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Item 2. Management’s Discussion and Analysis

2024-05-09 compared with 2023-11-09 · 165 added, 239 removed, 218 unchanged (65% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations (“MD&A”) relate to the three and nine months ended September 30, 2023 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.

The following management’s discussion and analysis of Global Water Resources, Inc.’s (the “Company”, “GWRI”, “we”, or “us”) financial condition and results of operations (“MD&A”) relate to the three months ended March 31, 2024 and should be read together with the consolidated financial statements and accompanying notes included in Part I, Item 1 of this report.

Cautionary Statement Regarding Forward-Looking Statements

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future financial performance;

regulatory and Arizona Corporation Commission (“ACC”) proceedings and approvals, such as the anticipated benefits resulting from Rate Decision No.

78644, including our expected collective revenue increase due to new water and wastewater rates and benefits from consolidation of rates;

our expectation that the ACC will not take any further material action relating to the Private Letter Ruling request issued by the Internal Revenue Service (“IRS”);

acquisition plans and our ability to complete additional acquisitions;

regulatory and Arizona Corporation Commission (“ACC”) proceedings, decisions, and approvals, such as the anticipated benefits resulting from rate decisions, including any collective revenue increases due to new water and wastewater rates, our beliefs and expectations pertaining to ACC actions relating to our Southwest Plant, as well as the outcome and timing of our rate case and other applications with the ACC, including our applications for the approval of an accounting order and the approval of an annual bill credit, in each case, relating to the Southwest Plant;

our plans relating to future filings of our rate cases with the ACC;

acquisition plans and our ability to complete additional acquisitions, including the anticipated acquisition of seven public water systems from the City of Tucson and the expected increase in active water service connections resulting from such acquisition;

population and growth projections;

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operating expenses;

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

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

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

liquidity and capital resources;

plans and expectations for capital expenditures;

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and certain general risks, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.

These and other factors are discussed in the risk factors described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 (the “2022 Form 10-K”).

Additionally, there may be other risks described from time to time in the reports that we file with the Securities and Exchange Commission (the “SEC”).

These and other factors are discussed in the risk factors described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Form 10-K”) as updated from time to time in our subsequent filings with the Securities and Exchange Commission (the “SEC”).

Additional risks and uncertainties include, but are not limited to, whether all conditions precedent in the asset purchase agreement to acquire the seven public water systems from the City of Tucson will be satisfied, including the receipt of ACC approval, and other risks to consummation of the acquisition, including circumstances that could give rise to the termination of the asset purchase agreement and the risk that the transaction will not be consummated without undue delay, cost or expense, or at all.

Any forward-looking statement speaks only as of the date of this report.

Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

GWRI is a water resource management company that owns, operates, and manages twenty-nine water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, Arizona.

GWRI is a water resource management company that owns, operates, and manages thirty-two water, wastewater, and recycled water systems in strategically located communities, principally in metropolitan Phoenix and Tucson, Arizona.

The Company seeks to deploy an integrated approach, referred to as “Total Water Management.” Total Water Management is a comprehensive approach to water utility management that reduces demand on scarce non-renewable water sources and costly renewable water supplies, in a manner that ensures sustainability and greatly benefits communities both environmentally and economically.

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Business Outlook

There was a trend of positive growth in new connections during 2022, and during the first nine months of 2023, growth continued at a moderate rate.

According to the 2020 U.S.

Census Data, the Phoenix metropolitan statistical area (“MSA”) is the 11th largest MSA in the U.S.

and had a population of 4.8 million, an increase of 14% over the 4.2 million people reported in the 2010 Census.

During the second half of 2023, we experienced an increase in the rate of connection growth, which has continued into the first three months of 2024.

According to the most recent U.S.

Census estimates, the Phoenix metropolitan statistical area (“MSA”) is the 10th largest MSA in the U.S.

and had an estimated population of 5.1 million, an increase of 4.6% over the 4.8 million people reported in the 2020 Census.

Metropolitan Phoenix continues to grow due to its comparatively affordable housing, excellent weather, large and growing universities, a diverse employment base, and low taxes.

The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.8 million people by 2030 and 6.5 million by 2040.

Job growth year over year in Arizona as of September 30, 2023 was 2.2%, and the state continues to be ranked in the top half nationally for job growth.

Despite market data indicating a general slowdown in housing for the Phoenix metropolitan area primarily due to inflation and increased interest rates, management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots, existing infrastructure in place within our services areas, and increased activity related to multi-family developments.

Arizona’s job growth increased by 2.2% during the first three months of 2024 as compared to the same period for the prior year, ranking the state in the top ten nationally as of March 31, 2024.

While we saw an overall weakness in the market for single-family housing during the first half of 2023, according to the W.P.

Carey School of Business Greater Phoenix Blue Chip Real Estate Consensus Panel the outlook is improving.

They anticipate permitting to increase in 2024 due to the improvement that started in the second half of 2023 combined with the expectations of modestly declining mortgage rates in 2024.

Further, single family permits in the City of Maricopa increased 131% for the three months ended March 31, 2024 as compared to the same period in the prior year.

Management believes that we are well-positioned to benefit from the growth expected in the Phoenix metropolitan area due to the availability of lots, existing infrastructure in place within our services areas, and increased activity related to multi-family developments.

Factors Affecting our Results of Operations

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

As of September 30, 2023, active service connections increased 4,902, or 8.7%, to 61,036 compared to 56,134 active service connections as of September 30, 2022, primarily due to the acquisition of Farmers Water Co.

(“Farmers”) and organic growth in our service areas.

As of March 31, 2024, active service connections increased 2,642, or 4.4%, to 62,451 compared to 59,809 active service connections as of March 31, 2023, primarily due to organic growth in our service areas.

Approximately 89.4% of the 62,451 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc.

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

(“Palo Verde”) utilities as of September 30, 2023.

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

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

(“GW-Palo Verde”) utilities as of March 31, 2024.

