Consolidated Water Annual Report 2017

Plain-text annual report

2017 ANNUAL REPORT FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED DECEMBER 31, (IN U.S. DOLLARS) Total revenues Net income Income from operations Net cash flows from operations Total assets Total stockholders’ equity Dividends declared per share Basic earnings per share Diluted earnings per share Net income as a % of total revenues Income from operations as a % of total revenues Net cash flows from operating activities as a % of total revenues TRADING IN SHARES Shares outstanding at year end Low closing share price during year High closing share price during year Closing share price at year end 2017 62,306,665 6,144,062 3,321,363 13,644,294 165,480,895 156,021,377 0.31 0.41 0.41 9.86 5.33 21.90 % % % 2017 14,918,869 10.05 13.60 12.60 $ $ $ $ $ $ $ $ $ $ $ $ 2016 57,875,707 3,960,501 2,137,683 7,823,352 163,604,528 154,105,372 0.30 0.27 0.27 6.84 3.69 13.52 % % % 2016 14,871,664 10.10 14.62 10.85 $ $ $ $ $ $ $ $ $ $ $ $ 2015 57,116,202 7,518,701 8,435,498 17,319,786 161,575,026 148,195,105 0.30 0.51 0.51 13.16 14.77 30.32 % % % 2015 14,781,201 9.78 13.50 12.24 $ $ $ $ $ $ $ $ $ $ $ $ CORPORATE INFORMATION BOARD OF DIRECTORS Wilmer F. Pergande Independent Consultant WF Pergande Consulting LLC Chairman of the Board Consolidated Water Co. Ltd. Attorney-at-Law and Notary Public Richard L. Finlay Cayman Islands Clarence B. Flowers, Jr. Real Estate Developer Frederick W. McTaggart Orchid Development Company Ltd. President and Chief Executive Officer Director Consolidated Water Co. Ltd. C.L. Flowers & Sons Brian E. Butler Property Developer Butler Development Group Leonard J. Sokolow CEO and President Newbridge Financial, Inc. Carson K. Ebanks, MBE, JP Raymond Whittaker Retired Permanent Secretary of Finance Tourism and Development Cayman Islands Government Principal FCM, Ltd. CORPORATE OFFICERS Frederick W. McTaggart Armando V. Averhoff President and Chief Executive Officer Vice President of Information Technology David W. Sasnett Brent A. Brodie Executive Vice President and Vice President of Sales and Marketing Chief Financial Officer John B. Tonner Executive Vice President and Chief Commercial Officer Ramjeet Jerrybandan Executive Vice President of Operations Robert B. Morrison Vice President of Procurement & Logistics Douglas R. Vizzini Vice President of Finance INDEPENDENT ACCOUNTANTS Marcum LLP 450 East Las Olas Boulevard, Suite 950 Ft. Lauderdale, FL 33301 USA LEGAL COUNSEL Duane Morris LLP 200 South Biscayne Boulevard, Suite 3400 Miami, FL 33131 USA PRINCIPAL BANKERS Scotiabank & Trust (Cayman) Ltd. P.O. Box 689 Grand Cayman, KY1-1107 Cayman Islands Fidelity Merchant Bank & Trust Limited 51 Frederick Street P.O. Box CB-12337 Nassau, The Bahamas Transfer Agents & Registrar American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 REGISTERED AND PRINCIPAL OFFICE Consolidated Water Co. Ltd. Regatta Office Park Windward Three, 4th Floor West Bay Road P.O. Box 1114 Grand Cayman, KY1-1102 Cayman Islands TEL: (345) 945-4277 FAX: (345) 949-2957 EMAIL: info@cwco.com www.cwco.com CONSOLIDATED WATER (THE “COMPANY”) WAS INCORPORATED AS CAYMAN WATER IN 1973. OVER THE YEARS, WE HAVE BENEFITED FROM THE EXPLOSIVE GROWTH IN THE CAYMAN ISLANDS, GROWTH THAT HAS BEEN FACILITATED BY THE WATER WE HAVE PROVIDED. CONSOLIDATED WATER OPERATES IN THE CAYMAN ISLANDS AS CAYMAN WATER COMPANY LIMITED AND OCEAN CONVERSION (CAYMAN) LIMITED, WHICH TOGETHER OPERATE SIX PLANTS TO PRODUCE SUBSTANTIALLY ALL OF THE PIPED DRINKING WATER ON GRAND CAYMAN. STOCK EXCHANGE LISTING FORMS 10-Q AND 10-K The Company’s common shares The Company files Quarterly and Annual trade on the NASDAQ Global Select Market. The trading symbol is “CWCO.” “The Nasdaq Stock Market, Inc.” or “NASDAQ” is a highly regulated electronic securities market comprising of competing Market Makers whose trading is supported by a communications network linking them to quotation dissemination, trade reporting, and execution systems. Reports with the U.S. Securities and Exchange Commission on Form 10-Q and 10-K, pursuant to the Securities Exchange Act of 1934. A copy of these reports may be obtained by calling or writing to the Company’s principal offices at the address shown on overleaf, attention: Investor Relations Department, or alternatively online at the SEC website www.sec.gov. ABOUT THE COMPANYThe Company installed its first Seawater Reverse Osmosis (SWRO) plant in 1989 and, therefore, has more than 28 years of design development and operational experience with this technology. SWRO is used in all the Company’s operations.In 1990, the Company’s exclusive retail water license to supply the famed Seven Mile Beach tourist area was expanded to include the residential district of West Bay.The 1990 license introduced a new business model which is now used throughout the Company’s operations. The base selling price of water is specified in the license and is adjusted monthly for changes in the cost of fuel and annually for changes in inflation.In July 2000, Consolidated Water acquired Consolidated Water (Belize) Limited, which supplies up to 550,000 gallons of water per day to the operator of the distribution system on Ambergris Caye, Belize, Central America under an exclusive supply agreement that expires in 2026.In February 2003, through the acquisition of four companies from multiple investors, Consolidated Water obtained affiliate operations in the British Virgin Islands and expanded its operations in the Cayman Islands and The Bahamas. The Company owns 50% of the voting shares and has engineering and management services agreements with its affiliate Ocean Conversion (BVI) Ltd., which operates plants on Tortola and Jost van Dyke and supplies water to the government of the British Virgin Islands for distribution.Through private transactions and a tender offer, Consolidated Water acquired approximately 91% of the issued shares of Consolidated Water (Bahamas) Ltd., which produces and supplies water to the Water and Sewerage Corporation of The Bahamas to distribute to Nassau and the remainder of New Providence Island. In 2011, the Company completed the expansion of its Blue Hills plant in the Bahamas to make it the world’s largest desalination plant utilizing diesel-driven high pressure pumps to economically produce water without relying on the local electrical grid. In February 2016, the Company acquired 51% of Aerex Industries, Inc., 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. Aerex is located in Fort Pierce, Florida, and its products include reverse osmosis desalination equipment, membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated components.The Company’s plants have small environmental footprints as a result of its extensive experience in the utilization of seawater well fields and its leadership in the reduction of energy consumption (driven by the necessity of operating in high energy cost locations). The Company is proud of its operating record in environmentally sensitive and high energy cost locations as these factors are often cited as barriers to desalination in potential new markets.62.3201757.1201557.92016Total Revenue($ in millions)4.020166.120177.52015Net Income($ in millions)Dear Shareholders,As your Chairman, I am pleased to report improved earnings and growth for your company in 2017 as a result of the efforts and diligence of our management, staff and Board of Directors.Our core desalination business continued to deliver steady, successful results due to our expertise and attention to controlling operating costs and maintaining the high operating performance efficiencies of our plants and utility business.Significant developments and accomplishments for 2017 included the following:• Our subsidiary, Aguas de Rosarito (AdR), executed a subscription agreement in February 2018 for the equity funding required for our on-going project to construct, operate and maintain a minority ownership in a 100 million gallon per day seawater reverse osmosis desalination plant to be located in Rosarito, Mexico and accompanying pipelines to deliver water to the Mexican potable water system. This agreement represents the culmination of extensive negotiations conducted over the course of 2017 and represents the achievement of a crucial milestone for our Rosarito project. Under this agreement, our subsidiary N.S.C. Agua, S.A. de C.V., will retain a minimum of 25% of the equity in AdR and one or more affiliates of Greenfield SPV VII, S.A.P.I. de C.V., a Mexico company managed by an affiliate of a leading U.S. asset manager, will acquire a minimum of 55% of AdR. The agreement also provides a Mexican subsidiary of SUEZ International, S.A.S. an option to purchase 20% of the equity of AdR. When completed by AdR, the Rosarito desalination plant will be one of largest desalination plants in the Western Hemisphere. We are proud and excited to partner with such esteemed organizations as Greenfield and SUEZ in what we expect will be a transformative project for our company.22017 ANNUAL REPORT154.12016148.22015156.02017Stockholders’ Equity At Year End($ in millions)0.4120170.5120150.272016Diluted EarningsPer Share(in $)• Our bulk operations in The Bahamas generated additional revenues and operating income during 2017 as a result of an increase in water demand arising from the new Baha Mar development in Nassau and the on-going operating efficiencies of our Blue Hills plant, which is the largest in our company. We began the refurbishment and expansion of our Windsor plant during the year and will complete this work in 2018. Also, at the request of the Water and Sewerage Corporation (WSC) of The Bahamas, we installed a post water treatment remineralization system at our Blue Hills plant to assist the WSC in improving the quality of the water they distribute. Economic prospects for The Bahamas are good and our Bahamas operations will remain a cornerstone of our business for the foreseeable future.• We rebounded from a disappointing 2016 for our recently-acquired U.S. manufacturing subsidiary, Aerex Industries, Inc., to increase the revenues and gross profit for this business by $3.1 million and $1.2 million, respectively, in 2017. We are continuing to focus on marketing and expanding the lines of business for this manufacturing and fabrication component of our operations and anticipate further increases in Aerex’s revenues and gross profit in the coming years.Our net income for 2017 was $6.1 million ($0.41 per share on a fully diluted basis), a 55% increase from the $4.0 million in net income ($0.27 per fully diluted share) we reported in 2016. Our total revenues for 2017 were $62.3 million, up 7.7% or $4.4 million from the $57.9 million we reported in 2016, as a result of additional revenues generated by our bulk and manufacturing segments. These additional revenues increased gross profit for 2017 by 4.9% to $25.4 million. Our general and administrative expenses were $19.1 million, up slightly from the $18.7 million we incurred in 2016, mainly due to incremental employee costs of $519,000.32017 ANNUAL REPORTConsistent with prior years, we ended 2017 with a very strong balance sheet, one that is practically debt free, and with more than ample liquidity. Our cash and cash equivalents amounted to $47.2 million at December 31, 2017, as compared to the $39.3 million in cash and cash equivalents we held a year earlier. Cash flows from operating activities increased just over 74% to $13.6 million for 2017, as compared to the $7.8 million we generated in 2016. Our dividends paid to shareholders amounted to $4.5 million in 2017. During the first quarter of 2018, we increased our quarterly dividend from $0.075 per share to $0.085 per share. This dividend increase reflects our Board’s confidence in our existing cash position and our future cash flows.On behalf of my fellow directors and our executive officers, I would like to express our continued appreciation to our customers, employees, valued suppliers, consultants and the other parties whose contributions to our business are integral to our success.We look forward to 2018 and the challenges it presents, confident in the knowledge that — for Consolidated Water Co. Ltd. — the best days are still ahead.Yours truly,Wilmer F. PergandeChairman of the BoardMarch 16, 2018When Christopher Columbus arrived in the Cayman Islands in 1503, he called the islands “Las Tortugas” because of the abundance of green sea turtles found there. The Company helps to protect and conserve the Cayman Island’s endangered green sea turtle population by providing the Cayman Turtle Centre (located within Cayman Water’s West Bay service area in Grand Cayman) with a safe and reliable supply of potable water.42017 ANNUAL REPORTGrandCaymanGRAND CAYMANGRAND CAYMAN, located 480 miles south of Miami, Florida, is one of the largest financial centers in the world with over $1.8 trillion on deposit in more than 250 banks. A British Overseas Territory, the Cayman Islands are comprised of three islands: Grand Cayman, the country’s capital and commercial center with approximately 56,000 residents, and the more sparsely populated “Sister Islands” of Cayman Brac and Little Cayman, located 80 miles to the northeast.The other “economic engine” of the islands is tourism, which in 2017 attracted approximately 2.1 million visitors to Cayman’s beautiful beaches, botanical gardens and wildlife, which include the blue iguana, an endangered species of lizard endemic to Grand Cayman. Consolidated Water’s corporate offices are located on the famous Seven Mile Beach, where the Company’s subsidiary, Cayman Water, has been providing drinking water since 1973 and operates one of the two water utilities on Grand Cayman Island.Consolidated Water’s other Cayman subsidiary, Ocean Conversion Cayman, provides drinking water to the other utility on Grand Cayman, the Water Authority-Cayman.52017 ANNUAL REPORTBiminiNASSAU, the political, tourist and commercial capital of the Commonwealth of The Bahamas, offers visitors amenities ranging from modern resorts and gambling casinos to picturesque Victorian mansions, cathedrals and 18th-century fortresses. The world-famous Atlantis Resort on Paradise Island draws tourists to its luxury hotels, casino and expansive beachfront. Consolidated Water (Bahamas) Limited provides drinking water in bulk to the Water and Sewerage Corporation of The Bahamas from two plants.NASSAUTHE BIMINIS, located 48 miles east of Miami, Florida, are part of an island group in The Bahamas. The Biminis have been dubbed the “Game Fishing Capital of the World.” The Biminis are actually two islands, separated by a narrow channel, and, in addition to sport fishing (popularized by Ernest Hemingway’s affection for angling and his patronage of a watering hole called “The Compleat Angler”) offer visitors excellent scuba diving and yachting activities. Consolidated Water provides drinking water to the Bimini Sands Resort, a full-service marina and condominium development on South Bimini. THE BIMINISNassau62017 ANNUAL REPORTAmbergrisCayeJostVanDykeTortolaBeautiful AMBERGRIS CAYE, the largest of about 1,000 islands in the northern-most waters of Belize, Central America, lies just west of the Belize Barrier Reef, which is the second longest barrier reef in the world. Ambergris Caye attracts tourists from around the world—many of them scuba divers or sport fishermen who come to explore the crystal clear waters surrounding the island. Consolidated Water’s wholly-owned subsidiary, Consolidated Water (Belize) Limited, provides drinking water to the public water utility on Ambergris Caye.AMBERGRIS CAYEConsolidated Water’s affiliate, Ocean Conversion (BVI) Limited (“OC-BVI”), supplies drinking water in bulk to the government of the BRITISH VIRGIN ISLANDS. Tortola, the most populated of the British Virgin Islands, is located in the northeastern Caribbean Sea, just east of Puerto Rico, and is a world-renowned destination for yachtsmen as well as home to several large yacht-chartering businesses.OC-BVI has also installed and operates a desalination plant on the island of Jost Van Dyke, known as the “barefoot island” because of its casual lifestyle and pristine beaches.BRITISH VIRGIN ISLANDS72017 ANNUAL REPORTFortPierceConsolidated Water owns 51% of Aerex Industries, located in Fort Pierce, Florida. Aerex is an original equipment manufacturer and service provider of a wide range of products and services applicable to municipal water treatment and industrial water and wastewater treatment. Its products include membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated components. Aerex 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. FLORIDAConsolidated Water believes that the quality of life is directly related to the quality of the environment. The Company is partnering with the Central Caribbean Marine Institute in Little Cayman to actively protect the natural marine resources relied upon to produce drinking water. The Company promotes sustainability through research, conservation and the education of today’s youth.82017 ANNUAL REPORT2017FORM10-KUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) (cid:2) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the ﬁscal year ended December 31, 2017 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 (State or other jurisdiction of incorporation or organization) Regatta Office Park Windward Three, 4th Floor, West Bay Road P.O. Box 1114 Grand Cayman, KY1-1102, Cayman Islands (Address of principal executive offices) 98-0619652 (I.R.S. Employer Identiﬁcation No.) N/A (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 (cid:4) No (cid:2) 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 (cid:4) No (cid:2) 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 (cid:2) No (cid:4) 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). Yes (cid:2) No (cid:4) 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. □ Indicate by check mark whether the registrant is a large accelerated ﬁler, an accelerated ﬁler, a non-accelerated ﬁler, a smaller reporting company or emerging growth company. See the deﬁnition of ‘‘large accelerated ﬁler’’, ‘‘accelerated ﬁler’’, ‘‘smaller reporting company’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated ﬁler □ Accelerated ﬁler (cid:2) 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 (cid:4) No (cid:2) 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, 2017, was $179,310,101. As of March 9, 2018, 14,946,281 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 and are incorporated by reference into Part III of this Form 10-K. Section Description Page TABLE OF CONTENTS Cautionary Note Regarding Forward-Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Item 3. Item 4. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mine Safety Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosure about Market Risk . . . . . . . . . . . . . . . . . . Item 8. Item 9. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneﬁcial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Item 14. Certain Relationships and Related Transactions, and Director Independence . . . . . . Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 2 2 15 23 23 25 26 27 27 29 29 47 49 94 94 97 97 97 97 98 98 98 98 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 i 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, limited to, statements regarding our future including but not 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 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$1.00. The official currency of the British Virgin Islands is the US$. Our Netherlands subsidiary conducts business in US$ and euros, our Indonesian subsidiary conducts business in US$ 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. 1 PART I 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. Through our subsidiaries and 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: • • • including residential, Retail Water Operations. We produce and supply water 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 2017, our retail water operations generated approximately 37% of our consolidated revenues. Substantially all of our retail revenues were generated by our Grand Cayman operations. to end-users, Bulk Water Operations. We produce and supply water to government-owned distributors in the In 2017, our bulk water operations generated Cayman Islands, Belize and the Bahamas. approximately 51% of our consolidated revenues. Services Operations. We provide desalination plant management and operating services to affiliated companies and design, construct and sell desalination plants to third parties. In 2017, our services operations generated approximately 1% of our consolidated revenues. • Manufacturing Operations. We manufacture and service a wide range of water-related products and provide design, engineering, management, operating and other services applicable to commercial, municipal and industrial water production, supply and treatment as a result of our acquisition of 51% of the equity ownership of Aerex Industries, Inc. on February 11, 2016. Substantially all of Aerex’s customers are U.S. companies. In 2017, our manufacturing operations generated approximately 11% of our consolidated revenues. • Affıliate Operations. We own 50% of the voting rights and 43.53% of the equity rights of Ocean Conversion (BVI) Ltd., which produces and supplies bulk water to the British Virgin Islands Water and Sewerage Department. As of December 31, 2017, the number of plants we, or our affiliate, operated in each country and the production capacities of these plants are as follows: Location Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bahamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . British Virgin Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bali . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Plants 6 3 1 2 1 13 Capacity(1) 8.9 15.2 0.6 0.8 0.3 25.8 (1) In millions of gallons per day. 2 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. 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 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. in areas with an insufficient natural supply. In addition, Key elements of our strategy include: • • • Expanding our existing operations in the Cayman Islands and The Bahamas. We plan to continue to seek new water supply agreements and licenses, renewing our existing supply agreements, and increasing our production levels in our two largest existing markets. Penetrating new markets. We plan to continue to seek opportunities to proﬁtably expand our operations into new markets that have signiﬁcant unfulﬁlled demands for potable water. These markets include the rest of the Caribbean, Mexico, the United States and any other areas where 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. our existing and future Broadening and services. 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. operations with complementary products 3 Our Company We conduct our operations in the Cayman Islands, The Bahamas, Belize, the British Virgin Islands, Mexico, the United States and Indonesia through our subsidiaries and our affiliate, as detailed below. Consolidated Water Co. Ltd. Retail Bulk Services Manufacturing Affiliates 100% 95% 100% 100% 100% 100% 43.5% Cayman Water Company Limited (Caymans Islands) Consolidated Water (Asia) Pte. Limited (Singapore) Aquilex, Inc. (United States) DesalCo Limited (Cayman Islands) Consolidated Water Cooperatief, U.A. (Netherlands) Consolidated Water U.S. Holdings, Inc. (United States) Ocean Conversion (BVI) Ltd. (British Virgin Islands) 95% PT Consolidated Water Bali (Indonesia) 99.9% 51% 60% Aerex Industries, Inc. (United States) JVD Ocean Desalination Ltd. (British Virgin Islands) N.S.C. Agua, S.A. de C.V. (Mexico) 99.6% Aguas de Rosarito, S.A.P.I. de C.V. (Mexico) 90.9% 100% 100% Consolidated Water (Bahamas) Limited (Bahamas) Consolidated Water (Belize) Limited (Belize) Ocean Conversion (Cayman) Limited (Cayman Islands) 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 desalination plants and is the only non-government-owned public water utility on Grand Cayman. Consolidated Water (Asia) Pte. Limited (‘‘CW-Asia’’) and PT Consolidated Water Bali (‘‘CW-Bali’’). We own 95% of CW-Asia, a Singapore company, which owns 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. 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. 4 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. 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 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 2018, our subsidiary Consolidated Water U.S. Holdings, Inc. acquired the remaining 0.4% of AdR’s equity ownership previously held by an unrelated party. reverse osmosis desalination plant Manufacturing Segment Inc. (‘‘CW-Holdings’’) and Aerex Industries, Consolidated Water U.S. Holdings, (‘‘Aerex’’). On February 11, 2016, we purchased, through a newly formed wholly-owned U.S. subsidiary (CW-Holdings), a in Aerex, a U.S. company located in Fort Pierce, Florida. Aerex is an original equipment 51% interest 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 training and custom fabricated components. Aerex also offers engineering, design, consulting, equipment maintenance services to its customers. inspection, Inc. Affiliate Ocean Conversion (BVI) Ltd. (‘‘OC-BVI’’). We own 50% of the voting stock of 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. Our Operations For ﬁscal year 2017, our retail water, bulk water, services and manufacturing segments generated approximately 37%, 51%, 1% and 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 16 to our consolidated ﬁnancial statements at ITEM 8 of this Annual Report. Retail Water Operations For ﬁscal years 2017, 2016 and 2015, our retail water operations accounted for approximately 37%, 41% and 41%, 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 and commercial customers through our wholly-owned subsidiary, Cayman Water, which operates under an exclusive license issued to us by the Cayman Islands government. Pursuant to the license, we have 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: Seven Mile Beach and West Bay. 5 The license was originally scheduled to expire in July 2010 but has been extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license expired on January 31, 2018. We continue to provide water subsequent to January 31, 2018 on the assumption that the license has been further extended to allow the parties to continue negotiations 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 from the WAC to OfReg. In July 2017, we began license negotiations with OfReg for a new retail license in the Cayman Islands and such negotiations are continuing. Under its present license, Cayman Water pays a royalty to the government of 7.5% of its gross retail water sales revenues (excluding energy cost adjustments). The selling prices of water sold to its customers are determined by the license and vary depending upon the type and location of the customer and the monthly volume of water purchased. The license provides for an automatic adjustment for inﬂation or deﬂation on an annual basis, subject to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a monthly basis. The WAC, on behalf of the government, previously reviewed and conﬁrmed the calculations of the price adjustments for inﬂation and electricity costs. Effective May 22, 2017, regulatory responsibility for the water utility sector was transferred from the WAC to OfReg and all reviews and conﬁrmations of calculations of the price adjustments for inﬂation and electricity costs are now performed by OfReg. If Cayman Water wants to adjust its prices for any reason other than inﬂation or electricity costs, Cayman Water has to request prior approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be referred to arbitration. See also 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 — Renewal of Retail License. Our retail operations in the Cayman Islands produce potable water at three reverse osmosis seawater conversion 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 plant located at ACWW is 2.0 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 885,000 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 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. 6 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 2017, 2016 and 2015, 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 in the Cayman Islands. Retail Operations in Bali, Indonesia Our subsidiary, CW-Bali, completed the construction of, and began operating, a seawater desalination plant with an initial capacity of 790,000 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 believed the water demands of these properties in Nusa Dua already exceeded the supply capacity of the local public water utility and would soon exceed other local sources (such as wells), and that other areas of Bali would also eventually experience fresh water shortages. Since desalination had not been employed to any meaningful extent in Bali, we concluded that to obtain customers in Bali we were required to ﬁrst demonstrate the viability of desalination as well as our capabilities and expertise. Consequently, we elected to construct this plant before obtaining water supply agreements for its production. Since its inception, we have 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 CW-Bali’s plant to 264,000 gallons per day by transferring two of its reverse osmosis desalination units to other operations. We 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, 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. Until this lawsuit is resolved we are legally prohibited from disposing of our investment in CW-Bali or any further dispositions of CW-Bali’s assets. See further discussion of CW-Bali at ITEM 3. LEGAL PROCEEDINGS and ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Bulk Water Operations For ﬁscal years 2017, 2016 and 2015, our bulk water operations accounted for approximately 51%, 51% and 56%, respectively, of our consolidated revenues. These operations produce potable water from seawater and sells 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 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 our retail license area. The water we sell to the WAC is produced at three reverse osmosis seawater conversion 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 plants, which have production capacities of approximately 1.6 million, 1.3 million and 2.4 million gallons of water per day, respectively. The plants we operate for the WAC are located on land owned by the WAC. The current operating agreements for the North Sound, Red Gate and North Side Water Works plants expire in July 2018, July 2018, and June 2019, respectively. We have been informed by the WAC that they intend to conduct a public bidding process for new operating agreements for the North Sound and Red Gate plants and we plan to submit a bid for both of these agreements. 7 Bulk Water Operations in Belize In Belize, we sell bulk water 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 our water primarily to residential properties, small hotels, and businesses that serve the tourist market. 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. 