Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions
of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2
of the Exchange Act.
This registration statement shall become
effective upon filing with the Commission in accordance with Section 8(a) of the Securities Act of 1933, as amended, and Rules 456
and 462 promulgated thereunder.
RISK FACTORS
Investing in our ordinary shares involves
risks. Prior to making a decision about investing in our ordinary shares, you should consider carefully the factors discussed below
and the information contained in our Annual Report on Form 10-K for the year ended December 31, 2015 and subsequent interim reports.
Each of these risks, as well as other risks and uncertainties not presently known to us or that we currently deem immaterial, could
adversely affect our business, results of operations, cash flows and financial condition, and cause the value of our ordinary shares
to decline, which may result in the loss of part or all of your investment.
Our exclusive license to provide water
to retail customers in the Cayman Islands may not be renewed in the future.
In the Cayman Islands, we provide water
to retail customers under a license issued in July 1990 by the Cayman Islands government that grants our subsidiary, Cayman
Water, the exclusive right to provide water to retail customers within our licensed service area. Our service area is comprised
of an area on Grand Cayman that includes the Seven Mile Beach and West Bay areas, two of the three most populated areas in the
Cayman Islands. For the three months ended March 31, 2016 and 2015, the Company generated approximately 42 %, and 41%, respectively,
of its consolidated revenues and 56% and 57%, respectively, of its consolidated gross profits from the retail water operations
conducted pursuant to Cayman Water’s exclusive license. If we are not in default of any of its terms, the license provides
us with the right to renew the license on terms that are no less favorable than those that the government offers to any third party.
Under our license, we pay a royalty to
the government of 7.5% of our gross retail water sales revenues (excluding energy cost adjustments). The selling prices of water
sold to our customers are determined by the license and vary depending upon the type and location of the customer and the monthly
volume of water purchased. The license provides for an automatic adjustment for inflation or deflation on an annual basis, subject
to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a monthly basis. The Water Authority
Cayman (the “WAC”), on behalf of the government, reviews and confirms the calculations of the price adjustments for
inflation and electricity costs. If we want to adjust our prices for any reason other than inflation or electricity costs, we have
to request prior approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be referred
to arbitration.
This license was set to expire on July
10, 2010; however, the Cayman Islands government and we have extended the license several times in order to provide sufficient
time to negotiate the terms of a new license agreement. The most recent extension of our license expires June 30, 2016.
In February 2011, the Water (Production
and Supply) Law, 2011 and the Water Authority (Amendment) Law, 2011 (the “New Laws”) were published and enacted. Under
the New Laws, the WAC will issue any new license, and such new license could include a rate of return on invested capital model,
as discussed in the following paragraph.
Following the enactment of the New Laws,
we were advised in correspondence from the Cayman Islands government and the WAC that: (i) the WAC is the principal negotiator,
and not the Cayman Islands government, in our license negotiations, and (ii) the WAC had determined that a rate of return on invested
capital model (“RCAM”) for the retail license is in the best interest of the public and our customers. RCAM is the
rate model currently utilized in the electricity transmission and distribution license granted by the Cayman Islands government
to the Caribbean Utilities Company, Ltd. We responded to the Cayman Islands government that we disagreed with its position on these
two matters and negotiations for a new license temporarily ceased.
In July 2012, in an effort to resolve several
issues relating to our retail license renewal negotiations, we filed an Application for Leave to Apply for Judicial Review (the
“Application”) with the Grand Court of the Cayman Islands (the “Court”), stating that: (i) certain provisions
of the New Laws appear to be incompatible, (ii) the WAC’s roles as the principal license negotiator, statutory regulator
and our competitor put the WAC in a position of hopeless conflict, and (iii) the WAC’s decision to replace the rate structure
under our current exclusive license with RCAM was predetermined and unreasonable. In October 2012, we were notified that the Court
agreed to consider the issues outlined in the Application.
The hearing for this judicial review was
held on April 1, 2014. Prior to the commencement of the hearing, the parties agreed that the Court should solely be concerned with
the interpretation of the statutory provisions. As part of this agreement, the WAC agreed to consider our submissions on the RCAM
model and/or alternative models of pricing. In June 2014, the Court determined that: (i) the renewal of the license does not require
a public bidding process; and (ii) the WAC is the proper entity to negotiate with us for the renewal of the license.
