What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-03-07 compared with 2023-03-09 · 406 added, 294 removed, 582 unchanged (55% of the section changed)

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Report of Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets as of December 31, 2022 and 2021

Consolidated Statements of Operations for the Years ended December 31, 2022 and 2021

Consolidated Statements of Shareholders’ Equity for the Years ended December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the Years ended December 31, 2022 and 2021

Consolidated Balance Sheets as o f December 31, 2023 an d 2022

Consolidated Statements of Operations for the Years ende d December 31, 2023 and 2022

Consolidated Statements of Shareholders’ Equity for the Years ende d December 31, 2023 a nd 2022

Consolidated Statements of Cash Flows for the Years ended December 31, 2023 a nd 2022

Notes to Consolidated Financial Statements

Table of Con tents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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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.

The Company’s regulated utilities are subject to rate regulation by the Arizona Corporation Commission (the “ACC”).

The ACC has jurisdiction with respect to the rates charged to water and wastewater service customers in Arizona.

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;

operation and maintenance expense;

and depreciation expense.

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.

Accounting for the economics effects of rate regulation has a pervasive effect on the financial statements.

The ACC establishes rates 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

Table of Con tents

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.

Given that management’s accounting judgments are based on assumptions about the outcome of decisions by the ACC, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.

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 read relevant regulatory orders and settlements issued by the ACC for the Company and other public utilities in Arizona, regulatory statutes, procedural memorandums, filings made by interveners and utilities, and other publicly available information to assess the likelihood of recovery in future rates or a future reduction in rates based on precedents of the ACC’s treatment of similar costs under similar circumstances.

We evaluated the external information and compared such information to management’s regulatory asset and liability balances for completeness.

• We obtained supporting documentation from management, as appropriate, regarding the likelihood of recovery in future rates or of a future reduction in rates not yet addressed in a regulatory order.

• We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

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GLOBAL WATER RESOURCES, INC.

CONSOLIDATED BALANCE SHEETS

CONSOLIDATED BALANCE SHEET

(in thousands, except share and per share amounts)

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Intangible assets, net 8,841 10,139

Regulatory asset 3,169 2,336

Regulatory assets 2,898 3,169

Restricted cash 1,676 1,001

Right-of -use asset 1,891 —

Right-of-use assets 1,741 1,891

Other noncurrent assets 74 34

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NONCURRENT LIABILITIES:

Line of credit 2,315 —

Long-term debt 101,341 104,945

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Deferred revenue - ICFA 19,656 20,974

Regulatory liability 6,371 7,421

Regulatory liabilities 6,076 6,371

Advances in aid of construction 111,529 93,656

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Deferred income tax liabilities, net 8,284 5,949

Acquisition liability 1,773 1,773

Acquisition liabilities 3,048 1,773

Other noncurrent liabilities 8,230 755

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Interest expense ( 4,882 ) ( 4,759 )

Other 2,592 2,962

Allowance for equity funds used during construction 981 723

Other, net 2,417 2,592

Total other expense ( 1,432 ) ( 1,379 )

INCOME BEFORE INCOME TAXES 10,854 6,440

INCOME TAX BENEFIT (EXPENSE) ( 934 ) ( 1,150 )

INCOME TAX EXPENSE ( 2,872 ) ( 934 )

NET INCOME $ 7,982 $ 5,506

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GLOBAL WATER RESOURCES, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

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Issuance of Common Stock 230,000 1 — — 2,727 — 2,728

Treasury Stock — — ( 41,648 ) — 304 — 304

Stock option exercise 167,779 — ( 93,584 ) — 239 — 239

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(Gain) Loss on disposal of fixed assets ( 63 ) 4

Provision for doubtful accounts receivable 103 86

Provision for credit losses 68 103

Deferred income tax expense 2,394 1,367

Changes in assets and liabilities

Accounts receivable ( 702 ) ( 248 )

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Refunds of advances for construction ( 1,171 ) ( 1,140 )

Refunds of developer taxes — ( 1,364 )

Proceeds from stock option exercise 9 3

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Principal payments under finance lease ( 525 ) —

Line of credit borrowings, net 2,315 —

Loan borrowings 260 —

Loan repayments ( 29 ) 259

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Proceeds from sale of stock 2,748 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 )

Payments of offering costs for sale of stock ( 20 ) —

Other contributions 6,700 —

Net cash provided by financing activities 406 4,971

INCREASE IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH ( 2,799 ) ( 5,881 )

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH — Beginning of period 7,562 13,443

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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.

Global Water Resources, Inc.

(the “Company”, “GWRI”, “we”, “us”, or “our”) 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.

Serving more than 82,000 people in approximately 32,000 homes within the Company’s 408 square miles of certificated service areas as of December 31, 2023, the Company provides water and wastewater utility services under the regulatory authority of the Arizona Corporation Commission (“ACC”).

Approximately 89.3 % of the active service connections are customers of the Company’s Global Water - Santa Cruz Water Company, Inc.

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

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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.

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 the Company and its subsidiaries.

All significant intercompany account balances and transactions have been eliminated in consolidation.

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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.

