UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-K

 

(Mark One)

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 20152018

 

OR

 

¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transaction period from __________________ to __________________

 

Commission File Number: 0-25248

 

CONSOLIDATED WATER CO. LTD.

(Exact name of Registrant as specified in its charter)

 

CAYMAN ISLANDS 98-0619652
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)  
   
Regatta Office Park  
Windward Three, 4th Floor, West Bay Road  
P.O. Box 1114  
Grand Cayman, KY1-1102, Cayman Islands N/A
(Address of principal executive offices) (Zip Code)

 

Registrant’s Telephone number, including area code:(345) 945-4277

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class: Name of each exchange on which registered:
Common Stock, $0.60 Par Value The NASDAQ Stock Market LLC (NASDAQ Global Select Market)

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes¨       Nox

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes¨       Nox

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yesx    No¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yesx       No¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this 10-K or any amendments to this Form 10-K. [Not Applicable]¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or emerging growth company. See the definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer¨Accelerated filerxNon-accelerated filer¨Smaller reporting companyx
Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes¨       Nox

 

The aggregate market value of common stock held by non-affiliates of the registrant, based on the closing sales price for the registrant’s common shares, as reported on the NASDAQ Global Select Market on June 30, 2015,2018, was $180,832,579.$188,091,275.

 

As of March 8, 2016, 14,785,9222019, 15,009,770 shares of the registrant’s common shares were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s Proxy Statement related to its Annual Shareholders’ Meeting will be subsequently filed with the Securities and Exchange Commission as toand are incorporated by reference into Part III of this Form 10-K.

 

 

 

  

TABLE OF CONTENTS

 

Section Description Page
Cautionary Note Regarding Forward-Looking Statements 3
PART I   4
Item 1. Business 4
Item 1A. Risk Factors 15
Item 1B. Unresolved Staff Comments 2321
Item 2. Properties 2321
Item 3. Legal Proceedings 2624
Item 4. Mine Safety Disclosure 2725
PART II   2826
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 2826
Item 6. Selected Financial Data 3027
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3027
Item 7A. Quantitative and Qualitative Disclosure about Market Risk 4539
Item 8. Financial Statements and Supplementary Data 4640
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 8986
Item 9A. Controls and Procedures 8986
PART III   9188
Item 10. Directors, Executive Officers and Corporate Governance 9188
Item 11. Executive Compensation 9188
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 9188
Item 13. Certain Relationships and Related Transactions, and Director Independence 9188
Item 14. Principal Accounting Fees and Services 9188
PART IV   9289
Item 15. Exhibits, Financial Statement Schedules 9289
SIGNATURES   9895


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including but not limited to, statements regarding our future revenues, future plans, objectives, expectations and events, assumptions and estimates. Forward-looking statements can be identified by use of the words or phrases “will,” “will likely result,” “are expected to,” “will continue,” “estimate,” “project,” “potential,” “believe,” “plan,” “anticipate,” “expect,” “intend,” or similar expressions and variations of such words. Statements that are not historical facts are based on our current expectations, beliefs, assumptions, estimates, forecasts and projections for our business and the industry and markets related to our business.

 

The forward-looking statements contained in this report are not guarantees of future performance and involve certain risks, uncertainties and assumptions which are difficult to predict. Actual outcomes and results may differ materially from what is expressed in such forward-looking statements. Important factors which may affect these actual outcomes and results include, without limitation:

 

·tourism and weather conditions in the areas we serve;
·the economies of the U.S. and other countries in which we conduct business;
·our relationships with the governments we serve;
·regulatory matters, including resolution of the negotiations for the renewal of our retail license on Grand Cayman;
·our ability to successfully enter new markets, including Mexico and Asia;the United States; and
·other factors, including those “Risk Factors” set forth under Part I, Item 1A. “Risk Factors” in this Annual Report.

 

The forward-looking statements in this Annual Report speak as of its date. We expressly disclaim any obligation or undertaking to update or revise any forward-looking statement contained in this Annual Report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any forward-looking statement is based, except as may be required by law.

 

References herein to “we,” “our,” “ours” and “us” refer to Consolidated Water Co. Ltd. and its subsidiaries.

 

Note Regarding Currency and Exchange Rates

 

Unless otherwise indicated, all references to “$” or “US$” are to United States dollars.

 

The exchange rate for conversion of Cayman Island dollars (CI$) into US$, as determined by the Cayman Islands Monetary Authority, has been fixed since April 1974 at US$1.20 per CI$1.00.

 

The exchange rate for conversion of Belize dollars (BZE$) into US$, as determined by the Central Bank of Belize, has been fixed since 1976 at US $0.50 per BZE$1.00.

 

The exchange rate for conversion of Bahamas dollars (B$) into US$, as determined by the Central Bank of The Bahamas, has been fixed since 1973 at US$1.00 per B$1.00.

 

The official currency of the British Virgin Islands is the United States dollar.US$.

 

Our Netherlands subsidiary conducts business in US$ and euros, our Indonesian subsidiary conducts business in US$ dollars and Indonesian rupiahs, and our Mexico subsidiary conducts business in US$ and Mexican pesos. The exchange rates for conversion of euros, rupiahs and Mexican pesos into US$ vary based upon market conditions.


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PART I

ITEM 1. BUSINESS

ITEM 1.BUSINESS

 

Overview

 

We develop and operate seawater desalination plants (that utilize reverse osmosis technology) and water distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent.scarce. Through our subsidiaries and affiliates,affiliate, we provide the following services to our customers in the Cayman Islands, The Bahamas, Belize, the British Virgin Islands, the United States and Indonesia:

 

·Retail Water Operations.We produce and supply water to end-users, including residential, commercial and government customers in the Cayman Islands under an exclusive retail license issued by the Cayman Islands government to provide water in two of the three most populated and rapidly developing areas on Grand Cayman Island. We also have a desalination plant in Bali, Indonesia that sells water to resort and residential properties. In 2015,2018, our retail water operations generated approximately 41%39% of our consolidated revenues. Substantially all of our retail revenues were generated by our Grand Cayman operations.

 

·Bulk Water Operations. We produce and supply water to government-owned distributors in the Cayman Islands Belize and theThe Bahamas. In 2015,2018, our bulk water operations generated approximately 56%47% of our consolidated revenues. As of and through December 31, 2018, we also supplied water in Belize, however, in February 2019, we completed the sale (which was effective as of January 1, 2019) of this subsidiary to our government-controlled customer in Belize. Accordingly, our results of continuing operations no longer include the results of this Belize subsidiary. CW-Belize’s results of operations for 2018 and 2017 are reflected in our consolidated results of operations as net income from discontinued operations.

·Services Operations. We provide desalination plant management and operating services to affiliated companies and design, construct and sell desalination plants to third parties. In 2018, our services operations generated approximately 3% of our consolidated revenues.

 

·Services OperationsManufacturing Operations.. We manufacture and service a wide range of water-related products and provide design, engineering, management, operating and managementother services for desalination projects, which include the designapplicable to commercial, municipal and constructionindustrial water production, supply and treatment as a result of desalination plants and the management and operationour 51% equity ownership of desalination plants owned by otherAerex Industries, Inc. Substantially all of Aerex’s customers are U.S. companies. In 2015,2018, our servicesmanufacturing operations generated approximately 3%11% of our consolidated revenues. We also own 99.9% of a Mexican company, N.S.C. Agua, S.A. de C.V., (“NSC”) that we formed to develop a project encompassing the construction and operation of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and an accompanying pipeline to deliver water to the Mexican potable water system. This project is in the development stage and NSC does not presently generate any revenues.

 

·Affiliate Operations. We own 50% of the voting rights and 43.53% of the equity rights of Ocean Conversion (BVI) Ltd. (“OC-BVI”), which produces and supplies bulk water to the British Virgin Islands Water and Sewerage Department.

 

As of December 31, 2015,2018, the number of plants we, or our affiliates,affiliate, operated in each country and the production capacities of these plants are as follows:

 

Location Plants  Capacity(1)  Plants  Capacity(1) 
Cayman Islands  7   9.1   6   8.9 
Bahamas  3   15.2   3   14.9 
Belize  1   0.6   1   0.6 
British Virgin Islands  2   0.8   2   0.8 
Bali  1   0.8   1   0.3 
Total  14   26.5   13   25.5 

 

(1) In millions of gallons per day.

(1)In millions of gallons per day.

 

Strategy

 

Our primary strategy is to provide water services in areas where (i) the supply of potable water is scarce and (ii) the production of potable water by reverse osmosis desalination is, or will be, economically viable for customers in those areas. We also seek to complement this primary strategy with other products and services relevant to desalination, water production and water treatment. We focus primarily on markets with the following characteristics:

 

·inadequate sources of potable water.
·favorable regulatory and tax environments.
·a large proportion of tourist properties (which historically have generated higher volume sales than residential properties).
·growing populations and economies.

4
favorable regulatory and tax environments.

a large proportion of tourist properties (which historically have generated higher volume sales than residential properties).
growing populations and economies.

We believe that our potential market includes any location with a demand for, but a limited supply of, potable water and that has access to seawater. The desalination of seawater is the most widely used process for producing potable water in areas with an insufficient natural supply. In addition, in many locations, desalination is the only commercially viable means to expand the existing water supply. We believe that our experience in the development and operation of reverse osmosis desalination plants provides us with the capabilities to successfully expand our operations beyond our existing markets and we expect to do so in the coming years.

 

Key elements of our strategy include:

 

ExpandingMaximizing our existing operations in the Cayman Islands and The Bahamas and Belize.Bahamas. We plan to continue to seek new water supply agreements and licenses, renewingrenewals of our existing supply agreements, and increasingto pursue increases in our production levels in our two largest existing markets.

 

Penetrating new markets.We plan to continue to seek opportunities to profitably expand our existing operations into new markets that have significant unfulfilled demands for potable water.water and/or our other products. These markets include the rest of the Caribbean, Mexico, Asia, the United States and any other areas where we believe we can provide water on a profitable basis and in favorable regulatory environments. We may pursue these opportunities either on our own or through joint ventures and strategic alliances.

Broadening our existing and future operations into complementary services. We consider opportunities to leverage our water-related expertise to enter complementary service industries as viable complements to our existing business and will pursue such opportunities as they arise.be successful. We may pursue these opportunities either on our own or through joint ventures, strategic alliances and/or acquisitions. Consistent

Broadening our existing revenue sources with this strategy,complementary products, services and businesses. We plan to pursue opportunities to leverage our water-related expertise to enter complementary industries that can serve as viable complements to our existing businesses. We may pursue these opportunities either on our own or through joint ventures, strategic alliances and/or acquisitions.

5

Our Company

We conduct our operations in the Cayman Islands, The Bahamas, the British Virgin Islands, Mexico, the United States and Indonesia through our subsidiaries and our affiliate. The following chart details our corporate organizational structure.

Retail Segment

Cayman Water Company Limited (“Cayman Water”). Cayman Water operates under an exclusive retail license granted by the Cayman Islands government to provide water to customers within a prescribed service 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. Cayman Water owns and operates three seawater reverse osmosis desalination plants and is the only non-government-owned public water utility on Grand Cayman.

PT Consolidated Water Bali (“CW-Bali”). We own 95% of CW-Bali, an Indonesian company. CW-Bali owns and operates a desalination plant that provides water to resort and residential properties in the Nusa Dua area of Bali, Indonesia.

Aquilex, Inc. (“Aquilex”). Aquilex, a United States company, provides financial, engineering, information technology, administrative and supply chain management support services to our subsidiaries and affiliate. We include Aquilex in our retail segment for financial reporting purposes; however, it provides services to all four of our business segments.

Bulk Segment

Consolidated Water (Bahamas) Limited (“CW-Bahamas”). We own 90.9% of CW-Bahamas, which provides bulk water under long-term contracts to the Water and Sewerage Corporation of The Bahamas (“WSC”), a government agency. CW-Bahamas owns and operates our largest desalination plant and two other desalination plants.

Ocean Conversion (Cayman) Limited (“OC-Cayman”). OC-Cayman provides bulk water under licenses and agreements to the Water Authority-Cayman (“WAC”), a government-owned utility and regulatory agency, which distributes the water to properties located outside our exclusive retail license service area in Grand Cayman. OC-Cayman operates three desalination plants owned by the WAC.

6

Services Segment

DesalCo Limited (“DesalCo”). A Cayman Islands company, DesalCo provides management, engineering and construction services for desalination projects as well as management and engineering services relating to municipal water distribution and treatment.

Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), N.S.C. Agua, S.A. de C.V. (“NSC”) and Aguas de Rosarito S.A.P.I. de C.V. (“AdR”). CW-Cooperatief is a wholly-owned Netherlands subsidiary incorporated in 2010. CW-Cooperatief owns 99.9% interest of NSC, a Mexican company. NSC was formed to pursue a project encompassing the design, construction, ownership and operation of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipeline to deliver water to the Mexican potable water system. This project is currently in the development stage and NSC does not generate any operating revenues. In August 2016, NSC and another party incorporated AdR, a special purpose Mexican company, that will ultimately own the Mexico project if it proceeds. NSC owns 99.6% of AdR and in February 2016, we2018, our subsidiary Consolidated Water U.S. Holdings, Inc. acquired 51%the remaining 0.4% of theAdR’s equity ownership ofpreviously held by an unrelated party.

Manufacturing Segment

Consolidated Water U.S. Holdings, Inc. (“CW-Holdings”) and Aerex Industries, Inc. (“Aerex”). In 2016, we purchased, through a newly formed wholly-owned U.S. subsidiary (CW-Holdings), a 51% interest in Aerex, a U.S. company located in Fort Pierce, Florida. Aerex is an original equipment manufacturer and service provider of a wide range of products and services applicable to desalination, municipal water treatment and industrial water and wastewater treatment.


Our Company Its products include reverse osmosis desalination equipment, membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance services to its customers.

 

Affiliate

Ocean Conversion (BVI) Ltd. (“OC-BVI”).We conduct our operations inown 50% of the Caymanvoting stock of OC-BVI, a British Virgin Islands The Bahamas, Belize,company, which sells bulk water to the Government of the British Virgin Islands Indonesia,Water and Sewerage Department. We own an overall 43.53% equity interest in OC-BVI’s profits and certain profit-sharing rights that raise our effective interest in OC-BVI’s profits to approximately 45%. OC-BVI also pays our subsidiary, DesalCo Limited, fees for certain engineering and administrative services. We account for our investment in OC-BVI under the United States through the following operating subsidiaries and affiliates:equity method of accounting.

 

 

Discontinued Operations

 

Cayman Water Company Limited (“Cayman Water”). Cayman Water operates under an exclusive retail license granted by the Cayman Islands government to provide water to customers within a prescribed service 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. Cayman Water owns and operates four desalination plants and is the only non-government owned public water utility on Grand Cayman.

As of and through December 31, 2018, we sold bulk water in Belize through our wholly-owned subsidiary CW-Belize, which is the exclusive provider of water in Ambergris Caye to Belize Water Services Ltd. (“BWSL”), a government-controlled entity which distributes the water through its own pipeline system to residential, commercial and tourist properties. BWSL distributes water primarily to residential properties, small hotels, and businesses that serve the tourist market. CW-Belize was included in our bulk segment.

In February 2019, we completed the sale (which was effective as of January 1, 2019) of CW-Belize to BWSL. See further discussion of this sale at Note 3 of the Notes to the Consolidated Financial Statements at ITEM 8.

Ocean Conversion (Cayman) Limited (“OC-Cayman”). OC-Cayman provides bulk water under various licenses and agreements to the Water Authority-Cayman, a government-owned utility and regulatory agency, which distributes the water to properties located outside our exclusive retail license service area in Grand Cayman. OC-Cayman operates three desalination plants owned by the Water Authority-Cayman.

Consolidated Water (Bahamas) Limited (“CW-Bahamas”). We own a 90.9% equity interest in CW-Bahamas, which provides bulk water under long-term contracts to the Water and Sewerage Corporation of The Bahamas, a government agency. CW-Bahamas owns and operates our largest desalination plant and two other desalination plants.

Consolidated Water (Belize) Limited (“CW-Belize”). CW-Belize owns and operates one desalination plant and has an exclusive contract to provide bulk water to Belize Water Services Ltd., a water distributor that serves residential, commercial and tourist properties in Ambergris Caye, Belize.

Aquilex, Inc. This subsidiary, a United States company, provides financial, engineering and supply chain management support services to our subsidiaries and affiliates.

Ocean Conversion (BVI) Ltd. (“OC-BVI”). We own 50% of the voting stock of our affiliate, OC-BVI, a British Virgin Islands company, which sells bulk water to the Government of the British Virgin Islands Water and Sewerage Department. We own an overall 43.53% equity interest in OC-BVI’s profits and certain profit sharing rights that raise our effective interest in OC-BVI’s profits to approximately 45%. OC-BVI also pays our subsidiary, DesalCo Limited, fees for certain engineering and administrative services. We account for our investment in OC-BVI under the equity method of accounting.

DesalCo Limited (“DesalCo”). A Cayman Islands company, DesalCo provides management, engineering and construction services for desalination projects.

Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”) and N.S.C. Agua, S.A. de C.V. (“NSC”).CW-Cooperatief is a wholly-owned Netherlands subsidiary organized in 2010. CW-Cooperatief owns a 99.9% interest in NSC, a Mexican company. NSC was formed to pursue a project encompassing the construction, ownership and operation of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipeline to deliver water to the Mexican potable water system. This project is currently in the development stage and NSC does not generate any operating revenues.

Consolidated Water (Asia) Pte. Limited (“CW-Asia”) and PT Consolidated Water Bali (“CW-Bali”).During 2012, we formed CW-Asia, a 95% owned Singapore company and CW-Bali, an Indonesian company, which is 95% owned by CW-Asia. CW-Bali owns and operates a 790,000 gallon per day desalination plant that provides water to resort and residential properties in the Nusa Dua area of Bali, Indonesia.

 

Our Operations

 

We have three business segments: retail water operations, bulk water operations and services operations. Our retail water operations supply water to end-users, including residential, commercial and government customers. Our bulk water operations supply water to government-owned distributors. Our retail and bulk operations serve customers in the Cayman Islands, The Bahamas, Belize, the British Virgin Islands and Indonesia. Our services operations provide engineering and management services, which include the design and construction of desalination plants and the management and operation of desalination plants.

For fiscal year 2015,2018, our retail water, bulk water, services and service operationsmanufacturing segments generated approximately 41%39%, 56%47%, 3% and 3%11%, respectively, of our consolidated revenues. For additional information about our business segments and geographical information about our operating revenues and long-lived assets, see Note 1617 to our consolidated financial statements at ITEM 8 of this Annual Report.

 

Retail Water Operations

 

For fiscal years 2015, 20142018 and 2013,2017, our retail water operations accounted for approximately 41%39%, 37% and 36%39%, respectively, of our consolidated revenues. This business produces and supplies water to end-users, including residential, commercial and government customers in the Cayman Islands and Bali, Indonesia.

Retail Operations in the Cayman Islands

 

We sell water through our retail operations to a variety of residential commercial and governmentcommercial customers through our wholly-owned subsidiary, Cayman Water, which operatesoperated under an exclusive license issued to us by the Cayman Islands government. As discussed below, this license was set to expiregovernment that expired in July 2010 but has since been extended while negotiations for a new license take place.January 2018. Pursuant to the license, we havehad the exclusive right to produce potable water and distribute it by pipeline to our licensed service area which consists of two of the three most populated areas of Grand Cayman Island,Island: Seven Mile Beach and West Bay.

 

The license was originally scheduled to expire in July 2010 but was extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license expired on January 31, 2018. We continue to provide water subsequent to January 31, 2018 on a month-to-month “good faith” basis under the terms of the expired license in order to allowed for the continuation of negotiations for a new license without interruption to an essential service.

7

In 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for economic regulation of the water utility sector and the retail license negotiations from the WAC to OfReg in May 2017. We began license negotiations with OfReg in July 2017 and such negotiations are continuing.

Under ourthe terms of its previous license we pay(and subsequent to the expiration of the license in January 2018), Cayman Water pays a royalty to the government of 7.5% of ourits gross retail water sales revenues (excluding energy cost adjustments). The selling prices of water sold to ourits customers are determined by the license and vary depending upon the type and location of the customer and the monthly volume of water purchased. The license provides for an automatic adjustment for inflation or deflation on an annual basis, subject to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a monthly basis. The Water Authority-Cayman (“WAC”),WAC, on behalf of the government, reviewspreviously reviewed and confirmsconfirmed the calculations of the price adjustments for inflation and electricity costs. If we wish to adjust our prices for any reason other than inflation or electricity costs, we must request prior approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be referred to arbitration.

This license was set to expire on July 10, 2010; however, we and the Cayman Islands government have extended the license several times in order to provide sufficient time to negotiate the terms of a new license agreement. The most recent extension of our license was scheduled to expire December 31, 2015, however, we have been informed by the WAC that our license will be extended through June 30, 2016 and that formal documentation of such extension is in process.

In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law, 2011 (the “New Laws”) were published and enacted. Under the New Laws, the WAC will issue any new license, and such new license could include a rate of return on invested capital model as discussed in the following paragraph.

Following the enactment of the New Laws, we were advised in correspondence from the Cayman Islands government and the WAC that: (i) the WAC is the principal negotiator, and not the Cayman Islands government, in our license negotiations, and (ii) the WAC had determined that a rate of return on invested capital model (“RCAM”)Effective May 22, 2017, regulatory responsibility for the retail license is in the best interest of the public and our customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. We responded to the Cayman Islands government that we disagreed with its position on these two matters and negotiations for a new license temporarily ceased.


In July 2012, in an effort to resolve several issues relating to our retail license renewal negotiations, we filed an Application for Leave to Apply for Judicial Review (the “Application”) with the Grand Court of the Cayman Islands (the “Court”), stating that: (i) certain provisions of the New Laws appear to be incompatible, (ii) the WAC’s roles as the principal license negotiator, statutory regulator and our competitor put the WAC in a position of hopeless conflict, and (iii) the WAC’s decision to replace the rate structure under our current exclusive license with RCAMwater utility sector was predetermined and unreasonable. In October 2012, we were notified that the Court agreed to consider the issues outlined in the Application.

The hearing for this judicial review was held on April 1, 2014. Prior to the commencement of the hearing, the parties agreed that the Court should solely be concerned with the interpretation of the statutory provisions. As part of this agreement, the WAC agreed to consider our submissions on the RCAM model and/or alternative models of pricing. In June 2014, the Court determined that: (i) the renewal of the license does not require a public bidding process; and (ii) the WAC is the proper entity to negotiate with us for the renewal of the license.

Our submissions on the RCAM model and/or alternative models of pricing were made to the WAC on June 9, 2014. We received a lettertransferred from the WAC dated September 11, 2014, which fully rejected our submissionsto OfReg and stated that they intended to provide us with a draft RCAM license in due course.

On November 21, 2014, we wrote to the Ministerall reviews and confirmations of Works offering to recommence license negotiations on the basiscalculations of the RCAM model subject to certain conditions which are: (i) the Government would undertake to amend the current water legislation to provideprice adjustments for an independent regulatorinflation and a fair and balanced regulatory regime more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and we would mutually appoint an independent referee and chairman of the negotiations, (iii) our new license would provide exclusivity for the production and provision of all piped water, both potable and non-potable, within its Cayman Islands license area, (iv) the Government would allow us to submit our counter proposal to the WAC’s June 2010 RCAM license draft, and (v) the principle of subsidization of residential customer rateselectricity costs are now performed by commercial customer rates would continue under a new license. On March 23 2015, we received a letter from the Minister of Works with the following responses to our November 21, 2014 letter: (1) while the Cayman government plans to create a new public utilities commission, the provision of the new retail license will not depend upon the formation of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell non-potable water within the area covered by the retail license will not take place until after the draft license has proceeded through the review process of the negotiations; (3) rather than allow us to submit our counter proposal to the WAC’s June 2010 RCAM license draft, the WAC will draft the license with the understanding that we will be allowed to propose amendments thereto; (4) the principle of subsidization of residential customer rates by commercial customer rates would continue under the new license; and (5) a request that we consider eliminating the monthly minimum volume charge in the new license.

We recommenced license negotiations with the WAC during the third quarter of 2015 based upon a draft RCAM license provided by the WAC. Such license negotiations remain on-going. We are presently unable to determine when such negotiations will be completed or the final outcome of such negotiations.OfReg.

 

See further discussion of this matter atalso ITEM 1.A. RISK FACTORS and ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Material Commitments, Expenditures and Contingencies.Contingencies –Cayman Water Retail License.

 

Facilities

Our retail operations in the Cayman Islands produce potable water at fourthree seawater reverse osmosis seawater conversiondesalination plants in Grand Cayman located at our Abel Castillo Water Works (“ACWW”), Britannia and West Bay sites. We own the land for our ACWW and West Bay plants and have entered into a lease for the land for our Britannia plant that expires January 1, 2027. The current production capacity of the two plantsplant located at ACWW is 2.22.0 million gallons of water per day. The production capacity of the Britannia plant is 715,000 gallons of water per day. The production capacity of the West Bay plant is 910,000885,000 gallons of water per day.

 

Electricity to our plants is supplied by Caribbean Utilities Co. Ltd., a publicly traded utility company. We maintain diesel engine-driven standby generators at all three retail plant sites with sufficient capacity to operate our distribution pumps and other essential equipment during any temporary interruptions in electricity supply. Standby generation capacity is available at our ACWW plants and West Bay plant and ACWW plants to operate a portion of the water production capacity as well.

 

In the event of an emergency, our distribution system is connected to the distribution system of the WAC. In prior years, we have purchased water from the WAC for brief periods of time and have also sold potable water to the WAC from our retail plants.

 

Our pipeline system on Grand Cayman covers the Seven Mile Beach and West Bay areas and consists of approximately 90 miles of potable water pipeline. We extend our distribution system periodically as demand warrants. We have a main pipe loop covering the Seven Mile Beach and West Bay areas. We place extensions of smaller diameter pipe off our main pipe to service new developments in our service area. This system of building branches from the main pipe keeps construction costs low and allows us to provide service to new areas in a timely manner. Developers are responsible for laying the pipeline within their developments at their own cost, but in accordance with our specifications. When a development is completed, the developer then transfers operation and maintenance of the pipeline to us.


Customers

We enter into contracts with hotels, condominiums, residential homes and other properties located in our existing licensed area to provide potable water. In the Seven Mile Beach area, our primary customers are the hotels and condominium complexes that serve the tourist industry. In the West Bay area, our primary customers are residential homes.

 

We bill our customers on a monthly basis based on metered consumption and bills are typically collected within 30 to 35 days after the billing date. Receivables not collected within 45 days subject the customer to disconnection from water service. In 2015, 20142018 and 2013,2017, bad debts represented less than 1% of our total annual retail sales. In addition to their past due invoice balance, customers that have had their service disconnected must pay re-connection charges.

 

Historically, demand on our pipeline distribution has varied throughout the year. Demand depends upon various factors including the number of tourists visiting and the amount of rainfall during any particular time of the year and other cyclical climate conditions. In general, the majority of tourists come from the United States during the winter which is also the dry season.season in the Cayman Islands.

 

Developing Retail Operations in Bali, Indonesia

 

During the latter half of 2012, we commenced, through ourOur subsidiary, PT Consolidated Water Bali,CW-Bali, completed the construction of, and in 2013 began operating, a seawater reverse osmosis (“SWRO”)desalination plant with an initial capacity of 264,000790,000 gallons per day in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. Nusa Dua has a target customer profile consisting of tourist resorts and luxury/vacation residences comparable to our retail service area on Grand Cayman. We believebelieved the water demands of these properties in Nusa Dua already exceedexceeded the supply capacity of the local public water utility willand would soon exceed other local sources (such as wells), and that other areas of Bali willwould also eventually experience fresh water shortages. However, as SWRO hasSince desalination had not been employed to any meaningful extent in Bali, we concluded that to obtain customers in Bali we mustwere required to first demonstrate the viability of SWROdesalination as well as our capabilities and expertise. Consequently, we elected to construct this plant before obtaining water supply agreements for its production. During 2014,

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Since its inception, we expandedhave recorded operating losses for CW-Bali as the sales volumes for its plant have not been sufficient to cover its operating costs. In May 2017, after considering CW-Bali’s historical and projected operating losses, its on-going funding requirements, the current business and economic environment in Bali and our inability to obtain a strategic partner for CW-Bali, our Board of Directors formally resolved to discontinue CW-Bali’s operations. Shortly thereafter, we reduced the capacity of thisCW-Bali’s plant to 790,000264,000 gallons per day.day by transferring two of its reverse osmosis desalination units to other operations. We believe sufficient demand existsplanned to cease the production of water in Nusa DuaBali, sell our stock in CW-Bali or CW-Bali’s net assets, and exit the Bali market at the earliest practical date, which we initially believed would be no later than March 31, 2018. However, in October 2017, CW-Bali’s sole remaining customer filed a lawsuit in Bali, Indonesia against CW-Bali seeking compensatory and punitive damages. This lawsuit was ultimately resolved in our favor and we are presently seeking to enable usdispose of our investment in CW-Bali. As a result of impairment losses recorded in prior years, the carrying value of our remaining investment in CW-Bali is immaterial to sell all of the plant’s capacity, although we cannot assure that we will be able to do so. As of December 31, 2015, the capitalized costs for this plant reflected on our consolidated balance sheetfinancial condition. CW-Bali’s operations were approximately $3.0 million.also immaterial to our consolidated results of operations for 2018.

 

See further discussion of our Bali retail operationsCW-Bali at ITEM 1.A. RISK FACTORS3. LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

 

Bulk Water Operations

 

For fiscal years 2015, 20142018 and 2013,2017, our bulk water operations accounted for approximately 56%, 60%47% and 63%48%, respectively, of our consolidated revenues. This business producesThese operations produce potable water from seawater and sellssell this water to governments in the Cayman Islands Belize and The Bahamas.

 

Bulk Water Operations in the Cayman Islands

 

Through our wholly-owned subsidiary OC-Cayman we provide bulk water on a take-or-pay basis to the WAC, a government ownedgovernment-owned utility and regulatory agency, under various agreements. The WAC in turn distributes that water to properties in the parts of Grand Cayman that are outside of our retail license area.

 

The water we sell to the WAC is produced at three seawater reverse osmosis seawater conversiondesalination plants in Grand Cayman that are owned by the WAC but designed, built and operated by OC-Cayman: the North Sound, Red Gate North Sound and North Side Water Works (“NSWW”) plants, which have production capacities of approximately 1.31.6 million, 1.61.3 million and 2.4 million gallons of water per day, respectively. The plants that we operate for the WAC are located on land owned by the WAC.

 

The currentprevious operating agreement for the Red Gate plant expires in July 2017. The current operating agreementagreements for the North Sound plant expiresand Red Gate plants expired in April 2017.February 2019. In response to a public bidding process for a new operations and maintenance agreement encompassing both the North Sound and Red Gate plants, OC-Cayman submitted a bid for the new agreement.

In August 2018, the WAC accepted OC-Cayman’s bid for the new agreement, and the WAC and OC-Cayman entered into a new five-year contract commencing on February 1, 2019 for the operation of the North Sound and Red Gate plants. The currentterms of the new agreement are substantially consistent with those of the prior North Sound and Red Gate water supply agreements, except that (i) we have decreased the price we charge for the water supplied; and (ii) under the new agreement the WAC pays the energy costs for the operation of these plants directly to the utility company rather than paying OC-Cayman pass -through energy charges for these costs. The per gallon price we charged for the water supplied under the new agreement in February 2019, excluding the effect of the pass-through energy component, was approximately 25% less than the per gallon rate we charged in February 2018 under the prior agreements. As a result of this price reduction (and assuming comparable sales volumes), the revenues and operating income we generate from the North Sound and Red Gate plants commencing February 1, 2019 will be less than the revenues and operating income we have historically generated from these plants under the previous agreements.

The operations and maintenance agreement for the North Side Water WorksNSWW plant expires in June 2019. Pursuant to a public bidding process, in February 2019, we submitted our bid to operate and maintain this plant for a period of seven years after the current contract expires and are awaiting the results of the bidding process and the decision of the WAC.

 

Bulk Water Operations in Belize

In Belize, we sell bulk water through our wholly-owned subsidiary CW-Belize.

FacilitiesThe Bahamas

 

We ownsell bulk water in The Bahamas through our majority-owned subsidiary, CW-Bahamas, to the reverse osmosis seawater conversion plant in Belize and lease the land on which our plant is located from the Belize government at an annual rent of BZE$1.00. The land lease expires in March 2026. The production capacity of the plant is 600,000 gallons of water per day.


Electricity to our plant is supplied by Belize Electricity Limited. At the plant site, we maintain a diesel engine-driven, standby generator with sufficient capacity to operate 100% of our water production equipment during any temporary interruption in the electricity supply.

Customers

In Ambergris Caye, Belize we are the exclusive provider of water to Belize Water Services Ltd. (“BWSL”), a government controlled entityWSC, which distributes the water through its own pipeline system to residential, commercial and tourist properties. BWSL distributes our water primarily to residential properties small hotels, and businesses that serve the tourist market. The base price of water supplied, and adjustments thereto, are determined by the terms of the contract, which provides for annual adjustments based upon the movement in the government price indices specified in the contract, as well as monthly adjustments for changes in the cost of diesel fuel and electricity.

We have an exclusive contract with BWSL to supply a minimum of 2.03 million gallons of water per week or, upon demand, up to 2.94 million gallons per week, on a take-or-pay basis. This contract expires on March 23, 2026. BWSL has the right, with six months advance notice before the expiration date, to renew the contract for a further 25-year period on the same terms and conditions.

Bulk Water Operations in The Bahamas

Island of New Providence. We also sell bulk water in The Bahamas to the Water and Sewerage Corporation of The Bahamas (“WSC”) and to a private resort on Bimini through our majority-owned subsidiary, CW-Bahamas.

FacilitiesBimini.

 

We currently supply bulk water in The Bahamas from our Windsor, Blue Hills and Bimini plants.

 

TheOur water supply agreement with the WSC for our Windsor plant, which has a capacity of 3.12.8 million gallons per day, expires in August 2033 and requires us to deliver a minimum of 16.8 million gallons per week. Pursuant to this agreement, CW-Bahamas was scheduledrequired to expire in July 2013. As discussed hereinafter, (see “Customers”) at present CW-Bahamas continuescomplete capital improvements to supply water from the Windsor plant on a month-to-month basis atto ensure that the requestplant can meet its performance guarantees during the agreement period. These improvements were completed during the fourth quarter of the government of The Bahamas.2018.

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We supply water from the Blue Hills plant, our Company’s largest seawater conversionreverse osmosis desalination facility with a capacity of 12.0 million gallons per day, under the terms of a water supply agreement with the WSC that expires in March 2032.2032 that requires us to deliver and requires the WSC to purchase a minimum of 63.0 million gallons of water each week.

 

The Bimini plant has a capacity of 115,000 gallons per day and supplies water to a private resort under a water supply agreement that expires in December 2020.

 

The high-pressure pumps at our Windsor and Blue Hills plants in theThe Bahamas are diesel engine-driven. Electricity for the remainder of our plant operations is supplied by Bahamas Power and Light, formally known as Bahamas Electricity Corporation. We maintain a standby generator with sufficient capacity to operate essential equipment at our Windsor and Blue Hills plants and are able to produce 100% of the production capacity with these plants during temporary interruptions in the electricity supply.

 

Customers

We provide bulk water to the WSC, which distributes the water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence.

Pursuant to a water supply agreement, we were required to provide the WSC with at least 16.8 million gallons per week of potable water from the Windsor plant. This water supply agreement was scheduled to expire when we delivered the total amount of water required under the agreement in July 2013, but has been extended on a month-to-month basis. At the conclusion of the agreement, the WSC has the option to:

i.extend the agreement for an additional five years at a rate to be negotiated;
ii.

exercise a right of first refusal to purchase any materials, equipment and facilities that CW-Bahamas intends to remove from the site at a purchase price to be negotiated with CW-Bahamas; or

iii.require CW-Bahamas to remove all materials, equipment and facilities from the site.

At the request of the government of The Bahamas, we continue to operate and maintain the Windsor plant on a month-to-month basis to provide the government of The Bahamas with additional time to decide whether or not it will extend CW-Bahamas’ water supply agreement for the Windsor plant on a long-term basis.

Under the terms of the water supply agreement for our Blue Hills plant, we are required to deliver and the WSC is required to purchase a minimum of 63.0 million gallons per week. The term of the Blue Hills water supply agreement expires the later of March 2032 or the date we deliver the total amount of water required under the agreement. At the conclusion of the agreement, the WSC has the option to:


i.extend agreement for an additional five years at a rate to be negotiated;
ii.

exercise a right of first refusal to purchase any materials, equipment and facilities that CW-Bahamas intends to remove from the site at a purchase price to be negotiated with CW-Bahamas; or

iii.require CW-Bahamas to remove all materials, equipment and facilities from the site.

Services Operations

 

For fiscal years 2015, 20142018 and 2013,2017, our services operations accounted for approximately 3%, 3% and 1%, respectively, of our consolidated revenuesrevenues. Presently, our services operations are providing management and are comprised of businesses providingpurchasing services to our affiliate OC-BVI in the Cayman Islands, The Bahamas, and the British Virgin Islands. These businesses provide engineeringIn the past, we have also provided services to the WAC and management services, which include designing and constructing desalination plants, and managing and operating plants owned by affiliated companies.to the WSC.

 

We provide design, engineering and construction services for desalination projects through DesalCo, which is recognized by suppliers as an original equipment manufacturer of seawater reverse osmosis seawater desalination plants for our Company.plants. DesalCo also provides management and procurement services for desalination plants and engineering services relating to our affiliates.

Our engineering departmentmunicipal water production, distribution and treatment. DesalCo also conducts research and development. We frequently testDesalCo sometimes tests new components and technology offered by suppliers in our business and, at times, we collaborate with suppliers in the development of their products.

 

Aquilex, Inc.Manufacturing Operations

For fiscal years 2018 and 2017, our manufacturing operations accounted for approximately 11% and 12%, respectively, of our wholly-owned U.S. subsidiaryconsolidated revenues. Our manufacturing operations consists of Aerex, an original equipment manufacturer and service provider of a wide range of products and services applicable to desalination, municipal water treatment and industrial water and wastewater treatment. Its products include reverse osmosis desalination equipment, membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance services to its customers. Aerex’s manufacturing facility and headquarters are located in Coral Springs,Fort Pierce, Florida provides financial, engineering and supply chain support services tosubstantially all of its customers are U.S. companies. We acquired our operating segments.51% ownership interest in Aerex in 2016.

 

Affiliate Operations

 

Our affiliate, OC-BVI, sells water to the Government of the British Virgin Islands Water and Sewerage Department (“BVIW&S”). We own 50% of the voting shares of OC-BVI and have an overall 43.53% equity interest in the profits of OC-BVI. We also own separate profit sharingprofit-sharing rights in OC-BVI that raise our effective interest in OC-BVI’s profits from 43.53% to approximately 45%. Sage Water Holdings (BVI) Limited (“Sage”) owns the remaining 50% of the voting shares of OC-BVI and the remaining 55% interest in its profits. Under the Articles of Association of OC-BVI, we have the right to appoint three of the six directors of OC-BVI. Sage is entitled to appoint the remaining three directors. In the event of a tied vote of the directors, the President of the Caribbean Water and Wastewater Association, a regional trade association comprised primarily of government representatives, is entitled to appoint a junior director to cast a deciding vote.

 

WeThrough our DesalCo subsidiary, we provide certain engineering and administrative services to OC-BVI for a monthly fee and a bonus arrangement which provides for payment of 4% of the net operating income of OC-BVI.

 

We account for our interestsinvestment in OC-BVI using the equity method of accounting.

Customers

 

OC-BVI sells bulk water to BVIW&S, which distributes the water through its own pipeline system to residential, commercial and tourist properties on the islands of Tortola and Jost Van Dyke in the British Virgin Islands. OC-BVI provides operating, engineering and procurement services for the Baughers Bayanother plant under a short-term agreement with Sage.

 

Facilities

OC-BVI owns and operates a 720,000 gallons per daydesalination plant located at Bar Bay, Tortola that supplieswith a capacity of 720,000 gallons per day. Pursuant to a water supply agreement with the BVI government, OC-BVI is required to supply up to 600,000 gallons per day to the BVI government under a contract datedgovernment. This water supply agreement was scheduled to expire in March 4, 2010 that has a term of seven years with a seven-year renewal option exercisable by the BVI government. 2017 but was extended in February 2017 to March 2031.

OC-BVI purchases electrical power to operate this plant from BVI Electric Co. and operateoperates diesel engine driven emergency power generators which can produce 100% of the plant’s production capacity when BVI Electric Co. is unable to provide power to the plant.

 

OC-BVI’s plant on the island of Jost Van Dyke has a capacity of 60,000 gallons per day. This plant operates under a 10-year contract with the BVI government that expired July 8, 2013. Pursuant to the contract, OC-BVI is operating the plant on a year-to-year basis until the BVI government informs OC-BVI of its intention to extend the existing contract or enter into a new agreement. We purchase electrical power to operate this plant from BVI Electric Co.

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Reverse Osmosis Technology

 

The conversion of seawater to potable water is called desalination. The two primary forms of desalination are distillation and reverse osmosis. Both methods are used throughout the world and technologies are improving to lower the costs of production. Reverse osmosis is a fluid separation process in which the saline water (i.e. seawater) is pressurized and the fresh water is separated from the saline water by passing through a semi-permeable membrane which rejects the salts. The saline water is first passed through a pretreatment system, which generally consists of fine filtration and treatment chemicals, if required. Pre-treatment removes suspended solids and organics which could cause fouling of the membrane surface. Next, a high-pressure pump pressurizes the saline water thus enabling approximately 40% conversion of the saline water to fresh water as it passes through the membrane, while more than 99% of the dissolved salts are rejected and remain in the now concentrated saline water. This concentrate is discharged without passing through the membrane; however,membrane, and the remaining hydraulic energy in the concentrate is transferred to the initial saline feed water with an energy recovery device thus reducing the total energy requirement for the reverse osmosis system. The final step is post-treatment, which consists of stabilizing the produced fresh water (thereby removing undesirable dissolved gases), adjusting the pH and (if necessary) the mineral content, and providing chlorination to prepare it for distribution.


We use reverse osmosis technology to convert seawater to potable water at all of the plants we construct and operate. We believe that this technology is the most effective and efficient conversion process for our markets. However, we are always seeking ways to maximize efficiencies in our current processes and investigating new, more efficient processes to convert seawater to potable water. The equipment at our plants is among the most energy efficient available and we monitor and maintain the equipment in an efficient manner. As a result of our decades of experience in seawater desalination, we believe our expertise and “know how” inexperience with respect to the development and operation of desalination plants and similar facilities is easily transferable to locations outside of our current operating areas.

 

Raw Materials and Sources of Supply

 

All materials, parts and supplies essential to our business operations are obtained from multiple sources and we use the latest industry technology. We doPrior to our acquisition of Aerex, we did not manufacture any parts or components for equipment essential to our business. Aerex has manufactured some of the key components for some of our plants in the past and we expect Aerex to continue to do so. Our access to seawater for processing into potable water is granted through our licenses and contracts with governments of the various jurisdictions in which we have our operations.

 

Seasonal Variations in Our Business

 

Our operations are affected by the levels of tourism and are subject to seasonal variations in our service areas. Demand for our water in the Cayman Islands, Belize, and theThe Bahamas is affected by variations in the level of tourism and local weather, primarily rainfall. Tourism in our service areas is affected by the economies of the tourists’ home countries, primarily the United States and Europe, terrorist activity and perceived threats thereof, and increased costs of fuel and airfares. We normally sell more water during the first and second quarters, when the number of tourists is greater and local rainfall is less in our markets, than in the third and fourth quarters.

 

Government Regulations, Custom Duties and Taxes

 

Our operations and activities are subject to the governmental regulations and taxes of the countries in which we operate. The following summary of regulatory developments and legislation does not purport to describe all present and proposed regulation and legislation that may affect our businesses. Legislative or regulatory requirements currently applicable to our businesses may change in the future. Any such changes could impose new obligations on us that may adversely affect our businesses and operating results. The following paragraphs set forth some of the key governmental regulations in the jurisdictions in which we operate outside of the United States.

 

The Cayman Islands

 

The Cayman Islands are a British Overseas Territory and have had a stable political climate since 1670, when the Treaty of Madrid ceded the Cayman Islands to England. The Queen of England appoints the Governor of the Cayman Islands to make laws with the advice and consent of the legislative assembly. The legislative assembly consists of 1819 elected members and two members appointed by the Governor from the Civil Service. The Cabinet is responsible for day-to-day government operations. The Cabinet consists of seventhe Premier and six other ministers who are chosen by the Premier from its 1819 popularly elected members, and the two Civil Service members. The elected members choose from among themselves a leader, who is designated the Premier, and is in effect the leader of the elected government. The Governor has reserved powers and the United Kingdom retains full control over foreign affairs and defense. The Cayman Islands are a common law jurisdiction and have adopted a legal system similar to that of the United Kingdom.

 

The Cayman Islands have no taxes on profits, income, distributions, capital gains or appreciation. We have exemptions from, or receive concessionary rates of customs duties on, certain capital expenditures for plant and major consumable spare parts and supplies imported into the Cayman Islands under our retail water license. We do not pay import duty or taxes on reverse osmosis membranes, electric pumps and motors, and chemicals, but we do pay duty at the rate of 10% of the cost, including insurance and transportation to the Cayman Islands, of other plant and associated materials and equipment to manufacture or supply water in the Seven Mile Beach or West Bay areas. We have been advised by the Government of the Cayman Islands that we will not receive any duty concessions in our new retail water license.

 

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The Bahamas

 

The Commonwealth of The Bahamas is an independent nation and a constitutional parliamentary democracy with the Queen of England as the constitutional head of state. The basis of the Bahamian law and legal system is the English common law tradition with a Supreme Court, Court of Appeals, and a Magistrates court.

 

Under the current laws of the Commonwealth of The Bahamas, no income, corporation, capital gains or othersimilar taxes are payable by us. We are required to pay an annual business license fee (the calculation of which is based on our preceding year’s financial statements) which to date has not been material to the results of our Bahamas operations.

Belize

Belize achieved full independence from the United Kingdom in 1981. Today, Belize is a constitutional monarchy with the adoption of a constitution in 1981. Based on the British model with three independent branches, the Queen of England is the constitutional head of state, represented by a Governor General. A Prime Minister and cabinet make up the executive branch, while a 31 member elected House of Representatives and a 13 member appointed Senate form a bicameral legislature. The cabinet consists of a prime minister, other ministers and ministers of state who We are appointed by the Governor-General on the advice of the Prime Minister, who has the support of the majority party in the House of Representatives. Belize is an English common law jurisdiction with a Supreme Court, Court of Appeals and local Magistrate Courts.

The Government of Belize has exempted CW-Belize from certain customs duties and all revenue replacement duties until April 18, 2026, and had exempted CW-Belize from company taxes until January 28, 2006. Belize levies a gross receipts tax on corporations at a rate varying between 0.75% and 25%, depending on the type of business, and a corporate income tax at a rate of 25% of chargeable income. Gross receipts tax payable amounts are credited towards corporate income tax. The Government of Belize also implemented certain environmental taxes and a general sales tax effective July 1, 2006 and increased certain business and personal taxes and created new taxes effective March 1, 2005. Belize levies import duty on most imported items at rates varying between 0% and 45%, with most items attracting a rate of 20%. Under the terms of our water supply agreement with BWSL we are reimbursed by BWSL for all taxes and customs duties that we are required to pay a value added tax on materials and services we record this reimbursement as an offset to our tax expense.purchase.

 

The British Virgin Islands

 

The British Virgin Islands (the “BVI”) is a British Overseas Territory, with the Queen of England as the Head of State and Her Majesty’s representative, the Governor, responsible for external affairs, defense and internal security, the Civil Service and administration of the courts. Since 1967, the BVI has held responsibility for its own internal affairs.

 

The BVI Constitution provides for the people of the BVI to be represented by a ministerial system of government, led by an elected Premier, a Cabinet of Ministers and the House of Assembly. The House of Assembly consists of 13 elected representatives, the Attorney General, and the Speaker.

 

The judicial system, based on English law, is under the direction of the Eastern Caribbean Supreme Court, which includes the High Court of Justice and the Court of Appeal. The ultimate appellate court is the Privy Council in London.

 

Bali, Indonesia

Bali is an Indonesian island with a population of over four million located between Java to the west and Lombok to the east. Bali is one of the world’s premier island tourist destinations, home to numerous four and five star resorts. Bali is renowned for its highly developed arts, beautiful surroundings (both mountain and coastal areas), diverse tourist attractions, excellent international and local restaurants, and the friendliness of the local people. Under the current laws of Bali, Indonesia, we are subject to corporate income taxes.

Market and Service Area

 

Although we currently operate in the Cayman Islands, Belize,The Bahamas, the British Virgin Islands, The Commonwealth of The Bahamas,the United States and Indonesia, we believe that our potential market consists of any location where a need exists for potable water and with access to seawater or brackish water. The desalination of seawater, either through distillation or reverse osmosis, is the most widely used process for producing potable water in areas with an insufficient natural supply. We believe our experience in the development and operation of reverse osmosis desalination plants provideswill provide us with a significant opportunityopportunities to successfully expand our operations beyond the markets in which we currently operate.

 

Cayman Islands. The Cayman Islands government, through the WAC, supplies water to partsthe areas of Grand Cayman whichthat are not within our licensed area, as well as to Cayman Brac. We operate all but one of the reverse osmosis desalination plants owned by the WAC on Grand Cayman and supply water under licenses and supply agreements held by OC-Cayman with the WAC.

 

According to the most recent information published by the Economics and Statistics Office of the Cayman Islands Government, the population of the Cayman Islands was estimated in December 20152017 to be 60,413.63,415. According to the figures published by the Department of Tourism Statistics Information Center, during the year ended December 31, 2015,in 2018 as compared to 2017, tourist air arrivals increased by less than 1%11% to approximately 463,000 and tourist cruise ship arrivals increased by 6.7% compared11% to 2014.approximately 1,921,000.


Total visitors for the year increased from 2.0 million in 2014 to 2.1 million in 2015.

We believe that our water sales in the Cayman Islands are more positively impacted by stay-over tourists that arrive by air than by those arriving by cruise ship, since cruise ship tourists generally only visit the island for one day or less and do not remain on the island overnight.

 

Our retail water sales are significantly impacted by the amount of rainfall on Grand Cayman Island.

The Bahamas. On South Bimini IslandThe Bahamas government, through the WSC, supplies all of the piped water on the island of New Providence, Bahamas, which includes Nassau, the largest city, political capital and commercial hub of The Bahamas. We supply water to the WSC through the water supply agreements for our Blue Hills and Windsor plants, which are located in Nassau. New Providence is the most populous island in The Bahamas, we supply water to a private developer and do not have competitors. GE Water operates a seawater desalination plant on North Bimini Island and other small family islands. We competed with companies such as GE Water, Veolia, IDE, OHL Inima and Biwater formore than 70% of the contract withcountry’s population. A 2010 census placed the Bahamian government to build and operate a seawater desalination plant at Blue Hills,population of New Providence Bahamas. We expect to compete with these companies and others for any future water supply contracts in The Bahamas.

Belize. Our current operations in Belize are located on Ambergris Caye, which consists of residential, commercial and tourist properties in the town of San Pedro. This town is located on the southern end of Ambergris Caye, one of many islands located east of the Belize mainland and off the southeastern tip of the Yucatan Peninsula. Ambergris Caye isat approximately 25 miles long and, according to the Central Statistical Office “Belize: 2010 National Census Overview”, has a population of about 11,500 residents. We provide bulk potable water to BWSL, which distributes this water to this market. BWSL currently has no other source of potable water on Ambergris Caye. Our contract with BWSL makes us their exclusive producer of desalinated water on Ambergris Caye through 2026.