Our submissions on the RCAM model and/or
alternative models of pricing were made to the WAC on June 9, 2014. We received a letter from the WAC dated September 11, 2014,
which fully rejected our submissions and stated that the WAC intend to provide us with a draft RCAM license in due course.
On November 21, 2014, we wrote to the Minister
of Works offering to recommence license negotiations on the basis of the RCAM model subject to certain conditions which are: (i)
the Government would undertake to amend the current water legislation to provide for an independent regulator and a fair and balanced
regulatory regime more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and we
would mutually appoint an independent referee and chairman of the negotiations, (iii) our new license would provide exclusivity
for the production and provision of all piped water, both potable and non-potable, within our Cayman Islands license area, (iv)
the Government would allow us to submit our counter proposal to the WAC’s June 2010 RCAM license draft, and (v) the principle
of subsidization of residential customer rates by commercial customer rates would continue under a new license. On March 23 2015,
we received a letter from the Minister of Works with the following responses to our November 21, 2014 letter: (1) that while the
Cayman government plans to create a public utilities commission, the provision of a new license will not depend upon the formation
of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell non-potable water within the area
covered by the retail license will not take place until after the draft license has proceeded through the review process of the
negotiations; (3) rather than allow us to submit a counter proposal to the WAC’s June 2010 RCAM license draft, the WAC will
draft the license with the understanding that we will be allowed to propose amendments thereto; (4) the principle of subsidization
of residential customer rates by commercial customer rates would continue under the new license; and (5) a request that we consider
eliminating our monthly minimum volume charge in the new license.
We recommenced license negotiations with
the WAC during the third quarter of 2015 based upon a draft RCAM license provided by the WAC. Such license negotiations remain
on-going. We are presently unable to determine when such negotiations will be completed or the final outcome of such negotiations.
The Cayman Islands government could ultimately
offer a third party a license to service some or all of our present service area. However, as set forth in the existing license,
“
the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant
a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence
Area without having first offered such a licence or franchise to the Company on terms no less favourable than the terms offered
to such other person or company.”
The resolution of these license negotiations
could result in a material reduction of the operating income and cash flows we have historically generated from our retail operations
and could require us to record an impairment charge to reduce the carrying value of our goodwill. Such impairment charge could
have a material adverse impact on our results of operations.
Our bulk water supply agreements with
our customers in the Cayman Islands and The Bahamas may not be renewed or may be renewed on terms less favorable to us.
All of our bulk water supply agreements
are for fixed terms, and such agreements for plants that we operate but are owned by our customers provide for our customers to
take over the operations of the plant upon expiration of the agreements.
Our bulk water supply agreements with the
WAC for their North Sound and Red Gate plants expire in April 2017 and July 2017 respectively. Our bulk water supply agreement
with the WAC for their North Side Water Works plant expires in June 2019. We generated approximately $840,000, $595,000, and $530,000
in revenues from the North Sound, Red Gate, and North Side Water Works plants, respectively, during the three months ended March
31, 2016.
The water supply agreement with the Water
and Sewerage Corporation of The Bahamas (“WSC”) for our Windsor plant was scheduled to expire with the delivery of
the total amount of water required under the agreement in July 2013, but has since been extended on a month-to-month basis. At
the request of the government of The Bahamas, we continue to maintain and operate the Windsor plant to provide the government of
The Bahamas with additional time to decide whether or not to enter into a long term water supply agreement with us for the Windsor
plant. We generated approximately $1.3 million in revenues from this plant during the three months ended March 31, 2016.
If our bulk water supply agreements are
not renewed or are renewed on terms less favorable to us, our results of operations and cash flows and financial condition will
be adversely affected and we could be required to record an impairment charge to reduce the carrying value of our goodwill. Such
impairment charge could have a material adverse impact on our results of operations.
We have purchased $20.7 million in land
and equipment and incurred development expenses totaling approximately $17.7 million for a possible project in Mexico. We expect
to expend significant additional funds in 2016 to continue to pursue this project. However, we may not be successful in completing
this project.
We own a 99.9% interest in N.S.C. Agua,
S.A. de C.V. (“NSC”), a development stage Mexico company formed to pursue a project encompassing 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 an accompanying pipeline to deliver water to the Mexican potable water system (the “Project”).