Private Placement Offering of 6.91 % Senior Secured Notes

On October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $ 20 million of 6.91 % Senior Secured Notes due on January 3, 2034.

Pursuant to the terms of the note purchase agreement, the Company issued the notes on January 3, 2024.

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.

One of the Company’s directors purchased an aggregate of 30,000 shares of common stock in the offering at the purchase price.

Public Offering of Common Stock

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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.

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.

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.

Farmers Acquisition

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.

Stipulated Condemnation of the Operations and Assets of Valencia Water Company, Inc.

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

The Company received growth premiums of $ 2.5 million and $ 1.4 million for the years ended December 31, 2022 and 2021, respectively.

The Company received growth premiums of $ 2.4 million and $ 2.5 million for the years ended December 31, 2023 and 2022, respectively, and has received an aggregate of $ 10.7 million in growth premiums to date.

The growth premiums are included in “Other, net” on the Consolidated Statements of Operations.

Significant Accounting Policies

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”).

The Company’s 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

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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,

amounts of water delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recorded.

At the end of each reporting period, 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.

Because the amounts charged for water connection fees are set by the ACC 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, 2023 and 2022, the Company recognized $ 0.3 million in connection fees.

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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

Unregulated revenues are limited to revenues resulting from certain infrastructure coordination and financing agreement arrangements (“ICFAs”).

Refer to Note 3 – “Revenue Recognition - Unregulated Revenue” for additional information.

Allowance for Credit Losses

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”).

The allowance for credit losses is recorded as bad debt expense, and is classified as general and administrative expense.

The allowance for credit losses 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

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Restricted Cash

Restricted cash represents cash deposited relating to HUF tariffs and asset retirement obligations.

Restricted cash represents cash deposited relating to hook-up fees (“HUF”) tariffs and asset retirement obligations.

The following table summarizes the restricted cash balance as of December 31, 2023 and 2022 (in thousands):

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The Company’s valuation allowance totaled zero as of December 31, 2023 and 2022 (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.

The Company evaluates uncertain tax positions using a two-step approach.

Recognition (step one) occurs when it is concluded 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.

Derecognition of a tax position that was previously recognized would occur when the Company 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, expanded disclosures are provided.

Basic and Diluted Earnings per Common Share

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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

A reconciliation of the denominator used in Basic and Diluted EPS calculations is show in the following

Year Ended December 31,

(In thousands) 2023 2022

Basic weighted average common shares outstanding 24,045 23,173

Effect of dilutive securities:

2017 Option grant 106 164

2019 Option grant 26 61

2020 Restricted stock awards 27 56

Option grants

Restricted stock awards

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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

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.

As required, the Company evaluates 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, the Company 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.

The Company utilizes internally developed discounted future cash flow models, third-party appraisals, or broker valuations to determine the fair value of the reporting unit.

Under the discounted cash flow approach, the Company utilizes various assumptions requiring judgment, including projected future cash flows, discount rates, and capitalization rates.

The estimated future cash flows are based on historical data, internal estimates, and external sources.

The estimated fair value is then compared to the carrying value.

If the carrying value is in excess of the fair value, an impairment charge is recorded to asset impairments within the Company’s 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.

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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.

In connection with the issuance of certain of the Company’s long-term debt, the Company has incurred legal and other costs that are believed to be 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.

Amortization of debt issuance costs and discounts totaled approximately $ 0.04 million for both the years ended December 31, 2023 and 2022.

Advances in Aid of Construction (“AIAC”) and Contributions in Aid of Construction (“CIAC”)

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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.

See Note 11 – “Debt” for information as to the fair value of long-term debt.

The refundable AIAC have a carrying value of $ 111.5 million and $ 93.7 million as of December 31, 2023 and 2022, respectively.

Portions of these non-interest-bearing instruments are payable annually through 2032 and amounts not paid by the contract expiration dates become nonrefundable.

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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

around specific products and services, geographic regions, or regulatory environments.

In consideration of ASC 280— Segment Reporting the Company notes it 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.

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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.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments, which changed the impairment model for certain financial assets that have a contractual right to receive cash, including trade and loan receivables.

The new model required recognition based upon an estimation of expected credit losses rather than recognition of losses based on the probability of occurrence.

The Company is a public business entity that qualifies as a smaller reporting company, and therefore ASU 2016-13 was effective for annual reporting periods beginning after December 15, 2022.

The Company adopted the standard utilizing the modified retrospective method for its trade receivables and unbilled revenue on January 1, 2023.

Based on the composition of the Company’s trade receivables and unbilled revenue, and expected future credit losses, the adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740).

ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods.

The guidance also simplifies the accounting for franchise taxes, transactions that result in a step-up in the tax basis of goodwill, and the effect of enacted changes in tax laws or rates in interim periods.

The Company adopted ASU 2019-12 during the first quarter of 2021 prospectively and the adoption did not have a material impact to the Company’s Consolidated Financial Statements.

In October of 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.

In a business combination, an acquirer generally recognizes assets acquired and liabilities assumed, including contract assets and contract liabilities, at their respective fair value on the acquisition date.

