NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Principal activity
Consolidated Water Co. Ltd., and its subsidiaries (collectively, the “Company”) use reverse osmosis technology to produce fresh water from seawater. The Company processes and supplies water to its customers in the Cayman Islands, Belize, The Bahamas 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 license and supply contracts, which provide for adjustments based upon the movement in the government price indices specified in the licenses and contracts, as well as monthly adjustments for changes in the cost of energy. The Company also provides engineering and design services for water plant construction, and manages and operates water plants owned by others.
2. Accounting policies
Basis of preparation:
The consolidated financial statements presented are prepared in accordance with the accounting principles generally accepted in the United States of America.
Use of estimates:
The preparation of consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, goodwill and the fair value of the Company’s investment in affiliate. Actual results could differ significantly from such estimates.
Basis of consolidation:
The accompanying consolidated financial statements include the accounts of the Company’s (i) wholly-owned subsidiaries, Aquilex, Inc., Cayman Water Company Limited (“Cayman Water”), Consolidated Water (Belize) Limited (“CW-Belize”), Ocean Conversion (Cayman) Limited (“OC-Cayman”), DesalCo Limited (“DesalCo”), Consolidated Water Cooperatief, U.A.; (ii) majority-owned subsidiaries Consolidated Water (Bahamas) Ltd. (“CW-Bahamas”),
Consolidated Water (Asia) Pte. Limited,
PT Consolidated Water Bali (“CW-Bali”
) and N.S.C. Agua, S.A. de C.V. (“NSC”
); and (iii) affiliate Consolidated Water (Bermuda) Limited (“CW-Bermuda”), which is consolidated for financial reporting purposes because the Company has a controlling financial interest in this company. The Company’s investment in its other 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 financial statements for the year ended December 31, 2011 also include the accounts of Consolidated Water (Bermuda) Limited (“CW-Bermuda”) which constructed a desalination plant and operated this plant through the expiration of its contract with the Government of Bermuda on June 30, 2011.
The Company generated revenues and gross profit of approximately $
723,000
and $
457,000
, respectively, for the year ended December 31, 2011 from CW-Bermuda.
Foreign currency:
The Company’s reporting currency is the United States dollar (“US$”). The functional currency of the Company and its foreign subsidiaries (other than its majority-owned subsidiary, NSC) is the currency for each respective country. The functional currency for NSC is the US$. The exchange rates between the Cayman Islands dollar, the Belize dollar, the Bahamian dollar, and the Bermuda dollar are fixed to the US$. CW-Coop
conducts business in US$ and euros,
CW-Bali
conducts business in US$ and Indonesian rupiahs, and NSC conducts business in US$ and Mexican pesos. The exchange rates for conversion of euros, rupiahs and pesos into US$ vary based upon market conditions. Net f
oreign currency gains (losses) arising from transactions conducted in foreign currencies were ($197,396), $
68,355
and $
85,996
for the years ended December 31, 2013, 2012 and 2011, respectively, and are included in other income (expense), net in the 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.
As of December 31, 2013, the Company had deposits in U.S. banks in excess of federally insured limits of
approximately $
554,000
.
As of December
31, 2013, the Company held cash in foreign bank accounts of approximately $
33.1
million.
Marketable securities:
Marketable securities consist primarily of marketable debt obligations with maturities of less than one year, are accounted for as trading securities, and stated at fair value. Any unrealized gains and losses on these securities are recognized in the consolidated statement of income.
Accounts receivable and allowance for doubtful accounts:
Accounts receivable are recorded at invoiced amounts based on meter readings or minimum take-or-pay amounts per contractual agreements. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable balance. The Company determines the allowance for doubtful accounts based on historical write-off experience and monthly review of delinquent accounts. Past due balances are reviewed individually for collectability and disconnection. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered by management to be remote.
Inventory:
Inventory primarily includes consumables stock and spare parts stock that are valued at the lower of cost or net realizable value with cost determined on the first-in, first-out basis. Inventory also includes potable water held in the Company’s reservoirs. The carrying amount of the water inventory is the lower of the average cost of producing water during the year or its net realizable value.
Loans receivable:
Loans receivable relate to notes receivable from customers arising from the construction and sale of water desalination plants. The allowance for loan losses, if any, is the Company’s best estimate of the amount of probable credit losses in the Company’s existing loans and is determined on an individual loan basis.
Property, plant and equipment:
Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using a straight line method with an allowance for estimated residual values. Rates are determined based on the estimated useful lives of the assets as follows:
Buildings
|
|
5
to
40
years
|
Plant and equipment
|
|
4
to
40
years
|
Distribution system
|
|
3
to
40
years
|
Office furniture, fixtures and equipment
|
|
3
to
10
years
|
Vehicles
|
|
3
to
10
years
|
Leasehold improvements
|
|
Shorter of 5 years or lease term
|
Lab equipment
|
|
5
to
10
years
|
Additions to property, plant and equipment are comprised of the cost of the contracted services, direct labor and materials. Assets under construction are recorded as additions to property, plant and equipment upon completion of the projects. Depreciation commences in the month the asset is placed in service.
Long-lived assets:
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and fair value.
During 2012, the Company determined, after assessing the economic prospects for one of CW-Bahamas’ reverse osmosis desalination plants, that the carrying value of this plant’s assets were likely not recoverable from its undiscounted future cash flows. Accordingly, the Company recorded an impairment loss of $
432,727
for the year ended December 31, 2012 to reduce the carrying value of this plant to its estimated fair value.
Construction in progress:
Interest costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a substantial period of time to be ready for their intended use, are added to the cost of those assets until such time as the assets are substantially ready for use. Interest capitalized on assets constructed during the year ended December 31, 2011 was $
246,851
.
Goodwill and intangible assets:
Goodwill represents the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized, but are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. The Company evaluates the possible impairment of goodwill annually as part of its reporting process for the fourth quarter of each fiscal year. Management identifies the Company’s reporting units and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company determines the fair value of each reporting unit and compares the fair value to the carrying amount of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, the Company is required to perform the second step of the impairment test, as this is an indication that the reporting unit goodwill may be impaired. In this step, the Company compares the implied fair value of the reporting unit goodwill with the carrying amount of the reporting unit 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 goodwill. If the implied fair value is less than its carrying amount, the impairment loss is recorded.
For each of the years in the three-year period ended December 31, 2013 the Company estimated the fair value of its reporting units by applying the discounted cash flow method, the subject company stock price method, the guideline public company method, the mergers and acquisitions method and, on an exception basis and where necessary and appropriate, the net asset value method.
The discounted cash flow method relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis. In preparing these seven-year projections for its retail unit the Company (i) identified possible outcomes of its on-going negotiations with the Cayman Islands government for the renewal of its retail license; (ii) estimated the cash flows associated with each possible outcome; and (iii) assigned a probability to each outcome and associated estimated cash flows. The weighted average estimated cash flows were then summed to determine the overall fair value of the retail unit under this method. The possible outcomes used for the discounted cash flow method for the retail unit included the implementation of a rate of return on invested capital model, the methodology proposed by Cayman Islands government representatives for the new retail license.
The Company also estimated the fair value of each of its reporting units for each of the years in the three-year period ended December 31, 2013 through reference to the quoted market prices for the Company and guideline companies and the market multiples implied by guideline merger and acquisition transactions. For the year ended December 31, 2012 the Company also relied upon net asset values to estimate the fair value of our services unit.
The Company weighted the fair values estimated for each of its reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit. The Company changed the relative weightings for 2013 from those used for 2012 to increase the weightings applied to those methods that resulted in more conservative estimates of fair value. The respective weightings the Company applied to each method for the years ended December 31, 2013 and 2012 are as follows:
|
|
2013
|
|
2012
|
|
Method
|
|
Retail
|
|
Bulk
|
|
Services
|
|
Retail
|
|
Bulk
|
|
Services
|
|
Discounted cash flow
|
|
50
|
%
|
50
|
%
|
|
|
20
|
%
|
30
|
%
|
|
|
Subject company stock price
|
|
30
|
%
|
30
|
%
|
|
|
60
|
%
|
50
|
%
|
10
|
%
|
Guideline public company
|
|
10
|
%
|
10
|
%
|
|
|
10
|
%
|
10
|
%
|
|
|
Mergers and acquisitions
|
|
10
|
%
|
10
|
%
|
|
|
10
|
%
|
10
|
%
|
|
|
Net asset value
|
|
|
|
|
|
|
|
|
|
|
|
90
|
%
|
|
|
100
|
%
|
100
|
%
|
|
|
100
|
%
|
100
|
%
|
100
|
%
|
The fair values the Company estimated for its retail, bulk and services units exceeded their carrying amounts for the year ended December 31, 2011. The fair values the Company estimated for its retail and bulk units exceeded their carrying amounts by
39
% and
6
%, respectively, for the year ended December 31, 2012.
The fair value the Company estimated for its services unit for the year ended December 31, 2012 was 10% less than its carrying amount.
As a result of this estimate and the Company’s subsequent step 2 analysis of the implied fair value of the goodwill recorded for its services unit, the Company recorded an impairment charge for the services unit goodwill of $
88,717
for the year ended December 31, 2012.