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 own 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. Bulk Water Operations in The Bahamas We sell bulk water in The Bahamas through our majority-owned subsidiary, CW-Bahamas, to the WSC, which distributes the water through its own pipeline system to residential, commercial and tourist properties on the Island of New Providence. We also sell water to a private resort on Bimini. We supply bulk water in The Bahamas from our Windsor, Blue Hills and Bimini plants. The water supply agreement for our Windsor plant, which has a capacity of 3.1 million gallons per day, was originally scheduled to expire in July 2013. Subsequent to July 2013, we continued to supply water from the Windsor plant on a month-to-month basis at the request of the government of The Bahamas. On December 28, 2016, we executed an amendment to the Windsor water supply agreement with the WSC, pursuant to which the agreement was extended for 15 years for a minimum of 16.8 million gallons per week. Pursuant to the amended agreement, CW-Bahamas is required to complete capital improvements to the Windsor plant to ensure that the plant can meet its performance guarantees during the extended agreement period. The per gallon price for the water supplied under the extended agreement, excluding the pass-through energy component, is approximately 18% less than the price in effect at December 31, 2016. The remaining terms of the original Windsor water supply the amended agreement are substantially consistent with those of agreement. We supply water from the Blue Hills plant, our Company’s largest seawater conversion 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 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 the Bahamas are diesel engine-driven. Electricity for the remainder of our plant operations is supplied by 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. 8 Services Operations For ﬁscal years 2017, 2016 and 2015, our services operations accounted for approximately 1%, 1% and 3%, respectively, of our consolidated revenues. Presently, our services operations are providing services in the British Virgin Islands. In the past, we have also provided services to the WAC in the Cayman Islands and to the WSC in The Bahamas. We provide design, engineering and construction services for desalination projects through DesalCo, which is recognized by suppliers as an original equipment manufacturer of reverse osmosis seawater desalination plants. DesalCo also provides management and procurement services for desalination plants and engineering services relating to municipal water production, distribution and treatment. DesalCo also conducts research and development. DesalCo 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. Manufacturing Operations 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 Fort Pierce, Florida and substantially all of its customers are U.S. companies. We acquired our 51% ownership interest in Aerex as of February 11, 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 sharing rights in OC-BVI that raise our in OC-BVI’s proﬁts from 43.53% to approximately 45%. Sage Water Holdings (BVI) effective interest 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 trade association directors, comprised primarily of government representatives, is entitled to appoint a junior director to cast a deciding vote. the President of the Caribbean Water and Wastewater Association, a regional Through 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 investment in OC-BVI using the equity method of accounting. 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 another plant under a short-term agreement with Sage. OC-BVI owns and operates a desalination plant located at Bar Bay, Tortola with 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. This water supply agreement was scheduled to expire in March 2017 but was extended in February 2017 to March 2031. The per gallon price for the water supplied under the extended agreement, excluding the pass-through energy component, is approximately 31% less than the price in effect at December 31, 2016. The remaining terms of the extended agreement are substantially consistent with those of the original Bar Bay water supply agreement. OC-BVI purchases electrical power to operate this plant from BVI Electric Co. and operates 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. 9 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 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. that expired July 8, 2013. Pursuant 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, 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 experience 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. Prior 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 Demand for our water in the Cayman Islands, Belize, 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 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. 10 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 19 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 the Premier and six other ministers who are chosen by the Premier from its 19 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 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. 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 other 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. We are also required to pay a value added tax on materials and services we purchase. 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 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 Appeal 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 and we record this reimbursement as an offset to our tax expense. 11 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. Market and Service Area Although we currently operate in the Cayman Islands, Belize, the British Virgin Islands, 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 will provide us with signiﬁcant opportunities 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 the areas of Grand Cayman that 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 2016 to be 61,361. According to the ﬁgures published by the Department of Tourism Statistics Information Center, in 2017 as compared to 2016, tourist air arrivals increased by 8% to approximately 418,000 and tourist cruise ship arrivals increased by 1% to approximately 1,728,000. 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. The Bahamas. The 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, with more than 70% of the country’s population. A 2010 census placed the population of New Providence at approximately 246,000. According to statistics published by the Bahamas Ministry of Tourism, the number of cruise ship arrival and air arrival tourists to New Providence exceeded 2.5 million and 1 million, respectively, in 2016. 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 is approximately 25 miles long and has a population of approximately 18,000 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. 12 According to information published by the Belize Trade and Investment Development Service, tourism is Belize’s second largest source of foreign income, next to agriculture. 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. Competition Cayman Islands. Pursuant to our license granted by the Cayman Islands government, we have the exclusive right to provide potable, piped water within our licensed service area on Grand Cayman. 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. We have competed with such companies as SUEZ (formerly GE 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. SUEZ (formerly GE Water) operates a seawater desalination plant on North Bimini Island and other small islands. We competed with companies such as SUEZ (formerly GE Water), Veolia, IDE Technologies, GS Inima and Biwater for the contract with the Bahamian government to build and operate a seawater 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. Our water supply contract with Belize Water Services Limited (‘‘BWSL’’) is exclusive, and BWSL cannot seek contracts with other water suppliers, or produce water itself, their future needs in Ambergris Caye, Belize. to meet British Virgin Islands. In the British Virgin Islands, SUEZ (formerly GE Water) operates seawater 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-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. Indonesia. Bali, equipment and services to individual resort properties. In Bali, we compete against local water treatment equipment suppliers who provide 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 for the Blue Hills project in Nassau, Bahamas such as SUEZ (formerly GE 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, already maintain worldwide operations, and 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. 13 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 Belize 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 governments to discharge concentrated seawater, which is a by-product of our desalination process, into deep disposal wells. OC-BVI 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 as to minimize the emission of airborne gas into the environment. is licensed by the British Virgin Islands government 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. Employees As of March 9, 2018, we employed a total of 120 persons, 63 in the Cayman Islands, 20 in The Bahamas, 26 in the United States, six in Belize and ﬁve in Asia. We also leased 18 employees for Aerex’s manufacturing activities in the United States and managed the six employees of OC-BVI in the British Virgin Islands. We have nine management employees and 37 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 is 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 Audit Committee, Compensation Committee, Nominations and Corporate Governance Committee and the Corporate Governance Guidelines of our Board of Directors are available at the Investors section of our website. the charters of 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. 14 ITEM 1A. RISK FACTORS Investing in our common shares involves risks. Prior to making a decision about 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 in the future. 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. Pursuant to the license, we have 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, the Seven Mile Beach and West Bay areas. For the years ended December 31, 2017, 2016 and 2015, we generated approximately 37%, 40% and 40%, respectively, of our consolidated revenues and 50%, 56% and 56%, respectively, of our consolidated gross proﬁt from the retail water operations conducted pursuant to Cayman Water’s exclusive license. The license was originally scheduled to expire in July 2010 but has been extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license expired on January 31, 2018. We continue to provide water subsequent to January 31, 2018 on the assumption that the license has been further extended to allow the parties to continue negotiations 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 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 for a new retail license in July 2017 and such negotiations continue. The resolution of these license negotiations could result in a material reduction of the operating income and cash ﬂows we have historically generated from our retail operations and could require us to record an impairment loss to reduce the carrying value of our goodwill. Such impairment loss could have a material adverse impact on our results of operations. Our bulk water supply agreements in the Cayman Islands may not be renewed or may be renewed on terms less favorable to us. 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 July 2018 and July 2018, respectively. Our bulk water supply agreement with the WAC for their North Side Water Works plant expires in June 2019. We generated total revenues of approximately $7.2 million from these three plants during the year ended December 31, 2017. 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 will be adversely affected, and we could be required to record an impairment loss to reduce the carrying value of our goodwill. Such impairment loss could have a material adverse impact on our results of operations. 15 We have paid $21.7 million for land, rights of way and equipment and incurred development expenses of approximately $23.5 million to date for a possible project in Mexico. We expect to expend signiﬁcant additional funds in 2018 to continue to pursue this project. However, we may not be successful in completing this project. We own 99.99% of N.S.C. Agua, S.A. de C.V. (‘‘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, 2017, our consolidated balance sheet includes purchases for the Project of approximately $21.7 million for land, rights of way and equipment. The Project 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 $23.5 million from 2010 through December 31, 2017. 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-sector authority and a private party that NSC is seeking to complete the Project. Pursuant to this new legislation, in November 2015 the State officially commenced a tender 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 connects to the Mexican potable water infrastructure and a second phase to be operational in 2024 consisting of an additional 50 million gallons per day of production capacity. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. and Degremont S.A. de C.V. (the ‘‘Consortium’’) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of 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. On August 17, 2016, NSC and NuWater incorporated Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (‘‘AdR’’), a special purpose company, to complete the Project and executed a shareholders agreement 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, 2017, NSC owned 99.6% of AdR. requires AdR to design, construct, ﬁnance and operate a seawater desalination plant On August 22, 2016, the Public Private Partnership Agreement for public private partnership number 002/2015, contest number SIDUE-CEA-APP-2015-002 (‘‘APP Contract’’), was executed between AdR, the State Water Commission of 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 (and accompanying aqueducts) with a capacity of up to 100 million gallons per day in two phases: the ﬁrst with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The ﬁrst phase must be operational within 36 months of commencing construction and the second phase must be operational by the end of 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueducts for a period of 37 years starting from the commencement of operation of the ﬁrst phase. At the end of the operating period, the plant and aqueducts will be transferred to is presently estimated at approximately 9.1 billion CEA. The total cost Mexican pesos. for Phase 1 of the Project 16 The APP Contract does not become effective until the following conditions are met: • • • • • • the State has established and registered various payment trusts, guaranties and bank credit lines for speciﬁc use by the Project; the CEA has obtained the rights from the relevant federal authority to take and desalinate seawater and distribute it for municipal use; various agreements between the CEA, the payment trusts and the CESPT have been executed; AdR has obtained all of the rights of way required for the Phase 1 aqueduct; AdR has obtained permission from the relevant federal authority to discharge the residual water from the Project’s desalination plant; and all debt ﬁnancing agreements necessary to provide the funding to AdR for the ﬁrst phase of the Project have been executed. Both the exchange rate for the Mexico peso relative to the dollar and general macroeconomic conditions in Mexico have varied since the execution of the APP Contract. These changes could adversely impact the estimated construction, operating, and ﬁnancing costs for the Project. The APP Contract and the APP Law allow for the parties to negotiate (but do not guarantee) modiﬁcations to the water tariff in the event of such signiﬁcant macroeconomic condition changes. In February 2017, AdR submitted proposals to the CEA requesting an increase to the water tariff to compensate for changes in foreign exchange rates, lending rates and certain changes in law which have impacted the Project. If AdR is unable to obtain this requested increase in the water tariff, it may be unable to obtain the debt and equity ﬁnancing required for the Project. We are currently unable to determine whether or not such water tariff increase will be approved. 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 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. If AdR is ultimately unable to proceed with the Project, the land NSC has purchased and the right of way deposits may lose their strategic importance derived from their association with the Project and consequently may decline in value. If AdR does not proceed with the Project, NSC may ultimately be unable to sell this land or recoup its right of way deposits for amounts at to their current carrying values of approximately $20.6 million and $947,000, respectively. Any loss on the sale of the land, or impairment losses NSC may be required to record as a result of a decrease in the (i) fair value of the 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 results of operations. least equal We have been required to record impairment losses to reduce the carrying value of the goodwill arising from our acquisition of Aerex in February 2016. If Aerex’s future ﬁnancial performance falls short of our most recent ﬁnancial projections for this subsidiary, we may be required to record additional impairment losses to reduce the carrying value of this goodwill. In February 2016, we acquired a 51% ownership interest in Aerex. In connection with this acquisition, we recorded initial goodwill of $8,035,211. Aerex’s actual results of operations in the six months following our acquisition of this company fell signiﬁcantly short of the projected results that were included in the overall cash ﬂow projections we utilized to determine the purchase price for Aerex and the fair values of its assets and liabilities. Due to this shortfall in Aerex’s results of operations, we updated our projections for Aerex’s future cash ﬂows and tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating 17 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 of each year, 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 may be required to record additional impairment losses to reduce the carrying value of our Aerex goodwill in future periods if we determine it likely that Aerex’s results of operations will fall short of our most recent projections of its future cash ﬂows. Such impairment losses could have a material adverse impact on our results of operations. We presently have a limited ability to transfer funds from our Belize subsidiary. If this situation continues, our overall liquidity could be adversely affected in the future. Transfers of funds held by our subsidiary CW-Belize to our parent company, which are accomplished by means of conversion of Belize dollars into U.S. dollars, require the approval of the Central Bank of Belize and are 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 has limited the amount of funds we are presently able to transfer from CW-Belize. Our repatriations of funds from CW-Belize to our parent company amounted to $458,000 and $400,000 in 2017 and 2016, respectively, signiﬁcantly less than the net income and net cash ﬂows CW-Belize generated for those years. As of December 31, 2017 and 2016, the equivalent U.S. dollar cash amounts for our bank account deposits in Belize were approximately $6.3 million and $4.9 million, respectively. We cannot presently determine when we will have an improved ability to transfer funds from CW-Belize. While we presently have sufficient liquidity from other sources, should we need to access our cash balances held by CW-Belize in the future to support our other operations, the majority of such funds may not be available for immediate transfer from Belize. 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. trade association comprised primarily of government 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 is entitled to appoint a regional 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 loss to reduce the carrying value of our investment in OC-BVI. Such an impairment loss would reduce our earnings and could have a material adverse impact on our result of operations and ﬁnancial condition. representatives, 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 18 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 including lower than anticipated production operating costs could be affected by a variety of factors, efficiencies and geo-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 impact our results of operations, ﬁnancial condition and cash ﬂows. 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. On December 8, 2017, we received a favorable ruling from the Supreme Court of Belize stating that (i) the claims by the PUC in the Order and the Second Order were 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 February 20, 2018, the PUC ﬁled an appeal with the Belize Court of Appeal, the results of which are pending. An unfavorable ruling by the Court of Appeal on the Order or the Second Order could have an adverse impact on our results of operations, cash ﬂows or ﬁnancial condition. A signiﬁcant portion of our consolidated revenues are derived from our water supply agreements with the WSC. The loss of, or a less favorable relationship with, the WSC could adversely affect us. One bulk water customer, the WSC, accounted for approximately 34% of our consolidated revenues for the year ended December 31, 2017. If the WSC becomes unable for ﬁnancial or other reasons to comply with the terms of our water supply agreements with them, or terminates either of our agreements with them for cause, our results of operations, cash ﬂows and ﬁnancial condition could be adversely affected. Our operations are affected by tourism and are subject to seasonal ﬂuctuations that could affect the demand for our water. 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 impact our results of operations and cash ﬂows. 19 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 agreements 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 agreement. Our operations could be harmed by hurricanes or tropical storms. including the large tourist properties A hurricane or tropical storm could cause major damage to our equipment and properties and the properties of our customers, 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. in our areas of operation. For example, Contamination of our processed water may cause disruption in our services and adversely affect our revenues. including acts of terrorism. In the event Our processed water may become contaminated by natural occurrences and by inadvertent or intentional human interference, that a portion of our processed water is 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 in a to adequately treat cost-effective manner may have an adverse effect on our results of operations, cash ﬂows and ﬁnancial condition. the contaminated plant feed water 20 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, 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; 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. 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, 2020. 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. 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 and by possible defaults in payment by the WAC on their loans payable to us. 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 majority 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. 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 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 21 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 similar 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, seven of our 15 directors and executive officers reside outside the United States. As a result, it may be difficult for investors to execute 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 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, 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. the lack of competent including, but not limited to, 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. For the year ended December 31, 2017, the average daily trading volume of our common shares was approximately 53,000 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 of the limited volume of trading in 22 our common shares, an investor in our stock may have difficulty selling a large number of our common shares in the manner, or at the price, that might be attainable if our common shares were more actively traded. The election process for our Board of Directors may discourage, delay or prevent a change of control of our Company. We have a classiﬁed Board of Directors that consists of three groups. Only one group of directors is elected each year. The classiﬁed nature of our Board may increase the length of time necessary for an acquirer to change the composition of a majority of directors in order to gain control of our Board. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES Cayman Islands Properties Abel Castillo Water Works Our wholly owned subsidiary, Cayman Water, owns and operates our Abel Castillo Water Works (‘‘ACWW’’) site, which encompasses 12,812 square feet of buildings, a high service distribution pump house, warehouse space and three 1.0 million gallon potable water storage tanks. The site is located on 3.2 acres, including 485 feet of waterfront. The current water production capacity of this site is 2.0 million gallons per day. We own an approximately one-acre property adjacent to our ACWW plant which we purchased in 2007 for future use. 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 approximately 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 1.0 million gallon potable water tanks. Britannia Plant We own the Britannia seawater 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 gallon potable water storage tank, potable water high service pumps, and various ancillary equipment. We have entered into a lease of the 0.73 acre site 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 systems consist of potable water pipes, valves, curb stops, meter boxes, and water meters. Corporate Offıce 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. North Sound Plant OC-Cayman operates the electrically powered North Sound plant, which is owned by the WAC, and supplies approximately 1.6 million gallons of desalinated water per day to 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, which expires in July 2018. Responsibility for operation of the plant passes to the WAC upon expiration of the sale and operating agreement. We have been informed by the WAC that they intend to conduct a public bidding process for a new operating agreement for the North Sound plant and we plan to submit a bid for this agreement. 23 Red Gate Plant Under the terms of the water production and supply license that expires in July 2018 between OC-Cayman and the government of the Cayman Islands, OC-Cayman is allowed to use the property and the plant for the Red Gate plant to produce approximately 1.3 million gallons of desalinated water per day for sale to the WAC. We have been informed by the WAC that they intend to conduct a public bidding process for a new operating agreement for the Red Gate plant and we plan to submit a bid for this agreement. North Side Water Works Plant OC-Cayman operates this electrically powered plant, which is owned by the WAC. This plant 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 the water production facility in South Bimini. The facility consists of a 250,000 gallon bolted steel potable water tank 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, to utilize the land for the term of the agreement without charge. Windsor plant We own the Windsor water production facility, located in Nassau, New Providence, with a production capacity of 3.1 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 Corporation to power all other loads in the plant. The plant is contained within a 13,000 sq. ft. concrete and steel building that also contains a warehouse, workshop and offices. It is located on land owned by the WSC and our water sales agreement gives us a license to use the land throughout the term of that agreement. This water supply agreement was originally scheduled to expire in July 2013 when we delivered the total amount of water required under the agreement but has since been extended through 2033. Blue Hills plant In July 2006, we substantially completed construction of a second water production facility in Nassau, New Providence: the Blue Hills plant. With an initial production capacity of 7.2 million gallons per day, this plant is the largest desalination plant we have built or operated to date. The plant is powered by a combination of diesel engine-driven high-pressure pumps, and electrical power purchased from the Bahamas Electricity Corporation to power all other loads in the plant. The plant is contained within a 16,000 sq. ft. concrete and steel building that also contains a warehouse, workshop and offices. It is located on land owned by the WSC 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 expansion 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 Corporation to power all other loads in the plant. The plant expansion is contained in a 10,640 sq. ft. steel building located adjacent to the initial production facility on land owned by the WSC. Belize Properties We own our water production facility in San Pedro, 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. 24 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 2018. 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. Mexico Properties NSC owns 20.1 hectares of land in Rosarito Beach, Baja California, 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 $15,000 per month. In December 2017, NSC assigned the lease to AdR. The lease is cancellable by AdR should it 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 528,000 gallon potable water storage tank. The land on which this plant and storage tank is located is leased through October 8, 2032. ITEM 3. LEGAL PROCEEDINGS CW-Bali In October 2017, CW-Bali’s sole remaining customer ﬁled a lawsuit in 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 to approximately arise from CW-Bali’s planned cessation of operations. Such damages were equivalent $4.1 million and $1.9 million, respectively, as of the exchange rate on March 9, 2018. We believe this lawsuit is without merit and are vigorously defending CW-Bali and the two other defendants. However, until this lawsuit in CW-Bali or any of CW-Bali’s assets. is resolved we are legally prohibited from disposing of our investment 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 times and (v) CW-Belize take possession of and replacement seawater RO membranes in stock at all 25 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. On December 8, 2017, we received a favorable ruling from the Supreme Court of Belize stating that (i) the claims by the PUC in the Order and the Second Order were 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 February 20, 2018, the PUC ﬁled an appeal with the Belize Court of Appeal for Belize, the results of which are pending. We are presently unable to determine what impact the Order and the Second Order will have on our ﬁnancial condition, results of operations or cash ﬂows. ITEM 4. MINE SAFETY DISCLOSURE Not applicable. 