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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-10 · 139 added, 126 removed, 393 unchanged (40% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations .

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations relates to the three and six months ended June 30, 2022 and should be read together with the condensed consolidated financial statements and accompanying notes included herein, as well as our audited annual financial statements and associated management’s discussion, which are available within our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 10-K") available on our Company’s profile on the Securities and Exchange Commission (“SEC”) website, www.sec.gov.

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations relates to the three and nine months ended September 30, 2022 and should be read together with the condensed consolidated financial statements and accompanying notes included herein, as well as our audited annual financial statements and associated management’s discussion, which are available within our Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 10-K") available on our Company’s profile on the Securities and Exchange Commission (“SEC”) website, www.sec.gov.

Cautionary Statement Regarding Forward-Looking Statements

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These forward-looking statements include, but are not limited to, statements about our strategies;

expectations about future business plans, prospective performance, and opportunities;

expectations about future business plans, prospective performance, growth, and opportunities;

future financial performance;

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trends relating to our industry, market, population growth, and housing permits;

the adequacy of our water supply to service our current demand and growth for the foreseeable future;

plans and expectations for capital expenditures;

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A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under “Risk Factors” in Part I, Item 1A in the 2021 10-K filed with the SEC, as updated from time to time in our subsequent filings with the SEC.

Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the definitive agreement to acquire Farmers Water Company will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the definitive agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all;

Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the definitive agreement to acquire Farmers Water Co.

will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the definitive agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all;

and whether the Internal Revenue Service (“IRS”) will rule in favor of us in connection with the contemplated Private Letter Ruling request.

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Further, we continue to monitor the impact of COVID-19 pandemic on our business and operations, including how it will impact our customers, employees, suppliers, vendors, and business partners.

While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three months ended June 30, 2022, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will be impacted by the COVID-19 pandemic.

While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three months ended September 30, 2022, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will be impacted by the COVID-19 pandemic.

The degree to which the COVID-19 pandemic impacts our business operations, results of operations, cash flows, and financial position will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted.

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and how quickly and to what extent normal economic and operating conditions can resume.

As of June 30, 2022, the COVID-19 pandemic did not have a material impact on uncollectible accounts.

As of September 30, 2022, the COVID-19 pandemic did not have a material impact on uncollectible accounts.

Our current results and financial condition discussed herein may not be indicative of future operating results and trends.

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Business Outlook

2021 and the first two quarters of 2022 continued the trend of positive growth in new connections.

2021 and the first three quarters of 2022 continued the trend of positive growth in new connections.

According to the 2020 U.S.

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The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.7 million people by 2030 and 6.5 million by 2040.

During the three months ended June 30, 2022, Arizona’s employment rate increased by 3.6%, ranking the state in the top twenty nationally for job growth.

During the three months ended September 30, 2022, Arizona’s employment rate increased by 3.6%, ranking the state in the top twenty-one nationally for job growth.

According to the W.P.

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The Greater Phoenix Blue Chip Panel expects this to continue but at a slower pace as lack of product and affordability issues slow demand.

We believe that our utilities and service areas are directly in the anticipated path of growth primarily in the Phoenix metropolitan area.

Management believes that we are well-positioned to benefit from the near-term growth in the Phoenix metropolitan area due to the availability of lots and existing infrastructure in place within our services areas.

However, while the Phoenix metropolitan area is currently experiencing a slowdown in housing in response to inflation and increased interest rates, management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots and existing infrastructure in place within our services areas.

Factors Affecting our Results of Operations

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An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner.

Our total service connections, including both active service connections and connections to vacant homes, increased 4,519 connections, or 8.8% (7.2% annualized growth), from a total of 51,615 as of June 30, 2021, to 56,134 as of June 30, 2022.

Our total service connections, including both active service connections and connections to vacant homes, increased 4,253 connections, or 8.1% (5.7% annualized growth), from a total of 52,254 as of September 30, 2021, to 56,507 as of September 30, 2022.

This increase was primarily due to organic growth in our service areas combined with the acquisition of Global Water - Las Quintas Serenas Water Company, Inc.

("Las Quintas") in November 2021, which contributed 1,257 connections through June 30, 2022.

As of June 30, 2022, active service connections increased 4,500, or 8.8% (7.2% annualized growth), to 55,814 compared to 51,314 active service connections as of June 30, 2021, primarily due to organic growth in our service areas combined with the acquisition of Las Quintas.