ASU 2021-08 requires that in a business combination, an acquirer should recognize and measure contract assets acquired and contract liabilities assumed in a business combination in accordance with Topic 606, Revenue from Contracts with Customers.

The guidance provides certain practical expedients for acquirers when recognizing and measuring acquired contract assets and contract liabilities from revenue contracts with customers in a business combination.

The guidance is effective for annual reporting periods beginning after December 15, 2022, including interim periods within those fiscal years.

ASU 2021-08 should be applied prospectively for acquisitions occurring on or after the effective date of the amendments, and early adoption is permitted.

The Company adopted ASU 2021-08 on January 1, 2023 prospectively and the adoption did not have a material impact to the Company’s Consolidated Financial Statements.

Future Adoption of Accounting Standards

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740):

Improvements to Income Tax Disclosures to expand the disclosure requirements for income taxes, specifically related to the rate reconciliation and income taxes paid.

ASU 2023-09 is effective for annual periods beginning after December 15, 2024, with early adoption permitted.

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

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280):

Improvements to Reportable Segment Disclosures that expands disclosures of significant segment expenses and includes new disclosures for entities with a single reportable segment.

ASU 2023-07 is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024.

Early adoption is permitted.

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

REGULATORY DECISION AND RELATED ACCOUNTING AND POLICY CHANGES

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

The Company’s regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within Accounting Standards Codification (“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.

Changes to the rates are made through formal rate applications with the ACC, which the Company has customarily done.

During the fourth quarter 2023, the Company notified the ACC of its intention to file a rate case for Farmers during 2024 and for Santa Cruz and Palo Verde in 2025.

On July 3, 2023, the Company’s Palo Verde and Santa Cruz utilities 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.

The Southwest Plant was substantially constructed prior to 2009 to provide water, wastewater, and recycled water utility services for the area southwest of the City of Maricopa.

Due to the unprecedented collapse of the housing market during the Great Recession, the nearly completed plant remained idle for well over a decade.

The total cost of the Southwest Plant was approximately $ 38.4 million.

In July 2023, $ 27.5 million related to the water production plant and a portion of the wastewater processing plant was placed in service, with the remaining parts of the Southwest Plant to be placed in service once sufficient flows, provided by connection growth, are established.

There can be no

assurance, however, that the ACC will approve the application as submitted and the ACC could take other actions regarding the application.

In January 2024, the Company discovered that approximately $ 7.8 million of construction costs for the Southwest Plant had been prematurely included as “plant in service” for rate making purposes in 2007 and were reflected in the calculation of customer rates in Rate Decision No.

71878 (September 15, 2010).

Those costs were also included as “plant in service” in Rate Decision No.

74364 (February 26, 2014) and Rate Decision No.

78644 (July 27, 2022).

The Company disclosed this circumstance to the ACC on March 1, 2024.

Although to date the ACC has not taken any action, the ACC could require the Company to reduce rates going forward or take other actions that would be unfavorable to the Company.

The final outcome and resolution of this matter cannot be predicted and the results, while not reasonably estimable at this time, could be material to the Company and its financial condition.

On June 27, 2023, seven of the Company’s regulated utilities each filed a rate case application with the ACC for increased 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 Global Water-Mirabell Water Company, Inc.

(“Mirabell”), Global Water-Lyn Lee Water Company, Inc.

(“Lyn Lee”), Global Water-Francesca Water Company, Inc.

(“Francesca”), Global Water-Tortolita Water Company, Inc.

(“Tortolita”), Global Water-Rincon Water Company, Inc.

(“Rincon”), Global Water-Las Quintas Serenas Water Company, Inc.

(“Las Quintas Serenas”), and Global Water-Red Rock Water Company, Inc.

(“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.

On February 29, 2024, the Company entered into a settlement agreement with the ACC Utilities Division Staff regarding the rate case application, which will be considered by an Administrative Law Judge and the ACC for approval.

The agreement includes, among other things, a recommended annual revenue increase of approximately $ 351,000 , acquisition premiums for six of the Company’s utilities, a capital structure matching the Company’s previous rate of 55 % equity with a 9.6 % return on equity, consolidation of the seven utilities, and an accounting deferral for Rincon.

There can be no assurance that the ACC will approve the settlement agreement 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 recent rate case.

78644 relating to the Company’s previous rate case.

Pursuant to Rate Decision No.

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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.

78644 also addressed the primary impacts of the Federal Tax Cuts and Jobs Act (the “TCJA”) on the Company, which includes 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.

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.

78644 approved an adjustor mechanism for income taxes (as described below) that 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:

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Finally, Rate Decision No.

78644 requires the Company to work with ACC staff and the Residential Utility Consumer Office to prepare a Private Letter Ruling request to the Internal Revenue Service (“IRS”) to clarify whether the failure to eliminate the deferred taxes attributable to assets condemned in a transaction governed by Section 1033 of the 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.

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 was provided to the ACC and no further action will be taken by the ACC, as documented in Decision No.

Certain accounting implications related to Rate Decision No.

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• 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.

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.