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

Economic and Environmental Utility Regulation

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The ACC determines a “rate of return” on that rate base, which includes the approved capital structure and the actual cost of debt and a fair and reasonable cost of equity based on the ACC’s judgment.

The overall revenue requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding “prudently” incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments.

The overall revenue requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding reasonably incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments.

To ensure an optimal combination of access to water and water conservation balanced with a fair rate of return for investors, our water utility operating revenue is based on two components:

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A discount to the volumetric rate applies for customers that use less than an amount specified by the ACC.

For all investor-owned water utilities, the ACC requires the establishment of inverted tier conservation-oriented rates, meaning that the price of water increases as consumption increases.

For all investor-owned water utilities, the ACC has, as a policy matter, required the establishment of inverted tier conservation-oriented rates, meaning that the price of water increases as consumption increases.

For wastewater utilities, wastewater collection, and treatment can be based on volumetric or fixed fees.

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We believe it is common industry practice to file for a rate increase every three to five years.

Refer to “—Rate Case Activity” below and Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Refer to “—Rate Case and Regulatory Activity” below and Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Additionally, our water and wastewater utility operations are subject to extensive regulation by U.S.

federal, state, and local regulatory agencies that enforce environmental, health, and safety requirements, which affect all of our regulated subsidiaries.

Environmental, health and safety, and water quality regulations are complex and change frequently, and they have tended to become more stringent over time.

Although it is difficult to project the ultimate costs of complying with pending or future requirements, we do not expect requirements under current regulations to have a material impact on our operations or financial condition, although it is possible new methods of treating drinking water may be required if additional regulations become effective in the future.

For example, on March 14, 2023, the U.S.

Environmental Protection Agency (“EPA”) announced the proposed National Primary Drinking Water Regulation (“NPDWR”) for the treatment of six per- and polyfluoroalkyl substances or compounds (“PFAS”).

The NPDWR proposed maximum contaminant levels (“MCLs”) in drinking water.

If finalized as proposed, the regulation will require public water systems to monitor for these compounds.

It will also require public water systems to notify customers and treat drinking water to reduce the compounds, if the MCL is exceeded.

The proposed NPDWR was issued for public comment and the EPA expects to finalize the regulation by early 2024.

Once the rule is finalized, water systems will be required to comply with the rule after a specified implementation period, anticipated to be three years from the rule-adoption date.

The Company is currently reviewing the proposed regulation as compared to our current treatment standards and expects that the regulation, once finalized, will result in changes to or addition of certain treatment processes that will require increased capital expenditures and water treatment and other operating costs.

As other newer or stricter standards are introduced in the future, they could also increase our operating expenses.

We would generally expect to recover expenses associated with compliance for environmental and health and safety standards through rate increases, but this recovery may be affected by regulatory lag.

Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by the ACC as appropriate for inclusion in establishing rates.

Environmental, health and safety, and water quality regulations are complex, change frequently, and have tended to become more stringent over time.

Although it is difficult to project the ultimate costs of complying with pending or future requirements, we do not expect requirements under current regulations to have a material impact on our operations or financial condition, though it is possible new methods of treating drinking water may be required if additional regulations become effective in the future.

On April 10, 2024, the U.S.

Environmental Protection Agency (“EPA”) finalized the National Primary Drinking Water Regulation (“NPDWR”) establishing legally enforceable levels, called maximum contaminant levels (“MCLs”), for six per- and polyfluoroalkyl substances or compounds (“ PFAS”) in drinking water.

The EPA also finalized health-based, non-enforceable maximum contaminant level goals for these PFAS.

The final rule requires:

that public water systems, such as the Company, must monitor for these PFAS and have three years to complete initial monitoring, followed by ongoing compliance monitoring.

Public water systems must also provide the public with information on the levels of these PFAS in their drinking water beginning in 2027.

Public water systems have five years to implement solutions that reduce these PFAS if monitoring shows that drinking water levels exceed the MCLs applicable.

Beginning in five years, public water systems that have PFAS in drinking water which violate one or more of these MCLs must take action to reduce levels of these PFAS in their drinking water and must provide notification to the public of the violation.

We are in process of complying with the first requirement of the rule mandating initial monitoring for all of our utilities.

Initial monitoring completed through March 31, 2024 indicated PFAS levels in quantities that exceed the NPDWR for two of our smaller utilities in which treatment options are being evaluated, and monitoring at all of our utilities will occur in accordance with the rule requirements.

Capital expenditures and operating costs required as a result of water quality standards have been traditionally recognized by the ACC as appropriate for inclusion in establishing rates or in a separate surcharge.

Infrastructure Investment

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However, we employ a variety of technologies and methodologies to minimize costs and maximize operational efficiencies.

Cybersecurity Risks

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

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

We operate in a highly regulated industry that requires the continued operation of sophisticated information technology systems and network infrastructure.

Despite implementation of security measures, our technology systems are vulnerable to disability, failures or unauthorized access.

Our facilities, information technology systems and other infrastructure facilities and systems and physical assets could be

targets of such unauthorized access.

Failures or breaches of our systems could impact the reliability of our systems and also subject us to financial harm.

If our technology systems were to fail or be breached and if we are unable to recover in a timely way, we may not be able to fulfill critical business functions and sensitive confidential data could be compromised, which could have a material adverse impact on our financial condition, results of operations or cash flows.

We are subject to laws and rules issued by multiple government agencies concerning safeguarding and maintaining the confidentiality of our security, customer, and business information.

The increasing promulgation of rules and standards will increase our compliance costs and our exposure to the potential risk of violations of the standards.

We have experienced, and expect to continue to experience, these types of threats and attempted intrusions.

The implementation of additional security measures could increase costs and have a material adverse impact on our financial results.

We have obtained cyber insurance to provide coverage for a portion of the losses and damages that may result from a security breach of our information technology systems, but such insurance may not cover the total loss or damage caused by a breach.

