Consolidated Water Co. Ltd. - Quarter Report: 2021 September (Form 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, 2021

☐ 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 10, 2021, 15,210,699 shares of the registrant’s common stock, with US$0.60 par value, were outstanding.

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TABLE OF CONTENTS

	Description	Page
PART I	FINANCIAL INFORMATION	4
Item 1	Financial Statements	4

	Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020	4

	Condensed Consolidated Statements of Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	5

	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	6

	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2021 and 2020	8

	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4	Controls and Procedures	43

PART II	OTHER INFORMATION	43
Item 1	Legal Proceedings	43
Item 1A	Risk Factors	45
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6	Exhibits	49

SIGNATURES		50

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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$.

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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS


		September 30,		December 31,
		2021		2020
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	40,397,593	$	43,794,150
Certificate of deposit		2,500,000		—
Accounts receivable, net		26,381,981		21,483,976
Inventory		2,545,998		3,214,178
Prepaid expenses and other current assets		3,300,999		2,412,282
Contract assets		483,190		516,521
Current assets of discontinued operations		770,645		1,511,099
Total current assets		76,380,406		72,932,206
Property, plant and equipment, net		53,720,792		57,687,984
Construction in progress		760,079		440,384
Inventory, noncurrent		4,485,284		4,506,842
Investment in OC-BVI		1,698,069		2,092,146
Goodwill		10,425,013		13,325,013
Intangible assets, net		3,564,166		4,148,333
Operating lease right-of-use assets		2,855,346		1,329,561
Other assets		1,796,287		1,926,594
Long-term assets of discontinued operations		21,129,171		21,166,489
Total assets	$	176,814,613	$	179,555,552

LIABILITIES AND EQUITY
Current liabilities
Accounts payable, accrued expenses and other current liabilities	$	3,151,005	$	2,856,127
Accounts payable - related parties		204,285		200,558
Accrued compensation		1,488,891		1,434,106
Dividends payable		1,317,987		1,300,022
Current maturities of operating leases		563,154		455,788
Current portion of long-term debt		54,698		42,211
Contract liabilities		45,232		461,870
Current liabilities of discontinued operations		252,720		188,434
Total current liabilities		7,077,972		6,939,116
Long-term debt, noncurrent		136,231		126,338
Deferred tax liabilities		1,279,910		1,440,809
Noncurrent operating leases		2,321,551		982,076
Net liability arising from put/call options		582,000		690,000
Other liabilities		141,000		362,165
Long-term liabilities of discontinued operations		—		2,499
Total liabilities		11,538,664		10,543,003
Commitments and contingencies
Equity
Consolidated Water Co. Ltd. stockholders' equity
Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares; issued and outstanding 30,916 and 31,068 shares, respectively		18,550		18,641
Class A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and outstanding 15,210,699 and 15,143,683 shares, respectively		9,126,419		9,086,210
Class B common stock, $0.60 par value. Authorized 145,000 shares; none issued		—		—
Additional paid-in capital		87,585,156		86,893,486
Retained earnings		60,634,661		64,910,709
Total Consolidated Water Co. Ltd. stockholders' equity		157,364,786		160,909,046
Non-controlling interests		7,911,163		8,103,503
Total equity		165,275,949		169,012,549
Total liabilities and equity	$	176,814,613	$	179,555,552

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

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CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	16,413,146	$	17,666,257	$	50,217,987	$	57,479,225
Cost of revenue (including purchases from related parties of $104,813 and $361,004 for the three months ended, and $390,196 and $1,225,668 for the nine months ended September 30, 2021 and 2020, respectively)		10,722,547		11,450,621		32,336,025		35,520,125
Gross profit		5,690,599		6,215,636		17,881,962		21,959,100
General and administrative expenses (including purchases from related parties of $24,231 and $0 for the three months ended, and $52,959 and $0 for the nine months ended September 30, 2021 and 2020, respectively)		4,359,040		4,810,016		13,847,830		14,062,938
Gain (loss) on asset dispositions and impairments, net		612		(984)		(3,144,961)		4,001
Income from operations		1,332,171		1,404,636		889,171		7,900,163

Other income (expense):
Interest income		168,880		164,761		503,889		411,020
Interest expense		(2,216)		(2,069)		(7,714)		(7,413)
Profit-sharing income from OC-BVI		6,075		6,075		16,200		30,375
Equity in the earnings of OC-BVI		17,717		22,411		44,223		82,387
Net unrealized gain (loss) on put/call options		(54,000)		39,000		108,000		(42,000)
Other		15,712		15,314		35,292		59,341
Other income, net		152,168		245,492		699,890		533,710
Income before income taxes		1,484,339		1,650,128		1,589,061		8,433,873
Provision (benefit) for income taxes		(11,230)		(263,165)		(20,735)		147,186
Net income from continuing operations		1,495,569		1,913,293		1,609,796		8,286,687
Income from continuing operations attributable to non-controlling interests		131,609		101,137		457,540		642,289
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders		1,363,960		1,812,156		1,152,256		7,644,398
Total loss from discontinued operations		(1,078,367)		(377,321)		(1,542,540)		(4,448,798)
Net income (loss) attributable to Consolidated Water Co. Ltd. stockholders	$	285,593	$	1,434,835	$	(390,284)	$	3,195,600

Basic earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders
Continuing operations	$	0.09	$	0.12	$	0.07	$	0.51
Discontinued operations		(0.07)		(0.03)		(0.10)		(0.30)
Basic earnings (loss) per share	$	0.02	$	0.09	$	(0.03)	$	0.21

Diluted earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders
Continuing operations	$	0.09	$	0.12	$	0.07	$	0.50
Discontinued operations		(0.07)		(0.03)		(0.10)		(0.29)
Diluted earnings (loss) per share	$	0.02	$	0.09	$	(0.03)	$	0.21

Dividends declared per common and redeemable preferred shares	$	0.085	$	0.085	$	0.26	$	0.26

Weighted average number of common shares used in the determination of:
Basic earnings per share		15,209,432		15,120,983		15,204,220		15,116,681
Diluted earnings per share		15,351,882		15,273,529		15,345,120		15,270,494

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

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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, 2020	31,068	$	18,641	15,143,683	$	9,086,210	$	86,893,486	$	64,910,709	$	8,103,503	$	169,012,549
Issue of share capital	—		—	57,577		34,546		(34,546)		—		—		—
Conversion of preferred stock	(215)		(129)	215		129		—		—		—		—
Buyback of preferred stock	(747)		(448)	—		—		(7,065)		—		—		(7,513)
Net income	—		—	—		—		—		988,772		128,793		1,117,565
Dividends declared	—		—	—		—		—		(1,296,197)		(649,880)		(1,946,077)
Stock-based compensation	—		—	—		—		176,210		—		—		176,210
Balance as of March 31, 2021	30,106		18,064	15,201,475		9,120,885		87,028,085		64,603,284		7,582,416		168,352,734
Issue of share capital	8,632		5,179	—		—		(5,179)		—		—		—
Conversion of preferred stock	(896)		(538)	896		538		—		—		—		—
Buyback of preferred stock	(704)		(422)	—		—		(6,928)		—		—		(7,350)
Net income (loss)	—		—	—		—		—		(1,664,649)		197,138		(1,467,511)
Exercise of options	211		126	—		—		1,583		—		—		1,709
Dividends declared	—		—	—		—		—		(1,294,697)		—		(1,294,697)
Stock-based compensation	—		—	—		—		178,589		—		—		178,589
Balance as of June 30, 2021	37,349		22,409	15,202,371		9,121,423		87,196,150		61,643,938		7,779,554		165,763,474
Conversion of preferred stock	(8,328)		(4,996)	8,328		4,996		—		—		—		—
Net income	—		—	—		—		—		285,593		131,609		417,202
Exercise of options	1,895		1,137	—		—		14,213		—		—		15,350
Dividends declared	—		—	—		—		—		(1,294,870)		—		(1,294,870)
Stock-based compensation	—		—	—		—		374,793		—		—		374,793
Balance as of September 30, 2021	30,916	$	18,550	15,210,699	$	9,126,419	$	87,585,156	$	60,634,661	$	7,911,163	$	165,275,949

