Global Water Resources, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34 ) 56 Consolidated Balance Sheets as of December 31, 2022 and 2021 58 Consolidated Statements of Operations for the Years ended December 31, 2022 and 2021 59 Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2022 and 2021 60 Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021 61 Notes to Consolidated Financial Statements 63 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the Board of Directors of Global Water Resources, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Global Water Resources, Inc. and subsidiaries (the "Company") as of December 31, 2022 and 2021 the related consolidated statements of operations, shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Regulatory Matters - Impact of Rate Regulation on the Financial Statements — Refer to Note 2 to the financial statements Critical Audit Matter Description The Company’s regulated utilities are subject to rate regulation by the Arizona Corporation Commission (the “ACC”), and are therefore subject to Accounting Standards Codification Topic 980, Regulated Operations (“ASC 980”). In accordance with ASC 980, rates charged to water and wastewater service customers in Arizona are intended to recover the costs of the provision of service plus a reasonable return in the same period. Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment; regulatory assets and liabilities; revenues; operation and maintenance expense; and depreciation expense. -56- The ACC establishes rates that are designed to permit the recovery of the cost of service and a return on investment. Decisions to be made by the ACC in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required. While the Company has indicated it expects to recover costs from customers through regulated rates, there is a risk that the ACC will not approve: (1) full recovery of the costs of providing utility service, or (2) full recovery of all amounts invested in the utility business and a reasonable return on that investment. We identified the impact of rate regulation as a critical audit matter due to the significant judgments that underlie the Company’s regulatory account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, and (2) a refund to customers. Given that management’s accounting judgments are based on assumptions about the outcome of future regulatory decisions and interpretation of new or revised regulatory decisions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due its inherent complexities and pervasive impact on the financial statements. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the uncertainty of future decisions by the ACC included the following, among others: • We read relevant regulatory orders and settlements issued by the ACC for the Company and other public utilities in Arizona, regulatory statutes, interpretations, procedural memorandums, filings made by interveners and utilities, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the ACC’s treatment of similar costs under similar circumstances. • We obtained supporting documentation from management, as appropriate, regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery or a future reduction in rates. • We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. /s/ DELOITTE & TOUCHE LLP Tempe, Arizona March 8, 2023 We have served as the Company's auditor since 2003. -57- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) December 31, 2022 December 31, 2021 ASSETS PROPERTY, PLANT AND EQUIPMENT: Land $ 1,480 $ 1,338 Depreciable property, plant and equipment 344,043 313,700 Construction work-in-progress 66,039 53,511 Other 697 697 Less accumulated depreciation ( 124,522 ) ( 113,380 ) Net property, plant and equipment 287,737 255,866 CURRENT ASSETS: Cash and cash equivalents 6,561 12,637 Accounts receivable — net 2,139 1,994 Customer payments in-transit 462 201 Unbilled revenue 2,557 2,510 Taxes, prepaid expenses, and other current assets 2,439 1,645 Total current assets 14,158 18,987 OTHER ASSETS: Goodwill 4,957 5,730 Intangible assets — net 10,139 10,339 Regulatory asset 3,169 2,336 Restricted cash 1,001 806 Right-of -use asset 1,891 — Other noncurrent assets 34 10 Total other assets 21,191 19,221 TOTAL ASSETS $ 323,086 $ 294,074 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,173 $ 2,120 Accrued expenses 8,056 9,191 Customer and meter deposits 1,682 1,646 Long-term debt — current portion 3,833 3,833 Leases — current portion 505 142 Total current liabilities 16,249 16,932 NONCURRENT LIABILITIES: Long-term debt 104,945 108,734 Long-term lease liabilities 1,616 199 Deferred revenue - ICFA 20,974 19,035 Regulatory liability 6,371 7,421 Advances in aid of construction 93,656 84,578 Contributions in aid of construction — net 26,404 21,326 Deferred income tax liabilities, net 5,949 3,269 Acquisition liability 1,773 1,773 Other noncurrent liabilities 755 778 Total noncurrent liabilities 262,443 247,113 Total liabilities 278,692 264,045 Commitments and contingencies (Refer to Note 15) SHAREHOLDERS' EQUITY: Common stock, $ 0.01 par value, 60,000,000 shares authorized; 24,095,139 and 22,832,013 shares issued as of December 31, 2022 and December 31, 2021, respectively. 239 228 Treasury stock, 224,093 and 182,445 shares at December 31, 2022 and December 31, 2021, respectively. ( 2 ) ( 2 ) Paid in capital 44,157 29,803 Retained earnings — — Total shareholders' equity 44,394 30,029 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 323,086 $ 294,074 See accompanying notes to the consolidated financial statements -58- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Year Ended December 31, 2022 2021 REVENUES: Water services $ 20,885 $ 18,944 Wastewater and recycled water services 23,843 22,241 Unregulated revenues — 729 Total revenues 44,728 41,914 OPERATING EXPENSES: Operations and maintenance 10,889 10,299 General and administrative 16,130 15,146 Depreciation and amortization 9,890 9,490 Total operating expenses 36,909 34,935 OPERATING INCOME 7,819 6,979 OTHER INCOME (EXPENSE): Interest income 65 19 Interest expense ( 4,036 ) ( 5,201 ) Other 2,592 2,962 Total other expense ( 1,379 ) ( 2,220 ) INCOME BEFORE INCOME TAXES 6,440 4,759 INCOME TAX BENEFIT (EXPENSE) ( 934 ) ( 1,150 ) NET INCOME $ 5,506 $ 3,609 Basic earnings per common share $ 0.24 $ 0.16 Diluted earnings per common share $ 0.24 $ 0.16 Dividends declared per common share $ 0.30 $ 0.29 Weighted average number of common shares used in the determination of: Basic 23,172,733 22,619,469 Diluted 23,332,356 22,902,970 See accompanying notes to the consolidated financial statements -59- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (in thousands, except share and per share amounts) 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 $ 0.29 per share — — — — ( 3,000 ) ( 3,609 ) ( 6,609 ) Issuance of Common Stock 54,163 — — — — — — Treasury stock — — ( 79,734 ) ( 1 ) 3 — 2 Stock option exercise 87,373 1 — — — — 1 Stock compensation — — — — 838 — 838 Net income — — — — — 3,609 3,609 BALANCE - December 31, 2021 22,832,013 228 ( 182,445 ) ( 2 ) 29,803 — 30,029 Dividend declared $ 0.30 per share — — — — ( 1,383 ) ( 5,506 ) ( 6,889 ) Issuance of common stock 1,150,000 11 — — 14,782 — 14,793 Treasury Stock — — ( 41,648 ) — 304 — 304 Stock option exercise 113,126 — — — 22 — 22 Stock compensation — — — — 629 — 629 Net income — — — — — 5,506 5,506 BALANCE - December 31, 2022 24,095,139 239 ( 224,093 ) ( 2 ) 44,157 — 44,394 See accompanying notes to the consolidated financial statements -60- Table of Contents GLOBAL WATER RESOURCES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES: Net income 5,506 $ 3,609 Adjustments to reconcile net income to net cash provided by operating activities: Deferred compensation 1,529 2,884 Depreciation and amortization 9,889 9,490 Right of use amortization 182 — Amortization of deferred debt issuance costs and discounts 44 90 (Gain) Loss on disposal of fixed assets 4 18 Provision for doubtful accounts receivable 103 86 Deferred income tax expense 1,367 ( 307 ) Accounts receivable ( 248 ) 82 Other current assets 210 ( 1,076 ) Accounts payable and other current liabilities ( 1,830 ) 415 Other noncurrent assets 387 ( 300 ) Other noncurrent liabilities 6,193 5,395 Net cash provided by operating activities 23,336 20,386 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ( 33,984 ) ( 18,250 ) Cash paid for acquisitions, net of cash acquired ( 180 ) ( 2,068 ) Other cash flows from investing activities ( 24 ) ( 1 ) Net cash used in investing activities ( 34,188 ) ( 20,319 ) CASH FLOWS FROM FINANCING ACTIVITIES: Dividends paid ( 6,889 ) ( 6,609 ) Advances in aid of construction 2,344 3,817 Refunds of advances for construction ( 1,140 ) ( 1,007 ) Refunds of developer taxes — ( 1,364 ) Proceeds from stock option exercise 3 4 Payments for taxes related to net shares settlement of equity awards ( 585 ) ( 656 ) Principal payments under finance lease — ( 147 ) Loan repayments 259 ( 4 ) Repayments of bond ( 3,833 ) ( 1,917 ) Proceeds from sale of stock 14,812 — Debt issuance costs paid — ( 46 ) Net cash provided by (used in) financing activities 4,971 ( 7,929 ) INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 5,881 ) ( 7,862 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 13,443 21,305 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH – End of period 7,562 13,443 See accompanying notes to the consolidated financial statements -61- Table of Contents Supplemental disclosure of cash flow information: Year Ended December 31, 2022 2021 Cash and cash equivalents $ 6,561 $ 12,637 Restricted Cash 1,001 806 Total cash, cash equivalents, and restricted cash $ 7,562 $ 13,443 -62- Table of Contents GLOBAL WATER RESOURCES, INC. Notes to the Consolidated Financial Statements 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, CORPORATE TRANSACTIONS, SIGNIFICANT ACCOUNTING POLICIES, AND RECENT ACCOUNTING PRONOUNCEMENTS Description of Business GWRI is a holding company that currently owns and operates twenty-nine water and wastewater systems in strategically targeted communities, primarily in the metropolitan areas of Phoenix and Tucson, Arizona. Serving more than 74,000 people in approximately 29,000 homes within our 397 square miles of certificated service areas as of December 31, 2022, GWRI provides water and wastewater utility services under the regulatory authority of the ACC. Approximately 91.0 % of the active service connections are customers of Global Water - Santa Cruz Water Company, Inc. (“Santa Cruz”) and Global Water - Palo Verde Utilities Company, Inc. (“Palo Verde”) utilities, which are located within a single service area. Basis of Presentation and Principles of Consolidation The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include the accounts of GWRI and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in consolidation. 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 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 ACC Rate Case 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 . 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; (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. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” for additional information. 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. -63- Table of Contents Recent Acquisitions 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. On February 1, 2023, the Company completed the acquisition of Farmers Water Co. Refer to Note 16 - "Subsequent Event" for additional information. 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. On January 13, 2022, the Company 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. On November 3, 2021, the Company completed the stock acquisition by merger of Las Quintas Serenas Water Company, Inc. ("Las Quintas"), an operator of a water utility with service area in Pima County, Arizona, adding 1,100 connections with approximately 2.5 square miles of service area at the time of acquisition. 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 $ 2.5 million and $ 1.4 million for the years ended December 31, 2022 and 2021, respectively. Significant Accounting Policies Regulation Our regulated utilities and certain other balances are subject to regulation by the ACC and are therefore subject to Accounting Standards Codification Topic 980, Regulated Operations (“ASC 980”) (See Note 2 – “Regulatory Decision and Related Accounting and Policy Changes”). Property, Plant, and Equipment Property, plant, and equipment is stated at cost less accumulated depreciation provided on a straight-line basis (See Note 5 – “Property, Plant, and Equipment”). Depreciation rates for asset classes of utility property, plant, and equipment are established by the ACC. The cost of additions, including betterments and replacements of units of utility fixed assets are charged to utility property, plant, and equipment. When units of utility property are replaced, renewed, or retired, their cost plus removal or disposal costs, less salvage proceeds, is charged to accumulated depreciation. For non-utility property, plant, and equipment, depreciation is calculated by the straight-line method over the estimated useful lives of depreciable assets. Cost and accumulated