Global Water Resources, Inc. 10-Q

Item 1. Financial Statements GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) (Unaudited) June 30, 2022 December 31, 2021 ASSETS PROPERTY, PLANT AND EQUIPMENT: Land $ 1,456 $ 1,338 Depreciable property, plant and equipment 322,086 313,700 Construction work-in-progress 67,108 53,511 Other 697 697 Less accumulated depreciation ( 119,619 ) ( 113,380 ) Net property, plant and equipment 271,728 255,866 CURRENT ASSETS: Cash and cash equivalents 4,791 12,637 Accounts receivable — net 2,337 1,994 Customer payments in-transit 368 201 Unbilled revenue 2,940 2,510 Prepaid expenses and other current assets 1,486 1,645 Total current assets 11,922 18,987 OTHER ASSETS: Goodwill 5,082 5,730 Intangible assets — net 10,259 10,339 Regulatory asset 3,270 2,336 Restricted cash 1,925 806 Right-of -use asset - finance lease 1,749 — Other noncurrent assets 34 10 Total other assets 22,319 19,221 TOTAL ASSETS 305,969 294,074 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable 1,399 2,120 Accrued expenses 8,692 9,191 Customer and meter deposits 1,798 1,646 Long-term debt and capital leases — current portion 3,962 3,975 Total current liabilities 15,851 16,932 NONCURRENT LIABILITIES: Long-term debt and capital leases 106,981 108,933 Deferred revenue - ICFA 20,870 19,035 Regulatory liability 6,584 7,421 Advances in aid of construction 91,964 84,578 Contributions in aid of construction — net 25,281 21,326 Deferred income tax liabilities — net 3,570 3,269 Acquisition liability 1,762 1,773 Other noncurrent liabilities 1,803 778 Right-of-use liability - finance lease 1,442 — Total noncurrent liabilities 260,257 247,113 Total liabilities 276,108 264,045 Commitments and contingencies (Refer to Note 15) SHAREHOLDERS' EQUITY: Common stock, $ 0.01 par value, 60,000,000 shares authorized; 22,939,811 and 22,832,013 shares issued as of June 30, 2022 and December 31, 2021, respectively. 228 228 Treasury stock, 223,202 and 182,445 shares at June 30, 2022 and December 31, 2021, respectively. ( 2 ) ( 2 ) Paid in capital 29,635 29,803 Retained earnings — — Total shareholders' equity 29,861 30,029 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 305,969 294,074 See accompanying notes to the condensed consolidated financial statements -3- Table of Contents PART I—FINANCIAL INFORMATION GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 REVENUES: Water services $ 5,682 $ 5,250 $ 10,030 $ 9,236 Wastewater and recycled water services 6,020 5,676 11,701 10,919 Unregulated revenues 5 18 5 47 Total revenues 11,707 10,944 21,736 20,202 OPERATING EXPENSES: Operations and maintenance 2,942 2,480 5,485 4,979 General and administrative 3,876 3,717 7,656 7,207 Depreciation and amortization 2,427 2,408 4,770 4,634 Total operating expenses 9,245 8,605 17,911 16,820 OPERATING INCOME 2,462 2,339 3,825 3,382 OTHER INCOME (EXPENSE): Interest income 2 8 4 13 Interest expense ( 1,057 ) ( 1,353 ) ( 2,262 ) ( 2,678 ) Other 550 1,629 1,622 1,644 Total other expense ( 505 ) 284 ( 636 ) ( 1,021 ) INCOME BEFORE INCOME TAXES 1,957 2,623 3,189 2,361 INCOME TAX BENEFIT (EXPENSE) 150 ( 641 ) ( 193 ) ( 596 ) NET INCOME $ 2,107 $ 1,982 $ 2,996 $ 1,765 Basic earnings per common share $ 0.09 $ 0.09 $ 0.13 $ 0.08 Diluted earnings per common share $ 0.09 $ 0.09 $ 0.13 $ 0.08 Dividends declared per common share $ 0.07 $ 0.07 $ 0.15 $ 0.15 Weighted average number of common shares used in the determination of: Basic 22,686,559 22,620,037 22,667,990 22,603,991 Diluted 22,867,290 22,895,275 22,876,273 22,884,618 See accompanying notes to the condensed consolidated financial statements -4- Table of Contents PART I—FINANCIAL INFORMATION GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (in thousands, except share and per share amounts) (Unaudited) Common Stock Shares Common Stock Treasury Stock Shares Treasury Stock Paid-in Capital Retained Earnings Total Equity 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 ) Issuance of common stock — — — — — — — Treasury stock — — ( 398 ) — — — — Stock option exercise 628 — — — — — — Stock compensation — — — — 271 — 271 Net income — — — — — ( 217 ) ( 217 ) BALANCE - March 31, 2021 22,691,105 $ 227 ( 103,109 ) $ ( 1 ) $ 30,583 $ ( 217 ) $ 30,592 Dividend declared $ 0.07 per share — — — — 330 ( 1,982 ) ( 1,652 ) Issuance of common stock 54,163 — — — — — — Treasury stock — — ( 24,599 ) — 4 — 4 Stock option exercise 2,875 — — — — — — Stock compensation — — — — 38 — 38 Net income — — — — — 1,982 1,982 BALANCE - June 30, 2021 22,748,143 $ 227 ( 127,708 ) $ ( 1 ) $ 30,955 $ ( 217 ) $ 30,964 BALANCE - December 31, 2021 22,832,013 $ 228 ( 182,445 ) $ ( 2 ) $ 29,803 $ — $ 30,029 Dividend declared $ 0.07 per share — — — — ( 781 ) ( 889 ) ( 1,670 ) Issuance of common stock — — — — — — — Treasury stock — — — — — — — Stock option exercise 250 — — — 3 — 3 Stock compensation — — — — 389 — 389 Net income — — — — — 889 889 BALANCE - March 31, 2022 22,832,263 $ 228 ( 182,445 ) $ ( 2 ) $ 29,414 $ — $ 29,640 Dividend declared $ 0.07 per share — — — — 433 ( 2,107 ) ( 1,674 ) Issuance of common stock 107,548 — — — — — — Treasury stock — — ( 40,756 ) — ( 257 ) — ( 257 ) Stock option exercise — — — — — — — Stock compensation — — — — 45 — 45 Net income — — — — — 2,107 2,107 BALANCE - June 30, 2022 22,939,811 $ 228 ( 223,201 ) $ ( 2 ) $ 29,635 $ — $ 29,861 See accompanying notes to the condensed consolidated financial statements -5- Table of Contents PART I—FINANCIAL INFORMATION GLOBAL WATER RESOURCES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited, in thousands) Six Months Ended June 30, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,996 $ 1,765 Adjustments to reconcile net income to net cash provided by operating activities: Deferred compensation 537 1,697 Depreciation and amortization 4,770 4,634 Right of use amortization 26 — Amortization of deferred debt issuance costs and discounts 22 22 Other losses ( 5 ) 16 Provision for doubtful accounts receivable 32 36 Deferred income tax expense 301 528 Changes in assets and liabilities: Accounts receivable ( 375 ) 212 Other current assets ( 463 ) ( 798 ) Accounts payable and other current liabilities ( 1,339 ) ( 3,077 ) Other noncurrent assets ( 483 ) ( 193 ) Other noncurrent liabilities 5,857 2,522 Net cash provided by operating activities 11,876 7,364 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 14,638 ) ( 6,408 ) Cash paid for acquisitions, net of cash acquired ( 121 ) ( 5 ) Other cash flows from investing activities ( 24 ) — Net cash used in investing activities ( 14,783 ) ( 6,413 ) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ( 3,343 ) ( 3,301 ) Advances