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	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, 2019	33,751	$	20,251	15,049,608	$	9,029,765	$	88,356,509	$	66,352,733	$	14,193,616	$	177,952,874
Issue of share capital	—		—	64,898		38,939		(38,939)		—		—		—
Net income	—		—	—		—		—		2,888,607		360,998		3,249,605
Purchase of non-controlling interests in Aerex	—		—	—		—		(2,444,047)		—		(6,055,953)		(8,500,000)
Dividends declared	—		—	—		—		—		(1,289,378)		—		(1,289,378)
Stock-based compensation	—		—	—		—		161,406		—		—		161,406
Balance as of March 31, 2020	33,751		20,251	15,114,506		9,068,704		86,034,929		67,951,962		8,498,661		171,574,507
Issue of share capital	6,123		3,674	—		—		(3,674)		—		—		—
Net income (loss)	—		—	—		—		—		(1,127,842)		180,154		(947,688)
Exercise of options	363		217	—		—		4,201		—		—		4,418
Dividends declared	—		—	—		—		—		(1,287,474)		—		(1,287,474)
Stock-based compensation	—		—	—		—		199,065		—		—		199,065
Balance as of June 30, 2020	40,237		24,142	15,114,506		9,068,704		86,234,521		65,536,646		8,678,815		169,542,828
Conversion of preferred stock	(7,543)		(4,526)	7,543		4,526		—		—		—		—
Buyback of preferred stock	(107)		(64)	—		—		(1,080)		—		—		(1,144)
Net income	—		—	—		—		—		1,434,835		101,137		1,535,972
Exercise of options	472		283	—		—		5,460		—		—		5,743
Purchase of non-controlling interests in PERC	—		—	—		—		(135,835)		—		(764,165)		(900,000)
Dividends declared	—		—	—		—		—		(1,287,526)		—		(1,287,526)
Stock-based compensation	—		—	—		—		486,991		—		—		486,991
Balance as of September 30, 2020	33,059	$	19,835	15,122,049	$	9,073,230	$	86,590,057	$	65,683,955	$	8,015,787	$	169,382,864

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

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CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Nine Months Ended September 30,
	2021		2020
Net cash provided by operating activities - continuing operations	$	5,285,457	$	11,909,538
Net cash used in operating activities - discontinued operations		(820,785)		(1,390,227)
Net cash provided by operating activities		4,464,672		10,519,311

Cash flows from investing activities
Purchase of certificate of deposit		(2,500,000)		—
Additions to property, plant and equipment and construction in progress		(973,270)		(1,571,450)
Proceeds from asset dispositions		45,560		450
Purchase of non-controlling interest in Aerex		—		(8,500,000)
Purchase of non-controlling interest in PERC		—		(900,000)
Net cash used in investing activities		(3,427,710)		(10,971,000)

Cash flows from financing activities
Dividends paid to common shareholders		(3,859,412)		(3,849,075)
Dividends paid to preferred shareholders		(8,387)		(9,180)
Dividends paid to non-controlling interests		(649,880)		—
Repurchase of redeemable preferred stock		(14,863)		(1,144)
Proceeds received from exercise of stock options		17,059		10,161
Principal repayments on long-term debt		(35,840)		(22,874)
Net cash used in financing activities		(4,551,323)		(3,872,112)
Net decrease in cash and cash equivalents		(3,514,361)		(4,323,801)
Cash and cash equivalents at beginning of period		43,794,150		42,071,083
Cash and cash equivalents at beginning of period - discontinued operations		154,130		831,586
Less: cash and cash equivalents at end of period - discontinued operations		(36,326)		(399,454)
Cash and cash equivalents at end of period	$	40,397,593	$	38,179,414


Interest paid in cash	$	7,714	$	7,413

Non-cash transactions:
Dividends declared but not paid	$	1,295,538	$	1,288,185
Transfers from (to) inventory to (from) property, plant and equipment and construction in progress	$	191,434	$	12,649
Transfers from construction in progress to property, plant and equipment	$	375,906	$	1,494,692
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,852,608	$	299,992
Purchase of equipment through issuance of long-term debt	$	58,220	$	122,292

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

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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 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”), 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 financial position, results of operations and cash flows as of and for the periods presented. The 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, 2021.

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, 2020.

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 arising from transactions and re-measurements were $15,302 and $14,751 for the three months ended September 30, 2021 and 2020, respectively, and $29,353 and $56,050 for the nine months ended September 30, 2021 and 2020, respectively, and are included in “Other income - Other” in the accompanying condensed consolidated statements of income (loss).

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Cash and cash equivalents: Cash and cash equivalents consist of demand deposits at banks and highly liquid deposits at banks with an original maturity of three months or less. Cash and cash equivalents as of September 30, 2021 and December 31, 2020 include approximately $8.5 million and $8.5 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, 2021 and December 31, 2020 were approximately $8.9 million and $15.9 million, respectively.

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 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 the retail, bulk, services, and manufacturing business segments, 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.

For the year ended December 31, 2020, 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 it reporting units for the year ended December 31, 2020 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 for the years ended December 31 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 the Company estimated for its retail, bulk, services and manufacturing reporting units exceeded their carrying amounts by 101%, 49%, 17%, and 31% respectively, as of December 31, 2020.

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tested its manufacturing reporting unit’s goodwill for possible impairment as of September 30, 2020 and 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, the Company determined that the estimated fair value of its manufacturing reporting unit exceeded its carrying value by approximately 22% as of September 30, 2020 and 31% as of December 31, 2020.

In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases 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. The updated sales estimate for this customer based on this new information is substantially below the sales previously anticipated to this customer for 2022 and subsequent years that the Company used in the discounted cash flow projections prepared for purposes of testing the manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020. 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 impacts of 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, the Company believes, 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 present weak economic conditions that the Company believes will continue into 2022, the Company updated its projections of future cash flows for its 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, the Company determined that the carrying value of its manufacturing reporting unit exceeded its fair value by $2.9 million, and the Company recorded an impairment loss to reduce its manufacturing reporting unit’s goodwill by this amount for the three months ended June 30, 2021.

If it is determined in the future that Aerex’s future cash inflows will be less than the Company’s present expectations, it may be required to record additional impairment losses to reduce the remaining carrying values as of September 30, 2021 of the manufacturing reporting unit’s goodwill of $1,985,211 and the unamortized balance of its intangible assets of $871,111 associated with the acquisition of Aerex. Any such impairment losses could have a material adverse impact on the Company’s consolidated results of operations.

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 (unaudited).


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Retail revenue	$	5,247,042	$	4,993,069	$	16,633,137	$	18,216,797
Bulk revenue		6,868,134		6,061,475		19,826,075		18,368,156
Services revenue		3,210,584		3,351,935		10,514,669		9,942,748
Manufacturing revenue		1,087,386		3,259,778		3,244,106		10,951,524
Total revenue	$	16,413,146	$	17,666,257	$	50,217,987	$	57,479,225

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 30 to 35 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

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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 distributors 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. CW-Bahamas also sold water to a private resort on Bimini through December 18, 2020, which generated revenue of approximately $46,000 and $118,000 for the three and nine months ended September 30, 2020, respectively.

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 develops, 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 water treatment-related systems and products applicable to commercial, municipal and industrial water production. Substantially all of Aerex’s customers are U.S. companies.

The Company generates services revenue from DesalCo and PERC and generates manufacturing revenue from Aerex.

The Company recognizes revenue for its construction and 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. 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 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. 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.

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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.