26 PART II ITEM 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. First Quarter 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . High $11.65 13.00 13.25 13.60 $12.17 14.62 13.79 12.15 Low $10.05 11.20 11.65 11.40 $10.63 11.95 11.45 10.10 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 March 31, 2017, we issued a total of 17,833 shares of common stock to executive officers under the 2008 Equity Incentive Plan. On November 20, 2017, we issued 17,158 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.’’ 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 their relative value to our common shares. Holders As of March 9, 2018, we had 787 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, is the amount of dividends declared on our issued and outstanding shares of common shares and redeemable preferred shares. First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter 2017 $0.075 0.075 0.075 0.085 $ 0.31 2016 $0.075 0.075 0.075 0.075 $ 0.30 27 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 nature of estate duty, inheritance, or capital transfer tax. 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. 28 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, 2017. 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. 2017 Year Ended December 31, 2015 2016 2014 2013 Statement of Income Data: Revenues . . . . . . . . . . . . . . . . . $ 62,306,665 Net Income . . . . . . . . . . . . . . . 6,144,062(2) Balance Sheet Data: $ 57,875,707 $ 57,116,202 $ 65,559,078 $ 63,822,131 8,594,519 3,960,501(1) 7,518,701 6,265,358 165,480,895 163,604,528 161,575,026 160,293,143 165,364,854 Total Assets . . . . . . . . . . . . . . . Long-Term Debt Obligations (including current portion) . . . . Demand loan payable . . . . . . . . . Note payable to related party . . . . Redeemable Preferred Stock . . . . . . . . . . . . Non-controlling interests Dividends Declared Per Share . . . . . $ Basic Earnings Per Share . . . . . . . . $ Weighted Average Shares-Basic . . . . Diluted Earnings Per Share . . . . . . . $ Weighted Average Shares-Diluted . . . — — 686,000 20,093 8,088,935 0.31 0.41 14,896,944 0.41 15,006,681 — — 490,000 21,135 8,500,424 — 6,958,328 — 23,282 3,154,943 $ $ $ 0.30 $ 0.27 $ 0.30 $ 0.51 $ 14,809,909 14,741,748 0.27 $ 0.51 $ 14,944,028 14,827,755 8,833,312 — 22,104 2,933,496 — 15,255,167 — — 22,445 2,599,258 0.30 0.59 14,633,884 0.58 14,703,880 0.30 $ 0.43 $ 0.42 $ 14,697,896 14,764,323 (1) Reﬂects $3,750,000 of impairment losses recorded during the third quarter of 2016. (2) Reﬂects $3,056,362 of impairment losses recorded during the second and fourth quarters of 2017. 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 13 plants in ﬁve countries: 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. the Cayman Islands, The Bahamas, Belize, 29 Comparative Operations Plants 6 3 1 2 1 13 Capacity(1) 8.9 15.2 0.6 0.8 0.3 25.8 Location Cayman Islands Bahamas Belize British Virgin Islands Bali, Indonesia 2016 Plants 6 3 1 2 1 13 Capacity(1) 8.9 15.2 0.6 0.8 0.8 26.3 2017 Location Cayman Islands . . . . . . . . . . . . . Bahamas . . . . . . . . . . . . . . . . . . Belize . . . . . . . . . . . . . . . . . . . . British Virgin Islands . . . . . . . . . Bali, Indonesia . . . . . . . . . . . . . . (1) In millions of gallons per day. 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 have 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. Our operations consist of three company owned and three government-owned reverse osmosis seawater conversion plants which provide water to approximately 6,100 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 the Cayman Islands 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 set to expire on July 30, 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. The most recent extension of the license expired on January 31, 2018. We continue to provide water subsequent to January 31, 2018 on the assumption that the license has been further extended to allow the parties to continue negotiations without interruption to an essential service. We have been informed during our retail 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. 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 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Material Commitments, Expenditures and Contingencies — Renewal of Retail License. license negotiations that The Bahamas CW-Bahamas produces potable water from three reverse osmosis seawater conversion 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 15.1 million gallons per day. CW-Bahamas supplies water from these plants to the Water and Sewerage Corporation of The Bahamas (‘‘WSC’’) under long-term build, own and operate supply agreements. During 2017, we supplied approximately 3.3 billion gallons (2016: 3.8 billion gallons) of water to the WSC from these plants. 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. We have also sold water intermittently to the WSC from our Bimini plant when their regular supply was unavailable. From time-to-time, CW-Bahamas has experienced delays in collecting its accounts receivable. Representatives of the Bahamas government have informed us that their previous delays in paying our accounts receivables did 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 accounts receivable from the WSC are fully collectible and therefore have not provided any allowance for possible non-payment of these receivables. Our accounts receivable balances due from the Bahamas government amounted to $9.0 million and $11.0 million, at December 31, 2017 and 2016, respectively. 30 Belize CW-Belize was acquired on July 21, 2000 and consists 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. Transfers of funds held by our subsidiary CW-Belize to our parent company, which are accomplished by means of conversion of Belize dollars into U.S. dollars, require the approval of the Central Bank of Belize and are 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 has limited the amount of funds we are presently able to transfer from CW-Belize. Our repatriations of funds from CW-Belize to our parent company amounted to $458,000 and $400,000 in 2017 and 2016, respectively, signiﬁcantly less than the net income and net cash ﬂows CW-Belize generated for those years. As of December 31, 2017 and 2016, the equivalent U.S. dollar cash amounts for our bank account deposits in Belize were approximately $6.3 million and $4.9 million, respectively. 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 valuations of our (i) goodwill and intangible assets; and (ii) long-lived assets. 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 identiﬁes our part of 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 these fair values to the carrying amounts of the reporting units. To the extent the carrying amount of the reporting unit exceeds the fair value of the reporting unit, an impairment loss is recorded. the fourth quarter of each ﬁscal year. Management reporting process for For the years ended December 31, 2017 and 2016, we estimated the fair value of our reporting units by applying the discounted cash ﬂow method, the guideline public company method, and the mergers and acquisitions method. The discounted cash ﬂow method relied upon seven-year discrete projections of operating results, working capital and capital expenditures, along with a terminal value subsequent to the discrete period. These seven-year projections were based upon historical and anticipated future results, general economic and market conditions, and considered the impact of planned business and operational strategies. The discount rates for the calculations represented the estimated cost of capital for market participants at the time of each analysis. 31 We also estimated the fair value of each of our reporting units for the years ended December 31, 2017 and 2016 through reference to the 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, 2017 were consistent with those used as of December 31, 2016 and were as follows: Method Discounted cash ﬂow . . . . . . . . . . . . . . . . . . . . . . . . . . Guideline public company . . . . . . . . . . . . . . . . . . . . . . . Mergers and acquisitions . . . . . . . . . . . . . . . . . . . . . . . . Retail 80% 10% 10% 100% Bulk 80% 10% 10% 100% Manufacturing 80% 10% 10% 100% The fair values we estimated for our retail and bulk units exceeded their carrying amounts by 121% and 59%, respectively, as of December 31, 2017. The carrying amount we estimated for our manufacturing unit exceeded its fair value by 12% as of December 31, 2017 and as discussed in the paragraph that follows, we recorded an impairment loss to reduce the carrying value of the goodwill for this segment. The fair values we estimated for our retail, bulk and manufacturing units exceeded their carrying amounts by 123%, 41% and 26%, respectively, as of December 31, 2016. On February 11, 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 may be required to record additional impairment losses to reduce the carrying value of our Aerex goodwill in future periods if we determine it likely that Aerex’s results of operations will fall short of our most recent projections of its future cash ﬂows. Long-lived assets We review the carrying amounts of our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Conditions that would necessitate an impairment assessment include a signiﬁcant decline in the observable market value of an asset, a signiﬁcant change in the extent or manner in which an asset is used, or a signiﬁcant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, we recognize an impairment loss only if its carrying amount is not recoverable through its undiscounted cash ﬂows and measure the impairment loss based on the difference between the carrying amount and fair value. Through our subsidiary, CW-Bali, we have built and presently operate a seawater reverse osmosis plant with a productive capacity of approximately 264,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. Since its inception, we have recorded operating losses for CW-Bali as the sales volumes for its plant have not been sufficient to cover its operating costs. In 2017 and 2016 we determined, based upon probability-weighted scenarios for CW-Bali’s future 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 of $1.6 million and $2.0 million, in 2017 and 2016, respectively, to reduce the carrying 32 values of these assets to their fair values. See further discussion of CW-Bali at ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Retail Segment. Quarterly Results of Operations The following table presents unaudited quarterly results of operations for the eight quarters ended December 31, 2017. 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. Total revenues . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Consolidated Water Co. Ltd. stockholders . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Consolidated Water Co. Ltd. stockholders . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . First Quarter $15,677,106 6,833,568 2,579,452 2,631,228 0.18 0.18 Year Ended December 31, 2017(1) Second Quarter $15,283,188 6,456,573 612,635 Third Quarter $16,572,203 6,307,806 1,416,744 Fourth Quarter $14,774,168 5,836,553 1,123,742 624,548 0.04 0.04 1,161,139 0.08 0.08 1,727,147 0.12 0.12 Year Ended December 31, 2016(1) First Quarter $14,034,772 6,177,031 2,178,871 Second Quarter $15,398,635 6,592,379 2,245,835 Third Quarter $14,385,353 5,919,323 (2,975,854) Fourth Quarter $14,056,947 5,562,153 1,328,461 2,054,641 0.14 0.14 2,204,333 0.15 0.15 (1,865,332) (0.13) (0.13) 1,566,859 0.11 0.10 (1) Due to rounding, the sum of the quarterly earnings per share amounts may not equal the annual earnings per share amount. 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. Year Ended December 31, 2017 Compared to Year Ended December 31, 2016 Consolidated Results Net income attributable to Consolidated Water Co. Ltd. stockholders for 2017 was $6,144,062 ($0.41 per share on a fully diluted basis), as compared to $3,960,501 ($0.27 per share on a fully-diluted basis) for 2016. Total revenues for 2017 increased to $62,306,665 from $57,875,707 in 2016 due to higher revenues for our bulk and manufacturing segments. Gross proﬁt for 2017 was $25,434,500 (41% of total revenues) as compared to $24,250,886 (42% of total revenues) for 2016 as the gross proﬁt for our bulk and manufacturing segments increased from 2016 to 2017. For further discussion of revenues and gross proﬁt for 2017 see the ‘‘Results by Segment’’ analysis that follows. G&A expenses on a consolidated basis were $19,072,979 and $18,677,584 for 2017 and 2016, respectively. The rise in consolidated G&A expenses from 2016 to 2017 is primarily attributable to incremental employee costs of approximately $519,000 arising from an increase in the number of staff, pay raises and a statutory retirement payment. Other income, net for 2017 was $1,522,233, as compared to $103,573 for 2016. The improvement in 2017 in this net component of our consolidated statement of income reﬂects (i) an unrealized gain of $960,000 in 33 2017 on the net put/call option associated with the acquisition of Aerex as compared to an unrealized loss in 2016 on this net put/call option of ($297,000); (ii) the impairment loss of ($925,000) recorded in 2016 for our investment in OC-BVI; (iii) a reduction of approximately $289,000 in the equity in the earnings and proﬁt sharing income of our investment income that was approximately $229,000 less in 2017 than 2016 due to a decrease in the average balances of interest earning deposits and loans receivable. in OC-BVI from 2016 to 2017; and (iv) interest Results by Segment Retail Segment The retail segment generated losses from operations of ($922,274) and ($202,787) in 2017 and 2016, respectively. Such losses were primarily attributable to impairment losses recorded for CW-Bali, as discussed in paragraphs that follow. Revenues generated by our retail water operations decreased slightly to $23,225,066 in 2017 from $23,505,619 in 2016, while the volume of water sold increased by approximately 1% from 2016 to 2017. The slight decrease in revenues for 2017 is attributable to the execution in mid-2017 of an amended contract with a high volume customer in Grand Cayman which expanded its ability to utilize a concessionary rate that was originally negotiated in 2002. Retail segment gross proﬁt remained relatively consistent at $12,852,867 (55% of retail revenues) and $13,211,321 (56% of retail revenues) for 2017 and 2016, respectively. Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct costs to our other three business segments. Retail G&A expenses were $12,134,983 and $11,460,165 for 2017 and 2016, respectively. The increase in retail G&A expenses from 2016 to 2017 is primarily due to (i) incremental employee costs of approximately $493,000 arising from an increase in the number of staff, pay raises and a statutory retirement payment; and (ii) incremental professional fees of approximately $338,000 that arose primarily as a result of the retail license negotiations and litigation initiated against CW-Bali. Through our subsidiary CW-Bali, we built a seawater reverse osmosis plant with an initial production capacity of approximately 790,000 gallons per day located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of Bali would eventually enable us to sell all of this plant’s production. However, the sales volumes for its plant have not been sufficient to cover its operating costs and CW-Bali has incurred net losses each year since the inception of its operations in 2013. In late 2015, we decided to seek a strategic partner for CW-Bali to (i) purchase a major portion of its equity ownership; (ii) lead CW-Bali’s sales and marketing efforts; (iii) liaise with the local water utility; and (iv) assist with CW-Bali’s on-going funding requirements. Although discussions were held and due diligence information was exchanged with potential strategic partners, we did not receive an offer for an investment in, a purchase of, or a joint venture for CW-Bali from any of these potential partners on terms we deemed acceptable. During the three months ended September 30, 2016, we reassessed the prospects for CW-Bali in light of its results to date, current circumstances and uncertainties impacting the business, and expected future funding requirements and tested its long-lived assets for possible impairment. As a result of this testing we recorded an impairment loss of $2.0 million for the year ended December 31, 2016 to reduce the carrying value of our long-lived CW-Bali assets to their estimated fair value. On May 23, 2017, after considering CW-Bali’s historical and projected operating losses, its on-going funding requirements, the current business and economic environment in Bali and our inability to obtain a strategic partner for CW-Bali, our Board of Directors formally resolved to discontinue CW-Bali’s operations. Shortly after this decision we transferred two of CW-Bali’s reverse osmosis units to our other operations, thereby reducing the capacity of CW-Bali’s plant to 264,000 gallons per day. We planned to cease the production of water in Bali, 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, CW-Bali’s President and our Chief Financial Officer in his capacity as the President of CW-Bali’s 34 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 to that will arise from CW-Bali’s planned cessation of operations. Such damages were equivalent approximately $4.1 million and $1.9 million, respectively, as of the exchange rate on March 9, 2018. We believe this lawsuit is without merit and are vigorously defending CW-Bali and the two other defendants. However, until this lawsuit is resolved we are legally prohibited from disposing of our investment in CW-Bali or any further dispositions of CW-Bali’s assets. Based upon the decision to cease CW-Bali’s operations, for the six months ended June 30, 2017 we estimated the future cash ﬂows we would receive under various scenarios from the disposition of our investment in CW-Bali and assigned a probability to each scenario to determine an estimated fair value of our investment in CW-Bali. Based upon these probability-weighted sums, we recorded an impairment loss of approximately ($1,000,000) for the six months ended June 30, 2017 to reduce the carrying value of our investment in CW-Bali (which included $549,555 in cumulative translation adjustments reﬂected in stockholders’ equity) to its estimated fair value. During the three months ended September 30, 2017, we updated our estimated fair value projections for CW-Bali in light of the lawsuit ﬁled in October 2017 and recorded an impairment loss of ($578,480) to reduce the carrying value of our investment in Bali to its estimated fair value of approximately $378,000 as of September 30, 2017. We recorded an additional impairment loss of approximately ($78,000) for our investment in CW-Bali during the three months ended December 31, 2017. The results of operations for the retail segment for 2017 include sales for CW-Bali of $159,856 and a net loss from operations for CW-Bali of ($1,911,081). Such net loss includes the ($1,656,362) in impairment losses recorded for 2017. The results of operations for the retail segment for 2016 include sales for CW-Bali of $91,311 and a net loss from operations for CW-Bali of ($2,744,361). Such net loss includes the ($2,000,000) impairment loss recorded for 2016. Bulk Segment The bulk segment contributed $9,307,135 and $8,414,644 to our income from operations for 2017 and 2016, respectively. Bulk segment revenues were $31,621,756 and $29,647,034 for 2017 and 2016, respectively. The volume of water sold by our bulk segment increased by 4% from 2016 to 2017. The increase in bulk revenues for 2017 is primarily attributable to our Bahamas operations which generated approximately $2,054,000 in incremental revenues due to (i) a signiﬁcant increase in the prices of diesel fuel and electricity from 2016 to 2017, which increased the energy component of our bulk water rates in The Bahamas; and (ii) a 6% increase in the volume of water sold. Gross proﬁt for our bulk segment was $10,555,549 (33% of bulk revenues) and $10,158,484 (34% of bulk revenues) for 2017 and 2016, respectively. Gross proﬁt as a percentage of revenues decreased slightly in 2017 as compared to 2016 due to higher energy prices, as energy expense for our bulk operations was approximately $1,560,000 more in 2017 than in 2016, and as a result of a 18% decrease (excluding energy pass through adjustments) in the price of water sold by our Windsor plant in the Bahamas that became effective at the beginning of 2017. Bulk segment G&A expenses decreased to $1,248,414 for 2017 as compared to $1,744,840 for 2016. This decrease primarily reﬂects bank charges incurred to transfer funds from our Bahamas operations to our Cayman headquarters that were signiﬁcantly lower for 2017 than for 2016 due to a decrease in the amount of funds transferred. Services Segment The services segment incurred losses from operations of ($3,043,528) and ($2,807,615) for 2017 and 2016, respectively. Services segment revenues decreased to $469,347 for 2017 as compared to $835,770 for 2016 as we generated $320,296 in revenues in 2016 under our contract with the WAC to refurbish their North Sound plant. Gross (loss) proﬁt for our services segment was ($450) and $84,631 for 2017 and 2016, respectively. The service segment’s gross proﬁt decreased from 2016 to 2017 due to the decrease in revenues. 35 G&A expenses for the services segment remained relatively consistent at $3,043,078 and $3,163,972 for 2017 and 2016, respectively. The services segment generated a gain of $271,726 on the sale of a reverse osmosis unit in 2016. No sales of long-lived assets were made by the services segment in 2017. Manufacturing Segment Our manufacturing segment consists of Aerex, a company in which we acquired a 51% ownership interest as of February 11, 2016. Consequently, the results of our manufacturing segment for 2017 are not entirely comparable to those reported for 2016, as 2017 reﬂects a full year of Aerex’s operations whereas 2016 reﬂects Aerex’s operations for the shorter period that began February 11, 2016 and ended on December 31, 2016. The manufacturing segment incurred losses from operations of ($2,019,970) and ($3,266,559) for 2017 and 2016, respectively. Manufacturing revenues were $6,990,496 and $3,887,284 for 2017 and 2016, respectively. The increase in revenues from 2016 to 2017 reﬂects the additional period of manufacturing activity in 2017 as compared to 2016 due to the acquisition of Aerex on February 11, 2016 and an increase in the average dollar value of manufacturing contracts. Manufacturing segment gross proﬁt was $2,026,534 (29% of revenues) and $796,450 (20% of revenues) for 2017 and 2016, respectively. Gross proﬁt for 2017 increased in dollars from 2016 due to the incremental revenues. the manufacturing segment were $2,646,504 and $2,308,607. Manufacturing G&A G&A expenses for expenses increased in 2017 from 2016 due to an increase of approximately $202,000 in project development expenses incurred for 2017. Losses on long-lived asset impairments and dispositions, net for the manufacturing segment were ($1,400,000) and ($1,754,402) for 2017 and 2016, respectively, due to the goodwill impairment losses of ($1,400,000) and ($1,750,000) recorded in 2017 and 2016, respectively. Year Ended December 31, 2016 Compared to Year Ended December 31, 2015 Consolidated Results Net income attributable to Consolidated Water Co. Ltd. stockholders for 2016 was $3,960,501, ($0.27 per share on a fully-diluted basis), as compared to $7,518,701 ($0.51 per share on a fully-diluted basis) for 2015. Total revenues for 2016 and 2015 were $57,875,707 and $57,116,202, respectively. Higher revenues for our retail and services segments in 2016 served to offset a decrease in the bulk segment revenues. Gross proﬁt for 2016 was $24,250,886 or 42% of total revenues, as compared to $23,308,220 or 41% of total revenues, for 2015. Gross proﬁt for the retail and services segments increased from 2015 to 2016 while bulk segment gross proﬁt remained relatively consistent. For further discussion of revenues and gross proﬁt for 2016, see the ‘‘Results by Segment’’ analysis that follows. We recorded an impairment long-lived assets to their estimated fair value. loss of ($2.0 million) in 2016 to reduce the carrying value of CW-Bali’s We recorded an impairment loss of ($1.8 million) in 2016 to reduce the carrying value of the goodwill associated with the Aerex acquisition. G&A expenses on a consolidated basis were $18,677,584 and $14,840,156 for 2016 and 2015, respectively. The increase in consolidated G&A expenses from 2015 to 2016 is primarily attributable to the addition of approximately $2,309,000 in expenses for Aerex after our acquisition of a 51% ownership interest in this company in February 2016 and an increase of approximately $1,036,000 in the expenses incurred in connection with the project development activities of our Mexican subsidiaries. 36 Other income (expense), net for 2016 was $103,573 as compared to ($510,004) for 2015. The ﬂuctuation in this net component of our results of operations reﬂects (i) interest income that was approximately $404,000 less in 2016 than 2015 due to a decrease in interest earning deposit and loan receivable balances (ii) an impairment loss recorded for our equity investment in OC-BVI in 2016 of ($925,000) as compared to an impairment loss of ($1.6 million) for this investment in 2015; (iii) an unrealized loss of ($297,000) recorded in 2016 resulting from the revaluation of the net put/call option value recorded in connection with the Aerex acquisition; and (iv) foreign currency gains relating to CW-Bali of approximately $201,000 in 2016, as compared to foreign currency losses relating to CW-Bali of approximately ($346,000) in 2015. Results by Segment Retail Segment: The retail segment generated a loss from operations of ($202,787) in 2016 as compared to income from operations of $1,582,270 in 2015. The loss from operations for 2016 is attributable to an impairment loss recorded in 2016 on the long-lived assets of CW-Bali, as discussed in paragraphs that follow. Revenues generated by our retail water operations were $23,505,619 in 2016 as compared to $23,254,757 in 2015. The volume of water sold by our Cayman Water retail operations increased by 12% from 2015 to 2016 which served to offset (i) lower energy costs, which reduced the energy component of the rates we charge to our Cayman Water customers by $818,771 from 2015; (ii) a reduction in Cayman Water base rates in the ﬁrst quarter of 2016 of 4.4% from 2015; and (iii) a decrease in sales for CW-Bali of approximately $277,000. Retail segment gross proﬁt was $13,211,321 (56% of retail revenues) and $12,710,785 (55% of retail revenues) for 2016 and 2015, respectively. Consistent with prior periods, we record all non-direct G&A expenses in our retail segment and do not allocate any of these non-direct expenses to our other two business segments. Retail G&A expenses for 2016 and 2015 remained relatively consistent at $11,460,165 and $11,095,349, respectively. Through our subsidiary, CW-Bali, we built a seawater reverse osmosis plant located in Nusa Dua, one of the primary tourist areas of Bali, Indonesia. We built this plant based upon our belief that future water shortages in this area of Bali would eventually enable us to sell all of this plant’s production. However, the sales volumes for its plant have not been sufficient to cover its operating costs and CW-Bali has incurred net losses each year since the inception of its operations in 2013. In late 2015, we decided to seek a strategic partner for CW-Bali to (i) purchase a major portion of its equity ownership; (ii) lead CW-Bali’s sales and marketing efforts; (iii) liaise with the local water utility; and (iv) assist with CW-Bali’s on-going funding requirements. Although discussions were held and due diligence information was exchanged with potential strategic partners, we did not receive an offer for an investment in, a purchase of, or a joint venture for CW-Bali from any of these potential partners on terms we deemed acceptable. During the three months ended September 30, 2016, we reassessed the prospects for CW-Bali in light of its results to date, then current circumstances and uncertainties impacting the business, and expected future funding requirements and tested its long-lived assets for possible impairment. As a result of this testing we recorded an impairment loss of ($2.0 million) for the nine months ended September 30, 2016 to reduce the carrying value of our long-lived CW-Bali assets to their estimated fair value. The results of our retail segment for 2016 and 2015 include CW-Bali’s sales of $91,311 and $368,012, respectively, and net operating losses generated by CW-Bali of ($2,744,361) and ($483,544), respectively. Bulk Segment: The bulk segment contributed $8,414,644 and $8,614,123 to our income from operations for 2016 and 2015, respectively. Bulk segment revenues were $29,647,034 and $31,854,255 for 2016 and 2015, respectively. The decrease in bulk revenues from 2015 to 2016 is attributable to our Bahamas and Cayman operations, which generated approximately $1,507,000 and $893,000 less in revenues, respectively, in 2016 than in 2015 due to a signiﬁcant decrease in the prices of diesel fuel and electricity from 2015 to 2016, which reduced the pass-through energy component of our bulk water rates. 