in aid of construction 1,789 1,773 Proceeds from stock option exercise 3 4 Principal payments under capital lease ( 28 ) ( 67 ) Refunds of advances for construction ( 91 ) — Loan repayments ( 233 ) — Repayments of bond ( 1,917 ) — Net cash (used) provided by financing activities ( 3,820 ) ( 1,591 ) DECREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 6,727 ) ( 640 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 13,443 21,305 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of period $ 6,716 $ 20,665 See accompanying notes to the condensed consolidated financial statements Supplemental disclosure of cash flow information: June 30, 2022 June 30, 2021 Cash and cash equivalents $ 4,791 $ 19,349 Restricted cash 1,925 1,316 Total cash, cash equivalents, and restricted cash $ 6,716 $ 20,665 -6- GLOBAL WATER RESOURCES, INC. Notes to the Condensed Consolidated Financial Statements (Unaudited) 1. BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS Basis of Presentation and Principles of Consolidation The condensed consolidated financial statements of Global Water Resources, Inc. (the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of June 30, 2022 and for the three and six months ended June 30, 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. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These financial statements follow the same accounting policies and methods of their application as the Company’s most recent annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2021. 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 six months ended June 30, 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"). The preparation of the financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Corporate Transactions Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc. On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of Valencia Water Company, Inc. ("Valencia") to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close. 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 $ 0.5 million and $ 0.2 million for the three months ended June 30, 2022 and 2021, respectively, and $ 1.6 million and $ 0.2 million for the six months ended June 30, 2022 and 2021, respectively. 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 a regulatory asset of $ 3.3 million and $ 2.3 million at June 30, 2022 and December 31, 2021, respectively, and regulatory liabilities of $ 0.8 million at June 30, 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 Accounting Standards Codification ("ASC") 740, Income Taxes , the tax effects of changes in tax laws must be recognized in the period in which the law is enacted. ASC 740 also requires deferred income tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred income taxes were re-measured based upon the new tax rate. For the Company’s regulated entities, substantially all of the change in deferred income taxes is recorded as an offset to either a regulatory asset or liability because the impact of changes in the rates are expected to be recovered from or refunded to customers. On December 20, 2017, the ACC opened a docket to address the utility ratemaking implications of the TCJA. The ACC subsequently approved an order in February 2018 requiring Arizona utilities to apply regulatory accounting treatment, which includes the use of regulatory assets and regulatory liabilities, to address all impacts from the enactment of the TCJA. On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah and Northern Scottsdale utilities due to the lower corporate tax rates under the TCJA. Rate Decision No. 76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under Decision No. 74364 enacted in February 2014. In 2021, the final year of the phase-in, the aggregate annual reductions in -7- 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 applied in 2021 versus the phased-in rates refunded in the years leading up to 2021 (i.e., 2018 through 2020). Rate Decision No. 76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes (“ADIT”), including excess ADIT (“EADIT”). Following the ACC's request for a proposal, the Company made its proposal in filings on December 19, 2018 and July 1, 2019. ACC Staff reviewed the Company's filing and requested that the Company defer tariff revisions until such revisions can be considered in the next rate case. ACC Staff also requested that the Company defer consideration of the regulatory assets and regulatory liabilities associated with 2018 EADIT amortization. On July 18, 2019, the Company made a filing proposing these items be deferred to the next rate case. On July 27, 2022, the ACC issued Rate Decision No. 78644, which approved an adjustor mechanism for income taxes. The adjustor mechanism permits the Company to flow through potential changes to state and federal income tax rates as well as refund or collect funds related to TCJA. The Company expects any remaining TCJA recovery to be addressed through the income tax adjustor. Refer to Note 2 — "Regulatory Decision and Related Accounting and Policy Changes" for additional information regarding the Company's recently approved rate case. On November 27, 2018, February 20, 2019, February 28, 2019, and January 23, 2020, the ACC adopted orders relating to the funding for income taxes on contributions in aid of construction (“CIAC”) and advances in aid of construction (“AIAC”) (which became taxable for our regulated utilities under the TCJA). Those orders 1) require that under the hybrid sharing method, a contributor will pay a gross-up to the utility consisting of 55 % of the income tax expense with the utility covering the remaining 45 % of the income tax expense; 2) remove the full gross-up method option for Class A and B utilities and their affiliates (which includes all of our utilities); 3) ensure proper ratemaking treatment of a utility using the self-pay method; 4) clarify that pass-through entities that are owned by a “C” corporation can recover tax expense according to methods allowed; and 5) require Class A and B utilities to self-pay the taxes associated with hook-up fee contributions but permit using a portion of the hook-up fees to fund these taxes. The Company's utilities have adopted the hybrid sharing method for income tax on CIAC and AIAC. On November 15, 2021, the Infrastructure Investment and Jobs Act was signed into law and became Public Law No. 117-58, which excludes AIAC and CIAC for regulated water and sewage disposal facility companies from income under Internal Revenue Code ("IRC") Section 118, effective January 1, 2021. Revolving Line of Credit 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 initially 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, initially bore 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 June 30, 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 revolving line of credit was extended to April 30, 2024. On July 26, 2022, the Company and Northern Trust entered into the second amendment (the "Second Modification Agreement") to the Northern Trust Loan Agreement. Pursuant to the Second Modification Agreement, the terms and conditions set forth in the Northern Trust Loan Agreement were further amended to, among other things, (i) extend the scheduled maturity date from April 30, 2024 to July 1, 2024; (ii) increase the maximum principal amount available for borrowing under the revolving line of credit from $ 10.0 million to $ 15.0 million; and (iii) replace the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR). 