The fair values the Company estimated for its retail and bulk units exceeded their carrying
amounts by
47
%
and
23
%
, respectively
, for the year ended December 31, 2013.
The Company also performed an analysis reconciling the conclusions of value for its reporting units to its market capitalization at October 1, 2013. This reconciliation did not result in an implied control premium for the Company.
Investments:
Investments where the Company does not exercise significant influence over the operating and financial policies of the investee and holds less than 20% of the voting stock are recorded at cost.
The Company uses the equity method of accounting for investments in common stock where the Company holds 20% to 50% of the voting stock of the investee and has significant influence over its operating and financial policies but does not meet the criteria for consolidation.
The Company recognizes impairment losses on declines in the fair value of the stock of investees that are other than temporary.
Other assets:
Under the terms of CW-Bahamas’ contract with the Water and Sewerage Corporation of The Bahamas to supply water from its Blue Hills desalination plant, CW-Bahamas was required to reduce the amount of water lost by the public water distribution system on New Providence Island, The Bahamas, over a one year period by
438
million gallons, a requirement CW-Bahamas met during 2007. The Company was solely responsible for the engineering, labor and materials costs incurred to effect the reduction in lost water, which were capitalized and are being amortized on a straight-line basis over the original remaining life of the Blue Hills contract. Such costs are included in other assets and aggregated approximately $
3.5
million as of December 31, 2013 and 2012. Accumulated amortization for these costs was approximately $
1.3
million and $
1.1
million as of December 31, 2013 and 2012, respectively.
Other liabilities:
Other liabilities consist of security deposits and advances in aid of construction. Security deposits are received from large customers as security for trade receivables. Advances in aid of construction are recognized as a liability when advances are received from condominium developers in the licensed area to help defray the capital expenditure costs of the Company. These advances do not represent loans to the Company and are interest free. However, the Company allows a discount of ten percent on future supplies of water to these developments until the aggregate discounts allowed are equivalent to advances received. Discounts are charged against advances received.
Income taxes:
The Company accounts for the income taxes arising from the operations of its United States subsidiary, Aquilex, Inc., under the asset and liability method. Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent any deferred tax asset may not be realized.
CW-Belize is liable for business and corporate income taxes. Under the terms of its water supply agreement with Belize Water Services Ltd. (“BWSL”), its sole customer, CW-Belize is reimbursed by BWSL for all taxes that it is required to pay and records this reimbursement as an offset to its tax expense.
The Company is not subject to income taxes in the other countries in which it operates.
Plant construction revenue and cost of plant construction revenue:
The Company recognizes revenue and related costs as work progresses on fixed price contracts for the construction of desalination plants to be sold to third parties using the percentage-of-completion method, which relies on contract revenue and estimates of total expected costs. The Company follows this method since it can make reasonably dependable estimates of the revenue and costs applicable to various stages of a contract. Under the percentage-of-completion method, the Company records revenue and recognizes profit or loss as work on the contract progresses. The Company estimates total project costs and profit to be earned on each long term, fixed price contract prior to commencement of work on the contract and updates these estimates as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a specified point in time is that percentage of total estimated revenue that incurred costs to date comprises of estimated total contract costs. If, as work progresses, the actual contract costs exceed estimates, the profit recognized on revenue from that contract decreases. The Company recognizes the full amount of any estimated loss on a contract at the time the estimates indicate such a loss. Any costs and estimated earnings in excess of billings are classified as current assets. Billings in excess of costs and estimated earnings on uncompleted contracts, if any, are classified as current liabilities.
The Company assumes the risk that the costs associated with constructing the plant may be greater than it anticipated in preparing its bid. However, the terms of each of the sales contracts with its customers require the Company to guarantee the sales price for the plant at the bid amount. Because the Company bases its contracted sales price in part on its estimation of future construction costs, the profitability of its plant sales is dependent on its ability to estimate these costs accurately. The cost estimates the Company prepares in connection with the construction of plants to be sold to third parties are subject to inherent uncertainties. The cost of materials and construction may increase significantly after the Company submits its bid for a plant due to factors beyond the Company’s control, which could cause the gross margin for a plant to be less than the Company anticipated when the bid was made. The profit margin the Company initially expects to generate from a plant sale could be further affected by other factors, such as hydro-geologic conditions at the plant site that differ materially from those the Company believes exist and relied upon when the Company submitted its bid.
Revenue from water sales:
The Company recognizes revenues from water sales at the time water is supplied to the customer’s facility or storage tank. The amount of water supplied is determined based upon water meter readings performed at the end of each month. Under the terms of both its license agreement with the government of the Cayman Islands and its bulk water supply contracts, the Company is entitled to charge its customers the greater of a minimum monthly charge or the price for water supplied during the month.
Comparative amounts:
Certain amounts presented in the financial statements previously issued for 2012 and 2011 have been reclassified to conform to the current year’s presentation.
3. Cash and cash equivalents
Cash and cash equivalents are not restricted as to withdrawal or use. As of December 31, 2013 and 2012, the equivalent United States dollars are denominated in the following currencies:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Bank accounts:
|
|
|
|
|
|
|
|
United States dollar
|
|
$
|
10,484,207
|
|
$
|
7,139,591
|
|
Cayman Islands dollar
|
|
|
5,275,615
|
|
|
10,907,483
|
|
Bahamian dollar
|
|
|
3,090,021
|
|
|
13,308,338
|
|
Belize dollar
|
|
|
3,055,990
|
|
|
2,007,243
|
|
Bermudian dollar
|
|
|
6,759
|
|
|
11,930
|
|
Mexican Peso
|
|
|
11,227
|
|
|
14,198
|
|
Euro
|
|
|
22,731
|
|
|
14,264
|
|
Singapore dollar
|
|
|
27,644
|
|
|
8,190
|
|
Indonesian Rupiah
|
|
|
84,058
|
|
|
112,442
|
|
|
|
|
22,058,252
|
|
|
33,523,679
|
|
|
|
|
|
|
|
|
|
Short term deposits:
|
|
|
|
|
|
|
|
United States dollar
|
|
|
527,580
|
|
|
368,976
|
|
Bahamian dollar
|
|
|
11,040,684
|
|
|
-
|
|
|
|
|
11,568,264
|
|
|
368,976
|
|
Total cash and cash equivalents
|
|
$
|
33,626,516
|
|
$
|
33,892,655
|
|
4. Accounts receivable
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Trade accounts receivable
|
|
$
|
18,666,283
|
|
$
|
12,098,566
|
|
Receivable from affiliate
|
|
|
53,867
|
|
|
110,544
|
|
Other accounts receivable
|
|
|
362,453
|
|
|
530,399
|
|
|
|
|
19,082,603
|
|
|
12,739,509
|
|
Allowance for doubtful accounts
|
|
|
(223,043)
|
|
|
(223,043)
|
|
|
|
$
|
18,859,560
|
|
$
|
12,516,466
|
|
The activity for the allowance for doubtful accounts consisted of:
|
|
Year ended December 31,
|
|
|
|
2013
|
|
2012
|
|
Opening allowance for doubtful accounts
|
|
$
|
223,043
|
|
$
|
160,134
|
|
Provision for doubtful accounts
|
|
|
32,933
|
|
|
62,909
|
|
Accounts written off during the year
|
|
|
(32,933)
|
|
|
-
|
|
Ending allowance for doubtful accounts
|
|
$
|
223,043
|
|
$
|
223,043
|
|
Significant concentrations of credit risk are disclosed in Note 20.
5. Inventory
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Water stock
|
|
$
|
28,222
|
|
$
|
32,515
|
|
Consumables stock
|
|
|
224,584
|
|
|
276,568
|
|
Spare parts stock
|
|
|
5,334,418
|
|
|
5,418,759
|
|
Total inventory
|
|
|
5,587,224
|
|
|
5,727,842
|
|
Less current portion
|
|
|
1,383,135
|
|
|
1,757,601
|
|
Inventory (non-current)
|
|
$
|
4,204,089
|
|
$
|
3,970,241
|
|
6. Loans receivable
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
All loans receivable are due from the Water Authority Cayman and consisted of:
|
|
|
|
|
|
|
|
Two loans originally aggregating $10,996,290, bearing interest at 6.5% per annum, receivable in aggregate monthly installments of $124,827 to May 2019, and secured by the machinery and equipment of the North Side Water Works plant.
|
|
$
|
6,912,337
|
|
$
|
7,925,386
|
|
Two loans originally aggregating $1,738,000, bearing interest at 5% per annum, receivable in aggregate monthly installments of $24,565 to March 2014, and secured by the machinery and equipment of the North Sound plant.
|
|
|
73,084
|
|
|
356,474
|
|
Two loans originally aggregating $3,671,039, bearing interest at 6.5% per annum, receivable in aggregate monthly installments of $54,513 to June 2017, and secured by the machinery and equipment of the Red Gate plant.
|
|
|
2,042,858
|
|
|
2,546,325
|
|
Two loans originally aggregating $897,000, bearing interest at 5% per annum, receivable in aggregate monthly installments of $12,678 to January 2013, and secured by the machinery and equipment of the Lower Valley plant.
