The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal activity
Consolidated Water Co. Ltd., and its subsidiaries
(collectively, the “Company”) use reverse osmosis technology to produce potable water from seawater. The Company processes
and supplies water and provides water-related products and services to its customers in the Cayman Islands, Belize, The Bahamas,
the British Virgin Islands, the United States and Indonesia. The Company sells water to a variety of customers, including public
utilities, commercial and tourist properties, residential properties and government facilities. The base price of water supplied
by the Company, and adjustments thereto, are determined by the terms of a retail license and bulk water supply contracts which
provide for adjustments based upon the movement in the government price indices specified in the license and contracts as well
as monthly adjustments for changes in the cost of energy. The Company also manufactures and services a wide range of products
and provides design, engineering, management, operating and other services applicable to desalination, commercial and municipal
water production, supply and treatment, and industrial water and wastewater treatment.
2. Accounting policies
Basis of preparation:
The consolidated
financial statements presented are prepared in accordance with the accounting principles generally accepted in the United States
of America.
Use of estimates:
The preparation
of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Significant items subject to estimates and assumptions include the carrying value of
property, plant and equipment, intangible assets, goodwill and the fair value of the Company’s investment in its affiliate.
Actual results could differ significantly from such estimates.
Basis of consolidation:
The accompanying
consolidated financial statements include the accounts of the Company’s (i) wholly-owned subsidiaries, Aquilex, Inc., Cayman
Water Company Limited (“Cayman Water”), Consolidated Water (Belize) Limited (“CW-Belize”), 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”), Aerex Industries, Inc. (“Aerex”), Consolidated Water (Asia) Pte. Limited, PT Consolidated
Water Bali (“CW-Bali”), N.S.C. Agua, S.A. de C.V. (“NSC”) and Aguas de Rosarito S.A.P.I. de C.V. (“AdR”).
The Company’s investment in its affiliate Ocean Conversion (BVI) Ltd. (“OC-BVI”) is accounted for using the equity
method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.
Foreign currency:
The Company’s
reporting currency is the United States dollar (“US$”). The functional currency of the Company and its foreign operating
subsidiaries (other than CW-Bali, NSC and CW-Cooperatief) is the currency for each respective country. As discussed in Note 18,
the Company changed the functional currency of CW-Bali from the Indonesian rupiah to the US$ as of October 1, 2016. The functional
currency for NSC and CW-Cooperatief is the US$. The exchange rates for the Cayman Islands dollar, the Belize dollar and the Bahamian
dollar are fixed to the US$. CW-Cooperatief conducts business in US$ and euros, CW-Bali conducts business in US$ and Indonesian
rupiahs, and NSC conducts business in US$ and Mexican pesos. The exchange rates for conversion of euros, rupiahs and Mexican pesos
into US$ vary based upon market conditions. Net foreign currency gains (losses) arising from transactions and re-measurements were
$50,299, ($485,291) and ($111,409) for the years ended December 31, 2016, 2015 and 2014, respectively, and are included in “Other
income (expense) - Other” in the accompanying consolidated statements of income.
Comprehensive income:
Comprehensive
income (loss) is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive
income (loss) is the total of net income and other comprehensive income (loss) which, for the Company, is comprised entirely of
foreign currency translation adjustments related to CW-Bali.
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 December 31, 2016 and December 31, 2015 include $1.0 million and $13.6 million,
respectively, of certificates of deposits with an original maturity of three months or less.
As of December 31, 2016, the Company had
deposits in U.S. banks in excess of federally insured limits of approximately $2.0 million. As of December 31, 2016, the Company
held cash in foreign bank accounts of approximately $40.0 million.
Transfers from the Company’s Bahamas
and Belize bank accounts to Company bank accounts in other countries require the approval of the Central Bank of the Bahamas and
Belize, respectively. As of December 31, 2016, the equivalent United States dollar cash balances for deposits held in the Bahamas
and Belize were approximately $5.9 million and $4.9 million, respectively.
Accounts receivable and allowance for doubtful
accounts:
Accounts receivable are recorded at invoiced amounts based on meter readings or minimum take-or-pay amounts per
contractual agreements. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit
losses in the Company’s existing accounts receivable balance. The Company determines the allowance for doubtful accounts
based on historical write-off experience and monthly review of delinquent accounts. Past due balances are reviewed individually
for collectability and disconnection. Account balances are charged off against the allowance for doubtful accounts after all means
of collection have been exhausted and the potential for recovery is considered by management to be remote.
Inventory:
Inventory primarily includes
consumables stock and spare parts stock that are valued at the lower of cost or net realizable value with cost determined on the
first-in, first-out basis. Inventory also includes potable water held in the Company’s reservoirs. The carrying amount of
the water inventory is the lower of the average cost of producing water during the year or its net realizable value.
Loans receivable:
Loans receivable
relate to notes receivable from customers arising from the construction and sale of water desalination plants. The allowance for
loan losses, if any, is the Company’s best estimate of the amount of probable credit losses in the Company’s existing
loans and is determined on an individual loan basis.
Property, plant and equipment:
Property,
plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using a straight line method with
an allowance for estimated residual values. Rates are determined based on the estimated useful lives of the assets as follows:
Buildings
|
|
5 to 40 years
|
Plant and equipment
|
|
4 to 40 years
|
Distribution system
|
|
3 to 40 years
|
Office furniture, fixtures and equipment
|
|
3 to 10 years
|
Vehicles
|
|
3 to 10 years
|
Leasehold improvements
|
|
Shorter of 5 years or lease term
|
Lab equipment
|
|
5 to 10 years
|
Additions to property, plant and equipment
are comprised of the cost of the contracted services, direct labor and materials. Assets under construction are recorded as additions
to property, plant and equipment upon completion of the projects. Depreciation commences in the month the asset is placed in service.
Long-lived assets:
Long-lived assets
are reviewed 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, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows
and measures the impairment loss based on the difference between the carrying amount and estimated fair value.
Construction in progress:
Interest
costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a
substantial period of time to be ready for their intended use, are added to the cost of those assets until such time as the assets
are substantially ready for use. No interest was capitalized during the years ended December 31, 2016, 2015 or 2014.
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 and bulk business segments and Aerex, and determines
the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible
assets, to those reporting units. The Company determines the fair value of each reporting unit and compares 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, the Company is required to perform the second step of the impairment test, as this is an indication that the reporting
unit’s goodwill may be impaired. In this step, the Company compares the implied fair value of the reporting unit’s
goodwill with the carrying amount of the reporting unit’s goodwill. The implied fair value of goodwill is determined by
allocating the fair value of the reporting unit to all the assets (recognized and unrecognized) and liabilities of the reporting
unit in a manner similar to a purchase price allocation. The residual fair value after this allocation is the implied fair value
of the reporting unit’s goodwill. If the implied fair value is less than its carrying amount, the impairment loss is recorded.
For the years ended December 31, 2016 and
2015, the Company estimated the fair value of its reporting units by applying the discounted cash flow method, the subject company
stock price method, the guideline public company method, and the mergers and acquisitions method.
The discounted cash flow method 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. In preparing these seven-year
projections for its retail unit, the Company (i) identified possible outcomes of its on-going negotiations with the Cayman Islands
government for the renewal of its retail license; (ii) estimated the cash flows associated with each possible outcome; and (iii)
assigned a probability to each outcome and associated estimated cash flows. The weighted average estimated cash flows were then
summed to determine the overall fair value of the retail unit under this method. The possible outcomes used for the discounted
cash flow method for the retail unit included the implementation of a rate of return on invested capital model, the methodology
proposed by Cayman Islands government representatives for the new retail license.
The Company also estimated the fair value
of each of its reporting units for the years ended December 31, 2016 and 2015 through reference to the quoted market prices for
the Company and guideline companies and the market multiples implied by guideline merger and acquisition transactions.
The Company weighted the fair values estimated
for each of its reporting units under each method and summed such weighted fair values to estimate the overall fair value for
each reporting unit. The respective weightings the Company applied to each method as of December 31, 2016 were consistent with
those used as of December 31, 2015 and were as follows:
Method
|
|
Retail
|
|
|
Bulk
|
|
Discounted cash flow
|
|
|
50
|
%
|
|
|
50
|
%
|
Subject company stock price
|
|
|
30
|
%
|
|
|
30
|
%
|
Guideline public company
|
|
|
10
|
%
|
|
|
10
|
%
|
Mergers and acquisitions
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
The fair values the Company estimated for
its retail, bulk and Aerex units exceeded their carrying amounts by 123%, 41% and 26%, respectively, as of December 31, 2016. The
fair values the Company estimated for its retail and bulk units exceeded their carrying amounts by 72% and 20%, respectively, as
of December 31, 2015.
The Company also performed an analysis
reconciling the conclusions of value for its reporting units to its market capitalization at December 31, 2016. This reconciliation
resulted in no implied control premium for the Company.
On February 11, 2016, the Company acquired
51% ownership interest in Aerex. In connection with this acquisition the Company recorded goodwill of $8,035,211. Aerex’s
actual results of operations subsequent to the Company’s acquisition have fallen significantly short of the projected results
for this period that were included in the overall cash flow projections the Company utilized to determine the purchase price for
Aerex and the fair values of its assets and liabilities. Based upon currently available information, the Company believes Aerex’s
results of operations for fiscal 2017 will also fall short of its purchase price projections for Aerex. Due to these actual and
projected shortfalls in Aerex’s results of operations, the Company 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,
the Company determined that the carrying value of the 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. The Company
may be required to record additional impairment losses to reduce the carrying value of its Aerex goodwill in future periods if
the Company determines it likely that Aerex’s results of operations will continue to fall short of its purchase price projections.
Investments:
Investments where the
Company does not exercise significant influence over the operating and financial policies of the investee and holds less than
20% of the voting stock are recorded at cost. The Company uses the equity method of accounting for investments in common stock
where the Company holds 20% to 50% of the voting stock of the investee and has significant influence over its operating and financial
policies but does not meet the criteria for consolidation. The Company recognizes impairment losses on declines in the fair value
of the stock of investees that are other than temporary.
Other assets:
Under the terms of CW-Bahamas’
contract with the Water and Sewerage Corporation of The Bahamas to supply water from its Blue Hills desalination plant, CW-Bahamas
was required to reduce the amount of water lost by the public water distribution system on New Providence Island, The Bahamas,
over a one year period by 438 million gallons, a requirement CW Bahamas met during 2007. The Company was solely responsible for
the engineering, labor and materials costs incurred to effect the reduction in lost water, which were capitalized and are being
amortized on a straight-line basis over the original remaining life of the Blue Hills contract. Such costs are included in other
assets and aggregated approximately $3.5 million as of December 31, 2016 and 2015. Accumulated amortization for these costs was
approximately $1.8 million and $1.6 million as of December 31, 2016 and 2015, respectively.
Other liabilities
: Other liabilities consist of security
deposits received from large customers as security for accounts receivable from such customers.
Income taxes:
The Company accounts
for the income taxes arising from the operations of its United States and Mexico subsidiaries under the asset and liability method.
Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and
tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance
is provided to the extent any deferred tax asset may not be realized.
CW-Belize is liable for business and
corporate income taxes. Under the terms of its water supply agreement with Belize Water Services Ltd. (“BWSL”), its
sole customer, CW-Belize is reimbursed by BWSL for all taxes that it is required to pay and records this reimbursement as
an offset to its tax expense.
The Company is not presently subject to income
taxes in the other countries in which it operates.
Construction revenue and cost of construction
revenue:
The Company recognizes revenue and related costs as work progresses on long term fixed price construction contracts
using the percentage-of-completion method, which relies on contract revenue and estimates of total expected costs. The Company
follows this method since it can make reasonably dependable estimates of the revenue and costs applicable to various stages of
a contract. Under the percentage-of-completion 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 costs and estimated earnings in excess of billings are classified as current
assets. Billings in excess of costs and estimated earnings on uncompleted contracts, if any, are classified as current liabilities.
With respect to the plant construction contracts
awarded as the result of a tender process, the Company assumes the risk that the costs associated with constructing the plant
may be greater than it anticipated in preparing its bid, as the terms of such tender processes typically require the winner to
guarantee the sales price for the plant at the bid amount. Because the Company bases its contracted sales price in part on its
estimation of future construction costs, the profitability of its plant sales is dependent on its ability to estimate these costs
accurately. The cost estimates the Company prepares in connection with the construction of plants to be sold to third parties
are subject to inherent uncertainties. The cost of materials and construction may increase significantly after the Company submits
its tender and accompanying bid price for a plant due to factors beyond the Company’s control, which could cause the profit
margin for a plant to be less than the Company anticipated when the tender was submitted. The profit margin the Company initially
expects to generate from a plant sale could be further affected by other factors, such as hydro-geologic conditions at the plant
site that differ materially from those the Company believes exists, and therefore relies upon, in determining its bid price.
Revenue from water sales:
The Company
recognizes revenues from water sales at the time water is supplied to the customer’s facility or storage tank. The amount
of water supplied is determined based upon water meter readings performed at the end of each month. Under the terms of both its
license agreement with the government of the Cayman Islands and its bulk water supply contracts, the Company is entitled to charge
its customers the greater of a minimum monthly charge or the price for water supplied during the month.
Comparative amounts:
Certain amounts
presented in the financial statements previously issued for 2015 and 2014 have been reclassified to conform to the current year’s
presentation.