Revenue recognized and amounts billed on contracts in progress are summarized as follows:



	September 30, 2021		December 31, 2020
Revenue recognized to date on contracts in progress	$	6,808,572	$	17,534,449
Amounts billed to date on contracts in progress		(6,565,955)		(17,791,928)
Retainage		195,341		312,130
Net contract asset	$	437,958	$	54,651

The above net balances are reflected in the accompanying condensed consolidated balance sheets as follows:



	September 30, 2021		December 31, 2020
Contract assets	$	483,190	$	516,521
Contract liabilities		(45,232)		(461,870)
Net contract asset	$	437,958	$	54,651

As of September 30, 2021, the Company had unsatisfied or partially unsatisfied performance obligations for contracts in progress representing approximately $6.4 million in aggregate transaction price for contracts with an original expected length of greater than one year. The Company expects to earn revenue as it satisfies its performance obligations under those contracts in the amount of approximately $445,000 during the remainder of the year ending December 31, 2021 and approximately $6.0 million thereafter.

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.

Comparative amounts: Certain amounts presented in the financial statements previously issued for 2020 have been reclassified to conform to the current periods’ presentation.

3. Segment information

The Company has 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.

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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.


	Three Months Ended September 30, 2021
	Retail		Bulk		Services		Manufacturing		Total
Revenue	$	5,247,042	$	6,868,134	$	3,210,584	$	1,087,386	$	16,413,146
Cost of revenue		2,745,796		4,628,386		2,410,430		937,935		10,722,547
Gross profit		2,501,246		2,239,748		800,154		149,451		5,690,599
General and administrative expenses		3,067,696		313,420		758,540		219,384		4,359,040
Gain on asset dispositions and impairments, net		612		—		—		—		612
Income (loss) from operations	$	(565,838)	$	1,926,328	$	41,614	$	(69,933)		1,332,171
Other income, net										152,168
Income before income taxes										1,484,339
Benefit from income taxes										(11,230)
Net income from continuing operations										1,495,569
Income from continuing operations attributable to non-controlling interests										131,609
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders										1,363,960
Net loss from discontinued operations										(1,078,367)
Net income attributable to Consolidated Water Co. Ltd. stockholders									$	285,593

Depreciation and amortization expenses for the three months ended September 30, 2021 for the retail, bulk, services and manufacturing segments were $625,640, $761,429, $203,411 and $70,679, respectively.


	Three Months Ended September 30, 2020
	Retail		Bulk		Services		Manufacturing		Total
Revenue	$	4,993,069	$	6,061,475	$	3,351,935	$	3,259,778	$	17,666,257
Cost of revenue		2,586,901		4,400,717		2,513,272		1,949,731		11,450,621
Gross profit		2,406,168		1,660,758		838,663		1,310,047		6,215,636
General and administrative expenses		3,367,802		382,662		728,829		330,723		4,810,016
Loss on asset dispositions and impairments, net		—		—		(984)		—		(984)
Income (loss) from operations	$	(961,634)	$	1,278,096	$	108,850	$	979,324		1,404,636
Other income, net										245,492
Income before income taxes										1,650,128
Benefit from income taxes										(263,165)
Net income from continuing operations										1,913,293
Income attributable to non-controlling interests										101,137
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders										1,812,156
Net loss from discontinued operations										(377,321)
Net income attributable to Consolidated Water Co. Ltd. stockholders									$	1,434,835

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Depreciation and amortization expenses for the three months ended September 30, 2020 for the retail, bulk, services and manufacturing segments were $596,528, $971,914, $191,419 and $88,452, respectively.


	Nine Months Ended September 30, 2021
	Retail		Bulk		Services		Manufacturing		Total
Revenue	$	16,633,137	$	19,826,075	$	10,514,669	$	3,244,106	$	50,217,987
Cost of revenue		8,235,699		13,170,333		8,010,767		2,919,226		32,336,025
Gross profit		8,397,438		6,655,742		2,503,902		324,880		17,881,962
General and administrative expenses		9,757,179		994,779		2,152,145		943,727		13,847,830
Gain (loss) on asset dispositions and impairments, net		(246,028)		1,500		(433)		(2,900,000)		(3,144,961)
Income (loss) from operations	$	(1,605,769)	$	5,662,463	$	351,324	$	(3,518,847)		889,171
Other income, net										699,890
Income before income taxes										1,589,061
Benefit from income taxes										(20,735)
Net income from continuing operations										1,609,796
Income from continuing operations attributable to non-controlling interests										457,540
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders										1,152,256
Net loss from discontinued operations										(1,542,540)
Net loss attributable to Consolidated Water Co. Ltd. stockholders									$	(390,284)

Depreciation and amortization expenses for the nine months ended September 30, 2021 for the retail, bulk, services and manufacturing segments were $1,892,848, $2,621,481, $607,906 and $216,346, respectively.


	Nine Months Ended September 30, 2020
	Retail		Bulk		Services		Manufacturing		Total
Revenue	$	18,216,797	$	18,368,156	$	9,942,748	$	10,951,524	$	57,479,225
Cost of revenue		8,343,018		12,906,606		7,418,305		6,852,196		35,520,125
Gross profit		9,873,779		5,461,550		2,524,443		4,099,328		21,959,100
General and administrative expenses		10,008,423		935,808		2,112,869		1,005,838		14,062,938
Gain on asset dispositions and impairments, net		—		200		3,801		—		4,001
Income (loss) from operations	$	(134,644)	$	4,525,942	$	415,375	$	3,093,490		7,900,163
Other income, net										533,710
Income before income taxes										8,433,873
Provision for income taxes										147,186
Net income from continuing operations										8,286,687
Income from continuing operations attributable to non-controlling interests										642,289
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders										7,644,398
Net loss from discontinued operations										(4,448,798)
Net income attributable to Consolidated Water Co. Ltd. stockholders									$	3,195,600

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Depreciation and amortization expenses for the nine months ended September 30, 2020 for the retail, bulk, services and manufacturing segments were $1,796,588, $2,906,213, $562,756 and $296,926, respectively.


	As of September 30, 2021
	Retail		Bulk		Services		Manufacturing		Total
Accounts receivable, net	$	2,233,715	$	21,646,332	$	1,579,404	$	922,530	$	26,381,981
Inventory, current and non-current	$	2,755,862	$	3,702,618	$	—	$	572,802	$	7,031,282
Property, plant and equipment, net	$	26,467,981	$	25,185,215	$	503,704	$	1,563,892	$	53,720,792
Construction in progress	$	624,805	$	31,737	$	—	$	103,537	$	760,079
Intangibles, net	$	—	$	—	$	2,693,056	$	871,110	$	3,564,166
Goodwill	$	1,170,511	$	1,948,875	$	5,320,416	$	1,985,211	$	10,425,013
Total segment assets	$	60,254,674	$	71,640,368	$	15,535,680	$	7,484,075	$	154,914,797
Assets of discontinued operations									$	21,899,816
Total assets									$	176,814,613


	As of December 31, 2020
	Retail		Bulk		Services		Manufacturing		Total
Accounts receivable, net	$	2,444,455	$	17,022,813	$	1,420,609	$	596,099	$	21,483,976
Inventory, current and non-current	$	2,787,163	$	3,795,544	$	—	$	1,138,313	$	7,721,020
Property, plant and equipment, net	$	27,947,545	$	27,611,567	$	487,973	$	1,640,899	$	57,687,984
Construction in progress	$	305,110	$	31,737	$	—	$	103,537	$	440,384
Intangibles, net	$	—	$	—	$	3,200,555	$	947,778	$	4,148,333
Goodwill	$	1,170,511	$	1,948,875	$	5,320,416	$	4,885,211	$	13,325,013
Total segment assets	$	56,425,159	$	74,771,798	$	14,470,322	$	11,210,685	$	156,877,964
Assets of discontinued operations									$	22,677,588
Total assets									$	179,555,552

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.