depreciation for non-utility property, plant, and equipment retired or disposed of are removed from the accounts and any resulting gain or loss is included in earnings. In addition to third party costs, direct personnel costs and indirect construction overhead costs may be capitalized. Interest incurred during the construction period is also capitalized as a component of the cost of the constructed assets, which represents the cost of debt and equity associated with construction activity. Expenditures for maintenance and repairs are charged to expense. Revenue Recognition—Water Services Water services revenues are recorded when service is rendered or water is delivered to customers. However, in addition to the monthly basic service charge, the determination and billing of water sales to individual customers is based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each reporting period, -64- Table of Contents amounts of water delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recorded. Water connection fees are the fees associated with the application process to set up a customer to receive utility service on an existing water meter. These fees are approved by the ACC through the regulatory process and are set based on the costs incurred to establish services including the application process, billing setup, initial meter reading, and service transfer. Because the amounts charged for water connection fees are set by our regulator and not negotiated in conjunction with the pricing of ongoing water service, the connection fees represent the culmination of a separate earnings process and are recognized when the service is provided. For both the years ended December 31, 2022 and 2021, the Company recognized $ 0.3 million in connection fees. Meter installation fees are the fees charged to developers or builders associated with installing new water meters. Certain fees for meters are regulated by the ACC, and are refundable to the end customer over a period of time. Refundable meter installation fees are recorded as a liability upon receipt. Revenue Recognition—Wastewater and Recycled Water Services Wastewater and recycled water services revenues are generally recognized when service is rendered. Wastewater services are billed at a fixed monthly amount per connection, and recycled water services are billed monthly based on volumetric fees. Revenue Recognition—Unregulated Revenues Unregulated revenues represent those revenues that are not subject to the ratemaking process of the ACC. Unregulated revenues are limited to rental revenue and revenues resulting from certain infrastructure coordination and financing agreement arrangements ("ICFAs"). ICFAs are agreements with developers and homebuilders whereby GWRI, which owns 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. Services provided within these agreements include coordination of construction services for water and wastewater treatment facilities as well as financing, arranging, and coordinating the provision of utility services. As these arrangements are with developers and not with the end water or wastewater customer, revenue recognition coincides with the completion of our performance obligations under the agreement with the developer and our ability to provide fitted capacity for water and wastewater service. Payments for ICFAs are usually received in advance and are recorded as deferred revenue until earned. Pursuant to Rate Decision No. 74364, as funding is received 70 % of ICFAs are now recorded as a hook-up fee (“HUF”) liability until the HUF liability is fully funded, with the remaining amount recorded as revenue once all components of revenue recognition are met (See Note 2 – “Regulatory Decision and Related Accounting and Policy Changes”). Allowance for Doubtful Accounts Provisions are made for doubtful accounts due to the inherent uncertainty around the collectability of accounts receivable. The allowance for doubtful accounts is recorded as bad debt expense, and is classified as general and administrative expense. The allowance for doubtful accounts is determined considering the age of the receivable balance, type of customer (e.g., residential or commercial), payment history, as well as specific identification of any known or expected collectability issues (see Note 6 – “Accounts Receivable”). Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments in debt instruments with an original maturity of three months or less. Restricted Cash Restricted cash represents cash deposited relating to HUF tariffs and asset retirement obligations. The following table summarizes the restricted cash balance as of December 31, 2022 and 2021 (in thousands): -65- Table of Contents December 31, 2022 December 31, 2021 HUF funds $ 161 $ 16 Certificate of deposits $ 840 790 $ 1,001 $ 806 Income Taxes The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s valuation allowance totaled zero as of December 31, 2022 and 2021 (see Note 12 – “Income Taxes”). We evaluate uncertain tax positions using a two-step approach. Recognition (step one) occurs when we conclude that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when we subsequently determine that a tax position no longer meets the more-likely-than-not threshold of being sustained. The use of a valuation allowance as a substitute for derecognition of tax positions is prohibited, and to the extent that uncertain tax positions exist, we provide expanded disclosures. Basic and Diluted Earnings per Common Share Basic earnings per share (“EPS”) in each period of this report were calculated by dividing net income by the weighted-average number of shares during those periods. Diluted EPS includes additional weighted-average common stock equivalents (options and restricted stock awards), if dilutive. Unless otherwise noted, the term “Earnings Per Share” refers to Basic EPS. A reconciliation of the denominator used in Basic and Diluted EPS calculations is show in the following table: (In thousands) December 31, 2022 December 31, 2021 Basic weighted average common shares outstanding 23,173 22,619 Effect of dilutive securities: 2017 Option grant 106 164 2019 Option grant 26 61 2020 Restricted stock awards 27 56 2021 Restricted stock awards — 3 Total dilutive securities 159 284 Diluted weighted average common shares outstanding 23,332 22,903 Anti-dilutive shares excluded from earnings per diluted shares (1) 185 — (1) Shares were excluded from the dilutive-effect calculation because the outstanding awards' exercise prices were greater than the average market price of the Company's common stock. Refer to Note 13 – “Deferred Compensation