Trinity One Metals Ltd. — Interim / Quarterly Report 2020

Feb 13, 2026

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following management's discussion and analysis of Global Water Resources, Inc.'s (the "Company", "GWRI", "we", or "us") financial condition and results of operations relates to the three and six months ended June 30, 2020 and should be read together with the condensed consolidated financial statements and accompanying notes included herein, as well as our audited annual financial statements and associated management's discussion, which are available within our Annual Report on Form 10-K for the year ended December 31, 2019 available on our Company's profile on the Securities and Exchange Commission ("SEC") website, www.sec.gov.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q") of the Company and documents incorporated herein by reference are forward-looking in nature and may constitute "forward-looking information" within the meaning of applicable securities laws. Often, but not always, forward-looking statements can be identified by the words "believes", "anticipates", "plans", "expects", "intends", "projects", "estimates", "objective", "goal", "focus", "aim", "should", "could", "may", and similar expressions. These forward-looking statements include, but are not limited to, statements about our strategies; expectations about future business plans, prospective performance, and opportunities, including potential acquisitions; future financial performance; population and growth projections; technologies; revenues; metrics; operating expenses; market trends, including those in the markets in which we operate; liquidity; cash flows and uses of cash; dividends; amount and timing of capital expenditures; depreciation and amortization; tax payments; hedging arrangements; our ability to repay indebtedness and invest in initiatives; impact and resolutions of legal matters; the impact of tax reform; the impact of accounting changes and other pronouncements; and the anticipated impacts from the COVID-19 pandemic on the Company, including to our business operations, results of operations, cash flows, and financial position, and our future responses to the COVID-19 pandemic. Forward-looking statements should not be read as guarantees of future performance or results, and will not necessarily be accurate indications of whether or not, or the times at or by which, such performance or results will be achieved. Investors are cautioned not to place undue reliance on forward-looking information. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under "Risk Factors" in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC and in Part II, Item 1A in this Form 10-Q, as updated from time to time in our subsequent filings with the SEC. Although the forward-looking statements are based upon what management believes to be reasonable assumptions, investors cannot be assured that actual results will be consistent with these forward-looking statements, and the differences may be material. Further, any forward-looking statement speaks only as of the date of this Form 10-Q. Except as required by law, we undertake no obligation to publicly release the results of any revision to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Overview

We are a water resource management company that owns, operates, and manages water, wastewater, and recycled water utilities in strategically located communities, principally in metropolitan Phoenix, Arizona. We seek to deploy our integrated approach, which we refer to as "Total Water Management," a term we use to mean managing the entire water cycle by owning and operating the water, wastewater, and recycled water utilities within the same geographic areas in order to both conserve water and maximize its total economic and social value. We use Total Water Management to promote sustainable communities in areas where we expect growth to outpace the existing potable water supply. Our model focuses on the broad issues of water supply and scarcity and applies principles of water conservation through water reclamation and reuse. Our basic premise is that the world's water supply is limited and yet can be stretched significantly through effective planning, the use of recycled water, and by providing individuals and communities resources that promote wise water usage practices.

COVID-19 Update

In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the President of the United States declared COVID-19 a national emergency. The outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of the COVID-19 pandemic, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home, or total lock-down (or similar) orders and business limitations and shutdowns. For example, the State of Arizona has implemented several orders promoting physical distancing, limiting certain activities, and restricting the operations of certain businesses, including restaurants, bars, gyms, theaters, and water parks.

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Our water and wastewater services are essential services and we intend to continue to provide those services for our customers. Further, we continue to monitor the impact of COVID-19 pandemic on our business and operations, including how it will impact our customers, employees, suppliers, vendors and, business partners. While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three and six months ended June 30, 2020, we are unable to predict the ultimate extent to which our business operations, results of operations, cash flows, and financial position will ultimately be impacted by the COVID-19 pandemic due to the fluid and rapidly evolving situation.

However, we believe that development and growth in our service areas may slow, which could impact negatively our organic growth for some period of time. In addition, we voluntarily agreed not to disconnect customers or charge late fees as a result of the economic hardships caused by the COVID-19 pandemic, such as due to the loss of employment by our customers, which may lead to an increase in uncollectable accounts. We also expanded our customer assistance program to more accounts, and increased the annual benefit for disabled and deployed military service members. As of June 30, 2020, COVID-19 did not have a material impact on uncollectable accounts. However, we believe that we may be unable to collect a portion of billed revenue for some period of time, if at all. Therefore, we could see a negative impact to our revenue, earnings, and cash flows due to the COVID-19 pandemic as this continues through 2020. Further, our current results and financial condition discussed herein may not be indicative of future operating results and trends. Refer to "Risk Factors" included in Part II, Item 1A of this Form 10-Q for additional risks we face due to the COVID-19 pandemic.

Business Outlook

2019 and the first half of 2020 continued the trend of positive growth in new connections. According to the 2010 U.S. Census Data, the Phoenix metropolitan statistical area ("MSA") is the 14th largest MSA in the U.S. and had a population of 4.2 million, an increase of 29% over the 3.3 million people reported in the 2000 Census. Metropolitan Phoenix continues to grow due to its low-cost housing, excellent weather, large and growing universities, a diverse employment base, and low taxes. The Employment and Population Statistics Department of the State of Arizona predicts that the Phoenix metropolitan area will have a population of 5.7 million people by 2030 and 6.5 million by 2040. During the twelve months ended June 30, 2020, Arizona's employment rate decreased by 3.3%, ranking the state in the top three nationally for job growth.

We believe that our utilities and service areas are directly in the anticipated path of growth primarily in the Phoenix metropolitan area. Market data indicates that our service areas currently incorporate a large portion of the final platted lots, partially finished lots, and finished lots in the Phoenix metropolitan area. Management believes that we are well-positioned to benefit from growth in the Phoenix metropolitan area due to the availability of lots and existing infrastructure in place within our services areas. However, as discussed above, we believe that development and growth in our service areas may slow, which could impact negatively our organic growth for some period of time, due to the COVID-19 pandemic.

Factors Affecting our Results of Operations

Our financial condition and results of operations are influenced by a variety of industry-wide factors, including but not limited to:

• population and community growth;
• economic and environmental utility regulation;
• economic environment;
• the need for infrastructure investment;
• production and treatment costs;
• weather and seasonality; and
• access to and quality of water supply.

The COVID-19 pandemic may impact the degree to which these factors affect our financial condition and results of operations as discussed above under "COVID-19 Update."

We are subject to economic regulation by the state regulator, the Arizona Corporation Commission ("ACC"). The U.S. federal and state governments also regulate environmental, health and safety, and water quality matters. We continue to execute on our strategy to optimize and focus the Company in order to provide greater value to our customers and shareholders by aiming to deliver predictable financial results, making prudent capital investments, and focusing our efforts on earning an appropriate rate of return on our investments.

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Population and Community Growth

Population and community growth in the metropolitan Phoenix area served by our utilities have a direct impact on our earnings. An increase or decrease in our active service connections will affect our revenues and variable expenses in a corresponding manner. Our total service connections, including both active service connections and connections to vacant homes, increased 1,679 connections, or 3.7% (3.0% annualized growth), from a total of 45,205 as of June 30, 2019 to 46,884 as of June 30, 2020. This increase is due to organic growth in new connections.

As of June 30, 2020, active service connections increased 1,858, or 4.2% (3.3% annualized growth), to 46,573 compared to 44,715 active service connections as of June 30, 2019. As with the increase in total service connections, the increase is due to organic growth in new connections. Approximately 93.0% of the 46,573 active service connections are serviced by our Global Water - Santa Cruz Water Company, Inc. ("Santa Cruz") and Global Water - Palo Verde Utilities Company, Inc. ("Palo Verde") utilities as of June 30, 2020.