Regulatory Assets and Liabilities

Regulatory assets and liabilities are the result of operating in a regulated environment in which the ACC establishes rates that are designed to permit the recovery of the cost of service and a return on investment.

The Company capitalizes and records regulatory assets for costs that would otherwise be charged to expense if it is probable that the incurred costs will be recovered in future rates.

Regulatory assets are amortized over the future periods that the costs are expected to be recovered.

Final determination of whether a regulatory asset can be recovered is decided by the ACC in regulatory proceedings.

If the Company determines that a portion of the regulatory assets is not recoverable in customer rates, the Company would be required to recognize the loss of the assets disallowed.

If costs expected to be incurred in the future are currently being recovered through rates, the Company records those expected future costs as regulatory liabilities.

The Company’s regulatory assets and liabilities consist of the following (in thousands):

Recovery Period December 31, 2023 December 31, 2022

Regulatory Assets

Income taxes recoverable through future rates (1)

Various $ 1,404 $ 1,482

Rate case expense surcharge (2)

2 years 221 467

Acquisition premiums (3)

25 years 1,269 1,220

Other regulatory assets 4 —

Total regulatory assets $ 2,898 $ 3,169

Regulatory Liabilities

Income taxes payable through future rates (1)

Acquired ICFAs (4)

Depreciation adjustment (5)

Total regulatory liabilities $ 6,076 $ 6,371

(1) 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.

(2) 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.

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 .

78743, issued on October 24, 2022, approved approximately $ 0.5 million in rate case expenses to be recovered through a rate case expense surcharge over a two-year period.

(3) Rate Decision No.

78319, issued on December 3, 2021, approved an acquisition premium to be amortized over 25 years related to the acquisition of the Company’s Rincon utility.

Amortization will begin once the Company receives a decision on its rate case filed in June 2023 that would approve the acquisition premium to be included in customer rates.

The acquisition premium balance as of December 31, 2023 was approximately $ 0.5 million.

Rate Decision No.

78644, issued on July 27, 2022, approved acquisition premiums related to the acquisitions of the Company’s Turner Ranches and Red Rock utilities.

Amortization began in 2022 as the acquisition premiums were included in customer rates as approved in the decision.

The acquisition premium balance as of December 31, 2023 was approximately $ 0.8 million.

(4) The acquired ICFA regulatory liability relates to the offset of intangible assets related to ICFA contracts obtained in connection with the Santa Cruz, Palo Verde, and Sonoran Utility Services, LLC (“Sonoran”) acquisitions.

When funds are received related to the acquired ICFA, a portion of these funds reduce the acquired ICFA regulatory liability and partially offset the amortization expense recognition of the related intangible asset.

(5) Rate Decision No.

78644, issued on July 27, 2022, approved an adjustment to update previously approved depreciation rates.

REVENUE RECOGNITION

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

Total revenues do not include sales tax as we consider ourselves a pass-through conduit for collecting and remitting sales taxes.

Total revenues do not include sales tax as the Company considers itself 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.

For the year ended December 31, 2023, unregulated revenues primarily related to the revenues recognized on a portion of ICFA funds received.

ICFAs are agreements with developers and homebuilders where the Company, 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.

In return, the developers and homebuilders pay the Company an agreed-upon amount per dwelling unit for the land legally described in the agreement, or a portion thereof.

Under ICFA agreements, the Company has a

contractual obligation to ensure physical capacity exists through its regulated utilities for the provision of water and wastewater utility service to the land 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.

Fees for these services are typically a negotiated amount per equivalent dwelling unit for the land legally described in the agreement, or a portion thereof.

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 the Company’s business model.

Payments for ICFAs are usually received in advance.

Rate Decision No.

74364 requires a HUF tariff to be established for all ICFAs that come due and are paid subsequent to December 31, 2013, which is a set amount per equivalent dwelling unit determined by the ACC based on the utility and meter size.

Also pursuant to Rate Decision No.

74364, as payments are received, 70% of the payment must be recorded as HUF liability until the HUF liability is fully funded, with the remaining amount initially recorded to deferred revenue until earned.

The Company is responsible for assuring that the full HUF tariff, which is the set amount determined by the rate decision, is funded in the HUF liability, even if it results in recording less than 30% of the overall ICFA funds as deferred revenue.

ICFA revenue is recorded when the Company completes the performance obligations under the agreement.

The Company accounts for the portion of ICFA funds allocated to the HUF liability as a contribution in aid of construction (“CIAC”).

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 restricted and segregated in a separate bank account and used for 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.

As these arrangements are with developers and not with the end water or wastewater customer, revenue recognition coincides with the completion of the Company’s performance obligations under the agreement with the developer and its regulated utilities’ ability to provide fitted capacity for water and wastewater service.

The Company exercises judgment when estimating the number of equivalent dwelling units that its regulated utilities have capacity to serve.

The Company believes that services provided within these agreements are not distinct in the context of the contract because they are highly interdependent with its regulated utilities’ 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.

