ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
45,950,954
|
|
|
$
|
39,126,214
|
|
Accounts receivable, net
|
|
|
14,091,119
|
|
|
|
16,480,639
|
|
Inventory
|
|
|
3,057,218
|
|
|
|
1,985,006
|
|
Prepaid expenses and other current assets
|
|
|
1,330,580
|
|
|
|
1,084,155
|
|
Current portion of loans receivable
|
|
|
1,355,824
|
|
|
|
1,633,588
|
|
Costs and estimated earnings in excess of billings
|
|
|
543,893
|
|
|
|
85,211
|
|
Current assets of discontinued operations
|
|
|
154,331
|
|
|
|
480,979
|
|
Total current assets
|
|
|
66,483,919
|
|
|
|
60,875,792
|
|
Property, plant and equipment, net
|
|
|
50,463,135
|
|
|
|
52,471,537
|
|
Construction in progress
|
|
|
2,804,958
|
|
|
|
885,494
|
|
Inventory, non-current
|
|
|
4,497,027
|
|
|
|
4,558,816
|
|
Loans receivable
|
|
|
1,446,541
|
|
|
|
2,135,428
|
|
Investment in OC-BVI
|
|
|
2,949,547
|
|
|
|
4,086,630
|
|
Intangible assets, net
|
|
|
4,468,530
|
|
|
|
5,195,476
|
|
Goodwill
|
|
|
9,784,248
|
|
|
|
9,784,248
|
|
Land held for development
|
|
|
20,558,424
|
|
|
|
20,558,424
|
|
Other assets
|
|
|
2,183,317
|
|
|
|
2,280,519
|
|
Long-term assets of discontinued operations
|
|
|
154,501
|
|
|
|
772,164
|
|
Total assets
|
|
$
|
165,794,147
|
|
|
$
|
163,604,528
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and other current liabilities
|
|
$
|
4,878,489
|
|
|
$
|
4,840,387
|
|
Dividends payable
|
|
|
1,189,786
|
|
|
|
1,187,214
|
|
Notes payable to related party
|
|
|
392,000
|
|
|
|
490,000
|
|
Billings in excess of costs and estimated earnings
|
|
|
1,396,426
|
|
|
|
102,966
|
|
Current liabilities of discontinued operations
|
|
|
55,329
|
|
|
|
58,521
|
|
Total current liabilities
|
|
|
7,912,030
|
|
|
|
6,679,088
|
|
Deferred tax liability
|
|
|
1,639,096
|
|
|
|
1,915,241
|
|
Other liabilities
|
|
|
752,828
|
|
|
|
904,827
|
|
Total liabilities
|
|
|
10,303,954
|
|
|
|
9,499,156
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
|
|
|
Consolidated Water Co. Ltd. stockholders' equity
|
|
|
|
|
|
|
|
|
Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares; issued and outstanding 45,087 and 35,225 shares, respectively
|
|
|
27,052
|
|
|
|
21,135
|
|
Class A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and outstanding 14,889,865 and 14,871,664 shares, respectively
|
|
|
8,933,919
|
|
|
|
8,922,998
|
|
Class B common stock, $0.60 par value. Authorized 145,000 shares; none issued
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
85,926,072
|
|
|
|
85,621,033
|
|
Retained earnings
|
|
|
52,606,237
|
|
|
|
51,589,337
|
|
Cumulative translation adjustment
|
|
|
(549,555
|
)
|
|
|
(549,555
|
)
|
Total Consolidated Water Co. Ltd. stockholders' equity
|
|
|
146,943,725
|
|
|
|
145,604,948
|
|
Non-controlling interests
|
|
|
8,546,468
|
|
|
|
8,500,424
|
|
Total equity
|
|
|
155,490,193
|
|
|
|
154,105,372
|
|
Total liabilities and equity
|
|
$
|
165,794,147
|
|
|
$
|
163,604,528
|
|
The accompanying
notes are an integral part of these condensed consolidated financial statements.
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF
INCOME
(UNAUDITED)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Retail revenues
|
|
$
|
6,029,449
|
|
|
$
|
6,273,400
|
|
|
$
|
12,478,399
|
|
|
$
|
12,216,660
|
|
Bulk revenues
|
|
|
8,043,921
|
|
|
|
7,441,061
|
|
|
|
15,734,323
|
|
|
|
14,706,354
|
|
Services revenues
|
|
|
119,204
|
|
|
|
403,935
|
|
|
|
249,456
|
|
|
|
584,647
|
|
Manufacturing revenues
|
|
|
1,056,047
|
|
|
|
1,260,806
|
|
|
|
2,435,895
|
|
|
|
1,879,335
|
|
Total revenues
|
|
|
15,248,621
|
|
|
|
15,379,202
|
|
|
|
30,898,073
|
|
|
|
29,386,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of retail revenues
|
|
|
2,659,066
|
|
|
|
2,555,545
|
|
|
|
5,278,713
|
|
|
|
5,065,540
|
|
Cost of bulk revenues
|
|
|
5,152,212
|
|
|
|
4,813,261
|
|
|
|
10,168,001
|
|
|
|
9,423,585
|
|
Cost of services revenues
|
|
|
103,753
|
|
|
|
272,537
|
|
|
|
205,919
|
|
|
|
469,813
|
|
Cost of manufacturing revenues
|
|
|
847,760
|
|
|
|
1,035,142
|
|
|
|
1,889,057
|
|
|
|
1,455,609
|
|
Total cost of revenues
|
|
|
8,762,791
|
|
|
|
8,676,485
|
|
|
|
17,541,690
|
|
|
|
16,414,547
|
|
Gross profit
|
|
|
6,485,830
|
|
|
|
6,702,717
|
|
|
|
13,356,383
|
|
|
|
12,972,449
|
|
General and administrative expenses
|
|
|
4,960,170
|
|
|
|
4,888,794
|
|
|
|
9,714,680
|
|
|
|
9,295,856
|
|
Income from operations
|
|
|
1,525,660
|
|
|
|
1,813,923
|
|
|
|
3,641,703
|
|
|
|
3,676,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
108,821
|
|
|
|
158,085
|
|
|
|
230,893
|
|
|
|
374,843
|
|
Interest expense
|
|
|
(7,939
|
)
|
|
|
(30,323
|
)
|
|
|
(10,162
|
)
|
|
|
(94,369
|
)
|
Profit sharing income from OC-BVI
|
|
|
-
|
|
|
|
14,175
|
|
|
|
10,125
|
|
|
|
48,600
|
|
Equity in the earnings (losses) of OC-BVI
|
|
|
(37,824
|
)
|
|
|
85,858
|
|
|
|
(10,958
|
)
|
|
|
131,222
|
|
Impairment loss on investment in OC-BVI
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
Unrealized gain (loss) on put/call options
|
|
|
(13,000
|
)
|
|
|
-
|
|
|
|
152,000
|
|
|
|
-
|
|
Other
|
|
|
(28,530
|
)
|
|
|
176,383
|
|
|
|
53,191
|
|
|
|
222,129
|
|
Other income, net
|
|
|
21,528
|
|
|
|
404,178
|
|
|
|
425,089
|
|
|
|
632,425
|
|
Income before income taxes
|
|
|
1,547,188
|
|
|
|
2,218,101
|
|
|
|
4,066,792
|
|
|
|
4,309,018
|
|
Benefit from income taxes
|
|
|
(136,448
|
)
|
|
|
(170,393
|
)
|
|
|
(276,145
|
)
|
|
|
(243,662
|
)
|
Net
income from continuing operations before non-controlling interests
|
|
|
1,683,636
|
|
|
|
2,388,494
|
|
|
|
4,342,937
|
|
|
|
4,552,680
|
|
Income (loss) from continuing operations attributable to non-controlling interests
|
|
|
(8,354
|
)
|
|
|
48,544
|
|
|
|
(56,146
|
)
|
|
|
172,040
|
|
Net income from continuing operations
|
|
|
1,691,990
|
|
|
|
2,339,950
|
|
|
|
4,399,083
|
|
|
|
4,380,640
|
|
Loss from discontinued operations
|
|
|
(1,071,001
|
)
|
|
|
(142,659
|
)
|
|
|
(1,150,850
|
)
|
|
|
(127,974
|
)
|
Loss from discontinued operations attributable to non-controlling interests
|
|
|
(3,559
|
)
|
|
|
(7,042
|
)
|
|
|
(7,543
|
)
|
|
|
(6,308
|
)
|
Net loss from discontinued operations
|
|
|
(1,067,442
|
)
|
|
|
(135,617
|
)
|
|
|
(1,143,307
|
)
|
|
|
(121,666
|
)
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
$
|
624,548
|
|
|
$
|
2,204,333
|
|
|
$
|
3,255,776
|
|
|
$
|
4,258,974
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.16
|
|
|
$
|
0.30
|
|
|
$
|
0.30
|
|
Discontinued operations
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
Basic earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.15
|
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.11
|
|
|
$
|
0.16
|
|
|
$
|
0.29
|
|
|
$
|
0.29
|
|
Discontinued operations
|
|
$
|
(0.07
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
-
|
|
Diluted earnings per share
|
|
$
|
0.04
|
|
|
$
|
0.15
|
|
|
$
|
0.21
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.075
|
|
|
$
|
0.075
|
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares used in the determination of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
|
14,889,816
|
|
|
|
14,792,053
|
|
|
|
14,880,889
|
|
|
|
14,787,716
|
|
Diluted earnings per share
|
|
|
15,055,554
|
|
|
|
14,871,119
|
|
|
|
15,045,204
|
|
|
|
14,863,791
|
|
The accompanying notes
are an integral part of these condensed consolidated financial statements.
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF
COMPREHENSIVE INCOME
(UNAUDITED
)
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income from continuing operations before non-controlling interests
|
|
$
|
1,683,636
|
|
|
$
|
2,388,494
|
|
|
$
|
4,342,937
|
|
|
$
|
4,552,680
|
|
Loss from discontinued operations
|
|
|
(1,071,001
|
)
|
|
|
(142,659
|
)
|
|
|
(1,150,850
|
)
|
|
|
(127,974
|
)
|
Net income
|
|
|
612,635
|
|
|
|
2,245,835
|
|
|
|
3,192,087
|
|
|
|
4,424,706
|
|
Other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
(2,659
|
)
|
|
|
-
|
|
|
|
(5,834
|
)
|
Total other comprehensive income (loss)
|
|
|
-
|
|
|
|
(2,659
|
)
|
|
|
-
|
|
|
|
(5,834
|
)
|
Comprehensive income
|
|
|
612,635
|
|
|
|
2,243,176
|
|
|
|
3,192,087
|
|
|
|
4,418,872
|
|
Income (loss) from continuing operations attributable to non-controlling interests
|
|
|
(8,354
|
)
|
|
|
48,411
|
|
|
|
(56,146
|
)
|
|
|
171,748
|
|
Loss from discontinued operations attributable to non-controlling interests
|
|
|
(3,559
|
)
|
|
|
(7,042
|
)
|
|
|
(7,543
|
)
|
|
|
(6,308
|
)
|
Comprehensive income attributable to Consolidated Water Co. Ltd. stockholders
|
|
$
|
624,548
|
|
|
$
|
2,201,807
|
|
|
$
|
3,255,776
|
|
|
$
|
4,253,432
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
CONSOLIDATED WATER CO. LTD.