The graph below presents the historical change in active and total connections for our ongoing operations, adjusting for the July 2015 condemnation of the assets and operations of Valencia Water Company, Inc. ("Valencia") and the May 2016 sale of Willow Valley Water Co., Inc. ("Willow Valley").

Economic and Environmental Utility Regulation

We are subject to extensive regulation of our rates by the ACC, which is charged with establishing rates based on the provision of reliable service at a reasonable cost while also providing an opportunity to earn a fair rate of return on rate base for investors of utilities. The ACC uses a historical test year to evaluate whether the plant in service is used and useful, to assess whether costs were prudently incurred, and to set "just and reasonable" rates. Rate base is typically the depreciated original cost of the plant in service (net of contributions in aid of construction ("CIAC") and advances in aid of construction ("AIAC") which are funds or property provided to a utility under the terms of a main extension agreement, the value of which may be refundable),

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that has been determined to have been "prudently invested" and "used and useful", although the reconstruction cost of the utility plant may also be considered in determining the rate base. The ACC also decides on an applicable capital structure based on actual or hypothetical analyses. The ACC determines a "rate of return" on that rate base, which includes the approved capital structure and the actual cost of debt and a fair and reasonable cost of equity based on the ACC's judgment. The overall revenue requirement for rate making purposes is established by multiplying the rate of return by the rate base and adding "prudently" incurred operating expenses for the test year, depreciation, and any applicable pro forma adjustments.

To ensure an optimal combination of access to water and water conservation balanced with a fair rate of return for investors, our water utility operating revenue is based on two components: a fixed fee and a consumption or volumetric fee. For our water utilities, the fixed fee, or "basic service charge," provides access to water for residential usage and has generally been set at a level to produce 50% of total revenue. The volumetric fee is based on the total volume of water supplied to a given customer after the minimum number of gallons, if any, covered by the basic service charge, multiplied by a price per gallon set by a tariff approved by the ACC. A discount to the volumetric rate applies for customers that use less than an amount specified by the ACC. For all investor-owned water utilities, the ACC requires the establishment of inverted tier conservation oriented rates, meaning that the price of water increases as consumption increases. For wastewater utilities, wastewater collection and treatment can be based on volumetric or fixed fees. Our wastewater utility services are billed based solely on a fixed fee, determined by the size of the water meter installed. Recycled water is sold on a volumetric basis with no fixed fee component.

We are required to file rate cases with the ACC to obtain approval for a change in rates. Rate cases and other rate-related proceedings can take a year or more to complete. As a result, there is frequently a delay, or regulatory lag, between the time of a capital investment or incurrence of an operating expense increase and when those costs are reflected in rates. In normal conditions, it would not be uncommon to see us file for a rate increase every three years based on year one being the test year, year two being the rate case filing year, and year three being the rate case award year. However, based on our settlement with the ACC in 2014 and extended new rate phase-in period, we have not initiated the next rate case on this timeline. On March 20, 2019, we filed a motion with the ACC to request an order for certain of our utilities to file a rate case. Thereafter, on April 26, 2019, the ACC issued Decision No. 77168, which required all of our utilities to file a rate case no later than June 30, 2020, using the twelve months ending December 31, 2019 as the test year for the rate case. Due to the COVID-19 pandemic, on May 5, 2020, the ACC extended the deadline to August 28, 2020. Refer to "—Rate Case Activity" for additional information.

Our water and wastewater operations are also subject to extensive United States federal, state, and local laws and regulations governing the protection of the environment, health and safety, the quality of the water we deliver to our customers, water allocation rights, and the manner in which we collect, treat, and discharge wastewater. We are also required to obtain various environmental permits from regulatory agencies for our operations. The ACC also sets conditions and standards for the water and wastewater services we deliver. We incur substantial costs associated with compliance with environmental, health and safety, and water quality regulation.

Environmental, health and safety, and water quality regulations are complex and change frequently, and they have tended to become more stringent over time. As newer or stricter standards are introduced, they could increase our operating expenses. We would generally expect to recover expenses associated with compliance for environmental and health and safety standards through rate increases, but this recovery may be affected by regulatory lag.

Economic Environment

The growth of our customer base depends almost entirely on the success of developers in developing residential and commercial properties within our service areas. Real estate development is a cyclical industry and development in our service areas is contingent upon construction or acquisition of major public improvements, such as arterial streets, drainage facilities, telephone and electrical facilities, recreational facilities, street lighting, and local in-tract improvements (e.g., site grading). Many of these improvements are built by municipalities with public financing, and municipal resources and access to capital may not be sufficient to support development in areas of rapid population growth.

Infrastructure Investment

Capital expenditures for infrastructure investment are a component of the rate base on which our regulated utility subsidiaries are allowed to earn an equity return. Capital expenditures for infrastructure provide a basis for earnings growth by expanding our "used and useful" rate base, which is a component of its permitted return on investment and revenue requirement. We are generally able to recover a rate of return on these capital expenditures (return on equity and debt), together with debt service and certain operating costs, through the rates we charge.

We have made significant capital investments in our territories within the last fifteen years, and because the infrastructure remains in the early stages of its useful life, we do not expect comparable capital investments to be required in the near term,

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either for growth or to maintain the existing infrastructure. Nevertheless, we have an established capital improvement plan to make targeted capital investments to repair and replace existing infrastructure as needed, address operating redundancy requirements, and improve our overall financial performance, by lowering expenses and increasing revenue. Additionally, to reduce our deferred tax liability of approximately \$19.4 million resulting from the gain on the condemnation of the operations and assets of Valencia, we have completed the planned investments within our capital improvement plan that we determined will qualify under the Internal Revenue Code §1033 re-investment criteria pursuant to a favorable Private Letter Ruling with the Internal Revenue Service (the "IRS"). Refer to "—Corporate Transactions—Private Letter Ruling" for additional information.

As discussed above, we believe that development and growth in our service areas may slow. Accordingly, we may reduce capital expenditures in the future, but will, in any event, continue to invest in maintenance related capital expenditures and perform those projects that are necessary to continue providing services.

Production and Treatment Costs

Our water and wastewater services require significant production resources and therefore result in significant production costs. Although we are permitted to recover these costs through the rates we charge, regulatory lag can decrease our margins and earnings if production costs or other operating expenses increase significantly before we are able to recover them through increased rates. Our most significant costs include labor, chemicals used to treat water and wastewater, and power used to operate pumps and other equipment. Power and chemical costs can be volatile. However, we employ a variety of technologies and methodologies to minimize costs and maximize operational efficiencies. Additionally, with our Total Water Management approach, whereby we maximize the direct beneficial reuse of recycled water, we can realize significant treatment costs and power savings because smaller volumes of water are required for potable use. Many utilities require that all water be treated to potable standards irrespective of use. Total Water Management focuses on the right water for the right use. Potable water is needed for consumption and recycled water is acceptable for non-potable uses such as irrigation. Non-potable water does not need to be treated for commonly occurring and regulated constituents such as arsenic, or for other current or future human consumption health-based contaminants.

Weather and Seasonality

Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. Drought, overuse of sources of water, the protection of threatened species or habitats, or other factors may limit the availability of ground and surface water. Also, customer usage of water and recycled water is affected by weather conditions, particularly during the summer. Our water systems generally experience higher demand in the summer due to the warmer temperatures and increased usage by customers for irrigation and other outdoor uses. However, summer weather that is cooler or wetter than average generally suppresses customer water demand and can have a downward effect on our operating revenue and operating income. Conversely, when weather conditions are extremely dry, our business may be affected by government-issued drought-related warnings and/or water usage restrictions that would artificially lower customer demand and reduce our operating revenue. The limited geographic diversity of our service areas makes the results of our operations more sensitive to the effect of local weather extremes. The second and third quarters of the year are generally those in which water services revenue and wastewater services revenues are highest. Accordingly, interim results should not be considered representative of the results of a full year.