("Las Quintas") in November 2021, which contributed 1,250 connections through September 30, 2022.

As of September 30, 2022, active service connections increased 4,176, or 8.0% (5.6% annualized growth), to 56,134 compared to 51,958 active service connections as of September 30, 2021, primarily due to organic growth in our service areas combined with the acquisition of Las Quintas.

Approximately 91.0% of the 56,134 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.

(“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc.

(“Palo Verde”) utilities as of June 30, 2022.

(“Palo Verde”) utilities as of September 30, 2022.

The graph below presents the historical change in active and total connections for our ongoing operations over the past five years.

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Cybersecurity Risks

In the regular course of our business, we handle a range of sensitive security, customer and business systems information.

In the regular course of our business, we manage a range of sensitive security, customer, and business systems information.

A security breach of our information systems such as theft or the inappropriate release of certain types of information, including confidential customer, employee, financial or system operating information, could have a material adverse impact on our financial condition, results of operations or cash flows.

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In addition, regulatory restrictions on the use of groundwater and the development of groundwater wells, lack of available water rights, drought, overuse of local or regional sources of water, protection of threatened species or habitats, or other factors, including climate change, may limit the availability of ground or surface water.

Notwithstanding the foregoing, we believe that we have an adequate supply of water to service our current demand and growth for the foreseeable future.

Rate Case Activity

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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;

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

and are expected to create economies of scale that are beneficial to all customers if consolidated.

Of the Company’s utilities filing a rate case, these utilities made up approximately 96% of the Company's active service connections at the time of the filing of the rate case application.

On July 27, 2022, the ACC issued Rate Decision No.

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Pursuant to Rate Decision No.

78644, the ACC approved 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:

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

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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.

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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.

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 Internal Revenue Code ("IRC') would violate the normalization provisions of Section 168(i)(9) of the IRC.

If the IRS accepts the request and issues its ruling, a copy must be provided to the ACC.

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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.

Certain accounting implications related to Rate Case Decision No.

Certain accounting implications related to Rate 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.

• Reclassification of Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums of approximately $0.8 million in the aggregate from goodwill to regulatory assets to be included in rate base.

The premiums are to be amortized over 25 years.

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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 reviewed the Company's filing and requested that the Company defer tariff revisions until such revisions were to 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.

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The Company's utilities 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 ("IRC") Section 118.

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.

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

Definitive Agreement to Acquire Farmers Water Co.

On April 14, 2022, the Company signed a definitive agreement to acquire Farmers Water Co., 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 of CC&N service area in Sahuarita, Arizona.

On October 3, 2022, the Company filed an application with the ACC in connection with the acquisition of Farmers Water Co.

The timing of the close of the acquisition is dependent upon regulatory approval and other closing conditions.

Acquisition of Rincon Water Company, Inc.

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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.

Public Offering of Common Stock

On August 1, 2022, the Company completed a public offering of 1,150,000 shares of common stock at a public offering price of $13.50 per share, which included 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 Company received net proceeds of approximately $14.9 million from the offering after deducting underwriting discounts and commissions and offering expenses paid by the Company.

Certain directors and/or their affiliates purchased an aggregate of the 652,000 shares of common stock at the public offering price.

Segment Reporting

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Based on the information described above and in accordance with the applicable literature, management has concluded that we are currently organized and operated as one operating and reportable segment.

Comparison of Results of Operations for the Three Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended June 30, 2022 and 2021 (in thousands, except per share amounts):

For the Three Months Ended June 30,

Comparison of Results of Operations for the Three Months Ended September 30, 2022 and 2021

The following table summarizes our results of operations for the three months ended September 30, 2022 and 2021 (in thousands, except per share amounts):

For the Three Months Ended September 30,

Revenues $ 11,893 $ 11,404

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Diluted earnings per common share $ 0.07 $ 0.07

Revenues – The following table summarizes our revenues for the three months ended June 30, 2022 and 2021 (in thousands):

For the Three Months Ended June 30,

Revenues – The following table summarizes our revenues for the three months ended September 30, 2022 and 2021 (in thousands):

For the Three Months Ended September 30,

Water services $ 5,824 $ 5,067

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Total revenues $ 11,893 $ 11,404

Total revenues increased $0.8 million, or 7.0%, to $11.7 million for the three months ended June 30, 2022 compared to $10.9 million for the three months ended June 30, 2021.

