UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

OR

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

For the transition 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)

(345) 945-4277

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A common stock, $0.60 par value	CWCO	The Nasdaq Global Select Market

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. Yes       ☒     No       ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes         ☒     No         ☐

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

Large accelerated filer  ☐     Accelerated filer  ☐

Non-accelerated filer   ☒   Smaller reporting company   ☒    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       ☐     No         ☒

As of November 10, 2021, 15,210,699 shares of the registrant’s common stock, with US$0.60 par value, were outstanding.

TABLE OF CONTENTS

	Description	Page
PART I	FINANCIAL INFORMATION	4
Item 1	Financial Statements	4
	Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020	4
	Condensed Consolidated Statements of Income (Loss) (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	5
	Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Three and Nine Months Ended September 30, 2021 and 2020	6
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2021 and 2020	8
	Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4	Controls and Procedures	43
PART II	OTHER INFORMATION	43
Item 1	Legal Proceedings	43
Item 1A	Risk Factors	45
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 6	Exhibits	49
SIGNATURES		50

2

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 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 US$.

3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,		December 31,
		2021		2020
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	40,397,593	$	43,794,150
Certificate of deposit		2,500,000		—
Accounts receivable, net		26,381,981		21,483,976
Inventory		2,545,998		3,214,178
Prepaid expenses and other current assets		3,300,999		2,412,282
Contract assets		483,190		516,521
Current assets of discontinued operations		770,645		1,511,099
Total current assets		76,380,406		72,932,206
Property, plant and equipment, net		53,720,792		57,687,984
Construction in progress		760,079		440,384
Inventory, noncurrent		4,485,284		4,506,842
Investment in OC-BVI		1,698,069		2,092,146
Goodwill		10,425,013		13,325,013
Intangible assets, net		3,564,166		4,148,333
Operating lease right-of-use assets		2,855,346		1,329,561
Other assets		1,796,287		1,926,594
Long-term assets of discontinued operations		21,129,171		21,166,489
Total assets	$	176,814,613	$	179,555,552
LIABILITIES AND EQUITY
Current liabilities
Accounts payable, accrued expenses and other current liabilities	$	3,151,005	$	2,856,127
Accounts payable - related parties		204,285		200,558
Accrued compensation		1,488,891		1,434,106
Dividends payable		1,317,987		1,300,022
Current maturities of operating leases		563,154		455,788
Current portion of long-term debt		54,698		42,211
Contract liabilities		45,232		461,870
Current liabilities of discontinued operations		252,720		188,434
Total current liabilities		7,077,972		6,939,116
Long-term debt, noncurrent		136,231		126,338
Deferred tax liabilities		1,279,910		1,440,809
Noncurrent operating leases		2,321,551		982,076
Net liability arising from put/call options		582,000		690,000
Other liabilities		141,000		362,165
Long-term liabilities of discontinued operations		—		2,499
Total liabilities		11,538,664		10,543,003
Commitments and contingencies
Equity
Consolidated Water Co. Ltd. stockholders' equity
Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares; issued and outstanding 30,916 and 31,068 shares, respectively		18,550		18,641
Class A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and outstanding 15,210,699 and 15,143,683 shares, respectively		9,126,419		9,086,210
Class B common stock, $0.60 par value. Authorized 145,000 shares; none issued		—		—
Additional paid-in capital		87,585,156		86,893,486
Retained earnings		60,634,661		64,910,709
Total Consolidated Water Co. Ltd. stockholders' equity		157,364,786		160,909,046
Non-controlling interests		7,911,163		8,103,503
Total equity		165,275,949		169,012,549
Total liabilities and equity	$	176,814,613	$	179,555,552