A 185 mile long barrier reef, which is the largest barrier reef in the Western Hemisphere, is situated just offshore of Ambergris Caye. This natural attraction is a choice destination for scuba divers and tourists.246,000. According to informationstatistics published by the Belize TradeBahamas Ministry of Tourism, the number of cruise ship arrival and Investment Development Service, tourism is Belize’s second largest source of foreign income, nextair arrival tourists to agriculture.New Providence exceeded 2.5 million and 1.1 million, respectively, in 2018.

 

British Virgin Islands. The British Virgin Islands are a British Overseas Territory and are situated east of Puerto Rico. They consist of 16 inhabited and more than 20 uninhabited islands, of which Tortola is the largest and most populated. The British Virgin Islands serve as a hub for many large yacht-chartering businesses.

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Competition

 

Cayman Islands. Pursuant to our license granted by the Cayman Islands government, we havehad the exclusive right to provide potable, piped water within our licensed service area on Grand Cayman. AtThis license expired on January 31, 2018. However, we continue to provide water subsequent to January 31, 2018 on a month-to-month “good faith” basis under the present time, weterms of the expired license in order to allow for the continuation of negotiations for a new license without interruption to an essential service. We are the only non-government-owned public water utility on Grand Cayman. The Cayman Islands government, through the WAC, supplies water to parts of Grand Cayman located outside of our licensed service area. Although we have no competition within our exclusive retail license service area for potable water, our ability to expand our service area is at the discretion of the Cayman Island government. Private residences and commercial multi-unit dwellings up to four units may install potable water making equipment for their own use. Water plants on premises within our license area and serving only their premises in existence prior to 1991 can be maintained but not replaced or expanded. We are aware of only one such plant currently in operation. The Cayman Islands government, through the WAC, supplies water to parts of Grand Cayman outside of our licensed service area. We have competed with such companies as SUEZ (formerly GE Water,Water), Veolia, and IDE Technologies for bulk water supply contracts with the WAC.

 

The Bahamas. On South Bimini Island in The Bahamas, we supply water to a private developer and do not have competitors. GE WaterA competitor operates a seawater reverse osmosis desalination plant on North Bimini Island and other small islands. We competed with companies such as SUEZ (formerly GE Water,Water), Veolia, IDE OHLTechnologies, GS Inima and Biwater for the contract with the Bahamian government to build and operate a seawater reverse osmosis desalination plant at Blue Hills, New Providence, Bahamas. We expect to compete with these companies and others for any future water supply contracts in The Bahamas.

Belize. On Ambergris Caye in Belize, our water supply contract with Belize Water Services Limited is exclusive, and Belize Water Services Limited cannot seek contracts with other water suppliers, or produce water itself, to meet their future needs in San Pedro, Ambergris Caye, Belize.

 

British Virgin Islands. In the British Virgin Islands, SUEZ (formerly GE WaterWater) operates seawater reverse osmosis desalination plants in West End, Tortola, and on Virgin Gorda and generally bids against OC-BVI for projects. In 2010, Biwater PLC negotiated a 16 year16-year contract on a sole sourced basis, pursuant to which it has constructed and is operating a 2.75 million gallon per day desalination plant in Parakeeta Bay, Tortola for the British Virgin Islands government. In August 2015, this plant was acquired from Biwater by Seven Seas Water, a division of AquaVenture Holdings. We expect that OC-BVI will be required to compete against SUEZ (formerly GE Water), Aquaventure Holdings and other parties for any future business opportunities that may arise in the British Virgin Islands.

United States. Aerex competes in the highly fragmented industry for manufactured water production and treatment equipment, systems and services against a large number of manufacturers, fabricators and service providers, many of which have greater resources than Aerex.

 

Bali, Indonesia. In Bali, we compete against local water treatment equipment suppliers who provide equipment and services to individual resort properties.

 

To implement our growth strategy for our desalination businesses outside our existing operating areas, we will have to compete with some of the same companies we competed with forin the Blue Hills project in Nassau, Bahamaspast such as Seven Seas Water, SUEZ (formerly GE Water,Water), Veolia, IDE Technologies, GS Inima, and Biwater as well as other companies. Some of these companies currently operate in areas in which we would like to expand our operations, and already maintain worldwide operations, havingand have greater financial, managerial and other resources than our company. We believe that our low overhead costs, knowledge of local markets and conditions and our efficient manner of operating desalinated water production and distribution equipment provide us with the capabilities to effectively compete for new projects in the Caribbean basin and other select markets.


Environmental and Health Regulatory Matters

 

Cayman Islands. With respect to our Cayman Islands operations, we operate our water plants in accordance with guidelines of the Cayman Islands Department of Environmental Health. We are licensed by the WAC to discharge concentrated seawater, which is a byproduct of our desalination process, into deep disposal wells.

 

Our Cayman Islands license requires that our potable water quality meet the World Health Organization’s Guidelines for Drinking Water Quality and contain less than 200 mg/l of total dissolved solids.

 

The Bahamas Belize, and British Virgin Islands. With respect to our Bahamas and BelizeBahamian operations and OC-BVI’s British Virgin Islands operations, we and OC-BVI are required by our water supply contracts to take all reasonable measures to prevent pollution of the environment. We are licensed by the Belize and Bahamian governmentsgovernment to discharge concentrated seawater, which is a by-product of our desalination process, into deep disposal wells. OC-BVI is licensed by the British Virgin Islands government to discharge concentrated seawater into the sea. At several of our locations, hydrogen sulfide gas is present in the seawater and we operate our plants in a manner so asdesigned to minimize the emission of airborne gas into the environment.

United States. Consistent with other U.S. manufacturers, Aerex must comply with laws and regulations administered by the U.S. Environmental Protection Agency.

 

We are not aware of any existing or pending environmental legislation which may affect our operations. To date, we have not received any complaints from any regulatory authorities.

 

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Employees

 

As of March 8, 2016,2019, we employed a total of 127108 persons, 6762 in the Cayman Islands, 2120 in The Bahamas, 2223 in the United States seven in Belize and fivethree in Asia. We also leased 19 employees for Aerex’s manufacturing activities in the United States and managed the five employees of OC-BVI in the British Virgin Islands. We have 10nine management employees and 3432 administrative and clerical employees. The remaining employees are engaged in engineering, purchasing, plant maintenance and operations, pipe laying and repair, leak detection, new customer connections, meter reading and laboratory analysis of water quality. None of our employees isare a party to a collective bargaining agreement. We consider our relationships with our employees to be good.

 

Available Information

 

Our website address is http://www.cwco.com. Information contained on our website is not incorporated by reference into this Annual Report, and you should not consider information contained on our website as part of this Annual Report.

 

We have adopted a written code of conduct and ethics that applies to all of our employees and directors, including, but not limited to, our principal executive officer, principal financial officer, and principal accounting officer or controller, or persons performing similar functions. The Code of Business Conduct and Ethics, the charters of the Audit Committee, Compensation Committee, Nominations and Corporate Governance Committee and the Consolidated Water Co. Ltd. Corporate Governance Guidelines of our Board of Directors are available at the Investors portionsection of our website.

 

You may access, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, plus amendments to such reports as filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, on our website and on the website of the Securities and Exchange Commission (the “SEC”) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. In addition, paper copies of these documents may be obtained free of charge by writing us at the following address: Consolidated Water Co. Ltd., Regatta Office Park, Windward Three, 4th Floor, West Bay Road, P.O. Box 1114, Grand Cayman, KY1-1102, Cayman Islands, Attention: Investor Relations; or by calling us at (345) 945-4277.

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ITEM 1A. RISK FACTORS

ITEM 1A.RISK FACTORS

 

Investing in our common shares involves risks. Prior to making a decision aboutBefore investing in our common shares you should consider carefully the factors discussed below and the information contained in this Annual Report. Each of these risks, as well as other risks and uncertainties not presently known to us or that we currently deem immaterial, could adversely affect our business, results of operations, cash flows and financial condition, and cause the value of our common shares to decline, which may result in the loss of part, or all, of your investment.


Our exclusive license to provide water to retail customers in the Cayman Islands may not be renewed inhas expired and we are presently unable to predict the future.outcome of our on-going negotiations for a new license.

 

In the Cayman Islands, we provide water to retail customers under a license issued in July 1990 by the Cayman Islands government that grants our subsidiary, Cayman Water, the exclusive right to provide water to retail customers within our licensed service area. OurPursuant to the license, we had the exclusive right to produce potable water and distribute it by pipeline to our licensed service area, is comprisedwhich consists of an area ontwo of the three most populated areas of 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, 2015, 2014areas. In 2018 and 2013,2017 we generated approximately 40%, 36%39% and 36%39%, respectively, of our consolidated revenues and approximately 55%, 53%54% and 52%54%, respectively, of our consolidated gross profitsprofit from the retail water operations conducted pursuant to thisCayman Water’s exclusive license. If we are not in default of any of its terms, the license provides us with the right to renew the license on terms that are no less favorable than those that the government offers to any third party.

 

ThisThe license was setoriginally scheduled to expire onin July 10, 2010; however,2010 but was extended several times by the Cayman Islands government and we have extended the license several times in order to provide sufficientthe parties with additional time to negotiate the terms of a new license agreement. The most recent extension of ourthe license was scheduledexpired on January 31, 2018. We continue to expireprovide water subsequent to January 31, 2018 on December 31, 2015, however, we have been informed bya month-to-month “good faith” basis under the Water Authority- Cayman (“WAC”) that our license will be extended through June 30, 2016 and that formal documentation of such extension is in process.

In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law, 2011 (the “New Laws”) were published and enacted. Under the New Laws, the WAC will issue any new license, and such new license could include a rate of return on invested capital model, as discussed in the following paragraph.

Following the enactmentterms of the New Laws, we were advisedexpired license in correspondence from the Cayman Islands government and the WAC that: (i) the WAC is the principal negotiator, and not the Cayman Islands government, in our license negotiations, and (ii) the WAC had determined that a rate of return on invested capital model (“RCAM”)order to allow for the retail license is in the best interestcontinuation of the public and our customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. We responded to the Cayman Islands government that we disagreed with its position on these two matters and negotiations for a new license temporarily ceased.without interruption to an essential service. We proposed to OfReg to adjust our rates in January 2019 consistent with the terms of the previous license, however OfReg has communicated that they have deferred any such adjustment until further notice.

 

In July 2012, in an effort to resolve several issues relating to our retail license renewal negotiations, we filed an Application for Leave to Apply for Judicial Review (the “Application”) withOctober 2016, the Grand CourtGovernment of the Cayman Islands (the “Court”), stating that: (i) certain provisionspassed legislation which created OfReg. OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the New Laws appear to be incompatible, (ii) the WAC’s roles as the principal license negotiator, statutory regulator and our competitor put the WACCayman Islands in a position of hopeless conflict, and (iii) the WAC’s decision to replace the rate structure under our current exclusive license with RCAM was predetermined and unreasonable. In October 2012, we were notified that the Court agreed to consider the issues outlined in the Application.

The hearingApril 2017, which transferred responsibility for this judicial review was held on April 1, 2014. Prior to the commencementeconomic regulation of the hearing,water utility sector and the parties agreed that the Court should solely be concerned with the interpretation of the statutory provisions. As part of this agreement, the WAC agreed to consider our submissions on the RCAM model and/or alternative models of pricing. In June 2014, the Court determined that: (i) the renewal of theretail license does not require a public bidding process; and (ii) the WAC is the proper entity to negotiate with us for the renewal of the license.

Our submissions on the RCAM model and/or alternative models of pricing were made to the WAC on June 9, 2014. We received a letternegotiations from the WAC dated September 11, 2014, which fully rejected our submissions and stated that the WAC intend to provide us with a draft RCAM licenseOfReg in due course.

On November 21, 2014, we wrote to the Minister of Works offering to recommence license negotiations on the basis of the RCAM model subject to certain conditions which are: (i) the Government would undertake to amend the current water legislation to provide for an independent regulator and a fair and balanced regulatory regime more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and we would mutually appoint an independent referee and chairman of the negotiations, (iii) our new license would provide exclusivity for the production and provision of all piped water, both potable and non-potable, within our Cayman Islands license area, (iv) the Government would allow us to submit our counter proposal to the WAC’s June 2010 RCAM license draft, and (v) the principle of subsidization of residential customer rates by commercial customer rates would continue under a new license. On March 23 2015, we received a letter from the Minister of Works with the following responses to our November 21, 2014 letter: (1) that while the Cayman government plans to create a public utilities commission, the provision of a new license will not depend upon the formation of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell non-potable water within the area covered by the retail license will not take place until after the draft license has proceeded through the review process of the negotiations; (3) rather than allow us to submit a counter proposal to the WAC’s June 2010 RCAM license draft, the WAC will draft the license with the understanding that we will be allowed to propose amendments thereto; (4) the principle of subsidization of residential customer rates by commercial customer rates would continue under the new license; and (5) a request that we consider eliminating our monthly minimum volume charge in the new license.

May 2017. We recommencedbegan license negotiations with the WACOfReg in July 2017 and such negotiations are continuing. We have been informed during the third quarter of 2015 based upon a draft RCAM license provided by the WAC. Suchour retail license negotiations, remain on-going. We are presently unable to determine when suchboth by OfReg and its predecessor in these negotiations, will be completed orthat the final outcome of such negotiations.


The Cayman Islands government could ultimately offer a third party a licenseseeks to service some or allrestructure the terms of our present service area. However, as set forthlicense in a manner that could significantly reduce the existing license, “the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, saleoperating income and supply of water within the Licence Area without having first offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.”cash flows we have historically generated from our retail license.

The resolution of these license negotiations could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our Cayman Water retail operations and could require us to record an impairment chargelosses to reduce the $3,499,037 carrying valuevalues of our goodwill.retail segment assets. Such impairment chargelosses could have a material adverse impact on our financial condition and results of operations.

 

Our bulk water supply agreements with our customers in the Cayman Islands and The Bahamas may not be renewed or may be renewed on terms less favorable to us.

15

 

All of our bulk water supply agreements are for fixed terms, and such agreements for plants that we operate but are owned by our customers provide for our customers to take over the operations of the plant upon expiration of the agreements.

Our bulk water supply agreements with the WAC for their North Sound and Red Gate plants expire in April 2017 and July 2017 respectively. Our bulk water supply agreement with the WAC for their North Side Water Works plant expires in June 2019. We generated $3.0 million, $3.0 million, and $2.4 million in revenues from the North Sound, Red Gate, and North Side Water Works plants, respectively, during the year ended December 31, 2015.

The water supply agreement with the Water and Sewerage Corporation of The Bahamas (“WSC”) for our Windsor plant was scheduled to expire with the delivery of the total amount of water required under the agreement in July 2013, but has since been extended on a month-to-month basis. At the request of the government of The Bahamas, we continue to maintain and operate the Windsor plant to provide the government of The Bahamas with additional time to decide whether or not to enter into a long term water supply agreement with us for the Windsor plant. We generated $5.8 million in revenues from this plant during the year ended December 31, 2015.

If our bulk water supply agreements are not renewed or are renewed on terms less favorable to us, our results of operations and cash flows and financial condition will be adversely affected and we could be required to record an impairment charge to reduce the $3,499,037 carrying value of our goodwill. Such impairment charge could have a material adverse impact on our results of operations.

 

We have purchased $20.7paid $24.2 million infor land, rights of way and equipment and incurred development expenses totalingof approximately $16.8$27.2 million to date for a possible project in Mexico. We expect to expend significant additional funds in 20162019 to continue to pursue this project. However, we may not be successful in completing this project.

 

We own a 99.9% interest in N.S.C. Agua, S.A. de C.V. (“NSC”),99.99% of NSC, a development stage Mexico company formed to pursue a project encompassing the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and an accompanying pipeline to deliver water to the Mexican potable water system (the “Project”). As of December 31, 2015,2018, our consolidated balance sheet includes purchases for the Project of $20.6approximately $24.2 million infor land, rights of way and $117,000 in equipment. The projectProject development activities we have conducted, which include conducting an equipment piloting plant and water data collection program at the proposed feed water source, completing various engineering studies and obtaining various governmental permits, have resulted in additional developmental expenses totaling $16.8$27.2 million from 2010 through 2015.December 31, 2018.

 

In August 2014, the State of Baja California (the “State”) enacted new legislation to regulate Public-Private Association projects which involve the type of long-term contract between a public sectorpublic-sector authority and a private party that NSC is seeking to complete the Project.Project (the “APP Law”). Pursuant to this new legislation, on January 4,in November 2015 NSC submitted an expression of interest for its project to the Secretary of Infrastructure and Urban Development of the State of Baja California (“SIDUE”). On January 23, 2015, SIDUE accepted NSC’s expression of interest and requested that NSC submitofficially commenced a detailed proposaltender process for the Project, the scope of which the State defined as a first phase to be operational in 2019 consisting of a 50 million gallon per day plant and a pipeline that complies with requirementsconnects to the Mexican potable water infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million gallons per day of production capacity. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. (“NuWater”) and Degremont S.A. de C.V. (the “Consortium”) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of the new legislation. NSC submitted this detailed proposal (the “APP Proposal”) to SIDUE in late March 2015. The new legislation requires that such proposal be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee (the “APP Committee”) for review and authorization. If the APP Committee grants its authorization, the State of Baja California (the “State”) is required to conduct a public tender process for the Project.

 

Due to the amount of capital the Project requires, NSC will ultimately need an equity partner or partners for the Project. Consequently, NSC’s tender to the State for the Project was based upon the following: (i) NSC will sell or otherwise transfer the land and other Project assets to a new company (“Newco”) that would build and own the Project; (ii) NSC’s potential partners would provide the majority of the equity for the Project and thereby would own the majority interest in Newco; (iii) NSC would maintain a minority ownership position in Newco; and (iv) Newco would enter into a long-term management and technical services contract for the Project with an entity partially owned by NSC or another Company subsidiary.

In responseAugust 2016, NSC and NuWater incorporated Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), a special purpose company, to our complete the Project and executed a shareholders agreement for AdR agreeing among other things that: (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operation and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation. As of December 31, 2018 and 2017, NSC owned 99.6% of the equity of AdR.

On August 22, 2016, the Public Private Partnership Agreement for public private partnership number 002/2015, bid number SIDUE-CEA-APP-2015-002 (“APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the Director General ofContract”), was executed between AdR, the Comisión Estatal dedel Agua de Baja California (“CEA”), the Government of Baja California represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract requires AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueducts) with a capacity of up to 100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The first phase must be operational within 36 months of commencing construction and the second phase must be operational by July 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueducts for a period of 37 years starting from the commencement of operation of the first phase. At the end of the operating period, the plant and aqueducts will be transferred to CEA.

The APP Contract does not become effective until the following conditions are met:

·the State has established and registered various payment trusts, guaranties and bank credit lines for specific use by the Project;
·various water purchase and sale agreements between the CEA, the payment trusts and the CESPT have been executed;
·AdR has obtained all of the rights of way required for the aqueduct; and
·all debt financing agreements necessary to provide the funding to AdR for the first phase of the Project have been executed.

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In December 2016, the Congress of the State agencyof Baja California, Mexico passed Decreto #57 which, among other things, ratified and authorized the payment obligations of the corresponding public entities under the APP Contract. During 2017, following consultations between representatives of the State of Baja California and the Ministry of Finance of the Federal Government of Mexico, it was determined that certain amendments to Decreto #57 were required to comply with responsibilityrecent changes to the Federal Financial Discipline Law for Federative Entities and Municipalities (the “Financial Discipline Law”). In addition, it was necessary to amend Decreto #57 to authorize the inclusion of revenues from the CESPT in the primary payment trust for the Project. In this letter, CEA stated that (i)These amendments were included in its opinion,Decreto #168, which was approved by the Project is in the public interest with high social benefits and is consistent with the objectivesCongress of the State Development Plan and (ii) thatof Baja California in December 2017. The authorization of the payment obligations of the public entities under the APP Contract given in Decreto #57, as amended by Decreto #168, expired on December 31, 2018. For the Project and accompanying required public tender process should be conducted. On November 6, 2015,to proceed, the State officially commencedmust obtain new approvals from its Congress to establish the tendervarious payment trusts, guaranties and bank credit lines for use by the Project. The State may be unsuccessful in its efforts to obtain such approvals.

Both the exchange rate for the Mexico peso relative to the dollar and general macroeconomic conditions in Mexico have varied since the execution of the APP Contract. These changes have adversely impacted the estimated construction, operating, and financing costs for the Project. The APP Contract and the APP Law allow for the parties to negotiate (but do not guarantee) modifications to the consideration (i.e. water tariff) under the APP Contract in the event of such significant macroeconomic condition changes. In February 2017, AdR submitted proposals to the CEA requesting the addition of a mechanism in the APP Contract to update the consideration under the APP Contract for changes in foreign exchange rates, lending rates and certain laws which have impacted the Project. On June 1, 2018, AdR and the CEA executed an amendment to the APP Contract which, among other things, increases the scope of Phase 1 of the Project by including the aqueduct originally designated for Phase 2, and addresses AdR’s concerns regarding the impact on the Project for changes in the exchange rate for the peso relative to the dollar and changes in interest rates that have occurred subsequent to the submission of the Consortium’s bid for the Project. As a result of this amendment to the APP Contract, the final cost of Phase 1 and the related consideration to be charged by AdR under the APP Contract will be determined based upon the bid submitted by the Consortium, the changes set forth in the amendment to the APP Contract and the economic conditions (e.g. interest rates and currency exchange rates) in effect on the financial closing date for Phase 1.

In February 2018, AdR executed a subscription agreement (the “Agreement”) for the equity funding required for the Project. The Agreement calls for NSC to retain a minimum of 25% of the equity in AdR. One or more affiliates of Greenfield SPV VII, S.A.P.I. de C.V. (“Greenfield”), a Mexico company managed by an affiliate of a leading U.S. asset manager, will acquire a minimum of 55% of the equity of AdR. The Agreement also provides Suez Medio Ambiente México, S.A. de C.V., (“Suez”), a subsidiary of SUEZ International, S.A.S., with the option to purchase 20% of the equity of AdR. If Suez does not exercise this option, NSC will retain 35% of the equity of AdR and Greenfield will acquire 65% of the equity of AdR. The Agreement will become effective when the additional conditions related to the Project are met, including but not limited to those conditions discussed previously with respect to this risk factor. The aggregate investment to be made by the equity partners in the Project, in the form of equity and subordinated shareholder loans, is presently estimated at approximately 20% of the total cost of Phase 1 of the Project. This Agreement expires on June 30, 2019, unless otherwise extended by mutual agreement of the parties.

NSC expects to generate a portion of its funding for AdR through the sale to AdR of the land it has purchased for the Project. Under the terms of the Agreement, Suez will design and construct the Project, while a joint venture company between NSC and Suez will operate the Project.

In June 2018, AdR and Suez executed a contract whereby Suez will serve as the engineering, construction and procurement contractor for the Project with such contract becoming effective on the effective date of the APP Contract.

The political environment in Mexico has recently experienced significant changes and set March 23, 2016 as the tender submission date. The State tendering process requires that prospective bidders providenew, federal administration has made economic policy announcements focusing on austerity. While the long-term ramifications of such changes and announcements are unknown, in the short-term they have (i) caused certain legal, technicalrating agencies to lower Mexico’s sovereign credit rating, (ii) resulted in a decrease in the value of the Mexico peso and financial qualifications in order to obtain the tender documents. NSC submitted its qualifications(iii) created uncertainty with respect to the State, obtainedincoming administration’s position on projects and contracts approved by previous administrations. The federal administration has a strong influence on many of the tender documents,state and plans to submit its tender tolocal governments and congresses, raising the State on or beforepossibility that the March 23, 2016 deadline.


Despitefederal government will influence local politics, which could impact the expenditures we have madeState’s and the activities we have completedCEA’s ability to date, upon completionmeet certain conditions required to make the APP Contract effective.

17

If AdR is ultimately unable to proceed with the Project due to a failure by any of the tender processparties involved to meet the State may awardconditions necessary for the ProjectAPP Contract to a partybecome effective, or for any other than NSC, or the State may cancel the tender process. If NSC is not awarded the Project,reason, the land we haveNSC has purchased and the right of way deposits may lose itstheir strategic importance as the site forderived from their association with the Project and consequently may decline in value. If NSC isAdR does not awardedproceed with the Project, weNSC may ultimately be unable to sell this land or recoup its right of way deposits for amountamounts at least equal to or in excesstheir carrying values as of its current carrying valueDecember 31, 2018 of $20.6approximately $21.1 million and any$3.0 million, respectively. Any loss on the sale of the land, or impairment charge welosses NSC may be required to record as a result of a decrease in the (i) fair value of the land,land; or (ii) value of the rights of way arising from the inability to complete the Project could have a material adverse impact on our financial condition and results of operations.

Our Bahamas subsidiary is experiencing substantial delays in the collection of its accounts receivable. If these collections do not improve significantly, our Bahamas subsidiary may have insufficient liquidity to continue operations, and our consolidated results of operations could be materially adversely affected.

CW-Bahamas’ accounts receivable balances due from the WSC amounted to $17.6 million as of December 31, 2018 as compared to $9.1 million as of December 31, 2017. The increase in these accounts receivable has adversely impacted the liquidity of this subsidiary.

CW-Bahamas has also experienced similar delays in collecting its accounts receivable from the WSC in prior years, and at times has held accounts receivable balances from the WSC in amounts comparable to the December 31, 2018 balance. During these periods, we arranged meetings and held discussions with representatives of the WSC and The Bahamas government to formulate a payment schedule for WSC’s delinquent accounts receivable and such amounts were subsequently paid in full. Based upon this payment history, we have never been required to provide an allowance for doubtful accounts for any of CW-Bahamas’ accounts receivable, even though CW-Bahamas periodically has been owed substantial delinquent balances.

If the WSC continues to be significantly delinquent in paying CW-Bahamas’ invoices, then in the coming months one or more of the following events may occur: (i) CW-Bahamas may not have sufficient liquidity to meet its obligations without new funding from its shareholders; (ii) we may be required to cease the recognition of revenues on CW-Bahamas’ water supply agreements with the WSC; and (iii) we may be required to provide an allowance for doubtful accounts for CW-Bahamas’ accounts receivable. Any of these events could have a material adverse impact on our results of operations.

In October 2015, we learned that EWG Water LLC (“EWG”), a minority shareholder in NSC, has filed a lawsuit against NSC, CW-Cooperatief, the Public Registry of Commerce of Tijuana, Baja California,operations, financial position and other parties in the Civil Court located in Tecate, Baja California, Mexico.

In this lawsuit, EWG is challenging the capital investment transactions that increased our ownership interest in NSC to 99.9%. EWG requested that the court, as a preliminary matter: (a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the lawsuit in the public records; and (c) appoint an inspector for NSC to oversee its commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG.

Additionally, EWG is also seeking an order directing: (i) NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii) NSC and CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSC and CW-Cooperatief. The court has not yet ruled on these requests.

This litigation could adversely impact our efforts to complete the Project. cash flows.

 

We expect the fair value of our investment in OC-BVI to decrease as its sole water supply contract matures. As this decrease in fair value occurs, we will behave been required to record impairment losses in future periods to reduce the carrying value of the goodwill arising from our investmentacquisition of Aerex in OC-BVIFebruary 2016. If Aerex’s future financial performance falls short of our most recent financial projections for this subsidiary, we may be required to its decreased fair value.

record additional impairment losses to reduce the carrying value of this goodwill.

 

We account for our investmentIn February 2016, we acquired a 51% ownership interest in OC-BVI under the equity methodAerex. In connection with this acquisition, we recorded initial goodwill of accounting for investments in common stock. This method requires recognition$8,035,211. Aerex’s actual results 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 lossoperations in the valuesix months following our acquisition of this company fell significantly short of the investment.

As a quoted marketprojected results that were included in the overall cash flow projections we utilized to determine the purchase price for OC-BVI’s stock is not available,Aerex and the fair values of its assets and liabilities. Due to testthis shortfall in Aerex’s results of operations, we updated our projections for Aerex’s future cash flows and tested Aerex’s goodwill for possible impairment as of our investment in OC-BVI, we estimateSeptember 30, 2016 by estimating its fair value through the use ofusing the discounted cash flow method, which relies upon projections of OC-BVI’s operating results, working capital and capital expenditures. The usemethod. As a result of this method requires us to estimate OC-BVI’s cash flows from (i) its water supply agreement with the BVI government for its Bar Bay plant (the “Bar Bay agreement”); and (ii) the pending amount awarded by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government (see further discussion of the Baughers Bay litigation at Item 8. - Notes to the Consolidated Financial Statements - Note 8).

We estimate the cash flows OC-BVI will receive from its Bar Bay agreement by (i) identifying various possible future scenarios for this agreement, which include the cancellation of the agreement after its initial seven-year term, and the exercise by the BVI government of the seven-year extension in the agreement; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability to each scenario. We similarly estimate the cash flows OC-BVI will receive from the BVI government for the amount due under the ruling by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities to different valuation scenarios. The resulting probability-weighted sum represents the expected cash flows, and our best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay agreement and the pending court award.

The identification of the possible scenarios for the Bar Bay plant agreement and the Baughers Bay plant valuation, the projections of cash flows for each scenario, and the assignment of relative probabilities to each scenario all represent significant estimates made by us. While we use our best judgment in identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning relative probabilities to each scenario, these estimates are by their nature highly subjective and are also subject to material change by our management over time based upon new information or changes in circumstances.

During the fiscal year 2015, after reassessing and revising our probability-weighted estimates of OC-BVI’s future cash flows and our resulting estimate of the fair value of our investment in OC-BVI,impairment testing, we determined that the carrying value of our investment in OC-BVIAerex goodwill exceeded its fair value and recorded an impairment losses on this investment totaling $1.1 million. The resulting $4.5 million carrying valueloss of our investment in OC-BVI as of December 31, 2015 assumes that the BVI government will honor its obligations under the Bar Bay agreement and also assumes (on a probability-weighted basis) that the (i) BVI government will exercise its option to extend the Bar Bay agreement for seven years beyond its initial term, which expires March 4, 2017, and (ii) OC-BVI will receive the pending amount (as estimated by us) awarded by the Eastern Caribbean Court of Appeals$1,750,000 for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government.


The remaining $4.5 million carrying value of our investment in OC-BVI as of December 31, 2015 exceeds our underlying equity in OC-BVI’s net assets by approximately $900,000. We account for this excess as goodwill. The BVI government is OC-BVI’s sole customer and substantially all of OC-BVI’s revenues are generated from its Bar Bay plant. As the Bar Bay agreement matures to its March 4, 2017 expiration date and OC-BVI receives the pending court award amount assumed due for the value of the Baughers Bay plant, OC-BVI’s expected future cash flows, and therefore its fair value computed under the discounted cash flow method, will decrease. Unless OC-BVI obtains an expansion or other modification of its Bar Bay agreement that results in a significant increase in the estimated future cash flows from its Bar Bay plant, we will be required to record impairment losses inthree months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211. As part of our investment in OC-BVI to its then current fair value. Theseannual impairment losses will, intesting of goodwill performed during the aggregate, at least equal the underlying $900,000 in goodwill reflected infourth quarter of each year, we updated our projections for Aerex’s future cash flows, determined that the carrying value of our investment in OC-BVI. The losses we recordAerex goodwill exceeded its fair value, and recorded an impairment loss of $1,400,000 for our investment in OC-BVI in the future will exceedthree months ended December 31, 2017 to further reduce the carrying value of this $900,000 if OC-BVI ultimately ceases operations at its Bar Bay plant, as OC-BVI willgoodwill to $4,885,211. We may be required to record anadditional impairment losslosses to reduce the carrying value of our Aerex goodwill in future periods if we determine it likely that Aerex’s results of operations will fall short of our most recent projections of its Bar Bay plant to its then estimated fair value. OC-BVI’s aggregate carrying value of the assets that comprise its Bar Bay plant was approximately $4.4 million as of December 31, 2015. Futurefuture cash flows. Such impairment losses for our investment in OC-BVI and our equity in any future operating losses incurred by OC-BVI could have a material adverse effect on our results of operations.

We have constructed a plant in Bali, Indonesia pursuant to the belief that the future demand for our water in this area will enable us to sell water in sufficient quantities to generate profits from this plant. If we are unable to significantly increase the amount of water we presently sell from this plant, we will be required to record an impairment charge to reduce the carrying value of this plant’s assets.

Through our subsidiary, CW-Bali, we have built and presently operate a seawater reverse osmosis plant with a productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of Bali will eventually enable us to sell all of this plant’s production. Our current sales volumes for this plant are not sufficient to cover its operating costs, and CW-Bali’s operating losses were approximately ($484,000) for the year ended December 31, 2015. As of December 31, 2015, the capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.0 million. If we are not able to significantly increase the revenues generated by this plant in the future, we will be required to record an impairment charge to reduce the carrying value of CW-Bali’s plant assets to their fair value. Such an impairment charge could have a material adverse impact on our results of operations.

We do not have voting control over our affiliate, OC-BVI. Should our interests and the interests of OC-BVI’s other voting shareholder diverge, the operations of OC-BVI could be adversely affected which could decrease the value of our investment in OC-BVI.

We own 43.53% of the equity and 50% of the voting shares of OC-BVI. We and Sage, which owns the remaining 50% of the voting shares, are each entitled to appoint three of the six directors of OC-BVI. If a tie vote of the directors occurs on any matter, the president of the Caribbean Water and Wastewater Association, a regional trade association comprised primarily of government representatives, is entitled to appoint a temporary director to cast the deciding vote. As a result, although we provide operating management and engineering services to OC-BVI, we share the overall management of OC-BVI with Sage and do not fully control its operations. A divergence of our interests and the interests of Sage could adversely affect the operations of OC-BVI and in turn decrease the value of our investment in OC-BVI, in which case we could be required to record an impairment charge to reduce the carrying value of our investment in OC-BVI. Such an impairment charge would reduce our earnings and could have a material adverse impact on our result of operations and financial condition.

 

The profitability of our plants is dependent upon our ability to accurately estimate the costs of their construction and operation.

 

The cost estimates we prepare in connection with the construction and operation of our plants are subject to inherent uncertainties. Additionally, the terms of our supply contracts may require us to guarantee the price of water on a per unit basis, subject to certain annual inflation and monthly energy cost adjustments, and to assume the risk that the costs associated with producing this water may be greater than anticipated. Because we base our contracted price of water in part on our estimation of future construction and operating costs, the profitability of our plants is dependent on our ability to estimate these costs accurately. The cost of materials and services and the cost of the delivery of such services may increase significantly after we submit our bid for a plant, which could cause the gross profit and net return on investment for a plant to be less than we anticipated when the bid was made. The profit margins we initially expect to generate from a plant could be further reduced if future operating costs for that plant exceed our estimates of such costs. These future operating costs could be affected by a variety of factors, including lower than anticipated production efficiencies and hydrologicalgeo-hydrological conditions at the plant site that differ materially from those we believe would exist at the time we submitted our bid. Any construction and operating costs for our plants that significantly exceed our initial estimates could adversely affectimpact our results of operations, financial condition and cash flows.

 

A significant portion of our consolidated revenues are derived from two customers. Aour water supply agreements with the WSC. The loss of, or a less favorable relationship with, either of these customersthe WSC could adversely affect us.

 

Our top twoOne bulk water customers,customer, the WAC and the Water and Sewerage Corporation of The Bahamas,WSC, accounted for approximately 15% and 36%, respectively,35% of our consolidated revenues for the year ended December 31, 2015.2018. If, either of these customers terminate for cause or decide not to renew their contracts with us, or renew such contracts on terms that are less favorable to us, or become unable for financial or other reasons, tothe WSC does not comply with the terms of our contracts with them,water supply agreements our results of operations, cash flows and financial condition could be adversely affected.


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Possible future regulatory oversight and control could adversely impact our Belize operations.

 

By Statutory Instrument No. 81 of 2009, the Minister of Public Utilities of the government of Belize published an order, the Public Utility Provider Class Declaration Order, 2009 (the “Order”), which as of May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this designation, the Public Utilities Commission of Belize (the “PUC”) has the authority to set the rates charged by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued the San Pedro Public Water Supply Quality and Security Complaint Order (the “Second Order”) which among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act, (ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval, (iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum number of replacement seawater RO membranes in stock at all times and (v) CW-Belize take possession of and reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010. CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay the enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter. The initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on November 29, 2012. The ruling on this case is pending. An unfavorable ruling on the Order or the Second Order could have an adverse impact on our results of operations, cash flows or financial condition.

  

Our operations are affected by tourism and are subject to seasonal fluctuations that could affect the demand for our water.

 

Our operations are affected by the levels of tourism and are subject to seasonal variations in our service areas. Demand for our water in the Cayman Islands Belize, Bimini and The Bahamas is affected by variations in the level of tourism and local weather, primarily rainfall. Tourism in our service areas is affected by the economies of the tourists’ home countries, primarily the United States and Europe, terrorist activity and perceived threats thereof, and increased costs of fuel and airfares. We normally sell more water during the first and second quarters, when the number of tourists is greater and local rainfall is less, than in the third and fourth quarters. A downturn in tourism or greater than expected rainfall in the locations we serve could adversely affectimpact our revenues, cash flows and results of operations.operations and cash flows.

 

We may have difficulty accomplishing our growth strategy within and outside of our current operating areas.

Our expansion both within our current operating areas and into new areas involves significant risks, including, but not limited to, the following:

 

·regulatory risks, including government relations difficulties, local regulations, currency controls and fluctuations in currency exchange rates;
·receiving and maintaining necessary permits, licenses and approvals;
·political instability, reliance on local economies, environmental problems, shortages of materials, immigration restrictions and limited skilled labor;
·risks related to development of new operations, including inaccurate assessment of the demand for water, engineering difficulties and inability to begin operations as scheduled; and
·risks relating to greater competition in these new territories, including the ability of our competitors to gain or retain market share by reducing prices.

 

Even if we successfully expand our operations, we may have difficulty managing our growth. We cannot assure you that any new operations within or outside of our current operating areas will attain or maintain profitability or that the results from these new operations will not adversely impact our results of operations, cash flows and financial condition.

 

Performance shortfalls under any of our bulk supply contracts could result in penalties or cancellation of the contract.

 

Our bulk water supply contractsagreements require us to meet specified minimum quality, quantity or energy consumption guarantees. Membrane fouling or other technical problems could occur at any of our plants, and if we are unable to meet the guarantees due to such operating issues, we could be in technical default of the supply contract and subject to various adverse consequences, including financial penalties or cancellation of the contract.agreement.

 

Our operations could be harmed by hurricanes or tropical storms.

 

A hurricane or tropical storm could cause major damage to our equipment and properties and the properties of our customers, including the large tourist properties in our areas of operation. For example, in September 2004 Hurricane Ivan caused significant damage to our plants and our customers’ properties in Grand Cayman which adversely affected our revenues. Any future damage could cause us to lose use of our equipment and properties and incur additional repair costs. Damage to our customers’ properties and the adverse impact on tourism could result in a decrease in water demand. A hurricane or tropical storm could also disrupt the delivery of equipment and supplies, including electricity, necessary to our operations. These and other possible effects of hurricanes or tropical storms could have an adverse impact on our results of operations, cash flows and financial condition.


Contamination of our processed water may cause disruption in our services and adversely affect our revenues.

 

Our processed water may become contaminated by natural occurrences and by inadvertent or intentional human interference, including acts of terrorism. In the event thatIf a portion of our processed water isbecomes contaminated, we may have to interrupt the supply of water until we are able to install treatment equipment or substitute the flow of water from an uncontaminated water production source. In addition, we may incur significant costs in order to treat a contaminated source of plant feed water through expansion of our current treatment facilities, or development of new treatment methods. An inability by us to substitute processed water from an uncontaminated water source or to adequately treat the contaminated plant feed water in a cost-effective manner may have an adverse effect on our results of operations, cash flows and financial condition.

 

Potential government decisions, actions and regulations could negatively affect our operations.

 

We are subject to the local regulations of the Cayman Islands, Belize, the British Virgin Islands, and The Bahamas and Indonesia, all of which are subject to change. Any government that regulates our operations may issue legislation or adopt new regulations, including but not limited to:

 

·restricting foreign ownership (by us);
·providing for the expropriation of our assets by the government;

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·providing for nationalization of public utilities by the government;
·providing for different water quality standards;
·unilaterally changing or renegotiating our licenses and agreements;
·restricting the transfer of U.S. currency; or
·causing currency exchange fluctuations/devaluations or making changes in tax laws.

 

As new laws and regulations are issued, we may be required to modify our operations and business strategy, which we may be unable to do in a cost-effective manner. Failure by us to comply with applicable regulations could result in the loss of our licenses or authorizations to operate, the assessment of penalties or fines, or otherwise may have a material adverse effect on our results of operations.

 

The rates we charge our retail customers in the Cayman Islands are subject to regulation. If we are unable to obtain government approval of our requests for rate increases, or if approved rate increases are untimely or inadequate to cover our projected expenses, our results of operations may be adversely affected.

Under our exclusive retail license in the Cayman Islands, with the exception of annual inflation-related and monthly energy-related adjustments, we cannot increase the base rates we charge our retail customers without prior approval from the Cayman Islands government. However, the expenses we incur in supplying water under this license may increase due to circumstances that were unforeseen at the time we entered into the license. We may incur additional costs in attempting to obtain government approval of any rate increase, which may be granted on a delayed basis, if at all. Failure to obtain timely and adequate rate increases could have an adverse effect on our results of operations, cash flows and financial condition.

We rely on the efforts of key employees. Our failure to retain these employees could adversely affect our results of operations.

 

Our success depends upon the abilities of our executive officers. In particular, the loss of the services of Frederick W. McTaggart, our President and Chief Executive Officer, could be detrimental to our operations and our continued success. Mr. McTaggart has an employment agreement expiring on December 31, 2018.2021. Each year, the term of this agreement may be extended for an additional year. However, we cannot guarantee that Mr. McTaggart will continue to work for us during the term of his agreement or will enter into any extensions thereof.

 

Our business could be adversely affected by cyber threats or other interruptions in information technology, communications networks and operations.

As part of our operations, we rely on computer systems to process transactions, communicate with our suppliers and other third parties. We rely on continued and unimpeded access to secure network connections to communicate between locations and on reliable internet connections to communicate with external parties. We have physical, technical and procedural safeguards in place that are designed to protect information and protect against security and data breaches as well as fraudulent transactions and other activities. Despite these safeguards and our other security processes and protections, we cannot be assured that all our systems and processes are free from vulnerability to evolving and increasingly sophisticated cyber-attacks, to other physical breaches or to inadvertent data disclosure by third parties or by us. A significant data security breach, including misappropriation of customer, supplier or employee confidential information, could cause us to incur significant costs, which may include potential costs of investigations, legal, forensic and consulting fees and expenses, costs and diversion of management attention required for investigation, remediation and litigation, substantial repair or replacement costs. We could also experience data losses that would impair our ability to manage our business operations, including accounting and project costs, manage our water and distribution systems or process transactions and have a negative impact on our reputation and loss of confidence of our customers, suppliers and others, any of which could have a material adverse impact on our business, financial condition and results of operations.

We are exposed to credit risk through our relationships with several customers.

 

We are subject to credit risk posed by possible defaults in payment by our bulk water customers in the Cayman Islands, Belize, the British Virgin Islands and The Bahamas andBahamas. We are also subject to credit risk posed by possible defaults in payment by our manufacturing customers in the WAC on their loans payable to us.United States. Adverse economic conditions affecting, or financial difficulties of, those parties could impair their ability to pay us or cause them to delay payment. We depend on these parties to pay us on a timely basis. Our outstanding accounts receivable are not covered by collateral or credit insurance. Any delay or default in payment could adversely affect our results of operations, cash flows, and financial condition.

 

We are exposed to the risk of variations in currency exchange rates.

 

Although we report our results in United States dollars, the majoritymost of our revenues are earned in other currencies. Although many of these currencies have been fixed to the United States dollar for more than 20 years, other currencies (e.g. the Mexico peso, Indonesian rupiah and the euro) are not. We do not employ hedging strategies against the foreign currency exchange rate risk associated with conducting business in foreign currencies while reporting in United States dollars. If any of the fixed exchange rates becomes a floating exchange rate, or the other currencies in which we conduct business depreciate significantly against the United State dollar, our results of operations, cash flows and financial condition could be adversely affected.

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We may enter new markets in the future in which we do not have a contractual commitment for our products or existing customers.

Our strategy contemplates potential entry into new markets (such as Mexico, Indonesia and other countries) where we believe a demand for potable water exists beyond the current supply of potable water in those markets. We may incur significant business development expenses in the pursuit of new markets prior to obtaining a contract for services in these markets, and such expenses could have an adverse impact on our results of operations and cash flows. We may decide to enter such markets by building new reverse osmosis desalination plants before we have obtained a contract for the sale of water produced by the new plant or before we have established a customer base for the water produced by the new plant. If after completing such plant we are unable to obtain a contract or sufficient number of customers for the plant, we may be unable to recover the cost of our investment in the plant, which could have a material adverse effect on our results of operations, cash flows and financial condition.

 

We may not pay dividends in the future. If dividends are paid, they may be in lesser amounts than past dividends.

 

Our shareholders may receive dividends out of legally available funds if, and when, they are declared by our Board of Directors. We have paid dividends in the past but may cease to do so at any time. We may incur increased operating or development expenses or capital requirements or additional indebtedness in the future that may restrict our ability to declare and pay dividends. We may also be restricted from paying dividends in the future due to restrictions imposed by applicable corporate laws, our results of operations, cash flows and financial condition, covenants contained in our financing agreements, and other factors considered by our Board of Directors. We may not continue to pay dividends in the future or, if dividends are paid, they may not be in amounts similarcomparable to past dividends.

 

Service of process and enforcement of legal proceedings commenced against us in the United States may be difficult to obtain.

 

We are incorporated under the laws of the Cayman Islands and substantially all of our assets are located outside of the United States. In addition, 10eight of our 16 directors and executive officers reside outside the United States. As a result, it may be difficult for investors to affectexecute service of process within the United States upon us and such other persons, or to enforce judgments obtained against such persons in United States courts, and bring any action, including actions predicated upon the civil liability provisions of the United States securities laws. In addition, it may be difficult for investors to enforce, in original actions brought in courts or jurisdictions located outside of the United States, rights predicated upon the United States securities laws.

 

Based on the advice of our Cayman Islands legal counsel, we believe there is no reciprocal statutory enforcement of foreign judgments exists between the United States and the Cayman Islands, and that foreign judgments originating from the United States are not directly enforceable in the Cayman Islands. A prevailing party in a United States proceeding against us or our officers or directors would have to initiate a new proceeding in the Cayman Islands using the United States judgment as evidence of the party’s claim. A prevailing party could rely on the summary judgment procedures available in the Cayman Islands, subject to available defenses in the Cayman Islands courts, including, but not limited to, the lack of competent jurisdiction in the United States courts, lack of due service of process in the United States proceeding and the possibility that enforcement or recognition of the United States judgment would be contrary to the public policy of the Cayman Islands.

 

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Depending on the nature of damages awarded, civil liabilities under the Securities Act of 1933, as amended (or the Securities Act), or the Securities Exchange Act of 1934, as amended (or the Exchange Act), for original actions instituted outside the Cayman Islands may or may not be enforceable. For example, a United States judgment awarding remedies unobtainable in any legal action in the courts of the Cayman Islands, such as treble damages, would likely not be enforceable under any circumstances.

 

The relatively low trading volume of our stock may adversely impact the ability to sell our shares.

 

DuringFor the year ended December 31, 2015,2018, the average daily trading volume of our common shares was approximately 96,00041,000 shares, a much lower trading volume than that of many other companies listed on the NASDAQ Global Select Market. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the market of willing buyers and sellers of our common shares at any given time. This presence in turn depends on the individual decisions of investors and general economic and market conditions over which we have no control. As a consequence ofDue to the limited volume of trading in our common shares, an investor in our stock may have difficulty selling a large numberlarger volumes of our common shares in the manner, or at the price, that might be attainable if our common shares were more actively traded.

 

We are subject to anti-takeover measures thatThe election process for our Board of Directors may discourage, delay or prevent a change of control of our Company.

 

Classified Board of Directors. We have a classified Board of Directors that consists of three groups. Only one group of directors is elected each year. OurThe classified nature of our Board may increase the length of time necessary for an acquirer to change the composition of a majority of directorsour Board in order to gain control of our Board.


Option Deed. We are party to an Option Deed that is intended to improve the bargaining position of our Board of Directors in the event of an unsolicited offer to acquire our outstanding stock. Under the terms of the Option Deed, a stock purchase right is attached to each of our current or future outstanding common shares and redeemable preferred shares issued prior to the time the purchase rights become exercisable, are redeemed or expire. The purchase rights will become exercisable only if an individual or group has acquired, or obtained the right to acquire, or announced a tender or exchange offer that if consummated would result in such individual or group acquiring, beneficial ownership of 20% or more of our outstanding common shares. Upon the occurrence of a triggering event, the rights will entitle every holder of our shares, other than the acquirer, to purchase our shares or shares of our successor on terms that would likely be economically dilutive to the acquirer. Under certain circumstances, instead of common shares, our Board of Directors may issue cash or debt securities. Our Board of Directors, however, has the power to amend the Option Deed so that it does not apply to a particular acquisition proposal or to redeem the rights for a nominal value before they become exercisable. These features will likely encourage an acquirer to negotiate with our Board of Directors before commencing a tender offer or to condition a tender offer on our Board of Directors taking action to prevent the purchase rights from becoming exercisable. The Option Deed does not expire until July 2017, and such expiration date may be extended by our Board.Company.

 

As a result of these anti-takeover measures, we could deter efforts to make changes to, or exercise control over, current management. In addition, our shareholders may not have an opportunity to sell their common shares to a potential acquirer at the acquirer’s offering price, which is typically at a premium to market price.

ITEM 1B. UNRESOLVED STAFF COMMENTS

ITEM 1B.UNRESOLVED STAFF COMMENTS

 

None.

ITEM 2. PROPERTIES

ITEM 2.PROPERTIES

 

Cayman IslandIslands Properties

 

Abel Castillo Water Works

 

Our wholly owned subsidiary, Cayman Water, presently owns and operates our Abel Castillo Water Works (“ACWW”)ACWW site, which encompasses 12,812 square feet of buildings, (containing two seawater reverse osmosis water treatment plants),desalination plants with an aggregate capacity of 3.0 million gallons per day, a high service distribution pump house, warehouse space and three 1.0 million gallon potable water storage tanks.tanks each with a capacity of 1.0 million gallons and one potable water storage tank with a capacity of 2.0 million gallons. The site is located on 3.24.2 acres, including 485 feet of waterfront. The current water production capacity of this site is 2.2 million gallons per day by two separate water plants with rated production capacities of 1.2 million and 1.0 million gallons per day, respectively.

We own an approximately one acre property adjacent to our ACWW plant which we purchased in 2007 to provide space for future additional water production and storage facilities.

 

West Bay Plant

 

We own, operate and maintain our West Bay plant in Grand Cayman, which is located on 6.1 acres in West Bay. The plant began operating in 1995, was expanded over the years, and now has a production capacity of 910,000approximately 885,000 gallons per day. On this site we have a 2,600 square foot building which houses our water production facilities, a 2,400 square foot building which houses the potable water distribution pumps, a water quality testing laboratory, and office space and water storage capacity consisting of three potable water tanks each with a capacity of 1.0 million gallon potable water tanks.gallons.