These types of events could also require significant management attention and resources, and could adversely affect our reputation with customers and the public.

Weather and Seasonality

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For additional information and risks associated with the access to and quality of water supply, see “Risk Factors,” included in Part I, Item 1A of the 2023 Form 10-K.

Rate Case Activity

On July 3, 2023, Global Water-Palo Verde Utilities Company, Inc.

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

(“Santa Cruz”) filed an application with the ACC for approval of an accounting order to defer and record as a regulatory asset the depreciation expense recorded for the Company’s Southwest Plant, plus the carrying cost at the authorized rate of return set in Palo Verde’s and Santa Cruz’s most recent rate order, until the plant is considered for recovery in the utilities’ next rate case.

On June 27, 2023, seven of the Company’s 13 regulated utilities each filed a rate case application with the ACC for water rates based on a 2022 test year.

In addition to a rate increase, the Company requested, among other things, the consolidation of water rates for certain of its utilities, including Mirabell, Lyn Lee, Francesca, Tortolita, Rincon, Las Quintas Serenas, and Red Rock, each located in Pima County.

Of the Company’s utilities, these utilities filing rate applications make up approximately 3% of the Company’s active service connections.

There can be no assurance that the ACC will approve the requested rate increase or any increase or the consolidation of water rates described above, and the ACC could take other actions as a result of the rate case.

Further, it is possible that the ACC may determine to decrease future rates.

There can also be no assurance as to the timing of when an approved rate increase (if any) would go into effect.

Rate Case and Regulatory Activity

During the fourth quarter of 2023, the Company notified the ACC of its intention to file a rate case for Global Water-Farmers Water Company, Inc.

(“GW-Farmers”) during 2024.

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

On July 3, 2023, the Company’s GW-Palo Verde and GW-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 GW-Palo Verde’s and GW-Santa Cruz’s most recent rate order, until the plant is considered for recovery in the next GW-Palo Verde and GW-Santa Cruz rate case.

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 and on April 25, 2024, GW-Palo Verde filed an application with the ACC requesting a monthly bill credit for customers that would be in place until the conclusion of the next GW-Palo Verde rate case.

If approved as filed, the impact of the bill credit would reduce revenue earned subsequent to the order by approximately $570,000 annually.

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 addition, further action may be taken by the ACC during the next GW-Palo Verde rate case.

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.

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

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

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

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

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

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

(“GW-Red Rock”), each located in Pima County.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

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

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(i) the consolidation of water and/or wastewater rates to create economies of scale that are beneficial to all customers when rates are consolidated;

(ii) acquisition premiums relating to the Company’s acquisitions of its Red Rock and Turner Ranches utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirementincluded in the table above;(iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding;

(ii) acquisition premiums relating to the Company’s acquisitions of its GW-Red Rock and Global Water - Turner Ranches Irrigation, Inc.

utilities, which increase the rate base for such utilities and result in an increase in the annual collective revenue requirement included in the table above;

(iii) the Company’s ability to annually adjust rates to flow through certain changes in tax expense, primarily related to income taxes, without the necessity of a rate case proceeding;

and (iv) a sustainable water surcharge, which will allow semiannual surcharges to be added to customer bills based on verified costs of new water resources.

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As required by Rate Decision No.

78644, the Private Letter Ruling has been provided to the ACC.

Within 90 days after receiving the ruling, ACC Staff is required to prepare, for ACC consideration, a memorandum and proposed order regarding guidance issued within the Private Letter Ruling.

The Private Letter Ruling was consistent with the adjustments used to determine the revenue requirements in Rate Decision No.

Accordingly, the Company has requested that no further action be taken by the ACC.

However, there can be no assurance provided until the ACC process is complete.

Refer to Note 2 – “Regulatory Decision and Related Accounting and Policy Changes” of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of the Company’s Form 10-K for the period ended December 31, 2022.

78644, the Private Letter Ruling was provided to the ACC and no further action will be taken by the ACC.

Corporate Transactions

Recent Acquisitions

On February 1, 2023, the Company acquired all of the equity of Farmers Water Co.

(“Farmers”), an operator of a water utility with service area in Pima County, Arizona.

The acquisition added approximately 3,300 active water service connections and approximately 21.5 square miles of service area in Sahuarita, Arizona and the surrounding unincorporated area of Pima County at the time of the acquisition.

Refer to Note 15 - “Acquisitions” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.

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.

Refer to Note 11 - “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.

Private Placement Offering of Common Stock

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The Company received gross proceeds of approximately $2.8 million from the offering.

Public Offering of Common Stock

On August 1, 2022, the Company completed a public offering of 1,150,000 shares of common stock at a public offering price of $13.50 per share, which included 150,000 shares issued and sold to the underwriter following the exercise in full of its option to purchase additional shares of common stock.

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

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

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.

Refer to Note 15 - “Acquisitions” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional details.

Stipulated Condemnation of the Operations and Assets of Valencia

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

Comparison of Results of Operations for the Three Months Ended September 30, 2023 and 2022

The following table summarizes results of operations for the three months ended September 30, 2023 and 2022 (in thousands, except for share amounts):

For the Three Months Ended September 30,

Revenues $ 14,532 $ 11,893

Operating expenses 10,695 9,127

Operating income 3,837 2,766

Total other expense (315) (468)

Income before income taxes 3,522 2,298

Income tax expense (888) (612)

Net income $ 2,634 $ 1,686

Basic earnings per common share $ 0.11 $ 0.07

Diluted earnings per common share $ 0.11 $ 0.07

Revenues – The following table summarizes revenues for the three months ended September 30, 2023 and 2022 (in thousands):

For the Three Months Ended September 30,

Water services $ 7,520 $ 5,824

Wastewater and recycled water services 6,494 6,069

Unregulated revenues 518 —

Total revenues $ 14,532 $ 11,893

Total revenues increased $2.6 million, or 22.2%, to $14.5 million for the three months ended September 30, 2023 compared to $11.9 million for the three months ended September 30, 2022.