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. -8- 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, is expected to add approximately 3,300 active water service connections, approximately $ 1.5 million in annual revenue, and 21.1 square miles Certificate of Convenience & Necessity ("CC&N") service area in Sahuarita, Arizona. Significant Accounting Policies Basic and Diluted Earnings per Common Share 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 June 30, 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 111,566 and 120,323 common share equivalents for the three and six months ended June 30, 2022, respectively, which were included within the calculation of diluted earnings per share for the three and six months ended June 30, 2022. The remaining 242,892 options outstanding from the 2019 option grant equated to 37,726 and 44,869 common share equivalents for the three and six months ended June 30, 2022, respectively, which were included within the calculation of diluted earnings per share for the three and six months ended June 30, 2022. As of June 30, 2022, there were 15,000 and 97,867 restricted stock awards outstanding from the 2020 grant and 2021 grant, respectively. The 15,000 restricted stock awards outstanding from the 2020 grant equated to 31,439 and 43,091 common share equivalents for the three and six months ended June 30, 2022, respectively, which were included within the calculation of diluted earnings per share for the three and six months ended June 30, 2022. The 97,867 restricted stock awards outstanding from the 2021 grant for the three and six months ended June 30, 2022 were not included within the dilutive earnings per share calculation, as to do so would be antidilutive. As of June 30, 2021, the Company had 620,476 options outstanding to acquire an equivalent number of shares of GWRI common stock. The 381,496 options outstanding from the 2017 option grant equated to 166,348 and 163,707 common share equivalents for the three and six months ended June 30, 2021, respectively, which were included within the calculation of diluted earnings per share for the three and six months ended June 30, 2021. The remaining 238,980 options outstanding from the 2019 option grant equated to 55,232 and 53,414 common share equivalents for the three and six months ended June 30, 2021, respectively, which were included within the calculation of diluted earnings per share for the three and six months ended June 30, 2021. As of June 30, 2021, there were 74,164 restricted stock awards outstanding from the 2020 grant. The 74,164 restricted stock awards outstanding equated to 53,658 and 63,507 common share equivalents for the three and six months ended June 30, 2021, respectively, which were included within the calculation of diluted earnings per share for the three and six months ended June 30, 2021. As of June 30, 2021, there were 164,650 restricted stock awards outstanding from the 2021 grant, which were not included within the calculation of diluted earnings per share for the three and six months ended June 30, 2021, as to do so would be antidilutive. Refer to Note 13 – “Deferred Compensation Awards” for additional information regarding the option and restricted stock grants. Customer payments in-transit Customer payments in-transit represent funds received by our third-party payment processor related to customer payments, a majority of which were paid for with debit cards, credit cards, and checks, to which the Company does not have immediate access but settles within a few days of the payment transaction. Recent Accounting Pronouncements In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”, or "ASC 842"). ASC 842 requires lessees to record a right-of-use asset and corresponding lease obligation for lease arrangements with a term of greater than twelve months and requires additional disclosures about leasing arrangements. The Company implemented Topic 842 on January 1, 2021. The implementation did not result in material changes to our consolidated financial statements. Refer to Note 4 — "Leases" of the notes to the unaudited condensed consolidated financial statements for additional information. 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 -9- customer should apply ASC 350-40 to determine which implementation costs should be capitalized in a CCA that is considered 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. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminates Step 2 from the impairment test which requires entities to determine the implied fair value of goodwill to measure if any impairment expense is necessary. Instead, entities will record impairment expenses based on the amount by which a reporting unit's carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. ASU 2019-10 extended the effective date for this ASU. The Company implemented ASU 2017-04 on January 1, 2021. The implementation did not result in material changes to our consolidated financial statements. 2. 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 ASC 980, Regulated Operations ("ASC 980"). 