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
(UNAUDITED)
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash provided by operating activities - continuing operations
|
|
$
|
9,663,793
|
|
|
$
|
2,663,297
|
|
Net cash provided by (used in) operating activities - discontinued operations
|
|
|
(80,753
|
)
|
|
|
32,402
|
|
Net cash provided by operating activities
|
|
|
9,583,040
|
|
|
|
2,695,699
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Maturity of certificate of deposit
|
|
|
-
|
|
|
|
5,637,538
|
|
Additions to property, plant and equipment and construction in progress
|
|
|
(2,551,511
|
)
|
|
|
(1,356,454
|
)
|
Proceeds from sale of equipment
|
|
|
18,027
|
|
|
|
526,800
|
|
Distribution of earnings from OC-BVI
|
|
|
1,136,250
|
|
|
|
-
|
|
Acquisition of Aerex, net of cash acquired
|
|
|
-
|
|
|
|
(7,742,853
|
)
|
Collections on loans receivable
|
|
|
966,651
|
|
|
|
906,012
|
|
Release of restricted cash balance
|
|
|
-
|
|
|
|
398,744
|
|
Net cash used in investing activities – continuing operations
|
|
|
(430,583
|
)
|
|
|
(1,630,213
|
)
|
Net cash used in investing activities - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net cash used in investing activities
|
|
|
(430,583
|
)
|
|
|
(1,630,213
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Dividends paid to common shareholders
|
|
|
(2,231,021
|
)
|
|
|
(2,212,791
|
)
|
Dividends paid to non-controlling interests
|
|
|
-
|
|
|
|
(182,663
|
)
|
Dividends paid to preferred shareholders
|
|
|
(5,284
|
)
|
|
|
(5,760
|
)
|
Issuance (repurchase) of redeemable preferred stock
|
|
|
6,588
|
|
|
|
(9,598
|
)
|
Proceeds received from exercise of stock options
|
|
|
-
|
|
|
|
143,226
|
|
(Repayment)/issuance of note payable to related party
|
|
|
(490,000
|
)
|
|
|
490,000
|
|
Issuance of note payable to related party
|
|
|
392,000
|
|
|
|
-
|
|
Repayments of demand loan payable
|
|
|
-
|
|
|
|
(7,000,000
|
)
|
Net cash used in financing activities – continuing operations
|
|
|
(2,327,717
|
)
|
|
|
(8,777,586
|
)
|
Net cash used in financing activities - discontinued operations
|
|
|
-
|
|
|
|
-
|
|
Net cash used in financing activities
|
|
|
(2,327,717
|
)
|
|
|
(8,777,586
|
)
|
Effect of exchange rate changes on cash
|
|
|
-
|
|
|
|
638
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
6,824,740
|
|
|
|
(7,711,462
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
39,126,214
|
|
|
|
44,792,734
|
|
Cash and cash equivalents at end of period
|
|
$
|
45,950,954
|
|
|
$
|
37,081,272
|
|
|
|
|
|
|
|
|
|
|
Interest paid in cash
|
|
$
|
7,074
|
|
|
$
|
67,689
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
|
|
Issuance of 9,441 and 8,421, respectively, shares of redeemable preferred stock for services rendered
|
|
$
|
118,485
|
|
|
$
|
106,357
|
|
Issuance of 17,833, and 9,964, respectively, shares of common stock for services rendered
|
|
$
|
203,551
|
|
|
$
|
106,415
|
|
Conversion (on a one-to-one basis) of 368 and 833, respectively, shares of redeemable preferred stock to common stock
|
|
$
|
221
|
|
|
$
|
500
|
|
Dividends declared but not paid
|
|
$
|
1,120,122
|
|
|
$
|
1,113,844
|
|
Transfers from inventory to property, plant and equipment and construction in progress
|
|
$
|
147,886
|
|
|
$
|
134,362
|
|
Transfers from construction in progress to property, plant and equipment
|
|
$
|
289,915
|
|
|
$
|
1,097,165
|
|
The accompanying notes are an integral part
of these condensed consolidated financial statements.
CONSOLIDATED WATER CO. LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
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 Commonwealth of 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
commercial, municipal and industrial water production, supply and treatment
2. Accounting policies
Basis of presentation:
The accompanying
condensed 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.
The accompanying interim condensed consolidated
financial statements are unaudited. These condensed consolidated financial statements reflect all adjustments (which are of a normal
recurring nature) that, in the opinion of management, are necessary to fairly present the Company’s financial position, results
of operations and cash flows as of and for the periods presented. The results of operations for these interim periods are not necessarily
indicative of the operating results for future periods, including the fiscal year ending December 31, 2017.
These condensed consolidated financial
statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission
(“SEC”) relating to interim financial statements and in conformity with accounting principles generally accepted in
the United States of America (“US GAAP”). Certain information and note disclosures normally included in annual financial
statements prepared in accordance with US GAAP have been condensed or omitted in these condensed financial statements pursuant
to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information
not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Foreign currency:
The Company’s
reporting currency is the United States dollar (“US$”). The functional currency of the Company and its foreign operating
subsidiaries (other than NSC, AdR, CW-Bali, and CW-Cooperatief) is the currency for each respective country. The functional currency
for NSC, AdR, CW-Bali and CW-Cooperatief is the US$. 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 and AdR conduct 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 $105,097 and ($76,977) for the three months ended June 30, 2017 and 2016, respectively, and $170,259 and
($83,816) for the six months ended June 30, 2017 and 2016, respectively, and are included in “Other income (expense) - Other”
in the accompanying condensed 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 June 30, 2017 and December 31, 2016 include a certificate of deposit with an original
maturity of three months or less of approximately $1.0 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 June 30, 2017, the equivalent United States dollar cash balances for deposits held in The Bahamas
and Belize were approximately $12.5 million and $5.7 million, respectively.
Comparative amounts:
Certain amounts
reported in the financial statements issued in prior periods have been reclassified herein to conform to the current period’s
presentation. These reclassifications had no effect on consolidated net income.
3. Discontinued operations – CW-Bali
Through its subsidiary CW-Bali, the Company
built and operates a seawater reverse osmosis plant with a production capacity of approximately 790,000 gallons per day located
in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. The Company built this plant based upon its belief that future
water shortages in this area of Bali would eventually enable it to sell all of this plant’s production. Since inception of
CW-Bali’s operations in 2013, the sales volumes for its plant have not been sufficient to cover its operating costs and CW-Bali
has incurred net losses. The Company’s net losses from CW-Bali for its two most recent fiscal years ended December 31, 2016
and 2015, were approximately ($2.5 million) and ($861,000), respectively. The results of CW-Bali were included in the retail segment
for segment reporting purposes.
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 the local water utility; and (iv) assist with CW-Bali’s on-going funding requirements.
Although discussions were held and due diligence information was exchanged with potential strategic partners, the Company did not
receive an offer for an investment in, a purchase of, or a joint venture for CW-Bali from any of these potential partners on terms
it deemed acceptable.
On May 23, 2017, after considering CW-Bali’s
historical and projected operating losses, its on-going funding requirements, the current business and economic environment in
Bali and the Company’s inability to obtain a strategic partner for CW-Bali, the Company’s Board of Directors formally
resolved to discontinue CW-Bali’s operations. The Company plans to cease the production of water in Bali and exit the Bali
market at the earliest practical date, which the Company believes will be within six months.
Based upon this decision to discontinue
CW-Bali’s operations, the Company estimated the future cash flows the Company will receive under various scenarios from the
disposition of its investment in CW-Bali and assigned a probability to each scenario to determine an estimated fair value of its
investment in CW-Bali. Based upon this probability-weighted sum, the Company recorded an impairment loss of $1.0 million for the
three months ended June 30, 2017 to reduce the carrying value of its investment in CW-Bali (which includes $549,555 in cumulative
translation adjustments reflected in stockholders’ equity) to its estimated fair value of approximately $832,000. The Company
may be required to record additional losses if it is ultimately unable to sell its investment in CW-Bali or CW-Bali’s net
assets for this estimated fair value.
Summarized financial information for CW-Bali
as of June 30, 2017 and for the three months and six months ended June 30, 2017 and 2016 is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
|
|
Current assets
|
|
$
|
154,331
|
|
|
$
|
480,979
|
|
Property, plant and equipment, net
|
|
|
154,501
|
|
|
|
612,568
|
|
Inventory, non-current
|
|
|
-
|
|
|
|
47,272
|
|
Other assets
|
|
|
-
|
|
|
|
112,324
|
|
Total assets of discontinued operations
|
|
$
|
308,832
|
|
|
$
|
1,253,143
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of discontinued operations
|
|
$
|
55,329
|
|
|
$
|
58,521
|
|
|
|
Three Months ended June 30,
|
|
|
Six Months ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
34,567
|
|
|
$
|
19,433
|
|
|
$
|
62,221
|
|
|
$
|
46,411
|
|
Loss from operations
|
|
|
(70,758
|
)
|
|
|
(157,318
|
)
|
|
|
(150,423
|
)
|
|
|
(303,943
|
)
|
Impairment loss
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
|
|
(1,000,000
|
)
|
|
|
-
|
|
Net loss
|
|
|
(1,071,001
|
)
|
|
|
(142,659
|
)
|
|
|
(1,150,850
|
)
|
|
|
(127,974
|
)
|
Depreciation
|
|
|
23,583
|
|
|
|
76,361
|
|
|
|
47,165
|
|
|
|
151,543
|
|
4. Segment information
The Company has four reportable segments:
retail, bulk, services and manufacturing. The retail segment consists of Cayman Water which owns and operates the water utility
that provides water to 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 provides desalination plant management and operating services to affiliated
companies and designs, constructs and sells desalination plants to third parties. The manufacturing segment manufactures and services
a wide range of water-related products and provides design, engineering, management, operating and other services applicable to
commercial, municipal and industrial water production, supply and treatment.
Consistent with prior periods, the Company
records all non-direct general and administrative expenses in its retail business segment and does not allocate any of these non-direct
expenses to its other three business segments.
The accounting policies of the segments
are consistent with those described in Note 2. The Company evaluates each segment’s performance based upon its income 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.
|
|
Three Months Ended June 30, 2017
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Manufacturing
|
|
|
Total
|
|
Revenues
|
|
$
|
6,029,449
|
|
|
$
|
8,043,921
|
|
|
$
|
119,204
|
|
|
$
|
1,056,047
|
|
|
$
|
15,248,621
|
|
Cost of revenues
|
|
|
2,659,066
|
|
|
|
5,152,212
|
|
|
|
103,753
|
|
|
|
847,760
|
|
|
|
8,762,791
|
|
Gross profit
|
|
|
3,370,383
|
|
|
|
2,891,709
|
|
|
|
15,451
|
|
|
|
208,287
|
|
|
|
6,485,830
|
|
General and administrative expenses
|
|
|
3,163,902
|
|
|
|
323,654
|
|
|
|
891,714
|
|
|
|
580,900
|
|
|
|
4,960,170
|
|
Income (loss) from operations
|
|
$
|
206,481
|
|
|
$
|
2,568,055
|
|
|
$
|
(876,263
|
)
|
|
$
|
(372,613
|
)
|
|
|
1,525,660
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,528
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
|
1,547,188
|
|
Benefit from income taxes
|
|
|
|
(136,448
|
)
|
Net income from continuing operations before non-controlling interests
|
|
|
|
|
1,683,636
|
|
Loss from continuing operations attributable to non-controlling interests
|
|
|
|
(8,354
|
)
|
Net income from continuing operations
|
|
|
|
1,691,990
|
|
Net loss from discontinued operations
|
|
|
|
(1,067,442
|
)
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
$
|
624,548
|
|
Depreciation and amortization expenses
from continuing operations for the three months ended June 30, 2017 for the retail, bulk, services and manufacturing segments
were $488,895, $827,037, $7,638 and $399,455, respectively
.
|
|
Three Months Ended June 30, 2016
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Manufacturing
|
|
|
Total
|
|
Revenues
|
|
$
|
6,273,400
|
|
|
$
|
7,441,061
|
|
|
$
|
403,935
|
|
|
$
|
1,260,806
|
|
|
$
|
15,379,202
|
|
Cost of revenues
|
|
|
2,555,545
|
|
|
|
4,813,261
|
|
|
|
272,537
|
|
|
|
1,035,142
|
|
|
|
8,676,485
|
|
Gross profit (loss)
|
|
|
3,717,855
|
|
|
|
2,627,800
|
|
|
|
131,398
|
|
|
|
225,664
|
|
|
|
6,702,717
|
|
General and administrative expenses
|
|
|
2,832,425
|
|
|
|
441,987
|
|
|
|
913,159
|
|
|
|
701,223
|
|
|
|
4,888,794
|
|
Income (loss) from operations
|
|
$
|
885,430
|
|
|
$
|
2,185,813
|
|
|
$
|
(781,761
|
)
|
|
$
|
(475,559
|
)
|
|
|
1,813,923
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
404,178
|
|
Income before income taxes
|
|
|
|
2,218,101
|
|
Benefit from income taxes
|
|
|
|
(170,393
|
)
|
Net income from continuing operations before non-controlling interests
|
|
|
|
2,388,494
|
|
Income from continuing operations attributable to non-controlling interests
|
|
|
|
48,544
|
|
Net income from continuing operations
|
|
|
|
2,339,950
|
|
Net loss from discontinued operations
|
|
|
|
(135,617
|
)
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
$
|
2,204,333
|
|
Depreciation and amortization expenses
from continuing operations for the three months ended June 30, 2016 for the retail, bulk, services and manufacturing segments
were $483,009, $841,184, $29,038 and $493,270, respectively
.
|
|
Six Months Ended June 30, 2017
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Manufacturing
|
|
|
Total
|
|
Revenues
|
|
$
|
12,478,399
|
|
|
$
|
15,734,323
|
|
|
$
|
249,456
|
|
|
$
|
2,435,895
|
|
|
$
|
30,898,073
|
|
Cost of revenues
|
|
|
5,278,713
|
|
|
|
10,168,001
|
|
|
|
205,919
|
|
|
|
1,889,057
|
|
|
|
17,541,690
|
|
Gross profit
|
|
|
7,199,686
|
|
|
|
5,566,322
|
|
|
|
43,537
|
|
|
|
546,838
|
|
|
|
13,356,383
|
|
General and administrative expenses
|
|
|
6,134,079
|
|
|
|
624,731
|
|
|
|
1,635,120
|
|
|
|
1,320,750
|
|
|
|
9,714,680
|
|
Income (loss) from operations
|
|
$
|
1,065,607
|
|
|
$
|
4,941,591
|
|
|
$
|
(1,591,583
|
)
|
|
$
|
(773,912
|
)
|
|
|
3,641,703
|
|
Other income, net
|
|
|
|
425,089
|
|
Income before income taxes
|
|
|
|
4,066,792
|
|
Benefit from income taxes
|
|
|
|
(276,145
|
)
|
Net income from continuing operations before non-controlling interests
|
|
|
|
4,342,937
|
|
Loss from continuing operations attributable to non-controlling interests
|
|
|
|
(56,146
|
)
|
Net income from continuing operations
|
|
|
|
4,399,083
|
|
Loss from discontinued operations
|
|
|
|
(1,143,307
|
)
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
$
|
3,255,776
|
|
Depreciation and amortization expenses
from continuing operations for the six months ended June 30, 2017 for the retail, bulk, services and manufacturing segments were
$975,133, $1,653,816, $29,657 and $805,945, respectively.
|
|
Six Months Ended June 30, 2016
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Manufacturing
|
|
|
Total
|
|
Revenues
|
|
$
|
12,216,660
|
|
|
$
|
14,706,354
|
|
|
$
|
584,647
|
|
|
$
|
1,879,335
|
|
|
|
29,386,996
|
|
Cost of revenues
|
|
|
5,065,540
|
|
|
|
9,423,585
|
|
|
|
469,813
|
|
|
|
1,455,609
|
|
|
|
16,414,547
|
|
Gross profit
|
|
|
7,151,120
|
|
|
|
5,282,769
|
|
|
|
114,834
|
|
|
|
423,726
|
|
|
|
12,972,449
|
|
General and administrative expenses
|
|
|
5,676,366
|
|
|
|
877,882
|
|
|
|
1,719,731
|
|
|
|
1,021,877
|
|
|
|
9,295,856
|
|
Income (loss) from operations
|
|
$
|
1,474,754
|
|
|
$
|
4,404,887
|
|
|
$
|
(1,604,897
|
)
|
|
$
|
(598,151
|
)
|
|
|
3,676,593
|
|
Other income, net
|
|
|
|
632,425
|
|
Income before income taxes
|
|
|
|
4,309,018
|
|
Benefit from income taxes
|
|
|
|
(243,662
|
)
|
Net income from continuing operations before non-controlling interests
|
|
|
|
4,552,680
|
|
Income from continuing operations attributable to non-controlling interests
|
|
|
|
172,040
|
|
Net income from continuing operations
|
|
|
|
4,380,640
|
|
Loss from discontinued operations
|
|
|
|
(121,666
|
)
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
$
|
4,258,974
|
|
Depreciation and amortization expenses
from continuing operations for the six months ended June 30, 2016 for the retail, bulk, services and manufacturing segments were
$995,552, $1,668,573, $58,076 and $703,939, respectively.
|
|
As of June 30, 2017
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Manufacturing
|
|
|
Total
|
|
Accounts receivable, net
|
|
$
|
2,109,492
|
|
|
$
|
10,461,311
|
|
|
$
|
974,505
|
|
|
$
|
545,811
|
|
|
$
|
14,091,119
|
|
Property plant and equipment, net
|
|
|
23,621,754
|
|
|
|
24,783,102
|
|
|
|
104,337
|
|
|
|
1,953,942
|
|
|
|
50,463,135
|
|
Construction in progress
|
|
|
105,681
|
|
|
|
2,714,010
|
|
|
|
(22,633
|
)
|
|
|
7,900
|
|
|
|
2,804,958
|
|
Intangibles, net
|
|
|
-
|
|
|
|
566,863
|
|
|
|
-
|
|
|
|
3,901,667
|
|
|
|
4,468,530
|
|
Goodwill
|
|
|
1,170,511
|
|
|
|
2,328,526
|
|
|
|
-
|
|
|
|
6,285,211
|
|
|
|
9,784,248
|
|
Land held for development
|
|
|
-
|
|
|
|
-
|
|
|
|
20,558,424
|
|
|
|
-
|
|
|
|
20,558,424
|
|
Total segment assets
|
|
|
52,776,187
|
|
|
|
72,904,263
|
|
|
|
24,561,282
|
|
|
|
15,243,583
|
|
|
|
165,485,315
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308,832
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,794,147
|
|
|
|
As of December 31, 2016
|
|
|
|
Retail
|
|
|
Bulk
|
|
|
Services
|
|
|
Manufacturing
|
|
|
Total
|
|
Accounts receivable, net
|
|
$
|
2,626,469
|
|
|
$
|
12,692,714
|
|
|
$
|
629,930
|
|
|
$
|
531,526
|
|
|
$
|
16,480,639
|
|
Property plant and equipment, net
|
|
|
24,277,463
|
|
|
|
26,124,724
|
|
|
|
91,030
|
|
|
|
1,978,320
|
|
|
|
52,471,537
|
|
Construction in progress
|
|
|
134,392
|
|
|
|
743,296
|
|
|
|
-
|
|
|
|
7,806
|
|
|
|
885,494
|
|
Intangibles, net
|
|
|
-
|
|
|
|
599,960
|
|
|
|
15,516
|
|
|
|
4,580,000
|
|
|
|
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 segment assets
|
|
|
53,049,868
|
|
|
|
68,663,628
|
|
|
|
25,558,495
|
|
|
|
15,079,394
|
|
|
|
162,351,385
|
|
Assets of discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,253,143
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,604,528
|
|
5. 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:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders
|
|
$
|
1,691,990
|
|
|
$
|
2,339,950
|
|
|
$
|
4,399,083
|
|
|
$
|
4,380,640
|
|
Less: preferred stock dividends
|
|
|
(3,382
|
)
|
|
|
(3,390
|
)
|
|
|
(6,023
|
)
|
|
|
(6,241
|
)
|
Net income from continuing operations available to common shares in the determination of basic earnings per common share
|
|
|
1,688,608
|
|
|
|
2,336,560
|
|
|
|
4,393,060
|
|
|
|
4,374,399
|
|
Net loss from discontinued operations
|
|
|
(1,067,442
|
)
|
|
|
(135,617
|
)
|
|
|
(1,143,307
|
)
|
|
|
(121,666
|
)
|
Net income available to common
shares in the determination of basic earnings per common share
|
|
$
|
621,166
|
|
|
$
|
2,200,943
|
|
|
$
|
3,249,753
|
|
|
$
|
4,252,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
14,889,816
|
|
|
|
14,792,053
|
|
|
|
14,880,889
|
|
|
|
14,787,716
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of preferred shares outstanding during the period
|
|
|
36,684
|
|
|
|
39,255
|
|
|
|
35,958
|
|
|
|
38,919
|
|
Potential dilutive effect of unexercised options and unvested stock grants
|
|
|
129,054
|
|
|
|
39,811
|
|
|
|
128,357
|
|
|
|
37,156
|
|
Weighted average number of shares used for determining diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
15,055,554
|
|
|
|
14,871,119
|
|
|
|
15,045,204
|
|
|
|
14,863,791
|
|
6. Investment in OC-BVI
The Company owns 50% of the outstanding
voting common shares and a 43.53% equity interest in 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 to which it sells bulk
water.