December 31, 2022 Balance Payments Allocated to Deferred Revenue

Revenue Recognized

December 31, 2023 Balance

Deferred Revenue - ICFA

$ 20,974 $ 1,468 $ ( 2,786 ) $ 19,656

December 31, 2021 Balance

Payments Allocated to Deferred Revenue

Revenue Recognized

December 31, 2022 Balance

Deferred Revenue - ICFA

$ 19,035 $ 1,939 $ — $ 20,974

Disaggregated Revenues

18 unchanged sentences

ICFA revenues 2,786 —

Rental revenues — 46

TOTAL UNREGULATED REVENUE 2,786 —

1 unchanged sentence

Contract Balances

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

The Company’s contract assets and liabilities consist of the following (in thousands):

December 31, 2023 December 31, 2022

7 unchanged sentences

Deferred revenue - ICFA $ 19,656 $ 20,974

Refund liability - regulated (2)

Total contract liabilities $ 19,656 $ 20,974

(1) The increase in accounts receivable was primarily due to increased connections through organic growth and rate increases resulting from Rate Decision No.

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.

Refer to Note 2— "Regulatory Decision and Related Accounting and Policy Changes" for further details.

Remaining Performance Obligations

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

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.

During the year ended December 31, 2023, the Company entered into five new finance leases for vehicles with either 48 month terms, all of which include a purchase option, and one new office equipment lease with a 60 month term.

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, and an office equipment lease with a 60 month term.

During August 2021, the Company entered into a new ten-year and nine-month office lease agreement with a commencement date of June 1, 2024.

The rent expense will be $ 5,200 for each full calendar month after a period of abated rent, with escalating rent commencing in March 2026 and annual escalations annually thereafter.

Tenant improvement payments are incorporated into the lease at an additional month payment of $ 1,840 with escalations following the same schedule as the base rent.

In December 2021, the Company entered into a new five-year corporate office lease agreement with a commencement date of May 1, 2022.

1 unchanged sentence

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.

Rent expense arising from operating leases totaled approximately $ 394,000 and $ 319,000 for the years ended December 31, 2023 and 2022, respectively.

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):

ROU assets at December 31, 2023 and December 31, 2022 consist of the following (in thousands):

December 31, 2023 December 31, 2022

Finance Leases $ 405 $ —

Financing Lease $ 561 $ 405

Operating Lease 1,180 1,486

Total $ 1,741 $ 1,891

Lease liabilities at December 31, 2022 and 2021 consist of the following (in thousands):

Lease liabilities at December 31, 2023 and December 31, 2022 consist of the following (in thousands):

December 31, 2023 December 31, 2022

Finance Leases $ 597 $ 341

Financing Lease $ 623 $ 597

Operating Lease 1,300 1,524

Total $ 1,923 $ 2,121

At December 31, 2023, the remaining aggregate annual minimum lease payments are as follows (in thousands):

Finance Lease Obligations Operating Lease Obligations

2024 $ 242 $ 294

Thereafter — —

Subtotal 691 1,390

amount representing interest ( 68 ) ( 90 )

Total $ 623 $ 1,300

PROPERTY, PLANT AND EQUIPMENT

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

Year Ended December 31,

Depreciable property, plant and equipment at December 31, 2023 and December 31, 2022 consist of the following (in thousands):

December 31, 2023 December 31, 2022

Equipment $ 60,536 $ 55,178

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ACCOUNTS RECEIVABLE

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

Accounts receivable as of December 31, 2023 and December 31, 2022 consist of the following (in thousands):

December 31, 2023 December 31, 2022

Billed receivables $ 2,967 $ 2,303

Less allowance for doubtful accounts $ ( 164 ) ( 132 )

Less provision for credit losses ( 122 ) ( 164 )

Accounts receivable, net $ 2,845 $ 2,139

The following table summarizes the allowance for doubtful accounts activity as of and for the years ended December 31, 2022 and 2021 (in thousands).

The following table summarizes the allowance for credit loss activity as of and for the years ended December 31, 2023 and 2022 (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:

Allowance for credit losses:

Year Ended December 31, 2023 $ ( 164 ) $ ( 76 ) $ ( 6 ) $ 124 $ ( 122 )

1 unchanged sentence

GOODWILL AND INTANGIBLE ASSETS

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.

The goodwill balance was $ 10.8 million at December 31, 2023 and is related to the Turner, Red Rock, Mirabell, Francesca, Tortolita, Lyn Lee, Las Quintas Serenas, Rincon, Twin Hawks, and Farmers 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).

The Farmers acquisition contributed approximately $ 6.0 million to the change in the goodwill balance (refer to Note 15 - “Acquisitions” 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.

The Company recorded no goodwill impairment in 2023 and 2022.