Access to and Quality of Water Supply

In many areas of Arizona (including certain areas that we service), water supplies are limited and, in some cases, current usage rates exceed sustainable levels for certain water resources. We currently rely predominantly (and are likely to continue to rely) on the pumping of groundwater and the generation and delivery of recycled water for non-potable uses to meet future demands in our service areas. At present, groundwater (and recycled water derived from groundwater) is the primary water supply available to us. In addition, regulatory restrictions on the use of groundwater and the development of groundwater wells, lack of available water rights, drought, overuse of local or regional sources of water, protection of threatened species or habitats, or other factors, including climate change, may limit the availability of ground or surface water.

Rate Case Activity

On July 9, 2012, we filed rate applications with the ACC to adjust the revenue requirements for seven utilities. In August 2013, we entered into a settlement agreement with the ACC staff, the Residential Utility Consumers Office, the City of Maricopa, and other parties to the rate case. The settlement required approval by the ACC before it could take effect. In February 2014, the rate case proceedings were completed and the ACC issued Rate Decision No. 74364, approving the settlement agreement. The collective rate increase included a 9.5% return on common equity which contributed to a 15% increase over revenue in 2011.

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For our utilities, adjusting for the condemnation of the operations and assets of Valencia and the sale of Willow Valley, the settlement provided for a collective aggregate revenue requirement increase of \$3.6 million based on 2011 test year service connections, phased-in over time, with the first increase in January 2015 as follows (in thousands, not updated for the Federal Tax Cuts and Jobs Act (the "TCJA"), refer to "—Corporate Transactions—ACC Tax Docket" for further details):

	Incremental	Cumulative
2015	\$ 1,083	\$ 1,083
2016	887	1,970
2017	335	2,305
2018	335	2,640
2019	335	2,975
2020	335	3,310
2021	335	3,645

Whereas this phase-in of additional revenues was determined using a 2011 test year, to the extent that the number of active service connections increases from 2011 levels, the additional revenues may be greater than the amounts set forth above. On the other hand, if active connections decrease or we experience declining usage per customer, we may not realize all of the anticipated revenues.

On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah and Northern Scottsdale utilities due to the TCJA. Rate Decision No. 76901 adopted the phase-in approach for the reductions to match the phase-in of our revenue requirement under Rate Decision No. 74364. Refer to "— Corporate Transactions — ACC Tax Docket" for details regarding Rate Decision No. 76901.

On March 20, 2019, we filed a motion with the ACC to request an order for certain of our utilities to file a rate case. Thereafter, on April 26, 2019, the ACC issued Decision No. 77168, which required all of our utilities to file a rate case no later than June 30, 2020, using the twelve months ending December 31, 2019 as the test year for the rate case. Due to the COVID-19 pandemic, on May 5, 2020, the ACC extended the deadline to August 28, 2020. Refer to "— Corporate Transactions — ACC Rate Case" for additional information.

ICFA Treatment

From 2003 to 2008, we entered into approximately 154 infrastructure coordination and financing agreements ("ICFAs") with developers and landowners covering approximately 275 square miles. Under these agreements, we have a contractual obligation to the developers and landowners to ensure that amongst other things, physical capacity exists through our regulated utilities for water and wastewater to the landowner/developer when needed. We receive fees from the landowner/developer for undertaking these obligations that typically are a negotiated amount per planned equivalent dwelling unit for the specified development or parcel of land. Payments are generally due to us from the landowner/developer based on progress of the development, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones and the final payment due upon final plat approval or sale of the subdivision. The payments are non-refundable. Our investment can be considerable, as we may phase-in the construction of facilities in accordance with a regional master plan, as opposed to a single development.

With the issuance of Rate Decision No. 74364, in February 2014, the ACC changed how ICFA funds would be characterized and accounted for going forward. Most notably, the ACC changed the rate treatment of ICFA funds. ICFA funds already received or which had become due prior to the date of Rate Decision No. 74364 were accounted for in accordance with our ICFA revenue recognition policy that had been in place prior to the 2010 Regulatory Rate Decision, wherein the funds received are recognized as revenue once the obligations specified in the ICFA were met. Rate Decision No. 74364 prescribes that of the ICFA funds which come due and are paid subsequent to December 31, 2013, 70% of the ICFA funds will be recorded in the associated utility subsidiary as a hook-up fee ("HUF") liability, with the remaining 30% to be recorded as deferred revenue, until such time that the HUF tariff is fully funded, after which the remaining funds will be recorded as deferred revenue in accordance with our ICFA revenue recognition policy. A HUF tariff, specifying the dollar value of a HUF for each utility, was approved by the ACC as part of Rate Decision No. 74364. We are responsible for assuring the full HUF value is paid from ICFA proceeds, and recorded in its full amount by predetermined milestones in Rate Decision No. 74364, even if it results in recording less than 30% of the ICFA fee as deferred revenue.

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We account for the portion of future payments received under these agreements allocated to HUF liability as CIAC. However, from the regulator's perspective, HUFs do not impact rate base until the related funds are expended. These funds are segregated in a separate bank account and used to construct plant assets. The HUF liability is to be relieved once the funds are used for the construction of plant. For facilities required under a hook-up fee or ICFA, we must first use the HUF funds received, after which we may use debt or equity financing for the remainder of construction. The deferred revenue portion of these fees is recognized as revenue once the obligations specified within the applicable ICFA are met, including construction of sufficient operating capacity to serve the customers for which revenue was deferred.

Pursuant to Rate Decision No. 74364, we have agreed not to enter into any new ICFAs, and instead will utilize HUF tariffs, which have become an acceptable industry practice in Arizona. As part of the settlement, a HUF tariff was established for each utility. Existing ICFAs will remain in place, with 70% of future ICFA payments to be recorded as HUFs until the HUF liability is fully funded. The HUF liability is relieved as funds are expended to construct plant, at which time a corresponding amount is recorded to CIAC. The portion of ICFA proceeds not recorded as HUF will be recorded as revenue or deferred revenue, in accordance with our ICFA revenue recognition policy.

In addition to ICFAs, we have various line extension agreements with developers and builders, through which funds, water line extensions or wastewater line extensions are provided to us by the developers and are considered refundable advances for construction. These AIACs are subject to refund by us to the developers through annual payments that are computed as a percentage of the total annual gross revenue earned from customers connected to utility services constructed under the agreement over a specified period. Upon the expiration of the agreements' refunding period, the remaining balance of the AIAC becomes nonrefundable and at that time is considered CIAC. CIAC is amortized as a reduction of depreciation expense over the estimated remaining life of the related utility plant. For rate-making purposes, a utility plant funded by AIAC and CIAC is excluded from rate base. The taxability of AIAC and CIAC was changed with the enactment of the TCJA. Previously, the majority of AIAC and CIAC that we collected were not taxable. However, with the enactment of the TCJA, they will be taxable going forward. On November 27, 2018, the ACC ruled that the utility may require that the contributor pay a gross-up to the utility consisting of 55% of the income tax expense with the utility covering the remaining 45% of the income tax expense. For more details regarding the ruling, refer to "—Corporate Transactions — ACC Tax Docket."