As of March 31, 2016, our consolidated balance sheet includes purchases for the Project of $20.6 million in land and $111,000 in
equipment. The project development activities we have conducted, which include conducting an equipment piloting plant and water
data collection program at the proposed feed water source, completing various engineering studies and obtaining various governmental
permits, have resulted in additional developmental expenses totaling $17.7 million from 2010 through March 31, 2016.
In August 2014, the State of Baja California
(the “State”) enacted new legislation to regulate Public-Private Association projects which involve the type of long-term
contract between a public sector authority and a private party that NSC is seeking to complete the Project. Pursuant to this new
legislation, in January 2015, NSC submitted an expression of interest for its project to the Secretary of Infrastructure and Urban
Development of the State of Baja California (“SIDUE”). SIDUE accepted NSC’s expression of interest and requested
that NSC submit a detailed proposal for the Project that complied with requirements of the new legislation. NSC submitted this
detailed proposal (the “APP Proposal”) to SIDUE in late March 2015. The new legislation required that such proposal
be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee (the “APP Committee”)
for review and authorization. If the Project is authorized the State would be required to conduct a public tender for the Project.
In response to our APP Proposal, in September
2015 NSC received a letter dated June 30, 2015 from the Director General of the Comisión Estatal de Agua de Baja California
(“CEA”), the State agency with responsibility for the Project that stated (i) the Project is in the public interest
with high social benefits and is consistent with the objectives of the State development plan and (ii) that the Project and accompanying
required public tender process should be conducted. In November 2015, the State officially commenced the tender for the Project,
the scope of which the State defined as a first phase to be operational in 2019 consisting of a 50 million gallons per day plant
and a pipeline that connects 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. The State originally set March 23, 2016 as the deadline for
tender submissions but subsequently extended such deadline to April 21, 2016.
NSC submitted its tender for the Project
on April 21, 2016. We cannot presently determine when the tender evaluation process will be completed by the State or the outcome
of such evaluation process.
Despite the expenditures we have made and
the activities we have completed to date, upon completion of the tender process the State may award the Project to a party other
than NSC, or the State may cancel the tender process. If NSC is not awarded the Project, the land we have purchased may lose its
strategic importance as the site for the Project and consequently may decline in value. If NSC is not awarded the Project, we may
ultimately be unable to sell this land for an amount equal to or in excess of its current carrying value of $20.6 million, and
any loss on sale of the land, or impairment charge we may be required to record as a result of a decrease in the fair value of
the land, could have a material adverse impact on our results of operations.
EWG Water LLC (“EWG”), a minority
shareholder in NSC, has filed a lawsuit against NSC, CW-Cooperatief, the Public Registry of Commerce of Tijuana, Baja California,
and other parties in the Civil Court located in Tecate, Baja California, Mexico.
In this lawsuit, EWG is challenging the
capital investment transactions that increased our ownership interest in NSC to 99.9%. EWG requested that the court, as a preliminary
matter: (a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency
of the lawsuit in the public records; and (c) appoint an inspector for NSC to oversee its commercial activities. The Court granted,
ex-parte, the preliminary relief sought by EWG.
Additionally, EWG is also seeking an order
directing: (i) NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii) NSC and
CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSC and CW-Cooperatief.
This litigation could adversely impact
our efforts to complete the Project.
We expect the fair value of our investment
in OC-BVI to decrease as its sole water supply contract matures. As this decrease in fair value occurs, we will be required to
record impairment losses in future periods to reduce the carrying value of our investment in OC-BVI to its decreased fair value.
We account for our investment in OC-BVI
under the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity
investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its
carrying amount may indicate a loss in the value of the investment.
As a quoted market price for OC-BVI’s
stock is not available, to test for possible impairment of our investment in OC-BVI, we estimate its fair value through the use
of the discounted cash flow method, which relies upon projections of OC-BVI’s operating results, working capital and capital
expenditures. The use of this method requires us to estimate OC-BVI’s cash flows from (i) its water supply agreement with
the BVI government for its Bar Bay plant (the “Bar Bay agreement”); and (ii) the pending amount awarded by the Eastern
Caribbean Court of Appeals for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government (see
further discussion of the Baughers Bay litigation at Item 8. - Notes to the Consolidated Financial Statements - Note 8).