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

4

CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Revenue	$	16,413,146	$	17,666,257	$	50,217,987	$	57,479,225
Cost of revenue (including purchases from related parties of $104,813 and $361,004 for the three months ended, and $390,196 and $1,225,668 for the nine months ended September 30, 2021 and 2020, respectively)		10,722,547		11,450,621		32,336,025		35,520,125
Gross profit		5,690,599		6,215,636		17,881,962		21,959,100
General and administrative expenses (including purchases from related parties of $24,231 and $0 for the three months ended, and $52,959 and $0 for the nine months ended September 30, 2021 and 2020, respectively)		4,359,040		4,810,016		13,847,830		14,062,938
Gain (loss) on asset dispositions and impairments, net		612		(984)		(3,144,961)		4,001
Income from operations		1,332,171		1,404,636		889,171		7,900,163
Other income (expense):
Interest income		168,880		164,761		503,889		411,020
Interest expense		(2,216)		(2,069)		(7,714)		(7,413)
Profit-sharing income from OC-BVI		6,075		6,075		16,200		30,375
Equity in the earnings of OC-BVI		17,717		22,411		44,223		82,387
Net unrealized gain (loss) on put/call options		(54,000)		39,000		108,000		(42,000)
Other		15,712		15,314		35,292		59,341
Other income, net		152,168		245,492		699,890		533,710
Income before income taxes		1,484,339		1,650,128		1,589,061		8,433,873
Provision (benefit) for income taxes		(11,230)		(263,165)		(20,735)		147,186
Net income from continuing operations		1,495,569		1,913,293		1,609,796		8,286,687
Income from continuing operations attributable to non-controlling interests		131,609		101,137		457,540		642,289
Net income from continuing operations attributable to Consolidated Water Co. Ltd. stockholders		1,363,960		1,812,156		1,152,256		7,644,398
Total loss from discontinued operations		(1,078,367)		(377,321)		(1,542,540)		(4,448,798)
Net income (loss) attributable to Consolidated Water Co. Ltd. stockholders	$	285,593	$	1,434,835	$	(390,284)	$	3,195,600
Basic earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders
Continuing operations	$	0.09	$	0.12	$	0.07	$	0.51
Discontinued operations		(0.07)		(0.03)		(0.10)		(0.30)
Basic earnings (loss) per share	$	0.02	$	0.09	$	(0.03)	$	0.21
Diluted earnings (loss) per common share attributable to Consolidated Water Co. Ltd. common stockholders
Continuing operations	$	0.09	$	0.12	$	0.07	$	0.50
Discontinued operations		(0.07)		(0.03)		(0.10)		(0.29)
Diluted earnings (loss) per share	$	0.02	$	0.09	$	(0.03)	$	0.21
Dividends declared per common and redeemable preferred shares	$	0.085	$	0.085	$	0.26	$	0.26
Weighted average number of common shares used in the determination of:
Basic earnings per share		15,209,432		15,120,983		15,204,220		15,116,681
Diluted earnings per share		15,351,882		15,273,529		15,345,120		15,270,494

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

5

CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Redeemable						Additional				Non-		Total
	preferred stock			Common stock			paid-in		Retained		controlling		stockholders’
	Shares	Dollars		Shares	Dollars		capital		earnings		interests		equity
Balance as of December 31, 2020	31,068	$	18,641	15,143,683	$	9,086,210	$	86,893,486	$	64,910,709	$	8,103,503	$	169,012,549
Issue of share capital	—		—	57,577		34,546		(34,546)		—		—		—
Conversion of preferred stock	(215)		(129)	215		129		—		—		—		—
Buyback of preferred stock	(747)		(448)	—		—		(7,065)		—		—		(7,513)
Net income	—		—	—		—		—		988,772		128,793		1,117,565
Dividends declared	—		—	—		—		—		(1,296,197)		(649,880)		(1,946,077)
Stock-based compensation	—		—	—		—		176,210		—		—		176,210
Balance as of March 31, 2021	30,106		18,064	15,201,475		9,120,885		87,028,085		64,603,284		7,582,416		168,352,734
Issue of share capital	8,632		5,179	—		—		(5,179)		—		—		—
Conversion of preferred stock	(896)		(538)	896		538		—		—		—		—
Buyback of preferred stock	(704)		(422)	—		—		(6,928)		—		—		(7,350)
Net income (loss)	—		—	—		—		—		(1,664,649)		197,138		(1,467,511)
Exercise of options	211		126	—		—		1,583		—		—		1,709
Dividends declared	—		—	—		—		—		(1,294,697)		—		(1,294,697)
Stock-based compensation	—		—	—		—		178,589		—		—		178,589
Balance as of June 30, 2021	37,349		22,409	15,202,371		9,121,423		87,196,150		61,643,938		7,779,554		165,763,474
Conversion of preferred stock	(8,328)		(4,996)	8,328		4,996		—		—		—		—
Net income	—		—	—		—		—		285,593		131,609		417,202
Exercise of options	1,895		1,137	—		—		14,213		—		—		15,350
Dividends declared	—		—	—		—		—		(1,294,870)		—		(1,294,870)
Stock-based compensation	—		—	—		—		374,793		—		—		374,793
Balance as of September 30, 2021	30,916	$	18,550	15,210,699	$	9,126,419	$	87,585,156	$	60,634,661	$	7,911,163	$	165,275,949