Corporate Transactions

Stipulated Condemnation of the Operations and Assets of Valencia

On July 14, 2015, we closed the stipulated condemnation to transfer the operations and assets of Valencia to the City of Buckeye. Terms of the condemnation were agreed upon through a settlement agreement and stipulated final judgment of condemnation wherein the City of Buckeye acquired all the operations and assets of Valencia and assumed operation of the utility upon close. The City of Buckeye paid the Company \$55.0 million at close, plus an additional \$0.1 million in working capital adjustments. The City of Buckeye is obligated to pay the Company a growth premium equal to \$3,000 for each new water meter installed within Valencia's prior service areas in the City of Buckeye, for a 20-year period ending December 31, 2034, subject to a maximum payout of \$45.0 million over the term of the agreement.

Private Letter Ruling

On June 2, 2016, we received a Private Letter Ruling from the IRS that, for purposes of deferring the approximately \$19.4 million gain realized from the condemnation of the operations and assets of Valencia, determined that the assets converted upon the condemnation of such assets could be replaced through certain reclamation facility improvements contemplated by the Company under Internal Revenue Code §1033 as property similar or related in service or use.

Pursuant to Internal Revenue Code §1033, we would have been able to defer the gain on condemnation through the end of 2017, which was subsequently extended through the end of 2020. The Company fully deferred the remaining tax liability during the six months ended June 30, 2020.

Sale of Loop 303 Contracts

In September 2013, we entered into an agreement to sell certain wastewater facilities main extension agreements and offsite water management agreements for the contemplated Loop 303 service area, along with their related rights and obligations (which we refer to collectively as the "Loop 303 Contracts"), relating to the 7,000-acre territory within a portion of the western planning area of the City of Glendale, Arizona known as the "Loop 303 Corridor." Pursuant to the agreement, we sold the Loop 303 Contracts to EPCOR for total proceeds of approximately \$4.1 million which was paid to us over time as certain milestones were met between EPCOR and the developers/landowners of the Loop 303 Corridor. As of December 31, 2018, we had

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received \$3.1 million of the proceeds and in March 2019, we received the final payment of \$1.0 million. These proceeds were recorded as other income.

New Revolving Credit Line

On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation, for a two-year revolving line of credit up to \$10.0 million with a maturity date of April 30, 2022. This new credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company's business, and for general corporate purposes, bears an interest rate equal to the London Interbank Offered Rate (LIBOR) plus 2.00% and has no unused line fee. This new credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in April 2020.

ACC Tax Docket

On December 20, 2017, the ACC opened a docket to address the utility ratemaking implications of the TCJA. The ACC subsequently approved an order in February 2018 requiring Arizona utilities to apply regulatory accounting treatment, which includes the use of regulatory assets and regulatory liabilities, to address all impacts from the enactment of the TCJA.

On September 20, 2018, the ACC issued Rate Decision No. 76901, which set forth the reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities due to lower corporate tax rates under the TCJA. Rate Decision No. 76901 adopted a phase-in approach for the reductions to match the phase-in of our revenue requirement under the Rate Decision No. 74364 enacted in February 2014. In 2019, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities were approximately \$890,000. In 2021, the final year of the phase-in, the aggregate annual reductions in revenue for our Santa Cruz, Palo Verde, Greater Tonopah, and Northern Scottsdale utilities will be approximately \$1.1 million. The ACC also approved a carrying cost of 4.25% on regulatory liabilities resulting from the difference of the fully phased-in rates to be applied in 2021 versus the phased-in rates refunded in the years leading up to 2021 (i.e., 2018 through 2020).

Rate Decision No. 76901, however, did not address the impacts of the TCJA on accumulated deferred income taxes ("ADIT"), including excess ADIT ("EADIT"). Following the ACC's request for a proposal, the Company made its proposal in filings on December 19, 2018 and July 1, 2019. ACC Staff reviewed the Company's filing and requested that the Company defer tariff revisions until such revisions can be considered in the next rate case. ACC Staff also requested that the Company defer consideration of the regulatory assets and regulatory liabilities associated with 2018 EADIT amortization. On July 18, 2019, the Company made a filing proposing these items be deferred to the next rate case. Refer to " — Corporate Transactions — ACC Rate Case" for additional information regarding the Company's next rate case.

On November 27, 2018, February 20, 2019, February 28, 2019, and January 23, 2020, the ACC adopted orders relating to the funding for income taxes on CIAC and AIAC (which became taxable for our regulated utilities under the TCJA). Those orders 1) require that under the hybrid sharing method, a contributor will pay a gross-up to the utility consisting of 55% of the income tax expense with the utility covering the remaining 45% of the income tax expense; 2) remove the full gross-up method option for Class A and B utilities and their affiliates (which includes all of our utilities); 3) ensure proper ratemaking treatment of a utility using the self-pay method; 4) clarify that pass-through entities that are owned by a "C" corporation can recover tax expense according to methods allowed; and 5) require Class A and B utilities to self-pay the taxes associated with hook-up fee contributions but permit using a portion of the hook-up fees to fund these taxes. The Company's utilities have adopted the hybrid sharing method for income tax on CIAC and AIAC.

ACC Rate Case

On April 26, 2019, the ACC issued Decision No. 77168, which required all of our utilities to file a rate case no later than June 30, 2020, using the twelve months ending December 31, 2019 as the test year for the rate case. Due to the COVID-19 pandemic, on April 14, 2020, we filed a request to extend the deadline for filing of a rate case to August 17, 2020. On May 5, 2020, the ACC extended the deadline to August 28, 2020.

We are in the final stages of evaluating and preparing for the rate case, but we anticipate requesting a moderate increase in rates. For certain utilities, we are requesting the rates be phased in over three years, starting January 1, 2022. We also intend to request the consolidation of water and wastewater rates for our Red Rock, Santa Cruz, Palo Verde, Picacho Water and Picacho Utilities. These utilities are all located in Pinal County; provide or will provide water, wastewater, and recycled water service; and consolidation will create economies of scale that are beneficial to all customers. The consolidated rate increase, if approved by the ACC, would result in the estimated average monthly residential bill for Santa Cruz and Palo Verde customers increasing

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approximately \$5.51, \$5.51, and \$3.32 in the aggregate in each of 2022, 2023, and 2024, respectively. The projected rate increases are preliminary and subject to change as the rate case schedules are finalized prior to filing our application and subject to further change in the final rate decision. There can be no assurance, however, that the ACC will approve the requested rate increase, or any increase, and the ACC could take other actions as a result of the rate case. Further, it is possible that the ACC may determine to decrease future rates. There can also be no assurance as to the timing of when any approved rate increase (if any) would go into effect.

Acquisition of Red Rock Utilities

On October 16, 2018, we completed the acquisition of Red Rock, an operator of a water and a wastewater utility with service areas in Pima and Pinal counties of Arizona, for a purchase price of \$5.9 million. The acquisition added over 1,650 connections and approximately 9 square miles of service area. The Company is obligated to pay to the seller a growth premium equal to \$750 for each new account established within three specified growth premium areas, commencing in each area on the date of the first meter installation and ending on the earlier of ten years after such first installation date or twenty years from the acquisition date. The three specified growth premium areas are located in Pima County, Arizona where Red Rock has not yet begun operating, and where Red Rock is authorized to provide water utility services only. As of June 30, 2020, no meters have been installed and no accounts have been established in any of the three growth premium areas. We believe this acquisition is consistent with the Company's declared strategy of making accretive acquisitions.

Recent Events

2020 Common Stock Offering

On January 21, 2020, we completed a public offering of 870,000 shares of common stock at a public offering price per share of \$12.50, for gross proceeds of \$10.9 million. On January 30, 2020, we issued an additional 130,000 shares of common stock at the public offering price of \$12.50 per share, for gross proceeds of \$1.6 million, resulting in total proceeds from the offering of approximately \$12.5 million. The issuance of the additional shares was completed pursuant to the exercise in full of the underwriter's over-allotment option. We received total net proceeds of approximately \$11.5 million after deducting underwriting discounts and commissions and offering expenses payable by us, which collectively totaled approximately \$1.0 million.