37 Gross proﬁt for our bulk segment was $10,158,484 and $10,219,466 for 2016 and 2015, respectively. Gross proﬁt as a percentage of bulk revenues increased to approximately 34% in 2016 as compared to 32% in 2015 due to the reduced energy prices, as energy expense for our bulk operations was approximately $2,048,000 less in 2016 than in 2015. Bulk segment G&A expenses were $1,744,840 and $1,605,943 for 2016 and 2015, respectively. The slight increase in bulk G&A expenses in 2016 is attributable to a $175,467 increase in bank charges incurred by to our Cayman Islands CW-Bahamas attributable to incremental cash transfers headquarters. from the Bahamas Services Segment: The services segment incurred losses from operations of ($2,807,615) and ($1,760,895) for 2016 and 2015, respectively. Services segment revenues were $835,770 and $2,007,190 for 2016 and 2015, respectively. Services revenues declined in 2016 as a result of a decrease in revenues recognized on plant construction and refurbishment projects performed for the WAC. Such revenues totaled $320,296 in 2016 as compared to $1,478,843 in 2015. Gross proﬁt for our services segment was $84,631 and $377,969 for 2016 and 2015, respectively. The decline in the services segment’s gross proﬁt for 2016 of $293,338 is primarily due to lower gross proﬁt generated on plant construction and refurbishment projects. G&A expenses for the services segment were $3,163,972 and $2,138,864 for 2016 and 2015, respectively. The increase in G&A expenses for 2016 as compared to 2015 reﬂects an increase of $1,035,581 in the expenses incurred in connection with the project development activities of our Mexican subsidiaries. Manufacturing Segment: in Aerex, We acquired our 51% interest in February 2016. For the period subsequent to our acquisition through December 31, 2016 Aerex generated sales of $3,887,284, gross proﬁt of $796,450, G&A expenses of $2,308,607 (which include amortization expenses of $1,320,000 for intangible assets recorded in connection with the acquisition) and a net loss from operations of ($3,266,559). the subsidiary that comprises our manufacturing segment, Aerex’s actual results of operations for the six months in 2016 immediately following the acquisition of our 51% interest 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. Based upon the information available at that time, we believed Aerex’s results of operations for the remainder of 2016 and for the 2017 ﬁscal year would also fall short of our purchase price projections for Aerex. Due to these actual and projected shortfalls 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 loss of ($1,750,000) for the three months ended exceeded its fair value and recorded an impairment September 30, 2016 to reduce the carrying value of this goodwill. FINANCIAL CONDITION The signiﬁcant changes in the consolidated balance sheet as of December 31, 2017 as compared to December 31, 2016 result from decreases in accounts receivable and intangible assets, and increases in other assets and construction in progress. The decrease in accounts receivable is primarily attributable to a decrease in the Bahamas receivables from the WSC and the decrease in intangible assets is primarily attributable to amortization of our Aerex intangible assets during the year ended December 31, 2017. The increase in other assets is primarily attributable to deposits for construction in progress and the increase in construction in progress is primarily attributable to capital improvements to the Windsor plant in the Bahamas. 38 LIQUIDITY AND CAPITAL RESOURCES Liquidity Position Our projected liquidity requirements for 2018 include capital expenditures for our existing operations of approximately $18.7 million (primarily for capital improvements to the Windsor plant in the Bahamas and for the expansion of the ACWW plant in Grand Cayman), dividends payable of approximately $1.3 million and approximately $1.4 million to be expended for NSC’s and AdR’s project development activities. Our liquidity requirements for 2018 may also include future quarterly dividends, if such dividends are declared by our Board. Our dividend payments amounted to approximately $4.5 million for the year ended December 31, 2017 and approximately $4.6 million for the year ended December 31, 2016. the equity ownership of Aerex, a U.S. original equipment In February 2016, we purchased 51% of manufacturer and service provider of a wide range of products and services applicable to industrial, commercial and municipal water treatment, for $7.7 million in cash. Immediately following our acquisition of Aerex, we and the former sole shareholder of Aerex loaned Aerex $510,000 and $490,000, respectively, in the form of notes payable which were scheduled to mature on June 30, 2017 and bore interest at 1% per annum. These notes payable were repaid in April 2017. In February 2017, we and the former sole shareholder of Aerex loaned Aerex $408,000 and $392,000, respectively, in the form of notes payable which mature on September 30, 2017 and bear interest at 1% per annum. In October 2017, we and the former shareholder of Aerex extended the term of the notes payable issued in February 2017 for an additional six months to a new maturity date of March 31, 2018. Additionally, we and the former shareholder loaned Aerex an additional $306,000 and $294,000, respectively, for a total outstanding notes payable balance with a maturity date of March 31, 2018 of $1,400,000. As of December 31, 2017, we had cash and cash equivalents of approximately $47.2 million and working capital of approximately $59.1 million. We are not presently aware of anything that would lead us to believe that we will not have sufficient liquidity to meet our needs for 2018 and thereafter. CW-Belize Liquidity Transfers of funds held by our subsidiary CW-Belize to our parent company, which are accomplished by means of conversion of Belize dollars into U.S. dollars, require the approval of the Central Bank of Belize and are 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 has limited the amount of funds we are presently able to transfer from CW-Belize. Our repatriations of funds from CW-Belize to our parent company amounted to $458,000 and $400,000 in 2017 and 2016, respectively, signiﬁcantly less than the net income and net cash ﬂows CW-Belize generated for those years. As of December 31, 2017 and 2016, the equivalent U.S. dollar cash amounts for our bank account deposits in Belize were approximately $6.3 million and $4.9 million, respectively. We cannot presently determine when we will have an improved ability to transfer funds from CW-Belize. While we presently have sufficient liquidity from other sources, should we need to access our cash balances held by CW-Belize in the future to support our other operations, the majority of such funds may not be available for immediate transfer from Belize. Discussion of Cash Flows for the Year Ended December 31, 2017 Our cash and cash equivalents increased to $47,182,966 as of December 31, 2017 from $39,254,116 as of December 31, 2016. Cash Flows from Operating Activities Our operating activities provided net cash of approximately $13.6 million. This net cash provided reﬂects net income generated for the year of approximately $5.7 million as adjusted for (i) various items included in the determination of net income that do not affect cash ﬂows during the year; and (ii) changes in the other components of working capital. The more signiﬁcant of such items and changes in working capital components included depreciation and amortization of approximately $7.5 million, a net increase in prepaids and other assets of approximately $3.1 million, and non-cash impairment losses aggregating approximately $3.1 million. 39 Cash Flows from Investing Activities Net cash used in our investing activities was approximately $1.4 million. We purchased property, plant and equipment and expended funds on construction in progress in the normal course of business in the aggregate of amount of approximately $4.6 million. We collected approximately $1.6 million in principal repayments on our loans receivable from the WAC and also received approximately $1.5 million in distributions of earnings from OC-BVI. Cash Flows from Financing Activities Our ﬁnancing activities used approximately $4.3 million in net cash as we paid dividends of approximately $4.5 million. In April 2017, we repaid a $490,000 note payable and during 2017 also issued a $686,000 note payable to Aerex’s prior sole stockholder that matures on March 31, 2018. Material Commitments, Expenditures and Contingencies Renewal of Retail License We sell water through our retail operations under a license issued in July 1990 by the Cayman Islands government that grants Cayman Water the exclusive right to provide potable water to customers within its licensed service area. As discussed below, this license was set to expire in July 2010 but has since been extended while negotiations for a new license take place. Pursuant to the license, Cayman Water has the exclusive right to produce potable water and distribute it by pipeline to its licensed service area, which consists of two of the three most populated areas of Grand Cayman, the Seven Mile Beach and West Bay areas. For the years ended December 31, 2017, 2016 and 2015, we generated approximately 37%, 40% and 40%, respectively, of our consolidated revenues and 50%, 56% and 56%, respectively, of our consolidated gross proﬁt from the retail water operations conducted pursuant to Cayman Water’s exclusive license. The license was originally scheduled to expire in July 2010 but has been extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license expired on January 31, 2018. We continue to provide water subsequent to January 31, 2018 on the assumption that the license has been further extended to allow the parties to continue negotiations 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. We began license negotiations with OfReg in July 2017 and such negotiations are continuing. Under its present license, Cayman Water pays a royalty to the government of 7.5% of its gross retail water sales revenues (excluding energy cost adjustments). The selling prices of water sold to its customers are determined by the license and vary depending upon the type and location of the customer and the monthly volume of water purchased. The license provides for an automatic adjustment for inﬂation or deﬂation on an annual basis, subject to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a monthly basis. The WAC, on behalf of the government, previously reviewed and conﬁrmed the calculations of the price adjustments for inﬂation and electricity costs. On July 7, 2017, we were advised by OfReg that regulatory responsibility for the water utility sector had been transferred from the WAC to OfReg effective May 22, 2017, and that effective immediately all reviews and conﬁrmations of calculations of the price adjustments for inﬂation and electricity costs will be performed by OfReg. If Cayman Water wants to adjust its prices for any reason other than inﬂation or electricity costs, Cayman Water has to request prior approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be referred to arbitration. 40 The Cayman Islands government could ultimately offer a third party a license to service some or all of Cayman Water’s present service area. However, as set forth in the existing license, ‘‘the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence Area without having ﬁrst offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.’’ We are presently unable to determine what impact the resolution of our retail license negotiations will have on our cash ﬂows, ﬁnancial condition or results of operations but such resolution could result in a material reduction of the operating income and cash ﬂows we have historically generated from our retail operations and could require us to record an impairment loss to reduce the carrying value of our goodwill. Such impairment loss could have a material adverse impact on our results of operations. NSC and AdR Project Development In May 2010, we acquired, subsidiary, Consolidated Water through our wholly-owned Netherlands 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 99.99%. NSC was formed to pursue a project (the ‘‘Project’’) encompassing the construction, operation and minority ownership of a 100 million gallon per day to be located in northern Baja California, Mexico and seawater 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 gallon per day plant and a pipeline that connects to the Mexican potable water infrastructure and a second phase consisting of an additional 50 million gallons of production capacity. reverse osmosis desalination plant Through a series of transactions completed in 2012 − 2014, NSC purchased 20.1 hectares for approximately $20.6 million on which the proposed Project’s plant would be constructed. In November 2012, NSC entered into a lease with an effective term of 20 years from the date of full operation of the 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 $15,000 per month. This lease may be cancelled by NSC should NSC ultimately not proceed with the Project. In August 2014, the State enacted new legislation to regulate Public-Private Association projects which involve the type of long-term contract between a public-sector authority and a private party that NSC is seeking to complete the Project. Pursuant to this new legislation, on January 4, 2015, NSC submitted an expression of interest for its project to the Secretary of Infrastructure and Urban Development of the State of Baja California (‘‘SIDUE’’). SIDUE accepted NSC’s expression of interest and requested that NSC submit a detailed proposal for the Project that complies with requirements of the new legislation. NSC submitted this detailed proposal (the ‘‘APP Proposal’’) to SIDUE in late March 2015. The new legislation required that such proposal be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee (the ‘‘APP Committee’’) for review and authorization. If the Project was authorized the State would be required to conduct a public tender for the Project. In response to its APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the Director General of the Comisión Estatal del Agua de Baja California (‘‘CEA’’), the State agency with responsibility for the Project, stating that (i) the Project is in the public interest with high social beneﬁts and is consistent with the objectives of the State development plan; and (ii) that the Project and accompanying required public tender process should be conducted. In November 2015, the State officially commenced the tender for the Project, the scope of which the State has deﬁned as a ﬁrst phase to be operational in 2019 consisting of a 50 million 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. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. and Degremont S.A. de C.V. (the ‘‘Consortium’’) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of tender process for the Project. 41 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 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, 2017 NSC owned 99.6% of AdR. the Public Private Partnership Agreement for public private partnership number On August 22, 2016, 002/2015, contest number SIDUE-CEA-APP-2015-002 (‘‘APP Contract’’), was executed between AdR, CEA, the Government of Baja California represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (‘‘CESPT’’). The APP Contract requires AdR to design, construct, ﬁnance and operate a seawater desalination plant (and accompanying aqueducts) with a capacity of up to 100 million gallons per day in two phases: the ﬁrst with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The ﬁrst phase must be operational within 36 months of commencing construction and the second phase must be operational by the end of 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueducts for a period of 37 years starting from the commencement of operation of the ﬁrst phase. At the end of the operating period, the plant and aqueducts will be transferred to CEA. The total Project cost for Phase 1 of the Project is presently estimated at approximately 9.1 billion Mexican pesos. The APP Contract does not become effective until the following conditions are met: • • • • • • the State has established and registered various payment trusts, guaranties and bank credit lines for speciﬁc use by the Project; the CEA has obtained the rights from the relevant federal authority to take and desalinate seawater and distribute it for municipal use; various agreements between the CEA, the payment trusts and the CESPT have been executed; AdR has obtained all of the rights of way required for the Phase 1 aqueduct; AdR has obtained permission from the relevant federal authority to discharge the residual water from the Project’s desalination plant; and all 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 in order to comply with recent changes to the Federal Financial Discipline Law for Federative Entities and Municipalities. 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. Following its issuance, two actions were ﬁled in Mexican Courts against Decreto #168. While neither NSC nor AdR has been named as a party in these actions, based upon publicly available 42 information we believe (1) one of these actions consists of a challenge ﬁled by certain members of the Congress of State of Baja, California alleging certain elements of Decreto #168 are contrary to the Mexican constitution; and (2) that the other action represents an amparo (i.e. a constitutional appeal) ﬁled by certain members of indigenous groups that alleges Decreto #168 violates certain of the human rights and individual guarantees they are afforded under the Mexican constitution. We cannot presently determine what impact, if any, these two actions will have upon 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 Project. These changes could adversely impact the estimated construction, operating, and ﬁnancing costs for the Project. The APP Contract and the APP Law allow for the parties to negotiate (but do not guarantee) modiﬁcations to the water tariff in the event of such signiﬁcant macroeconomic condition changes. On February 10, 2017, AdR submitted proposals to the CEA requesting an increase to the water tariff to compensate for changes in foreign exchange rates, lending rates and certain changes in law which have impacted the Project. If AdR is unable to obtain this requested increase in the water tariff, it may be unable to obtain the debt and equity ﬁnancing required for the Project. We are currently unable to determine whether or not such water tariff increase will be approved. 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 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 funding to be provided by AdR’s shareholders for 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. 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 February 2018, our subsidiary Consolidated Water U.S. Holdings acquired the remaining 0.4% of AdR’s equity ownership previously held by NuWater. If AdR is ultimately unable to proceed with the Project, the land NSC has purchased and the right of way deposits may lose their strategic importance derived from their association with the Project and consequently may decline in value. If AdR does not proceed with the Project, NSC may ultimately be unable to sell this land or recoup its right of way deposits for amounts at to their current carrying values of approximately $20.6 million and $947,000, respectively. Any loss on the sale of the land, or impairment losses NSC may be required to record as a result of a decrease in the (i) fair value of the 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 results of operations. least equal 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 $3.0 million, $3.0 million and $2.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. The assets and liabilities of NSC and AdR included in the Company’s consolidated balance sheets amounted to approximately $23.1 million and $173,000, respectively, as of December 31, 2017 and approximately $22.3 million and $221,000 respectively, as of December 31, 2016. 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 43 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. On December 8, 2017, we received a favorable ruling from the Supreme Court of Belize stating that (i) the claims by the PUC in the Order and the Second Order were 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 February 20, 2018, the PUC ﬁled an appeal with the Belize Court of Appeal, the results of which are pending. We are presently unable to determine what impact the resolution of this matter will have on our ﬁnancial condition, results of operations or cash ﬂows. Adoption of New Accounting Standards: the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of In July 2015, Inventory. ASU 2015-11 applies to all inventory that is measured using ﬁrst-in, ﬁrst-out or average cost. The guidance requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective prospectively for ﬁscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The adoption of ASU 2015-11 did not have a material impact on our ﬁnancial position, results of operations or cash ﬂows. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classiﬁcation of Deferred Taxes. ASU 2015-17 requires net deferred tax assets and liabilities be classiﬁed as noncurrent in a classiﬁed balance sheet and eliminates the classiﬁcation between current and noncurrent amounts ASU No. 2015-17 is effective for ﬁnancial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The adoption of ASU 2015-17 did not have a material impact on our ﬁnancial position, results of operations or cash ﬂows. In March 2016, the FASB issued ASU 2016-07, Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains signiﬁcant inﬂuence over a previously held investment. ASU 2016-07 will be effective for the ﬁscal year beginning January 1, 2017 and subsequent interim periods. The adoption of ASU 2016-07 did not have a material impact on our ﬁnancial position, results of operations or cash ﬂows. the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): In March 2016, Improvements to Employee Share-Based Payment Accounting, which simpliﬁes several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classiﬁcation on the statement of cash ﬂows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2016-09 did not have a material impact on our ﬁnancial position, results of operations or cash ﬂows. 44 for Goodwill Impairment, which removes Step 2 of the goodwill In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 should be applied on a prospective basis and is effective for annual periods tests beginning January 1, 2020. Early adoption is permitted for interim or annual goodwill performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 did not have a material impact on our ﬁnancial position, results of operations or cash ﬂows. impairment impairment Effect of newly issued but not yet effective accounting standards: the contract, identiﬁcation of 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 including prescribes a ﬁve-step framework in accounting for revenues from contracts within its scope, (a) the contract, identiﬁcation of (c) determination of the transaction price, (d) allocation of the transaction price to the identiﬁed performance the identiﬁed performance obligations are satisﬁed. obligations and (e) 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. the performance obligations under recognition of revenues as (b) 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. the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, In April 2016, 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. the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): In May 2016, Narrow-Scope Improvements and Practical Expedients, which clariﬁes implementation guidance around collectability, sales taxes collected from customers, noncash considerations, contract modiﬁcations at transition, and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amended the guidance on performance obligation disclosures and makes technical corrections and improvements to the new revenue standard. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative effect transition method. 45 The effective dates of ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 are the same as ASU 2015-14 discussed above. We intend to elect the modiﬁed retrospective method to all active contracts on the date of initial application, which will involve applying the guidance retrospectively only to the most current period presented in the ﬁnancial statements and recognizing the cumulative effect of initially applying the guidance as an adjustment to the January 1, 2018 opening balance of retained earnings at the date of initial application. Based on an analysis we have performed, the adoption of ASC 606, Revenue from Contracts with Customers, will not have a material impact on our ﬁnancial position, results of operations or cash ﬂows, but will require us to enhance our disclosures with respect to our revenue recognition policies. Instruments — Overall the FASB issued ASU 2016-01, Financial (Subtopic 825-10): In January 2016, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the In recognition, measurement, presentation and disclosure of ﬁnancial assets and ﬁnancial the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial February 2018, 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 and 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 adoption of ASU 2016-01 and ASU 2018-03 is not expected to have a material impact on our ﬁnancial position, results of operations or cash ﬂows. liabilities. the FASB issued ASU 2016-02, Leases (Topic 842), which provides guidance for In February 2016, accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The accounting guidance for lessors will remain relatively largely unchanged. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient for the adoption of ASU 2016-02 that, if elected, would not require an organization to reconsider their accounting for 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. ASU 2016-02 and ASU 2018-01 are effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. We are currently evaluating the effect the adoption of this amendment will have on our consolidated ﬁnancial statements, however, we expect impact on our consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. the adoption of the new lease standard will have a material that 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 is not expected to have a material impact on our ﬁnancial position, results of operations or cash ﬂows. Material Expenditures and Commitments The following table summarizes our contractual obligations as of December 31, 2017: . . . . . . . . . . . . . . . . . Employment agreements Operating leases . . . . . . . . . . . . . . . . . . . . . . . Purchase obligations . . . . . . . . . . . . . . . . . . . . Security deposits . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CW-Bahamas Performance Guarantees Total $2,974,438 1,304,644 4,413,413 224,827 $8,917,322 2018 $1,706,738 613,510 4,387,571 — $6,707,819 2019 − 2021 $1,267,700 691,134 25,842 124,827 $2,109,503 2022 and Thereafter — $ — — 100,000 $100,000 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 46 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, 2017, we paid a dividend of $0.075 to shareholders of record on January 2, 2017. On May 1, 2017, we paid a dividend of $0.075 to shareholders of record on April 3, 2017. On July 31, 2017, we paid a dividend of $0.075 to shareholders of record on July 3, 2017. On October 31, 2017, we paid a dividend of $0.075 to shareholders of record on October 2, 2017. Our Board of Directors approved a quarterly cash dividend increase to $0.085 per share from $0.075 per share. • • On January 31, 2018, we paid a dividend of $0.085 to shareholders of record on January 3, 2017. On February 6, 2018, our Board declared a dividend of $0.085 payable on April 30, 2018 to shareholders of record on April 2, 2018. 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 Risk 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. As of December 31, 2017, we had approximately $2.1 million in loans receivable due from the WAC. These loans are current as to scheduled principal and interest payments. Interest Rate Risk We are not exposed to signiﬁcant interest rate risk as the balance of our note 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 and the euro have been ﬁxed to the dollar for over 20 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. 47 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 $1,400 for the year ended December 31, 2017. 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 $3,400 for the year ended December 31, 2017. 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. 48 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED WATER CO. LTD. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Income for the Years Ended December 31, 2017, 2016 and 2015 . . . . . Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2017, 2016 and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015 . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schedule II, Valuation and Qualifying Accounts, is omitted because the information is included in the ﬁnancial statements and notes. Page 50 51 52 53 54 55 56 49 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. (the ‘‘Company’’) as of December 31, 2017 and 2016, income, comprehensive income, stockholders’ equity and cash ﬂows for each of the three years in the period ended December 31, 2017, 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, 2017 and 2016, and the results of its operations and its cash ﬂows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. the related consolidated statements of We also have audited, in 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, 2017, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in 2013 and our report dated March 16, 2018, expressed an unqualiﬁed opinion on the effectiveness of the Company’s internal control over ﬁnancial reporting. Basis for Opinion These ﬁnancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s ﬁnancial statements based on our audits. We are a public accounting to the Company in ﬁrm registered with the PCAOB and are required to be independent with respect 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 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, whether 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 regarding the amounts and disclosures in the ﬁnancial statements. 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 statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Marcum LLP We have served as the Company’s auditor since 2005. Fort Lauderdale, Florida March 16, 2018 50 CONSOLIDATED WATER CO. LTD. CONSOLIDATED BALANCE SHEETS December 31, 2017 2016 ASSETS Current assets Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,182,966 15,047,846 Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,744,445 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,077,257 Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . 1,400,448 Current portion of loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,435 Costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . . Total current assets 66,691,397 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,525,064 Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,823,284 Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,758,973 Inventory, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 734,980 Loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,783,882 Investment in OC-BVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,384,248 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill 20,558,424 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Land held for development 3,765,434 Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,455,209 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,480,895 $ 39,254,116 16,500,798 2,305,879 1,096,200 1,633,588 85,211 60,875,792 53,084,105 885,494 4,606,088 2,135,428 4,086,630 9,784,248 20,558,424 5,195,476 2,392,843 $163,604,528 LIABILITIES AND EQUITY Current liabilities Accounts payable and other current liabilities . . . . . . . . . . . . . . . . . . . . . $ Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note payable to related party . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Billings in excess of costs and estimated earnings . . . . . . . . . . . . . . . . . . Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,662,448 1,281,612 686,000 1,258 7,631,318 1,024,893 803,307 9,459,518 $ 4,898,908 1,187,214 490,000 102,966 6,679,088 1,915,241 904,827 9,499,156 Commitments and contingencies Equity Consolidated Water Co. Ltd. stockholders’ equity Redeemable preferred stock, $0.60 par value. Authorized 200,000 shares; issued and outstanding 33,488 and 35,225 shares, respectively . . . . . . . . 