 

Britannia Plant

 

We own the Britannia seawater reverse osmosis desalination plant in Grand Cayman, which consists of a seawater reverse osmosis production plant with a capacity of 715,000 gallons of water per day, an 840,000 gallona potable water storage tank with a capacity of 840,000 gallons, potable water high service pumps, and various ancillary equipment to support the operation.equipment. We have entered into a leaseleased the site (comprised of the 0.73 acre siteacres) and steel frame building which houses the plant for a term that ends in 2027 at an annual rent of $1.00.

 

Distribution System

 

We own our Seven Mile Beach and West Bay potable water distribution systems in Grand Cayman. The combined systemsCayman which consist of potable water pipes, valves, curb stops, meter boxes, and water meters. We have the legal right to maintain (and expand or contract as necessary) these systems on public and private land within our licensed service area.

 

Corporate Office

 

We occupy approximately 5,500 square feet of office space at the Regatta Office Park, West Bay Road, Grand Cayman, Cayman Islands under a lease that expires April 30, 2019.

 

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North Sound Plant

Under the terms of the water production and supply agreement with the WAC that expires in January 2024, OC-Cayman operates and maintains the electrically powered North Sound plant, which is owned by the WAC, and supplies approximately 1.6 million gallons of water per day to the WAC.

Red Gate Plant

 

Under the terms of the water production and supply licenseagreement with the WAC that expires in July 2017 betweenJanuary 2024, OC-Cayman operates and maintains the government of the Cayman Islands, OC-Cayman is allowed to use the property and the plant for theelectrically powered Red Gate plant, to producewhich is owned by the WAC, and supplies approximately 1.3 million gallons of desalinated water per day for sale to the Water Authority-Cayman (“WAC”).


North Sound Plant

Construction of this plant was completed in November 2002. OC-Cayman provided the plant and equipment to the WAC under a seven-year vendor-financed sale and operating agreement. The agreement provided for the expansion of the plant at the WAC’s request during the term of the agreement. In January 2007, the WAC requested that OC-Cayman expand the plant from a rated capacity of approximately 800,000 gallons per day to 1.6 million gallons per day and extended the term of the contract for a further seven years from the completion date of the expansion, April 1, 2007. On April 17, 2014, the WAC extended the term of the agreement a further 12 months and on July 15, 2015, the WAC further extended the agreement by two years from April 1, 2015 and contracted with OC-Cayman to provide major capital improvements to the plant. OC-Cayman operates the electrically powered plant and supplies approximately 1.6 million gallons of desalinated water per day to the WAC.

North Side Water Works Plant

Under the terms of the water production and supply agreement with the WAC that expires in June 2019. OC-Cayman operates and maintains this electrically powered plant owned by the WAC. This plant can supply up to approximately 2.4 million gallons of water per day. OC-Cayman leases the property on which the plant is located from the WAC for a minimal annual rent for the duration of the saleagreement. Pursuant to a public bidding process, in February 2019 we submitted our bid to operate and operating agreement. The salemaintain this plant for a period of seven years after the current contract expires and operating agreement and property lease expires in April 2017. Responsibility for operationare awaiting the results of the plant passes tobidding process and the WAC upon expirationdecision of the sale and operating agreement.

North Side Water Works Plant

OC-Cayman operates this electrically powered plant, which can supply up to approximately 2.4 million gallons of desalinated water per day under a vendor-financed sale and operating agreement with the WAC. OC-Cayman leases the property on which the plant is located from the WAC for a minimal annual rent for the duration of the sale and operating agreement. Responsibility for operation of the plant passes to the WAC upon expiration of the sale and operating agreement in June 2019.

 

Bahamas Properties

 

Bimini plant

 

We own theOur water production facility in South Bimini. The facilityBimini consists of a 250,000 gallon bolted steel potable water tank with a capacity of 250,000 gallons and two 40 foot long standard shipping containers which contain a seawater reverse osmosis production plant with a rated capacity of 115,000 gallons per day, a high service pump skid and an office. The facility is located on a parcel of land owned by South Bimini International Ltd., and we are allowed, under the terms of our agreement which expires in December 2020, to utilize the land for the term of the agreement without charge.

 

Windsor plant

 

We own theOur Windsor water production facility, located in Nassau, New Providence, withhas a production capacity of 3.12.8 million gallons per day. The plant is powered by a combination of diesel engine-driven high-pressure pumps and electrical power purchased from the Bahamas Electricity CorporationPower and Light to power all other loads in the plant. The plant is contained within a 13,00012,000 sq. ft. concrete and steel building, that also containsand a warehouse, workshop and offices. It isoffices contained within a 2,600 sq. ft. concrete building. The buildings are located on land owned by the WaterWSC and Sewerage Corporation of The Bahamas and our 15-year water sales agreement gives us a license to use the land throughout the term of that agreement. This water supply agreement was scheduled to expireexpires in July 2013 when we delivered the total amount of water required under the agreement, but has since been extended on a month-to-month basis.

At the conclusion of the agreement, the WSC has the option to (i) extend the agreement for an additional five years at a rate to be negotiated; (ii) exercise a right of first refusal to purchase any materials, equipment and facilities that CW-Bahamas intends to remove from the site at a purchase price to be negotiated; or (iii) require CW-Bahamas to remove all materials, equipment and facilities from the site. At the request of the government of The Bahamas, we continue to maintain and operate the Windsor plant to provide the government of The Bahamas with additional time to decide whether or not it will extend CW-Bahamas’ water supply agreement for the Windsor plant on a long term basis.2033.

 

Blue Hills plant

 

In July 2006, we substantially completed construction of a second water production facilityOur Blue Hills plant in Nassau, New Providence: the Blue Hills plant. With an initialProvidence consists of two production facilities. The first facility was completed in July 2006, has a production capacity of 7.2 million gallons per day, this plant is the largest desalination plant we have built or operated to date. The plantand is powered by a combination of diesel engine-driven high-pressure pumps, and electrical power purchased from the Bahamas Electricity CorporationPower and Light to power all other loads in the plant. The plant is contained within a 16,000 sq. ft. concrete and steel building with a footprint of 16,000 square feet that also contains a warehouse, workshop and offices. It is located on land owned by the Water and Sewerage Corporation of The BahamasWSC and our 20-year water sales agreement gives us a license to use the land throughout the term of that agreement.

 

The Blue Hills plant water supply agreement was amended in January 2011 and extended through 2032. Pursuant to this amendment, we added a second production facility to increase the total production capacity of the Blue Hills plant to 12.0 million gallons per day. The plant expansionsecond facility was substantially completed in March of 2012 and is powered by a combination of diesel engine-driven high-pressure pumps and electrical power purchased from the Bahamas Electricity CorporationPower and Light to power all other loads in the plant. The plant expansionsecond facility is contained inwithin a 10,640 sq. ft. steel building with a footprint of 10,640 square feet located adjacent to the initial production facility on land owned by the WSC.


Belize Properties

We own our San Pedro water production facility in Ambergris Caye, Belize. The plant consists of a one story concrete block building, which contains a seawater reverse osmosis water production plant with a production capacity of 600,000 gallons per day and a 1.0 million gallon potable water storage tank. We lease the land on which our plant is located from the Government of Belize at an annual rent of BZE$1.00. This lease expires in April 2026.

Indonesia Property

We own a water production facility located in the Nusa Dua region of Bali, Indonesia consisting of a plant with a production capacity of 790,000 gallons per day and a 528,000 gallon potable water storage tank. The land on which this plant and storage tank is located is leased through October 8, 2032.

 

U.S. Properties

 

Aerex owns its 30,000 square foot manufacturing facility located in Fort Pierce, Florida and has approximately 6,000 square feet of office space in downtown Fort Pierce under a lease that expires in June 2021.

Our Aquilex warehouse consists of 4,100 square feet located in Sunrise, Florida that has been leased through September 2020. Our Aquilex office consists of 6,500 square feet located in Coral Springs, Florida that has been leased through March 2021. Our U.S. warehouse consists of 4,100 square feet located in Sunrise, Florida that has been leased through September 2020.

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Mexico Properties

 

NSC owns 20.1 hectares of land on which its proposed plant would be constructed in Rosarito Beach, Baja California, Mexico.Mexico which is designated for use as the plant site for the proposed desalination project to be completed by AdR.

 

In November 2012, NSC entered into a lease with an effective term of 20-years from the date of full operation of the desalination plant, with the Comisión Federal de Electricidad for approximately 5,000 square meters of land on which it plans to construct the water intake and discharge works for the plant. The amounts due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately $20,000$15,000 per month. ThisIn December 2017, NSC assigned the lease to AdR. The lease is cancellable by AdR should NSCit ultimately not proceed with the project.

Indonesia Property

We own a water production facility located in the Nusa Dua region of Bali, Indonesia consisting of a plant with a production capacity of 264,000 gallons per day and a potable water storage tank with a capacity of 528,000 gallons. The land on which this plant and storage tank is located is leased through October 8, 2032. 


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ITEM 3.LEGAL PROCEEDINGS

ITEM 3. LEGAL PROCEEDINGS

NSC and AdR

Tecate Claim:

In May 2010, we acquired, through our wholly-owned Netherlands subsidiary, CW-Cooperatief a 50% interest in NSC, which was formed to pursue a project (the “Project”) encompassing the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system. Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50% ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (“NSA”). NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (“EWG”) and the other half of its shares in NSC to Alejandro de la Vega (the “individual shareholder”). In February 2012, we paid $300,000 to enter into an agreement (the “Option Agreement”) that provided us with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of $1.0 million along with an immediate usufruct and power of attorney to vote those shares. Such shares constituted 25% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief, we acquired 99.99% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that required us to transfer or otherwise cause the individual shareholder to acquire, for a total price of $1 (regardless of their par or market value), shares in NSC of an amount sufficient to maintain the individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement (causing the individual shareholder’s 25% ownership interest in NSC to be decreased); and (ii) we did not exercise our share purchase option by February 7, 2014. We exercised our option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.

In October 2015, we learned that EWG filed a lawsuit against the individual shareholder, NSC, NSA, CW-Cooperatief, other third parties, and the Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja California, Mexico. In this lawsuit, EWG challenged, among other things, the capital investment transactions that increased our ownership interest in NSC to 99.99%. EWG requested that the court, as a preliminary matter, among others: (a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG, which resulted in the placement of inscriptions for the lawsuit on NSC’s public records.

EWG also sought an order directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief.

On April 5, 2016, NSC filed a motion for reconsideration with the Tecate, Mexico court asking, among other things, that the court; (i) reverse its order to record the pendency of the lawsuit in the public records; (ii) cancel the appointment of the inspector; and (iii) allow NSC to provide a counter-guarantee to suspend the effects of the court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public records; and (ii) rejecting NSC’s motion for cancellation of the appointment of the inspector.

On April 26, 2016, NSC filed a full answer to EWG’s claims rejecting every claim made by EWG.

On May 17, 2016, NSC filed a claim with the Third District Court in Matters of Amparo and Federal Trials in the City of Tijuana, Baja California (the “Amparo Court”) challenging the Tecate, Mexico court ex-parte order which appointed an inspector over NSC’s commercial activities. On July 29, 2016, the Amparo Court found that such appointment is unconstitutional and reversed the Tecate, Mexico court’s appointment of an inspector.

On September 6, 2016, the Tecate, Mexico court issued a decree granting the counter-guaranty requested by NSC. Such counter-guaranty was fixed in the amount of 300,000 Mexican pesos and was given to the court on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the challenged transactions were suspended.

On May 2, 2017, the Tecate, Mexico court declared that the initial filing of this lawsuit had expired due to EWG’s lack of activity with respect to certain actions required to proceed to trial. Further, on May 25, 2017, such court declaration became definitive. EWG is entitled to refile the lawsuit, but to date has not done so.

Tijuana Claim - Amparo:

In addition to the Tecate Claim, in January 2018, EWG initiated an ordinary mercantile claim (the “Tijuana Claim”) against the individual shareholder named in the Tecate Claim, NSC and CW-Cooperatief, (with AdR being named as a third party to be called to trial) before the Tenth Civil Judge in Tijuana, Baja California for Mercantile Matters (the “Tenth Civil Judge”).

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

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In April 2018, AdR filed an amparo (i.e. a constitutional appeal) against the official writs issued by the Tenth Civil Judge to two governmental entities. In May 2018, the amparo claim was amended to also request protection against additional official writs issued by the Tenth Civil Judge to two other governmental entities and one banking institution. In May 2018, the Third District Court for Amparo and Federal Trials in the State of Baja California with residence in Tijuana granted a temporary suspension of the effects and consequences of the claimed official writs issued by the Tenth Civil Judge pending a further determination by the Third District Court. Such suspension was granted definitively in July 2018, and in August 2018, a resolution determining that the claimed official writs are unconstitutional, was issued. EWG filed a remedy against such resolution, which has not yet been resolved.

On October 16, 2018, NSC was served with the Tijuana Claim. On November 7, 2018, NSC filed a legal response to this claim, vigorously opposing the claims made by EWG. In addition to such legal response, NSC has filed (i) a request to submit the Tijuana Claim to arbitration, based on certain provisions of the by-laws of NSC, (ii) an appeal remedy against the preliminary relief, and (iii) a request for the setting of a guarantee to release the preliminary relief granted in favor of EWG. Neither the request for arbitration nor the mentioned appeal have been resolved.

On February 26, 2019, the Tenth Civil Judge acknowledged the filing of the mentioned legal response, the request to submit to arbitration, and the appeals remedy, granting EWG a period of three business days to, among others, state what it deemed convenient to its interest. However, to date, no resolution on such matters has been issued.

Further, on February 26, 2019, the Tenth Civil Judge set the requested guarantee, in the form of a security deposit in the amount of Mex. Cy. $1,000,000.00 (One million Mexican pesos), to release the preliminary relief sought by EWG. On March 4, 2019, NSC filed before the Tenth Civil Judge, evidence of such security deposit, requesting the release of the mentioned preliminary relief. Due to the recent filing of the security deposit, as of the date hereof, the resolution on the release of the preliminary relief is pending.

CW-Cooperatief has not been officially served with the Tijuana Claim, and AdR has not been notified that it has to appear for such trial. In any event, AdR is only named a third party called to trial, and no claims are made by EWG directly to AdR.

We cannot presently determine what impact the resolution of the Tijuana Claim may ultimately have on our ability to complete the Project.

 

CW-Bali

In October 2017, CW-Bali’s sole remaining customer filed a lawsuit in the district court of Denpasar, Bali, Indonesia against CW-Bali, CW-Bali’s President, and our Chief Financial Officer in his capacity as the President of CW-Bali’s Board of Commissioners (i.e. Directors) seeking compensatory damages of 57.1 billion rupiahs and punitive damages of 26 billion rupiahs as a result of the anticipated breach of this customer’s water supply agreement that will arise from CW-Bali’s planned cessation of operations. In April 2018, the Denpasar court ruled that it had no authority to adjudicate the case due to a clause in the water supply agreement that requires all disputes to be handled through arbitration in Singapore. However, the customer immediately filed an appeal with respect to the Denpasar court ruling. In October 2018, the Denpasar appeals court issued its ruling which upheld the previous court’s ruling, thereby denying the customer’s appeal.

CW-Belize

 

By Statutory Instrument No. 81 of 2009, the Minister of Public Utilities of the government of Belize published an order, the Public Utility Provider Class Declaration Order, 2009 (the “Order”), which as of May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this designation, the Public Utilities Commission of Belize (the “PUC”) has the authority to set the rates charged by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued the San Pedro Public Water Supply Quality and Security Complaint Order (the “Second Order”) which among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act, (ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval, (iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum number of replacement seawater RO membranes in stock at all times and (v) CW-Belize take possession of and reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010. CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay the enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter. The initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on November 29, 2012. The

On December 8, 2017, we received a favorable ruling on this case is pending. We are presently unable to determine what impactfrom the Supreme Court of Belize stating that (i) the claims by the PUC in the Order and the Second Order will havewere unlawful, null and void and of no effect; and (ii) the PUC is prohibited from taking any steps or proceedings or making any further Order in respect of the said Order. However, on ourFebruary 20, 2018, the PUC filed an appeal with the Belize Court of Appeal, the results of operations, financial position or cash flows.

N.S.C. Agua, S.A. de C.V.

In May 2010, we acquired, through our wholly-owned Netherlands subsidiary, Consolidated Water Cooperatief, U.A., (“CW-Cooperatief”) a 50% interest in N.S.C. Agua, S.A. de C.V. (“NSC”), a development stage Mexican company. We have since purchased, through the conversion of a loan we made to NSC, sufficient shares to raise our ownership interest in NSC to 99.9%. NSC was formed to pursue a project encompassing the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and an accompanying pipeline to deliver water to the Mexican potable water system (the “Project”).which are pending.

 

NSC LitigationIn February 2019, we sold 100% of our equity ownership in CW-Belize to Belize Water Services, Ltd.

 

Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50% ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (“NSA”). NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC and the other half of its shares in NSC to Alejandro de la Vega (the “individual shareholder”). In February 2012, we paid $300,000 to enter into an agreement (the “Option Agreement”) that provided us with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder, along with an immediate power of attorney to vote those shares, for $1.0 million. Such shares constituted 25% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief, we acquired 99.9% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that required us to issue new shares in NSC of an amount sufficient to maintain the individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement and (ii) we did not exercise our share purchase option by February 7, 2014. We exercised our option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.

In October 2015, we learned that EWG has filed a lawsuit against the individual shareholder, NSC, NSA, CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo Ahumada Arruit, Luis de Angitia Becerra, and the Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja California, Mexico. However, as of the date of the filing of this report, neither NSC nor CW-Cooperatief has been served with formal process for this lawsuit.

In this lawsuit, EWG is challenging the capital investment transactions that increased our ownership interest in NSC to 99.9%. EWG requested that the court, as a preliminary matter: (a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG.

Additionally, EWG is also seeking an order directing: (i) NSA, NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief. The court has not yet ruled on these requests.

We believe that the claims made by EWG are baseless and without merit, and we will vigorously defend NSC and CW-Cooperatief in this litigation, and will seek dismissal of the orders entered by the court and all claims against NSC and CW-Cooperatief. Furthermore, on November 19, 2015, NSC and CW-Cooperatief filed a complaint in the United States District Court, Southern District of New York against EWG and its Managing Partner, based upon our conclusion that lawsuit filed by EWG in Mexico directly breaches a contract dated April 12, 2012 between NSC and CW-Cooperatief, and EWG. We are vigorously pursuing our claims and seeking relief pursuant to this complaint.


We cannot presently determine the outcome of this litigation. However, such litigation could adversely impact our efforts to complete the Project.

Mexico tax authority

The Mexico tax authority, the Servicio de Administracion Tributaria (“SAT”), assessed NSC for taxes relating to payments to foreign vendors on which the SAT contended should have been subject to income tax withholdings during NSC’s 2011 tax year. As of December 31, 2015, the assessment and related penalties, surcharges, inflation adjustments and late fees totaled 7,367,875 Mexican pesos. Such assessment was equivalent to approximately $428,203 as of December 31, 2015 based upon the exchange rate between the US$ and the Mexican peso as of that date.

NSC retained the assistance of Mexican tax advisers in this matter, as it believed the assumptions and related work performed by the SAT did not support their tax assessment. As a result, NSC elected to contest this assessment in Mexico federal tax court. NSC was required to provide an irrevocable letter of credit which amounted to 7,367,875 Mexican pesos as of December 31, 2015 as collateral in connection with this tax case. The restricted cash balance of $428,203 included in the accompanying consolidated balance sheet as of December 31, 2015 represents cash on deposit with a bank to secure payment of this irrevocable letter of credit.

In November 2014, NSC received a favorable judgment from the tax court. Based on this outcome, the SAT filed an appeal shortly thereafter to contest the judgment. On February 15, 2016, NSC received a favorable judgment from the appellate tax court.

ITEM 4. MINE SAFETY DISCLOSURE

ITEM 4.MINE SAFETY DISCLOSURE

 

Not applicable.


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PART II

 

ITEM 5 .5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Market Information

 

Our Class A common stock is listed on the NASDAQ Global Select Market and trades under the symbol “CWCO.” Listed below, for each quarter of the last two fiscal years, are the high and low closing prices for our Class A common stock on the NASDAQ Global Select Market.“CWCO”.

  High  Low 
First Quarter 2015 $11.49  $9.78 
Second Quarter 2015  13.12   10.59 
Third Quarter 2015  13.50   9.97 
Fourth Quarter 2015  13.12   10.37 
         
First Quarter 2014 $14.47  $11.28 
Second Quarter 2014  13.02   10.05 
Third Quarter 2014  12.81   10.23 
Fourth Quarter 2014  12.76   9.33 

 

No trading market exists for our redeemable preferred shares, which are only issued to, or purchased by, long-term employees of our company and must be held by these employees for a period of four years before they vest.

 

On December 17, 2015,January 2, 2018, March 28, 2018 and January 2, 2019, we issued 10,514a total of 26,958 shares, 13,028 shares and 26,864 shares of common stock, respectively, to executive officers under the 2008 Equity Incentive Plan. On December 10, 2018, we issued a total of 18,242 shares of common stock to our directors under the Non-Executive Directors’ Share Plan in consideration for their service on our Board of Directors and the committees thereof. See “ITEM 11. EXECUTIVE COMPENSATION.”

We are a party to an Option Deed dated August 6, 1997, and amended on August 8, 2005, September 27, 2005 and May 30, 2007 (as amended, the “Option Deed”), designed to deter coercive takeover tactics. Pursuant to the Option Deed, we granted to the holders of our common shares and redeemable preferred shares options (the “Options”) to purchase one one-hundredth of a share of our Class 'B' common shares at an exercise price of $100.00 per one one-hundredth of a Class 'B' common share, subject to adjustment. The Options are attached to and trade with our common shares and redeemable preferred shares, and no separate certificates representing the Options have been distributed. The Options will separate from our common shares and redeemable preferred shares, and certificates representing the Options will be issued, upon the earlier of the date (such date, the “Distribution Date”) that is (i) ten business days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of our outstanding common shares, or (ii) ten business days following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person.

The Options are not exercisable until the Distribution Date and will expire at the close of business on July 31, 2017, unless that date is extended or the Options are earlier redeemed by us. Additionally, following the Distribution Date, all Options that are, or in certain circumstances were, beneficially owned by any Acquiring Person will be null and void.

For a period of ten business days following the date that any person, alone or jointly with its affiliates and associates, becomes an Acquiring Person, we will have the right to redeem the Options at a price of CI$0.01 per Option. If the Options are not redeemed, then following such ten business day period each holder of an Option will have the right to receive on exercise, in lieu of one one-hundredth of a Class 'B' common share, common shares (or, in certain circumstances, cash, property or other securities) having a value equal to two times the exercise price of the Option. For example, at an exercise price of $100.00 per Option, each Option not owned by an Acquiring Person (or by certain related parties) following any person, alone or jointly with its affiliates and associates, becoming an Acquiring Person would entitle its holder to purchase $200.00 worth of common shares for $100.00. Assuming that the common shares had a per share value of $20.00 at such time, the holder of each valid Option would be entitled to purchase 10 common shares for $100.00.

Any of the provisions of the Option Deed may be amended by our Board of Directors prior to the Distribution Date. After the Distribution Date, the provisions of the Option Deed may be amended by the Board of Directors in order to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Options (excluding the interests of any Acquiring Person), or to shorten or lengthen any time period under the Option Deed.

 

Currently 2,023,850 Bahamian Depository Receipts (“BDRs”) that constitute ownership of 404,770 shares of our common stock are listed and traded on the Bahamian International Stock Exchange. Our common shares that underlie these BDRs are held in a custodial account in The Bahamas. The BDRs are entitled to dividend payments, if and when declared on our common shares in proportion to theirthe BDRs’ relative value to our common shares.


Holders

 

OnAs of March 8, 2016,2019, we had 798770 holders of record of our common stock.

 

Dividends

 

Our Board of Directors declares and approves any and all dividends.

 

We have paid dividends to owners of our common shares and redeemable preferred shares since we began declaring dividends in 1985. However, the payment of any future cash dividends will depend upon our earnings, financial condition, cash flows, capital requirements and other factors our Board of Directors deems relevant in determining the amount and timing of such dividends.

 

Listed below, for each quarter of the last two fiscal years, isare the amount ofper share dividends declared on our issued and outstanding shares of common shares and redeemable preferred shares.

 

 2015  2014  2018  2017 
First Quarter $0.075  $0.075  $0.085  $0.075 
Second Quarter  0.075   0.075   0.085   0.075 
Third Quarter  0.075   0.075   0.085   0.075 
Fourth Quarter  0.075   0.075   0.085   0.085 
 $0.34  $0.31 

 

Exchange Controls and Other Limitations Affecting Security Holders

 

Our Company is not subject to any governmental laws, decrees or regulations in the Cayman Islands which restrict the export or import of capital, or that affect the remittance of dividends, interest or other payments to non-resident holders of our securities. The Cayman Islands does not impose any limitations on the right of non-resident owners to hold or vote our common stock. There are no exchange control restrictions in the Cayman Islands.

 

Taxation

 

The Cayman Islands presently impose no taxes on profit, income, distribution, capital gains, or appreciations of our Company and no taxes are currently imposed in the Cayman Islands on profit, income, capital gains, or appreciations of the holders of our securities or in the naturefor of estate duty, inheritance, or capital transfer tax.taxes. The United States and the Cayman Islands do not have an income tax treaty.

 

The information required by Item 201(d) of Regulation S-K is provided under ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS of this Annual Report.


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ITEM 6.SELECTED FINANCIAL DATA

 

The table below contains selected financial data, derived from our audited consolidated financial statements for each of the years in the five-year period ended December 31, 2015. Our consolidated financial statements are prepared in accordance with the accounting principles generally accepted in the United States of America (“US-GAAP”). As a result, all financial information presented herein has been prepared in accordance with US-GAAP. This selected financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with our consolidated financial statements and related notes thereto contained elsewhere in this Annual Report.Not applicable.

 

  Year Ended December 31, 
  2015  2014  2013  2012  2011 
Statement of Income Data:                    
Revenues $57,116,202  $65,559,078  $63,822,131  $65,450,702  $55,154,492 
Net Income  7,518,701   6,265,358   8,594,519   9,315,514   6,113,218 
Balance Sheet Data:                    
Total Assets  161,616,698   160,459,831   165,364,854   150,449,086   160,859,431 
Long Term Debt Obligations (including current portion)  -   -   15,255,167   6,852,660   24,383,794 
Demand loan payable  7,000,000   9,000,000   -   -   - 
Redeemable Preferred Stock  23,282   22,104   22,445   18,159   13,456 
Non-controlling interests  3,154,943   2,933,496   2,599,258   1,927,214   1,556,529 
Dividends Declared Per Share $0.30  $0.30  $0.30  $0.30  $0.30 
Basic Earnings Per Share $0.51  $0.43  $0.59  $0.64  $0.42 
Weighted Average Number of Shares  14,741,748   14,697,896   14,633,884   14,578,518   14,560,259 
Diluted Earnings Per Share $0.51  $0.42  $0.58  $0.64  $0.42 
Weighted Average Number of Shares  14,827,755   14,764,323   14,703,880   14,606,148   14,596,013 

ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Overview

 

Our primary objective is to provide water services in areas where the supply of potable water is scarce and where the use of reverse osmosis technology to produce potable water is economically feasible.

 

We intend to increase revenues by developing new business opportunities both within our current service areas and in new markets. We expect to maintain operating efficiencies by continuing to properly execute our water production, energy recovery, equipment maintenance and water loss mitigation programs. We believe that many water scarce countries in the Caribbean basin and other select markets present opportunities for our business model.

 

Our water production operations and activities, and those of our affiliate OC-BVI, are presently conducted at 1412 plants in fivefour countries: the Cayman Islands, The Bahamas, Belize, the British Virgin Islands and Indonesia. The following table sets forth the comparative combined production capacity of our retail, bulk and affiliate operations as of December 31 of each year.

 

Comparative Operations
2015 2014
20182018 2017
Location Plants  Capacity(1)  Location Plants  Capacity(1)  Plants  Capacity(1)  Location Plants  Capacity(1) 
Cayman Islands  7   9.1  Cayman Islands  7   9.1   6   8.9  Cayman Islands  6   8.9 
Bahamas  3   15.2  Bahamas  3   15.2   3   14.9  Bahamas  3   15.2 
Belize(2)  1   0.6  Belize  1   0.6   1   0.6  Belize  1   0.6 
British Virgin Islands  2   0.8  British Virgin Islands  2   0.8   2   0.8  British Virgin Islands  2   0.8 
Bali, Indonesia  1   0.8  Bali, Indonesia  1   0.8   1   0.3  Bali, Indonesia  1   0.3 
  14   26.5   14   26.5   13   25.5   13   25.8 

 

(1)In millions of gallons per day.

30 

(2)In February 2019, we completed the sale (which was effective as of January 1, 2019) of CW-Belize to BWSL.

 

Cayman Islands

 

We have been operating our business on Grand Cayman since 1973 and have been using reverse osmosis technology to convert seawater to potable water since 1989. The Cayman Islands have a limited natural supply of fresh water. We currently havepreviously had an exclusive license from the Cayman Islands government to process potable water from seawater and then sell and distribute that water by pipeline to the Seven Mile Beach and West Bay areas of Grand Cayman. This license expired in January 2018 but as discussed in the following paragraph we continue to provide water under the terms of this prior license. Our Grand Cayman operations consist of fourthree company owned and three government ownedgovernment-owned seawater reverse osmosis seawater conversiondesalination plants which provide water to approximately 5,8006,300 retail residential and commercial customers within a government licensed area and bulk water sales to the Water Authority-Cayman (“WAC”), respectively. Our pipeline system in theon Grand Cayman IslandsIsland covers the Seven Mile Beach and West Bay areas of Grand Cayman and consists of approximately 90 miles of potable water pipe.

 

Our exclusive license from the Cayman Islands government was setoriginally scheduled to expire onin July 30, 2010 however, we andbut was extended several times by the Cayman Islands government have extended the license several times in order to provide sufficientthe parties with additional time to negotiate the terms of a new license.license agreement. The most recent extension of ourthe license was scheduledexpired on January 31, 2018. We continue to expire Decemberprovide water subsequent to January 31, 2015, however, we have been informed by2018 on a month-to-month “good faith” basis under the WAC that ourterms of the expired license will be extended through June 30, 2016 and that formal documentationin order to allow for the continuation of such extension is in process. In 2011, the Cayman Islands government enactednegotiations for a new water regulation laws pursuantlicense without interruption to which the WAC will issue any new retail license.an essential service. We have been informed during our retail license negotiations that the Cayman Islands government seeks to restructure the terms of our license to employin a rate of return on invested capital model, the implementation of whichmanner that could significantly reduce the operating income and cash flows we have historically generated from our retail license. Our retail license negotiations have also been impacted by the passage of new legislation and the establishment of a new water regulatory body in the Cayman Islands. See further discussion of this matter at ITEM 1A. RISK FACTORS and ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Material Commitments, Expenditures and Contingencies - Renewal of– Cayman Water Retail License.

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The Bahamas

 

CW-Bahamas produces potable water from three seawater reverse osmosis seawater conversiondesalination plants. Two of these plants, the Windsor plant and the Blue Hills plant, are located in Nassau, New Providence and have a total installed capacity of 15.114.8 million gallons per day. CW-Bahamas supplies water from these plants on a take-or-pay basis to the Water and Sewerage Corporation of The Bahamas (“WSC”) under long-term build, own and operate supply agreements. During 2015,2018, we supplied approximately 3.73.9 billion gallons (2014: 4.3(2017: 4.0 billion gallons) of water to the WSC from these plants. The Windsor water supply agreement was scheduled to expire in July 2013, but has been extended on a month-to-month basis while the Bahamas government determines whether or not to enter into a new supply contract with us. CW-Bahamas’ third plant is located in Bimini, has a capacity of 115,000 gallons per day, and provides potable water to the Bimini Sands Resort and to the Bimini Beach Hotel.Resort. We have also sold water intermittently to the WSC from our Bimini plant when their regular supply was unavailable.

 

From time to time (including presently), CW-Bahamas has experienced delays in collecting its accounts receivable. However, during 2014, the government of the Bahamas made significant incremental payments on its outstanding balances due to CW-Bahamas and since such time CW-Bahamas’ accounts receivable from the WSC, which totaled approximately $4.7 million as of December 31, 2015, have not been delinquent. Representatives of the Bahamas government have informed us that previoustheir delays in paying our accounts receivables diddid/do not reflect any type of dispute with us with respect to the amounts owed. To date, we have not been required to provide an allowance for any delinquent CW-Bahamas accounts receivable as such amounts were eventually paid in full. Based upon our experience, we believe that the present accounts receivable from the WSC are fully collectible and therefore have not provided any allowance for possible non-payment of these receivablesreceivables. Such accounts receivable balances due from The Bahamas government amounted to $17.6 million as of December 31, 2015.

Belize

CW-Belize was acquired on July 21, 2000, and consists2018, as compared to $9.1 million as of one reverse osmosis seawater conversion plant on Ambergris Caye, Belize, capable of producing 600,000 gallons per day. We sell water to one customer, Belize Water Services Limited, which then distributes the water through its own distribution system to residential, commercial and tourist properties on Ambergris Caye.

In 2009, the Minister of Public Utilities of the government of Belize published a declaratory order designating CW-Belize as a public utility provider. With this order the Public Utilities Commission of Belize (“PUC”) has the authority to regulate CW-Belize’s activities. In 2011, the PUC issued a second order that requires CW-Belize to take various actions mandated by the PUC that would be significant to its operations. Hearings on this matter have been conducted in a Belize court and the ruling on the matter is pending.December 31, 2017. See further discussion of this matter at ITEM 1A. RISK FACTORS.7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – LIQUIDITY AND CAPTIAL RESOURCES – CW Bahamas Liquidity.

 

Critical Accounting Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Our actual results could differ significantly from such estimates and assumptions.


Certain of our accounting estimates or assumptions constitute “critical accounting estimates” for us because:

 

·the nature of these estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and

·the impact of the estimates and assumptions on financial condition and results of operations is material.

 

Our critical accounting estimates relate to the valuationvaluations of our (i) equity investment in our affiliate, OC-BVI; (ii) goodwill and intangible assets; and (iii)(ii) long-lived assets.

 

Valuation of Investment in OC-BVI

We account for our investment in OC-BVI under the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity investment that is other than temporary, and indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a loss in the value of the investment.

As a quoted market price for OC-BVI’s stock is not available, to test for possible impairment of our investment in OC-BVI, we estimate its fair value through the use of the discounted cash flow method, which relies upon projections of OC-BVI’s operating results, working capital and capital expenditures. The use of this method requires us to estimate OC-BVI’s cash flows from (i) its water supply agreement with the BVI government for its Bar Bay plant (the “Bar Bay agreement”); and (ii) the pending amount awarded by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government (see further discussion of the Baughers Bay litigation at Item 8. - Notes to the Consolidated Financial Statements - Note 8).

We estimate the cash flows OC-BVI will receive from its Bar Bay agreement by (i) identifying various possible future scenarios for this agreement, which include the cancellation of the agreement after its initial seven-year term, and the exercise by the BVI government of the seven-year extension in the agreement; (ii) estimating the cash flows associated with each possible scenario; and (iii) assigning a probability to each scenario. We similarly estimate the cash flows OC-BVI will receive from the BVI government for the amount due under the ruling by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant at the date it was transferred to the BVI government by assigning probabilities to different valuation scenarios. The resulting probability-weighted sum represents the expected cash flows, and our best estimate of future cash flows, to be derived by OC-BVI from its Bar Bay agreement and the pending court award.

The identification of the possible scenarios for the Bar Bay plant agreement and the Baughers Bay plant valuation, the projections of cash flows for each scenario, and the assignment of relative probabilities to each scenario all represent significant estimates made by us. While we use our best judgment in identifying these possible scenarios, estimating the expected cash flows for these scenarios and assigning relative probabilities to each scenario, these estimates are by their nature highly subjective and are also subject to material change by our management over time based upon new information or changes in circumstances.

As of March 31, 2015, June 30, 2015, September 30, 2015, and December 31, 2015, after updating our probability-weighted estimates of OC-BVI’s future cash flows and our resulting estimate of the fair value of our investment in OC-BVI, we determined that the carrying value of our investment in OC-BVI exceeded its fair value and recorded impairment losses on this investment of $310,000, $275,000, $225,000 and $250,000 for the three months ended March 31, 2015, June 30, 2015, September 30, 2015, and December 31, 2015, respectively. The resulting carrying value of our investment in OC-BVI of approximately $4.5 million as of December 31, 2015 assumes that the BVI government will honor its obligations under the Bar Bay agreement and also assumes (on a probability-weighted basis) that (i) the BVI government will exercise its option to extend the Bar Bay agreement for seven years beyond its initial term, which expires March 4, 2017 and (ii) OC-BVI will receive the pending amount (based upon our estimate) awarded by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government.

The $4.5 million carrying value of our investment in OC-BVI as of December 31, 2015 exceeds our underlying equity in OC-BVI’s net assets by approximately $900,000. We account for this excess as goodwill. The BVI government is OC-BVI’s sole customer and substantially all of OC-BVI’s revenues are generated from its Bar Bay plant. As the Bar Bay agreement matures to its March 4, 2017 expiration date and OC-BVI receives the pending court award amount assumed due for the value of the Baughers Bay plant, OC-BVI’s expected future cash flows, and therefore its fair value computed under the discounted cash flow method, will decrease. Unless OC-BVI obtains an extension or modification of its Bar Bay agreement that results in a significant increase in the estimated future cash flows from its Bar Bay plant, we will be required to record impairment losses during 2016 to reduce the carrying value of our investment in OC-BVI to its then current fair value. These impairment losses will, in the aggregate, at least equal the underlying $900,000 in goodwill reflected in the carrying value of our investment in OC-BVI. The losses we record for our investment in OC-BVI in the future will exceed this $900,000 if OC-BVI ultimately ceases operations at its Bar Bay plant, as OC-BVI will be required to record an impairment loss to reduce the carrying value of its Bar Bay plant to its then estimated fair value. OC-BVI’s aggregate carrying value of the assets that comprise its Bar Bay plant was approximately $4.4 million as of December 31, 2015. Future impairment losses for our investment in OC-BVI and our equity in any future operating losses incurred by OC-BVI could have a material adverse impact on our results of operations.

32 

Goodwill and intangible assets

 

Goodwill represents the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. We evaluate the possible impairment of goodwill annually as part of our reporting process for the fourth quarter of each fiscal year. Management identifies our reporting units, which consist of our retail, bulk and manufacturing operations, and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. We determine the fair value of each reporting unit and compare thethese fair valuevalues to the carrying amountamounts of the reporting unit.units. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, we are required to perform the second step of the impairment test, as this is an indication that the reporting unit goodwill may be impaired. In this step, we compare 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 the years ended December 31, 20152018 and 2014,2017, we estimated the fair value of our reporting units by applying the discounted cash flow method, the subject company stock price method, the guideline public company method, and the mergers and acquisitions method.

 

The discounted cash flow method relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis. In preparing these seven-year projections for our retail unit we (i) identified possible outcomes of our on-going negotiations with the Cayman Islands government for the renewal of our retail license; (ii) estimated the cash flows associated with each possible outcome; and (iii) assigned a probability to each outcome and associated estimated cash flows. The weighted average estimated cash flows were then summed to determine the overall fair value of the retail unit under this method. The possible outcomes used for the discounted cash flow method for the retail unit included the implementation of a rate of return on invested capital model, the methodology proposed by Cayman Islands government representatives for the new retail license.

 

We also estimated the fair value of each of our reporting units for the years ended December 31, 20152018 and 20142017 through reference to the quoted market prices for our Company and guideline companies and the market multiples implied by guideline merger and acquisition transactions.

 

We weighted the fair values estimated for each of our reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit. The respective weightings we applied to each method as of December 31, 20152018 were consistent with those used as of December 31, 20142017 and were as follows:

 

 2015  2014 
Method Retail  Bulk  Retail  Bulk  Retail  Bulk  Manufacturing 
Discounted cash flow  50%  50%  50%  50%  80%  80%  80%
Subject company stock price  30%  30%  30%  30%
Guideline public company  10%  10%  10%  10%  10%  10%  10%
Mergers and acquisitions  10%  10%  10%  10%  10%  10%  10%
  100%  100%  100%  100%  100%  100%  100%

28

  

The fair values we estimated for our retail, bulk and manufacturing units exceeded their carrying amounts 79%, 62% and 53%, respectively, as of December 31, 2018. The fair values we estimated for our retail and bulk units exceeded their carrying amounts by 72%121% and 20%59%, respectively, as of December 31, 2015.2017. The fair valuescarrying amount we estimated for our retail and bulk unitsmanufacturing unit exceeded their carrying amountsits fair value by 36% and 29%, respectively,12% as of December 31, 2014.2017 and as discussed in the following paragraph, we recorded an impairment loss to reduce the carrying value of the goodwill for this segment.

 

In February 2016, we acquired 51% ownership interest in Aerex. In connection with this acquisition we recorded goodwill of $8,035,211. Aerex’s actual results of operations for the six months in 2016 following the acquisition fell significantly short of the projected results that were included in the overall cash flow projections we utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities. Due to this shortfall in Aerex’s results of operations, we tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the discounted cash flow method. As a result of this impairment testing, we determined that the carrying value of our Aerex goodwill exceeded its fair value and recorded an impairment loss of $1,750,000 for the three months ended September 30, 2016 to reduce the carrying value of this goodwill to $6,285,211. As part of our annual impairment testing of goodwill performed during the fourth quarter, in 2017 we updated our projections for Aerex’s future cash flows, determined that the carrying value of our Aerex goodwill exceeded its fair value, and recorded an impairment loss of $1,400,000 for the three months ended December 31, 2017 to further reduce the carrying value of this goodwill to $4,885,211. We also performed an analysis reconcilingmay be required to record additional impairment losses to reduce the conclusionscarrying value of valueour Aerex goodwill in future periods if we determine it likely that Aerex’s results of operations will fall short of our most recent projections of its future cash flows.

In February 2019 we sold CW-Belize. As a result of this sale, CW-Belize has been accounted for as discontinued operations in our reporting unitsconsolidated financial statements, and bulk segment goodwill of approximately $381,000 as of December 31, 2018 and 2017 associated with CW-Belize has been reclassified to long-term assets of discontinued operations in our market capitalization at October 1, 2015. This reconciliation resulted in an implied control premium for our Companyconsolidated statements of 5%.financial condition.

Long-lived assets

 

We review the carrying amounts of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measure the impairment loss based on the difference between the carrying amount and fair value.

 

Through our subsidiary, CW-Bali, we have built and presently operate a seawater reverse osmosis plant with a productive capacity of approximately 790,000264,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of Bali will eventually enable us to sell all of this plant’s production. Our currentSince its inception, we have recorded operating losses for CW-Bali as the sales volumes for thisits plant are not sufficienthave been insufficient to cover its operating costs,costs. In 2017 and 2016 we determined, based upon probability-weighted scenarios for CW-Bali’s operatingfuture undiscounted cash flows, that the carrying values of CW-Bali’s long-lived assets and our investment in CW-Bali were not recoverable. We recorded impairment losses were approximately ($484,000) for the year ended December 31, 2015. As of December 31, 2015, the capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.0 million. If we are not able to significantly increase the revenues generated by this plant$1.6 million and $2.0 million, in the future, we will be required to record an impairment charge2017 and 2016, respectively, to reduce the carrying valuevalues of CW-Bali’s plantthese assets to their fair value. Such an impairment charge could have a material adverse impact on our results of operations. See further discussion of CW-Bali at Item 7. “LIQUIDITY AND CAPITAL RESOURCES - Material Commitments, Expenditures and Contingencies.”


Quarterly Results of Operationsvalues.

 

The following table presents unaudited quarterly results of operations for the eight quarters ended December 31, 2015. We believe that all adjustments, consisting only of normal recurring adjustments, necessary to present fairly such quarterly information have been included in the amounts reported below.

  Year Ended December 31, 2015(1) 
  First  Second  Third  Fourth 
  Quarter  Quarter  Quarter  Quarter 
Total revenues $14,666,112  $14,485,669  $14,605,649  $13,358,772 
Gross profit  6,054,925   5,867,942   5,546,391   5,457,300 
Net income attributable to Consolidated Water Co. Ltd. stockholders  1,921,261   2,228,100   1,775,500   1,593,840 
Diluted earnings per share  0.13   0.15   0.12   0.11 

  Year Ended December 31, 2014(1) 
  First  Second  Third  Fourth 
  Quarter  Quarter  Quarter  Quarter 
Total revenues $16,348,610  $16,931,832  $17,021,056  $15,257,580 
Gross profit  5,970,425   6,370,046   5,700,315   5,074,712 
Net income attributable to Consolidated Water Co. Ltd. stockholders  654,909   2,759,693   1,882,692   968,064 
Diluted earnings per share  0.04   0.19   0.13   0.07 

(1)Due to rounding, the sum of the quarterly amounts may not equal the reported amounts for the year.

Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and accompanying notes included under Part II, ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, of this Annual Report.

 

In late December 2018, our Board of Directors formally approved the sale of our CW-Belize subsidiary, which was part of our bulk water operations, to Belize Water Services Ltd. (“BWSL”) and on February 14, 2019, we completed the sale (which was effective as of January 1, 2019) of CW-Belize to BWSL. In accordance with U.S. generally accepted accounting principles, CW-Belize’s results of operations for 2018 and 2017 have been reflected in our consolidated results of operations as discontinued operations. Net income from these discontinued operations for 2018 and 2017 was $1,115,825 ($0.07 per share on a fully diluted basis) and $1,041,234 ($0.07 per share on a fully diluted basis), respectively.

Year Ended December 31, 20152018 Compared to Year Ended December 31, 20142017

The discussion and analysis of our results of operations that follows refers only to our continuing operations.

 

Consolidated Results

 

Net income attributable to Consolidated Water Co. Ltd. common stockholders for 20152018 was $7,518,701$11,293,487 ($0.510.75 per share on a fully-diluted basis), as compared to $6,265,358$6,144,062 ($0.420.41 per share on a fully-diluted basis) for 2014.2017. Net income from continuing operations for 2018 was $10,177,662 ($0.68 per share on a fully-diluted basis), as compared to $5,102,828 ($0.34 per share on a fully-diluted basis) for 2017.

The substantial rise in net income for 2018 as compared to 2017 reflects (i) an improvement in income from operations of approximately $5.7 million, due in part to impairment losses recorded in 2017 that exceeded those recorded for 2018 by almost $3 million; and (ii) the litigation settlement received by OC-BVI in September 2018 (see Note 9 of the Notes to the Consolidated Financial Statements), which is the primary reason for the incremental aggregate income (i.e. earnings and profit sharing) from this equity investment of almost $2.3 million.

29

  

Total revenues for 2015 decreased2018 increased to $57,116,202$65,719,857 from $65,559,078$59,367,022 in 2014 due to decreases in2017 as a result of higher revenues for our all three businessour segments. Gross profit for 20152018 was $22,926,558 or 40%$26,742,287 (41% of total revenues,revenues) as compared to $23,115,498 or 35%$23,998,561 (40% of total revenues,revenues) for 2014. In 2015 as compared to 2014, gross profit dollars for the retail segment increased slightly but decreased for the bulk segment and the services segment generated a gross profit as opposed to incurring a gross loss.2017. For further discussion of revenues and gross profit for 2015, see the “Results by Segment” analysis that follows.

We recorded an impairment loss for CW-Bali of approximately $1.7 million in 2017 based upon the operating losses generated by this subsidiary and our projections of its future cash flows. CW-Bali did not materially impact our 2018 results of operations. We also recorded an impairment loss of approximately $1.4 million in 2017 to reduce the carrying value of the goodwill we recorded for the Aerex acquisition based upon our projections of its future cash flows at that time. Based upon our most current projections of Aerex’s future cash flows, no impairment loss for the Aerex goodwill was required for 2018.

 

General and administrative (“G&A”) expenses on a consolidated basis were $14,458,494 and $16,654,439remained consistent at $18,709,419 for 2015 and 2014, respectively. The decline in consolidated G&A expenses from 20142018 as compared to 2015 reflects (i) a decrease in professional fees$18,682,399 for 2017.

Other income, net for 2018 increased to $2,740,064 for 2018 as compared to $1,526,358 for 2017, due to the incremental income of almost $484,000, as we incurred added fees in 2014 for the judicial review conducted in connection with our retail license negotiations; and (ii) a decrease of approximately $1,534,000 in the project development expenses incurred by NSC, our Mexico subsidiary.

Interest expense decreased to $269,090 in 2015$2.3 million generated from $488,770 in 2014 as interest expense for 2014 reflects the prepayment premium paid for the early redemption in February 2014 of the remaining outstanding balance on our bonds payable and the amortization of the related bond discount and deferred issuance costs.

As a result of the declining cash flows projected from OC-BVI’s Bar Bay contract, we recorded impairment charges aggregating $1,060,000 in 2015 to reduce the carrying value of our investment in OC-BVI to its estimated fair value. See further discussion of these impairment charges at Note 8 of Notes to Consolidated Financial Statements.


Other expense increased to $626,400 for 2015 from $203,135 for 2014 due toin 2018 and incremental foreign currency losses recorded for our CW-Bali subsidiaryinterest income of approximately $223,000.$283,000 arising from higher interest earning balances. These items more than offset the incremental expense impact of approximately $1.2 million arising from the revaluation to fair value of the put/call options associated with the Aerex acquisition.

 

Results by Segment

 

Retail Segment:

 

The retail segment contributed $1,615,436 and $977,130$2,567,683 to our income from operations for 2015 and 2014, respectively.2018. The retail segment generated a net loss from operations of ($671,950) for 2017, which included an impairment loss of approximately $1.7 million for CW-Bali.

 

Revenues generated by our retail water operations were $23,254,757 and $24,104,932increased to $25,621,048 in 2018 from $23,225,066 in 2017 due to an increase in the volume of water sold of 8%. We believe the increase in the volume of water sold for 2015 and 2014, respectively. The drop in retail revenues in 20152018 is primarily attributable to a decrease in electricity prices from 2014weather conditions, as (based on information provided by Cayman Islands National Weather Service) the amount rainfall recorded for Grand Cayman for 2018 was 43.5 inches, as compared to 2015 that reduced the energy component of our retail water rates.59.2 inches for 2017.

 

Retail segment gross profit was $12,329,123 (53%$14,609,592 (57% of retail revenues) and $12,160,861 (50%$12,852,867 (55% of retail revenues) for 20152018 and 2014, respectively. The improvement in retail gross profit as a percentage of revenues from 2014 to 2015 is due to energy prices, maintenance expenses and water system losses for 2015 that were less than those for 2014.

Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other two business segments. Retail G&A expenses for 2015 and 2014 were $10,713,687 and $11,183,731, respectively. G&A expenses declined from 2014 to 2015 principally as a result of a decrease of approximately $531,000 in professional fees primarily due to incremental legal fees incurred in 2014 for the judicial review conducted in connection with our retail license negotiations.

CW-Bali owns and operates a seawater reverse osmosis plant with a productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of Bali will eventually enable us to sell all of this plant’s production. However, to date we have been unable to obtain enough customers to generate a profit at this plant. We sold approximately 44.0 million and 54.0 million gallons of water from this plant during 2015 and 2014, respectively. As of December 31, 2015, capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.0 million. The revenues we generated from this plant amounted to approximately $368,000 and $472,000 for 2015 and 2014, respectively. CW-Bali’s operating losses were approximately ($484,000) and ($458,000) for 2015 and 2014, respectively. See further discussion of CW-Bali at Item 7. “LIQUIDITY AND CAPITAL RESOURCES - Material Commitments, Expenditures and Contingencies.”

Bulk Segment:

The bulk segment contributed $8,613,523 and $9,676,263 to our income from operations for 2015 and 2014,2017, respectively.