Application for Certificate of Convenience & Necessity ("CC&N") for Inland Port Project

We recently submitted our application for a CC&N for the Inland Port Project located in Pinal County. We anticipate its approval before the end of the year. We see this project benefiting us in multiple ways, including adding, for the first time, a large industrial service area to our portfolio which will drive commercial and residential growth in the surrounding area.

Segment Reporting

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing operating performance. In consideration of the Financial Accounting Standards Board's Accounting Standards Codification 280, Segment Reporting, we are not organized around specific products and services, geographic regions, or regulatory environments. We currently operate in one geographic region within the State of Arizona, wherein each operating utility operates within the same regulatory environment.

While we report revenue, disaggregated by service type, on the face of our statement of operations, we do not manage the business based on any performance measure at the individual revenue stream level. We do not have any customers that contribute more than 10% to our revenues or revenue streams. Additionally, the chief operating decision maker uses consolidated financial information to evaluate our performance, which is the same basis on which he communicates our results and performance to our board of directors. It is upon this consolidated basis from which he bases all significant decisions regarding the allocation of our resources on a consolidated level. Based on the information described above and in accordance with the applicable literature, management has concluded that we are currently organized and operated as one operating and reportable segment.

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Comparison of Results of Operations for the Three Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the three months ended June 30, 2020 and 2019 (in thousands, except per share amounts):

	For the Three Months Ended June 30,
	2020		2019
Revenues	\$ 9,889	\$	9,121
Operating expenses	8,162		6,876
Operating income	1,727		2,245
Total other expense	(1,812)		(1,111)
Income (loss) before income taxes	(85)		1,134
Income tax expense	(37)		(356)
Net income (loss)	\$ (122) \$		778
Basic earnings (loss) per common share	\$ (0.01) \$		0.04
Diluted earnings (loss) per common share	\$ (0.01) \$		0.04

Revenues – The following table summarizes our revenues for the three months ended June 30, 2020 and 2019 (in thousands):

	For the Three Months Ended June 30,
	2020		2019
Water services	\$ 4,675	\$	4,243
Wastewater and recycled water services	5,126		4,862
Unregulated revenues	88		16
Total revenues	\$ 9,889	\$	9,121

Total revenues increased \$0.8 million, or 8.4%, to \$9.9 million for the three months ended June 30, 2020 compared to \$9.1 million for the three months ended June 30, 2019. This increase reflects the 4.2% increase in active service connections, combined with the increase in rates related to Rate Decision No. 74364.

Water Services – Water services revenue increased \$0.4 million, or 10.2%, to \$4.7 million for the three months ended June 30, 2020 compared to \$4.2 million for the three months ended June 30, 2019. The increase in water services revenues is primarily related to growth in connections.

Water services revenue based on consumption increased \$0.4 million, or 21.4%, to \$2.4 million for the three months ended June 30, 2020 compared to \$2.0 million for the three months ended June 30, 2019. The increase was primarily driven by increased residential consumption for the three months ended June 30, 2020 compared to the three months ended June 30, 2019.

Active water connections increased 4.1% to 24,160 as of June 30, 2020 from 23,208 as of June 30, 2019, primarily due to the growth in our service areas.

Water consumption increased 12.6% to 938 million gallons for the three months ended June 30, 2020 from 833 million gallons for the three months ended June 30, 2019. The increase in consumption was primarily related to an increase in residential consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased \$0.1 million, or 3.9%, to \$2.2 million for the three months ended June 30, 2020. The increase was primarily driven by increases in active service connections, combined with an increase in rates related to Rate Decision No. 74364.

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Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased \$0.3 million, or 5.4%, to \$5.1 million for the three months ended June 30, 2020 compared to \$4.9 million for the three months ended June 30, 2019. The increase in wastewater and recycled water services revenue included a \$0.2 million increase in wastewater services revenue. The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 4.2% to 22,413 as of June 30, 2020, from 21,507 as of June 30, 2019, as well as the increase in rates related to Rate Decision No. 74364.

Recycled water services revenue, which is based on the number of gallons delivered, increased \$0.1 million, or 24.6%, to \$0.4 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019. The increase in recycled water services revenue was primarily related to the increase in recycled water consumption, coupled with an increase in rates related to Rate Decision No. 74364. The volume of recycled water delivered increased 34 million gallons, or 15.9%, to 246 million gallons for the three months ended June 30, 2020 compared to 212 million gallons for the three months ended June 30, 2019.

Operating Expenses – The following table summarizes our operating expenses for the three months ended June 30, 2020 and 2019 (in thousands):

	For the Three Months Ended June 30,
		2020		2019
Operations and maintenance	\$	2,340	\$	1,780
Operations and maintenance - related party	—		437
General and administrative	3,625			2,650
Depreciation and amortization		2,197		2,009
Total operating expenses	\$	8,162	\$	6,876

Until December 2019, when it ceased operations, Global Water Management, LLC ("GWM") provided substantially all of the billing, customer service, and other support services for the Company's regulated utilities. When GWM ceased operations, we brought the customer service and billing operations in-house and entered into new contract services agreements to replace the services previously provided by GWM through its FATHOM platform. As described further below, this transition resulted in increased operations and maintenance expense and the elimination of contract services – related party expenses. Additionally, the Company no longer receives royalty payments that were previously based upon a percentage of certain of GWM's recurring revenue, which was historically recorded as Other – related party income.

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased \$0.6 million, or 31.5%, to \$2.3 million for the three months ended June 30, 2020 compared to \$1.8 million for the three months ended June 30, 2019.

Total personnel expenses increased \$0.2 million, or 43.4%, to \$0.7 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019, primarily due to the hiring of additional employees to bring the customer service and billing operations in-house as discussed above, coupled with an increase in other employee benefits expense.

Contract services increased \$0.2 million for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 as a result of new services agreements we entered into in connection with the FATHOM transition.

Operations and maintenance - related party - Operations and maintenance - related parties expenses decreased \$0.4 million to zero for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 as a result of the FATHOM transition.

General and Administrative – General and administrative costs include the day-to-day expenses of office operation, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs increased \$1.0 million, or 36.8%, to \$3.6 million for the three months ended June 30, 2020 compared to \$2.7 million for the three months ended June 30, 2019.

Deferred compensation expense increased \$0.6 million to \$0.9 million for the three months ended June 30, 2020, from \$0.3 million for the three months ended June 30, 2019. The increase was primarily driven by restricted stock awards granted and partially vested during the three months ended June 30, 2020. The increase was also due to an increase in employee option expense due to the 2019 stock option grant, the value of which we began to expense in August 2019. Refer to Note 14 — "Deferred Compensation Awards" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

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Personnel and related expenses increased \$0.3 million to \$1.2 million for the three months ended June 30, 2020, from \$0.9 million for the three months ended June 30, 2019. The increase was primarily related to increases in salaries and bonuses due to the hiring of additional employees, coupled with increases in other employee benefits expense for the three months ended June 30, 2020, compared to the three months ended June 30, 2019.

Other Expense – Other expense increased \$0.7 million to \$1.8 million for the three months ended June 30, 2020, from \$1.1 million for the three months ended June 30, 2019. The increase in other expense was primarily attributed to the \$0.5 million loss on asset disposals recorded during the three months ended June 30, 2020 combined with the elimination of the FATHOM royalty.

Income Tax Expense – Income tax expense decreased \$0.3 million to \$37,000 for the three months ended June 30, 2020 compared to \$0.4 million for the three months ended June 30, 2019. The decrease was driven by a decrease in pretax income.

