10-Q 1 cwco-20230930x10q.htm 10-Q
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

OR

   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: 0-25248

CONSOLIDATED WATER CO. LTD.

(Exact name of registrant as specified in its charter)

CAYMAN ISLANDS

    

98-0619652

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

Regatta Office Park

 

Windward Three, 4th Floor, West Bay Road

 

P.O. Box 1114

 

Grand Cayman KY1-1102

 

Cayman Islands

N/A

(Address of principal executive offices)

(Zip Code)

(345) 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

Class A Common Stock, $0.60 par value

 

CWCO

 

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. 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).  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  

Non-accelerated filer      Smaller reporting company       Emerging growth company   

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            No        

As of November 3, 2023, 15,747,464 shares of the registrant’s common stock, with US$0.60 par value, were outstanding.

TABLE OF CONTENTS

Description

Page

PART I

FINANCIAL INFORMATION

    

4

Item 1

Financial Statements

4

Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022

4

Condensed Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022

5

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2023 and 2022

6

Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2023 and 2022

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

Item 3

Quantitative and Qualitative Disclosures about Market Risk

40

Item 4

Controls and Procedures

40

PART II

OTHER INFORMATION

41

Item 1

Legal Proceedings

41

Item 1A

Risk Factors

42

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 6

Exhibits

45

SIGNATURES

46

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, 

December 31, 

 

    

2023

2022

 

(Unaudited)

ASSETS

 

  

 

  

Current assets

 

  

 

  

Cash and cash equivalents

$

48,845,606

$

50,711,751

Accounts receivable, net

 

38,114,847

 

27,046,182

Inventory

 

7,915,456

 

5,727,842

Prepaid expenses and other current assets

 

5,430,079

 

5,643,279

Contract assets

 

8,972,740

 

2,913,722

Current assets of discontinued operations

 

298,591

 

531,480

Total current assets

109,577,319

 

92,574,256

Property, plant and equipment, net

 

50,063,524

 

52,529,545

Construction in progress

 

6,446,049

 

3,705,681

Inventory, noncurrent

 

5,048,222

 

4,550,987

Investment in OC-BVI

 

1,388,917

 

1,545,430

Goodwill

 

10,425,013

 

10,425,013

Intangible assets, net

 

2,408,888

 

2,818,888

Operating lease right-of-use assets

1,720,637

2,058,384

Other assets

 

3,389,634

 

1,669,377

Long-term assets of discontinued operations

 

21,129,288

 

21,129,288

Total assets

$

211,597,491

$

193,006,849

LIABILITIES AND EQUITY

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable, accrued expenses and other current liabilities

$

11,436,484

$

8,438,315

Accounts payable - related parties

403,839

Accrued compensation

 

2,697,033

 

2,267,583

Dividends payable

 

1,570,319

 

1,375,403

Current maturities of operating leases

471,506

546,851

Current portion of long-term debt

114,964

114,964

Contract liabilities

 

9,528,749

 

8,803,921

Deferred revenue

391,558

315,825

Current liabilities of discontinued operations

 

259,853

 

389,884

Total current liabilities

 

26,470,466

 

22,656,585

Long-term debt, noncurrent

133,770

216,117

Deferred tax liabilities

 

466,285

 

560,306

Noncurrent operating leases

1,481,005

1,590,542

Other liabilities

 

153,000

 

219,110

Total liabilities

 

28,704,526

 

25,242,660

Commitments and contingencies

 

  

 

  

Equity

 

  

 

  

Consolidated Water Co. Ltd. stockholders' equity

 

  

 

  

Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares; issued and outstanding 45,209 and 34,383 shares, respectively

 

27,125

 

20,630

Class A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and outstanding 15,746,552 and 15,322,875 shares, respectively

 

9,447,931

 

9,193,725

Class B common stock, $0.60 par value. Authorized 145,000 shares; none issued

 

 

Additional paid-in capital

 

91,716,763

 

89,205,159

Retained earnings

 

76,807,700

 

61,247,699

Total Consolidated Water Co. Ltd. stockholders' equity

 

177,999,519

 

159,667,213

Non-controlling interests

 

4,893,446

 

8,096,976

Total equity

 

182,892,965

 

167,764,189

Total liabilities and equity

$

211,597,491

$

193,006,849

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

2023

    

2022

 

2023

    

2022

Revenue

$

49,854,075

$

25,051,705

$

126,960,328

$

65,676,737

Cost of revenue (including related party expense of $0 and $685,481 for the three months ended, and $0 and $2,165,850 for the nine months ended, September 30, 2023 and 2022, respectively)

 

33,239,647

 

18,207,932

 

84,323,269

 

44,211,703

Gross profit

 

16,614,428

 

6,843,773

 

42,637,059

 

21,465,034

General and administrative expenses (including related party expense of $0 and $24,231 for the three months ended, and $0 and $72,693 for the nine months ended, September 30, 2023 and 2022, respectively)

 

5,872,490

 

5,610,650

 

17,894,067

 

15,403,458

Gain on asset dispositions and impairments, net

 

 

3,499

 

6,916

 

21,237

Income from operations

 

10,741,938

 

1,236,622

 

24,749,908

 

6,082,813

Other income (expense):

 

  

 

  

 

  

 

  

Interest income

 

196,567

 

56,701

 

396,348

 

348,304

Interest expense

 

(34,020)

 

(2,042)

 

(108,111)

 

(8,847)

Profit-sharing income from OC-BVI

 

12,150

 

6,075

 

38,475

 

24,300

Equity in the earnings of OC-BVI

 

37,182

 

19,921

 

108,012

 

71,238

Net gain (loss) on put/call options

 

 

(247,000)

 

 

29,000

Other

 

24,187

 

(2,635)

 

87,532

 

84,734

Other income (expense), net

 

236,066

 

(168,980)

 

522,256

 

548,729

Income before income taxes

 

10,978,004

 

1,067,642

 

25,272,164

 

6,631,542

Provision for income taxes

 

1,976,453

 

26,616

 

4,366,005

 

83,041

Net income from continuing operations

 

9,001,551

 

1,041,026

 

20,906,159

 

6,548,501

Income from continuing operations attributable to non-controlling interests

 

163,428

 

217,415

 

463,775

 

691,042

Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders

 

8,838,123

 

823,611

 

20,442,384

 

5,857,459

Total loss from discontinued operations

(232,994)

(505,917)

(699,858)

(1,533,064)

Net income attributable to Consolidated Water Co. Ltd. stockholders

$

8,605,129

$

317,694

$

19,742,526

$

4,324,395

Basic earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders

 

  

 

  

 

  

 

  

Continuing operations

$

0.56

$

0.05

$

1.30

$

0.38

Discontinued operations

(0.01)

(0.03)

(0.05)

(0.10)

Basic earnings per share

$

0.55

$

0.02

$

1.25

$

0.28

Diluted earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders

 

  

 

  

 

  

 

  

Continuing operations

$

0.55

$

0.05

$

1.28

$

0.38

Discontinued operations

(0.01)

(0.03)

(0.04)

(0.10)

Diluted earnings per share

$

0.54

$

0.02

$

1.24

$

0.28

Dividends declared per common and redeemable preferred shares

$

0.095

$

0.085

$

0.265

$

0.255

Weighted average number of common shares used in the determination of:

 

  

 

  

 

  

 

  

Basic earnings per share

 

15,742,854

 

15,290,597

 

15,734,234

 

15,287,233

Diluted earnings per share

 

15,928,604

 

15,450,276

 

15,909,725

 

15,440,261

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, 2022

34,383

$

20,630

15,322,875

$

9,193,725

$

89,205,159

$

61,247,699

$

8,096,976

$

167,764,189

Issue of share capital

 

 

 

44,783

 

26,870

 

(26,870)

 

 

 

Net income

 

 

 

 

 

 

3,813,626

 

163,121

 

3,976,747

Purchase of remaining non-controlling interest in PERC

368,383

221,030

1,006,248

(3,667,305)

(2,440,027)

Dividends declared

 

 

 

 

 

 

(1,342,015)

 

 

(1,342,015)

Stock-based compensation

 

 

 

 

 

463,893

 

 

 

463,893

Balance as of March 31, 2023

 

34,383

20,630

 

15,736,041

9,441,625

90,648,430

63,719,310

4,592,792

168,422,787

Issue of share capital

 

13,309

 

7,985

 

 

 

(7,985)

 

 

 

Buyback of preferred stock

(203)

(122)

(1,708)

(1,830)

Net income

 

 

 

 

 

 

7,323,771

 

137,226

 

7,460,997

Exercise of options

599

360

6,891

7,251

Dividends declared

 

 

 

 

 

 

(1,340,972)

 

 

(1,340,972)

Stock-based compensation

 

 

 

 

 

461,695

 

 

 

461,695

Balance as of June 30, 2023

 

48,088

28,853

 

15,736,041

9,441,625

91,107,323

69,702,109

4,730,018

175,009,928

Conversion of preferred stock

(7,936)

(4,762)

7,936

4,762

Net income

 

 

 

 

 

 

8,605,129

 

163,428

 

8,768,557

Exercise of options

5,057

3,034

2,575

1,544

87,935

92,513

Dividends declared

 

 

 

 

 

 

(1,499,538)

 

 

(1,499,538)

Stock-based compensation

 

 

 

 

 

521,505

 

 

 

521,505

Balance as of September 30, 2023

 

45,209

$

27,125

 

15,746,552

$

9,447,931

$

91,716,763

$

76,807,700

$

4,893,446

$

182,892,965

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, 2021

28,635

$

17,181

15,243,693

$

9,146,216

$

87,812,432

$

60,603,056

$

8,086,538

$

165,665,423

Issue of share capital

 

 

 

41,830

 

25,098

 

(25,098)

 

 

 

Conversion of preferred stock

 

 

 

 

 

 

 

 

Buyback of preferred stock

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

1,716,815

 

241,430

 

1,958,245

Dividends declared

 

 

 

 

 

 

(1,303,014)

 

 

(1,303,014)

Stock-based compensation

 

 

 

 

 

188,985

 

 

 

188,985

Balance as of March 31, 2022

 

28,635

17,181

 

15,285,523

9,171,314

87,976,319

61,016,857

8,327,968

166,509,639

Issue of share capital

 

9,295

 

5,577

 

 

 

(5,577)

 

 

Buyback of preferred stock

Net income

 

 

 

 

 

 

2,289,886

 

232,197

2,522,083

Exercise of options

309

185

2,511

2,696

Dividends declared

 

 

 

 

 

 

(1,301,840)

 

(464,200)

(1,766,040)

Stock-based compensation

 

 

 

 

 

205,137

 

 

205,137

Balance as of June 30, 2022

 

38,239

22,943

 

15,285,523

9,171,314

88,178,390

62,004,903

8,095,965

167,473,515

Conversion of preferred stock

(6,585)

(3,951)

6,585

3,951

Net income

 

 

 

 

 

 

317,694

 

217,415

535,109

Exercise of options

2,755

1,653

22,390

24,043

Purchase of non-controlling interests in PERC

 

 

 

 

 

 

 

(638,275)

(638,275)

Dividends declared

 

 

 

 

 

 

(1,302,110)

 

(1,302,110)

Stock-based compensation

 

 

 

 

 

413,539

 

 

413,539

Balance as of September 30, 2022

 

34,409

$

20,645

 

15,292,108

$

9,175,265

$

88,614,319

$

61,020,487

$

7,675,105

$

166,505,821

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, 

 

2023

    

2022

Net cash provided by operating activities - continuing operations

$

9,245,264

$

16,926,429

Net cash used in operating activities - discontinued operations

 

(849,639)

 

(1,123,193)

Net cash provided by operating activities

8,395,625

15,803,236

Cash flows from investing activities

 

  

 

  

Purchase of certificate of deposit

(2,518,493)

Maturity of certificate of deposit

5,018,493

Additions to property, plant and equipment and construction in progress

 

(4,123,770)

 

(2,947,937)

Proceeds from asset dispositions

 

21,410

 

31,181

Purchase of remaining non-controlling interest in PERC

(2,440,027)

Net cash used in investing activities

(6,542,387)

(416,756)

Cash flows from financing activities

 

  

 

  

Dividends paid to common shareholders

 

(3,977,676)

 

(3,841,842)

Dividends paid to preferred shareholders

 

(9,933)

 

(8,154)

Dividends paid to non-controlling interests

(1,102,475)

Buyback of redeemable preferred stock

 

(1,830)

 

Proceeds received from exercise of stock options

99,764

26,739

Principal repayments on long-term debt

(82,347)

(51,564)

Net cash used in financing activities

 

(3,972,022)

 

(4,977,296)

Net increase (decrease) in cash and cash equivalents

 

(2,118,784)

 

10,409,184

Cash and cash equivalents at beginning of period

 

50,711,751

 

40,358,059

Cash and cash equivalents at beginning of period - discontinued operations

442,252

750,048

Less: cash and cash equivalents at end of period - discontinued operations

(189,613)

(432,002)

Cash and cash equivalents at end of period

$

48,845,606

$

51,085,289

Non-cash transactions:

Issuance of 13,309 and 9,295, respectively, shares of redeemable preferred stock for services rendered

$

287,922

$

133,197

Issuance of 44,783 and 41,830, respectively, shares of common stock for services rendered

$

621,811

$

521,016

Conversion (on a one-to-one basis) of 7,936 and 6,585, respectively, shares of redeemable preferred stock to common stock

4,762

3,951

Dividends declared but not paid

$

1,500,218

$

1,302,754

Issuance of 368,383 and 0, respectively, shares of common stock for the purchase of non-controlling interest in PERC

$

5,359,973

$

Transfers from inventory to property, plant and equipment and construction in progress

$

224,952

$

246,238

Transfers from construction in progress to property, plant and equipment

$

525,673

$

413,416

Right-of-use assets obtained in exchange for new operating lease liabilities

$

249,145

$

Purchase of equipment through issuance of long-term debt

$

$

68,422

Transfers from prepaid expenses to property, plant and equipment

$

255,379

$

Transfers from prepaid expenses to inventory

$

238,032

$

The accompanying notes are an integral part of these condensed consolidated financial statements.

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.

2. Accounting policies

Basis 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”), Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), Consolidated Water U.S. Holdings, Inc. (“CW-Holdings”), DesalCo Limited (“DesalCo”), Kalaeloa Desalco LLC (“Kalaeloa Desalco”), Ocean Conversion (Cayman) Limited (“OC-Cayman”), and PERC Water Corporation ("PERC"); and (ii) majority-owned subsidiaries Consolidated Water (Bahamas) Ltd. (“CW-Bahamas”), N.S.C. Agua, S.A. de C.V. (“NSC”), and Aguas de Rosarito S.A.P.I. de C.V. (“AdR”). 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.

On January 4, 2023, as a result of CW-Holdings' exercise of a call option in October 2022, CW-Holdings purchased the remaining 39% ownership interest in PERC for $2.4 million in cash and 368,383 shares of the Company’s common stock, having a value of approximately $5.36 million based upon the opening trading price of the Company’s common stock on The Nasdaq Global Market on the date of the transaction. After giving effect to this purchase, CW-Holdings owns 100% of the outstanding capital stock of PERC.

In September 2021, Kalaeloa Desalco was formed to pursue a project encompassing the design, construction, operations and maintenance of a seawater reverse osmosis desalination plant in Oahu, Hawaii. On June 2, 2023, Kalaeloa Desalco, which is jointly owned by PERC and CW-Holdings, signed a definitive agreement with the Honolulu Board of Water Supply to design, build, operate and maintain a 1.7 million gallons per day seawater reverse osmosis desalination plant in Oahu, Hawaii.

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, 2023.

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, 2022.

9

Foreign 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 $22,077 and ($8,068) for the three months ended September 30, 2023 and 2022, respectively, and $72,253 and $20,966 for the nine months ended September 30, 2023 and 2022, respectively, and are included in “Other income (expense) - Other” in the accompanying condensed consolidated statements of income.

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, 2023 and December 31, 2022 include approximately $5.1 million and $5.0 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, 2023 and December 31, 2022 were approximately $5.1 million and $5.7 million, respectively.

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 as of the date of acquisition. Goodwill and intangible assets recorded as a result of 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 for goodwill impairment testing purposes, which consist of Cayman Water, the bulk segment (which is comprised of CW-Bahamas and OC-Cayman), PERC, and the manufacturing segment (i.e., Aerex), 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 these fair values to the carrying amounts of the reporting units. To the extent the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded.

As of December 31, 2022, the Company elected to assess qualitative factors to determine whether it was necessary to perform the quantitative goodwill impairment testing conducted in prior years for all reporting units other than the manufacturing reporting unit. The Company assessed relevant events and circumstances to evaluate whether it is more likely than not that the fair values of such reporting units are less than their carrying values. The events and circumstances assessed for each unit included macroeconomic conditions, industry and market conditions, cost factors, overall financial performance, and other relevant events. Based upon this qualitative assessment the Company determined that it was more likely than not that the fair values of its Cayman Water and bulk segment reporting units exceeded their carrying values as of December 31, 2022. Based upon the Company’s negotiated, arms-length purchase of the remaining 39% equity interest in PERC from its minority shareholders for $7.8 million in January 2023, the fair value of the Company’s PERC reporting unit exceeded its carrying value by 79% as of December 31, 2022.

For the year ended December 31, 2022, the Company estimated the fair value of its manufacturing reporting unit 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 the analysis. The Company also estimated the fair value of its manufacturing reporting unit for the year ended December 31, 2022 by applying the guideline public company

10

method. The Company weighted the fair values estimated for its manufacturing reporting unit under each method and summed such weighted fair values to estimate the overall fair value for the reporting unit. The respective weightings the Company applied to each method for the year ended December 31, 2022 were 80% to the discounted cash flow method and 20% to the guideline public company method.

The fair value the Company estimated for its manufacturing reporting unit exceeded its carrying amount by 63% as of December 31, 2022.

The Company believes that the inherent uncertainties associated with the accounting estimates and assumptions it uses for its estimates of its manufacturing reporting unit’s fair value 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 its raw materials, and have also, the Company believes, adversely affected its customers. Should interest rates rise significantly in the future the Company would likely be required to increase the discount rate it uses under the discounted cash flow method to estimate the fair value of this reporting unit, and such increased discount rate in and of itself could decrease the estimated fair value of the manufacturing reporting unit under the discounted cash flow method.

As noted previously, based upon the Company’s estimation prepared as of December 31, 2022, the fair value of the Company’s manufacturing reporting unit exceeded its carrying value by 63%. However, if the Company determines in the future that Aerex’s discounted future cash inflows will be less than its present expectations, the Company may be required to record impairment losses to reduce the remaining carrying values of its manufacturing reporting unit’s goodwill and its remaining unamortized intangible assets balances, which amounted to $1,985,211 and $684,444, respectively, as of September 30, 2023. Any such impairment losses could have a material adverse impact on the Company’s consolidated results of operations.

Income taxes: The Company accounts for the income taxes arising from the operations of its United States subsidiaries under the asset and liability method. Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent any deferred tax asset may not be realized.

The Company is not presently subject to income taxes in the other countries in which it operates.

Revenue 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.

The following table presents the Company’s revenue disaggregated by revenue source.

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

2023

    

2022

 

2023

    

2022

Retail revenue

$

7,216,574

$

6,274,650

$

22,560,998

$

19,114,653

Bulk revenue

 

8,488,615

 

8,667,931

 

25,975,483

 

24,442,324

Services revenue

 

29,427,664

 

8,731,124

 

66,243,328

 

18,530,427

Manufacturing revenue

 

4,721,222

 

1,378,000

 

12,180,519

 

3,589,333

Total revenue

$

49,854,075

$

25,051,705

$

126,960,328

$

65,676,737

11

Services revenue consists of the following:

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

    

2023

    

2022

 

2023

    

2022

Construction revenue

$

24,204,446

$

4,781,613

$

52,563,822

$

5,347,023

Operations and maintenance revenue

 

5,021,081

 

3,394,142

 

12,750,902

 

10,740,623

Design and consulting revenue

 

202,137

 

555,369

 

928,604

 

2,442,781

Total services revenue

$

29,427,664

$

8,731,124

$

66,243,328

$

18,530,427

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. Customers are billed on a monthly basis based on metered consumption and bills are typically collected within 30 to 45 days after the billing date. Receivables not collected within 45 days subject the customer to disconnection from water service.

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 designs, builds, sells, operates and maintains, and provides consulting services related to 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 also 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, 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, operations and maintenance, design and consulting revenue from PERC and DesalCo and generates manufacturing revenue from Aerex.

12

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 the total estimated costs at completion to measure progress toward satisfying a contract’s performance obligations as such measure best reflects the transfer of control of the promised good to the customer. Contract costs include labor, materials, subcontractor costs and other expenses. 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 costs to be incurred 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. Due to the extended time it may take to complete many of the Company’s contracts and the scope and nature of the work required to be performed on those contracts, the estimations of total revenue and costs at completion are complicated and subject to many variables and, accordingly, are subject to changes. When adjustments in estimated total contract revenue or estimated total contract costs are required, any changes from prior estimates are recognized in the current period for the inception-to-date effect of such changes. 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.

During the three and nine months ended September 30, 2023, the Company adjusted its previous estimates of the total contract costs for two of its construction contracts. These adjustments increased the services segment’s income from operations and the Company’s consolidated net income by $1,787,275 and $1,350,108, respectively, for the three months ended September 30, 2023, and $3,549,028 and $2,680,936 for the nine months ended September 30, 2023, respectively. This adjustment increased diluted earnings per share by $0.08 and $