3. Cash and cash equivalents
Cash and cash equivalents are not restricted
by the terms of the Company’s bank accounts as to withdrawal or use. As of December 31, 2016 and 2015, the equivalent United
States dollars are denominated in the following currencies:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Bank accounts:
|
|
|
|
|
|
|
|
|
United States dollar
|
|
$
|
11,355,704
|
|
|
$
|
10,961,159
|
|
Cayman Islands dollar
|
|
|
16,511,673
|
|
|
|
10,590,207
|
|
Bahamian dollar
|
|
|
4,859,914
|
|
|
|
1,983,236
|
|
Belize dollar
|
|
|
4,884,161
|
|
|
|
4,213,923
|
|
Bermudian dollar
|
|
|
3,733
|
|
|
|
4,571
|
|
Mexican peso
|
|
|
72,507
|
|
|
|
27,872
|
|
Euro
|
|
|
11,657
|
|
|
|
23,819
|
|
Singapore dollar
|
|
|
25,840
|
|
|
|
25,879
|
|
Indonesian rupiah
|
|
|
29,220
|
|
|
|
40,483
|
|
|
|
|
37,754,409
|
|
|
|
27,871,149
|
|
|
|
|
|
|
|
|
|
|
Short term deposits:
|
|
|
|
|
|
|
|
|
United States dollar
|
|
|
490,914
|
|
|
|
1,307,337
|
|
Bahamian dollar
|
|
|
1,008,793
|
|
|
|
15,614,248
|
|
|
|
|
1,499,707
|
|
|
|
16,921,585
|
|
Total cash and cash equivalents
|
|
$
|
39,254,116
|
|
|
$
|
44,792,734
|
|
Transfers from the Company’s Bahamas
and Belize bank accounts to Company bank accounts in other countries require the approval of the Central Bank of the Bahamas and
Belize, respectively.
4. Accounts receivable
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
Trade accounts receivable
|
|
$
|
15,368,218
|
|
|
$
|
8,235,514
|
|
Receivable - construction project
|
|
|
-
|
|
|
|
521,250
|
|
Receivable from OC-BVI
|
|
|
53,970
|
|
|
|
45,118
|
|
Other accounts receivable
|
|
|
1,271,948
|
|
|
|
920,472
|
|
|
|
|
16,694,136
|
|
|
|
9,722,354
|
|
Allowance for doubtful accounts
|
|
|
(193,338
|
)
|
|
|
(193,338
|
)
|
|
|
$
|
16,500,798
|
|
|
$
|
9,529,016
|
|
The activity for the allowance for doubtful accounts consisted
of:
|
|
December 31
|
|
|
|
2016
|
|
|
2015
|
|
Opening allowance for doubtful accounts
|
|
$
|
193,338
|
|
|
$
|
193,338
|
|
Provision for doubtful accounts
|
|
|
42,553
|
|
|
|
-
|
|
Accounts written off during the year
|
|
|
(42,553
|
)
|
|
|
-
|
|
Ending allowance for doubtful accounts
|
|
$
|
193,338
|
|
|
$
|
193,338
|
|
Significant concentrations of credit risk
are disclosed in Note 21.
5. Inventory
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Water stock
|
|
$
|
23,905
|
|
|
$
|
27,670
|
|
Consumables stock
|
|
|
143,028
|
|
|
|
152,350
|
|
Spare parts stock
|
|
|
6,745,034
|
|
|
|
6,297,082
|
|
Total inventory
|
|
|
6,911,967
|
|
|
|
6,477,102
|
|
Less current portion
|
|
|
2,305,879
|
|
|
|
1,918,728
|
|
Inventory (non-current)
|
|
$
|
4,606,088
|
|
|
$
|
4,558,374
|
|
6. Loans receivable
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
All loans receivable are due from the Water Authority-Cayman and consisted of:
|
|
|
|
|
|
|
Two loans originally aggregating $10,996,290, bearing interest at 6.5% per annum,
receivable in aggregate monthly installments of $124,827 to June 2019, and secured by the machinery and equipment of the North
Side Water Works plant.
|
|
$
|
3,448,051
|
|
|
$
|
4,678,355
|
|
Two loans originally aggregating $3,671,039, bearing interest at 6.5% per
annum, receivable in aggregate monthly installments of $54,513 to June 2017, and secured by the machinery and equipment of
the Red Gate plant.
|
|
|
320,965
|
|
|
|
932,512
|
|
Total loans receivable
|
|
|
3,769,016
|
|
|
|
5,610,867
|
|
Less current portion
|
|
|
1,633,588
|
|
|
|
1,841,851
|
|
Loans receivable, excluding current portion
|
|
$
|
2,135,428
|
|
|
$
|
3,769,016
|
|
7. Property, plant and equipment and construction
in progress
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Land
|
|
$
|
3,570,361
|
|
|
$
|
3,223,361
|
|
Buildings
|
|
|
19,366,123
|
|
|
|
18,437,758
|
|
Plant and equipment
|
|
|
62,227,399
|
|
|
|
63,733,553
|
|
Distribution system
|
|
|
33,482,674
|
|
|
|
31,726,766
|
|
Office furniture, fixtures and equipment
|
|
|
3,405,633
|
|
|
|
3,210,819
|
|
Vehicles
|
|
|
1,396,886
|
|
|
|
1,384,294
|
|
Leasehold improvements
|
|
|
261,147
|
|
|
|
260,519
|
|
Lab equipment
|
|
|
151,233
|
|
|
|
157,851
|
|
|
|
|
123,861,456
|
|
|
|
122,134,921
|
|
Less accumulated depreciation
|
|
|
70,777,351
|
|
|
|
68,391,751
|
|
Property, plant and equipment, net
|
|
$
|
53,084,105
|
|
|
$
|
53,743,170
|
|
Construction in progress
|
|
$
|
885,494
|
|
|
$
|
1,928,610
|
|
As of December 31, 2016, the Company had outstanding
capital commitments of $1,809,418. The Company maintains insurance for loss or damage to all fixed assets that it deems susceptible
to loss. The Company does not insure its underground distribution system as the Company considers the possibility of material
loss or damage to this system to be remote. During the years ended December 31, 2016 and 2015, $3,542,119 and $2,694,733, respectively,
of construction in progress was placed in service. Depreciation expense was $5,765,580, $5,501,491, and $5,355,771 for the years
ended December 31, 2016, 2015 and 2014, respectively.
8. Investment in OC-BVI
The Company owns 50% of the outstanding voting
common shares and a 43.53% equity interest in the profits of Ocean Conversion (BVI) Ltd. (“OC-BVI”). The Company also
owns certain profit sharing rights in OC-BVI that raise its effective interest in the profits of OC-BVI to approximately 45%.
Pursuant to a management services agreement, OC-BVI pays the Company monthly fees for certain engineering and administrative services.
OC-BVI’s sole customer is the Ministry of Communications and Works of the Government of the British Virgin Islands (the
“Ministry”) to which it sells bulk water.
The Company’s equity investment in OC-BVI
amounted to $4,086,630 and $4,548,271 as of December 31, 2016 and 2015, respectively.
Until 2009, substantially all of the water
sold by OC-BVI to the Ministry was supplied by one desalination plant with a capacity of 1.7 million gallons per day located at
Baughers Bay, Tortola (the “Baughers Bay plant”). As discussed later in this Note (see “
Baughers Bay litigation”
),
the BVI government assumed the operating responsibilities for the Baughers Bay plant in March 2010. During 2007, OC-BVI completed
the construction of a desalination plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the “Bar
Bay plant”). OC-BVI began selling water to the Ministry from this plant in January 2009 and on March 4, 2010, OC-BVI and
the BVI government executed a seven-year contract for the Bar Bay plant (the “Bar Bay agreement”). The Bar Bay agreement
was extended by 14 years on February 14, 2017. Under the terms of the Bar Bay agreement, OC-BVI delivers up to 600,000 gallons
of water per day to the BVI government from the Bar Bay plant on a take-or-pay basis. The Bar Bay agreement required OC-BVI to
complete a storage reservoir on a BVI government site by no later than March 4, 2011. OC-BVI has not commenced construction of
this storage reservoir due to the BVI government’s failure to pay (i) the full amount of invoices for the water provided
by the Bar Bay plant on a timely basis; and (ii) the full amount ordered pursuant to a court ruling relating to the Baughers Bay
litigation (see discussion that follows).
Summarized financial information for OC-BVI
is as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current assets
|
|
$
|
5,627,414
|
|
|
$
|
4,323,792
|
|
Non-current assets
|
|
|
3,963,242
|
|
|
|
4,682,650
|
|
Total assets
|
|
$
|
9,590,656
|
|
|
$
|
9,006,442
|
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Current liabilities
|
|
$
|
197,673
|
|
|
$
|
584,116
|
|
Non-current liabilities
|
|
|
1,854,900
|
|
|
|
1,650,252
|
|
Total liabilities
|
|
$
|
2,052,573
|
|
|
$
|
2,234,368
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues
|
|
$
|
3,832,929
|
|
|
$
|
4,143,882
|
|
|
$
|
4,679,829
|
|
Cost of revenues
|
|
|
2,107,557
|
|
|
|
2,261,973
|
|
|
|
2,833,007
|
|
Gross profit
|
|
|
1,725,372
|
|
|
|
1,881,909
|
|
|
|
1,846,822
|
|
General and administrative expenses
|
|
|
930,838
|
|
|
|
958,364
|
|
|
|
940,072
|
|
Income from operations
|
|
|
794,534
|
|
|
|
923,545
|
|
|
|
906,750
|
|
Other income (expense), net
|
|
|
51,475
|
|
|
|
(176,448
|
)
|
|
|
(188,751
|
)
|
Net income
|
|
|
846,009
|
|
|
|
747,097
|
|
|
|
717,999
|
|
Income (loss) attributable to non-controlling interests
|
|
|
69,975
|
|
|
|
70,854
|
|
|
|
21,045
|
|
Net income attributable to controlling interests
|
|
$
|
776,034
|
|
|
$
|
676,243
|
|
|
$
|
696,954
|
|
A reconciliation of the beginning and ending
balances for the investment in OC-BVI for the year ended December 31, 2016:
Balance as of December 31, 2015
|
|
$
|
4,548,271
|
|
Profit sharing and equity from earnings of OC-BVI
|
|
|
463,359
|
|
Distributions received from OC-BVI
|
|
|
-
|
|
Impairment of investment in OC-BVI
|
|
|
(925,000
|
)
|
Balance as of December 31, 2016
|
|
$
|
4,086,630
|
|
The Company recognized $337,809, $294,368
and $303,380 in earnings from its equity investment in OC-BVI for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company recognized $125,550, $105,300 and $111,375 in profit sharing income from its profit sharing agreement with OC-BVI for
the years ended December 31, 2016, 2015 and 2014, respectively.
For the years ended December 31, 2016,
2015, and 2014, the Company recognized $515,474, $528,346, and $747,340, respectively, in revenues from sales of consumable stock
and its management services agreement with OC-BVI, which is included in services revenues in the accompanying consolidated statement
of income. Amounts payable by OC-BVI to the Company were $34,218 and $23,803 as of December 31, 2016 and 2015, respectively. The
Company’s remaining unamortized balance recorded for this management services agreement, which is reflected as an intangible
asset on the consolidated balance sheet, was approximately $15,500 and $106,000 as of December 31, 2016 and 2015, respectively
(see Note 10).
Baughers Bay Litigation
Under the terms of a water supply agreement
dated May 1990 (the “1990 Agreement”) between OC-BVI and the Government of the British Islands (the “BVI Government”),
upon the expiration of its initial seven-year term in May 1999, the 1990 Agreement would automatically be extended for another
seven-year term unless the BVI government provided notice, at least eight months prior to such expiration, of its decision to
purchase the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $1.42 million. In correspondence
between the parties from late 1998 through early 2000, the BVI government indicated that it intended to purchase the plant but
would be amenable to negotiating a new water supply agreement, and that it considered the 1990 Agreement to be in force on a monthly
basis until negotiations between the BVI government and OC-BVI were concluded. Occasional discussions were held between the parties
since 2000 without resolution of the matter. OC-BVI continued to supply water from the plant and expended approximately $4.7 million
between 1995 and 2003 to significantly expand the production capacity of the plant beyond that contemplated in the 1990 Agreement.
In 2006, the BVI government took the position
that the seven-year extension of the 1990 Agreement had been completed and that it was entitled to ownership of the Baughers Bay
plant. In response, OC-BVI disputed the BVI government’s contention that the original terms of the 1990 Agreement remained
in effect.
During 2007, the BVI government significantly
reduced its payments for the water being supplied by OC-BVI and filed a lawsuit with the Eastern Caribbean Supreme Court (the
“Court”) seeking ownership of the Baughers Bay plant. OC-BVI counterclaimed to the Court that it was entitled to continued
possession and operation of the Baughers Bay plant until the BVI government paid OC-BVI approximately $4.7 million, which OC-BVI
believed represented the value of the Baughers Bay plant at its expanded production capacity. OC-BVI subsequently filed claims
with the Court seeking payment for water sold and delivered to the BVI government through May 31, 2009 at the contract prices
in effect before the BVI government asserted its purported right of ownership of the plant.
The Court ruled on this litigation in 2009,
determining that (i) the BVI government was entitled to immediate ownership and possession of the Baughers Bay plant; (ii) OC-BVI
was not entitled to compensation for the expenditures made to expand the production capacity of the plant; (iii) OC-BVI was entitled
to full payment of water invoices issued up to December 20, 2007, which had been calculated under the terms of the original 1990
Agreement; and (iv) OC-BVI was entitled to the amount of $10.4 million for water produced by OC-BVI from the Baughers Bay plant
subsequent to December 20, 2007.
OC-BVI filed an appeal with the Eastern Caribbean
Court of Appeals (the “Appellate Court”) in October 2009 asking the Appellate Court to review the September 17, 2009
ruling by the Court as it related to OC-BVI’s claim for compensation for expenditures made to expand the production capacity
of the Baughers Bay plant. In October 2009, the BVI government also filed an appeal with the Appellate Court requesting the Appellate
Court to reduce the $10.4 million awarded by the Court to OC-BVI for water supplied subsequent to December 20, 2007 to an amount
equal to the cost of producing such water.
In March 2010, OC-BVI vacated the Baughers
Bay plant and the BVI government assumed direct responsibility for the plant’s operations.
In June 2012, the Appellate Court issued the
final ruling with respect to the Baughers Bay litigation. This ruling dismissed the BVI government’s appeal against the
previous judgment of the Court awarding $10.4 million for the water supplied, and also awarded OC-BVI compensation for improvements
made to the plant in the amount equal to the difference between (i) the value of the Baughers Bay plant at the date OC-BVI transferred
possession of the plant to the BVI government and (ii) $1.42 million (the purchase price for the Baughers Bay plant under the
1990 Agreement). OC-BVI was also awarded all of its court costs at the trial level and two-thirds of such costs incurred on appeal.
OC-BVI and the BVI government engaged a mutually
approved valuation expert to complete a valuation of the Baughers Bay plant at the date it was transferred to the BVI government
in accordance with the Appellate Court ruling.