As of December 31, 2023 and December 31, 2022, the goodwill balance consisted of the following (in thousands):

December 31, 2022 Balance Acquisition Activity December 31, 2023 Balance

Goodwill $ 4,957 $ 5,863 $ 10,820

Intangible Assets

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

As of December 31, 2023 and December 31, 2022, intangible assets consisted of the following (in thousands):

December 31, 2023 December 31, 2022

8 unchanged sentences

Organizational costs 163 163 87 87

1,764 1,764 1,743 1,743

Total indefinite lived intangible assets 1,847 1,847 1,764 1,764

DEFINITE LIVED INTANGIBLE ASSETS:

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Sonoran contract rights 7,406 ( 2,285 ) 5,121 7,406 ( 2,224 ) 5,182

25,384 ( 17,009 ) 8,375 25,385 ( 16,789 ) 8,596

Total definite lived intangible assets 25,384 ( 18,390 ) 6,994 25,384 ( 17,009 ) 8,375

Total intangible assets $ 27,231 $ ( 18,390 ) $ 8,841 $ 27,148 $ ( 17,009 ) $ 10,139

2 unchanged sentences

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

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

Franchise contract rights are agreements with Pima and Pinal counties that allow the Company to place infrastructure in public right-of-way and permits expected to be renewable indefinitely.

Franchise contract rights and organizational costs relate to the 2018 acquisition of Red Rock and the 2023 acquisition of Farmers.

Franchise contract rights are agreements with Pima and Pinal counties for Red Rock and Pima county for Farmers 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.

Acquired ICFAs and Sonoran contract rights relate to acquired rights under certain ICFAs through the 2004 acquisition of Santa Cruz and Palo Verde and the 2005 acquisition of Sonoran assets, respectively.

The Acquired ICFAs and Sonoran contract rights 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, the Company cannot reliably estimate when the remaining intangible assets’ amortization will be recorded.

Amortization in the amount of $ 1.4 million and $ 0.2 million was recorded for these balances for the years ended December 31, 2023 and 2022, respectively.

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.

The Company provides medical benefits to employees through its 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 $ 1.0 million for the year ended December 31, 2023 and $ 0.9 million for the year ended December 31, 2022.

Refer to Note 1 — “Basis of Presentation, Corporate Transactions, Significant Accounting Policies, and Recent Accounting Pronouncements — Corporate Transactions” (specifically the “Public Offering of Common Stock” and “Private Placement Offering of Common Stock” sections) for additional information regarding other related party disclosures.

ACCRUED EXPENSES

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

Accrued expenses at December 31, 2023 and December 31, 2022 consist of the following (in thousands):

December 31, 2023 December 31, 2022

Deferred compensation $ 818 $ 1,211

Property taxes $ 1,242 $ 1,195

Accrued project liabilities 1,001 1,585

Interest 483 492

Customer prepayments 883 588

Asset retirement obligations 697 697

Dividend payable 606 593

Asset retirement obligation 697 697

Accrued Bonus 602 557

Customer prepayments 588 438

Interest 480 483

Deferred compensation 239 818

Accrued purchase orders 200 515

Other accrued liabilities 1,179 1,025

6 unchanged sentences

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

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

Financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 were as follows (in thousands):

December 31, 2023 December 31, 2022

7 unchanged sentences

— 854 — 854 — 840 — 840

Long-term debt (3)

— 103,611 — 103,611 — 125,650 — 125,650

Acquisition Liability (3)

4 unchanged sentences

(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.

(3) 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.

2 unchanged sentences

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

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

In addition, as part of the Farmers acquisition, the Company is required to pay the seller a growth premium equal to $ 1,000 (not in thousands) 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 (i) ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or unplatted and owned by the seller within the service area or (ii) ten years after the date of closing if a new account (as previously described) has not been established.

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.

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, 2023 and December 31, 2022 are as follows (in thousands):

December 31, 2023 December 31, 2022

1 unchanged sentence

BONDS AND NOTES PAYABLE -

4.380 % Series A 2016, maturing June 2028

4.38 % Senior Secured Notes, Series A, maturing June 2028

$ — 28,750 $ — $ 28,750

4.580 % Series B 2016, maturing June 2036

4.58 % Senior Secured Notes, Series B, maturing June 2036

3,833 72,833 3,833 76,667

1 unchanged sentence

Debt issuance costs — ( 426 ) — ( 472 )

Loan Payable 47 184 — —

Total debt $ 3,880 $ 101,341 $ 3,833 $ 104,945

Debt is measured at fair value on a recurring basis as of December 31, 2023 and December 31, 2022 as follows (in thousands):

December 31, 2023 December 31, 2022

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

Long-term debt (3)

— 100,746 — 100,746 — 103,611 — 103,611

(3) The fair value of debt was estimated based on interest rates considered available for instruments of similar terms and remaining maturities.

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.

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.

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 (the “Series A Notes”).

Series B carries a principal balance of $ 76.7 million and bears an interest rate of 4.58 % over a 20 -year term, with the principal payment due on June 15, 2036 (the “Series B Notes”).

The Series B Notes were interest only for the first five years , with $ 1.9 million principal payments paid semiannually thereafter beginning December 2021.

The Series A Notes and the Series B 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 .

The Series A Notes and the Series B 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.

As of December 31, 2023, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes.

Additionally, on October 26, 2023, the Company entered into a note purchase agreement for the issuance of an aggregate principal amount of $ 20,000,000 of 6.91 % Senior Secured Notes due on January 3, 2034 (the “ 6.91 % Notes” and collectively with the Series A Notes and the Series B Notes, the “Senior Secured Notes”).

