|
||||||||||||||||||||||||||
| SEC Info℠ | | | Home | | | Search | | | My Interests | | | Help | | | Sign In | | | Please Sign In | |||||||
|
||||||||||||||||||||||||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/14/22 Consolidated Water Co. Ltd. 10-Q 9/30/22 62:10M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 1.91M
2: EX-10.1 Material Contract HTML 905K
3: EX-31.1 Certification -- §302 - SOA'02 HTML 22K
4: EX-31.2 Certification -- §302 - SOA'02 HTML 22K
5: EX-32.1 Certification -- §906 - SOA'02 HTML 19K
6: EX-32.2 Certification -- §906 - SOA'02 HTML 19K
12: R1 Document and Entity Information HTML 72K
13: R2 Condensed Consolidated Balance Sheets HTML 178K
14: R3 Condensed Consolidated Balance Sheets HTML 38K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Income HTML 151K
16: R5 Condensed Consolidated Statements of Income HTML 22K
(Parenthetical)
17: R6 Condensed Consolidated Statements of Stockholders' HTML 93K
Equity
18: R7 Condensed Consolidated Statements of Cash Flows HTML 85K
19: R8 Condensed Consolidated Statements of Cash Flows HTML 24K
(Parenthetical))
20: R9 Principal activity HTML 22K
21: R10 Accounting policies HTML 90K
22: R11 Segment information HTML 345K
23: R12 Earnings per share HTML 65K
24: R13 Discontinued operations - Mexico project HTML 67K
development
25: R14 Leases HTML 120K
26: R15 Fair value HTML 70K
27: R16 Contingencies HTML 31K
28: R17 Related party transactions HTML 23K
29: R18 Impact of recent accounting standards HTML 30K
30: R19 Subsequent events HTML 21K
31: R20 Accounting policies (Policies) HTML 102K
32: R21 Accounting policies (Tables) HTML 75K
33: R22 Segment information (Tables) HTML 341K
34: R23 Earnings per share (Tables) HTML 63K
35: R24 Discontinued operations - Mexico project HTML 59K
development (Tables)
36: R25 Leases (Tables) HTML 123K
37: R26 Fair value (Tables) HTML 71K
38: R27 Accounting policies (Details) HTML 29K
39: R28 Accounting policies - Goodwill and intangible HTML 45K
assets (Details)
40: R29 Accounting policies - Disaggregated revenue HTML 40K
(Details)
41: R30 Accounting policies - Performance obligations HTML 32K
(Details)
42: R31 Accounting policies - Revenue recognized and HTML 33K
billed on services (Details)
43: R32 Segment information (Details) HTML 155K
44: R33 Segment information - Additional Information HTML 29K
(Details)
45: R34 Earnings per share (Details) HTML 49K
46: R35 Discontinued operations - Mexico project HTML 55K
development- Narratives (Details)
47: R36 Discontinued operations - Mexico project HTML 45K
development (Details)
48: R37 Discontinued operations - Mexico project HTML 27K
development - Financial Information (Details)
49: R38 Leases - Lease assets and liabilities (Details) HTML 53K
50: R39 Leases - Components of lease cost (Details) HTML 27K
51: R40 Leases - Supplemental cash flow information HTML 22K
(Details)
52: R41 Leases - Future lease payments (Details) HTML 41K
53: R42 Fair value (Details) HTML 34K
54: R43 Fair value - Activity for the Level 3 asset HTML 23K
(Details)
55: R44 Contingencies (Details) HTML 26K
56: R45 Related party transactions (Details) HTML 28K
57: R46 Subsequent events (Details) HTML 21K
60: XML IDEA XML File -- Filing Summary XML 106K
58: XML XBRL Instance -- cwco-20220930x10q_htm XML 2.39M
59: EXCEL IDEA Workbook of Financial Reports XLSX 111K
8: EX-101.CAL XBRL Calculations -- cwco-20220930_cal XML 157K
9: EX-101.DEF XBRL Definitions -- cwco-20220930_def XML 526K
10: EX-101.LAB XBRL Labels -- cwco-20220930_lab XML 785K
11: EX-101.PRE XBRL Presentations -- cwco-20220930_pre XML 662K
7: EX-101.SCH XBRL Schema -- cwco-20220930 XSD 132K
61: JSON XBRL Instance as JSON Data -- MetaLinks 306± 450K
62: ZIP XBRL Zipped Folder -- 0001558370-22-017766-xbrl Zip 430K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM i 10-Q
(Mark One)
i ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended i September 30, 2022
OR
i ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: i 0-25248
i CONSOLIDATED WATER CO. LTD.
(Exact name of Registrant as specified in its charter)
CAYMAN ISLANDS |
| i 98-0619652 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) |
| |
|
| |
Regatta Office Park |
| |
i Windward Three, 4th Floor, West Bay Road |
| |
i P.O. Box 1114 |
| |
i Grand Cayman i KY1-1102 |
| |
i Cayman Islands | N/A | |
(Address of principal executive offices) | (Zip Code) |
( i 345) i 945-4277
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
i Class A common stock, $0.60 par value |
| i CWCO |
| i The Nasdaq Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐
i Non-accelerated filer ☒ Smaller reporting company i ☒ Emerging growth company i ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes i ☐ No ☒
As of November 9, 2022, i 15,292,108 shares of the registrant’s common stock, with US$0.60 par value, were outstanding.
| | | |
| Description | | Page |
| 4 | ||
| 4 | ||
| | | |
| Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 | | 4 |
| | | |
| | 5 | |
| | | |
| | 6 | |
| | | |
| | 8 | |
| | | |
| Notes to Condensed Consolidated Financial Statements (Unaudited) | | 9 |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 25 | |
| 41 | ||
| 41 | ||
| | | |
| 42 | ||
| 42 | ||
| 46 | ||
| 46 | ||
| | | |
| 47 | ||
2
Note Regarding Currency and Exchange Rates
Unless otherwise indicated, all references to “$” or “US$” are to United States dollars.
The exchange rate for conversion of Cayman Island dollars (CI$) into US$, as determined by the Cayman Islands Monetary Authority, has been fixed since April 1974 at US$1.20 per CI$1.00.
The exchange rate for conversion of Bahamas dollars (B$) into US$, as determined by the Central Bank of The Bahamas, has been fixed since 1973 at US$1.00 per B$1.00.
The official currency of the British Virgin Islands is the US$.
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | |
| | September 30, | |
| |||
|
| 2022 | | 2021 |
| ||
| | (Unaudited) | | | | | |
ASSETS |
| |
|
| |
| |
Current assets |
| |
|
| |
| |
Cash and cash equivalents | | $ | i 51,085,289 | | $ | i 40,358,059 | |
Certificate of deposit | | | i — | | | i 2,500,000 | |
Accounts receivable, net | |
| i 24,352,487 | |
| i 27,349,307 | |
Inventory | |
| i 4,053,662 | |
| i 2,504,832 | |
Prepaid expenses and other current assets | |
| i 4,696,845 | |
| i 2,558,822 | |
Contract assets | |
| i 1,658,912 | |
| i 489,961 | |
Net asset arising from put/call options | | | i 157,000 | | | i 128,000 | |
Current assets of discontinued operations | |
| i 500,661 | |
| i 1,173,741 | |
Total current assets | | | i 86,504,856 | |
| i 77,062,722 | |
Property, plant and equipment, net | |
| i 50,236,746 | |
| i 52,946,539 | |
Construction in progress | |
| i 2,618,972 | |
| i 710,863 | |
Inventory, noncurrent | |
| i 4,882,659 | |
| i 4,733,010 | |
Investment in OC-BVI | |
| i 1,538,743 | |
| i 1,715,905 | |
Goodwill | |
| i 10,425,013 | |
| i 10,425,013 | |
Intangible assets, net | |
| i 2,959,166 | |
| i 3,401,666 | |
Operating lease right-of-use assets | | | i 2,179,159 | | | i 2,681,137 | |
Other assets | |
| i 2,525,864 | |
| i 2,204,013 | |
Long-term assets of discontinued operations | |
| i 21,139,574 | |
| i 21,146,186 | |
Total assets | | $ | i 185,010,752 | | $ | i 177,027,054 | |
| | | | | | | |
LIABILITIES AND EQUITY | |
|
| |
|
| |
Current liabilities | |
|
| |
|
| |
Accounts payable, accrued expenses and other current liabilities | | $ | i 6,332,647 | | $ | i 2,831,925 | |
Accounts payable - related parties | | | i 569,088 | | | i 163,947 | |
Accrued compensation | |
| i 2,061,131 | |
| i 1,435,542 | |
Dividends payable | |
| i 1,377,540 | |
| i 1,320,572 | |
Current maturities of operating leases | | | i 555,300 | | | i 592,336 | |
Current portion of long-term debt | | | i 85,533 | | | i 62,489 | |
Contract liabilities | |
| i 3,753,488 | |
| i 513,878 | |
Deferred revenue | | | i 408,534 | | | i 583,646 | |
Current liabilities of discontinued operations | |
| i 237,675 | |
| i 182,322 | |
Total current liabilities | |
| i 15,380,936 | |
| i 7,686,657 | |
Long-term debt, noncurrent | | | i 145,852 | | | i 152,038 | |
Deferred tax liabilities | |
| i 1,114,809 | |
| i 1,236,723 | |
Noncurrent operating leases | | | i 1,721,643 | | | i 2,137,394 | |
Other liabilities | |
| i 141,000 | |
| i 141,000 | |
Long-term liabilities of discontinued operations | | | i 691 | | | i 7,819 | |
Total liabilities | |
| i 18,504,931 | |
| i 11,361,631 | |
Commitments and contingencies | |
|
| |
|
| |
Equity | |
|
| |
|
| |
Consolidated Water Co. Ltd. stockholders' equity | |
|
| |
|
| |
Redeemable preferred stock, $ i i 0.60 / par value. Authorized i i 200,000 / shares; issued and outstanding i 34,409 and i 28,635 shares, respectively | |
| i 20,645 | |
| i 17,181 | |
Class A common stock, $ i i 0.60 / par value. Authorized i i 24,655,000 / shares; issued and outstanding i 15,292,108 and i 15,243,693 shares, respectively | |
| i 9,175,265 | |
| i 9,146,216 | |
Class B common stock, $ i 0.60 par value. Authorized i 145,000 shares; i i none / issued | |
| i — | |
| i — | |
Additional paid-in capital | |
| i 88,614,319 | |
| i 87,812,432 | |
Retained earnings | |
| i 61,020,487 | |
| i 60,603,056 | |
Total Consolidated Water Co. Ltd. stockholders' equity | |
| i 158,830,716 | |
| i 157,578,885 | |
Non-controlling interests | |
| i 7,675,105 | |
| i 8,086,538 | |
Total equity | |
| i 166,505,821 | |
| i 165,665,423 | |
Total liabilities and equity | | $ | i 185,010,752 | | $ | i 177,027,054 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
| | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Revenue | | $ | i 25,051,705 | | $ | i 16,413,146 | | $ | i 65,676,737 | | $ | i 50,217,987 |
Cost of revenue (including purchases from related parties of $ i 685,481 and $ i 104,813 for the three months ended, and $ i 2,165,850 and $ i 390,196 for the nine months ended, September 30, 2022 and 2021, respectively) | |
| i 18,207,932 | |
| i 10,722,547 | |
| i 44,211,703 | |
| i 32,336,025 |
Gross profit | |
| i 6,843,773 | |
| i 5,690,599 | |
| i 21,465,034 | |
| i 17,881,962 |
General and administrative expenses (including purchases from related parties of $ i 24,231 and $ i 24,231 for the three months ended, and $ i 72,693 and $ i 52,959 for the nine months ended, September 30, 2022 and 2021, respectively) | |
| i 5,610,650 | |
| i 4,359,040 | |
| i 15,403,458 | |
| i 13,847,830 |
Gain (loss) on asset dispositions and impairments, net | |
| i 3,499 | |
| i 612 | |
| i 21,237 | |
| ( i 3,144,961) |
Income from operations | |
| i 1,236,622 | |
| i 1,332,171 | |
| i 6,082,813 | |
| i 889,171 |
| | | | | | | | | | | | |
Other income (expense): | |
|
| |
|
| |
|
| |
|
|
Interest income | |
| i 56,701 | |
| i 168,880 | |
| i 348,304 | |
| i 503,889 |
Interest expense | |
| ( i 2,042) | |
| ( i 2,216) | |
| ( i 8,847) | |
| ( i 7,714) |
Profit-sharing income from OC-BVI | |
| i 6,075 | |
| i 6,075 | |
| i 24,300 | |
| i 16,200 |
Equity in the earnings of OC-BVI | |
| i 19,921 | |
| i 17,717 | |
| i 71,238 | |
| i 44,223 |
Net unrealized gain (loss) on put/call options | |
| ( i 247,000) | |
| ( i 54,000) | |
| i 29,000 | |
| i 108,000 |
Other | |
| ( i 2,635) | |
| i 15,712 | |
| i 84,734 | |
| i 35,292 |
Other income (expense), net | |
| ( i 168,980) | |
| i 152,168 | |
| i 548,729 | |
| i 699,890 |
Income before income taxes | |
| i 1,067,642 | |
| i 1,484,339 | |
| i 6,631,542 | |
| i 1,589,061 |
Income tax provision (benefit) | |
| i 26,616 | |
| ( i 11,230) | |
| i 83,041 | |
| ( i 20,735) |
Net income from continuing operations | |
| i 1,041,026 | |
| i 1,495,569 | |
| i 6,548,501 | |
| i 1,609,796 |
Income from continuing operations attributable to non-controlling interests | |
| i 217,415 | |
| i 131,609 | |
| i 691,042 | |
| i 457,540 |
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders | |
| i 823,611 | |
| i 1,363,960 | |
| i 5,857,459 | |
| i 1,152,256 |
Loss from discontinued operations | | | ( i 505,917) | | | ( i 1,078,367) | | | ( i 1,533,064) | | | ( i 1,542,540) |
Net income (loss) attributable to Consolidated Water Co. Ltd. stockholders | | $ | i 317,694 | | $ | i 285,593 | | $ | i 4,324,395 | | $ | ( i 390,284) |
| | | | | | | | | | | | |
Basic earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders | |
|
| |
|
| |
|
| |
|
|
Continuing operations | | $ | i 0.05 | | $ | i 0.09 | | $ | i 0.38 | | $ | i 0.07 |
Discontinued operations | | | ( i 0.03) | | | ( i 0.07) | | | ( i 0.10) | | | ( i 0.10) |
Basic earnings (loss) per share | | $ | i 0.02 | | $ | i 0.02 | | $ | i 0.28 | | $ | ( i 0.03) |
| | | | | | | | | | | | |
Diluted earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders | |
|
| |
|
| |
|
| |
|
|
Continuing operations | | $ | i 0.05 | | $ | i 0.09 | | $ | i 0.38 | | $ | i 0.07 |
Discontinued operations | | | ( i 0.03) | | | ( i 0.07) | | | ( i 0.10) | | | ( i 0.10) |
Diluted earnings (loss) per share | | $ | i 0.02 | | $ | i 0.02 | | $ | i 0.28 | | $ | ( i 0.03) |
| | | | | | | | | | | | |
Dividends declared per common and redeemable preferred shares | | $ | i 0.085 | | $ | i 0.085 | | $ | i 0.255 | | $ | i 0.255 |
| | | | | | | | | | | | |
Weighted average number of common shares used in the determination of: | |
|
| |
|
| |
|
| |
|
|
Basic earnings per share | |
| i 15,290,597 | |
| i 15,209,432 | |
| i 15,287,233 | |
| i 15,204,220 |
Diluted earnings per share | |
| i 15,450,276 | |
| i 15,351,882 | |
| i 15,440,261 | |
| i 15,345,120 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | |
| | Redeemable | | | | | | | Additional | | | | | Non- | | Total | ||||||
|
| preferred stock |
| Common stock |
| paid-in |
| Retained |
| controlling |
| stockholders’ | ||||||||||
|
| Shares |
| Dollars |
| Shares |
| Dollars |
| capital |
| earnings |
| interests |
| equity | ||||||
Balance as of December 31, 2021 | | i 28,635 | | $ | i 17,181 | | i 15,243,693 | | $ | i 9,146,216 | | $ | i 87,812,432 | | $ | i 60,603,056 | | $ | i 8,086,538 | | $ | i 165,665,423 |
Issue of share capital |
| — |
| | — |
| i 41,830 |
| | i 25,098 |
| | ( i 25,098) |
| | — |
| | — |
| | — |
Net income |
| — |
| | — |
| — |
| | — |
| | — |
| | i 1,716,815 |
| | i 241,430 |
| | i 1,958,245 |
Dividends declared |
| — |
| | — |
| — |
| | — |
| | — |
| | ( i 1,303,014) |
| | — |
| | ( i 1,303,014) |
Stock-based compensation |
| — |
| | — |
| — |
| | — |
| | i 188,985 |
| | — |
| | — |
| | i 188,985 |
Balance as of March 31, 2022 |
| i 28,635 | | | i 17,181 |
| i 15,285,523 | | | i 9,171,314 | | | i 87,976,319 | | | i 61,016,857 | | | i 8,327,968 | | | i 166,509,639 |
Issue of share capital |
| i 9,295 |
| | i 5,577 |
| — |
| | — |
| | ( i 5,577) |
| | — |
| | — |
| | — |
Net income |
| — |
| | — |
| — |
| | — |
| | — |
| | i 2,289,886 |
| | i 232,197 |
| | i 2,522,083 |
Exercise of options | | i 309 | | | i 185 | | — | | | — | | | i 2,511 | | | — | | | — | | | i 2,696 |
Dividends declared |
| — |
| | — |
| — |
| | — |
| | — |
| | ( i 1,301,840) |
| | ( i 464,200) |
| | ( i 1,766,040) |
Stock-based compensation |
| — |
| | — |
| — |
| | — |
| | i 205,137 |
| | — |
| | — |
| | i 205,137 |
Balance as of June 30, 2022 |
| i 38,239 | | | i 22,943 |
| i 15,285,523 | | | i 9,171,314 | | | i 88,178,390 | | | i 62,004,903 | | | i 8,095,965 | | | i 167,473,515 |
Conversion of preferred stock | | ( i 6,585) | | | ( i 3,951) | | i 6,585 | | | i 3,951 | | | — | | | — | | | — | | | — |
Net income |
| — |
| | — |
| — |
| | — |
| | — |
| | i 317,694 |
| | i 217,415 |
| | i 535,109 |
Exercise of options | | i 2,755 | | | i 1,653 | | — | | | — | | | i 22,390 | | | — | | | — | | | i 24,043 |
Dividends declared |
| — |
| | — |
| — |
| | — |