We estimate the cash flows OC-BVI will
receive from its Bar Bay agreement by (i) identifying various possible future scenarios for this agreement, which include the cancellation
of the agreement after its initial seven-year term, and the exercise by the BVI government of the seven-year extension in the agreement;
(ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability to each scenario. We similarly
estimate the cash flows OC-BVI will receive from the BVI government for the amount due under the ruling by the Eastern Caribbean
Court of Appeals for the value of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities
to different valuation scenarios. The resulting probability-weighted sum represents the expected cash flows, and our best estimate
of future cash flows, to be derived by OC-BVI from its Bar Bay agreement and the pending court award.
The identification of the possible scenarios
for the Bar Bay plant agreement and the Baughers Bay plant valuation, the projections of cash flows for each scenario, and the
assignment of relative probabilities to each scenario all represent significant estimates made by us. While we use our best judgment
in identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning relative probabilities
to each scenario, these estimates are by their nature highly subjective and are also subject to material change by our management
over time based upon new information or changes in circumstances.
As of March 31, 2016, after updating our
probability-weighted estimates of OC-BVI’s future cash flows and our resulting estimate of the fair value of its investment
in OC-BVI, we determined that the carrying value of our investment in OC-BVI exceeded its fair value and recorded impairment charges
on this investment totaling $50,000. The remaining carrying value of the Company’s investment in OC-BVI of approximately
$4.6 million as of March 31, 2016 assumes that the BVI government will honor its obligations under the Bar Bay agreement and also
assumes (on a probability-weighted basis) that (i) the BVI government will exercise its option to extend the Bar Bay agreement
for seven years beyond its initial term, which expires March 4, 2017, and (ii) OC-BVI will receive the pending amount (as estimated
by the Company) awarded by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant previously transferred
by OC-BVI to the BVI government.
The remaining $4.6 million carrying value
of our investment in OC-BVI as of March 31, 2016 exceeds our underlying equity in OC-BVI’s net assets by approximately $850,000.
We account for this excess as goodwill. The BVI government is OC-BVI’s sole customer and substantially all of OC-BVI’s
revenues are generated from its Bar Bay plant. As the Bar Bay agreement matures to its March 4, 2017 expiration date, and OC-BVI
receives the pending court award amount assumed due for the value of the Baughers Bay plant, OC-BVI’s expected future cash
flows, and therefore its fair value computed under the discounted cash flow method, will decrease. Unless OC-BVI obtains an expansion
or other modification of its Bar Bay agreement that results in a significant increase in the estimated future cash flows from its
Bar Bay plant, we will be required to record additional impairment losses during 2016 to reduce the carrying value of our investment
in OC-BVI to its then current fair value. These impairment losses will, in the aggregate, at least equal the underlying $850,000
in goodwill reflected in the carrying value of our investment in OC-BVI. The losses we record for our investment in OC-BVI in the
future will exceed this $850,000 if OC-BVI ultimately ceases operations at its Bar Bay plant, as OC-BVI will be required to record
an impairment loss to reduce the carrying value of its Bar Bay plant to its then estimated fair value. OC-BVI’s aggregate
carrying value of the assets that comprise its Bar Bay plant was approximately 4.3 million as of March 31, 2016. Future impairment
losses for our investment in OC-BVI and our equity in any future operating losses incurred by OC-BVI could have a material adverse
effect on our results of operations.
We have constructed a plant in Bali,
Indonesia pursuant to the belief that the future demand for our water in this area will enable us to sell water in sufficient quantities
to generate profits from this plant. If we are unable to significantly increase the amount of water we presently sell from this
plant, we will be required to record an impairment charge to reduce the carrying value of this plant’s assets.
Through our subsidiary, CW-Bali, we have
built and presently operate a seawater reverse osmosis plant with a productive capacity of approximately 790,000 gallons per day
located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future
water shortages in this area of Bali will eventually enable us to sell all of this plant’s production. However, since its
inception, the sales volumes for this plant have not been sufficient to cover its operating costs. CW-Bali’s operating losses
were approximately ($147,000) for the three months ended March 31, 2016 and ($484,000) for the year ended December 31, 2015. As
of March 31, 2016, the capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.1 million.
If we are not able to significantly increase the revenues generated by this plant in the future, we will be required to record
an impairment charge to reduce the carrying value of CW-Bali’s plant assets to their fair value. Such an impairment charge
could have a material adverse impact on our results of operations.