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. Changes to the rates are made through formal rate applications with the ACC, which we have done for all of our operating utilities as described below. On August 28, 2020, 12 of the Company's 18 regulated utilities each filed a rate case application with the ACC for water, wastewater, and recycled water rates, based on a 2019 test year. In addition to a rate increase, the Company requested, among other things, the consolidation of water and/or wastewater rates for certain of its utilities, including its Red Rock, Santa Cruz, Palo Verde, Picacho Water, and Picacho Utilities located in Pinal County. Of the Company’s utilities filing a rate case, these utilities make up approximately 96% of the Company's active service connections. On July 27, 2022, the ACC issued Rate Decision No. 78644 relating to the Company's recent rate case. Pursuant to Rate Decision No. 78644, the ACC approved, among other things, a collective annual revenue requirement increase of approximately $ 2.2 million, (including the acquisition premiums discussed below) based on 2019 test year service connections, and phased-in over approximately two years, as follows: Incremental Cumulative August 1, 2022 $ 1,457,462 $ 1,457,462 January 1, 2023 $ 675,814 $ 2,133,277 January 1, 2024 $ 98,585 $ 2,231,861 The phase-in of additional revenues was determined using a 2019 test year. To the extent that the number of active service connections has increased and continues to increase from 2019 levels, the additional revenues may be greater than the amounts set forth above. On the other hand, if active connections decrease or the Company experiences declining usage per customer, the Company may not realize all of the anticipated revenues. The ACC also approved; (i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated.; (ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Turner Ranches utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above; (iii) the Company’s ability to annually adjust rates to flow through changes in property tax expense and/or changes in income tax expense, without the necessity of a rate case proceeding; and (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources. Finally, Rate Decision No. 78644 requires the Company to work with ACC staff and the Residential Utility Consumer Office to prepare a Private Letter Ruling request to the Internal Revenue Service (“IRS”) to clarify whether the failure to eliminate the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the IRC would violate the normalization provisions of Section 168(i)(9) of the Code. If the IRS accepts the request and issues its ruling, a copy must be provided to the ACC. Within 90 days after providing the ruling to the ACC, ACC Staff shall prepare, for ACC consideration, a memorandum and proposed order regarding guidance issued within the Private Letter Ruling. This may result in further action by the ACC, which we are unable to predict due to the uncertainties involved, that could have an adverse impact on our financial condition, results of operations and cash flows. -10- Certain accounting implications related to Rate Case Decision No. 78644 were recognized and recorded as of June 30, 2022, and are as follows: • Reclass Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums of approximately $ 0.8 million from goodwill to regulatory assets to be included in rate base. The premiums are to be amortized over 25 years. • Reversal of the 2017 TCJA tax reform regulatory liability of approximately $ 0.8 million, which was recorded as a reduction to income tax expense for approximately $ 0.7 million, and as a reduction to interest expense for approximately $ 0.1 million. • Write-off of approximately $ 0.3 million in capitalized rate case costs. On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to the TCJA. Rate Decision No. 76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirements under Rate Decision No. 74364. 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. 76901. The following provides additional discussion on accounting and policy changes resulting from Rate Decision No. 74364 enacted in February 2014. Infrastructure Coordination and Financing Agreements – ICFAs are agreements with developers and homebuilders whereby GWRI, the indirect parent of the operating utilities, provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. Under the ICFAs, GWRI has a contractual obligation to ensure physical capacity exists through its regulated utilities for water and wastewater to the landowner/developer when needed. This obligation persists regardless of connection growth. Fees for these services are typically a negotiated amount per equivalent dwelling unit for the specified development or portion of land. Payments are generally due in installments, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones, and the final payment due upon final plat approval or sale of the subdivision. The payments are non-refundable. The agreements are generally recorded against the land and must be assumed in the event of a sale or transfer of the land. The regional planning and coordination of the infrastructure in the various service areas has been an important part of GWRI’s business model. In February 2014, the ACC issued Rate Decision No. 74364, and concluded ICFA funds already received would no longer be deemed CIAC for rate making purposes. ICFA funds already received or which had become due prior to the date of Rate Decision No. 74364 were recognized as revenue once the obligations specified in the ICFA were met. Rate Decision No. 74364 prescribes that of the ICFA funds which come due and are paid subsequent to December 31, 2013, 70 % of the ICFA funds will be recorded in the associated utility subsidiary as a hook-up fee (“HUF”) liability, with the remaining 30 % to be recorded as deferred revenue, which the Company accounts for in accordance with the Company's ICFA revenue recognition policy. A HUF tariff, specifying the dollar value of a HUF for each utility, was approved by the ACC as part of Rate Decision No. 74364. The Company is responsible for assuring the full HUF value is paid from ICFA proceeds, and recorded in its full amount, even if it results in recording less than 30 % of the ICFA fee as deferred revenue. The Company will account for the portion allocated to the HUF as a CIAC contribution. However, in accordance with the ACC directives the CIAC is not deducted from rate base until the HUF funds are expended for utility plant. Such funds will be segregated in a separate bank account and used for plant. A HUF liability will be established and will be amortized as a reduction of depreciation expense over the useful life of the related plant once the HUF funds are utilized for the construction of plant. For facilities required under a HUF or ICFA, the utilities must first use the HUF moneys received, after which, it may use debt or equity financing for the remainder of construction. 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 June 30, 2022 and December 31, 2021, ICFA deferred revenue recorded on the consolidated balance sheet totaled $ 20.9 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. 