| | — |
| | ( i 1,302,110) |
| | ( i 638,275) |
| | ( i 1,940,385) |
Stock-based compensation |
| — |
| | — |
| — |
| | — |
| | i 413,539 |
| | — |
| | — |
| | i 413,539 |
Balance as of September 30, 2022 |
| i 34,409 | | $ | i 20,645 |
| i 15,292,108 | | $ | i 9,175,265 | | $ | i 88,614,319 | | $ | i 61,020,487 | | $ | i 7,675,105 | | $ | i 166,505,821 |
6
| | | | | | | | | | | | | | | | | | | | | | |
|
| Redeemable |
| | | | |
| Additional |
| | |
| Non- |
| Total | ||||||
| | preferred stock | | Common stock | | paid-in | | Retained | | controlling | | stockholders’ | ||||||||||
|
| Shares |
| Dollars |
| Shares |
| Dollars |
| capital |
| earnings |
| interests |
| equity | ||||||
Balance as of December 31, 2020 | | i 31,068 | | $ | i 18,641 | | i 15,143,683 | | $ | i 9,086,210 | | $ | i 86,893,486 | | $ | i 64,910,709 | | $ | i 8,103,503 | | $ | i 169,012,549 |
Issue of share capital |
| — |
| | — |
| i 57,577 |
| | i 34,546 |
| | ( i 34,546) |
| | — |
| | — |
| | — |
Conversion of preferred stock |
| ( i 215) | |
| ( i 129) |
| i 215 | |
| i 129 | |
| — | |
| — | |
| — | |
| — |
Buyback of preferred stock |
| ( i 747) | |
| ( i 448) |
| — | |
| — | |
| ( i 7,065) | |
| — | |
| — | |
| ( i 7,513) |
Net income |
| — |
| | — |
| — |
| | — |
| | — |
| | i 988,772 |
| | i 128,793 |
| | i 1,117,565 |
Dividends declared |
| — |
| | — |
| — |
| | — |
| | — |
| | ( i 1,296,197) |
| | ( i 649,880) |
| | ( i 1,946,077) |
Stock-based compensation |
| — |
| | — |
| — |
| | — |
| | i 176,210 |
| | — |
| | — |
| | i 176,210 |
Balance as of March 31, 2021 |
| i 30,106 | | | i 18,064 |
| i 15,201,475 | | | i 9,120,885 | | | i 87,028,085 | | | i 64,603,284 | | | i 7,582,416 | | | i 168,352,734 |
Issue of share capital |
| i 8,632 |
| | i 5,179 |
| — |
| | — |
| | ( i 5,179) |
| | — |
| | — | | | — |
Conversion of preferred stock |
| ( i 896) | |
| ( i 538) |
| i 896 | |
| i 538 | |
| — | |
| — | |
| — | |
| — |
Buyback of preferred stock | | ( i 704) | | | ( i 422) | | — | | | — | | | ( i 6,928) | | | — | | | — | | | ( i 7,350) |
Net income (loss) |
| — |
| | — |
| — |
| | — |
| | — |
| | ( i 1,664,649) |
| | i 197,138 | | | ( i 1,467,511) |
Exercise of options | | i 211 | | | i 126 | | — | | | — | | | i 1,583 | | | — | | | — | | | i 1,709 |
Dividends declared |
| — |
| | — |
| — |
| | — |
| | — |
| | ( i 1,294,697) |
| | — | | | ( i 1,294,697) |
Stock-based compensation |
| — |
| | — |
| — |
| | — |
| | i 178,589 |
| | — |
| | — | | | i 178,589 |
Balance as of June 30, 2021 |
| i 37,349 | | | i 22,409 |
| i 15,202,371 | | | i 9,121,423 | | | i 87,196,150 | | | i 61,643,938 | | | i 7,779,554 | | | i 165,763,474 |
Conversion of preferred stock | | ( i 8,328) | | | ( i 4,996) | | i 8,328 | | | i 4,996 | | | — | | | — | | | — | | | — |
Net income |
| — |
| | — |
| — |
| | — |
| | — |
| | i 285,593 |
| | i 131,609 | | | i 417,202 |
Exercise of options | | i 1,895 | | | i 1,137 | | — | | | — | | | i 14,213 | | | — | | | — | | | i 15,350 |
Dividends declared |
| — |
| | — |
| — |
| | — |
| | — |
| | ( i 1,294,870) |
| | — | | | ( i 1,294,870) |
Stock-based compensation |
| — |
| | — |
| — |
| | — |
| | i 374,793 |
| | — |
| | — | | | i 374,793 |
Balance as of September 30, 2021 |
| i 30,916 | | $ | i 18,550 |
| i 15,210,699 | | $ | i 9,126,419 | | $ | i 87,585,156 | | $ | i 60,634,661 | | $ | i 7,911,163 | | $ | i 165,275,949 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
7
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | | | |
|
| Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
Net cash provided by operating activities - continuing operations | | $ | i 16,926,429 | | $ | i 5,285,457 |
Net cash used in operating activities - discontinued operations | |
| ( i 1,123,193) | |
| ( i 820,785) |
Net cash provided by operating activities | | | i 15,803,236 | | | i 4,464,672 |
| | | | | | |
Cash flows from investing activities | |
|
| |
|
|
Purchase of certificate of deposit | | | ( i 2,518,493) | | | ( i 2,500,000) |
Maturity of certificate of deposit | |
| i 5,018,493 | |
| — |
Additions to property, plant and equipment and construction in progress | |
| ( i 2,947,937) | |
| ( i 973,270) |
Proceeds from asset dispositions | | | i 31,181 | | | i 45,560 |
Net cash used in investing activities - continuing operations | |
| ( i 416,756) | |
| ( i 3,427,710) |
| | | | | | |
Cash flows from financing activities | |
| | |
| |
Dividends paid to common shareholders | |
| ( i 3,841,842) | |
| ( i 3,859,412) |
Dividends paid to preferred shareholders | | | ( i 8,154) | | | ( i 8,387) |
Dividends paid to non-controlling interests | |
| ( i 1,102,475) | |
| ( i 649,880) |
Repurchase of redeemable preferred stock | | | — | | | ( i 14,863) |
Proceeds received from exercise of stock options | |
| i 26,739 | |
| i 17,059 |
Payments on note payable | | | ( i 51,564) | | | ( i 35,840) |
Net cash used in financing activities | |
| ( i 4,977,296) | |
| ( i 4,551,323) |
Net increase (decrease) in cash and cash equivalents | |
| i 10,409,184 | |
| ( i 3,514,361) |
Cash and cash equivalents at beginning of period | |
| i 40,358,059 | |
| i 43,794,150 |
Cash and cash equivalents at beginning of period - discontinued operations | | | i 750,048 | | | i 154,130 |
Less: cash and cash equivalents at end of period - discontinued operations | | | ( i 432,002) | | | ( i 36,326) |
Cash and cash equivalents at end of period | | $ | i 51,085,289 | | $ | i 40,397,593 |
| | | | | | |
| | | | | | |
Non-cash transactions: | | | | | | |
Issuance of i 9,295 and i 8,632, respectively, shares of redeemable preferred stock for services rendered | | $ | i 133,197 | | $ | i 102,203 |
Issuance of i 41,830 and i 57,577, respectively, shares of common stock for services rendered | | $ | i 521,016 | | $ | i 745,468 |
Conversion (on a one-to-one basis) of i 6,585 and i 9,439, respectively, shares of redeemable preferred stock to common stock | | $ | i 3,951 | | $ | i 5,663 |
Dividends declared but not paid | | $ | i 1,302,754 | | $ | i 1,295,377 |
Transfers from (to) inventory to (from) property, plant and equipment and construction in progress | | $ | i 246,238 | | $ | i 148,138 |
Net transfers from construction in progress to property, plant and equipment | | $ | i 413,416 | | $ | i 166,335 |
Right-of-use assets obtained in exchange for new operating lease liabilities | | $ | — | | $ | i 1,852,608 |
Purchase of equipment through issuance of long-term debt | | $ | i 68,422 | | $ | i 58,220 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
i
8
CONSOLIDATED WATER CO. LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Principal activity
Consolidated Water Co. Ltd. and its subsidiaries (collectively, the “Company”) supply potable water, treat wastewater and water for reuse, and provide water-related products and services to customers in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands. The Company produces potable water from seawater using reverse osmosis technology and sells this water to a variety of customers, including public utilities, commercial and tourist properties, residential properties and government facilities. The Company designs, builds and sells water production and water treatment infrastructure and manages water infrastructure for commercial and governmental customers. The Company also manufactures a wide range of specialized and custom water industry related products and provides design, engineering, operating and other services applicable to commercial, municipal and industrial water production, supply and treatment.
i2. Accounting policies
iBasis of consolidation: The accompanying condensed consolidated financial statements include the accounts of the Company’s (i) wholly-owned subsidiaries, Aerex Industries, Inc. (“Aerex”), Aquilex, Inc. (“Aquilex”), Cayman Water Company Limited (“Cayman Water”), Ocean Conversion (Cayman) Limited (“OC-Cayman”), DesalCo Limited (“DesalCo”), Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), Consolidated Water U.S. Holdings, Inc. (“CW-Holdings”); and (ii) majority-owned subsidiaries Consolidated Water (Bahamas) Ltd. (“CW-Bahamas”), N.S.C. Agua, S.A. de C.V. (“NSC”), Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), and PERC Water Corporation ("PERC"). The Company’s investment in its affiliate Ocean Conversion (BVI) Ltd. (“OC-BVI”) is accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying interim condensed consolidated financial statements are unaudited. These condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) that, in the opinion of management, are necessary to fairly present the Company’s consolidated financial position, results of operations and cash flows as of and for the periods presented. The consolidated results of operations for these interim periods are not necessarily indicative of the operating results for future periods, including the fiscal year ending December 31, 2022.
These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) relating to interim financial statements and in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted in these condensed consolidated financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
iForeign currency: The Company’s reporting currency is the United States dollar (“US$”). The functional currency of the Company and its foreign operating subsidiaries (other than NSC, AdR, and CW-Cooperatief) is the currency for each respective country. The functional currency for NSC, AdR, and CW-Cooperatief is the US$. NSC and AdR conduct business in US$ and Mexican pesos and CW-Cooperatief conducts business in US$ and euros. The exchange rates for the Cayman Islands dollar and the Bahamian dollar are fixed to the US$. The exchange rates for conversion of Mexican pesos and euros into US$ vary based upon market conditions.
Net foreign currency gains (losses) arising from transactions and re-measurements were ($ i 8,068) and $ i 15,302 for the three months ended September 30, 2022 and 2021, respectively, and $ i 20,966 and $ i 29,353 for the nine months ended September 30, 2022 and 2021 and are included in “Other income (expense) - Other” in the accompanying condensed consolidated statements of income (loss).
/ /9
Cash and cash equivalents: Cash and cash equivalents consist of demand deposits at banks and certificates of deposit at banks with an original maturity of three months or less. Cash and cash equivalents as of September 30, 2022 and December 31, 2021 include approximately $ i 7.5 million and $ i 7.4 million, respectively, of certificates of deposits with an original maturity of three months or less.
Certain transfers from the Company’s Bahamas bank accounts to Company bank accounts in other countries require the approval of the Central Bank of The Bahamas. The equivalent United States dollar cash balances for deposits held in The Bahamas as of September 30, 2022 and December 31, 2021 were approximately $ i 4.7 million and $ i 3.9 million, respectively.
Certificate of deposit: As of December 31, 2021, the Company held a certificate of deposit in The Bahamas of $ i 2.5 million with an original maturity of six months.
/ iGoodwill and intangible assets: Goodwill represents the excess cost of an acquired business over the fair value of the assets and liabilities of the acquired business. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful life are not amortized but are tested for impairment annually or upon the identification of a triggering event. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. The Company evaluates the possible impairment of goodwill annually as part of its reporting process for the fourth quarter of each fiscal year. Management identifies the Company’s reporting units, which consist of retail, bulk, services, and manufacturing, and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company determines the fair value of each reporting unit and compares the fair value to the carrying amount of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded.
As of December 31, 2021, the Company estimated the fair value of its reporting units by applying the discounted cash flow method, which relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis.
The Company also estimated the fair value of each of its reporting units as of December 31, 2021 by applying the guideline public company method.
The Company weighted the fair values estimated for each of its reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit. The respective weightings the Company applied to each method as of December 31, 2021 were i 80% to the discounted cash flow method and i 20% to the guideline public company method.
The fair values the Company estimated for its retail, bulk, services and manufacturing reporting units exceeded their carrying amounts by i 32%, i 51%, i 15%, and i 15% respectively, as of December 31, 2021.
Based upon its estimation prepared as of December 31, 2021, the fair value of the Company’s manufacturing reporting unit exceeded its carrying value by only i 15%. If the Company determines in the future that Aerex’s discounted future cash inflows will be less than its present expectation, the Company may be required to record additional impairment losses to reduce the remaining carrying values as of September 30, 2022 of its manufacturing reporting unit’s goodwill of $ i 1,985,211 and its remaining unamortized intangible assets balances of $ i 777,778 recorded as a result of the acquisition of Aerex. Any such impairment losses could have a material adverse impact on the Company’s consolidated results of operations.
/ iRevenue recognition: Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
10
The following table presents the Company’s revenue disaggregated by revenue source.
| | | | | | | | | | | | |
| | Three Months Ended September 30, |
| Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Retail revenue | | $ | i 6,274,650 | | $ | i 5,247,042 | | $ | i 19,114,653 | | $ | i 16,633,137 |
Bulk revenue | |
| i 8,667,931 | |
| i 6,868,134 | |
| i 24,442,324 | |
| i 19,826,075 |
Services revenue | |
| i 8,731,124 | |
| i 3,210,584 | |
| i 18,530,427 | |
| i 10,514,669 |
Manufacturing revenue | |
| i 1,378,000 | |
| i 1,087,386 | |
| i 3,589,333 | |
| i 3,244,106 |
Total revenue | | $ | i 25,051,705 | | $ | i 16,413,146 | | $ | i 65,676,737 | | $ | i 50,217,987 |
/Retail revenue
The Company produces and supplies water to end-users, including residential, commercial and governmental customers in the Cayman Islands under an exclusive retail license issued to Cayman Water by the Cayman Islands government to provide water in two of the three most populated areas on Grand Cayman Island. Customers are billed on a monthly basis based on metered consumption and bills are typically collected within i 30 to i 45 days after the billing date.
The Company recognizes revenue from water sales at the time water is supplied to the customer’s premises. The amount of water supplied is determined and invoiced based upon water meter readings performed at the end of each month. All retail water contracts are month-to-month contracts. The Company has elected the “right to invoice” practical expedient for revenue recognition on its retail water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice.
Bulk revenue
The Company produces and supplies water to government-owned utilities in the Cayman Islands and The Bahamas.
OC-Cayman provides bulk water to the Water Authority-Cayman (“WAC”), a government-owned utility and regulatory agency, under two agreements. The WAC in turn distributes such water to properties in Grand Cayman outside of Cayman Water’s retail license area.