In June 2016, OC-BVI received the final valuation
report from the valuation expert, which sets forth a value for the Baughers Bay plant of $13.0 million as of the date OC-BVI transferred
possession of the plant to the BVI government. Applying the valuation determined by the valuation expert to the formula set forth
by the Appellate Court in its ruling, OC-BVI would be entitled to $11.58 million from the BVI government for the Baughers Bay
plant. The BVI government has indicated that it disagrees with the valuation methodology used by the valuation expert and the
resulting valuation for the Baughers Bay plant. We cannot presently determine if the Appellate Court will uphold the Baughers
Bay plant valuation or when, or to what extent, any amount for the value of the Baughers Bay plant will be paid by the BVI government
to OC-BVI. Consequently, any amount due for the Baughers Bay plant valuation will not be included in OC-BVI’s results of
operations until such amount, if any, is paid by the BVI government.
Valuation of Investment in OC-BVI
The Company accounts for its 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 its investment in OC-BVI, the Company estimated 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 required the Company 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.
The Company estimated the cash flows OC-BVI
will receive from its Bar Bay plant by (i) identifying various possible future scenarios which included the execution of a new
agreement for the Bar Bay plant as well as the termination of Bar Bay plant operations upon the expiration of the existing Bar
Bay agreement in March 2017; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability
to each scenario. The Company similarly estimated 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 represented
the expected cash flows, and the Company’s best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay
plant and the pending court award.
The identification of the possible scenarios
for the Bar Bay plant and the Baughers Bay plant valuation, the projections of cash flows for each scenario, and the assignment
of relative probabilities to each scenario all represented significant estimates made by the Company. While the Company used its
best judgment in identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning relative
probabilities to each scenario, these estimates were by their nature highly subjective and were also subject to material change
by the Company’s management over time based upon new information or changes in circumstances.
During 2016, after updating its probability-weighted
estimates of OC-BVI’s future cash flows and its resulting estimate of the fair value of our investment in OC-BVI, the Company
determined that the carrying value of its investment in OC-BVI exceeded its fair value and recorded impairment losses of totaling
$925,000 through the nine months ended September 30, 2016. The Company recorded impairment losses for its investment in OC-BVI
of $1,060,000 and $860,000 for 2015 and 2014, respectively. As a result of the impairment losses recorded to date, as of December
31, 2016 the amount of the Company’s proportionate share (43.5%) of the net assets reflected on OC-BVI’s balance sheet
exceeded the carrying value of its investment in OC-BVI by approximately $30,000.
In February 2017, the BVI government executed
a 14 year extension to Bar Bay plant agreement. The selling price for the water under this extension is approximately 31% lower
than the price that was in effect as of December 31, 2016.
9. N.S.C. Agua, S.A. de C.V.
In May 2010, the Company acquired, through
its wholly-owned Netherlands subsidiary, CW-Cooperatief, a 50% interest in NSC, a development stage Mexican company. The Company
has since purchased, through the conversion of a loan it made to NSC, sufficient shares to raise its ownership interest in NSC
to 99.9%. 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. As discussed in paragraphs
that follow, during 2015 the scope of the Project was defined by the State of Baja California (the “State”) to consist
of a first phase consisting of a 50 million gallons per day plant and a pipeline that connects to the Mexican potable water infrastructure
and a second phase consisting of an additional 50 million gallons of production capacity.
Since its inception, NSC has engaged engineering
groups with extensive regional and/or technical experience to prepare preliminary designs and cost estimates for the desalination
plant and the proposed pipeline and prepare the environmental impact studies for local, state and federal regulatory agencies,
and has also acquired the land, performed pilot plant and feed water source testing and evaluated financing alternatives for the
Project.
Through a series of transactions completed
in 2012-2014, NSC purchased 20.1 hectares of land on which the proposed Project’s plant would be constructed for an aggregate
price of approximately $20.6 million.
In November 2012, NSC entered into a lease
with an effective term of 20-years from the date of full operation of the desalination plant, with the Comisión Federal
de Electricidad for approximately 5,000 square meters of land on which it plans to construct the water intake and discharge works
for the plant. The amounts due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately
$20,000 per month. This lease may be cancelled by NSC should NSC ultimately not proceed with the Project.
In August 2014, 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, on January 4, 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 complies 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 was authorized
the State would be required to conduct a public tender for the Project.
In response to its 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, stating that (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 should
proceed and the required public tender 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. A consortium comprised of NSC, NuWater S.A.P.I.
de C.V. and Degremont S.A. de C.V. (the “Consortium”) submitted its tender for the Project on the April 21, 2016 tender
submission deadline date set by the State.
The Company has acknowledged since the inception
of the Project that, due to the amount of capital the Project requires, NSC will ultimately need an equity partner or partners
for the Project. Consequently, NSC’s tender to the State for the Project was based upon the following: (i) NSC will sell
or otherwise transfer the land and other Project assets to a new company (“Newco”) that would build and own the Project;
(ii) NSC’s potential partners would provide the majority of the equity for the Project and thereby would own the majority
interest in Newco; (iii) NSC would maintain a minority ownership position in Newco; and (iv) Newco would enter into a long-term
management and technical services contract for the Project with an entity partially owned by NSC or another Company subsidiary.
On June 15, 2016, the State designated the
Consortium as the winner of tender process for the Project.
On August 17, 2016, NSC and NuWater incorporated
Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), a special project company, to execute 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. As of December 31, 2016, NSC owned 99.6% of AdR.
On August 22, 2016, the Public Private Partnership
Agreement for public private partnership number 002/2015, contest number SIDUE-CEA-APP-2015-002 (“APP Contract”) was
executed between AdR, CEA, the Government of Baja California represented by the Secretary of Planning and Finance (“SPF”),
and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract requires AdR to design, construct, finance
and operate a seawater desalination plant (and accompanying aqueducts) 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 and an aqueduct to a second delivery point
in Tijuana. The first phase must be operational within 36 months of commencing construction, and the second phase must be operational
by the end of 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueducts 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 aqueducts will
be transferred to CEA.
The total Project cost is expected to be
approximately 9 billion Mexican pesos, or approximately US$463 million (based upon the currency exchange rate as of March 10, 2017).
Annual revenues from the Project are expected to be approximately 1.02 billion Mexican pesos, or approximately US$52 million (based
upon the currency exchange rate as of March 10, 2017). Water rates under the APP Contract are indexed to the Mexican national consumer
price index over its term. Electrical energy costs incurred by AdR to desalinate and deliver water are treated as a pass through
charge to CEA, subject to efficiency guarantees. AdR expects to raise Mexican peso denominated debt financing through a consortium
led by the North American Development Bank, which also provided financial advisory services to the Consortium through the bidding
process and contract negotiations.
The APP Contract does not become effective
until the following conditions are met:
|
·
|
the
State has established and registered various payment trusts, guaranties and bank credit
lines for specific use by the Project;
|
|
·
|
the
CEA has obtained the rights from the relevant federal authority to take and desalinate
seawater and distribute it for municipal use;
|
|
·
|
various
water purchase and sale agreements between the CEA, the payment trusts and the CESPT
have been executed;
|
|
·
|
AdR
has obtained all rights of ways required for the aqueduct;
|
|
·
|
AdR
has obtained permission from the relevant federal authority to discharge the residual
water from the Project’s desalination plant; and
|
|
·
|
all
equity and debt financing agreements necessary to provide the funding to AdR for the first phase of the
Project have been executed.
|
Both the exchange rate for the Mexico peso
relative to the dollar and general macroeconomic conditions in Mexico have declined since the U.S. Presidential election in November
2016. These changes have adversely impacted the estimated construction, operating, and financing costs for the Project. The APP
Contract and the APP Law allow for the parties to negotiate (but do not guarantee) modifications to the water tariff in the event
of such significant macroeconomic condition changes. On February 10, 2017 AdR submitted proposals to the CEA requesting an increase
to the water tariff to compensate for changes in foreign exchange rates, lending rates and certain changes in law which have impacted
the Project. If AdR is unable to obtain this requested increase in the water tariff it may be unable to obtain the debt and equity
financing required for the Project. The Company is currently unable to say whether or not such water tariff increase will be approved.
If AdR is ultimately unable to proceed with
the Project, the land NSC has purchased may lose its strategic importance as the site for the Project and consequently may decline
in value. If AdR does not proceed with the Project, NSC may ultimately be unable to sell this land for an amount equal to or in
excess of its current carrying value of approximately $20.6 million, and any loss on sale of the land, or impairment loss NSC
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.
Included in the Company’s results of
operations are general and administrative expenses from NSC and AdR, consisting of organizational, legal, accounting, engineering,
consulting and other costs relating to Project development activities. Such expenses amounted to approximately $3.0 million, $2.0
million and $3.7 million for the years ended December 31, 2016, 2015 and 2014, respectively. The assets and liabilities of NSC
and AdR included in the Company’s consolidated balance sheets amounted to approximately $23.3 million and $221,000, respectively,
as of December 31, 2016 and approximately $22.0 million and $488,000 respectively, as of December 31, 2015.
NSC 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 Alejandro de la Vega (the “individual shareholder”).
In February 2012, the Company 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, along
with an immediate power of attorney to vote those shares, for $1.0 million. 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 acquired 99.9% of the ownership of NSC. The Option Agreement
contained an anti-dilution provision that required the Company to issue new 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 and (ii) the Company did not exercise its share purchase option by February 7, 2014. The Company exercised
its option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.
In October 2015, the Company learned that
EWG had filed a lawsuit against the individual shareholder, NSC, NSA, CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo
Ahumada Arruit, Luis de Angitia Becerra, and the Public Registry of Commerce of Tijuana, Baja California in the Civil Court located
in Tecate, Baja California, Mexico.
In this lawsuit, EWG is challenging, among
other things, the capital investment transactions that increased the Company’s 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 NSA and NSC to oversee
its commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG, which resulted in the placement
of inscriptions for the lawsuit on NSC’s public records.
EWG is also seeking an order directing, among
other things: (i) NSA, NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii)
NSA, NSC and CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief.
On April 5, 2016, NSC filed a motion for reconsideration
with the Tecate, Mexico Court asking, among other things, that the Court; (i) reverse its order to record the pendency of the
lawsuit in the public records, (ii) cancel the appointment of the inspector, and (iii) allow NSC to provide a counter-guarantee
to suspend the effects of the Court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico
Court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public records and (ii)
rejecting NSC’s motion for cancellation of the appointment of the inspector.
On April 26, 2016, NSC filed a full answer
to EWG’s claims rejecting every claim made by EWG. The Court’s response on this matter is pending.
On May 17, 2016, NSC filed a claim with the
Third District Court in Matters of Amparo and Federal Trials in the City of Tijuana, Baja California (the “Amparo Court”)
challenging the Tecate, Mexico Court ex-parte order which appointed an inspector over NSC’s commercial activities. On July
29, 2016, the Amparo Court found that such appointment is unconstitutional and reversed the Tecate, Mexico Court’s appointment
of an inspector.
On September 6, 2016, the Tecate, Mexico Court
issued a decree granting the counter guaranty requested by NSC. Such counter-guaranty was fixed in the amount of 300,000 Mexican
pesos and was given to the Court on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the challenged
transactions were suspended.
The Company believes that the claims made
by EWG are baseless and without merit, will vigorously defend NSC and CW-Cooperatief in this litigation, and will seek dismissal
of the orders entered by the court and all claims against NSC and CW-Cooperatief. The Company incurred legal fees in connection
with this litigation of approximately $203,000 and $138,000 for the years ended December 31, 2016 and 2015, respectively.
The Company cannot presently determine the
outcome of this litigation. However, such litigation could adversely impact the Company’s efforts to complete the Project.
Mexico Tax Authority
The Mexico tax authority, the Servicio de
Administracion Tributaria (“SAT”), assessed NSC for taxes relating to payments to foreign vendors on which the SAT
contended should have been subject to income tax withholdings during NSC’s 2011 tax year. As of December 31, 2015, the assessment
and related penalties, surcharges, inflation adjustments and late fees totaled 7,367,875 Mexican pesos. Such assessments were
equivalent to approximately $428,203 as of December 31, 2015 based upon the exchange rate between the United States dollars and
the Mexican peso.
NSC retained the assistance of Mexican tax
advisers in this matter, as it believed the assumptions and related work performed by the SAT did not support their tax assessment.
As a result, NSC elected to contest this assessment in Mexico federal tax court. NSC was required to provide an irrevocable letter
of credit which amounted to 7,367,875 Mexican pesos as of December 31, 2015 as collateral in connection with this tax case. The
restricted cash balance of $428,203 included in the accompanying consolidated balance sheet as of December 31, 2015 represented
the US dollar equivalent of Mexican pesos on deposit with a bank to secure payment of this irrevocable letter of credit.
In November 2014, NSC received a favorable
judgment from the tax court. Based on this outcome, the SAT filed an appeal shortly thereafter to contest the judgment. On February
15, 2016, NSC received a favorable judgment from the appellate tax court and shortly thereafter obtained the release of the Mexican
pesos cash balance that had been restricted and pledged as collateral as of December 31, 2015 for the irrevocable letter of credit.
10. Intangible assets
In 2003, as part of the acquisition of a group
of companies, the Company acquired 100% of the outstanding voting common shares of DesalCo, which had an agreement to provide
management and engineering services to OC-BVI. The Company attributed $856,356 of the purchase price of the acquisition to the
value of this management services agreement, which has no expiration term. Initially, the Company determined that this intangible
asset had an indefinite life and therefore it was not amortized. However in 2010, as a result of the loss by OC-BVI of its Baughers
Bay contract (see Note 8), the Company began amortizing this asset over the life of OC-BVI’s remaining seven-year water
supply contract for its Bar Bay plant.
The carrying amount of the Belize Water Production
and Supply Agreement is being amortized over the 23-year term of the agreement that expires in March 2026.