74364, approximately 70 % of ICFA funds to be received in the future will be recorded as a HUF, until the HUF is fully funded at the Company’s applicable utility subsidiary. -11- The remaining approximate 30 % of future ICFA funds will be recorded at the parent company level and will be subject to the Company’s ICFA revenue recognition accounting policy. As the Company now expects to experience an economic benefit from the approximately 30 % portion of future ICFA funds, 30 % of the regulatory liability, or $ 3.4 million, was reversed in 2014. The remaining 70 % of the regulatory liability, or $ 7.9 million, will continue to be recorded on the balance sheet. The intangible assets amortize when the corresponding ICFA funds are received in proportion to the amount of total cash expected to be received under the underlying agreements. The recognition of amortization expense will be partially offset by a corresponding reduction of the regulatory liability. As of June 30, 2022, regulatory liability recorded on the consolidated balance sheet totaled $ 6.6 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 $ 0.7 million relates to the TCJA rate reduction mandated by the ACC pursuant to Rate Decision No. 76901. 3. REVENUE RECOGNITION Regulated Revenue The Company's operating revenues are primarily attributable to regulated services based upon tariff rates approved by the ACC. Regulated service revenues consist of amounts billed to customers based on approved fixed monthly fees and consumption fees, as well as unbilled revenues estimated from the last meter reading date to the end of the accounting period utilizing historical customer data recorded as accrued revenue. The measurement of sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, the Company estimates consumption since the date of the last meter reading and a corresponding unbilled revenue is recognized. The unbilled revenue estimate is based upon the number of unbilled days that month and the average daily customer billing rate from the previous month (which fluctuates based upon customer usage). The Company applies the invoice practical expedient and recognizes revenue from contracts with customers in the amount for which the Company has a right to invoice. The Company has the right to invoice for the volume of consumption, service charge, and other authorized charges. The Company satisfies its performance obligation to provide water, wastewater, and recycled services over time as the services are rendered. Regulated services may be terminated by the customers at will, and, as a result, no separate financing component is recognized for the Company's collections from customers, which generally require payment within 15 days of billing. The Company applies judgment, based principally on historical payment experience, in estimating its customers' ability to pay. Total revenues do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting sales taxes. Unregulated Revenue Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. Unregulated revenues are limited to rental revenue and imputed revenues resulting from a portion of ICFA funds received. ICFAs are agreements with developers and homebuilders where the Company provides services to plan, coordinate, and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder. In return, the developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the specified development or portion of land. In addition, under ICFA agreements, the Company has a contractual obligation to ensure physical capacity exists through its regulated utilities for water and wastewater to the developer when needed. This obligation persists regardless of connection growth. The Company believes that these services are not distinct in the context of the contract because they are highly interdependent with the Company’s ability to provide fitted capacity for water and wastewater services. The Company concluded that the goods and services provided under ICFA contracts constitute a single performance obligation. ICFA revenue is recognized at a point in time when the Company has the necessary capacity in place within its infrastructure to provide water/wastewater services to the developer. The Company exercises judgment when estimating the number of equivalent dwelling units that the Company has capacity to serve. -12- Disaggregated Revenues For the three and six months ended June 30, 2022 and 2021, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 REGULATED REVENUE Water Services Residential $ 3,893 $ 3,572 $ 7,292 $ 6,652 Irrigation 982 1,026 1,329 1,479 Commercial 329 236 612 417 Construction 219 187 340 338 Other water revenues 259 229 457 350 Total water revenues 5,682 5,250 10,030 9,236 Wastewater and recycled water services Residential 5,228 4,910 10,370 9,690 Commercial 258 253 527 503 Recycled water revenues 427 425 589 582 Other wastewater revenues 107 88 215 144 Total wastewater and recycled water revenues 6,020 5,676 11,701 10,919 TOTAL REGULATED REVENUE 11,702 10,926 21,731 20,155 UNREGULATED REVENUE Rental revenues 5 18 5 47 TOTAL UNREGULATED REVENUE 5 18 5 47 TOTAL REVENUE $ 11,707 $ 10,944 $ 21,736 $ 20,202 Contract Balances Our contract assets and liabilities consist of the following (in thousands): June 30, 2022 December 31, 2021 CONTRACT ASSETS Accounts receivable Water services $ 1,365 $ 1,139 Wastewater and recycled water services 1,066 988 Total contract assets $ 2,431 $ 2,127 CONTRACT LIABILITIES Deferred revenue - ICFA $ 20,870 $ 19,035 Refund liability - regulated 776 762 Total contract liabilities $ 21,646 $ 19,797 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 $ 20.9 million and $ 19.0 million at June 30, 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. -13- 4. LEASES On January 1, 2021, the Company adopted ASC 842 using the modified retrospective method. The Company elected the practical expedient package when scoping and identifying leases. As such, the Company has not reassessed: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) the initial direct costs for any existing leases. 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 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. On September 28, 2021, the Company entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022. Refer to Note 15 – “Commitments and Contingencies” for additional information regarding the components of the lease agreement. The right-of-use ("ROU") asset recorded represents the Company’s right to use an underlying asset for the lease term and ROU 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. Right-of-use assets at June 30, 2022 and December 31, 2021 consist of the following (in thousands): June 30, 2022 December 31, 2021 Financing Lease $ 107 $ — Operating Lease 1,642 — Total $ 1,749 $ — Lease liabilities at June 30, 2022 and December 31, 2021 consist of the following (in thousands): June 30, 2022 December 31, 2021 Financing Lease $ 88 $ — Operating Lease 1,354 — Total $ 1,442 $ — 5. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at June 30, 2022 and December 31, 2021 consist of the following (in thousands): June 30, 2022 December 31, 2021 Plant, equipment, and water and sewer lines $ 319,418 $ 311,041 Computers, office equipment and software 2,668 2,659 Total property, plant and equipment 322,086 313,700 Depreciation of property, plant, and equipment is computed based on the estimated useful lives as follows: Useful Lives Plant, equipment, and water and sewer lines 5 to 50 years Computers, office equipment and software 3 to 15 years -14- 6. ACCOUNTS RECEIVABLE Accounts receivable as of June 30, 2022 and December 31, 2021 consist of the following (in thousands): June 30, 2022 December 31, 2021 Billed receivables $ 2,431 $ 2,126 Less allowance for doubtful accounts ( 94 ) ( 132 ) Accounts receivable – net $ 2,337 $ 1,994 7. GOODWILL AND INTANGIBLE ASSETS Goodwill The goodwill balance decreased from $ 5.8 million at March 31, 2022 to $ 5.1 million at June 30, 2022. The balance is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon and Twin Hawks acquisitions. June 30, 2022, the Company reclassed approximately $ 0.8 million to regulatory assets related to acquisition premiums approved in Rate Case Decision 78644 (refer to Note 2 - "Regulatory Decision and Related Accounting and Policy Changes" for additional information). 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. Intangible Assets As of June 30, 2022 and December 31, 2021, intangible assets consisted of the following (in thousands): June 30, 2022 December 31, 2021 Gross Amount Accumulated Amortization Net Amount Gross Amount Accumulated Amortization Net Amount INDEFINITE LIVED INTANGIBLE ASSETS: CP Water Certificate of Convenience & Necessity service area $ 1,532 $ 1,532 $ 1,532 $ 1,532 Intangible trademark 13 13 13 13 Franchise contract rights 132 132 130 130 Organizational costs 86 86 68 68 1,763 1,763 1,743 1,743 DEFINITE LIVED INTANGIBLE ASSETS: Acquired ICFAs 17,978 ( 14,665 ) 3,313 17,978 ( 14,565 ) 3,413 Sonoran contract rights 7,407 ( 2,224 ) 5,183 7,407 ( 2,224 ) 5,183 25,385 ( 16,889 ) 8,496 25,385 ( 16,789 ) 8,596 Total intangible assets $ 27,148 $ ( 16,889 ) $ 10,259 $ 27,128 $ ( 16,789 ) $ 10,339 A CC&N is a permit issued by the ACC allowing a public service corporation to serve a specified area, and preventing other public service corporations from offering the same services within the specified area. The CP Water CC&N intangible asset was acquired through the acquisition of CP Water Company in 2006. 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. Franchise contract rights are agreements with Pima and Pinal counties that allow the Company to place infrastructure in public right-of-way and permits expected to be renewable indefinitely. The organizational costs represent fees paid to federal or state governments for the privilege of incorporation and expenditures incident to organizing the corporation and preparing it to conduct business. -15- Acquired ICFAs and contract rights related to our 2005 acquisition of Sonoran Utility Services, LLC assets are amortized when cash is received in proportion to the amount of total cash expected to be received under the underlying agreements. 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 amount of $ 0.1 million was recorded for both the three and six months ended June 30, 2022, compared to $ 0.5 million recorded for both the three and six months ended June 30, 2021 . 8. 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 significant shareholder and director of the Company. Medical claims paid to the plan were approximately $ 0.2 million for both the three months ended June 30, 2022 and 2021. Medical claims paid to the plan were approximately $ 0.3 million for both the six months ended June 30, 2022 and 2021. Refer to Note 16 — "Subsequent Events — Public Offering of Common Stock" for additional information regarding other related party disclosures. 9. ACCRUED EXPENSES Accrued expenses at June 30, 2022 and December 31, 2021 consist of the following (in thousands): June 30, 2022 December 31, 2021 Deferred compensation $ 819 $ 1,211 Property taxes 1,337 1,238 Income taxes 542 1,407 Interest 493 492 Dividend payable 547 547 Asset retirement obligation 697 697 Accrued Bonus 519 478 Other accrued liabilities 3,738 3,121 Total accrued expenses $ 8,692 $ 9,191 10. FAIR VALUE Fair Value of Financial Instruments 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: • Level 1 - Quoted market prices in active markets for identical assets or liabilities • Level 2 - Inputs other than Level 1 that are either directly or indirectly observable • Level 3 - Unobservable inputs developed using the Company's estimates and assumptions, which reflect those that the Company believes market participants would use. -16- Financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2022 and December 31, 2021 were as follows (in thousands): June 30, 2022 December 31, 2021 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Asset/Liability Type: HUF Funds - restricted cash (1) $ 1,135 $ — $ — $ 1,135 $ 16 $ — $ — $ 16 Demand Deposit (2) 50 — — 50 135 — — 135 Certificate of Deposit - Restricted (1) — 790 — 790 — 790 — 790 Long-term debt (3) — 106,745 — 106,745 — 125,650 — 125,650 Acquisition Liability (4) — — 838 838 — — 838 838 Total $ 1,185 $ 107,535 $ 838 $ 109,558 $ 151 $ 126,440 $ 838 $ 127,429 (1) HUF Funds - restricted cash and Certificate of Deposit - Restricted are presented on the Restricted cash line item of the Company's consolidated balance sheets and are valued at amortized cost, which approximates fair value. The increase is primarily driven by additional funds received in growth areas of several utilities. (2) Demand Deposit is presented on the Cash and cash equivalents line item of the Company's consolidated balance sheets and is valued at amortized cost, which approximates fair value. (3) The fair value of our debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities. (4) As part of the Red Rock acquisition, the Company is required to pay to the seller a growth premium equal to $ 750 (not in thousands) 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 fair value of the acquisition liability was calculated using a discounted cash flow technique which utilized