The Company sells bulk water in The Bahamas through its majority-owned subsidiary, CW-Bahamas, under two agreements with the Water and Sewerage Corporation of The Bahamas (“WSC”), which distributes such water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence.
The Company has elected the “right to invoice” practical expedient for revenue recognition on its bulk water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice.
Services and Manufacturing revenue
The Company provides design, engineering, management, procurement and construction services for desalination infrastructure through DesalCo, which serves customers in the Cayman Islands, The Bahamas and the British Virgin Islands.
The Company also designs, builds, sells, operates and manages water, wastewater and water reuse infrastructure through PERC. All of PERC's customers are companies or governmental entities located in the U.S.
The Company, through Aerex, is a custom and specialty manufacturer of systems and products applicable to commercial, municipal and industrial water production and treatment. Substantially all of Aerex’s customers are U.S. companies.
The Company generates construction and services revenue from DesalCo and PERC and generates manufacturing revenue from Aerex.
11
The Company recognizes revenue for its construction and custom/specialized manufacturing contracts over time under the input method using costs incurred (which represents work performed) to date relative to total estimated costs at completion to measure progress toward satisfying its performance obligations as such measure best reflects the transfer of control of the promised good to the customer. Contract costs include labor, materials and amounts payable to subcontractors. The Company follows this method since it can make reasonably dependable estimates of the revenue and costs applicable to the various stages of a contract. Under this input method, the Company records revenue and recognizes profit or loss as work on the contract progresses. The Company estimates total project costs and profit to be earned on each long-term, fixed price contract prior to commencement of work on the contract and updates these estimates as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to date comprise of estimated total contract costs. If, as work progresses, the actual contract costs exceed estimates, the profit recognized on revenue from that contract decreases. The Company recognizes the full amount of any estimated loss on a contract at the time the estimates indicate such a loss. Any contract assets are classified as current assets. Contract liabilities on uncompleted contracts, if any, are classified as current liabilities.
The Company has elected the “right to invoice” practical expedient for revenue recognition on its services agreements and recognizes revenue in the amount to which the Company has a right to invoice.
iRevenue recognized and amounts billed on contracts in progress are summarized as follows:
| | | | | | | |
| | September 30, | | December 31 | | ||
| | 2022 | | 2021 | | ||
Revenue recognized to date on contracts in progress |
| $ | i 16,576,248 | | $ | i 6,109,396 | |
Amounts billed to date on contracts in progress | |
| ( i 19,694,500) | |
| ( i 6,370,855) | |
Retainage | | | i 1,023,676 | | | i 237,542 | |
Net contract liability | | $ | ( i 2,094,576) | | $ | ( i 23,917) | |
iThe above net balances are reflected in the accompanying condensed consolidated balance sheets as follows:
| | | | | | | |
| | September 30, | | December 31 | | ||
| | 2022 | | 2021 | | ||
Contract assets |
| $ | i 1,658,912 |
| $ | i 489,961 | |
Contract liabilities | |
| ( i 3,753,488) | |
| ( i 513,878) | |
Net contract liability | | $ | ( i 2,094,576) | | $ | ( i 23,917) | |
As of September 30, 2022, the Company had unsatisfied or partially unsatisfied performance obligations for contracts in progress representing approximately $ i 104.8 million in aggregate transaction price for contracts with an original expected length of greater than i one year. The Company expects to earn revenue as it satisfies its performance obligations under those contracts in the amount of approximately $ i 12.6 million during the remainder of the year ending December 31, 2022 and approximately $ i 92.2 million thereafter. In addition, the Company recognized revenue of $ i 396,000 in the nine months ended September 30, 2022, that was included in the contract liability balance as of December 31, 2021.
Practical Expedients and Exemptions
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which it has the right to invoice for services performed.
iComparative amounts: Certain amounts presented in the financial statements previously issued for 2021 have been reclassified to conform to the current periods’ presentation.
12
3. Segment information
The Company has i four reportable segments: retail, bulk, services and manufacturing. The retail segment operates the water utility for the Seven Mile Beach and West Bay areas of Grand Cayman Island pursuant to an exclusive license granted by the Cayman Islands government. The bulk segment supplies potable water to government utilities in Grand Cayman and The Bahamas under long-term contracts. The services segment designs, constructs and sells water infrastructure and provides management and operating services to third parties. The manufacturing segment manufactures and services a wide range of custom and specialized water-related products applicable to commercial, municipal and industrial water production, supply and treatment. Consistent with prior periods, the Company records all non-direct general and administrative expenses in its retail business segment and does not allocate any of these non-direct expenses to its other three business segments.
The accounting policies of the segments are consistent with those described in Note 2. The Company evaluates each segment’s performance based upon its income (or loss) from operations. All intercompany transactions are eliminated for segment presentation purposes.
The Company’s segments are strategic business units that are managed separately because each segment sells different products and/or services, serves customers with distinctly different needs and generates different gross profit margins.
i
| | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, 2022 | |||||||||||||
|
| Retail |
| Bulk |
| Services |
| Manufacturing |
| Total | |||||
Revenue | | $ | i 6,274,650 | | $ | i 8,667,931 | | $ | i 8,731,124 | | $ | i 1,378,000 |
| $ | i 25,051,705 |
Cost of revenue | |
| i 3,231,973 | |
| i 6,446,549 | |
| i 7,333,982 | |
| i 1,195,428 | |
| i 18,207,932 |
Gross profit | |
| i 3,042,677 | |
| i 2,221,382 | |
| i 1,397,142 | |
| i 182,572 | |
| i 6,843,773 |
General and administrative expenses | |
| i 3,818,459 | |
| i 473,534 | |
| i 936,708 | |
| i 381,949 | |
| i 5,610,650 |
Gain on asset dispositions | |
| i 1,499 | |
| i 2,000 | |
| — | |
| — | |
| i 3,499 |
Income (loss) from operations | | $ | ( i 774,283) | | $ | i 1,749,848 | | $ | i 460,434 | | $ | ( i 199,377) | |
| i 1,236,622 |
Other income (loss), net | |
|
| |
|
| |
| | |
|
| |
| ( i 168,980) |
Income before income taxes | |
|
| |
|
| |
|
| |
|
| |
| i 1,067,642 |
Income tax provision | |
|
| |
|
| |
|
| |
|
| |
| i 26,616 |
Net income from continuing operations | |
|
| |
|
| |
|
| |
|
| |
| i 1,041,026 |
Income from continuing operations attributable to non-controlling interests | |
|
| |
|
| |
|
| |
|
| |
| i 217,415 |
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| |
| i 823,611 |
Loss from discontinued operations | |
|
| |
|
| |
|
| |
|
| |
| ( i 505,917) |
Net income attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| | $ | i 317,694 |
Depreciation and amortization expenses for the three months ended September 30, 2022 for the retail, bulk, services and manufacturing segments were $ i 567,086, $ i 707,788, $ i 175,732 and $ i 71,734, respectively.
/ /13
| | | | | | | | | | | | | | | |
|
| Three Months Ended September 30, 2021 | |||||||||||||
|
| Retail |
| Bulk |
| Services |
| Manufacturing |
| Total | |||||
Revenue | | $ | i 5,247,042 | | $ | i 6,868,134 | | $ | i 3,210,584 | | $ | i 1,087,386 | | $ | i 16,413,146 |
Cost of revenue | |
| i 2,745,796 | |
| i 4,628,386 | |
| i 2,410,430 | |
| i 937,935 | |
| i 10,722,547 |
Gross profit | |
| i 2,501,246 | |
| i 2,239,748 | |
| i 800,154 | |
| i 149,451 | |
| i 5,690,599 |
General and administrative expenses | |
| i 3,067,696 | |
| i 313,420 | |
| i 758,540 | |
| i 219,384 | |
| i 4,359,040 |
Gain on asset dispositions | |
| i 612 | |
| — | |
| — | |
| — | |
| i 612 |
Income (loss) from operations | | $ | ( i 565,838) | | $ | i 1,926,328 | | $ | i 41,614 | | $ | ( i 69,933) | |
| i 1,332,171 |
Other income, net | |
|
| |
|
| |
|
| |
|
| |
| i 152,168 |
Income before income taxes | |
|
| |
|
| |
|
| |
|
| |
| i 1,484,339 |
Income tax benefit | |
|
| |
|
| |
|
| |
|
| |
| ( i 11,230) |
Net income from continuing operations | |
|
| |
|
| |
|
| |
|
| |
| i 1,495,569 |
Income attributable to non-controlling interests | |
|
| |
|
| |
|
| |
|
| |
| i 131,609 |
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| |
| i 1,363,960 |
Loss from discontinued operations | |
|
| |
|
| |
|
| |
|
| |
| ( i 1,078,367) |
Net income attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| | $ | i 285,593 |
Depreciation and amortization expenses for the three months ended September 30, 2021 for the retail, bulk, services and manufacturing segments were $ i 625,640, $ i 761,429, $ i 203,411 and $ i 70,679, respectively.
| | | | | | | | | | | | | | | |
|
| Nine Months Ended September 30, 2022 | |||||||||||||
|
| Retail |
| Bulk |
| Services |
| Manufacturing |
| Total | |||||
Revenue | | $ | i 19,114,653 | | $ | i 24,442,324 | | $ | i 18,530,427 | | $ | i 3,589,333 |
| $ | i 65,676,737 |
Cost of revenue | |
| i 9,404,124 | |
| i 16,781,251 | |
| i 14,849,029 | |
| i 3,177,299 | |
| i 44,211,703 |
Gross profit | |
| i 9,710,529 | |
| i 7,661,073 | |
| i 3,681,398 | |
| i 412,034 | |
| i 21,465,034 |
General and administrative expenses | |
| i 10,613,975 | |
| i 1,187,909 | |
| i 2,554,721 | |
| i 1,046,853 | |
| i 15,403,458 |
Gain on asset dispositions | |
| i 2,699 | |
| i 2,000 | |
| i 16,538 | |
| — | |
| i 21,237 |
Income (loss) from operations | | $ | ( i 900,747) | | $ | i 6,475,164 | | $ | i 1,143,215 | | $ | ( i 634,819) | |
| i 6,082,813 |
Other income, net | |
|
| |
|
| |
| | |
|
| | | i 548,729 |
Income before income taxes | |
|
| |
|
| |
|
| |
|
| |
| i 6,631,542 |
Income tax provision | |
|
| |
|
| |
|
| |
|
| |
| i 83,041 |
Net income from continuing operations | |
|
| |
|
| |
|
| |
|
| |
| i 6,548,501 |
Income from continuing operations attributable to non-controlling interests | |
|
| |
|
| |
|
| |
|
| |
| i 691,042 |
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| |
| i 5,857,459 |
Loss from discontinued operations | |
|
| |
|
| |
|
| |
|
| |
| ( i 1,533,064) |
Net income attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| | $ | i 4,324,395 |
Depreciation and amortization expenses for the nine months ended September 30, 2022 for the retail, bulk, services and manufacturing segments were $ i 1,820,567, $ i 2,114,888, $ i 502,809 and $ i 213,249, respectively.
14
| | | | | | | | | | | | | | | |
|
| Nine Months Ended September 30, 2021 | |||||||||||||
|
| Retail |
| Bulk |
| Services |
| Manufacturing |
| Total | |||||
Revenue | | $ | i 16,633,137 | | $ | i 19,826,075 | | $ | i 10,514,669 | | $ | i 3,244,106 | | $ | i 50,217,987 |
Cost of revenue | |
| i 8,235,699 | |
| i 13,170,333 | |
| i 8,010,767 | |
| i 2,919,226 | |
| i 32,336,025 |
Gross profit | |
| i 8,397,438 | |
| i 6,655,742 | |
| i 2,503,902 | |
| i 324,880 | |
| i 17,881,962 |
General and administrative expenses | |
| i 9,757,179 | |
| i 994,779 | |
| i 2,152,145 | |
| i 943,727 | |
| i 13,847,830 |
Gain (loss) on asset dispositions and impairments, net | |
| ( i 246,028) | |
| i 1,500 | |
| ( i 433) | |
| ( i 2,900,000) | |
| ( i 3,144,961) |
Income (loss) from operations | | $ | ( i 1,605,769) | | $ | i 5,662,463 | | $ | i 351,324 | | $ | ( i 3,518,847) | |
| i 889,171 |
Other income, net | |
|
| |
|
| |
|
| |
|
| |
| i 699,890 |
Income before income taxes | |
|
| |
|
| |
|
| |
|
| |
| i 1,589,061 |
Income tax benefit | | | | | | | | | | | | | | | ( i 20,735) |
Net income from continuing operations | |
|
| |
|
| |
|
| |
|
| |
| i 1,609,796 |
Income from continuing operations attributable to non-controlling interests | |
|
| |
|
| |
|
| |
|
| |
| i 457,540 |
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| |
| i 1,152,256 |
Loss from discontinued operations | |
|
| |
|
| |
|
| |
|
| |
| ( i 1,542,540) |
Net loss attributable to Consolidated Water Co. Ltd. stockholders | |
|
| |
|
| |
|
| |
|
| | $ | ( i 390,284) |
Depreciation and amortization expenses for the nine months ended September 30, 2021 for the retail, bulk, services and manufacturing segments were $ i 1,892,848, $ i 2,621,481, $ i 607,906 and $ i 216,346, respectively.
| | | | | | | | | | | | | | | |
|
| As of September 30, 2022 | |||||||||||||
|
| Retail |
| Bulk |
| Services |
| Manufacturing |
| Total | |||||
Accounts receivable, net | | $ | i 2,512,908 | | $ | i 15,491,003 | | $ | i 4,948,103 | | $ | i 1,400,473 | | $ | i 24,352,487 |
Inventory, current and non-current | | $ | i 2,766,577 | | $ | i 4,218,974 | | $ | — | | $ | i 1,950,770 | | $ | i 8,936,321 |
Property, plant and equipment, net | | $ | i 24,817,595 | | $ | i 23,171,096 | | $ | i 679,506 | | $ | i 1,568,549 | | $ | i 50,236,746 |
Construction in progress | | $ | i 2,557,180 | | $ | — | | $ | — | | $ | i 61,792 | | $ | i 2,618,972 |
Intangibles, net | | $ | — | | $ | — | | $ | i 2,181,388 | | $ | i 777,778 | | $ | i 2,959,166 |
Goodwill | | $ | i 1,170,511 | | $ | i 1,948,875 | | $ | i 5,320,416 | | $ | i 1,985,211 | | $ | i 10,425,013 |
Total segment assets | | $ | i 67,462,955 | | $ | i 61,756,965 | | $ | i 23,657,779 | | $ | i 10,492,818 | | $ | i 163,370,517 |
Assets of discontinued operations | | | | | | | | | | | | | | $ | i 21,640,235 |
Total assets | | | | | | | | | | | | | | $ | i 185,010,752 |
| | | | | | | | | | | | | | | |
|
| As of December 31, 2021 | |||||||||||||
|
| Retail |
| Bulk |
| Services |
| Manufacturing |
| Total | |||||
Accounts receivable, net | | $ | i 2,601,619 | | $ | i 21,682,951 | | $ | i 1,698,797 | | $ | i 1,365,940 | | $ | i 27,349,307 |
Inventory, current and non-current | | $ | i 2,787,277 | | $ | i 3,860,808 | | $ | — | | $ | i 589,757 | | $ | i 7,237,842 |
Property, plant and equipment, net | | $ | i 26,357,390 | | $ | i 24,476,936 | | $ | i 512,493 | | $ | i 1,599,720 | | $ | i 52,946,539 |
Construction in progress | | $ | i 617,334 | | $ | i 31,737 | | $ | — | | $ | i 61,792 | | $ | i 710,863 |
Intangibles, net | | $ | — | | $ | — | | $ | i 2,553,888 | | $ | i 847,778 | | $ | i 3,401,666 |
Goodwill | | $ | i 1,170,511 | | $ | i 1,948,875 | | $ | i 5,320,416 | | $ | i 1,985,211 | | $ | i 10,425,013 |
Total segment assets | | $ | i 61,736,441 | | $ | i 68,723,405 | | $ | i 16,049,001 | | $ | i 8,198,280 | | $ | i 154,707,127 |
Assets of discontinued operations | |
| | |
| | |
| | |
| | | $ | i 22,319,927 |
Total assets | |
| | |
| | |
| | |
| | | $ | i 177,027,054 |
15
4. Earnings per share
Earnings per share (“EPS”) is computed on a basic and diluted basis. Basic EPS is computed by dividing net income (loss) (less preferred stock dividends) available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted EPS assumes the issuance of common shares for all potential common shares outstanding during the reporting period and, if dilutive, the effect of stock options as computed under the treasury stock method.
iThe following summarizes information related to the computation of basic and diluted EPS:
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders | | $ | i 823,611 | | $ | i 1,363,960 | | $ | i 5,857,459 | | $ | i 1,152,256 |
Less: preferred stock dividends | |
| ( i 2,925) | |
| ( i 2,628) | |
| ( i 8,609) | |
| ( i 8,362) |
Net income from continuing operations available to common shares in the determination of basic earnings per common share | |
| i 820,686 | |
| i 1,361,332 | |
| i 5,848,850 | |
| i 1,143,894 |
Loss from discontinued operations | |
| ( i 505,917) | |
| ( i 1,078,367) | |
| ( i 1,533,064) | |
| ( i 1,542,540) |
Net income (loss) available to common shares in the determination of basic earnings per common share | | $ | i 314,769 | | $ | i 282,965 | | $ | i 4,315,786 | | $ | ( i 398,646) |
| | | | | | | | | | | | |
Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders | |
| i 15,290,597 | |
| i 15,209,432 | |
| i 15,287,233 | |
| i 15,204,220 |
Plus: | |
| | |
| | |
| | |
| |
Weighted average number of preferred shares outstanding during the period | |
| i 35,366 | |
| i 31,861 | |
| i 31,041 | |
| i 30,701 |
Potential dilutive effect of unexercised options and unvested stock grants | |
| i 124,313 | |
| i 110,589 | |
| i 121,987 | |
| i 110,199 |
Weighted average number of shares used for determining diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders | |
| i 15,450,276 | |
| i 15,351,882 | |
| i 15,440,261 | |
| i 15,345,120 |
/
i5. Discontinued operations - Mexico project development
In 2010, the Company began the pursuit, through its Netherlands subsidiary, Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), and its Mexico subsidiary, N.S.C. Agua, S.A. de C.V. (“NSC”), of a project (the “Project”) that encompassed the construction, operation and minority ownership of a i 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system.