|
|
|
-
|
|
|
12,626
|
|
Total loans receivable
|
|
|
9,028,279
|
|
|
10,840,811
|
|
Less current portion
|
|
|
1,691,102
|
|
|
1,812,532
|
|
Loans receivable, excluding current portion
|
|
$
|
7,337,177
|
|
$
|
9,028,279
|
|
7. Property, plant and equipment and construction in progress
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Land
|
|
$
|
3,223,361
|
|
$
|
3,223,361
|
|
Buildings
|
|
|
18,054,305
|
|
|
17,751,797
|
|
Plant and equipment
|
|
|
60,416,031
|
|
|
57,635,523
|
|
Distribution system
|
|
|
24,974,214
|
|
|
24,213,390
|
|
Office furniture, fixtures and equipment
|
|
|
2,825,009
|
|
|
2,644,900
|
|
Vehicles
|
|
|
1,237,736
|
|
|
1,182,782
|
|
Leasehold improvements
|
|
|
235,930
|
|
|
228,007
|
|
Lab equipment
|
|
|
29,871
|
|
|
19,192
|
|
|
|
|
110,996,457
|
|
|
106,898,952
|
|
Less accumulated depreciation
|
|
|
52,393,571
|
|
|
47,905,546
|
|
Property, plant and equipment, net
|
|
$
|
58,602,886
|
|
$
|
58,993,406
|
|
Construction in progress
|
|
$
|
1,450,417
|
|
$
|
2,612,800
|
|
As of December 31, 2013, the Company had outstanding capital commitments of approximately
$
309,000
. The Company
maintains insurance for loss or damage to all fixed assets that it deems susceptible to loss. The Company does not insure its underground distribution system as the Company considers the possibility of material loss or damage to this system to be remote. During the years ended December 31, 2013 and 2012, $
4,924,980
and $
278,214
, respectively, of construction in progress was placed in service. Depreciation expense was $
5,113,589
, $
7,381,759
, and $
5,789,401
for the years ended December 31, 2013, 2012 and 2011, respectively.
8. Investment in OC-BVI
The Company owns
50
% of the outstanding voting common shares and a
43.5
% equity interest in the profits of Ocean Conversion (BVI) Ltd. (“OC-BVI”). The Company also owns certain profit sharing rights in OC-BVI that raise its effective interest in the profits of OC-BVI to approximately
45
%. Pursuant to a management services agreement, OC-BVI pays the Company monthly fees for certain engineering and administrative services. OC-BVI’s sole customer is the Ministry of Communications and Works of the Government of the British Virgin Islands (the “Ministry”) to which it sells bulk water.
The Company’s equity investment in OC-BVI amounted to $
6,623,448
and $
6,925,346
as of December 31, 2013 and 2012, respectively.
Until 2009, substantially all of the water sold by OC-BVI to the Ministry was initially supplied under a Water Supply Agreement dated May 1990 (the “1990 Agreement’) and was produced by one desalination plant with a capacity of
1.7
million gallons per day located at Baughers Bay, Tortola (the “Baughers Bay plant”). As discussed later in this Note (see “
Baughers
Bay litigation”
), the BVI government assumed the operating responsibilities for the Baughers Bay plant in March 2010. During 2007, OC-BVI completed, for a total cost of approximately $
8
million, the construction of a desalination plant with a capacity of
720,000
gallons per day located at Bar Bay, Tortola (the “Bar Bay plant”). OC-BVI began selling water to the Ministry from this plant in January 2009 and on March 4, 2010, OC-BVI and the BVI government executed a definitive seven-year contract for the Bar Bay plant (the “Bar Bay agreement”). Under the terms of the Bar Bay agreement, OC-BVI delivers up to
600,000
gallons of water per day to the BVI government from the Bar Bay plant. The Bar Bay agreement includes a seven-year extension option exercisable by the BVI government and required OC-BVI to complete a storage reservoir on the BVI government site by no later than March 4, 2011. OC-BVI has not commenced construction of this storage reservoir due to the BVI government’s failure to pay (i) the full amount of invoices for the water provided by the Bar Bay plant on a timely basis; and (ii) the full amount ordered pursuant to a court ruling relating to the Baughers Bay litigation (see discussion that follows).
Summarized financial information of OC-BVI is presented as follows:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Current assets
|
|
$
|
3,422,328
|
|
$
|
3,033,939
|
|
Non-current assets
|
|
|
5,923,387
|
|
|
6,730,121
|
|
Total assets
|
|
$
|
9,345,715
|
|
$
|
9,764,060
|
|
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Current liabilities
|
|
$
|
717,890
|
|
$
|
937,965
|
|
Non-current liabilities
|
|
|
1,688,850
|
|
|
1,743,077
|
|
Total liabilities
|
|
$
|
2,406,740
|
|
$
|
2,681,042
|
|
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
(1)
|
|
Revenues
|
|
$
|
4,711,091
|
|
$
|
4,371,520
|
|
$
|
3,925,108
|
|
Gross Profit
|
|
$
|
1,824,271
|
|
$
|
1,545,568
|
|
$
|
1,453,878
|
|
Income from operations
|
|
$
|
866,528
|
|
$
|
496,755
|
|
$
|
833,056
|
|
Other income (expense), net (2)
|
|
$
|
1,411,931
|
|
$
|
4,410,425
|
|
$
|
1,123,310
|
|
Net income attributable to controlling interests
|
|
$
|
2,250,667
|
|
$
|
4,873,236
|
|
$
|
1,926,597
|
|
|
(1)
|
The Company reclassified $1.0 million presented as revenues in 2011 to Other income Court award Baughers Bay dispute, to conform to the current year’s presentation.
|
|
(2)
|
Other income (expense), net, includes $2.0 million, $4.7 million and $1.0 million for the years ended December 31, 2013, 2012 and 2011, respectively, in award amounts received under the Court ruling for the Baughers Bay litigation.
|
The Company recognized $
979,716
, $
2,121,319
and $
838,652
in earnings from its equity investment in OC-BVI for the years ended December 31, 2013, 2012 and 2011, respectively. The Company recognized $
357,636
, $
343,454
and $nil in profit sharing income from its profit sharing agreement with OC-BVI for the years ended December 31, 2013, 2012 and 2011, respectively.
For the years ended December 31, 2013, 2012, and 2011, the Company recognized approximately $
785,000
, $
470,000
, and $
317,500
, respectively, in revenues from sales of consumable stock and its management services agreement with OC-BVI. The Company’s remaining unamortized balance of this management services agreement, which is reflected as an intangible asset on the consolidated balance sheet, was approximately $
285,000
and $
428,000
as of December 31, 2013 and 2012, respectively (see Note 10).
Baughers
Bay
litigation:
Under the terms of the water supply agreement dated May 1990 (the “1990 Agreement”) between OC-BVI and the Government of the British Islands (the “BVI Government”), upon the expiration of its initial seven-year term in May 1999, the 1990 Agreement would automatically be extended for another seven-year term unless the BVI government provided notice, at least eight months prior to such expiration, of its decision to purchase the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $
1.42
million. In correspondence between the parties from late 1998 through early 2000, the BVI government indicated that it intended to purchase the plant but would be amenable to negotiating a new water supply agreement, and that it considered the 1990 Agreement to be in force on a monthly basis until negotiations between the BVI government and OC-BVI were concluded. Occasional discussions were held between the parties since 2000 without resolution of the matter. OC-BVI continued to supply water from the plant and expended approximately $
4.7
million between 1995 and 2003 to significantly expand the production capacity of the plant beyond that contemplated in the 1990 Agreement.
In 2006, the BVI government took the position that the seven-year extension of the 1990 Agreement had been completed and that it was entitled to ownership of the Baughers Bay plant.
In response, OC-BVI disputed the BVI government’s contention that the original terms of the 1990 Agreement remained in effect.
During 2007, the BVI government significantly reduced the amount and frequency of its payments for the water being supplied by OC-BVI and filed a lawsuit with the Eastern Caribbean Supreme Court (the “Court”) seeking ownership of the Baughers Bay plant. OC-BVI counterclaimed to the Court that it was entitled to continued possession and operation of the Baughers Bay plant until the BVI government paid OC-BVI approximately $
4.7
million, which OC-BVI believed represented the value of the Baughers Bay plant at its expanded production capacity. OC-BVI subsequently filed claims with the Court seeking payment for water sold and delivered to the BVI government through May 31, 2009 at the contract prices in effect before the BVI government asserted its purported right of ownership of the plant.
The Court ruled on this litigation in 2009, determining that (1) the BVI government was entitled to immediate ownership and possession of the Baughers Bay plant and dismissed OC-BVI’s claim for compensation of approximately $
4.7
million for the expenditures made to expand the production capacity of the plant; (2) OC-BVI was entitled to full payment of water invoices issued up to December 20, 2007, which had been calculated under the terms of the original 1990 Agreement; and (3) OC-BVI was entitled to the amount of $
10.4
million for water produced by OC-BVI from the Baughers Bay plant subsequent to December 20, 2007. The BVI government made a payment of $
2.0
million to OC-BVI under the Court order during the fourth quarter of 2009, a second payment of $
2.0
million under the Court order during 2010 and a third payment under the Court order of $
1.0
million in 2011.