On February 11, 2016, the Company purchased
a 51% ownership interest in Aerex Industries, Inc. The purchase transaction identified certain intangible assets with a fair value
of $5,900,000 and useful life as follows: Non-Compete (5 years), Trade name (15 years), Certifications/programs (3 years), Customer
backlog (1 year), and Customer relationships (4 years). See further discussion of this acquisition at Note 11.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset management service agreement
|
|
$
|
856,356
|
|
|
$
|
856,356
|
|
Belize water production and supply agreement
|
|
|
1,522,419
|
|
|
|
1,522,419
|
|
Aerex - Non-compete agreement
|
|
|
400,000
|
|
|
|
-
|
|
Aerex - Trade name
|
|
|
1,400,000
|
|
|
|
-
|
|
Aerex - Certifications/programs
|
|
|
2,000,000
|
|
|
|
-
|
|
Aerex - Customer backlog
|
|
|
100,000
|
|
|
|
-
|
|
Aerex - Customer relationships
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
|
8,278,775
|
|
|
|
2,378,775
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
Intangible asset management service agreement
|
|
|
(840,839
|
)
|
|
|
(750,697
|
)
|
Belize water production and supply agreement
|
|
|
(922,460
|
)
|
|
|
(856,267
|
)
|
Aerex - Non-compete agreement
|
|
|
(73,333
|
)
|
|
|
-
|
|
Aerex - Trade name
|
|
|
(85,556
|
)
|
|
|
-
|
|
Aerex - Certifications/programs
|
|
|
(611,111
|
)
|
|
|
-
|
|
Aerex - Customer backlog
|
|
|
(91,667
|
)
|
|
|
-
|
|
Aerex - Customer relationships
|
|
|
(458,333
|
)
|
|
|
-
|
|
|
|
|
(3,083,299
|
)
|
|
|
(1,606,964
|
)
|
Intangible assets, net
|
|
$
|
5,195,476
|
|
|
$
|
771,811
|
|
Amortization of intangible assets for each
of the next five years and thereafter is expected to be as follows:
2017
|
|
$
|
1,430,042
|
|
2018
|
|
|
1,406,192
|
|
2019
|
|
|
795,081
|
|
2020
|
|
|
281,192
|
|
2021
|
|
|
166,192
|
|
Thereafter
|
|
|
1,116,777
|
|
|
|
$
|
5,195,476
|
|
Amortization expense was $1,476,335, $156,089,
and $168,588 for the years ended December 31, 2016, 2015 and 2014, respectively.
11. Purchase of interest in Aerex Industries,
Inc.
On February 11, 2016 (the “Closing Date”),
the Company, through its wholly-owned subsidiary, CW-Holdings, entered into a stock purchase agreement (the “Purchase Agreement”)
with Aerex and Thomas Donnick, Jr. (“Donnick”), Aerex’s sole shareholder prior to the Closing Date. Pursuant
to the terms of the Purchase Agreement, CW-Holdings purchased a 51% ownership interest in Aerex for an aggregate purchase price
of approximately $7.7 million in cash. After giving effect to the transactions contemplated by the Purchase Agreement, CW-Holdings
owns 51% of the outstanding capital stock of Aerex and Donnick owns 49% of the outstanding capital stock of Aerex. CW-Holdings
also acquired from Donnick an option to compel Donnick to sell, and granted to Donnick an option to require CW-Holdings to purchase,
Donnick’s 49% ownership interest in Aerex at a price based upon the fair market value of Aerex at the time of the exercise
of the option. The options are exercisable on or after the third anniversary of the Closing Date. In connection with the Purchase
Agreement, the Company guaranteed the obligations of CW-Holdings with respect to the option granted to Donnick to require CW-Holdings
to purchase Donnick’s 49% ownership interest in Aerex.
Aerex is an original equipment manufacturer
and service provider of a wide range of products and services applicable to municipal water treatment and industrial water and
wastewater treatment. Its products include membrane separation equipment, filtration equipment, piping systems, vessels and custom
fabricated components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance services
to its customers. Aerex is an American Society of Mechanical Engineers (ASME) code accredited manufacturer and maintains the ASME
U and S and the National Board NB and R Certificates of Authorization. Its corporate offices and manufacturing facilities are
located in Fort Pierce, Florida.
In connection with the Purchase Agreement,
CW-Holdings, Aerex and Donnick entered into a shareholders agreement pursuant to which CW-Holdings and Donnick agreed to certain
rights and obligations with respect to the governance of Aerex. Immediately following the acquisition, Donnick and the Company
loaned $490,000 and $510,000, respectively, to Aerex. These loans bear interest at 1% per annum and mature June 30, 2017. In February
2017, the Company and the former sole shareholder of Aerex loaned Aerex an additional $408,000 and $392,000, respectively, in
the form of notes payable which mature on September 30, 2017 and bear interest at 1% per annum.
The purchase price for Aerex is summarized as follows:
Cash consideration
|
|
|
|
|
Purchase price (excluding working capital)
|
|
$
|
7,140,000
|
|
Working capital adjustment
|
|
|
605,179
|
|
Cash acquired
|
|
|
(2,326
|
)
|
Total cash consideration
|
|
$
|
7,742,853
|
|
The following table summarizes the estimated fair values of the
assets and liabilities assumed at the acquisition date:
Financial assets
|
|
$
|
456,664
|
|
Inventory
|
|
|
70,487
|
|
Costs and estimated earnings in excess of billings
|
|
|
784,465
|
|
Property, plant and equipment
|
|
|
2,159,401
|
|
Identifiable intangible assets
|
|
|
5,900,000
|
|
Deferred tax liability
|
|
|
(2,451,298
|
)
|
Accounts payable and accrued liabilities
|
|
|
(116,893
|
)
|
Net liability arising from put/call options
|
|
|
(383,000
|
)
|
Total identifiable net assets
|
|
|
6,419,826
|
|
Non-controlling interest in Aerex
|
|
|
(6,712,184
|
)
|
Goodwill
|
|
|
8,035,211
|
|
|
|
$
|
7,742,853
|
|
The identifiable intangible assets consisted
of the following items:
|
|
Amount
|
|
|
Useful life
|
|
Non-compete agreement
|
|
$
|
400,000
|
|
|
|
5 years
|
|
Trade name
|
|
|
1,400,000
|
|
|
|
15 years
|
|
Certifications/programs
|
|
|
2,000,000
|
|
|
|
3 years
|
|
Customer backlog
|
|
|
100,000
|
|
|
|
1 year
|
|
Customer relationships
|
|
|
2,000,000
|
|
|
|
4 years
|
|
|
|
$
|
5,900,000
|
|
|
|
|
|
Aerex’s actual results of operations
for the period subsequent to its acquisition by the Company on February 11, 2016 fell significantly short of the projected results
for this period that were included in the overall cash flow projections utilized by the Company to determine the purchase price
for Aerex and the fair values of its assets and liabilities. Due to this negative variance in actual results compared to projected
results, the Company 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, the Company determined that the carrying value
of its Aerex reporting unit exceeded its fair value, and recorded an impairment loss for the three months ended September 30,
2016 of $1,750,000 for the goodwill associated with the Aerex acquisition to reduce the goodwill balance associated with the Aerex
acquisition to $6,285,211.
The results of operations of Aerex included
in the Company’s results of operations for the period February 11, 2016 to December 31, 2016 are as follows:
|
|
Year Ended
December 31, 2016
|
|
Revenues
|
|
$
|
3,887,284
|
|
Gross profit
|
|
|
796,450
|
|
Amortization of intangibles
|
|
|
(1,320,000
|
)
|
Impairment loss
|
|
|
(1,750,000
|
)
|
Net loss
|
|
|
(1,566,281
|
)
|
The following unaudited pro forma financial
information presents the results of operations of the Company for the years ended December 31, 2016 and 2015, as if the acquisition
of Aerex had taken place on January 1, 2015. The pro forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations which would have actually occurred had the transaction taken place on January
1, 2015, or of future results of operations:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenues
|
|
$
|
58,381,424
|
|
|
$
|
75,919,627
|
|
Cost of revenues
|
|
|
33,892,238
|
|
|
|
47,624,001
|
|
Gross profit
|
|
|
24,489,186
|
|
|
|
28,295,626
|
|
General and administrative expenses
|
|
|
18,992,301
|
|
|
|
17,266,335
|
|
Impairment loss on long-lived assets
|
|
|
2,000,000
|
|
|
|
-
|
|
Impairment of goodwill
|
|
|
1,750,000
|
|
|
|
-
|
|
Income from operations
|
|
|
1,746,885
|
|
|
|
11,029,291
|
|
Other income (expense), net
|
|
|
419,458
|
|
|
|
226,762
|
|
Income before income taxes
|
|
|
2,166,343
|
|
|
|
11,256,053
|
|
Provision for (benefit from) income taxes
|
|
|
(608,970
|
)
|
|
|
1,127,911
|
|
Net income
|
|
|
2,775,313
|
|
|
|
10,128,142
|
|
Income (loss) attributable to non-controlling interests
|
|
|
(1,148,675
|
)
|
|
|
1,719,425
|
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
$
|
3,923,988
|
|
|
$
|
8,408,717
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share attributable to Consolidated Water Co.
Ltd. common stockholders
|
|
$
|
0.26
|
|
|
$
|
0.57
|
|
Diluted earnings per common share attributable to Consolidated Water Co.
Ltd. common stockholders
|
|
$
|
0.26
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in the determination of:
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
14,809,909
|
|
|
|
14,741,748
|
|
Diluted earnings per share
|
|
|
14,944,028
|
|
|
|
14,827,755
|
|
12. Dividends
Interim dividends declared on Class A common
stock and redeemable preferred stock for each quarter of the respective years ended December 31 were as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
First Quarter
|
|
$
|
0.075
|
|
|
$
|
0.075
|
|
|
$
|
0.075
|
|
Second Quarter
|
|
|
0.075
|
|
|
|
0.075
|
|
|
|
0.075
|
|
Third Quarter
|
|
|
0.075
|
|
|
|
0.075
|
|
|
|
0.075
|
|
Fourth Quarter
|
|
|
0.075
|
|
|
|
0.075
|
|
|
|
0.075
|
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
13. Long term debt
Long term debt consists of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Demand loan payable with an original balance of $10.0 million, payable in quarterly installments of $500,000 with the remaining principal balance due on May 14, 2016, if not called by the lender; bearing interest at LIBOR plus 1.5%.
|
|
$
|
-
|
|
|
$
|
7,000,000
|
|
|
|
|
|
|
|
|
|
|
Working capital loan from related party to Aerex bearing interest at 1% per annum and payable on June 30, 2017
|
|
|
490,000
|
|
|
|
-
|
|
Total debt
|
|
|
490,000
|
|
|
|
7,000,000
|
|
Less current portion
|
|
|
490,000
|
|
|
|
7,000,000
|
|
Long term debt, excluding current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
14. Share capital and additional paid-in capital
Shares of redeemable preferred stock (“preferred
shares”) are issued under the Company’s Employee Share Incentive Plan (see Note 19) and carry the same voting and dividend
rights as shares of common stock (“common shares”). Preferred shares vest over four years and convert to common stock
on a share for share basis on the fourth anniversary of each grant date. Preferred shares are only redeemable with the Company’s
agreement. Upon liquidation, preferred shares rank in preference to the common shares to the extent of the par value of the preferred
shares and any related additional paid in capital.
The Company is a party to an Option Deed
dated August 6, 1997, and amended on August 8, 2005, September 27, 2005 and May 30, 2007 (as amended, the “Option Deed”),
which expires on July 31, 2017, that is designed to deter coercive takeover tactics. Pursuant to the Option Deed, the Company granted
to the holders of its common shares and redeemable preferred shares options (the “Options”) to purchase one one-hundredth
of a share of Class 'B' common shares of the Company at an exercise price of $100.00 per one one-hundredth of a Class 'B' common
share, subject to adjustment. The Options are attached to and trade with the Company’s common shares and redeemable preferred
shares, and no separate certificates representing the Options have been distributed. The Options will separate from the Company’s
common shares and redeemable preferred shares, and certificates representing the Options will be issued, upon the earlier of the
date (such date, the “Distribution Date”) that is (i) ten business days following a public announcement that a person
or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire,
beneficial ownership of 20% or more of the Company’s outstanding common shares, or (ii) ten business days following the commencement
of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person.
The Options are not exercisable until the
Distribution Date and will expire at the close of business on July 31, 2017, unless that date is extended or the Options are earlier
redeemed by us. Additionally, following the Distribution Date, all Options that are, or in certain circumstances were, beneficially
owned by any Acquiring Person will be null and void.
For a period of ten business days following
the date that any person, alone or jointly with its affiliates and associates, becomes an Acquiring Person, the Company will have
the right to redeem the Options at a price of CI$0.01 per Option. If the Options are not redeemed, then following such ten business
day period each holder of an Option will have the right to receive on exercise, in lieu of one one-hundredth of a Class 'B' common
share, common shares of the Company (or, in certain circumstances, cash, property or other securities) having a value equal to
two times the exercise price of the Option. For example, at an exercise price of $100.00 per Option, each Option not owned by
an Acquiring Person (or by certain related parties) following any person, alone or jointly with its affiliates and associates,
becoming an Acquiring Person would entitle its holder to purchase $200.00 worth of the Company’s common shares for $100.00.
Assuming that the common shares had a per share value of $20.00 at such time, the holder of each valid Option would be entitled
to purchase 10 common shares for $100.00.
Any of the provisions of the Option Deed may
be amended by the Company’s Board of Directors prior to the Distribution Date. After the Distribution Date, the provisions
of the Option Deed may be amended by the Board of Directors in order to cure any ambiguity, to make changes which do not adversely
affect the interests of holders of Options (excluding the interests of any Acquiring Person), or to shorten or lengthen any time
period under the Option Deed.
15. Cost of revenues and general and administrative expenses
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of revenues consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
$
|
9,037,347
|
|
|
$
|
10,675,287
|
|
|
$
|
14,631,638
|
|
Depreciation
|
|
|
5,355,529
|
|
|
|
5,270,454
|
|
|
|
5,077,293
|
|
Fuel oil
|
|
|
4,210,542
|
|
|
|
4,974,421
|
|
|
|
8,726,195
|
|
Employee costs
|
|
|
5,541,983
|
|
|
|
4,287,783
|
|
|
|
4,274,007
|
|
Cost of plant sales
|
|
|
142,151
|
|
|
|
878,396
|
|
|
|
1,470,045
|
|
Maintenance
|
|
|
3,545,269
|
|
|
|
3,436,736
|
|
|
|
3,131,947
|
|
Retail license royalties
|
|
|
1,528,914
|
|
|
|
1,427,073
|
|
|
|
1,405,067
|
|
Insurance
|
|
|
992,374
|
|
|
|
1,187,097
|
|
|
|
1,397,799
|
|
Materials
|
|
|
1,280,794
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
1,989,918
|
|
|
|
1,670,735
|
|
|
|
1,972,987
|
|
|
|
$
|
33,624,821
|
|
|
$
|
33,807,982
|
|
|
$
|
42,086,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee costs
|
|
$
|
7,598,829
|
|
|
$
|
6,841,274
|
|
|
$
|
6,671,510
|
|
Insurance
|
|
|
782,013
|
|
|
|
802,386
|
|
|
|
923,089
|
|
Professional fees
|
|
|
1,101,938
|
|
|
|
941,193
|
|
|
|
1,424,927
|
|
Directors’ fees and expenses
|
|
|
774,769
|
|
|
|
754,145
|
|
|
|
686,228
|
|
Depreciation
|
|
|
384,045
|
|
|
|
218,032
|
|
|
|
278,478
|
|
NSC project expenses
|
|
|
3,011,989
|
|
|
|
1,976,408
|
|
|
|
3,606,332
|
|
Amortization of intangibles
|
|
|
1,410,143
|
|
|
|
89,896
|
|
|
|
89,896
|
|
Other
|
|
|
3,613,858
|
|
|
|
3,216,822
|
|
|
|
3,330,581
|
|
|
|
$
|
18,677,584
|
|
|
$
|
14,840,156
|
|
|
$
|
17,011,041
|
|
16. Earnings per share
Earnings per share (“EPS”) are
computed on a basic and diluted basis. Basic EPS is computed by dividing net income (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.
The following summarizes information related
to the computation of basic and diluted EPS:
|
|
Year Ended December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
$
|
3,960,501
|
|
|
$
|
7,518,701
|
|
|
$
|
6,265,358
|
|
Less: preferred stock dividends
|
|
|
(11,563
|
)
|
|
|
(12,028
|
)
|
|
|
(11,485
|
)
|
Net income available to common shares in the determination of basic earnings
per common share
|
|
$
|
3,948,938
|
|
|
$
|
7,506,673
|
|
|
$
|
6,253,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares in the determination of basic earnings per common share
attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
14,809,909
|
|
|
|
14,741,748
|
|
|
|
14,697,896
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of preferred shares outstanding during the period
|
|
|
37,706
|
|
|
|
38,612
|
|
|
|
37,924
|
|
Potential dilutive effect of unexercised options
|
|
|
96,413
|
|
|
|
47,395
|
|
|
|
28,503
|
|
Weighted average number of shares used for determining diluted earnings
per common share attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
14,944,028
|
|
|
|
14,827,755
|
|
|
|
14,764,323
|
|
17. Segment information
The Company has three reportable segments:
retail, bulk and services. The retail segment primarily 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, The Bahamas and Belize under long-term contracts. The services segment
manufactures and services a wide range of water-related products and provides design, engineering, management, operating and other
services applicable to commercial and municipal water production, water supply and treatment, and industrial water and wastewater
treatment. The services segment includes the operations of Aerex beginning February 11, 2016. 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 costs to its other two 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 from operations.
All intercompany transactions are eliminated for segment presentation purposes.
The Company’s segments are strategic
business units that are managed separately because each segment sells different products and/or services, serves customers with
distinctly different needs and generates different gross profit margins.
|
|
Year Ended December
31, 2016
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Total
|
|
Revenues
|
|
$
|
23,505,619
|
|
|
$
|
29,647,034
|
|
|
$
|
4,723,054
|
|
|
$
|
57,875,707
|
|
Cost of revenues
|
|
|
10,294,298
|
|
|
|
19,488,550
|
|
|
|
3,841,973
|
|
|
|
33,624,821
|
|
Gross profit
|
|
|
13,211,321
|
|
|
|
10,158,484
|
|
|
|
881,081
|
|
|
|
24,250,886
|
|
General and administrative expenses
|
|
|
11,460,165
|
|
|
|
1,744,840
|
|
|
|
5,472,579
|
|
|
|
18,677,584
|
|
Impairment loss on long-lived assets
|
|
|
2,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000,000
|
|
Impairment of goodwill
|
|
|
-
|
|
|
|
-
|
|
|
|
1,750,000
|
|
|
|
1,750,000
|
|
Income (loss) from operations
|
|
$
|
(248,844
|
)
|
|
$
|
8,413,644
|
|
|
$
|
(6,341,498
|
)
|
|
|
1,823,302
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
417,954
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,241,256
|
|
Provision for (benefit from) income taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(536,057
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,777,313
|
|
Loss attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,183,188
|
)
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,960,501
|
|
Depreciation and amortization expenses for
the year ended December 31, 2016 for the retail, bulk and services segments were $2,468,846, $3,288,083 and $1,664,339, respectively.
|
|
As of December 31, 2016
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Total
|
|
Accounts receivable, net
|
|
$
|
2,646,628
|
|
|
$
|
12,692,714
|
|
|
$
|
1,161,456
|
|
|
$
|
16,500,798
|
|
Property plant and equipment, net
|
|
$
|
24,890,031
|
|
|
$
|
26,124,724
|
|
|
$
|
2,069,350
|
|
|
$
|
53,084,105
|
|
Construction in progress
|
|
$
|
134,392
|
|
|
$
|
743,296
|
|
|
$
|
7,806
|
|
|
$
|
885,494
|
|
Intangibles, net
|
|
$
|
-
|
|
|
$
|
599,960
|
|
|
$
|
4,595,516
|
|
|
$
|
5,195,476
|
|
Goodwill
|
|
$
|
1,170,511
|
|
|
$
|
2,328,526
|
|
|
$
|
6,285,211
|
|
|
$
|
9,784,248
|
|
Land held for development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,558,424
|
|
|
$
|
20,558,424
|
|
Total assets
|
|
$
|
54,303,011
|
|
|
$
|
68,663,628
|
|
|
$
|
40,637,889
|
|
|
$
|
163,604,528
|
|
|
|
Year Ended December
31, 2015
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Total
|
|
Revenues
|
|
$
|
23,254,757
|
|
|
$
|
31,854,255
|
|
|
$
|
2,007,190
|
|
|
$
|
57,116,202
|
|
Cost of revenues
|
|
|
10,543,972
|
|
|
|
21,634,789
|
|
|
|
1,629,221
|
|
|
|
33,807,982
|
|
Gross profit (loss)
|
|
|
12,710,785
|
|
|
|
10,219,466
|
|
|
|
377,969
|
|
|
|
23,308,220
|
|
General and administrative expenses
|
|
|
11,095,349
|
|
|
|
1,605,943
|
|
|
|
2,138,864
|
|
|
|
14,840,156
|
|
Income (loss) from operations
|
|
$
|
1,615,436
|
|
|
$
|
8,613,523
|
|
|
$
|
(1,760,895
|
)
|
|
|
8,468,064
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(542,570
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,925,494
|
|
Income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
406,793
|
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,518,701
|
|
Depreciation and amortization expenses for
the year ended December 31, 2015 for the retail, bulk and services segments were $2,344,315, $3,389,717 and $102,901, respectively.
|
|
As of December 31, 2015
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Total
|
|
Accounts receivable, net
|
|
$
|
2,261,141
|
|
|
$
|
6,231,626
|
|
|
$
|
1,036,249
|
|
|
$
|
9,529,016
|
|
Property plant and equipment, net
|
|
$
|
25,204,226
|
|
|
$
|
28,421,906
|
|
|
$
|
117,038
|
|
|
$
|
53,743,170
|
|
Construction in progress
|
|
$
|
1,860,050
|
|
|
$
|
68,560
|
|
|
$
|
-
|
|
|
$
|
1,928,610
|
|
Intangibles, net
|
|
$
|
-
|
|
|
$
|
666,152
|
|
|
$
|
105,659
|
|
|
$
|
771,811
|
|
Goodwill
|
|
$
|
1,170,511
|
|
|
$
|
2,328,526
|
|
|
$
|
-
|
|
|
$
|
3,499,037
|
|
Land held for development
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
20,558,424
|
|
|
$
|
20,558,424
|
|
Total assets
|
|
$
|
54,561,577
|
|
|
$
|
83,284,439
|
|
|
$
|
23,729,010
|
|
|
$
|
161,575,026
|
|
|
|
Year ended December
31, 2014
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Total
|
|
Revenues
|
|
$
|
24,104,932
|
|
|
$
|
39,201,011
|
|
|
$
|
2,253,135
|
|
|
$
|
65,559,078
|
|
Cost of revenues
|
|
|
11,521,277
|
|
|
|
27,985,441
|
|
|
|
2,580,260
|
|
|
|
42,086,978
|
|
Gross profit
|
|
|
12,583,655
|
|
|
|
11,215,570
|
|
|
|
(327,125
|
)
|
|
|
23,472,100
|
|
General and administrative expenses
|
|
|
11,540,333
|
|
|
|
1,605,499
|
|
|
|
3,865,209
|
|
|
|
17,011,041
|
|
Income from operations
|
|
$
|
1,043,322
|
|
|
$
|
9,610,071
|
|
|
$
|
(4,192,334
|
)
|
|
|
6,461,059
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
303,481
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,764,540
|
|
Income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,182
|
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,265,358
|
|
Depreciation and amortization expenses for
the year ended December 31, 2014 for the retail, bulk and services segments were $2,404,404, $3,196,912 and $102,396, respectively.
Revenues earned by major geographic region were:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cayman Islands
|
|
$
|
31,211,705
|
|
|
$
|
32,735,215
|
|
|
$
|
35,040,803
|
|
Bahamas
|
|
|
19,554,944
|
|
|
|
21,062,081
|
|
|
|
26,702,605
|
|
Indonesia
|
|
|
91,311
|
|
|
|
368,012
|
|
|
|
471,919
|
|
Belize
|
|
|
2,614,989
|
|
|
|
2,422,547
|
|
|
|
2,596,410
|
|
United States
|
|
|
3,887,284
|
|
|
|
-
|
|
|
|
-
|
|
Revenues earned from management services agreement with OC-BVI
|
|
|
515,474
|
|
|
|
528,347
|
|
|
|
747,341
|
|
|
|
$
|
57,875,707
|
|
|
$
|
57,116,202
|
|
|
$
|
65,559,078
|
|
Revenues earned from major customers were:
|
|
Year ended December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues earned from the Water and Sewerage Corporation of the Bahamas("WSC")
|
|
$
|
19,254,395
|
|
|
$
|
20,770,347
|
|
|
$
|
26,376,520
|
|
Percentage of total revenues from the WSC
|
|
|
33
|
%
|
|
|
36
|
%
|
|
|
40
|
%
|
Revenues earned from the Water Authority - Cayman ("WAC")
|
|
$
|
7,477,101
|
|
|
$
|
8,369,627
|
|
|
$
|
9,901,996
|
|
Percentage of total revenues from the WAC
|
|
|
13
|
%
|
|
|
15
|
%
|
|
|
15
|
%
|
Property, plant and equipment, net by major
geographic region were:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Cayman Islands
|
|
$
|
24,252,351
|
|
|
$
|
22,518,524
|
|
Bahamas
|
|
|
25,180,669
|
|
|
|
27,441,376
|
|
Belize
|
|
|
907,752
|
|
|
|
920,149
|
|
Indonesia
|
|
|
612,568
|
|
|
|
2,665,312
|
|
United States
|
|
|
1,978,321
|
|
|
|
-
|
|
All other country operations
|
|
|
152,444
|
|
|
|
197,809
|
|
|
|
$
|
53,084,105
|
|
|
$
|
53,743,170
|
|
18. Commitments and contingencies
Commitments
As of December 31, 2016, the Company held
operating leases for land, office space, warehouse space, and equipment. In addition to minimum lease payments, certain leases
provide for payment of real estate taxes, insurance, common area maintenance, and certain other expenses. Lease terms may include
escalating rent provisions and rent incentives. Minimum lease payments and rent incentives are expensed using a straight line
method over the non-cancellable lease term, which expire at various dates through the year 2035.
The short-term and long-term components of
deferred rent assets are included within prepaid expenses and other current assets, and other assets, respectively, in the consolidated
balance sheets.
Future minimum lease payments under these
non-cancellable operating leases as of December 31, 2016 are as follows:
2017
|
|
$
|
806,279
|
|
2018
|
|
|
790,725
|
|
2019
|
|
|
557,480
|
|
2020
|
|
|
432,473
|
|
2021
|
|
|
216,786
|
|
Thereafter
|
|
|
2,595,436
|
|
|
|
$
|
5,399,179
|
|
Total rental expense for the years ended December
31, 2016, 2015 and 2014 was $834,738, $821,845, and $812,658, respectively, and is included within general and administrative
expenses in the consolidated statements of income.
The Company has entered into employment agreements
with certain executives, which expire through December 31, 2019 and provide for, among other things, base annual salaries in an
aggregate amount of approximately $2.1 million, performance bonuses and various employee benefits.
The Company has purchase obligations
totaling approximately $2.9 million through March 31, 2018.
Retail License
The Company sells water through its retail
operations under a license issued in July 1990 by the Cayman Islands government that grants Cayman Water the exclusive right to
provide potable water to customers within its licensed service area. As discussed below, this license was set to expire in July
2010 but has since been extended while negotiations for a new license take place. Pursuant to the 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, the Seven Mile Beach and West Bay areas. For the years ended December 31, 2016,
2015 and 2014, the Company generated approximately 40%, 40% and 36%, respectively, of its consolidated revenues and 56%, 56% and
54%, respectively, of its consolidated gross profit from the retail water operations conducted pursuant to Cayman Water’s
exclusive license.
Under the license, Cayman Water pays a royalty
to the government of 7.5% of its gross retail water sales revenues (excluding energy cost adjustments). The selling prices of
water sold to its 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 Cayman Water wants to adjust its prices for any reason other than inflation or electricity
costs, Cayman Water has to request prior approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments
would be referred to arbitration.
The license was scheduled to expire in July
2010 but has been 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 extension of the license expired on June 30, 2016. The Company
continues to provide water subsequent to June 30, 2016 on the assumption that the license has been further extended to allow the
parties to continue negotiations without interruption to an essential service.