Net Income/Loss – Net loss totaled \$0.1 million for the three months ended June 30, 2020 compared to net income of \$0.8 million for the three months ended June 30, 2019. The decrease was primarily attributed to the loss on asset disposals, combined with a decrease in operating income, which was driven by increases in deferred compensation expense and personnel and related expense.

Comparison of Results of Operations for the Six Months Ended June 30, 2020 and 2019

The following table summarizes our results of operations for the six months ended June 30, 2020 and 2019 (in thousands, except per share amounts):

	For the Six Months Ended June 30,
	2020		2019
Revenues	\$ 18,119	\$	16,844
Operating expenses	14,595		13,400
Operating income	3,524		3,444
Total other expense	(3,049)		(1,319)
Income before income taxes	475		2,125
Income tax expense	(243)		(698)
Net income	\$ 232	\$	1,427
Basic earnings per common share	\$ 0.01	\$	0.07
Diluted earnings per common share	\$ 0.01	\$	0.07

Revenues – The following table summarizes our revenues for the six months ended June 30, 2020 and 2019 (in thousands):

	For the Six Months Ended June 30,
		2020		2019
Water services	\$	8,063	\$	7,381
Wastewater and recycled water services		9,949		9,431
Unregulated revenues		107		32
Total revenues	\$	18,119	\$	16,844

Total revenues increased \$1.3 million, or 7.6%, to \$18.1 million for the six months ended June 30, 2020 compared to \$16.8 million for the six months ended June 30, 2019. The increase in revenue reflects the 4.2% increase in active service connections, combined with the increase in rates related to Rate Decision No. 74364.

Water Services – Water services revenue increased \$0.7 million, or 9.2%, to \$8.1 million for the six months ended June 30, 2020 compared to \$7.4 million for the six months ended June 30, 2019. The increase in water services revenues primarily related to growth in connections.

Water services revenue based on consumption increased \$0.6 million, or 20.5%, to \$3.5 million for the six months ended June 30, 2020 compared to \$2.9 million for the six months ended June 30, 2019. This increase was primarily driven by increases in residential and irrigation consumption for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

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Active water connections increased 4.1% to 24,160 as of June 30, 2020 from 23,208 as of June 30, 2019, due to the growth in our service areas.

Water consumption increased 12.3% to 1,400 million gallons for the six months ended June 30, 2020 from 1,247 million gallons for the six months ended June 30, 2019. The increase in consumption was primarily related to the increase in residential and construction consumption.

Water services revenue associated with the basic service charge, excluding miscellaneous charges, increased \$0.2 million, or 4.4%, to \$4.5 million for the six months ended June 30, 2020 compared to \$4.3 million for the six months ended June 30, 2019. The increase was primarily due to the increase in active service connections, combined with an increase in rates related to Rate Decision No. 74364.

Wastewater and Recycled Water Services – Wastewater and recycled water services revenue increased \$0.5 million, or 5.5%, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase in wastewater and recycled water services revenue was driven by a \$0.4 million increase in wastewater services revenue. The increase in wastewater services revenue reflects the increase in active wastewater connections, which increased 4.2% to 22,413 as of June 30, 2020, from 21,507 as of June 30, 2019, as well as the increase in rates related to Rate Decision No. 74364.

Recycled water services revenue, which is based on the number of gallons delivered, increased \$0.1 million, or 23.2%, to \$0.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase in recycled water services revenue was primarily driven by the increase in rates related to Rate Decision No. 74364.

Operating Expenses – The following table summarizes our operating expenses for the six months ended June 30, 2020 and 2019 (in thousands):

	For the Six Months Ended June 30,
		2020		2019
Operations and maintenance	\$	4,572	\$	3,503
Operations and maintenance - related party	—		852
General and administrative		5,713		5,025
Depreciation and amortization		4,310		4,020
Total operating expenses	\$	14,595	\$	13,400

Operations and Maintenance – Operations and maintenance costs, consisting of personnel costs, production costs (primarily chemicals and purchased power), maintenance costs, and property tax, increased \$1.1 million, or 30.5%, to \$4.6 million for the six months ended June 30, 2020 compared to \$3.5 million for the six months ended June 30, 2019.

Total personnel expenses increased \$0.4 million, or 44.0%, to \$1.4 million for the six months ended June 30, 2020 compared to \$1.0 million for the six months ended June 30, 2019, primarily due to the hiring of additional employees to bring the customer service and billing operations in-house as discussed above, coupled with an increase in other employee benefits expense.

Contract services increased \$0.5 million to \$0.6 million for the six months ended June 30, 2020 compared to \$0.1 million for the six months ended June 30, 2019, primarily due to new services agreements we entered into in connection with the FATHOM transition.

Operations and maintenance - related party - Operations and maintenance - related parties expenses decreased \$0.9 million to zero, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 as a result of the FATHOM transition.

General and Administrative – General and administrative costs include the day-to-day expenses of office operation, personnel costs, legal and other professional fees, insurance, rent, and regulatory fees. These costs increased \$0.7 million, or 13.7%, to \$5.7 million for the six months ended June 30, 2020 compared to \$5.0 million for the six months ended June 30, 2019.

Personnel and related expenses increased \$0.6 million, or 34.1%, to \$2.5 million for the six months ended June 30, 2020 compared to \$1.8 million for the six months ended June 30, 2019. The increase was primarily related to increases in salaries and bonuses due to the hiring of additional employees, coupled with increases in other employee benefit expense for the six months ended June 30, 2020, compared to the six months ended June 30, 2019.

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Other Expense – Other expense totaled \$3.0 million for the six months ended June 30, 2020 compared to other expense of \$1.3 million for the six months ended June 30, 2019. The increase of \$1.7 million in other expense was primarily attributed to the receipt of the remaining \$1.0 million of proceeds in March 2019 relating to the Loop 303 Contracts. The increase was also due to the \$0.5 million expense related to loss on asset disposals recognized during the six months ended June 30, 2020.

Income Tax Expense – Income tax expense decreased \$0.5 million, or 65.2%, to \$0.2 million for the six months ended June 30, 2020 compared to \$0.7 million for the six months ended June 30, 2019. The decrease was driven by a decrease in pretax income.

Net Income – Net income totaled \$0.2 million for the six months ended June 30, 2020 compared to net income of \$1.4 million for the six months ended June 30, 2019. The \$1.2 million decrease was primarily attributed to the \$1.7 million increase in total other expense for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase in total other expense was primarily attributed to the final payout pursuant to the Loop 303 contracts received in the first quarter of 2019, combined with the loss on asset disposals recognized during the six months ended June 30, 2020. This decrease was partially offset by the \$0.1 million increase in operating income for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Outstanding Share Data

As of August 3, 2020, there were 22,586,544 shares of our common stock outstanding and stock based awards to acquire an additional 760,827 shares of our common stock outstanding.

Liquidity and Capital Resources

Our capital resources are provided by internally generated cash flows from operations as well as debt and equity financing. Additionally, our regulated utility subsidiaries receive advances and contributions from customers, home builders, and real estate developers to partially fund construction necessary to extend service to new areas. We use our capital resources to:

• fund operating costs;
• fund capital requirements, including construction expenditures;
• pay dividends;
• fund acquisitions;
• make debt and interest payments; and
• invest in new and existing ventures.

Our utility subsidiaries operate in rate-regulated environments in which the amount of new investment recovery may be limited. Such recovery will take place over an extended period of time because recovery through rate increases is subject to regulatory lag.

As of June 30, 2020, we have no notable near-term cash expenditures or debt obligations. While specific facts and circumstances could change, we believe that we have sufficient cash on hand, the ability to draw on our new \$10.0 million revolver, and will be able to generate sufficient cash flows to meet our operating cash flow requirements and capital expenditure plan as well as remain in compliance with our debt covenants for at least the next twelve months. However, our near term cash flow may be impacted by the COVID-19 pandemic. Refer to "—COVID-19 Update" and "Risk Factors" included in Part II, Item 1A of this Form 10-Q for additional discussion relating to the COVID-19 pandemic.