OC-BVI filed an appeal with the Eastern Caribbean Court of Appeals (the “Appellate Court”) in October 2009 asking the Appellate Court to review the September 17, 2009 ruling by the Court as it related to OC-BVI’s claim for compensation for expenditures made to expand the production capacity of the Baughers Bay plant. In October 2009, the BVI government also filed an appeal with the Appellate Court requesting the Appellate Court to reduce the $
10.4
million awarded by the Court to OC-BVI for water supplied subsequent to December 20, 2007 to an amount equal to the cost of producing such water.
In March 2010, OC-BVI vacated the Baughers Bay plant and the BVI government assumed direct responsibility for the plant’s operations.
In June 2012, the Appellate Court issued the final ruling with respect to the Baughers Bay litigation. This ruling dismissed the BVI government’s appeal against the previous judgment of the Court awarding $10.4 million for the water supplied, and also awarded OC-BVI compensation for improvements made to the plant in the amount equal to the difference between (i) the value of the Baughers Bay plant at the date OC-BVI transferred possession of the plant to the BVI government and (ii) $1.42 million (the purchase price for the Baughers Bay plant under the 1990 Agreement). OC-BVI was also awarded all of its court costs at the trial level and two-thirds of such costs incurred on appeal. Prior to the final ruling, the BVI government had paid only $
5.0
of the original $
10.4
million, and the remaining $
5.4
million amount due had increased to approximately $
6.7
million by the fourth quarter of 2012 due to the court costs awarded by the Appellate Court and the accrued interest due on the aggregate unpaid balance. The BVI government paid OC-BVI $
4.7
million of this amount during the fourth quarter of 2012 and the remaining $2.0 million in January 2013. These amounts paid by the BVI government were recognized in OC-BVI’s earnings in the periods in which they were received. To date OC-BVI and the BVI government have been unable to reach agreement on the value of the plant at the date it was transferred to the BVI government.
Valuation of Investment in OC-BVI
:
The Company accounts for its investment in OC-BVI under the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a loss in the value of the investment.
As a quoted market price for OC-BVI’s stock is not available, to test for possible impairment of its investment in OC-BVI, the Company estimates its fair value through the use of the discounted cash flow method, which relies upon projections of OC-BVI’s operating results, working capital and capital expenditures. The use of this method requires the Company to estimate OC-BVI’s cash flows from (i) the Bar Bay agreement and (ii) the pending amount awarded by the Appellate Court for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government.
The Company estimates the cash flows OC-BVI will receive from its Bar Bay agreement by (i) identifying various possible future scenarios for this agreement, which include the cancellation of the agreement after its initial seven-year term, and the exercise by the BVI government of the seven-year extension in the agreement; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability to each scenario. The Company similarly estimates the cash flows OC-BVI will receive from the BVI government for the amount due under the ruling by the Appellate Court for the value of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities to different valuation scenarios.
The resulting probability-weighted sum represents the expected cash flows, and the Company’s best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay agreement and the pending Appellate Court award.
The identification of the possible scenarios for the Bar Bay plant agreement and the Baughers Bay plant valuation, the projections of cash flows for each scenario, and the assignment of relative probabilities to each scenario all represent significant estimates made by the Company. While the Company uses 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 are by their nature highly subjective and are also subject to material change by the Company’s management over time based upon new information or changes in circumstances.
During the fourth quarter of 2013, after reassessing what the Company believes will be the future demand for water in Tortola, British Virgin Islands, and the probable sources the BVI government will utilize to meet this demand, the Company determined it appropriate to modify the projections of cash flows
for OC-BVI that it uses to estimate the fair value of its investment in OC-BVI by increasing (from those used in prior years) the probabilities assigned to those scenarios that result in a lower supply of water or revenue stream from the Bar Bay plant. Based on these current estimates of OC-BVI’s cash flows and the Company’s resulting estimate of the fair value of its investment in OC-BVI, the Company determined that the carrying value of its investment in OC-BVI exceeded its fair value and recorded an impairment loss on this
investment of $
200,000
.
The resulting carrying value of the Company’s investment in OC-BVI of approximately $6.6 million as of December 31, 2013 assumes that the BVI government will honor its obligations under the Bar Bay agreement and also assumes (on a probability weighted basis) that the BVI government will exercise its option to extend the Bar Bay agreement for seven years beyond its initial term, which expires in 2017.
The remaining $
6.6
million
carrying value of the Company’s investment in OC-BVI as of December 31, 2013 exceeds the Company’s underlying equity in OC-BVI’s net assets by approximately $
2.8
million. The Company accounts for this excess as goodwill.
The BVI government is OC-BVI’s sole customer and substantially all of OC-BVI’s revenues are generated from its Bar Bay plant. As the Bar Bay agreement matures and OC-BVI receives (or is determined by the court to not be entitled to receive) the pending Appellate Court award amount assumed due for the value of the Baughers Bay plant, OC-BVI’s expected future cash flows, and therefore its fair value computed under the discounted cash flow method, will decrease. Unless OC-BVI obtains an expansion or other modification of its Bar Bay agreement that results in a significant increase in the estimated future cash flows from its Bar Bay plant, the Company will be required to record impairment losses in future periods to reduce the carrying value of its investment in OC-BVI to its then current fair value.
These impairment losses will, in the aggregate, equal the underlying $2.8 million in goodwill reflected in the carrying value of the Company’s investment in OC-BVI and could have a material adverse effect on the Company’s earnings and consolidated statement of operations.
9. N.S.C. Agua, S.A. de C.V.
In May 2010, the Company acquired, through its wholly-owned Netherlands subsidiary, Consolidated Water Cooperatief, U.A. (“Cooperatief”), a
50
% interest in N.S.C. Agua, S.A. de C.V., (“NSC”) a development stage Mexican company. The Company has since purchased, through the conversion of a previous loan to NSC, sufficient shares to raise its ownership interest in NSC to
99.9
%. NSC was formed to pursue a project encompassing the construction, operation and minority ownership of a
100
million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and an accompanying pipeline to deliver water to the Mexican potable water infrastructure and the U.S. border. The Company believes such a project can be successful due to what the Company anticipates will be a growing need for a new potable water supply for the areas of northern Baja California, Mexico and Southern California, United States. To complete this project, the Company has engaged two engineering groups with extensive regional and/or technical experience and entered into a Memorandum of Understanding (the “EPC MOU”) with a global engineering, procurement and construction contractor for large seawater desalination plants. If the project is completed, the Company expects to participate in the operation of the plant and pipeline and also expects to retain a minority ownership position in the project. NSC is presently seeking contracts for the electric power and feed water sources for the plant’s proposed operations, and has conducted (under the EPC MOU) an equipment piloting plant and water quality data collection program at the proposed feed water source. NSC will be required to accomplish various additional steps before it can commence construction of the plant and pipeline including, but not limited to, completing the purchases of land required for the project, obtaining approvals and permits from various governmental agencies in Mexico and the United States, securing contracts with its proposed customers to sell water in sufficient quantities and at prices that make the project financially viable, and obtaining equity and debt financing for the project. NSC’s potential customers will also be required to obtain various governmental permits and approvals in order to purchase water from NSC.
In February 2012, the Company entered into an agreement (the “Option Agreement”) that provided it with an option, exercisable through February 7, 2014, to purchase the shares of one of the other shareholders of NSC, along with an immediate power of attorney to vote those shares, for $
1
million.
Such shares constituted
25
% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $
5.7
million loan payable to Cooperatief by issuing additional shares of its stock. As a result of this share issuance to Cooperatief, the Company acquired
99.9
% of the ownership of NSC. The Option Agreement contained an anti-dilutive provision that required the Company to issue new shares in NSC of an amount sufficient to maintain the other 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 purchased the Option Agreement shares in February 2014.
NSC has entered into a purchase contract for 8.1 hectares of land on which the proposed plant would be constructed. In 2012, NSC obtained an extension of this purchase contract through May 15, 2014 in exchange for prepayments of (i) $
500,000
paid at signing of the extension and (ii) a further $
500,000
paid in May 2013. NSC is required to pay a balance of $
6.98
million on May 15, 2014 to complete the purchase of this land. In 2013, NSC purchased an additional 12 hectares of land, which constitute most of the land required for the project, for $
12
million, of which $
2
million has been paid. The remaining $
10
million balance for this purchase is due on May 15, 2014.
In August 2012, the EPC MOU was extended for 18 months from August 19, 2012, pursuant to which the contractor installed and operated an equipment piloting plant and collected water quality data from the proposed feed water source site in Rosarito Beach, Baja California, Mexico. The amended EPC MOU required that NSC negotiate exclusively with the contractor for the construction of the
100
million gallon per day seawater reverse osmosis desalination plant and further required payment by NSC to the contractor of up to $
500,000
as compensation for the operation and maintenance of the equipment piloting plant should NSC not award the engineering, procurement and construction contract for the project to the contractor. This first phase of the pilot plant testing program was completed in October 2013. NSC has decided not to extend the EPC MOU beyond its February 2014 expiration date and will pay the contractor $
350,000
as compensation for the operation and maintenance of the pilot plant.