The Company’s equity investment in
OC-BVI amounted to $2,949,547 and $4,086,630 as of June 30, 2017 and December 31, 2016, respectively
.
OC-BVI sells water produced by a desalination
plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the “Bar Bay plant”) to the BVI government
under a contract (the “Bar Bay agreement”) that was due to expire in March 2017 but was extended on February 14, 2017
for 14 years. The selling price for the water under the extension is approximately 31% lower than the price that was in effect
as of December 31, 2016. 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 (including interest) for the water provided by the Bar
Bay plant on a timely basis; and (ii) the remaining amount due under a court ruling relating to the Baughers Bay litigation (see
discussion that follows).
Summarized financial information for OC-BVI
is as follows:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current assets
|
|
$
|
3,521,329
|
|
|
$
|
5,627,414
|
|
Non-current assets
|
|
|
3,687,893
|
|
|
|
3,963,242
|
|
Total assets
|
|
$
|
7,209,222
|
|
|
$
|
9,590,656
|
|
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
Current liabilities
|
|
$
|
301,675
|
|
|
$
|
197,673
|
|
Non-current liabilities
|
|
|
1,267,650
|
|
|
|
1,854,900
|
|
Total liabilities
|
|
$
|
1,569,325
|
|
|
$
|
2,052,573
|
|
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Revenues
|
|
$
|
673,270
|
|
|
$
|
948,189
|
|
|
$
|
1,492,752
|
|
|
$
|
1,885,073
|
|
Cost of revenues
|
|
|
453,022
|
|
|
|
512,699
|
|
|
|
1,001,549
|
|
|
|
997,338
|
|
Gross profit
|
|
|
220,248
|
|
|
|
435,490
|
|
|
|
491,203
|
|
|
|
887,735
|
|
General and administrative expenses
|
|
|
290,294
|
|
|
|
222,191
|
|
|
|
487,857
|
|
|
|
482,733
|
|
Income from operations
|
|
|
(70,046
|
)
|
|
|
213,299
|
|
|
|
3,346
|
|
|
|
405,002
|
|
Other income (expense), net
|
|
|
3,318
|
|
|
|
(8,913
|
)
|
|
|
10,968
|
|
|
|
(77,763
|
)
|
Net income
|
|
|
(66,728
|
)
|
|
|
204,386
|
|
|
|
14,314
|
|
|
|
327,239
|
|
Income (loss) attributable to non-controlling interests
|
|
|
20,160
|
|
|
|
7,146
|
|
|
|
39,486
|
|
|
|
25,787
|
|
Net income attributable to controlling interests
|
|
$
|
(86,888
|
)
|
|
$
|
197,240
|
|
|
$
|
(25,172
|
)
|
|
$
|
301,452
|
|
A reconciliation of the beginning and ending
balances for the investment in OC-BVI for the six months ended June 30, 2017 is as follows:
Balance as of December 31, 2016
|
|
$
|
4,086,630
|
|
Profit sharing and equity from earnings of OC-BVI
|
|
|
(833
|
)
|
Distributions received from OC-BVI
|
|
|
(1,136,250
|
)
|
Balance as of June 30, 2017
|
|
$
|
2,949,547
|
|
The Company recognized ($37,824) and $85,858
for the three months ended June 30, 2017 and 2016, respectively, and ($10,958) and $131,222 for the six months ended June 30, 2017
and 2016, respectively, in earnings (losses) from its equity investment in OC-BVI. The Company recognized $0 and $14,175 for the
three months ended June 30, 2017 and 2016, respectively, and $10,125 and $48,600 for the six months ended June 30, 2017 and 2016,
respectively, in profit sharing income from its profit sharing agreement with OC-BVI.
For the three months ended June 30, 2017
and 2016, the Company recognized approximately $119,204 and $125,594, respectively, in revenues from its management services agreement
with OC-BVI. For the six months ended June 30, 2017 and 2016, the Company recognized approximately $249,456 and $264,350, respectively,
in revenues from its management services agreement with OC-BVI. Amounts receivable by OC-BVI from the Company were $15,037 and
$0 as of June 30, 2017 and December 31, 2016, respectively. Amounts payable by OC-BVI to the Company were $47,056 and $54,559 as
of June 30, 2017 and December 31, 2016, respectively. The Company’s remaining unamortized balance recorded for this management
services agreement, which is reflected as an intangible asset on the Company’s condensed consolidated balance sheets, was
$0 and $15,516 as of June 30, 2017 and December 31, 2016, respectively.
Baughers Bay Litigation
Through March 2010, OC-BVI supplied water
to the BVI government from a plant located at Baughers Bay, Tortola, under the terms of a water supply agreement dated May 1990
(the “1990 Agreement”) with an initial seven-year term that expired in May 1999. The 1990 Agreement provided that such
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 after 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,
awarding ownership of the Baughers Bay plant to the BVI government without compensation to OC-BVI and awarding OC-BVI payments
from the BVI government for the water supplied from the plant at rates deemed appropriate by the Court. Both OC-BVI and the BVI
subsequently filed appeals with the Eastern Caribbean Court of Appeals (the “Appellate Court”) asking the Appellate
Court to review certain rulings by the Court with respect to this litigation.
In March 2010, OC-BVI vacated the Baughers
Bay plant and the BVI government assumed direct responsibility for the plant’s operations pursuant to the Court ruling.
In June 2012, the Appellate Court issued
the final ruling with respect to the Baughers Bay litigation. This ruling upheld the previous ruling of the Court with one exception:
the Appellate Court 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 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 this valuation
expert, which set 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 disagreed 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 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. While a quoted market price for OC-BVI’s stock
is not available, due to the uncertainties (specifically the Baughers Bay litigation and the possible expiration without renewal
of the Bar Bay agreement) associated with OC-BVI’s future cash flows, the Company tested the carrying value of its investment
in OC-BVI (which exceeded the Company’s proportionate share of OC-BVI’s net assets by an amount accounted for as goodwill)
for impairment in 2016 and prior years.
The Company estimated the fair value of
its investment in OC-BVI through the use of the discounted cash flow method, which relied 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 future
cash flows from its Bar Bay plant and the resolution of the Baughers Bay litigation.
The Company estimated OC-BVI’s cash
flows 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 scheduled expiration of the 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 would receive from the BVI government in connection with the Court
and Appellate Court rulings on the Baughers Bay litigation by assigning probabilities to different scenarios. The resulting probability-weighted
sum represented the Company’s best estimate of future cash flows to be generated by OC-BVI.
The identification of the possible scenarios
for the Bar Bay plant agreement and the Baughers Bay litigation, 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.
After updating its probability-weighted
estimates of OC-BVI’s future cash flows and its resulting estimate of the fair value of its investment in OC-BVI, the Company
recorded an impairment loss of $50,000 for the six months ended June 30, 2016 to reduce the carrying value of its investment in
OC-BVI. The Company subsequently recorded an additional $875,000 in impairment losses for the remainder of the year ended December
31, 2016 to reduce the carrying value of its investment in OC-BVI.
As a result of the extension of the Bar
Bay agreement, no impairment losses were necessary in 2017 for the Company’s investment in OC-BVI. As of June 30, 2017,
the amount of the Company’s proportionate share (43.53%) of OC-BVI’s net assets exceeded the carrying value of the
Company’s investment in OC-BVI by approximately $30,000.
7. NSC and AdR Project Development
In May 2010, the Company acquired, through
its wholly-owned Netherlands subsidiary, CW-Cooperatief, a 50% interest in NSC, a development stage Mexican company. 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.
Through a series of transactions completed
in 2012-2014, NSC purchased 20.1 hectares for approximately $20.6 million on which the proposed Project’s plant would be
constructed.
In November 2012, NSC entered into a lease
with an effective term of 20-years from the date of full operation of the Project’s 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, in January 2015,
NSC submitted an expression of interest for its project to the Secretary of Infrastructure and Urban Development of the State
of Baja California (“SIDUE”). SIDUE accepted NSC’s expression of interest and requested that NSC submit a detailed
proposal for the Project that 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 del 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
Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), a special project company, to complete the Project
and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project
assets from NSC on the date that the Project begins commercial operations; and (ii) AdR would enter into a Management and Technical
Services Agreement with NSC effective on the first day that the Project begins commercial operations. As of June 30, 2017 and 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, 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 for Phase 1 is
expected to be approximately 9.1 billion Mexican pesos. Annual revenues from the Project for Phase 1 are expected to be approximately
1.79 billion Mexican pesos. 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 agreements between the CEA, the payment trusts
and the CESPT have been executed;
|
|
·
|
AdR has obtained all rights of ways required for the
Phase 1 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.
|
As of June 30, 2017, AdR has paid approximately
$349,000 for deposits on, or purchases of, rights of way for the Phase 1 aqueduct, which are included in prepaid expenses and other
assets on the Company’s condensed consolidated balance sheet.
Both the exchange rate for the Mexico
peso relative to the dollar and general macroeconomic conditions in Mexico have varied since the U.S. Presidential election in
November 2016. These changes could adversely impact 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 determine 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 at least
equal to 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 the Company’s
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 $885,000 and $875,000 for the three months ended June 30, 2017 and 2016, respectively,
and $1,605,000 and $1,642,000 for the six months ended June 30, 2017 and 2016, respectively. The assets and liabilities of NSC
and AdR included in the Company’s condensed consolidated balance sheets amounted to approximately $22.6 million and $309,000,
respectively, as of June 30, 2017 and approximately $22.3 million and $221,000 respectively, as of December 31, 2016.