We do not have voting control over our
affiliate, OC-BVI. Should our interests and the interests of OC-BVI’s other voting shareholder diverge, the operations of
OC-BVI could be adversely affected which could decrease the value of our investment in OC-BVI.
We own 43.53% of the equity and 50% of
the voting shares of OC-BVI. We and Sage, which owns the remaining 50% of the voting shares, are each entitled to appoint three
of the six directors of OC-BVI. If a tie vote of the directors occurs on any matter, the president of the Caribbean Water and Wastewater
Association, a regional trade association comprised primarily of government representatives, is entitled to appoint a temporary
director to cast the deciding vote. As a result, although we provide operating management and engineering services to OC-BVI, we
share the overall management of OC-BVI with Sage and do not fully control its operations. A divergence of our interests and the
interests of Sage could adversely affect the operations of OC-BVI and in turn decrease the value of our investment in OC-BVI, in
which case we could be required to record an impairment charge to reduce the carrying value of our investment in OC-BVI. Such an
impairment charge would reduce our earnings and could have a material adverse impact on our result of operations and financial
condition.
The profitability of our plants is dependent
upon our ability to accurately estimate the costs of their construction and operation.
The cost estimates we prepare in connection
with the construction and operation of our plants are subject to inherent uncertainties. Additionally, the terms of our supply
contracts may require us to guarantee the price of water on a per unit basis, subject to certain annual inflation and monthly energy
cost adjustments, and to assume the risk that the costs associated with producing this water may be greater than anticipated. Because
we base our contracted price of water in part on our estimation of future construction and operating costs, the profitability of
our plants is dependent on our ability to estimate these costs accurately. The cost of materials and services and the cost of the
delivery of such services may increase significantly after we submit our bid for a plant, which could cause the gross profit and
net return on investment for a plant to be less than we anticipated when the bid was made. The profit margins we initially expect
to generate from a plant could be further reduced if future operating costs for that plant exceed our estimates of such costs.
These future operating costs could be affected by a variety of factors, including lower than anticipated production efficiencies
and hydrological conditions at the plant site that differ materially from those we believe would exist at the time we submitted
our bid. Any construction and operating costs for our plants that significantly exceed our initial estimates could adversely affect
our results of operations, financial condition and cash flows.
A significant portion of our consolidated
revenues are derived from two customers. A loss of, or a less favorable relationship with, either of these customers could adversely
affect us.
Our top two bulk water customers, the WAC
and the Water and Sewerage Corporation of The Bahamas, accounted for approximately 15% and 36%, respectively, of our consolidated
revenues for the year ended December 31, 2015. If either of these customers terminate for cause or decide not to renew their contracts
with us, or renew such contracts on terms that are less favorable to us, or become unable for financial or other reasons to comply
with the terms of our contracts with them, our results of operations, cash flows and financial condition could be adversely affected.
Possible future regulatory oversight
and control could adversely impact our Belize operations.
By Statutory Instrument No. 81 of 2009,
the Minister of Public Utilities of the government of Belize published an order, the Public Utility Provider Class Declaration
Order, 2009 (the “Order”), which as of May 1, 2009 designated CW-Belize as a public utility provider under the laws
of Belize. With this designation, the Public Utilities Commission of Belize (the “PUC”) has the authority to set the
rates charged by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal complaint
from the PUC alleging that CW-Belize was operating without a license under the terms of the Water Industry Act. CW-Belize applied
for this license in December 2010. On July 29, 2011, the PUC issued the San Pedro Public Water Supply Quality and Security Complaint
Order (the “Second Order”) which among other things requires that (i) CW-Belize and its customer jointly make a submission
to the responsible Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest
reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act, (ii) CW-Belize submit
an operations manual for CW-Belize’s desalination plant to the PUC for approval, (iii) CW-Belize and its customer modify
the water supply agreement between the parties to (a) include new water quality parameters included in the Order and (b) cap the
current exclusive water supply arrangement in the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum
number of replacement seawater RO membranes in stock at all times and (v) CW-Belize take possession of and reimburse the PUC for
certain equipment which the PUC purchased from a third-party in late 2010. CW-Belize has applied for declaratory judgment and has
been granted a temporary injunction to stay the enforcement of the Second Order by the PUC until such time as the Belize courts
could hear the matter. The initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on
November 29, 2012. The ruling on this case is pending. An unfavorable ruling on the Order or the Second Order could have an adverse
impact on our results of operations, cash flows or financial condition.