Pursuant to the terms of the Note Purchase Agreement, the Company issued the Notes on January 3, 2024.

The 6.91 % Notes will accrue interest at 6.91 % per annum from the date of issuance, payable semi-annually on January 3 and July 3 of each year, beginning on July 3, 2024, with a balloon payment due on January 3, 2034.

The 6.91 % 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.

The 6.91 % Notes also contain a provision limiting the payment of dividends if the Company falls below a debt service coverage ratio of 1.20 for any fiscal quarter ended on or before June 15, 2024 and 1.25 for any fiscal quarter ended during the period from and after June 16, 2024.

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.

The Senior Secured Notes also have 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;

engage in certain affiliate transactions;

and change the nature of the business.

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.

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

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

The Company and Northern Trust have subsequently amended the credit facility agreement on multiple occasions (as amended, the “Northern Trust Loan Agreement”) to, among other things, (i) extend the scheduled maturity date to July 1, 2025;

(ii) increase the maximum principal amount available for borrowing to $ 15.0 million;

(iii) replaced the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR);

and (iv) add a quarterly facility fee equal to 0.35 % of the average daily unused amount of the revolving line of credit.

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

2023 $ 3,789 $ 200

2024 3,789 159

2025 3,789 135

2026 3,789 94

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 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.

As of December 31, 2023, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.

As of December 31, 2023 and December 31, 2022, the outstanding borrowings on this credit line were approximately $ 2.3 million and $ 0 , respectively.

There were approximately $ 25,000 and $ 9,812 unamortized debt issuance costs as of December 31, 2023 and December 31, 2022, respectively.

At December 31, 2023, the remaining aggregate annual maturities of debt obligations are as follows (in thousands):

Thereafter 57,287

Subtotal 105,221

amount representing interest — —

amount representing unamortized discount and debt issuance costs ( 426 )

Total $ 105,647

3 unchanged sentences

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):

As of December 31, 2023 and December 31, 2022, the Company did not have any valuation allowances or unrecognized tax benefits.

The income tax expense for the years ended December 31, 2023 and 2022 is comprised of the following (in thousands):

Federal State Total

6 unchanged sentences

Income tax expense $ 714 $ 220 $ 934

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, 2023 and 2022 (in thousands):

18 unchanged sentences

Net deferred tax liability $ ( 8,284 ) $ ( 5,949 )

As of December 31, 2022, we have approximately $ 14.6 million remaining net operating loss (“NOL”) carry forwards.

As of December 31, 2023, the Company has approximately $ 4.4 million remaining net operating loss (“NOL”) carry forwards.

The Company had a regulatory asset of $ 1.4 million and $ 3.2 million at December 31, 2023 and December 31, 2022, respectively, related to the 2017 Federal Tax Cuts and Jobs Act (the "TCJA") signed into law on December 22, 2017.

3 unchanged sentences

The effective tax rates for the years ended December 31, 2023 and 2022 were 26.5 % and 14.3 %, 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.

The effective tax rate for the year ended December 31, 2023 was higher than the federal statutory rate of 21 % primarily driven by the 2017 TCJA reversal of approximately $ 0.7 million for the year ended 2022.

DEFERRED COMPENSATION AWARDS

2 unchanged sentences

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.

The Company recognizes compensation expense associated with the options over the vesting period.

2017 stock option grant

1 unchanged sentence

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 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 % having vested 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.

As of August 2021, these options were fully expensed.

As of December 31, 2023, 84,292 options have been exercised and 114,587 options have been forfeited with 266,121 options outstanding.

2019 stock option grant

4 unchanged sentences

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.

Stock-based compensation expense of $ 92,000 and $ 174,000 was recorded for the year ended December 31, 2023 and 2022, respectively.

As of December 31, 2023, 12,764 options have been exercised and 77,473 options have been forfeited with 159,763 options outstanding.

A summary of stock option activity is as follows (in thousands, except option prices and years):

3 unchanged sentences

Exercised ( 2 ) $ 9.61

Forfeited $ ( 18 ) $ 11.17

Options Outstanding at December 31, 2022 518 $ 10.12 5.4 $ 1,638.4

4 unchanged sentences

Options Vested at December 31, 2023 426 $ 10.10 4.4 $ 1,270.1

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):

Phantom stock units/Restricted stock units

Restricted stock units are granted in the first quarter based on the prior year’s performance and vest over a three-year period.

The units are credited quarterly using the closing price of the Company’s common stock on the applicable record date for the respective quarter.

The following table details total awards granted and the number of units outstanding as of December 31, 2023, 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, 2023 and 2022 (in thousands, except unit amounts):

Amounts Paid For the Year Ended December 31,

2 unchanged sentences

Q1 2020 22,481 — 24 108

Q1 2020 22,481 1,824 108 125

27,403 2,133 106 132

22,262 8,890 88 79

30,366 21,824 86 —

Total 134,702 32,847 $ 304 $ 364

1 unchanged sentence

2020 Omnibus Incentive Plan, effective May 7, 2020, long-term incentive awards are no longer granted in the form of PSUs and are granted as RSUs instead.