20,093 21,135 Class A common stock, $0.60 par value. Authorized 24,655,000 shares; issued and outstanding 14,918,869 and 14,871,664 shares, respectively . . 8,951,321 8,922,998 Class B common stock, $0.60 par value. Authorized 145,000 shares; none — issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86,405,387 Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53,105,196 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (549,555) Cumulative translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,932,442 Total Consolidated Water Co. Ltd. stockholders’ equity . . . . . . . . . . . . . . . . 8,088,935 Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,021,377 Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $165,480,895 — 85,621,033 51,589,337 (549,555) 145,604,948 8,500,424 154,105,372 $163,604,528 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 51 CONSOLIDATED WATER CO. LTD. CONSOLIDATED STATEMENTS OF INCOME Retail revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bulk revenues Services revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Manufacturing revenues . . . . . . . . . . . . . . . . . . . . . . . . . Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of retail revenues . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of bulk revenues . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of services revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of manufacturing revenues Total cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses . . . . . . . . . . . . . . . . . . . Long-lived asset impairment and disposition losses, net Income from operations . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense): Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proﬁt sharing income from OC-BVI . . . . . . . . . . . . . . . Equity in the earnings of OC-BVI . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment loss on investment in OC-BVI Net unrealized gain (loss) on put/call options . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . Provision for (beneﬁt from) income taxes . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) attributable to non-controlling interests . . Net income attributable to Consolidated Water Co. Ltd. 2017 $23,225,066 31,621,756 469,347 6,990,496 62,306,665 10,372,199 21,066,207 469,797 4,963,962 36,872,165 25,434,500 19,072,979 3,040,158 3,321,363 Year Ended December 31, 2016 $23,505,619 29,647,034 835,770 3,887,284 57,875,707 10,294,298 19,488,550 751,139 3,090,834 33,624,821 24,250,886 18,677,584 3,435,619 2,137,683 2015 $23,254,757 31,854,255 2,007,190 — 57,116,202 10,543,972 21,634,789 1,629,221 — 33,807,982 23,308,220 14,840,156 32,566 8,435,498 380,563 (6,806) 46,575 127,802 — 960,000 14,099 1,522,233 4,843,596 (888,977) 5,732,573 (411,489) 609,750 (104,048) 125,550 337,809 (925,000) (297,000) 356,512 103,573 2,241,256 (536,057) 2,777,313 (1,183,188) 1,013,252 (269,090) 105,300 294,368 (1,060,000) — (593,834) (510,004) 7,925,494 — 7,925,494 406,793 stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,144,062 $ 3,960,501 $ 7,518,701 Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders . . Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders . . Dividends declared per common share . . . . . . . . . . . . . $ $ $ 0.41 0.41 0.31 $ $ $ 0.27 0.27 0.30 $ $ $ 0.51 0.51 0.30 Weighted average number of common shares used in the determination of: Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . 14,896,944 14,809,909 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . 15,006,681 14,944,028 14,741,748 14,827,755 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 52 CONSOLIDATED WATER CO. LTD. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) Foreign currency translation adjustment . . . . . . . . . . . . . Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) attributable to non-controlling interests . . . . . . Comprehensive income attributable to Consolidated 2017 $5,732,573 Year Ended December 31, 2016 $2,777,313 2015 $7,925,494 — 5,732,573 (411,489) (17,042) 2,760,271 (1,184,040) (53,660) 7,871,834 404,110 Water Co. Ltd. stockholders . . . . . . . . . . . . . . . . . . . . $6,144,062 $3,944,311 $7,467,724 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 53 CONSOLIDATED WATER CO. LTD. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Redeemable preferred stock Shares Dollars Shares Common stock Cumulative translation adjustment Balance as of December 31, 2014 . . 36,840 $22,104 14,715,899 $8,829,539 $83,779,292 $49,000,621 $(482,388) — . . . . . . . . . Issue of share capital — Conversion of preferred stock . . . . — Buyback of preferred stock . . . . . . — Net income . . . . . . . . . . . . . . . — Exercise of options . . . . . . . . . . . Dividends declared . . . . . . . . . . . — Foreign currency translation — — — — 7,518,701 — — (4,435,147) 8,615 (7,195) (748) — 1,292 — 5,169 (4,317) (449) — 775 — 6,308 4,317 — — 28,557 — 10,514 7,195 — — 47,593 — 131,741 — (5,565) Additional paid-in capital Retained earnings 427,431 Dollars Non-controlling interests $2,933,496 — — — 406,793 — (182,663) — — — — — — adjustment . . . . . . . . . — . . . . . . . . . . . . . . — Stock-based compensation . . . . . . Balance as of December 31, 2015 . . 38,804 23,282 14,781,201 8,868,721 15,094 Issue of share capital 8,421 6,935 Conversion of preferred stock . . . . (11,558) — (1,755) Buyback of preferred stock . . . . . . — Net income — . . . . . . . . . . . . . . . 32,248 1,313 Exercise of options . . . . . . . . . . . Dividends declared . . . . . . . . . . . — — Foreign currency translation 5,053 (6,935) (1,053) — 788 — 25,156 11,558 — — 53,749 — — 264,450 84,597,349 159,426 — (13,001) (2,683) — (50,977) — — — 3,154,943 (533,365) 52,084,175 — — — — — — — — — — (1,183,188) — 3,960,501 — — — (182,663) — — (4,455,339) 535,813 Total stockholders’ equity $144,082,664 143,218 — (6,014) 7,925,494 456,763 (4,617,810) (53,660) 264,450 148,195,105 179,573 — (14,054) 2,777,313 568,849 (4,638,002) adjustment . . . . . . . . . . . . . . — — — — — — (16,190) (852) (17,042) Aerex non-controlling interest at — — — — — — . . . . . . . . . acquisition date — . . . . . . . . . . . — Stock-based compensation . . . . . . — (549,555) Balance as of December 31, 2016 . . 35,225 21,135 14,871,664 8,922,998 — 20,995 Issue of share capital 9,441 — 7,328 Conversion of preferred stock . . . . (12,214) — — (1,093) Buyback of preferred stock . . . . . . — — — . . . . . . . . . . . . . . . Net income — — 2,129 Exercise of options . . . . . . . . . . . — — — Dividends declared . . . . . . . . . . . Stock-based compensation . . . . . . — — — Balance as of December 31, 2017 . . 33,488 $20,093 14,918,869 $8,951,321 $86,405,387 $53,105,196 $(549,555) — — 51,589,337 — — — — 6,144,062 — — (4,628,203) — — 341,446 85,621,033 183,491 — (9,063) 5,665 (7,328) (656) — 1,277 — — 34,991 12,214 — — — — — 593,426 16,500 6,712,184 — 8,500,424 — — — (411,489) — — — $8,088,935 6,712,184 341,446 154,105,372 210,151 — (9,719) 5,732,573 17,777 (4,628,203) 593,426 $156,021,377 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 54 CONSOLIDATED WATER CO. LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS Cash ﬂows from operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax beneﬁt Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized (gain) loss on put/call option . . . . . . . . . . . . . . . . . . . Compensation expense relating to stock and stock option grants . . . . Net loss (gain) on disposal of ﬁxed assets . . . . . . . . . . . . . . . . . . Foreign currency transaction adjustment . . . . . . . . . . . . . . . . . . . Proﬁt sharing and equity in earnings of OC-BVI . . . . . . . . . . . . . . Impairment loss on long-lived assets . . . . . . . . . . . . . . . . . . . . . Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of investment in OC-BVI . . . . . . . . . . . . . . . . . . . . . Change in: Accounts receivable and costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepaid expenses and other assets . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and other liabilities and billings in excess of costs and estimated earnings − construction project . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . Cash ﬂows from investing activities Purchase of certiﬁcate of deposit Maturity of certiﬁcate of deposit Additions to property, plant and equipment and construction in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of equipment . . . . . . . . . . . . . . . . . . . . . . . . Distribution of earnings from OC-BVI . . . . . . . . . . . . . . . . . . . . Acquisition of Aerex, net of cash acquired . . . . . . . . . . . . . . . . . . Collections on loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . Release of restricted cash balance . . . . . . . . . . . . . . . . . . . . . . . Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . Year Ended December 31, 2016 2015 2017 $5,732,573 $2,777,313 $7,925,494 7,472,341 — (888,977) — (960,000) 803,577 117,969 6,685 (174,377) 1,656,362 1,400,000 — 7,421,268 41,672 (536,057) 42,553 297,000 521,019 (314,381) (172,130) (463,359) 2,000,000 1,750,000 925,000 5,836,933 125,016 — — — 407,668 32,566 420,641 (399,668) — — 1,060,000 1,370,128 (217,028) (3,083,708) (5,910,009) (622,724) 204,642 3,402,728 (732,588) 299,130 408,749 13,644,294 (138,455) 7,823,352 (1,058,134) 17,319,786 — — — (5,637,538) 5,000,000 5,637,538 (4,576,717) 22,427 1,477,125 1,633,588 — (1,443,577) (3,462,150) 547,332 — — (7,742,853) 1,841,851 398,744 (2,779,538) Cash ﬂows from ﬁnancing activities Dividends paid to common shareholders . . . . . . . . . . . . . . . . . . . Dividends paid to non-controlling interests . . . . . . . . . . . . . . . . . Dividends paid to preferred shareholders . . . . . . . . . . . . . . . . . . . Issuance (repurchase) of redeemable preferred stock . . . . . . . . . . . Proceeds received from exercise of stock options . . . . . . . . . . . . . Issuance (repayment) of note payable to related party . . . . . . . . . . . Issuance of note payable to related party . . . . . . . . . . . . . . . . . . . Repayments of demand loan payable . . . . . . . . . . . . . . . . . . . . . Net cash used in ﬁnancing activities . . . . . . . . . . . . . . . . . . . . . (4,271,867) Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . — Net increase (decrease) in cash and cash equivalents 7,928,850 . . . . . . . . . Cash and cash equivalents at beginning of period . . . . . . . . . . . 39,254,116 Cash and cash equivalents at end of period . . . . . . . . . . . . . . . $47,182,966 (4,464,712) — (11,213) (9,719) 17,777 (490,000) 686,000 (4,433,539) (182,663) (11,831) (14,054) 568,849 490,000 — — (7,000,000) (10,583,238) 806 (5,538,618) 44,792,734 $39,254,116 (3,113,565) 10,160 — — 1,726,310 (42,716) (2,057,349) (4,417,534) (201,473) (11,881) (6,014) 456,763 — — (2,000,000) (6,180,139) (3,253) 9,079,045 35,713,689 $44,792,734 The accompanying notes are an integral part of these consolidated ﬁnancial statements. 55 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 other services applicable to commercial, municipal and industrial water production, supply and 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 to estimates and assumptions include the carrying value of property, plant and equipment, intangible assets, and goodwill. Actual results could differ signiﬁcantly from such estimates. items subject Basis of consolidation: The accompanying consolidated ﬁnancial statements include the accounts of the Inc., Cayman Water Company Limited (‘‘Cayman Company’s (i) wholly-owned subsidiaries, Aquilex, Water’’), Consolidated Water (Belize) Limited (‘‘CW-Belize’’), Ocean Conversion (Cayman) Limited (‘‘OC-Cayman’’), DesalCo Limited (‘‘DesalCo’’), Consolidated Water Cooperatief, U.A. (‘‘CW-Cooperatief’’), Consolidated Water U.S. Holdings, Inc. (‘‘CW-Holdings’’); and (ii) majority-owned subsidiaries Consolidated Water (Bahamas) Ltd. (‘‘CW-Bahamas’’), Aerex Industries, Inc. (‘‘Aerex’’), Consolidated Water (Asia) Pte. Limited, PT Consolidated Water Bali (‘‘CW-Bali’’), N.S.C. Agua, S.A. de C.V. (‘‘NSC’’) and Aguas de Rosarito S.A.P.I. de C.V. (‘‘AdR’’). The Company’s investment in its affiliate Ocean Conversion (BVI) Ltd. (‘‘OC-BVI’’) is accounted for using the equity method of accounting. All signiﬁcant intercompany balances and transactions have been eliminated in consolidation. Foreign currency: The Company’s reporting currency is the United States dollar (‘‘US$’’). The functional currency of the Company and its foreign operating subsidiaries (other than NSC, AdR, CW-Cooperatief and 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 for the Cayman Islands dollar, the Belize dollar and the Bahamian dollar are ﬁxed to the US$. The exchange rates for conversion of Mexican pesos, euros and rupiahs into US$ vary based upon market conditions. Net foreign currency gains (losses) arising from transactions and re-measurements were $69,630, $50,299 and ($485,291) for the years ended December 31, 2017, 2016 and 2015, respectively, and are included in ‘‘Other income (expense) — Other’’ in the accompanying consolidated statements of income. 56 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies − (continued) 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, 2017 and December 31, 2016 include $15.9 million and $1.0 million, respectively, of certiﬁcates of deposits with an original maturity of three months or less. As of December 31, 2017, the Company had deposits in U.S. banks in excess of federally insured limits of approximately $2.7 million. As of December 31, 2017, the Company held cash in foreign bank accounts of approximately $43.8 million. Transfers from the Company’s Bahamas and Belize bank accounts to Company bank accounts in other respectively. As of countries require the approval of December 31, 2017, the equivalent United States dollar cash balances for deposits held in the Bahamas and Belize were approximately $14.3 million and $6.3 million, respectively. the Bahamas and Belize, the Central Bank of Accounts receivable and allowance for doubtful accounts: Accounts receivable are recorded at invoiced amounts based on meter readings or minimum take-or-pay amounts per contractual agreements. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable balance. The Company determines the allowance for doubtful accounts based on historical write-off experience and monthly review of delinquent accounts. Past due balances are reviewed individually for collectability and disconnection. Account balances are charged off against the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered by management to be remote. Inventory: Inventory primarily includes consumables stock and spare parts stock that are valued at the lower of cost or net realizable value with cost determined on the ﬁrst-in, ﬁrst-out basis. Inventory also includes potable water held in the Company’s reservoirs. The carrying amount of the water inventory is the lower of the average cost of producing water during the year or its net realizable value. Loans receivable: Loans receivable relate to notes receivable from customers arising from the construction and sale of water desalination plants. The allowance for loan losses, if any, is the Company’s best estimate of the amount of probable credit losses in the Company’s existing loans and is determined on an individual loan basis. Property, plant and equipment: Property, plant and equipment less accumulated depreciation. Depreciation is calculated using a straight-line method with an allowance for estimated residual values. Rates are determined based on the estimated useful lives of the assets as follows: is stated at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings Plant and equipment . . . . . . . . . . . . . . . . . . . . . . Distribution system . . . . . . . . . . . . . . . . . . . . . . . Office furniture, ﬁxtures and equipment . . . . . . . . . Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . Lab equipment . . . . . . . . . . . . . . . . . . . . . . . . . . 5 to 40 years 4 to 40 years 3 to 40 years 3 to 10 years 3 to 10 years Shorter of 5 years or lease term 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. 57 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies − (continued) 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, 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. the Company recognizes an impairment loss only if its carrying amount Construction in progress: Interest costs directly attributable to the acquisition and construction of qualifying assets, which are assets that necessarily take a substantial period of time to be ready for their intended use, are added to the cost of those assets until such time as the assets are substantially ready for use. No interest was capitalized during the years ended December 31, 2017, 2016 or 2015. 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, 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. including the existing goodwill and intangible assets, For the years ended December 31, 2017 and 2016, the Company estimated the fair value of its reporting units by applying the discounted cash ﬂow method, the guideline public company method, and the mergers and acquisitions method. The discounted cash ﬂow method relied upon seven-year discrete projections of operating results, working to the discrete period. These capital and capital expenditures, along with a terminal value subsequent 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 its reporting units for the years ended December 31, 2017 and 2016 through reference to the 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, 2017 were consistent with those used as of December 31, 2016 and were as follows: Method Discounted cash ﬂow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Guideline public company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mergers and acquisitions Retail Bulk Manufacturing 80% 10% 10% 100% 80% 10% 10% 100% 80% 10% 10% 100% 58 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies − (continued) The fair values the Company estimated for its retail and bulk units exceeded their carrying amounts by 121% the Company estimated for its and 59%, respectively, as of December 31, 2017. The carrying amount manufacturing unit exceeded its fair value by 12% as of December 31, 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. The fair values the Company estimated for its retail, bulk and manufacturing units exceeded their carrying amounts by 123%, 41% and 26%, respectively, as of December 31, 2016. 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 in 2017 the Company updated its projections for Aerex’s future cash ﬂows, during the fourth quarter, 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 may be required to record additional impairment losses to reduce the carrying value of this 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. 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-year period by 438 million gallons, a requirement CW-Bahamas met during 2007. The Company was solely responsible for the engineering, labor and materials costs incurred to affect 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, 2017 and 2016. Accumulated amortization for these costs was approximately $2.0 million and $1.8 million as of December 31, 2017 and 2016, respectively. Amortization expense was $179,353 for each of the years ended December 31, 2017, 2016 and 2015. Income taxes: The Company accounts for the income taxes arising from the operations of its United States and Mexico subsidiaries under the asset and liability method. Deferred tax assets and liabilities, if any, are recognized for the future tax consequences attributable to differences between the ﬁnancial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. 59 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. Accounting policies − (continued) The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent any deferred tax asset may not be realized. CW-Belize is liable for business and corporate income taxes. Under the terms of its water supply agreement with Belize Water Services Ltd. (‘‘BWSL’’), its sole customer, CW-Belize is reimbursed by BWSL for all taxes that it is required to pay and records this reimbursement as an offset to its tax expense. The Company is not presently subject to income taxes in the other countries in which it operates. the percentage-of-completion method, Construction revenue and cost of construction revenue: The Company recognizes revenue and related costs as work progresses on long-term ﬁxed price construction contracts using the percentage-of-completion method, which relies on contract revenue and estimates of total expected costs. The Company follows this method since it can make reasonably dependable estimates of the revenue and costs applicable to various the Company records revenue and stages of a contract. Under recognizes proﬁt or loss as work on the contract progresses. The Company estimates total project costs and proﬁt to be earned on each long-term, ﬁxed price contract prior to commencement of work on the contract and updates these estimates as work on the contract progresses. The cumulative amount of revenue recorded on a contract at a speciﬁed point in time is that percentage of total estimated revenue that incurred costs to date comprises of estimated total contract costs. If, as work progresses, the actual contract costs exceed estimates, the proﬁt recognized on revenue from that contract decreases. The Company recognizes the full amount of any estimated loss on a contract at the time the estimates indicate such a loss. Any costs and estimated earnings in excess of billings are classiﬁed as current assets. Billings in excess of costs and estimated earnings on uncompleted contracts, if any, are classiﬁed as current liabilities. With respect to the plant construction contracts awarded as the result of a tender process, the Company assumes the risk that the costs associated with constructing the plant may be greater than it anticipated in preparing its bid, as the terms of such tender processes typically require the winner to guarantee the sales price for the plant at the bid amount. Because the Company bases its contracted sales price in part on its estimation of future construction costs, the proﬁtability of its plant sales is dependent on its ability to estimate these costs accurately. The cost estimates the Company prepares in connection with the construction of plants to be sold to third parties are subject to inherent uncertainties. The cost of materials and construction may increase signiﬁcantly after the Company submits its tender and accompanying bid price for a plant due to factors beyond the Company’s control, which could cause the proﬁt margin for a plant to be less than the Company anticipated when the tender was submitted. The proﬁt margin the Company initially expects to generate from a plant sale could be further affected by other factors, such as hydro-geologic conditions at the plant site that differ materially from those the Company believes exists, and therefore relies upon, in determining its bid price. Revenue from water sales: The Company recognizes revenues from water sales at the time water is supplied to the customer’s facility or storage tank. The amount of water supplied is determined based upon water meter readings performed at the end of each month. Under the terms of both its license agreement with the government of the Cayman Islands and its bulk water supply contracts, the Company is entitled to charge its customers the greater of a minimum monthly charge or the price for water supplied during the month. Comparative amounts: Certain amounts presented in the ﬁnancial statements previously issued for 2016 and 2015 have been reclassiﬁed to conform to the current year’s presentation. 60 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Cash and cash equivalents Cash and cash equivalents are not restricted by the terms of the Company’s bank accounts as to withdrawal or the equivalent United States dollars are denominated in the use. As of December 31, 2017 and 2016, following currencies: Bank accounts: United States dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bahamian dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belize dollar Bermudian dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mexican peso . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Euro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Singapore dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesian rupiah . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short term deposits: United States dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cayman Islands dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bahamian dollar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 2016 $ 6,764,201 4,306,768 13,310,936 6,346,184 3,502 17,014 — — 46,331 30,794,936 $11,350,895 16,511,673 4,859,914 4,884,161 3,733 83,752 5,221 25,840 29,220 37,754,409 10,559,407 4,802,060 1,026,563 16,388,030 $47,182,966 490,914 — 1,008,793 1,499,707 $39,254,116 Transfers from the Company’s Bahamas and Belize bank accounts to Company bank accounts in other countries require the approval of the Central Bank of the Bahamas and Belize, respectively. 4. Accounts receivable, net Trade accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Receivable from OC-BVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The activity for the allowance for doubtful accounts consisted of: December 31, 2017 $13,609,203 123,807 1,473,738 15,206,748 (158,902) $15,047,846 2016 $15,368,218 53,970 1,271,948 16,694,136 (193,338) $16,500,798 Opening allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts written off during the year . . . . . . . . . . . . . . . . . . . . . . . Ending allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . $ $ Signiﬁcant concentrations of credit risk are disclosed in Note 20. December 31, 2017 193,338 — (34,436) 158,902 2016 193,338 42,553 (42,553) 193,338 $ $ 61 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. Inventory Water stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumables stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Spare parts stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory (non-current) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6. Loans receivable December 31, $ 2017 28,332 150,534 6,324,552 6,503,418 1,744,445 $4,758,973 $ 2016 23,905 143,028 6,745,034 6,911,967 2,305,879 $4,606,088 December 31, 2017 2016 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivable, excluding current portion . . . . . . . . . . . . . . . . . . . . . . . . . 7. Property, plant and equipment and construction in progress $2,135,428 $3,448,051 — 2,135,428 1,400,448 $ 734,980 320,965 3,769,016 1,633,588 $2,135,428 Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Distribution system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office furniture, ﬁxtures and equipment . . . . . . . . . . . . . . . . . . . Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lab equipment Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 $ 3,435,361 20,135,753 61,437,751 33,986,305 3,425,992 1,446,468 261,148 158,637 124,287,415 73,762,351 $ 50,525,064 $ 2016 3,570,361 19,366,123 62,227,399 33,482,674 3,405,633 1,396,886 261,147 151,233 123,861,456 70,777,351 $ 53,084,105 $ 1,823,284 $ 885,494 62 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. Property, plant and equipment and construction in progress − (continued) As of December 31, 2017, the Company had outstanding capital commitments of $3,619,925. 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, 2017 and 2016, $3,183,122 and $3,542,119, respectively, of construction in progress was placed in service. Depreciation expense was $5,862,947, $5,765,580, and $5,501,491 for the years ended December 31, 2017, 2016 and 2015, respectively. 8. Investment in OC-BVI The Company owns 50% of the outstanding voting common shares and a 43.53% equity interest in the proﬁts of Ocean Conversion (BVI) Ltd. (‘‘OC-BVI’’). The Company also owns certain proﬁt sharing rights in OC-BVI that raise its effective interest 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. in the proﬁts of OC-BVI to approximately 45%. Pursuant The Company’s equity investment in OC-BVI amounted to $2,783,882 and $4,086,630 as of December 31, 2017 and 2016, respectively. Until 2009, substantially all of the water sold by OC-BVI to the Ministry was supplied by one desalination plant with a capacity of 1.7 million gallons per day located at Baughers Bay, Tortola (the ‘‘Baughers Bay plant’’). As discussed later in this Note (see ‘‘Baughers Bay litigation’’), the BVI government assumed the operating responsibilities for the Baughers Bay plant in March 2010. During 2007, OC-BVI completed the construction of a desalination plant with a capacity of 720,000 gallons per day located at Bar Bay, Tortola (the ‘‘Bar Bay plant’’). OC-BVI began selling water to the Ministry from this plant in January 2009 and on March 4, 2010, OC-BVI and the BVI government executed a seven-year contract for the Bar Bay plant (the ‘‘Bar Bay agreement’’). The Bar Bay agreement was extended by 14 years on February 14, 2017. Under the terms of the Bar Bay agreement, OC-BVI delivers up to 600,000 gallons of water per day to the BVI government from the Bar Bay plant on a take-or-pay basis. The Bar Bay agreement required OC-BVI to complete a storage reservoir on a BVI government site by no later than March 4, 2011. OC-BVI has not commenced construction of this storage reservoir due to the BVI government’s failure to pay (i) the full amount of invoices for the water provided by the Bar Bay plant on a timely basis; and (ii) the full amount ordered pursuant to a court ruling relating to the Baughers Bay litigation (see discussion that follows). Summarized ﬁnancial information for OC-BVI is as follows: Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current liabilities Non-current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 $2,835,614 3,945,071 $6,780,685 2016 $5,627,414 3,963,242 $9,590,656 December 31, 2017 $ 218,753 1,158,300 $1,377,053 2016 $ 197,673 1,854,900 $2,052,573 63 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Investment in OC-BVI − (continued) Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . General and administrative expenses Long-lived asset impairment and disposition losses . . . . . . . . . . . . Income (loss) from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) attributable to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to controlling interests Year Ended December 31, 2017 $2,874,936 1,759,285 1,115,651 1,163,547 188,164 (236,060) 587,859 351,799 58,202 $ 293,597 2016 $3,832,929 2,107,557 1,725,372 930,838 — 794,534 51,475 846,009 69,975 $ 776,034 A reconciliation of the beginning and ending balances for the investment in OC-BVI for the year ended December 31, 2017: Balance as of December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proﬁt sharing and equity from earnings of OC-BVI . . . . . . . . . . . . . . . . . . . . . . . Distributions received from OC-BVI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance as of December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,086,630 174,377 (1,477,125) $ 2,783,882 The Company recognized $127,802, $337,809 and $294,368 in earnings from its equity investment in OC-BVI for the years ended December 31, 2017, 2016 and 2015, respectively. The Company recognized $46,575, $125,550 and $105,300 in proﬁt sharing income from its proﬁt sharing agreement with OC-BVI for the years ended December 31, 2017, 2016 and 2015, respectively. For the years ended December 31, 2017, 2016 and 2015, the Company recognized approximately $469,347, $515,474 and $528,346, respectively, in revenues from its management services agreement with OC-BVI. Amounts payable by OC-BVI to the Company were $123,807 and $54,559 as of December 31, 2017 and December 31, 2016, respectively. The Company’s deferred revenues from OC-BVI, included in other current liabilities in the accompanying consolidated balance sheets, were $181,328 and $0 as of December 31, 2017 and December 31, 2016, respectively. The Company’s remaining unamortized balance recorded for this management services agreement, which is reﬂected as an intangible asset on the Company’s consolidated balance sheets, was $0 and $15,500 as of December 31, 2017 and December 31, 2016, respectively (see Note 10). Baughers Bay Litigation Through March 2010, OC-BVI supplied water to the BVI government from a plant located at Baughers Bay, Tortola, under the terms of a water supply agreement dated May 1990 (the ‘‘1990 Agreement’’) with an initial seven-year term that expired in May 1999. The 1990 Agreement provided that such agreement would automatically be extended for another seven-year term unless the BVI government provided notice, at least eight months prior to such expiration, of its decision to purchase the plant from OC-BVI at the agreed upon amount under the 1990 Agreement of approximately $1.42 million. In correspondence between the parties from late 1998 through early 2000, the BVI government indicated that it intended to purchase the plant but would be amenable to negotiating a new water supply agreement and that it considered the 1990 Agreement to be in force on a monthly basis until negotiations between the BVI government and OC-BVI were concluded. 