Our operations are affected by tourism
and are subject to seasonal fluctuations that could affect the demand for our water.
Our operations are affected by the levels
of tourism and are subject to seasonal variations in our service areas. Demand for our water in the Cayman Islands, Belize, Bimini
and The Bahamas is affected by variations in the level of tourism and local weather, primarily rainfall. Tourism in our service
areas is affected by the economies of the tourists’ home countries, primarily the United States and Europe, terrorist activity
and perceived threats thereof, and increased costs of fuel and airfares. We normally sell more water during the first and second
quarters, when the number of tourists is greater and local rainfall is less, than in the third and fourth quarters. A downturn
in tourism or greater than expected rainfall in the locations we serve could adversely affect our revenues, cash flows and results
of operations.
We may have difficulty accomplishing
our growth strategy within and outside of our current operating areas
.
Our expansion both within our current operating
areas and into new areas involves significant risks, including, but not limited to, the following:
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regulatory risks, including government relations difficulties,
local regulations, currency controls and fluctuations in currency exchange rates;
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receiving and maintaining necessary permits, licenses
and approvals;
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political instability, reliance on local economies,
environmental problems, shortages of materials, immigration restrictions and limited skilled labor;
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risks related to development of new operations, including
inaccurate assessment of the demand for water, engineering difficulties and inability to begin operations as scheduled; and
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risks relating to greater competition in these new territories,
including the ability of our competitors to gain or retain market share by reducing prices.
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Even if we successfully expand our operations,
we may have difficulty managing our growth. We cannot assure you that any new operations within or outside of our current operating
areas will attain or maintain profitability or that the results from these new operations will not adversely impact our results
of operations, cash flows and financial condition.
Performance shortfalls under any of
our bulk supply contracts could result in penalties or cancellation of the contract.
Our bulk water supply contracts require
us to meet specified minimum quality, quantity or energy consumption guarantees. Membrane fouling or other technical problems could
occur at any of our plants, and if we are unable to meet the guarantees due to such operating issues, we could be in technical
default of the supply contract and subject to various adverse consequences, including financial penalties or cancellation of the
contract.
Our operations could be harmed by hurricanes
or tropical storms.
A hurricane or tropical storm could cause
major damage to our equipment and properties and the properties of our customers, including the large tourist properties in our
areas of operation. For example, in September 2004 Hurricane Ivan caused significant damage to our plants and our customers’
properties, which adversely affected our revenues. Any future damage could cause us to lose use of our equipment and properties
and incur additional repair costs. Damage to our customers’ properties and the adverse impact on tourism could result in
a decrease in water demand. A hurricane or tropical storm could also disrupt the delivery of equipment and supplies, including
electricity, necessary to our operations. These and other possible effects of hurricanes or tropical storms could have an adverse
impact on our results of operations, cash flows and financial condition.
Contamination of our processed water
may cause disruption in our services and adversely affect our revenues
.
Our processed water may become contaminated
by natural occurrences and by inadvertent or intentional human interference, including acts of terrorism. In the event that a portion
of our processed water is contaminated, we may have to interrupt the supply of water until we are able to install treatment equipment
or substitute the flow of water from an uncontaminated water production source. In addition, we may incur significant costs in
order to treat a contaminated source of plant feed water through expansion of our current treatment facilities, or development
of new treatment methods. An inability by us to substitute processed water from an uncontaminated water source or to adequately
treat the contaminated plant feed water in a cost-effective manner may have an adverse effect on our results of operations, cash
flows and financial condition.
Potential government decisions, actions
and regulations could negatively affect our operations.
We are subject to the local regulations
of the Cayman Islands, Belize, the British Virgin Islands, and The Bahamas, all of which are subject to change. Any government
that regulates our operations may issue legislation or adopt new regulations, including but not limited to:
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restricting foreign ownership (by us);
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providing for the expropriation of our assets by the
government;
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providing for nationalization of public utilities by
the government;
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providing for different water quality standards;
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unilaterally changing or renegotiating our licenses
and agreements;
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restricting the transfer of U.S. currency; or
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causing currency exchange fluctuations/devaluations
or making changes in tax laws.