Through a series of transactions that began in 2012, NSC purchased i 20.1 hectares of land for approximately $ i 21.1 million on which the proposed Project’s plant was to be constructed.
Following an assessment by the State of Baja, California (the “State”) of the need for such a desalination plant and the passage of enabling legislation in November 2015, the State officially commenced the required public tender for the Project. A consortium (the “Consortium”) comprised of NSC, Suez Medio Ambiente México, S.A. de C.V. (“Suez MA”),
/16
a subsidiary of SUEZ International, S.A.S., and NuWater S.A.P.I. de C.V. (“NuWater”) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of the tender process for the Project.
In August 2016, NSC and NuWater incorporated a new company under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”) to pursue completion of the Project and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operation and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation. NSC initially owned i 99.6% of the equity of AdR. In February 2018, CW-Holdings acquired the remaining i 0.4% ownership in AdR from NuWater.
On August 22, 2016, the Public Private Partnership Agreement for the Project (the “APP Contract”) was executed between AdR, the State Water Commission of Baja, California (“CEA”), and the Government of Baja California, as represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract required AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueduct) with a capacity of up to i 100 million gallons per day in two phases: the first with a capacity of i 50 million gallons per day and an aqueduct to the Mexican public water system in Tijuana, Baja California and the second phase with a capacity of i 50 million gallons per day. The first phase was to be operational within i 36 months of commencing construction and the second phase was to be operational by January 2025. The APP Contract further required AdR to operate and maintain the plant and aqueduct for a period of i 37 years starting from the commencement of operation of the first phase. At the end of the operating period, the plant and aqueduct would have been transferred to CEA. The APP Contract was subsequently amended by the parties in June 2018 to increase the scope of Phase 1 and to allow for changes in the water tariff due to the changes in the exchange rate for the peso, interest rates and construction costs that had and would occur from the date the APP Contract was signed to the date construction commenced.
On June 29, 2020, AdR received a letter (the “Letter”) from the Director General of CEA and the Director General of CESPT terminating the APP Contract. The Letter requested that AdR provide an inventory of the assets that currently comprise the “Project Works” (as defined in the APP Contract) for the purpose of acknowledging and paying the non-recoverable expenses made by AdR in connection with the Project, with such reimbursement to be calculated in accordance with the terms of the APP Contract. The applicable law required that this list of non-recoverable expenses made by AdR in connection with the Project be submitted to CEA and CESPT within i 20 business days from the date of receipt of the Letter. AdR initiated an amparo claim before a federal district court in Tijuana, Baja California, to challenge the provision of the applicable law requiring submittal of the list of non-recoverable expenses within the i 20 business days term, as AdR considered such term to be unreasonably short due to the magnitude of the Project and the scope of supporting documentation required to be provided with respect to the non-recoverable expenses. AdR obtained an initial provisional suspension of the lapsing of such i 20-day term from the court, and on August 10, 2020 the court made such suspension definitive until the completion of the amparo trial. As such, the i 20-day term for filing the list of non-recoverable expenses was suspended. Therefore, on August 28, 2020, AdR submitted their list of non-recoverable expenses, including those of NSC, to CEA and CESPT which was comprised of i 51,144,525 United States dollars and an additional i 137,333,114 Mexican pesos. In February 2021, AdR withdrew this amparo claim, and such withdrawal was accepted by the federal district court in Tijuana. To date, AdR has not received a formal response from CEA or CESPT to its submission of non-recoverable expenses.
The Company believes CW-Cooperatief, as a Netherlands company, has certain rights relating to its investments in NSC and AdR under the Agreement on Promotion, Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the United Mexican States entered into force as of October 1, 1999 (the “Treaty”). On April 16, 2021, CW-Cooperatief submitted a letter to the President of Mexico and other Mexican federal government officials alleging that the State’s termination of the APP Contract constituted a breach by Mexico of its international obligations under the Treaty, entitling CW-Cooperatief to full reparation, including monetary damages. This letter invited Mexico to seek a resolution of this investment dispute through consultation and negotiation, but stated that if the dispute cannot be resolved in this manner, CW-Cooperatief elects to refer the dispute to the International Centre for the Settlement of International Disputes for arbitration, as provided for in the Treaty. On June 29, 2021, the Mexican Ministry of Economy responded to CW-Cooperatief’s letter and proposed to hold a consultation meeting. Two such meetings were held on July 9, 2021 and August 2, 2021 on a confidential basis, without a resolution of the Company’s investment dispute.
17
On February 9, 2022, CW-Cooperatief, filed a Request for Arbitration with the International Centre for Settlement of International Disputes requesting that the United Mexican States pay CW-Cooperatief damages in excess of US$ i 51 million plus MXN$ i 137 million (with the exact amount to be quantified in the proceedings), plus fees, costs and pre- and post-award interest.
CW-Cooperatief intends to pursue vigorously the relief sought in the arbitration, in addition to pursuing all other legal remedies and courses of action available under the operative contracts and applicable law with respect to its rights, damages, fees and expenses. The Company cannot provide any assurances that CW-Cooperatief will be able to obtain the relief sought in the arbitration, and CW-Cooperatief will incur legal and other arbitration-related expenses that the Company expects will be material to its consolidated results of operations and cash flows.
During July 2022, the State initiated discussions with the Company to potentially resolve the issues related to the cancellation by the government of the Rosarito desalination plant contract as well as potentially addressing the State’s acute water shortage issues. The Company cannot presently determine the outcome of the discussions and the Company has not terminated its efforts to obtain relief through the international arbitration process as a result of these discussions.
The Company cannot provide any assurances that it will be able to obtain reimbursement for any expenses or investments made with respect to the Project.
As a result of the cancellation of the APP Contract, in 2020 the Company discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project. Accordingly, the assets and liabilities of CW-Cooperatief, NSC and AdR, as well as all Project development expenses and the costs for legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP Contract, have been classified as discontinued operations in the accompanying consolidated financial statements.
iSummarized financial information for the discontinued Mexico project development operation is as follows:
| | | | | | |
| | September 30, | | |||
| | 2022 | | 2021 | ||
Cash |
| $ | i 432,002 |
| $ | i 750,048 |
Prepaid expenses and other current assets | | | i 67,882 | | | i 82,783 |
Value added taxes receivable (net of allowance of $ i 1,657,871 and $ i 1,279,757, respectively) | | | i 777 | | | i 340,910 |
Land | |
| i 21,126,898 | |
| i 21,126,898 |
Other assets | |
| i 12,676 | |
| i 19,288 |
Total assets of discontinued operations | | $ | i 21,640,235 | | $ | i 22,319,927 |
| |
|
| |
|
|
Total liabilities of discontinued operations | | $ | i 238,366 | | $ | i 190,141 |
| | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | ||||
Revenue |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
Provision for uncollected value added taxes | | $ | — | | $ | i 641,810 | | $ | i 377,326 | | $ | i 650,897 |
Loss from discontinued operations | | $ | i 505,917 | | $ | i 1,078,367 | | $ | i 1,533,064 | | $ | i 1,542,540 |
Depreciation expense | | $ | — | | $ | i 1,136 | | $ | — | | $ | i 3,409 |
i6. Leases
The Company leases consist primarily of leases for office and warehouse space. For leases with terms greater than twelve months, the related asset and obligation are recorded at the present value of the lease payments over the term. Many of these leases contain rental escalation clauses which are factored into the determination of the lease payments when appropriate. When available, the lease payments are discounted using the rate implicit in the lease; however, the
18
Company’s current leases do not provide a readily determinable implicit rate. Therefore, the Company’s incremental borrowing rate is estimated to discount the lease payments based on information available at the lease commencement.
These leases contain both lease and non-lease components, which the Company has elected to treat as a single lease component. The Company elected not to recognize leases that have an original lease term, including reasonably certain renewal or purchase obligations, of twelve months or less in its condensed consolidated balance sheets for all classes of underlying assets. Lease costs for such short-term leases are expensed on a straight-line basis over the lease term.
The land used by the Company to operate its seawater desalination plants in the Cayman Islands and The Bahamas is owned by the Company or leased to the Company for immaterial annual amounts and are not included in the lease amounts presented in the condensed consolidated balance sheets.
All lease assets denominated in a foreign currency are measured using the exchange rate at the commencement of the lease. All lease liabilities denominated in a foreign currency are remeasured using the exchange rate as of the condensed consolidated balance sheet date.
Lease assets and liabilities
iThe following table presents the lease-related assets and liabilities and their respective classification on the condensed consolidated balance sheets:
| | | | | | | |
|
| September 30, | | December 31 | | ||
| | 2022 | | 2021 | | ||
ASSETS |
| | | |
| | |
Current |
| |
| | |
| |
Prepaid expenses and other current assets | | $ | i 53,097 | | $ | — | |
Current assets of discontinued operations | | | — | | | i 2,654 | |
Noncurrent | |
| | |
| | |
Operating lease right-of-use assets | |
| i 2,179,159 | |
| i 2,681,137 | |
Long-term assets of discontinued operations | | | i 10,286 | | | i 16,898 | |
Total lease right-of-use assets | | $ | i 2,242,542 | | $ | i 2,700,689 | |
| | | | | | | |
LIABILITIES |
|
| |
|
| |
|
Current |
| |
| | |
| |
Current maturities of operating leases | | $ | i 555,300 | | $ | i 592,336 | |
Current liabilities of discontinued operations | | | i 8,058 | | | i 11,195 | |
Noncurrent | |
| | |
| | |
Noncurrent operating leases | | | i 1,721,643 | | | i 2,137,394 | |
Noncurrent liabilities of discontinued operations | |
| i 691 | |
| i 7,819 | |
Total lease liabilities | | $ | i 2,285,692 | | $ | i 2,748,744 | |
| | | | | | | |
Weighted average remaining lease term: | |
|
| |
|
| |
Operating leases | |
| i 6.7 years | |
| i 7.0 years | |
Operating leases - discontinued operations | | | i 1.1 years | | | i 1.6 years | |
| |
| | |
| | |
Weighted average discount rate: | |
| | |
| | |
Operating leases | |
| i 5.08% | |
| i 5.03% | |
Operating leases - discontinued operations | | | i 4.96% | | | i 4.77% | |
19
The components of lease costs were as follows:
| | | | | | | | | | | | | |
|
| Three Months Ended September 30, |
| | Nine Months Ended September 30, | ||||||||
| | 2022 | | 2021 | | | 2022 | | 2021 | ||||
Operating lease costs | | $ | i 168,910 | | $ | i 165,899 | | | $ | i 523,107 | | $ | i 518,524 |
Short-term lease costs | |
| i 25,345 | | | i 24,781 | | |
| i 75,629 | | | i 54,541 |
Lease costs - discontinued operations | | | i 10,185 | | | i 7,684 | | | | i 29,767 | | | i 22,571 |
Total lease costs | | $ | i 204,440 | | $ | i 198,364 | | | $ | i 628,503 | | $ | i 595,636 |
iSupplemental cash flow information related to leases is as follows:
| | | | | | |
|
| Nine Months Ended September 30, | ||||
| | 2022 | | 2021 | ||
Cash paid for amounts included in measurement of liabilities: |
| |
| | | |
Operating cash outflows for operating leases | | $ | i 582,044 | | $ | i 541,054 |
Operating cash outflows for operating leases - discontinued operations | | | i 6,923 | | | i 24,007 |
iFuture lease payments relating to the Company’s operating lease liabilities from continuing operations as of September 30, 2022 were as follows:
| | | |
Years ending December 31, |
| Total | |
2022 | | $ | i 167,692 |
2023 | |
| i 643,233 |
2024 | |
| i 390,630 |
2025 | |
| i 268,056 |
2026 | | | i 227,542 |
Thereafter | |
| i 1,007,877 |
Total future lease payments | |
| i 2,705,030 |
Less: imputed interest | |
| ( i 428,087) |
Total lease obligations | |
| i 2,276,943 |
Less: current obligations | |
| ( i 555,300) |
Noncurrent lease obligations | | $ | i 1,721,643 |
i7. Fair value
As of September 30, 2022 and December 31, 2021, the carrying amounts of cash equivalents, accounts receivable, accounts payable, accrued expenses, accrued compensation, dividends payable and other current liabilities approximate their fair values due to the short-term maturities of these instruments.
Under US GAAP, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. US GAAP guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s
20
assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
iThe following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | |
|
| |||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: | | | | | | | | | | | | |
Recurring | | | | | | | | | | | | |
Certificate of deposit | | $ | — | | $ | — | | $ | — | | $ | — |
Net asset arising from put/call options | | | — | | | — | | | i 157,000 | | | i 157,000 |
| | | | | | | | | | | | |
|
| |||||||||||
|
| Level 1 |
| Level 2 |
| Level 3 |
| Total | ||||
Assets: | | |
|
| |
|
| |
|
| |
|
Recurring | | |
|
| |
|
| |
|
| |
|
Certificate of deposit | | $ | — | | $ | i 2,500,000 | | $ | — | | $ | i 2,500,000 |
Net asset arising from put/call options | | | — | | | — | | | i 128,000 | | | i 128,000 |
iThe activity for the Level 3 asset for the nine months ended September 30, 2022:
| | | |
Net asset arising from put/call options |
| | |
Balance as of December 31, 2021 | | $ | i 128,000 |
Unrealized gain | |
| i 29,000 |
Balance as of September 30, 2022 | | $ | i 157,000 |
The put/call options are reported at fair value at their net asset or liability balance in the condensed consolidated balance sheets. The underlying asset and liability fair values are calculated using discounted cash flow analysis valuation techniques that incorporate unobservable inputs, such as future cash flows, weighted-average cost of capital, and expected future volatility. The inputs to these valuations are considered Level 3 inputs.
i8. Contingencies
COVID-19
The worldwide coronavirus (COVID-19) pandemic was formally recognized by the World Health Organization on March 11, 2020. In response to this pandemic, the governments of the countries in which the Company operates - the Cayman Islands, The Bahamas, and the United States - implemented preventative measures to slow the spread of COVID-19, measures which had profound adverse consequences for the economies of those countries. Tourism, a major economic
21
driver for the Cayman Islands, temporarily ceased due to closing of the country to tourist arrivals by air and sea travel and has yet to return to pre-pandemic levels. Tourist arrivals to The Bahamas by air and sea also declined significantly due to the pandemic. Overall economic activity in the United States was adversely affected by COVID-19.
As a result of the impact of the COVID-19 pandemic on the economies of the countries in which the Company operates, the Company experienced decreases in consolidated revenue, net income and cash flows from operations as compared to pre-pandemic periods. The economic downturn arising initially from the COVID-19 pandemic and furthered by the Russian invasion of Ukraine and other factors has further adversely affected the Company’s supply chain and the markets for the Company’s products and services. A continuation of the current weak economic conditions could have a material adverse impact on the Company’s consolidated financial condition, results of operations and cash flows.
Cayman Water
The Company sells water through its retail operations under a license issued in July 1990 by the Cayman Islands government (the “1990 license”) that granted Cayman Water the exclusive right to provide potable water to customers within its licensed service area. Although the 1990 license was not expressly extended after January 2018, the Company continues to supply water under the terms of the 1990 license, as further discussed in the following paragraph. Pursuant to the 1990 license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island: Seven Mile Beach and West Bay. For the three months ended September 30, 2022 and 2021, the Company generated approximately i 25% and i 32%, respectively, of its consolidated revenue and i 44% and i 44%, respectively, of its consolidated gross profit from the retail water operations conducted under the 1990 license. For the nine months ended September 30, 2022 and 2021, the Company generated approximately i 29% and i 33%, respectively, of its consolidated revenue and i 45% and i 47%, respectively, of its consolidated gross profit from the retail water operations conducted under the 1990 license.
The 1990 license was originally scheduled to expire in July 2010 but was extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent express extension of the 1990 license expired on January 31, 2018. The Company continues to operate under the terms of the 1990 license, providing water services to the level and quality specified in the 1990 license and in accordance with its understanding of its legal obligations, treating those obligations set forth in the 1990 license as operative notwithstanding the expiration of the express extension. The Company continues to pay the royalty required under the 1990 license.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for the economic regulation of the water utility sector and the negotiations with the Company for a new retail license from the WAC to OfReg in May 2017. The Company began license negotiations with OfReg in July 2017 and such negotiations are ongoing. The Company has been informed during its retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of its license in a manner that could significantly reduce the operating income and cash flows the Company has historically generated from its retail license.
The Company is presently unable to determine what impact the resolution of its retail license negotiations will have on its consolidated financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows the Company has historically generated from Cayman Water’s retail operations and could require the Company to record impairment losses to reduce the carrying values of its retail segment assets. Such impairment losses could have a material adverse impact on the Company’s consolidated financial condition and results of operations.
22
CW-Bahamas
As December 31, 2021, CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the Water and Sewerage Corporation of The Bahamas (“WSC”) amounted to $ i 21.5 million.
From time to time, CW-Bahamas has experienced delays in collecting its accounts receivable from the WSC. When these delays occur, the Company holds discussions and meetings with representatives of the WSC and The Bahamas government, and as a result, payment schedules are developed for WSC’s delinquent accounts receivable. All previous delinquent accounts receivable from the WSC, including accrued interest thereon, were eventually paid in full. Based upon this payment history, CW-Bahamas has never been required to provide an allowance for doubtful accounts for any of its accounts receivable, despite the periodic accumulation of significant delinquent balances.
In February 2022, CW-Bahamas received correspondence from the Ministry of Finance of the Government of the Bahamas that set forth a payment schedule providing for the gradual reduction over the course of 2022 of the CW-Bahamas' delinquent accounts receivable due from the WSC. Such correspondence also indicated that the Government intends to return all of CW-Bahamas’ accounts receivable from the WSC to current status.
As of September 30, 2022, CW-Bahamas’ accounts receivable from the WSC amounted to $ i 15.2 million.
In its latest report dated October 6, 2022, Moody’s Investor Services (“Moody’s) downgraded the Government of The Bahamas’ long-term issuer and senior unsecured ratings to B1 from Ba3. Moody’s also lowered The Bahamas’ local currency ceiling to Baa3 from Baa2 and its foreign currency ceiling to Ba1 from Baa. Based upon its review of this Moody’s report, the Company continues to believe no allowance for doubtful accounts is required for CW-Bahamas’ accounts receivable from the WSC.
i9. Related party transactions
The Company, through PERC and the services segment, purchases engineering and technology support services from various companies with a minority shareholder in those companies who is also a minority shareholder of PERC. During the three months ended September 30, 2022 and 2021, the Company made total purchases of services from these companies of approximately $ i 685,000 and $ i 105,000, respectively, and approximately $ i 2,166,000 and $ i 390,000 during the nine months ended September 30, 2022 and 2021, respectively. These total purchases are included in the Company’s cost of revenue in the accompanying condensed consolidated statements of income (loss).
PERC has entered into a sublease agreement with one of these related companies that commenced on March 14, 2021 and ended August 31, 2021. This lease has been extended on a month-to-month basis subsequent to August 31, 2021. During the three months ended September 30, 2022 and 2021, the Company recognized approximately $ i 24,000 and $ i 24,000 of expense related to this lease, respectively, and approximately $ i 73,000 and $ i 53,000 during the nine months ended September 30, 2022 and 2021, respectively. This lease expense is included in the Company's general and administrative expenses in the accompanying condensed consolidated statements of income (loss).
The total amount of accounts payable outstanding to these companies as of September 30, 2022 and December 31, 2021, was approximately $ i 569,000 and $ i 164,000, respectively.
/ i10. Impact of recent accounting standards
Adoption of new accounting standards:
None.
Effect of newly issued but not yet effective accounting standards:
None.
23
11. Subsequent events
In October 2022, the Company exercised its option to purchase the shares constituting the remaining i 39% minority interest in PERC at a price to be determined by an independent valuation, which is currently in-process.
The Company evaluated subsequent events through the time of the filing of this report on Form 10-Q. Other than as disclosed in these condensed consolidated financial statements, the Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on its condensed consolidated financial statements.
/
24
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our future revenue, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by use of the words or phrases “will,” “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “potential,” “believe,” “plan,” “anticipate,” “expect,” “intend,” or similar expressions and variations of such words. Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets related to our business.
The forward-looking statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Important factors which may affect these actual outcomes and results include, without limitation:
| ● | tourism and weather conditions in the areas we serve; |
| ● | the impacts of the COVID-19 pandemic, particularly on our retail and manufacturing segments; |
| ● | the economic, political and social conditions of each country in which we conduct or plan to conduct business; |
| ● | our relationships with the government entities and other customers we serve; |
| ● | regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman; |
| ● | our ability to successfully enter new markets; and |
| ● | other factors, including those “Risk Factors” set forth under Part II, Item 1A. “Risk Factors” in this Quarterly Report and in our 2021 Annual Report on Form 10-K. |
The forward-looking statements in this Quarterly Report speak as of its date. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.
References herein to “we,” “our,” “ours” and “us” refer to Consolidated Water Co. Ltd. and its subsidiaries.
Critical Accounting Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Our actual results could differ significantly from such estimates and assumptions.
Certain of our accounting estimates or assumptions constitute “critical accounting estimates” for us because:
| ● | the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and |
| ● | the impact of the estimates and assumptions on our financial condition and results of operations is material. |
Our critical accounting estimates relate to (i) the valuations of our goodwill, intangible assets and long-lived assets; and (ii) revenue recognition on our construction and manufacturing contracts.
Goodwill and intangible assets
Goodwill represents the excess cost of an acquired business over the fair value of the assets and liabilities of the acquired business. Goodwill and intangible assets acquired in a business combination and determined to have an indefinite useful
25
life are not amortized but are tested for impairment annually or upon the identification of a triggering event. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. We evaluate the possible impairment of goodwill annually as part of our reporting process for the fourth quarter of each fiscal year. Management identifies our reporting units, which consist of our retail, bulk, services, and manufacturing operations, and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. We determine the fair value of each reporting unit and compare these fair values to the carrying amounts of the reporting units. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded.
For the year ended December 31, 2021, we estimated the fair value of our reporting units by applying the discounted cash flow method, which relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis.
We also estimated the fair value of each of our reporting units for the year ended December 31, 2021 by applying the guideline public company method.
We weighted the fair values estimated for each of our reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit. The respective weightings we applied to each method for the year ended December 31, 2021 were 80% to the discounted cash flow method and 20% to the guideline public company method.
The fair values we estimated for our retail, bulk, services and manufacturing reporting units exceeded their carrying amounts by 32%, 51%, 15% and 15%, respectively, as of December 31, 2021.
In February 2016, we acquired a 51% ownership interest in Aerex, our manufacturing subsidiary. In connection with this acquisition, we recorded goodwill of $8,035,211. Aerex’s actual results of operations for the six months in 2016 following the acquisition fell significantly short of the projected results that were included in the cash flow projections we utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities. Due to this shortfall in Aerex’s results of operations, we tested our manufacturing reporting unit’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the discounted cash flow method. As a result of this impairment testing, we determined that the carrying value of our manufacturing reporting unit’s goodwill exceeded its fair value and recorded an impairment loss of $1,750,000 for the three months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211. As part of our annual impairment testing of goodwill performed during the fourth quarter, in 2017 we updated our projections for Aerex’s future cash flows, determined that the carrying value of our manufacturing reporting unit’s goodwill exceeded its fair value, and recorded an impairment loss of $1,400,000 for the three months ended December 31, 2017 to further reduce the carrying value of this goodwill to $4,885,211.
Approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit, for the year ended December 31, 2020 were generated from sales to one customer. While Aerex sells various products to this customer, Aerex’s revenue from this customer has historically been derived primarily from one specialized product. In October 2020, this customer informed Aerex that, for inventory management purposes, it was suspending its purchases of the specialized product from Aerex following 2020 for a period of approximately one year. This customer informed Aerex at that time that it expected to recommence its purchases of the specialized product from Aerex beginning with the first quarter of 2022. As a result of this anticipated loss of revenue for Aerex, we updated our projections for our manufacturing reporting unit’s future cash flows. Such projections assumed, in part, that Aerex’s major customer would recommence its purchases from Aerex in 2022 but at a reduced aggregate amount, as compared to 2020. Based upon these updated projections, we tested our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. As a result of these impairment tests, we determined that the estimated fair value of our manufacturing reporting unit exceeded its carrying value by approximately 31% as of December 31, 2020.
26
In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases of the specialized product from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to the amounts it had purchased from Aerex in 2020 and prior years. Our updated sales estimate for this customer based on this new information was substantially below the sales we anticipated to this customer for 2022 and subsequent years that we used in the discounted cash flow projections we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020. Furthermore, Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic conditions (caused in part by the COVID-19 pandemic) which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials, and also adversely affected the overall financial condition of Aerex’s current and prospective customers. Accordingly, in light of this new information from Aerex’s former major customer, and the on-going weak economic conditions that we believed would continue through 2022, we updated our projections of future cash flows for the manufacturing reporting unit and tested its goodwill for possible impairment as of June 30, 2021 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. Based upon this testing, we determined that the carrying value of our manufacturing reporting unit exceeded its fair value by $2.9 million, and we recorded an impairment loss to reduce our manufacturing reporting unit’s goodwill by this amount for the three months ended June 30, 2021.
We believe the inherent uncertainties associated with the accounting estimates and assumptions we use for our estimates of our reporting units’ fair values have increased due to the current, less predictable economic conditions, which have resulted in increasing raw material prices, extended and unexpected delays in the procurement and delivery of our raw materials, and have also, we believe, adversely affected our customers. Should interest rates rise significantly in the future we would likely be required to increase the discount rate we use under the discounted cash flow method we use to estimate the fair values of our reporting units, and such increased discount rate in and of itself could decrease the estimated fair value of our reporting units under the discounted cash flow method.
Based upon our estimation prepared as of December 31, 2021, the fair value of our manufacturing reporting unit exceeded its carrying value by only 15%. If we determine in the future that Aerex’s discounted future cash inflows will be less than our present expectations, we may be required to record additional impairment losses to reduce the remaining carrying values as of September 30, 2022 of our manufacturing reporting unit’s goodwill of $1,985,211 and its remaining unamortized intangible assets balances of $777,778 recorded as a result of the acquisition of Aerex. Any such impairment losses could have a material adverse impact on our consolidated results of operations.
Long-lived assets
We review the carrying amounts of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the carrying amount and fair value.
On June 29, 2020, our Mexico subsidiary, AdR, received a letter from the State of Baja California (the “State”) terminating AdR’s contract with the State involving the construction and operation of a desalination plant in Rosarito California and accompanying aqueduct to deliver the water produced by this plant to the Mexican public water system. As a result of the cancellation of this contract, we recorded an impairment loss for rights of way acquired for the contract’s proposed aqueduct of approximately ($3.0 million) in 2020.
Through our former subsidiary, PT Consolidated Water Bali (“CW-Bali”), we built and operated a seawater reverse osmosis plant with a productive capacity of approximately 264,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We recorded operating losses for CW-Bali as the sales volumes for its plant were insufficient to cover its operating costs. In 2017 we determined, based upon probability-weighted scenarios for CW-Bali’s future undiscounted cash flows, that the carrying values of CW-Bali’s long-lived assets and our investment in CW-Bali
27
were not recoverable. Consequently, we recorded impairment losses of ($1.6 million) in 2017 to reduce the carrying values of these assets to their fair values.
Construction and Manufacturing Contract Revenue Recognition
We design, construct, and sell desalination infrastructure through DesalCo, which serves customers in the Cayman Islands, The Bahamas, and the British Virgin Islands. We design, construct, and sell wastewater and water reuse infrastructure in the U.S. through PERC. Aerex, is a custom and specialty manufacturer in the U.S. of water treatment-related systems and products applicable to commercial, municipal and industrial water production.
We recognize revenue for our construction and our specialized/custom manufacturing contracts over time under the input method using costs incurred (which represents work performed) to date relative to total estimated costs at completion to measure progress toward satisfying its performance obligations as such measure best reflects the transfer of control of the promised good to the customer. Contract costs include labor, materials and amounts payable to subcontractors. We follow this method since we can make reasonably dependable estimates of the revenue and costs applicable to the various stages of a contract. Under this input method, we record revenue and recognize profit or loss as work on the contract progresses. We estimate total project or manufacturing costs and profit to be earned on each long-term, fixed price contract prior to commencement of work on the contract and update these estimates as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to date comprises of estimated total contract costs. If, as work progresses, the actual contract costs exceed estimates, the profit recognized on revenue from that contract decreases. We recognize the full amount of any estimated loss on a contract at the time the estimates indicate such a loss.
The cost estimates we prepare in connection with our construction and manufacturing contracts are subject to inherent uncertainties. Because we base our contract prices on our estimation of future construction and manufacturing costs, the profitability of our construction and manufacturing contracts is highly dependent on our ability to estimate these costs accurately, as almost all of our construction and manufacturing contracts are fixed-price contracts. The cost of materials, labor and subcontractors could increase significantly after we sign a construction or manufacturing contract, which could cause the gross profit for a contract to decline from our previous estimates, adversely affecting our recognition of revenue and gross profit for the contract. Construction or manufacturing contract costs that significantly exceed our initial estimates could have a material adverse impact our consolidated financial condition, results of operations, and cash flows.
RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes included under Part I, Item 1. “Financial Statements” of this Quarterly Report and our consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2021 (“2021 Form 10-K”) and the information set forth under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2021 Form 10-K.
Three Months Ended September 30, 2022 Compared to Three Months Ended September 30, 2021
Discontinued Operations – Mexico Project Development
In 2010, we began the pursuit, through our Netherlands subsidiary, Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), and our Mexico subsidiary, N.S.C. Agua, S.A. de C.V. (“NSC”), of a project (the “Project”) that encompassed the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system.
Through a series of transactions that began in 2012, NSC purchased 20.1 hectares of land for approximately $21.1 million on which the proposed Project’s plant was to be constructed.
28
Following an assessment by the State of Baja, California (the “State”) of the need for such a desalination plant and the passage of enabling legislation in November 2015, the State officially commenced the required public tender for the Project. A consortium (the “Consortium”) comprised of NSC, Suez Medio Ambiente México, S.A. de C.V. (“Suez MA”), a subsidiary of SUEZ International, S.A.S., and NuWater S.A.P.I. de C.V. (“NuWater”) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of the tender process for the Project.
In August 2016, NSC and NuWater incorporated a new company under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”) to pursue completion of the Project and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operation and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation. NSC initially owned 99.6% of the equity of AdR. In February 2018, we acquired the remaining 0.4% ownership in AdR from NuWater.
On August 22, 2016, the Public Private Partnership Agreement for the Project (the “APP Contract”) was executed between AdR, the State Water Commission of Baja California (“CEA”), the Government of Baja California as represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract required AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueduct) with a capacity of up to 100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California and the second phase with a capacity of 50 million gallons per day. The first phase was to be operational within 36 months of commencing construction and the second phase was to be operational by July 2024. The APP Contract further required AdR to operate and maintain the plant and aqueduct for a period of 37 years starting from the commencement of operation of the first phase. At the end of the operating period, ownership of the plant and aqueduct would have been transferred to CEA. The APP Contract was subsequently amended by the parties in June 2018 to increase the scope of Phase 1 and to allow for changes in the water tariff due to the changes in the exchange rate for the peso, interest rates and construction costs that had and would occur from the date the APP Contract was signed to the date construction commenced.
On June 29, 2020, AdR received a letter (the “Letter”) from the Director General of CEA and the Director General of CESPT terminating the APP Contract. The Letter requested that AdR provide an inventory of the assets that currently comprise the “Project Works” (as defined in the APP Contract) for the purpose of acknowledging and paying the non-recoverable expenses made by AdR in connection with the Project, with such reimbursement to be calculated in accordance with the terms of the APP Contract. The applicable law required that this list of non-recoverable expenses made by AdR in connection with the Project be submitted to CEA and CESPT within 20 business days from the date of receipt of the Letter. AdR initiated an amparo claim before a federal district court in Tijuana, Baja California, to challenge the provision of the applicable law requiring submittal of the list of non-recoverable expenses within the 20 business days term, as AdR considered such term to be unreasonably short due to the magnitude of the Project and the scope of supporting documentation required to be provided with respect to the non-recoverable expenses. AdR obtained an initial provisional suspension of the lapsing of such 20-day term from the court, and on August 10, 2020 the court made such suspension definitive until the completion of the amparo trial. As such, the 20-day term for filing the list of non-recoverable expenses was suspended. Therefore, on August 28, 2020, AdR submitted their list of non-recoverable expenses, including those of NSC, to CEA and CESPT which was comprised of 51,144,525 United States dollars and an additional 137,333,114 Mexican pesos. In February 2021, AdR withdrew this amparo claim, and such withdrawal was accepted by the federal district court in Tijuana. To date, AdR has not received a formal response from CEA or CESPT to its submission of non-recoverable expenses.
We believe CW-Cooperatief, as a Netherlands company, has certain rights relating to its investments in NSC and AdR under the Agreement on Promotion, Encouragement and Reciprocal Protection of Investments between the Kingdom of the Netherlands and the United Mexican States entered into force as of October 1, 1999 (the “Treaty”). On April 16, 2021, CW-Cooperatief submitted a letter to the President of Mexico and other Mexican federal government officials alleging that the State’s termination of the APP Contract constituted a breach by Mexico of its international obligations under the Treaty, entitling CW-Cooperatief to full reparation, including monetary damages. This letter invited Mexico to seek a resolution of this investment dispute through consultation and negotiation, but stated that if the dispute cannot be resolved in this manner, CW-Cooperatief elects to refer the dispute to the International Centre for the Settlement of International Disputes for arbitration, as provided for in the Treaty. On June 29, 2021, the Mexican Ministry of Economy responded to
29
CW-Cooperatief’s letter and proposed to hold a consultation meeting. Two such meetings were held on July 9, 2021 and August 2, 2021 on a confidential basis, without a resolution of our investment dispute.
On February 9, 2022, CW-Cooperatief, filed a Request for Arbitration with the International Centre for Settlement of International Disputes requesting that the United Mexican States pay CW-Cooperatief damages in excess of US$51 million plus MXN$137 million (with the exact amount to be quantified in the proceedings), plus fees, costs and pre- and post-award interest.
CW-Cooperatief intends to pursue vigorously the relief sought in the arbitration, in addition to pursuing all other legal remedies and courses of action available under the operative contracts and applicable law with respect to its rights, damages, fees and expenses. We cannot provide any assurances that CW Cooperatief will be able to obtain the relief sought in the arbitration, and we will incur legal and other arbitration-related expenses that we expect will be material to our consolidated results of operations and cash flows.
During July 2022, the State initiated discussions with us to potentially resolve the issues related to the cancellation by the government of the Rosarito desalination plant contract as well as potentially addressing the State’s acute water shortage issues. We cannot presently determine the outcome of the discussions and we have not terminated our efforts to obtain relief through the international arbitration process as a result of these discussions.
We cannot provide any assurances that we will be able to obtain reimbursement for any expenses or investments made with respect to the Project.
As a result of the cancellation of the APP Contract, in 2020 we discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project. Accordingly, the assets and liabilities of CW-Cooperatief, NSC and AdR, as well as all Project development expenses and the costs for our legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP Contract, have been reclassified from the services segment to discontinued operations in the accompanying consolidated financial statements. Our net losses from discontinued operations for the three months ended September 30, 2022 and 2021 were ($505,917) and ($1,078,367), respectively.
Consolidated Results
Including discontinued operations, net income attributable to Consolidated Water Co. Ltd. stockholders for 2022 was $317,694 ($0.02 per share on a fully diluted basis), as compared to a net income of $285,593 ($0.02 per share on a fully diluted basis) for 2021.
The following discussion and analysis of our consolidated results of operations and results of operations by segment for the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 relates only to our continuing operations.
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders for 2022 was $823,611 ($0.05 per share on a fully diluted basis), as compared to a net income from continuing operations of $1,363,960 ($0.09 per share on a fully diluted basis) for 2021.
Revenue for 2022 increased to $25,051,705 from $16,413,146 in 2021, reflecting revenue increases in all four of our segments. Gross profit for 2022 was $6,843,773 (27% of total revenue) as compared to $5,690,599 (35% of total revenue) for 2021. For further discussion of revenue and gross profit see the “Results by Segment” discussion and analysis that follows.
General and administrative (“G&A”) expenses on a consolidated basis increased to $5,610,650 for 2022 as compared to $4,359,040 for 2021. The most significant increase in G&A expenses for 2022 relates to increased bonus accruals of $573,381 arising from the improved financial performance of the Company. Other components of the G&A expenses increase relate to (i) other employee costs, which increased by $207,895 due to salary increases and new hires; (ii) professional and legal fees, which increased by $134,154; and (iii) incremental bank fees of approximately $120,000
30
arising from the transfer of funds from CW-Bahamas to our parent company in the Cayman Islands. The rise in G&A for 2022 is also due in part to inflationary factors which have increased many of our G&A expenses.
Other income (loss), net, decreased to ($168,980) for 2022 as compared to $152,168 for 2021 primarily due to an unrealized loss of ($247,000) recorded for the valuation of the put/call options associated with the acquisition of PERC, as compared to an unrealized loss recorded on these options of ($54,000) in 2021. In addition, interest income decreased by approximately $112,000 for 2022 as compared to 2021 primarily due to the decrease in CW-Bahamas’ accounts receivable balance.
The COVID-19 pandemic had a adverse impact on our consolidated results of operations for the three months ended September 30, 2022 and we believe the COVID-19 pandemic will continue to adversely impact our results of operations in future periods. See further discussion herein and at “LIQUIDITY AND CAPITAL RESOURCES – Material Commitments, Expenditures and Contingencies – COVID-19.”
Results by Segment
Retail Segment:
The retail segment recorded a loss from operations of ($774,283) for 2022 as compared to a loss from operations of ($565,838) for 2021.
Revenue generated by our retail water operations increased to $6,274,650 in 2022 from $5,247,042 in 2021 in part due to a 14% increase in the volume of water sold. The sales volumes for both 2022 and 2021 were below the historical volumes for the retail segment prior to 2020 due to the cessation of tourism on Grand Cayman resulting from border restrictions that lasted from March 2020 through November 2021 in response to the COVID-19 pandemic. The increase in the volume of water sold in 2022 as compared to 2021 resulted from the lifting in November 2021 of travel restrictions to the Cayman Islands for vaccinated individuals, which allowed the resumption of tourism to the Cayman Islands and the reopening of many tourist properties that we serve in Grand Cayman. Retail revenue also increased due to higher energy costs which increased the energy pass-through component of our water rates and a more favorable rate mix, as much of the volume increase for the quarter was due to higher sales volumes to tourist industry related businesses, which in general purchase higher volumes and therefore pay higher per gallon rates than other retail customers.
Retail segment gross profit increased to $3,042,677 (48% of retail revenue) for 2022 from $2,501,246 (48% of retail revenue) for 2021 due to the revenue increase.
Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business segments. Retail G&A expenses increased to $3,818,459 for 2022 as compared to $3,067,696 for 2021. The most significant increase in G&A expenses for 2022 relates increased bonus accruals of $560,881 arising from the improved financial performance of the Company. Other components of the G&A expenses increase relate to (i) other employee costs, which increased by $98,349 due to salary increases; and (ii) professional and legal fees, which increased by $72,766.
Bulk Segment:
The bulk segment contributed $1,749,848 and $1,926,328 to our income from operations for 2022 and 2021, respectively.
Bulk segment revenue was $8,667,931 and $6,868,134 for 2022 and 2021, respectively. The increase in bulk segment revenue is attributable to an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas’ rates.
Gross profit for our bulk segment was $2,221,382 (26% of bulk revenue) and $2,239,748 (33% of bulk revenue) for 2022 and 2021, respectively. Gross profit decreased in 2022 as compared to 2021 principally due to incremental repairs and maintenance and supplies expenses for CW-Bahamas of approximately $361.000.
31
Bulk segment G&A expenses increased to $473,534 for 2022 as compared to $313,420 for 2021 primarily.as a result of incremental bank fees of approximately $120,000 attributable to cash transfers from CW-Bahamas to our parent company in the Cayman Islands.
Services Segment:
The services segment income from operations was $460,434 and $41,614 for 2022 and 2021, respectively.
Services segment revenue increased to $8,731,124 for 2022 from $3,210,584 for 2021 due to increases in both plant design and construction revenue and operating and maintenance revenue, with most of the revenue increase resulting from PERC’s progress on its contract with Liberty Utilities for the construction of a water treatment plant in Goodyear, Arizona.
Gross profit for the services segment was $1,397,142 (16% of services revenue) in 2022 as compared to $800,154 (25% of services revenue) for 2021. The increase in gross profit dollars results from the increased revenue. The decrease in gross profit as a percentage of revenue from 2021 to 2022 results from the relatively lower gross profit percentage earned on PERC’s contract with Liberty Utilities compared to that earned from PERC’s operating and maintenance contracts.
G&A expenses for the services segment increased to $936,708 for 2022 as compared to $758,540 for 2021 as a result of higher employee costs and increased insurance expense.
Manufacturing Segment:
The manufacturing segment incurred a loss from operations of ($199,377) for 2022 as compared to a loss from operations of ($69,933) in 2021.
Manufacturing revenue was $1,378,000 and $1,087,386 for 2022 and 2021, respectively. Certain manufacturing contracts have been delayed due to current supply chain and economic conditions, which have resulted in significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.
Manufacturing gross profit was $182,572 (13% of manufacturing revenue) for 2022 as compared to a gross profit of $149,451 (14% of manufacturing revenue) for 2021. The increase in manufacturing gross profit in dollars reflects the increase in revenue. Gross profit as a percentage of revenue has remained low due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we have elected not to furlough or terminate the employment of our highly skilled manufacturing personnel in 2022 and 2021 despite the decrease in production activity.
G&A expenses for the manufacturing segment were $381,949 for 2022 as compared to $219,384 for 2021.
The results of our manufacturing segment have been adversely affected by current economic conditions including but not limited to increasing raw materials prices, rising human resources costs, tight labor markets, and extended and unexpected delays in the procurement and delivery of raw materials. We believe these economic conditions have also resulted in product order delays from Aerex’s existing and prospective customers. The current economic conditions could continue (or further deteriorate) and therefore could continue to adversely impact the future results of our manufacturing segment.
Nine Months Ended September 30, 2022 Compared to Nine Months Ended September 30, 2021
Discontinued Operations – Mexico Project Development
As previously discussed, on June 29, 2020, the State of Baja California cancelled its APP Contract with AdR for the Project. As a result of the cancellation of the APP Contract, during the three months ended June 30, 2020, we discontinued all development activities associated with the Project and commenced active marketing efforts to sell the land NSC purchased for the Project.
Our net loss from discontinued operations for the nine months ended September 30, 2022 and 2021 was ($1,533,064) and ($1,542,540), respectively, and consists of the costs for our legal and administrative activities to pursue reimbursement from the State of Baja California following the cancellation of the APP Contract, and for 2022, a provision of $377,326 for potentially uncollectible value added tax refunds.
32
Consolidated Results
Including discontinued operations, net income attributable to Consolidated Water Co. Ltd. stockholders for 2022 was $4,324,395 ($0.28 per share on a fully diluted basis), as compared to a loss of ($390,284) ( ($0.03) per share on a fully diluted basis) for 2021.
The following discussion and analysis of our consolidated results of operations and results of operations by segment for the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 relates only to our continuing operations.
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders for 2022 was $5,857,459 ($0.38 per share on a fully diluted basis), as compared to net income from continuing operations of $1,152,256 ($0.07 per share on a fully diluted basis) for 2021.
Revenue for 2022 increased to $65,676,737 from $50,217,987 in 2021, reflecting substantial revenue increases in our retail, services and bulk segments along with a minor revenue increase in our manufacturing segment. Gross profit for 2022 was $21,465,034 (33% of total revenue) as compared to $17,881,962 (36% of total revenue) for 2021. For further discussion of revenue and gross profit see the “Results by Segment” discussion and analysis that follows.
G&A expenses on a consolidated basis increased to $15,403,458 for 2022 as compared to $13,847,830 for 2021. The most significant increase in G&A expenses for 2022 relates to increased bonus accruals of $405,682 arising from the improved financial performance of the Company. Other components of the 2022 G&A expenses increase relate to (i) other employee costs, which increased by $160,030 due to salary increases and new hires; (ii) professional and legal fees, which increased by $201,606; (iii) insurance expense, which increased by $249,247 due to higher premiums; (iv) incremental business development expenses of $175,699; (v) incremental bank fees of approximately $86,000 arising from the transfer of funds from CW-Bahamas to our parent company in the Cayman Islands; and (vi) directors fees, which increased by $102,559. The rise in G&A for 2022 is also due in part to inflationary factors which have increased many of our G&A expenses.
Other income, net, decreased to $548,729 for 2022 as compared to $699,890 for 2021 primarily due to an unrealized gain of $29,000 recorded for the valuation of the put/call options associated with the acquisition of a majority interest in PERC, as compared to an unrealized gain recorded on these options of $108,000 in 2021. In addition, interest income decreased by approximately $156,000 for 2022 as compared to 2021 primarily due to the decrease in CW-Bahamas’ accounts receivable balance.
The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the nine months ended September 30, 2022, and we believe the COVID-19 pandemic will continue to adversely impact our results of operations in future periods. See further discussion herein and at “LIQUIDITY AND CAPITAL RESOURCES – Material Commitments, Expenditures and Contingencies – COVID-19.”
Results by Segment
Retail Segment:
The retail segment incurred a loss from operations of ($900,747) for 2022 as compared to a loss from operations of ($1,605,769) for 2021.
Revenue generated by our retail water operations increased to $19,114,653 in 2022 from $16,633,137 in 2021 in part due to a 10% increase in the volume of water sold. The sales volumes for both 2022 and 2021 were below the historical volumes for the retail segment prior to 2020 due to the cessation of tourism on Grand Cayman resulting from border restrictions that lasted from March 2020 through November 2021 in response to the COVID-19 pandemic. The increase in the volume of water sold in 2022 as compared to 2021 resulted from the lifting in November 2021 of travel restrictions to the Cayman Islands for vaccinated individuals, which allowed the resumption of tourism to the Cayman Islands and the reopening of many tourist properties that we serve in Grand Cayman. Retail revenue also increased due to higher energy costs which increased the energy pass-through component of our water rates and a more favorable rate mix, as much of
33
the volume increase for the quarter was due to higher sales volumes to tourist industry related businesses, which in general purchase higher volumes and therefore pay higher per gallon rates than other retail customers.
Retail segment gross profit increased to $9,710,529 (51% of retail revenue) for 2022 from $8,397,438 (50% of retail revenue) for 2021 due to the revenue increase.
Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business segments. Retail G&A expenses increased to $10,613,975 for 2022 as compared to $9,757,179 for 2021. The more significant increases in G&A expenses for 2022 relate to (i) employee costs, which increased by $188,769 primarily due to increased bonus accruals, and to a lesser extent salary increases; (ii) professional and legal fees, which increased by $103,765: (iii) insurance expense, which increased by $123,636 due to higher premiums; (iv) incremental business development expenses of $175,699; and (v) directors fees, which increased by $86,196.
Bulk Segment:
The bulk segment contributed $6,475,164 and $5,662,463 to our income from operations for 2022 and 2021, respectively.
Bulk segment revenue was $24,442,324 and $19,826,075 for 2022 and 2021, respectively. The increase in bulk segment revenue is primarily attributable to an increase in energy costs for CW-Bahamas, which increased the energy pass-through component of CW-Bahamas’ rates and, to a lesser extent, an increase of 4% in the volume of water sold by CW-Bahamas.
Gross profit for our bulk segment was $7,661,073 (31% of bulk revenue) and $6,655,742 (34% of bulk revenue) for 2022 and 2021, respectively. Gross profit in dollars increased in 2022 as compared to 2021 principally due to the revenue increase.
Bulk segment G&A expenses remained relatively consistent at $1,187,909 for 2022 as compared to $994,779 for 2021.
Services Segment:
The services segment income from operations was $1,143,215 and $351,324 for 2022 and 2021, respectively.
Services segment revenue increased to $18,530,427 for 2022 from $10,514,669 for 2021 due to increases in both plant design and construction revenue and operating and maintenance revenue, with most of the revenue increase resulting from PERC’s progress on its contract with Liberty Utilities for the construction of a water treatment plant in Goodyear, Arizona.
Gross profit for the services segment was $3,681,398 (20% of services revenue) in 2022 as compared to $2,503,902 (24% of services revenue) for 2021. The increase in gross profit dollars resulted from the increased revenue. The decrease in gross profit as a percentage of revenue from 2021 to 2022 resulted from the relatively lower gross profit percentage earned on PERC’s contract with Liberty Utilities compared to that earned from PERC’s operating and maintenance contracts.
G&A expenses for the services segment increased to $2,554,721 for 2022 as compared to $2,152,145 for 2021. as a result of (i) higher employee costs attributable to increased bonus accruals, new hires and pay raises; and (ii) increased insurance expense.
Manufacturing Segment:
The manufacturing segment incurred a loss from operations of ($634,819) for 2022 as compared to a loss from operations of ($3,518,847) in 2021. The net loss from operations in 2021 included a $2.9 million impairment loss due to decline in Aerex’s projected future cash flows.
Manufacturing revenue was $3,589,333 and $3,244,106 for 2022 and 2021, respectively. Certain manufacturing contracts have been delayed due to significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.
34
Manufacturing gross profit was $412,034 (11% of manufacturing revenue) and $324,880 (10% of manufacturing revenue) for 2022 and 2021, respectively. The increase in manufacturing gross profit in dollars reflects the increase in revenue. Gross profit as a percentage of revenue has remained relatively low due to the greater impact of fixed factory overhead on this measure resulting from the revenue decrease, as we have elected not to furlough or terminate the employment of our highly skilled manufacturing personnel in 2022 and 2021 despite the decrease in production activity.
G&A expenses for the manufacturing segment remained relatively consistent at $1,046,853 for 2022 as compared to $943,727 for 2021.
The results of our manufacturing segment have been adversely affected by current economic conditions including but not limited to increasing raw materials prices, rising human resources costs, tight labor markets, and extended and unexpected delays in the procurement and delivery of raw materials. We believe these economic conditions have also resulted in product order delays from Aerex’s existing and prospective customers. The current economic conditions could continue (or further deteriorate) and therefore could continue to adversely impact the future results of our manufacturing segment.
FINANCIAL CONDITION
The significant changes in the components of our condensed consolidated balance sheet as of September 30, 2022 as compared to December 31, 2021 (other than the change in our cash and cash equivalents, which is discussed later in “LIQUIDITY AND CAPITAL RESOURCES”) and the reasons for these changes are discussed in the following paragraphs.
Accounts receivable decreased by approximately $3.0 million due to the collection by CW-Bahamas of significant delinquent receivables balances owed by the WSC. This decrease in CW-Bahamas’ accounts receivable balance was partially offset by an increase in PERC’s accounts receivables.
Current inventory increased by approximately $1.5 million primarily due to an increase in Aerex’s inventory, as certain of its manufacturing contracts have been delayed, resulting in extended retention times for various inventory items purchased for these contracts.
Prepaid expenses and other current assets increased by approximately $2.1 million primarily due to approximately $1.0 million in advance payments to contractors, approximately $646,000 in annual insurance premiums principally paid in June 2022 and approximately $340,000 for the cost of PERC’s construction bond for the Liberty Utilities project.
Contract assets increased by approximately $1.2 million primarily due to Aerex's manufacturing projects.
Property, plant and equipment, net decreased by approximately $2.7 million due to the scheduled depreciation of fixed assets.
Construction in progress increased by approximately $1.9 million due to construction activity for Cayman Water’s replacement of its West Bay desalination plant.
Accounts payable, accrued expenses and other liabilities increased by approximately $3.5 million primarily due to an increase in subcontractor costs for PERC’s contract with Liberty Utilities.
Contract liabilities increased by $3.2 million due to billings made by the services segment in connection with PERC’s new contract with Liberty Utilities to construct a wastewater treatment facility in Arizona.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
Our projected liquidity requirements for the balance of 2022 include capital expenditures for our existing operations of approximately $6.0 million which includes approximately $837,000 to be incurred for the balance of 2022 for the replacement of the West Bay seawater desalination plant and approximately $2.4 million for construction of the WAC’s
35
new Red Gate plant. We paid approximately $1.4 million in dividends in October 2022. Our liquidity requirements may include future quarterly dividends if such dividends are declared by our Board.
Our future liquidity requirements also will include the funds necessary to purchase the 39% minority interest in PERC, as in October 2022 we exercised our option to purchase these shares at a price to be determined by an independent valuation.
As of September 30, 2022, we had cash and cash equivalents of $51.1 million and working capital of $71.1 million. We are not presently aware of anything that would lead us to believe that we will not have sufficient liquidity to meet our needs.
CW-Bahamas Liquidity
As of December 31, 2021, CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the Water and Sewerage Corporation of The Bahamas (“WSC”) amounted to $21.5 million.
From time to time, CW-Bahamas has experienced delays in collecting its accounts receivable from the WSC. When these delays occur, we hold discussions and meetings with representatives of the WSC and The Bahamas government, and as a result, payment schedules are developed for WSC’s delinquent accounts receivable. All previous delinquent accounts receivable from the WSC, including accrued interest thereon, were eventually paid in full. Based upon this payment history, CW-Bahamas has never been required to provide an allowance for doubtful accounts for any of its accounts receivable, despite the periodic accumulation of significant delinquent balances.
In February 2022, we received correspondence from the Ministry of Finance of the Government of the Bahamas that set forth a payment schedule providing for the gradual reduction over the course of 2022 of the CW-Bahamas' delinquent accounts receivable due from the WSC. Such correspondence also indicated that the Government intends to return all of CW-Bahamas’ accounts receivable from the WSC to current status.
As of September 30, 2022, CW-Bahamas’ accounts receivable from the WSC amounted to $15.2 million.
In its latest report dated October 6, 2022, Moody’s Investor Services (“Moody’s) downgraded the Government of The Bahamas’ long-term issuer and senior unsecured ratings to B1 from Ba3. Moody’s also lowered The Bahamas’ local currency ceiling to Baa3 from Baa2 and its foreign currency ceiling to Ba1 from Baa. Based upon our review of this Moody’s report, we continue to believe no allowance for doubtful accounts is required for CW-Bahamas’ accounts receivable from the WSC.
Discussion of Cash Flows for the Nine Months Ended September 30, 2022
Our cash and cash equivalents increased to $51,085,289 as of September 30, 2022 from $40,358,059 as of December 31, 2021.
Cash Flows from Operating Activities
Net cash provided by our operating activities was $15,803,236. This net cash reflects the net income incurred for the nine months ended September 30, 2022 of $5,015,437 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year; and (ii) changes in the other components of working capital. The more significant of such items and changes in working capital components included depreciation and amortization of $4,651,513, an increase in billings in excess of cost and estimated earnings and accounts payable and accrued expenses of $7,771,062, an increase in prepaid expenses and other current assets of $2,663,516, a decrease in overall accounts receivable of $1,851,369 and a provision for uncollected value added taxes of $377,326.
Cash Flows from Investing Activities
Net cash used by our investing activities was $416,756, primarily for additions to property, plant and equipment and construction in progress. We did not renew our CW-Bahamas $2.5 million certificate of deposit.
36
Cash Flows from Financing Activities
Net cash used by our financing activities was $4,977,296, almost all of which related to the payment of dividends.
Revolving Credit Facility
In September 2022, Cayman Water entered into an agreement (the “Credit Agreement”) with Scotiabank & Trust (Cayman) Ltd. (the “Bank”) for a revolving credit facility in an aggregate principal amount of up to $10.0 million (the “Credit Facility”). We expect to utilize the funds obtained from the Credit Facility for general working capital purposes.
The Credit Facility matures two years following the date of the initial advance (the “Maturity Date”). All amounts outstanding under the Credit Facility are due and payable upon the earlier of the Maturity Date, demand from the bank or the acceleration of the Credit Facility upon an event of default.
The principal balance of the Credit Facility bears interest at a rate of 2.0% plus the secured overnight financing rate (“SOFR”) as determined by the SOFR Administrator for a one-month period on the day that is two days prior to the first day of the interest period. All interest calculations will be made based on a 360-day year. So long as the Bank has not demanded repayment, interest will be payable monthly, commencing one month from the initial advance, with the outstanding balance due on the Maturity Date, unless the Bank agrees to renew the Credit Facility for an additional period.
Cayman Water’s obligations under the Credit Agreement are secured by a first priority lien on all its fixed and floating assets and an assignment of insurance proceeds with respect to its fixed assets. Further, the Company has guaranteed the repayment of all of Cayman Water’s present and future debts and liabilities owed to the Bank.
The Credit Agreement requires Cayman Water to meet certain financial covenants.
Cayman Water has not yet utilized its available borrowings under the Credit Facility.
Material Commitments, Expenditures and Contingencies
COVID-19
The worldwide coronavirus (COVID-19) pandemic, which was formally recognized by the World Health Organization on March 11, 2020, has had a profound negative impact on the economies of the countries in which we operate. Consequently, the COVID-19 pandemic has had, and will continue to have, an adverse impact on our consolidated financial condition, results of operations, and cash flows.
A discussion of the current effects of the COVID-19 pandemic on each of our operating subsidiaries is provided in the following paragraphs. However, its future effects on our company could differ materially from the information we are providing herein.
Cayman Water
As preventative measures to combat the possible spread of COVID-19, the Cabinet of the Cayman Islands (“the Cabinet”) closed all of Cayman Islands’ seaports to international passenger arrivals effective March 13, 2020; and closed all Cayman Islands airports to international passenger arrivals effective March 22, 2020. Effective March 28, 2020, the Cabinet and Cayman Islands law enforcement enacted various ‘stay-at-home’ regulations and curfews, which closed all businesses not deemed essential by the government and required citizens to stay at home unless they were purchasing necessities or engaged in an essential errand. In May 2020, the Cabinet started the phased relaxation of the shelter-in-place regulations and on October 1, 2020, the Cayman Islands reopened its borders for residents or individuals who own property in the Cayman Islands that provide evidence of a negative COVID-19 test performed within three days prior to arrival in the Cayman Islands and agree to remain in quarantine for 14 days after arrival. In July 2021, this quarantine period was reduced to five days for fully vaccinated travelers who can provide proof of vaccination from Cayman Islands government approved sources.
37
In November 2021, the Cayman Islands began allowing vaccinated travelers to visit the islands without the need to quarantine. However, the testing requirements upon arrival on the islands, and the fact that families with unvaccinated children were still required to quarantine, continued to restrict the number of overseas visitors.
Effective August 24, 2022, the COVID-19 restrictions for entry to the Cayman Islands were lifted by the government of the Cayman Islands. This easing of restrictions has positively impacted tourism to the Cayman Islands. However, tourism to the Cayman Islands continues to be below pre-COVID-19 levels. We expect that our retail segment revenue and cash flows will continue to be adversely impacted until such time as tourism and the economy in the Cayman Islands fully recover from the impact and effects of the COVID-19 pandemic.
Cayman Water’s operations have been designated as essential services by the Cayman Islands government. Presently, the day-to-day operations of Cayman Water’s water production facilities and distribution network have not been materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the demand for water in our retail license area. We believe Cayman Water has adequate spare parts and supplies in stock to continue normal operations.
OC-Cayman
Although it operates on Grand Cayman - and therefore is also affected by the preventative measures enacted by government that have been discussed previously - OC-Cayman sells water on a bulk basis to the WAC, which in turn provides this water to areas of Grand Cayman that are more residential, and less tourist related, than the license area served by Cayman Water. The monthly amounts OC-Cayman charges the WAC for water supplied under its water supply agreements consist of fixed amounts that constitute most of the amounts charged, and lesser amounts that vary with the volume of water supplied. Therefore, unlike Cayman Water, OC-Cayman’s revenue is not as directly affected by tourism on Grand Cayman and, due to the structure of the underlying water supply agreements, is not as acutely sensitive to declines in water demand.
OC-Cayman’s operations have been designated as essential services by the Cayman Islands government. Presently, OC-Cayman’s day-to-day operations have not been materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the requirements of our two water supply agreements with the WAC. We believe OC-Cayman has adequate spare parts and supplies in stock to continue normal operations. However, OC-Cayman’s operations could be adversely affected should a significant number of its operations personnel be required to miss work due to illness.
CW-Bahamas
The government of The Bahamas enacted Emergency Powers Regulations which became effective March 18, 2020 in an effort to combat the spread of COVID-19. Initially, these regulations closed all businesses not deemed essential by the government, encouraged the employees of non-essential businesses to work remotely and imposed 24-hour shelter-in-place curfew on all residents of The Bahamas other than those engaged in essential or pre-approved activities. On March 24, 2020, the government banned all international travel to The Bahamas by closing all airports and seaports. As a result of the measures taken by The Bahamas government, tourism on New Providence Island, where CW-Bahamas operates, temporarily ceased and economic activity in The Bahamas slowed dramatically. During the summer of 2020, travel restrictions were briefly lifted then reimposed. In November 2020, shelter-in-place regulations were loosened, and commercial and retail operations were permitted to open with limited capacity although working from home was still encouraged. The Emergency Powers Regulations expired on November 13, 2021 and the government then enacted new rules to prevent and manage community spread of COVID-19. Most of such rules have since been lifted and there are no longer significant restrictions on economic activity. Home port cruise ship departures from the Port of Nassau commenced in June 2021 and cruise ship arrivals into The Bahamas commenced in July 2021.
Effective September 20, 2022, all COVID-related travel restrictions to The Bahamas were eliminated by the Bahamian government.
CW-Bahamas sells the water produced by its plants on a bulk basis to the WSC, which in turn provides water to the residences, businesses, and other end users on New Providence. Under the terms of each of its water supply agreements with the WSC, CW-Bahamas charges the WSC (i) a fixed monthly amount; (ii) an amount each month that is based upon the amount of water supplied during the month; and (iii) pass-through energy charges, therefore CW-Bahamas’ revenue is impacted by changes in energy prices and, to a lesser extent, changes in demand. The volume of water CW-Bahamas sells
38
to the WSC was not adversely impacted by the COVID-19 pandemic despite the reduced economic activity on New Providence in 2021, and water volume sales remain steady as economic activity has increased in 2022.
CW-Bahamas’ day-to-day operations were not materially impeded by the COVID-19 pandemic – we continue to produce and supply water to meet the requirements of our two water agreements with the WSC. We believe CW-Bahamas has sufficient spare parts and consumables inventories to continue normal operations.
Aerex
Aerex presently has 15 manufacturing employees. Should a number of these employees become ill, Aerex could be required to reduce or cease its manufacturing activities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.
As a result of current economic conditions (resulting in part from the COVID-19 pandemic), in late March 2021 Aerex began experiencing issues with its supply chain for the raw materials and components used in its manufacturing operations, including higher prices, scarcities/shortages, and longer fulfillment times for its orders to suppliers. These conditions, and a decline in projected future sales to Aerex’s former largest customer, required us to record an impairment loss of ($2.9 million) for the three months ended June 30, 2021 to reduce the carrying value of our manufacturing reporting unit’s goodwill. While these economic conditions and issues continue, Aerex could have difficulty completing its orders from its customers and obtaining new business, which could have a material adverse impact on our consolidated revenue, results of operations and cash flows, and could require us to record additional impairment losses to reduce the carrying value of the goodwill recorded for our manufacturing reporting unit. Any such impairment losses could have a material adverse impact on our consolidated financial condition and results of operations.
PERC
PERC’s operations are considered essential services by the states in which it operates. Presently, the COVID-19 pandemic has not materially impeded PERC’s day-to-day operations.
Approximately 46% of PERC’s revenue of $17.8 million for the nine months ended September 30, 2022 was generated in California under contracts with government entities. The State of California has publicly acknowledged on-going difficulties due to the COVID-19 pandemic, and such difficulties presently, or could in the future, extend to the various counties, municipalities, and other government-related entities in California, including PERC’s customers, which could adversely impact PERC’s revenue and the collection of its accounts receivable.
PERC employs state-certified water and wastewater operators to operate various water treatment facilities in California and Arizona. Should a number of these employees become ill as a result of COVID-19, PERC could have difficulty meeting its contractual and statutory obligations for operating these water treatment facilities, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.
Cayman Water Retail License
We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands government (the “1990 license”) that granted Cayman Water the exclusive right to provide potable water to customers within its licensed service area. Although the 1990 license was not expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as further discussed in the following paragraph. Pursuant to the 1990 license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island: Seven Mile Beach and West Bay. For the three months ended September 30, 2022 and 2021, we generated approximately 25% and 32%, respectively, of our consolidated revenue and 44% and 44%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license. For the nine months ended September 30, 2022 and 2021, the Company generated approximately 29% and 33%, respectively, of its consolidated revenue and 45% and 47%, respectively, of its consolidated gross profit from the retail water operations conducted under the 1990 license.