Awards” for additional information regarding the option and restricted stock grants. Goodwill Goodwill represents the excess purchase price over the fair value of net tangible and identifiable intangible assets acquired through acquisitions. Goodwill is not amortized, it is instead tested for impairment annually, or more often if circumstances indicate a possible impairment may exist. As required, we evaluate goodwill for impairment annually, and do so as of November 1 of each year, and at an interim date if indications of impairment exist. When testing goodwill for impairment, we may assess qualitative factors, including macroeconomic conditions, industry and market considerations, overall financial performance, and entity specific events to determine whether it is more likely than not that the fair value of an operating and reportable segment is less than its carrying amount. We utilize internally developed discounted future cash -66- Table of Contents flow models, third-party appraisals, or broker valuations to determine the fair value of the reporting unit. Under the discounted cash flow approach, we utilize various assumptions requiring judgment, including projected future cash flows, discount rates, and capitalization rates. Our estimated future cash flows are based on historical data, internal estimates, and external sources. We then compare the estimated fair value to the carrying value. If the carrying value is in excess of the fair value, an impairment charge is recorded to asset impairments within our consolidated statement of operations in the amount by which the reporting unit's carrying value exceeds its fair value, limited to the carrying value of goodwill. Refer to Note 7 — "Goodwill and Intangible Assets" for additional information about goodwill. Intangible Assets Intangible assets not subject to amortization consist of certain permits expected to be renewable indefinitely, water rights, and certain service areas acquired in transactions which did not meet the definition of business combinations for accounting purposes, and are considered to have indefinite lives. Intangible assets with indefinite lives are not amortized but are tested for impairment annually, or more often if certain circumstances indicate a possible impairment may exist. Amortized intangible assets consist primarily of acquired ICFA contract rights. Refer to Note 2 – "Regulatory Decision and Related Accounting and Policy Changes” for additional information about ICFAs. Impairment of Long-Lived Assets Management evaluates the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. If an indicator of possible impairment exists, an undiscounted cash flow analysis would be prepared to determine whether there is an actual impairment. Measurement of the impairment loss is based on the fair value of the asset. Generally, fair value will be determined using appraisals or valuation techniques such as the present value of expected future cash flows. Debt Issuance Costs In connection with the issuance of some of our long-term debt, we have incurred legal and other costs that we believe are directly attributable to realizing the proceeds of the debt issued. These costs are netted against long-term debt and amortized as interest expense using the effective interest method over the term of the respective debt. Amortization of debt issuance costs and discounts totaled approximately $ 0.04 million for the year ended December 31, 2022 and approximately $ 0.09 million for the year ended December 31, 2021, respectively. Advances in Aid of Construction ("AIAC") and Contributions in Aid of Construction ("CIAC") The Company has various agreements with developers, whereby funds, water line extensions, or wastewater line extensions are provided to the Company by the developers and are considered refundable AIAC. These AIAC are non-interest-bearing and are subject to refund to the developers through annual payments that are computed as a percentage of the total annual gross revenue earned from customers connected to utility services constructed under the agreement over a specified period. Upon the expiration of the agreements’ refunding period, the remaining balance of the AIAC becomes nonrefundable and at that time is considered CIAC. CIAC are amortized as a reduction of depreciation expense over the estimated remaining life of the related utility plant. For rate-making purposes, utility plant funded by AIAC or CIAC are excluded from rate base. There was no AIAC balance transferred to CIAC for the years ended December 31, 2022 or December 31, 2021. Fair Value of Financial Instruments The carrying values of cash equivalents, accounts receivables, and accounts payable approximate fair value due to the short-term maturities of these instruments. See Note 11 – “Debt” for information as to the fair value of our long-term debt. Our refundable AIAC have a carrying value of $ 93.7 million and $ 84.6 million as of December 31, 2022 and 2021, respectively. Portions of these non-interest-bearing instruments are payable annually through 2032 and amounts not paid by the contract expiration dates become nonrefundable. Their relative fair values cannot be accurately estimated because future refund payments depend on several variables, including new customer connections, customer consumption levels, and future rate increases. However, the fair value of these amounts would be less than their carrying value due to the non-interest-bearing feature. Segments Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (“CODM”) in deciding how to allocate resources and in assessing operating performance. In consideration of ASC 280— Segment Reporting the Company notes it is not organized -67- Table of Contents around specific products and services, geographic regions, or regulatory environments. The Company currently operates in one geographic region within the State of Arizona, wherein each operating utility operates within the same regulatory environment. While the Company reports its revenue, disaggregated by service type, on the face of its Statements of Operations, the Company does not manage the business based on any performance measure at the individual revenue stream level. The Company does not have any customers that contribute more than 10% to the Company’s revenues or revenue streams. Additionally, the Company notes that the CODM uses consolidated financial information to evaluate the Company’s performance, which is the same basis on which he communicates the Company’s results and performance to the Board of Directors. It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of the Company’s resources on a consolidated level. Based on the information described above and in accordance with the applicable literature, management has concluded that the Company is currently organized and operated as one operating and reportable segment. Recent Accounting Pronouncements Recently Adopted Accounting Standards In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”, or "ASC 842"). 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 ASC 842 on January 1, 2021. The implementation did not result in material changes to our consolidated financial statements. Refer to Note 4 — "Leases" 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 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 ASU 2018-15 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. 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 . 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 and which are described below. 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 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. -68- Table of Contents Rate Decision No. 78644 also addressed the primary impacts of the TCJA on the Company, which is the reduction of the federal income tax rate from 35 percent to 21 percent beginning on January 1, 2018. The TCJA required the Company to re-measure all existing deferred income tax assets and liabilities to reflect the reduction in the federal 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 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. In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities were approximately $ 415,000 , $ 669,000 , $ 16,000 , and $ 5,000 , respectively. The ACC also approved a carrying cost of 4.25 % on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the years leading up to 2021 (i.e., 2018 through 2020). Rate Decision No. 76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes (“ADIT”), including excess ADIT (“EADIT”). Subsequently, Rate Decision No. 78644 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 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 certain changes in tax expense, primarily related to income taxes, 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 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. 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. Certain accounting implications related to Rate Decision No. 78644 were recognized and recorded as of June 30, 2022, and are as follows: • 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. • 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. 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. -69- Table of Contents 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 with the appropriate recorder's office 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. Rate Decision No. 74364 prescribes that of the ICFA funds received, approximately 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 accounts 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 are segregated in a separate bank account and used for plant. A HUF liability is established and 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 records 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 December 31, 2022 and 2021, ICFA deferred revenue recorded on the consolidated balance sheet totaled $ 21.0 million and $ 19.0 million, respectively, which represents deferred revenue recorded for ICFA funds received on contracts. 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 December 31, 2022, the regulatory liability recorded on the consolidated balance sheet totaled $ 6.4 million of which $ 5.9 million relates to the offset of intangible assets related to ICFA contracts obtained in connection with our Santa Cruz, Palo Verde, and Sonoran acquisitions . 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 water 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. -70- Table of Contents 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. Disaggregated Revenues For the years ended December 31, 2022 and 2021, disaggregated revenues from contracts with customers by major source and customer class are as follows (in thousands): Year Ended December 31, 2022 2021 REGULATED REVENUE Water Services Residential $ 15,114 $ 13,697 Irrigation 2,899 2,917 Commercial 1,165 868 Construction 830 691 Other water revenues 877 771 Total water revenues 20,885 18,944 Wastewater and recycled water services Residential 21,346 19,743 Commercial 888 1,020 Recycled water revenues 1,242 1,132 Other wastewater revenues 367 346 Total wastewater and recycled water revenues 23,843 22,241 TOTAL REGULATED REVENUE 44,728 41,185 UNREGULATED REVENUE ICFA revenues — 683 Rental revenues — 46 TOTAL UNREGULATED REVENUE — 729 TOTAL REVENUE $ 44,728 $ 41,914 -71- Table of Contents Contract Balances Our contract assets and liabilities consist of the following (in thousands): December 31, 2022 December 31, 2021 CONTRACT ASSETS Accounts receivable Water services $ 1,179 $ 1,139 Wastewater and recycled water services 1,124 987 Total contract assets (1) $ 2,303 $ 2,126 CONTRACT LIABILITIES Deferred revenue - ICFA $ 20,974 $ 19,035 Refund liability - regulated (2) — 762 Total contract liabilities $ 20,974 $ 19,797 (1) The increase in accounts receivable was primarily due to increased connections through organic growth and rate increases resulting from Rate Decision No. 78644. Refer to Note 2— "Regulatory Decision and Related Accounting and Policy Changes" for further details. (2) The decrease in refund liability related to tax reform is due to the phase-in approach approved in Rate Decision No. 76901. Refer to Note 2— "Regulatory Decision and Related Accounting and Policy Changes" for further details. Remaining Performance Obligations Revenue allocated to remaining performance obligations represents contracted revenue that has not yet been recognized, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. Contracted revenue expected to be recognized in future periods was approximately $ 21.0 million and $ 19.0 million at December 31, 2022 and December 31, 2021, respectively. Deferred revenue - ICFA is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred. Due to the uncertainty of future events, the Company is unable to estimate when to expect recognition of deferred revenue - ICFA. 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 and lessor arrangements. The Company measures the lease liability at the present value of future lease payments, excluding variable payments based on usage or performance, and calculates the present value using implicit rates. Leases with an initial term of twelve months or less are not recorded on the balance sheet. During the year ended December 31, 2022, the Company entered into nine new finance leases for vehicles with either 48 or 60 month terms, all of which include a purchase option. 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. -72- Table of Contents In December 2021, the Company 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 the Company amended the terms of the lease to incorporate construction of tenant improvements. Should the Company incur additional costs in excess of the landlord improvement allowance, the Company 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. Rent expense arising from the operating leases totaled approximately $ 319,000 and $ 197,000 for the years ended December 31, 2022 and 2021, respectively. 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 under this lease. 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 December 31, 2022 and 2021 consist of the following (in thousands): December 31, 2022 December 31, 2021 Finance Leases $ 405 $ — Operating Lease 1,486 — Total $ 1,891 $ — Lease liabilities at December 31, 2022 and 2021 consist of the following (in thousands): December 31, 2022 December 31, 2021 Finance Leases $ 597 $ 341 Operating Lease 1,524 — Total $ 2,121 $ 341 5. PROPERTY, PLANT AND EQUIPMENT Property, plant, and equipment at December 31, 2022 and 2021 consist of the following (in thousands): Year Ended December 31, 2022 2021 Equipment 55,178 49,859 Office buildings and other structures 54,647 50,264 Transmission and distribution plant 234,218 213,577 Total property, plant, and equipment 344,043 313,700 Depreciation of property, plant and equipment is computed based on the estimated useful lives as follows: Useful Lives Equipment 3 to 30 years Office buildings and other structures 30 years Transmission and distribution plant 10 to 50 years -73- Table of Contents 6. ACCOUNTS RECEIVABLE Accounts receivable as of December 31, 2022 and 2021 consist of the following (in thousands): December 31, 2022 December 31, 2021 Billed receivables $ 2,303 $ 2,126 Less allowance for doubtful accounts $ ( 164 ) ( 132 ) Accounts receivable – net $ 2,139 $ 1,994 The following table summarizes the allowance for doubtful accounts activity as of and for the years ended December 31, 2022 and 2021 (in thousands). Balance at Beginning of Period Additions Charged to Expense Charged to Other Accounts Write-offs Balance at End of Period Allowance for doubtful accounts: Year Ended December 31, 2022 $ ( 132 ) $ ( 99 ) $ ( 8 ) $ 75 $ ( 164 ) Year Ended December 31, 2021 $ ( 205 ) $ ( 27 ) $ ( 10 ) $ 110 $ ( 132 ) 7. GOODWILL AND INTANGIBLE ASSETS Goodwill The goodwill balance was $ 5.0 million at December 31, 2022. The balance is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon and Twin Hawks acquisitions. As of June 30, 2022, the Company reclassified approximately $ 0.8 million of goodwill to regulatory assets related to Red Rock Water, Red Rock Wastewater, and Turner Ranches acquisition premiums as a result of Rate Decision No. 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 December 31, 2022 and 2021 intangible assets consisted of the following (in thousands): December 31, 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 87 87 68 68 1,764 1,764 1,743 1,743 DEFINITE LIVED INTANGIBLE ASSETS: Acquired ICFAs 17,978 ( 14,785 ) 3,193 17,978 ( 14,565 ) 3,413 Sonoran contract rights 7,406 ( 2,224 ) 5,182 7,407 ( 2,224 ) 5,183 25,384 ( 17,009 ) 8,375 25,385 ( 16,789 ) 8,596 Total intangible assets $ 27,148 $ ( 17,009 ) $ 10,139 $ 27,128 $ ( 16,789 ) $ 10,339 A Certificate of Convenience & Necessity ("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. -74- Table of Contents 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. 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 $ 0.2 million and $ 0.8 million was recorded for these balances for the years ended December 31, 2022 and 2021, respectively. 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 $ 0.9 million and $ 1.8 million for the years ended December 31, 2022 and 2021, respectively. Refer to Note 1 — "Description of Business, Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions — Public Offering of Common Stock" for additional information regarding other related party disclosures. 9. ACCRUED EXPENSES Accrued expenses at December 31, 2022 and 2021 consist of the following (in thousands): December 31, 2022 December 31, 2021 Deferred compensation $ 818 $ 1,211 Property taxes 1,195 1,238 Accrued project liabilities 1,585 605 Interest 483 492 Dividend payable 593 547 Asset retirement obligation 697 697 Accrued bonus 557 478 Customer prepayments 588 438 Other accrued liabilities 1,540 3,485 Total accrued expenses $ 8,056 $ 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. -75- Table of Contents Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and 2021 were as follows (in thousands): December 31, 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) $ 161 $ — $ — $ 161 $ 16 $ — $ — $ 16 Demand Deposit (2) 50 — — 50 135 — — 135 Certificate of Deposit - Restricted (1) — 840 — 840 — 790 — 790 Long-term debt (3) — 103,611 — 103,611 — 125,650 — 125,650 Acquisition Liability (4) — — 838 838 — — 838 838 Total $ 211 $ 104,451 $ 838 $ 105,500 $ 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 was 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 . 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 December 31, 2022 and 2021 are as follows (in thousands): December 31, 2022 December 31, 2021 Short-term Long-term Short-term Long-term BONDS AND NOTES PAYABLE - 4.380 % Series A 2016, maturing June 2028 — 28,750 $ — $ 28,750 4.580 % Series B 2016, maturing June 2036 3,833 76,667 3,833 80,500 3,833 105,417 3,833 109,250 OTHER Debt issuance costs — ( 472 ) — ( 516 ) Total debt $ 3,833 $ 104,945 $ 3,833 $ 108,734 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 $ 80.5 million and bears an interest rate of 4.58 % over a 20 -year term. Series B was interest only for the first five years, with $ 1.9 million principal payments paid semiannually thereafter beginning December 2021. 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 December 31, 2022 and 2021. -76- Table of Contents 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 December 31, 2022, the Company was in compliance with its financial debt covenants. Revolving Credit Line 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 London Interbank Offered Rate (LIBOR) plus 2.00 % and has no unused line fee. On April 30, 2021, the Company and The Northern Trust Company entered into an amendment to the Northern Trust Loan Agreement pursuant to which, among other things, the maturity date for the Company's revolving credit line was extended from April 30, 2022 to April 30, 2024. As of December 31, 2022, the Company had no outstanding borrowings under this credit line. There were $ 9,812 and $ 17,191 unamortized debt issuance costs as of December 31, 2022 and December 31, 2021, respectively. The Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25 . However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20 . As of December 31, 2022, the Company was in compliance with its financial debt covenants. On July 26, 2022, the Company and The Northern Trust Company entered into the second amendment (the "Second Modification Agreement") to the Northern Trust Loan Agreement, which, among other things, further extended the scheduled maturity date for the revolving line of credit from April 30, 2024 to July 1, 2024, increased the maximum principal amount available for borrowing from $ 10.0 million to $ 15.0 million, and replaced the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR). In 2020, Accounting Standards Update (ASU) 2020-04 was issued establishing ASC 848, Reference Rate Reform, and in 2021 ASU 2021-01 was issued, Reference Rate Reform (Topic 848): Scope (collectively, ASC 848). ASC 848 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASC 848 is optional and may be elected over time as reference rate reform activities occur. In 2022, ASU 2022-06 was issued, Deferral of the Sunset Date of Topic 848 (ASU 2022-06), to defer the sunset date of ASC 848 to December 31, 2024. ASU 2022-06 is effective immediately for all companies. The Company continues to evaluate the impact of ASC 848. At December 31, 2022, the remaining aggregate annual maturities of debt and minimum lease payments under finance lease obligations are as follows (in thousands): Debt Finance Lease Obligations 2023 $ 3,789 $ 200 2024 3,789 159 2025 3,789 135 2026 3,789 94 2027 3,789 9 Thereafter 89,833 — Subtotal 108,778 597 Less: amount representing interest — — Total $ 108,778 $ 597 -77- Table of Contents 12. INCOME TAXES The Company utilizes the asset and liability method of accounting for income taxes. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. As of December 31, 2022 and December 31, 2021, the Company did no t have any valuation allowances or unrecognized tax benefits. The income tax expense from continuing operations for the years ended December 31, 2022 and 2021 is comprised of the following (in thousands): 2022 Federal State Total Current income tax expense (benefit) $ ( 1,551 ) $ ( 252 ) $ ( 1,803 ) Deferred income tax expense (benefit) $ 2,265 $ 472 $ 2,737 Income tax expense $ 714 $ 220 $ 934 2021 Federal State Total Current income tax expense (benefit) $ 1,142 $ 257 $ 1,399 Deferred income tax expense (benefit) ( 215 ) ( 34 ) $ ( 249 ) Income tax expense $ 927 $ 223 $ 1,150 ASC 740, Income Taxes , prescribes the method to determine whether a deferred tax asset is realizable and significant weight is given to evidence that it can be objectively verified. As of December 31, 2022 and 2021, the Company recorded no valuation allowance. The following table summarizes the Company’s temporary differences between book and tax accounting that give rise to the deferred tax assets and deferred tax liabilities, as of December 31, 2022 and 2021 (in thousands): December 31, 2022 December 31, 2021 DEFERRED TAX ASSETS: Taxable meter deposits 7 $ 19 Net operating loss carry forwards 3,623 — Balterra intangible asset acquisition 224 224 Deferred gain on ICFA funds received 5,216 4,734 AIAC 4,099 3,899 Other 1,539 1,231 Total deferred tax assets 14,708 10,107 Net deferred tax asset 14,708 10,107 DEFERRED TAX LIABILITIES: Regulatory liability ( 243 ) ( 257 ) CP Water intangible asset acquisition ( 381 ) ( 381 ) ICFA intangible asset ( 625 ) ( 641 ) Property, plant and equipment ( 17,936 ) ( 10,962 ) Gain on condemnation of Valencia ( 81 ) ( 222 ) Other Liabilities ( 1,391 ) ( 913 ) Total deferred tax liabilities ( 20,657 ) ( 13,376 ) Net deferred tax liability $ ( 5,949 ) $ ( 3,269 ) As of December 31, 2022, we have approximately $ 14.6 million remaining net operating loss (“NOL”) carry forwards. -78- Table of Contents The Company had a regulatory asset of $ 3.2 million and $ 2.3 million at December 31, 2022 and December 31, 2021, respectively, related to the 2017 Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017. The regulatory liability of $ 0.8 million at December 31, 2021 was reversed as of June 30, 2022 due to Rate Decision No. 78664. The reversal was recorded as a reduction to income tax expense for approximately $ 0.7 million, and a reduction to interest expense for approximately $ 0.1 million. Refer to Note 2 - "Regulatory Decision and Related Accounting Policy and Changes." The effective tax rates for the years ended December 31, 2022 and 2021 were 14.3 % and 24.2 %, respectively. The effective tax rate for the year ended December 31, 2022 was lower than the federal statutory rate of 21 % primarily due to the TCJA reversal, state income taxes, share based compensation, and IRC Section 4534 interest. 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 IRC Section 118, effective January 1, 2021. 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 In August 2017, GWRI's Board of Directors granted stock options to acquire 465,000 shares of GWRI's common stock to employees throughout the Company. The options were granted with an exercise price of $ 9.40 , the market price of the Company's common shares on the NASDAQ Global Market at the close of business on August 10, 2017. The options vested over a four-year period, with 25 % having vested in August 2018, 25 % having vested in August 2019, 25 % having vested in August 2020, and 25 % vesting in August 2021. The options have a 10 -year life. The Company expensed the $ 1.1 million fair value of the stock option grant ratably over the four-year vesting period. Stock-based compensation expense of $ 0.0 million and $ 0.2 million was recorded for years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, 46,370 options have been exercised and 100,309 options have been forfeited with 318,321 outstanding. 2019 stock option grant In August 2019, GWRI's Board of directors granted stock options to acquire 250,000 shares of GWRI's common stock to employees throughout the Company. The options were granted with an exercise price of $ 11.26 , the market price of the Company's common shares on the NASDAQ Global Market at the close of business on August 13, 2019. The options vest over a four-year period, with 25 % having vested in August 2020, 25 % having vested in August 2021, 25 % having vested in August 2022, and 25 % vesting in August 2023. The options have a 10-year life. The Company will expense the $ 0.8 million fair value of the stock option grant ratably over the four-year vesting period. Stock-based compensation expense of $ 0.2 million was recorded for both years ended December 31, 2022 and 2021. As of December 31, 2022, 11,251 options have been exercised and 39,090 options have been forfeited with 199,659 outstanding. -79- Table of Contents A summary of stock option activity is as follows (in thousands, except option prices and years): Number of Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life Aggregate Intrinsic Value Options Outstanding at December 31, 2020 626 $ 10.12 7.3 2,683.6 Options Vested at December 31, 2020 348 $ 9.72 7.0 1,629.7 Granted — Exercised $ ( 87 ) $ 9.95 Forfeited $ ( 18 ) $ 11.17 Options Outstanding at December 31, 2021 $ 520 $ 10.12 6.6 3,635.4 Options Vested at December 31, 2021 $ 420 $ 9.84 6.2 3,050.9 Granted $ — Exercised $ ( 2 ) $ 9.61 Forfeited $ — Options Outstanding at December 31, 2022 $ 518 $ 10.12 5.4 1,638.4 Options Vested at December 31, 2022 $ 468 $ 10.00 5.3 1,537.6 Phantom stock/Restricted stock units compensation The following table details total awards granted and the number of units outstanding as of December 31, 2022 along with the amounts paid to holders of the phantom stock units ("PSUs") and/or restricted stock units ("RSUs") for the years ended December 31, 2022 and 2021 (in thousands, except unit amounts): Amounts Paid For the Year Ended December 31, Grant Date Units Granted Units Outstanding 2022 2021 Q1 2018 30,907 — $ — $ 39 Q1 2019 32,190 — 45 180 Q1 2020 22,481 1,824 108 125 Q1 2021 (1) 27,403 11,155 132 118 Q1 2022 (1) 22,262 16,697 79 — Total 135,243 29,676 $ 364 $ 462 (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. -80- Table of Contents 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 December 31, 2022 and amounts paid during the years ended December 31, 2022 and 2021 (in thousands, except unit and per unit amounts): Amounts Paid For the Year Ended December 31, Recipients Grant Date Units Granted Exercise Price Units Outstanding 2022 2021 Members of Management (1)(2) Q1 2015 299,000 $ 4.26 65,500 $ 62 $ 269 Members of Management (1)(3) Q3 2017 103,000 $ 9.40 17,000 — 321 Members of Management (1)(4) Q1 2018 33,000 $ 8.99 8,250 — 189 Total 735,000 90,750 $ 62 $ 779 (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 exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of August 10, 2017. (4) The exercise price was determined to be the fair market value of one share of GWRI stock on the grant date of March 12, 2018. For the twelve months ended December 31, 2022 and 2021, the Company recorded approximately $ 0.04 million and $ 1.1 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 December 30, 2022 (the last trading date of the year), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands): PSUs SARs 2023 241 — 2024 99 — Total 340 — 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 year ended December 31, 2022, 87,000 RSAs were issued. The Company recorded approximately $ 1.3 million of compensation expense related to the grant and partial vesting of RSAs for the year ended December 31, 2022. During the year ended December 31, 2021, 177,490 RSAs were issued. The Company recorded approximately $ 1.2 million of compensation expense related to the grant and partial vesting of RSAs for the year ended December 31, 2021. The following table summarizes the RSA transactions for the year ended December 31, 2022: Number of RSAs Weighted Average Fair Value Nonvested RSAs at the beginning of period 225,664 $ 14.89 Granted 87,000 16.53 Vested 69,224 13.83 Forfeited 50,972 14.02 Nonvested RSAs at the end of period 192,468 $ 15.57 14. SUPPLEMENTAL CASH FLOW INFORMATION The following is supplemental cash flow information for the years ended December 31, 2022 and 2021 (in thousands): -81- Table of Contents For the Year Ended December 31, 2022 2021 Supplemental cash flow information: Cash paid for interest $ 11,355 $ 5,226 Cash paid for taxes $ 1,589 $ 1,613 Non-cash financing and investing activities: Capital expenditures included in accounts payable and accrued liabilities $ 158 $ — 15. COMMITMENTS AND CONTINGENCIES Commitments The Company has operating and finance leases for vehicles, office equipment, and office space. Refer to Note 4 – “Leases” for additional information. On October 16, 2018, the Company completed the acquisition of Red Rock, an operator of a water and a wastewater utility with service areas in the Pima and Pinal counties of Arizona. Under the terms of the purchase agreement, the Company is obligated to pay to the seller a growth premium equal to $ 750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date. As of December 31, 2022, no meters have been installed and no accounts have been established in any of the three growth premium areas. 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 EVENT The Company has evaluated subsequent events through March 8, 2023, 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: Acquisition of Farmers Water Co. On February 1, 2023, the Company acquired all of the equity of Farmers Water Co., an operator of a water utility with service area in Pima County, Arizona, for a total consideration of $ 6.2 million. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of CC&N service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County. The acquisition was accounted for as a business combination under ASC 805, "Business Combinations." The purchase price will be allocated to the acquired utility assets and liabilities assumed based on the seller's book value at acquisition as the historical cost of these assets and liabilities will be the amount the amounts that will continue to be reflected in customer rates. The initial accounting for the business combination is incomplete at this time due to the close proximity of the acquisition close date to the issuance date of these consolidate financial statements. Under the terms of the purchase agreement, the Company is obligated to pay the seller a growth premium equal to $ 1,000 for each new account established in the service area, up to a total aggregate growth premium of $ 3.5 million. The obligation period of the growth premium commences on the closing date of the acquisition and ends ten years after the first new account for residential purposes is established or ten years after the date of closing if a new account has not been established. -82- Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.