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As new laws and regulations are issued,
we may be required to modify our operations and business strategy, which we may be unable to do in a cost-effective manner. Failure
by us to comply with applicable regulations could result in the loss of our licenses or authorizations to operate, the assessment
of penalties or fines, or otherwise may have a material adverse effect on our results of operations.
The rates we charge our retail customers
in the Cayman Islands are subject to regulation. If we are unable to obtain government approval of our requests for rate increases,
or if approved rate increases are untimely or inadequate to cover our projected expenses, our results of operations may be adversely
affected.
Under our exclusive retail license in the
Cayman Islands, with the exception of annual inflation-related and monthly energy-related adjustments, we cannot increase the base
rates we charge our retail customers without prior approval from the Cayman Islands government. However, the expenses we incur
in supplying water under this license may increase due to circumstances that were unforeseen at the time we entered into the license.
We may incur additional costs in attempting to obtain government approval of any rate increase, which may be granted on a delayed
basis, if at all. Failure to obtain timely and adequate rate increases could have an adverse effect on our results of operations,
cash flows and financial condition.
We rely on the efforts of key employees.
Our failure to retain these employees could adversely affect our results of operations.
Our success depends upon the abilities
of our executive officers. In particular, the loss of the services of Frederick W. McTaggart, our President and Chief Executive
Officer, could be detrimental to our operations and our continued success. Mr. McTaggart has an employment agreement expiring on
December 31, 2018. Each year, the term of this agreement may be extended for an additional year. However, we cannot guarantee that
Mr. McTaggart will continue to work for us during the term of his agreement or will enter into any extensions thereof.
We are exposed to credit risk through
our relationships with several customers.
We are subject to credit risk posed by
possible defaults in payment by our bulk water customers in the Cayman Islands, Belize, the British Virgin Islands and The Bahamas
and by possible defaults in payment by the WAC on their loans payable to us. Adverse economic conditions affecting, or financial
difficulties of, those parties could impair their ability to pay us or cause them to delay payment. We depend on these parties
to pay us on a timely basis. Our outstanding accounts receivable are not covered by collateral or credit insurance. Any delay or
default in payment could adversely affect our results of operations, cash flows, and financial condition.
We are exposed to the risk of variations
in currency exchange rates.
Although we report our results in United
States dollars, the majority of our revenues are earned in other currencies. Although many of these currencies have been fixed
to the United States dollar for more than 20 years, other currencies (e.g. the Mexico peso, Indonesian rupiah and the euro) are
not. We do not employ hedging strategies against the foreign currency exchange rate risk associated with conducting business in
foreign currencies while reporting in United States dollars. If any of the fixed exchange rates becomes a floating exchange rate,
or the other currencies in which we conduct business depreciate significantly against the United State dollar, our results of operations,
cash flows and financial condition could be adversely affected.
We may enter new markets in the future
in which we do not have a contractual commitment for our products or existing customers.
Our strategy contemplates potential entry
into new markets (such as Mexico, Indonesia and other countries) where we believe a demand for potable water exists beyond the
current supply of potable water in those markets. We may incur significant business development expenses in the pursuit of new
markets prior to obtaining a contract for services in these markets, and such expenses could have an adverse impact on our results
of operations and cash flows. We may decide to enter such markets by building new reverse osmosis desalination plants before we
have obtained a contract for the sale of water produced by the new plant or before we have established a customer base for the
water produced by the new plant. If after completing such plant we are unable to obtain a contract or sufficient number of customers
for the plant, we may be unable to recover the cost of our investment in the plant, which could have a material adverse effect
on our results of operations, cash flows and financial condition.
We may not pay dividends in the future.
If dividends are paid, they may be in lesser amounts than past dividends
.
Our shareholders may receive dividends
out of legally available funds if, and when, they are declared by our Board of Directors. We have paid dividends in the past, but
may cease to do so at any time. We may incur increased operating or development expenses or capital requirements or additional
indebtedness in the future that may restrict our ability to declare and pay dividends. We may also be restricted from paying dividends
in the future due to restrictions imposed by applicable corporate laws, our results of operations, cash flows and financial condition,
covenants contained in our financing agreements, and other factors considered by our Board of Directors. We may not continue to
pay dividends in the future or, if dividends are paid, they may not be in amounts similar to past dividends.