The increase in revenue was primarily driven by the 8.8% increase in active service connections due to organic growth and new connections associated with the acquisition of Las Quintas in November 2021.

Water Services – Water services revenue increased $0.4 million, or 8.2%, to $5.7 million for the three months ended June 30, 2022 compared to $5.3 million for the three months ended June 30, 2021.

The increase in water services revenues was primarily related to growth in connections.

Water services revenue based on consumption increased $0.1 million, or 5.6%, to $2.8 million for the three months ended June 30, 2022 compared to $2.7 million for the three months ended June 30, 2021.

The increase was primarily driven by increases in commercial and residential consumption for the three months ended June 30, 2022 compared to the three months ended June 30, 2021.

Active water connections increased 11.1% to 29,627 as of June 30, 2022 from 26,678 as of June 30, 2021, was primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas.

Water consumption increased 8.1% to 1.1 billion gallons for the three months ended June 30, 2022 from 989 million gallons for the three months ended June 30, 2021.

The increase in consumption was primarily related to increased connections.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 10.5%, to $2.7 million for the three months ended June 30, 2022 from $2.4 million for the three months ended June 30, 2021.

The increase was primarily driven by an increase in active service connections which included organic growth combined with new connections associated with the acquisition of Las Quintas.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.3 million, or 6.1%, to $6.0 million for the three months ended June 30, 2022 compared to $5.7 million for the three months ended June 30, 2021.

Total revenues increased $0.5 million, or 4.3%, to $11.9 million for the three months ended September 30, 2022 compared to $11.4 million for the three months ended September 30, 2021.

The increase in revenue was driven by the 8.0% increase in active service connections due to organic growth and new connections associated with the acquisition of Las Quintas in November 2021, combined with the increase in rates related to Rate Decision No.

The increase in revenue was partially offset by the recognition of $0.7 million in ICFA revenues received during the three months ended September 30, 2021 related to funds received during the quarter for an area where the Company had completed all obligations under the ICFA agreement, including water and wastewater services that did not recur in the current year quarter.

Water Services – Water services revenue increased $0.8 million, or 14.9%, to $5.8 million for the three months ended September 30, 2022 compared to $5.1 million for the three months ended September 30, 2021.

The increase in water services revenue was primarily related to growth in connections combined with the increase in rates related to Rate Decision No.

Water services revenue based on consumption increased $0.4 million, or 16.7%, to $2.8 million for the three months ended September 30, 2022 compared to $2.4 million for the three months ended September 30, 2021.

The increase was primarily driven by increases in commercial and residential consumption for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.

Active water connections increased 10.3% to 29,785 as of September 30, 2022 from 27,003 as of September 30, 2021, primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas.

Water consumption increased 18.5% to 1.0 billion gallons for the three months ended September 30, 2022 from 837 million gallons for the three months ended September 30, 2021.

The increase in consumption was primarily related to increased connections as well as lower precipitation in the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.4 million, or 14.8%, to $2.9 million for the three months ended September 30, 2022 from $2.5 million for the three months ended September

The increase was primarily driven by an increase in active service connections, which included organic growth combined with new connections associated with the acquisition of Las Quintas, as well as an increase in rates due to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 7.5%, to $6.1 million for the three months ended September 30, 2022 compared to $5.6 million for the three months ended September 30, 2021.

The increase in wastewater and recycled water services revenue was primarily driven by an increase in wastewater services revenue.

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 6.3% to 26,187 as of June 30, 2022, from 24,636 as of June 30, 2021.

Recycled water services revenue, which is based on the number of gallons delivered, was $0.4 million for both the three months ended June 30, 2022 and 2021.

The volume of recycled water delivered for both the three months ended June 30, 2022 and 2021 was 258 million gallons.

Operating Expenses – The following table summarizes our operating expenses for the three months ended June 30, 2022 and 2021 (in thousands):

For the Three Months Ended June 30,

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 5.6% to 26,349 as of September 30, 2022, from 24,955 as of September 30, 2021, combined with the increase in rates related to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, was $0.4 million for the three months ended September 30, 2022 compared to $0.3 million for the three months ended September 30, 2021.

The volume of recycled water delivered for the three months ended September 30, 2022 was 246 million gallons compared to 178 million gallons for the three months ended September 30, 2021.