6

	Redeemable						Additional				Non-		Total
	preferred stock			Common stock			paid-in		Retained		controlling		stockholders’
	Shares	Dollars		Shares	Dollars		capital		earnings		interests		equity
Balance as of December 31, 2019	33,751	$	20,251	15,049,608	$	9,029,765	$	88,356,509	$	66,352,733	$	14,193,616	$	177,952,874
Issue of share capital	—		—	64,898		38,939		(38,939)		—		—		—
Net income	—		—	—		—		—		2,888,607		360,998		3,249,605
Purchase of non-controlling interests in Aerex	—		—	—		—		(2,444,047)		—		(6,055,953)		(8,500,000)
Dividends declared	—		—	—		—		—		(1,289,378)		—		(1,289,378)
Stock-based compensation	—		—	—		—		161,406		—		—		161,406
Balance as of March 31, 2020	33,751		20,251	15,114,506		9,068,704		86,034,929		67,951,962		8,498,661		171,574,507
Issue of share capital	6,123		3,674	—		—		(3,674)		—		—		—
Net income (loss)	—		—	—		—		—		(1,127,842)		180,154		(947,688)
Exercise of options	363		217	—		—		4,201		—		—		4,418
Dividends declared	—		—	—		—		—		(1,287,474)		—		(1,287,474)
Stock-based compensation	—		—	—		—		199,065		—		—		199,065
Balance as of June 30, 2020	40,237		24,142	15,114,506		9,068,704		86,234,521		65,536,646		8,678,815		169,542,828
Conversion of preferred stock	(7,543)		(4,526)	7,543		4,526		—		—		—		—
Buyback of preferred stock	(107)		(64)	—		—		(1,080)		—		—		(1,144)
Net income	—		—	—		—		—		1,434,835		101,137		1,535,972
Exercise of options	472		283	—		—		5,460		—		—		5,743
Purchase of non-controlling interests in PERC	—		—	—		—		(135,835)		—		(764,165)		(900,000)
Dividends declared	—		—	—		—		—		(1,287,526)		—		(1,287,526)
Stock-based compensation	—		—	—		—		486,991		—		—		486,991
Balance as of September 30, 2020	33,059	$	19,835	15,122,049	$	9,073,230	$	86,590,057	$	65,683,955	$	8,015,787	$	169,382,864

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

7

CONSOLIDATED WATER CO. LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2021		2020
Net cash provided by operating activities - continuing operations	$	5,285,457	$	11,909,538
Net cash used in operating activities - discontinued operations		(820,785)		(1,390,227)
Net cash provided by operating activities		4,464,672		10,519,311
Cash flows from investing activities
Purchase of certificate of deposit		(2,500,000)		—
Additions to property, plant and equipment and construction in progress		(973,270)		(1,571,450)
Proceeds from asset dispositions		45,560		450
Purchase of non-controlling interest in Aerex		—		(8,500,000)
Purchase of non-controlling interest in PERC		—		(900,000)
Net cash used in investing activities		(3,427,710)		(10,971,000)
Cash flows from financing activities
Dividends paid to common shareholders		(3,859,412)		(3,849,075)
Dividends paid to preferred shareholders		(8,387)		(9,180)
Dividends paid to non-controlling interests		(649,880)		—
Repurchase of redeemable preferred stock		(14,863)		(1,144)
Proceeds received from exercise of stock options		17,059		10,161
Principal repayments on long-term debt		(35,840)		(22,874)
Net cash used in financing activities		(4,551,323)		(3,872,112)
Net decrease in cash and cash equivalents		(3,514,361)		(4,323,801)
Cash and cash equivalents at beginning of period		43,794,150		42,071,083
Cash and cash equivalents at beginning of period - discontinued operations		154,130		831,586
Less: cash and cash equivalents at end of period - discontinued operations		(36,326)		(399,454)
Cash and cash equivalents at end of period	$	40,397,593	$	38,179,414
Interest paid in cash	$	7,714	$	7,413
Non-cash transactions:
Dividends declared but not paid	$	1,295,538	$	1,288,185
Transfers from (to) inventory to (from) property, plant and equipment and construction in progress	$	191,434	$	12,649
Transfers from construction in progress to property, plant and equipment	$	375,906	$	1,494,692
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,852,608	$	299,992
Purchase of equipment through issuance of long-term debt	$	58,220	$	122,292

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

8

CONSOLIDATED WATER CO. LTD.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Principal activity

Consolidated Water Co. Ltd. and its subsidiaries (collectively, the “Company”) supply potable water, treat water for reuse and provide water-related products and services to customers in the Cayman Islands, The Bahamas, the United States and the British Virgin Islands. The Company produces potable water from seawater using reverse osmosis technology and sells this water to a variety of customers, including public utilities, commercial and tourist properties, residential properties and government facilities. The Company designs, builds and sells water production and water treatment infrastructure and manages water infrastructure for commercial and governmental customers. The Company also manufactures a wide range of specialized and custom water industry related products and provides design, engineering, operating and other services applicable to commercial, municipal and industrial water production, supply and treatment.