 

Bulk segment revenues were $31,854,255 and $39,201,011We recorded an impairment loss for 2015 and 2014, respectively. The decrease in bulk revenues from 2014 to 2015 is principally attributable to our Bahamas and Cayman operations, whose revenues decreased by approximately $5,641,000 and $1,532,000, respectively. The 2015 revenue decrease for our bulk operations resulted from significant decreases in the prices of diesel fuel and electricity from 2014 to 2015 that reduced the energy component of our bulk water rates, declines of 13% and 3% in the volumes of water sold by our Bahamas and Cayman operations, respectively, a reallocation of production to the Red Gate plant from the North Sound plant while the North Sound plant was being refurbished, and a reduction in rates charged for water produced from the North Sound Plant under the terms of the two-year operating agreement extension. These lower volumes of water sold by our bulk operations in 2015 reflects (i) the continuing water conservation and loss mitigation efforts of the Water and Sewerage Corporation of the Bahamas; and (ii) a decrease in purchases by the WAC.

Gross profit for our bulk segment was $10,219,466 and $11,281,762 for 2015 and 2014, respectively. Gross profit as a percentage of bulk revenues was approximately 32% for 2015 and 29% for 2014. Total gross profit dollars decreased in 2015 due to maintenance and repairs expenses that exceeded those for 2014 by approximately $363,000 and the lower revenues generated in 2015.

Bulk segment G&A expenses remained consistent at $1,605,943 and $1,605,499 for 2015 and 2014, respectively.

Services Segment:

The services segment incurred losses from operations of ($1,760,895) and ($4,192,334) for 2015 and 2014, respectively. We anticipate that the services segment will continue to incur losses from operations while we continue to fund the project development activities of NSC and/or until such time as we obtain significant new management services or plant construction contracts.

Services segment revenues were $2,007,190 and $2,253,135 for 2015 and 2014, respectively. Services revenues decreased in 2015 due to a decline in procurement services feesCW-Bali of approximately $221,000.

The services segment$1.7 million in 2017 based upon the operating losses generated by this subsidiary and our projections of its future cash flows. CW-Bali did not have a gross profit of $377,969 in 2015 as opposed to a gross loss in 2014 of ($327,125), as a result of improved gross profit margins formaterial impact on our construction activities.


G&A expenses for the services segment were $2,138,864 and $3,865,209 for 2015 and 2014, respectively. The decrease in G&A expenses for 2015 as compared to 2014 reflects a decrease of approximately $1,534,000 in the project development expenses incurred by NSC, our Mexican subsidiary.

Year Ended December 31, 2014 Compared to Year Ended December 31, 2013

Consolidated Results

Net income attributable to Consolidated Water Co. Ltd. common stockholders for 2014 was $6,265,358 ($0.42 per share on a fully-diluted basis), as compared to $8,594,519 ($0.58 per share on a fully-diluted basis) for 2013.

Total revenues for 2014 increased to $65,559,078 from $63,822,131 in 2013 due to increases in revenues for our services and retail segments. Gross profit for 2014 was $23,115,498 or 35% of total revenues, as compared to $23,505,879 or 37% of total revenues, for 2013. Gross profit for the bulk and service segments decreased from 2013 to 2014 while gross profit for the2018 retail segment increased in 2014 from 2013. For further discussionresults of revenues and gross profit for 2014, see the “Results by Segment” analysis that follows.

General and administrative (“G&A”) expenses on a consolidated basis were $16,654,439 and $15,844,303 for 2014 and 2013, respectively. The increase of approximately 5% in consolidated G&A expenses in 2014 resulted from increases in (i) the project development expenses incurred by NSC, our Mexico subsidiary, of approximately $544,000; and (ii) professional fees of approximately $378,000 reflecting consulting and legal fees incurred for the judicial review conducted in conjunction with our retail license negotiations. These increases were partially offset by decreases in (i) non-Mexico related business development costs of approximately $108,000; and (ii) research and development costs of approximately $91,000.

Interest income increased to $1,440,631 for 2014 from $826,570 in 2013 due to interest on past due accounts receivables from the WSC.

We recognized earnings and profit sharing on our investment in OC-BVI for 2014 and 2013 of $414,755 and $1,337,352, respectively. Our earnings from OC-BVI decreased from 2014 to 2013 due to the receipt by OC-BVI during 2013 of approximately $2 million for the remaining unpaid balance awarded in the Baughers Bay litigation. See further discussion of OC-BVI and the Baughers Bay litigation at Note 8 of our Consolidated Financial Statements at Item 8.

Results by Segment

Retail Segment:

The retail segment contributed $977,130 and $1,248,717 to our income from operations for 2014 and 2013, respectively.

Revenues generated by our retail water operations were $24,104,932 and $23,018,498 for 2014 and 2013, respectively. The additional retail revenues we generated in 2014 are attributable to an increase in the gallons of water sold of 3% from 2013 to 2014 for our Cayman Water retail operations and an increase of approximately $328,000 in revenues generated by CW- Bali.

Retail segment gross profit was $12,160,861 (50% of retail revenues) and $12,061,594 (52% of retail revenues) for 2014 and 2013, respectively. The decline in gross profit as a percentage of revenues from 2013 to 2014 is due to higher plant and pipeline maintenance costs for our Cayman operations and a negative gross profit for our Bali operations.

 

Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other twothree business segments. Retail G&A expenses remained consistent at $12,029,646 for 2014 and 2013 were $11,183,731 and $10,812,877, respectively. G&A expenses increased from 20132018 as compared to 2014 principally as a result of increases of approximately (i) $378,000 in professional fees reflecting consulting and legal fees incurred$11,884,659 for the judicial review conducted in conjunction with our retail license negotiations; (ii) $88,000 for computer system updates; and (iii) $80,000 in employee costs due to base salary increases. These increases were partially offset by decreases in (i) non-Mexico related business development costs of approximately $108,000; (ii) research and development costs of approximately $91,000.

CW-Bali owns and operates a seawater reverse osmosis plant with a productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of Bali will eventually enable us to sell all of this plant’s production. We utilized approximately 18.8% of this plant’s capacity during the year ended December 31, 2014, selling to customers on a month-to-month basis. As of December 31, 2014, capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.3 million. The revenues we generated from this plant amounted to approximately $472,000 and $144,000 for the years ended December 31, 2014 and 2013, respectively. CW-Bali’s operating losses were approximately ($458,000) and ($438,000) for the years ended December 31, 2014 and 2013, respectively.2017.

 

Bulk Segment:

 

The bulk segment contributed $9,676,263$8,178,862 and $10,037,263$8,011,452 to our income from operations for 20142018 and 2013,2017, respectively.


Bulk segment revenues were $39,201,011$31,031,287 and $39,960,220$28,682,113 for 20142018 and 2013,2017, respectively. The decreaseincrease in bulk revenues of approximately $759,000 from 20132017 to 20142018 is attributable primarily to our Bahamas operations, which generated approximately $2.5 million less in revenues in 2014 than in 2013. The 2014 revenue decrease for our Bahamas operations resulted from a decrease in the volume of water sold (primarily from our Blue Hills plant) to the Water and Sewerage Corporation of the Bahamas (“WSC”). In 2013, the WSC purchased water volumes from our Blue Hills plant that were significantly higher than the minimum amounts they were required to purchase under the water supply agreement for this plant. However, as a result of water conservation and loss mitigation efforts it has conducted since that time, the WSC has significantly reduced the amount of water lost by its distribution system and consequently decreased the volume of water purchased from our Blue Hills plant in 2014 (although the WSC continued to purchase more in 2014 than the contract minimum amount). The decrease in the revenues from our Bahamas operations was partially mitigated by a $1.7 million increase in revenues from our Cayman bulk operations that resulted from a 23%significant increase in the gallonsprices of diesel fuel and electricity from 2017 to 2018, which increased the energy component of our bulk water sold. Such incremental sales volumes were due to the temporary closing (for refurbishment) of the one plant ownedrates by the WAC that we no longer operate.approximately $2 million.

 

Gross profit for our bulk segment was $11,281,762 and $11,681,132 for 2014 and 2013, respectively. Gross profit as a percentage$9,479,904 (31% of bulk revenues was approximately 29%revenues) and $9,119,610 (32% of bulk revenues) for both 20142018 and 2013. The2017, respectively. Bulk segment gross profit dollars and gross profit as a percentage of revenues from 2013increased due to 2014 remained fairly consistent as greater gross profit for our Cayman bulk operationsthe increase in 2014 mitigated the lower gross profit for our Bahamas bulk operations.revenues.

 

Bulk segment G&A expenses remainedincreased to $1,301,042 for 2018 as compared to $1,108,158 for 2017 due to additional bank charges incurred by CW-Bahamas to repatriate funds to our parent company and incremental consulting fees.

The water OC-Cayman sells to the WAC is produced at three seawater reverse osmosis desalination plants in Grand Cayman owned by the WAC, but designed, built and operated by OC-Cayman: the North Sound, Red Gate and North Side Water Works (“NSWW”) plants. The previous operating agreements for the North Sound and Red Gate plants expired in February 2019. In response to a public bidding process for a new operations and maintenance agreement encompassing both the North Sound and Red Gate plants, OC-Cayman submitted a bid for the new agreement.

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In August 2018, the WAC accepted OC-Cayman’s bid for the new agreement, and the WAC and OC-Cayman entered into a new five-year contract commencing on February 1, 2019 for the operation of the North Sound and Red Gate plants. The terms of the new agreement are substantially consistent at $1,605,499with those of the prior North Sound and $1,643,869Red Gate water supply agreements, except that (i) we have decreased the price we charge for 2014the water supplied; and 2013, respectively.(ii) under the new agreement the WAC pays the energy costs for the operation of these plants directly to the utility company rather than paying OC-Cayman a pass-through charge for these costs. The per gallon price we charged for the water supplied under the new agreement in February 2019, excluding the effect of the pass-through energy charges, was approximately 25% less than the per gallon rate we charged in February 2018 under the prior agreements. As a result of this price reduction (and assuming comparable sales volumes), the revenues and operating income we generate from the North Sound and Red Gate plants commencing February 1, 2019 will be less than the revenues and operating income we generated from these plants under the previous agreements. In 2018, we generated approximately $5.1 million in revenues under the North Sound and Red Gate agreements, of which $3.2 million consisted of energy pass-through charges.

 

The current operations and maintenance agreement for the NSWW plant expires June 2019. Pursuant to a public bidding process, in February 2019 we submitted our bid to operate and maintain this plant for a period of seven years after the current contract expires and are awaiting the results of the bidding process and the decision of the WAC. We may not be selected for this new agreement. Even if we are selected to operate the NSWW plant, the rates we have proposed in our bid are less than those we presently charge, thus the revenues and operating income we would generate from a new agreement for this plant will be less than the amounts we have previously generated. In 2018, we generated approximately $2.7 million in revenues under the NSWW agreement.

Services Segment:

 

The services segment incurred losses from operations of ($4,192,334)2,622,545) and ($3,624,404)3,043,528) for 20142018 and 2013,2017, respectively. We anticipate that the services segment will continue to incur losses from operations while we continue to fund the project development activities of NSC and/or until such time as we obtain significant new management services or plant construction contracts.

 

Services segment revenues were $2,253,135 and $843,413increased to $1,811,372 for 2014 and 2013, respectively. Services revenues increased from 20132018 as compared to 2014 primarily$469,347 for 2017 due to constructionapproximately $710,000 in revenues generated from our contracts with the WAC to refurbish their Lower Valleyfor 2018 for a refurbishment project completed for OC-BVI’s Bar Bay plant and buildapproximately $518,000 in revenues for pipeline installations made on Grand Cayman for a plant on Cayman Brac.real estate developer.

  

Gross profit for ourthe services segment was ($327,125) and ($236,847)$308,338 for 2014 and 2013, respectively.2018 as compared to a negative gross profit of ($450) for 2017. The lowerimprovement in the services segment gross profit for 2014 reflects a decline2018 is attributable to the increase in sales of consumables stock to OC-BVI and other outside parties.revenues.

 

G&A expenses for the services segment were $3,865,209$2,889,703 and $3,387,557$3,043,078 for 20142018 and 2013,2017, respectively. The increasedecrease in G&A expenses for 2014 as compared to 2013 reflects an increase2018 results from a decrease of approximately $544,000$127,000 in the project development activitiesexpenses incurred by our Mexican subsidiaries.

Manufacturing Segment:

The manufacturing segment incurred losses from operations of NSC($147,906) and ($2,019,970) for 2018 and 2017, respectively.

Manufacturing revenues were $7,256,150 and $6,990,496 for 2018 and 2017, respectively. Manufacturing revenues in 2018 were impacted by Aerex’s production in 2018 of various components to be used by our other subsidiaries CW-Bahamas (for the refurbishment of CW-Bahamas’ Windsor plant) andCayman Water (for the expansion of its Abel Castillo Water Works plant). While the revenues Aerex generated from this work for its affiliates amounted to approximately $2 million, such intercompany revenues are eliminated in consolidation for financial reporting purposes.

Manufacturing segment gross profit was $2,344,453 (32% of manufacturing revenues) and $2,026,534 (29% of manufacturing revenues) for 2018 and 2017, respectively. Gross profit for 2018 increased as a percentage of revenues from 2017 due to a more profitable product mix.

G&A expenses for the manufacturing segment were $2,489,028 for 2018 as compared to $2,646,504 for 2017. The decrease in G&A expenses for the manufacturing segment from 2017 to 2018 is attributable to a $1.0decrease of approximately $184,000 in product development expenses.

FINANCIAL CONDITION

The significant changes in our consolidated balance sheet as of December 31, 2018 as compared to December 31, 2017 (other than the change in our cash and cash equivalents, which is discussed later in “LIQUIDITY AND CAPITAL RESOURCES”) result from increases in accounts receivable, property, plant and equipment and construction in progress.

The increase in our accounts receivable, from approximately $14.7 million payment onas of December 31, 2017 to approximately $24.2 million as of December 31, 2018 is attributable to an option agreement to purchaseincrease in CW-Bahamas’ receivables from the shares in NSC held by oneWSC of its shareholders and a $350,000 payment made to reimburse a construction contractorapproximately $8.5 million See “LIQUIDITY AND CAPITAL RESOURCES, CW-Bahamas-Liquidity” for pilot testing and water monitoring activities conducted by the contractor on behalf of NSC. Such reimbursement was required due to NSC’s decision not to extend a memorandum of understanding with this contractor. See further discussion of these two payments at Note 9receivables.

Property, plant and equipment as of December 31, 2018 was approximately $9.2 million higher than the Notesprior year end balance as a result of expenditures made to Consolidated Financial Statements included at Item 8.refurbish our Windsor plant in The Bahamas and, to a lesser extent, capital expenditures made for our retail operations in Grand Cayman.

Construction in progress increased by approximately $4.7 million due to the expansion in Grand Cayman of our Abel Castillo Water Works plant capacity and the additional of a new water storage tank for this plant.

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LIQUIDITY AND CAPITAL RESOURCES

 

Liquidity Position

 

Our projected liquidity requirements for 20162019 include capital expenditures for our existing operations of approximately $3.9$4.0 million, approximately $7.0$2.5 million to be expended for NSC's and AdR's project development activities and approximately $1.3 million for debt service on our demand loan payable and approximately $1.2 million for NSC’s project development activities.dividends payable. Our liquidity requirements for 2016 may also include future quarterly dividends, if such dividends are declared by our Board. Our dividend payments amounted to approximately $4.4$5.1 million for the year ended December 31, 2015.2018.

 

In May 2014, we obtained financing (the proceeds of which were usedFebruary 2019, our Board approved a $4 million revolving loan facility to fund NSC’s land purchases in May 2014) in the form of a demand loan payableAerex with an initial principal balance of $10 million. Assuming the loan is not called by the lender, payments on this loan are due quarterly under a five year amortization schedule with the remaining principal balance due on May 14, 2016. This loan bears interest at LIBOR plus 1.5%.the rate of 3% per annum, repayable in December 2019. In March 2019, Aerex borrowed $2.5 million under this facility.

 

As of December 31, 2015,2018, we had cash and cash equivalents of approximately $44.8$31.3 million and working capital of approximately $52.2$54.5 million. WeExcept for the liquidity matter relating to CW-Bahamas that is discussed in paragraphs that follow, we are not presently aware of anything that would lead us to believe that we will not have sufficient liquidity to meet our needs for 20162019 and thereafter.

 

In February 2016, we purchased 51%CW-Bahamas Liquidity

CW-Bahamas’ accounts receivable balances due from the WSC amounted to $17.6 million as of December 31, 2018 as compared to $9.1 million as of December 31, 2017. Approximately 75% of the equity ownershipDecember 31, 2018 accounts receivable balance was delinquent as of Aerex Industries, Inc.,that date. The increase in these accounts receivable has adversely impacted the liquidity of this subsidiary.

CW-Bahamas has also experienced similar delays in collecting its accounts receivable from the WSC in prior years, and at times has held accounts receivable balances from the WSC in amounts comparable to the December 31, 2018 balance. During these periods, we arranged meetings and held discussions with representatives of the WSC and The Bahamas government to formulate a U.S. original equipment manufacturerpayment schedule for WSC’s delinquent accounts receivable and service providersuch amounts were subsequently paid in full. Based upon this payment history, we have never been required to provide an allowance for doubtful accounts for any of a wide range of products and services applicable to municipal and industrial water treatment, for $7.7CW-Bahamas’ accounts receivable, even though CW-Bahamas periodically has been owed substantial delinquent balances. We believe CW-Bahamas’ accounts receivables will ultimately be collected in full based upon our history with The Bahamas government.

CW-Bahamas received approximately $5.6 million in cash.payments on its accounts receivable in January 2019 and as of February 28, 2019 its accounts receivable balance from the WSC was approximately $16.1 million.

On March 12, 2019, CW-Bahamas received approximately $1.4 million in payments on its accounts receivable along with correspondence from the Bahamas Ministry of Finance which acknowledged the receivable balance and stated that payment in full of all outstanding amounts is anticipated in due course.

If CW-Bahamas continues to be unable to collect a significant portion of its delinquent accounts receivable then in the coming months one or more of the following events may occur: (i) CW-Bahamas may not have sufficient liquidity to meet its obligations without new funding from its shareholders; (ii) we may be required to cease the recognition of revenues on CW-Bahamas’ water supply agreements with the WSC; and (iii) we may be required to provide an allowance for CW-Bahamas’ accounts receivable. Any of these events could have a material adverse impact on our results of operations, financial position and cash flows.

Resolution of CW-Belize Liquidity Issue

Transfers of funds held by our former subsidiary CW-Belize, to our parent company, which were accomplished by means of conversion of Belize dollars into U.S. dollars, required the approval of the Central Bank of Belize and were dependent on the amount of U.S. dollars available to Belize banks to execute such transfers. Weakness in the Belize economy and other factors have reduced the amount of U.S. dollars that Belize banks have available for transfer, which limited in prior years and for most of 2018 the amount of funds we were able to transfer from CW-Belize. Our repatriations of funds from CW-Belize to our parent company amounted to $458,000 and $400,000 for the years ended December 31, 2017 and 2016, respectively, significantly less than the net income and net cash flows CW-Belize generated for those years.

During the quarter ended September 30, 2018, we signed a non-binding Memorandum of Understanding (“MOU”) with Belize Water Services Ltd. (“BWSL”) with respect to the potential sale of CW-Belize to BWSL. We were not otherwise considering a sale of CW-Belize, so as an incentive for us to consider this proposed transaction, BWSL promised in the MOU to facilitate both the conversion from Belize dollars to US dollars and the subsequent repatriation of all cash balances we have on deposit in Belize. With BWSL’s assistance, we were able to repatriate approximately $2.75 million in cash from Belize to our bank accounts in the Cayman Islands during the three months ended September 30, 2018 and an additional $1.0 million during the fourth quarter of 2018.

In late December 2018, our Board of Directors formally approved the sale of CW-Belize to BWSL. We repatriated an additional $1.1 million from CW-Belize during the first week of 2019. We received the sales proceeds of $7.0 million (less $265,000 retained for indemnification obligations) upon the closing of the sale of CW-Belize in February 2019.


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Discussion of Cash Flows for the Year Ended December 31, 20152018

 

Our cash and cash equivalents increaseddecreased to $44,792,734$31,337,477 as of December 31, 20152018 from $35,713,689$45,482,966 as of December 31, 2014.2017.

 

Cash Flows from Operating Activities

 

Our operating activities from continuing operations provided net cash of approximately $17.3 million.$7,990,397. This net cash provided reflects net income generated for the year of approximately $7.9 million$11,989,274 as adjusted for (i) various items included in the determination of net income that do not affect cash flows during the yearyear; and (ii) changes in the other components of working capital. The more significant of such items and changes in working capital components included depreciation and amortization of approximately $5.9 million,$7,034,234, a net decreaseincrease in accounts receivable (primarily attributable to CW-Bahamas) of approximately $3.4 million,$9,557,798, profit sharing and a non-cash impairment charge forequity in the earnings of our investment in OC-BVI affiliate of $1,060,000.$2,452,355 and income from discontinued operations (CW-Belize) of $1,115,825.

 

Cash Flows from Investing Activities

 

Net cash used in our investing activities was approximately $2.1 million. We increased the total amount invested in certificates of deposit by $637,538 during the year and purchased$17,405,831. Additions to property, plant and equipment and expended funds on construction in progress (primarily arising from the refurbishment of the CW-Bahamas’ Windsor plant and the expansion of Cayman Water’s Abel Castillo Water Works plant) used $16,202,520 in the normal coursecash and $2,655,349 was expended for rights of businessway for our Mexico project. These cash outflows were partially offset by $1,400,448 in the aggregate of amount of approximately $3.1 million. We also collected $1.7 million in principal repaymentscollections on our notesloans receivable from the WAC.

 

Cash Flows from Financing Activities

 

Our financing activities used approximately $6.2 million$5,786,004 in net cash.

We paid cash as we paid dividends of approximately $4.4 million$5,092,796.

In March 2018, we repaid $392,000 of the $686,000 note payable to the former sole shareholder of Aerex. In July 2018, we borrowed additional funds, increasing the outstanding balance on this note payable to $1,078,000 and extended the maturity date to June 30, 2019. In October 2018, we repaid $2.0 million$686,000 of our demandthis note payable.payable and in December 2018, we repaid the remaining balance of $392,000.

  

Material Commitments, Expenditures and Contingencies

 

Cayman Water Retail License

 

We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands government that grantsgranted Cayman Water the exclusive right to provide potable water to customers within its licensed service area. As discussed below, this license was set to expireexpired in July 2010 but has since been extended while negotiations for a new license take place.January 2018. Pursuant to the license, we haveCayman Water had the exclusive right to produce potable water and distribute it by pipeline to ourits licensed service area, which consists of two of the three most populated areas of Grand Cayman theIsland: Seven Mile Beach and West Bay areas. For the years ended December 31, 2015, 2014Bay. In 2018 and 2013,2017, we generated approximately 40%, 36%39% and 36%39%, respectively, of our consolidated revenues and 55%, 53%54% and 52%54%, respectively, of our consolidated gross profitsprofit from the retail water operations conducted pursuant to Cayman Water’s exclusive license. As discussed later herein, if we are not in default of any of its terms, this license provides us with the right to renew the license on terms that are no less favorable than those that the government offers to any third party.

 

The license was originally scheduled to expire in July 2010 but has beenwas extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license was scheduledexpired on January 31, 2018. We continue to expireprovide water subsequent to January 31, 2018 on December 31, 2015; however, we have been informed bya month-to-month “good faith” basis under the WAC that our license will be extended through June 30, 2016 and that formal documentation of such extension is in process.

In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law, 2011 (the “New Laws”) were published and enacted. Under the New Laws, the WAC will issue any new license, and such new license could include a rate of return on invested capital model, as discussed in the following paragraph.

Following the enactmentterms of the New Laws, we were advisedexpired license in correspondence from the Cayman Islands government and the WAC that: (i) the WAC is the principal negotiator, and not the Cayman Islands government, in our license negotiations, and (ii) the WAC has determined that a rate of return on invested capital model (“RCAM”)order to allow for the retail license is in the best interestcontinuation of the public and our customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. We responded to the Cayman Islands government that we disagreed with its position on these two matters and negotiations for a new license temporarily ceased.without interruption to an essential service.

 

In July 2012, in an effort to resolve several issues relating to our retail license renewal negotiations, we filed an Application for Leave to Apply for Judicial Review (the “Application”) withOctober 2016, the Grand CourtGovernment of the Cayman Islands (the “Court”passed legislation which created a new utilities regulation and competition office (“OfReg”), seeking declarations that: (i) certain provisions. OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the New Laws appear to be incompatible and a determination as to how those provisions should be interpreted, (ii) the WAC’s roles as the principal license negotiator, statutory regulator and our competitor put the WACCayman Islands in a position of hopeless conflict, and (iii) the WAC’s decision to replace the rate structure under our current exclusive license with RCAM was predetermined and unreasonable. In October 2012, we were notified that the Court agreed to consider the issues raised in the Application.

The hearingApril 2017, which transferred responsibility for this judicial review was held on April 1, 2014. Prior to the commencementeconomic regulation of the hearing,water utility sector and the parties agreed that the Court should solely be concerned with the interpretation of the statutory provisions. As part of this agreement, the WAC agreed to consider our submissions on the RCAM model and/or alternative models of pricing. In June 2014, the Court determined that: (i) the renewal of theretail license does not require a public bidding process; and (ii) the WAC is the proper entity to negotiate with us for the renewal of the license.


Our submissions on the RCAM model and/or alternative models of pricing were made to the WAC on June 9, 2014. We received a letternegotiations from the WAC dated September 11, 2014, which fully rejected our submissions and stated that the WAC intend to provide us with a draft RCAM licenseOfReg in due course.

On November 21, 2014, we wrote to the Minister of Works offering to recommence license negotiations on the basis of the RCAM model subject to certain conditions which are: (i) the Government would undertake to amend the current water legislation to provide for an independent regulator and a fair and balanced regulatory regime more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and we would mutually appoint an independent referee and chairman of the negotiations, (iii) our new license would provide exclusivity for the production and provision of all piped water, both potable and non-potable, within our Cayman Islands license area, (iv) the Government would allow us to submit our counter proposal to the WAC’s June 2010 RCAM license draft, and (v) the principle of subsidization of residential customer rates by commercial customer rates would continue under a new license. On March 23 2015, we received a letter from the Minister of Works with the following responses to our November 21, 2014 letter: (1) that while the Cayman government plans to create a public utilities commission, the provision of a new license will not depend upon the formation of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell non-potable water within the area covered by the retail license will not take place until after the draft license has proceeded through the review process of the negotiations; (3) rather than allow us to submit a counter proposal to the WAC’s June 2010 RCAM license draft, the WAC will draft the license with the understanding that we will be allowed to propose amendments thereto; (4) the principle of subsidization of residential customer rates by commercial customer rates would continue under the new license; and (5) a request that we consider eliminating our monthly minimum volume charge in the new license.

May 2017. We recommencedbegan license negotiations with the WACOfReg in July 2017 and such negotiations are continuing. We have been informed during the third quarter of 2015 based upon a draft RCAM license provided by the WAC. Suchour retail license negotiations, remain on-going.both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of our license in a manner that could significantly reduce the operating income and cash flows we have historically generated from our retail license. We are presently unableproposed to determine whenOfReg to adjust our rates in January 2019 consistent with the terms of the previous license, however OfReg has communicated that they have deferred any such negotiations will be completed or the final outcome of such negotiations.adjustment until further notice.

 

The Cayman Islands government could ultimately offergrant a third party a license to service some or all of ourCayman Water’s present service area. However, as set forth in the existingexpired license,the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence Area without having first offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.”

 

TheWe are presently unable to determine what impact the resolution of theseour retail license negotiations will have on our cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows we have historically generated from our retail operations and could require us to record an impairment chargelosses to reduce the $3,499,037 carrying value of our goodwill.retail segment assets. Such impairment chargelosses could have a material adverse impact on our financial condition and results of operations.operations.

 

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We are presently unable to determine what impact the resolution of this matter will have on our cash flows, financial condition or results of operations.

  

N.S.C. Agua, S.A. de C.V.NSC and AdR Project Development

 

In May 2010, we acquired, through our wholly-owned Netherlands subsidiary, Consolidated Water Cooperatief, U.A., (“CW-Cooperatief”) a 50% interest in N.S.C. Agua, S.A. de C.V. (“NSC”), a development stage Mexican company. We have since purchased, through the conversion of a loan we made to NSC, sufficient shares to raise our ownership interest in NSC to 99.9%99.99%. NSC was formed to pursue a project (the “Project”) that originally encompassedencompassing the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system. As discussed in the paragraphs that follow, during 2015 the scope of the Project was defined by the State of Baja California (the “State”) to consist of a first phase consisting of a 50 million gallonsgallon per day plant and a pipeline that connects only to the Mexican potable water infrastructure and a second phase consisting of an additional 50 million gallons per day of production capacity. We believe the Project can be successful due to what we believe is a growing need for a new potable water supply to serve the area of north Baja California, Mexico and (indirectly) Southern California, U.S.capacity with additional pipeline infrastructure.

 

Since its inceptionThrough a series of transactions completed in 2012-2014, NSC has engaged engineering groups with extensive regional and/or technical experience to prepare preliminary designs and cost estimates for the desalination plant and the proposed pipeline and prepare the environmental impact studies for local, state and federal regulatory agencies and has also acquired the land, performed pilot plant and feed water source testing, and evaluated financing alternatives for the Project..

NSC entered into a purchase contract for 8.1purchased 20.1 hectares of land for approximately $20.6 million on which the proposed Project’s plant would be constructed and in 2012 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 paid $7.4 million in May 2014 to complete this land purchase. In 2013, NSC purchased an additional 12 hectares of land for the project for $12 million, of which $2 million was paid. NSC paid the remaining $10 million balance for this land purchase on May 15, 2014.


In 2012 and 2013, NSC conducted an equipment piloting plant and water data collection program at the proposed feed water source for the Project under a Memorandum of Understanding (the “EPC MOU”) with a global engineering, procurement and construction contractor for large seawater desalination plants. Under the EPC MOU, 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 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 decided not to extend the EPC MOU beyond its February 2014 expiration date and NSC paid the contractor $350,000 during the three months ended March 31, 2014 as compensation for the operation and maintenance of the pilot plant.

Based upon the initial scope of the Project, NSC signed a letter of intent with Otay Water District in Southern California in November 2012 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 U.S. On November 25, 2013, Otay Water District submitted an application to the Department of State of the United States of America for a Presidential Permit authorizing the construction, connection, operation and importation of desalinated seawater at the international boundary between the United States and Mexico in San Diego County, California. We understand that this application is currently being reviewed by the relevant authorities. However, in discussions held in 2015, Mexican federal and state water regulators indicated to us that it is not likely that water produced by the Project would be approved by such regulators for direct sale by NSC to U.S. customers such as the Otay Water District. Instead any additional water ultimately provided to the United States as either a direct or indirect result of the Project would be arranged through third party agreements with Mexican governmental agencies and delivered by the means such agencies deem appropriate, which may or may not include a pipeline from the Project’s plant to the U.S. border.constructed.

 

In November 2012, NSC entered into a lease with an effective term of 20-years20 years from the date of full operation of the desalination plant with the Comisión Federal de Electricidad for approximately 5,000 square meters of land on which it plans to construct the water intake and discharge works for the plant. The amounts due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately $20,000$15,000 per month. This lease is cancellablemay be cancelled by NSC should NSC ultimately not proceed with the Project.

 

In August 2014, the State of Baja California enacted new legislation to regulate Public-Private Association projects which involve the type of long-term contract between a public sectorpublic-sector authority and a private party that NSC is seeking to complete the Project.Project (the “APP Law”). Pursuant to this new legislation, on January 4, 2015, NSC submitted an expression of interest for its project to the SecretaryMinistry of Infrastructure and Urban Development of the State of Baja California (“SIDUE”). On January 23, 2015, SIDUE accepted NSC’s expression of interest and requested that NSC submit a detailed proposal for the Project that complies with the requirements of the new legislation. NSC submitted this detailed proposal (the “APP Proposal”) to SIDUE in late March 2015. The new legislation requiresrequired that such proposal be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee (the “APP Committee”) for review and authorization. If the APP Committee grants its authorization,Project was authorized the State of Baja California (the “State’) iswould be required to conduct a public tender for the Project.

 

In response to ourits APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the Director General of the Comisión Estatal dedel Agua de Baja California (“CEA”), the State agency with responsibility for the Project. In this letter, CEA statedProject, stating that (i) in its opinion, the Project is in the public interest with high social benefits and is consistent with the objectives of the State Development Plandevelopment plan; and (ii) that the Project and accompanying required public tender process should be conducted Onconducted. In November 6, 2015, the State officially commenced the tender for the Project, the scope of which the State has defined as a first phase to be operational in 2019 consisting of a 50 million gallon per day plant and a pipeline that connects to the Mexican potable water infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million gallons per day of production capacity. Thecapacity with additional pipeline infrastructure. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. (“NuWater”) and Degremont S.A. de C.V. (the “Consortium”) submitted its tender for the Project in April 2016 and in June 2016, the State has set March 23, 2016designated the Consortium as the winner of tender submission date. The State tendering process requires that prospective bidders provide certain legal, technical and financial qualifications in order to obtainfor the tender document. NSC submitted its qualifications to the State, was deemed qualified by the State and provided the tender documents, and plans to submit its tender on or before the March 23, 2016 deadline.Project.

 

We have acknowledged since the inception of the Project that, dueDue to the amount of capital the Project requires, weNSC will ultimately need an equity partner or partners for the Project. DuringConsequently, NSC’s tender to the fourth quarter of 2014, we concluded that our chances of successfully completingState for the Project underwas based upon the new Public-Private Association legislation would be greatly enhanced through the addition of an equity partner for NSC with substantial financial resources and a history of successful capital project investments in Mexico. In March 2015, NSC entered into a Letter of Intent (“LOI”) with such a potential partner. Pursuant to the LOI,following: (i) NSC agreed towill sell or otherwise transfer the land and other Project assets to a new company (“Newco”) that willwould build and own the Project; (ii) NSC’s potential partner willpartners would provide the majority of the equity for the Project and thereby willwould own the majority interest in Newco; (iii) NSC would maintain a minority ownership position in Newco; and (iv) Newco would enter into a long-term management and technical services contract for the Project with an entity partially owned by NSC or another Company subsidiary.

In August 2016, NSC and NuWater incorporated Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), a special purpose company, to complete the Project and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operation and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operation. As of December 31, 2018 and 2017, NSC owned 99.6% of the equity of AdR.

On August 22, 2016, the Public Private Partnership Agreement for public private partnership number 002/2015, bid number SIDUE-CEA-APP-2015-002 (“APP Contract”), was executed between AdR, CEA, the Government of Baja California represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract requires AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueducts) with a capacity of up to 100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The first phase must be operational within 36 months of commencing construction and the second phase must be operational by July 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueduct for a period of 37 years starting from the commencement of operation of the first phase. At the end of the operating period, the plant and aqueduct will be transferred to CEA.

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The APP Contract does not become effective until the following conditions are met:

·the State has established and registered various payment trusts, guaranties and bank credit lines for specific use by the Project;
·various water purchase and sale agreements between the CEA, the payment trusts and the CESPT have been executed;
·AdR has obtained all of the rights of way required for the aqueduct; and
·all debt financing agreements necessary to provide the funding to AdR for the first phase of the Project have been executed.

In December 2016, the Congress of the State of Baja California, Mexico passed Decreto #57 which, among other things, ratified and authorized the payment obligations of the corresponding public entities under the APP Contract. During 2017, following consultations between representatives of the State of Baja California and the Ministry of Finance of the Federal Government of Mexico, it was determined that certain amendments to Decreto #57 were required to comply with recent changes to the Federal Financial Discipline Law for Federative Entities and Municipalities (the “Financial Discipline Law”). In addition, it was necessary to amend Decreto #57 to authorize the inclusion of revenues from the CESPT in the primary payment trust for the Project. This LOI is no longer valid,These amendments were included in Decreto #168, which was approved by the Congress of the State of Baja, California in December 2017. The authorization of the payment obligations of the public entities under the APP Contract given in Decreto #57, as amended by Decreto #168, expired on December 31, 2018. For the Project to proceed, the State must obtain new approvals from its terms were applicable ifCongress to establish the various payment trusts, guaranties and only if NSCbank credit lines for use by the Project. While we have been informed by officials of the State that they are seeking these approvals, we cannot provide any assurances that such approvals will be obtained.

Both the exchange rate for the Mexico peso relative to the dollar and its potential partner were ultimately awardedgeneral macroeconomic conditions in Mexico have varied since the execution of the APP Contract. These changes have adversely impacted the estimated construction, operating, and financing costs for the Project. The APP Contract and the APP Law allow for the parties to negotiate (but do not guarantee) modifications to the consideration (i.e. water tariff) under the APP Contract in the event of such significant macroeconomic condition changes. In February 2017, AdR submitted proposals to the CEA requesting the definition of the mechanism required by the APP Contract to update the consideration under the APP Contract for changes in foreign exchange rates, lending rates and certain laws which have impacted the Project. On June 1, 2018, AdR and the CEA executed an amendment to the APP Contract which, among other things, increases the scope of Phase 1 of the Project by early March 2016. However, we expect NSC’s tender submittedincluding the aqueduct originally designated for Phase 2, and addresses AdR’s concerns regarding the impact on the Project for changes in the exchange rate for the peso relative to the Statedollar and changes in interest rates that have occurred subsequent to the submission of the Consortium’s bid for the Project. As a result of this amendment to the APP Contract, the final cost of Phase 1 and the related consideration to be charged by AdR under the APP Contract will be determined based upon an agreement with one or more equity partners on terms comparable to thosethe bid submitted by the Consortium, the changes set forth in the LOI.amendment to the APP Contract and the economic conditions (e.g. interest rates and currency exchange rates) in effect on the financial closing date for Phase 1.

 

Included in our 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 $2.2 million, $3.7 million and $3.2 millionIn February 2018, AdR executed a subscription agreement (the “Agreement”) for the years ended December 31, 2015, 2014equity funding required for the Project. The Agreement calls for NSC to retain a minimum of 25% of the equity in AdR. One or more affiliates of Greenfield SPV VII, S.A.P.I. de C.V. (“Greenfield”), a Mexico company managed by an affiliate of a leading U.S. asset manager, will acquire a minimum of 55% of the equity of AdR. The Agreement also provides Suez Medio Ambiente México, S.A. de C.V., (“Suez”) a subsidiary of SUEZ International, S.A.S., with the option to purchase 20% of the equity of AdR. If Suez does not exercise this option, NSC will retain 35% of the equity of AdR and 2013, respectively.Greenfield will acquire 65% of the equity of AdR. The assetsAgreement will become effective when the additional conditions related to the Project are met, including but not limited to those conditions discussed previously. The aggregate funding to be provided by AdR’s shareholders for the Project, in the form of equity and liabilitiessubordinated shareholder loans, is presently estimated at approximately 20% of the total cost of Phase 1 of the Project. This Agreement expires on June 30, 2019, unless otherwise extended by mutual agreement of the parties.

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NSC includedexpects to generate a portion of its funding for AdR through the sale to AdR of the land it has purchased for the Project. Under the terms of the Agreement, Suez will design and construct the Project, while a joint venture company between NSC and Suez will operate the Project.

In February 2018, our subsidiary, Consolidated Water U.S. Holdings, acquired the remaining 0.4% of AdR’s equity ownership previously held by NuWater.

In June 2018, AdR and Suez executed a contract whereby Suez will serve as the engineering, construction and procurement contractor for the Project with such contract becoming effective on the effective date of the APP Contract.

The political environment in our consolidated balance sheets amounted to approximately $22.0 million and $488,000, respectively, as of December 31, 2015 and approximately $22.0 million and $214,000, respectively, as of December 31, 2014.


Despite the expenditures we have madeMexico has recently experienced significant changes and the activities wenew, federal administration has made economic policy announcements focusing on austerity. While the long-term ramifications of such changes and announcements are unknown, in the short-term they have completed(i) caused certain rating agencies to date, upon completionlower Mexico’s sovereign credit rating, (ii) resulted in a decrease in the value of the tender processMexico peso and (iii) created uncertainty with respect to the State may awardincoming administration’s position on projects and contracts approved by previous administrations. The federal administration has a strong influence on many of the state and local governments and congresses, raising the possibility that the federal government will influence local politics, which could impact the State’s and the CEA’s ability to meet certain conditions required to make the APP Contract effective.

If AdR is ultimately unable to proceed with the Project due to a partyfailure by any of the parties involved to meet the conditions necessary for the APP Contract to become effective, or for any other than NSC, or the State may decide to cancel the tender process. If NSC is not awarded the Project,reason, the land we haveNSC has purchased and the right of way deposits may lose itstheir strategic importance as the site forderived from their association with the Project and consequently may decline in value. If NSC isAdR does not awardedproceed with the Project, weNSC may ultimately be unable to sell this land or recoup its right of way deposits for amountamounts at least equal to or in excesstheir carrying values as of its current carrying valueDecember 31, 2018 of $20.6approximately $21.1 million and any$3.0 million, respectively. Any loss on the sale of the land, or impairment charge welosses NSC may be required to record as a result of a decrease in the (i) fair value of the land,land; or (ii) value of the rights of way arising from the inability to complete the Project, could have a material adverse impact on our financial condition and results of operations.

 

Included in our results of operations are general and administrative expenses from NSC and AdR, consisting of organizational, legal, accounting, engineering, consulting and other costs relating to Project development activities. Such expenses amounted to approximately $2,884,000 and $3,012,000 for the years ended December 31, 2018 and 2017, respectively. The assets and liabilities of NSC and AdR included in our consolidated balance sheets amounted to approximately $26.2 million and $243,000, respectively, as of December 31, 2018 and approximately $23.1 million and $173,000 respectively, as of December 31, 2017.

Project Litigation Initiated by EWG

Tecate Claim:

 

Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50% ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (“NSA”). NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (“EWG”) and the other half of its shares in NSC to Alejandro de la Vega (the “individual shareholder”). In February 2012, we paid $300,000 to enter into an agreement (the “Option Agreement”) that provided us with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of $1.0 million along with an immediate usufruct and power of attorney to vote those shares, for $1.0 million.shares. Such shares constituted 25% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief, we acquired 99.9%99.99% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that required us to issue newtransfer or otherwise cause the individual shareholder to acquire, for a total price of $1 (regardless of their par or market value), shares in NSC of an amount sufficient to maintain the individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement (causing the individual shareholder’s 25% ownership interest in NSC to be decreased); and (ii) we did not exercise our share purchase option by February 7, 2014. We exercised our option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.

 

In October 2015, we learned that EWG has filed a lawsuit against the individual shareholder, NSC, NSA, CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo Ahumada Arruit, Luis de Angitia Becerra,other third parties, and the Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja California, Mexico. However, as of the date of the filing of this report, neither NSC nor CW-Cooperatief has been served with formal process for this lawsuit.

In this lawsuit, EWG is challengingchallenged, among other things, the capital investment transactions that increased our ownership interest in NSC to 99.9%99.99%. EWG requested that the court, as a preliminary matter:matter, among others: (a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG.EWG, which resulted in the placement of inscriptions for the lawsuit on NSC’s public records.

 

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Additionally,

EWG is also seekingsought an order directing:directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief.

On April 5, 2016, NSC filed a motion for reconsideration with the Tecate, Mexico court asking, among other things, that the court; (i) reverse its order to record the pendency of the lawsuit in the public records; (ii) cancel the appointment of the inspector; and (iii) allow NSC to provide a counter-guarantee to suspend the effects of the court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public records; and (ii) rejecting NSC’s motion for cancellation of the appointment of the inspector.

On April 26, 2016, NSC filed a full answer to EWG’s claims rejecting every claim made by EWG.

On May 17, 2016, NSC filed a claim with the Third District Court in Matters of Amparo and Federal Trials in the City of Tijuana, Baja California (the “Amparo Court”) challenging the Tecate, Mexico court ex-parte order which appointed an inspector over NSC’s commercial activities. On July 29, 2016, the Amparo Court found that such appointment is unconstitutional and reversed the Tecate, Mexico court’s appointment of an inspector.

On September 6, 2016, the Tecate, Mexico court issued a decree granting the counter-guaranty requested by NSC. Such counter-guaranty was fixed in the amount of 300,000 Mexican pesos and was given to the court on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the challenged transactions were suspended.

On May 2, 2017, the Tecate, Mexico court declared that the initial filing of this lawsuit had expired due to EWG’s lack of activity with respect to certain actions required to proceed to trial. Further, on May 25, 2017, such court declaration became definitive. EWG is entitled to refile the lawsuit, but to date has not done so.

Tijuana Claim - Amparo:

In addition to the Tecate Claim, in January 2018, EWG initiated an ordinary mercantile claim (the “Tijuana Claim”) against the individual shareholder named in the Tecate Claim, NSC and CW-Cooperatief, (with AdR being named as a third party to be called to trial) before the Tenth Civil Judge in Tijuana, Baja California for Mercantile Matters (the “Tenth Civil Judge”).

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

In April 2018, AdR filed an amparo (i.e. a constitutional appeal) against the official writs issued by the Tenth Civil Judge to two governmental entities. In May 2018, the amparo claim was amended to also request protection against additional official writs issued by the Tenth Civil Judge to two other governmental entities and one banking institution. In May 2018, the Third District Court for Amparo and Federal Trials in the State of Baja California with residence in Tijuana granted a temporary suspension of the effects and consequences of the claimed official writs issued by the Tenth Civil Judge pending a further determination by the Third District Court. Such suspension was granted definitively in July 2018, and in August 2018, a resolution determining that the claimed official writs are unconstitutional, was issued. EWG filed a remedy against such resolution, which has not yet ruled on these requests.been resolved.

 

EWGOn October 16, 2018, NSC was offered opportunities to invest the capital required to maintain its relative ownership position in NSC in connectionserved with the capital transactions that increased our ownership interest inTijuana Claim. On November 7, 2018, NSC filed a legal response to 99.9% (i.e. the conversion of our loan to NSC into shares of its common stock), however, EWG consistently elected not to make such capital investments.

We believe thatthis claim, vigorously opposing the claims made by EWG are baseless and without merit, and we will vigorously defendEWG. In addition to such legal response, NSC and CW-Cooperatief in this litigation, and will seek dismissalhas filed (i) a request to submit the Tijuana Claim to arbitration, based on certain provisions of the orders entered byby-laws of NSC, (ii) an appeal remedy against the courtpreliminary relief, and all claims against NSC(iii) a request for the setting of a guarantee to release the preliminary relief granted in favor of EWG. Neither the request for arbitration nor the mentioned appeal have been resolved.

On February 26, 2019, the Tenth Civil Judge acknowledged the filing of the mentioned legal response, the request to submit to arbitration, and CW-Cooperatief. Furthermore,the appeals remedy, granting EWG a period of three business days to, among others, state what it deemed convenient to its interest. However, to date, no resolution on November 19, 2015, NSC and CW-Cooperatief filed a complaintsuch matters has been issued.

Further, on February 26, 2019, the Tenth Civil Judge set the requested guarantee, in the United States District Court, Southern Districtform of New York against EWGa security deposit in the amount of Mex. Cy. $1,000,000.00 (One million Mexican pesos), to release the preliminary relief sought by EWG. On March 4, 2019, NSC filed before the Tenth Civil Judge, evidence of such security deposit, requesting the release of the mentioned preliminary relief. Due to the recent filing of the security deposit, as of the date hereof, the resolution on the release of the preliminary relief is pending.

CW-Cooperatief has not been officially served with the Tijuana Claim, and its Managing Partner, based upon our conclusionAdR has not been notified that lawsuit filedit has to appear for such trial. In any event, AdR is only named a third party called to trial, and no claims are made by EWG in Mexico directly breaches a contract dated April 12, 2012 between NSC and CW-Cooperatief, and EWG. We are vigorously pursuing our claims and seeking relief pursuant to this complaint.AdR.

 

We cannot presently determine what impact the outcomeresolution of this litigation. However, such litigation could adversely impactthe Tijuana Claim may ultimately have on our effortsability to complete the Project.

 

CW-Belize

By Statutory Instrument No. 81 of 2009, the Minister of Public Utilities of the government of Belize published an order, the Public Utility Provider Class Declaration Order, 2009 (the “Order”), which as of May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this designation, the Public Utilities Commission of Belize (the “PUC”) has the authority to set the rates charged by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued the San Pedro Public Water Supply Quality and Security Complaint Order (the “Second Order”) which among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act, (ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval, (iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum number of replacement seawater RO membranes in stock at all times and (v) CW-Belize take possession of and reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010. CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay the enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter. The initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on November 29, 2012. The ruling on this case is pending. We are presently unable to determine what impact the Order and the Second Order will have on our results of operations, financial position or cash flows.


Transfers of U.S. dollars from CW-Belize to our other subsidiaries require authorization in advance from the Central Bank of Belize.

Windsor Plant Water Supply Agreement

Our subsidiary, CW-Bahamas, provides bulk water to the WSC, which distributes the water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence. Pursuant to a water supply agreement, we are required to provide the WSC with at least 16.8 million gallons per week of potable water from the Windsor plant. This water supply agreement was scheduled to expire when we delivered the total amount of water required under the agreement in July 2013, but has been extended on a month-to-month basis. At the conclusion of the agreement, the WSC has the option to:

i.extend the agreement for an additional five years at a rate to be negotiated;
ii.

exercise a right of first refusal to purchase any materials, equipment and facilities that CW-Bahamas intends to remove from the site at a purchase price to be negotiated with CW-Bahamas; or

iii.require CW-Bahamas to remove all materials, equipment and facilities from the site.

At the request of the government of The Bahamas, we continue to operate and maintain the Windsor plant on a month-to-month basis to provide the government of The Bahamas with additional time to decide whether or not it will extend CW-Bahamas’ water supply agreement for the Windsor plant on a long-term basis. CW-Bahamas generated revenues from the operation of this plant of approximately $5.8 million, $6.2 million and $7.2 million during the years ended December 31, 2015, 2014 and 2013, respectively.

CW-Bali

Through our subsidiary, CW-Bali, we have built and presently operate a seawater reverse osmosis plant with a productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of Bali will eventually enable us to sell all of this plant’s production. Our current sales volumes for this plant are not sufficient to cover its operating costs, and CW-Bali’s operating losses were approximately ($484,000), ($458,000) and ($438,000) for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, the capitalized costs for this plant reflected on our consolidated balance sheet were approximately $3.0 million.

In 2015, the Indonesian government passed Regulation 121 which provides a mechanism for governmental regulatory oversight over the utilization of Indonesia’s water resources. Under this new regulation, the approval or cooperation of the local government water utility is required for any water supply contracts executed by non-governmental providers after the effective date of the regulation. Consequently CW-Bali will be required to enter into a cooperation agreement with Bali’s local government water utility, PDAM, or otherwise obtain PDAM’s approval, to supply any new customers. However, we presently have no reason to believe PDAM would not approve any new water supply agreements for CW-Bali.

We are presently seeking a strategic partner to (i) purchase a major portion of our equity ownership in CW-Bali; (ii) lead its sales and marketing efforts; (iii) liaise with PDAM; and (iv) assist with CW-Bali’s on-going funding requirements. We also plan to market the available productive capacity of our Nusa Dua plant to PDAM. If we are not able to obtain a strategic partner for CW-Bali, sell water to PDAM or other new customers, or otherwise significantly increase the revenues generated by our Nusa Dua plant in the future, we will be required to record an impairment charge to reduce the carrying value of CW-Bali’s plant assets to their fair value. Such an impairment charge could have a material adverse impact on our results of operations.

4237

 

  

EffectAdoption of Newly Issued But Not Yet EffectiveNew Accounting Standards:

 

In May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU 2014-09,Revenue from Contracts with Customers. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 prescribes a five stepfive-step framework in accounting for revenues from contracts within its scope, including (a) identification of the contract, (b) identification of the performance obligations under the contract, (c) determination of the transaction price, (d) allocation of the transaction price to the identified performance obligations and (e) recognition of revenues as the identified performance obligations are satisfied. ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. This amendment was originally effective January 1, 2017. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year to January 1, 2018. Early application is permitted but not before January 1, 2017.

In March 2016, the FASB issued ASU 2016-08,Principal versus Agent Considerations (Reporting Revenue Gross versus Net), that amends the principal versus agent guidance in ASU 2014-09. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. ASU 2016-08 also provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services.

In April 2016, the FASB issued ASU 2016-10,Identifying Performance Obligations and Licensing, that amends the revenue guidance in ASU 2014-09 on identifying performance obligations and accounting for licenses of intellectual property. ASU 2016-10 changed the FASB's previous proposals on renewals of right-to-use licenses and contractual restrictions. The Companyeffective date of the standard for us will coincide with ASU 2014-09 during the first quarter 2018.

In May 2016, the FASB issued ASU 2016-11,Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services.

In May 2016, the FASB issued ASU 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies implementation guidance around collectability, sales taxes collected from customers, noncash considerations, contract modifications at transition, and completed contracts at transition.

In December 2016, the FASB issued ASU 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amended the guidance on performance obligation disclosures and makes technical corrections and improvements to the new revenue standard. The standard is currently evaluatingeffective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative effect transition method.

The effective dates of ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 are the same as ASU 2015-14 discussed above. On January 1, 2018, we adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. There was no impact to opening retained earnings as of January 1, 2018 as a result of the adoption of this standard will have on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02,Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The amendments in this update require management to reevaluate whether certain legal entities should be consolidated. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2015-02 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03,Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 provides authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as a direct deduction from the carrying value of debt. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance must be applied retrospectively to each prior period presented. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In July 2015, the FASB issued ASU 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 applies to all inventory that is measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15,Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies the treatment of debt issuance costs from line-of-credit arrangements after adoption of ASU 2015-03. The SEC Staff announced they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendment requires retrospective application and represents a change in accounting principle. The amendment becomes effective in fiscal years beginning after December 15, 2015. The adoption of ASU 2015-15 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU 2015-16,Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires an acquirer to recognize adjustments identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adjustment must include the cumulative effect of the adjustment as if the accounting had been completed on the acquisition date. The update should be applied prospectively and becomes effective January 1, 2016. Early application is permitted. The adoption of ASU 2015-16 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.standard.

 

In January 2016, the FASB issued ASU 2016-01,Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,which provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. In February 2018, the FASB issued ASU 2018-03,Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that clarifies the guidance in ASU No. 2016-01 on equity securities and certain fair value option liabilities among other things. ASU 2016-01 isand ASU 2018-03 are effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for most provisions, is effective using the cumulative-effect transition approach. Early application is permitted for certain provisions.

The Companyadoption of ASU 2016-01 and ASU 2018-03 did not have a material impact on our financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and payments are presented in the statement of cash flows. ASU 2016-15 is currently evaluatingeffective for annual periods beginning after December 15, 2017 and early adoption is permitted. The adoption of ASU 2016-15 did not have a material impact on our financial position, results of operations or cash flows for the effectyear ended December 31, 2018. For the year ended December 31, 2017, the adoption resulted in a reclassification of this amendment will have onapproximately $1.5 million in cash inflows related to the Company’sdistribution of earnings from OC-BVI from investing activities to operating activities in the consolidated financial statements. statement of cash flows.

38

Effect of newly issued but not yet effective accounting standards:

 

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842)which amends the guidance relating to the definition of a lease, recognition of lease assets and liabilities on the balance sheet, and the related disclosure requirements. In July 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, which amends the new leasing guidance such that entities may elect not to restate their comparative periods in the period of adoption. In January 2018, the FASB issued ASU 2018-01,Leases (Topic 842), which provides guidancean optional transition practical expedient for the adoption of ASU 2016-02 that, if elected, would not require an organization to reconsider their accounting for leases. existing land easements that are not currently accounted for under the old leases standard and clarify that new or modified land easements should be evaluated under ASU 2016-02, once an entity has adopted the new standard.

In December 2018, the FASB issued ASU 2018-20,Leases (Topic 842): Narrow-Scope Improvements for Lessors,which addresses issues facing lessors when applying the leases standard such as taxes collected from lessees, certain lessor costs paid directly by lessees, and recognition of variable payments for contracts with lease and nonlease components. In March 2019, the FASB issued ASC 2019-01,Leases (Topic 842): Codification Improvements,which amends the new leasing guidance to align the application of fair value by lessors that are not manufacturers or dealers, requires lessors within the scope of Topic 942,Financial Services-Depository and Lending,to present all principal payments received under leases within investment activities on the Statement of Cash Flows, and exempts both lessees and lessors from providing certain interim disclosures in the fiscal year in which a company adopts the new leases standard.

The new guidance requires companieslessees to recognize an asset and liability on the assets and liabilitiesbalance sheet for all of their lease obligations. Operating leases were previously not recognized on the rights and obligations created by leased assets. The accounting guidance for lessors will remain relatively largely unchanged.balance sheet. ASU 2016-02 is effective for annual and interimreporting periods beginning after December 15, 2018. Early2018 and early adoption is permitted. The Company is currently evaluatingWe will adopt the effectstandard using the modified retrospective method for its existing leases and expects that this standard will increase lease assets and lease liabilities on the consolidated balance sheets. We intend to elect certain practical expedients and will carry forward historical conclusions related to (1) contracts that contain leases, (2) existing lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. We will also apply the practical expedient that will allow us to elect, as an accounting policy, by asset class, to include both lease and non-lease components as a single component and account for it as a lease. We will apply the short-term lease exception for lessees which will allow us to not have to apply the recognition requirements of the new leasing guidance for short-term leases and to recognize lease payments in net income on a straight-line basis over the lease term. We will also apply the practical expedient related to land easements, allowing us to carry forward our accounting treatment for land easements on existing agreements. Based on an analysis we performed, the adoption of this amendment willnew lease standard is not expected to have a material impact on the Company’s consolidatedour financial statements.


Material Expenditures and Commitments

The following table summarizes our contractual obligations asposition, results of December 31, 2015:

  Total  2016  2017-2019  2020-2022  

2023 and

Thereafter

 
Demand loan payable(1) $7,045,258  $7,045,258  $  $-  $- 
Employment agreements  3,145,301   1,846,610   1,298,691   -   - 
Operating leases  6,453,053   717,874   2,084,211   949,596   2,701,372 
Purchase obligations  1,249,704   1,171,368   78,336   -   - 
Security deposits  224,827   50,000   124,827   -   50,000 
Total $18,118,143  $10,831,110  $3,586,065  $949,596  $2,751,372 

(1) Includes interest costs to be incurred.

CW-Bahamas Liquidity

Transfers of U.S. dollars from CW-Bahamas to our other subsidiaries require authorization in advance from the Central Bank of The Bahamas.operations or cash flows.

 

CW-Bahamas Performance Guarantees

 

Our contract to supply water to the WSC from our Blue Hills plant requires us to guarantee delivery of a minimum quantity of water per week. If we do not meet this minimum, we are required to pay the WSC for the difference between the minimum and actual gallons delivered at a per gallon rate equal to the price per gallon that WSC is currently paying us under the contract. The Blue Hills contract expires in 2032 and requires us to deliver 63.0 million gallons of water each week.

 

Dividends

 

·On January 31, 2015,2018, we paid a dividend of $0.075$0.085 to shareholders of record on January 1, 2015.3, 2018.
·On April 30, 2015,2018, we paid a dividend of $0.075$0.085 to shareholders of record on April 1, 2015.2, 2018.
·On July 31, 2015,2018, we paid a dividend of $0.075$0.085 to shareholders of record on July 1, 2015.2, 2018.
·On October 31, 2015,2018, we paid a dividend of $0.075$0.085 to shareholders of record on October 1, 2015.2018.
·On January 31, 2016,2019, we paid a dividend of $0.075$0.085 to shareholders of record on January 1, 2016.2, 2019.
·On February 16, 2016,6, 2019, our Board declared a dividend of $0.075$0.085 payable on April 30, 20162019 to shareholders of record on April 1, 2016.2019.

 

We have paid dividends to owners of our common shares and redeemable preferred shares since we began declaring dividends in 1985. Our payment of any future cash dividends will depend upon our earnings, financial condition, cash flows, capital requirements and other factors our Board of Directors deems relevant in determining the amount and timing of such dividends.

 

Dividend Reinvestment and Common Stock Purchase Plan.

 

This program is available to our shareholders, who may reinvest all or a portion of their common cash dividends into shares of common stock at prevailing market prices and may also invest optional cash payments to purchase additional shares at prevailing market prices as part of this program.

 

Impact of Inflation

 

Under the terms of our Cayman Islands license and our water sales agreements in The Bahamas Belize and the British Virgin Islands, our water rates are automatically adjusted for inflation on an annual basis, subject to temporary exceptions. We, therefore, believe that the impact of inflation on our gross profit, measured in consistent dollars, will not be material. However, significant increases in items such as fuel and energy costs could create additional credit risks for us, as our customers’ ability to pay our invoices could be adversely affected by such increases.


ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

 

Credit RiskNot applicable.

 

We are not exposed to significant credit risk on retail customer accounts in the Cayman Islands as our policy is to cease supply of water to customers whose accounts are more than 45 days overdue. Our primary exposure to credit risk is from accounts receivable arising from bulk water sales to the governments of Belize, The Bahamas, the British Virgin Islands, and the Cayman Islands.

39

 

As of December 31, 2015, we had approximately $5.6 million in loans receivable due from the Water Authority-Cayman. These loans were current as to scheduled principal and interest payments as of December 31, 2015.

  

Interest Rate Risk

We are not exposed to significant interest rate risk as the balance of our demand loan payable is not material to our operations or financial condition.

Foreign Exchange Risk

All of the currencies in our operating areas other than the Mexican peso, Indonesian rupiah (“IDR”) and the euro have been fixed to the dollar for over 30 years and we do not employ a hedging strategy against exchange rate risk associated with our reporting in dollars. If any of these fixed exchange rates becomes a floating exchange rate or if any of the foreign currencies in which we conduct business depreciate significantly against the dollar, our results of operations and financial condition could be adversely affected.

As a result of our foreign operations, we have revenues and expenses, and assets and liabilities that are denominated in foreign currencies that are subject to variable foreign exchange rates. A 10% hypothetical adverse change in foreign exchange rates applied consistently to our financial instruments subject to foreign exchange risk would result in an increase or decrease in our consolidated net income of approximately $308,000 for the year ended December 31, 2015. A 10% hypothetical adverse change in foreign exchange rates applied variably to our financial instruments subject to foreign exchange risk would result in an increase or decrease in our consolidated net income of approximately $402,000 for the year ended December 31, 2015.

Although operations generally are conducted in the relevant local currency, we also are subject to foreign exchange transaction exposure when our subsidiaries transact business in a currency other than their own functional currency.


ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

  Page
CONSOLIDATED WATER CO. LTD.  
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS  
Report of Independent Registered Public Accounting Firm 4741
Consolidated Balance Sheets as of December 31, 20152018 and 20142017 4842
Consolidated Statements of Income for the Years Ended December 31, 2015, 20142018 and 20132017 49
Consolidated Statements of Comprehensive Income (Loss) for the Years Ended December 31, 2015, 2014 and 20134350
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2015, 20142018 and 20132017 5144
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 20142018 and 20132017 5245
Notes to Consolidated Financial Statements 5346
Schedule II, Valuation and Qualifying Accounts, is omitted because the information is included in the financial statements and notes.  


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders of

Consolidated Water Co. Ltd.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Consolidated Water Co. Ltd.Ltd. (the “Company”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of income, comprehensive income (loss), stockholders’ equity and cash flows for each of the two years in the three-year period ended December 31, 2015. 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, Consolidated Water Co. Ltd.’sin accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2015,2018, based on the criteria established in Internal Control-IntegratedControl - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Consolidated Water Co. Ltd.’s management is responsible for these financial statements, for maintaining effective in 2013 and our report dated March 15, 2019,expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting, andreporting.

Basis for its assessmentOpinion

These financial statements are the responsibility of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting.Company's management. Our responsibility is to express an opinion on thesethe Company's financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, and whether effective internal control over financial reporting was maintained in all material respects.due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances.statements. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Consolidated Water Co. Ltd. as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, Consolidated Water Co. Ltd. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).opinion.

 

/s/ Marcum LLP
Fort Lauderdale, Florida
March 15, 2016llp 

We have served as the Company’s auditor since 2005.

Fort Lauderdale, Florida
March 15, 2019


41

CONSOLIDATED WATER CO. LTD.

 

CONSOLIDATED BALANCE SHEETS

 

 December 31,  December 31, 
 2015  2014  2018  2017 
ASSETS                
Current assets                
Cash and cash equivalents $44,792,734  $35,713,689  $31,337,477  $45,482,966 
Certificate of deposit  5,637,538   5,000,000 
Restricted cash  428,203   456,083 
Accounts receivable, net  9,529,016   11,773,744   24,228,095   14,687,078 
Inventory  1,918,728   1,738,382   2,232,721   1,583,553 
Prepaid expenses and other current assets  1,282,660   1,612,860   1,035,796   1,069,743 
Current portion of loans receivable  1,841,851   1,726,310   734,980   1,400,448 
Costs and estimated earnings in excess of billings - construction projects  -   1,090,489 
Costs and estimated earnings in excess of billings  835,669   238,435 
Current assets of discontinued operations  1,959,494   2,229,174 
Total current assets  65,430,730   59,111,557   62,364,232   66,691,397 
Property, plant and equipment, net  53,743,170   56,396,988   58,880,818   49,683,771 
Construction in progress  1,928,610   1,900,016   6,015,043   1,823,284 
Inventory, non-current  4,558,374   4,240,977   4,545,198   4,462,961 
Loans receivable  3,769,016   5,610,867   -   734,980 
Investment in OC-BVI  4,548,271   5,208,603   2,584,987   2,783,882 
Goodwill  8,003,568   8,003,568 
Land and rights of way held for development  24,161,024   21,505,675 
Intangible assets, net  771,811   927,900   1,891,667   3,231,667 
Goodwill  3,499,037   3,499,037 
Land held for development  20,558,424   20,558,424 
Other assets  2,809,255   3,005,462   2,123,999   4,492,835 
Long-term assets of discontinued operations  1,945,062   2,066,875 
Total assets $161,616,698  $160,459,831  $172,515,598  $165,480,895 
                
LIABILITIES AND EQUITY                
Current liabilities                
Accounts payable and other current liabilities $4,829,535  $5,962,015 
Accounts payable, accrued expenses and other current liabilities $4,570,641  $3,548,965 
Accrued compensation  1,286,468   1,015,662 
Dividends payable  1,177,246   1,190,325   1,286,493   1,281,612 
Demand loan payable  7,000,000   9,000,000 
Billings in excess of costs and estimated earnings - construction project  189,985   - 
Note payable to related party  -   686,000 
Billings in excess of costs and estimated earnings  109,940   1,258 
Current liabilities of discontinued operations  646,452   1,097,821 
Total current liabilities  13,196,766   16,152,340   7,899,994   7,631,318 
Deferred tax liability  659,874   1,024,893 
Other liabilities  224,827   224,827   199,827   803,307 
Total liabilities  13,421,593   16,377,167   8,759,695   9,459,518 
Commitments and contingencies                
Equity                
Consolidated Water Co. Ltd. stockholders' equity                
Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares; issued and outstanding 38,804 and 36,840 shares, respectively  23,282   22,104 
Class A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and outstanding 14,781,201 and 14,715,899 shares, respectively  8,868,721   8,829,539 
Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares; issued and outstanding 34,796 and 33,488 shares, respectively  20,878   20,093 
Class A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and outstanding 14,982,906 and 14,918,869 shares, respectively  8,989,744   8,951,321 
Class B common stock, $0.60 par value. Authorized 145,000 shares; none issued  -   -   -   - 
Additional paid-in capital  84,597,349   83,779,292   87,211,953   86,405,387 
Retained earnings  52,084,175   49,000,621   59,298,161   53,105,196 
Cumulative translation adjustment  (533,365)  (482,388)  (549,555)  (549,555)
Total Consolidated Water Co. Ltd. stockholders' equity  145,040,162   141,149,168   154,971,181   147,932,442 
Non-controlling interests  3,154,943   2,933,496   8,784,722   8,088,935 
Total equity  148,195,105   144,082,664   163,755,903   156,021,377 
Total liabilities and equity $161,616,698  $160,459,831  $172,515,598  $165,480,895 

 

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

 

48 

42

 

 

CONSOLIDATED WATER CO. LTD.

 

CONSOLIDATED STATEMENTS OF INCOME

 

  Year Ended December 31, 
  2015  2014  2013 
Retail revenues $23,254,757  $24,104,932  $23,018,498 
Bulk revenues  31,854,255   39,201,011   39,960,220 
Services revenues  2,007,190   2,253,135   843,413 
Total revenues  57,116,202   65,559,078   63,822,131 
             
Cost of retail revenues  10,925,634   11,944,071   10,956,904 
Cost of bulk revenues  21,634,789   27,919,249   28,279,088 
Cost of services revenues  1,629,221   2,580,260   1,080,260 
Total cost of revenues  34,189,644   42,443,580   40,316,252 
Gross profit  22,926,558   23,115,498   23,505,879 
General and administrative expenses  14,458,494   16,654,439   15,844,303 
Income from operations  8,468,064   6,461,059   7,661,576 
             
Other income (expense):            
Interest income  1,013,252   1,440,631   826,570 
Interest expense  (269,090)  (488,770)  (484,057)
Profit sharing income from OC-BVI  105,300   111,375   357,636 
Equity in earnings of OC-BVI  294,368   303,380   979,716 
Impairment of investment in OC-BVI  (1,060,000)  (860,000)  (200,000)
Other  (626,400)  (203,135)  7,048 
Other income (expense), net  (542,570)  303,481   1,486,913 
Net income  7,925,494   6,764,540   9,148,489 
Income attributable to non-controlling interests  406,793   499,182   553,970 
Net income attributable to Consolidated Water Co. Ltd. stockholders $7,518,701  $6,265,358  $8,594,519 
             
Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders $0.51  $0.43  $0.59 
Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders $0.51  $0.42  $0.58 
Dividends declared per common share $0.30  $0.30  $0.30 
             
Weighted average number of common shares used in the determination of:            
Basic earnings per share  14,741,748   14,697,896   14,633,884 
Diluted earnings per share  14,827,755   14,764,323   14,703,880 

  Year Ended December 31, 
  2018  2017 
Retail revenues $25,621,048  $23,225,066 
Bulk revenues  31,031,287   28,682,113 
Services revenues  1,811,372   469,347 
Manufacturing revenues  7,256,150   6,990,496 
 Total revenues  65,719,857   59,367,022 
         
Cost of retail revenues  11,011,456   10,372,199 
Cost of bulk revenues  21,551,383   19,562,503 
Cost of services revenues  1,503,034   469,797 
Cost of manufacturing revenues  4,911,697   4,963,962 
 Total cost of revenues  38,977,570   35,368,461 
Gross profit  26,742,287   23,998,561 
General and administrative expenses  18,709,419   18,682,399 
Loss on asset dispositions and impairments, net  56,774   3,040,158 
Income from operations  7,976,094   2,276,004 
         
Other income (expense):        
Interest income  663,197   380,563 
Interest expense  (8,427)  (5,722)
Profit-sharing income from OC-BVI  654,075   46,575 
Equity in the earnings of OC-BVI  1,798,280   127,802 
Net unrealized gain (loss) on put/call options  (256,000)  960,000 
Other  (111,061)  17,140 
 Other income, net  2,740,064   1,526,358 
Income before income taxes  10,716,158   3,802,362 
Benefit from income taxes  (157,291)  (888,977)
Net income from continuing operations  10,873,449   4,691,339 
Income (loss) from continuing operations attributable to non-controlling interests  695,787   (411,489)
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders  10,177,662   5,102,828 
Net income from discontinued operations  1,115,825   1,041,234 
Net income attributable to Consolidated Water Co. Ltd. stockholders $11,293,487  $6,144,062 
         
Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders        
Continuing operations $0.68  $0.34 
Discontinued operations $0.07  $0.07 
Basic earnings per share $0.75  $0.41 
         
Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders        
Continuing operations $0.68  $0.34 
Discontinued operations $0.07  $0.07 
Diluted earnings per share $0.75  $0.41 
         
Dividends declared per common share $0.34  $0.31 
         
Weighted average number of common shares used in the determination of:        
Basic earnings per share  14,962,760   14,896,944 
Diluted earnings per share  15,074,147   15,006,681 

 

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


43

CONSOLIDATED WATER CO. LTD.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)STOCKHOLDERS’ EQUITY

 

  Year Ended December 31, 
  2015  2014  2013 
Net income $7,925,494  $6,764,540  $9,148,489 
Other comprehensive income (loss)            
Foreign currency translation adjustment  (53,660)  (10,953)  (480,614)
Total other comprehensive income (loss)  (53,660)  (10,953)  (480,614)
Comprehensive income  7,871,834   6,753,587   8,667,875 
Comprehensive income attributable to non-controlling interests  404,110   498,634   529,939 
Comprehensive income attributable to Consolidated Water Co. Ltd. stockholders $7,467,724  $6,254,953  $8,137,936 
  Redeemable
preferred stock
  Common stock  Additional
paid-in
  Retained  Cumulative
translation
  Non-controlling  Total
stockholders’
 
  Shares  Dollars  Shares  Dollars  capital  earnings  adjustment  interests  equity 
Balance as of December 31, 2016  35,225  $21,135   14,871,664  $8,922,998  $85,621,033  $51,589,337  $(549,555) $8,500,424  $154,105,372 
Issue of share capital  9,441   5,665   34,991   20,995   183,491   -   -   -   210,151 
Conversion of preferred stock  (12,214)  (7,328)  12,214   7,328   -   -   -   -   - 
Buyback of preferred stock  (1,093)  (656)  -   -   (9,063)  -   -   -   (9,719)
Net income  -   -   -   -   -   6,144,062   -   (411,489)  5,732,573 
Exercise of options  2,129   1,277   -   -   16,500   -   -   -   17,777 
Dividends declared  -   -   -   -   -   (4,628,203)  -   -   (4,628,203)
Stock-based compensation  -   -   -   -   593,426   -   -   -   593,426 
Balance as of December 31, 2017  33,488   20,093   14,918,869   8,951,321   86,405,387   53,105,196   (549,555)  8,088,935   156,021,377 
Issue of share capital  7,409   4,445   58,228   34,938   197,308   -   -   -   236,691 
Conversion of preferred stock  (5,809)  (3,485)  5,809   3,485   -   -   -   -   - 
Buyback of preferred stock  (1,627)  (976)  -   -   (16,362)  -   -   -   (17,338)
Net income  -   -   -   -   -   11,293,487   -   695,787   11,989,274 
Exercise of options  1,335   801   -   -   12,175   -   -   -   12,976 
Dividends declared  -   -   -   -   -   (5,100,522)  -   -   (5,100,522)
Stock-based compensation  -   -   -   -   613,445   -   -   -   613,445 
Balance as of December 31, 2018  34,796  $20,878   14,982,906  $8,989,744  $87,211,953  $59,298,161  $(549,555) $8,784,722  $163,755,903 

 

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


44

CONSOLIDATED WATER CO. LTD.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCASH FLOWS

 

  Redeemable
preferred stock
  Common stock  Additional
paid-in
  Retained  Cumulative translation  Non-controlling  Total
stockholders’
 
  Shares  Dollars  Shares  Dollars  capital  earnings  adjustment  interests  equity 
Balance as of December 31, 2012  30,265  $18,159   14,593,011  $8,755,807  $82,467,421  $42,965,179  $(15,400) $1,927,214  $136,118,380 
Issue of share capital  10,180   6,108   25,111   15,067   196,698   -   -   -   217,873 
Conversion of preferred stock  (4,720)  (2,832)  4,720   2,832   -   -   -   -   - 
Buyback of preferred stock  (521)  (313)  -   -   (3,952)  -   -   -   (4,265)
Net income  -   -   -   -   -   8,594,519   -   553,970   9,148,489 
Exercise of options  2,204   1,323   63,355   38,012   474,747   -   -   -   514,082 
Dividends declared  -   -   -   -   -   (4,404,150)  -   -   (4,404,150)
Foreign currency translation adjustment  -   -   -   -   -   -   (456,583)  (24,031)  (480,614)
Capital contribution  -   -   -   -   -   -   -   142,105   142,105 
Stock-based compensation  -   -   -   -   246,473   -   -   -   246,473 
Balance as of December 31, 2013  37,408   22,445   14,686,197   8,811,718   83,381,387   47,155,548   (471,983)  2,599,258   141,498,373 
Issue of share capital  5,957   3,574   18,294   10,976   244,787   -   -   -   259,337 
Conversion of preferred stock  (4,756)  (2,854)  4,756   2,854   -   -   -   -   - 
Buyback of preferred stock  (1,822)  (1,093)  -   -   (12,569)  -   -   -   (13,662)
Net income  -   -   -   -   -   6,265,358   -   499,182   6,764,540 
Exercise of options  53   32   6,652   3,991   49,113   -   -   -   53,136 
Dividends declared  -   -   -   -   -   (4,420,285)  -   (164,396)  (4,584,681)
Foreign currency translation adjustment  -   -   -   -   -   -   (10,405)  (548)  (10,953)
Stock-based compensation  -   -   -   -   116,574   -   -   -   116,574 
Balance as of December 31, 2014  36,840   22,104   14,715,899   8,829,539   83,779,292   49,000,621   (482,388)  2,933,496   144,082,664 
Issue of share capital  8,615   5,169   10,514   6,308   131,741   -   -   -   143,218 
Conversion of preferred stock  (7,195)  (4,317)  7,195   4,317   -   -   -   -   - 
Buyback of preferred stock  (748)  (449)  -   -   (5,565)  -   -   -   (6,014)
Net income  -   -   -   -   -   7,518,701   -   406,793   7,925,494 
Exercise of options  1,292   775   47,593   28,557   427,431   -   -   -   456,763 
Dividends declared  -   -   -   -   -   (4,435,147)  -   (182,663)  (4,617,810)
Foreign currency translation adjustment  -   -   -   -   -   -   (50,977)  (2,683)  (53,660)
Stock-based compensation  -   -   -   -   264,450   -   -   -   264,450 
Balance as of December 31, 2015  38,804  $23,282   14,781,201  $8,868,721  $84,597,349  $52,084,175  $(533,365) $3,154,943  $148,195,105 
  Year Ended December 31, 
  2018  2017 
Cash flows from operating activities        
Net income $11,989,274  $5,732,573 
Adjustments to reconcile net income to net cash provided by operating activities:        
         
Income from discontinued operations  (1,115,825)  (1,041,234)
Depreciation and amortization  7,034,234   7,290,068 
Deferred income tax benefit  (365,019)  (888,977)
Unrealized (gain) loss on put/call option  256,000   (960,000)
Compensation expense relating to stock and stock option grants  850,138   803,577 
Net loss on disposal of fixed assets  36,562   117,969 
Foreign currency transaction adjustment  2,593   6,685 
Profit-sharing and equity in earnings of OC-BVI  (2,452,355)  (174,377)
Impairment loss on long-lived assets  20,211   1,656,362 
Impairment of goodwill  -   1,400,000 
Distribution of earnings from OC-BVI  2,651,250   1,477,125 
Change in:        
Accounts receivable and costs and estimated earnings in excess of billings  (10,155,032)  1,007,753 
Inventory  (1,131,409)  (209,975)
Prepaid expenses and other assets  (158,238)  (3,115,279)
Accounts payable, accrued expenses and other current liabilities, and billings in excess of costs and estimated earnings  528,013   191,500 
Net cash provided by operating activities - continuing operations  7,990,397   13,293,770 
Net cash provided by operating activities - discontinued operations  1,055,949   1,827,649 
Net cash provided by operating activities  9,046,346   15,121,419 
         
Cash flows from investing activities        
Additions to property, plant and equipment and construction in progress  (16,202,520)  (4,549,857)
Proceeds from sale of equipment  51,590   22,427 
Collections on loans receivable  1,400,448   1,633,588 
Payment for land and right of way held for development  (2,655,349)  - 
Net cash used in investing activities - continuing operations  (17,405,831)  (2,893,842)
Net cash used in investing activities - discontinued operations  -   (26,860)
Net cash used in investing activities  (17,405,831)  (2,920,702)
         
Cash flows from financing activities        
Dividends paid to common shareholders  (5,092,796)  (4,464,712)
Dividends paid to preferred shareholders  (2,846)  (11,213)
Issuance (repurchase) of redeemable preferred stock  (4,362)  8,058 
Payments on note payable to related party  (1,470,000)  (490,000)
Issuance of note payable to related party  784,000   686,000 
Net cash used in financing activities  (5,786,004)  (4,271,867)
Net increase (decrease) in cash and cash equivalents  (14,145,489)  7,928,850 
Cash and cash equivalents at beginning of period  45,482,966   37,554,116 
Cash and cash equivalents at end of period $31,337,477  $45,482,966 

 

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


CONSOLIDATED WATER CO. LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

45

 

  Year Ended December 31, 
  2015  2014  2013 
Cash flows from operating activities            
Net income $7,925,494  $6,764,540  $9,148,489 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation and amortization  5,657,580   5,524,359   5,472,116 
Amortization of other assets  179,353   179,353   179,353 
Land lease  23,014   25,968   27,371 
Provision for doubtful accounts  -   -   32,933 
Compensation expense relating to stock and stock option grants  407,668   202,454   381,976 
Net loss on disposal of fixed assets  32,566   77,495   14,562 
Foreign currency transaction adjustment  420,641   107,839   245,684 
Profit sharing and equity in earnings of OC-BVI  (399,668)  (414,755)  (1,337,352)
Impairment losses  1,060,000   860,000   200,000 
Unrealized gain on marketable securities  -   -   (17,137)
Change in:            
Accounts receivable and Costs and estimated earnings in excess of billings  3,402,728   5,988,523   (6,387,462)
Inventory  (732,588)  (566,928)  (65,637)
Prepaid expenses and other assets  276,116   423,893   (137,563)
Accounts payable and other liabilities and Billings in excess of costs and estimated earnings - construction project  (933,118)  (987,880)  1,622,611 
Net cash provided by operating activities  17,319,786   18,184,861   9,379,944 
             
Cash flows from investing activities            
Purchase of certificate of deposit  (5,637,538)  (5,000,000)  - 
Maturity of certificate of deposit  5,000,000   -   - 
Additions to property, plant and equipment and construction in progress  (3,113,565)  (3,626,278)  (4,315,389)
Proceeds from sale of equipment  10,160   13,620   13,740 
Distribution of earnings from OC-BVI  -   969,600   1,439,250 
Collections on loans receivable  1,726,310   1,691,102   1,812,533 
Sale of marketable securities  -   8,587,475   - 
Payment for land held for development  -   (7,382,858)  (3,125,566)
Payment of land purchase obligation  -   (10,050,000)  - 
Restriction on cash balance  (42,716)  (456,083)  - 
Net cash used in investing activities  (2,057,349)  (15,253,422)  (4,175,432)
             
Cash flows from financing activities            
Dividends paid to CWCO common shareholders  (4,417,534)  (4,407,249)  (4,388,708)
Dividends paid to CWCO preferred shareholders  (11,881)  (11,528)  (10,383)
Dividends paid to non-controlling interests  (201,473)  (164,396)  - 
Repurchase of redeemable preferred stock  (6,014)  (13,077)  9,313 
Proceeds received from exercise of stock options  456,763   52,551   500,505 
Principal repayments of long term debt  -   (5,301,327)  (1,724,025)
Capital contribution from non-controlling interest  -   -   142,105 
Proceeds received from demand loan payable  -   10,000,000   - 
Repayments of demand loan payable  (2,000,000)  (1,000,000)  - 
Net cash used in financing activities  (6,180,139)  (845,026)  (5,471,193)
Effect of exchange rate changes on cash  (3,253)  760   542 
Net increase (decrease) in cash and cash equivalents  9,079,045   2,087,173   (266,139)
Cash and cash equivalents at beginning of period  35,713,689   33,626,516   33,892,655 
Cash and cash equivalents at end of period $44,792,734  $35,713,689  $33,626,516 

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


  

CONSOLIDATED WATER CO. LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Principal activity

 

Consolidated Water Co. Ltd., and its subsidiaries (collectively, the “Company”) use reverse osmosis technology to produce potable water from seawater. The Company processes and supplies water and provides water-related products and services to its customers in the Cayman Islands, Belize, The Commonwealth of The Bahamas, the British Virgin Islands, the United States and Indonesia. The Company sells water to a variety of customers, including public utilities, commercial and tourist properties, residential properties and government facilities. The base price of water supplied by the Company, and adjustments thereto, are determined by the terms of a retail license and bulk water supply contracts which provide for adjustments based upon the movement in the government price indices specified in the license and contracts as well as monthly adjustments for changes in the cost of energy. The Company also manufactures and services a wide range of products and provides design, engineering, management, operating and designother services forapplicable to commercial, municipal and industrial water plant construction,production, supply and manages and operates water plants owned by others.treatment.

 

2. Accounting policies

 

Basis of preparation: The consolidated financial statements presented are prepared in accordance with the accounting principles generally accepted in the United States of America.

 

Use of estimates: The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, goodwill and the fair value of the Company’s investment in its affiliate.goodwill. Actual results could differ significantly from such estimates.

 

Basis of consolidation: The accompanying consolidated financial statements include the accounts of the Company’s (i) wholly-owned subsidiaries, Aquilex, Inc., Cayman Water Company Limited (“Cayman Water”), Consolidated Water (Belize) Limited (“CW-Belize”), Ocean Conversion (Cayman) Limited (“OC-Cayman”), DesalCo Limited (“DesalCo”), Consolidated Water Cooperatief, U.A. (“CW-Cooperatief”), Consolidated Water U.S. Holdings, Inc. (“CW-Holdings”); and (ii) majority-owned subsidiaries Consolidated Water (Bahamas) Ltd. (“CW-Bahamas”), Consolidated Water (Asia) Pte. Limited,Aerex Industries, Inc. (“Aerex”), PT Consolidated Water Bali (“CW-Bali”) and, N.S.C. Agua, S.A. de C.V. (“NSC”) and Aguas de Rosarito S.A.P.I. de C.V. (“AdR”). The Company’s investment in its affiliate Ocean Conversion (BVI) Ltd. (“OC-BVI”), is accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.

 

Foreign currency:The Company’s reporting currency is the United States dollar (“US$”). The functional currency of the Company and its foreign operating subsidiaries (other than NSC, AdR, CW-Cooperatief and CW-Cooperatief)CW-Bali) is the currency for each respective country. The functional currency for NSC, AdR, CW-Cooperatief and CW-Bali is the US$. NSC and AdR conduct business in US$ and Mexican pesos, CW-Cooperatief conducts business in US$ and euros, and CW-Bali conducts business in US$ and Indonesian rupiahs. The exchange rates betweenfor the Cayman Islands dollar, the Belize dollar and the Bahamian dollar are fixed to the US$. CW-Cooperatief conducts business in US$ and euros, CW-Bali conducts business in US$ and Indonesian rupiahs, and NSC conducts business in US$ and Mexican pesos. The exchange rates for conversion of euros, rupiahs and Mexican pesos, euros and rupiahs into US$ vary based upon market conditions. Net foreign currency gains (losses) arising from transactions conducted in foreign currenciesand re-measurements were ($485,291), ($111,409)$8,089 and ($197,396)$73,635 for the years ended December 31, 2015, 20142018 and 2013,2017, respectively, and are included in “Other income (expense) - Other” in the accompanying consolidated statements of income.

Comprehensive income: Comprehensive income (loss) is defined as the change in equity during a period from transactions and other events from non-owner sources. Comprehensive income (loss) is the total of net income and other comprehensive income (loss) which, for the Company, is comprised entirely of foreign currency translation adjustments related to CW-Bali.

 

Cash and cash equivalents: Cash and cash equivalents consist of demand deposits at banks and highly liquid deposits at banks with an original maturity of three months or less. Cash and cash equivalents as of December 31, 20152018 and December 31, 20142017 include $13.6$8.4 million and $3.0$15.9 million, respectively, of certificates of deposits with an original maturity of three months or less.

 

As of December 31, 2015,2018, the Company had deposits in U.S. banks in excess of federally insured limits of approximately $1.9$2.7 million. As of December 31, 2015,2018, the Company held cash in foreign bank accounts, including Belize cash not held for sale, of approximately $44.4$28.9 million.

 

Transfers from the Company’s Bahamas and Belize bank accounts to Company bank accounts in other countries require the approval of the Central Bank of the Bahamas and Belize, respectively.Bahamas. As of December 31, 2015,2018, the equivalent United States dollar cash balances for deposits held in theThe Bahamas and Belize were approximately $23.2 million and $4.2 million, respectively. The $23.2 million Bahamas balance includes the Company’s certificate of deposit balance of approximately $5.6$4.3 million.

 

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.


46

Inventory:Inventory primarily includes consumables stock and spare parts stock that are valued at the lower of cost, or net realizable valueless an allowance for obsolescence, 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 linestraight-line method with an allowance for estimated residual values. Rates are determined based on the estimated useful lives of the assets as follows:

 

Buildings 5 to 40 years
Plant and equipment 4 to 40 years
Distribution system 3 to 40 years
Office furniture, fixtures and equipment 3 to 10 years
Vehicles 3 to 10 years
Leasehold improvements Shorter of 5 years or lease term 
Lab equipment 5 to 10 years

 

Additions to property, plant and equipment are comprised of the cost of the contracted services, direct labor and materials. Assets under construction are recorded as additions to property, plant and equipment upon completion of the projects. Depreciation commences in the month the asset is placed in service.

 

Long-lived assets: Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company recognizes an impairment loss only if its carrying amount is not recoverable through its undiscounted cash flows and measures the impairment loss based on the difference between the carrying amount and estimated fair value.

 

Construction in progress: Interest costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a substantial periodamount of time to be ready for their intended use, are added to the cost of those assets until such time as the assets are substantially ready for use. No interest was capitalized during the years ended December 31, 2015, 20142018 or 2013.2017.

 

Goodwill and intangible assets: Goodwill represents the excess cost over the fair value of the assets of an acquired business. Goodwill and intangible assets acquired in a business combination accounted for as a purchase and determined to have an indefinite useful life are not amortized but are tested for impairment at least annually. Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values and reviewed periodically for impairment. The Company evaluates the possible impairment of goodwill annually as part of its reporting process for the fourth quarter of each fiscal year. Management identifies the Company’s reporting units, which consist of the retail, bulk, and manufacturing business segments, and determines the carrying value of each reporting unit by assigning the assets and liabilities, including the existing goodwill and intangible assets, to those reporting units. The Company determines the fair value of each reporting unit and compares the fair value to the carrying amount of the reporting unit. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, 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 the years ended December 31, 20152018 and 2014,2017, the Company estimated the fair value of its reporting units by applying the discounted cash flow method, the subject company stock price method, the guideline public company method, and the mergers and acquisitions method.

 

The discounted cash flow method relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis. In preparing these seven-year projections for its retail unit, the Company (i) identified possible outcomes of its on-going negotiations with the Cayman Islands government for the renewal of its retail license; (ii) estimated the cash flows associated with each possible outcome; and (iii) assigned a probability to each outcome and associated estimated cash flows. The weighted average estimated cash flows were then summed to determine the overall fair value of the retail unit under this method. The possible outcomes used for the discounted cash flow method for the retail unit included the implementation of a rate of return on invested capital model, the methodology proposed by Cayman Islands government representatives for the new retail license.


The Company also estimated the fair value of each of its reporting units for the years ended December 31, 20152018 and 20142017 through reference to the quoted market prices for the Company and guideline companies and the market multiples implied by guideline merger and acquisition transactions.

 

The Company weighted the fair values estimated for each of its reporting units under each method and summed such weighted fair values to estimate the overall fair value for each reporting unit. The respective weightings the Company applied to each method as of December 31, 20152018 were consistent with those used as of December 31, 20142017 and were as follows:

 

  2015  2014 
Method Retail  Bulk  Retail  Bulk 
Discounted cash flow  50%  50%  50%  50%
Subject company stock price  30%  30%  30%  30%
Guideline public company  10%  10%  10%  10%
Mergers and acquisitions  10%  10%  10%  10%
   100%  100%  100%  100%
47

Method Retail  Bulk  Manufacturing 
Discounted cash flow  80%  80%  80%
Guideline public company  10%  10%  10%
Mergers and acquisitions  10%  10%  10%
   100%  100%  100%

 

The fair values the Company estimated for its retail, bulk and manufacturing units exceeded their carrying amounts by 79%, 62% and 53%, respectively, as of December 31, 2018. The fair values the Company estimated for its retail and bulk units exceeded their carrying amounts by 72%121% and 20%59%, respectively, as of December 31, 2015.2017. The fair valuescarrying amount the Company estimated for its retail and bulk unitsmanufacturing unit exceeded their carrying amountsits fair value by 36% and 29%, respectively,12% as of December 31, 2014.2017 and as discussed in the paragraph that follows, the Company recorded an impairment loss to reduce the carrying value of the goodwill for this segment.

 

On February 11, 2016, the Company acquired 51% ownership interest in Aerex. In connection with this acquisition the Company recorded goodwill of $8,035,211. Aerex’s actual results of operations for the six months in 2016 following the acquisition fell significantly short of the projected results for this period that were included in the overall cash flow projections the Company utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities. Due to this shortfall in Aerex’s results of operations, the Company tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the discounted cash flow method. As a result of this impairment testing, the Company determined that the carrying value of the Aerex goodwill exceeded its fair value and recorded an impairment loss of $1,750,000 for the three months ended September 30, 2016, included in loss on long-lived asset dispositions and impairments, net in the accompanying consolidated statements of income, to reduce the carrying value of this goodwill to $6,285,211. As part of the Company’s annual impairment testing of goodwill performed during the fourth quarter, in 2017 the Company updated its projections for Aerex’s future cash flows, determined that the carrying value of the Aerex goodwill exceeded its fair value, and recorded an impairment loss of $1,400,000 for the three months ended December 31, 2017, which is included in loss on long-lived asset dispositions and impairments, net in the accompanying consolidated statements of income, to further reduce the carrying value of the goodwill to $4,885,211. The Company also performed an analysis reconcilingmay be required to record additional impairment losses to reduce the conclusionscarrying value of valuethis goodwill in future periods if the Company determines it likely that Aerex’s results of operations will fall short of its most recent projections of its future cash flows.

In February 2019, the Company sold CW-Belize. As a result of this sale, CW-Belize has been accounted for its reporting unitsas discontinued operations in the consolidated financial statements, and bulk segment goodwill of approximately $381,000 as of December 31, 2018 and 2017 associated with CW-Belize has been reclassified to its market capitalization at October 1, 2015. This reconciliation resultedlong-term assets of discontinued operations in an implied control premium for our Companythe consolidated statements of 5%.financial condition.

 

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 (“WSC”) 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 yearone-year period by 438 million gallons, a requirement CW BahamasCW-Bahamas met during 2007. The Company was solely responsible for the engineering, labor and materials costs incurred to effectaffect 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, 20152018 and 2014.2017. Accumulated amortization for these costs was approximately $1.6$2.2 million and $1.4$2.0 million as of December 31, 20152018 and 2014,2017, respectively.

Other liabilities:Other liabilities consist of security deposits received from large customers as security Amortization expense was $179,353 for trade receivables.the years ended December 31, 2018 and 2017.

 

Income taxes: The Company accounts for the income taxes arising from the operations of its United States subsidiary, Aquilex, Inc.,and Mexico subsidiaries under the asset and liability method. Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent any deferred tax asset may not be realized.

 

CW-Belize is liable for business and corporate income taxes. Under the terms of its water supply agreement with Belize Water Services Ltd. (“BWSL”), its sole customer, CW-Belize is reimbursed by BWSL for all taxes that it is required to pay and records this reimbursement as an offset to its tax expense.

Other than Bali, Indonesia, theThe Company is not presently subject to income taxes in the other countries in which it operates.

Revenue recognition: Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The following table presents the Company’s revenues disaggregated by revenue source.

  Year Ended December 31, 
  2018  2017 
Retail revenues $25,621,048  $23,225,066 
Bulk revenues  31,031,287   28,682,113 
Services revenues  1,811,372   469,347 
Manufacturing revenues  7,256,150   6,990,496 
Total Revenues $65,719,857  $59,367,022 


48

Plant construction revenue

Retail revenues

The Company produces and costsupplies water to end-users, including residential, commercial and government customers in the Cayman Islands under an exclusive retail license issued to Cayman Water by the Cayman Islands government to provide water in two of the three most populated and rapidly developing areas on Grand Cayman Island. CW-Bali owns and operates a desalination plant construction revenue:in Bali, Indonesia that sells water to resort and residential properties. Customers are billed on a monthly basis based on metered consumption and bills are typically collected within 30 to 35 days after the billing date. Receivables not collected within 45 days subject the customer to disconnection from water service. In 2018 and 2017, bad debts represented less than 1% of the Company’s total retail 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. All retail water contracts are month-to-month contracts and revenue is recorded as invoiced.

Bulk revenues

The Company produces and related costssupplies water to government-owned distributors in the Cayman Islands and The Bahamas.

OC-Cayman provides bulk water to the Water Authority-Cayman (“WAC”), a government-owned utility and regulatory agency, under various agreements. The WAC in turn distributes such water to properties in Grand Cayman outside of Cayman Water’s retail license area.

The Company sells bulk water in The Bahamas through its majority-owned subsidiary CW-Bahamas to the Water WSC, which distributes such water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence. The Company also sells water to a private resort on Bimini.

The Company has elected the “right to invoice” practical expedient for revenue recognition on its bulk water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice.

Services and Manufacturing revenues

The Company, through its 51% owned subsidiary Aerex, is a custom and specialty manufacturer of water treatment-related systems and products and provides design, engineering, management, operating and other services applicable to commercial, municipal and industrial water production. Substantially all of Aerex’s customers are U.S. companies.

The Company also provides design, engineering and construction services for desalination projects through DesalCo, which is recognized by suppliers as work progresses on fixed price contractsan original equipment manufacturer of seawater reverse osmosis desalination plants. DesalCo also provides management and procurement services for the construction of desalination plants and engineering services relating to be soldmunicipal water production, distribution and treatment.

The Company recognizes construction services and manufacturing revenues over time under the input method using costs incurred (which represents work performed) to third parties usingdate relative to total estimated costs at completion to measure progress toward satisfying its performance obligations as such measure best reflects the percentage-of-completion method, which relies on contract revenuetransfer of control of the promised good to the customer. Contract costs include labor, material and estimates of total expected costs.overhead. 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-completionthis input method, the Company records revenue and recognizes profit or loss as work on the contract progresses. The Company estimates total project costs and profit to be earned on each long term,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 assumeshas elected the risk that“right to invoice” practical expedient for revenue recognition on its management services agreements and recognizes revenue in the costs associated with constructingamount to which the plant may be greater than it anticipated in preparing its bid. However,Company has a right to invoice.

Practical Expedients and Exemptions

The Company does not disclose the termsvalue of each of the salesunsatisfied performance obligations for (i) contracts with its customers requirean original expected length of one year or less and (ii) contracts for which the Company to guarantee the sales price for the plantrecognizes revenue at the bid amount. Becauseamount to which it has 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 abilityright 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 bidinvoice for a plant due to factors beyond the Company’s control, which could cause the profit margin for a plant to be less than the Company anticipated when the 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 exists, and therefore relies upon, in preparing its bid.services performed.

 

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 2014 and 20132017 have been reclassified to conform to the current year’s presentation. Amounts shown

49

3. Discontinued operations - CW-Belize

During the quarter ended September 30, 2018, the Company signed a non-binding Memorandum of Understanding (“MOU”) with Belize Water Services Ltd. (“BWSL”) with respect to the potential sale of CW-Belize to BWSL. The Company was not otherwise considering a sale of CW-Belize, so as an incentive for the Company to consider this proposed transaction, BWSL promised in the statementMOU to facilitate both the conversion from Belize dollars to US dollars and the subsequent repatriation of all cash balances CW-Belize had on deposit in Belize. Transfers of funds held by CW-Belize to its parent company, which were accomplished by means of conversion of Belize dollars into U.S. dollars, required the approval of the Central Bank of Belize and were dependent on the amount of U.S. dollars available to Belize banks to execute such transfers. Weakness in the Belize economy and other factors have reduced the amount of U.S. dollars that Belize banks have available for transfer, which limited in prior years and for most of 2018 the amount of funds the Company was able to transfer from CW-Belize. Repatriations of funds from CW-Belize to its parent company amounted to $458,000 and $400,000 for the years ended December 31, 2017 and 2016, respectively, significantly less than the net income and net cash flows CW-Belize generated for 2014 totalingthose years. With BWSL’s assistance, the Company was able to repatriate approximately $2.75 million in cash from Belize to its bank accounts in the Cayman Islands during the three months ended September 30, 2018 and an additional $1.0 million during the fourth quarter of 2018.

In late December 2018, the Company’s Board of Directors formally approved the sale of CW-Belize to BWSL and the Company repatriated an additional $1.1 million relating to costs and estimated earnings in excessfrom CW-Belize during the first week of billings – construction project were reclassified from investing activities to operating activities. Amounts shown in the statement of cash flows for 2013 as effect of exchange rate changes on cash totaling approximately $364,000 were reclassified to operating activities.2019.

 

3.On February 14, 2019, the Company closed the Transaction and completed the sale of CW-Belize to BWSL. After adjustments, the final purchase price under the Agreement was approximately $7.0 million. Pursuant to the Agreement, BWSL has paid the Company $6.735 million of the purchase price, with approximately $265,000 being withheld to cover any indemnification obligations of the Company under the Agreement. The amount withheld is payable by BWSL to the Company by June 30, 2019 to the extent not applied to cover any liabilities of the Company under the Agreement. 

Summarized financial information for CW-Belize as of December 31, 2018 and 2017 and for the years ended December 31, 2018 and 2017 is as follows:

  December 31, 
  2018  2017 
Current assets $1,959,494  $2,229,174 
Property, plant and equipment, net  725,930   841,293 
Inventory, non-current  356,854   296,012 
Goodwill  380,680   380,680 
Intangible assets  467,575   533,767 
Other assets  14,023   15,123 
Total assets of discontinued operations $3,904,556  $4,296,049 
         
Total liabilities of discontinued operations $646,452  $1,097,821 

  Year Ended December 31, 
  2018  2017 
Revenues $3,127,767  $2,939,643 
Income from operations  1,154,897   1,045,359 
Net Income  1,115,825   1,041,234 
Depreciation  115,363   116,081 

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4. Cash and cash equivalents

 

Cash and cash equivalents are not restricted by the terms of the Company’s bank accounts as to withdrawal or use. As of December 31, 20152018 and 2014,2017, the equivalent United States dollars are denominated in the following currencies:

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Bank accounts:                
United States dollar $10,961,159  $7,809,107  $11,797,054  $6,764,201 
Cayman Islands dollar  10,590,207   4,274,025   5,626,487   4,306,768 
Bahamian dollar  1,983,236   6,822,761   3,301,002   13,310,936 
Belize dollar  4,213,923   3,658,705   1,130,783   4,646,184 
Bermudian dollar  4,571   5,507   3,370   3,502 
Mexican Peso  27,872   53,203 
Euro  23,819   30,291 
Singapore dollar  25,879   27,641 
Indonesian Rupiah  40,483   78,991 
Mexican peso  37,313   17,014 
Indonesian rupiah  22,289   46,331 
  27,871,149   22,760,231   21,918,298   29,094,936 
                
Short term deposits:                
United States dollar  1,307,337   474,728   8,379,723   10,559,407 
Cayman Islands dollar  -   4,802,060 
Bahamian dollar  15,614,248   12,478,730   1,039,456   1,026,563 
  16,921,585   12,953,458   9,419,179   16,388,030 
Total cash and cash equivalents $44,792,734  $35,713,689  $31,337,477  $45,482,966 

 

Transfers from the Company’s Bahamas and Belize bank accounts to Company bank accounts in other countries require the approval of the Central Bank of the Bahamas and Belize, respectively.

Bahamas.

56 

51

 

 

4.5. Accounts receivable, net

 

  December 31 
  2015  2014 
Trade accounts receivable $8,235,514  $10,722,177 
Receivable – construction project  521,250   415,305 
Receivable from OC-BVI  45,118   49,154 
Other accounts receivable  920,472   780,446 
   9,722,354   11,967,082 
Allowance for doubtful accounts  (193,338)  (193,338)
  $9,529,016  $11,773,744 

  December 31, 
  2018  2017 
Trade accounts receivable $22,331,720  $13,341,438 
Receivable from OC-BVI  46,600   123,807 
Other accounts receivable  2,008,677   1,380,735 
   24,386,997   14,845,980 
Allowance for doubtful accounts  (158,902)  (158,902)
Accounts receivable, net $24,228,095  $14,687,078 

 

The activity for the allowance for doubtful accounts consisted of:

 

 December 31  December 31, 
 2015  2014  2018  2017 
Opening allowance for doubtful accounts $193,338  $223,043  $158,902  $193,338 
Provision for doubtful accounts  -   -   -   - 
Accounts written off during the year  -   (29,705)  -   (34,436)
Ending allowance for doubtful accounts $193,338  $193,338  $158,902  $158,902 

 

Significant concentrations of credit risk are disclosed in Note 20.21.

 

5.6. Inventory

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Water stock $27,670  $38,353  $36,837  $28,332 
Consumables stock  152,350   204,180   106,925   103,442 
Spare parts stock  6,297,082   5,736,826   6,634,157   5,914,740 
Total inventory  6,477,102   5,979,359   6,777,919   6,046,514 
Less current portion  1,918,728   1,738,382   2,232,721   1,583,553 
Inventory (non-current) $4,558,374  $4,240,977  $4,545,198  $4,462,961 

 

6.7. Loans receivable

 

  December 31, 
  2015  2014 
All loans receivable are due from the Water Authority-Cayman and consisted of:        
Two loans originally aggregating $10,996,290, bearing interest at 6.5% per annum, receivable in aggregate monthly installments of $124,827 to June 2019, and secured by the machinery and equipment of the North Side Water Works plant. $4,678,355  $5,831,504 
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.  932,512   1,505,673 
Total loans receivable  5,610,867   7,337,177 
Less current portion  1,841,851   1,726,310 
Loans receivable, excluding current portion $3,769,016  $5,610,867 

  December 31, 
  2018  2017 
All loans receivable are due from the Water Authority Cayman and consisted of:        
Two loans originally aggregating $10,996,290, bearing interest at 6.5% per annum, receivable in aggregate monthly installments of $124,827 to June 2019, and secured by the machinery and equipment of the North Side Water Works plant. $734,980  $2,135,428 
Total loans receivable  734,980   2,135,428 
Less current portion  734,980   1,400,448 
Loans receivable, excluding current portion $-  $734,980 


52

7.

8. Property, plant and equipment and construction in progress

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Land $3,223,361  $3,223,361  $3,435,361  $3,435,361 
Buildings  18,437,758   18,462,770   19,829,575   19,916,098 
Plant and equipment  63,733,553   61,679,293   61,777,836   58,873,604 
Distribution system  31,726,766   31,481,048   36,057,078   33,901,161 
Office furniture, fixtures and equipment  3,210,819   3,159,699   3,635,184   3,413,702 
Vehicles  1,384,294   1,273,803   1,431,719   1,444,182 
Leasehold improvements  260,519   260,519   244,221   237,027 
Lab equipment  157,851   28,743   27,795   157,838 
  122,134,921   119,569,236   126,438,769   121,378,973 
Less accumulated depreciation  68,391,751   63,172,248   67,557,951   71,695,202 
Property, plant and equipment, net $53,743,170  $56,396,988  $58,880,818  $49,683,771 
Construction in progress $1,928,610  $1,900,016  $6,015,043  $1,823,284 

 

As of December 31, 2015,2018, the Company had outstanding capital commitments of $563,551.$443,503. 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, 20152018 and 2014, $2,694,7332017, $14,398,624 and $2,693,622,$3,183,122, respectively, of construction in progress was placed in service. Depreciation expense was $5,501,491, $5,355,771,$5,514,881 and $5,113,589$5,746,865 for the years ended December 31, 2015, 20142018 and 2013,2017, respectively.

 

8.9. Investment in OC-BVI

 

The Company owns 50% of the outstanding voting common shares and a 43.53% equity interest in the profits of Ocean Conversion (BVI) Ltd. (“OC-BVI”). The Company also owns certain profit sharingprofit-sharing rights in OC-BVI that raise its effective interest in the profits of OC-BVI to approximately 45%. Pursuant to a management services agreement, OC-BVI pays the Company monthly fees for certain engineering and administrative services. OC-BVI’s sole customer is the Ministry of Communications and Works of the Government of the British Virgin Islands (the “Ministry”) to which it sells bulk water.

 

The Company’s equity investment in OC-BVI amounted to $4,548,271$2,584,987 and $5,208,603$2,783,882 as of December 31, 20152018 and 2014,2017, respectively.

 

Until 2009, substantially all of the water sold by OC-BVI to the Ministry was supplied by one desalination plant with a capacity of 1.7 million gallons per day located at Baughers Bay, Tortola (the “Baughers Bay plant”). As discussed later in this Note (see “Baughers Bay litigation”), the BVI government assumed the operating responsibilities for the Baughers Bay plant in March 2010. During 2007, OC-BVI completed the construction of a desalination plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the “Bar Bay plant”). OC-BVI began selling water to the Ministry from this plant in January 2009 and on March 4, 2010, OC-BVI and the BVI government executed a seven-year contract for the Bar Bay plant (the “Bar Bay agreement”). 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 a BVI government site by no later than March 4, 2011. OC-BVI has not commenced construction of this storage reservoir due to the BVI government’s failure to pay (i) the full amount of invoices for the water provided by the Bar Bay plant on a timely basis; and (ii) the full amount ordered pursuant to a court ruling relating to the Baughers Bay litigation(see discussion that follows).


Summarized financial information for OC-BVI is as follows:

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Current assets $4,323,792  $2,547,542  $2,286,179  $2,835,614 
Non-current assets  4,682,650   5,297,904   3,859,310   3,945,071 
Total assets $9,006,442  $7,845,446  $6,145,489  $6,780,685 

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Current liabilities $584,116  $427,269  $132,005  $218,753 
Non-current liabilities  1,650,252   1,393,200   1,048,950   1,158,300 
Total liabilities $2,234,368  $1,820,469  $1,180,955  $1,377,053 

53

  Year Ended December 31, 
  2018  2017 
Revenues $2,845,211  $2,874,936 
Cost of revenues  1,348,046   1,759,285 
Gross profit  1,497,165   1,115,651 
General and administrative expenses  707,034   1,163,547 
Long-lived asset impairment and disposition losses  -   188,164 
Income (loss) from operations  790,131   (236,060)
Other income, net  3,393,271   587,859 
Net income  4,183,402   351,799 
Income attributable to non-controlling interests  52,275   58,202 
Net income attributable to controlling interests $4,131,127  $293,597 

 

A reconciliation of the beginning and ending balances for the investment in OC-BVI for the year ended December 31, 2018: 

  Year Ended December 31, 
  2015  2014  2013 
Revenues $4,143,882  $4,679,829  $4,711,091 
Cost of revenues  2,261,973   2,833,007   2,886,820 
Gross profit  1,881,909   1,846,822   1,824,271 
General and administrative expenses  958,364   940,072   957,743 
Income from operations  923,545   906,750   866,528 
Other income (expense), net(1)  (176,448)  (188,751)  1,411,932 
Net income  747,097   717,999   2,278,460 
Income (loss) attributable to non-controlling interests  70,854   21,045   27,793 
Net income attributable to controlling interests $676,243  $696,954  $2,250,667 

(1)Other income (expense), net, includes $2,000,000 for the year ended December 31, 2013 in award amounts received under the Court ruling for the Baughers Bay litigation.
Balance as of December 31, 2017 $2,783,882 
Profit-sharing and equity from earnings of OC-BVI  2,452,355 
Distributions received from OC-BVI  (2,651,250)
Balance as of December 31, 2018 $2,584,987 

 

The Company recognized $294,369, $303,380$1,798,280 and $979,716$127,802 in earnings from its equity investment in OC-BVI for the years ended December 31, 2015, 20142018 and 2013,2017, respectively. The Company recognized $105,300, $111,375$654,075 and $357,636$46,575 in profit sharingprofit-sharing income from its profit sharingprofit-sharing agreement with OC-BVI for the years ended December 31, 2015, 20142018 and 2013,2017, respectively. 

 

For the years ended December 31, 2015, 2014,2018 and 2013,2017, the Company recognized $528,346, $747,340,approximately $1,811,372 and $784,626,$469,347, respectively, in revenues from sales of consumable stock and its management services agreement with OC-BVI, which is included in services revenues in the accompanying consolidated statement of income.OC-BVI. Amounts payable by OC-BVI to the Company were $23,803$46,746 and $33,707$123,807 as of December 31, 20152018 and 2014,2017, respectively. The Company’s remaining unamortized balance recorded for this management services agreement, which is reflected as an intangible asset onCompany's deferred revenues from OC-BVI, included in other current liabilities in the accompanying consolidated balance sheet, was approximately $106,000sheets, were $0 and $196,000$181,328 as of December 31, 20152018 and 2014, respectively (see Note 10).2017, respectively.

 

Resolution of Baughers Bay Litigation

 

UnderThrough March 2010, OC-BVI supplied water to the BVI government from a plant located at Baughers Bay, Tortola, under the terms of a water supply agreement dated May 1990 (the “1990 Agreement”) between OC-BVI and the Government of the British Islands (the “BVI Government”), upon the expiration of itswith an initial seven-year term that expired in May 1999, the1999. The 1990 Agreement provided that such agreement would automatically be extended for another seven-year term unless the BVI government provided notice, at least eight months prior to such expiration, of its decision to purchase the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $1.42 million. In correspondence between the parties from late 1998 through early 2000, the BVI government indicated that it intended to purchase the plant but would be amenable to negotiating a new water supply agreement and that it considered the 1990 Agreement to be in force on a monthly basis until negotiations between the BVI government and OC-BVI were concluded. Occasional discussions were held between the parties 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.

Duringplant and 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”)initiated litigation 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

As a result of the plant.


Thefinal ruling made by the Appellate Court ruled on this litigation in 2009, determining that (i) the BVI governmentGovernment was entitled to immediateawarded 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; (ii)but 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 (iii) 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,

On August 31, 2018, OC-BVI and the BVI government have not reached anentered into a settlement agreement on the value of the plant at the date it was transferred to the BVI government. However, during the first quarter of 2015, OC-BVI and the BVI government appointed a mutually approved appraiser to complete a valuation offor the Baughers Bay plant in accordance with the Appellate Court ruling, and such valuation is presently in process.

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 fairagreed upon 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 valueplant of the Baughers Bay plant previously transferred by$4,432,834, which resulted in a net payment (i.e. after legal and other expenses) to 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 cancellationin September 2018 of the agreement after its initial seven-year term, and the exercise by the BVI government of the seven-year extension$4,271,409. Such amount is included 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.


As of December 31, 2014, the Company determined that the carrying value of its investment in OC-BVI exceeded its fair value and recorded an impairment charge of $860,000 for the three months ended December 31, 2014.

As of March 31, 2015, June 30, 2015, September 30, 2015, and December 31, 2015, after updating its probability-weighted estimates of OC-BVI’s future cash flows and its resulting estimate of the fair value of its investment in OC-BVI, the Company determined that the carrying value of its investment in OC-BVI exceeded its fair value and recorded impairment losses on this investment of $310,000, $275,000, $225,000 and $250,000 for the three months ended March 31, 2015, June 30, 2015, September 30, 2015, and December 31, 2015, respectively. The resulting carrying value of the Company’s investment in OC-BVI of approximately $4.5 million as of December 31, 2015 assumes that the BVI government will honor its obligations under the Bar Bay agreement and also assumes (on a probability-weighted basis) that (i) the BVI government will exercise its option to extend the Bar Bay agreement for seven years beyond its initial term, which expires March 4, 2017, and (ii) OC-BVI will receive the pending amount (as estimated by the Company) awarded by the Eastern Caribbean Court of Appeals for the value of the Baughers Bay plant previously transferred by OC-BVI to the BVI government.

The $4.5 million carrying value of the Company’s investment in OC-BVI as of December 31, 2015 exceeds the Company’s underlying equityother income, net in OC-BVI’s net assets by approximately $900,000. 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 to its March 4, 2017 expiration date, and OC-BVI receives the pending court award amount assumed due for the value of the Baughers Bay plant, OC-BVI’s expected future cash flows, and therefore its fair value computed under the discounted cash flow method, will decrease. Unless OC-BVI obtains an extension or 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 during 2016 to reduce the carrying value of its investment in OC-BVI to its then current fair value. These impairment losses will, in the aggregate, at least equal the underlying $900,000 in goodwill reflected in the carrying value of the Company’s investment in OC-BVI. The losses the Company records for its investment in OC-BVI in the future will exceed this $900,000 if OC-BVI ultimately ceases operations at its Bar Bay plant, as OC-BVI will be required to record an impairment loss to reduce the carrying value of its Bar Bay plant to its then estimated fair value. OC-BVI’s aggregate carrying value of the assets that comprise its Bar Bay plant was approximately $4.4 million as of December 31, 2015. Future impairment losses for the Company’s investment in OC-BVI and the Company’s equity in any future operating losses incurred by OC-BVI could have a material adverse impact on the Company’s2018 consolidated results of operations.

 

54

9. N.S.C. Agua, S.A. de C.V.

10. NSC and AdR Project Development

 

In May 2010, the Company acquired, through its wholly-owned Netherlands subsidiary, CW-Cooperatief, a 50% interest in NSC, a development stage Mexican company. The Company has since purchased, through the conversion of a loan it made to NSC, sufficient shares to raise its ownership interest in NSC to 99.9%99.99%. NSC was formed to pursue a project (the “Project”) that originally encompassed the construction, operation and minority ownership of a 100 million gallon per day seawater reverse osmosis desalination plant to be located in northern Baja California, Mexico and accompanying pipelines to deliver water to the Mexican potable water system. As discussed in paragraphs that follow, during 2015 the scope of the Project was defined by the State of Baja California (the “State”) to consist of a first phase consisting of a 50 million gallonsgallon per day plant and a pipeline that connects only to the Mexican potable water infrastructure and a second phase consisting of an additional 50 million gallons per day of production capacity.capacity with additional pipeline infrastructure.

 

Since its inceptionThrough a series of transactions completed in 2012-2014, NSC has engaged engineering groups with extensive regional and/or technical experience to prepare preliminary designs and cost estimates for the desalination plant and the proposed pipeline and prepare the environmental impact studies for local, state and federal regulatory agencies, and has also acquired the land, performed pilot plant and feed water source testing, and evaluated financing alternatives for the Project.

NSC entered into a purchase contract for 8.1purchased 20.1 hectares of land for approximately $20.6 million on which the proposed Project’s plant would be constructed and in 2012 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 paid $7.4 million in May 2014 to complete this land purchase. In 2013, NSC purchased an additional 12 hectares of land for the project for $12 million, of which $2 million was paid. NSC paid the remaining $10 million balance for this land purchase on May 15, 2014.constructed.

 

In 2012 and 2013, NSC conducted an equipment piloting plant and water data collection program at the proposed feed water source for the Project under a Memorandum of Understanding (the “EPC MOU”) with a global engineering, procurement and construction contractor for large seawater desalination plants. Under the EPC MOU, 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 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 decided not to extend the EPC MOU beyond its February 2014 expiration date and NSC paid the contractor $350,000 during the three months ended March 31, 2014 as compensation for the operation and maintenance of the pilot plant.

Based upon the original scope of the Project, NSC signed a letter of intent with Otay Water District in Southern California in November 2012 to deliver no less than 20 million and up to 40 million gallons of water per day from the Project’s plant to the Otay Water District at the border between Mexico and the U.S. On November 25, 2013, Otay Water District submitted an application to the Department of State of the United States of America for a Presidential Permit authorizing the construction, connection, operation and importation of desalinated seawater at the international boundary between the United States and Mexico in San Diego County, California. The Company understands that this application is currently being reviewed by the relevant authorities. However, in discussions held in 2015, Mexican federal and state water regulators have indicated to the Company that it is not likely that water produced by the Project would be approved by such regulators for direct sale by NSC to U.S. customers such as the Otay Water District. Instead any additional water ultimately provided to the United States as either a direct or indirect result of the Project would be arranged through third party agreements with Mexican governmental agencies and delivered by the means such agencies deem appropriate, which may or may not include a pipeline from the Project’s plant to the U.S. border.


In November 2012, NSC entered into a lease with an effective term of 20-years from the date of full operation of the Project’s desalination plant, with the Comisión Federal de Electricidad for approximately 5,000 square meters of land on which it plans to construct the water intake and discharge works for the plant. The amounts due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately $20,000$15,000 per month. This lease is cancellablemay be cancelled by NSC should NSC ultimately not proceed with the Project.

 

In August 2014, the State of Baja California enacted new legislation to regulate Public-Private Association projects which involve the type of long-term contract between a public sectorpublic-sector authority and a private party that NSC is seeking to completerequired for the Project.Project (the “APP Law”). Pursuant to this new legislation, onin January 4, 2015, NSC submitted an expression of interest for its project to the SecretaryMinistry of Infrastructure and Urban Development of the State of Baja California (“SIDUE”). On January 23, 2015, SIDUE accepted NSC’s expression of interest and requested that NSC submit a detailed proposal for the Project that complies with the requirements of the new legislation. NSC submitted this detailed proposal (the “APP Proposal”) to SIDUE in late March 2015. The new legislation requiresrequired that such proposal be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee (the “APP Committee”) for review and authorization. If the Project iswas authorized the State of Baja California (the “State”) iswould be required to conduct a public tender for the Project.

 

In response to its APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the Director General of the Comisión Estatal dedel Agua de Baja California (“CEA”), the State agency with responsibility for the Project. In this letter, CEA statedProject, stating that (i) in its opinion, the Project is in the public interest with high social benefits and is consistent with the objectives of the State Development Plandevelopment plan; and (ii) that the Project should proceed, and the required public tender should be conducted. OnIn November 6, 2015, the State officially commenced the tender for the Project, the scope of which the State has defined as a first phase to be operational in 2019 consisting of a 50 million gallonsgallon per day plant and a pipeline that connects to the Mexican potable water infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million gallons per day of production capacity. Thecapacity with additional pipeline infrastructure. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. (“NuWater”) and Degremont S.A. de C.V. (the “Consortium”) submitted its tender for the Project in April 2016 and in June 2016, the State has set March 23, 2016designated the Consortium as the tender submission date. The State tendering process requires that prospective bidders provide certain legal, technical and financial qualifications in order to obtainwinner of the tender documents. NSC provided its qualifications, was deemed qualified byprocess for the State and obtained the tender documents, and plans to submit its tender on or before the March 23, 2016 deadline.Project.

 

The Company has acknowledged since the inception of the Project that, dueDue to the amount of capital the Project requires, NSC will ultimately need an equity partner or partners for the Project. DuringConsequently, NSC’s tender to the fourth quarter of 2014, the Company concluded that its chances of successfully completingState for the Project underwas based upon the new Public-Private Association legislation would be greatly enhanced through the addition of an equity partner for NSC with substantial financial resources and a history of successful capital project investments in Mexico. In March 2015, NSC entered into a Letter of Intent (“LOI”) with such a potential partner. Pursuant to the LOI,following: (i) NSC agreed towill sell or otherwise transfer the land and other Project assets to a new company (“Newco”) that would build and own the Project; (ii) NSC’s potential partnerpartners would provide the majority of the equity for the Project and thereby would own the majority interest in Newco; (iii) NSC would maintain a minority ownership position in Newco; and (iv) Newco would enter into a long-term management and technical services contract for the Project with an entity partially owned by NSC or another Company subsidiary.

In August 2016, NSC and NuWater incorporated Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), a special purpose company, to complete the Project and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operations and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the first day that the Project begins commercial operations. As of December 31, 2018 and 2017, NSC owned 99.6% of the equity of AdR.

On August 22, 2016, the Public Private Partnership Agreement for public private partnership number 002/2015, bid number SIDUE-CEA-APP-2015-002 (“APP Contract”), was executed between AdR, CEA, the Government of Baja California represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (“CESPT”). The APP Contract requires AdR to design, construct, finance and operate a seawater reverse osmosis desalination plant (and accompanying aqueducts) with a capacity of up to 100 million gallons per day in two phases: the first with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The first phase must be operational within 36 months of commencing construction and the second phase must be operational by July 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueduct for a period of 37 years starting from the commencement of operation of the first phase. At the end of the operating period, the plant and aqueduct will be transferred to the CEA.

55

The APP Contract does not become effective until the following conditions are met:

·the State has established and registered various payment trusts, guaranties and bank credit lines for specific use by the Project;
·various water purchase and sale agreements between the CEA, the payment trusts and the CESPT have been executed;
·AdR has obtained all of the rights of way required for the aqueduct; and
·all debt financing agreements necessary to provide the funding to AdR for the first phase of the Project have been executed.

In December 2016, the Congress of the State of Baja California, Mexico passed Decreto #57 which, among other things, ratified and authorized the payment obligations of the corresponding public entities under the APP Contract. During 2017, following consultations between representatives of the State of Baja California and the Ministry of Finance of the Federal Government of Mexico, it was determined that certain amendments to Decreto #57 were required to comply with recent changes to the Federal Financial Discipline Law for Federative Entities and Municipalities (the “Financial Discipline Law”). In addition, it was necessary to amend Decreto #57 to authorize the inclusion of revenues from the CESPT in the primary payment trust for the Project. These amendments were included in Decreto #168, which was approved by the Congress of the State of Baja California in December 2017. The authorization of the payment obligations of the public entities under the APP Contract given in Decreto #57, as amended by Decreto #168, expired on December 31, 2018. For the Project to proceed, the State must obtain new approvals from its Congress to establish the various payment trusts, guaranties and bank credit lines for use by the Project.

Both the exchange rate for the Mexico peso relative to the dollar and general macroeconomic conditions in Mexico have varied since the execution of the APP Contract. These changes have adversely impacted the estimated construction, operating, and financing costs for the Project. The LOI is no longer valid, as its terms were applicable ifAPP Contract and only if NSCthe APP Law allow for the parties to negotiate (but do not guarantee) modifications to the consideration (i.e. water tariff) under the APP Contract in the event of such significant macroeconomic condition changes. In February 2017, AdR submitted proposals to the CEA requesting the definition of the mechanism required by the APP Contract to update the consideration under the APP Contract for changes in foreign exchange rates, lending rates and its potential partner were awardedcertain laws which have impacted the Project. On June 1, 2018, AdR and the CEA executed an amendment to the APP Contract which, among other things, increases the scope of Phase 1 of the Project by early March 2016. However,for including the Company expects NSC’s tender submittedaqueduct originally designated for Phase 2, and addresses AdR’s concerns regarding the impact on the Project for changes in the exchange rate for the peso relative to the Statedollar and changes in interest rates that have occurred subsequent to the submission of the Consortium’s bid for the Project. As a result of this amendment to the APP Contract, the final cost of Phase 1 and the related consideration to be charged by AdR under the APP Contract will be determined based upon an agreement with one or more equity partners on terms similar to thosethe bid submitted by the Consortium, the changes set forth in the LOI.amendment to the APP Contract and the economic conditions (e.g. interest rates and currency exchange rates) in effect on the financial closing date for Phase 1.

 

IncludedIn February 2018, AdR executed a subscription agreement (the “Agreement”) for the equity funding required for the Project. The Agreement calls for NSC to retain a minimum of 25% of the equity in AdR. One or more affiliates of Greenfield SPV VII, S.A.P.I. de C.V. (“Greenfield”), a Mexico company managed by an affiliate of a leading U.S. asset manager, will acquire a minimum of 55% of the equity of AdR. The Agreement also provides Suez Medio Ambiente México, S.A. de C.V. (“Suez”), a subsidiary of SUEZ International, S.A.S., with the option to purchase 20% of the equity of AdR. If Suez does not exercise this option, NSC will retain 35% of the equity of AdR and Greenfield will acquire 65% of the equity of AdR. The Agreement will become effective when the additional conditions related to the Project are met, including but not limited to those conditions discussed previously. The aggregate investment to be made by the equity partners in the Company’s consolidated resultsProject, in the form of operations are generalequity and administrative expenses from NSC, consistingsubordinated shareholder loans, is presently estimated at approximately 20% of organizational, legal, accounting,the total cost of Phase 1 of the Project. This Agreement expires on June 30, 2019, unless otherwise extended by mutual agreement of the parties.

In February 2018, CW-Holdings acquired the remaining 0.4% of AdR’s equity interest previously held by NuWater.

In June 2018, AdR and Suez executed a contract whereby Suez will serve as the engineering, consultingconstruction and other costs relating to NSC’s project development activities. Such expenses amounted to $2.2 million, $3.7 million, and $3.2 millionprocurement contractor for the years ended December 31, 2015, 2014 and 2013, respectively. The assets and liabilitiesProject with such contract becoming effective on the effective date of NSC included in the Company’s consolidated balance sheets amounted to approximately $22.0 million and $488,000, respectively, as of December 31, 2015 and approximately $22.0 million and $214,000, respectively, as of December 31, 2014.APP Contract.

56

  

The Company expectspolitical environment in Mexico has recently experienced significant changes and the new, federal administration has made economic policy announcements focusing on austerity. While the long-term ramifications of such changes and announcements are unknown, in the short-term they have (i) caused certain rating agencies to incur additional project development costslower Mexico’s sovereign credit rating, (ii) resulted in a decrease in the value of the Mexico peso and (iii) created uncertainty with respect to the incoming administration’s position on behalfprojects and contracts approved by previous administrations. The federal administration has a strong influence on many of NSC during 2016.the state and local governments and congresses, raising the possibility that the federal government will influence local politics, which could impact the State’s and the CEA’s ability to meet certain conditions required to make the APP Contract effective.

 

DespiteIf AdR is ultimately unable to proceed with the expenditures the Company has made and the activities it has completedProject due to date, upon completiona failure by any of the tender processparties involved to meet the State may awardconditions necessary for the ProjectAPP Contract to a partybecome effective, or for any other than NSC, or the State may cancel the tender process. If NSC is not awarded the Project,reason, the land NSC has purchased and the right of way deposits may lose itstheir strategic importance as the site forderived from their association with the Project and consequently may decline in value. If NSC isAdR does not awardedproceed with the Project, NSC may ultimately be unable to sell this land or recoup their right of way deposits for amountamounts at least equal to or in excesstheir carrying values as of its current carrying valueDecember 31, 2018 of $20.6approximately $21.1 million and any$3.0 million, respectively. Any loss on the sale of the land, or impairment charge the Companylosses NSC may be required to record as a result of a decrease in the (i) fair value of the land,land; or (ii) value of the rights of way arising from the inability to complete the Project could have a material adverse impact on itsthe Company’s financial condition and results of operations.

 

Included in the Company’s results of operations are general and administrative expenses from NSC and AdR, consisting of organizational, legal, accounting, engineering, consulting and other costs relating to Project development activities. Such expenses amounted to approximately $2,884,000 and $3,012,000 for the year ended December 31, 2018 and 2017, respectively. The assets and liabilities of NSC and AdR included in our consolidated balance sheets amounted to approximately $26.2 million and $243,000, respectively, as of December 31, 2018 and approximately $23.1 million and $173,000 respectively, as of December 31, 2017.

Project Litigation Initiated by EWG

Tecate Claim:

 

Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50% ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (“NSA”). NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (“EWG”) and the other half of its shares in NSC to an individualAlejandro de la Vega (the “individual shareholder”). In February 2012, the Company paid $300,000 to enter into an agreement (the “Option Agreement”) that provided it with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of $1.0 million along with an immediate usufruct and power of attorney to vote those shares, for $1.0 million.shares. Such shares constituted 25% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief, the Company acquired 99.9%99.99% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that required the Company to issue newtransfer or otherwise cause the individual shareholder to acquire, for a total price of $1 (regardless of their par or market value), shares in NSC of an amount sufficient to maintain the individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement (causing the individual shareholder’s 25% ownership interest in NSC to be decreased); and (ii) the Company did not exercise its share purchase option by February 7, 2014. The Company exercised its option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014.


In October 2015, the Company learned that EWG has filed a lawsuit against the individual shareholder, NSC, NSA, CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo Ahumada Arruit, Luis de Angitia Becerra,other third parties, and the Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja California, Mexico. However, as of the date of the filing of this report, neither NSC nor CW-Cooperatief has been served with formal process for this lawsuit.

In this lawsuit, EWG is challengingchallenged, among other things, the capital investment transactions that increased the Company’s ownership interest in NSC to 99.9%99.99%. EWG requested that the court, as a preliminary matter:matter, among others: (a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG.EWG, which resulted in the placement of inscriptions for the lawsuit on NSC’s public records.

 

Additionally, EWG is also seekingsought an order directing:directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief.

On April 5, 2016, NSC filed a motion for reconsideration with the Tecate, Mexico court asking, among other things, that the court; (i) reverse its order to record the pendency of the lawsuit in the public records; (ii) cancel the appointment of the inspector; and (iii) allow NSC to provide a counter-guarantee to suspend the effects of the court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public records; and (ii) rejecting NSC’s motion for cancellation of the appointment of the inspector.

On April 26, 2016, NSC filed a full answer to EWG’s claims rejecting every claim made by EWG.

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On May 17, 2016, NSC filed a claim with the Third District Court in Matters of Amparo and Federal Trials in the City of Tijuana, Baja California (the “Amparo Court”) challenging the Tecate, Mexico court ex-parte order which appointed an inspector over NSC’s commercial activities. On July 29, 2016, the Amparo Court found that such appointment is unconstitutional and reversed the Tecate, Mexico court’s appointment of an inspector.

On September 6, 2016, the Tecate, Mexico court issued a decree granting the counter-guaranty requested by NSC. Such counter-guaranty was fixed in the amount of 300,000 Mexican pesos and was given to the court on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the challenged transactions were suspended.

On May 2, 2017, the Tecate, Mexico court declared that the initial filing of this lawsuit had expired due to EWG’s lack of activity with respect to certain actions required to proceed to trial. Further, on May 25, 2017, such court declaration became definitive. EWG is entitled to refile the lawsuit, but to date has not done so.

Tijuana Claim - Amparo:

In addition to the Tecate Claim, in January 2018, EWG initiated an ordinary mercantile claim (the “Tijuana Claim”) against the individual shareholder named in the Tecate Claim, NSC and CW-Cooperatief, (with AdR being named as a third party to be called to trial) before the Tenth Civil Judge in Tijuana, Baja California for Mercantile Matters (the “Tenth Civil Judge”).

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

In April 2018, AdR filed an amparo (i.e. a constitutional appeal) against the official writs issued by the Tenth Civil Judge to two governmental entities. In May 2018, the amparo claim was amended to also request protection against additional official writs issued by the Tenth Civil Judge to two other governmental entities and one banking institution. In May 2018, the Third District Court for Amparo and Federal Trials in the State of Baja California with residence in Tijuana granted a temporary suspension of the effects and consequences of the claimed official writs issued by the Tenth Civil Judge pending a further determination by the Third District Court. Such suspension was granted definitively in July 2018, and in August 2018, a resolution determining that the claimed official writs are unconstitutional, was issued. EWG filed a remedy against such resolution, which has not yet ruled on these requests.been resolved.

 

The Company believes thatOn October 16, 2018, NSC was served with the Tijuana Claim. On November 7, 2018, NSC filed a legal response to this claim, vigorously opposing the claims made by EWG are baseless and without merit, and will vigorously defendEWG. In addition to such legal response, NSC and CW-Cooperatief in this litigation, and will seek dismissalhas filed (i) a request to submit the Tijuana Claim to arbitration, based on certain provisions of the orders entered byby-laws of NSC, (ii) an appeal remedy against the courtpreliminary relief, and all claims against NSC(iii) a request for the setting of a guarantee to release the preliminary relief granted in favor of EWG. Neither the request for arbitration nor the mentioned appeal have been resolved.

On February 26, 2019, the Tenth Civil Judge acknowledged the filing of the mentioned legal response, the request to submit to arbitration, and CW-Cooperatief. Furthermore,the appeals remedy, granting EWG a period of three business days to, among others, state what it deemed convenient to its interest. However, to date, no resolution on November 19, 2015, NSC and CW-Cooperatief filed a complaintsuch matters has been issued.

Further, on February 26, 2019, the Tenth Civil Judge set the requested guarantee, in the United States District Court, Southern Districtform of New York against EWGa security deposit in the amount of Mex. Cy. $1,000,000.00 (One million Mexican pesos), to release the preliminary relief sought by EWG. On March 4, 2019, NSC filed before the Tenth Civil Judge, evidence of such security deposit, requesting the release of the mentioned preliminary relief. Due to the recent filing of the security deposit, as of the date hereof, the resolution on the release of the preliminary relief is pending.

CW-Cooperatief has not been officially served with the Tijuana Claim, and its Managing Partner, based upon the Company’s conclusionAdR has not been notified that lawsuit filedit has to appear for such trial. In any event, AdR is only named a third party called to trial, and no claims are made by EWG in Mexico directly breaches a contract dated April 12, 2012 between NSC and CW-Cooperatief, and EWG. The Company is vigorously pursuing its claims and seeking relief pursuant to this complaint.AdR.

 

The Company cannot presently determine the outcome of this litigation. However, such litigation could adverselywhat impact the Company’s effortsresolution of the Tijuana Claim may ultimately have on our ability to complete the Project.

 

58

Mexico tax authority

 

The Mexico tax authority, the Servicio de Administracion Tributaria (“SAT”), assessed NSC for taxes relating to payments to foreign vendors on which the SAT contended should have been subject to income tax withholdings during NSC’s 2011 tax year. As of December 31, 2015 and 2014, the assessment and related penalties, surcharges, inflation adjustments and late fees totaled 7,367,875 Mexican pesos, respectively. Such assessments were equivalent to approximately $428,203 and $456,083 as of December 31, 2015 and 2014, respectively, based upon the exchange rate between the US$ and the Mexican peso as of those dates.

NSC retained the assistance of Mexican tax advisers in this matter, as it believed the assumptions and related work performed by the SAT did not support their tax assessment. As a result, NSC elected to contest this assessment in Mexico federal tax court. NSC was required to provide an irrevocable letter of credit which amounted to 7,367,875 Mexican pesos as of December 31, 2015 as collateral in connection with this tax case. The restricted cash balances of $428,203 and $456,083 included in the accompanying consolidated balance sheets as of December 31, 2015 and 2014, respectively, represents cash on deposit with a bank to secure payment of this irrevocable letter of credit.

In November 2014, NSC received a favorable judgment from the tax court. Based on this outcome, the SAT filed an appeal shortly thereafter to contest the judgment. On February 15, 2016, NSC received a favorable judgment from the appellate tax court.

10.11. Intangible assets

 

In 2003, as part of the acquisition of a group of companies,February 2016, 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.purchased a 51% ownership interest in Aerex Industries, Inc. The Company attributed $856,356 of the purchase price of the acquisition to thetransaction identified certain intangible assets with a fair value of this management services agreement, which has no expiration term. Initially the Company determined that this intangible asset had an indefinite life$5,900,000 and therefore it was not amortized. However in 2010,useful lives as a resultfollows: Non-Compete (5 years), Trade name (15 years), Certifications/programs (3 years), Customer backlog (1 year), and Customer relationships (4 years). The costs and accumulated amortization for these assets as of the loss by OC-BVI of its Baughers Bay contract (see Note 8), the Company began amortizing this asset over the life of OC-BVI’s remaining seven-year water supply contract for its Bar Bay plant.December 31, 2018 and 2017 were as follows:

 

The carrying amount of the Belize Water Production and Supply Agreement is being amortized over the 23-year term of the agreement that expires in March 2026. 

  December 31, 
  2018  2017 
Cost        
Non-compete agreement $400,000  $400,000 
Trade name  1,400,000   1,400,000 
Certifications/programs  2,000,000   2,000,000 
Customer backlog  100,000   100,000 
Customer relationships  2,000,000   2,000,000 
   5,900,000   5,900,000 
Accumulated amortization        
Non-compete agreement  (233,333)  (153,333)
Trade name  (272,222)  (178,889)
Certifications/programs  (1,944,444)  (1,277,778)
Customer backlog  (100,000)  (100,000)
Customer relationships  (1,458,334)  (958,333)
   (4,008,333)  (2,668,333)
Intangible assets, net $1,891,667  $3,231,667 

 

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 amortized over the option period.


  December 31, 
  2015  2014 
Cost        
Intangible asset management service agreement $856,356  $856,356 
Belize water production and supply agreement  1,522,419   1,522,419 
Option agreement  -   300,000 
   2,378,775   2,678,775 
Accumulated amortization        
Intangible asset management service agreement  (750,697)  (660,800)
Belize water production and supply agreement  (856,267)  (790,075)
Option agreement  -   (300,000)
   (1,606,964)  (1,750,875)
Intangible assets, net $771,811  $927,900 

Amortization of intangible assets for each of the next five years and thereafter is expected to be as follows:

 

2016 $156,757 
2017  81,286 
2018  66,192 
2019  66,192  $728,889 
2020  66,192   215,000 
2021  100,000 
2022  93,333 
2023  93,333 
Thereafter  335,192   661,112 
 $771,811  $1,891,667 

 

Amortization expense was $156,089, $168,588,$1,340,000 and $358,527$1,363,850 for the years ended December 31, 2015, 20142018 and 2013,2017, respectively.

 

11. Dividends12. Note payable

 

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:

  2015  2014  2013 
First Quarter $0.075  $0.075  $0.075 
Second Quarter  0.075   0.075   0.075 
Third Quarter  0.075   0.075   0.075 
Fourth Quarter  0.075   0.075   0.075 
  $0.30  $0.30  $0.30 

12. Long term debt

Long term debtNote payable consists of the following:

 

  December 31, 
  2015  2014 
       
Demand loan payable with an original balance of $10.0 million, payable in quarterly installments of $500,000 with the remaining principal balance due on May 14, 2016 if not called by the lender; bearing interest at LIBOR plus 1.5%. $7,000,000  $9,000,000 
Total debt  7,000,000   9,000,000 
Less current portion  7,000,000   9,000,000 
Long term debt, excluding current portion $-  $- 
  December 31, 
  2018  2017 
Working capital loan from related party to Aerex bearing interest at 1.04% per annum and payable on March 31, 2018 $-  $686,000 
Total note payable  -   686,000 
Less current portion  -   686,000 
Note payable, excluding current portion $-  $- 

59

13. Income taxes

 

Substantially allThe components of income before income taxes for the years ended December 31, 2018 and 2017 are as follows:

  Year Ended December 31, 
  2018  2017 
Foreign (not subject to income taxes) $15,100,642  $10,041,971 
Mexico  (3,115,656)  (3,188,134)
United States  (153,003)  (2,010,241)
   11,831,983   4,843,596 
Less discontinued operations  (1,115,825)  (1,041,234)
  $10,716,158  $3,802,362 

On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. The Tax Act made significant changes to U.S. corporate income tax by, among other things, reducing the corporate federal income tax rate from 35% to 21%, eliminating or reducing certain deductions, and providing for immediate expensing of certain qualified property. U.S. GAAP requires the effects of changes in tax rates and laws upon deferred tax balances to be recognized in the period in which the legislation is enacted. Accordingly, the Company re-measured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal income tax rate of 21%, which is the tax rate at which these assets and liabilities are expected to reverse in the future. The re-measurement resulted in a $545,000 income tax benefit for the year ended December 31, 2017 related to items included in continuing operations.

The Company's provision for income taxes for the years ended December 31, 2018 and 2017 consisted of a deferred tax benefit relating to U.S. operations made up of the Company assets owned by its Cayman Island subsidiaries are pledged as collateralfollowing:

  Year Ended December 31, 
  2018  2017 

Current tax expense

 $207,728  $1,371 
Deferred tax benefit  (365,019)  (890,348)
  $(157,291) $(888,977)

A reconciliation of the U.S. statutory federal tax rate to the effective benefit rate for the $10.0U.S. loss before income taxes for the years ended December 31, 2018 and 2017 is as follows:

  Year Ended December 31, 
  2018  2017 
U.S. statutory federal rate  21.00%  34.00%
State taxes, net of federal effect  4.22%  2.00%
Foreign tax rate differential  (38.26)%  (82.91)%

R&D tax credit

  (2.27)%  (2.49)%
Permanent items  1.26%  13.39%

Tax Act adjustment

  0.00%  (11.25)%
Valuation allowance for deferred tax assets  12.72%  28.90%
   (1.33)%  (18.36)%

The tax effects of significant items comprising the Company's net long-term deferred tax liability as of December 31, 2018 and 2017 were as follows:

  December 31, 
  2018  2017 
Deferred tax assets:        
Operating loss carryforwards - Mexico $3,020,049  $4,923,026 
Land basis difference - Mexico  999,719   702,547 
Start-up costs - Mexico  3,856,942   747,215 
Valuation allowances  (7,876,710)  (6,372,788)
   -   - 
Deferred tax liabilities:        
Property and equipment - U.S.  180,431   205,827 
Intangible assets - U.S.  479,443   819,066 
   659,874   1,024,893 
         
Net deferred tax liability $659,874  $1,024,893 

60

During the year ended December 31, 2018, the Company increased its total valuation allowance from $6.4 million demand loan payable. to $7.9 million. As of December 31, 2018, the Company had a net loss carryforward valued at $10.1 million that will begin to expire in 2020 if unused.


13.

14. Share capital and additional paid-in capital

 

Shares of redeemable preferred stock (“preferred shares”) are issued under the Company’s Employee Share Incentive Plan (see Note 18)19) and carry the same voting and dividend rights as shares of common stock (“common shares”). Preferred shares vest over four years and convert to common stock on a share for share basis on the fourth anniversary of each grant date. Preferred shares are only redeemable with the Company’s agreement. Upon liquidation, preferred shares rank in preference to the common shares to the extent of the par value of the preferred shares and any related additional paid in capital.

The Company is a party to an Option Deed dated August 6, 1997, and amended on August 8, 2005, September 27, 2005 and May 30, 2007 (as amended, the “Option Deed”), designed to deter coercive takeover tactics. Pursuant to the Option Deed, the Company granted to the holders of its common shares and redeemable preferred shares options (the “Options”) to purchase one one-hundredth of a share of Class 'B' common shares of the Company at an exercise price of $100.00 per one one-hundredth of a Class 'B' common share, subject to adjustment. The Options are attached to and trade with the Company’s common shares and redeemable preferred shares, and no separate certificates representing the Options have been distributed. The Options will separate from the Company’s common shares and redeemable preferred shares, and certificates representing the Options will be issued, upon the earlier of the date (such date, the “Distribution Date”) that is (i) ten business days following a public announcement that a person or group of affiliated or associated persons (an “Acquiring Person”) has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Company’s outstanding common shares, or (ii) ten business days following the commencement of a tender offer or exchange offer that would result in a person or group becoming an Acquiring Person.

The Options are not exercisable until the Distribution Date and will expire at the close of business on July 31, 2017, unless that date is extended or the Options are earlier redeemed by us. Additionally, following the Distribution Date, all Options that are, or in certain circumstances were, beneficially owned by any Acquiring Person will be null and void.

For a period of ten business days following the date that any person, alone or jointly with its affiliates and associates, becomes an Acquiring Person, the Company will have the right to redeem the Options at a price of CI$0.01 per Option. If the Options are not redeemed, then following such ten business day period each holder of an Option will have the right to receive on exercise, in lieu of one one-hundredth of a Class 'B' common share, common shares of the Company (or, in certain circumstances, cash, property or other securities) having a value equal to two times the exercise price of the Option. For example, at an exercise price of $100.00 per Option, each Option not owned by an Acquiring Person (or by certain related parties) following any person, alone or jointly with its affiliates and associates, becoming an Acquiring Person would entitle its holder to purchase $200.00 worth of the Company’s common shares for $100.00. Assuming that the common shares had a per share value of $20.00 at such time, the holder of each valid Option would be entitled to purchase 10 common shares for $100.00.

Any of the provisions of the Option Deed may be amended by the Company’s Board of Directors prior to the Distribution Date. After the Distribution Date, the provisions of the Option Deed may be amended by the Board of Directors in order to cure any ambiguity, to make changes which do not adversely affect the interests of holders of Options (excluding the interests of any Acquiring Person), or to shorten or lengthen any time period under the Option Deed.

14. Cost of revenues and general and administrative expenses

  Year Ended December 31, 
  2015  2014  2013 
Cost of revenues consist of:            
Electricity $10,675,287  $14,631,638  $13,634,617 
Depreciation  5,270,454   5,077,293   4,822,967 
Fuel oil  4,974,421   8,726,195   10,106,409 
Employee costs  4,669,445   4,630,609   4,422,093 
Cost of plant sales  878,396   1,470,045   - 
Maintenance  3,429,736   3,131,947   2,332,893 
Retail license royalties  1,427,073   1,405,067   1,357,988 
Insurance  1,187,097   1,397,799   1,499,201 
Other  1,677,735   1,972,987   2,140,084 
  $34,189,644  $42,443,580  $40,316,252 
             
General and administrative expenses consist of:            
Employee costs $6,459,612  $6,314,908  $6,218,948 
Insurance  802,386   923,089   969,370 
Professional fees  941,193   1,424,927   1,005,495 
Directors’ fees and expenses  754,145   686,228   752,044 
Depreciation  218,032   278,478   290,622 
NSC project expenses  2,168,408   3,702,332   3,158,309 
Other  3,114,718   3,324,477   3,449,515 
  $14,458,494  $16,654,439  $15,844,303 

65 

 

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:

 

  Year Ended December 31, 
  2018  2017 
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders $10,177,662  $5,102,828 
Less: preferred stock dividends  (12,356)  (11,418)
Net income from continuing operations available to common shares in the determination of basic earnings per common share  10,165,306   5,091,410 
Net income from discontinued operation  1,115,825   1,041,234 
Net income available to common shares in the determination of basic earnings per common share $11,281,131  $6,132,644 
         
Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders  14,962,760   14,896,944 
Plus:        
Weighted average number of preferred shares outstanding during the period  35,125   35,765 
Potential dilutive effect of unexercised options and unvested stock grants  76,262   73,972 
Weighted average number of shares used for determining diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders  15,074,147   15,006,681 

  Year Ended December 31, 
  2015  2014  2013 
Net income attributable to Consolidated Water Co. Ltd. stockholders $7,518,701  $6,265,358  $8,594,519 
Less: preferred stock dividends  (12,028)  (11,485)  (11,222)
Net income available to common shares in the determination of basic earnings per common share $7,506,673  $6,253,873  $8,583,297 
             
Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders  14,741,748   14,697,896   14,633,884 
Plus:            
Weighted average number of preferred shares outstanding during the period  38,612   37,924   34,827 
Potential dilutive effect of unexercised options and unvested stock grants  47,395   28,503   35,169 
Weighted average number of shares used for determining diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders  14,827,755   14,764,323   14,703,880 

16. Dividends

 

16.Interim dividends declared on Class A common stock and redeemable preferred stock for each quarter of the respective years ended December 31, 2018 and 2017 were as follows:

  2018  2017 
First Quarter $0.085  $0.075 
Second Quarter  0.085   0.075 
Third Quarter  0.085   0.075 
Fourth Quarter  0.085   0.085 
  $0.34  $0.31 

61

17. Segment information

 

The Company has threefour reportable segments: retail, bulk, services and services.manufacturing. 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 and 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.companies and design, construct and sell desalination plants to third parties. The manufacturing segment manufactures and services a wide range of water-related products and provides design, engineering, management, operating and other services applicable to commercial, municipal and industrial water production, supply and treatment. Consistent with prior periods, the Company records all non-direct general and administrative expenses in its retail business segment and does not allocate any of these non-direct costs to its other twothree 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, 2015  Year Ended December 31, 2018 
 Retail  Bulk  Services  Total  Retail  Bulk  Services  Manufacturing  Total 
Revenues $23,254,757  $31,854,255  $2,007,190  $57,116,202  $25,621,048  $31,031,287  $1,811,372  $7,256,150  $65,719,857 
Cost of revenues  10,925,634   21,634,789   1,629,221   34,189,644   11,011,456   21,551,383   1,503,034   4,911,697   38,977,570 
Gross profit (loss)  12,329,123   10,219,466   377,969   22,926,558 
Gross profit  14,609,592   9,479,904   308,338   2,344,453   26,742,287 
General and administrative expenses  10,713,687   1,605,943   2,138,864   14,458,494   12,029,646   1,301,042   2,889,703   2,489,028   18,709,419 
Loss on asset dispositions and impairments, net  12,263   -   41,180   3,331   56,774 
Income (loss) from operations $1,615,436  $8,613,523  $(1,760,895)  8,468,064  $2,567,683  $8,178,862  $(2,622,545) $(147,906)  7,976,094 
Other income (expense), net              (542,570)
Net income              7,925,494 
Income attributable to non-controlling interests              406,793 
Other income, net                  2,740,064 
Income before income taxes                  10,716,158 
Benefit from income taxes                  (157,291)
Net income from continuing operations                  10,873,449 
Income from continuing operations attributable to non-controlling interests                  695,787 
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders                  10,177,662 
Net income from discontinued operations                  1,115,825 
Net income attributable to Consolidated Water Co. Ltd. stockholders             $7,518,701                  $11,293,487 

 

Depreciation and amortization expenses for the year ended December 31, 20152018 for the retail, bulk, services and servicesmanufacturing segments were $2,344,315, $3,389,717$2,019,462, $3,387,592, $28,386 and $102,901,$1,598,794, respectively.


  As of December 31, 2015 
  Retail  Bulk  Services  Total 
Accounts receivable, net $2,261,141  $6,231,626  $1,036,249  $9,529,016 
Property plant and equipment, net $25,204,226  $28,421,906  $117,038  $53,743,170 
Construction in progress $1,860,050  $68,560  $-  $1,928,610 
Goodwill $1,170,511  $2,328,526  $-  $3,499,037 
Land held for development $-  $-  $20,558,424  $20,558,424 
Total assets $54,603,249  $83,284,439  $23,729,010  $161,616,698 

 

  Year Ended December 31, 2014 
  Retail  Bulk  Services  Total 
Revenues $24,104,932  $39,201,011  $2,253,135  $65,559,078 
Cost of revenues  11,944,071   27,919,249   2,580,260   42,443,580 
Gross profit (loss)  12,160,861   11,281,762   (327,125)  23,115,498 
General and administrative expenses  11,183,731   1,605,499   3,865,209   16,654,439 
Income (loss) from operations $977,130  $9,676,263  $(4,192,334)  6,461,059 
Other income, net              303,481 
Net income              6,764,540 
Income attributable to non-controlling interests              499,182 
Net income attributable to Consolidated Water Co. Ltd. stockholders             $6,265,358 
62

  As of December 31, 2018 
  Retail  Bulk  Services  Manufacturing  Total 
Accounts receivable, net $2,947,193  $18,480,589  $1,812,838  $987,475  $24,228,095 
Property plant and equipment, net $24,435,501  $32,820,908  $14,772  $1,609,637  $58,880,818 
Construction in progress $5,437,093  $574,659  $3,291  $-  $6,015,043 
Intangibles, net $-  $-  $-  $1,891,667  $1,891,667 
Goodwill $1,170,511  $1,947,846  $-  $4,885,211  $8,003,568 
Land and rights of way held for development $-  $-  $24,161,024  $-  $24,161,024 
Total segment assets $61,210,879  $67,739,059  $27,406,983  $12,254,121  $168,611,042 
Assets of discontinued operations                 $3,904,556 
Total assets                 $172,515,598 

  Year Ended December 31, 2017 
  Retail  Bulk  Services  Manufacturing  Total 
Revenues $23,225,066  $28,682,113  $469,347  $6,990,496  $59,367,022 
Cost of revenues  10,372,199   19,562,503   469,797   4,963,962   35,368,461 
Gross profit  12,852,867   9,119,610   (450)  2,026,534   23,998,561 
General and administrative expenses  11,884,659   1,108,158   3,043,078   2,646,504   18,682,399 
Loss on asset dispositions and impairments, net  1,640,158   -   -   1,400,000   3,040,158 
Income (loss) from operations $(671,950) $8,011,452  $(3,043,528) $(2,019,970)  2,276,004 
Other income, net                  1,526,358 
Income before income taxes                  3,802,362 
Benefit from income taxes                  (888,977)
Net income from continuing operations                  4,691,339 
Loss from continuing operations attributable to non-controlling interests                  (411,489)
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders                  5,102,828 
Net income from discontinued operations                  1,041,234 
Net income attributable to Consolidated Water Co. Ltd. stockholders                 $6,144,062 

 

Depreciation and amortization expenses for the year ended December 31, 20142017 for the retail, bulk, services and servicesmanufacturing segments were $2,404,404, $3,196,912$2,008,992, $3,632,171, $44,934 and $102,396,$1,603,971, respectively.

 

  As of December 31, 2014 
  Retail  Bulk  Services  Total 
Accounts receivable, net $2,521,008  $8,399,999  $852,737  $11,773,744 
Property plant and equipment, net $26,978,259  $29,318,534  $100,195  $56,396,988 
Construction in progress $902,656  $997,360  $-  $1,900,016 
Goodwill $1,170,511  $2,328,526  $-  $3,499,037 
Land held for development $-  $-  $20,558,424  $20,558,424 
Total assets $51,319,117  $85,063,571  $24,077,143  $160,459,831 
63

 

  Year Ended December 31, 2013 
  Retail  Bulk  Services  Total 
Revenues $23,018,498  $39,960,220  $843,413  $63,822,131 
Cost of revenues  10,956,904   28,279,088   1,080,260   40,316,252 
Gross profit (loss)  12,061,594   11,681,132   (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 $1,248,717  $10,037,263  $(3,624,404)  7,661,576 
Other income, net              1,486,913 
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, 2017 
  Retail  Bulk  Services  Manufacturing  Total 
Accounts receivable, net $2,406,595  $9,816,852  $1,155,318  $1,308,313  $14,687,078 
Property plant and equipment, net $23,172,382  $24,579,526  $84,339  $1,847,524  $49,683,771 
Construction in progress $321,368  $1,498,625  $3,291  $0  $1,823,284 
Intangibles, net $-  $-  $-  $3,231,667  $3,231,667 
Goodwill $1,170,511  $1,947,846  $-  $4,885,211  $8,003,568 
Land and rights of way held for development $-  $-  $21,505,675  $-  $21,505,675 
Total segment assets $52,095,524  $71,489,274  $24,488,173  $13,111,875  $161,184,846 
Assets of discontinued operations                 $4,296,049 
Total assets                 $165,480,895 

Depreciation and amortization expenses for the year ended December 31, 2013 for the retail, bulk and services segments were $2,077,903, $3,281,231 and $292,335, respectively.


Revenues earned by major geographic region were:

 

 Year ended December 31,  Year ended December 31, 
 2015  2014  2013  2018  2017 
Cayman Islands $32,735,215  $35,040,803  $31,164,165  $34,623,925  $30,218,830 
Bahamas  21,062,081   26,702,605   29,192,529   23,241,361   21,528,494 
Indonesia  368,012   471,919   144,030   153,233   159,856 
Belize  2,422,547   2,596,410   2,536,780 
USA  7,256,150   6,990,496 
Revenues earned from management services agreement with OC-BVI  528,347   747,341   784,627   445,188   469,346 
 $57,116,202  $65,559,078  $63,822,131  $65,719,857  $59,367,022 

 

Revenues earned from major customers were:

 

 Year ended December 31,  Year ended December 31, 
 2015  2014  2013  2018  2017 
Revenues earned from the Water and Sewerage Corporation ("WSC") $20,770,347  $26,376,520  $28,861,195 
Revenues earned from the Water and Sewerage Corporation $22,956,878  $21,307,993 
Percentage of total revenues from the WSC  36%  40%  45%  35%  36%
Revenues earned from the Water Authority - Cayman ("WAC") $8,369,627  $9,901,996  $8,230,912 
Revenues earned from the Water Authority - Cayman $7,789,926  $7,153,620 
Percentage of total revenues from the WAC  15%  15%  13%  12%  12%

 

Property, plant and equipment, net by major geographic region were:

 

  December 31, 
  2015  2014 
Cayman Island operations $22,518,524  $23,681,420 
Bahamas operations  27,441,376   28,208,145 
Belize operations  920,149   1,025,970 
Indonesia operations  2,665,312   3,245,846 
All other country operations  197,809   235,607 
  $53,743,170  $56,396,988 

  December 31, 
  2018  2017 
Cayman Island operations $24,340,063  $23,182,334 
Bahamas operations  32,738,531   24,511,285 
USA  1,609,637   1,847,524 
All other country operations  192,587   142,628 
  $58,880,818  $49,683,771 

 

68 

64

 

 

17. Commitments18. Cost of revenues and contingencies

Commitments

As of December 31, 2015, the Company held operating leases for land, office space, warehouse space, and equipment. In addition to minimum lease payments, certain leases provide for payment of real estate taxes, insurance, common area maintenance, and certain other expenses. Lease terms may include escalating rent provisions and rent incentives. Minimum lease payments and rent incentives are expensed using a straight line method over the non-cancellable lease term, which expire at various dates through the year 2035.

The short-term and long-term components of deferred rent assets are included within prepaid expenses and other current assets, and other assets, respectively, in the consolidated balance sheets.

Future minimum lease payments under these non-cancellable operating leases as of December 31, 2015 are as follows:

2016 $717,874 
2017  740,778 
2018  753,303 
2019  590,130 
2020  490,244 
Thereafter  3,160,724 
  $6,453,053 

Total rental expense for the years ended December 31, 2015, 2014 and 2013 was $821,845, $812,658, and $822,159, respectively, and is included within general and administrative expenses in the consolidated statements of income.

 

The Company has entered into employment agreements with certain executives, which expire through December 31, 2018 and provide for, among other things, base annual salaries in an aggregate amount of approximately $2.1 million, performance bonuses and various employee benefits.

  Year Ended December 31, 
  2018  2017 
Cost of revenues consist of:        
Electricity $11,087,214  $9,722,210 
Depreciation  5,328,091   5,553,423 
Fuel oil  5,434,995   4,423,264 
Employee costs  5,127,831   5,344,251 
Cost of plant sales  1,059,520   - 
Maintenance  2,481,095   2,443,629 
Retail license royalties  1,687,010   1,537,879 
Insurance  996,563   944,366 
Materials  3,102,533   2,836,240 
Other  2,672,718   2,563,199 
  $38,977,570  $35,368,461 
         
General and administrative expenses consist of:        
Employee costs $8,400,729  $8,061,686 
Insurance  751,541   734,003 
Professional fees  1,250,634   1,375,965 
Directors’ fees and expenses  845,891   804,110 
Depreciation  158,404   164,025 
NSC project expenses  2,884,213   3,011,710 
Amortization of Intangibles  1,340,000   1,363,849 
Other  3,078,007   3,167,051 
  $18,709,419  $18,682,399 

 

The Company has purchase obligations totaling approximately $1.2 million through December 31, 2018.

Retail License

The Company sells water through its retail operations under a license issued in July 1990 by the Cayman Islands government that grants Cayman Water the exclusive right to provide potable water to customers within its licensed service area. As discussed below, this license was set to expire in July 2010 but has since been extended while negotiations for a new license take place. Pursuant to the license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area which consists of two of the three most populated areas of Grand Cayman, the Seven Mile Beach and West Bay areas. For the years ended December 31, 2015, 2014 and 2013, the Company generated approximately 40%, 36% and 36%, respectively, of its consolidated revenues and 55% 53% and 52%, respectively, of its consolidated gross profits from the retail water operations conducted pursuant to Cayman Water’s exclusive license. As discussed later herein, if Cayman Water is not in default of any of its terms, this license provides Cayman Water with the right to renew the license on terms that are no less favorable than those that the government offers to any third party.

The license was scheduled to expire in July 2010 but has been extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license scheduled to expire on December 31, 2015; however, the Company has been informed by the WAC that its license will be extended through June 30, 2016 and that formal documentation of such extension is in process.

In February 2011, the Water (Production and Supply) Law, 2011 and the Water Authority (Amendment) Law, 2011 (the “New Laws”) were published and enacted. Under the New Laws, the WAC will issue any new license, and such new license could include a rate of return on invested capital model, as discussed in the following paragraph.

Following the enactment of the New Laws, the Company was advised in correspondence from the Cayman Islands government and the WAC that: (i) the WAC 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”) for the retail license is in the best interest of the public and Cayman Water’s customers. RCAM is the rate model currently utilized in the electricity transmission and distribution license granted by the Cayman Islands government to the Caribbean Utilities Company, Ltd. The Company responded to the Cayman Islands government that it disagreed with the government’s position on these two matters and negotiations for a new license temporarily ceased.

In July 2012, in an effort to resolve several issues relating to its retail license renewal negotiations, the Company filed an Application for Leave to Apply for Judicial Review (the “Application”) with the Grand Court of the Cayman Islands (the “Court”), seeking declarations that: (i) certain provisions of the New Laws appear to be incompatible and a determination as to how those provisions should be interpreted, (ii) the WAC’s roles as the principal license negotiator, statutory regulator and the Company’s competitor put the WAC in a position of hopeless conflict, and (iii) the WAC’s decision to replace the rate structure under the Company’s current exclusive license with RCAM was predetermined and unreasonable. In October 2012 the Company was notified that the Court agreed to consider the issues raised in the Application.


The hearing for this judicial review was held on April 1, 2014. Prior to the commencement of the hearing, the parties agreed that the Court should solely be concerned with the interpretation of the statutory provisions. As part of this agreement, the WAC agreed to consider our submissions on the RCAM model and/or alternative models of pricing. In June 2014, the Court determined that: (i) the renewal of the license does not require a public bidding process; and (ii) the WAC is the proper entity to negotiate with the Company for the renewal of the license.

The Company’s submissions on the RCAM model and/or alternative models of pricing were made to the WAC on June 9, 2014. The Company received a letter from the WAC dated September 11, 2014, which fully rejected the Company’s submissions and stated that they intend to provide the Company with a draft RCAM license in due course.

On November 21, 2014, the Company wrote to the Minister of Works offering to recommence license negotiations on the basis of the RCAM model subject to certain conditions which are: (i) the Government would undertake to amend the current water legislation to provide for an independent regulator and a fair and balanced regulatory regime more consistent with that provided under the electrical utility regulatory regime, (ii) the Government and the Company would mutually appoint an independent referee and chairman of the negotiations, (iii) the Company’s new license would provide exclusivity for the production and provision of all piped water, both potable and non-potable, within its Cayman Islands license area, (iv) the Government would allow the Company to submit its counter proposal to the WAC’s June 2010 RCAM license draft, and (v) the principle of subsidization of residential customer rates by commercial customer rates would continue under a new license. On March 23 2015, the Company received a letter from the Minister of Works with the following responses to the Company’s November 21, 2014 letter: (1) while the Cayman government plans to create a new public utilities commission, the provision of the new retail license will not depend upon the formation of such a commission; (2) any consideration regarding inclusion of the exclusive right to sell non-potable water within the area covered by the retail license will not take place until after the draft license has proceeded through the review process of the negotiations; (3) rather than allow the Company to submit its counter proposal to the WAC’s June 2010 RCAM license draft, the WAC will draft the license with the understanding that the Company will be allowed to propose amendments thereto; (4) the principle of subsidization of residential customer rates by commercial customer rates would continue under the new license; and (5) a request that the Company consider eliminating its monthly minimum volume charge in the new license.

The Company recommenced license negotiations with the WAC during the third quarter of 2015 based upon a draft RCAM license provided by the WAC. Such license negotiations remain on-going. The Company is presently unable to determine when such negotiations will be completed or the final outcome of such negotiations.

The Cayman Islands government could ultimately offer a third party a license to service some or all of Cayman Water’s present service area. However, as set forth in the existing license, “the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence Area without having first offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.”

The resolution of these license negotiations could result in a material reduction of the operating income and cash flows 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 financial condition, results of operations or cash flows.

70 

CW-Belize

By Statutory Instrument No. 81 of 2009, the Minister of Public Utilities of the government of Belize published an order, the Public Utility Provider Class Declaration Order, 2009 (the “Order”), which as of May 1, 2009 designated CW-Belize as a public utility provider under the laws of Belize. With this designation, the Public Utilities Commission of Belize (the “PUC”) has the authority to set the rates charged by CW-Belize and to otherwise regulate its activities. On November 1, 2010, CW-Belize received a formal complaint from the PUC alleging that CW-Belize was operating without a license under the terms of the Water Industry Act. CW-Belize applied for this license in December 2010. On July 29, 2011, the PUC issued the San Pedro Public Water Supply Quality and Security Complaint Order (the “Second Order”) which among other things requires that (i) CW-Belize and its customer jointly make a submission to the responsible Minister requesting that the area surrounding CW-Belize’s seawater abstraction wells be designated a forest reserve or national park and be designated a Controlled Area under section 58 of the Water Industry Act, (ii) CW-Belize submit an operations manual for CW-Belize’s desalination plant to the PUC for approval, (iii) CW-Belize and its customer modify the water supply agreement between the parties to (a) include new water quality parameters included in the Order and (b) cap the current exclusive water supply arrangement in the agreement at a maximum of 450,000 gallons per day, (iv) CW-Belize keep a minimum number of replacement seawater RO membranes in stock at all times and (v) CW-Belize take possession of and reimburse the PUC for certain equipment which the PUC purchased from a third-party in late 2010. CW-Belize has applied for declaratory judgment and has been granted a temporary injunction to stay the enforcement of the Second Order by the PUC until such time as the Belize courts could hear the matter. The initial hearing on this matter was conducted on October 30 and 31, 2012 with an additional hearing on November 29, 2012. The ruling on this case is pending. The Company is presently unable to determine what impact the Order and the Second Order will have on its results of operations, financial position or cash flows.

Windsor Plant Water Supply Agreement

CW-Bahamas provides bulk water to the Water and Sewerage Corporation of The Bahamas (“WSC”), which distributes the water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence. Pursuant to a water supply agreement, CW-Bahamas was required to provide the WSC with at least 16.8 million gallons per week of potable water from the Windsor plant. This water supply agreement was scheduled to expire when CW-Bahamas delivered the total amount of water required under the agreement in July 2013, but has been extended on a month-to-month basis. At the conclusion of the agreement, the WSC has the option to:

i.extend the agreement for an additional five years at a rate to be negotiated;
ii.

exercise a right of first refusal to purchase any materials, equipment and facilities that CW-Bahamas intends to remove from the site at a purchase price to be negotiated with CW-Bahamas; or

iii.require CW-Bahamas to remove all materials, equipment and facilities from the site.

At the request of the government of The Bahamas, CW-Bahamas continues to operate and maintain the Windsor plant on a month-to-month basis to provide the government of The Bahamas with additional time to decide whether or not it will extend CW-Bahamas’ water supply agreement for the Windsor plant on a long-term basis. CW-Bahamas generated revenues from the operation of this plant of approximately $5.8 million, $6.2 million and $7.2 million during years ended December 31, 2015, 2014 and 2013, respectively.

CW-Bali

Through its subsidiary CW-Bali, the Company has built and presently operates a seawater reverse osmosis plant with a productive capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. The Company built this plant based upon its belief that future water shortages in this area of Bali will eventually enable CW-Bali to sell all of this plant’s production. The current sales volumes for this plant are not sufficient to cover its operating costs, and CW- Bali’s operating losses were approximately ($484,000), ($458,000) and ($438,000) for the years ended December 31, 2015, 2014 and 2013, respectively. As of December 31, 2015, the capitalized costs for this plant reflected on the Company’s consolidated balance sheet were approximately $3.0 million.

In 2015, the Indonesian government passed Regulation 121 which provides a mechanism for governmental regulatory oversight over the utilization of Indonesia’s water resources. Under this new regulation, the approval or cooperation of the local government water utility is required for any water supply contracts executed by non-governmental providers after the effective date of the regulation. Consequently CW-Bali will be required to enter into a cooperation agreement with Bali’s local government water utility, PDAM, or otherwise obtain PDAM’s approval, to supply any new customers.

The Company is presently seeking a strategic partner to (i) purchase a major portion of its equity ownership in CW-Bali; (ii) lead CW-Bali’s sales and marketing efforts and liaise with PDAM; and (iii) assist with CW-Bali’s on-going funding requirements. The Company also plans to market the available productive capacity of CW-Bali’s Nusa Dua plant to PDAM. If the Company is not able to obtain a strategic partner for CW-Bali, sell water to PDAM or other new customers, or otherwise significantly increase the revenues generated by its Nusa Dua plant in the future, the Company will be required to record an impairment charge to reduce the carrying value of CW-Bali’s plant assets to their fair value. Such an impairment charge could have a material adverse impact on the Company’s 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 WAC 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.

18.19. Stock-based compensation

 

The Company has the following stock compensation plans that form part of its employees’ and Directors’ remuneration:

 

Employee Share Incentive Plan (Preferred Shares)

 

The Company awards shares of its preferred stock for $nil consideration under its Employee Share Incentive Plan to eligible employees, other than Directors and Officers, after four consecutive years of employment. If these employees remain with the Company for an additional four consecutive years, they can convert these preferred shares into shares of common stock on a one for one basis. In addition, at the time the preferred shares are granted, the employees receive options to purchase an equal number of shares of preferred stock at a discount to the average trading price of the Company’s common stock for the first seven days of the October immediately preceding the date of the preferred stock grant. If these options are exercised, the shares of preferred stock obtained may also be converted to shares of common stock if the employee remains with the Company for an additional four consecutive years. Each employee’s option to purchase shares of preferred stock must be exercised within 30 days of the grant date, which is the 90th day after the date of the independent registered public accountants firm’saccountants’ audit opinion on the Company’s consolidated financial statements. Shares of preferred stock not subsequently converted to shares of common stock are redeemable only at the discretion of the Company. Shares of preferred stock granted under this plan during the years ended December 31, 2015, 20142018 and 2013,2017 totaled 8,615, 5,9577,409 and 10,180,9,441, respectively, and an equal number of preferred stock options were granted in each of these years.

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Employee Share Option Plan (Common Stock Options)

 

The Company has an employee stock option plan for certain long-serving employees of the Company. Under the plan, these employees are granted in each calendar year, as long as the employee is a participant in the Employee Share Incentive Plan, options to purchase common shares. The price at which the option may be exercised will be the closing market price on the grant date, which is the 40th day after the date of the Company’s Annual Shareholder Meeting. The number of options each employee is granted is equal to five times the sum of (i) the number of preferred shares which that employee receives for $nil consideration and (ii) the number of preferred share options which that employee exercises in that given year. Options may be exercised during the period commencing on the fourth anniversary of the grant date and ending on the thirtieth day after the fourth anniversary of the grant date. Options granted under this plan during the years ended December 31, 2015, 2014,2018 and 2013,2017 totaled 4,030, 2,9902,750 and 6,600,3,390, 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. No options were granted under the plan in 2013, 2014 or 2015.

The Company measures and recognizes compensation expense at fair value for all share-based payments, including stock options. Stock-based compensation for the Employee Share Incentive Plan, Employee Share Option Plan and the 2008 Equity Incentive Plan totaled $143,951, $116,574 and $246,473 for the years ended December 31, 2015, 2014 and 2013, respectively, and is included in general and administrative expenses in the consolidated statements of income.

Non-Executive Directors’ Share Plan

This stock grant plan provides part of Directors’ remuneration. Under this plan, non-Executive Directors receive a combination of cash and common stock for their participation in Board meetings. The number of shares of common stock granted is calculated based upon the market price of the Company’s common stock on October 1 of the year preceding the grant. Common stock granted under this plan during the years ended December 31, 2015, 2014 and 2013 totaled 10,514, 5,992 and 13,980 shares, respectively. The Company recognized stock-based compensation for these share grants of $143,218, $85,880 and $135,503 for the years ended December 31, 2015, 2014 and 2013, respectively.


The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing model that uses the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding. The Company uses historical data to estimate stock option exercises and forfeitures within its valuation model. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant.

 

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.

Non-Executive Directors’ Share Plan

This stock grant plan provides part of Directors’ remuneration. Under this plan, non-Executive Directors receive a combination of cash and common stock for their participation in Board meetings. The number of shares of common stock granted is calculated based upon the market price of the Company’s common stock on October 1 of the year preceding the grant. Common stock granted under this plan during the years ended December 31, 2018 and 2017 totaled 18,242 and 17,158 shares, respectively. The Company recognized stock-based compensation for these share grants of $236,691 and $210,151 for the years ended December 31, 2018 and 2017, respectively.

The Company measures and recognizes compensation expense at fair value for all share-based payments, including stock options. Stock-based compensation for the Employee Share Incentive Plan, Employee Share Option Plan and the 2008 Equity Incentive Plan totaled $137,191 and $152,166 for the years ended December 31, 2018 and 2017, respectively, and is included in general and administrative expenses in the accompanying consolidated statements of income.

The significant weighted average assumptions for the years ended December 31, 2015, 20142018 and 20132017 were as follows:

 

 2015  2014  2013  2018  2017 
Risk free interest rate  0.41%  0.48%  0.47%  2.05%  1.09%
Expected option life (years)  1.4   1.4   1.7   1.2   1.0 
Expected volatility  33.74%  48.06%  27.87%  25.10%  37.21%
Expected dividend yield  2.35%  2.71%  2.71%  2.62%  2.41%

 

A summary of the Company’s stock option activity for the year ended December 31, 20152018 is as follows:

 

  Options  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual Life
(Years)
 Aggregate
Intrinsic
Value (1)
 
Outstanding at beginning of period  186,632  $10.18       
Granted  12,645   9.92       
Exercised  (48,885)  7.90       
Forfeited/expired  (55,914)  10.30       
Outstanding as of December 31, 2015  94,478  $10.52  1.06  years $164,500 
Exercisable as of December 31, 2015  75,078  $10.46  0.86  years $133,764 

  Options  Weighted
Average
Exercise
Price
  Weighted
Average
Remaining
Contractual
Life (Years)
 Aggregate
Intrinsic
Value (1)
 
Outstanding at beginning of period  12,085  $12.38       
Granted  10,159   10.58       
Exercised  (1,335)  9.72       
Forfeited/expired  (10,079)   10.58       
Outstanding as of December 31, 2018  10,830  $12.69  2.05 years $- 
Exercisable as of December 31, 2018  -  $0.00  - years $- 

 

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(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 $12.24$11.66 on the Nasdaq Global Select Market on December 31, 2015,2018, exceeds the exercise price of the option.

 

As of December 31, 2015, 19,4002018, 10,830 non-vested options and 75,078 vested options were outstanding, with weighted average exercise pricesprice of $10.74 and $10.46, respectively,$12.69, and average remaining contractual liveslife of 1.87 years and 0.86 years, respectively.2.05 years. The total remaining unrecognized compensation costs related to unvested stock-based arrangements were $28,012$17,044 as of December 31, 20152018 and are expected to be recognized over a weighted average period of 1.872.05 years.

 

As of December 31, 2015,2018, unrecognized compensation costs relating to redeemable preferred stock outstanding were $143,234,$159,332 and are expected to be recognized over a weighted average period of 1.191.14 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, 2015, 20142018 and 2013:2017:

 

 2015  2014  2013  2018  2017 
Options granted with an exercise price below market price on the date of grant:                    
Employees — preferred stock $4.19  $-  $4.65  $3.27  $4.11 
Overall weighted average $4.19  $-  $4.65   3.27   4.11 
                    
Options granted with an exercise price at market price on the date of grant:                    
Management employees $-  $-  $-  $-  $- 
Employees — common stock $3.39  $3.11  $3.18   3.19   3.23 
Overall weighted average $3.39  $3.11  $3.18   3.19   3.23 
                    
Options granted with an exercise price above market price on the date of grant:                    
Management employees $-  $-  $-  $-  $- 
Employees — preferred stock $-  $0.59  $-   -   - 
Overall weighted average $-  $0.59  $-   -   - 
                    
Total intrinsic value of options exercised $87,371  $17,162  $190,212  $4,379  $8,942 

 

Executive Long-Term Incentive Compensation

 

The Board of Directors approved changes to the long-term incentive compensation for the Company’s executive officers effective for 2015 and thereafter to better align the interests of its executive officers with those of its shareholders. The revised long-term compensation plan includes a combination of performance and non-performance basednon-performance-based grants of common stock. stock from the shares of Company stock provided for issuance under the 2008 Equity Incentive Plan.

The non-performance basednon-performance-based stock grants vest ratablyin one third increments at the end of each year over a three-year period. The performance basedNon-performance-based stock grants vest at the end of three years based upon the achievement of three year cumulative performance outcomes. The initial three year measurement periodunder this plan totaled 26,864 and 26,958 for the performance based stock grants is 2015-2017.years ended December 31, 2018 and 2017, respectively and were issued in 2019 and 2018, respectively. The Company recognized $120,500$317,991 and $302,121 in stock-based compensation expense related to the non-performance stock grants under the revised long-term compensation plan for the years ended December 31, 2018 and 2017, respectively. 

The performance-based grants may be earned at the end of each year based upon the relative level of achievement of three-year cumulative financial performance targets. The initial three-year measurement period for the performance-based stock grants began January 1, 2015 and ended December 31, 2017. A total of 13,028 shares of common stock were granted effective December 31, 2017 for this initial three-year measurement period based upon the Company’s financial performance relative to the cumulative financial performance targets and the Company recognized $139,139 in stock-based compensation for the year ended December 31, 2015.2017 related to these grants.

The next three-year measurement period for the performance-based stock grants was for the period which began January 1, 2016 and ended December 31, 2018. A total of 12,930 shares of common stock were granted effective December 31, 2018 for this three-year measurement period based upon the Company’s financial performance relative to the cumulative financial performance targets and the Company recognized $158,263 in stock-based compensation for the year ended December 31, 2018 related to these grants.

 

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19.20. Retirement benefits

 

Staff retirementRetirement benefit plans are offered to all employees in Florida, Cayman Islands and Bahamas. The plans are administered by third party plan providers and are defined contribution plans. The Company matches the contribution of each employee participating in the plans in an amount up to (i) the first 5% of each participating employee’s salary up to $72,000 for thea Cayman Islands there is no salary limit for theor Bahamas employee’s salary; and up to(ii) 6% of each participating employee salary fora Florida employees.employee’s salary. The total amount recognized as an expense under the plans during the years ended December 31, 2015, 2014,2018 and 20132017 was $328,084, $325,576,$408,128, and $300,682,$384,624, respectively.

 

20.21. Financial instruments

 

Credit risk:

 

The Company is not exposed to significant credit risk on its retail customer accounts as its policy is to cease supply of water to customers’ accounts that are more than 45 days overdue. The Company’s exposure to credit risk is concentrated on receivables from its Bulkbulk water and manufacturing customers. The Company considers these receivables fully collectible and therefore has not recorded an allowance for these receivables.

 

Interest rate risk:

 

The Company is not subject to significant interest-rate risk arising from fluctuations in interest rates as the balance of the Company’s demand loan payable at December 31, 2015 is not significant to its financial condition or results of operations.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 30more than 20 years and as a result, 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, 20152018 and 2014,2017, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the note payable to related party, the demand loan payable and dividends payable approximate their fair values due to the short termshort-term maturities of these instruments. Management considers that the carrying amounts for loans receivable and long term debt as of December 31, 20152018 and 20142017 approximate their fair value as the stated interest rates approximate market rates.

 

Under US GAAP, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The US GAAP guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.


Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company reviews its fair value hierarchy classifications on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassification of levels for certain securities within the fair value hierarchy.

 

The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value as of December 31, 20152018 and 2014:2017:

 

  December 31, 2015 
  Level 1  Level 2  Level 3  Total 
Assets:                
Recurring                
Restricted cash $428,203  $-  $-  $428,203 
Certificate of deposit  -   5,637,538   -   5,637,538 
Total recurring $428,203  $5,637,538  $-  $6,065,741 
                 
Nonrecurring                
Investment in OC-BVI $-  $-  $4,548,271  $4,548,271 
  December 31, 2018 
  Level 1  Level 2  Level 3  Total 
Assets:                
Recurring                
Net asset arising from put/call options $-  $-  $24,000  $24,000 

 

  December 31, 2014 
  Level 1  Level 2  Level 3  Total 
Assets:                
Recurring                
Restricted cash $456,083  $-  $-  $456,083 
Certificate of deposit  -   5,000,000   -   5,000,000 
Total recurring $456,083  $5,000,000  $-  $5,456,083 
                 
Nonrecurring                
Investment in OC-BVI $-  $-  $5,208,603  $5,208,603 
  December 31, 2017 
  Level 1  Level 2  Level 3  Total 
Assets:                
Recurring                
Net asset arising from put/call options $-  $-  $280,000  $280,000 

 

A reconciliation of

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The activity for the beginning and ending balances for Level 3 investmentsasset for the year ended December 31, 2015:2018:

 

Balance as of December 31, 2014 $5,208,603 
Profit sharing and equity from earnings of OC-BVI  399,668 
Distributions received from OC-BVI  - 
Impairment of investment in OC-BVI (See Note 8)  (1,060,000)
Balance as of December 31, 2015 $4,548,271 
Net asset arising from put/call options    
Balance as of December 31, 2017(1) $280,000 
Unrealized loss  256,000 
Balance as of December 31, 2018(1) $24,000 

 

21.

(1)The net asset arising from the put/call options is included in other assets in the accompanying consolidated balance sheets as of December 31, 2018 and 2017.

22. CW-Bali

Through its subsidiary CW-Bali, the Company built a seawater reverse osmosis plant located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. The Company built this plant based upon its belief that future water shortages in this area of Bali would eventually enable it to sell all of this plant’s production. Since inception of CW-Bali’s operations in 2013, the sales volumes for its plant have not been sufficient to cover its operating costs and CW-Bali has incurred net losses. The Company’s net losses from CW-Bali for the years ended December 31, 2018 and 2017, were approximately ($218,000) and ($1.9 million). The results of CW-Bali are included in the retail segment for segment reporting purposes.

In May 2017, after considering CW-Bali’s historical and projected operating losses, its on-going funding requirements, the current business and economic environment in Bali and the Company’s inability to obtain a strategic partner for CW-Bali, the Company’s Board of Directors formally resolved to discontinue CW-Bali’s operations. Based upon this decision to cease CW-Bali’s operations, the Company estimated the future cash flows the Company would receive under various scenarios from the disposition of its investment in CW-Bali and assigned a probability to each scenario to determine an estimated fair value of its investment in CW-Bali. Based upon these probability-weighted sums, the Company recorded impairment losses totaling approximately ($1.7 million) in 2017, which are included in loss on long-lived asset dispositions and impairments, net in the accompanying consolidated statements of income.

The Company planned to cease the production of water in Bali, sell its stock in CW-Bali or CW-Bali’s net assets, and exit the Bali market at the earliest practical date. However, in October 2017, CW-Bali’s sole remaining customer filed a lawsuit in the district court of Denpasar in Bali, Indonesia against CW-Bali, its President, and the Company’s Chief Financial Officer in his capacity as the President of CW-Bali’s Board of Commissioners (i.e. Directors) seeking compensatory damages of 57.1 billion rupiahs and punitive damages of 26 billion rupiahs as a result of the anticipated breach of this customer’s water supply agreement that will arise from CW-Bali’s planned cessation of operations. The Company believed this lawsuit was without merit and vigorously defended CW-Bali and the two other defendants. However, until this lawsuit was resolved the Company was legally prohibited from disposing of its investment in CW-Bali or any of CW-Bali’s assets. In April 2018, the Denpasar court ruled that it had no authority to adjudicate this case due to a clause in the water supply agreement that requires all disputes to be handled through arbitration in Singapore. However, the customer immediately filed an appeal with respect to the Denpasar court ruling. In October 2018, the Denpasar appeals court issued its ruling which upheld the previous court’s ruling, thereby denying the customer’s appeal.

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23. Commitments and contingencies

Commitments

As of December 31, 2018, the Company held operating leases for 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 2021.

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 accompanying consolidated balance sheets.

Future minimum lease payments under these non-cancellable operating leases as of December 31, 2018 are as follows:

2019 $474,831 
2020  335,471 
2021  83,886 
  $894,188 

Total rental expense for the years ended December 31, 2018 and 2017 was $870,833 and $844,561, respectively, and is included within general and administrative expenses in the accompanying consolidated statements of income.

The Company has entered into employment agreements with certain executives, which expire through December 31, 2021 and provide for, among other things, base annual salaries in an aggregate amount of approximately $2.0 million, performance bonuses and various employee benefits.

The Company has purchase obligations totaling approximately $4.3 million through May 31, 2020.

Contingencies

CW-Bahamas

CW-Bahamas’ accounts receivable balances due from the WSC amounted to $17.6 million as of December 31, 2018 as compared to $9.1 million as of December 31, 2017. The increase in these accounts receivable has adversely impacted the liquidity of this subsidiary.

CW-Bahamas has also experienced similar delays in collecting its accounts receivable from the WSC in several prior years. During these times, the Company arranged meetings and held discussions with representatives of the WSC and The Bahamas government to formulate a payment schedule for WSC’s delinquent accounts receivable and such amounts were eventually paid in full. Based upon this payment history, CW-Bahamas has never been required to provide an allowance for doubtful accounts for any of its accounts receivable, despite the periodic accumulation of significant delinquent balances.

If CW-Bahamas continues to be unable to collect a significant portion of its delinquent accounts receivable in the coming months, one or more of the following events may occur: (i) CW-Bahamas may not have sufficient liquidity to meet its obligations without new funding from its shareholders; (ii) we may be required to cease the recognition of revenues on CW-Bahamas’ water supply agreements with the WSC; and (iii) we may be required to provide an allowance for CW-Bahamas’ accounts receivable. Any of these events could have a material adverse impact on the Company’s results of operations, financial position and cash flows.

Cayman Water

The Company sells water through its retail operations under a license issued in July 1990 by the Cayman Islands government that granted Cayman Water the exclusive right to provide potable water to customers within its licensed service area. As discussed below, this license expired in January 2018. Pursuant to the license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman Island: Seven Mile Beach and West Bay. In 2018 and 2017 the Company generated approximately 39% and 39%, respectively, of its consolidated revenues and 54% and 54%, respectively, of its consolidated gross profit from the retail water operations conducted pursuant to Cayman Water’s exclusive license.

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The license was originally scheduled to expire in July 2010 but was extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license expired on January 31, 2018. The Company continues to provide water subsequent to January 31, 2018 on a month-to-month “good faith” basis under the terms of the expired license in order to allow for the continuation of negotiations for a new license without interruption to an essential service.

In October 2016, the Government of the Cayman Islands passed legislation which created a new utilities regulation and competition office (“OfReg”). OfReg is an independent and accountable regulatory body with a view of protecting the rights of consumers, encouraging affordable utility services, and promoting competition. OfReg, which began operations in January 2017, has the ability to supervise, monitor and regulate multiple utility undertakings and markets. Supplemental legislation was passed by the Government of the Cayman Islands in April 2017, which transferred responsibility for economic regulation of the water utility sector and the retail license negotiations from the WAC to OfReg in May 2017. The Company began license negotiations with OfReg in July 2017 and such negotiations are continuing. The Company has been informed during its retail license negotiations, both by OfReg and its predecessor in these negotiations, that the Cayman Islands government seeks to restructure the terms of its license in a manner that could significantly reduce the operating income and cash flows the Company has historically generated from its retail license.

The Company is presently unable to determine what impact the resolution of its retail license negotiations will have on its cash flows, financial condition or results of operations but such resolution could result in a material reduction (or the loss) of the operating income and cash flows the Company has historically generated from Cayman Water retail operations and could require the Company to record impairment losses to reduce the carrying values of its retail segment assets. Such impairment losses could have a material adverse impact on the Company’s financial condition and results of operations.

Bulk Water Operations in the Cayman Islands

Through its wholly-owned subsidiary, OC-Cayman, the Company provides bulk water to the WAC, a government-owned utility and regulatory agency, under various agreements. The WAC in turn distributes that water to properties in Grand Cayman outside of Cayman Water’s retail license area.

The water OC-Cayman sells to the WAC is produced at three seawater reverse osmosis desalination plants in Grand Cayman owned by the WAC, but designed, built and operated by OC-Cayman: the North Sound, Red Gate and North Side Water Works (“NSWW”) plants. The previous operating agreements for the North Sound and Red Gate plants expired in February 2019. In response to a public bidding process for a new operations and maintenance agreement encompassing both the North Sound and Red Gate plants, the Company submitted a bid for the new agreement.

In August 2018, the WAC accepted OC-Cayman’s bid for the new agreement, and the WAC and OC-Cayman entered into a new five-year contract commencing on February 1, 2019 for the operation of the North Sound and Red Gate plants. The terms of the new agreement are substantially consistent with those of the prior North Sound and Red Gate water supply agreements, except that (i) OC-Cayman has decreased the price it charges for the water supplied; and (ii) under the new agreement the WAC pays the energy costs for the operation of these plants directly to the utility company rather than paying OC-Cayman a pass-through charge for these costs. In 2018, OC-Cayman generated approximately $5.1 million in revenues under the North Sound and Red Gate agreements, of which $3.2 million consisted of energy pass-through charges.

The current operations and maintenance agreement for the NSWW plant expires June 2019. Pursuant to a public bidding process, in February 2019 we submitted our bid to operate and maintain this plant for a period of seven years after the current contract expires and are awaiting the results of the bidding process and the decision of the WAC. In 2018, the Company generated approximately $2.7 million in revenues under the NSWW agreement

If the Company does not obtain a new bulk water supply agreement for the NSWW plant, or if such new agreement is obtained on terms less favorable than the Company’s existing agreement, its results of operations and cash flows will be adversely affected.

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24. Supplemental disclosure of cash flow information

 

  Year Ended December 31, 
  2015  2014  2013 
Interest paid in cash $147,546  $196,768  $380,014 
             
Non-cash transactions:            
Transfers from inventory to property plant and equipment and construction in progress $123,036  $168,622  $181,875 
Transfers from construction in progress to property, plant and equipment $2,694,733  $2,693,622  $4,924,980 
             
Issuance of 10,514, 18,294, and 25,111, respectively, shares of common stock for services rendered $119,018  $263,098  $217,826 
Issuance of 8,615, 5,957, and 10,180 , respectively, shares of redeemable preferred stock for services rendered for services rendered $110,703  $65,289  $110,249 
Conversion (on a one-to-one basis) of 7,195, 4,756, and 4,720, respectively, shares of redeemable preferred stock to common stock $4,317  $2,854  $2,832 
Dividends declared but not paid $1,111,501  $1,106,456  $1,104,271 
Obligation incurred for land held for development $-  $-  $10,050,000 

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  Year Ended December 31, 
  2018  2017 
Interest paid in cash $12,534  $5,978 
         
Non-cash transactions:        
Transfers from inventory to property, plant and equipment and construction in progress $400,004  $291,275 
Transfers from construction in progress to property, plant and equipment $14,398,624  $3,183,122 
Transfers from other assets to construction in progress $2,137,341  $- 
Transfer from other assets to land and rights of way held for development $-  $947,251 
Issuance of 58,228 and 34,991, respectively, shares of common stock for services rendered $674,658  $402,927 
Issuance of 7,409 and 9,441, respectively, shares of redeemable preferred stock for services rendered $96,317  $118,485 
Conversion (on a one-to-one basis) of 5,809 and 12,214, respectively, shares of redeemable preferred stock to common stock $3,485  $7,328 
Dividends declared but not paid $1,276,505  $1,270,950 

 

22.25. Impact of recent accounting standards

 

EffectAdoption of Newly Issued But Not Yet EffectiveNew Accounting Standards:

 

In May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU 2014-09,Revenue from Contracts with Customers. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 prescribes a five stepfive-step framework in accounting for revenues from contracts within its scope, including (a) identification of the contract, (b) identification of the performance obligations under the contract, (c) determination of the transaction price, (d) allocation of the transaction price to the identified performance obligations and (e) recognition of revenues as the identified performance obligations are satisfied. ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. This amendment was originally effective January 1, 2017. In August 2015, the FASB issued ASU 2015-14,Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which defers the effective date by one year to January 1, 2018. Early application is permitted but not before January 1, 2017.

In March 2016, the FASB issued ASU 2016-08,Principal versus Agent Considerations (Reporting Revenue Gross versus Net), that amends the principal versus agent guidance in ASU 2014-09. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer. ASU 2016-08 also provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services.

In April 2016, the FASB issued ASU 2016-10,Identifying Performance Obligations and Licensing, that amends the revenue guidance in ASU 2014-09 on identifying performance obligations and accounting for licenses of intellectual property. ASU 2016-10 changed the FASB's previous proposals on renewals of right-to-use licenses and contractual restrictions. The effective date of the standard for the Company will coincide with ASU 2014-09 during the first quarter 2018.

In May 2016, the FASB issued ASU 2016-11,Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting. ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services.

In May 2016, the FASB issued ASU 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which clarifies implementation guidance around collectability, sales taxes collected from customers, noncash considerations, contract modifications at transition, and completed contracts at transition.

In December 2016, the FASB issued ASU 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amended the guidance on performance obligation disclosures and makes technical corrections and improvements to the new revenue standard. The standard is currently evaluatingeffective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative effect transition method.

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The effective dates of ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 are the same as ASU 2015-14 discussed above. On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. There was no impact to opening retained earnings as of January 1, 2018 as a result of the adoption of this standard will have on the Company’s consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02,Consolidation (Topic 810) - Amendments to the Consolidation Analysis. The amendments in this update require management to reevaluate whether certain legal entities should be consolidated. Specifically, the amendments (1) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities, (2) eliminate the presumption that a general partner should consolidate a limited partnership, (3) affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and (4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The amendments in this update are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2015-02 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In April 2015, the FASB issued ASU 2015-03,Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 provides authoritative guidance related to the presentation of debt issuance costs on the balance sheet, requiring companies to present debt issuance costs as a direct deduction from the carrying value of debt. The amendments in this update are effective for public business entities in fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. The new guidance must be applied retrospectively to each prior period presented. The adoption of ASU 2015-03 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In July 2015, the FASB issued ASU 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory. ASU 2015-11 applies to all inventory that is measured using first-in, first-out or average cost. The guidance requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective prospectively for fiscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s consolidated financial statements.

In August 2015, the FASB issued ASU 2015-15,Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies the treatment of debt issuance costs from line-of-credit arrangements after adoption of ASU 2015-03. The SEC Staff announced they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The amendment requires retrospective application and represents a change in accounting principle. The amendment becomes effective in fiscal years beginning after December 15, 2015. The adoption of ASU 2015-15 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In September 2015, the FASB issued ASU 2015-16,Business Combinations: Simplifying the Accounting for Measurement-Period Adjustments, which requires an acquirer to recognize adjustments identified during the measurement period in the reporting period in which the adjustment amounts are determined. The adjustment must include the cumulative effect of the adjustment as if the accounting had been completed on the acquisition date. The update should be applied prospectively and becomes effective January 1, 2016. Early application is permitted. The adoption of ASU 2015-16 is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.standard.

 

In January 2016, the FASB issued ASU 2016-01,Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,which provides guidance for the recognition, measurement, presentation and disclosure of financial assets and financial liabilities. In February 2018, the FASB issued ASU 2018-03,Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that clarifies the guidance in ASU No. 2016-01 on equity securities and certain fair value option liabilities among other things. ASU 2016-01 isand ASU 2018-03 are effective for fiscal years, and for interim periods within those years, beginning after December 15, 2017 and, for most provisions, is effective using the cumulative-effect transition approach. Early application is permitted for certain provisions. The Company is currently evaluating the effect the adoption of this amendment willASU 2016-01 and ASU 2018-03 did not have a material impact on the Company’s financial position, results of operations or cash flows.

In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how certain cash receipts and payments are presented in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017 and early adoption is permitted. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial position, results of operations or cash flows for the year ended December 31, 2018. For the year ended December 31, 2017, the adoption resulted in a reclassification of approximately $1.5 million in cash inflows related to the distribution of earnings from OC-BVI from investing activities to operating activities in the consolidated financial statements.statement of cash flows.

Effect of newly issued but not yet effective accounting standards:

 

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842)which amends the guidance relating to the definition of a lease, recognition of lease assets and liabilities on the balance sheet, and the related disclosure requirements. In July 2018, the FASB issued ASU 2018-11, Leases: Targeted Improvements, which amends the new leasing guidance such that entities may elect not to restate their comparative periods in the period of adoption. In January 2018, the FASB issued ASU 2018-01,Leases (Topic 842), which provides guidancean optional transition practical expedient for the adoption of ASU 2016-02 that, if elected, would not require an organization to reconsider their accounting for leases. existing land easements that are not currently accounted for under the old leases standard and clarify that new or modified land easements should be evaluated under ASU 2016-02, once an entity has adopted the new standard.

In December 2018, the FASB issued ASU 2018-20,Leases (Topic 842): Narrow-Scope Improvements for Lessors,which addresses issues facing lessors when applying the leases standard such as taxes collected from lessees, certain lessor costs paid directly by lessees, and recognition of variable payments for contracts with lease and nonlease components. In March 2019, the FASB issued ASC 2019-01,Leases (Topic 842): Codification Improvements,which amends the new leasing guidance to align the application of fair value by lessors that are not manufacturers or dealers, requires lessors within the scope of Topic 942,Financial Services-Depository and Lending,to present all principal payments received under leases within investment activities on the Statement of Cash Flows, and exempts both lessees and lessors from providing certain interim disclosures in the fiscal year in which a company adopts the new leases standard.

The new guidance requires companieslessees to recognize an asset and liability on the assets and liabilitiesbalance sheet for all of their lease obligations. Operating leases were previously not recognized on the rights and obligations created by leased assets. The accounting guidance for lessors will remain relatively largely unchanged.balance sheet. ASU 2016-02 is effective for annual and interimreporting periods beginning after December 15, 2018. Early2018 and early adoption is permitted. The Company is currently evaluatingwill adopt the effectstandard using the modified retrospective method for its existing leases and expects that this standard will increase lease assets and lease liabilities on the consolidated balance sheets. The Company intends to elect certain practical expedients and will carry forward historical conclusions related to (1) contracts that contain leases, (2) existing lease classification for any expired or existing leases, and (3) initial direct costs for any existing leases. The Company will also apply the practical expedient that will allow the Company to elect, as an accounting policy, by asset class, to include both lease and non-lease components as a single component and account for it as a lease. The Company will apply the short-term lease exception for lessees which will allow the Company to not have to apply the recognition requirements of the new leasing guidance for short-term leases and to recognize lease payments in net income on a straight-line basis over the lease term. The Company will also apply the practical expedient related to land easements, allowing it to carry forward its accounting treatment for land easements on existing agreements. Based on an analysis the Company has performed, the adoption of this amendment willnew lease standard is not expected to have a material impact on the Company’s consolidated financial statements.position, results of operations or cash flows.

 

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23.26. 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.

 

On February 11, 2016, the Company, through its wholly-owned subsidiary, Consolidated Water U.S. Holdings, Inc. (“Consolidated Water U.S.”), entered into a stock purchase agreement (the “Purchase Agreement”) with Aerex Industries, Inc. (“Aerex”) and Thomas Donnick, Jr. (“Donnick”). Pursuant to the terms of the Purchase Agreement, Consolidated Water U.S. purchased a 51% ownership interest in Aerex for an aggregate purchase price of approximately $7.7 million in cash. After giving effect to the transactions contemplated by the Purchase Agreement, Consolidated Water U.S. owns 51% of the outstanding capital stock of Aerex and Donnick owns 49% of the outstanding capital stock of Aerex. Consolidated Water U.S. also acquired from Donnick an option to compel Donnick to sell, and granted to Donnick an option to require Consolidated Water U.S. to purchase, Donnick’s 49% ownership interest in Aerex at a price based upon the fair market value of Aerex at the time of the exercise of the option. The options are exercisable on or after February 11, 2019. In connection with the Purchase Agreement, the Company guaranteed the obligations of Consolidated Water U.S. with respect to the option granted to Donnick to require Consolidated Water U.S. to purchase Donnick’s 49% ownership interest in Aerex.

Aerex is an original equipment manufacturer and service provider of a wide range of products and services applicable to municipal water and industrial water treatment. Its products include membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance services to its customers. Aerex is an American Society of Mechanical Engineers (ASME) code accredited manufacturer and maintains the ASME U and S and the National Board NB and R Certificates of Authorization. Its corporate offices and manufacturing facilities are located in Fort Pierce, Florida.

In connection with the Purchase Agreement, Consolidated Water U.S., Aerex and Donnick entered into a shareholders agreement, pursuant to which Consolidated Water U.S. and Donnick agreed to certain rights and obligations with respect to the governance of Aerex.

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73

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

TheTo the Board of Directors and Stockholders of

Ocean Conversion (BVI) Ltd.LTD.

 

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Ocean Conversion (BVI) Ltd. and its subsidiaryLTD. (the “Company”) as of December 31, 20152018 and 2014, and2017, the related consolidated statements of operations, statements of stockholders’ equity and cash flows for each of the two years in the three-year period ended December 31, 2015. 2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on thesethe Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement.misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included considerationAs part of our audits we are required to obtain an understanding of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ocean Conversion (BVI) Ltd. and subsidiary as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

/s/ Marcum LLP
We have served as the Company’s auditor since 2005. 
Fort Lauderdale, Florida
March 15, 2019

 

/s/ Marcum LLP

Fort Lauderdale, Florida

March 15, 2016 

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OCEAN CONVERSION (BVI) LTD.

 

CONSOLIDATED BALANCE SHEETS

 

  December 31, 
  2015  2014 
ASSETS        
Current assets        
Cash and cash equivalents $1,290,227  $848,960 
Accounts receivable  2,839,338   1,498,521 
Inventory  63,365   108,171 
Prepaid expenses and other assets  130,862   91,890 
Total current assets  4,323,792   2,547,542 
         
Property, plant and equipment, net  3,925,802   4,535,087 
Construction in progress  63,047   63,809 
Inventory non-current  274,384   242,591 
Other assets  419,417   456,417 
Total assets $9,006,442  $7,845,446 
         
LIABILITIES AND EQUITY        
Current liabilities        
Accounts payable and other liabilities $584,116  $427,269 
Total current liabilities  584,116   427,269 
         
Profit sharing obligation  1,603,800   1,393,200 
Deferred revenue  46,452   - 
Total liabilities  2,234,368   1,820,469 
         
Equity        
Class A, voting shares, $1 par value. Authorized 600,000 shares: issued and outstanding 555,000 shares  555,000   555,000 
Class B, voting shares, $1 par value. Authorized 600,000 shares: issued and outstanding 555,000 shares  555,000   555,000 
Class C, non-voting shares, $1 par value. Authorized 600,000 shares: issued and outstanding 165,000 shares  165,000   165,000 
Additional paid-in capital  225,659   225,659 
Retained earnings  5,056,829   4,380,586 
Total OC-BVI stockholders’ equity  6,557,488   5,881,245 
Non-controlling interest  214,586   143,732 
Total equity  6,772,074   6,024,977 
Total liabilities and equity $9,006,442  $7,845,446 

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

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OCEAN CONVERSION (BVI) LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

  Year Ended December 31, 
  2015  2014  2013 
Revenues $4,143,882  $4,679,829  $4,711,091 
Cost of revenues  2,261,973   2,833,007   2,886,820 
Gross profit  1,881,909   1,846,822   1,824,271 
General and administrative expenses  958,364   940,072   957,743 
Income from operations  923,545   906,750   866,528 
Other income (expense)            
Interest income  33,152   39,299   - 
Profit sharing expense  (210,600)  (222,750)  (715,273)
Court award - Baughers Bay dispute  -   -   2,000,000 
Other  1,000   (5,300)  127,205 
Other income (expense), net  (176,448)  (188,751)  1,411,932 
Net income  747,097   717,999   2,278,460 
Income attributable to non-controlling interests  70,854   21,045   27,793 
Net income attributable to controlling interests $676,243  $696,954  $2,250,667 
  December 31, 
  2018  2017 
ASSETS        
Current assets        
Cash and cash equivalents $1,541,237  $2,028,540 
Accounts receivable, net  625,438   543,204 
Inventory  59,693   58,898 
Prepaid expenses and other assets  59,811   204,972 
Total current assets  2,286,179   2,835,614 
         
Property, plant and equipment, net  3,256,326   3,298,106 
Inventory, non-current  290,484   301,548 
Other assets  312,500   345,417 
Total assets $6,145,489  $6,780,685 
         
LIABILITIES AND EQUITY        
Current liabilities        
Accounts payable and other liabilities $132,005  $218,753 
Total current liabilities  132,005   218,753 
         
Profit-sharing obligation  1,048,950   1,158,300 
Total liabilities  1,180,955   1,377,053 
         
Equity        
Class A, voting shares, $1 par value. Authorized 600,000 shares: issued and outstanding 555,000 shares  555,000   555,000 
Class B, voting shares, $1 par value. Authorized 600,000 shares: issued and outstanding 555,000 shares  555,000   555,000 
Class C, non-voting shares, $1 par value. Authorized 600,000 shares: issued and outstanding 165,000 shares  165,000   165,000 
Additional paid-in capital  225,659   225,659 
Retained earnings  3,308,837   3,640,210 
Total OC-BVI stockholders’ equity  4,809,496   5,140,869 
Non-controlling interest  155,038   262,763 
Total equity  4,964,534   5,403,632 
Total liabilities and equity $6,145,489  $6,780,685 

 

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

 

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OCEAN CONVERSION (BVI) LTD.

 

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYOPERATIONS

 

        Additional        Total 
  Common  paid-in  Retained  Non-controlling  stockholders' 
  Shares  Dollars  capital  earnings  interest  equity 
Balance as of December 31, 2012  1,275,000  $1,275,000  $225,659  $5,487,465  $94,894  $7,083,018 
Net income  -   -   -   2,250,667   27,793   2,278,460 
Dividends declared  -   -   -   (2,422,500)  -   (2,422,500)
Balance as of December 31, 2013  1,275,000   1,275,000   225,659   5,315,632   122,687   6,938,978 
Net income  -   -   -   696,954   21,045   717,999 
Dividends declared  -   -   -   (1,632,000)  -   (1,632,000)
Balance as of December 31, 2014  1,275,000   1,275,000   225,659   4,380,586   143,732   6,024,977 
Net income  -   -   -   676,243   70,854   747,097 
Dividends declared  -   -   -   -   -   - 
Balance as of December 31, 2015  1,275,000  $1,275,000  $225,659  $5,056,829  $214,586  $6,772,074 
  December 31, 
  2018  2017 
Revenues $2,845,211  $2,874,936 
Cost of revenues  1,348,046   1,759,285 
Gross profit  1,497,165   1,115,651 
General and administrative expenses  707,034   1,163,547 
Loss on long-lived asset dispositions  -   188,164 
Income (loss) from operations  790,131   (236,060)
Other income (expense)        
Interest income  18,544   93,657 
Gain on insurance proceeds  250,142   587,352 
Profit sharing expense  (1,308,150)  (93,150)
Litigation settlement  4,432,735   - 
Other income (expense), net  3,393,271   587,859 
Net income  4,183,402   351,799 
Income attributable to non-controlling interests  52,275   58,202 
Net income attributable to controlling interests $4,131,127  $293,597 

 

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

 

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OCEAN CONVERSION (BVI) LTD.

 

CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY

 

  Year Ended December 31, 
  2015  2014  2013 
Cash flows from operating activities            
Net income $747,097  $717,999  $2,278,460 
Adjustments to reconcile net income to net cash provided by operating activities:            
Depreciation  673,711   753,759   790,785 
Net loss on disposal of fixed assets  -   14,454   - 
Profit sharing  210,600   222,750   715,273 
(Increase) decrease in accounts receivable  (1,340,817)  1,253,309   (954,737)
(Increase) decrease in inventory  13,013   (69,010)  49,135 
(Increase) decrease in prepaid expenses and other assets  (1,972)  62,373   (17,965)
Increase (decrease) in accounts payable and other liabilities  156,847   (290,618)  (220,078)
Increase in deferred revenue  46,452   -   - 
Net cash provided by operating activities  504,931   2,665,016   2,640,873 
             
Cash flows from investing activities            
Additions to property, plant and equipment and construction in progress  (63,664)  (122,583)  (1,888)
Net cash (used in) investing activities  (63,664)  (122,583)  (1,888)
             
Cash flows from financing activities            
Profit sharing rights paid  -   (518,400)  (769,500)
Dividends paid  -   (1,632,000)  (2,422,500)
Net cash (used in) financing activities  -   (2,150,400)  (3,192,000)
Net increase (decrease) in cash and cash equivalents  441,267   392,033   (553,015)
Cash and cash equivalents at the beginning of the period  848,960   456,927   1,009,942 
Cash and cash equivalents at the end of the period $1,290,227  $848,960  $456,927 
             
Non-cash transactions            
Transfers from inventory to property, plant and equipment, net $64,426  $-   - 
  Common  Additional  Retained  Non-controlling  Total
stockholders'
 
  Shares  Dollars  paid-in capital  earnings  interest  equity 
Balance as of December 31, 2016  1,275,000   1,275,000   225,659   5,832,863   204,561   7,538,083 
Net income  -   -   -   293,597   58,202   351,799 
Dividends declared  -   -   -   (2,486,250)  -   (2,486,250)
Balance as of December 31, 2017  1,275,000   1,275,000   225,659   3,640,210   262,763   5,403,632 
Net income  -   -   -   4,131,127   52,275   4,183,402 
Dividends declared  -   -   -   (4,462,500)  (160,000)  (4,622,500)
Balance as of December 31, 2018  1,275,000  $1,275,000  $225,659  $3,308,837  $155,038  $4,964,534 

 

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

 

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OCEAN CONVERSION (BVI) LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

  Year Ended December 31, 
  2018  2017 
Cash flows from operating activities      
Net income $4,183,402  $351,799 
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities        
Depreciation  393,072   433,802 
Loss on long-lived asset dispositions  -   188,164 
Gain from insurance recovery  (250,142)  (587,352)
Profit sharing  1,308,150   93,150 
(Increase) decrease in accounts receivable  (204,326)  533,823 
(Increase) decrease in inventory  10,269   (36,753)
(Increase) decrease in prepaid expenses and other assets  178,078   (105,215)
Increase (decrease) in accounts payable and other liabilities  (86,748)  21,080 
Net cash provided by operating activities  5,531,755   892,498 
         
Cash flows from investing activities        
Additions to property, plant and equipment and construction in progress  (351,292)  (911,878)
Proceeds from insurance recovery  372,234   814,330 
Net cash (used in) investing activities  20,942   (97,548)
         
Cash flows from financing activities        
Profit sharing rights paid  (1,417,500)  (789,750)
Dividends paid to stockholders  (4,462,500)  (2,486,250)
Dividends paid to non-controlling interests  (160,000)  - 
Net cash (used in) financing activities  (6,040,000)  (3,276,000)
Net increase (decrease) in cash and cash equivalents  (487,303)  (2,481,050)
Cash and cash equivalents at the beginning of the period  2,028,540   4,509,590 
Cash and cash equivalents at the end of the period $1,541,237  $2,028,540 
         
Non-cash transactions        
Receivable from long-lived asset dispositions due to hurricane $-  $102,659 

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

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OCEAN CONVERSION (BVI) LTD.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Principal activity

 

Ocean Conversion (BVI) Ltd. (“OC-BVI”) was incorporated in the British Virgin Islands under the Companies Act, Cap 285, on May 14, 1990 and is engaged in the production and sale of potable water to the Government of the British Virgin Islands (the “BVI government”). OC-BVI has an agreement with the BVI government, its sole customer, to produce and supply a guaranteed quantity and quality of potable water. This agreement provides for specific penalties should OC-BVI not be able to provide the guaranteed quantity of water.

 

JVD Ocean Desalination Ltd. (“JVD”), a majority owned subsidiary of OC-BVI, was incorporated on January 2, 2003 and began producing potable water on the island of Jost Van Dyke for the BVI government in July 2003 under a 10-year contract with the BVI government that expired July 8, 2013. PursuantOC-BVI continues to the contract, OC-BVI is operatingoperate the plant on a year-to-year basisJost van Dyke on the terms of this contract until such time that the BVI government informs OC-BVI of its intention to extend the existing, orprevious contract, enter into a new agreement.agreement or cease purchasing water from the Jost van Dyke plant.

 

OC-BVI supplies water to the BVI government under a seven-year contract executed in March 2010 for an original term of seven years for OC-BVI’s plant located at Bar Bay, Tortola (the “Bar Bay Agreement”). Under the terms of the Bar Bay Agreement, OC-BVI delivers up to 600,000 gallons of water per day to the BVI government from the Bar Bay plant and the BVI government is obligated to pay for this water at a specified price as adjusted by a monthly energy factor. The Bar Bay Agreement includes a seven-year extension option exercisable by the BVI government. Substantially all of OC-BVI’s revenuesIn February 2017, OC-BVI and cash flows are derived from the Bar Bay plant. If OC-BVI ceases supplying water to the BVI government fromextended the Bar Bay plant after the March 4, 2017 expiration date of the initial seven-year term of the Bar Bay Agreement OC-BVI will be required to record an impairment loss on its long-lived Bar Bay plant assets to reduce the carrying value of these assets to their then fair value. This impairment loss would have an adverse impact on OC-BVI’s consolidated financial condition and consolidated statements of operations. The accompanying consolidated financial statements do not include any adjustments for the possible outcome of this contingency.March 2031.

 

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.

 

Basis of consolidation: The consolidated financial statements include the financial statements of OC-BVI and its majority owned subsidiary, JVD (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated.

 

Use of estimates: The preparation of the consolidated financial statements in conformity with the accounting principles generally accepted in the United States of America requires management of the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to estimates and assumptions include the carrying value of property, plant and equipment and inventory. Actual results could differ from those estimates.

 

Cash and cash equivalents: Cash and cash equivalents are comprised of demand deposits at banks and highly liquid deposits at banks with an original maturity of three months or less. Cash and cash equivalents are not restricted as to withdrawal or use.

 

Accounts receivable:receivable and allowance for doubtful accounts: Accounts receivable are recorded at the invoiced amounts based on meter readings. 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.

 

Interest income: The Company earns interest income on accounts receivable based on the overdue invoices from its customer.

 

Inventory:Inventory primarily includes replacement sparesconsumables stock and spare parts stock that are valued at the lower of cost or net realizable value,less an allowance for obsolescence, with cost determined on the first-in, first-out basis.

 

Impairment of long-lived assets: Assets such as property, plant and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized byfor the amount by which the carrying amount exceeds the fair value of the asset.

 

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Property, plant and equipment: Property, plant and equipment is stated at cost less accumulated depreciation. Depreciation is calculated using a straight linestraight-line method with an allowance for estimated residual values. Rates are determined based on the estimated useful lives of the assets as follows:

 

Plant and equipment 45 to 1422 years
Office furniture, fixtures and equipment 3 to 10 years
Vehicles 3 to 10 years
Lab equipment 5 to 10 years

 

Additions to property, plant and equipment consist of the cost of the contracted services, direct labor and materials. Assets under construction are recorded as additions to property, plant and equipment upon completion of the projects. Depreciation commences in the month of addition.

 

Revenue from water sales: OC-BVI recognizes revenues from Bar Bay plant water sales at the time water is supplied to the BVI government’s distribution system. The amount of water supplied is determined based upon water meter readings performed at the end of each month. Under the terms of its bulk water supply contracts, OC-BVI is entitled to charge its customers the greater of a minimum monthly charge or the price for water supplied during the month.

 

The following table presents the Company’s revenues disaggregated by revenue source.

  Year Ended December 31, 
  2018  2017 
Bar Bay, Tortola water sales $2,518,518  $2,535,301 
Jost Van Dyke water sales  326,693   339,635 
Total Revenues $2,845,211  $2,874,936 

In May 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers. ASU 2014-09 requires revenue recognition to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 prescribes a five-step framework in accounting for revenues from contracts within its scope, including (a) identification of the contract, (b) identification of the performance obligations under the contract, (c) determination of the transaction price, (d) allocation of the transaction price to the identified performance obligations and (e) recognition of revenues as the identified performance obligations are satisfied. ASU 2014-09 also prescribes additional disclosures and financial statement presentations. ASU 2014-09 may be adopted retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application.

On January 1, 2018, the Company adopted Topic 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. There was no impact to opening retained earnings as of January 1, 2018 as a result of the adoption of this standard.

The Company has elected the “right to invoice” practical expedient for revenue recognition on its water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice.

3. Litigation with the BVI government

 

UnderThrough March 2010, OC-BVI supplied water to the BVI government from a plant located at Baughers Bay, Tortola, under the terms of a water supply agreement dated May 1990 (the “1990 Agreement”) between OC-BVI and the Government of the British Islands (the “BVI Government”), upon the expiration of itswith an initial seven-year term that expired in May 1999, the1999. The 1990 Agreement provided that such agreement would automatically be extended for another seven-year term unless the BVI government provided notice, at least eight months prior to such expiration, of its decision to purchase the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $1.42 million. In correspondence between the parties from late 1998 through early 2000, the BVI government indicated that it intended to purchase the plant but would be amenable to negotiating a new water supply agreement and that it considered the 1990 Agreement to be in force on a monthly basis until negotiations between the BVI government and OC-BVI were concluded. Occasional discussions were held between the parties 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.

Duringplant and 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.

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The Court ruled on this litigation in 2009, determining that (1) the BVI government was entitled to immediateawarding 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 millionwithout compensation to OC-BVI. Both OC-BVI underand 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-BVIBVI subsequently filed an appealappeals with the Eastern Caribbean Court of Appeals (the “Appellate Court”) in October 2009 asking the Appellate Court to review the September 17, 2009 rulingcertain rulings by the Court as it relatedwith respect 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.this litigation.

 

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 thereversed a previous judgmentruling 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 results of operations as other income in the periods in which they were received. During the first quarter of 2015,

OC-BVI and the BVI government appointedengaged a mutually approved appraiservaluation expert to complete a valuation of the Baughers Bay plant at the date it was transferred to the BVI government in accordance with the Appellate Court ruling. ThisIn June 2016, OC-BVI received the final valuation is presently underway.report from this valuation expert, which set forth a value for the Baughers Bay plant of $13.0 million as of the date OC-BVI transferred possession of the plant to the BVI government. Applying the valuation determined by the valuation expert to the formula set forth by the Appellate Court in its ruling, OC-BVI would be entitled to $11.58 million from the BVI government for the Baughers Bay plant. The BVI government has disagreed with the valuation methodology used by the valuation expert and the resulting valuation for the Baughers Bay plant. OC-BVI’s legal counsel subsequently held discussions with the BVI government in an effort to settle this matter. On August 31, 2018, OC-BVI and the BVI government entered into a settlement agreement for the Baughers Bay plant pursuant to the Appellate Court ruling with an agreed upon value for the plant of $4,432,834, which resulted in a net payment (i.e. after legal and other expenses) to OC-BVI in September 2018 of $4,271,409.

 

4. Accounts receivable, net

Accounts receivable, net consists of:

  December 31, 
  2018  2017 
Trade $690,054  $706,876 
Other  8,000   123,548 
Total accounts receivable  698,054   830,424 
Allowance for doubtful accounts  (72,616)  (287,220)
Accounts receivable, net $625,438  $543,204 

Trade accounts receivable consist of billings to the Government of the British Virgin Islands in the normal course of business.

Other accounts receivable consists of reimbursement of cellular expenses from an employee and expected insurance recovery from long-lived asset dispositions and other losses incurred due to hurricane damages for the years ended December 31, 2018 and 2017, respectively.

5. Inventory

 

Inventory consists of:

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Consumables stock $8,043  $20,667  $15,289  $6,309 
Spare parts inventory  329,706   330,095   334,888   354,137 
Total inventory  337,749   350,762   350,177   360,446 
Less current portion  63,365   108,171   59,693   58,898 
Inventory (non-current) $274,384  $242,591  $290,484  $301,548 

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5.6. Property, plant and equipment

 

Property, plant and equipment consist of:

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Buildings $3,664,250  $3,599,824  $3,736,124  $3,539,709 
Plant and equipment  5,691,242   5,691,243   5,189,574   5,036,087 
Office furniture, fixtures and equipment  44,203   44,203   49,168   47,778 
Vehicles  78,428   78,428   78,428   78,428 
Tools & test equipment  9,622   9,622   4,906   4,906 
  9,487,745   9,423,320   9,058,200   8,706,908 
Accumulated depreciation  (5,561,943)  (4,888,233)  (5,801,874)  (5,408,802)
Property, plant and equipment, net $3,925,802  $4,535,087  $3,256,326  $3,298,106 

 

Depreciation expense was $673,711, $753,759$393,072 and $790,785$433,802 for the years ended December 31, 2015, 20142018 and 2013,2017, respectively.

 

During 2007, OC-BVI completed, for a total cost of approximately $8 million, the construction of a desalination plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the “Bar Bay plant”). OC-BVI began selling water to the Ministry from this plant in January 2009 and on March 4, 2010, OC-BVI and the BVI government executed a definitive seven-year contract for the Bar Bay plant (the “Bar Bay Agreement”). Under the terms of the Bar Bay Agreement, OC-BVI delivers up to 600,000 gallons of water per day to the BVI government from the Bar Bay plant and the BVI government is obligated to pay for this water at a specified price as adjusted by a monthly energy factor. The

In February 2017, OC-BVI and the BVI government extended the expiration date of the Bar Bay Agreement includes a seven-yearto March 2031. As part of this extension, option exercisable by the BVI government andOC-BVI was required OC-BVI to complete, a storage reservoir on a BVI government site by no later than March 4, 2011. OC-BVI has not commenced construction of this storage reservoir dueat its own expense, capital improvements to the BVI government’s failure to pay the invoices for the water provided by the Bar Bay plant to ensure the plant can meet its performance guarantees. Several existing fixed assets were required to be disposed of as a result of these capital improvements, which encompassed the majority of the $188,164 loss on a timely basis.long-lived asset dispositions.

 

6.Gain from Insurance Recovery

In September 2017, OC-BVI suffered damage to the RO building, degassifier, and other equipment at its Bar Bay and JVD plants as a result of the Hurricane Irma and Hurricane Maria. These assets were covered by property insurance. In May 2018, OC-BVI received $372,234 in insurance proceeds for this property loss. The assets replaced with these insurance proceeds had a carrying value of $102,659 and an additional $19,433 of repair expenses were incurred, resulting in a gain on insurance proceeds of $250,142.

In March 2017, OC-BVI suffered damage to the generator building, generators, and other equipment at its Bar Bay plant as a result of a fire. These assets were covered by property insurance. In September 2017, OC-BVI received $814,330 in insurance proceeds for this property loss. The assets replaced with these insurance proceeds had a carrying value of $226,978, resulting in a gain on insurance proceeds of $587,352.

7. Commitments

 

During 2005, OC-BVI entered into a 25- year lease agreement with Bar Bay Estate Holdings Limited (“Bar Bay Holdings”), a private company incorporated in the Territory of the British Virgin Islands, pursuant to which OC-BVI agreed to lease from Bar Bay Holdings approximately 50,000 square feet of land on Tortola, British Virgin Islands on which a seawater desalination plant and wells waswere constructed. Under the terms of the lease agreement, a lease premium payment of $750,000 was made on June 10, 2005, annual lease and easement payments of $19,319 ($15,020 through May 2010 and $17,662 through May 2016) are due annually and royalty payments of 2.87% of annual sales, as defined in the lease agreement, are payable quarterly. Sage Water Holdings (BVI) Limited currently owns 100% of the non-voting stock, 50% of the voting common stock and 50% of the profit sharingprofit-sharing rights of OC-BVI. A Director of Sage Water Holdings is also a Director of OC-BVI and holds 50% of the outstanding shares of Bar Bay Holdings.


OC-BVI entered into an agreement that grants an easement over a parcel of land used to access certainthe Bar Bay plant. Under the terms of the agreement, an initial premium payment of $70,000 was made and fees of $6,000 are due annually through September 2019.

 

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Future minimum lease payments under non-cancelable operating leases as of December 31, 20152018 are as follows:

 

2016 $23,662 
2017  23,662 
2018  23,662 
2019  21,662  $23,319 
2020  17,662   19,319 
2021  19,319 
2022  19,319 
2023  19,319 
Thereafter  166,310   123,962 
 $276,620  $224,557 

 

Total rental expense amounted to $76,262, $76,262$77,917 and $76,262$77,917 for the years ended December 31, 2015, 20142018 and 2013,2017, respectively.

 

7.8. Expenses

 

  Year Ended December 31, 
  2015  2014  2013 
Cost of water sales consist of the following:            
Fuel oil $42,685  $89,672  $55,024 
Electricity  777,680   1,114,780   1,173,659 
Maintenance  85,518   90,025   109,782 
Depreciation  671,804   751,705   789,342 
Employee costs  338,143   395,648   385,943 
Insurance  74,394   74,086   72,974 
Other  271,749   317,091   300,096 
  $2,261,973  $2,833,007  $2,886,820 

  Year Ended December 31, 
  2018  2017 
Cost of water sales consist of the following:      
Fuel oil $2,153  $34,473 
Electricity  232,611   521,768 
Maintenance  103,350   131,115 
Depreciation  390,539   431,671 
Employee costs  339,475   352,849 
Insurance  95,931   73,609 
Other  183,987   213,800 
  $1,348,046  $1,759,285 
         
General and administrative expenses consist of the following:        
         
Management fees $552,958  $539,026 
Directors fees and expenses  59,591   54,476 
Professional fees  189,945   121,155 
Employee costs  73,188   69,853 
Depreciation  2,533   2,131 
Maintenance  815   2,967 
Other  (171,996)  373,939 
  $707,034  $1,163,547 

 

General and administrative expenses consist of the following:

Management fees $630,932  $628,643  $627,725 
Directors fees and expenses  88,738   71,390   78,735 
Professional fees  28,525   25,626   18,900 
Employee costs  66,254   65,213   65,301 
Depreciation  1,908   2,054   1,442 
Maintenance  948   -   - 
Other  141,059   147,146   165,640 
  $958,364  $940,072  $957,743 

8.9. Related party transactions

 

Pursuant to an amended and restated Management Services Agreement between DesalCo Limited (“DesalCo”), a wholly-owned subsidiary of CWCO, and the Company, DesalCo provides the Company with management, administration, finance, operations, maintenance, engineering and purchasing services, and is entitled to be reimbursed for all reasonable expenses incurred on behalf of the Company.

 

Pursuant to a Management Services Memorandum effective January 1, 2004 between the Class B Directors who at any point in time represent Sage Water Holdings (BVI) Limited (“SWHL”), and the Company, the Class B directors provide the Company with delegated operational matters, general management of local business matters, donation, sponsorship and public relations activities, and are entitled to an annual fixed fee of $60,000, adjusted annually for inflation, and a profit sharing bonus equal to 2% of the Company’s income before depreciation, interest (income and expense), and other expenses not directly related to the operation of the Company.

 

Pursuant to a Services Agreement effective November 30, 2012 between the Company and Sage Utilities Holdings (BVI) Limited (“SUHL”), which is related to Sage Water Holdings (BVI) Ltd. through common ownership, the Company provides SUHL with operations, maintenance, engineering, and purchasing services. However, this Services Agreement for the Baughers Bay plant was suspended as of August 1, 2018.


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The statements of operations include the following transactions with related parties:

 

  Year ended December 31, 
  2015  2014  2013 
Revenues         
SUHL management fees $331,599  $447,965  $476,060 
             
General and administrative expenses            
DesalCo management fees $514,858  $513,048  $510,998 
SWHL management fees  116,074   115,595   116,727 
  $630,932  $628,643  $627,725 

  Year ended December 31, 
  2018  2017 
Revenues      
SUHL management fees $169,438  $287,219 
         
General and administrative expenses        
DesalCo management fees $445,187  $449,001 
SWHL management fees  107,771   90,025 
  $552,958  $539,026 

 

The accompanying balance sheets include the following amounts associated with related parties:

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Accounts receivable             
SUHL $351,161  $150,715  $369,992  $202,051 
                
Prepaid expenses and other assets                
DesalCo $46,452  $-  $-  $118,820 
                
Accounts payable and other liabilities                
DesalCo $44,977  $49,031  $46,559  $31,083 
SWHL  9,251   6,244   8,574   1,017 
 $54,228  $55,275  $55,133  $32,100 
        
Deferred revenue        
SUHL $46,452  $- 

 

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9.10. Profit sharing obligation

 

 December 31,  December 31, 
 2015  2014  2018  2017 
Opening balance $1,393,200  $1,688,850  $1,158,300  $1,854,900 
Additions  210,600   222,750   1,308,150   93,150 
Distributions paid and accrued  -   (518,400)
Distributions paid  (1,417,500)  (789,750)
Ending balance $1,603,800  $1,393,200  $1,048,950  $1,158,300 

 

In 1993, the Company and its existing shareholders at that time, entered into two Share Repurchase and Profit Sharing Agreements (the “Agreements”) to repurchase 225,000 shares each from those shareholders (the “Parties”), whose shares were issued in exchange for guarantees of the Company’s long termlong-term debt. The Agreements were subsequently approved by special resolution at an Extraordinary Meeting of all the Company’s shareholders.

 

Under the terms of the Agreements, the Company, in exchange for the above-mentioned shares, granted the Parties, profit sharing rights in the Company’s profits for as long as the Company remains in business as a going concern. The Agreement states that where the Company has profits available for the payment of dividends and pays a dividend from there, a distribution shall be made to each of the Parties equal to 202,500 times the dividend per share received by the remaining shareholders and paid concurrently with such dividend. The factor of 202,500 shall be subject to amendment by the same proportion and at the same time as changes take place or adjustments are made in respect of the remaining shareholders.

 

The current shareholders and an affiliate of a current shareholder have acquired these profit sharingprofit-sharing rights. The Company has recorded an obligation as of December 31, 20152018 for the maximum profit shares payable to the Parties if all retained earnings were to be distributed as dividends and profit shares.

 

10.11. Taxation

 

Under the terms of the water sale agreements with the Government, the Company is exempt from all non-employee taxation in the British Virgin Islands.

 

11.12. Pension plan

 

Effective December 1, 2003, the Company established the MWM Global Retirement Plan (the “Plan”). The Plan is a defined contribution plan whereby the Company contributes 5% of each participating employee’s salary to the Plan. The total amount recognized as an expense under the plan was $11,648, $11,319$13,354 and $11,051$12,235 for the years ended December 31, 2015, 20142018 and 2013,2017, respectively.

 

84

12.

13. Financial instruments

 

Credit risk:

 

Financial assets that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents, accounts receivable and intercompany loans receivable. The Company’s cash is placed with high credit quality financial institutions. The accounts receivable are due from the Company’s sole customer, the BVI government. As a result, the Company is subject to credit risk to the extent of any non-performance by the BVI government.

 

Interest rate risk:

 

The Company has no long-term debt as of December 31, 2015.2018.

 

Fair values:

 

As of December 31, 20152018 and 2014,2017, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate fair values due to the short term maturities of these assets and liabilities.

 

13.14. Subsequent events

 

The Company has evaluated subsequent events for potential recording or disclosure in these consolidated financial statements through the date the financial statements were issued.available to be issued and has determined that other than as disclosed in these consolidated financial statements, the Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the issuance of this report that would have a material impact on its consolidated financial statements.

 

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ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A.CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

Disclosure controls and procedures are the Company’s controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the possible controls and procedures.

 

Our management has evaluated, with the participation of our principal executive officer and principal financial officer, the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, our management, including our principal executive officer and principal financial officer, has concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective at the reasonable assurance level.

 

Internal Control Over Financial Reporting

 

(a)Management’s Annual Report on Internal Control Over Financial Reporting

 

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

 

Company management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our principal executive officer and principal financial officer and effected by the Company’s Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America and includes those policies and procedures that:

 

·pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;

·provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

·provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

 

Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015.2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control-Integrated Framework (2013).

 

Based on our assessment, management has concluded that, as of December 31, 2015,2018, the Company’s internal control over financial reporting was effective at the reasonable assurance level.

 

The Company’s independent registered public accounting firm, Marcum LLP, has issued a report on the effectiveness of the Company’s internal control over financial reporting. Their report appears in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.9A(b).


b)(b)Attestation Report of the Independent Registered Public Accounting Firm

 

86

See ITEM 8.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON INTERNAL CONTROL OVER FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.REPORTING

Board of Directors and Stockholders of

Consolidated Water Co. Ltd.

Opinion on Internal Control over Financial Reporting

We have audited Consolidated Water Co. Ltd.'s (the “Company”) internal control over financial reporting as of December 31, 2018, based on criteria established inInternal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established inInternal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated balance sheets as of December 31, 2018 and 2017 and the related consolidated statements of income, shareholders’ equity, and cash flows and related notes for each of the two years in the period ended December 31, 2018 of the Company and our report dated March 15, 2019 expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management Annual Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that degree of compliance with the policies or procedures may deteriorate.

/s/ Marcum LLP
Fort Lauderdale, Florida
March 15, 2019

 

(c)Changes in Internal Control Over Financial Reporting

 

There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of such internal control that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART III

 

ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Information required by this item with respect to our directors and the nomination process is contained in the proxy statement for our 20152019 Annual Meeting of Shareholders to be filed with the SEC (the “Proxy Statement”) under the heading “Proposal 1 - Election of Group IIII Directors” and is incorporated by reference in this Annual Report.

 

Information required by this item with respect to our executive officers is set forth in the Proxy Statement under the heading “Executive Officers.”

 

Information required by this item with respect to our audit committee and our audit committee financial expert is contained in the Proxy Statement under the heading “Proposal 1 - Election of Group IIII Directors - Committees of the Board of Directors - Audit Committee” and is incorporated by reference in this Annual Report.

 

Information required by this item with respect to compliance with Section 16(a) of the Exchange Act is contained in the Proxy Statement under the heading “Additional Information Regarding Executive“Executive Compensation - Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated by reference in this Annual Report.

 

The Board of Directors has adopted a Code of Business Conduct and Ethics (the “Code”) that applies to all of the Company’s directors, officers (including the principal executive officer, principal financial officer and principal accounting officer) and employees. Information related to the Code is contained in the Proxy Statement under the heading “Proposal 1 - Election of Group IIII Directors - Governance of the Company” and is incorporated by reference in this Annual Report.

 

We intend to disclose future amendments to certain provisions of the Code, or waivers of such provisions granted to executive officers and directors, on our website within four business days following the date of such amendment or waiver.

 

ITEM 11.EXECUTIVE COMPENSATION

 

Information required by this item with respect to executive compensation and director compensation is contained in the Proxy Statement under the headings “Compensation Discussion and Analysis” and “Additional Information Regarding Executiveheading “Executive Compensation”, respectively, and is incorporated by reference in this Annual Report.

 

The information required by this item with respect to compensation committee interlocks and insider participation is contained in the Proxy Statement under the heading “Additional Information Regarding Executive Compensation - Compensation Committee Interlocks and Insider Participation in Compensation Decisions” and is incorporated by reference in this Annual Report. The compensation committee report required by this item is contained in the Proxy Statement under the heading “Compensation Discussion and Analysis - Compensation Committee Report” and is incorporated by reference in this Annual Report.

The information required by this item with respect to compensation policies and practices as they relate to the Company’s risk management is contained in the Proxy Statement under the heading “Compensation Discussion and Analysis” and is incorporated by reference in this Annual Report.

ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

Information required by this item with respect to security ownership of certain beneficial owners and management is contained in the Proxy Statement under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Shareholders Matters” and is incorporated by reference in this Annual Report.

 

ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Information required by this item with respect to such contractual relationships and director independence is contained in the Proxy Statement under the headings “Additional Information Regarding Executive“Executive Compensation - Transactions With Related Persons” and is incorporated by reference in this Annual Report.

 

ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES

 

Information with respect to principal accounting fees and services are contained in the Proxy Statement under the heading “Proposal 3 Ratification of the Selection of Independent Accountants - Principal Accounting Fees and Services” and is incorporated by reference in this Annual Report.

 

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PART IV

 

ITEM 15.EXHIBITS, FINANCIAL STATEMENTS SCHEDULES

 

1. Financial Statements

 

The Consolidated Water Co. Ltd. Financial statements found in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA are incorporated herein by reference.

Pursuant to Rule 3-09 of Regulation S-X, when either the first or third condition set forth in Rule 1-02(w), substituting 20 percent for 10 percent, is met by a 50 percent-or-less-owned person accounted for by the equity method separate financial statements shall be filed. The Ocean Conversion (BVI) Ltd. financial statements found in ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA are incorporated herein by reference.

 

2. Financial Statement Schedules

 

None

 

3. Exhibits

 

The Exhibits listed in the Exhibit Index immediately preceding the Signatures are filed as part of this Annual Report on Form 10-K.

 

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CONSOLIDATED WATER CO. LTD.

 

INDEX TO EXHIBITS FILED WITH 10-K

 

Number Exhibit Description
   
3.1 Amended and Restated Memorandum of Association of Consolidated Water Co. Ltd. dated May 14, 2008 (incorporated by reference to Exhibit 3.1 filed as part of our Form 8-K filed June 6, 2008, Commission File No. 0-25248)
   
3.2 Amended and Restated Articles of Association of Consolidated Water Co. Ltd. dated May 10, 2006 (incorporated by reference to Exhibit 4.2 filed as part of our Form F-3 filed October 12, 2006, Commission File No. 333-137970)
   
3.3 Amendment to Articles of Association of Consolidated Water Co. Ltd. dated May 11, 2007 (incorporated by reference to Exhibit 3.1 filed as part of our Form 8-K filed May 14, 2007, Commission File No. 0-25248)
   
3.4 Amendment to Articles of Association of Consolidated Water Co. Ltd. dated May 26, 2009 (incorporated by reference to Exhibit 3.1 filed as part of our Form 8-K filed May 27, 2009, Commission File No. 0-25248)
   
4.1 Option Deed, dated August 6, 1997, between Cayman Water Company Limited and American Stock Transfer & Trust Company (incorporated herein by reference to the exhibit filed on our Form 6-K, dated August 7, 1997, Commission File No. 0-25248)
   
4.2 Deed of Amendment of Option Deed dated August 8, 2005 (incorporated herein by reference to Exhibit 4.2 filed as a part of our Form 8-K dated August 11, 2005, Commission File No. 0-25248)
   
4.3 Second Deed of Amendment of Option Deed, dated September 27, 2005 (incorporated herein by reference to Exhibit 4.2 filed as a part of our Form 8-K dated October 3, 2005, Commission File No. 0-25248)
   
4.4 Third Deed of Amendment to Option Deed, dated May 30, 2007 (incorporated herein by reference to Exhibit 4.3 filed as part of our Form 8-K filed June 1, 2007, Commission File No. 0-25248)
   
10.1.1 License Agreement dated July 11, 1990 between Cayman Water Company Limited and the Government of the Cayman Islands (incorporated herein by reference to the exhibit filed as a part of our Form 20-F dated December 7, 1994, Commission File No. 0-25248)
   
10.1.2 First Amendment to License Agreement dated September 18, 1990 between Cayman Water Company Limited and the Government of the Cayman Islands. (incorporated herein by reference to the exhibit filed as a part of our Form 20-F dated December 7, 1994, Commission File No. 0-25248)
   
10.1.3 Second Amendment to License Agreement dated February 14, 1991 between Cayman Water Company Limited and the Government of the Cayman Islands. (incorporated herein by reference to the exhibit filed as a part of our Form 20-F dated December 7, 1994, Commission File No. 0-25248)
   
10.1.4 Third Amendment to a License to Produce Potable Water dated August 15, 2001 between Consolidated Water Co. Ltd. by the Government of the Cayman Islands (incorporated herein by reference to Exhibit 10.4 filed as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission File No. 0-25248)
   
10.1.5 Fourth Amendment to a License to Produce Potable Water dated February 1, 2003 between Consolidated Water Co. Ltd. by the Government of the Cayman Islands (incorporated herein by reference to Exhibit 10.5 filed as a part of our Form 10-K for the fiscal year ended December 31, 2002, Commission File No. 0-25248)
   
10.1.6 Amendment to License Agreement dated July 20, 2010 between the Government of the Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to Exhibit 10 filed as a part of our Form 8-K filed July 23, 2010, Commission File No. 0-25248)
   
10.1.7 Amendment to a License to Produce Potable Water dated July 11, 2012 between Cayman Water Company Limited and the Government of the Cayman Islands (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 10-Q for the second quarter ended June 30, 2012, Commission File No. 0-25248)


90

10.1.8 Amendment to License Agreement dated December 31, 2012 between the Government of the Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed March 4, 2013, Commission File No. 0-25248)
   
10.1.9  Amendment to License Agreement dated April 24, 2013 between the Government of the Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to Exhibit 10.1.9 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248) 
   
10.1.10  Amendment to License Agreement dated November 6, 2013 between the Government of the Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to Exhibit 10.1.10 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248) 

10.1.11 

10.1.11Amendment to License Agreement dated June 30, 2014 between the Government of the Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to Exhibit 10.1 to our Form 8-K filed July 14, 2014, Commission File No. 0-25248)

10.1.12  
10.1.12 Amendment to License Agreement dated January 20, 2015 between the Government of the Cayman Islands and Cayman Water Company Limited (incorporated herein by reference to Exhibit 10.1.12 filed as a part of our Form 10-K for the fiscal year ended December 31, 2014, Commission File No. 0-25248)

10.1.13** 
10.1.13Amendment to License Agreement dated August 5, 2015 between the Government of the Cayman Islands and Cayman Water Company Limited.Limited (incorporated herein by reference to Exhibit 10.1.13 filed as a part of our Form 10-K for the fiscal year ended December 31, 2015, Commission File No. 0-25248)
   
 10.210.1.14 Amendment to License Agreement dated April 11, 2016 between the Government of the Cayman Islands and Cayman Water Company Limited (incorporated by reference to Exhibit 10.1 filled as part of our Form 10-Q for the fiscal quarter ended June 30, 2016, Commission File No. 0-25248)
10.2Water Supply Agreement dated December 18, 2000 between Consolidated Water Co. Ltd. and South Bimini International Ltd. (incorporated herein by reference to Exhibit 10.2 filed as a part of our Form 10-K for the fiscal year ended December 31, 2000, Commission File No. 0-25248)
   
10.3.1* Employment contract dated December 5, 2003 between Frederick McTaggart and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.18 filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)
   
10.3.2* Amendment of Engagement Agreement dated September 14, 2007 between Frederick W. McTaggart and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.2 to our Form 8-K filed September 19, 2007, Commission File No. 0-25248)
   
10.3.3* Third Amendment of Engagement Agreement dated September 9, 2009 between Frederick W. McTaggart and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.1 to our Form 8-K filed September 9, 2009, Commission File No. 0-25248)
   
10.4* Engagement Agreement dated January 15, 2008 between David Sasnett and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as part of our Form 8-K filed January 22, 2008, Commission File No. 0-25248)
   
10.5*10.5.1* Employment contract dated January 14, 2008 between Ramjeet Jerrybandan and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.11 filed as part of our Form 10-K for the fiscal year ended December 31, 2008, Commission File No. 0-25248)
   
10.6*10.5.2* First Amendment to Employment Contract dated March 29, 2017 between Ramjeet Jerrybandan and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.12 filed as part of our Form 8-K filed April 4, 2017, Commission File No. 0-25248) 

10.6*Employment contract dated January 16, 2008 between Gerard Pereira and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.12 filed as a part of our Form 10-K for the fiscal year ended December 31, 2008, Commission File No. 0-25248)

91

10.7.1* 
10.7*Engagement Agreement dated July 12, 2011 between John Tonner and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed August 5, 2011, Commission File No. 0-25248).
10.7.2* Amended and Restated Engagement Agreement dated March 29, 2017 between John Tonner and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as part of our Form 8-K filed April 4, 2017, Commission File No. 0-25248)
   
10.8 Specimen Service Agreement between Cayman Water Company Limited and consumers (incorporated herein by reference to the exhibit filed as part of our Registration Statement on Form F-1 dated March 26, 1996)


10.9* 
10.9*Summary Share Grant Plan for Directors (incorporated herein by reference to Exhibit 10.24 filed as part of our Registration Statement on Form F-2 dated May 17, 2000, Commission File No. 333-35356)
   
10.10* Employee Share Option Plan (incorporated herein by reference to Exhibit 10.26 filed as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission File No. 0-25248)
   
10.11* 2008 Equity Incentive Plan (incorporated by reference to Exhibit 10.1 filled as part of our Form 10-Q for the fiscal quarter ended September 30, 2008, Commission File No. 0-25248)
   
10.12 Agreement dated February 1, 2002 between Consolidated Water Co. Ltd. and Cayman Hotel and Golf Inc. (incorporated herein by reference to Exhibit 10.31 filed as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission File No. 0-25248)
   
10.13 Lease dated December 10, 2001 between Cayman Hotel and Golf Inc. and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.52 filed as a part of our Form 10-K for the fiscal year ended December 31, 2001, Commission File No. 0-25248)

10.14 
10.14Amended Lease dated April 27, 1993 signed January 2, 2004 between Government of Belize and Belize Water Limited (incorporated herein by reference to Exhibit 10.36 filed as a part of our Form 10-K for the fiscal year ended December 31, 2003, Commission File No. 0-25248)
   
10.15 Loan Agreement dated February 7, 2003 between Consolidated Water Co. Ltd. and Scotiabank (Cayman Islands) Ltd. (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K dated February 13, 2003, Commission File No. 0-25248)
   
10.16.1 Loan Agreement dated May 25, 2005 between Ocean Conversion (BVI), Ltd. and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 99.1 filed as a part of our Form 8-K dated June 1, 2005, Commission File No. 0-25248)
   
10.16.2 Debenture Agreement dated August 24, 2007 between Ocean Conversion (BVI), Ltd. and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.31.2 filed as a part of our Form 10-K for the fiscal year ended December 31, 2009, Commission File No. 0-25248)
   
10.16.3 Amending Debenture Agreement dated March 14, 2008 between Ocean Conversion (BVI), Ltd. and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.31.3 filed as a part of our Form 10-K for the fiscal year ended December 31, 2009, Commission File No. 0-25248)
   
10.16.4 Second Amending Debenture Agreement dated February 18, 2009 between Ocean Conversion (BVI), Ltd. and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.31.4 filed as a part of our Form 10-K in the fiscal year ended December 31, 2009, Commission File No. 0-25248)
   
10.16.5 Amending Loan Agreement dated August 20, 2009 between Ocean Conversion (BVI), Ltd. and Consolidated Water Co. (incorporated herein by reference to Exhibit 10.31.5 filed as a part of our Form 10-K for the fiscal year ended December 31, 2009, Commission File No. 0-25248)

10.16.6 
10.16.6Amending Loan Agreement dated February 10, 2010 between Ocean Conversion (BVI), Ltd. and Consolidated Water Co. (incorporated herein by reference to Exhibit 10.31.6 filed as a part of our Form 10-K for the fiscal year ended December 31, 2009, Commission File No. 0-25248)

92

10.17 
10.17Trust Deed dated August 4, 2006 between Consolidated Water Co. Ltd. and Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)

10.18 
10.18Subscription Agreement dated August 4, 2006 between Consolidated Water Co. Ltd. and Scotiatrust and Merchant Bank Trinidad & Tobago Limited (incorporated herein by reference to Exhibit 10.2 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)

10.19 
10.19Deed of Second Debenture dated August 4, 2006 between Consolidated Water Co. Ltd. and Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.5 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248) 
   
10.20 Deed of Second Collateral Debenture dated August 4, 2006 between Cayman Water Company Limited and Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.6 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)

10.21 
10.21Equitable Charge of Shares dated August 4, 2006 between Consolidated Water Co. Ltd. and Dextra Bank & Trust Co. Ltd. (incorporated herein by reference to Exhibit 10.7 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
   
10.22 Intercreditor Deed dated August 4, 2006 among Scotiabank & Trust (Cayman) Ltd., Dextra Bank & Trust Co. Ltd., Consolidated Water Co. Ltd. and Cayman Water Company Limited (incorporated herein by reference to Exhibit 10.8 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
   
10.23 Cayman Islands Collateral Charge, West Bay Beach South Property, Block 12D, Parcel 79REM1/2 (incorporated herein by reference to Exhibit 10.9 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)

10.24 
10.24Cayman Islands Collateral Charge, West Bay Beach North, Block 11D, Parcel 40 (incorporated herein by reference to Exhibit 10.10 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
   
10.25 Cayman Islands Collateral Charge, West Bay Beach North, Block 11D, Parcel 8 (incorporated herein by reference to Exhibit 10.11 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
   
10.26 Cayman Islands Collateral Charge, West Bay North East, Block 9A, Parcel 8 (incorporated herein by reference to Exhibit 10.12 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
   
10.27 Cayman Islands Collateral Charge, West Bay North East, Block 9A, Parcel 469 (incorporated herein by reference to Exhibit 10.13 filed as a part of our Form 8-K filed August 9, 2006, File No. 0-25248)
   
10.28 Loan Agreement dated as of October 4, 2006, by and between Royal Bank of Canada and Consolidated Water (Bahamas) Ltd. (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed October 6, 2006, File No. 0-25248)
   
10.29.1† Form of Agreement for Desalinated Water Supply dated May 2005 among Water and Sewerage Corporation, Consolidated Water Co. Ltd. and Consolidated Water (Bahamas) Limited (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed February 4, 2011, File No. 0-25248)
   
10.29.2† Letter of Acceptance dated January 25, 2011 (effective January 31, 2011) between Water and Sewerage Corporation and Consolidated Water Co. Ltd. (incorporated herein by reference to Exhibit 10.2 filed as a part of our Form 8-K filed February 4, 2011, File No. 0-25248)
   
10.29.3† Proposal letter dated December 8, 2010 addressed to the Water and Sewerage Corporation (incorporated herein by reference to Exhibit 10.3 filed as a part of our Form 8-K filed February 4, 2011, File No. 0-25248)

10.30.1  
10.30.1 N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land dated May 16, 2013 (incorporated herein by reference to Exhibit 10.32.1 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248) 

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10.30.2  
10.30.2 Appendix to N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land dated May 16, 2013 (incorporated herein by reference to Exhibit 10.32.2 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248) 

10.30.3 
10.30.3Exhibit Index to N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land dated May 16, 2013 (incorporated herein by reference to Exhibit 10.32.3 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248)

10.30.4 
10.30.4Exhibits to N.S.C. Agua S.A. de C.V. agreement for the purchase of 12 hectares of land dated May 16, 2013 (incorporated herein by reference to Exhibit 10.32.4 filed as a part of our Form 10-K for the fiscal year ended December 31, 2013, Commission File No. 0-25248)
   
10.31 Stock Purchase Agreement dated February 11, 2016 among Consolidated Water U.S. Holdings, Inc., Aerex Industries, Inc. and Thomas Donnick, Jr. (incorporated herein by reference to Exhibit 10.1 filed as a part of our Form 8-K filed February 16, 2016, File No. 0-25248)
   
21.1**10.32 Public-Private Partnership Contract dated August 22, 2016 among Aguas de Rosarito S.A.P.I. de C.V., the State Water Commission of Baja California, the Government of Baja California represented by the Secretary of Planning and Finance, and the Public Utilities Commission of Tijuana. (incorporated herein by reference to Exhibit 10.1 to be filed as a part of our Amendment No. 1 to Form 8-K filed August 26, 2016, File No. 0-25248)

 10.33Share Sale and Purchase Agreement dated December 31, 2018 between Consolidated Water Co. Ltd. and Belize Water Services Ltd. (incorporated herein by reference to Exhibit 10.1 to be filed as a part of our Form 8-K filed January 8, 2019, File No. 0-25248) 

21.1**Subsidiaries of the Registrant
   
23.1** Consent of Marcum LLP — Consolidated Water Co. Ltd.

23.2**Consent of Marcum LLP - Ocean Conversion (BVI)Consolidated Water Co. Ltd.
   
31.1** Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2** Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1** Certification by the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2** Certification by the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, Section 906 of the Sarbanes-Oxley Act of 2002
   
101.INS** XBRL Instance Document
   
101.SCH** XBRL Taxonomy Schema
   
101.CAL** XBRL Taxonomy Calculation Linkbase
   
101.DEF** XBRL Taxonomy Definition Linkbase
   
101.LAB** XBRL Taxonomy Label Linkbase
   
101.PRE** XBRL Taxonomy Presentation Linkbase

 

*Indicates a management contract or compensatory plan.

**Filed herewith.

Portions of these Exhibits have been omitted pursuant to a request for confidential treatment.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 CONSOLIDATED WATER CO. LTD.
   
 By: /s/ Wilmer F. Pergande
  Wilmer F. Pergande
  Chairman of the Board of Directors

 

Dated: March 15, 20162019

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature Title Date
      
By:/s/ Wilmer F. Pergande Chairman of the Board of Directors March 15, 20162019
 Wilmer F. Pergande    
      
By:/s/ Frederick W. McTaggart Director, Chief Executive Officer and President March 15, 20162019
 Frederick W. McTaggart (Principal Executive Officer)  
      
By:/s/ David W. Sasnett Executive Vice President & Chief Financial Officer March 15, 20162019
 David W. Sasnett (Principal Financial and Accounting Officer)  
      
By:/s/ Linda Beidler-D’AguilarDirectorMarch 15, 2019
Linda Beidler-D’Aguilar
By:/s/ Brian E. Butler Director March 15, 20162019
 Brian E. Butler    
      
By:/s/ Carson K. Ebanks Director March 15, 20162019
 Carson K. Ebanks    
      
By:/s/ Richard L. Finlay Director March 15, 20162019
 Richard L. Finlay    
      
By:/s/ Clarence B. Flowers, Jr. Director March 15, 20162019
 Clarence B. Flowers, Jr.    
      
By:/s/ Leonard J. Sokolow Director March 15, 20162019
 Leonard J. Sokolow    
      
By:/s/ Raymond Whittaker Director March 15, 20162019
 Raymond Whittaker    


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