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The following summarizes information related to the computation of basic and diluted EPS:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders	$	1,363,960	$	1,812,156	$	1,152,256	$	7,644,398
Less: preferred stock dividends		(2,628)		(2,810)		(8,362)		(9,099)
Net income from continuing operations available to common shares in the determination of basic earnings per common share		1,361,332		1,809,346		1,143,894		7,635,299
Total loss from discontinued operations		(1,078,367)		(377,321)		(1,542,540)		(4,448,798)
Net income (loss) available to common shares in the determination of basic earnings per common share	$	282,965	$	1,432,025	$	(398,646)	$	3,186,501

Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders		15,209,432		15,120,983		15,204,220		15,116,681
Plus:
Weighted average number of preferred shares outstanding during the period		31,861		34,191		30,701		34,355
Potential dilutive effect of unexercised options and unvested stock grants		110,589		118,355		110,199		119,458
Weighted average number of shares used for determining diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders		15,351,882		15,273,529		15,345,120		15,270,494

5. Discontinued operations - Mexico project development

In May 2010, the Company acquired, through its wholly-owned Netherlands subsidiary, CW-Cooperatief, a 50% interest in NSC, a development stage Mexican company. CW-Cooperatief thereafter purchased, through the conversion of a loan it made to NSC, additional shares that increased its ownership interest in NSC to 99.99%. NSC was formed to pursue a project (the “Project”) that originally 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 would 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 tender for the Project. The scope of the Project was defined by the State as a first phase to be operational in 2019 consisting of a 50 million gallon per day plant and an aqueduct that connected to the Mexican potable water infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million gallons per day of production capacity. A consortium (the “Consortium”) comprised of NSC, NuWater S.A.P.I. de C.V. (“NuWater”) and Suez Medio Ambiente México, S.A. de C.V. (“Suez

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MA”), a subsidiary of SUEZ International, S.A.S., 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”), a special purpose company, to complete 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 operations and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operations. NSC initially owned 99.6% of the equity of AdR. In February 2018, CW-Holdings 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 public 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 January 2025. 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, 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.

Through June 30, 2020, NSC had paid approximately $3.0 million to acquire rights of way for the aqueduct to be constructed for the Project to deliver water to the Mexico public water system.

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.

As a consequence of the termination of the APP Contract, the rights of way NSC and AdR acquired for the aqueduct no longer have any value due to the loss of their strategic importance derived from their incorporation in the Project. Consequently, the Company recorded an impairment loss of approximately ($3.0 million) for the three months ended June 30, 2020 to write off its investment in these rights of way. The Company also recorded adjustments during the three months ended June 30, 2020 of $2.6 million and $2.2 million to reduce its operating lease right-of-use assets and operating lease liabilities, respectively, due to the planned cancellation (or transfer to the State) of a long-term land lease associated with the Project.

As a result of the cancellation of the APP Contract, during the three months ended September 30, 2020, the Company discontinued all project development activities associated with the Project and engaged a real estate broker 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 incurred by the Company, have been reclassified from the services segment to discontinued operations in the accompanying condensed financial statements.

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Summarized financial information for the Mexico project development is as follows:


		September 30,		December 31,
		2021		2020
Cash	$	36,326	$	154,130
Prepaid expenses and other current assets		88,777		88,978
Value added taxes receivable (net of allowance of $967,115 and $316,217, respectively)		645,542		1,267,991
Property, plant and equipment, net		2,273		5,682
Land		21,126,898		21,126,898
Other assets		—		33,909
Total assets of discontinued operations	$	21,899,816	$	22,677,588

Total liabilities of discontinued operations	$	252,720	$	190,933


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	—	$	—	$	—	$	—
Income from operations	$	—	$	—	$	—	$	—
Net loss from discontinued operations	$	1,078,367	$	377,321	$	1,542,540	$	4,448,798
Gain on sale of discontinued operations	$	—	$	—	$	—	$	—
Depreciation expense	$	1,136	$	1,137	$	3,409	$	3,409

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, in due time and form, its 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 response from CEA or CESPT to its submission of non-recoverable expenses.

The Company, AdR and NSC 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 they may have upon termination of the APP Contract, including the reimbursement of expenses and investments.

As a Netherlands company, CW-Cooperatief, believes it 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. 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. The investment dispute remains unresolved to date. Should CW-Cooperatief elect to refer the dispute to international arbitration, CW-Cooperatief could incur legal and other expenses related to this arbitration that could be material to the Company’s consolidated results of operations.

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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.

The Company, AdR and NSC have terminated the various agreements ancillary to the Project as a result of the termination of the APP Contract.

Project Litigation

Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50% ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (“NSA”). NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (“EWG”) and the other half of its shares in NSC to an individual (the “individual shareholder”). In February 2012, CW-Cooperatief paid $300,000 to enter into an agreement (the “Option Agreement”) that provided it with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of $1.0 million along with an immediate usufruct and power of attorney to vote those shares. Such shares constituted 25% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief, the Company indirectly acquired 99.99% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that required CW-Cooperatief to transfer or otherwise cause the individual shareholder to acquire, for a total price of $1 (regardless of their par or market value), shares in NSC of an amount sufficient to maintain the individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement (causing the individual shareholder’s 25% ownership interest in NSC to be decreased); and (ii) CW-Cooperatief did not exercise its share purchase option by February 7, 2014. CW-Cooperatief exercised its option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.

In January 2018, EWG initiated an ordinary mercantile claim against the individual shareholder, NSC and CW-Cooperatief, (with AdR being named as a third party to be called to trial) before the Tenth Civil Judge in Tijuana, Baja California for Mercantile Matters (the “Tenth Civil Judge”). In the ordinary mercantile claim, EWG challenged, among other things, the transactions contemplated under the Option Agreement, and therefore, the capital investment transactions that increased the ownership interest of CW-Cooperatief in NSC to 99.99% as a consequence of the Option Agreement. EWG requested that the court, as a preliminary matter (a) suspend the effectiveness of the challenged transactions; (b) order certain public officials in Mexico to record the pendency of the lawsuit in the public records (including a special request to register a lien over the real estate owned by NSC); (c) appoint an inspector for NSC to oversee its commercial activities; and (d) order public officials in Mexico and credit institutions abroad to refrain from authorizing or executing any legal act related with the activities of the plaintiff, the co-defendants and the third party called to trial to avoid damages to third parties, including those with whom negotiations or any form of commercial or administrative activities, or activities of any other nature related with the “Rosarito” water desalination project, are being conducted. The Tenth Civil Judge granted, ex-parte, the preliminary relief sought by EWG, which resulted in the issuance of official writs to several governmental and public entities involved with the “Rosarito” water desalination project, including the registration of the pendency of the lawsuit in certain public records.

On October 16, 2018, NSC was served with the ordinary mercantile claim. On November 7, 2018, NSC filed a legal response to the claim, vigorously opposing the claims made by EWG. In addition to such legal response, NSC filed (i) a request to submit the claim to arbitration, based on certain provisions of the by-laws of NSC, (ii) an appeal remedy against the preliminary relief, and (iii) a request for the setting of a guarantee to release the preliminary relief granted in favor of EWG.

On October 1, 2020, and following an order from a Federal Judge obtained by NSC, the Tenth Civil Judge resolved to (i) move the claim of EWG to arbitration, and (ii) suspend the corresponding ordinary mercantile procedure. EWG challenged such resolution, arguing that its notification was not lawful. The Tenth Civil Judge dismissed such challenge, and thereafter EWG filed a remedy against such dismissal. NSC appeared before the court to vigorously oppose such remedy, which has been dismissed. To date, the referral to arbitration has not occurred and, as such, the procedure is currently suspended.

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Notwithstanding the resolution of the Tenth Civil Judge to move to arbitration, subparagraphs a) through d) that follow describe certain separate amparo claims, and appeal remedies arising from or relating to such ordinary mercantile claim and amparo claims, all in chronological order. Due to the current global COVID-19 pandemic, most tribunals in Mexico suspended their activities intermittently since March 2020, with certain such tribunals partially restarting on different dates and with different special rules. As such, several resolutions are pending issuance.

a) Appeal filed by NSC against the preliminary relief sought by EWG.