2. Accounting policies

Basis of consolidation: The accompanying condensed consolidated financial statements include the accounts of the Company’s (i) wholly-owned subsidiaries, Aerex Industries, Inc. (“Aerex”), Aquilex, Inc. (“Aquilex”), Cayman Water Company Limited (“Cayman Water”), 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”), N.S.C. Agua, S.A. de C.V. (“NSC”), Aguas de Rosarito S.A.P.I. de C.V. (“AdR”), and PERC Water Corporation ("PERC"). The Company’s investment in its affiliate Ocean Conversion (BVI) Ltd. (“OC-BVI”) is accounted for using the equity method of accounting. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying interim condensed consolidated financial statements are unaudited. These condensed consolidated financial statements reflect all adjustments (which are of a normal recurring nature) that, in the opinion of management, are necessary to fairly present the Company’s financial position, results of operations and cash flows as of and for the periods presented. The results of operations for these interim periods are not necessarily indicative of the operating results for future periods, including the fiscal year ending December 31, 2021.

These condensed consolidated financial statements and notes are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) relating to interim financial statements and in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with US GAAP have been condensed or omitted in these condensed consolidated financial statements pursuant to SEC rules and regulations, although the Company believes that the disclosures made herein are adequate to make the information not misleading. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Foreign currency: The Company’s reporting currency is the United States dollar (“US$”). The functional currency of the Company and its foreign operating subsidiaries (other than NSC, AdR, and CW-Cooperatief) is the currency for each respective country. The functional currency for NSC, AdR, and CW-Cooperatief is the US$. NSC and AdR conduct business in US$ and Mexican pesos and CW-Cooperatief conducts business in US$ and euros. The exchange rates for the Cayman Islands dollar and the Bahamian dollar are fixed to the US$. The exchange rates for conversion of Mexican pesos and euros into US$ vary based upon market conditions.

Net foreign currency gains arising from transactions and re-measurements were $15,302 and $14,751 for the three months ended September 30, 2021 and 2020, respectively, and $29,353 and $56,050 for the nine months ended September 30, 2021 and 2020, respectively, and are included in “Other income - Other” in the accompanying condensed consolidated statements of income (loss).

9

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 September 30, 2021 and December 31, 2020 include approximately $8.5 million and $8.5 million, respectively, of certificates of deposits with an original maturity of three months or less.

Certain transfers from the Company’s Bahamas bank accounts to Company bank accounts in other countries require the approval of the Central Bank of The Bahamas. The equivalent United States dollar cash balances for deposits held in The Bahamas as of September 30, 2021 and December 31, 2020 were approximately $8.9 million and $15.9 million, respectively.

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, services, 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, an impairment loss is recorded.

For the year ended December 31, 2020, the Company estimated the fair value of its reporting units by applying the discounted cash flow method, which 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.

The Company also estimated the fair value of each of it reporting units for the year ended December 31, 2020 by applying the guideline public company method.

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 for the years ended December 31 were as follows:

	As of December 31, 2020
Method	Retail		Bulk		Services		Manufacturing
Discounted cash flow	80	%	80	%	80	%	80	%
Guideline public company	20	%	20	%	20	%	20	%
Mergers and acquisitions	—	%	—	%	—	%	—	%
	100	%	100	%	100	%	100	%

The fair values the Company estimated for its retail, bulk, services and manufacturing reporting units exceeded their carrying amounts by 101%, 49%, 17%, and 31% respectively, as of December 31, 2020.

Approximately 81% and 84% of Aerex’s revenue, and 88% and 86% of Aerex’s gross profit, for the three and nine months ended September 30, 2020, respectively, were generated from sales to one customer. Approximately 80% of Aerex’s revenue, and 89% of Aerex’s gross profit, for the year ended December 31, 2020 were generated from sales to this customer. In October 2020, this customer informed Aerex that, for inventory management purposes, it was suspending its purchases from Aerex following 2020 for a period of approximately one year. This customer informed Aerex at that time that it expected to recommence its purchases from Aerex beginning with the first quarter of 2022. As a result of this anticipated loss of revenue for Aerex, the Company updated its projections for its manufacturing reporting unit’s future cash flows. Such projections assumed, in part, that Aerex’s major customer would recommence its purchases from Aerex in 2022 but at a reduced aggregate amount, as compared to 2020. Based upon these updated projections, the Company

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tested its manufacturing reporting unit’s goodwill for possible impairment as of September 30, 2020 and December 31, 2020 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. As a result of these impairment tests, the Company determined that the estimated fair value of its manufacturing reporting unit exceeded its carrying value by approximately 22% as of September 30, 2020 and 31% as of December 31, 2020.

In late July 2021, this former major customer communicated to Aerex that it expected to recommence its purchases from Aerex in 2022 and subsequent years, but informed Aerex that such purchases would be at substantially reduced annual amounts, as compared to the amounts it had purchased from Aerex in 2020 and prior years. The updated sales estimate for this customer based on this new information is substantially below the sales previously anticipated to this customer for 2022 and subsequent years that the Company used in the discounted cash flow projections prepared for purposes of testing the manufacturing reporting unit’s goodwill for possible impairment as of December 31, 2020. Aerex’s efforts to replace the revenue previously generated from this customer with revenue from existing and new customers have been adversely impacted by the continuing negative economic impacts of the COVID-19 pandemic, which have increased Aerex’s raw material costs, resulted in raw material shortages and extended delivery times for such materials and, the Company believes, also adversely affected the overall financial condition of Aerex’s current and prospective customer base. Accordingly, in light of this new information from Aerex’s former major customer, and present weak economic conditions that the Company believes will continue into 2022, the Company updated its projections of future cash flows for its manufacturing reporting unit and tested its goodwill for possible impairment as of June 30, 2021 using the discounted cash flow and guideline public company methods, with a weighting of 80% and 20% applied to these two methods, respectively. Based upon this testing, the Company determined that the carrying value of its manufacturing reporting unit exceeded its fair value by $2.9 million, and the Company recorded an impairment loss to reduce its manufacturing reporting unit’s goodwill by this amount for the three months ended June 30, 2021.

If it is determined in the future that Aerex’s future cash inflows will be less than the Company’s present expectations, it may be required to record additional impairment losses to reduce the remaining carrying values as of September 30, 2021 of the manufacturing reporting unit’s goodwill of $1,985,211 and the unamortized balance of its intangible assets of $871,111 associated with the acquisition of Aerex. Any such impairment losses could have a material adverse impact on the Company’s consolidated results of operations.

Revenue recognition: Revenue is 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 revenue disaggregated by revenue source (unaudited).

	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
Retail revenue	$	5,247,042	$	4,993,069	$	16,633,137	$	18,216,797
Bulk revenue		6,868,134		6,061,475		19,826,075		18,368,156
Services revenue		3,210,584		3,351,935		10,514,669		9,942,748
Manufacturing revenue		1,087,386		3,259,778		3,244,106		10,951,524
Total revenue	$	16,413,146	$	17,666,257	$	50,217,987	$	57,479,225

Retail revenue

The Company produces and supplies water to end-users, including residential, commercial and governmental 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 areas on Grand Cayman Island. 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.

The Company recognizes revenue from water sales at the time water is supplied to the customer’s premises. The amount of water supplied is determined and invoiced based upon water meter readings performed at the end of each month. All retail water contracts are month-to-month contracts. The Company has elected the “right to invoice” practical expedient

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for revenue recognition on its retail water sale contracts and recognizes revenue in the amount to which the Company has a right to invoice.

Bulk revenue

The Company produces and supplies 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 two 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, under two agreements with the Water and Sewerage Corporation of The Bahamas (“WSC”), which distributes such water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence. CW-Bahamas also sold water to a private resort on Bimini through December 18, 2020, which generated revenue of approximately $46,000 and $118,000 for the three and nine months ended September 30, 2020, respectively.

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 revenue

The Company provides design, engineering, management, procurement and construction services for desalination infrastructure through DesalCo, which serves customers in the Cayman Islands, The Bahamas and the British Virgin Islands.

The Company also develops, builds, sells, operates and manages water, wastewater and water reuse infrastructure through PERC. All of PERC's customers are companies or governmental entities located in the U.S.

The Company, through Aerex, is a custom and specialty manufacturer of water treatment-related systems and products applicable to commercial, municipal and industrial water production. Substantially all of Aerex’s customers are U.S. companies.

The Company generates services revenue from DesalCo and PERC and generates manufacturing revenue from Aerex.

The Company recognizes revenue for its construction and specialized/custom manufacturing contracts over time under the input method using costs incurred (which represents work performed) to date relative to total estimated costs at completion to measure progress toward satisfying its performance obligations as such measure best reflects the transfer of control of the promised good to the customer. Contract costs include labor, materials and amounts payable to subcontractors. The Company follows this method since it can make reasonably dependable estimates of the revenue and costs applicable to the various stages of a contract. Under this 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 ear