table summarizes the RSA transactions as of the three months ended September 30, 2021:

During the three months ended March 31, 2022, no RSA was issued.

For the three months ended March 31, 2022 and 2021, the Company recorded approximately $ 0.3 million and $ 0.2 million of compensation expense related to the RSAs, respectively.

The following table summarizes the RSA transactions as of the three months ended March 31, 2022:

Number of RSAs Weighted Average Fair Value

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Forfeited ( 2,125 ) 16.59

Nonvested RSAs at end of period 217,963 $ 14.75

Nonvested stock units at end of period 223,539 $ 14.86

SUPPLEMENTAL CASH FLOW INFORMATION

The following is supplemental cash flow information for the nine months ended September 30, 2021 and 2020 (in thousands):

For the Nine Months Ended September 30,

The following is supplemental cash flow information for the three months ended March 31, 2022 and 2021 (in thousands):

For the Three Months Ended March 31,

Supplemental cash flow information:

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As such, the Company's monthly rent expense increased to approximately $ 16 ,000.

Rent expense arising from the operating leases totaled approximately $ 51 ,000 and $ 44 ,000 for the three months ended September 30, 2021 and 2020, respectively, and $ 144 ,000 and $ 133 ,000 for the nine months ended September 30, 2021 and 2020, respectively.

Rent expense arising from the operating leases totaled approximately $ 55 ,000 and $ 44 ,000 for the three months ended March 31, 2022 and 2021, respectively.

We entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022.

The new monthly rent expense will increase to $ 23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and $ 41,572 for each calendar month commencing on May 1, 2025 through April 30, 2027.

On March 1, 2022 we amended the terms of the lease to incorporate construction of tenant improvements.

Should we incur additional costs in excess of the landlord improvement allowance, we will have the option of paying the expenses at time of possession or amortized over the lease term as additional rent at three percent cost of funds.

Contingencies

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SUBSEQUENT EVENTS

Acquisition of Las Quintas Serenas Water Company

On November 3, 2021, the Company completed the acquisition of Las Quintas Serenas Water Company ("Las Quintas"), an operator of a water utility with service area in the Pima county of Arizona.

The acquisition added over 1,100 connections and approximately 2.5 square miles of service area.

The Company has evaluated subsequent events through May 4, 2022, which is the date the financial statements was available to be issued and also the filing date.

There are no other subsequent events that require adjustment of, or disclosure in, the financial statements for the three months ended March 31, 2022 except for the following:

Definitive Agreement to Acquire Farmers Water Company

On April 14, 2022 the Company signed a definitive agreement to acquire Farmers Water Company, an operator of a water utility with service area in Pima County, Arizona, subject to customary closing conditions and ACC approval.

The acquisition, if completed, would add approximately 3,300 active water service connections and approximately 21.5 square miles of service area.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements