Global Water Resources, Inc. 10-Q

ITEM 2. 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 (“MD&A”) relate to the three and nine months ended September 30, 2023 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report. Cautionary Statement Regarding Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q are forward-looking in nature and may constitute “forward-looking information” within the meaning of applicable securities laws. Often, but not always, forward-looking statements can be identified by the words “believes”, “anticipates”, “plans”, “expects”, “intends”, “projects”, “estimates”, “objective”, “goal”, “focus”, “aim”, “should”, “could”, “may”, and similar expressions. These forward-looking statements include future estimates described in “Business Outlook”, “Factors Affecting our Results of Operations”, and “Liquidity and Capital Resources”. These forward-looking statements include, but are not limited to, statements about our strategies; expectations about future business plans, prospective performance, growth, and opportunities; future financial performance; regulatory and Arizona Corporation Commission (“ACC”) proceedings and approvals, such as the anticipated benefits resulting from Rate Decision No. 78644, including our expected collective revenue increase due to new water and wastewater rates and benefits from consolidation of rates; our expectation that the ACC will not take any further material action relating to the Private Letter Ruling request issued by the Internal Revenue Service (“IRS”); acquisition plans and our ability to complete additional acquisitions; population and growth projections; technologies, including expected benefits from implementing such technologies; revenues; metrics; operating expenses; 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; liquidity; plans and expectations for capital expenditures; cash flows and uses of cash; dividends; depreciation and amortization; tax payments; our ability to repay indebtedness and invest in initiatives; the anticipated impact and resolutions of legal matters; the anticipated impact of new or proposed laws, including regulatory requirements, tax changes, and judicial decisions; and the anticipated impact of accounting changes and other pronouncements. Forward-looking statements should not be read as a guarantee of future performance or results. They are based on numerous assumptions that we believe are reasonable, but they are open to a wide range of uncertainties and business risks. Consequently, actual results may vary materially from what is contained in a forward-looking statement. Investors are cautioned not to place undue reliance on forward-looking information. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including risks related to legal, regulatory, and legislative matters; risks related to our business and operations; risks related to market and financial matters; risk related to technology; risks related to the ownership of our common stock; and certain general risks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. These and other factors are discussed in the risk factors described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”). Additionally, there may be other risks described from time to time in the reports that we file with the Securities and Exchange Commission (the “SEC”). Any forward-looking statement speaks only as of the date of this report. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Overview GWRI is a water resource management company that owns, operates, and manages twenty-nine water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, Arizona. The Company seeks to deploy an integrated approach, referred to as “Total Water Management.” Total Water Management is a comprehensive approach to water utility management that reduces demand on scarce non-renewable water sources and costly renewable water supplies, in a manner that ensures sustainability and greatly benefits communities both environmentally and economically. This approach employs a series of principles and practices that can be tailored to each community: • Reuse of recycled water, either directly or to non-potable uses, through aquifer recharge, or possibly direct potable reuse in the future; • Regional planning; • Use of advanced technology and data; • Employing respected subject matter experts and retaining thought and application leaders; -25- Table of Contents • Leading outreach and educational initiatives to ensure all stakeholders including customers, development partners, regulators, and utility staff are knowledgeable on the principles and practices of the Total Water Management approach; and • Establishing partnerships with communities, developers, and industry stakeholders to gain support of the Total Water Management principles and practices. Business Outlook There was a trend of positive growth in new connections during 2022, and during the first nine months of 2023, growth continued at a moderate rate. According to the 2020 U.S. Census Data, the Phoenix metropolitan statistical area (“MSA”) is the 11th largest MSA in the U.S. and had a population of 4.8 million, an increase of 14% over the 4.2 million people reported in the 2010 Census. Metropolitan Phoenix continues to grow due to its comparatively affordable housing, excellent weather, large and growing universities, a diverse employment base, and low taxes. The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.8 million people by 2030 and 6.5 million by 2040. Job growth year over year in Arizona as of September 30, 2023 was 2.2%, and the state continues to be ranked in the top half nationally for job growth. Despite market data indicating a general slowdown in housing for the Phoenix metropolitan area primarily due 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, existing infrastructure in place within our services areas, and increased activity related to multi-family developments. Factors Affecting our Results of Operations Our financial condition and results of operations are influenced by a variety of industry-wide factors, including but not limited to: • population and community growth; • economic and environmental utility regulation; • economic environment; • the need for infrastructure investment; • production and treatment costs; • weather and seasonality; and • access to and quality of water supply. We are subject to economic regulation by the state regulator, the ACC. The U.S. federal and state governments also regulate environmental, health and safety, and water quality matters. We continue to execute on our strategy to optimize and focus the Company in order to provide greater value to our customers and shareholders by aiming to deliver predictable financial results, making prudent capital investments, and focusing our efforts on earning an appropriate rate of return on our investments. Population and Community Growth Population and community growth in the metropolitan Phoenix area served by our utilities have a direct impact on our earnings. An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner. As of September 30, 2023, active service connections increased 4,902, or 8.7%, to 61,036 compared to 56,134 active service connections as of September 30, 2022, primarily due to the acquisition of Farmers Water Co. (“Farmers”) and organic growth in our service areas. Approximately 88.3% of the 61,036 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 September 30, 2023. The graph below presents the historical change in active and total connections for our ongoing operations over the past five years. -26- Table of Contents Economic and Environmental Utility Regulation We are subject to extensive regulation of our rates by the ACC, which is charged with establishing rates based on the provision of reliable service at a reasonable cost while also providing an opportunity to earn a fair rate of return on rate base for investors of utilities. The ACC uses a historical test year to evaluate whether the plant in service is used and useful, to assess whether costs were prudently incurred, and to set “just and reasonable” rates. Rate base is typically the depreciated original cost of the plant in service (net of contributions in aid of construction (“CIAC”) and advances in aid of construction (“AIAC”) which are funds or property provided to a utility under the terms of a main extension agreement, the value of which may be refundable), that has been determined to have been “prudently invested” and “used and useful”, although the reconstruction cost of the utility plant may also be considered in determining the rate base. The ACC also decides on an applicable capital structure based on actual or hypothetical analyses. The ACC determines a “rate of return” on that rate base, which includes the approved capital structure and the actual cost of debt and a fair and reasonable cost of equity based on the ACC’s judgment. The overall revenue requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding “prudently” incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments. To ensure an optimal combination of access to water and water conservation balanced with a fair rate of return for investors, our water utility operating revenue is based on two components: a fixed fee and a consumption or volumetric fee. For our water utilities, the fixed fee, or “basic service charge,” provides access to water for residential usage and has generally been set at a level to produce approximately 50% of total water revenue. The volumetric fee is based on the total volume of water supplied to a given customer after the minimum number of gallons, if any, covered by the basic service charge, multiplied by a price per gallon set by a tariff approved by the ACC. A discount to the volumetric rate applies for customers that use less than an amount specified by the ACC. For all investor-owned water utilities, the ACC requires the establishment of inverted tier conservation-oriented rates, meaning that the price of water increases as consumption increases. For wastewater utilities, wastewater collection, and treatment can be based on volumetric or fixed fees. Our wastewater utility services are billed based solely on a fixed fee, determined by the size of the water meter installed. Recycled water is sold on a volumetric basis with no fixed fee component. -27- Table of Contents We are required to file rate cases with the ACC to obtain approval for a change in rates. Rate cases and other rate-related proceedings can take a year or more to complete. As a result, there is frequently a delay, or regulatory lag, between the time of a capital investment or incurrence of an operating expense increase and when those costs are reflected in rates. We believe it is common industry practice to file for a rate increase every three to five years. Refer to “—Rate Case Activity” below and Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. Additionally, our water and wastewater utility operations are subject to extensive regulation by U.S. federal, state, and local regulatory agencies that enforce environmental, health, and safety requirements, which affect all of our regulated subsidiaries. Environmental, health and safety, and water quality regulations are complex and change frequently, and they have tended to become more stringent over time. Although it is difficult to project the ultimate costs of complying with pending or future requirements, we do not expect requirements under current regulations to have a material impact on our operations or financial condition, although it is possible new methods of treating drinking water may be required if additional regulations become effective in the future. For example, on March 14, 2023, the U.S. Environmental Protection Agency (“EPA”) announced the proposed National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”). The NPDWR proposed maximum contaminant levels (“MCLs”) in drinking water. If finalized as proposed, the regulation will require public water systems to monitor for these compounds. It will also require public water systems to notify customers and treat drinking water to reduce the compounds, if the MCL is exceeded. The proposed NPDWR was issued for public comment and the EPA expects to finalize the regulation by early 2024. Once the rule is finalized, water systems will be required to comply with the rule after a specified implementation period, anticipated to be three years from the rule-adoption date. The Company is currently reviewing the proposed regulation as compared to our current treatment standards and expects that the regulation, once finalized, will result in changes to or addition of certain treatment processes that will require increased capital expenditures and water treatment and other operating costs. As other newer or stricter standards are introduced in the future, they could also increase our operating expenses. We would generally expect to recover expenses associated with compliance for environmental and health and safety standards through rate increases, but this recovery may be affected by regulatory lag. Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by the ACC as appropriate for inclusion in establishing rates. Infrastructure Investment Capital expenditures for infrastructure investment are a component of the rate base on which our regulated utility subsidiaries are allowed to earn an equity rate of return. Capital expenditures for infrastructure provide a basis for earnings growth by expanding our “used and useful” rate base, which is a component of our permitted return on investment and revenue requirement. We are generally able to recover a rate of return on these capital expenditures (return on equity and debt), together with debt service and certain operating costs, through the rates we charge. We have an established capital improvement plan to make targeted capital investments to repair and replace existing infrastructure as needed, address operating redundancy requirements, improve our overall financial performance and expand our infrastructure in areas where growth is occurring. Production and Treatment Costs Our water and wastewater services require significant production resources and therefore result in significant production costs. Although we are permitted to recover these costs through the rates we charge, regulatory lag can decrease our margins and earnings if production costs or other operating expenses increase significantly before we are able to recover them through increased rates. Our most significant costs include labor, chemicals used to treat water and wastewater, and power used to operate pumps and other equipment. Power and chemical costs can be volatile. However, we employ a variety of technologies and methodologies to minimize costs and maximize operational efficiencies. Cybersecurity Risks 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. We operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure. Despite implementation of security measures, our technology systems are vulnerable to disability, failures or unauthorized access. Our facilities, information technology systems and other infrastructure facilities and systems and physical assets could be -28- Table of Contents targets of such unauthorized access. Failures or breaches of our systems could impact the reliability of our systems and also subject us to financial harm. If our technology systems were to fail or be breached and if we are unable to recover in a timely way, we may not be able to fulfill critical business functions and sensitive confidential data could be compromised, which could have a material adverse impact on our financial condition, results of operations or cash flows. We are subject to laws and rules issued by multiple government agencies concerning safeguarding and maintaining the confidentiality of our security, customer, and business information. The increasing promulgation of rules and standards will increase our compliance costs and our exposure to the potential risk of violations of the standards. We have experienced, and expect to continue to experience, these types of threats and attempted intrusions. The implementation of additional security measures could increase costs and have a material adverse impact on our financial results. We have obtained cyber insurance to provide coverage for a portion of the losses and damages that may result from a security breach of our information technology systems, but such insurance may not cover the total loss or damage caused by a breach. These types of events could also require significant management attention and resources, and could adversely affect our reputation with customers and the public. Weather and Seasonality Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. Drought, overuse of sources of water, the protection of threatened species or habitats, or other factors may limit the availability of ground and surface water. Also, customer usage of water and recycled water is affected by weather conditions, particularly during the summer. Our water systems generally experience higher demand in the summer due to the warmer temperatures and increased usage by customers for irrigation and other outdoor uses. However, summer weather that is cooler or wetter than average generally suppresses customer water demand and can have a downward effect on our operating revenue and operating income. Conversely, when weather conditions are extremely dry, our business may be affected by government-issued drought-related warnings and/or water usage restrictions that would artificially lower customer demand and reduce our operating revenue. The limited geographic diversity of our service areas makes the results of our operations more sensitive to the effect of local weather extremes. The second and third quarters of the year are generally those in which water services revenue and wastewater services revenues are highest. For additional information and risks associated with weather and seasonality, see “Risk Factors,” included in Part I, Item 1A of the 2022 Form 10-K. Access to and Quality of Water Supply In many areas of Arizona (including certain areas that we service), water supplies are limited and, in some cases, current usage rates exceed sustainable levels for certain water resources. We currently rely predominantly (and are likely to continue to rely) on the pumping of groundwater and the generation and delivery of recycled water for non-potable uses to meet future demands in our service areas. At present, groundwater (and recycled water derived from groundwater) is the primary water supply available to us. 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. Additionally, in the majority of the Phoenix Active Management Area, the Arizona Department of Water Resources (“ADWR”) has paused the issuance of new certificates of assured water supply based on groundwater and paused modifications of any designations of assured water supply for the increase in groundwater. Approximately 1.76% of the Company’s water connections are located within the Phoenix Active Management Area. We believe that we have an adequate supply of water to service our current demand and growth for the foreseeable future in our service areas. For additional information and risks associated with the access to and quality of water supply, see “Risk Factors,” included in Part I, Item 1A of the 2022 Form 10-K. Rate Case Activity On July 3, 2023, Global Water-Palo Verde Utilities Company, Inc. (“Palo Verde”) and Global Water-Santa Cruz Water Company, Inc. (“Santa Cruz”) filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset the depreciation expense recorded for the Company’s Southwest Plant, plus the carrying cost at the authorized rate of return set in Palo Verde’s and Santa Cruz’s most recent rate order, until the plant is considered for recovery in the utilities’ next rate case. -29- Table of Contents On June 27, 2023, seven of the Company’s 13 regulated utilities each filed a rate case application with the ACC for water rates based on a 2022 test year. In addition to a rate increase, the Company requested, among other things, the consolidation of water rates for certain of its utilities, including Mirabell, Lyn Lee, Francesca, Tortolita, Rincon, Las Quintas Serenas, and Red Rock, each located in Pima County. Of the Company’s utilities, these utilities filing rate applications make up approximately 3% of the Company’s active service connections. There can be no assurance that the ACC will approve the requested rate increase or any increase or the consolidation of water rates described above, and the ACC could take other actions as a result of the rate case. Further, it is possible that the ACC may determine to decrease future rates. There can also be no assurance as to the timing of when an approved rate increase (if any) would go into effect. On July 27, 2022, the ACC issued Rate Decision No. 78644 relating to the Company’s previous rate case involving 12 of the Company’s regulated utilities, which consisted of approximately 96% of the Company’s active service connections at the time of the rate case application filing. 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. 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 requirementincluded 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 required 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. The IRS accepted the request and issued its Private Letter Ruling, dated September 22, 2023. The Private Letter Ruling determined that the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the IRC must be eliminated and failure to do so would violate the normalization provisions of Section 168(i)(9) of the IRC. As required by Rate Decision No. 78644, the Private Letter Ruling has been provided to the ACC. Within 90 days after receiving the ruling, ACC Staff is required to prepare, for ACC consideration, a memorandum and proposed order regarding guidance issued within the Private Letter Ruling. The Private Letter Ruling was consistent with the adjustments used to determine the revenue requirements in Rate Decision No. 78644. Accordingly, the Company has requested that no further action be taken by the ACC. However, there can be no assurance provided until the ACC process is complete. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Form 10-K for the period ended December 31, 2022. Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. Corporate Transactions Recent Acquisitions On February 1, 2023, the Company acquired all of the equity of Farmers Water Co. (“Farmers”), an operator of a water utility with service area in Pima County, Arizona. The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition. Refer to Note 15 - “Acquisitions” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details. -30- Table of Contents Private Placement Offering of Common Stock On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder. The Company received gross proceeds of approximately $2.8 million from the offering. 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 of the Company’s directors and/or their affiliates purchased an aggregate of 652,000 shares of common stock at the public offering price. Stipulated Condemnation of the Operations and Assets of Valencia On July 14, 2015, the Company closed the stipulated condemnation to transfer the operations and assets of 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. Segment Reporting 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 in deciding how to allocate resources and in assessing operating performance. In consideration of the Financial Accounting Standards Board’s Accounting Standards Codification 280, Segment Reporting , the Company is not organized 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 revenue, disaggregated by service type, on the face of the statement 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 chief operating decision maker uses consolidated financial information to evaluate performance, which is the same basis on which he communicates results and performance to the Company’s 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. -31- Table of Contents Comparison of Results of Operations for the Three Months Ended September 30, 2023 and 2022 The following table summarizes results of operations for the three months ended September 30, 2023 and 2022 (in thousands, except for share amounts): For the Three Months Ended September 30, 2023 2022 Revenues $ 14,532 $ 11,893 Operating expenses 10,695 9,127 Operating income 3,837 2,766 Total other expense (315) (468) Income before income taxes 3,522 2,298 Income tax expense (888) (612) Net income $ 2,634 $ 1,686 Basic earnings per common share $ 0.11 $ 0.07 Diluted earnings per common share $ 0.11 $ 0.07 Revenues – The following table summarizes revenues for the three months ended September 30, 2023 and 2022 (in thousands): For the Three Months Ended September 30, 2023 2022 Water services $ 7,520 $ 5,824 Wastewater and recycled water services 6,494 6,069 Unregulated revenues 518 — Total revenues $ 14,532 $ 11,893 Total revenues increased $2.6 million, or 22.2%, to $14.5 million for the three months ended September 30, 2023 compared to $11.9 million for the three months ended September 30, 2022. The increase in revenue was primarily attributable to higher average temperatures for the quarter coupled with a 64% decrease in precipitation causing an escalation of consumption, as compared to the same quarter last year and the recognition of $0.5 million of ICFA related revenue. Other contributing factors include increased rates related to Rate Decision No. 78644, new connections associated with the acquisition of Farmers in February 2023, and year over year organic growth in connections of 2.6%. Water Services – Water services revenue increased $1.7 million, or 29.1%, to $7.5 million for the three months ended September 30, 2023 compared to $5.8 million for the three months ended September 30, 2022. The increase in water services revenue was primarily related to the weather conditions discussed above prompting higher consumption, the acquisition of Farmers in February 2023 and increased rates related to Rate Decision No. 78644. Water services revenue based on consumption increased $1.3 million, or 46.3%, to $4.1 million for the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022. The increase was primarily driven by the weather conditions discussed above resulting in a 31.2% increase in consumption as compared to the three months ended September 30, 2022, the Farmers acquisition in February 2023, and an increase in rates related to Rate Decision No. 78644. Active water connections increased 14.1% to 33,976 as of September 30, 2023 from 29,785 as of September 30, 2022, primarily due to the acquisition of Farmers in February 2023 and organic growth in our service areas. Water consumption increased 31.2% to 1.3 billion gallons for the three months ended September 30, 2023 from 992.4 million for the three months ended September 30, 2022. The increase in consumption was primarily attributable to the weather conditions discussed above and the additional connections resulting from the acquisition of Farmers in February 2023. Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 13.4%, to $3.2 million for the three months ended September 30, 2023 compared to $2.9 million for the three months ended September 30, 2022. The increase was primarily due to growth in active service connections, primarily from new connections associated with the acquisition of Farmers, as well as an increase in rates due to Rate Decision No. 78644. -32- Table of Contents Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 7.0%, to $6.5 million for the three months ended September 30, 2023 compared to $6.1 million for the three months ended September 30, 2022. The increase in wastewater and recycled water services revenue was primarily driven by a $0.4 million increase in wastewater services revenue, which reflects a 2.7% increase in active wastewater connections from 26,349 as of September 30, 2022 to 27,060 as of September 30, 2023, combined with an increase in rates due to Rate Decision No. 78644. Recycled water services revenue, which is based on the number of gallons delivered, increased by approximately 9.6% to $0.5 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended September 30, 2022. The increase in recycled water services revenue was primarily driven by the volume of recycled gallons delivered, which increased 10.2% to 271.7 million gallons for three months ended September 30, 2023 compared to 246.5 million gallons for the three months ended September 30, 2022. Also contributing to the increase was the rate increase resulting from Rate Decision No. 78644. Operating Expenses – The following table summarizes operating expenses for the three months ended September 30, 2023 and 2022 (in thousands): For the Three Months Ended September 30, 2023 2022 Operations and maintenance $ 3,587 $ 2,775 General and administrative 3,923 3,923 Depreciation and amortization 3,185 2,429 Total operating expenses $ 10,695 $ 9,127 Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased $0.8 million, or 29.3%, to $3.6 million for the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022, which was primarily attributable to the Farmers acquisition, additional costs for purchased power as a direct result of increased consumption, increased personnel costs and higher property tax expenses. Utility power and related expenses increased $0.2 million to $0.9 million for the three months ended September 30, 2023 compared to $0.7 million for the same period in 2022. The additional power costs were due to increased pump usage related to increased consumption and additional connections, from both the Farmers acquisition and organic growth. Total personnel expenses increased $0.2 million, or 26.3%, to $1.2 million for the three months ended September 30, 2023 compared from $1.0 million for the three months ended September 30, 2022. The increase in personnel expenses was primarily related to the acquisition of Farmers in February 2023 and increased salary and wages, partially offset by lower medical benefit costs. Property tax expense increased $0.1 million, or 38.4%, to $0.6 million for the three months ended September 30, 2023 compared to $0.5 million for the same period in 2022. Property taxes are calculated using a centrally valued property calculation, which derives property values based upon three-year historical average revenues. As revenues increase, property taxes are also expected to increase. General and Administrative – General and administrative costs include the day-to-day expenses of office operations, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs remained flat and were $3.9 million for both the three months ended September 30, 2023 and 2022. Personnel related costs increased $0.3 million, or 14.0%, to $1.9 million for the three months ended September 30, 2023 compared to $1.6 million for the three months ended September 30, 2022. The increase was primarily related to higher salaries and wages and employee related expenses. Deferred compensation expense decreased $0.2 million, or 68.8%, to $0.1 million for the three months ended September 30, 2023 compared to $0.3 million for the three months ended September 30, 2022. The decrease was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased more during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022). Refer to Note 13 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. -33- Table of Contents Board compensation decreased $0.1 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. The decrease was primarily due to the impact of the change in the stock price used in the valuation of board compensation as discussed above. Depreciation and amortization - Depreciation and amortization expense increased $0.8 million, or 31.1%, to $3.2 million for the three months ended September 30, 2023, compared to $2.4 million for the three months ended September 30, 2022. The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, $0.1 million of which was attributable to the partial activation of the Southwest Plant in Maricopa, AZ. Approximately $44,000 of depreciation expense for the quarter was attributable to the Farmers acquisition. Other Expense – Other expense decreased $0.2 million, or 32.7%, to $0.3 million for three months ended September 30, 2023 from $0.5 million for the three months ended September 30, 2022, which was primarily attributable to the increase in the equity portion of the allowance for funds used during construction (“AFUDC”) and increased Buckeye growth premiums. Income Tax Expense – Income tax expense of $0.9 million was recorded for the three months ended September 30, 2023 compared to income tax expense of $0.6 million for the three months ended September 30, 2022. The primary driver for the change was due to the increase in pre-tax income for three months ended September 30, 2023. Net Income – Net income totaled $2.6 million for the three months ended September 30, 2023 compared to net income of $1.7 million for the three months ended September 30, 2022. The $0.9 million increase was primarily attributable to increased operating revenue as a result of escalated consumption and increased rates related to Rate Decision No. 78644, increased revenue resulting from the Farmers acquisition in February 2023, and the recognition of $0.5 million of ICFA related revenue, partially offset by an increase in operations and maintenance expenses of approximately $0.8 million, higher depreciation expenses of $0.8 million, and increased tax expense of $0.3 million. Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022 The following table summarizes results of operations for the nine months ended September 30, 2023 and 2022 (in thousands, except for share amounts): For the Nine Months Ended September 30, 2023 2022 Revenues $ 40,660 $ 33,629 Operating expenses 30,036 27,038 Operating income 10,624 6,591 Total other expense (1,301) (1,104) Income before income taxes 9,323 5,487 Income tax expense (2,484) (805) Net income $ 6,839 $ 4,682 Basic earnings per common share $ 0.28 $ 0.20 Diluted earnings per common share $ 0.28 $ 0.20 Revenues – The following table summarizes revenues for the nine months ended September 30, 2023 and 2022 (in thousands): For the Nine Months Ended September 30, 2023 2022 Water services $ 18,916 $ 15,854 Wastewater and recycled water services 18,958 17,770 Unregulated revenues 2,786 5 Total revenues $ 40,660 $ 33,629 Total revenues increased $7.1 million, or 20.9%, to $40.7 million for the nine months ended September 30, 2023 compared to $33.6 million for the nine months ended September 30, 2022. The increase in revenue was primarily attributable to elevated consumption related to higher average temperatures and lower average precipitation, ICFA revenue earned during the 2023 period that did not occur in the prior year period, increased rates related to Rate Decision No. 78644, new connections associated with the acquisition of Farmers in February 2023, and organic connection growth. -34- Table of Contents Water Services – Water services revenue increased $3.0 million, or 19.3%, to $18.9 million for the nine months ended September 30, 2023 compared to $15.9 million for the nine months ended September 30, 2022. The increase in water services revenue was primarily related to increased consumption, the acquisition of Farmers and an increase in rates related to Rate Decision No. 78644. Water services revenue based on consumption increased $1.7 million, or 23.6%, to $8.9 million for the nine months ended September 30, 2023 compared to $7.2 million for the nine months ended September 30, 2022. The increase was primarily driven by a 13.5% increase in consumption, the Farmers acquisition in February 2023 and increase in rates related to Rate Decision No. 78644. Active water connections increased 13.8% to 33,976 as of September 30, 2023 from 29,785 as of September 30, 2022, primarily due to the Farmers acquisition in February 2023 and organic growth in our service areas. Water consumption increased 13.5% to 3.1 billion gallons for the nine months ended September 30, 2023 compared to 2.7 billion for the nine months ended September 30, 2022. The increase was primarily related to the considerable increase in consumption during the third quarter which we believe can be attributed to the higher temperatures and lower precipitation as compared to the same period in 2022. Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $1.4 million, or 16.4%, to $9.6 million for the nine months ended September 30, 2023 compared to $8.2 million for the nine months ended September 30, 2022. The increase was primarily due to the increase in active service connections primarily from new connections associated with the acquisition of Farmers, as well as an increase in rates due to Rate Decision No. 78644. Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.2 million, or 6.7%, to $19.0 million for the nine months ended September 30, 2023 compared to $17.8 million for the nine months ended September 30, 2022. The increase in wastewater and recycled water services revenue was primarily driven by a $1.2 million increase in wastewater services revenue resulting from the 2.7% increase in active wastewater connections from 26,349 as of September 30, 2022 to 27,060 as of September 30, 2023, combined with an increase in rates due to Rate Decision No. 78644. Recycled water services revenue, which is based on the number of gallons delivered, increased by approximately 4.4% to $1.1 million for the nine months ended September 30, 2023 from $1.0 million for the nine months ended September 30, 2022. The volume of recycled water delivered had a modest increase of 4.6% with 629 million gallons delivered for the nine months ended September 30, 2023 compared to 602 million gallons delivered for the nine months ended September 30, 2022. Operating Expenses – The following table summarizes operating expenses for the nine months ended September 30, 2023 and 2022 (in thousands): For the Nine Months Ended September 30, 2023 2022 Operations and maintenance $ 9,557 $ 8,260 General and administrative 11,934 11,579 Depreciation and amortization 8,545 7,199 Total operating expenses $ 30,036 $ 27,038 Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased approximately $1.3 million, or 15.7%, to $9.6 million for the nine months ended September 30, 2023 compared to $8.3 million for the nine months ended September 30, 2022. Total personnel expenses increased approximately $0.7 million, or 24.2%, to $3.3 million for the nine months ended September 30, 2023 compared to $2.6 million for the nine months ended September 30, 2022. The increase was primarily attributable to the Farmers acquisition in February 2023, a cost of living adjustment, and an increase in personnel. -35- Table of Contents Utility power and related expenses increased $0.4 million to $2.1 million for the nine months ended September 30, 2023 compared to $1.7 million for the same period in 2022. The additional power costs were due to increased pump usage related to increased consumption and additional connections, from both the Farmers acquisition and organic growth. Contract services increased $0.1 million to $1.2 million for the nine months ended September 30, 2023 from $1.1 million for the nine months ended September 30, 2022. The increase was primarily due to increased costs for billing software related to the additional connections period over period and cloud storage services. General and Administrative – General and administrative costs include the day-to-day expenses of office operations, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs increased $0.3 million, or 3.1%, to $11.9 million for the nine months ended September 30, 2023 compared to $11.6 million for the nine months ended September 30, 2022. Deferred compensation expense decreased $0.1 million, or 12.2%, to $0.8 million for the nine months ended September 30, 2023 compared to $0.9 million for the nine months ended September 30, 2022. The decrease was a direct result of the change in the stock price impacting certain valuations during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Refer to Note 13 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. Other notable increases were related to personnel expenses, information technology expenses, rent, and contract services. Other expenses decreased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, such as professional fees expense and regulatory expenses, which were directly related to the rate case activity and acquisition related matters during 2022. Depreciation and amortization - Depreciation and amortization expense increased $1.3 million, or 18.7%, to $8.5 million for the nine months ended September 30, 2023, compared to $7.2 million for the nine months ended September 30, 2022. The increase was primarily driven by increased depreciation due to the increase in fixed assets. Approximately $136,000 of the depreciation for the nine months ended September 30, 2023 was attributable to the Farmers acquisition. Other Expense – Other expense totaled $1.3 million for the nine months ended September 30, 2023 compared to $1.1 million for the nine months ended September 30, 2022. The increase of $0.2 million in other expense was related to the $0.6 million decrease in income associated with Buckeye growth premiums as a result of fewer new meter connections in the area and an increase in interest expense of $0.4 million, partially offset by an increase in the equity portion of AFUDC of $0.8 million for the nine months ended September 30, 2023. Income Tax Expense – Income tax expense of $2.5 million was recorded for the nine months ended September 30, 2023 compared to $0.8 million for the nine months ended September 30, 2022. During the nine months ended September 30, 2022, the Company recorded a tax benefit of approximately $0.7 million from the reversal of the regulatory liability related to Rate Decision No. 78622. Also contributing to the increase in income tax expense was higher pre-tax income for the nine months ended September 30, 2023. Net Income – Net income totaled $6.8 million for the nine months ended September 30, 2023 compared to net income of $4.7 million for the nine months ended September 30, 2022. The $2.1 million increase was primarily attributable to the recognition of $2.8 million of ICFA related revenue, increased operating revenue as a result of both escalated consumption and increased rates related to Rate Decision No. 78644, and increased revenue resulting from the Farmers acquisition in February 2023, partially offset by an increase in operating expenses of approximately $1.7 million, higher depreciation expenses of $1.3 million, and increased tax expense of $1.7 million. Outstanding Share Data As of November 8, 2023, there were 24,171,517 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 444,584 shares of the Company’s common stock. Liquidity and Capital Resources The Company’s capital resources are provided by internally generated cash flows from operations as well as debt and equity financing. Additionally, its regulated utility subsidiaries receive advances and contributions from customers, home builders, and real estate developers to partially fund construction necessary to extend service to new areas. The Company uses capital resources primarily to: • fund operating costs; -36- Table of Contents • fund capital requirements, including construction expenditures; • make debt and interest payments; • fund acquisitions; and • pay dividends. The Company’s utility subsidiaries operate in rate-regulated environments in which the amount of new investment recovery may be limited. Such recovery will take place over an extended period of time because recovery through rate increases is subject to regulatory lag. As of September 30, 2023, the Company has no notable near-term cash expenditures, other than the principal payments for the Series B senior secured notes in the amount of $1.9 million due in December 2023 and June 2024. While specific facts and circumstances could change, the Company believes that there is sufficient cash on hand, the ability to draw on the $15.0 million revolving line of credit, and will be able to generate sufficient cash flows to meet the operating cash flow requirements and capital expenditure plan, as well as remain in compliance with its debt covenants, for the next twelve months and beyond. In March 2014, the Company initiated a dividend program to declare and pay a monthly dividend. On November 30, 2022, the Company announced a monthly dividend increase from $0.02458 per share ($0.29496 per share annually) to $0.02483 per share (0.29796 per share annually). Although the Company expects that monthly dividends will be declared and paid for the foreseeable future, the declaration of any dividends is at the discretion of the Company’s board of directors and is subject to legal requirements and debt service ratio covenant requirements (refer to “—Senior Secured Notes” and “—Revolving Credit Line”). Cash from Operating Activities Cash flows provided by operating activities are used for operating needs and to meet capital expenditure requirements. The Company’s 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 nine months ended September 30, 2023, net cash provided by operating activities totaled approximately $22.7 million compared to $19.7 million for the nine months ended September 30, 2022. The $3.0 million increase in cash from operating activities was primarily driven by the improvement in net income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Cash from Investing Activities The net cash used in investing activities totaled approximately $24.8 million for the nine months ended September 30, 2023 compared to $25.4 million for the nine months ended September 30, 2022. The $0.6 million increase in cash used in investing activities was primarily driven by the $6.2 million acquisition of Farmers, and a decrease in capital expenditures of $6.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The Company continues to invest capital prudently in existing, core service areas where the Company is able to deploy the Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities. The projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors. As a result, the Company may reduce capital expenditures to correspond with any decreases in demand for housing in service areas. Cash from Financing Activities The net cash provided by financing activities totaled $2.3 million for the nine months ended September 30, 2023, a $6.6 million change, as compared to the $8.8 million in cash used in financing activities for the nine months ended September 30, 2022. This change was primarily driven by an increase of $6.2 million in advances in aid of construction, offset by a $12.1 million decrease in proceeds from the sale of stock for the nine months ended September 30, 2023. Senior Secured Notes On June 24, 2016, the Company issued two series of senior secured notes with a total principal balance of $115.0 million at a blended interest rate of 4.55%. Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38% over a twelve-year term, with the principal payment due on June 15, 2028. Series B carries a principal balance of $86.3 -37- Table of Contents 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 proceeds of the senior secured notes were primarily used to refinance the Company’s long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the Company’s U.S. initial public offering of its common stock in May 2016. 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 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 September 30, 2023, the Company was in compliance with its financial debt covenants. Note Purchase Agreement On October 26, 2023, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with Jackson National Life Insurance Company pursuant to which the Company will, subject to customer closing conditions, issue an aggregate principal amount of $20,000,000 of 6.91% Senior Secured Notes due on January 3, 2034 (the “Notes”). The Company plans to use the proceeds from the Notes offering to refinance existing indebtedness, to support capital investments associated with growth and for general corporate purposes. Debt issuance costs as of September 30, 2023 and December 31, 2022 were $0.4 million and $0.5 million, respectively. Revolving Credit Line On April 30, 2020, the Company entered into an agreement with Northern Trust, for a two-year revolving line of credit initially up to $10.0 million with an initial maturity date of April 30, 2022 (as amended, the “Northern Trust Loan Agreement”). This credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company’s business, and for general corporate purposes, initially bore an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00% and had no unused line fee. This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in April 2020. On April 30, 2021, the Company and Northern Trust 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 with provisions based on the Secured Overnight Financing Rate (SOFR). Refer to Note 11 – “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. On June 28, 2023, the Company and Northern Trust entered into a third amendment to the Northern Trust Loan Agreement, which, among other things, (i) further extended the scheduled maturity date for the revolving line of credit from July 1, 2024 to July 1, 2025 and (ii) added a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit. On October 26, 2023, the Company and Northern Trust entered into a fourth amendment to the Northern Trust Loan Agreement, which, among other things, further amended the terms and conditions set forth in the Loan Agreement to make certain conforming changes to reflect the issuance of the Notes and related matters. 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. 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 ended June 30, 2021 through the quarter ending March 31, 2024, the debt service ratio drops to 1.20. Additionally, the Northern Trust Loan Agreement contains certain restrictive covenants that limit, among other things, the Company’s ability to: create liens and other encumbrances; incur additional indebtedness; merge, liquidate or consolidate with another entity; dispose of or transfer assets; make distributions or other restricted payments (including dividends); engage in certain affiliate transactions; and change the nature of the business. The foregoing covenants are subject to various qualifications and limitations as set forth in the Northern Trust Loan Agreement. Pursuant to the -38- Table of Contents Northern Trust Loan Agreement, the revolving credit facility is subject to certain customary events of default after which the revolving credit facility could be declared due and payable if not cured within the grace period or, in certain circumstances, could be declared due and payable immediately. Refer to Note 11 — “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information. As of September 30, 2023, the Company was in compliance with its financial debt covenants. As of September 30, 2023, the Company had outstanding borrowings of approximately $15,000 under the revolving line of credit with Northern Trust. The Company did not incur debt issuance costs relating to the Northern Trust Loan Agreement for the three and nine months ended September 30, 2023 and 2022. Other Financing Activity On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder. The Company received gross proceeds of approximately $2.8 million from the offering. 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. Insurance Coverage The Company carries various property, casualty, and financial insurance policies with limits, deductibles, and exclusions consistent with industry standards. However, insurance coverage may not be adequate or available to cover unanticipated losses or claims. The Company is self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such losses could have a material adverse effect on the Company’s short-term and long-term financial condition and the results of operations and cash flows. Contractual Obligations The Company entered into the Note Purchase Agreement and the fourth amendment to the Northern Trust Loan Agreement on October 26, 2023. Refer to additional details under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” above. There have been no additional material changes in our reported contractual obligations from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” in the 2022 10-K. Critical Accounting Policies, Judgments, and Estimates The application of critical accounting policies is particularly important to the Company’s financial condition and results of operations and provides a framework for management to make significant estimates, assumptions, and other judgments. Additionally, the Company’s financial condition, results of operations, and cash flow are impacted by the methods, assumptions, and estimates used in the application of critical accounting policies. Although management believes that these estimates, assumptions, and other judgments are appropriate, they relate to matters that are inherently uncertain and that may change in subsequent periods. Accordingly, changes in the estimates, assumptions, and other judgments applied to these accounting policies could have a significant impact on the Company’s financial condition and results of operations as reflected in its financial statements. There have been no significant changes to our critical accounting policies from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies, Judgments, and Estimates” in the 2022 10-K. Off Balance Sheet Arrangements As of September 30, 2023 and 2022, the Company did not have any off-balance sheet arrangements. -39- Table of Contents ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable