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;
? the economic, political and social stability 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 2020 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 financial condition and results
of operations is material.
Our critical accounting estimates relate to the valuations of our (i) goodwill
and intangible assets; and (ii) long-lived assets.
Goodwill and intangible assets
Goodwill represents the excess cost over the fair value of the assets of an
acquired business. Goodwill and intangible assets acquired in a business
combination accounted for as a purchase and determined to have an indefinite
useful life are not amortized but are tested for impairment at least annually.
Intangible assets with estimable useful lives are amortized over
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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, 2020 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, 2020 by applying the guideline public company method. We
have, in years prior to 2020, also estimated the fair value of each of our
reporting units by referencing the market multiples implied by guideline merger
and acquisition transactions (the mergers and acquisition method). We considered
utilizing the mergers and acquisition method for the year ended December 31,
2020 but due to a lack of relevant meaningful mergers and acquisition activity
during the year, such method was not utilized for 2020.
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 as
of December 31, 2020 were as follows:
As of December 31, 2020
Method Retail Bulk Services Manufacturing
Discounted cash flow 80 % 80 % 80 % 80 %
Guideline public company 20 % 20 % 20 % 20 %
Mergers and acquisitions - % - % - % - %
100 % 100 % 100 % 100 %
The fair values we estimated for our retail, bulk, services and manufacturing
reporting units exceeded their carrying amounts by 101%, 49%, 17% and 31%
respectively, as of December 31, 2020.
In February 2016, we acquired a 51% ownership interest in Aerex. 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 Aerex'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 Aerex 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 Aerex 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 86% and 80% of Aerex's revenue, and 78% and 89% of Aerex's gross
profit, for the three months ended March 31, 2020 and the year ended December
31, 2020, respectively, were generated from sales to one customer. In October
2020, this customer informed Aerex that, for inventory management purposes, it
was suspending its purchases from Aerex following 2020 for a period of
approximately one year and Aerex did not generate any revenue from this customer
during the three months ended March 31, 2021. This customer has informed Aerex
that it presently expects to recommence its purchases from Aerex beginning with
the first quarter of 2022. However, we can offer no assurances that
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this customer will recommence its purchases from Aerex at that time.
Furthermore, any such future purchases (should they occur) may not generate as
much revenue and gross profit as Aerex has historically earned from this
customer. We are seeking to replace the anticipated loss in revenue and gross
profit from this customer by increasing sales of other products that we
manufacture to new and existing customers, however, we may not be able to do so.
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 assume, in part, that Aerex's major customer will 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 method. As a result of this impairment testing, we
determined that the estimated fair value of our manufacturing reporting unit
exceeded its carrying value by approximately 31% as of December 31, 2020.
However, we may be required to record an impairment loss in the future to reduce
the carrying value of our manufacturing reporting unit's goodwill should we
determine that Aerex's future net cash inflows will be less than our most
current expectations. Any such impairment loss could have a material adverse
impact on our consolidated financial condition and 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 $(3.0 million) for the three months ended June
30, 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 and 2016 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 were not recoverable.
Consequently, we recorded impairment losses of $(1.6 million) and $(2.0
million), in 2017 and 2016, respectively, to reduce the carrying values of these
assets to their fair values.
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, 2020 ("2020
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 2020
Form 10-K.
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
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
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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.
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 Newco 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
reasoning provided in the Letter for the decision to terminate the APP Contract
is that the Project (a) is not financially feasible due to increases in the
construction, operating and financing costs for the Project in addition to
negative changes in economic conditions (e.g. interest rates and currency
exchange rates); (b) is not sustainable for CEA and CESPT given its financial
unfeasibility; (c) puts pressure to increase the rates charged to customers; (d)
would force the Government of the State to cover a deficit of CEA and CESPT,
thus preventing the State Government from spending on investment programs or
social expenditures; and (e) negatively affects the general interest. 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 requires 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
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amparo claim, and such withdrawal was accepted by the federal district court in
Tijuana. To date, AdR has not received a response from CEA or CESPT to its
submission of non-recoverable expenses.
We plan to vigorously pursue all legal remedies and courses of action available
under the APP Contract and applicable law (including international treaties and
agreements) with respect to any rights we may have upon termination of the APP
Contract, including the reimbursement of expenses and investments.
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 invites Mexico to seek
a resolution of this investment dispute through consultation and negotiation,
but states 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. To date,
CW-Cooperatief has not received a response to this letter.
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, during the three months
ended September 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. Accordingly, the assets and liabilities of
CW-Cooperatief, NSC and AdR, as well as all Project development expenses and the
impairment loss these subsidiaries incurred, have been reclassified from the
services segment to discontinued operations in the accompanying condensed
consolidated financial statements as of and for the three months ended March 31,
2021 and 2020. Our net losses from discontinued operations for the three months
ended March 31, 2021 and 2020 of ($312,794) and ($316,365), respectively,
consist of legal, accounting, engineering, administrative, consulting and other
costs relating to Project development activities and, for 2021, our activities
following the cancellation of the APP Contract to pursue reimbursement from the
State of Baja California.
The following discussion and analysis of our consolidated results of operations
and results of operations by segment for the three months ended March 31, 2021
as compared to the three months ended March 31, 2020 relates only to our
continuing operations.
Consolidated Results
Net income from continuing operations attributable to Consolidated Water Co.
Ltd. stockholders for 2021 was $1,301,566 ($0.08 per share on a fully diluted
basis), as compared to net income from continuing operations of $3,204,972
($0.21 per share on a fully diluted basis) for 2020.
Total revenue for 2021 decreased to $17,103,317 from $20,725,721 in 2020, as the
retail and manufacturing segments experienced significant revenue declines.
Gross profit for 2021 was $6,126,510 (36% of total revenue) as compared to
$8,440,321 (41% of total revenue) for 2020. 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 remained
relatively consisted at $4,764,486 for 2021 as compared to $4,695,309 for 2020.
Other income, net, increased to $314,608 for 2021 as compared to $27,261 for
2020 due to an unrealized gain of $131,000 recorded for the valuation of the
put/call options arising from the acquisition of a majority interest in PERC, as
compared to an unrealized loss recorded on these options of $(161,000) in 2020.
The COVID-19 pandemic had a material adverse impact on our consolidated results
of operations for the three months ended March 31, 2021 and we believe the
COVID-19 pandemic will continue to adversely impact our results of operations
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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 ($617,699) for 2021 as
compared to generating income from operations of $896,973 for 2020.
Revenue generated by our retail water operations decreased to $5,711,305 in 2021
from $7,257,432 in 2020 due to a 20% decrease in the volume of water sold. This
sales volume decrease is due to the temporary cessation of tourism on Grand
Cayman resulting from the closing of all Cayman Islands airports and seaports in
March 2020 in response to the COVID-19 pandemic.
Retail segment gross profit decreased to $3,003,311 (53% of retail revenue) for
2021 from $4,270,812 (59% of retail revenue) for 2020 as a result of the revenue
decline.
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 remained consistent at $3,371,010
for 2021 as compared to $3,373,839 for 2020.
Bulk Segment:
The bulk segment contributed $1,714,814 and $1,583,858 to our income from
operations for 2021 and 2020, respectively.
Bulk segment revenue was $6,245,970 and $6,440,284 for 2021 and 2020,
respectively. The decrease in bulk segment revenue is attributable to a decrease
in CW-Bahamas' revenue of approximately $166,000 for 2021 due to lower energy
costs, which correspondingly decreased the energy pass-through component of
CW-Bahamas' rates.
Gross profit for our bulk segment was $2,090,817 (33% of bulk revenue) and
$1,875,704 (29% of bulk revenue) for 2021 and 2020, respectively. Gross profit
in dollars and as a percentage of revenue increased in 2021 as compared to 2020
principally due to a decrease in operating expenses (primarily repairs and
maintenance costs) for CW-Bahamas of approximately $188,000.
Bulk segment G&A expenses remained relatively consistent at $377,503 for 2021 as
compared to $292,046 for 2020.
Services Segment:
The services segment income from operations of $96,465 and $168,183 for 2021 and
2020, respectively.
Services segment revenue increased to $3,540,846 for 2021 from $3,114,813 for
2020 due to an increase of approximately $1.3 million in revenue from operating
and maintenance contracts attributable to new contracts, which served to more
than offset a decline in plant construction revenue of approximately $913,000.
Gross profit for the services segment was $818,918 (23% of services revenue) in
2021 as compared to $841,293 (27% of services revenue) for 2020. The decrease in
gross profit as a percentage of revenue reflects a shift in the contract mix.
G&A expenses for the services segment remained consistent at $722,020 for 2021
as compared to $672,690 for 2020.
Manufacturing Segment:
The manufacturing segment incurred a loss from operations of ($80,489) for 2021
as compared to generating income from operations of $1,095,778 in 2020.
Manufacturing revenue was $1,605,196 and $3,913,192 for 2021 and 2020,
respectively. Manufacturing revenue decreased from 2020 to 2021 due to the loss
of orders from Aerex's former largest customer.
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Manufacturing gross profit was $213,464 (13% of manufacturing revenue) and
$1,452,512 (37% of manufacturing revenue) for 2021 and 2020, respectively. The
decrease in manufacturing gross profit in dollars reflects the decrease in
revenue. Gross profit as a percentage of revenue declined due to the greater
impact of fixed factory overhead on this measure resulting from the revenue
decrease.
G&A expenses for the manufacturing segment dropped to $293,953 for 2021 as
compared to $356,734 for 2020.
Approximately 86% and 80% of Aerex's revenue, and 78% and 89% of Aerex's gross
profit, for the three months ended March 31, 2020 and the year ended December
31, 2020, respectively, were generated from sales to one customer. In October
2020, this customer informed Aerex that, for inventory management purposes, it
was suspending its purchases from Aerex following 2020 for a period of
approximately one year and Aerex did not generate any revenue from this customer
during the three months ended March 31, 2021. This customer has informed Aerex
that it presently expects to recommence its purchases from Aerex beginning with
the first quarter of 2022. However, we can offer no assurances that this
customer will recommence its purchases from Aerex at that time. Furthermore, any
such future purchases (should they occur) may not generate as much revenue and
gross profit as Aerex has historically earned from this customer. We are seeking
to replace the anticipated loss in revenue and gross profit from this customer
by increasing sales of other products that we manufacture to new and existing
customers, however, we may not be able to do so. Consequently, our manufacturing
segment revenue and gross profit for 2021 may decline as compared to the two
prior years.
FINANCIAL CONDITION
The significant changes in the components of our condensed consolidated balance
sheet as of March 31, 2021 as compared to December 31, 2020 (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 increased by approximately $3.2 million. This net increase
reflects an increase in CW-Bahamas' accounts receivable of approximately $2.7
million - see discussion at "CW-Bahamas Liquidity."
Current inventory decreased by $894,089 primarily due to a decline in orders for
Aerex.
Property, plant and equipment, net decreased by $1.6 million due to scheduled
depreciation of fixed assets.
Operating lease right-of -use assets increased by approximately $1.6 million,
with a related increase in operating lease liabilities of approximately $1.5
million, due to a new office lease for Aquilex that began in March 2021.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
Our projected liquidity requirements for the balance of 2021 include capital
expenditures for our existing operations of approximately $6.0 million, which
includes $3.9 million for the replacement of the 26-year old West Bay seawater
desalination plant in Grand Cayman and approximately $1.3 million for dividends
payable. Our liquidity requirements may also include future quarterly dividends
if such dividends are declared by our Board. Our dividend payments amounted to
approximately $1.9 million for the three months ended March 31, 2021 and
approximately $5.1 million for the year ended December 31, 2020.
As of March 31, 2021, we had cash and cash equivalents of $42.8 million and
working capital of $67.4 million. With the possible exception of the liquidity
matter relating to CW-Bahamas that is discussed in the paragraphs that follow,
we are not presently aware of anything that would lead us to believe that we
will not have sufficient liquidity to meet our needs.
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CW-Bahamas Liquidity
CW-Bahamas' accounts receivable balances (which include accrued interest) due
from the Water and Sewerage Corporation of The Bahamas ("WSC") amounted to $19.5
million as of March 31, 2021 and $16.8 million as of December 31, 2020.
Approximately 78% of the March 31, 2021 accounts receivable balance was
delinquent as of that date. The delay in collecting these accounts receivable
has adversely impacted the liquidity of this subsidiary. As of April 30, 2021,
CW-Bahamas' accounts receivable from the WSC totaled an all-time high of
approximately $21.7 million
From time to time (including presently), 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. As of March 31, 2021,
we have not provided an allowance for doubtful accounts for CW-Bahamas' accounts
receivable from the WSC.
We believe the delays we have experienced in collecting CW-Bahamas' receivables
have been extended by the severe adverse impact of the COVID-19 pandemic on The
Bahamas government's revenue sources. Based upon our discussions and collection
history with The Bahamas government, we believe that our accounts receivable
from the WSC are fully collectible.
If CW-Bahamas continues to be unable to collect a significant portion of its
delinquent accounts receivable, one or more of the following events may occur:
(i) CW-Bahamas may not have sufficient liquidity to meet its obligations;
(ii) we may be required to cease the recognition of revenue on CW-Bahamas' water
supply agreements with the WSC; and (iii) we may be required to provide an
allowance for doubtful accounts for CW-Bahamas' accounts receivable. Any of
these events could have a material adverse impact on our consolidated financial
condition, results of operations, and cash flows.
Discussion of Cash Flows for the Three Months Ended March 31, 2021
Our cash and cash equivalents decreased to $42,782,527 as of March 31, 2021 from
$43,794,150 as of December 31, 2020.
Cash Flows from Operating Activities
Net cash provided by our operating activities from continuing operations was
$1,466,141. This net cash reflects net income generated for the three months
ended March 31, 2021 of $1,117,565 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 $1,864,043, a loss from discontinued operations
of $312,794, an increase in accounts receivable of $3,244,456 and an decrease in
current inventory of $818,656.
Cash Flows from Investing Activities
Net cash used by our investing activities was $251,303 primarily from additions
to property, plant and equipment and construction in progress.
Cash Flows from Financing Activities
Net cash used by our financing activities was $1,959,392, almost all of which
related to the payment of dividends.
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,
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the COVID-19 pandemic has had, and will continue to have, a material 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, as the
worldwide impact of COVID-19 continues to develop and expand, 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 Cayman Islands sea ports 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. No
date has yet been set for the planned reopening of the Cayman Islands to
tourists.
As a result of these measures taken by the Cayman Islands government, tourism in
the Cayman Islands has temporarily ceased. The preventative measures taken by
the Cayman Islands government in response to the COVID-19 pandemic commenced in
the latter half of March 2020. Consequently, our retail sales volume for the
year ended December 31, 2020 declined by approximately 13% from the year ended
December 31, 2019 and our retail sales volume for the first quarter of 2021
declined 20% from our retail sales volume for the first quarter of 2020. We
expect that our retail segment revenue and cash flows will continue to be
materially 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 the majority 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.
The amount of water provided by OC-Cayman to the WAC for the year ended December
31, 2020 was approximately 1% less than that provided for the year ended
December 31, 2019. We cannot presently determine to what extent OC-Cayman's
future revenue will be impacted by the COVID-19 pandemic.
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.
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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. 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. In
May 2020, the Bahamian government relaxed some of the shelter-in-place
regulations and in July 2020, the government of The Bahamas enacted a limited
reopening of The Bahamas to air travel. However, increased travel restrictions
were reimposed shortly thereafter due to an increase in COVID-19 cases. As of
November 2020, shelter-in-place regulations were loosened and commercial and
retail operations were permitted to open with limited capacity; additional
economic activity (including the operation of restaurants and bars with outdoor
and limited indoor seating) has since been permitted. Conditions for travel to
The Bahamas have also been loosened and individuals that wish to travel to The
Bahamas must obtain a health travel visa which will be issued upon receipt of a
negative RT-PCR COVID-19 test five days in advance of travel; they must submit
to a mandatory COVID-19 rapid antigen test five days after arrival in The
Bahamas or upon exhibiting symptoms of COVID-19 while in The Bahamas. It is
anticipated that a limited number of cruise ship departures from the Port of
Nassau may commence in June 2021, but a date for cruise ship arrivals has not
yet been set.
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 a fixed monthly amount, an amount each month
that is based upon the amount of water supplied during the month, and
pass-through energy charges, therefore CW-Bahamas' revenue is impacted by
changes in water demand and energy prices. To date, the volume of water
CW-Bahamas sells to the WSC has not been adversely impacted by the COVID-19
pandemic despite the downturn in economic activity on New Providence that began
in April 2020 stemming from the preventative measures taken by the government in
March 2020. In addition, the adverse impact of the COVID-19 pandemic on The
Bahamas government's revenue sources may further delay the collection of
CW-Bahamas' delinquent accounts receivable from the WSC.
CW-Bahamas' operations have been designated as essential services by the
government of The Bahamas. Presently, CW-Bahamas' 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 agreements with the WSC.
We believe CW-Bahamas has sufficient spare parts and consumables inventories to
continue normal operations.
Aerex
To date, the COVID-19 pandemic has not materially impeded Aerex's day-to-day
operations.
Aerex presently has 14 plant employees. Should a number of these employees
become ill or be required to enter quarantine as a result of COVID-19, 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. Should these economic conditions and issues continue,
Aerex could have difficulty completing its orders from its customers, which
could have a material adverse impact on our consolidated revenue, results of
operations and cash flows, and could require us to record an impairment loss to
reduce the carrying value of the goodwill recorded for our manufacturing
segment. Any such impairment loss could have a material adverse impact on our
consolidated financial condition and results of operations.
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PERC
PERC's operations are considered essential services by the states within which
it operates. Presently, the COVID-19 pandemic has not materially impeded PERC's
day-to-day operations.
Approximately 70% of PERC's revenue of $3.4 million for the three months ended
March 31, 2021 was generated in California under contracts with government
entities. The State of California has publicly acknowledged its on-going
financial difficulties as a result of 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 or be required to enter quarantine 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 March 31, 2021 and 2020, we generated approximately 33%
and 35%, respectively, of our consolidated revenue and 49% and 51%,
respectively, of our 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 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
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record an 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 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:
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic
848), which provides optional expedients and exceptions to the current guidance
on contract modifications and hedging relationships to ease the financial
reporting burdens of the expected market transition from LIBOR and other
interbank offered rates to alternative reference rates. The guidance was
effective upon issuance and may be applied prospectively to contract
modifications made and hedging relationships entered into or evaluated on or
before December 31, 2022. We are currently evaluating the impact of the new
guidance on our consolidated financial statements, however the adoption of this
standard is not expected to have a material impact on our financial position,
results of operations or cash flows.
Dividends
? On February 1, 2021, we paid a dividend of $0.085 to shareholders of record on
January 4, 2021.
? On April 30, 2021, we paid a dividend of $0.085 to shareholders of record on
April 1, 2021.
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 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. We, therefore, believe that the
impact of inflation on our gross profit, measured in consistent dollars, should
not be material. However, significant increases in items such as fuel and energy
costs could create additional credit risks for us, as our customers' ability to
pay our invoices could be adversely affected by such increases.
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