unobservable inputs developed using the Company's estimates and assumptions. Significant inputs used in the fair value calculation are as follows: year of the first meter installation, total new accounts per year, years to complete full build out, and discount rate. -17- 11. DEBT The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of June 30, 2022 and December 31, 2021 are as follows (in thousands): June 30, 2022 December 31, 2021 Short-term Long-term Short-term Long-term BONDS AND NOTES PAYABLE - 4.38 % Series A 2016, maturing June 2028 $ — $ 28,750 $ — $ 28,750 4.58 % Series B 2016, maturing June 2036 3,833 78,583 3,833 80,500 3,833 107,333 3,833 109,250 OTHER Capital lease obligations 129 141 142 199 Debt issuance costs — ( 493 ) — ( 516 ) Total debt $ 3,962 $ 106,981 $ 3,975 $ 108,933 2016 Senior Secured Notes On June 24, 2016, the Company issued two series of senior secured notes with an aggregate total principal balance of $ 115.0 million at a blended interest rate of 4.55 %. Series A carries a principal balance of $ 28.8 million and bears an interest rate of 4.38 % over a twelve-year term, with the principal payment due on June 15, 2028. Series B carries a principal balance of $ 86.3 million and bears an interest rate of 4.58 % over a 20 -year term. Series B is interest only for the first five years , with $ 1.9 million principal payments paid semiannually thereafter beginning December 2021. The proceeds of the senior secured notes were primarily used to refinance the previously outstanding long-term tax exempt bonds, which were subject to an early redemption option at 103 %, plus accrued interest, as a result of our initial public offering in the United States. As part of the refinancing of the long-term debt, the Company paid a prepayment penalty of $ 3.2 million and wrote off the remaining $ 2.2 million in capitalized loan fees related to the tax exempt bonds, which were recorded as additional interest expense in the second quarter of 2016. 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 totaled $ 0.5 million as of both June 30, 2022 and December 31, 2021. 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. Consolidated EBITDA is calculated as net income plus depreciation and amortization, taxes, interest and other non-cash charges net of non-cash income. Consolidated debt service is calculated as interest expense, principal payments, and dividend or stock repurchases. 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 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 June 30, 2022, the Company was in compliance with its financial debt covenants. Revolving Line of Credit On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (the “Northern Trust Loan Agreement”), for a two-year revolving line of credit initially 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, initially bore an interest rate equal to 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. 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 line of credit was extended from April 30, 2022 to April 30, 2024. As of June 30, 2022, the Company had no outstanding borrowings under this credit line. There were $ 14,000 and $ 17,000 unamortized debt issuance costs as of June 30, 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 debt service ratio drops to 1.20 . As of June 30, 2022, the Company was in compliance with its financial debt covenants. -18- On July 26, 2022, the Company and The Northern Trust Company entered into a second amendment to the loan agreement, which, among other things, further extended the maturity date for the revolving line of credit to July 1, 2024, increased the maximum principal amount available for borrowing to $ 15.0 million and replaced the LIBOR interest rate provisions. Refer to Note 1 — "Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements " for additional information regarding the revolving credit line amendment. At June 30, 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 six months of 2022 $ 1,917 $ 66 2023 3,833 106 2024 3,833 61 2025 3,833 33 2026 3,833 — Thereafter 93,917 — Subtotal 111,166 266 Less: amount representing interest — — Total $ 111,166 $ 266 12. INCOME TAXES During the three months ended June 30, 2022, the Company recorded a tax benefit of $ 0.2 million. The tax expense calculated on pre-tax income of $ 2.0 million for the three months ended June 30, 2022 was $ 0.5 million, offset by approximately $ 0.7 million from the reversal of the regulatory liability related to Rate Decision No. 78622 (refer to Note 2 — "Regulatory Decision and Related Accounting and Policy Changes" for additional information). Tax expense of $ 0.6 million was recorded on pre-tax income of $ 2.6 million for the three months ended June 30, 2021. During the six months ended June 30, 2022, the Company recorded a tax expense of $ 0.2 million. The tax expense calculated on pre-tax income of $ 3.2 million for the six months ended June 30, 2022, was approximately $ 0.9 million, offset by approximately $ 0.7 million from the reversal of the regulatory liability. Tax expense of $ 0.6 million was recorded on pre-tax income of $ 2.4 million for the six months ended June 30, 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 six months ended June 30, 2022 due to the exercise and vesting of stock-based compensation in 2021, resulting in windfall tax benefits. 13. DEFERRED COMPENSATION AWARDS Stock-based compensation Stock-based compensation related to option awards is measured based on the fair value of the award. The fair value of stock option awards is determined using a Black-Scholes option-pricing model. We recognize compensation expense associated with the options over the vesting period. 2017 stock option grant Stock-based compensation expense of zero and $ 67 ,000 was recorded for the three months ended June 30, 2022 and 2021, respectively, and zero and $ 131 ,000 was recorded for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there were 320,321 options outstanding and no options were exercised or forfeited during the three months ended June 30, 2022. 