The Cayman Islands government could ultimately
offer a third party a license to service some or all of Cayman Water’s 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.”
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, the
Company was advised in correspondence from the Cayman Islands government and the WAC that: (i) the WAC, and not the Cayman Islands
government, is the principal negotiator in these license negotiations; and (ii) the WAC has determined that a rate of return on
invested capital model (“RCAM”) for the retail license is in the best interest of the public and Cayman Water’s
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. The Company responded to the Cayman Islands government that it disagreed
with the government’s 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 its retail license renewal negotiations, the Company filed an Application for Leave to Apply for Judicial Review
(the “Application”) with the Grand Court of the Cayman Islands (the “Court”), seeking declarations that:
(i) certain provisions of the New Laws appear to be incompatible and a determination as to how those provisions should be interpreted;
(ii) the WAC’s roles as the principal license negotiator, statutory regulator and the Company’s competitor put the
WAC in a position of hopeless conflict; and (iii) the WAC’s decision to replace the rate structure under the Company’s
current exclusive license with RCAM was predetermined and unreasonable. The hearing for this judicial review was held in April
2014 and in June 2014 the Court issued its ruling, which was limited to the determination 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 the Company for the renewal
of the license.
In November 2014, the Company wrote to
the Minister of Works offering to recommence license negotiations on the basis of the RCAM model subject to the following conditions:
(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 the Company would mutually appoint an independent referee and chairman of the negotiations, (iii) the Company’s new license
would provide exclusivity for the production and provision of all piped water, both potable and non-potable, within its Cayman
Islands license area, (iv) the Government would allow the Company to submit its counter proposal to the WAC’s RCAM license
draft, and (v) the principle of subsidization of residential customer rates by commercial customer rates would continue under a
new license. In March 2015 the Company received a letter from the Minister of Works with the following responses to the Company’s
November 2014 letter: (1) while the Cayman government plans to create a new public utilities commission, the provision of the new
retail 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 the Company to submit its counter proposal
to the WAC’s RCAM license draft, the WAC will draft the license with the understanding that the Company 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 the Company consider eliminating its monthly minimum volume charge in the
new license.
The Company recommenced license negotiations
with the WAC during the third quarter of 2015 based upon a draft RCAM license provided by the WAC.
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 has the ability to supervise, monitor and regulate multiple utility undertakings and
markets. Water utilities are not presently included in the scope of OFREG’s regulatory functions and remain under the regulatory
control of the WAC. However, the Company was given the opportunity by the Cayman Islands government to comment on four draft legislative
bills which are intended to transfer responsibility for economic regulation of the water utility sector from the WAC to OFREG.
The Company has not been advised as to the final form and content of these legislative bills and is therefore presently unable
to assess their ultimate impact on its retail license negotiations, however the Company believes that these bills will be enacted
into law within the coming months. OFREG began operations in January 2017, and the Company has been advised by the WAC that they
are presently coordinating with OFREG to transfer responsibility for the Company’s license negotiations from the WAC to OFREG.
The Company cannot presently determine the impact of OFREG or the pending legislative bills on its retail license negotiations.
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 of the operating income and cash flows the Company has historically generated
from its retail operations and could require the Company to record an impairment loss to reduce the carrying value of its goodwill.
Such impairment loss could have a material adverse impact on the Company’s results of operations.
CW-Belize
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. The Company is presently unable to determine what impact the Order and
the Second Order will have on its financial condition, results of operations or cash flows.
CW-Bali
Through its subsidiary CW-Bali, the Company
has built and presently operates 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. Since its inception, the sales volumes for this
plant have not been sufficient to cover its operating costs. CW-Bali’s summarized financial results for the three most recent
fiscal years are as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues
|
|
$
|
91,311
|
|
|
$
|
368,012
|
|
|
$
|
471,919
|
|
Impairment loss on long-lived assets
|
|
|
(2,000,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Loss from operations
|
|
|
(2,744,361
|
)
|
|
|
(483,544
|
)
|
|
|
(458,393
|
)
|
Net loss
|
|
|
(2,547,332
|
)
|
|
|
(860,783
|
)
|
|
|
(585,744
|
)
|
Depreciation
|
|
|
450,736
|
|
|
|
304,673
|
|
|
|
279,037
|
|
In 2015, the Indonesian government passed
Regulation 122 which provides a mechanism for governmental regulatory oversight over the utilization of Indonesia’s water
resources. Under this new regulation, the approval or cooperation of the local government water utility is required for any water
supply contracts executed by non-governmental providers after the effective date of the regulation. Consequently CW-Bali will
be required to enter into a cooperation agreement with Bali’s local government water utility, PDAM, or otherwise obtain
PDAM’s approval, to supply any new customers.
In late 2015, the Company decided to seek
a strategic partner for CW-Bali to (i) purchase a major portion of its equity ownership in CW-Bali; (ii) lead CW-Bali’s
sales and marketing efforts; (iii) liaise with PDAM; and (iv) assist with CW-Bali’s on-going funding requirements.
During the three months ended September 30,
2016, the Company reassessed the prospects for CW-Bali in light of its results to date, current circumstances and uncertainties
impacting the business, and expected future funding requirements and tested its long-lived assets for possible impairment. To
test for impairment, the Company estimated the future undiscounted cash flows CW-Bali will receive from its plant by (i) identifying
various possible future scenarios for the business; (ii) estimating the undiscounted future cash flows associated with each possible
scenario; and (iii) assigning a probability to each scenario. The resulting probability-weighted sum represents the Company’s
best estimate of the future undiscounted cash flows to be derived by CW-Bali from its long-lived desalination plant assets. The
carrying value of CW-Bali’s long-lived assets exceeded the Company’s probability-weighted estimate of CW-Bali’s
future undiscounted cash flows which indicated impairment of these assets, and the Company recorded an impairment loss of $2.0
million during the three months ended September 30, 2016 to reduce the carrying value of its long-lived CW-Bali assets to their
estimated fair value.
If in the coming months CW-Bali is not
able to obtain a strategic partner, sell water to PDAM or to other new customers through a cooperation agreement, or otherwise
significantly increase the revenues generated by its Nusa Dua plant, the Company may cease CW-Bali’s operations. If the
Company ceases CW-Bali’s operations, it may be required to record further impairment losses to reduce the carrying value
of its investment in CW-Bali to its fair value for the period in which the Company formally commits to exit the Bali market. Such
impairment losses could have a material adverse impact on the Company’s results of operations. Any sale of a portion of
the Company’s investment in CW-Bali may be for an amount less than its carrying amount, resulting in a loss on the sale
that could have a material adverse impact on the Company’s results of operations. The carrying value of the Company’s
investment in CW-Bali as of December 31, 2016 totaled $1.8 million, consisting of net assets of approximately $1.2 million and
a cumulative foreign currency translation adjustment reflected in stockholders’ equity of $549,555.
The Company anticipated at the time CW-Bali
commenced operations that CW-Bali’s revenues, expenditures, and other cash flows would be conducted primarily in the local
currency, the Indonesian rupiah (IDR). The Company expected that financial support it and its other subsidiaries provided to CW-Bali
would not extend beyond CW-Bali’s start-up phase, and that thereafter CW-Bali would generate positive net cash flows from
its operations and thus remain relatively self-contained and integrated within the economic environment of Bali, Indonesia. As
a result, since inception of its operations through September 30, 2016, the functional currency of CW-Bali was the IDR.
However, since its inception CW-Bali has been
dependent upon on-going financial support from the Company in U.S dollars (US$) to continue its operations. The Company expects
such funding to continue until such time, if ever, that CW-Bali generates sufficient revenues to support its operations, or is
able to obtain a strategic partner to assist with its on-going funding requirements, or ceases operations. Consequently, effective
as of October 1, 2016, the Company changed the functional currency of CW-Bali to US$.
During the periods for which IDR was CW-Bali’s
functional currency, the Company recorded foreign currency gains and losses arising from CW-Bali’s transactions conducted
in currencies other than the IDR. Such foreign currency gains and losses included amounts associated with (i) transactions denominated
in currencies other than the IDR and (ii) the re-measurement of monetary assets and liabilities denominated in currencies other
than the IDR as of the balance sheet date. CW-Bali’s monetary assets and liabilities denominated in currencies other than
the IDR consist of US$-denominated bank accounts and US$-denominated loans provided to CW-Bali by the Company. Such foreign currency
transaction gains (losses) were included in income and amounted to approximately $28,000 and ($309,000) for the three months ended
September 30, 2016 and 2015, respectively and approximately $202,000 and ($542,000) for the nine months ended September 30, 2016
and 2015, respectively. After the re-measurement process of monetary assets and liabilities was completed, the assets and liabilities
of CW-Bali were translated into US$ using exchange rates in effect at the end of each period. Revenues and expenses for CW-Bali
were translated using rates that approximated those in effect during the period. The effect of these foreign currency translations
was recognized in the cumulative translation adjustment included in the Company’s stockholders’ equity, which amounted
to ($549,555) as of September 30, 2016 and December 31, 2016 and ($533,365) as of December 31, 2015.
This change in functional currency will be
applied on a prospective basis, and therefore, the cumulative translation adjustment of ($549,555) as of September 30, 2016 will
remain unchanged until such time that the CW-Bali is no longer dependent on US$ funding to support its operations, the Company
sells all or a portion of its equity interest in CW-Bali, or the Company discontinues CW-Bali’s operations. Translated amounts
for non-monetary assets as of September 30, 2016 will become the new accounting basis for those assets effective October 1, 2016.
Monetary assets denominated in foreign currencies, including the IDR, will be re-measured to US$ at the current exchange rate
as of the balance sheet date going forward. The Company anticipates that the likely effect of this change in functional currency
will result in future foreign currency gains and losses that pertain to (i) transactions denominated in IDR and (ii) foreign currency
re-measurements associated with monetary assets and liabilities denominated in IDR. As of December 31, 2016, such balances include
IDR-denominated cash and accounts payable, which amounted to approximately $28,000 and $7,000, respectively, based upon the exchange
rate between the IDR and US$ as of that date. Based on this change in functional currency, the US$-denominated loans to CW-Bali
from its parent and affiliates will not be subject to further re-measurement adjustments.
Other Contingencies
CW-Bahamas’ contract to supply water
to the WSC from its Blue Hills plant requires CW-Bahamas to guarantee delivery of a minimum quantity of water per week. If CW-Bahamas
does not meet this minimum, it will be 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 under the contract. The Blue Hills contract expires
in 2032 and requires CW-Bahamas to deliver 63.0 million gallons of water each week.
19. Stock-based compensation
The Company has the following stock compensation
plans that form part of its employees’ remuneration:
Employee Share Incentive Plan (Preferred
Shares)
The Company awards shares of its preferred
stock for $nil consideration under its Employee Share Incentive Plan to eligible employees, other than Directors and Officers,
after four consecutive years of employment. If these employees remain with the Company for an additional four consecutive years,
they can convert these preferred shares into shares of common stock on a one for one basis. In addition, at the time the preferred
shares are granted, the employees receive options to purchase an equal number of shares of preferred stock at a discount to the
average trading price of the Company’s common stock for the first seven days of the October immediately preceding the date
of the preferred stock grant. If these options are exercised, the shares of preferred stock obtained may also be converted to
shares of common stock if the employee remains with the Company for an additional four consecutive years. Each employee’s
option to purchase shares of preferred stock must be exercised within 30 days of the grant date, which is the 90th day after the
date of the independent registered public accountants firm’s audit opinion on the Company’s consolidated financial
statements. Shares of preferred stock not subsequently converted to shares of common stock are redeemable only at the discretion
of the Company. Shares of preferred stock granted under this plan during the years ended December 31, 2016, 2015 and 2014, totaled
8,421, 8,615 and 5,957, respectively, and an equal number of preferred stock options were granted in each of these years.
2008 Equity Incentive Plan
On May 14, 2008, the Company’s stockholders
approved the 2008 Equity Incentive Plan (the “2008 Plan”) and reserved 1,500,000 shares of the Company’s Class
A common shares for issuance under this plan. All Directors, executives and key employees of the Company or its affiliates are
eligible for participation in the 2008 Plan which provides for the issuance of options, restricted stock and stock equivalents
at the discretion of the Board. No options were granted under the plan in 2014, 2015 or 2016.
The Company measures and recognizes compensation
expense at fair value for all share-based payments, including stock options. Stock-based compensation for the Employee Share Incentive
Plan, Employee Share Option Plan and the 2008 Equity Incentive Plan totaled $152,078, $143,951 and $116,574 for the years ended
December 31, 2016, 2015 and 2014, respectively, and is included in general and administrative expenses in the consolidated statements
of income.
Non-Executive Directors’ Share Plan
This stock grant plan provides part of Directors’
remuneration. Under this plan, non-Executive Directors receive a combination of cash and common stock for their participation
in Board meetings. The number of shares of common stock granted is calculated based upon the market price of the Company’s
common stock on October 1 of the year preceding the grant. Common stock granted under this plan during the years ended December
31, 2016, 2015 and 2014 totaled 15,192, 10,514 and 5,992 shares, respectively. The Company recognized stock-based compensation
for these share grants of $179,573, $143,218 and $85,880 for the years ended December 31, 2016, 2015 and 2014, respectively.
Employee Share Option
Plan (Common Stock Options)
The Company has an employee stock option plan
for certain long-serving employees of the Company. Under the plan, these employees are granted in each calendar year, as long
as the employee is a participant in the Employee Share Incentive Plan, options to purchase common shares. The price at which the
option may be exercised will be the closing market price on the grant date, which is the 40th day after the date of the Company’s
Annual Shareholder Meeting. The number of options each employee is granted is equal to five times the sum of (i) the number of
preferred shares which that employee receives for $nil consideration and (ii) the number of preferred share options which that
employee exercises in that given year. Options may be exercised during the period commencing on the fourth anniversary of the
grant date and ending on the thirtieth day after the fourth anniversary of the grant date. Options granted under this plan during
the years ended December 31, 2016, 2015, and 2014, totaled 3,980, 4,030 and 2,990, respectively.