The increase in revenue was primarily attributable to higher average temperatures for the quarter coupled with a 64% decrease in precipitation causing an escalation of consumption, as compared to the same quarter last year and the recognition of $0.5 million of ICFA related revenue.

Other contributing factors include increased rates related to Rate Decision No.

78644, new connections associated with the acquisition of Farmers in February 2023, and year over year organic growth in connections of 2.6%.

Water Services – Water services revenue increased $1.7 million, or 29.1%, to $7.5 million for the three months ended September 30, 2023 compared to $5.8 million for the three months ended September 30, 2022.

The increase in water services revenue was primarily related to the weather conditions discussed above prompting higher consumption, the acquisition of Farmers in February 2023 and increased rates related to Rate Decision No.

Water services revenue based on consumption increased $1.3 million, or 46.3%, to $4.1 million for the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022.

The increase was primarily driven by the weather conditions discussed above resulting in a 31.2% increase in consumption as compared to the three months ended September 30, 2022, the Farmers acquisition in February 2023, and an increase in rates related to Rate Decision No.

Active water connections increased 14.1% to 33,976 as of September 30, 2023 from 29,785 as of September 30, 2022, primarily due to the acquisition of Farmers in February 2023 and organic growth in our service areas.

Water consumption increased 31.2% to 1.3 billion gallons for the three months ended September 30, 2023 from 992.4 million for the three months ended September 30, 2022.

The increase in consumption was primarily attributable to the weather conditions discussed above and the additional connections resulting from the acquisition of Farmers in February 2023.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 13.4%, to $3.2 million for the three months ended September 30, 2023 compared to $2.9 million for the three months ended September 30, 2022.

The increase was primarily due to growth in active service connections, primarily from new connections associated with the acquisition of Farmers, as well as an increase in rates due to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 7.0%, to $6.5 million for the three months ended September 30, 2023 compared to $6.1 million for the three months ended September 30, 2022.

The increase in wastewater and recycled water services revenue was primarily driven by a $0.4 million increase in wastewater services revenue, which reflects a 2.7% increase in active wastewater connections from 26,349 as of September 30, 2022 to 27,060 as of September 30, 2023, combined with an increase in rates due to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, increased by approximately 9.6% to $0.5 million for the three months ended September 30, 2023 compared to $0.4 million for the three months ended September 30, 2022.

The increase in recycled water services revenue was primarily driven by the volume of recycled gallons delivered, which increased 10.2% to 271.7 million gallons for three months ended September 30, 2023 compared to 246.5 million gallons for the three months ended September 30, 2022.

Also contributing to the increase was the rate increase resulting from Rate Decision No.

Operating Expenses – The following table summarizes operating expenses for the three months ended September 30, 2023 and 2022 (in thousands):

For the Three Months Ended September 30,

Operations and maintenance $ 3,587 $ 2,775

General and administrative 3,923 3,923

Depreciation and amortization 3,185 2,429

Total operating expenses $ 10,695 $ 9,127

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased electrical power), maintenance costs, and property tax, increased $0.8 million, or 29.3%, to $3.6 million for the three months ended September 30, 2023 compared to $2.8 million for the three months ended September 30, 2022, which was primarily attributable to the Farmers acquisition, additional costs for purchased power as a direct result of increased consumption, increased personnel costs and higher property tax expenses.

Utility power and related expenses increased $0.2 million to $0.9 million for the three months ended September 30, 2023 compared to $0.7 million for the same period in 2022.

The additional power costs were due to increased pump usage related to increased consumption and additional connections, from both the Farmers acquisition and organic growth.

Total personnel expenses increased $0.2 million, or 26.3%, to $1.2 million for the three months ended September 30, 2023 compared from $1.0 million for the three months ended September 30, 2022.

The increase in personnel expenses was primarily related to the acquisition of Farmers in February 2023 and increased salary and wages, partially offset by lower medical benefit costs.

Property tax expense increased $0.1 million, or 38.4%, to $0.6 million for the three months ended September 30, 2023 compared to $0.5 million for the same period in 2022.

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

As revenues increase, property taxes are also expected to increase.

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

These costs remained flat and were $3.9 million for both the three months ended September 30, 2023 and 2022.

Personnel related costs increased $0.3 million, or 14.0%, to $1.9 million for the three months ended September 30, 2023 compared to $1.6 million for the three months ended September 30, 2022.

The increase was primarily related to higher salaries and wages and employee related expenses.

Deferred compensation expense decreased $0.2 million, or 68.8%, to $0.1 million for the three months ended September 30, 2023 compared to $0.3 million for the three months ended September 30, 2022.

The decrease was a direct result of the change in the stock price impacting certain equity-like awards (i.e., the stock price decreased more during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022).

Refer to Note 13 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Board compensation decreased $0.1 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

The decrease was primarily due to the impact of the change in the stock price used in the valuation of board compensation as discussed above.

Depreciation and amortization - Depreciation and amortization expense increased $0.8 million, or 31.1%, to $3.2 million for the three months ended September 30, 2023, compared to $2.4 million for the three months ended September 30, 2022.

The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, $0.1 million of which was attributable to the partial activation of the Southwest Plant in Maricopa, AZ.

Approximately $44,000 of depreciation expense for the quarter was attributable to the Farmers acquisition.

Other Expense – Other expense decreased $0.2 million, or 32.7%, to $0.3 million for three months ended September 30, 2023 from $0.5 million for the three months ended September 30, 2022, which was primarily attributable to the increase in the equity portion of the allowance for funds used during construction (“AFUDC”) and increased Buckeye growth premiums.

Income Tax Expense – Income tax expense of $0.9 million was recorded for the three months ended September 30, 2023 compared to income tax expense of $0.6 million for the three months ended September 30, 2022.

The primary driver for the change was due to the increase in pre-tax income for three months ended September 30, 2023.