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. 64 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Investment in OC-BVI − (continued) 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 and during 2007 the BVI government 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. The Court ruled on this litigation in 2009, awarding ownership of the Baughers Bay plant to the BVI government without compensation to OC-BVI. Both OC-BVI and the BVI subsequently ﬁled appeals with the Eastern Caribbean Court of Appeals (the ‘‘Appellate Court’’) asking the Appellate Court to review certain rulings by the Court with respect to this litigation. In June 2012, the Appellate Court issued the ﬁnal ruling with respect to the Baughers Bay litigation. This ruling reversed a previous ruling of the Court and awarded OC-BVI compensation for improvements made to the plant in the amount equal to the difference between (i) the value of the Baughers Bay plant at the date OC-BVI transferred possession of the plant to the BVI government and (ii) $1.42 million (the purchase price for the Baughers Bay plant under the 1990 Agreement). OC-BVI and the BVI government engaged a mutually approved valuation expert to complete a valuation of the Baughers Bay plant at the date it was transferred to the BVI government in accordance with the Appellate Court ruling. In June 2016, OC-BVI received the ﬁnal valuation report from this valuation expert, which set forth a value for the Baughers Bay plant of $13.0 million as of the date OC-BVI transferred possession of the plant to the BVI government. Applying the valuation determined by the valuation expert to the formula set forth by the Appellate Court in its ruling, OC-BVI would be entitled to $11.58 million from the BVI government for the Baughers Bay plant. The BVI government has disagreed with the valuation methodology used by the valuation expert and the resulting valuation for the Baughers Bay plant. OC-BVI cannot presently determine if the Appellate Court will uphold the Baughers Bay plant valuation or when, or to what extent, any amount for the value of the Baughers Bay plant will be paid by the BVI government to OC-BVI. Consequently, any amount due for the Baughers Bay plant valuation will not be included in OC-BVI’s results of operations until such amount, if any, is paid by the BVI government. Valuation of Investment in OC-BVI The Company accounts for its investment in OC-BVI under the equity method of accounting for investments in common stock. This method requires recognition of a loss on an equity investment that is other than temporary and indicates that a current fair value of an equity investment that is less than its carrying amount may indicate a loss in the value of the investment. While a quoted market price for OC-BVI’s stock is not available, due to the uncertainties (speciﬁcally the Baughers Bay litigation and the possible expiration without renewal of the Bar Bay agreement) associated with OC-BVI’s future cash ﬂows, the Company tested the carrying value of its investment in OC-BVI (which exceeded the Company’s proportionate share of OC-BVI’s net assets by an amount accounted for as goodwill) for impairment in 2016 and prior years. The Company estimated the fair value of its investment in OC-BVI through the use of the discounted cash ﬂow method, which relied upon projections of OC-BVI’s operating results, working capital and capital expenditures. The use of this method required the Company to estimate OC-BVI’s future cash ﬂows from its Bar Bay plant and the resolution of the Baughers Bay litigation. The Company estimated OC-BVI’s cash ﬂows from its Bar Bay plant by (i) identifying various possible future scenarios which included the execution of a new agreement for the Bar Bay plant as well as the termination of Bar Bay plant operations upon the scheduled expiration of the Bar Bay agreement in March 2017; (ii) estimating the cash ﬂows associated with each possible scenario; and (iii) assigning a probability to each scenario. The Company similarly estimated the cash ﬂows OC-BVI would receive from the BVI government in connection with the Court and Appellate Court rulings on the Baughers Bay litigation by assigning 65 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. Investment in OC-BVI − (continued) probabilities to different scenarios. The resulting probability-weighted sum represented the Company’s best estimate of future cash ﬂows to be generated by OC-BVI. The identiﬁcation of the possible scenarios for the Bar Bay plant agreement and the Baughers Bay litigation, the projections of cash ﬂows for each scenario, and the assignment of relative probabilities to each scenario all represented signiﬁcant estimates made by the Company. While the Company used its best judgment in identifying these possible scenarios, estimating the expected cash ﬂows for these scenarios and assigning relative probabilities to each scenario, these estimates were by their nature highly subjective and were also subject to material change by the Company’s management over time based upon new information or changes in circumstances. After updating its probability-weighted estimates of OC-BVI’s future cash ﬂows and its resulting estimate of the fair value of its investment in OC-BVI, the Company recorded an impairment loss of approximately $925,000 for the twelve months ended December 31, 2016, to reduce the carrying value of its investment in OC-BVI. As a result of the extension of the Bar Bay agreement, no impairment losses were necessary in 2017 for the Company’s investment in OC-BVI. As of December 31, 2017, the amount of the Company’s proportionate share (43.53%) of OC-BVI’s net assets exceeded the carrying value of the Company’s investment in OC-BVI by approximately $30,000. 9. 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 99.99%. 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 gallon per day plant and a pipeline that connects to the Mexican potable water infrastructure and a second phase consisting of an additional 50 million gallons of production capacity. Through a series of transactions completed in 2012 − 2014, NSC purchased 20.1 hectares for approximately $20.6 million on which the proposed Project’s plant would be constructed. In November 2012, NSC entered into a lease with an effective term of 20-years from the date of full operation of the Project’s desalination plant, with the Comisión Federal de Electricidad for approximately 5,000 square meters of land on which it plans to construct the water intake and discharge works for the plant. The amounts due on this lease are payable in Mexican pesos at an amount that is currently equivalent to approximately $15,000 per month. This lease may be cancelled by NSC should NSC ultimately not proceed with the Project. In August 2014, the State enacted new legislation to regulate Public-Private Association projects which involve the type of long-term contract between a public-sector authority and a private party that NSC is seeking to complete the Project. Pursuant in January 2015, NSC submitted an expression of interest for its project to the Secretary of Infrastructure and Urban Development of the State of Baja California (‘‘SIDUE’’). SIDUE accepted NSC’s expression of interest and requested that NSC submit a detailed proposal for the Project that complies with requirements of the new legislation. NSC submitted this detailed proposal (the ‘‘APP Proposal’’) to SIDUE in late March 2015. The new legislation required that such proposal be evaluated by SIDUE and submitted to the Public-Private Association Projects State Committee to this new legislation, 66 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. NSC and AdR Project Development − (continued) (the ‘‘APP Committee’’) for review and authorization. If the Project was authorized the State would be required to conduct a public tender for the Project. In response to its APP Proposal, in September 2015 NSC received a letter dated June 30, 2015 from the Director General of the Comisión Estatal del Agua de Baja California (‘‘CEA’’), the State agency with responsibility for the Project, stating that (i) the Project is in the public interest with high social beneﬁts and is consistent with the objectives of the State development plan; and (ii) that the Project should proceed, and the required public tender should be conducted. In November 2015, the State officially commenced the tender for the Project, the scope of which the State deﬁned as a ﬁrst phase to be operational in 2019 consisting of a 50 million 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. A consortium comprised of NSC, NuWater S.A.P.I. de C.V. and Degremont S.A. de C.V. (the ‘‘Consortium’’) submitted its tender for the Project in April 2016 and in June 2016, the State designated the Consortium as the winner of the 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 August 2016, NSC and NuWater incorporated Newco under the name Aguas de Rosarito S.A.P.I. de C.V. (‘‘AdR’’), a special project company, to complete the Project and executed a shareholders agreement for AdR agreeing among other things that (i) AdR would purchase the land and other Project assets from NSC on the date that the Project begins commercial operations and (ii) AdR would enter into a Management and Technical Services Agreement with NSC effective on the ﬁrst day that the Project begins commercial operations. As of December 31, 2017, NSC owned 99.6% of AdR. On August 22, 2016, the Public Private Partnership Agreement for public private partnership number 002/2015, contest number SIDUE-CEA-APP-2015-002 (‘‘APP Contract’’), was executed between AdR, CEA, the Government of Baja California represented by the Secretary of Planning and Finance and the Public Utilities Commission of Tijuana (‘‘CESPT’’). The APP Contract requires AdR to design, construct, ﬁnance and operate a seawater desalination plant (and accompanying aqueducts) with a capacity of up to 100 million gallons per day in two phases: the ﬁrst with a capacity of 50 million gallons per day and an aqueduct to the Mexican potable water system in Tijuana, Baja California; and the second phase with a capacity of 50 million gallons per day and an aqueduct to a second delivery point in Tijuana. The ﬁrst phase must be operational within 36 months of commencing construction and the second phase must be operational by the end of 2024. The APP Contract further requires AdR to operate and maintain the plant and aqueducts for a period of 37 years starting from the commencement of operation of the ﬁrst phase. At the end of the operating period, the plant and aqueducts will be transferred to CEA. The total Project cost for Phase 1 of the Project is presently estimated at approximately 9.1 billion Mexican pesos. The APP Contract does not become effective until the following conditions are met: • • the State has established and registered various payment trusts, guaranties and bank credit lines for speciﬁc use by the Project; the CEA has obtained the rights from the relevant federal authority to take and desalinate seawater and distribute it for municipal use; 67 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. NSC and AdR Project Development − (continued) • • • • 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; AdR has obtained permission from the relevant federal authority to discharge the residual water from the Project’s desalination plant; 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 in order to comply with recent changes to the Federal Financial Discipline Law for Federative Entities and Municipalities. 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. Following its issuance, two actions were ﬁled in Mexican Courts against Decreto #168. While neither NSC nor AdR has been named as a party in these actions, based upon publicly available information the Company believes (1) one of these actions consists of a challenge ﬁled by certain members of the Congress of State of Baja, California alleging certain elements of Decreto #168 are contrary to the Mexican constitution; and (2) that the other action represents an amparo (i.e. a constitutional appeal) ﬁled by certain members of indigenous groups that alleges Decreto #168 violates certain of the human rights and individual guarantees they are afforded under the Mexican constitution. The Company cannot presently determine what impact, if any, these two actions will have upon 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 Project. These changes have adversely impacted the estimated construction, operating, and ﬁnancing costs for the Project. The APP Contract and the APP Law allow for the parties to negotiate (but do not guarantee) modiﬁcations to the water tariff in the event of such signiﬁcant macroeconomic condition changes. On February 10, 2017 AdR submitted proposals to the CEA requesting an increase to the water tariff to compensate for changes in foreign exchange rates, lending rates and certain changes in law which have impacted the Project. If AdR is unable to obtain this requested increase in the water tariff it may be unable to obtain the debt and equity ﬁnancing required for the Project. The Company is currently unable to say whether or not such water tariff increase will be approved. 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 U.S. asset manager, will acquire a minimum of 55% 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 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. In February 2018, our subsidiary Consolidated Water U.S. Holdings acquired the remaining 0.4% of AdR’s equity interest previously held by NuWater. 68 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. NSC and AdR Project Development − (continued) If AdR is ultimately unable to proceed with the Project, the land NSC has purchased and the right of way deposits may lose their strategic importance derived from their association with the Project and consequently may decline in value. If AdR does not proceed with the Project, NSC may ultimately be unable to sell this land or recoup their right of way deposits for amounts at to its current carrying values of approximately $20.6 million and $947,000, respectively. Any loss on sale of the land, or impairment losses NSC may be required to record as a result of a decrease in the (1) fair value of the land; or (2) value of the rights of way arising from the inability to complete the Project could have a material adverse impact on the Company’s results of operations. least equal Included in the Company’s results of operations are general and administrative expenses from NSC and AdR, consisting of organizational, legal, accounting, engineering, consulting and other costs relating to Project development activities. Such expenses amounted to approximately $3.0 million, $3.0 million and $2.0 million for the years ended December 31, 2017, 2016 and 2015, respectively. The assets and liabilities of NSC and AdR included in the Company’s consolidated balance sheets amounted to approximately $23.1 million and $173,000, respectively, as of December 31, 2017 and approximately $22.3 million and $221,000 respectively, as of December 31, 2016. EWG Litigation Immediately following CW-Cooperatief’s acquisition of its initial 50% ownership in NSC, the remaining 50% ownership interest in NSC was held by an unrelated company, Norte Sur Agua, S. de R.L. de C.V. (‘‘NSA’’). NSA subsequently transferred ownership of half of its shares in NSC to EWG Water LLC (‘‘EWG’’) and the other half of its shares in NSC to Alejandro de la Vega (the ‘‘individual shareholder’’). In February 2012, the Company paid $300,000 to enter into an agreement (the ‘‘Option Agreement’’) that provided it with an option, exercisable through February 7, 2014, to purchase the shares of NSC owned by the individual shareholder for a price of $1.0 million along with an immediate power of attorney to vote those shares. Such shares constituted 25% of the ownership of NSC as of February 2012. In May 2013, NSC repaid a $5.7 million loan payable to CW-Cooperatief by issuing additional shares of its stock. As a result of this share issuance to CW-Cooperatief, the Company acquired 99.99% of the ownership of NSC. The Option Agreement contained an anti-dilution provision that required the Company to issue new shares in NSC of an amount sufficient to maintain the individual shareholder’s 25% ownership interest in NSC if (i) any new shares of NSC were issued subsequent to the execution of the Option Agreement; and (ii) the Company did not exercise its share purchase option by February 7, 2014. The Company exercised its option and paid the $1.0 million to the individual shareholder to purchase the Option Agreement shares in February 2014. In October 2015, the Company learned that EWG ﬁled a lawsuit against the individual shareholder, NSC, NSA, CW-Cooperatief, Ricardo del Monte Nunez, Carlos Eduardo Ahumada Arruit, Luis de Angitia Becerra, and the Public Registry of Commerce of Tijuana, Baja California in the Civil Court located in Tecate, Baja California, Mexico. In this lawsuit, EWG challenged, among other things, the capital investment transactions that increased the Company’s ownership interest in NSC to 99.99%. EWG requested that the court, as a preliminary matter: (a) suspend the effectiveness of the challenged transactions; (b) order public officials in Mexico to record the pendency of the lawsuit in the public records; and (c) appoint an inspector for NSA and NSC to oversee its commercial activities. The court granted, ex-parte, the preliminary relief sought by EWG, which resulted in the placement of inscriptions for the lawsuit on NSC’s public records. 69 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. NSC and AdR Project Development − (continued) EWG also sought an order directing, among other things: (i) NSA, NSC and CW-Cooperatief to refrain from carrying out any transactions with respect to the Project; and (ii) NSA, NSC and CW-Cooperatief, and the partners thereof, to refrain from transferring any interests in NSA, NSC and CW-Cooperatief. On April 5, 2016, NSC ﬁled a motion for reconsideration with the Tecate, Mexico court asking, among other things, that the court; (i) reverse its order to record the pendency of the lawsuit in the public records; (ii) cancel the appointment of the inspector; and (iii) allow NSC to provide a counter-guarantee to suspend the effects of the court’s order regarding the challenged transactions. On April 26, 2016, the Tecate, Mexico court issued an interlocutory judgment (i) ordering the cancellation of the inscriptions on NSC’s public records; and (ii) rejecting NSC’s motion for cancellation of the appointment of the inspector. On April 26, 2016, NSC ﬁled a full answer to EWG’s claims rejecting every claim made by EWG. The court’s response on this matter is pending. On May 17, 2016, NSC ﬁled a claim with the Third District Court in Matters of Amparo and Federal Trials in the City of Tijuana, Baja California (the ‘‘Amparo Court’’) challenging the Tecate, Mexico court ex-parte order which appointed an inspector over NSC’s commercial activities. On July 29, 2016, the Amparo Court found that such appointment is unconstitutional and reversed the Tecate, Mexico court’s appointment of an inspector. On September 6, 2016, the Tecate, Mexico court issued a decree granting the counter-guaranty requested by NSC. Such counter-guaranty was ﬁxed in the amount of 300,000 Mexican pesos and was given to the court on October 13, 2016 at which time all remaining ex-parte restrictions on NSC related to the challenged transactions were suspended. On May 2, 2017, the Tecate, Mexico court declared that the initial ﬁling of this lawsuit had expired due to EWG’s lack of activity with respect to certain actions required to proceed to trial. However, EWG can appeal the expiration or reﬁle the lawsuit. 10. Intangible assets In 2003, as part of the acquisition of a group of companies, the Company acquired 100% of the outstanding voting common shares of DesalCo, which had an agreement to provide management and engineering services to OC-BVI. The Company attributed $856,356 of the purchase price of the acquisition to the value of this management services agreement, which has no expiration term. Initially, the Company determined that this intangible asset had an indeﬁnite life and therefore it was not amortized. However in 2010, as a result of the loss by OC-BVI of its Baughers Bay contract (see Note 8), the Company began amortizing this asset over the life of OC-BVI’s remaining seven-year water supply contract for its Bar Bay plant. The carrying amount of the Belize Water Production and Supply Agreement is being amortized over the 23-year term of the agreement that expires in March 2026. 70 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Intangible assets − (continued) On February 11, 2016, the Company purchased a 51% ownership interest in Aerex Industries, Inc. The purchase transaction identiﬁed certain intangible assets with a fair value of $5,900,000 and useful life as follows: Non-Compete (5 years), Trade name (15 years), Certiﬁcations/programs (3 years), Customer backlog (1 year), and Customer relationships (4 years). See further discussion of this acquisition at Note 21. Cost Intangible asset management service agreement . . . . . . . . . . . . . . Belize water production and supply agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Non-compete agreement Aerex − Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Certiﬁcations/programs . . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated amortization . . . . . . . . . . . . . . Intangible asset management service agreement Belize water production and supply agreement . . . . . . . . . . . . . . . Aerex − Non-compete agreement . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Certiﬁcations/programs . . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aerex − Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 2016 $ 856,356 1,522,419 400,000 1,400,000 2,000,000 100,000 2,000,000 8,278,775 (856,356) (988,652) (153,333) (178,889) (1,277,778) (100,000) (958,333) (4,513,341) $ 3,765,434 $ 856,356 1,522,419 400,000 1,400,000 2,000,000 100,000 2,000,000 8,278,775 (840,839) (922,460) (73,333) (85,556) (611,111) (91,667) (458,333) (3,083,299) $ 5,195,476 Amortization of intangible assets for each of the next ﬁve years and thereafter is expected to be as follows: 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,406,192 795,081 281,192 166,192 159,525 957,252 $3,765,434 Amortization expense was $1,430,042, $1,476,335, and $156,089 for the years ended December 31, 2017, 2016 and 2015, respectively. 71 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. Note payable Note payable consists of the following: December 31, 2017 2016 Working capital loan from related party to Aerex bearing interest at 1% per annum and payable on June 30, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $490,000 Working capital loan from related party to Aerex bearing interest at 1.04% per annum and payable on March 31, 2018 . . . . . . . . . . . . . . . . . . . . . . Total note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note payable, excluding current portion . . . . . . . . . . . . . . . . . . . . . . . . . . 686,000 686,000 686,000 — $ — 490,000 490,000 — $ 12. Income taxes The components of income (loss) before income taxes for the years ended December 31 are as follows: . . . . . . . . . . Foreign (not subject to income taxes) Mexico . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 $10,041,971 (3,188,134) (2,010,241) $ 4,843,596 Year Ended December 31, 2016 $ 8,851,332 (3,339,932) (3,270,144) $ 2,241,256 2015 $10,502,379 (2,576,885) — $ 7,925,494 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, 2017 and 2016 consisted of a deferred tax beneﬁt relating to U.S. operations made up of the following: Current tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax beneﬁt Year Ended December 31, 2017 2016 $ 1,371 (890,348) $(888,977) $ — (536,057) $(536,057) 72 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. Income taxes − (continued) A reconciliation of the U.S. statutory federal tax rate to the effective beneﬁt rate for the U.S. loss before income taxes for the years ended December 31, 2017 and 2016 is as follows: U.S. statutory federal rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . State taxes, net of federal effect . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . R&D tax credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Permanent items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax Act adjustment Valuation allowance for deferred tax assets . . . . . . . . . . . . . . . . . Year Ended December 31, 2017 34.00% 2.00 (82.91) (2.49) 13.39 (11.25) 28.90 (18.36)% 2016 34.00% (2.00) (128.30) 0.00 20.90 0.00 51.40 (24.00)% The tax effects of signiﬁcant December 31, 2017 and 2016 were as follows: items comprising the Company’s net long-term deferred tax liability at Deferred tax assets: Operating loss carryforwards − Mexico . . . . . . . . . . . . . . . . . . Land basis difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Start-up costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating loss carryforwards − United States . . . . . . . . . . . . . . Valuation allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liabilities: Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2017 2016 $ 4,923,026 702,547 747,215 — (6,372,788) — $ 4,462,746 414,101 668,161 150,758 (5,695,766) — 205,827 819,066 1,024,893 $ 1,024,893 129,041 1,786,200 1,915,241 $ 1,915,241 During the year ended December 31, 2017, the Company increased its total valuation allowance from $5.7 million to $6.4 million. As of December 31, 2017, the Company had a net loss carryforward valued at $16.4 million that will begin to expire in 2020 if unused. 13. Share capital and additional paid-in capital Shares of redeemable preferred stock (‘‘preferred shares’’) are issued under the Company’s Employee Share Incentive Plan (see Note 18) and carry the same voting and dividend rights as shares of common stock (‘‘common shares’’). Preferred shares vest over four years and convert to common stock on a share for share basis on the fourth anniversary of each grant date. Preferred shares are only redeemable with the Company’s agreement. Upon liquidation, preferred shares rank in preference to the common shares to the extent of the par value of the preferred shares and any related additional paid in capital. 73 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. Earnings per share Earnings per share (‘‘EPS’’) are computed on a basic and diluted basis. Basic EPS is computed by dividing income (less preferred stock dividends) available to common stockholders by the weighted average net 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: Net income attributable to Consolidated Water Co. Ltd. stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: preferred stock dividends . . . . . . . . . . . . . . . . . . . . Net income available to common shares in the determination of basic earnings per common share . . . . . . . . . . . . . . . Weighted average number of common shares in the determination of basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Plus: Weighted average number of preferred shares outstanding during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . Potential dilutive effect of unexercised options . . . . . . . . . . Weighted average number of shares used for determining diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders . . . . . 15. Dividends Year Ended December 31, 2016 2015 2017 $ 6,144,062 (11,418) $ 3,960,501 (11,563) $ 7,518,701 (12,028) $ 6,132,644 $ 3,948,938 $ 7,506,673 14,896,944 14,809,909 14,741,748 35,765 73,972 37,706 96,413 38,612 47,395 15,006,681 14,944,028 14,827,755 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: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . First Quarter Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 $0.075 0.075 0.075 0.085 $ 0.31 2016 $0.075 0.075 0.075 0.075 $ 0.30 2015 $0.075 0.075 0.075 0.075 $ 0.30 16. Segment information The Company has four reportable segments: retail, bulk, services and 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, The Bahamas and Belize under long-term contracts. The services segment provides desalination plant management and operating services to affiliated 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 as a result of our acquisition of 51% of the equity ownership of Aerex Industries, Inc. on February 11, 2016. 74 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Segment information − (continued) 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 three business segments. The accounting policies of the segments are consistent with those described in Note 2. The Company evaluates each segment’s performance based upon its income from operations. All intercompany transactions are eliminated for segment presentation purposes. The Company’s segments are strategic business units that are managed separately because each segment sells different products and/or services, serves customers with distinctly different needs and generates different gross proﬁt margins. Retail Year Ended December 31, 2017 Services Bulk Manufacturing Total Revenues . . . . . . . . . . . . . . . . . . . . . $23,225,066 $31,621,756 $ Cost of revenues . . . . . . . . . . . . . . . . Gross proﬁt (loss) . . . . . . . . . . . . . . . General and administrative expenses . . . Long-lived asset impairment and 21,066,207 10,555,549 1,248,414 10,372,199 12,852,867 12,134,983 469,347 $ 6,990,496 $62,306,665 36,872,165 4,963,962 469,797 25,434,500 2,026,534 (450) 19,072,979 2,646,504 3,043,078 1,640,158 . . . . . . . . . . . disposition losses, net — 1,400,000 Income (loss) from operations. . . . . . . . $ (922,274) $ 9,307,135 $(3,043,528) $(2,019,970) . . . . . . . . . . . . . . . Other income, net . . . . . . . . Income before income taxes Provision for (beneﬁt from) income taxes . . Net income . . . . . . . . . . . . . . . . . . . . Loss attributable to non-controlling — interests . . . . . . . . . . . . . . . . . . . . Net income attributable to Consolidated Water Co. Ltd. stockholders . . . . . . . 3,040,158 3,321,363 1,522,233 4,843,596 (888,977) 5,732,573 (411,489) $ 6,144,062 Depreciation and amortization expenses for the year ended December 31, 2017 for the retail, bulk, services and manufacturing segments were $2,008,992, $3,814,444, $44,934 and $1,603,971, respectively. Retail Accounts receivable, net . . . . . . . . $ 2,406,595 Property, plant and equipment, net . . $23,172,382 Construction in progress 321,368 . . . . . . . . $ Intangibles, net . . . . . . . . . . . . . . . $ Goodwill . . . . . . . . . . . . . . . . . . . $ 1,170,511 Land held for development . . . . . . . $ Total segment assets . . . . . . . . . . . $52,095,524 — $ — $ Bulk $10,177,620 $25,420,819 $ 1,498,625 533,767 $ 2,328,526 As of December 31, 2017 Services $ 1,155,318 84,339 $ $ 3,291 $ $ $75,785,323 — $20,558,424 $24,488,173 Total Manufacturing $ 1,308,313 $ 15,047,846 $ 1,847,524 $ 50,525,064 1,823,284 $ 3,765,434 8,384,248 $ — $ 20,558,424 $13,111,875 $165,480,895 — $ — $ 3,231,667 $ — $ 4,885,211 $ 75 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . $23,505,619 $29,647,034 $ 16. Segment information − (continued) Retail Revenues Cost of revenues . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . General and administrative expenses . . Long-lived asset impairment and (gain)/loss on dispositions, net Year Ended December 31, 2016 Services Bulk Manufacturing 835,770 $ 3,887,284 3,090,834 751,139 796,450 84,631 2,308,607 3,163,972 10,294,298 13,211,321 11,460,165 19,488,550 10,158,484 1,744,840 . . . . 1,754,402 1,953,943 Income (loss) from operations . . . . . . . $ (202,787) $ 8,414,644 $(2,807,615) $(3,266,559) Other income, net . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . Provision for (beneﬁt from) income taxes . Net income . . . . . . . . . . . . . . . . . . . Loss attributable to non-controlling (271,726) (1,000) interests . . . . . . . . . . . . . . . . . . . . Net income attributable to Consolidated Water Co. Ltd. stockholders . . . . . . Total $57,875,707 33,624,821 24,250,886 18,677,584 3,435,619 2,137,683 103,573 2,241,256 (536,057) 2,777,313 (1,183,188) $ 3,960,501 Depreciation and amortization expenses for the year ended December 31, 2016 for the retail, bulk, services and manufacturing segments were $2,468,846, $3,288,083, $116,151 and $1,548,188, respectively. Retail As of December 31, 2016 Services Accounts receivable, net . . . . . . . . $ 2,646,628 Property, plant and equipment, net . . $24,890,031 134,392 . . . . . . . . $ Construction in progress Intangibles, net . . . . . . . . . . . . . . . $ Goodwill . . . . . . . . . . . . . . . . . . . $ 1,170,511 Land held for development . . . . . . . $ Total segment assets . . . . . . . . . . . $54,303,011 Bulk $12,692,714 $26,124,724 743,296 $ 599,960 — $ $ 2,328,526 $ $ $ $ $ 629,930 91,030 15,516 Total — $ Manufacturing $ 531,526 $ 16,500,798 $ 1,978,320 $ 53,084,105 885,494 5,195,476 9,784,248 $ — $ 20,558,424 $15,079,394 $163,604,528 7,806 $ $ 4,580,000 $ — $ 6,285,211 $ — $ $68,663,628 — $20,558,424 $25,558,495 76 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Segment information − (continued) Year Ended December 31, 2015 Services Retail . . . . . . . . . . . . . . . . . . . . $23,254,757 $31,854,255 $ 2,007,190 1,629,221 377,969 2,138,864 10,543,972 12,710,785 11,095,349 21,634,789 10,219,466 1,605,943 Revenues Cost of revenues . . . . . . . . . . . . . . . Gross proﬁt . . . . . . . . . . . . . . . . . . . General and administrative expenses . . Long-lived asset impairment and (gain)/loss on dispositions, net 33,166 (600) — . . . . Bulk Income (loss) from operations . . . . . . . $ 1,582,270 $ 8,614,123 $(1,760,895) $ . . . . . . . Other income (expense), net Net income . . . . . . . . . . . . . . . . . . . Income attributable to non-controlling interests . . . . . . . . . . . . . . . . . . . . Net income attributable to Consolidated Water Co. Ltd. stockholders . . . . . . Manufacturing $ Total — $57,116,202 — 33,807,982 — 23,308,220 — 14,840,156 — — 32,566 8,435,498 (510,004) 7,925,494 406,793 $ 7,518,701 Depreciation and amortization expenses for the year ended December 31, 2015 for the for the retail, bulk and services segments were $2,344,315, $3,389,717 and $102,901, respectively. Revenues earned by major geographic region were: Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . . Bahamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenues earned from management services agreement with OC-BVI . . . . . . . . . . . . . . . . . Revenues earned from major customers were: 2017 $30,218,830 21,528,494 159,856 2,939,643 6,990,496 Year Ended December 31, 2016 $31,211,705 19,554,944 91,311 2,614,989 3,887,284 2015 $32,735,215 21,062,081 368,012 2,422,547 — 469,346 $62,306,665 515,474 $57,875,707 528,347 $57,116,202 Year Ended December 31, 2016 2015 2017 Revenues earned from the Water and Sewerage Corporation (‘‘WSC’’) . . . . . . . . . . . . . . . . . . Percentage of total revenues from the WSC . . . . . . Revenues earned from the Water Authority − Cayman (‘‘WAC’’) . . . . . . . . . . . . . . . . . . . . . Percentage of total revenues from the WAC . . . . . $21,307,993 $19,254,396 $20,770,347 34% 33% 36% $ 7,153,620 $ 7,477,101 $ 8,369,627 11% 13% 15% 77 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. Segment information − (continued) Property, plant and equipment, net by major geographic region were: Cayman Islands . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bahamas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Belize . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other 17. Cost of revenues and general and administrative expenses December 31, 2017 $23,182,334 24,511,285 841,293 — 1,847,524 142,628 $50,525,064 2016 $24,252,351 25,180,669 907,752 612,568 1,978,321 152,444 $53,084,105 Cost of revenues consist of: Electricity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fuel oil . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee costs Cost of plant sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maintenance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retail license royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other General and administrative expenses consist of: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee costs Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Directors’ fees and expenses . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NSC project expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Year Ended December 31, 2016 2015 2017 $ 9,832,128 5,666,394 5,183,186 5,666,972 — 2,613,573 1,537,879 944,975 2,910,514 2,516,544 $36,872,165 $ 8,118,231 761,115 1,362,332 814,208 167,135 3,011,710 1,363,849 3,474,399 $19,072,979 $ 9,037,347 5,355,529 4,210,542 5,541,983 142,151 3,545,265 1,528,914 992,374 1,280,794 1,989,922 $33,624,821 $ 7,598,829 782,013 1,101,938 774,769 384,045 3,011,989 1,410,143 3,613,858 $18,677,584 $10,675,287 5,270,454 4,974,421 4,287,783 878,396 3,436,736 1,427,073 1,187,097 — 1,670,735 $33,807,982 $ 6,841,274 802,386 941,193 754,145 218,032 1,976,408 89,896 3,216,822 $14,840,156 18. 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 78 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Stock-based compensation − (continued) preferred shares into shares of common stock on a one for one basis. In addition, at the time the preferred shares are granted, the employees receive options to purchase an equal number of shares of preferred stock at a discount to the average trading price of the Company’s common stock for the ﬁrst seven days of the October immediately preceding the date of the preferred stock grant. If these options are exercised, the shares of preferred stock obtained may also be converted to shares of common stock if the employee remains with the Company for an additional four consecutive years. Each employee’s option to purchase shares of preferred stock must be exercised within 30 days of the grant date, which is the 90th day after the date of the independent registered public accountants ﬁrm’s audit opinion on the Company’s consolidated ﬁnancial statements. Shares of preferred stock not subsequently converted to shares of common stock are redeemable only at the discretion of the Company. Shares of preferred stock granted under this plan during the years ended December 31, 2017, 2016 and 2015, totaled 9,441, 8,421 and 8,615, respectively, and an equal number of preferred stock options were granted in each of these years. 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, 2017, 2016, and 2015, totaled 3,390, 3,980 and 4,030, respectively. The fair value of each option award is estimated on the date of grant using a Black-Scholes option-pricing that uses the assumptions noted in the table below. Expected volatilities are based on historical model 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, 2017, 2016 and 2015 totaled 17,158, 15,192 and 10,514 shares, respectively. The Company recognized stock-based compensation for these share grants of $210,151, $179,573 and $143,218 for the years ended December 31, 2017, 2016 and 2015, respectively. 79 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Stock-based compensation − (continued) The Company measures and recognizes compensation expense at fair value for all share-based payments, including stock options. Stock-based compensation for the Employee Share Incentive Plan, Employee Share Option Plan and the 2008 Equity Incentive Plan totaled $152,166, $152,078 and $143,951 for the years ended December 31, 2017, 2016 and 2015, 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, 2017, 2016 and 2015 were as follows: Risk free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected option life (years) . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . 2017 1.12% 1.1 37.24% 2.41% 2016 0.43% 1.4 33.49% 2.29% 2015 0.41% 1.4 33.74% 2.35% A summary of the Company’s stock option activity for the year ended December 31, 2017 is as follows: Outstanding at beginning of period . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited/expired . . . . . . . . . . . . . . . . . . . . . . . . . . Outstanding as of December 31, 2017 . . . . . . . . . . . . Exercisable as of December 31, 2017 . . . . . . . . . . . . Weighted Average Exercise Price $12.02 9.42 8.35 10.18 $12.38 $ 0.00 Options 17,600 12,831 (2,129) (16,217) 12,085 — Weighted Average Remaining Contractual Life (Years) Aggregate Intrinsic Value(1) 2.22 years — years $3,658 $ — (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 $12.60 on the Nasdaq Global Select Market on December 31, 2017, exceeds the exercise price of the option. As of December 31, 2017, 12,085 non-vested options were outstanding, with weighted average exercise price of $12.38, and average remaining contractual remaining unrecognized compensation costs related to unvested stock-based arrangements were $20,702 as of December 31, 2017 and are expected to be recognized over a weighted average period of 2.22 years. life of 2.22 years. The total As of December 31, 2017, unrecognized compensation costs relating to redeemable preferred stock outstanding were $172,244 and are expected to be recognized over a weighted average period of 1.18 years. 80 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 18. Stock-based compensation − (continued) 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, 2017, 2016 and 2015: Options granted with an exercise price below market price on the date of grant: Employees − preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overall weighted average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4.11 4.11 $ 4.48 4.48 $ 4.19 4.19 2017 2016 2015 Options granted with an exercise price at market price on the date of grant: Management employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employees − common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overall weighted average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 3.23 3.23 $ — 3.13 3.13 $ — 3.39 3.39 Options granted with an exercise price above market price on the date of grant: Management employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employees − preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Overall weighted average . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total intrinsic value of options exercised . . . . . . . . . . . . . . . . . . . . $ — — — $8,942 $ — — — $73,753 $ — — — $87,371 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-based grants of common stock from the shares of Company stock provided for issuance under the 2008 Equity Incentive Plan. The non-performance-based stock grants vest in one third increments at the end of each year over a three-year period. Non-performance-based stock grants under this plan totaled 26,958, 17,833 and 9,964 for the years ended December 31, 2017, 2016 and 2015, respectively and were issued in 2018, 2017 and 2016, respectively. The Company recognized $302,121, $189,368 and $120,500 in stock-based compensation expense related to the non-performance stock grants under the long-term compensation plan for the years ended December 31, 2017, 2016, and 2015, 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, 2017 related to these grants. 19. Retirement beneﬁts Retirement 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 a Cayman Islands or Bahamas employee’s salary; and (ii) 6% of a Florida employee’s salary. The total amount recognized as an expense under the plans during the year ended December 31, 2017, 2016, and 2015 was $384,624, $376,086, and $328,084, respectively. 81 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Financial instruments Credit risk: The Company is not exposed to signiﬁcant credit risk on its retail customer accounts as its policy is to cease supply of water to customers’ accounts that are more than 45 days overdue. The Company’s exposure to credit risk is concentrated on receivables from its Bulk water customers. The Company considers these receivables fully collectible and therefore has not recorded an allowance for these receivables. Interest rate risk: The Company is not subject to signiﬁcant interest-rate risk arising from ﬂuctuations in interest rates as the balance of the Company’s note payable to related party as of December 31, 2017 is not signiﬁcant to its ﬁnancial condition or results of operations. Foreign exchange risk: All relevant foreign currencies other than the Mexican peso, Indonesian rupiah and the euro have been ﬁxed to the dollar for over 20 years and the Company does not employ a hedging strategy against exchange rate risk associated with the reporting in dollars. If any of these ﬁxed exchange rates becomes a ﬂoating exchange rate or if any of the foreign currencies in which the Company conducts business depreciate signiﬁcantly against the dollar, the Company’s consolidated results of operations could be adversely affected. Fair values: As of December 31, 2017 and 2016 the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities, the note payable to related party, the demand loan payable and dividends payable approximate their fair values due to the short-term maturities of these instruments. Management considers that the carrying amounts for loans receivable as of December 31, 2017 and 2016 approximate their fair value as the stated interest rates approximate market rates. Under US GAAP, fair value is deﬁned as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. US GAAP guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reﬂect the Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value: Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 — Unobservable inputs that are supported by little or no market activity and that are signiﬁcant to the fair value of the assets or liabilities. Assets and liabilities are classiﬁed in their entirety based on the lowest level of input that is signiﬁcant to the fair value measurements. The Company reviews its fair value hierarchy classiﬁcations on a quarterly basis. Changes in the observability of valuation inputs may result in a reclassiﬁcation of levels for certain securities within the fair value hierarchy. 82 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Financial instruments − (continued) The following table presents the Company’s fair value hierarchy for assets and liabilities measured at fair value as of December 31, 2017 and 2016: Level 1 Level 2 Level 3 Total December 31, 2017 Assets: Recurring Net asset arising from put/call options . . . . . $ — $ — $280,000 $280,000 Level 1 Level 2 Level 3 Total December 31, 2016 Liabilities: Recurring Net liability arising from put/call options . . . $ — $ — $(680,000) $(680,000) The activity for the Level 3 liability for the year ended December 31, 2017: Net (liability)/asset arising from put/call options Balance as of December 31, 2016(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance as of December 31, 2017(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(680,000) 960,000 $ 280,000 (1) The net (liability) arising from the put/call options is included in other liabilities in the accompanying consolidated balance sheets as of December 31, 2016. (2) The net asset arising from the put/call options is included in other assets in the accompanying consolidated balance sheets as of December 31, 2017. 21. Purchase of interest in Aerex Industries, Inc. the Company, On February 11, 2016 (the ‘‘Closing Date’’), through its wholly-owned subsidiary, CW-Holdings, entered into a stock purchase agreement (the ‘‘Purchase Agreement’’) with Aerex and Thomas Donnick, Jr. (‘‘Donnick’’), Aerex’s sole shareholder prior to the Closing Date. Pursuant to the terms of the Purchase Agreement, CW-Holdings purchased a 51% ownership interest in Aerex for an aggregate purchase price of approximately $7.7 million in cash. After giving effect to the transactions contemplated by the Purchase Agreement, CW-Holdings owns 51% of the outstanding capital stock of Aerex and Donnick owns 49% of the outstanding capital stock of Aerex. CW-Holdings also acquired from Donnick an option to compel Donnick to sell and granted to Donnick an option to require CW-Holdings to purchase, Donnick’s 49% ownership interest in Aerex at a price based upon the fair market value of Aerex at the time of the exercise of the option. The options are exercisable on or after the third anniversary of the Closing Date. In connection with the Purchase Agreement, the Company guaranteed the obligations of CW-Holdings with respect to the option granted to Donnick to require CW-Holdings to purchase Donnick’s 49% ownership interest in Aerex. Aerex is an original equipment manufacturer and service provider of a wide range of products and services applicable to municipal water treatment and industrial water and wastewater treatment. Its products include membrane separation equipment, ﬁltration equipment, piping systems, vessels and custom fabricated components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance services to its customers. Aerex is an American Society of Mechanical Engineers (ASME) code accredited manufacturer and maintains the ASME U and S and the National Board NB and R Certiﬁcates of Authorization. Its corporate offices and manufacturing facilities are located in Fort Pierce, Florida. 83 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Purchase of interest in Aerex Industries, Inc. − (continued) In connection with the Purchase Agreement, CW-Holdings, Aerex and Donnick entered into a shareholder’s agreement pursuant to which CW-Holdings and Donnick agreed to certain rights and obligations with respect to the governance of Aerex. Immediately following the acquisition, Donnick and the Company loaned $490,000 and $510,000, respectively, to Aerex. These loans bear interest at 1% per annum and mature June 30, 2017. In February 2017, the Company and the former sole shareholder of Aerex loaned Aerex an additional $408,000 and $392,000, respectively, in the form of notes payable which mature on September 30, 2017 and bear interest at 1.04% per annum. In October 2017, the Company and the former shareholder of Aerex extended the term of the notes payable issued in February 2017 for an additional six months with a new maturity date of March 31, 2018. Additionally, the Company and the former shareholder loaned Aerex an additional $306,000 and $294,000, respectively, for a total outstanding notes payable balance with a maturity date of March 31, 2018 of $1,400,000. The purchase price for Aerex is summarized as follows: Cash consideration Purchase price (excluding working capital) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Working capital adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,140,000 605,179 (2,326) $7,742,853 The following table summarizes the estimated fair values of the assets and liabilities assumed at acquisition date: the Financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs and estimated earnings in excess of billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, plant and equipment Identiﬁable intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net liability arising from put/call options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total identiﬁable net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-controlling interest in Aerex . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 456,664 70,487 784,465 2,159,401 5,900,000 (2,451,298) (116,893) (383,000) 6,419,826 (6,712,184) 8,035,211 $ 7,742,853 The identiﬁable intangible assets consisted of the following items: Non-compete agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trade name . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certiﬁcations/programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer backlog . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Customer relationships Amount $ 400,000 1,400,000 2,000,000 100,000 2,000,000 $5,900,000 Useful life 5 years 15 years 3 years 1 year 4 years 84 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21. Purchase of interest in Aerex Industries, Inc. − (continued) The results of operations of Aerex included in the Company’s results of operations for the period February 11, 2016 to December 31, 2016 are as follows: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revenues Gross proﬁt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loss Year Ended December 31, 2016 $ 3,887,284 796,450 (1,320,000) (1,750,000) (1,566,281) The Company recorded impairment losses of $1,400,000 and $1,750,000 for the years ended December 31, 2017 and 2016, respectively, to reduce the carrying value of the goodwill it recorded in connection with the Aerex acquisition. See at Note 2 — Accounting these Policies — Goodwill and Intangible Assets. further discussion of impairment losses The following unaudited pro forma ﬁnancial information presents the results of operations of the Company for the years ended December 31, 2016 and 2015, as if the acquisition of Aerex had taken place on January 1, 2015. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually occurred had the transaction taken place on January 1, 2015, or of future results of operations: Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross proﬁt General and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment loss on long-lived assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment of goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for (beneﬁt from) income taxes . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income (loss) attributable to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to Consolidated Water Co. Ltd. stockholders Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average number of common shares used in the determination of: Year Ended December 31, 2016 $58,381,424 33,892,238 24,489,186 18,992,301 2,000,000 1,750,000 1,746,885 419,458 2,166,343 (608,970) 2,775,313 (1,148,675) $ 3,923,988 2015 $75,919,627 47,624,001 28,295,626 17,266,335 — — 11,029,291 226,762 11,256,053 1,127,911 10,128,142 1,719,425 $ 8,408,717 $ $ 0.26 0.26 $ $ 0.57 0.57 Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,809,909 14,741,748 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,944,028 14,827,755 85 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 its three most recent ﬁscal years ended December 31, 2017, 2016 and 2015, were approximately ($1.9 million), ($2.5 million) and ($861,000), respectively. The results of CW-Bali are included in the retail segment for segment reporting purposes. In late 2015, the Company decided to seek a strategic partner for CW-Bali to (i) purchase a major portion of its equity ownership in CW-Bali; (ii) lead CW-Bali’s sales and marketing efforts; (iii) liaise with the local water utility; and (iv) assist with CW-Bali’s on-going funding requirements. Although discussions were held and due diligence information was exchanged with potential strategic partners, the Company did not receive an offer for an investment in, a purchase of, or a joint venture for CW-Bali from any of these potential partners on terms it deemed acceptable. During the three months ended September 30, 2016, the Company reassessed the prospects for CW-Bali then current circumstances and uncertainties impacting the business, and expected future funding requirements and tested its long-lived assets for possible impairment. As a result of this testing, the Company recorded an impairment loss of $2.0 million for the nine months ended September 30, 2016 to reduce the carrying value of its long-lived CW-Bali assets to their estimated fair value. its results to date, in light of On May 23, 2017, after considering CW-Bali’s historical and projected operating losses, its on-going funding requirements, the current business and economic environment in Bali and the Company’s inability to obtain a strategic partner for CW-Bali, the Company’s Board of Directors formally resolved to discontinue CW-Bali’s operations. The Company 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, which the Company 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, 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. Such damages were equivalent to approximately $4.1 million and $1.9 million, respectively, as of the exchange rate on March 9, 2018. The Company believes this lawsuit is without merit and is vigorously defending CW-Bali and the two other defendants. However, until this lawsuit is resolved the Company is legally prohibited from disposing of its investment in CW-Bali or any of CW-Bali’s assets. 86 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 22. CW-Bali − (continued) Based upon the decision to cease CW-Bali’s operations, for the six months ended June 30, 2017 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 an impairment loss of approximately $1,000,000 for the six months ended June 30, 2017, which is included in loss on long-lived asset dispositions and impairments, net in the accompanying consolidated statements of income, to reduce the carrying value of its investment in CW-Bali (which includes $549,555 in cumulative translation adjustments reﬂected in stockholders’ equity) to its estimated fair value. During the three months ended September 30, 2017 the Company updated its estimated fair value projections for CW-Bali in light of the lawsuit ﬁled in October 2017 and recorded an impairment loss of $578,480, which is included in loss on long-lived asset dispositions and impairments, net in the accompanying consolidated statements of income, to reduce the carrying value of its investment in Bali to its estimated fair value of approximately $378,000 as of September 30, 2017. The Company recorded an additional impairment loss of approximately $78,000 for its investment in CW-Bali for the three months ended December 31, 2017. 23. Commitments and contingencies Commitments As of December 31, 2017, 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, 2017 are as follows: 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter $ 613,510 385,548 259,289 46,297 — — $1,304,644 Total rental expense for the years ended December 31, 2017, 2016 and 2015 was $844,561, $834,738, and $821,845, 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, 2020 and provide for, among other things, base annual salaries in an aggregate amount of approximately $1.9 million, performance bonuses and various employee beneﬁts. The Company has purchase obligations totaling approximately $4.4 million through May 31, 2020. Contingencies 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 87 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Commitments and contingencies − (continued) 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, 2017, 2016 and 2015, the Company generated approximately 37%, 40% and 40%, respectively, of its consolidated revenues and 50%, 56% and 56%, respectively, of its consolidated gross proﬁt from the retail water operations conducted pursuant to Cayman Water’s exclusive license. The license was originally scheduled to expire in July 2010 but has been extended several times by the Cayman Islands government in order to provide the parties with additional time to negotiate the terms of a new license agreement. The most recent extension of the license expired on January 31, 2018. The Company continues to provide water subsequent to January 31, 2018 on the assumption that the license has been further extended to allow the parties to continue negotiations 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. Under its present license, Cayman Water pays a royalty to the government of 7.5% of its gross retail water sales revenues (excluding energy cost adjustments). The selling prices of water sold to its customers are determined by the license and vary depending upon the type and location of the customer and the monthly volume of water purchased. The license provides for an automatic adjustment for inﬂation or deﬂation on an annual basis, subject to temporary limited exceptions, and an automatic adjustment for the cost of electricity on a monthly basis. The WAC, on behalf of the government, previously reviewed and conﬁrmed the calculations of the price adjustments for inﬂation and electricity costs. Regulatory responsibility for the water utility sector was transferred from the WAC to OfReg in May 2017, and all reviews and conﬁrmations of calculations of the price adjustments for inﬂation and electricity costs are now performed by OfReg. If Cayman Water wants to adjust its prices for any reason other than inﬂation or electricity costs, Cayman Water has to request prior approval of the Cabinet of the Cayman Islands government. Disputes regarding price adjustments would be referred to arbitration. The Cayman Islands government could ultimately offer a third party a license to service some or all of Cayman Water’s present service area. However, as set forth in the existing license, ‘‘the Governor hereby agrees that upon the expiry of the term of this Licence or any extension thereof, he will not grant a licence or franchise to any other person or company for the processing, distribution, sale and supply of water within the Licence Area without having ﬁrst offered such a licence or franchise to the Company on terms no less favourable than the terms offered to such other person or company.’’ The Company is presently unable to determine what impact the resolution of its retail license negotiations will have on its cash ﬂows, ﬁnancial condition or results of operations but such resolution could result in a material reduction of the operating income and cash ﬂows the Company has historically generated from its retail operations and could require the Company to record an impairment loss to reduce the carrying value of loss could have a material adverse impact on the Company’s results of its goodwill. Such impairment operations. 88 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Commitments and contingencies − (continued) 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-owned utility and regulatory agency, under various agreements. The WAC in turn distributes that water to properties in Grand Cayman outside of our retail license area. The water we sell to the WAC is produced at three reverse osmosis seawater conversion 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 plants, which have production capacities of approximately 1.6 million, 1.3 million and 2.4 million gallons of water per day, respectively. The plants we operate for the WAC are located on land owned by the WAC. The current operating agreements for the North Sound, Red Gate and North Side Water Works plants expire in July 2018, July 2018, and June 2019, respectively. We have been informed by the WAC that they intend to conduct a public bidding process for the North Sound and Red Gate plants and we plan to submit a bid for the renewal of both of these contracts. 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 will be adversely affected. 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. On December 8, 2017, CW-Belize received a favorable ruling from the Supreme Court of Belize stating that (i) the claims by the PUC in the Order and the Second Order were unlawful null and void and of no effect; and (ii) stated that the PUC is prohibited from taking any steps or proceedings or making any further Order in respect of the said Order. However, on February 20, 2018, the PUC ﬁled an appeal with the Belize Court of Appeal, the results of which are pending. 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. 89 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23. Commitments and contingencies − (continued) Other Contingencies CW-Bahamas’ water supply agreement with the WSC for 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. 24. Supplemental disclosure of cash ﬂow information Interest paid in cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,062 2017 Year Ended December 31, 2016 74,898 $ 2015 $ 147,546 Non-cash transactions: Transfers from inventory to property, plant and equipment and construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . Transfers from construction in progress to property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of 34,991, 25,156, and 10,514, respectively, shares of common stock for services rendered . . . . . . . . . . . . . . . . Issuance of 9,441, 8,421, and 8,615, respectively, shares of $ 291,275 $ 276,807 $ 123,036 $3,183,122 $3,542,119 $2,694,733 $ 402,927 $ 278,388 $ 119,018 redeemable preferred stock for services rendered . . . . . . . . $ 118,485 $ 111,410 $ 110,703 Conversion (on a one-to-one basis) of 12,214, 11,558, and 7,195, respectively, shares of redeemable preferred stock to common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends declared but not paid . . . . . . . . . . . . . . . . . . . . . $ 7,328 $1,270,950 $ 6,935 $1,118,017 $ 4,317 $1,111,501 25. Impact of recent accounting standards Adoption of New Accounting Standards: the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of In July 2015, Inventory. ASU 2015-11 applies to all inventory that is measured using ﬁrst-in, ﬁrst-out or average cost. The guidance requires an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective prospectively for ﬁscal years, and for interim periods within those years, beginning after December 15, 2016. Early application is permitted. The adoption of ASU 2015-11 did not have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows. In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), Balance Sheet Classiﬁcation of Deferred Taxes. ASU 2015-17 requires net deferred tax assets and liabilities be classiﬁed as noncurrent in a classiﬁed balance sheet and eliminates the classiﬁcation between current and noncurrent amounts ASU No. 2015-17 is effective for ﬁnancial statements issued for annual periods beginning after December 15, 2016 and interim periods within those annual periods. Early adoption is permitted. The adoption of ASU 2015-17 did not have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows. In March 2016, the FASB issued ASU 2016-07, Investments — Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains signiﬁcant inﬂuence over a previously held investment. ASU 2016-07 will be effective for the Company’s ﬁscal year beginning January 1, 2017 and subsequent interim periods. The adoption of ASU 2016-07 did not have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows. 90 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25. Impact of recent accounting standards − (continued) the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718): In March 2016, Improvements to Employee Share-Based Payment Accounting, which simpliﬁes several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classiﬁcation on the statement of cash ﬂows. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The adoption of ASU 2016-09 did not have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows. for Goodwill Impairment, which removes Step 2 of the goodwill In January 2017, the FASB issued ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill allocated to that reporting unit. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU 2017-04 should be applied on a prospective basis and is effective for annual periods tests beginning January 1, 2020. Early adoption is permitted for interim or annual goodwill performed on testing dates after January 1, 2017. The adoption of ASU 2017-04 did not have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows. impairment impairment Effect of newly issued but not yet effective accounting standards: the contract, identiﬁcation of 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 including prescribes a ﬁve-step framework in accounting for revenues from contracts within its scope, (a) the contract, identiﬁcation of (c) determination of the transaction price, (d) allocation of the transaction price to the identiﬁed performance obligations and (e) 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. the performance obligations under recognition of revenues as (b) 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. the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, that In April 2016, 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 including, among other items, guidance relating to Staff Announcements that are codiﬁed in Topic 605, accounting for shipping and handling fees and freight services. 91 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25. Impact of recent accounting standards − (continued) the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): In May 2016, Narrow-Scope Improvements and Practical Expedients, which clariﬁes implementation guidance around collectability, sales taxes collected from customers, noncash considerations, contract modiﬁcations at transition, and completed contracts at transition. In December 2016, the FASB issued ASU 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amended the guidance on performance obligation disclosures and makes technical corrections and improvements to the new revenue standard. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, and permits early adoption on a limited basis. The update permits the use of either the retrospective or cumulative effect transition method. The effective dates of ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12 and ASU 2016-20 are the same as ASU 2015-14 discussed above. The Company intends to elect the modiﬁed retrospective method to all active contracts on the date of initial application, which will involve applying the guidance retrospectively only to the most current period presented in the ﬁnancial statements and recognizing the cumulative effect of initially applying the guidance as an adjustment to the January 1, 2018 opening balance of retained earnings at the date of initial application. Based on an analysis the Company has performed, the adoption of ASC 606, Revenue from Contracts with Customers, will not have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows, but will require the Company to enhance its disclosures with respect to its revenue recognition policies. Instruments — Overall the FASB issued ASU 2016-01, Financial (Subtopic 825-10): In January 2016, Recognition and Measurement of Financial Assets and Financial Liabilities, which provides guidance for the recognition, measurement, presentation and disclosure of ﬁnancial assets and ﬁnancial In the FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial February 2018, 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 and 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 adoption of ASU 2016-01 and ASU 2018-03 are not expected to have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows. liabilities. the FASB issued ASU 2016-02, Leases (Topic 842), which provides guidance for In February 2016, accounting for leases. The new guidance requires companies to recognize the assets and liabilities for the rights and obligations created by leased assets. The accounting guidance for lessors will remain relatively largely unchanged. In January 2018, the FASB issued ASU 2018-01, Leases (Topic 842), which provides an optional transition practical expedient for the adoption of ASU 2016-02 that, if elected, would not require an organization to reconsider their accounting for 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. ASU 2016-02 and ASU 2018-01 are effective for annual and interim periods beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the effect the adoption of this amendment will have on the Company’s consolidated ﬁnancial statements, however, the Company expects that the adoption of the new lease standard will have a material impact on the Company’s consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases. 92 CONSOLIDATED WATER CO. LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25. Impact of recent accounting standards − (continued) 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 is not expected to have a material impact on the Company’s ﬁnancial position, results of operations or cash ﬂows. 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. 93 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 to provide reasonable assurance Company’s Board of Directors, management and other personnel 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 transactions and dispositions of the assets of the Company; the 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. limitations, Because of inherent 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, 2017. In making this assessment, management used the criteria set forth by the Committee the Treadway Commission (COSO) in Internal Control-Integrated of Sponsoring Organizations of Framework (2013). 94 Based on our assessment, management has concluded that, as of December 31, 2017, 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 9A(b). (b) Attestation Report of the Independent Registered Public Accounting Firm REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING Board of Directors and Stockholders Consolidated Water Co. Ltd. Opinion on Internal Control over Financial Reporting internal control over ﬁnancial We have audited Consolidated Water Co. Ltd.’s (the ‘‘Company’’) reporting as of December 31, 2017, based on criteria established in Internal 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, 2017, based on criteria established in Internal 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, 2017 and 2016 and the related consolidated statements of income, comprehensive income (loss), shareholders’ equity, and cash ﬂows for the three years then ended of the Company and our report dated March 16, 2018 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 95 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 16, 2018 (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. 96 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 2018 Annual Meeting of Shareholders to be ﬁled with the SEC (the ‘‘Proxy Statement’’) under the heading ‘‘Proposal 1 — Election of Group III 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.’’ contained in the Proxy Statement under Information required by this item with respect to our audit committee and our audit committee ﬁnancial expert is the heading ‘‘Proposal 1 — Election of Group III 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 Information Regarding Executive Compensation — Section 16(a) Beneﬁcial Ownership Reporting Compliance’’ and is incorporated by reference in this Annual Report. the heading ‘‘Additional 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 III 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 to executive compensation and director compensation is Information required by this item with respect contained in the Proxy Statement under the headings ‘‘Compensation Discussion and Analysis’’ and ‘‘Additional Information Regarding Executive Compensation’’, 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 the heading ‘‘Compensation is contained in the Proxy Statement under 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. 97 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 Information Regarding Executive Compensation — Transactions With Related Persons’’ and is incorporated by reference in this Annual Report. the headings ‘‘Additional 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. 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. 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. 98 Number 3.1 3.2 3.3 3.4 4.1 4.2 4.3 4.4 10.1.1 10.1.2 10.1.3 10.1.4 10.1.5 10.1.6 CONSOLIDATED WATER CO. LTD. INDEX TO EXHIBITS FILED WITH 10-K Exhibit Description 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) 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) 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) 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) 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) 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) 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) 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) 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) 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) 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) 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) 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) 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) 99 Number 10.1.7 10.1.8 10.1.9 10.1.10 10.1.11 10.1.12 10.1.13 10.1.14 10.2 10.3.1* 10.3.2* 10.3.3* 10.4* Exhibit Description 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) 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) to License Agreement dated April 24, 2013 between the Government of the Amendment 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) 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) to License Agreement dated June 30, 2014 between the Government of the Amendment 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) 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) Amendment to License Agreement dated August 5, 2015 between the Government of the Cayman Islands and Cayman Water Company 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) 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) Water 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) 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) 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) 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) 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) 100 Number 10.5.1* 10.5.2* 10.6* 10.7.1* 10.7.2* 10.8 10.9* 10.10* 10.11* 10.12 10.13 10.14 10.15 10.16.1 10.16.2 Exhibit Description 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) to Employment Contract dated March 29, 2017 between Ramjeet First Amendment reference Jerrybandan to Exhibit 10.12 ﬁled as part of our Form 8-K ﬁled April 4, 2017, Commission File No. 0-25248) and Consolidated Water Co. Ltd. (incorporated herein by 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) 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) 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) 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) 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) 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) 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) 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) 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) Amended 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) 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) 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) 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) 101 Number 10.16.3 10.16.4 10.16.5 10.16.6 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 Exhibit Description 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) 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) 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) Amending 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) Trust 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) Subscription 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) Deed 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) 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) Equitable 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) 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) 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) Cayman 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) 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) 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) 102 Number 10.27 10.28 10.29.1† 10.29.2† 10.29.3† 10.30.1 10.30.2 10.30.3 10.30.4 10.31 10.32 21.1** 23.1** 31.1** 31.2** 32.1** Exhibit Description 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) 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) 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) 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) 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) 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) 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) Exhibit 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) Exhibits 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) 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) 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) Subsidiaries of the Registrant Consent of Marcum LLP — Consolidated Water Co. Ltd. Certiﬁcation by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certiﬁcation by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 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 XBRL Instance Document 101.INS** 101.SCH** XBRL Taxonomy Schema 103 Number Exhibit Description 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. 104 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. SIGNATURES CONSOLIDATED WATER CO. LTD. By: /s/ Wilmer F. Pergande Wilmer F. Pergande Chairman of the Board of Directors Dated: March 16, 2018 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 Wilmer F. Pergande Chairman of the Board of Directors March 16, 2018 By: /s/ Frederick W. McTaggart Frederick W. McTaggart Director, Chief Executive Officer and President (Principal Executive Officer) March 16, 2018 By: /s/ David W. Sasnett David W. Sasnett By: /s/ Brian E. Butler Brian E. Butler By: /s/ Carson K. Ebanks Carson K. Ebanks By: /s/ Richard L. Finlay Richard L. Finlay By: /s/ Clarence B. Flowers, Jr. Clarence B. Flowers, Jr. By: /s/ Leonard J. Sokolow Leonard J. Sokolow By: /s/ Raymond Whittaker Raymond Whittaker Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) March 16, 2018 March 16, 2018 March 16, 2018 March 16, 2018 March 16, 2018 March 16, 2018 March 16, 2018 Director Director Director Director Director Director 105 EXHIBIT 21.1 CONSOLIDATED WATER CO. LTD. Subsidiaries of the Registrant The following list includes all of the Registrant’s wholly-owned subsidiaries, majority-owned subsidiaries and affiliates as of December 31, 2017. All subsidiaries of the Registrant appearing in the following table are included in the consolidated ﬁnancial statements of the Registrant. Subsidiaries Jurisdiction of Organization Aguas de Rosarito S.A.P.I. de C.V. (99.6%) Mexico Aerex Industries, Inc. (Affiliate) Aquilex, Inc. (100%) United States of America United States of America Cayman Water Company Limited (100%) Cayman Islands Consolidated Water (Asia) Pte. Limited (95%) Singapore Consolidated Water (Bahamas) Limited (90.9%) The Bahamas Consolidated Water (Belize) Limited (100%) Belize Consolidated Water (Bermuda) Limited (Affiliate) Bermuda Consolidated Water Cooperatief, U.A. (100%) Netherlands Consolidated Water U.S. Holdings, Inc. (100%) United States of America DesalCo Limited (100%) N.S.C. Agua, S.A. de C.V. (99.9%) Cayman Islands Mexico Ocean Conversion (BVI) Ltd. (Affiliate) The British Virgin Islands Ocean Conversion (Cayman) Limited (100%) Cayman Islands PT Consolidated Water Bali (95%) Indonesia EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 In connection with the Form 10-K of Consolidated Water Co. Ltd. for the ﬁscal year ended December 31, 2017, as ﬁled with the Securities and Exchange Commission on the date hereof, I, Frederick W. McTaggart, certify, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, that: 1. I have reviewed the Form 10-K of Consolidated Water Co. Ltd. December 31, 2017; for the ﬁscal year ended 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this report, fairly present in all material respects the ﬁnancial condition, results of operations and cash ﬂows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over ﬁnancial reporting (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over ﬁnancial reporting, or caused such internal control over ﬁnancial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial reporting that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over ﬁnancial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal control over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report ﬁnancial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the registrant’s internal control over ﬁnancial reporting. Date: March 16, 2018 By: Name: Title: /s/ Frederick W. McTaggart Frederick W. McTaggart Chief Executive Officer (Principal Executive Officer) EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13a-14(a)/15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 In connection with the Form 10-K of Consolidated Water Co. Ltd. for the ﬁscal year ended December 31, 2017, as ﬁled with the Securities and Exchange Commission on the date hereof, I, David W. Sasnett, certify, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, that: 1. I have reviewed the Form 10-K of Consolidated Water Co. Ltd. December 31, 2017; for the ﬁscal year ended 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the ﬁnancial statements, and other ﬁnancial information included in this report, fairly present in all material respects the ﬁnancial condition, results of operations and cash ﬂows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as deﬁned in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over ﬁnancial reporting (as deﬁned in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over ﬁnancial reporting, or caused such internal control over ﬁnancial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant’s internal control over ﬁnancial reporting that occurred during the registrant’s most recent ﬁscal quarter (the registrant’s fourth ﬁscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over ﬁnancial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over ﬁnancial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): (a) All signiﬁcant deﬁciencies and material weaknesses in the design or operation of internal control over ﬁnancial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report ﬁnancial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a signiﬁcant role in the registrant’s internal control over ﬁnancial reporting. Date: March 16, 2018 /s/ David W. Sasnett By: Name: David W. Sasnett Title: Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 EXHIBIT 32.1 In connection with the Form 10-K of Consolidated Water Co. Ltd. for the year ended December 31, 2017 as ﬁled with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, Frederick W. McTaggart, certify, pursuant the Sarbanes-Oxley Act of 2002, that: to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the ﬁnancial condition and result of operations of the Company. Date: March 16, 2018 /s/ Frederick W. McTaggart By: Name: Frederick W. McTaggart Chief Executive Officer Title: (Principal Executive Officer) EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Form 10-K of Consolidated Water Co. Ltd. for the year ended December 31, 2017 as ﬁled with the Securities and Exchange Commission on the date hereof (the ‘‘Report’’), I, David W. Sasnett, certify, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the ﬁnancial condition and result of operations of the Company. Date: March 16, 2018 /s/ David W. Sasnett By: Name: David W. Sasnett Title: Executive Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) FINANCIAL HIGHLIGHTS FOR THE YEARS ENDED DECEMBER 31, (IN U.S. DOLLARS) Total revenues Net income Income from operations Net cash flows from operations Total assets Total stockholders’ equity Dividends declared per share Basic earnings per share Diluted earnings per share Net income as a % of total revenues Income from operations as a % of total revenues Net cash flows from operating activities as a % of total revenues 2017 62,306,665 6,144,062 3,321,363 13,644,294 165,480,895 156,021,377 0.31 0.41 0.41 9.86 5.33 21.90 % % % 2016 57,875,707 3,960,501 2,137,683 7,823,352 163,604,528 154,105,372 0.30 0.27 0.27 6.84 3.69 13.52 % % % 2015 57,116,202 7,518,701 8,435,498 17,319,786 161,575,026 148,195,105 0.30 0.51 0.51 13.16 14.77 30.32 % % % TRADING IN SHARES Shares outstanding at year end Low closing share price during year High closing share price during year Closing share price at year end 2017 14,918,869 10.05 13.60 12.60 2016 14,871,664 10.10 14.62 10.85 2015 14,781,201 9.78 13.50 12.24 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ CONSOLIDATED WATER (THE “COMPANY”) WAS INCORPORATED AS CAYMAN WATER IN 1973. OVER THE YEARS, WE HAVE BENEFITED FROM THE EXPLOSIVE GROWTH IN THE CAYMAN ISLANDS, GROWTH THAT HAS BEEN FACILITATED BY THE WATER WE HAVE PROVIDED. CONSOLIDATED WATER OPERATES IN THE CAYMAN ISLANDS AS CAYMAN WATER COMPANY LIMITED AND OCEAN CONVERSION (CAYMAN) LIMITED, WHICH TOGETHER OPERATE SIX PLANTS TO PRODUCE SUBSTANTIALLY ALL OF THE PIPED DRINKING WATER ON GRAND CAYMAN. CORPORATE INFORMATION INDEPENDENT ACCOUNTANTS Marcum LLP 450 East Las Olas Boulevard, Suite 950 Ft. Lauderdale, FL 33301 USA LEGAL COUNSEL Duane Morris LLP 200 South Biscayne Boulevard, Suite 3400 Miami, FL 33131 USA PRINCIPAL BANKERS Scotiabank & Trust (Cayman) Ltd. P.O. Box 689 Grand Cayman, KY1-1107 Cayman Islands Fidelity Merchant Bank & Trust Limited 51 Frederick Street P.O. Box CB-12337 Nassau, The Bahamas Transfer Agents & Registrar American Stock Transfer & Trust Company 6201 15th Avenue Brooklyn, NY 11219 REGISTERED AND PRINCIPAL OFFICE Consolidated Water Co. Ltd. Regatta Office Park Windward Three, 4th Floor West Bay Road P.O. Box 1114 Grand Cayman, KY1-1102 Cayman Islands TEL: (345) 945-4277 FAX: (345) 949-2957 EMAIL: info@cwco.com www.cwco.com BOARD OF DIRECTORS Wilmer F. Pergande Independent Consultant WF Pergande Consulting LLC Chairman of the Board Consolidated Water Co. Ltd. Frederick W. McTaggart President and Chief Executive Officer Consolidated Water Co. Ltd. Richard L. Finlay Attorney-at-Law and Notary Public Cayman Islands Clarence B. Flowers, Jr. Real Estate Developer Orchid Development Company Ltd. Director C.L. Flowers & Sons Brian E. Butler Property Developer Butler Development Group Leonard J. Sokolow CEO and President Newbridge Financial, Inc. Carson K. Ebanks, MBE, JP Retired Permanent Secretary of Finance Tourism and Development Cayman Islands Government Raymond Whittaker Principal FCM, Ltd. CORPORATE OFFICERS Frederick W. McTaggart President and Chief Executive Officer Armando V. Averhoff Vice President of Information Technology David W. Sasnett Executive Vice President and Chief Financial Officer John B. Tonner Executive Vice President and Chief Commercial Officer Ramjeet Jerrybandan Executive Vice President of Operations Brent A. Brodie Vice President of Sales and Marketing Robert B. Morrison Vice President of Procurement & Logistics Douglas R. Vizzini Vice President of Finance STOCK EXCHANGE LISTING The Company’s common shares trade on the NASDAQ Global Select Market. The trading symbol is “CWCO.” “The Nasdaq Stock Market, Inc.” or “NASDAQ” is a highly regulated electronic securities market comprising of competing Market Makers whose trading is supported by a communications network linking them to quotation dissemination, trade reporting, and execution systems. FORMS 10-Q AND 10-K The Company files Quarterly and Annual Reports with the U.S. Securities and Exchange Commission on Form 10-Q and 10-K, pursuant to the Securities Exchange Act of 1934. A copy of these reports may be obtained by calling or writing to the Company’s principal offices at the address shown on overleaf, attention: Investor Relations Department, or alternatively online at the SEC website www.sec.gov. C o n s o l i d a t e d W a t e r 2 0 1 7 A N N U A L R E P O R T 2017 ANNUAL REPORT Consolidated Water Co. Ltd. Regatta Office Park Windward Three, 4th Floor West Bay Road P.O. Box 1114 Grand Cayman, KY1-1102 Cayman Islands WWW.CWCO.COM

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