The fair value of each option award is estimated
on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatilities
are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option
exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents
the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate stock option
exercises and forfeitures within its valuation model. The risk-free interest rate for the expected term of the option is based
on the U.S. Treasury yield curve in effect at the time of the grant.
The significant weighted average assumptions
for the years ended December 31, 2016, 2015 and 2014 were as follows:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Risk free interest rate
|
|
|
0.43
|
%
|
|
|
0.41
|
%
|
|
|
0.48
|
%
|
Expected option life (years)
|
|
|
1.4
|
|
|
|
1.4
|
|
|
|
1.4
|
|
Expected volatility
|
|
|
33.49
|
%
|
|
|
33.74
|
%
|
|
|
48.06
|
%
|
Expected dividend yield
|
|
|
2.29
|
%
|
|
|
2.35
|
%
|
|
|
2.71
|
%
|
A summary of the Company’s stock option activity for the
year ended December 31, 2016 is as follows:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Aggregate
Intrinsic
Value
(1)
|
|
Outstanding at beginning of period
|
|
|
94,478
|
|
|
$
|
10.52
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
12,401
|
|
|
|
10.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(55,061
|
)
|
|
|
7.90
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(34,218
|
)
|
|
|
9.87
|
|
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2016
|
|
|
17,600
|
|
|
$
|
12.02
|
|
|
|
1.90
years
|
|
|
$
|
-
|
|
Exercisable as of December 31, 2016
|
|
|
-
|
|
|
$
|
0.00
|
|
|
|
-
years
|
|
|
$
|
-
|
|
|
(1)
|
The intrinsic value of a stock option
represents the amount by which the fair value of the underlying stock, measured by reference
to the closing price of the common shares of $10.85 on the Nasdaq Global Select Market
on December 31, 2016, exceeds the exercise price of the option.
|
As of December 31, 2016, 17,600 non-vested
options were outstanding, with weighted average exercise price of $12.02, and average remaining contractual life of 1.90 years.
The total remaining unrecognized compensation costs related to unvested stock-based arrangements were $25,336 as of
December 31, 2016 and are expected to be recognized over a weighted average period of 1.90 years.
As of December 31, 2016, unrecognized compensation costs relating
to redeemable preferred stock outstanding were $155,231 and are expected to be recognized over a weighted average period of 1.22
years.
The following table summarizes the weighted
average fair value of options at the date of grant and the intrinsic value of options exercised during the years ended December
31, 2016, 2015 and 2014:
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Options granted with an exercise price below market price on the date of grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employees — preferred stock
|
|
$
|
4.48
|
|
|
$
|
4.19
|
|
|
$
|
-
|
|
Overall weighted average
|
|
|
4.48
|
|
|
|
4.19
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted with an exercise price at market price on the date of grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management employees
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Employees — common stock
|
|
|
3.13
|
|
|
|
3.39
|
|
|
|
3.11
|
|
Overall weighted average
|
|
|
3.13
|
|
|
|
3.39
|
|
|
|
3.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted with an exercise price above market price on the date of grant:
|
|
|
|
|
|
|
|
|
|
|
|
|
Management employees
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Employees — preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
0.59
|
|
Overall weighted average
|
|
|
-
|
|
|
|
-
|
|
|
|
0.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
$
|
73,753
|
|
|
$
|
87,371
|
|
|
$
|
17,162
|
|
Long-Term Incentive Compensation
The Board of Directors approved changes to the long-term incentive compensation for the Company’s
executive officers effective for 2015 and thereafter to better align the interests of its executive officers with those of its
shareholders. The revised long-term compensation plan includes a combination of performance and non-performance based grants of
common stock. The non-performance based stock grants vest ratably over a three-year period. The performance based grants vest at
the end of three years based upon the achievement of three year cumulative performance outcomes. The initial three year measurement
period for the performance based stock grants is 2015-2017. Common stock granted under this plan for the year ended December 31,
2015 but issued in 2016 totaled 9,964 shares. Common stock granted under this plan for the year ended December 31, 2016 but issued
in 2017 totaled 17,825 shares. The Company recognized $189,368 and $120,500 in stock-based compensation expense related to the
non-performance stock grants under the revised long-term compensation plan for the year ended December 31, 2016 and 2015, respectively.
20. Retirement benefits
Staff pension plans are offered to all employees
in Florida, Cayman Islands and Bahamas. The plans are administered by third party pension plan providers and are defined contribution
plans. The Company matches the contribution of the first 5% of each participating employee’s salary up to $104,400 for the
Cayman Islands, there is no salary limit for the Bahamas and up to 6% of each participating employee salary for Florida employees.
The total amount recognized as an expense under the plan during the year ended December 31, 2016, 2015, and 2014 was $376,086,
$328,084, and $325,576, respectively.
21. Financial instruments
Credit risk:
The Company is not exposed to significant
credit risk on its retail customer accounts as its policy is to cease supply of water to customers’ accounts that are more
than 45 days overdue. The Company’s exposure to credit risk is concentrated on receivables from its Bulk water customers.
The Company considers these receivables fully collectible and therefore has not recorded an allowance for these receivables.
Interest rate risk:
The Company is not subject to significant
interest-rate risk arising from fluctuations in interest rates as the balance of the Company’s note payable to related party
at December 31, 2016 is not significant to its financial condition or results of operations.
Foreign exchange risk:
All relevant foreign currencies other than
the Mexican peso, Indonesian rupiah and the euro have been fixed to the dollar for over 30 years and the Company does not employ
a hedging strategy against exchange rate risk associated with the reporting in dollars. If any of these fixed exchange rates becomes
a floating exchange rate or if any of the foreign currencies in which the Company conducts business depreciate significantly against
the dollar, the Company’s consolidated results of operations could be adversely affected.
Fair values:
As of December 31, 2016 and 2015 the carrying
amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the note payable to
related party, the demand loan payable and dividends payable approximate their fair values due to the short term maturities of
these instruments. Management considers that the carrying amounts for loans receivable as of December 31, 2016 and 2015 approximate
their fair value as the stated interest rates approximate market rates.
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 December 31, 2016 and 2015:
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability arising from put/call options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
680,000
|
|
|
$
|
680,000
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
428,203
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
428,203
|
|
Certificate of deposit
|
|
|
-
|
|
|
|
5,637,538
|
|
|
|
-
|
|
|
|
5,637,538
|
|
Total recurring
|
|
$
|
428,203
|
|
|
$
|
5,637,538
|
|
|
$
|
-
|
|
|
$
|
6,065,741
|
|
The activity for the Level 3 liability for the year ended December
31, 2016:
Net liability arising from put/call options
(1)
|
|
|
|
|
Balance as of December 31, 2015
|
|
$
|
-
|
|
Issuance
|
|
|
383,000
|
|
Unrealized loss
|
|
|
297,000
|
|
Balance as of December 31, 2016
|
|
$
|
680,000
|
|
(1) The net liability arising from the put/call options is included
other liabilities in the accompanying consolidated balance sheets as of December 31, 2016.
22. Supplemental disclosure of cash flow information
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Interest paid in cash
|
|
$
|
74,898
|
|
|
$
|
147,546
|
|
|
$
|
196,768
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Transfers from inventory to property plant and equipment
and construction in progress
|
|
$
|
276,807
|
|
|
$
|
123,036
|
|
|
$
|
168,622
|
|
Transfers from construction in progress to property,
plant and equipment
|
|
$
|
3,542,119
|
|
|
$
|
2,694,733
|
|
|
$
|
2,693,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 25,156, 10,514, and 18,294, respectively,
shares of common stock for services rendered
|
|
$
|
278,388
|
|
|
$
|
119.018
|
|
|
$
|
263,098
|
|
Issuance of 8,421, 8,615, and 5,957, respectively,
shares of redeemable preferred stock for services rendered
|
|
$
|
111,410
|
|
|
$
|
110,703
|
|
|
$
|
65,289
|
|
Conversion (on a one-to-one basis) of 11,558, 7,195,
and 4,756, respectively, shares of redeemable preferred stock to common stock
|
|
$
|
6,935
|
|
|
$
|
4,317
|
|
|
$
|
2,854
|
|
Dividends declared but not paid
|
|
$
|
1,118,017
|
|
|
$
|
1,111,501
|
|
|
$
|
1,106,456
|
|
23. Impact of recent accounting standards
Adoption of New Accounting Standards:
In February 2015, the Financial Accounting
Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02,
Consolidation (Topic 810)
- Amendments to the Consolidation Analysis
. The amendments in this update require management to reevaluate whether certain
legal entities should be consolidated. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and
similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (2) eliminate the presumption
that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that
are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope
exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with
or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered
money market funds. The amendments in this update are effective for public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2015. The adoption of ASU 2015-02 did not have a material impact on the
Company’s consolidated financial statements.
In April 2015, the FASB issued ASU 2015-03,
Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
. ASU 2015-03 provides
authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present
debt issuance costs as a direct deduction from the carrying value of debt. The amendments in this update are effective for public
business entities in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance
must be applied retrospectively to each prior period presented. The adoption of ASU 2015-03 did not have a material impact on the
Company’s consolidated financial statements.
In August 2015, the FASB issued ASU 2015-15,
Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements
, which clarifies
the treatment of debt issuance costs from line-of-credit arrangements after adoption of ASU 2015-03. The SEC Staff announced they
would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred
debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings
on the line-of-credit arrangement. The amendment requires retrospective application and represents a change in accounting principle.
The amendment becomes effective in fiscal years beginning after December 15, 2015. The adoption of ASU 2015-15 did not have a material
impact on the Company’s consolidated financial statements.
In September 2015, the FASB issued ASU
2015-16,
Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments
, which requires an acquirer
to recognize adjustments identified during the measurement period in the reporting period in which the adjustment amounts are determined.
The adjustment must include the cumulative effect of the adjustment as if the accounting had been completed on the acquisition
date. The update should be applied prospectively and becomes effective January 1, 2016. Early application is permitted. The adoption
of ASU 2015-16 did not have a material impact on the Company’s consolidated financial statements.
Effect of newly issued but not yet effective accounting standards:
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers
. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. ASU 2014-09 prescribes a five step framework in accounting for revenues from contracts within its scope, including
(a) identification of the contract, (b) identification of the performance obligations under the contract, (c) determination of
the transaction price, (d) allocation of the transaction price to the identified performance obligations and (e) recognition of
revenues as the identified performance obligations are satisfied. ASU 2014-09 also prescribes additional disclosures and financial
statement presentations. ASU 2014-09 may be adopted retrospectively or under a modified retrospective method where the cumulative
effect is recognized at the date of initial application. This amendment was originally effective January 1, 2017. In August 2015,
the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
, which defers
the effective date by one year to January 1, 2018. Early application is permitted but not before January 1, 2017.
In March 2016, the FASB issued ASU 2016-08,
Principal versus Agent Considerations (Reporting Revenue Gross versus Net
), that amends the principal versus agent guidance
in ASU 2014-09. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before
they are transferred to the customer. ASU 2016-08 also provides additional guidance about how to apply the control principle when
services are provided and when goods or services are combined with other goods or services.
In April 2016, the FASB issued ASU 2016-10,
Identifying Performance Obligations and Licensing,
that amends the revenue guidance in ASU 2014-09 on identifying performance
obligations and accounting for licenses of intellectual property. ASU 2016-10 changed the FASB's previous proposals on renewals
of right-to-use licenses and contractual restrictions. The effective date of the standard for the Company will coincide with ASU
2014-09 during the first quarter 2018.
In May 2016, the FASB issued ASU 2016-11,
Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards
Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting
. ASU 2016-11 rescinds several
SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping
and handling fees and freight services.
In May 2016, the FASB issued ASU 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,
which clarifies implementation
guidance around collectability, sales taxes collected from customers, noncash considerations, contract modifications at transition,
and completed contracts at transition.
In December 2016, the FASB issued ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
, which amended the guidance on
performance obligation disclosures and makes technical corrections and improvements to the new revenue standard. The standard is
effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period,
and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative effect transition
method.
The effective dates of ASU 2016-08, ASU
2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 are the same as ASU 2015-14 discussed above. The Company is currently evaluating
the effect the adoption of these standards will have on the Company’s consolidated financial statements.
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. ASU 2015-11 applies to all inventory that is measured using
first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost or net realizable
value. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December
15, 2016. Early application is permitted. The adoption of ASU 2015-11 is not expected to have a material impact on the Company’s
financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 requires net deferred tax assets and
liabilities be classified as noncurrent in a classified balance sheet and eliminates the classification between current and noncurrent
amounts ASU No. 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016 and interim
periods within those annual periods. Early adoption is permitted. The adoption of ASU 2015-17 is not expected to have a material
impact on the Company’s financial position, results of operations or cash flows.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,
which provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities.
ASU 2016-01 is effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for
most provisions, is effective using the cumulative-effect transition approach. Early application is permitted for certain provisions.
The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s consolidated financial
statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which provides guidance for accounting for leases. The new guidance requires companies to recognize
the assets and liabilities for the rights and obligations created by leased assets. The accounting guidance for lessors will remain
relatively largely unchanged. ASU 2016-02 is effective for annual and interim periods beginning after December 15, 2018. Early
adoption is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s
consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07,
Investments- Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting,
which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant
influence over a previously held investment. ASU 2016-07 will be effective for the Company’s fiscal year beginning January
1, 2017 and subsequent interim periods. The adoption of ASU 2016-07 is not expected to have a material impact on the Company’s
financial position, results of operations or cash flows.
In March 2016, the FASB issued ASU 2016-09,
C
ompensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
which simplifies
several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory
tax withholding requirements and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning
after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2016-09 is not expected to have a
material impact on the Company’s financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which clarifies how certain
cash receipts and payments are presented in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning
after December 15, 2017 and early adoption is permitted. The Company is currently evaluating the effect the adoption of this amendment
will have on the Company’s consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
, which removes Step 2 of the
goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its
fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. An entity still has the option to perform
the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 should
be applied on a prospective basis and is effective for annual periods beginning January 1, 2020. Early adoption is permitted for
interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating
the effect the adoption of this amendment will have on the Company’s consolidated financial statements.