The 1990 license was originally scheduled to expire in July 2010 but was extended several times by the Cayman Islands government to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent
39
express extension of the license expired on January 31, 2018. We continue to operate under the terms of the 1990 license, providing water services to the level and quality specified in the 1990 license and in accordance with our understanding of its legal obligations, treating those obligations set forth in the 1990 license as operative notwithstanding the expiration of the express extension. We continue to pay the royalty required under the 1990 license.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for the economic regulation of the water utility sector and the retail license negotiations from the WAC to OfReg in May 2017. We began license negotiations with OfReg in July 2017 and such negotiations are continuing. We have been informed during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license.
The Cayman Islands government could seek to grant a third party a license to service some or all of Cayman Water’s present service area. However, as set forth in the 1990 license, “the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence Area without having first offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.”
We are presently unable to determine what impact the resolution of our retail license negotiations will have on our cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our retail operations and could require us to record impairment losses to reduce the carrying value of our retail segment assets. Such impairment losses could have a material adverse impact on our consolidated financial condition, results of operation and cash flows.
CW-Bahamas Performance Guarantees
Our contracts to supply water to the WSC from our Blue Hills and Windsor plants require us to guarantee delivery of a minimum quantity of water per week. If the WSC requires the water and we do not meet this minimum, we are required to pay the WSC for the difference between the minimum and actual gallons delivered at a per gallon rate equal to the price per gallon that WSC is currently paying us under the contract. The Blue Hills contract expires in 2032 and requires us to deliver 63.0 million gallons of water each week. The Windsor contract expires in 2033 and requires us to deliver 16.8 million gallons of water each week.
Adoption of New Accounting Standards
None.
Effect of Newly Issued but not yet Effective Accounting Standards
None.
Dividends
| ● | On January 31, 2022, we paid a dividend of $0.085 to shareholders of record on January 3, 2022. |
| ● | On April 29, 2022, we paid a dividend of $0.085 to shareholders of record on April 1, 2022. |
| ● | On July 29, 2022, we paid a dividend of $0.085 to shareholders of record on July 1, 2022 |
| ● | On September 1, 2022, our Board declared a dividend of $0.085 payable on October 31, 2022 to shareholders of record on October 3, 2022. |
We have paid dividends to owners of our common stock and redeemable preferred stock since we began declaring dividends in 1985. Our payment of any future cash dividends will depend upon our earnings, financial condition, cash
40
flows, capital requirements and other factors our Board of Directors deems relevant in determining the amount and timing of such dividends.
Dividend Reinvestment and Common Stock Purchase Plan
This plan is available to our shareholders, who may reinvest all or a portion of their common stock dividends into shares of common stock at prevailing market prices and may also invest optional cash payments to purchase additional shares at prevailing market prices as part of this plan.
Impact of Inflation
Under the terms of our Cayman Islands license and our water sales agreements in The Bahamas and the British Virgin Islands, our water rates are automatically adjusted for inflation on an annual basis. Therefore, the impact of inflation on our gross profit, measured in consistent dollars, historically has not been material. However, we have not increased our retail water rates since January 2018 (despite the inflation that has occurred since that date) due to the lack of a resolution of our negotiations with OfReg for a new retail license. This lack of a rate increase has contributed to a decline in the gross profit generated by our retail segment. Furthermore, our manufacturing segment has been adversely impacted by recent significant increases in raw material costs and our services segment could suffer similar adverse impacts in the future. Should the current inflationary trend continue, our consolidated results of operations and cash flows could be materially adversely affected.
Increases in fuel and energy costs and other items could create additional credit risks for us, as our customers’ ability to pay our invoices could be adversely affected by such increases.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk from December 31, 2021 to the end of the period covered by this report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, with the participation of its principal executive officer and principal financial and accounting officer, the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, our principal executive officer and principal financial and accounting officer have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective at the reasonable assurance level.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
41
PART II – OTHER INFORMATION
ITEM 1A. RISK FACTORS
Our business faces significant risks. These risks include those disclosed in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as supplemented by the additional risk factors included below. If any of the events or circumstances described in the referenced risks actually occurs, our business, financial condition or results of operations could be materially adversely affected and such events or circumstances could cause our actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. These risks should be read in conjunction with the other information set forth in this Quarterly Report as well as in our Annual Report on Form 10-K for the year ended December 31, 2021 and in our other periodic reports on Form 10-Q and Form 8-K.
The COVID-19 pandemic will likely continue to have a material adverse impact on our financial performance and financial condition in the future, to an extent and for a period of time that cannot presently be determined.
The worldwide coronavirus (COVID-19) pandemic was formally recognized by the World Health Organization on March 11, 2020. In response to this pandemic, the governments of the countries in which we operate - the Cayman Islands, The Bahamas, and the United States - implemented preventative measures to slow the spread of COVID-19, measures which have had profound adverse consequences for the economies of those countries. Tourism, a major economic driver for the Cayman Islands, temporarily ceased due to closing of the country to tourist arrivals by air and sea travel. In November 2021, the Cayman Islands government eliminated certain travel restrictions for COVID-19 vaccinated travelers that allowed tourists to enter the Cayman Islands for the first time since March 2020. Our retail water revenues continue to be significantly lower than pre-pandemic levels. Tourist arrivals to The Bahamas by air and sea declined significantly due to the pandemic. Overall economic activity in the United States has also declined.
As a result of the impact of the COVID-19 pandemic on the economies of the countries in which we operate, we have experienced, and will continue to experience, decreases in our consolidated revenue, cash flows generated from operations, and overall liquidity as compared to comparable prior periods.
Furthermore, the COVID-19 pandemic has adversely impacted our customers. Such adverse impacts, should they continue for a prolonged period, could require us to reassess the expected future cash flows from our four reporting units and could require us to record impairment losses to reduce the carrying values of one or more of these reporting units due to a decline in their fair values.
Although we cannot presently quantify the future financial impacts of the COVID-19 pandemic on our company, we believe such impacts will likely continue to have an adverse impact on our consolidated financial condition, results of operations, and cash flows. Given the uncertainty associated with the resolution of this pandemic, we cannot presently determine how long such adverse financial impacts may last.
Our exclusive license to provide water to retail customers in the Cayman Islands has not been expressly extended and we are presently unable to predict the outcome of our on-going negotiations relating to this license.
We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands government (the “1990 license”) that granted Cayman Water the exclusive right to provide potable water to customers within its licensed service area. Although the 1990 license was not expressly extended after January 2018, we continue to supply water under the terms of the 1990 license, as further discussed in the following paragraph. Pursuant to the 1990 license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island: Seven Mile Beach and West Bay. For the three months ended September 30, 2022 and 2021, we generated approximately 25% and 32%, respectively, of our consolidated revenue and 44% and 44%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license. For the nine months ended September 30, 2022 and 2021, the Company generated approximately 29% and 33%, respectively, of its consolidated revenue and 45% and 47%, respectively, of its consolidated gross profit from the retail water operations conducted under the 1990 license.
42
The 1990 license was originally scheduled to expire in July 2010 but was extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent express extension of the license expired on January 31, 2018. We continue to operate under the terms of the 1990 license, providing water services to the level and quality specified in the 1990 license and in accordance with our understanding of its legal obligations, treating those obligations set forth in the 1990 license as operative notwithstanding the expiration of the express extension. We continue to pay the royalty required under the 1990 license.
In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for the economic regulation of the water utility sector and the negotiations with us for a new retail license from the Water Authority-Cayman to OfReg in May 2017. We began license negotiations with OfReg in July 2017 and such negotiations are ongoing. We have been informed during our retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license.
We are presently unable to determine what impact the resolution of our retail license negotiations will have on our cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our retail operations and could require us to record impairment losses to reduce the carrying values of our retail segment assets. Such impairment losses could have a material adverse impact on our consolidated financial condition and results of operations.
Most of our services segment revenue is generated under short-term contracts. An inability to obtain extensions of these contracts or to obtain new contracts to replace the revenue that is lost from contracts that are not extended could adversely impact our financial results.
PERC, our principal services segment subsidiary, generates most of its revenue from contracts (“O&M contracts”) to operate and maintain water treatment and reuse facilities owned by third parties. For the three and nine months ended September 30, 2022, we generated revenue of approximately $3.3 million and $10.4 million, respectively, under these O&M contracts. PERC’s O&M contracts have terms ranging from one to five years, with varying renewal options exercisable solely at the discretion of the customer. Approximately 32% of PERC’s revenue for the nine months ended September 30, 2022 was generated under O&M contracts that expire at various dates through December 31, 2023. If we are unable to obtain extensions of these expiring O&M contracts or are unable to replace the revenue lost from contracts that expire with revenue from new O&M contracts, our consolidated financial condition, results of operations, and cash flows would be adversely affected.
If the future financial performance of Aerex falls short of our most recent financial projections for this subsidiary, we may be required to record impairment losses to reduce the carrying values of the goodwill and intangible assets of our manufacturing reporting unit.
Approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit, for the year ended December 31, 2020 were generated from sales to one customer. While Aerex sells various products to this customer, Aerex’s revenue from this customer has historically been derived primarily from one specialized product. In October 2020, this customer informed Aerex that, for inventory management purposes, it was suspending its purchases of the specialized product from Aerex following 2020 for a period of approximately one year. This customer informed Aerex at that time that it expected to recommence its purchases of the specialized product from Aerex beginning with the first quarter of 2022. As a result of this anticipated loss of revenue for Aerex, we updated our projections for our manufacturing reporting unit’s future cash flows. Such projections assumed, in part, that Aerex’s major customer would recommence its purchases from Aerex in 2022 but at a reduced aggregate amount, as compared to 2020. Based upon these updated projections, we tested our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. As
43
a result of these impairment tests, we determined that the estimated fair value of our manufacturing reporting unit exceeded its carrying value by approximately 31% as of December 31, 2020.
In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases of the specialized product from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to the amounts it had purchased from Aerex in 2020 and prior years. Our updated sales estimate for this customer based on this new information was substantially below the anticipated sales to this customer for 2022 and subsequent years that we used in the discounted cash flow projections we prepared for purposes of testing our manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020. Furthermore, Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic conditions (caused in part by the COVID-19 pandemic) which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials, and also adversely affected the overall financial condition of Aerex’s current and prospective customer base. Accordingly, in light of this new information from Aerex’s former major customer and the on-going weak economic conditions that we believed would continue through 2022, we updated our projections of future cash flows for the manufacturing reporting unit and tested its goodwill for possible impairment as of June 30, 2021 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. Based upon this testing, we determined that the carrying value of our manufacturing reporting unit exceeded its fair value by $2.9 million, and we recorded an impairment loss to reduce our manufacturing reporting unit’s goodwill by this amount for the three months ended June 30, 2021.
The accounting estimates and assumptions we employ to estimate the fair values of our manufacturing and reporting units constitute “critical accounting estimates” for us because:
| ● | the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change (for example, should interest rates rise significantly in the future we would likely be required to increase the discount rate we use under the discounted cash flow method we use to estimate the fair values of our reporting units, and such increased discount rate in and of itself could decrease the estimated fair value of our reporting units under the discounted cash flow method); and |
| ● | the impact of the estimates and assumptions on financial condition and results of operations is material. |
We believe the inherent uncertainties associated with the accounting estimates and assumptions we use for our estimates of our reporting units’ fair values have increased due to current, less predictable economic conditions, which have resulted in increasing raw material prices, extended and unexpected delays in the procurement and delivery of our raw materials, and have also, we believe, adversely affected our customers.
Based upon our estimation prepared as of December 31, 2021, the fair value of our manufacturing reporting unit exceeded its carrying value by only 15%. If we determine in the future that Aerex’s discounted future cash inflows will be less than our present expectations, we may be required to record additional impairment losses to reduce the remaining carrying values as of September 30, 2022 of our manufacturing reporting unit’s goodwill of $1,985,211 and its remaining unamortized intangible assets balances of $777,778 recorded as a result of the acquisition of Aerex. Any such impairment losses could have a material adverse impact on our consolidated results of operations.
Current economic conditions are adversely impacting the supply chain for our operations and could have a material adverse impact on our financial results.
As a result of the economic conditions resulting from the COVID-19 pandemic, the Russian invasion of Ukraine, and other factors, we are experiencing issues with our supply chain for the raw materials, components, chemicals, and capital expenditures used in our operations, including rapidly increasing prices, scarcities/shortages, and longer fulfillment times and unexpected delays for our orders to suppliers. Should these economic conditions and issues continue, our operations could be adversely affected, which could have a material adverse impact on our consolidated financial condition, results of operations and cash flows.
44
The profitability of our contracts is dependent upon our ability to accurately estimate construction and operating costs.
The cost estimates we prepare in connection with the construction and operation of our water plants, the water infrastructure we construct and sell to third parties, and our manufacturing contracts, are subject to inherent uncertainties. Additionally, the terms of our water supply contracts may require us to guarantee the price of water on a per unit basis, subject to certain annual inflation and monthly energy cost adjustments, and to assume the risk that the costs associated with producing this water may be greater than anticipated. Because we base our contract prices in part on our estimation of future construction, manufacturing and operating costs, the profitability of our plants and our manufacturing and management contracts is dependent on our ability to estimate these costs accurately. The cost of materials and services and the cost of the delivery of such services may increase significantly after we submit our bid for contract, which could cause the gross profit for a contract to be less than we anticipated when the bid was made. The profit margins we initially expect to generate from a management contract could be further reduced if future operating costs for that contract exceed our estimates of such costs. Any construction, manufacturing, and operating costs for our contracts that significantly exceed our initial estimates could adversely impact our consolidated financial condition, results of operations, and cash flows.
45
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In July 2022, we issued 2,755 shares of preferred stock to 20 employees for cash at a price of $8.73 per share. The issuance of the preferred stock to sixteen employees was exempt from registration under Regulation S promulgated under the Securities Act because the shares were issued outside of the United States to non-US persons (as defined in Regulation S). Four employees are US persons and the issuance of such shares to them was exempt under Section 4(a)(2) of the Securities Act. The US persons is knowledgeable, sophisticated and experienced in making investment decisions of this kind and received adequate information about us or had adequate access, including through the employee's business relationship with us, to information about us.
ITEM 6. EXHIBITS
| | |
Exhibit |
| Exhibit Description |
10.1* | | |
31.1 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31.2 | | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
32.1 | | |
32.2 | | |
101.INS | | XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH | | XBRL Taxonomy Extension Schema |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
101.DEF | | XBRL Taxonomy Extension Definition Document |
101.LAB | | XBRL Taxonomy Extension Label Linkbase |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
104 | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
* Portions of the exhibit have been omitted pursuant to Item 601 of Regulation S-K, as such information both (i) is not material and (ii) would be competitively harmful if publicly disclosed, and will be furnished on a supplemental basis to the Securities and Exchange Commission upon request.
46
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | |
CONSOLIDATED WATER CO. LTD. | ||
|
|
|
By: |
| |
|
| |
| Chief Executive Officer |
|
| (Principal Executive Officer) |
|
|
|
|
By: | /s/ David W. Sasnett |
|
|
| |
| Executive Vice President & Chief Financial Officer |
|
| (Principal Financial and Accounting Officer) |
|
|
|
|
Date: November 14, 2022 | ||
47
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 12/31/23 | ||||
| 12/31/22 | ||||
| Filed on: | 11/14/22 | |||
| 11/9/22 | ||||
| 10/31/22 | ||||
| 10/6/22 | ||||
| 10/3/22 | ||||
| For Period end: | 9/30/22 | |||
| 9/20/22 | 8-K | |||
| 9/1/22 | ||||
| 8/24/22 | ||||
| 7/29/22 | ||||
| 7/1/22 | ||||
| 6/30/22 | 10-Q | |||
| 4/29/22 | ||||
| 4/1/22 | 4, PRE 14A | |||
| 3/31/22 | 10-Q | |||
| 2/9/22 | 8-K | |||
| 1/31/22 | ||||
| 1/3/22 | 4 | |||
| 12/31/21 | 10-K | |||
| 11/13/21 | ||||
| 9/30/21 | 10-Q | |||
| 8/31/21 | ||||
| 8/2/21 | ||||
| 7/9/21 | ||||
| 6/30/21 | 10-Q | |||
| 6/29/21 | ||||
| 4/16/21 | 4 | |||
| 3/31/21 | 10-K, 10-Q, 8-K | |||
| 3/14/21 | ||||
| 12/31/20 | 10-K | |||
| 10/1/20 | ||||
| 8/28/20 | ||||
| 8/10/20 | ||||
| 6/30/20 | 10-Q | |||
| 6/29/20 | 8-K | |||
| 3/28/20 | ||||
| 3/24/20 | 4 | |||
| 3/22/20 | ||||
| 3/18/20 | 4 | |||
| 3/13/20 | 10-K | |||
| 3/11/20 | ||||
| 1/31/18 | ||||
| 12/31/17 | 10-K | |||
| 9/30/16 | 10-Q | |||
| 8/22/16 | 8-K, 8-K/A | |||
| 10/1/99 | ||||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 3/27/24 Consolidated Water Co. Ltd. 10-K 12/31/23 116:14M Toppan Merrill Bridge/FA |