Operating Expenses – The following table summarizes our operating expenses for the three months ended September 30, 2022 and 2021 (in thousands):

For the Three Months Ended September 30,

Operations and maintenance $ 2,775 $ 2,677

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Total operating expenses $ 9,127 $ 9,111

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.5 million, or 18.6%, to $2.9 million for the three months ended June 30, 2022 compared to $2.5 million for the three months ended June 30, 2021.

Personnel and related expenses increased $0.2 million, or 28.4%, to $0.9 million for the three months ended June 30, 2022 compared to $0.7 million for the three months ended June 30, 2021.

The increase was primarily driven by increased salaries and wages expense and medical insurance due to an increase in head count.

Repairs and maintenance expenses increased $0.1 million to $0.2 million for the three months ended June 30, 2022 compared to $0.1 million for the same period in 2021.

The increase was primarily related to maintenance costs for plant equipment.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.1 million, or 3.7%, to $2.8 million for the three months ended September 30, 2022 compared to $2.7 million for the three months ended September 30, 2021.

Personnel and related expenses increased $0.1 million, or 13.1%, to $1.0 million for the three months ended September 30, 2022 compared to $0.9 million for the three months ended September 30, 2021.

The increase was primarily driven by increased salaries and wages expense and medical insurance due to an increase in medical claims.

Utility power and related expenses increased $0.1 million to approximately $0.7 million for the three months ended September 30, 2022 compared to $0.5 million for the same period in 2021.

The increase was due to increased electric utility expense due to increased pump usage related to additional connections and increased consumption.

Contract services increased $0.1 million to $0.4 million for the three months ended September 30, 2022 from $0.3 million for the three months ended September 30, 2021.

The increase was primarily due to increased costs for billing software related to the additional connections quarter over quarter.

Property taxes decreased $0.2 million, or 28.4%, to $0.5 million for the three months ended September 30, 2022 from $0.6 million for the three months ended September 30, 2021, due to a decrease in property taxes.

General and Administrative – General and administrative costs include the day-to-day expenses of office operation, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees.

These costs increased $0.2 million, or 4.3%, to $3.9 million for the three months ended June 30, 2022 compared to $3.7 million for the three months ended June 30, 2021.

Professional fees increased $0.2 million to $0.7 million for the three months ended June 30, 2022 compared to $0.5 million for the three months ended June 30, 2021.

The increase was primarily attributable to legal fees incurred relating to our rate case, capital raise transaction, and for acquisition related matters for the three months ended June 30, 2022.

Depreciation and amortization - Depreciation and amortization expense increased slightly by less than $0.1 million, or 0.8%, at $2.4 million for both the three months ended June 30, 2022 and 2021, and was primarily related to depreciation of fixed assets.

Other Income/Expense – Other expense totaled $0.5 million for the three months ended June 30, 2022, compared to other income of $0.3 million for the three months ended June 30, 2021.

The $0.8 million decrease was primarily attributable to the non-recurring income recognized in the three months ended June 30, 2021 related to the sale of a wireless communication tower in addition to a decrease in interest expense of $0.3 million for the three months ended June 30, 2022 compared to the same period in 2021.

This was partially offset by higher income of $0.4 million related to the Buckeye growth premiums received for the three months ended June 30, 2022 compared to the same period in 2021.

Income Tax Expense – Income tax expense decreased $0.8 million to $0.2 million for the three months ended June 30, 2022 compared to tax expense of $0.6 million for the three months ended June 30, 2021.

The decrease was primarily driven by the reversal of approximately $0.7 million related to Rate Case Decision No.

Net Income – Net income totaled $2.1 million for the three months ended June 30, 2022 compared to $2.0 million for the three months ended June 30, 2021.

Comparison of Results of Operations for the Six Months Ended June 30, 2022 and 2021

The following table summarizes our results of operations for the six months ended June 30, 2022 and 2021 (in thousands, except per share amounts):

For the Six Months Ended June 30,

These costs decreased $0.2 million, or 3.8%, to $3.9 million for the three months ended September 30, 2022 compared to $4.1 million for the three months ended September 30, 2021.

Deferred compensation decreased $0.5 million to $0.3 million for the three months ended September 30, 2022 compared to $0.8 million for the three months ended September 30, 2021.

The decrease was primarily driven by the decrease in the stock price year over year.

Professional fees increased $0.2 million to $0.6 million for the three months ended September 30, 2022 compared to $0.5 million for the three months ended September 30, 2021.

The increase was primarily attributable to legal fees incurred relating to our rate case and acquisition related matters for the three months ended September 30, 2022.

Depreciation and amortization - Depreciation and amortization expense increased approximately $0.1 million, or 3.1%, from the prior year quarter, but remained at $2.4 million for both the three months ended September 30, 2022 and 2021.

The increase was primarily related to depreciation of fixed assets.

Other Expense – Other expense was approximately $0.5 million for both the three months ended September 30, 2022 and 2021.

Income Tax Expense – Income tax expense increased $0.3 million to $0.6 million for the three months ended September 30, 2022 compared to $0.3 million for the three months ended September 30, 2021.

The increase was driven by the increase in income before income taxes, offset by the reversal of approximately $0.7 million related to Rate Decision No.

Net Income – Net income increased 12.6% to $1.7 million for the three months ended September 30, 2022 compared to $1.5 million for the three months ended September 30, 2021.

Comparison of Results of Operations for the Nine Months Ended September 30, 2022 and 2021

The following table summarizes our results of operations for the nine months ended September 30, 2022 and 2021 (in thousands, except per share amounts):

For the Nine Months Ended September 30,

Revenues $ 33,629 $ 31,606

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Diluted earnings per common share $ 0.20 $ 0.14

Revenues – The following table summarizes our revenues for the six months ended June 30, 2022 and 2021 (in thousands):

For the Six Months Ended June 30,

Revenues – The following table summarizes our revenues for the nine months ended September 30, 2022 and 2021 (in thousands):

For the Nine Months Ended September 30,

Water services $ 15,854 $ 14,303

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Total revenues $ 33,629 $ 31,606

Total revenues increased $1.5 million, or 7.6%, to $21.7 million for the six months ended June 30, 2022 compared to $20.2 million for the six months ended June 30, 2021.

The increase in revenue reflects the 8.8% increase in active service connections due to organic growth, combined with new connections associated with the acquisition of Las Quintas and increases in consumption.

Water Services – Water services revenue increased $0.8 million, or 8.6%, to $10.0 million for the six months ended June 30, 2022 compared to $9.2 million for the six months ended June 30, 2021.

The increase in water services revenues was primarily related to growth in connections.

Water services revenue based on consumption increased by $0.2 million, or 4.4%, to $4.4 million for the six months ended June 30, 2022 compared to $4.2 million for the six months ended June 30, 2021.

Total revenues increased $2.0 million, or 6.4%, to $33.6 million for the nine months ended September 30, 2022 compared to $31.6 million for the nine months ended September 30, 2021.

The increase in revenue reflects the 8.0% increase in active service connections due to organic growth, combined with new connections associated with the acquisition of Las Quintas and increases in consumption, as well as an increase in rates due to Rate Decision No.

The increase in revenue was partially offset by the recognition of $0.7 million in ICFA revenues received during the nine months ended September 30, 2021 as discussed above that did not recur in the current year period.

Water Services – Water services revenue increased $1.6 million, or 10.8%, to $15.9 million for the nine months ended September 30, 2022 compared to $14.3 million for the nine months ended September 30, 2021.

The increase in water services revenue was primarily related to growth in connections combined with an increase in rates due to Rate Decision No.

Water services revenue based on consumption increased by $0.6 million, or 8.9%, to $7.2 million for the nine months ended September 30, 2022 compared to $6.6 million for the nine months ended September 30, 2021.

This increase was primarily driven by increases in commercial and residential consumption as well as growth in connections.

Active water connections increased 11.1% to 29,627 as of June 30, 2022 from 26,678 as of June 30, 2021, primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas.

Water consumption increased by 91 million gallons, or 5.6%, to 1.7 billion gallons for the six months ended June 30, 2022 compared to 1.6 billion for the six months ended June 30, 2021.

The increase was primarily related to the increases in commercial and construction consumption as well as growth in connections partially offset by lower consumption from irrigation resulting from higher precipitation.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.5 million, or 10.6%, to $5.3 million for the six months ended June 30, 2022 compared to $4.8 million for the six months ended June 30, 2021.

The increase was primarily due to the increase in active service connections, which included organic growth combined with new connections associated with the acquisition of Las Quintas.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.8 million, or 7.2%, for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 6.3% to 26,187 as of June 30, 2022, from 24,636 as of June 30, 2021.

Recycled water services revenue, which is based on the number of gallons delivered, increased 1.3%, but remained consistent at $0.6 million for both the six months ended June 30, 2022 and 2021.

Water consumption increased by 246 million gallons, or 10.0%, to 2.7 billion gallons for the nine months ended September 30, 2022 compared to 2.5 billion gallons for the nine months ended September 30, 2021.

The increase was primarily due to organic growth in our service areas combined with new connections associated with the acquisition of Las Quintas, as well as lower precipitation year over year.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.9 million, or 12.1%, to $8.2 million for the nine months ended September 30, 2022 compared to $7.3 million for the nine months ended September 30, 2021.

The increase was primarily due to the increase in active service connections, which included organic growth combined with new connections associated with the acquisition of Las Quintas, as well as an increase in rates due to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.2 million, or 7.3%, to $17.8 million for the nine months ended September 30, 2022 compared to$16.6 million for the nine months ended September 30, 2021.

Recycled water services revenue, which is based on the number of gallons delivered, increased 16.7% to $1.0 million for the nine months ended September 30, 2022 compared to $0.9 million for the nine months ended September 30, 2021.

The increase in recycled water services revenue was primarily driven by the increase in number of gallons consumed.

The volume of recycled water delivered increased 3 million gallons, or 0.8%, to 355 million gallons for the six months ended June 30, 2022 compared to 352 million gallons for the six months ended June 30, 2021.

Operating Expenses – The following table summarizes our operating expenses for the six months ended June 30, 2022 and 2021 (in thousands):

For the Six Months Ended June 30,

The volume of recycled water delivered increased 71 million gallons, or 13.5%, to 602 million gallons for the nine months ended September 30, 2022 compared to 530 million gallons for the nine months ended September 30, 2021.

Operating Expenses – The following table summarizes our operating expenses for the nine months ended September 30, 2022 and 2021 (in thousands):

For the Nine Months Ended September 30,

Operations and maintenance $ 8,260 $ 7,656

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Total operating expenses $ 27,038 $ 25,931

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.5 million, or 10.2%, to $5.5 million for the six months ended June 30, 2022 compared to $5.0 million for the six months ended June 30, 2021.

Property tax expense increased $0.1 million but remained constant at $1.3 million for both the six months ended June 30, 2022 and 2021.

Property taxes are calculated using a centrally valued property calculation, which derives property values based upon three-year historical average revenues.

As revenues increase, we expect property taxes to also increase.

Total personnel and related expenses increased $0.1 million, or 8.3%, to $1.7 million for the six months ended June 30, 2022 compared to $1.5 million for the six months ended June 30, 2021, primarily due to increased salary and wages expense and medical benefits expense due to an increase in head count.

Utilities and related expense increased $0.1 million, or 8.9%, to $1.1 million for the six months ended June 30, 2022 from $1.0 million for the six months ended June 30, 2021.

The increase was primarily related to increased electric utility consumed for operations, which aligned with the increase in revenue.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased $0.6 million, or 7.9%, to $8.3 million for the nine months ended September 30, 2022 compared to $7.7 million for the nine months ended September 30, 2021.

Total personnel and related expenses increased $0.2 million, or 10.1%, to $2.6 million for the nine months ended September 30, 2022 compared to $2.4 million for the nine months ended September 30, 2021, primarily due to increased salary and wages expense, partially offset by a decrease in medical benefits expense due to lower medical claims.

Utilities power and related expenses increased $0.2 million, or 13.1%, to $1.7 million for the nine months ended September 30, 2022 from $1.5 million for the nine months ended September 30, 2021.

The increase was due to increased electric utility expense due to increased pump usage related to additional connections and increased consumption.

Contract services increased $0.2 million, or 19.4%, to $1.1 million for the nine months ended September 30, 2022 from $0.9 million for the nine months ended September 30, 2021.

The increase was primarily due to increased costs for billing software related to the additional connections year over year.

These costs increased $0.4 million, or 6.2%, to $7.7 million for the six months ended June 30, 2022 compared to $7.2 million for the six months ended June 30, 2021.

Personnel and related expenses increased $0.4 million, or 14.9%, to $3.0 million for the six months ended June 30, 2022 compared to $2.6 million for the six months ended June 30, 2021.

The increase was primarily related to increases in salaries and wages for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Professional fees expenses increased $0.5 million, or 50.5%, to $1.4 million for the six months ended June 30, 2022 from $0.9 million for the six months ended June 30, 2021.

The increase was primarily related to legal fees incurred relating to our rate case, capital raise transaction, and acquisitions related matters for the six months ended June 30, 2022.

Board compensation expenses decreased $0.3 million to $0.1 million for the six months ended June 30, 2022 compared to $0.4 million for the six months ended June 30, 2021.

The decrease was primarily driven by the decrease in stock price for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Depreciation and amortization - Depreciation and amortization expense increased approximately $0.2 million, or 2.9%, to $4.8 million for the six months ended June 30, 2022, from $4.6 million for the six months ended June 30, 2021.

The increase was primarily driven by increased depreciation due to the increase in fixed assets.

Other Income/Expense – Other expense totaled $0.6 million for the six months ended June 30, 2022 compared to other expense of $1.0 million for the six months ended June 30, 2021.

The $0.4 million improvement in other expense was primarily driven by the decrease in interest expense combined with $1.5 million of income recognized on the sale of a wireless communication tower during the six months ended June 30, 2021, partially offset by higher income of $1.4 million related to the Buckeye growth premiums received for the six months ended June 30, 2022 compared to six months ended June 30, 2021.

Income Tax Expense – Income tax expense decreased $0.4 million to $0.2 million for the six months ended June 30, 2022 compared to $0.6 million for the six months ended June 30, 2021.

These costs increased $0.3 million, or 2.6%, to $11.6 million for the nine months ended September 30, 2022 compared to $11.3 million for the nine months ended September 30, 2021.

Personnel and related expenses increased $0.4 million, or 9.8%, to $4.6 million for the nine months ended September 30, 2022 compared to $4.2 million for the nine months ended September 30, 2021.

The increase was primarily related to increases in salaries and wages for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Professional fees expenses increased $0.6 million, or 45.4%, to $2.0 million for the nine months ended September 30, 2022 from $1.4 million for the nine months ended September 30, 2021.

The increase was primarily related to legal fees incurred relating to the rate case and acquisition related matters for the nine months ended September 30, 2022.

Deferred compensation expenses decreased $1.2 million, or 57.7%, to $0.9 million for the nine months ended September 30, 2022 compared to $2.2 million for the nine months ended September 30, 2021.

The decrease was primarily driven by the decrease in stock price for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Board compensation expenses decreased to $0.1 million for the nine months ended September 30, 2022 compared to $0.6 million for the nine months ended September 30, 2021.

The decrease was primarily driven by the decrease in stock price for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Depreciation and amortization - Depreciation and amortization expense increased approximately $0.2 million, or 3.0%, to $7.2 million for the nine months ended September 30, 2022, from $7.0 million for the nine months ended September 30, 2021.

The increase was primarily driven by an increase in depreciation of fixed assets.

Other Expense – Other expense totaled $1.1 million for the nine months ended September 30, 2022 compared to other expense of $1.5 million for the nine months ended September 30, 2021.

The $0.4 million improvement in other expense was primarily driven by higher net income of $1.3 million related to the Buckeye growth premiums received for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, combined with a decrease in interest expense of $0.6 million.

This was partially offset by $1.5 million of income recognized on the sale of a wireless communication tower during the nine months ended September 30, 2021 that did not recur in the current year period.

Income Tax Expense – Income tax expense decreased $0.1 million to $0.8 million for the nine months ended September 30, 2022 compared to $0.9 million for the nine months ended September 30, 2021.

The decrease was primarily driven by the reversal of approximately $0.7 million related to Rate Case Decision No.

Net Income – Net income totaled $3.0 million for the six months ended June 30, 2022 compared to net income of $1.8 million for the six months ended June 30, 2021.

The $1.2 million increase was primarily attributed to the $0.4 million improvement in total other expense coupled with the $0.4 million increase in operating income and the decrease in income tax expense for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Net Income – Net income increased 43.5% to $4.7 million for the nine months ended September 30, 2022 compared to $3.3 million for the nine months ended September 30, 2021.

The $1.4 million increase was primarily attributed to the $0.9 million increase in operating income and the decrease in income tax expense coupled with the $0.4 million improvement in total other expense for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Outstanding Share Data

As of August 10, 2022, there were 23,866,609 shares of our common stock outstanding and stock based awards to acquire an additional 755,695 shares of our common stock outstanding.

As of November 9, 2022, there were 23,866,286 shares of our common stock outstanding and stock-based awards to acquire an additional 755,695 shares of our common stock outstanding.

Liquidity and Capital Resources

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Such recovery will take place over an extended period of time because recovery through rate increases is subject to regulatory lag.