EWG 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 for a price
of $1.0 million along with an immediate power of attorney to vote those shares. Such shares constituted 25% of the ownership of
NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of
its stock. As a result of this share issuance to CW-Cooperatief, the Company 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 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 challenged, 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 also sought 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.
On May 2, 2017, the Tecate, Mexico court
declared that the initial filing of this lawsuit had expired due to EWG’s lack of activity with respect to certain actions
required to proceed to trial. However, EWG can appeal the expiration or refile the lawsuit.
8. Fair value measurements
As of June 30, 2017 and December 31, 2016,
the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the notes
payable to related party 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 June 30, 2017 and December 31, 2016 approximate their
fair value as their 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 June 30, 2017 and December 31, 2016:
|
|
June 30, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability arising from put/call options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
528,000
|
|
|
$
|
528,000
|
|
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liability arising from put/call options
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
680,000
|
|
|
$
|
680,000
|
|
The activity for the Level 3 liability for the six months ended
June 30, 2017:
Net liability arising from put/call options
(1)
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
680,000
|
|
Unrealized gain
|
|
|
(152,000
|
)
|
Balance as of June 30, 2017
|
|
$
|
528,000
|
|
(1) In connection
with the Company’s acquisition of 51% of Aerex in February 2016, the Company acquired from Aerex’s former sole shareholder
an option to compel such shareholder to sell, and granted to such shareholder an option to require the Company to purchase, the
shareholder’s remaining 49% ownership interest in Aerex at a price based upon the fair value of Aerex at the time of the
exercise of the option. The options are exercisable on or after the third anniversary of the February 2016 acquisition date. The
net liability arising from the put/call options is included in other liabilities in the accompanying condensed consolidated balance
sheets as of June 30, 2017 and December 31, 2016.
9. Contingencies
Cayman Water
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 three months ended June 30, 2017 and
2016, the Company generated approximately 40% and 41%, respectively, of its consolidated revenues and 52% and 55%, respectively,
of its consolidated gross profit from the retail water operations conducted pursuant to Cayman Water’s exclusive license.
For the six months ended June 30, 2017 and 2016, the Company generated approximately 40% and 42%, respectively, of its consolidated
revenues and 54% and 55%, respectively, of its consolidated gross profit from the retail water operations conducted pursuant to
Cayman Water’s exclusive license.
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 Company has been informed by the Cayman Islands government that the
retail license has been extended through January 31, 2018 and is awaiting the formal documentation for this extension.
In October 2016, the Government of the
Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg
is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility
services, and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and
regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands
in April 2017, which transferred responsibility for economic regulation of the water utility sector from the Water Authority-Cayman
(the “WAC”) to OfReg. In July 2017, the Company began negotiating with OfReg for a new retail license in the Cayman
Islands.
Under its present 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
WAC, on behalf of the government, previously reviewed and confirmed the calculations of the price adjustments for inflation and
electricity costs. On July 7, 2017, the Company was advised by OfReg that regulatory responsibility for the water utility sector
had been transferred from the WAC to OfReg effective May 22, 2017, and that effective immediately all reviews and confirmations
of calculations of the price adjustments for inflation and electricity costs will be performed by OfReg. If Cayman Water wants
to adjust its prices for any reason other than inflation or electricity costs, Cayman Water has to request prior approval from
the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be referred to arbitration.
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.”
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-Bahamas
CW-Bahamas’ water supply agreements
with the Water and Sewerage Corporation of The Bahamas ("WSC") for its Blue Hills and Windsor plants require CW-Bahamas
to guarantee delivery of a minimum quantity of water per week. If CW-Bahamas does not meet these minimums, 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 respective agreement. The Blue Hills and Windsor agreements require CW-Bahamas to
deliver 63.0 million gallons and 16.8 million gallons of water each week, respectively.
Aerex Put/Call Options
In connection with the Company’s
acquisition of 51% of Aerex in February 2016, the Company acquired from Aerex’s former sole shareholder an option to compel
such shareholder to sell, and granted to such shareholder an option to require the Company to purchase, the shareholder’s
remaining 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 February 2016 acquisition date. The fair value of
the net liability arising from these put/call options was $528,000 and $680,000 as of June 30, 2017 and December 31, 2016, respectively,
and is included in other liabilities in the accompanying condensed consolidated balance sheets.
10. Impact of recent accounting standards
Adoption of new accounting standards:
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 did not 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 did not have
a material impact on the Company’s financial position, results of operations or cash flows.
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 did not 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 did not have a material impact
on the Company’s financial position, results of operations or cash flows.
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, if any, and intends
to elect the modified retrospective method to all active contracts on the date of initial application. This will involve applying
the guidance retrospectively only to the most current period presented in the financial statements and recognizing the cumulative
effect of initially applying the guidance as an adjustment to the January 1, 2018 opening balance of retained earnings at the date
of initial application. The adoption of ASC 606,
Revenue from Contracts with Customers,
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 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.
11. Subsequent events
The Company’s management evaluated
subsequent events through the time of the filing of this report on Form 10-Q. Other than as disclosed in these condensed consolidated
financial statements, the Company’s management 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.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains
forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited
to, statements regarding our future revenues, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking
statements can be identified by use of the words or phrases “will,” “will likely result,” “are expected
to,” “will continue,” “estimate,” “project,” “potential,” “believe,”
“plan,” “anticipate,” “expect,” “intend,” or similar expressions and variations
of such words. Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates,
forecasts and projections for our business and the industry and markets related to our business.
The forward-looking statements contained
in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult
to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Important
factors which may affect these actual outcomes and results include, without limitation:
·
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tourism and weather conditions in the areas we serve;
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·
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the economies of the U.S. and other countries in which we conduct business;
|
·
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our relationships with the governments we serve;
|
·
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regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman;
|
·
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our ability to successfully enter new markets, including Mexico and the United States; and
|
·
|
other factors, including those “Risk Factors” set forth under Part II, Item 1A. “Risk Factors” in this Quarterly Report and in our 2016 Annual Report on Form 10-K.
|
The forward-looking statements in this
Quarterly Report speak as of its date. We expressly disclaim any obligation or undertaking to update or revise any forward-looking
statement contained in this Quarterly Report to reflect any change in our expectations with regard thereto or any change in events,
conditions or circumstances on which any forward-looking statement is based, except as may be required by law.
References herein to “we,”
“our,” “ours” and “us” refer to Consolidated Water Co. Ltd. and its subsidiaries.
Critical Accounting Estimates
The preparation of consolidated financial
statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.
Our actual results could differ significantly from such estimates and assumptions.
Certain of our accounting estimates or
assumptions constitute “critical accounting estimates” for us because:
·
|
the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
|
·
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the impact of the estimates and assumptions on financial condition and results of operations is material.
|
Our critical accounting estimates relate
to the valuations of our (i) equity investment in our affiliate OC-BVI; (ii) goodwill and intangible assets; and (iii) long-lived
assets.
Valuation of Investment in OC-BVI
We account for our investment in OC-BVI
under the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity
investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its
carrying amount may indicate a loss in the value of the investment. While a quoted market price for OC-BVI’s stock is not
available, due to the uncertainties (specifically the Baughers Bay litigation and the possible expiration without renewal of the
Bar Bay agreement) associated with OC-BVI’s future cash flows, we tested the carrying value of our investment in OC-BVI
(which exceeded our proportionate share of OC-BVI’s net assets by an amount accounted for as goodwill) for impairment in
2016 and prior years.
We estimated the fair value of our investment in OC-BVI through the use of the discounted cash flow method,
which relied upon projections of OC-BVI’s operating results, working capital and capital expenditures. The use of this method
required us to estimate OC-BVI’s future cash flows from its Bar Bay plant and the resolution of the Baughers Bay litigation.
We estimated OC-BVI’s cash flows
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 scheduled expiration of the Bar Bay agreement
in March 2017; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability to each
scenario. We similarly estimated the cash flows OC-BVI would receive from the BVI government in connection with the final court
rulings on the Baughers Bay litigation (which were issued in 2012) by assigning probabilities to different scenarios. The resulting
probability-weighted sum represented our best estimate of future cash flows to be generated by OC-BVI.
The identification of the possible scenarios
for the Bar Bay plant agreement and the Baughers Bay litigation, the projections of cash flows for each scenario, and the assignment
of relative probabilities to each scenario all represented significant estimates made by us. While we used our best judgment in
identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning relative probabilities
to each scenario, these estimates were by their nature highly subjective and were also subject to material change by our management
over time based upon new information or changes in circumstances.
After updating our probability-weighted estimates of OC-BVI’s
future cash flows and our resulting estimate of the fair value of our investment in OC-BVI, we recorded impairment losses for
our investment in OC-BVI for 2016 and other prior years. Such impairment losses amounted to $50,000 and $925,000 for the six months
ended June 30, 2016 and the year ended December 31, 2016, respectively.
In February 2017, the BVI government executed
a 14-year extension to water supply agreement for OC-BVI’s Bar Bay plant. Based upon the execution of this extension, we
believe further impairment losses to reduce the carrying value of our investment in OC-BVI will not be required unless the BVI
government fails to comply with the terms of the Bar Bay extension or a presently unforeseen event occurs that would impact the
future cash flows we expect OC-BVI to generate.
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. We evaluate the possible impairment of goodwill annually as part of our reporting
process for the fourth quarter of each fiscal year. Management identifies our reporting units and determines the carrying value
of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those
reporting units. We determine the fair value of each reporting unit and compare these fair values to the carrying amounts of the
reporting units. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, we are 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, we compare the implied fair value of each reporting unit’s goodwill with the carrying amount of such 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 year ended December 31, 2016,
we estimated the fair value of our reporting units by applying the discounted cash flow 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 our retail unit we (i) identified possible outcomes of our on-going negotiations with the Cayman
Islands government for the renewal of our 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 methodology
for determining water rates proposed by Cayman Islands government representatives for the new retail license.
We also estimated the fair value of each
of our reporting units for the year ended December 31, 2016 through reference to the quoted market prices for our Company and guideline
companies and the market multiples implied by guideline merger and acquisition transactions.
We weighted the fair values estimated for
each of our reporting units under each method and summed such weighted fair values to estimate the overall fair value for each
reporting unit. The respective weightings we applied to each method as of December 31, 2016 were as follows:
Method
|
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Retail
|
|
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Bulk
|
|
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Manufacturing
|
|
Discounted cash flow
|
|
|
80
|
%
|
|
|
80
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%
|
|
|
80
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%
|
Guideline public company
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
Mergers and acquisitions
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
10
|
%
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
The fair values we estimated for our retail,
bulk and manufacturing units exceeded their carrying amounts by 123%, 41%, and 26%, respectively, as of December 31, 2016.