24. Income taxes
The components of income (loss) before
income taxes are as follows:
|
|
Years Ended December 31
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Foreign (not subject to income taxes)
|
|
$
|
8,851,332
|
|
|
$
|
10,502,379
|
|
|
$
|
10,355,689
|
|
Mexico
|
|
|
(3,339,932
|
)
|
|
|
(2,576,885
|
)
|
|
|
(3,591,149
|
)
|
United States
|
|
|
(3,270,144
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
2,241,256
|
|
|
$
|
7,925,494
|
|
|
$
|
6,764,540
|
|
The Company's provision for income taxes
for 2016 consisted of a deferred tax benefit relating to U.S. operations of $536,057.
A reconciliation of the U.S. statutory
federal tax rate to the effective benefit rate for the U.S. loss before income taxes for the year ended December 31, 2016 is as
follows:
U.S statutory federal rate
|
|
|
34.0
|
%
|
State taxes, net of federal effect
|
|
|
(2.0
|
%)
|
Foreign tax rate differential
|
|
|
(128.3
|
%)
|
Permanent items
|
|
|
20.9
|
%
|
Valuation allowance for deferred tax assets
|
|
|
51.4
|
%
|
|
|
|
(23.9
|
%)
|
The tax effects of significant items comprising
the Company's net long term deferred tax liability at December 31, 2016 were as follows:
Deferred tax assets:
|
|
|
|
Operating loss carryforwards - Mexico
|
|
$
|
5,545,008
|
|
Operating loss carryforwards - United States
|
|
|
150,758
|
|
Valuation allowances
|
|
|
(5,695,766
|
)
|
|
|
|
-
|
|
Deferred tax liabilities:
|
|
|
|
|
Property and equipment
|
|
|
129,041
|
|
Intangible assets
|
|
|
1,786,200
|
|
|
|
|
1,915,241
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
1,915,241
|
|
25. Subsequent events
The Company evaluated subsequent events through
the time of the filing of its Annual Report on Form 10-K. Other than as disclosed in these 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 consolidated financial statements.
The accompanying
notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes
are an integral part of these consolidated financial statements.
Ocean Conversion (BVI) Ltd. (“OC-BVI”)
was incorporated in the British Virgin Islands under the Companies Act, Cap 285, on May 14, 1990 and is engaged in the production
and sale of potable water to the Government of the British Virgin Islands (the “BVI government”). OC-BVI has an agreement
with the BVI government, its sole customer, to produce and supply a guaranteed quantity and quality of potable water. This agreement
provides for specific penalties should OC-BVI not be able to provide the guaranteed quantity of water.
JVD Ocean Desalination Ltd. (“JVD”),
a majority owned subsidiary of OC-BVI, was incorporated on January 2, 2003 and began producing potable water on the island of
Jost Van Dyke for the BVI government in July 2003 under a 10-year contract with the BVI government that expired July 8, 2013.
Pursuant to the contract, OC-BVI is operating the plant on a year-to-year basis until the BVI government informs OC-BVI of its
intention to extend the existing, or enter into a new agreement.
OC-BVI supplies water to the BVI government
under a seven-year contract executed in March 2010 for OC-BVI’s plant located at Bar Bay, Tortola (the “Bar Bay Agreement”).
Under the terms of the Bar Bay Agreement, OC-BVI delivers up to 600,000 gallons of water per day to the BVI government from the
Bar Bay plant and the BVI government is obligated to pay for this water at a specified price as adjusted by a monthly energy factor.
In February 2017, the OC-BVI and BVI government executed a 14 year extension of the Bar Bay Agreement at a reduced price per gallon
for the water provided.
Additions to property, plant and equipment
consist of the cost of the contracted services, direct labor and materials. Assets under construction are recorded as additions
to property, plant and equipment upon completion of the projects. Depreciation commences in the month of addition.
Under the terms of a water supply agreement
dated May 1990 (the “1990 Agreement”) between OC-BVI and the Government of the British Islands (the “BVI Government”),
upon the expiration of its initial seven-year term in May 1999, the 1990 Agreement would automatically be extended for another
seven-year term unless the BVI government provided notice, at least eight months prior to such expiration, of its decision to
purchase the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $1.42 million. In correspondence
between the parties from late 1998 through early 2000, the BVI government indicated that it intended to purchase the plant but
would be amenable to negotiating a new water supply agreement, and that it considered the 1990 Agreement to be in force on a monthly
basis until negotiations between the BVI government and OC-BVI were concluded. Occasional discussions were held between the parties
since 2000 without resolution of the matter. OC-BVI continued to supply water from the plant and expended approximately $4.7 million
between 1995 and 2003 to significantly expand the production capacity of the plant beyond that contemplated in the 1990 Agreement.
In 2006, the BVI government took the position
that the seven-year extension of the 1990 Agreement had been completed and that it was entitled to ownership of the Baughers Bay
plant. In response, OC-BVI disputed the BVI government’s contention that the original terms of the 1990 Agreement remained
in effect.
During 2007, the BVI government significantly
reduced its payments for the water being supplied by OC-BVI and filed a lawsuit with the Eastern Caribbean Supreme Court (the
“Court”) seeking ownership of the Baughers Bay plant. OC-BVI counterclaimed to the Court that it was entitled to continued
possession and operation of the Baughers Bay plant until the BVI government paid OC-BVI approximately $4.7 million, which OC-BVI
believed represented the value of the Baughers Bay plant at its expanded production capacity. OC-BVI subsequently filed claims
with the Court seeking payment for water sold and delivered to the BVI government through May 31, 2009 at the contract prices
in effect before the BVI government asserted its purported right of ownership of the plant.
The Court ruled on this litigation in 2009,
determining that (i) the BVI government was entitled to immediate ownership and possession of the Baughers Bay plant; (ii) OC-BVI
was not entitled to compensation for the expenditures made to expand the production capacity of the plant; (iii) OC-BVI was entitled
to full payment of water invoices issued up to December 20, 2007, which had been calculated under the terms of the original 1990
Agreement; and (iv) OC-BVI was entitled to the amount of $10.4 million for water produced by OC-BVI from the Baughers Bay plant
subsequent to December 20, 2007.
OC-BVI filed an appeal with the Eastern Caribbean
Court of Appeals (the “Appellate Court”) in October 2009 asking the Appellate Court to review the September 17, 2009
ruling by the Court as it related to OC-BVI’s claim for compensation for expenditures made to expand the production capacity
of the Baughers Bay plant. In October 2009, the BVI government also filed an appeal with the Appellate Court requesting the Appellate
Court to reduce the $10.4 million awarded by the Court to OC-BVI for water supplied subsequent to December 20, 2007 to an amount
equal to the cost of producing such water.
In March 2010, OC-BVI vacated the Baughers
Bay plant and the BVI government assumed direct responsibility for the plant’s operations.
In June 2012, the Appellate Court issued the
final ruling with respect to the Baughers Bay litigation. This ruling dismissed the BVI government’s appeal against the
previous judgment of the Court awarding $10.4 million for the water supplied, and also awarded OC-BVI compensation for improvements
made to the plant in the amount equal to the difference between (i) the value of the Baughers Bay plant at the date OC-BVI transferred
possession of the plant to the BVI government and (ii) $1.42 million (the purchase price for the Baughers Bay plant under the
1990 Agreement). OC-BVI was also awarded all of its court costs at the trial level and two-thirds of such costs incurred on appeal.
OC-BVI and the BVI government engaged a mutually
approved valuation expert to complete a valuation of the Baughers Bay plant at the date it was transferred to the BVI government
in accordance with the Appellate Court ruling.
In June 2016, OC-BVI received the final valuation
report from the valuation expert, which sets forth a value for the Baughers Bay plant of $13.0 million as of the date OC-BVI transferred
possession of the plant to the BVI government. Applying the valuation determined by the valuation expert to the formula set forth
by the Appellate Court in its ruling, OC-BVI would be entitled to $11.58 million from the BVI government for the Baughers Bay
plant. The BVI government has indicated that it disagrees with the valuation methodology used by the valuation expert and the
resulting valuation for the Baughers Bay plant. OC-BVI cannot presently determine if the Appellate Court will uphold the Baughers
Bay plant valuation or when, or to what extent, any amount for the value of the Baughers Bay plant will be paid by the BVI government.
Consequently, any amount due for the Baughers Bay plant valuation will not be included in OC-BVI’s results of operations
until such amount, if any, is paid by the BVI government.
Depreciation expense was $716,750, $673,711
and $753,759 for the years ended December 31, 2016, 2015 and 2014, respectively.
During 2007, OC-BVI completed, for a total
cost of approximately $8 million, the construction of a desalination plant with a capacity of 720,000 gallons per day located
at Bar Bay, Tortola (the “Bar Bay plant”). OC-BVI began selling water to the Ministry from this plant in January 2009
and on March 4, 2010, OC-BVI and the BVI government executed a definitive seven-year contract for the Bar Bay plant (the “Bar
Bay Agreement”). Under the terms of the Bar Bay Agreement, OC-BVI delivers up to 600,000 gallons of water per day to the
BVI government from the Bar Bay plant and the BVI government is obligated to pay for this water at a specified price as adjusted
by a monthly energy factor. The Bar Bay Agreement included a seven-year extension option exercisable by the BVI government and
required OC-BVI to complete a storage reservoir on a BVI government site by no later than March 4, 2011. OC-BVI has not commenced
construction of this storage reservoir due to the BVI government’s failure to pay the invoices for the water provided by
the Bar Bay plant on a timely basis. In February 2017, the OC-BVI and BVI government executed a 14 year extension of the Bar Bay
Agreement at a reduced price per gallon for the water provided.
During 2005, OC-BVI entered into a 25-
year lease agreement with Bar Bay Estate Holdings Limited (“Bar Bay Holdings”), a private company incorporated in
the Territory of the British Virgin Islands, pursuant to which OC-BVI agreed to lease from Bar Bay Holdings approximately 50,000
square feet of land on Tortola, British Virgin Islands on which a seawater desalination plant and wells was constructed. Under
the terms of the lease agreement, a lease premium payment of $750,000 was made on June 10, 2005, annual lease and easement payments
of $17,662 are due annually and royalty payments of 2.87% of annual sales, as defined in the lease agreement, are payable
quarterly. Sage Water Holdings (BVI) Limited currently owns 100% of the non-voting stock, 50% of the voting common stock and 50%
of the profit sharing rights of OC-BVI. A Director of Sage Water Holdings is also a Director of OC-BVI and holds 50% of the outstanding
shares of Bar Bay Holdings.
OC-BVI entered into an agreement that grants
an easement over a parcel of land used to access certain Bar Bay plant. Under the terms of the agreement, an initial premium payment
of $70,000 was made and fees of $6,000 are due annually through September 2019.
Future minimum lease payments under non-cancelable
operating leases as of December 31, 2016 are as follows:
Total rental expense amounted to $77,227, $76,262 and $76,262 for
the years ended December 31, 2016, 2015 and 2014, respectively.
Pursuant to an amended and restated Management
Services Agreement between DesalCo Limited (“DesalCo”), a wholly-owned subsidiary of CWCO, and the Company, DesalCo
provides the Company with management, administration, finance, operations, maintenance, engineering and purchasing services, and
is entitled to be reimbursed for all reasonable expenses incurred on behalf of the Company.
Pursuant to a Management Services Memorandum
effective January 1, 2004 between the Class B Directors who at any point in time represent Sage Water Holdings (BVI) Limited (“SWHL”),
and the Company, the Class B directors provide the Company with delegated operational matters, general management of local business
matters, donation, sponsorship and public relations activities, and are entitled to an annual fixed fee of $60,000, adjusted annually
for inflation, and a profit sharing bonus equal to 2% of the Company’s income before depreciation, interest (income
and expense), and other expenses not directly related to the operation of the Company.
Pursuant to a Services Agreement effective
November 30, 2012 between the Company and Sage Utilities Holdings (BVI) Limited (“SUHL”), which is related to Sage
Water Holdings (BVI) Ltd. through common ownership, the Company provides SUHL with operations, maintenance, engineering, and purchasing
services.
The statements of operations include the following
transactions with related parties:
The accompanying balance sheets include the
following amounts associated with related parties:
In 1993, the Company and its existing shareholders
at that time, entered into two Share Repurchase and Profit Sharing Agreements (the “Agreements”) to repurchase 225,000
shares each from those shareholders (the “Parties”), whose shares were issued in exchange for guarantees of the Company’s
long term debt. The Agreements were subsequently approved by special resolution at an Extraordinary Meeting of all the Company’s
shareholders.
Under the terms of the Agreements, the Company,
in exchange for the above-mentioned shares, granted the Parties, profit sharing rights in the Company’s profits for as long
as the Company remains in business as a going concern. The Agreement states that where the Company has profits available for the
payment of dividends and pays a dividend from there, a distribution shall be made to each of the Parties equal to 202,500 times
the dividend per share received by the remaining shareholders and paid concurrently with such dividend. The factor of 202,500
shall be subject to amendment by the same proportion and at the same time as changes take place or adjustments are made in respect
of the remaining shareholders.
The current shareholders and an affiliate
of a current shareholder have acquired these profit sharing rights. The Company has recorded an obligation as of December 31,
2016 for the maximum profit shares payable to the Parties if all retained earnings were to be distributed as dividends and profit
shares.
Under the terms of the water sale agreements
with the Government, the Company is exempt from all non-employee taxation in the British Virgin Islands.
Effective December 1, 2003, the Company established
the MWM Global Retirement Plan (the “Plan”). The Plan is a defined contribution plan whereby the Company contributes
5% of each participating employee’s salary to the Plan. The total amount recognized as an expense under the plan was $11,587,
$11,648, and $11,319 for the years ended December 31, 2016, 2015 and 2014, respectively.
Financial assets that potentially subject
the Company to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and intercompany
loans receivable. The Company’s cash is placed with high credit quality financial institutions. The accounts receivable
are due from the Company’s sole customer, the BVI government. As a result, the Company is subject to credit risk to the
extent of any non-performance by the BVI government.
As of December 31, 2016 and 2015, the carrying
amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair values due
to the short term maturities of these assets and liabilities.
On January 3, 2017, the Company declared
a cash dividend of $1.50 per share to the shareholders of record on that date, amounting to total dividends and profit sharing
rights payable of $2,520,000.
The Company has evaluated subsequent events
through the date the financial statements were issued and has determined that other than as disclosed in these 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 consolidated financial statements.