Net Income – Net income totaled $2.6 million for the three months ended September 30, 2023 compared to net income of $1.7 million for the three months ended September 30, 2022.

The $0.9 million increase was primarily attributable to increased operating revenue as a result of escalated consumption and increased rates related to Rate Decision No.

78644, increased revenue resulting from the Farmers acquisition in February 2023, and the recognition of $0.5 million of ICFA related revenue, partially offset by an increase in operations and maintenance expenses of approximately $0.8 million, higher depreciation expenses of $0.8 million, and increased tax expense of $0.3 million.

Comparison of Results of Operations for the Nine Months Ended September 30, 2023 and 2022

The following table summarizes results of operations for the nine months ended September 30, 2023 and 2022 (in thousands, except for share amounts):

For the Nine Months Ended September 30,

Comparison of Results of Operations for the Three Months Ended March 31, 2024 and 2023

The following table summarizes results of operations for the three months ended March 31, 2024 and 2023 (in thousands, except for share amounts):

For the Three Months Ended March 31,

Revenues $ 11,610 $ 13,128

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Diluted earnings per common share $ 0.03 $ 0.10

Revenues – The following table summarizes revenues for the nine months ended September 30, 2023 and 2022 (in thousands):

For the Nine Months Ended September 30,

Revenues – The following table summarizes revenues for the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended March 31,

Water services $ 5,226 $ 4,839

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Total revenues $ 11,610 $ 13,128

Total revenues increased $7.1 million, or 20.9%, to $40.7 million for the nine months ended September 30, 2023 compared to $33.6 million for the nine months ended September 30, 2022.

The increase in revenue was primarily attributable to elevated consumption related to higher average temperatures and lower average precipitation, ICFA revenue earned during the 2023 period that did not occur in the prior year period, increased rates related to Rate Decision No.

78644, new connections associated with the acquisition of Farmers in February 2023, and organic connection growth.

Water Services – Water services revenue increased $3.0 million, or 19.3%, to $18.9 million for the nine months ended September 30, 2023 compared to $15.9 million for the nine months ended September 30, 2022.

The increase in water services revenue was primarily related to increased consumption, the acquisition of Farmers and an increase in rates related to Rate Decision No.

Water services revenue based on consumption increased $1.7 million, or 23.6%, to $8.9 million for the nine months ended September 30, 2023 compared to $7.2 million for the nine months ended September 30, 2022.

The increase was primarily driven by a 13.5% increase in consumption, the Farmers acquisition in February 2023 and increase in rates related to Rate Decision No.

Active water connections increased 13.8% to 33,976 as of September 30, 2023 from 29,785 as of September 30, 2022, primarily due to the Farmers acquisition in February 2023 and organic growth in our service areas.

Water consumption increased 13.5% to 3.1 billion gallons for the nine months ended September 30, 2023 compared to 2.7 billion for the nine months ended September 30, 2022.

The increase was primarily related to the considerable increase in consumption during the third quarter which we believe can be attributed to the higher temperatures and lower precipitation as compared to the same period in 2022.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $1.4 million, or 16.4%, to $9.6 million for the nine months ended September 30, 2023 compared to $8.2 million for the nine months ended September 30, 2022.

The increase was primarily due to the increase in active service connections primarily from new connections associated with the acquisition of Farmers, as well as an increase in rates due to Rate Decision No.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $1.2 million, or 6.7%, to $19.0 million for the nine months ended September 30, 2023 compared to $17.8 million for the nine months ended September 30, 2022.

The increase in wastewater and recycled water services revenue was primarily driven by a $1.2 million increase in wastewater services revenue resulting from the 2.7% increase in active wastewater connections from 26,349 as of September 30, 2022 to 27,060 as of September 30, 2023, combined with an increase in rates due to Rate Decision No.

Recycled water services revenue, which is based on the number of gallons delivered, increased by approximately 4.4% to $1.1 million for the nine months ended September 30, 2023 from $1.0 million for the nine months ended September 30, 2022.

The volume of recycled water delivered had a modest increase of 4.6% with 629 million gallons delivered for the nine months ended September 30, 2023 compared to 602 million gallons delivered for the nine months ended September 30, 2022.

Operating Expenses – The following table summarizes operating expenses for the nine months ended September 30, 2023 and 2022 (in thousands):

For the Nine Months Ended September 30,

Total revenues decreased $1.5 million, or 11.6%, to $11.6 million for the three months ended March 31, 2024 compared to $13.1 million for the three months ended March 31, 2023.

The decrease in revenue was primarily attributable to the recognition of $2.3 million in unregulated revenue related to infrastructure coordination and financing agreements (“ICFA”) during the three months ended March 31, 2023 that did not occur in the current period, partially offset by an increase of $0.8 million in regulated revenue primarily from organic connection growth and one additional month of revenue resulting from the February 2023 acquisition of GW-Farmers for the three months ended March 31, 2024 as compared to the same period for the prior year.

Water Services – Water services revenue increased $0.4 million, or 8.0%, to $5.2 million for the three months ended March 31, 2024 compared to $4.8 million for the three months ended March 31, 2023.

The increase in water services revenue was primarily related to the organic connection growth of 4.4%.

Water services revenue based on consumption increased $0.1 million, or 9.5%, to $1.7 million for the three months ended March 31, 2024 compared to $1.6 million for the three months ended March 31, 2023.

The moderate increase was primarily driven by organic growth.

Active water connections increased 4.4% to 34,715 as of March 31, 2024 from 33,298 as of March 31, 2023, primarily due to organic growth in our service areas.

Water consumption increased 6.8% to 0.7 billion gallons for the three months ended March 31, 2024 from 0.6 billion for the three months ended March 31, 2023.

The increase in consumption was primarily attributable to organic growth in our service areas.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased $0.3 million, or 8.0%, to $3.4 million for the three months ended March 31, 2024 compared to $3.1 million for the three months ended March 31, 2023.