We also performed an analysis reconciling
the conclusions of value for our reporting units to our market capitalization at December 31, 2016. This reconciliation resulted
in no implied control premium for our Company.
Our manufacturing unit consists of the
operations of Aerex, a company in which we acquired a 51% ownership interest in February 2016. In connection with this acquisition
we recorded goodwill of $8,035,211. Aerex’s actual results of operations in the months following our acquisition fell significantly
short of the projected results that were included in the overall cash flow projections we utilized to determine the purchase price
for Aerex and the fair values of its assets and liabilities. Due to this shortfall in Aerex’s results of operations, we updated
our projections for Aerex’s future cash flows and tested Aerex’s goodwill for possible impairment as of September 30,
2016 by estimating its fair value using the discounted cash flow method. As a result of this impairment testing, we determined
that the carrying value of our Aerex goodwill exceeded its fair value, and recorded an impairment loss of $1,750,000 for the three
months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211. We may be required to record additional
impairment losses to reduce the carrying value of our Aerex goodwill in future periods if we determine it likely that Aerex’s
results of operations will fall short of our most recent projections of its future cash flows.
Long-lived assets
We review the carrying amounts of our long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be
recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market
value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that
would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and
used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measure
the impairment loss based on the difference between the carrying amount and fair value.
RESULTS OF OPERATIONS
The following discussion and analysis of
our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial
statements and accompanying notes included under Part I, Item 1 of this Quarterly Report and our consolidated financial statements
and accompanying notes included in our Annual Report on Form 10-K for our fiscal year ended December 31, 2016 (“2016 Form
10-K”) and the information set forth under Item 7. “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of our 2016 Form 10-K.
Three Months Ended June 30, 2017 Compared to Three Months
Ended June 30, 2016
Net income attributable to Consolidated
Water Co. Ltd. stockholders for 2017 was $624,548 ($0.04 per share on a fully-diluted basis), as compared to $2,204,333 ($0.15
per share on a fully-diluted basis) for 2016.
During May 2017, we formally committed to discontinue the operations of CW-Bali and
exit the Bali market (see further discussion of this matter at “
Discontinued Operations: CW-Bali
” herein).
In accordance with US GAAP, CW-Bali’s results of operations have been reported as discontinued operations in our consolidated
statements of income for 2017 and 2016.
The “
Consolidated Results
”
and “
Results by Segment
” discussions herein relate to continuing operations.
Consolidated Results
Net income from continuing operations attributable
to Consolidated Water Co. Ltd. stockholders for 2017 was $1,691,990 ($0.11 per share on a fully diluted basis), as compared to
$2,339,950 ($0.16 per share on a fully-diluted basis) for 2016.
Total revenues for 2017 were $15,248,621
as compared to $15,379,202 in 2016. Higher revenues for our bulk segment in 2017 served to partially offset revenue decreases in
our other three segments. Gross profit for 2017 was $6,485,830 (43% of total revenues) as compared to $6,702,717 (44% of total
revenues) for 2016 as the gross profit for the bulk segment increased but decreased for the other three segments. For further discussion
of revenues and gross profit for 2017 see the “
Results by Segment
” analysis that follows.
General and administrative (“G&A”)
expenses on a consolidated basis were $4,960,170 and $4,888,794 for 2017 and 2016, respectively. Consolidated G&A expenses
increased from 2016 to 2017 due to incremental employee costs of approximately $180,000, which were partially offset by a decrease
of approximately $94,000 in professional fees.
Other income, net for 2017 was $21,528,
as compared to $404,178 for 2016. The decrease for 2017 in this net component of our consolidated statement of income reflects
(i) $49,264 less in interest income for 2017 due to lower interest earning balances; (ii) a non-recurring gain on sale of fixed
assets in 2016 of approximately $272,000; and (iii) equity of ($37,824) in the loss generated by OC-BVI for 2017 as compared to
aggregate profit sharing income from, and equity in the earnings of, OC-BVI for 2016 of $100,033. As a result of the renewal during
the first quarter of 2017 of OC-BVI’s water supply agreement for its Bar Bay plant at a 31% reduction in price for the water
OC-BVI supplies, we expect the earnings and profit sharing amounts we report from our investment in OC-BVI for the remainder of
2017 and thereafter will be significantly less than such amounts reported for 2016.
Results by Segment
Retail Segment
The retail segment contributed $206,481
and $885,430 to our income from operations for 2017 and 2016, respectively.
Revenues generated by our retail water
operations were $6,029,449 in 2017 as compared to $6,273,400 in 2016, as the volume of water sold by the retail segment declined
by 1% from 2016 to 2017.
Retail segment gross profit was $3,370,383
(56% of retail revenues) and $3,717,855 (59% of retail revenues) for 2017 and 2016, respectively. The decline in retail gross profit
as a percentage of revenues from 2016 to 2017 is attributable to incremental maintenance costs for 2017 of approximately $153,000.
Consistent with prior periods, we record
all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business
segments. Retail G&A expenses for 2017 and 2016 were $3,163,902 and $2,832,425 for 2017 and 2016, respectively. The increase
in retail G&A expenses from 2016 to 2017 is primarily due to incremental employee costs of $227,000 arising from a non-recurring
retirement payment as well as base salary increases.
Bulk Segment
The bulk segment contributed $2,568,055
and $2,185,813 to our income from operations for 2017 and 2016, respectively.
Bulk segment revenues were $8,043,921
and $7,441,061 for 2017 and 2016, respectively. The increase in bulk revenues from 2016 to 2017 is primarily attributable to our
Bahamas operations, which generated approximately $648,000 in incremental revenues due to a significant increase in the prices
of diesel fuel and electricity from 2016 to 2017, which increased the energy component of our bulk water rates in The Bahamas.
Gross profit for our bulk segment was $2,891,709
and $2,627,800 for 2017 and 2016, respectively. Gross profit as a percentage of bulk revenues was approximately 36% and 35% for
2017 and 2016, respectively. The improvement in bulk segment gross profit as a percentage of revenues in 2017 resulted from a decrease
in maintenance and chemicals expenses for our Bahamas operations in 2017 of almost $244,000.
Bulk segment G&A expenses decreased
to $323,654 for 2017 as compared to $441,987 for 2016. This decrease reflects bank charges incurred to transfer funds from our
Bahamas operations to our Cayman headquarters that were significantly lower for 2017 than for 2016 due to a decrease in the amount
of funds transferred.
Services Segment
The services segment incurred losses from
operations of ($876,263) and ($781,761) for 2017 and 2016, respectively.
Services segment revenues decreased to
$119,204 for 2017 as compared to $403,935 for 2016 as we generated $278,340 in revenues in 2016 under our contract with the WAC
to refurbish their North Sound plant.
Gross profit for our services segment was
$15,451 and $131,398 for 2017 and 2016, respectively. The service segment’s gross profit decreased from 2016 to 2017 due
to the gross profit generated on the North Sound plant refurbishment in 2016.
G&A expenses for the services segment
remained relatively consistent at $891,714 and $913,159 for 2017 and 2016, respectively.
Manufacturing Segment
The manufacturing segment incurred losses
from operations of ($372,613) and ($475,559) for 2017 and 2016, respectively.
Manufacturing revenues declined to $1,056,047
in 2017 from $1,260,806 in 2016 due to a decrease in the dollar value of active contracts.
Manufacturing segment gross profit was
$208,287 (20% of revenues) and $225,664 (18% of revenues) for 2017 and 2016, respectively. Gross profit for 2017 decreased in dollars
from 2016 due to lower revenues.
G&A expenses for the manufacturing
segment were $580,900 and $701,223 for 2017 and 2016, respectively. Such expenses include amortization expenses related to the
intangible assets recorded in connection with the Aerex acquisition of $335,000 and $420,000 for 2017 and 2016, respectively.
Discontinued Operations: CW-Bali
Through our subsidiary CW-Bali, we built
and operate a seawater reverse osmosis plant with a production capacity of approximately 790,000 gallons per day located in Nusa
Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages
in this area of Bali would eventually enable us to sell all of this plant’s production. However, since inception of CW-Bali’s
operations in 2013, the sales volumes for its plant have not been sufficient to cover its operating costs and CW-Bali has incurred
net losses. Our net losses from CW-Bali for our two most recent fiscal years ended December 31, 2016 and 2015 were approximately
($2.5 million) and ($861,000), respectively. The results of CW-Bali were included in the retail segment for segment reporting purposes.
In late 2015, we decided to seek a strategic
partner for CW-Bali to (i) purchase a major portion of its equity ownership; (ii) lead CW-Bali’s sales and marketing efforts;
(iii) liaise with the local water utility; and (iv) assist with CW-Bali’s on-going funding requirements. Although discussions
were held and due diligence information was exchanged with potential strategic partners, we did not receive an offer for an investment
in, a purchase of, or a joint venture for CW-Bali from any of these potential partners on terms we deemed acceptable.
On May 23, 2017, after considering CW-Bali’s
historical and projected operating losses, its on-going funding requirements, the current business and economic environment in
Bali and our inability to obtain a strategic partner for CW-Bali, our Board of Directors formally resolved to discontinue CW-Bali’s
operations. We plan to cease the production of water in Bali and exit the Bali market at the earliest practical date, which we
believe will be within six months.
Based upon this decision to discontinue
CW-Bali’s operations, we estimated the future cash flows we will receive under various scenarios from the disposition of
our investment in CW-Bali and assigned a probability to each scenario to determine an estimated fair value of our investment in
CW-Bali. Based upon this probability-weighted sum, we recorded an impairment loss of $1.0 million for the three months ended June
30, 2017 to reduce the carrying value of our investment in CW-Bali (which includes $549,555 in cumulative translation adjustments
reflected in stockholders’ equity) to its estimated fair value of approximately $832,000. We may be required to record additional
losses if we are ultimately unable to sell our investment in CW-Bali or CW-Bali’s net assets for this estimated fair value.
Our net loss from CW-Bali’s discontinued
operations (including the $1.0 million impairment loss discussed in the previous paragraph) was approximately ($1,067,000) for
2017, as compared to approximately ($136,000) for 2016.
Six Months Ended June 30, 2017 Compared to Six Months Ended
June 30, 2016
Net income attributable to Consolidated
Water Co. Ltd. stockholders for 2017 was $3,255,776 ($0.21 per share on a fully diluted basis), as compared to $4,258,974 ($0.29
per share on a fully-diluted basis) for 2016.
During May 2017, we formally committed
to discontinue the operations of CW-Bali and exit the Bali market (see further discussion of this matter at “
Discontinued
Operations: CW-Bali”
herein). In accordance with US GAAP, CW-Bali’s results of operations have been reported as
discontinued operations in our consolidated statements of income for 2017 and 2016.