Service of process and enforcement of
legal proceedings commenced against us in the United States may be difficult to obtain.
We are incorporated under the laws of the
Cayman Islands and substantially all of our assets are located outside of the United States. In addition, 10 of our 16 directors
and executive officers reside outside the United States. As a result, it may be difficult for investors to affect service of process
within the United States upon us and such other persons, or to enforce judgments obtained against such persons in United States
courts, and bring any action, including actions predicated upon the civil liability provisions of the United States securities
laws. In addition, it may be difficult for investors to enforce, in original actions brought in courts or jurisdictions located
outside of the United States, rights predicated upon the United States securities laws.
Based on the advice of our Cayman Islands
legal counsel, we believe there is no reciprocal statutory enforcement of foreign judgments between the United States and the Cayman
Islands, and that foreign judgments originating from the United States are not directly enforceable in the Cayman Islands. A prevailing
party in a United States proceeding against us or our officers or directors would have to initiate a new proceeding in the Cayman
Islands using the United States judgment as evidence of the party’s claim. A prevailing party could rely on the summary judgment
procedures available in the Cayman Islands, subject to available defenses in the Cayman Islands courts, including, but not limited
to, the lack of competent jurisdiction in the United States courts, lack of due service of process in the United States proceeding
and the possibility that enforcement or recognition of the United States judgment would be contrary to the public policy of the
Cayman Islands.
Depending on the nature of damages awarded,
civil liabilities under the Securities Act of 1933, as amended (or the Securities Act), or the Securities Exchange Act of 1934,
as amended (or the Exchange Act), for original actions instituted outside the Cayman Islands may or may not be enforceable. For
example, a United States judgment awarding remedies unobtainable in any legal action in the courts of the Cayman Islands, such
as treble damages, would likely not be enforceable under any circumstances.
The relatively low trading volume of
our stock may adversely impact the ability to sell our shares.
During the year ended December 31, 2015
and the quarter ended March 31, 2016, the average daily trading volume of our common shares was approximately 96,000 shares and
71,000 shares, respectively, a much lower trading volume than that of many other companies listed on the NASDAQ Global Select Market.
A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market
of willing buyers and sellers of our common shares at any given time. This presence in turn depends on the individual decisions
of investors and general economic and market conditions over which we have no control. As a consequence of the limited volume of
trading in our common shares, an investor in our stock may have difficulty selling a large number of our common shares in the manner,
or at the price, that might be attainable if our common shares were more actively traded.
We are subject to anti-takeover measures
that may discourage, delay or prevent a change of control of our Company.
Classified Board of Directors
. We
have a classified Board of Directors that consists of three groups. Only one group of directors is elected each year. Our classified
Board may increase the length of time necessary for an acquirer to change the composition of a majority of directors in order to
gain control of our Board.
Option Deed
. We are party to an
Option Deed that is intended to improve the bargaining position of our Board of Directors in the event of an unsolicited offer
to acquire our outstanding stock. Under the terms of the Option Deed, a stock purchase right is attached to each of our current
or future outstanding common shares and redeemable preferred shares issued prior to the time the purchase rights become exercisable,
are redeemed or expire. The purchase rights will become exercisable only if an individual or group has acquired, or obtained the
right to acquire, or announced a tender or exchange offer that if consummated would result in such individual or group acquiring,
beneficial ownership of 20% or more of our outstanding common shares. Upon the occurrence of a triggering event, the rights will
entitle every holder of our shares, other than the acquirer, to purchase our shares or shares of our successor on terms that would
likely be economically dilutive to the acquirer. Under certain circumstances, instead of common shares, our Board of Directors
may issue cash or debt securities. Our Board of Directors, however, has the power to amend the Option Deed so that it does not
apply to a particular acquisition proposal or to redeem the rights for a nominal value before they become exercisable. These features
will likely encourage an acquirer to negotiate with our Board of Directors before commencing a tender offer or to condition a tender
offer on our Board of Directors taking action to prevent the purchase rights from becoming exercisable. The Option Deed does not
expire until July 2017, and such expiration date may be extended by our Board.
As a result of these anti-takeover measures,
we could deter efforts to make changes to, or exercise control over, current management. In addition, our shareholders may not
have an opportunity to sell their common shares to a potential acquirer at the acquirer’s offering price, which is typically
at a premium to market price.