NSC is currently developing additional sampling protocols to comply with regulatory requirements in the U.S. and Mexico, and is also coordinating with regulators to assess the need, if any, for further process piloting.
In November 2012, NSC signed a letter of intent with Otay Water District in Southern California to deliver no less than 20 million and up to 40 million gallons of water per day from the plant to the Otay Water District at the border between Mexico and the United States.
NSC has entered into a
20
-year lease, effective November 2012, 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 is cancellable should NSC ultimately not proceed with the project.
Included in the consolidated results of operations are general and administrative expenses from NSC, consisting of organizational, legal, accounting, engineering, consulting and other costs relating to NSC’s project development activities. Such expenses amounted to $
3.2
million, $
1.7
million and $
3.0
million for the years ended December 31, 2013, 2012 and 2011, respectively. The assets and liabilities of NSC included in the consolidated balance sheets amounted to approximately $
13,671,000
and $
10,307,000
, respectively, as of December 31, 2013 and approximately $
1,452,000
and $
116,000
, respectively, as of December 31, 2012.
The Company has determined that completing NSC’s development activities will require significant additional funding. The Company estimates that it will take at least until the first quarter of 2015 for NSC to complete all of the development activities (which include completing the site piloting plant activities, completing the purchase of the land for the plant, securing feed water and power supplies, completing the engineering and feasibility studies, negotiating customer contracts, obtaining the required rights-of-way and regulatory permits and arranging the project financing) necessary to commence construction of the plant and pipeline. However, NSC may ultimately be unable to complete all of the activities necessary to begin construction of the project.
10. Intangible assets
In 2003, as part of the acquisition of a group of companies, the Company acquired
100
% of the outstanding voting common shares of DesalCo, which had an agreement to provide management and engineering services to OC-BVI. The Company attributed $856,356 of the purchase price of the acquisition to the value of this management services agreement, which has no expiration term. Initially the Company determined that this intangible asset had an indefinite life and therefore it was not amortized. However in 2010, as a result of the loss by OC-BVI of its Baughers Bay contract (see Note 8), the Company began amortizing this asset over the life of OC-BVI’s remaining water supply contract for its Bar Bay plant.
The carrying amount of the Belize Water Production and Supply Agreement is
being amortized over the
23
-year term of the agreement.
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 one of the other shareholders of NSC, along with an immediate power of attorney to vote those shares, for $
1.0
million.
This $300,000 payment was capitalized and is being amortized over the
one
year option period.
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Cost
|
|
|
|
|
|
|
|
Intangible asset management service agreement
|
|
$
|
856,356
|
|
$
|
856,356
|
|
Belize water production and supply agreement
|
|
|
1,522,419
|
|
|
1,522,419
|
|
Usufruct option
|
|
|
300,000
|
|
|
300,000
|
|
|
|
|
2,678,775
|
|
|
2,678,775
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
Intangible asset management service agreement
|
|
|
(570,904)
|
|
|
(428,569)
|
|
Belize water production and supply agreement
|
|
|
(723,883)
|
|
|
(657,691)
|
|
Usufruct option
|
|
|
(287,500)
|
|
|
(137,500)
|
|
|
|
|
(1,582,287)
|
|
|
(1,223,760)
|
|
Intangible assets, net
|
|
$
|
1,096,488
|
|
$
|
1,455,015
|
|
Amortization for each of the next five years and thereafter is expected to be as follows:
2014
|
|
|
221,418
|
|
2015
|
|
|
208,918
|
|
2016
|
|
|
66,192
|
|
2017
|
|
|
66,192
|
|
2018
|
|
|
66,192
|
|
Thereafter
|
|
|
467,576
|
|
|
|
$
|
1,096,488
|
|
11. Dividends
Interim dividends declared on Class A common stock and redeemable preferred stock for each quarter of the respective years ended December 31 were as follows:
|
|
2013
|
|
2012
|
|
2011
|
|
First Quarter
|
|
$
|
0.075
|
|
$
|
0.075
|
|
$
|
0.075
|
|
Second Quarter
|
|
|
0.075
|
|
|
0.075
|
|
|
0.075
|
|
Third Quarter
|
|
|
0.075
|
|
|
0.075
|
|
|
0.075
|
|
Fourth Quarter
|
|
|
0.075
|
|
|
0.075
|
|
|
0.075
|
|
12. Long term debt
Long term debt consists of the following:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Fixed rate bonds bearing interest at a rate of 5.95%; maturing on August 4, 2016; repayable in quarterly installments of $526,010; secured through an inter-creditor agreement with the Republic Bank & Trust by substantially all of the Company’s assets. Redeemable in full at any time after August 4, 2009 at a premium of 1.5% of the outstanding principal and accrued interest on the bonds on the date of redemption.
|
|
$
|
5,301,328
|
|
$
|
7,025,353
|
|
Total debt
|
|
|
5,301,328
|
|
|
7,025,353
|
|
Less discount
|
|
|
96,161
|
|
|
172,693
|
|
Less current portion
|
|
|
5,205,167
|
|
|
1,647,493
|
|
Long term debt, excluding current portion
|
|
$
|
-
|
|
$
|
5,205,167
|
|
The Company collateralized all borrowings under the
5.95
% fixed rate bonds by providing a first debenture over fixed and floating assets, a first legal charge over all land and buildings, a security interest in all insurance policies and claims, a reimbursement agreement for standby letters of credit, a pledge of capital stock of each subsidiary and guarantees and negative pledges from each subsidiary.
The Company
prepaid the remaining outstanding balance on these bonds
on February 17, 2014.
13. Share capital and additional paid-in capital
Shares of redeemable preferred stock (“preferred shares”) are issued under the Company’s Employee Share Incentive Plan as discussed in Note 18 and carry the same voting and dividend rights as shares of common stock (“common shares”). Preferred shares vest over four years and convert to common stock on a share for share basis on the fourth anniversary of each grant date. Preferred shares are only redeemable with the Company’s agreement. Upon liquidation, preferred shares rank in preference to the common shares to the extent of the par value of the preferred shares and any related additional paid in capital.
The Company has an Option Deed in place designed to deter coercive takeover tactics. Pursuant to this Option Deed, holders of common shares and preferred shares are granted options which entitle them to purchase
1/100 of a share
of Class ‘B’ stock at an exercise price of $
50.00
if a person or group acquires or commences a tender offer for 20% or more of the Company’s common shares.
Option holders (other than the acquiring person or group) will also be entitled to buy, for the $37.50 exercise price, common shares with a then market value of $100.00 in the event a person or group actually acquires 20% or more of the Company’s common shares.
Options may be redeemed at $0.01 under certain circumstances. A total of
145,000
of the Company’s authorized but unissued common shares have been reserved for issuance as Class ‘B’ stock. The Class ‘B’ stock has priority over common shares with respect to dividend and voting rights. No Class ‘B’ stock options have been issued, exercised or redeemed up to December 31, 2013. In March 2007, the Board of Directors extended the expiration date of the Option Deed through July 2017.
14. Cost of revenues and general and administrative expenses
|
|
Year ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Cost of revenues consist of:
|
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
$
|
13,634,617
|
|
$
|
14,473,583
|
|
$
|
12,622,788
|
|
Depreciation
|
|
|
4,822,967
|
|
|
6,959,912
|
|
|
5,537,098
|
|
Fuel oil
|
|
|
10,106,409
|
|
|
10,078,724
|
|
|
7,195,692
|
|
Employee costs
|
|
|
4,422,093
|
|
|
4,423,899
|
|
|
4,276,682
|
|
Maintenance
|
|
|
2,332,893
|
|
|
2,849,453
|
|
|
2,140,776
|
|
Royalties
|
|
|
1,357,988
|
|
|
1,451,672
|
|
|
1,406,160
|
|
Insurance
|
|
|
1,499,201
|
|
|
1,625,733
|
|
|
1,545,771
|
|
Other
|
|
|
2,140,084
|
|
|
1,595,284
|
|
|
1,407,458
|
|
|
|
$
|
40,316,252
|
|
$
|
43,458,260
|
|
$
|
36,132,425
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses consist of:
|
|
|
|
|
|
|
|
|
|
|
Employee costs
|
|
$
|
6,218,948
|
|
$
|
5,751,142
|
|
$
|
5,265,360
|
|
Insurance
|
|
|
969,370
|
|
|
968,662
|
|
|
965,003
|
|
Professional fees
|
|
|
1,798,939
|
|
|
2,097,294
|
|
|
3,112,678
|
|
Directors’ fees and expenses
|
|
|
853,478
|
|
|
608,429
|
|
|
551,132
|
|
Depreciation
|
|
|
290,622
|
|
|
421,851
|
|
|
252,303
|
|
Other
|
|
|
5,712,946
|
|
|
4,695,439
|
|
|
3,505,174
|
|
|
|
$
|
15,844,303
|
|
$
|
14,542,817
|
|
$
|
13,651,650
|
|
15. 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 for the respective years ended December 31:
|
|
Year ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Net income attributable to Consolidated Water Co. Ltd. Common stockholders
|
|
$
|
8,594,519
|
|
$
|
9,315,514
|
|
$
|
6,113,218
|
|
Less: preferred stock dividends
|
|
|
(11,222)
|
|
|
(9,080)
|
|
|
(7,040)
|
|
Net income available to common shares in the determination of basic earnings per common share
|
|
$
|
8,583,297
|
|
$
|
9,306,434
|
|
$
|
6,106,178
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
14,633,884
|
|
|
14,578,518
|
|
|
14,560,259
|
|
Plus:
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of preferred shares outstanding during the period
|
|
|
34,827
|
|
|
27,057
|
|
|
19,892
|
|
Potential dilutive effect of unexercised options
|
|
|
35,169
|
|
|
573
|
|
|
15,862
|
|
Weighted average number of shares used for determining diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders
|
|
|
14,703,880
|
|
|
14,606,148
|
|
|
14,596,013
|
|
16. Segment information
The Company has three reportable segments: retail, bulk and services. The retail segment
primarily
operates the water utility for the Seven Mile Beach and West Bay areas of Grand Cayman Island pursuant to an exclusive license granted by the Cayman Islands government. The bulk segment supplies potable water to government utilities in Grand Cayman, The Bahamas and Belize under long-term contracts. The services segment designs, constructs and sells desalination plants to third parties and provides desalination plant management and operating services to affiliated companies. Consistent with prior periods, we record all non-direct general and administrative expenses in our retail business segment and do not allocate any of these non-direct costs to our other two business segments.
The accounting policies of the segments are consistent with those described in Note 2. The Company evaluates each segment’s performance based upon its income from operations. All intercompany transactions are eliminated for segment presentation purposes.
The Company’s segments are strategic business units that are managed separately because, while all segments derive their revenues from desalination-related activities, each segment sells different products and/or services, serves customers with distinctly different needs and generates different gross profit margins.
|
|
Year ended December 31, 2013
|
|
|
|
Retail
|
|
Bulk
|
|
Services
|
|
Total
|
|
Revenues
|
|
$
|
23,018,498
|
|
$
|
39,960,220
|
|
$
|
843,413
|
|
$
|
63,822,131
|
|
Cost of revenues
|
|
|
11,023,096
|
|
|
28,212,896
|
|
|
1,080,260
|
|
|
40,316,252
|
|
Gross profit
|
|
|
11,995,402
|
|
|
11,747,324
|
|
|
(236,847)
|
|
|
23,505,879
|
|
General and administrative expenses
|
|
|
10,812,877
|
|
|
1,643,869
|
|
|
3,387,557
|
|
|
15,844,303
|
|
Income (loss) from operations
|
|
|
1,182,525
|
|
|
10,103,455
|
|
|
(3,624,404)
|
|
|
7,661,576
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
1,486,913
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
|
9,148,489
|
|
Income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
553,970
|
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
|
|
|
|
|
|
|
|
$
|
8,594,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property plant and equipment, net
|
|
$
|
26,339,461
|
|
$
|
31,736,774
|
|
$
|
526,651
|
|
$
|
58,602,886
|
|
Construction in progress
|
|
|
1,181,628
|
|
|
98,807
|
|
|
169,982
|
|
|
1,450,417
|
|
Goodwill
|
|
|
1,170,511
|
|
|
2,328,526
|
|
|
-
|
|
|
3,499,037
|
|
Total assets
|
|
|
115,659,023
|
|
|
42,094,311
|
|
|
7,611,520
|
|
|
165,364,854
|
|
|
|
Year ended December 31, 2012
|
|
|
|
Retail
|
|
Bulk
|
|
Services
|
|
Total
|
|
Revenues
|
|
$
|
24,222,895
|
|
$
|
40,758,182
|
|
$
|
469,625
|
|
$
|
65,450,702
|
|
Cost of revenues
|
|
|
11,548,255
|
|
|
31,679,887
|
|
|
230,118
|
|
|
43,458,260
|
|
Gross profit
|
|
|
12,674,640
|
|
|
9,078,295
|
|
|
239,507
|
|
|
21,992,442
|
|
General and administrative expenses
|
|
|
11,304,528
|
|
|
1,384,527
|
|
|
1,853,762
|
|
|
14,542,817
|
|
Impairment losses
|
|
|
-
|
|
|
432,727
|
|
|
88,717
|
|
|
521,444
|
|
Income (loss) from operations
|
|
|
1,370,112
|
|
|
7,261,041
|
|
|
(1,702,972)
|
|
|
6,928,181
|
|
Other income, net
|
|
|
|
|
|
|
|
|
|
|
|
2,695,828
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
|
9,624,009
|
|
Income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
308,495
|
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
|
|
|
|
|
|
|
|
$
|
9,315,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property plant and equipment, net
|
|
$
|
24,021,301
|
|
$
|
34,308,805
|
|
$
|
663,300
|
|
$
|
58,993,406
|
|
Construction in progress
|
|
|
2,342,248
|
|
|
270,552
|
|
|
-
|
|
|
2,612,800
|
|
Goodwill
|
|
|
1,170,511
|
|
|
2,328,526
|
|
|
-
|
|
|
3,499,037
|
|
Total assets
|
|
|
63,649,696
|
|
|
83,177,550
|
|
|
3,621,840
|
|
|
150,449,086
|
|
|
|
Year ended December 31, 2011
|
|
|
|
Retail
|
|
Bulk
|
|
Services
|
|
Total
|
|
Revenues
|
|
$
|
23,356,338
|
|
$
|
30,757,874
|
|
$
|
1,040,280
|
|
$
|
55,154,492
|
|
Cost of revenues
|
|
|
11,496,598
|
|
|
24,127,488
|
|
|
508,339
|
|
|
36,132,425
|
|
Gross profit
|
|
|
11,859,740
|
|
|
6,630,386
|
|
|
531,941
|
|
|
19,022,067
|
|
General and administrative expenses
|
|
|
9,102,291
|
|
|
1,285,121
|
|
|
3,264,238
|
|
|
13,651,650
|
|
Income (loss) from operations
|
|
|
2,757,449
|
|
|
5,345,265
|
|
|
(2,732,297)
|
|
|
5,370,417
|
|
Other income (expense), net
|
|
|
|
|
|
|
|
|
|
|
|
1,181,563
|
|
Consolidated net income
|
|
|
|
|
|
|
|
|
|
|
|
6,551,980
|
|
Income attributable to non-controlling interests
|
|
|
|
|
|
|
|
|
|
|
|
438,762
|
|
Net income attributable to Consolidated Water Co. Ltd. stockholders
|
|
|
|
|
|
|
|
|
|
|
$
|
6,113,218
|
|
Revenues earned by major geographic region were:
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Cayman Islands
|
|
$
|
31,164,165
|
|
|
$
|
33,661,440
|
|
|
$
|
32,223,536
|
|
Bahamas
|
|
|
29,192,529
|
|
|
|
28,996,724
|
|
|
|
19,825,070
|
|
Indonesia
|
|
|
144,030
|
|
|
|
-
|
|
|
|
-
|
|
Belize
|
|
|
2,536,780
|
|
|
|
2,322,913
|
|
|
|
2,065,606
|
|
Bermuda
|
|
|
-
|
|
|
|
-
|
|
|
|
722,774
|
|
Revenues earned from management services agreement with OC-BVI
|
|
|
784,627
|
|
|
|
469,625
|
|
|
|
317,506
|
|
|
|
$
|
63,822,131
|
|
|
$
|
65,450,702
|
|
|
$
|
55,154,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues earned from major customers were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Revenues earned from the Water and Sewerage Corporation ("WSC")
|
|
$
|
28,861,195
|
|
|
$
|
28,765,529
|
|
|
$
|
19,610,650
|
|
Percentage of total revenues from the WSC
|
|
|
45
|
%
|
|
|
44
|
%
|
|
|
36
|
%
|
Revenues earned from the Water Authority - Cayman ("WAC")
|
|
$
|
8,230,912
|
|
|
$
|
9,438,545
|
|
|
$
|
8,867,198
|
|
Percentage of total revenues from the WAC
|
|
|
13
|
%
|
|
|
14
|
%
|
|
|
16
|
%
|
Property, plant and equipment, net by major geographic region were:
|
|
December 31,
|
|
|
|
2013
|
|
2012
|
|
Cayman Islands
|
|
$
|
23,907,080
|
|
$
|
24,004,499
|
|
Bahamas
|
|
|
31,907,625
|
|
|
33,710,233
|
|
Belize
|
|
|
1,046,184
|
|
|
1,134,721
|
|
All other countries
|
|
|
1,741,997
|
|
|
143,953
|
|
|
|
$
|
58,602,886
|
|
$
|
58,993,406
|
|
17. Commitments and contingencies
Commitments
As of December 31, 2013, the Company held operating leases for land, office space, warehouse space, and equipment. In addition to minimum lease payments, certain leases provide for payment of real estate taxes, insurance, common area maintenance, and certain other expenses. Lease terms may include escalating rent provisions and rent incentives. Minimum lease payments and rent incentives are expensed using a straight line method over the non-cancellable lease term, which expire at various dates through the year
2032
.
The short-term and long-term components of deferred rent assets are included within prepaid expenses and other current assets, and other assets, respectively, in the consolidated balance sheets.
Future minimum lease payments under these non-cancelable operating leases as of December 31, 2013 are as follows:
2014
|
|
$
|
566,721
|
|
2015
|
|
|
461,147
|
|
2016
|
|
|
294,408
|
|
2017
|
|
|
247,192
|
|
2018
|
|
|
247,192
|
|
Thereafter
|
|
|
3,419,487
|
|
|
|
$
|
5,236,147
|
|
Total rental expense for the years ended December 31, 2013, 2012 and 2011 was $
822,159
, $
559,811
and $
464,355
, respectively, and is included within general and administrative expenses in the consolidated statements of income.
The Company is obligated to supply water, where feasible, to customers in the Cayman Islands within its license area in accordance with the terms of the license. Royalties are paid to the Government of the Cayman Islands at the rate of
7.5
% of gross water sales.
The Company has six water supply agreements under which it is required to provide minimum water quantities.
The Company has entered into employment agreements with certain executives, which expire through December 31, 2016 and provide for, among other things, base annual salaries in an aggregate amount of $
3.0
million, performance bonuses and various employee benefits.
Retail License
The Company sells water through its retail operations under a license issued in July 1990 by the Cayman Islands government that grants the
Company’s wholly owned subsidiary Cayman Water
the exclusive right to provide water to customers within its licensed service area. Cayman Water’s service area is comprised of an area on Grand Cayman that includes the Seven Mile Beach and West Bay areas, two of the three most populated areas in the Cayman Islands. For the years ended December 31, 2013 and 2012, the Company generated approximately
36
% and
37
%, respectively, of its consolidated revenues and
52
% and
58
%, respectively, of its consolidated gross profits from the retail water operations conducted pursuant to our exclusive license. If Cayman Water is not in default of any terms of its terms, this license provides Cayman Water with the right of first refusal to renew the license on terms that are no less favorable than those that the government offers to any third party.
This license was set to expire on July 10, 2010; however, the Company and the Cayman Islands government have agreed in correspondence to extend the license several times in order to provide sufficient time to negotiate the terms of a new license agreement. The most recent extension of the Company’s license expires June 30, 2014.
In February 2011, the Water (Production and Supply) Law, 2011 (which replaces the Water (Production and Supply) Law (1996 Revision)) and the Water Authority (Amendment) Law, 2011 (the “New Laws”) were published and are now in full force and effect. Under the New Laws, the Water Authority-Cayman (“WAC”) would issue any new license which could include a rate of return on invested capital model described below.
The Company has been advised in correspondence from the Cayman Islands government and the WAC that: (i) the WAC is now the principal negotiator, and not the Cayman Islands government, in these license negotiations, and (ii) the WAC has determined that a rate of return on invested capital model (“RCAM”) is in the best interest of the public and the Company’s customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd.
In July 2012, in an effort to resolve several issues relating to the retail license renewal negotiations, the Company filed an Application for Leave to Apply for Judicial Review (the “Application”) with the Grand Court of the Cayman Islands (the “Court”), stating that: (i) certain provisions of the Water Authority Law, 2011 and the Water (Production and Supply) Law, 2011, appear to be incompatible, (ii) the WAC’s roles as the principal license negotiator, statutory regulator and our competitor put the WAC in a position of hopeless conflict, and (iii) the WAC’s decision to replace the rate structure under our current exclusive license with RCAM was predetermined and unreasonable.
Throughout the course of the retail license renewal negotiations, the Company has objected to the use of RCAM on the basis that it believes such a model would not promote the efficient operation of its water utility and could ultimately increase water rates to its customers.
In October 2012, the Company was notified that the Court has agreed to consider the issues raised by the Company in the Application. As a result, the Company, the Cayman Islands government and the WAC will have the opportunity to present their positions to the Court in a trial proceeding.
The Company has been notified by the Court that the first hearing for this judicial review has been scheduled for April 12, 2014.
If the Company does not ultimately enter into a new license agreement and no other party is awarded a license, the Company expects to be permitted to continue to supply water to its service area.
It is possible that the Cayman Islands government could offer a third party a license to service some or all of the Company’s present service area. In such event, the Company may assume the license offered to the third party by exercising its right of first refusal. However, the terms of any new license agreement may not be as favorable to the Company as the terms under which it is presently operating and could materially reduce the operating income and cash flows that the Company has historically generated from its retail license and could require the Company to record an impairment charge to reduce the $
3,499,037
carrying value of its goodwill. Such impairment charge could have a material adverse impact on the Company’s results of operations.
The Company is presently unable to determine what impact the resolution of this matter will have on its cash flows, financial condition or results of operations.
Other Contingencies
As part of the acquisition of the Company’s interests in OC-Cayman, with the approval of Scotiabank (Cayman Islands) Ltd., the Company has guaranteed the performance of OC-Cayman to the Cayman Islands government, pursuant to the water supply contract with the Water Authority-Cayman dated April 25, 1994, as amended.
CW-Bahamas’ contract to supply water to the WSC from its Blue Hills plant requires CW-Bahamas to guarantee delivery of a minimum quantity of water per week. If CW-Bahamas does not meet this minimum, it will be required to pay the WSC for the difference between the minimum and actual gallons delivered at a per gallon rate equal to the price per gallon that WSC is currently paying under the contract. The Blue Hills contract expires in 2032 and requires CW-Bahamas to deliver
63
.0 million gallons of water each week.
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 matter could be heard by the Belize courts. 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 results of operations, financial position or cash flows.
18. Stock-Based Compensation
The Company has the following stock compensation plans that form part of its employees’ remuneration:
Employee Share Incentive Plan (Preferred Shares)
The Company awards preferred shares for $nil consideration under the Employee Share Incentive Plan as part of compensation for certain eligible employees, excluding Directors and certain Officers, that require future services as a condition to the delivery of common shares. In addition, options are granted to purchase preferred shares at a fixed price, determined annually, which will typically represent a discount to the market value of the common stock. In consideration for preferred shares, the Company issues shares of common stock on a share for share basis. Under the plan, the conversion is conditional on the grantee’s satisfying requirements outlined in the award agreements. Preferred shares are only redeemable with the Company’s approval. Each employee’s option to purchase preferred shares must be exercised within 30 days of the grant date, which is the 90th day after the date of the auditor’s opinion on the financial statements for the relevant year. Options granted during the years ended December 31, 2013, 2012 and 2011, totaled
10,180
,
10,033
and
7,455
options, respectively.
Employee Share Option Plan (Common Stock Options)
The Company has an employee stock option plan for certain long-serving employees of the Company. Under the plan, these employees are granted in each calendar year, as long as the employee is a participant in the Employee Share Incentive Plan, options to purchase common shares. The price at which the option may be exercised will be the closing market price on the grant date, which is the 40th day after the date of the Company’s Annual Shareholder Meeting. The number of options each employee is granted is equal to five times the sum of (i) the number of preferred shares which that employee receives for $nil consideration and (ii) the number of preferred share options which that employee exercises in that given year. Options may be exercised during the period commencing on the fourth anniversary of the grant date and ending on the thirtieth day after the fourth anniversary of the grant date. Options granted during the years ended December 31, 2013, 2012, and 2011, totaled
6,600
,
5,780
and
5,440
, respectively.
Non-Executive Directors’ Share Plan
This stock grant plan provides part of Directors’ remuneration. Under this plan, Directors receive a combination of cash and common stock for their participation in Board meetings. All Directors are eligible except Executive Officers, who are covered by individual employment contracts. The number of common stock granted is calculated based upon the market price of the Company’s common stock on October 1 of the year preceding the grant. Stock granted during the years ended December 31, 2013, 2012 and 2011 totaled
13,980
,
10,886
and
7,614
shares, respectively. The Company recognized stock-based compensation for these share grants of $
135,503
, $
82,649
and $
71,945
for the years ended December 31, 2013, 2012 and 2011, respectively.
2008 Equity Incentive Plan
On May 14, 2008, the Company’s stockholders approved the 2008 Equity Incentive Plan (the “2008 Plan”) and reserved
1,500,000
shares of the Company’s Class A common shares for issuance under this plan. All Directors, executives and key employees of the Company or its affiliates are eligible for participation in the 2008 Plan which provides for the issuance of options, restricted stock and stock equivalents at the discretion of the Board. In 2011, a total of
18,000
options to purchase shares of common stock were granted to a new member of management under the 2008 Equity Incentive Plan at an exercise price of $
9.11
. No options were granted under the plan in 2012 or 2013.
The Company measures and recognizes compensation expense at fair value for all share-based payments, including stock options. Stock-based compensation totaled $
246,473
, $
371,038
and $
494,648
for the years ended December 31, 2013, 2012 and 2011, respectively, and is included in general and administrative expenses in the consolidated statements of income.
The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.
The significant weighted average assumptions for the years ended December 31, 2013, 2012 and 2011 were as follows:
|
|
2013
|
|
2012
|
|
2011
|
|
Risk free interest rate
|
|
0.47
|
%
|
0.26
|
%
|
1.33
|
%
|
Expected option life (years)
|
|
1.7
|
|
1.5
|
|
3.4
|
|
Expected volatility
|
|
27.87
|
%
|
43.43
|
%
|
68.18
|
%
|
Expected dividend yield
|
|
2.71
|
%
|
3.78
|
%
|
2.89
|
%
|
A summary of the Company’s stock option activity for the year ended December 31, 2013 is as follows:
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
Aggregate
Intrinsic
Value (1)
|
|
Outstanding at beginning of period
|
|
315,654
|
|
$
|
13.56
|
|
|
|
|
|
|
|
Granted
|
|
16,780
|
|
|
8.24
|
|
|
|
|
|
|
|
Exercised
|
|
(65,559)
|
|
|
7.90
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
(42,531)
|
|
|
24.14
|
|
|
|
|
|
|
|
Outstanding as of December 31, 2013
|
|
224,344
|
|
$
|
12.82
|
|
1.80
|
years
|
|
$
|
772,522
|
|
Exercisable as of December 31, 2013
|
|
154,211
|
|
$
|
13.94
|
|
1.28
|
years
|
|
$
|
510,184
|
|
___________________________________________________________________________________________________
|
(1)
|
The intrinsic value of a stock option represents the amount by which the fair value of the underlying stock, measured by reference to the closing price of the common shares of $
14.10
on the Nasdaq Global Select Market on December 31, 2013, exceeds the exercise price of the option.
|
As of December 31, 2013,
70,133
non-vested options and
154,211
vested options were outstanding, with weighted average exercise prices of $
10.36
and $
13.94
, respectively, and average remaining contractual lives of
2.94
years and
1.28
years, respectively. The total remaining unrecognized compensation costs related to unvested stock-based arrangements were $
55,123
as of December 31, 2013 and are expected to be recognized over a weighted average period of
2.94
years.
As of December 31, 2013, unrecognized compensation costs relating to redeemable preferred stock outstanding were $
138,091
, and are expected to be recognized over a weighted average period of
1.24
years.
The following table summarizes the weighted average fair value of options at the date of grant and the intrinsic value of options exercised during the years ended December 31, 2013, 2012 and 2011:
|
|
2013
|
|
2012
|
|
2011
|
|
Options granted with an exercise price below market price on the date of grant:
|
|
|
|
|
|
|
|
|
|
|
Employees preferred stock
|
|
$
|
4.65
|
|
$
|
1.28
|
|
$
|
1.47
|
|
Overall weighted average
|
|
$
|
4.65
|
|
$
|
1.28
|
|
$
|
1.47
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted with an exercise price at market price on the date of grant:
|
|
|
|
|
|
|
|
|
|
|
Management common stock
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4.45
|
|
Other employees common stock
|
|
$
|
3.18
|
|
$
|
3.28
|
|
$
|
4.17
|
|
Overall weighted average
|
|
$
|
3.18
|
|
$
|
3.28
|
|
$
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
Options granted with an exercise price above market price on the date of grant:
|
|
|
|
|
|
|
|
|
|
|
Management
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Other employees
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Overall weighted average
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value of options exercised
|
|
$
|
190,212
|
|
$
|
1,799
|
|
$
|
1,325
|
|
19. Pension benefits
Staff pension plans are offered to all employees in the Cayman Islands and the Bahamas. The plans are administered by third party pension plan providers and are defined contribution plans whereby the Company matches the contribution of the first 5% of each participating employee’s salary up to $
72,000
for the Cayman Islands.
There is no salary limit for the Bahamas. The total amount recognized as an expense under the plan during the years ended December 31, 2013, 2012 and 2011 was $
198,329
, $
166,060
and $
161,853
, respectively.
20. Financial instruments
Credit risk:
The Company is not exposed to significant credit risk on its retail customer accounts as its policy is to cease supply of water to customers’ accounts that are more than 45 days overdue. The Company’s exposure to credit risk is concentrated on receivables from its Bulk water customers. Management considers these receivables fully collectible and therefore the Company has not recorded an allowance for these receivables.
Interest rate risk:
As the Company’s outstanding debt consists of fixed rate obligations, the Company is not subject to interest-rate risk arising from fluctuations in interest rates.
Foreign exchange risk:
All relevant foreign currencies other than the Mexican peso, Indonesian rupiah and the euro have been fixed to the dollar for over 20 years and the Company does not employ a hedging strategy against exchange rate risk associated with the reporting in dollars. If any of these fixed exchange rates becomes a floating exchange rate or if any of the foreign currencies in which the Company conducts business depreciate significantly against the dollar, the Company’s consolidated results of operations could be adversely affected.
Fair values:
As of December 31, 2013 and 2012, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other liabilities 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 and long term debt as of December 31, 2013 and 2012 approximate their fair value.
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. The 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 the fair value hierarchy classification on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.
The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value as of December 31, 2013 and 2012:
|
|
December 31, 2013
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
8,587,475
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,587,475
|
|
Nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in affiliate
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,623,448
|
|
$
|
6,623,448
|
|
|
|
December 31, 2012
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities
|
|
$
|
8,570,338
|
|
$
|
-
|
|
$
|
-
|
|
$
|
8,570,338
|
|
Nonrecurring
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in affiliate
|
|
$
|
-
|
|
$
|
-
|
|
$
|
6,925,346
|
|
$
|
6,925,346
|
|
A reconciliation of the beginning and ending balances for Level 3 investments for the year ended December 31, 2013:
Balance as of December 31, 2012
|
|
$
|
6,925,346
|
|
Profit sharing and equity from earnings of OC-BVI
|
|
|
1,337,352
|
|
Distribution of earnings from OC-BVI
|
|
|
(1,439,250)
|
|
Impairment of Investment in OC-BVI (See Note 8)
|
|
|
(200,000)
|
|
Balance as of December 31, 2013
|
|
$
|
6,623,448
|
|
21. Supplemental disclosure of cash flow information
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
Interest paid in cash, net of capitalized interest of $246,851 in 2011
|
|
$
|
380,014
|
|
$
|
670,042
|
|
$
|
962,744
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transactions:
|
|
|
|
|
|
|
|
|
|
|
Transfers from (to) inventory to (from) property plant and equipment, net
|
|
$
|
181,875
|
|
$
|
508,107
|
|
$
|
(100,000)
|
|
Issuance of 25,111, 21,686 and 11,158, respectively, of common stock for
services rendered
|
|
$
|
217,826
|
|
$
|
175,313
|
|
$
|
104,443
|
|
Issuance of 10,180, 10,033 and 7,455, respectively, of redeemable
preferred stock for services rendered
|
|
$
|
110,249
|
|
$
|
77,856
|
|
$
|
65,902
|
|
Conversion (on a one-to-one basis) of 4,720, 2,629 and 2,145,
respectively, of redeemable preferred stock to common stock
|
|
$
|
2,832
|
|
$
|
1,577
|
|
$
|
1,287
|
|
Dividends declared but not paid
|
|
$
|
1,104,271
|
|
$
|
1,096,746
|
|
$
|
1,094,334
|
|
Obligation incurred for investment in land
|
|
$
|
10,050,000
|
|
$
|
-
|
|
$
|
-
|
|
22. Impact of recent accounting standards pronouncements
Adoption of New Accounting Standards:
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2012-02,
Intangibles - Goodwill and Other (Topic 350) - Testing Indefinite-Lived Intangible Assets for Impairment
, which aims to simplify the impairment test for indefinite-lived intangible assets by permitting an entity the option to first assess qualitative factors to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired as a basis for determining whether the quantitative impairment test included in Accounting Standards Codification Subtopic 350-30,
IntangiblesGoodwill and OtherGeneral Intangibles Other than
Goodwill
must be performed. The amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company currently has no indefinite-lived intangible assets other than goodwill reported on its consolidated balance sheet. The adoption of ASU 2012-02 did not have an impact on the Company’s consolidated financial statements.
In October 2012, the FASB issued ASU 2012-04,
Technical Corrections and Improvements
. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update are effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 did not have an impact on the Company’s consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02,
Other Comprehensive Income (Topic 220) - Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which requires an entity to provide information about the amounts reclassified out of Accumulated Other Comprehensive Income (“AOCI”) by component. In addition, an entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount reclassified is required to be reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional details about those amounts. ASU 2013-02 does not change the current requirements for reporting net income or other comprehensive income in the financial statements. The adoption of ASU 2013-02 on January 1, 2013 did not have an impact on the Company’s consolidated financial statements.
Effect of Newly Issued But Not Yet Effective Accounting Standards:
In March 2013, the FASB issued ASU 2013-05,
Foreign Currency Matters (Topic 830: Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity
. This ASU offers guidance on a parent’s accounting for the cumulative translation adjustment upon derecognition of a subsidiary or group of assets within a foreign entity. This new guidance requires that the parent release any related cumulative translation adjustment into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. The amendment will be effective for annual and interim reporting periods beginning after December 15, 2013. The adoption of ASU 2013-05 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
23. Subsequent events
The Company evaluated subsequent events through the time of the filing of its Annual Report on Form 10-K.
Other than as disclosed in these consolidated financial statements, the
Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on its consolidated financial statements.