The appeal remedy filed by NSC on November 7, 2018, mentioned previously, suspended the proceeding (through the posting of a guarantee by NSC) and was resolved in December 2019 and communicated to EWG in January 2020. Such resolution revoked the order of the Tenth Civil Judge whereby EWG was granted the preliminary relief.

b) Amparo filed by EWG against the revocation of the preliminary relief.

In January 2020, EWG filed a new amparo claim against the resolution of the appeal remedy previously mentioned in subparagraph a). NSC has responded to this new amparo to vigorously oppose such amparo claim of EWG and to uphold the resolution of such appeal remedy. To this date, the resolution to this amparo claim has not been made public or communicated to NSC. However, from publicly available information it may be concluded that the claim has been dismissed by the amparo court, considering that public excerpts make reference to such dismissal. If such dismissal has occurred, no public information evidences that EWG has filed a remedy against such dismissal. As such, the revocation of the preliminary relief is not affected.

c) Amparo apparently filed by EWG against a resolution of the Tenth Civil Judge.

In August 2021, counsel to NSC and AdR became aware, from publicly available information of Mexican Federal courts, of an amparo claim filed by EWG, against the resolution of the Tenth Civil Judge dismissing the remedy filed by EWG against the October 1, 2021 resolution within the mentioned ordinary mercantile claim. NSC has filed before the corresponding amparo court a writ vigorously opposing this claim.

Within this amparo claim, the Third District Court in Tijuana granted a suspension in favor of EWG, merely for the effect of holding in place the referral to arbitration subject matter of the October 1, 2021 resolution mentioned above. Such suspension was conditioned on the posting of a guarantee in the amount of 50,000 Mexican pesos which, as of the date hereof, has not been posted. Regardless of the effects of the suspension and the lack of the posting of a guarantee, in September 2021, NSC filed an appeal remedy against its granting.

Recently, AdR was notified of this claim. However, considering that NSC has vigorously opposed it, and that AdR is a third party with interest, it is not necessary for AdR to appear before the court for this claim and submit arguments against EWG.

To date, CW-Cooperatief has not been notified of this amparo claim. Further, a final hearing on the main merits of the claim, as well as on the arguments filed by the parties has been deferred on several occasions. The next scheduled date for such hearing is December 15, 2021.

d) Appeal filed by NSC against the suspension granted in favor of EWG.

The appeal remedy mentioned in the second paragraph of item c) immediately above was admitted by the superior court on October 18, 2021 and is still pending to be resolved.

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Notwithstanding the resolution to move to arbitration mentioned previously, CW-Cooperatief has not been officially served with the ordinary mercantile claim, and AdR has not been notified that it has to appear for such trial. In any event, AdR is only a named third party called to trial in this claim, and no claims have been made by EWG against AdR.

The Company cannot presently determine what impact the resolution of this litigation may have on its consolidated financial condition, results of operations or cash flows.

6. Leases

The Company leases property and equipment under operating leases, primarily office and warehouse locations. 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 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.

Effective March 9, 2021, the Company entered into a new office lease for the existing office located in Coral Springs, Florida under similar terms compared to the prior lease. This new lease expires, including all renewal options, on March 8, 2031.

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Lease assets and liabilities

The following table presents the lease-related assets and liabilities and their respective classification on the condensed consolidated balance sheets:


	September 30,		December 31,
	2021		2020
ASSETS
Current
Accounts receivable, net	$	21,131	$	—
Prepaid expenses and other current assets		8,228		108,303
Current assets of discontinued operations		10,570		—
Noncurrent
Operating lease right-of-use assets		2,855,346		1,329,561
Long-term assets of discontinued operations		—		33,909
Total lease right-of-use assets	$	2,895,275	$	1,471,773

LIABILITIES
Current
Current maturities of operating leases	$	563,154	$	455,788
Current liabilities of discontinued operations		9,778		29,432
Noncurrent
Noncurrent operating leases		2,321,551		982,076
Noncurrent liabilities of discontinued operations		—		2,499
Total lease liabilities	$	2,894,483	$	1,469,795

Weighted average remaining lease term:
Operating leases		7.1 years		3.4 years
Operating leases - discontinued operations		0.4 years		1.1 years

Weighted average discount rate:
Operating leases		4.96%		4.15%
Operating leases - discontinued operations		3.48%		3.48%

The components of lease costs were as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Operating lease costs	$	165,899	$	191,507	$	518,524	$	576,971
Short-term lease costs		24,781		—		54,541		5,518
Lease costs - discontinued operations		7,684		20,048		22,571		120,753
Total lease costs	$	198,364	$	211,555	$	595,636	$	703,242

Supplemental cash flow information related to leases is as follows:


	Nine Months Ended September 30,
	2021		2020
Cash paid for amounts included in measurement of liabilities:
Operating cash outflows for operating leases	$	541,054	$	605,306
Operating cash outflows for operating leases - discontinued operations		24,007		119,480

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Future lease payments relating to the Company’s operating lease liabilities as of September 30, 2021 were as follows:


Years ending December 31,	Total
2021	$	172,762
2022		694,215
2023		663,190
2024		410,464
2025		268,896
Thereafter		1,235,418
Total future lease payments		3,444,945
Less: imputed interest		(560,240)
Total lease obligations		2,884,705
Less: current obligations		(563,154)
Noncurrent lease obligations	$	2,321,551

7. Fair value

As of September 30, 2021 and December 31, 2020, 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 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.

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value as of September 30, 2021 and December 31, 2020:


	September 30, 2021
	Level 1		Level 2		Level 3		Total
Assets:
Recurring
Certificate of deposit	$	—	$	2,500,000	$	—	$	2,500,000

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Liabilities:
Recurring
Net liability arising from put/call options	$	—	$	—	$	582,000	$	582,000


	December 31, 2020
	Level 1		Level 2		Level 3		Total
Liabilities:
Recurring
Net liability arising from put/call options	$	—	$	—	$	690,000	$	690,000

The activity for the Level 3 liability for the nine months ended September 30, 2021:


Net liability arising from put/call options
Balance as of December 31, 2020	$	690,000
Unrealized gain		(108,000)
Balance as of September 30, 2021	$	582,000

Put/call options are reported at fair value as either assets or liabilities in the condensed consolidated balance sheets. These 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 for these valuations are considered Level 3 inputs.

8. 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 have had profound adverse consequences for the economies of those countries. Tourism, a major economic driver for the Cayman Islands, has temporarily ceased due to closing of the country to tourist arrivals by air and sea travel. Tourist arrivals to The Bahamas by air and sea have declined significantly due to the pandemic and continue to be only a small fraction of pre-pandemic numbers due to travel restrictions within and outside of The Bahamas, as well the continued reluctance of people to travel internationally. 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 the Company operates, the Company has experienced, and could continue to experience, decreases in consolidated revenue, cash flows generated from operations, and overall liquidity as compared to comparable prior periods.

Furthermore, the prolonged extension of the economic downturn created by the COVID-19 pandemic could further adversely affect the markets for the Company’s products and services. Such adverse market effects could further adversely impact the Company’s expected future cash flows from its four reporting units and could require the Company 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 the Company cannot presently quantify the future financial impacts of the COVID-19 pandemic, such impacts will likely have a material adverse impact on the Company’s consolidated financial condition, results of operations, and cash flows. Given the uncertainty associated with the resolution of this pandemic, the Company cannot presently determine how long such adverse financial impacts may last.

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

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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, 2021 and 2020, the Company generated approximately 32% and 28%, respectively, of its consolidated revenue and 44% and 39%, respectively, of its consolidated gross profit from the retail water operations conducted under the 1990 license. For the nine months ended September 30, 2021 and 2020, the Company generated approximately 33% and 32%, respectively, of its consolidated revenue and 47% and 45%, 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 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 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.

CW-Bahamas

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $21.4 million as of September 30, 2021 and $16.8 million as of December 31, 2020.

From time to time (including presently), 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. As of September 30, 2021, the Company has not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC. The Bahamas government and the WSC continue to make intermittent payments on these accounts receivable, and such payments amounted to approximately $6.9 million and $15.6 million for the three and nine months ended September 30, 2021, respectively.

Presently, Moody’s Investors Service and Standard & Poor’s have assigned a credit rating to The Bahamas of Ba3 and B+, respectively.

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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) the Company may be required to cease the recognition of revenue on CW-Bahamas’ water supply agreements with the WSC; and (iii) the Company 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 the Company’s consolidated financial condition, results of operations, and cash flows.

9. Related party transactions

The Company, through PERC and the services segment, purchases engineering and technology support services from various companies with a minority shareholder who is also a minority shareholder of PERC. During the three months ended September 30, 2021 and 2020, the Company made total purchases of services from these companies of approximately $105,000 and $361,000, respectively, and approximately $390,000 and $1,226,000 during the nine months ended September 30, 2021 and 2020, respectively. These total purchases are included in the Company’s cost of revenue in the accompanying condensed consolidated statements of income (loss).

On February 1, 2021, PERC entered into a sublease agreement with a related company commencing March 14, 2021 and ending 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, 2021, the Company recognized approximately $24,000 of expense related to this lease, and approximately $53,000 during the nine months ended September 30, 2021. This lease amount 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, 2021 and December 31, 2020, was approximately $204,000 and $201,000, respectively.

10. Impact of recent accounting standards

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. The Company is currently evaluating the impact of the new guidance on the consolidated financial statements, however the adoption of this standard is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

11. Subsequent events

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.

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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 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 our 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 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.

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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 September 30, 2020 and 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 22% as of September 30, 2020 and 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 is 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. 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 impacts of 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, we believe, 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 present weak economic conditions that we believe will continue into 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.

If we determine in the future that Aerex’s 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, 2021 of our manufacturing reporting unit’s goodwill of $1,985,211 and the unamortized balance of its intangible assets of $871,111 associated with 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) for the three months ended June 30, 2020, which is reflected in our loss from discontinued operations for the nine months ended September 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

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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 September 30, 2021 Compared to Three Months Ended September 30, 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 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 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.

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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 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 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. 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. The investment dispute remains unresolved to date. Should CW-Cooperatief elect to refer the dispute to international arbitration, CW-Cooperatief could incur legal and other expenses related to this arbitration that could be material to the Company’s consolidated results of operations.

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, the impairment loss of approximately ($3.0 million) recorded during 2020 for Project assets, 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 condensed consolidated financial statements effective as of the three months ended September 30, 2020. Our net losses from discontinued operations for the three months ended September 30, 2021 and 2020 were ($1,078,367) and ($377,321), respectively. Our net loss from discontinued operations for 2021 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 a provision of $641,810 for potentially uncollectible value added taxes paid that are reimbursable/receivable from the Mexican federal government. We recorded this provision as a result of the Mexican government’s rejection of our most recent request for repayment of these value added taxes paid. We believe we are entitled to be repaid for these value added taxes and have engaged a firm to assist us in collecting these amounts from the Mexican government. However, we ultimately may not be able to obtain such payment from the Mexican government and therefore may be

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required in the future to record another provision to write off the remaining balance of these receivables, which amounted to approximately $645,000 as of September 30, 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, 2021 as compared to the three months ended September 30, 2020 relates only to our continuing operations.

Consolidated Results

The net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders for 2021 was $1,363,960 ($0.09 per share on a fully diluted basis), as compared to net income from continuing operations of $1,812,156 ($0.12 per share on a fully diluted basis) for 2020.

Revenue for 2021 decreased to $16,413,146 from $17,666,257 in 2020, reflecting a significant decline in manufacturing segment revenue and to a lesser extent, a drop in revenue for the services segment. These declines were partially offset by increases in revenue generated by our bulk and retail segments. Gross profit for 2021 was $5,690,599 (35% of total revenue) as compared to $6,215,636 (35% 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 decreased to $4,359,040 for 2021 as compared to $4,810,016 for 2020.

Other income, net, decreased to $152,168 for 2021 as compared to $245,492 for 2020 due to an unrealized loss of ($54,000) recorded for the valuation of the put/call options arising from the acquisition of a majority interest in PERC, as compared to an unrealized gain recorded on these options of $39,000 in 2020.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the three months ended September 30, 2021, 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 ($565,838) for 2021 as compared to a loss from operations of ($961,634) for 2020.

Revenue generated by our retail water operations increased to $5,247,042 in 2021 from $4,993,069 in 2020 due to a 1% increase in the volume of water sold. The sales volumes for both 2021 and 2020 are significantly below the historical volumes for the retail segment prior to 2020 due to the continuing cessation of tourism on Grand Cayman resulting from border restrictions initiated in March 2020 in response to the COVID-19 pandemic.

Retail segment gross profit increased to $2,501,246 (48% of retail revenue) for 2021 from $2,406,168 (48% of retail revenue) for 2020 as a result of the slight 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 decreased to $3,067,696 for 2021 as compared to $3,367,802 for 2020 due to reduced employee costs.

Bulk Segment:

The bulk segment contributed $1,926,328 and $1,278,096 to our income from operations for 2021 and 2020, respectively.

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Bulk segment revenue was $6,868,134 and $6,061,475 for 2021 and 2020, 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 $2,239,748 (33% of bulk revenue) and $1,660,758 (27% 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 the revenue increase and a decrease in depreciation expense for assets that became fully depreciated during the second quarter of 2021 but continue to be used in operations.

Bulk segment G&A expenses remained relatively consistent at $313,420 for 2021 as compared to $382,662 for 2020.

Services Segment:

The services segment income from operations was $41,614 and $108,850 for 2021 and 2020, respectively.

Services segment revenue decreased to $3,210,584 for 2021 from $3,351,935 for 2020 due to a decline in plant construction revenue of approximately $525,000. An increase of approximately $385,000 in revenue from operating and maintenance contracts attributable to new contracts served to partially offset the decline in plant construction revenue.

Gross profit for the services segment was $800,154 (25% of services revenue) in 2021 as compared to $838,663 (25% of services revenue) for 2020.

G&A expenses for the services segment remained consistent at $758,540 for 2021 as compared to $728,829 for 2020.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($69,933) for 2021 as compared to generating income from operations of $979,324 in 2020. Manufacturing revenue was $1,087,386 and $3,259,778 for 2021 and 2020, respectively. Manufacturing revenue decreased from 2020 to 2021 due to the loss of orders from Aerex’s former largest customer, and to date we have not been successful in replacing this lost revenue. Manufacturing revenue under certain contracts has been deferred due to significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

Manufacturing gross profit was $149,451 (14% of manufacturing revenue) and $1,310,047 (40% 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, as we have elected to continue the employment of all of our manufacturing personnel in 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment decreased to $219,384 for 2021 as compared to $330,723 for 2020.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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 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.

Our net loss from discontinued operations of ($1,542,540) for 2021 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 a provision of $650,897 for potentially uncollectible value added tax refunds that are reimbursable/receivable from the Mexican federal government. We believe we are entitled to be repaid for these value added taxes and have engaged a firm to assist us in collecting these amounts from the Mexican government. However, we ultimately may not be able to obtain such payment from the Mexican government and therefore may be required in the future to record another provision to

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write off the remaining balance of these receivables, which amounted to approximately $645,000 as of September 30, 2021.

Through the date the APP Contract was cancelled, NSC had paid approximately $3.0 million to acquire rights of way for the aqueduct to be constructed for the Project to deliver water to the Mexico public water system. As a result of the cancellation of the APP Contract, we recorded an impairment loss of approximately ($3.0 million) for the three months ended June 30, 2020 for these rights of way. Our net loss from discontinued operations of ($4,448,798) for 2020 consists of this impairment loss and the development expenses incurred for the Project.

The following discussion and analysis of our consolidated results of operations and results of operations by segment for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 relates only to our continuing operations.

Consolidated Results

Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders for 2021 was $1,152,256 ($0.07 per share on a fully diluted basis), as compared to net income from continuing operations of $7,644,398 ($0.50 per share on a fully diluted basis) for 2020.

Revenue for 2021 decreased to $50,217,987 from $57,479,225 in 2020, as the retail and manufacturing segments experienced significant revenue declines, which were not fully offset by revenue increases in the bulk and services segments. Gross profit for 2021 was $17,881,962 (36% of total revenue) as compared to $21,959,100 (38% of total revenue) for 2020. 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 remained relatively consistent at $13,847,830 for 2021 as compared to $14,062,938 for 2020.

Other income, net, increased to $699,890 for 2021 as compared to $533,710 for 2020 due to an unrealized gain of $108,000 recorded in 2021 for the valuation of the put/call options arising from the acquisition of PERC, as compared to an unrealized loss recorded on these options of ($42,000) in 2020.

The COVID-19 pandemic had a material adverse impact on our consolidated results of operations for the nine months ended September 30, 2021, 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 ($1,605,769) for 2021 as compared to a loss from operations of ($134,644) for 2020.

Revenue generated by our retail water operations decreased to $16,633,137 in 2021 from $18,216,797 in 2020 due to a 9% decrease in the volume of water sold. This sales volume decrease is due to the continuing cessation of tourism on Grand Cayman resulting from border restrictions initiated in March 2020 in response to the COVID-19 pandemic.

Retail segment gross profit decreased to $8,397,438 (50% of retail revenue) for 2021 from $9,873,779 (54% of retail revenue) for 2020. This decrease in gross profit dollars is attributable to the revenue decline. The revenue decline also resulted in lower gross profit as a percentage of revenue for 2021 due to the resulting greater relative impact of fixed production and distribution costs.

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 decreased to $9,757,179 for 2021 as compared to $10,008,423 for 2020.

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Bulk Segment:

The bulk segment contributed $5,662,463 and $4,525,942 to our income from operations for 2021 and 2020, respectively.

Bulk segment revenue was $19,826,075 and $18,368,156 for 2021 and 2020, respectively. The increase in bulk segment revenue is attributable to an increase of 3% in the volume of water sold by CW-Bahamas and 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 $6,655,742 (34% of bulk revenue) and $5,461,550 (30% 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 the increase in revenue and a decrease of approximately $476,000 in non-energy operating expenses.

Bulk segment G&A expenses remained relatively consistent at $994,779 for 2021 as compared to $935,808 for 2020.

Services Segment:

The services segment income from operations was $351,324 and $415,375 for 2021 and 2020, respectively.

Services segment revenue increased to $10,514,669 for 2021 from $9,942,748 for 2020 due to an increase of approximately $2.7 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 $2.1 million.

Gross profit for the services segment was $2,503,902 (24% of services revenue) in 2021 as compared to $2,524,443 (25% of services revenue) for 2020. The slight 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 $2,152,145 for 2021 as compared to $2,112,869 for 2020.

Manufacturing Segment:

The manufacturing segment incurred a loss from operations of ($3,518,847) for 2021 as compared to generating income from operations of $3,093,490 in 2020. The loss incurred for 2021 results from decreased revenue and an impairment loss, as discussed in paragraphs that follow.

Approximately 84% and 80% of our manufacturing segment revenue, and 86% and 89% of our manufacturing segment gross profit, for the nine months ended September 30, 2020 and the year ended December 31, 2020, respectively, 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 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 presently expected to recommence its purchases from Aerex beginning with the first quarter of 2022. 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 both the amounts it had purchased from Aerex in 2020 and prior years and the amounts we had anticipated the customer would purchase. Our 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 impacts of 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, we believe, 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 present weak economic conditions that we believe will continue into 2022, we tested the carrying value of our manufacturing reporting unit for possible impairment as of June 30, 2021. 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.

Manufacturing revenue was $3,244,106 and $10,951,524 for 2021 and 2020, respectively. Manufacturing revenue decreased from 2020 to 2021 due to the loss of orders from Aerex’s former largest customer, and to date we have not been

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successful in replacing this lost revenue. Manufacturing revenue under certain contracts has been deferred due to significant product delivery delays requested by customers as well as continuing delayed shipments of raw materials and supplies to Aerex.

Manufacturing gross profit was $324,880 (10% of manufacturing revenue) and $4,099,328 (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, as we elected to continue the employment of all of our manufacturing personnel during 2021 despite the decrease in production activity.

G&A expenses for the manufacturing segment remaining relatively consistent at $943,727 for 2021 as compared to $1,005,838 for 2020.

FINANCIAL CONDITION

The significant changes in the components of our condensed consolidated balance sheet as of September 30, 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 $4.9 million. This net increase reflects an increase in CW-Bahamas’ accounts receivable of approximately $4.7 million – see discussion at “CW-Bahamas Liquidity.”

Current inventory decreased by approximately $668,000 primarily due to a decline in orders for Aerex.

Prepaid expenses and other current assets increased by approximately $889,000 due to annual insurance premiums that were paid in June 2021.

Property, plant and equipment, net decreased by approximately $4.0 million due to scheduled depreciation of fixed assets.

Operating lease right-of-use assets increased by approximately $1.4 million, with a related increase in operating lease liabilities of approximately $1.4 million, primarily 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 $1.9 million (which includes $855,000 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 $4.5 million for the nine months ended September 30, 2021 and approximately $5.1 million for the year ended December 31, 2020.

As of September 30, 2021, we had cash and cash equivalents of $40.4 million and working capital of $69.3 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.

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 $21.4 million as of September 30, 2021 and $16.8 million as of December 31, 2020. Approximately 78% of the September 30, 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 October 31, 2021, CW-Bahamas’ accounts receivable from the WSC totaled approximately $21.3 million.

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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 September 30, 2021, we have not provided an allowance for doubtful accounts for CW-Bahamas’ accounts receivable from the WSC. The Bahamas government and the WSC continue to make intermittent payments on these accounts receivable, and such payments totaled approximately $18.0 million for the period from January 1, 2021 through October 31, 2021.

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. Presently, Moody’s Investors Service and Standard & Poor’s have assigned a credit rating to The Bahamas of Ba3 and B+, respectively. 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 Nine Months Ended September 30, 2021

Our cash and cash equivalents decreased to $40,397,593 as of September 30, 2021 from $43,794,150 as of December 31, 2020.

Cash Flows from Operating Activities

Net cash provided by our operating activities was $4,464,672. This net cash reflects the net loss incurred for the nine months ended September 30, 2021 of ($390,284) 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 $5,338,581, an impairment loss for Aerex goodwill of $2,900,000, $650,897 provision for partially uncollected value added taxes, an increase in accounts receivable of $4,921,874 (principally attributable to CW-Bahamas) and an increase in prepaid expenses and other current assets of $859,396.

Cash Flows from Investing Activities

Net cash used by our investing activities was $3,427,710. Cash used was primarily to purchase a certificate of deposit of $2.5 million and for additions to property, plant and equipment and construction in progress.

Cash Flows from Financing Activities

Net cash used by our financing activities was $4,551,323, 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, 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.

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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. 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. Recently, the Cayman Islands’ government announced that the country’s borders would be reopened on November 20, 2021. After this date, according to government sources, vaccinated visitors will be allowed into the country without the need to quarantine. However, with the recent COVID-19 outbreaks and the increasing infection rate, the Center for Disease Control and Prevention placed the Cayman Islands on its high-risk list. Consequently, it is unclear as to when the reopening of the borders will translate into increased tourism to the Cayman Islands.

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 nine months ended September 30, 2021 declined 8.5% from our retail sales volume for the nine months ended September 30, 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. However, Cayman Water’s operations could be adversely affected should a significant number of its operations personnel be required to miss work due to illness or a requirement to quarantine.

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 and the nine months ended September 30, 2021 was also approximately 1.0% less than the nine months ended September 30, 2020. 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

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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 or a requirement to quarantine.

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. Restrictions on economic activity have largely been lifted subject to businesses adhering to social distancing protocols, requiring customers to wear face masks and practicing regular sanitization. International travel to The Bahamas is permitted and individuals that wish to travel to The Bahamas must obtain a health travel visa which will be issued upon receipt of a negative COVID-19 test five days in advance of travel; the nature of the test depends on whether the individual travelling is fully vaccinated or not. Any visitor who is not fully vaccinated 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. 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. Persons entering The Bahamas via cruise ship must be fully vaccinated prior to embarkation.

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 notwithstanding the downturn in economic activity on New Providence due to preventative measures taken by the government in March 2020 and continuing thereafter in various forms. 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

Aerex presently has 13 plant employees. Should a number of these employees become ill or be required to enter quarantine because 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. 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

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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 within which it operates. Presently, the COVID-19 pandemic has not materially impeded PERC’s day-to-day operations.

Approximately 76% of PERC’s revenue of $10.2 million for the nine months ended September 30, 2021 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 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 September 30, 2021 and 2020, we generated approximately 32% and 28%, respectively, of our consolidated revenue and 44% and 39%, respectively, of our consolidated gross profit from the retail water operations conducted under the 1990 license. For the nine months ended September 30, 2021 and 2020, the Company generated approximately 33% and 32%, respectively, of its consolidated revenue and 47% and 45%, 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 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

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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 an impairment loss 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

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.

●	On July 30, 2021, we paid a dividend of $0.085 to shareholders of record on July 1, 2021.

●	On August 24, 2021, our Board declared a dividend of $0.085 payable on October 29, 2021 to shareholders of record on October 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. Therefore, the impact of inflation on

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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. Should the current inflationary trend continue, our 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, 2020 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.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

NSC and AdR

Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50% ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (“NSA”). NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (“EWG”) and the other half of its shares in NSC to an individual (the “individual shareholder”). In February 2012, CW-Cooperatief paid $300,000 to enter into an agreement (the “Option Agreement”) that provided it with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of $1.0 million along with an immediate usufruct and power of attorney to vote those shares. Such shares constituted 25% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief, we indirectly acquired 99.99% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that required CW-Cooperatief to transfer or otherwise cause the individual shareholder to acquire, for a total price of $1 (regardless of their par or market value), shares in NSC of an amount sufficient to maintain the individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement (causing the individual shareholder’s 25% ownership interest in NSC to be decreased); and (ii) CW-Cooperatief did not exercise its share purchase option by February 7, 2014. CW-Cooperatief exercised its option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.

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In January 2018, EWG initiated an ordinary mercantile claim against the individual shareholder, NSC and CW-Cooperatief, (with AdR being named as a third party to be called to trial) before the Tenth Civil Judge in Tijuana, Baja California for Mercantile Matters (the “Tenth Civil Judge”). In the ordinary mercantile claim, EWG challenged, among other things, the transactions contemplated under the Option Agreement, and therefore, the capital investment transactions that increased the ownership interest of CW-Cooperatief in NSC to 99.99% as a consequence of the Option Agreement. EWG requested that the courts, as a preliminary matter (a) suspend the effectiveness of the challenged transactions; (b) order certain public officials in Mexico to record the pendency of the lawsuit in the public records (including a special request to register a lien over the real estate owned by NSC); (c) appoint an inspector for NSC to oversee its commercial activities; and (d) order public officials in Mexico and credit institutions abroad to refrain from authorizing or executing any legal act related with the activities of the plaintiff, the co-defendants and the third party called to trial to avoid damages to third parties, including those with whom negotiations or any form of commercial or administrative activities, or activities of any other nature related with the “Rosarito” water desalination project, are being conducted. The Tenth Civil Judge granted, ex-parte, the preliminary relief sought by EWG, which resulted in the issuance of official writs to several governmental and public entities involved with the “Rosarito” water desalination project, including the registration of the pendency of the lawsuit in certain public records.

a) Appeal filed by NSC against the preliminary relief sought by EWG.

b) Amparo filed by EWG against the revocation of the preliminary relief.

c) Amparo apparently filed by EWG against a resolution of the Tenth Civil Judge.

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d) Appeal filed by NSC against the suspension granted in favor of EWG.

The appeal remedy mentioned in the second paragraph of item c) immediately above was admitted by the superior court on October 18, 2021 and is still pending to be resolved.

We cannot presently determine what impact the resolution of this litigation may ultimately have on our consolidated financial condition, results of operations or cash flows.

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, 2020 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, 2020 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, has temporarily ceased due to closing of the country to tourist arrivals by air and sea travel. Tourists arrivals to The Bahamas by air and sea have declined significantly due to the pandemic and continue to be only a small fraction of pre-pandemic numbers due to travel restrictions within and outside of The Bahamas, as well the continued

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reluctance of people to travel internationally. Overall economic activity in the United States has also declined precipitously.

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 is adversely impacting 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 a material 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.

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, results of operations, and cash flows.

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Periodically, our Bahamas subsidiary experiences substantial delays in the collection of its accounts receivable. As a result, our Bahamas subsidiary could have insufficient liquidity to continue operations, and our consolidated results of operations could be materially adversely affected.

CW-Bahamas’ accounts receivable balances (which include accrued interest) due from the WSC amounted to $21.4 million as of September 30, 2021 and $16.8 million as of December 31, 2020. Approximately 78% of the September 30, 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 October 31, 2021, CW-Bahamas’ accounts receivable from the WSC totaled approximately $21.3 million.

Presently, Moody’s Investors Service and Standard & Poor’s have assigned a credit rating to The Bahamas of Ba3 and B+, respectively.

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.

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, 2021, we generated revenue of approximately $3.0 million and $9.3 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 44% of PERC’s revenue for the nine months ended September 30, 2021 was generated under O&M contracts that expire at various dates through December 31, 2022. 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 could be adversely affected.

If Aerex’s future financial performance falls short of our most recent financial projections for this subsidiary, we may be required to record an impairment loss to reduce the carrying values of the goodwill and intangible assets of our manufacturing reporting unit.

In February 2016, we acquired a 51% ownership interest in Aerex. In connection with this acquisition, we recorded initial goodwill of $8,035,211. Aerex’s actual results of operations in the six months following our acquisition of this company fell significantly short of the projected results that were included in the overall 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 updated our projections for Aerex’s future cash flows and 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 of each

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year, 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 81% and 84% of Aerex’s revenue, and 88% and 86% of Aerex’s gross profit, for the three and nine months ended September 30, 2020, respectively, were generated from sales to one customer. 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 this 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 September 30, 2020 and 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 22% as of September 30, 2020 and 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 is also 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 impacts of 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 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, 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.

If we determine in the future that Aerex’s future cash inflows will be less than our present expectation, we may be required to record additional impairment losses to reduce the remaining carrying values as of September 30, 2021 of our manufacturing reporting unit’s goodwill of $1,985,211 and the unamortized intangible assets balances of $871,111 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, 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 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 revenue, results of operations and cash flows, and financial condition.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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In July 2021, we issued 1,895 shares of preferred stock to 12 employees for cash at a price of $8.10 per share. The issuance of the preferred stock to 10 of the employees was exempt from registration under Regulation S promulgated under the Securities Act of 1933 as amended (the “Securities Act”), because the shares were issued outside of the United States to non-U.S. persons (as defined in Regulation S). Two employees are U.S. persons and the issuance of such shares to them were exempt under Section 4(a)(2) of the Securities Act. The U.S. persons are 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 Number		Exhibit Description
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		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer
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.

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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:	/s/ Frederick W. McTaggart
	Frederick W. McTaggart
	Chief Executive Officer
	(Principal Executive Officer)

By:	/s/ David W. Sasnett
	David W. Sasnett
	Executive Vice President & Chief Financial Officer
	(Principal Financial and Accounting Officer)

Date: November 15, 2021