As of June 30, 2022, we have no notable near-term cash expenditures, other than the principal payments for our Series B senior secured notes in the amount of $1.9 million due in December 2022 and $1.9 million due in June 2023.

As of September 30, 2022, we have no notable near-term cash expenditures, other than the principal payments for our Series B senior secured notes in the amount of $1.9 million due in December 2022 and $1.9 million due in June 2023.

While specific facts and circumstances could change, we believe that we have sufficient cash on hand, the ability to draw on our $15.0 million revolving line of credit (which reflects the increased borrowing amount under this recently amended facility as discussed below), and will be able to generate sufficient cash flows to meet our operating cash flow requirements and capital expenditure plan, as well as remain in compliance with our debt covenants, for the next twelve months and beyond.

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Our future cash flows from operating activities will be affected by economic utility regulation, infrastructure investment, growth in service connections, customer usage of water, compliance with environmental health and safety standards, production costs, weather, and seasonality.

For the six months ended June 30, 2022, our net cash provided by operating activities totaled $11.9 million compared to $7.4 million for the six months ended June 30, 2021.

The $4.5 million increase in cash from operating activities was primarily driven by the increases in accounts payable and other current and noncurrent liabilities relating to CIAC from developers for the six months ended June 30, 2022 compared to June 30, 2021.

For the nine months ended September 30, 2022, our net cash provided by operating activities totaled $19.7 million compared to $15.2 million for the nine months ended September 30, 2021.

The $4.5 million increase in cash from operating activities was primarily driven by the improvement in net income, combined with the increase in noncurrent liabilities relating to CIAC from developers for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

Cash from Investing Activities

Our net cash used in investing activities totaled $14.8 million for the six months ended June 30, 2022 compared to $6.4 million for the six months ended June 30, 2021.

The $8.4 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of $8.2 million for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Our net cash used in investing activities totaled $25.4 million for the nine months ended September 30, 2022 compared to $11.8 million for the nine months ended September 30, 2021.

The $13.6 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of $13.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

We continue to invest capital prudently in our existing, core service areas where we are able to deploy our Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities.

Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors.

Although we currently plan for capital expenditures in the second half of the year to continue in amounts comparable to the first half of the year, we may reduce capital expenditures to correspond with any decreases in demand for housing in our service areas.

As a result, we may reduce capital expenditures to correspond with any decreases in demand for housing in our service areas.

Cash from Financing Activities

Our net cash used in financing activities totaled $3.8 million for the six months ended June 30, 2022 compared to $1.6 million in cash used in financing activities for the six months ended June 30, 2021.

This change was primarily driven by the $1.9 million principal payment for our Series B senior secured notes for the six months ended June 30, 2022, for which there was no comparable payment for the six months ended June 30, 2021.

Our net cash provided by financing activities totaled $8.8 million for the nine months ended September 30, 2022 compared to $2.7 million in cash used in financing activities for the nine months ended September 30, 2021.

This change was primarily driven by the $14.9 million in net proceeds received from our public offering of common stock in August 2022, partially offset by a $1.9 million principal payment for our Series B senior secured notes for the nine months ended September 30, 2022.

Senior Secured Notes

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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.

Series B was 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 our long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the initial public offering of our common stock in May 2016.

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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.

Debt issuance costs as of both June 30, 2022 and December 31, 2021 remained consistent at $0.5 million.

As of September 30, 2022, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of both September 30, 2022 and December 31, 2021 remained consistent at $0.5 million.

Revolving Line of Credit

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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 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" ” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

As of September 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 Northern Trust 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 The Northern Trust Company entered into a second amendment to the Northern Trust 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 - Corporate Transactions - Revolving Line of Credit" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

Similar to the senior secured notes, 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.

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Refer to Note 11 — "Debt" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

As of June 30, 2022, the Company was in compliance with its financial debt covenants.

As of September 30, 2022, the Company was in compliance with its financial debt covenants.

Financing Activity

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 purchases shares of common stock in the offering.

The Company received net proceeds of approximately $14.9 million from the offering after deducting underwriting discounts and commissions and offering expenses paid by the Company.

Certain directors and/or their affiliates purchased an aggregate of the 652,000 shares of common stock at the public offering price.

Contractual Obligations

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Off Balance Sheet Arrangements

As of June 30, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements.

As of September 30, 2022 and December 31, 2021, we did not have any off-balance sheet arrangements.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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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 2. Management’s Discussion and Analysis