The increase was primarily due to growth in active service connections.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased $0.4 million, or 6.0%, to $6.4 million for the three months ended March 31, 2024 compared to $6.0 million for the three months ended March 31, 2023.

The increase in wastewater and recycled water services revenue was primarily driven by a $0.4 million increase in wastewater services revenue, which reflects a 4.6% increase in active wastewater connections from 26,511 as of March 31, 2023 to 27,736 as of March 31, 2024.

Recycled water services revenue, which is based on the volume of recycled gallons delivered, was $0.1 million for both the three months ended March 31, 2024 and March 31, 2023.

Consumption of recycled water was consistent for both periods.

Operating Expenses – The following table summarizes operating expenses for the three months ended March 31, 2024 and 2023 (in thousands):

For the Three Months Ended March 31,

Operations and maintenance $ 3,284 $ 2,789

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Total operating expenses $ 10,343 $ 9,351

Total personnel expenses increased approximately $0.7 million, or 24.2%, to $3.3 million for the nine months ended September 30, 2023 compared to $2.6 million for the nine months ended September 30, 2022.

The increase was primarily attributable to the Farmers acquisition in February 2023, a cost of living adjustment, and an increase in personnel.

Utility power and related expenses increased $0.4 million to $2.1 million for the nine months ended September 30, 2023 compared to $1.7 million for the same period in 2022.

The additional power costs were due to increased pump usage related to increased consumption and additional connections, from both the Farmers acquisition and organic growth.

Contract services increased $0.1 million to $1.2 million for the nine months ended September 30, 2023 from $1.1 million for the nine months ended September 30, 2022.

The increase was primarily due to increased costs for billing software related to the additional connections period over period and cloud storage services.

Total personnel expenses increased $0.3 million, or 36.7%, to $1.3 million for the three months ended March 31, 2024 compared to $0.9 million for the three months ended March 31, 2023.

The increase in personnel expenses was primarily related to an increase of $0.1 million in salary and wages, higher medical insurance expenses of $0.2 million, and an additional month of personnel expenses attributable to GW-Farmers for the three months ended March 31, 2024 as compared to the same period for the prior year.

Other notable increases were related to purchased power and property taxes, partially offset by a moderate decrease in chemicals, consumables and supplies.

These costs increased $0.3 million, or 3.1%, to $11.9 million for the nine months ended September 30, 2023 compared to $11.6 million for the nine months ended September 30, 2022.

Deferred compensation expense decreased $0.1 million, or 12.2%, to $0.8 million for the nine months ended September 30, 2023 compared to $0.9 million for the nine months ended September 30, 2022.

The decrease was a direct result of the change in the stock price impacting certain valuations during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022.

Refer to Note 13 — “Deferred Compensation Awards” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

Other notable increases were related to personnel expenses, information technology expenses, rent, and contract services.

Other expenses decreased for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, such as professional fees expense and regulatory expenses, which were directly related to the rate case activity and acquisition related matters during 2022.

Depreciation and amortization - Depreciation and amortization expense increased $1.3 million, or 18.7%, to $8.5 million for the nine months ended September 30, 2023, compared to $7.2 million for the nine months ended September 30, 2022.

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

Approximately $136,000 of the depreciation for the nine months ended September 30, 2023 was attributable to the Farmers acquisition.

Other Expense – Other expense totaled $1.3 million for the nine months ended September 30, 2023 compared to $1.1 million for the nine months ended September 30, 2022.

The increase of $0.2 million in other expense was related to the $0.6 million decrease in income associated with Buckeye growth premiums as a result of fewer new meter connections in the area and an increase in interest expense of $0.4 million, partially offset by an increase in the equity portion of AFUDC of $0.8 million for the nine months ended September 30, 2023.

Income Tax Expense – Income tax expense of $2.5 million was recorded for the nine months ended September 30, 2023 compared to $0.8 million for the nine months ended September 30, 2022.

During the nine months ended September 30, 2022, the Company recorded a tax benefit of approximately $0.7 million from the reversal of the regulatory liability related to Rate Decision No.

Also contributing to the increase in income tax expense was higher pre-tax income for the nine months ended September 30, 2023.

Net Income – Net income totaled $6.8 million for the nine months ended September 30, 2023 compared to net income of $4.7 million for the nine months ended September 30, 2022.

The $2.1 million increase was primarily attributable to the recognition of $2.8 million of ICFA related revenue, increased operating revenue as a result of both escalated consumption and increased rates related to Rate Decision No.

78644, and increased revenue resulting from the Farmers acquisition in February 2023, partially offset by an increase in operating expenses of approximately $1.7 million, higher depreciation expenses of $1.3 million, and increased tax expense of $1.7 million.

These costs increased $0.2 million, or 5.6%, to $4.1 million for the three months ended March 31, 2024 compared to $3.9 million for the three months ended March 31, 2023.

Total personnel expenses increased $0.2 million, or 11.5%, to $1.9 million for the three months ended March 31, 2024 compared to $1.7 million for the three months ended March 31, 2023.

The increase was primarily related to higher medical insurance expenses and increased salaries and wages as a result of an increase in employee headcount.

Other notable increases were related to contract services, regulatory expenses, and board compensation expenses as a direct result of the change in the Company’s stock price impacting certain valuations, which were partially offset by a decrease in professional fees.

Depreciation and amortization - Depreciation and amortization expense increased $0.2 million, or 10.5%, to $2.9 million for the three months ended March 31, 2024, compared to $2.7 million for the three months ended March 31, 2023.

The increase was primarily driven by additional depreciation expense recorded as a direct result of the increase in fixed assets, which includes certain assets related to the Southwest Plant put into service July 2023.