In March 2014, we initiated a dividend program to declare and pay a monthly dividend. On November 6, 2019, we announced a monthly dividend increase from \$0.023861 per share (\$0.286332 per share annually) to \$0.0241 per share (\$0.2892 per share annually). Although we expect monthly dividends will be declared and paid for the foreseeable future, the declaration of any dividends is at the discretion of our board of directors and is subject to legal requirements and debt service ratio covenant requirements (refer to "—Senior Secured Notes" and "—Revolving Credit Line").

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Cash from Operating Activities

Cash flows provided by operating activities are used for operating needs and to meet capital expenditure requirements. Our future cash flows from operating activities will be affected by economic utility regulation, infrastructure investment, growth in service connections, customer usage of water, compliance with environmental health and safety standards, production costs, weather, and seasonality.

For the six months ended June 30, 2020, our net cash provided by operating activities totaled \$5.1 million compared to \$5.7 million for the six months ended June 30, 2019. The \$0.6 million decrease in cash from operating activities was primarily driven by the increase in deferred compensation expense of \$0.5 million, coupled with the increase in other expense of \$0.6 million due to the loss on disposal of fixed assets, partially offset by a decrease in payments related to other non-current liabilities of \$0.4 million, for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

Cash from Investing Activities

Our net cash used in investing activities totaled \$5.4 million for the six months ended June 30, 2020 compared to \$4.9 million for the six months ended June 30, 2019. The \$0.6 million increase in cash used in investing activities was primarily driven by an increase in capital expenditures of \$0.5 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

We continue to invest capital prudently in our existing, core service areas where we are able to deploy our Total Water Management model as. This includes any required maintenance capital expenditures and the construction of new water and wastewater treatment and delivery facilities. Pursuant to Internal Revenue Code §1033, we would have been able to defer the gain on condemnation through the end of 2017, which was subsequently extended through the end of 2020. The Company fully deferred the remaining tax liability during the six months ended June 30, 2020 (refer to "—Corporate Transactions—Private Letter Ruling"). Our projected capital expenditures and other investments are subject to periodic review and revision to reflect changes in economic conditions and other factors. In particular, we continue to monitor the rapidly evolving COVID-19 pandemic. As discussed above, we believe that development and growth in our service areas may slow. Accordingly, we may reduce capital expenditures in the future, but will, in any event, continue to invest in maintenance related capital expenditures and perform those projects that are necessary to continue providing services.

Cash from Financing Activities

Our net cash received in financing activities totaled \$8.6 million for the six months ended June 30, 2020 compared to \$2.3 million in cash used by financing activities for the six months ended June 30, 2019. This change was primarily driven by the \$11.5 million in net proceeds received from our public offering of stock in January 2020, partially offset by the \$0.4 million decrease in proceeds from stock option exercise.

Senior Secured Notes

On June 24, 2016, we issued two series of senior secured notes with a total principal balance of \$115.0 million at a blended interest rate of 4.55%. Series A carries a principal balance of \$28.8 million and bears an interest rate of 4.38% over a twelveyear term, with the principal payment due on June 15, 2028. Series B carries a principal balance of \$86.3 million and bears an interest rate of 4.58% over a 20-year term. Series B is interest only for the first five years, with \$1.9 million principal payments paid semiannually thereafter. The proceeds of the senior secured notes were primarily used to refinance our long-term tax exempt bonds, pursuant to an early redemption option at 103%, plus accrued interest, as a result of the initial public offering of our common stock in May 2016.

The senior secured notes require the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. Consolidated EBITDA is calculated as net income plus depreciation and amortization, taxes, interest and other non-cash charges net of non-cash income. Consolidated debt service is calculated as interest expense, principal payments, and dividend or stock repurchases. The senior secured notes also contain a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20. As of June 30, 2020, the Company was in compliance with its financial debt covenants.

Debt issuance costs as of both June 30, 2020 and December 31, 2019 were \$0.6 million.

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Revolving Credit Line

On April 30, 2020, the Company entered into an agreement with The Northern Trust Company, an Illinois banking corporation (the "Northern Trust Loan Agreement"), for a two-year revolving line of credit up to \$10.0 million with a maturity date of April 30, 2022. This new credit facility, which may be used to refinance existing indebtedness, to acquire assets to use in and/or expand the Company's business, and for general corporate purposes, bears an interest rate equal to LIBOR plus 2.00% and has no unused line fee. This new credit facility replaced the previous revolving line of credit with MidFirst Bank, which was terminated in April 2020.

Similar to the senior secured notes, the Northern Trust Loan Agreement requires the Company to maintain a debt service coverage ratio of consolidated EBITDA to consolidated debt service of at least 1.10 to 1.00. The Northern Trust Loan Agreement also contains a provision limiting the payment of dividends if the Company falls below a debt service ratio of 1.25. However, for the quarter ending June 30, 2021 through the quarter ending March 31, 2024, the ratio drops to 1.20. Additionally, the Northern Trust Loan Agreement contains certain restrictive covenants that limit, among other things, the Company's ability to: create liens and other encumbrances; incur additional indebtedness; merge, liquidate or consolidate with another entity; dispose of or transfer assets; make distributions or other restricted payments (including dividends); engage in certain affiliate transactions; and change the nature of the business. The foregoing covenants were subject to various qualifications and limitations as set forth in the Northern Trust Loan Agreement. Pursuant to the Northern Trust Loan Agreement, the revolving credit facility is subject to certain customary events of default after which the revolving credit facility could be declared due and payable if not cured within the grace period or, in certain circumstances, could be declared due and payable immediately. Refer to Note 12 — "Debt" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information. As of June 30, 2020, the Company was in compliance with its financial debt covenants.

As of June 30, 2020, the Company had no outstanding borrowings under this credit line with Northern Trust Bank. The Company incurred \$53,000 debt issuance costs as of June 30, 2020 and \$40,000 as of December 31, 2019.

Insurance Coverage

We carry various property, casualty, and financial insurance policies with limits, deductibles, and exclusions consistent with industry standards. However, insurance coverage may not be adequate or available to cover unanticipated losses or claims. We are self-insured to the extent that losses are within the policy deductible or exceed the amount of insurance maintained. Such losses could have a material adverse effect on our short-term and long-term financial condition and the results of operations and cash flows.

Critical Accounting Policies, Judgments, and Estimates

The application of critical accounting policies is particularly important to our financial condition and results of operations and provides a framework for management to make significant estimates, assumptions, and other judgments. Additionally, our financial condition, results of operations, and cash flow are impacted by the methods, assumptions, and estimates used in the application of critical accounting policies. Although our management believes that these estimates, assumptions, and other judgments are appropriate, they relate to matters that are inherently uncertain and that may change in subsequent periods. Accordingly, changes in the estimates, assumptions, and other judgments applied to these accounting policies could have a significant impact on our financial condition and results of operations as reflected in our financial statements.

There have been no significant changes to our critical accounting policies from those disclosed under "Managements' Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies, Judgments, and Estimates" in our most recent Annual Report on Form 10-K filed with the SEC on March 5, 2020 other than as disclosed below.

Off Balance Sheet Arrangements

As of June 30, 2020 and December 31, 2019, we did not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company is exposed to market risk associated with changes in commodity prices, equity prices, and interest rates. The Company uses fixed-rate long-term debt to reduce the risk from interest rate fluctuations. Although the Company's currently outstanding long-term debt is based on fixed rates, changes in interest rates could impact the fair market value of such longterm debt. As of June 30, 2020, the fair market value of the Company's long-term debt was \$124.2 million. For additional information about the Company's long-term debt, refer to Note 12 — "Debt" of the Notes to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Form 10-Q for additional information.

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Other than interest-related risks, the Company believes the risks associated with price increases for chemicals, electricity, and other commodities are mitigated by the Company's ability over the long-term to recover its costs through rate increases to its customers, though such recovery is subject to regulatory lag.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, reviewed and evaluated our disclosure controls and procedures (as such term is defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of the end of the period covered by this Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as such term is defined under Rules 13a-15(f) and 15d-15(f) of the Exchange Act) during the fiscal quarter ended June 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In the ordinary course of business, we may, from time to time, be subject to various pending and threatened lawsuits in which claims for monetary damages are asserted. To our knowledge, we are not involved in any legal proceeding which is expected to have a material effect on us.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in our risk factors from those discussed in "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 other than as disclosed below.

The recent COVID-19 pandemic could have a material adverse effect on our business operations, results of operations, cash flows and financial position.

In late 2019, a novel strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the President of the United States declared COVID-19 a national emergency. The outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID-19 pandemic, such as travel bans and restrictions, quarantines, shelter-in-place, stay-at-home or total lock-down (or similar) orders and business limitations and shutdowns. For example, the State of Arizona has implemented several orders promoting physical distancing, limiting certain activities, and restricting the operations of certain businesses, including restaurants, bars, gyms, theaters, and water parks.

While the COVID-19 pandemic did not have a material effect on our business operations, results of operations, cash flows, and financial position for the three and six months ended June 30, 2020, our business operations, results of operations, cash flows, and financial position may be adversely impacted in a number of ways, including due to related responses from government authorities.

For example, near term cash flow may be impacted by the COVID-19 pandemic. In particular, we have voluntarily agreed not to disconnect customers or charge late fees as a result of the economic hardships caused by the COVID-19 pandemic, such as due to the loss of employment by our customers, which may lead to an increase in uncollectable accounts. Accordingly, we believe that we may be unable to collect a portion of billed revenue for some period of time, if at all. Additionally, we believe that development and growth in our service areas may slow, which could impact negatively our organic growth for some period of time.

Other potential impacts include, but are not limited to, the following:

• disruptions to our operations and business activities, including any closures of offices or facilities, and to those of governmental agencies regulating our business, suppliers, customers, and other business partners;
• reduced demand for our water and wastewater services from our commercial customers, particularly as businesses are shutdown;
• a slowdown or disruption in the supply chain for the supplies used in our operations, including chemicals used to treat water and wastewater, in addition to higher costs;
• limitations on employee resources and availability, including due to sickness, government restrictions, and the desire of employees to avoid contact with large groups of people;
• potential legislative or regulatory efforts to impose new requirements on our operations;
• an increase in the cost or the difficulty to obtain debt or equity financing could affect our financial condition or future investment opportunities; and
• an increase in regulatory restrictions or continued market volatility could hinder our ability to execute strategic business activities, including acquisitions, as well as negatively impact our stock price.

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The spread of the COVID-19 has caused us to modify our business practices (including additional cybersecurity measures, employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences), and we may take further actions as may be required by government authorities or that we determine are prudent to support the wellbeing of our employees, customers, suppliers, business partners and others. There is no certainty that such measures will be sufficient to mitigate the risks posed by the virus, and our ability to perform critical functions could be harmed.

Additionally, the COVID-19 pandemic could affect our internal controls over financial reporting as a portion of our workforce is required to work from home and therefore new processes, procedures, and controls could be required to respond to changes in our business environment. Further, should any key employees become ill from COVID-19 and unable to work, the attention of the management team could be diverted.

Any of the foregoing could adversely affect our business operations, results of operations, cash flows, and financial position. The potential effects of the COVID-19 pandemic may also impact our other risk factors discussed in "Risk Factors" included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019. The ultimate extent of the impact of the COVID-19 pandemic on our business operations, results of operations, cash flows, and financial position, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, which are highly uncertain, continuously evolving and cannot be predicted. This includes, but is not limited to, the duration and spread of the COVID-19 pandemic, its severity, the actions to contain the virus or treat its impact, such as related restrictions on travel and transportation, and how quickly and to what extent normal economic and operating conditions can resume.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

a) Sales of Unregistered Securities

No unregistered securities were sold during the three months ended June 30, 2020.

b) Use of Proceeds

None.

c) Issuer Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit Number	Description of Exhibit	Method of Filing
2.1.1	Arrangement Agreement	Incorporated by reference to Exhibit 2.1 of the Company's Registration Statement on Form S-1 (File No. 333-209025) filed January 19, 2016.
2.1.2	Plan of Arrangement	Incorporated by reference to Exhibit 2.1.2 of Amendment No. 2 to the Company's Registration Statement on Form S-1 (File No. 333-209025) filed April 13, 2016.
3.1	Second Amended and Restated Certificate of Incorporation of Global Water Resources, Inc.	Incorporated by reference to Exhibit 3.1 of the Company's Form 8-K filed May 4, 2016.
3.2	Amended and Restated Bylaws of Global Water Resources, Inc.	Incorporated by reference to Exhibit 3.2 of the Company's Form 8-K filed May 4, 2016.
10.1	Incorporated by reference to Exhibit 10.1 of the Loan Agreement, dated April 30, 2020, by and between Global Water Resources, Inc. and The Northern Trust Company	Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed May 6, 2020.
10.2	Guaranty Agreement, dated as of April 30, 2020, by Global Water, LLC	Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed May 6, 2020.
10.3	Incorporated by reference to Exhibit 10.2 of the Guaranty Agreement, dated as of April 30, 2020, by West Maricopa Combine, LLC	Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed May 6, 2020.
10.4	Pledge and Security Agreement, dated as of April 30, 2020, by and between Global Water Resources, Inc. and U.S. Bank National Association, as collateral agent	Incorporated by reference to Exhibit 10.4 of the Company's Form 8-K filed May 6, 2020.
10.5	Pledge and Security Agreement, dated as of April 30, 2020, by and between Global Water, LLC and U.S. Bank National Association, as collateral agent	Incorporated by reference to Exhibit 10.4 of the Incorporated by reference to Exhibit 10.5 of the Company's Form 8-K filed May 6, 2020.
10.6	Pledge and Security Agreement, dated as of April 30, 2020, by and between West Maricopa Combine, LLC and U.S. Bank National Association, as collateral agent	Incorporated by reference to Exhibit 10.6 of the Company's Form 8-K filed May 6, 2020.
10.7	Restricted Stock Agreement with Ron L. Fleming, dated May 8, 2020	Incorporated by reference to Exhibit 10.1 of the Company's Form 8-K filed May 8, 2020.
10.8	Restricted Stock Agreement with Michael J. Liebman, dated May 8, 2020	Incorporated by reference to Exhibit 10.2 of the Company's Form 8-K filed May 8, 2020.
10.9	Form of Restricted Stock Agreement	Incorporated by reference to Exhibit 10.3 of the Company's Form 8-K filed May 8, 2020.
10.10	Global Water Resources, Inc. 2020 Omnibus Incentive Plan	Filed herewith.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer	Filed herewith.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer	Filed herewith.
32.1	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer	Furnished herewith.

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101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document	Filed herewith.
101.SCH	Inline XBRL Taxonomy Extension Schema Document	Filed herewith.
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith.
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.
101. PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.
104	Cover Page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101)	Filed herewith.

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SIGNATURES

Pursuant to the requirements 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.

Global Water Resources, Inc.

Date: August 5, 2020 By: /s/ Michael J. Liebman

Michael J. Liebman

Chief Financial Officer and Corporate Secretary (Duly Authorized Officer and Principal Financial and Accounting Officer)