The “
Consolidated Results
”
and “
Results by Segment
” discussions herein relate to continuing operations.
Consolidated Results
Net income from continuing operations attributable
to Consolidated Water Co. Ltd. stockholders for 2017 was $4,399,083 ($0.29 per share on a fully diluted basis), as compared to
$4,380,640 ($0.29 per share on a fully-diluted basis) for 2016.
Total revenues for 2017 increased to $30,898,073
from $29,386,996 in 2016 due to higher revenues for our retail, bulk and manufacturing segments. Gross profit for 2017 was $13,356,383
(43% of total revenues) as compared to $12,972,449 (44% of total revenues) for 2016 as the gross profit for our retail, bulk and
manufacturing segments increased from 2016 to 2017. For further discussion of revenues and gross profit for 2017 see the “
Results
by Segment
” analysis that follows.
G&A expenses on a consolidated basis
were $9,714,680 and $9,295,856 for 2017 and 2016, respectively. The increase in consolidated G&A expenses from 2016 to 2017
is primarily attributable (i) incremental employee costs of approximately $299,000 arising from a non-recurring retirement payment
and base salary increases; and (ii) project development expenses incurred by Aerex of approximately $194,000.
Other income, net for 2017 was $425,089,
as compared to $632,425 for 2016. The decrease for 2017 in this net component of our consolidated statement of income for 2017
reflects (i) $143,950 less in interest income for 2017 due to lower interest earning balances; (ii) a non-recurring gain on sale
of fixed assets in 2016 of approximately $272,000; and (iii) equity of ($10,958) in the loss generated by OC-BVI and profit sharing
income from OC-BVI of $10,125 for 2017 as compared to an aggregate income effect of $129,822 for the profit sharing income, equity
in the earnings, and impairment loss we recorded for OC-BVI for 2016. As a result of the renewal during the first quarter of 2017
of OC-BVI’s water supply agreement for its Bar Bay plant at a 31% reduction in price for the water OC-BVI supplies, we expect
the earnings and profit sharing amounts we report from our investment in OC-BVI for the remainder of 2017 and thereafter will be
significantly less than such amounts reported for 2016.
Results by Segment
Retail Segment
The retail segment contributed $1,065,607
and $1,474,754 to our income from operations for 2017 and 2016, respectively.
Revenues generated by our retail water
operations increased slightly to $12,478,399 in 2017 from $12,216,660 in 2016, as a result of a 4% increase in the volume of water
sold.
Retail segment gross profit remained relatively consistent at $7,199,686 (58% of retail revenues) and $7,151,120 (59% of
retail revenues) for 2017 and 2016, respectively.
Consistent with prior periods, we record
all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business
segments. The increase in retail G&A expenses from 2016 to 2017 is primarily due to (i) incremental employee costs of approximately
$293,000 arising from a non-recurring retirement payment and base salary increases; and (ii) incremental professional fees of
approximately $178,000.
Bulk Segment
The bulk segment contributed $4,941,591
and $4,404,887 to our income from operations for 2017 and 2016, respectively.
Bulk segment revenues were $15,734,323
and $14,706,354 for 2017 and 2016, respectively. The increase in bulk revenues from 2016 to 2017 is primarily attributable to
our Bahamas operations, which generated approximately $1,092,000 in incremental revenues due to a significant increase in the
prices of diesel fuel and electricity from 2016 to 2017, which increased the energy component of our bulk water rates in The Bahamas.
Gross profit for our bulk segment was $5,566,322
and $5,282,769 for 2017 and 2016, respectively. Gross profit as a percentage of bulk revenues was approximately 35% and 36% for
2017 and 2016, respectively. Gross profit as a percentage of revenues decreased in 2017 as compared to 2016 due to higher energy
prices, as energy expense for our bulk operations was approximately $1,064,000 more in 2017 than in 2016.
Bulk segment G&A expenses decreased
to $624,731 for 2017 as compared to $877,882 for 2016. This decrease reflects bank charges incurred to transfer funds from our
Bahamas operations to our Cayman headquarters that were significantly lower for 2017 than for 2016 due to a decrease in the amount
of funds transferred.
Services Segment
The services segment incurred losses from
operations of ($1,591,583) and ($1,604,897) for 2017 and 2016, respectively.
Services segment revenues decreased to
$249,456 for 2017 as compared to $584,647 for 2016 as we generated $320,296 in revenues in 2016 under our contract with the WAC
to refurbish their North Sound plant.
Gross profit for our services segment was
$43,537 and $114,834 for 2017 and 2016, respectively. The service segment’s gross profit decreased from 2016 to 2017 due
to the gross profit generated on the North Sound plant refurbishment in 2016.
G&A expenses for the services segment
remained relatively consistent at $1,635,120 and $1,719,731 for 2017 and 2016, respectively.
Manufacturing Segment
Our manufacturing segment consists of Aerex,
a company in which we acquired a 51% ownership interest as of February 11, 2016. Consequently, the results of our manufacturing
segment for 2017 are not entirely comparable to those reported for 2016, as 2017 reflects a full six months of Aerex’s operations
whereas 2016 reflects Aerex’s operations for shorter period that began February 11, 2016 and ended on June 30, 2016.
The manufacturing segment incurred losses
from operations of ($773,912) and ($598,151) for 2017 and 2016, respectively.
Manufacturing revenues were $2,435,895
and $1,879,335 for 2017 and 2016, respectively. The increase in revenues from 2016 to 2017 reflects the additional days of manufacturing
activity in 2017 as compared to 2016 due to the acquisition of Aerex on February 11, 2016.
Manufacturing segment gross profit was
$546,838 (22% of revenues) and $423,726 (23% of revenues) for 2017 and 2016, respectively. Gross profit for 2017 increased in dollars
from 2016 due to the incremental revenues.
G&A expenses for the manufacturing
segment were $1,320,750 and $1,021,877 for 2017 and 2016, respectively
.
Manufacturing G&A
increased from 2017 to 2016 as a result of an increase of approximately $194,000 in project development expenses incurred for 2017.
Manufacturing G&A expenses also reflect amortization expenses related to the intangible assets recorded in connection with
the Aerex acquisition of $678,333 and $600,000 for 2017 and 2016, respectively.
Discontinued Operations: CW-Bali
Through our subsidiary CW-Bali, we built
and operate a seawater reverse osmosis plant with a production capacity of approximately 790,000 gallons per day located in Nusa
Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages
in this area of Bali would eventually enable us to sell all of this plant’s production. However, since inception of CW-Bali’s
operations in 2013, the sales volumes for its plant have not been sufficient to cover its operating costs and CW-Bali has incurred
net losses. Our net losses from CW-Bali for our two most recent fiscal years ended December 31, 2016 and 2015 were approximately
($2.5 million) and ($861,000), respectively. The results of CW-Bali were included in the retail segment for segment reporting purposes.
In late 2015, we decided to seek a strategic
partner for CW-Bali to (i) purchase a major portion of its equity ownership; (ii) lead CW-Bali’s sales and marketing efforts;
(iii) liaise with the local water utility; and (iv) assist with CW-Bali’s on-going funding requirements. Although discussions
were held and due diligence information was exchanged with potential strategic partners, we did not receive an offer for an investment
in, a purchase of, or a joint venture for CW-Bali from any of these potential partners on terms we deemed acceptable.
On May 23, 2017, after considering CW-Bali’s
historical and projected operating losses, its on-going funding requirements, the current business and economic environment in
Bali and our inability to obtain a strategic partner for CW-Bali, our Board of Directors formally resolved to discontinue CW-Bali’s
operations. We plan to cease the production of water in Bali and exit the Bali market at the earliest practical date, which we
believe will be within six months.
Based upon this decision to discontinue
CW-Bali’s operations, we estimated the future cash flows we will receive under various scenarios from the disposition of
our investment in CW-Bali and assigned a probability to each scenario to determine an estimated fair value of our investment in
CW-Bali. Based upon this probability-weighted sum, we recorded an impairment loss of $1.0 million for the three months ended June
30, 2017 to reduce the carrying value of our investment in CW-Bali (which includes $549,555 in cumulative translation adjustments
reflected in stockholders’ equity) to its estimated fair value of approximately $832,000. We may be required to record additional
losses if we are ultimately unable to sell our investment in CW-Bali or CW-Bali’s net assets for this estimated fair value.
Our net loss from CW-Bali’s discontinued
operations (including the $1.0 million impairment loss discussed in the previous paragraph) was approximately ($1,143,000) for
2017, as compared to approximately ($122,000) for 2016.
FINANCIAL CONDITION
Accounts receivable decreased by approximately
$2.4 million from December 31, 2016 to June 30, 2017 primarily due to a decrease in the accounts receivables for CW-Bahamas of
approximately $2.2 million. We believe, based upon prior payment history, that our accounts receivable balances will be collected
in full. Inventory increased by approximately $1.1 million as a result of additional inventory for Aerex for in-process projects.
Construction in progress increased by approximately $1.9 million from December 31, 2016 to June 30, 2017 as a result of the refurbishment
of our Bahamas operations. Billings in excess of costs and estimated earnings increased by approximately $1.3 million from December
31, 2016 to June 30, 2017 due to Aerex.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity Position
Our projected liquidity requirements for
2017 include capital expenditures for our existing operations of approximately $6.7 million, approximately $392,000 due on notes
payable, dividends payable of approximately $1.2 million and approximately $4.6 million to be expended for NSC’s and AdR’s
project development activities. Our liquidity requirements for 2017 may also include further quarterly dividends, if such dividends
are declared by our Board of Directors. Our dividend payments amounted to approximately $4.6 million for the year ended December
31, 2016 and approximately $2.2 million for the six months ended June 30, 2017.
In February 2016, we purchased 51% of the
equity ownership of Aerex, a U.S. original equipment manufacturer and service provider of a wide range of products and services
applicable to industrial, commercial and municipal water treatment, for $7.7 million in cash. Immediately following our acquisition
of Aerex, we and the former sole shareholder of Aerex loaned Aerex $510,000 and $490,000, respectively, in the form of notes payable
which were scheduled to mature on June 30, 2017 and bore interest at 1% per annum. These notes payable were repaid in April 2017.
In February 2017, we and the former sole shareholder of Aerex loaned Aerex $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.
As of June 30, 2017, we had cash and cash
equivalents of approximately $46.0 million and working capital of approximately $58.6 million. We are not presently aware of anything
that would lead us to believe that we will not have sufficient liquidity to meet our needs.
CW-Bahamas and CW-Belize Liquidity Considerations
Transfers from our bank accounts in The
Bahamas and Belize to our bank accounts in other countries require the approval of the Central Banks of The Bahamas and Belize,
respectively. As of June 30, 2017, the equivalent United States dollar cash balances for our bank account deposits in The Bahamas
and Belize were approximately $12.5 million and $5.7 million, respectively.