Other Expense – Other expense decreased $0.1 million, or 26.9%, to $0.3 million for three months ended March 31, 2024 from $0.4 million for the three months ended March 31, 2023, which was primarily attributable an increase of $0.4 million in Buckeye growth premiums and a $0.2 million increase in interest income, which was partially offset by an increase of $0.4 million in interest expense primarily related to the senior secured notes issued in January 2024 (refer to “—Corporation Transactions” above for additional information) and a decrease of $0.1 million in the equity portion of the allowance for funds used during construction (“AFUDC”).

Income Tax Expense – Income tax expense of $0.3 million was recorded for the three months ended March 31, 2024 compared to income tax expense of $0.9 million for the three months ended March 31, 2023.

The primary driver for the change was due to the decrease in pre-tax income for three months ended March 31, 2024.

Net Income – Net income totaled $0.7 million for the three months ended March 31, 2024 compared to net income of $2.5 million for the three months ended March 31, 2023.

The $1.8 million decrease was primarily attributable to the recognition of $2.3 million of ICFA related revenue during the three months ended March 31, 2023 that did not occur in the current period and an increase in operating expenses of approximately $1.0 million, partially offset by an increase in regulated revenue of $0.8 million and decreased tax expense of $0.6 million.

Outstanding Share Data

As of November 8, 2023, there were 24,171,517 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 444,584 shares of the Company’s common stock.

As of May 8, 2024, there were 24,176,113 shares of the Company’s common stock outstanding and stock-based awards outstanding to acquire an additional 395,607 shares of the Company’s common stock.

Liquidity and Capital Resources

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

As of September 30, 2023, the Company has no notable near-term cash expenditures, other than the principal payments for the Series B senior secured notes in the amount of $1.9 million due in December 2023 and June 2024.

While specific facts and circumstances could change, the Company believes that there is sufficient cash on hand, the ability to draw on the $15.0 million revolving line of credit, and will be able to generate sufficient cash flows to meet the operating cash flow requirements and capital expenditure plan, as well as remain in compliance with its debt covenants, for the next twelve months and beyond.

As of March 31, 2024, the Company has no notable near-term cash expenditures, other than the principal payments for its Series B Notes (as defined below) in the amount of $1.9 million due in both June 2024 and December 2024.

While specific facts and circumstances could change, the Company believes that with the cash on hand and the ability to draw on its $15.0 million revolving line of credit, it will be able to generate sufficient cash flows to meet its operating cash flow requirements and capital expenditure plan, as well as remain in compliance with its debt covenants, for the next twelve months and beyond.

In March 2014, the Company initiated a dividend program to declare and pay a monthly dividend.

On November 30, 2022, the Company announced a monthly dividend increase from $0.02458 per share ($0.29496 per share annually) to $0.02483 per share (0.29796 per share annually).

On November 30, 2023, the Company announced a monthly dividend increase to 0.02508 per share (0.30096 per share annually) from 0.02483 per share (0.29796 per share annually).

Although the Company expects that monthly dividends will be declared and paid for the foreseeable future, the declaration of any dividends is at the discretion of the Company’s board of directors and is subject to legal requirements and debt service ratio covenant requirements (refer to “—Senior Secured Notes” and “—Revolving Credit Line”).

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

For the nine months ended September 30, 2023, net cash provided by operating activities totaled approximately $22.7 million compared to $19.7 million for the nine months ended September 30, 2022.

The $3.0 million increase in cash from operating activities was primarily driven by the improvement in net income for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

For the three months ended March 31, 2024, net cash provided by operating activities totaled approximately $8.1 million compared to $6.5 million for the three months ended March 31, 2023.

The $1.6 million increase in cash from operating activities was primarily driven by an increase in noncurrent liabilities for the three months ended March 31, 2024 as a result of funds received related to ICFA payments during the first three months in 2024 compared to an overall decrease in noncurrent liabilities for three months ended March 31, 2023 largely attributable to the recognition of ICFA related revenue, partially offset by a decrease in net income for the three months ended March 31, 2024 compared to the prior year period.

In addition, there were other notable fluctuations in working capital accounts.

Cash from Investing Activities

The net cash used in investing activities totaled approximately $24.8 million for the nine months ended September 30, 2023 compared to $25.4 million for the nine months ended September 30, 2022.

The $0.6 million increase in cash used in investing activities was primarily driven by the $6.2 million acquisition of Farmers, and a decrease in capital expenditures of $6.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The net cash used in investing activities totaled approximately $5.8 million for the three months ended March 31, 2024 compared to $12.8 million for the three months ended March 31, 2023.

The $7.0 million decrease in cash used in investing activities was primarily driven by the $6.2 million cash paid for the acquisition of GW-Farmers (net of cash acquired) in February 2023 and a decrease in capital expenditures of $0.8 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.

The Company continues to invest capital prudently in existing, core service areas where the Company is able to deploy the Total Water Management model as this includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities.

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

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

As a result, the Company may adjust capital expenditures to correspond with any substantial changes in demand for housing in service areas.

Cash from Financing Activities

The net cash provided by financing activities totaled $2.3 million for the nine months ended September 30, 2023, a $6.6 million change, as compared to the $8.8 million in cash used in financing activities for the nine months ended September 30, 2022.

This change was primarily driven by an increase of $6.2 million in advances in aid of construction, offset by a $12.1 million decrease in proceeds from the sale of stock for the nine months ended September 30, 2023.

The net cash provided by financing activities totaled $15.8 million for the three months ended March 31, 2024, a $14.0 million increase, as compared to the $1.8 million in cash provided by financing activities for the three months ended March 31, 2023.

This increase was primarily driven by the $20 million received from the senior secured notes issuance in January 2024, partially offset by $2.3 million of repayments on the Company’s revolving line of credit in the three months ended March 31, 2024 as compared to $3.5 million of net borrowings against the line of credit in the three months ended March 31, 2023.

Senior Secured Notes

On June 24, 2016, the Company issued two series of senior secured notes with a total principal balance of $115.0 million at a blended interest rate of 4.55%.