2019 stock option grant Stock-based compensation expense of $ 45 ,000 and $ 48 ,000 was recorded for the three months ended June 30, 2022 and 2021, respectively, and $ 90 ,000 and $ 95 ,000 was recorded for the six months ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there were 242,892 options outstanding and no options were exercised or forfeited during the three months ended June 30, 2022. -19- Phantom stock/Restricted stock units compensation The following table details total awards granted and the number of units outstanding as of June 30, 2022 along with the amounts paid to holders of the phantom stock units ("PSUs") and/or restricted stock units ("RSUs") for the three and six months ended June 30, 2022 and 2021 (in thousands, except unit amounts): Amounts Paid For the Three Months Ended June 30, Amounts Paid For the Six Months Ended June 30, Grant Date Units Granted Units Outstanding 2022 2021 2022 2021 Q1 2018 30,907 — — — — 39 Q1 2019 32,190 — — 45 45 85 Q1 2020 22,481 5,473 30 31 61 59 Q1 2021 (1) 27,403 15,618 37 38 74 38 Q1 2022 (1) 22,262 20,407 30 — 30 — Total 135,243 41,498 97 114 210 221 (1) Pursuant to the Global Water Resources, Inc. 2020 Omnibus Incentive Plan, effective May 7, 2020, long-term incentive awards are no longer granted in the form of PSUs and are granted as RSUs instead. 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 June 30, 2022 and amounts paid during the three and six months ended June 30, 2022 and 2021 (in thousands, except unit and per unit amounts): Amounts Paid For the Three Months Ended June 30, Amounts Paid For the Six Months Ended June 30, Recipients Grant Date Units Granted Exercise Price Units Outstanding 2022 2021 2022 2021 Members of Management (1)(2) Q1 2015 299,000 $ 4.26 65,500 — — 62 269 Key Executives (3)(4) Q2 2015 300,000 $ 5.13 — — — — — Members of Management (1)(5) Q3 2017 103,000 $ 9.40 17,000 — — — — Members of Management (1)(6) Q1 2018 33,000 $ 8.99 8,250 — — — — Total 735,000 90,750 $ — $ — $ 62 $ 269 (1) The SARs vest ratably over 16 quarters from the grant date. (2) The exercise price was determined to be the fair market value of one share of GWRC stock on the grant date of February 11, 2015. (3) The SARs vest over 16 quarters, vesting 20 % per year for the first three years, with the remainder, 40 %, vesting in year four. (4) The exercise price was determined to be the fair market value of one share of GWRC stock on the grant date of May 8, 2015. (5) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of August 10, 2017. (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. -20- For the three months ended June 30, 2022 and 2021, the Company recorded approximately $ 0.2 million of negative compensation expense and $ 0.4 million of compensation expense related to the PSUs/RSUs and SARs, respectively. For the six months ended June 30, 2022 and 2021, the Company recorded approximately $ 0.1 million of negative compensation expense and $ 0.7 million of compensation expense related to the PSUs/RSUs and SARs, respectively. These are liability awards, so when the stock price decreases, cumulative compensation expense is reduced, which can lead to negative compensation in a given period. Based on GWRI’s closing share price on June 30, 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): PSUs SARs Remaining six months of 2022 $ 163 $ — 2023 225 — 2024 102 — 2025 — — Total $ 490 $ — Restricted stock compensation On May 7, 2020, the Company's stockholders approved the Global Water Resources, Inc. 2020 Omnibus Incentive Plan which allows restricted stock awards as a form of compensation. A restricted stock award ("RSA") represents the right to receive a share of the Company's common stock. RSAs vest over two to three years , beginning on the date of the grant. 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 six months ended June 30, 2022, no RSAs were issued. For the three and six months ended June 30, 2022, the Company recorded approximately $ 0.3 million and $ 0.7 million of compensation expense related to the RSAs, respectively. For the three and six months ended June 30, 2021, the Company recorded approximately $ 0.3 million and $ 0.5 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 June 30, 2022: Number of RSAs Weighted Average Fair Value Nonvested stock units at beginning of period 223,538 $ 14.88 Stock units vested and issued 107,548 13.92 Granted 83,500 14.02 Forfeited 2,825 16.59 Nonvested stock units at end of period 196,665 $ 15.01 14. SUPPLEMENTAL CASH FLOW INFORMATION The following is supplemental cash flow information for the six months ended June 30, 2022 and 2021 (in thousands): For the Six Months Ended June 30, 2022 2021 Supplemental cash flow information: Cash paid for interest $ 6 $ 2,616 Non-cash financing and investing activities: Capital expenditures included in accounts payable and accrued liabilities $ 2,406 $ 1,444 15. COMMITMENTS AND CONTINGENCIES Commitments In January 2019, the Company's corporate office lease agreement was amended to extend the term of the lease, with a commencement date of March 1, 2019 and termination date of May 31, 2022. As such, the Company's monthly rent expense increased to approximately $ 16,000 . Rent expense arising from the operating leases totaled approximately $ 71 ,000 and $ 48 ,000 for the three months ended June 30, 2022 and 2021, respectively, and $ 127 ,000 and $ 93 ,000 for the six months ended June 30, 2022 and 2021, respectively. -21- We entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022. The new monthly rent expense increased to $ 23,750 for each full calendar month commencing on May 1, 2022 through April 30, 2025 and will increase to $ 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 From time to time, in the ordinary course of business, the Company may be subject to pending or threatened lawsuits in which claims for monetary damages are asserted. Management is not aware of any legal proceeding of which the ultimate resolution could materially affect our financial position, results of operations, or cash flows. 16. SUBSEQUENT EVENTS The Company has evaluated subsequent events through August 10, 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 disclosure, except for the following: Public Offering of Common Stock On August 1, 2022, the Company completed a public offering of 1,150,000 shares of common stock at $ 13.50 per share, which includes 150,000 shares issued and sold to the underwriter following the exercise in full of its option to purchase additional shares of common stock. The gross proceeds to the Company from the offering were approximately $ 15.5 million before deducting underwriting discounts and commissions and estimated offering expenses payable by the Company. Certain directors and/or their affiliates purchased an aggregate of the 652,000 shares of common stock offered at the public offering price. Rate Case Approval of Consolidation On July 27, 2022, the ACC issued Rate Decision No. 78644 relating to the Company's recent rate case. Pursuant to Rate Decision No. 78644, the ACC approved the consolidation of certain water utility companies and certain wastewater utility companies. -22-