Stock appreciation rights compensation

Stock appreciation rights

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, 2023 and amounts paid during the years ended December 31, 2023 and 2022 (in thousands, except unit and per unit amounts):

9 unchanged sentences

(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.

(2) The exercise price was determined to be the fair market value of one share of GWR Global Water Resources Corp.

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.

For the year ended December 31, 2023, the Company recorded approximately $ 0.2 million of negative compensation expense related to the PSUs/RSUs and SARs.

No negative compensation was recorded for the year ended December 31, 2022 .

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):

Restricted stock compensation

Based on GWRI’s closing share price on December 29, 2023 (the last trading date of the quarter), deferred compensation expense to be recognized over future periods is estimated for the years ending December 31 as follows (in thousands):

Restricted stock awards

On May 7, 2020, the Company’s stockholders approved the Global Water Resources, Inc.

3 unchanged sentences

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 details the RSA units granted during the year ended December 31, 2023 and 2022 as well as the compensation expense related to the grant and partial vesting of RSAs for the years ended December 31, 2023 and 2022 (in thousands, except unit amounts):

For the Year Ended December 31,

Compensation expense

$ 972 $ 1,344

The following table summarizes the RSA transactions for the year ended December 31, 2023:

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

December 31, 2022 Balance Forfeited Vested Granted December 31, 2023 Balance

Nonvested Number of RSAs 192,468 24,835 91,783 22,500 98,350

Weighted Average Fair Value $ 15.57 12.22 10.83 10.78 $ 12.35

SUPPLEMENTAL CASH FLOW INFORMATION

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

The following is supplemental cash flow information for the year ended December 31, 2023 and 2022 (in thousands):

For the Year Ended December 31,

Supplemental cash flow information:

Cash paid for interest $ 11,355 $ 5,226

Cash paid for taxes $ 1,589 $ 1,613

Cash paid for interest - net of amounts capitalized

$ 4,686 $ 1,450

Cash paid for income taxes

$ 706 $ 1,589

Non-cash financing and investing activities:

Capital expenditures included in accounts payable and accrued liabilities $ 1,747 $ 158

Business acquisition through issuance of contingent consideration payable $ 1,330 $ —

Finance lease additions

Acquisition of Farmers Water Company

On February 1, 2023, the Company acquired all of the equity of Farmers, an operator of a water utility with service area in Pima County, Arizona, for a total consideration of $ 7.6 million consisting of $ 6.2 million in cash plus a growth premium estimated at $ 1.4 million.

The acquisition was accounted for as a business combination under ASC 805, “Business Combinations” and the purchase price was allocated to the acquired utility assets and liabilities based on the acquisition-date fair values.

Fair values are determined in accordance with ASC 820 “Fair Value Measurement,” which allows for the characteristics of the acquired assets and liabilities to be considered, particularly restrictions on the use of the asset and liabilities.

Regulation is considered both a restriction on the use of the assets and liabilities, as it relates to inclusion in rate base, and a fundamental input to measuring the fair value in a business combination.

Substantially all the Company’s operations are subject to the rate-setting authority of the ACC and are accounted for pursuant to accounting guidance for regulated operations.

The rate-setting and cost recovery provisions currently in place for the Company’s regulated operations provide revenues derived from costs, including a return on investment of assets and liabilities included in rate base.

As such, the fair value of the Company’s assets and liabilities subject to these rate-setting provisions approximates the pre-acquisition carrying values and does not reflect any net valuation adjustments.

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 (i) ten years after the first new account for residential purposes is established on land that is, at the time of the closing date of the acquisition, undeveloped or unplatted and owned by the seller within the service area or (ii) ten years after the date of closing if a new account (as described above) has not been established.

The assumptions and estimates used in determining the acquisition liability related to the growth premium are consistent with previous acquisitions.

As of December 31, 2023, the remaining liability was $ 1.3 million.

The purchase price allocation of the net assets acquired in the transaction is as follows (in thousands):

Net assets acquired:

Accounts receivable 72

Property, plant and equipment 10,386

Construction work-in-progress 126

Intangibles (1)

Other taxes ( 35 )

Other accrued liabilities ( 55 )

Developer deposits ( 22 )

AIAC ( 1,481 )

CIAC ( 7,322 )

Total net assets assumed 1,712

Goodwill 5,863

Total purchase price $ 7,575

(1) Intangibles consist of franchise contract rights and organization costs.

Refer to Note 7 — “Goodwill & Intangible Assets” for additional information regarding the intangibles.

The goodwill reflects the value paid primarily for the long-term potential for connection growth as a result of the Company’s increased scale and diversity, opportunities for synergies, and an improved risk profile.

While the Company uses the best available estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, such estimates are inherently uncertain and subject to refinement.

Events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results.

As a result, during the one-year measurement period from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.

Any adjustments subsequent to the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, will be recorded in the Company’s Consolidated Statements of Operations.

COMMITMENTS AND CONTINGENCIES

6 unchanged sentences

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.

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.

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.

Management is not aware of any legal proceeding of which the ultimate resolution could materially affect the Company’s financial position, results of operations, or cash flows.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data