Weakness in the Belize economy and other
factors have reduced the amount of U.S. dollars that Belize banks can transfer outside the country, which has limited the amount
of U.S. dollars we are presently able to transfer from Belize to our other subsidiaries. We cannot presently determine when
conditions in Belize will improve or when we will have an improved ability to transfer funds from CW-Belize.
Discussion of Cash Flows for the Six Months Ended June 30,
2017
Our cash and cash equivalents increased
to $46.0 million as of June 30, 2017 from $39.1 million as of December 31, 2016.
Cash Flows from Operating Activities
Our operating activities provided cash
of approximately $9.6 million. This net cash amount reflects net income generated for the six months of approximately $3.2 million
as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the year; and
(ii) changes in the other components of working capital. The more significant of such items and changes in working capital components
included depreciation and amortization of approximately $3.5 million, a net decrease in accounts receivable and costs and estimated
earnings in excess of billings of approximately $2.0 million, an increase in accounts payable and other current liabilities and
billings in excess of costs and estimated earnings of approximately $1.3 million, an increase in inventory of approximately $1.2
million and an impairment loss of $1.0 million to reduce the carrying value of our investment in CW-Bali.
Cash Flows from Investing Activities
Net cash used in our investing activities
was approximately $431,000. Additions to property, plant and equipment and construction in progress was approximately $2.6 million
which was partially offset by a $1.1 million distribution of earnings from OC-BVI and approximately $1.0 million collections on
our loan receivable.
Cash Flows from Financing Activities
Our financing activities used approximately
$2.3 million in net cash as we paid dividends of approximately $2.2 million. In February 2017, we also obtained a $392,000 note
payable from Aerex’s prior sole stockholder that matures on September 30, 2017 and also repaid the original loan of $490,000
from the same stockholder in April 2017.
Material Commitments, Expenditures and Contingencies
Renewal of Retail License
We sell water through our 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 three months ended June 30, 2017 and 2016, we generated
approximately 40% and 41%, respectively, of our consolidated revenues and 52% and 55%, respectively, of our consolidated gross
profit from the retail water operations conducted pursuant to Cayman Water’s exclusive license. For the six months ended
June 30, 2017 and 2016, we generated approximately 40% and 42%, respectively, of our consolidated revenues and 54% and 55%, respectively,
of our consolidated gross profit from the retail water operations conducted pursuant to Cayman Water’s exclusive license.
The license was originally 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. We have been informed by the Cayman Islands government that
the retail license has been extended through January 31, 2018 and we are awaiting the formal documentation for this extension.
In October 2016, the Government of the
Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg
is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility
services, and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate
multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April
2017, which transferred responsibility for economic regulation of the water utility sector from the Water Authority-Cayman (the
“WAC”) to OfReg. In July 2017, we began license negotiations with OfReg for a new retail license in the Cayman Islands.
Under its present 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
WAC, on behalf of the government, previously reviewed and confirmed the calculations of the price adjustments for inflation and
electricity costs. On July 7, 2017, we were advised by OfReg that regulatory responsible for the water utility sector had been
transferred from the WAC to OfReg effective May 22, 2017, and that effective immediately all reviews and confirmations of calculations
of the price adjustments for inflation and electricity costs will be performed by OfReg. 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 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.”
We are presently unable to determine what
impact the resolution of our retail license negotiations will have on our cash flows, financial condition or results of operations
but such resolution could result in a material reduction of the operating income and cash flows we have historically generated
from our retail operations and could require us to record an impairment loss to reduce the carrying value of our goodwill. Such
impairment loss could have a material adverse impact on our results of operations.
NSC and AdR Project Development
In May 2010, we acquired, through our wholly-owned
Netherlands subsidiary, Consolidated Water Cooperatief, U.A., (“CW-Cooperatief”) a 50% interest in N.S.C. Agua, S.A.
de C.V. (“NSC”), a development stage Mexican company. We have since purchased, through the conversion of a loan we
made to NSC, sufficient shares to raise our ownership interest in NSC to 99.9%. NSC was formed to pursue a project (the “Project”)
encompassing the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination
plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water
system. As discussed in the 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.
Through a series of transactions completed
in 2012-2014, NSC purchased 20.1 hectares for approximately $20.6 million on which the proposed Project’s plant would be
constructed.
In 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 del 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 and accompanying
required public tender process should be conducted. In November 2015, the State officially commenced the tender for the Project,
the scope of which the State has 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.
We have 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
Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), a special purpose company, to complete the Project
and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project
assets from NSC on the date that the Project begins commercial operation; and (ii) AdR would enter into a Management and Technical
Services Agreement with NSC effective on the first day that the Project begins commercial operation. As of June 30, 2017 and 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, 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 for Phase 1 is
expected to be approximately 9.1 billion Mexican pesos. Annual revenues from the Project for Phase 1 are expected to be approximately
1.79 billion Mexican pesos. 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;
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·
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the CEA has obtained the rights from the relevant federal authority to take and desalinate seawater and distribute it for municipal use;
|
·
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various agreements between the CEA, the payment trusts and the CESPT have been executed;
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·
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AdR has obtained all rights of ways required for the Phase 1 aqueduct;
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·
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AdR has obtained permission from the relevant federal authority to discharge the residual water from the Project’s desalination plant; and
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·
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all equity and debt financing agreements necessary to provide the funding to AdR for the first phase of the Project have been executed.
|
As of June 30, 2017, AdR has paid approximately
$349,000 for deposits on, or purchases of, rights of way for the Phase 1 aqueduct, which are included in prepaid expenses and other
assets on our condensed consolidated balance sheet.
Both the exchange rate for the Mexico peso
relative to the dollar and general macroeconomic conditions in Mexico have varied since the U.S. Presidential election in November
2016. These changes could adversely impact 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. We are currently unable to determine 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 at least
equal to 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 our 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 $885,000 and $875,000 for the
three months ended June 30, 2017 and 2016, respectively, and $1,605,000 and $1,642,000 for the six months ended June 30, 2017 and
2016, respectively. The assets and liabilities of NSC and AdR included in our condensed consolidated balance sheets amounted to
approximately $22.6 million and $309,000, respectively, as of June 30, 2017 and approximately $22.3 million and $221,000 respectively,
as of December 31, 2016.
EWG 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, we paid $300,000 to enter into an agreement (the “Option Agreement”) that provided us with an
option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of
$1.0 million along with an immediate power of attorney to vote those shares. Such shares constituted 25% of the ownership of NSC
as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its
stock. As a result of this share issuance to CW-Cooperatief, we acquired 99.9% of the ownership of NSC. The Option Agreement contained
an anti-dilution provision that required us 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) we did not exercise our share purchase option by February 7, 2014. We exercised our option and paid the $1.0 million to the
individual shareholder to purchase the Option Agreement shares in February 2014.
In October 2015, we learned that EWG has
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 challenged, among
other things, the capital investment transactions that increased our ownership interest in NSC to 99.9%. EWG requested that the
court, as a preliminary matter: (a) suspend of the effectiveness of the challenged transactions; (b) order of 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 also sought 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.
On May 2, 2017, the Tecate, Mexico court
declared that the initial filing of this lawsuit had expired due to EWG’s lack of activity with respect to certain actions
required to proceed to trial. However, EWG can appeal the expiration or refile the lawsuit.
Aerex
Aerex’s actual results of operations
in the months following our acquisition of the company on February 11, 2016 fell significantly short of the projected results that
were included in the overall cash flow projections we utilized to determine the purchase price for Aerex and the fair values of
its assets and liabilities. Due to this shortfall in Aerex’s results of operations, we updated our projections for Aerex’s
future cash flows and tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value
using the discounted cash flow method. As a result of this impairment testing, we determined that the carrying value of our Aerex
goodwill exceeded its fair value, and recorded an impairment loss of $1,750,000 for the three months ended September 30, 2016 to
reduce the carrying value of this goodwill to $6,285,211. We may be required to record additional impairment losses to reduce the
carrying value of our Aerex goodwill in future periods if we determine it likely that Aerex’s results of operations will
fall short of our most recent projections of its future cash flows.
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. We are presently unable to determine what impact the Order and the Second
Order will have on our results of operations, financial position or cash flows.
Adoption of new accounting
standards:
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 did not have a material impact on our 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 did not have a material impact on
our financial position, results of operations or cash flows.
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 did not have a material impact on our 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 did not have a material impact
on our financial position, results of operations or cash flows.
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 us 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. We are currently evaluating the
effect the adoption of these standards will have on our consolidated financial statements and intend to elect the modified retrospective
method to all active contracts on the date of initial application. This will involve applying the guidance retrospectively only
to the most current period presented in the financial statements and recognizing the cumulative effect of initially applying the
guidance as an adjustment to the January 1, 2018 opening balance of retained earnings at the date of initial application. The adoption
of ASC 606,
Revenue from Contracts with Customers,
is not expected to have a material impact on our 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.
We currently are evaluating the effect the adoption of this amendment will have on our 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. We currently are evaluating the effect the adoption of this amendment will have on our consolidated financial
statements.
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. We currently are evaluating the effect the adoption of this amendment
will have on our 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. We currently are evaluating the effect
the adoption of this amendment will have on our consolidated financial statements.
Dividends
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On January 31, 2017, we paid a dividend of $0.075 to shareholders of record on January 2, 2017.
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On May 1, 2017, we paid a dividend of $0.075 to shareholders of record on April 3, 2017.
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On May 23, 2017, our Board declared a dividend of $0.075 payable on July 31, 2017 to shareholders
of record on July 3, 2017.
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We have paid dividends to owners of our
common shares and redeemable preferred shares since we began declaring dividends in 1985. Our payment of any future cash dividends
will depend upon our earnings, financial condition, cash flows, capital requirements and other factors our Board of Directors deems
relevant in determining the amount and timing of such dividends.
Dividend Reinvestment and Common Stock
Purchase Plan
.
This program is available to our shareholders,
who may reinvest all or a portion of their common cash dividends into shares of common stock at prevailing market prices and may
also invest optional cash payments to purchase additional shares at prevailing market prices as part of this program.
Impact of Inflation
Under the terms of our Cayman Islands license
and our water sales agreements in The Bahamas, Belize and the British Virgin Islands, our water rates are automatically adjusted
for inflation on an annual basis, subject to temporary exceptions. We, therefore, believe that the impact of inflation on our gross
profit, measured in consistent dollars, will not be material. However, significant increases in items such as fuel and energy costs
could create additional credit risks for us, as our customers’ ability to pay our invoices could be adversely affected by
such increases.