Series A carries a principal balance of $28.8 million and bears an interest rate of 4.38% over a twelve-year term, with the principal payment due on June 15, 2028.

Series B carries a principal balance of $86.3

million and bears an interest rate of 4.58% over a 20-year term.

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

The proceeds of the senior secured notes were primarily used to refinance the Company’s long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the Company’s U.S.

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 $86.3 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 proceeds of the Series A Notes and the Series B Notes were primarily used to refinance the Company’s long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the Company’s U.S.

initial public offering of its common stock in May 2016.

The senior secured notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

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 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 September 30, 2023, the Company was in compliance with its financial debt covenants.

Note Purchase Agreement

On October 26, 2023, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with Jackson National Life Insurance Company pursuant to which the Company will, subject to customer closing conditions, issue an aggregate principal amount of $20,000,000 of 6.91% Senior Secured Notes due on January 3, 2034 (the “Notes”).

The Company plans to use the proceeds from the Notes offering to refinance existing indebtedness, to support capital investments associated with growth and for general corporate purposes.

Debt issuance costs as of September 30, 2023 and December 31, 2022 were $0.4 million and $0.5 million, respectively.

The debt service ratio increases to 1.25 for any fiscal quarter ending during the period from and after June 30, 2024.

As of March 31, 2024, the Company was in compliance with its financial debt covenants relating to the Series A Notes and the Series B Notes.

Additionally, on January 3, 2024, the Company issued $20.0 million aggregate principal amount 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”).

The 6.91% Notes 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.

As of March 31, 2024, the Company was in compliance with its financial debt covenants relating to 6.91% Notes.

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.

Debt issuance costs as of March 31, 2024 and December 31, 2023 were $0.8 million and $0.4 million, respectively.

Revolving Credit Line

On April 30, 2020, the Company entered into an agreement with Northern Trust, for a two-year revolving line of credit initially up to $10.0 million with an initial maturity date of April 30, 2022 (as amended, the “Northern Trust Loan Agreement”).

On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an 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.

This credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in April 2020.

On April 30, 2021, the Company and Northern Trust entered into an amendment to the Northern Trust Loan Agreement pursuant to which, among other things, the maturity date for the revolving line of credit was extended to April 30, 2024.

On July 26, 2022, the Company and The Northern Trust Company entered into a second amendment to the Northern Trust Loan Agreement, which, among other things, further extended the maturity date for the revolving line of credit to July 1, 2024, increased the maximum principal amount available for borrowing to $15.0 million and replaced the LIBOR interest rate provisions with provisions based on the Secured Overnight Financing Rate (SOFR).

Refer to Note 11 – “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

On June 28, 2023, the Company and Northern Trust entered into a third amendment to the Northern Trust Loan Agreement, which, among other things, (i) further extended the scheduled maturity date for the revolving line of credit from July 1, 2024 to July 1, 2025 and (ii) added a quarterly facility fee equal to 0.35% of the average daily unused amount of the revolving line of credit.

On October 26, 2023, the Company and Northern Trust entered into a fourth amendment to the Northern Trust Loan Agreement, which, among other things, further amended the terms and conditions set forth in the Loan Agreement to make certain conforming changes to reflect the issuance of the Notes and related matters.

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) replace 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.

Similar to the Senior Secured Notes, the Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00.

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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.

Refer to Note 11 — “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information.

As of September 30, 2023, the Company was in compliance with its financial debt covenants.

As of September 30, 2023, the Company had outstanding borrowings of approximately $15,000 under the revolving line of credit with Northern Trust.

The Company did not incur debt issuance costs relating to the Northern Trust Loan Agreement for the three and nine months ended September 30, 2023 and 2022.

Other Financing Activity

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 March 31, 2024, the Company was in compliance with its financial debt covenants under the Northern Trust Loan Agreement.

As of March 31, 2024, the Company had no outstanding borrowings under the revolving line of credit with Northern Trust.

There were approximately $16,000 and $25,000 unamortized debt issuance costs as of March 31, 2024 and December 31, 2023, respectively.

Refer to Note 11 — “Debt” of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this report for additional information regarding the Senior Secured Notes and the Company’s revolving line of credit.

Other Recent Financing Activity

On June 8, 2023, the Company entered into a securities purchase agreement for the issuance and sale by the Company of an aggregate of 230,000 shares of the Company’s common stock at a purchase price of $12.07 per share in an offering exempt from registration pursuant to Section 4(a)(2) of the Securities Act and Rule 506 promulgated thereunder.

The Company received gross proceeds of approximately $2.8 million from the offering.

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

Insurance Coverage

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Contractual Obligations

The Company entered into the Note Purchase Agreement and the fourth amendment to the Northern Trust Loan Agreement on October 26, 2023.

Refer to additional details under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources” above.

There have been no additional material changes in our reported contractual obligations from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” in the 2022 10-K.

Critical Accounting Policies, Judgments, and Estimates

Except as described below, there have been no additional material changes in our reported contractual obligations from those disclosed under “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Contractual Obligations” in the 2023 10-K.

On January 3, 2024, the Company issued $ 20.0 million aggregate principal amount of 6.91 % Senior Secured Notes due on January 3, 2034.

Refer to additional details under “– Liquidity and Capital Resources – Debt ” above.

Critical Accounting Estimates

The application of critical accounting policies is particularly important to the Company’s financial condition and results of operations and provides a framework for management to make significant estimates, assumptions, and other judgments.

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Accordingly, changes in the estimates, assumptions, and other judgments applied to these accounting policies could have a significant impact on the Company’s financial condition and results of operations as reflected in its financial statements.

There have been no significant changes to our critical accounting policies from those disclosed under “Managements’ Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies, Judgments, and Estimates” in the 2022 10-K.

Off Balance Sheet Arrangements

As of September 30, 2023 and 2022, the Company did not have any off-balance sheet arrangements.

As of March 31, 2024 and 2023, the Company did not have any off-balance sheet arrangements.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis