Quarterly Report (10-q)

Date : 05/08/2019 @ 9:24PM
Source : Edgar (US Regulatory)
Stock : AquaVenture Holdings Limited (WAAS)
Quote : 19.59  0.0 (0.00%) @ 1:00AM
AquaVenture share price Chart

Quarterly Report (10-q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019  

 

OR

 

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

 

For the transition period from              to             

 

Commission file number 001-37903  

 

AquaVenture Holdings Limited

(Exact name of registrant as specified in its charter)

 

 

 

 

British Virgin Islands

    

98-1312953

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

c/o Conyers Corporate Services (BVI) Limited

Commerce House, Wickhams Cay 1

    

 

 

P.O. Box 3140 Road Town

British Virgin Islands

 

VG1110

(Address of principal executive office)

 

(Zip Code)

 

 

 

(813) 855 8636
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

 

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

 

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

 

Large accelerated filer      

Accelerated filer

  ☒

Non-accelerated filer        ☐ 

Smaller reporting company

  ☒

Emerging growth company   

 

 

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

 

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

 

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Ordinary Shares

 

WAAS

 

New York Stock Exchange (NYSE)

 

The total number of ordinary shares outstanding as of May 6, 2019 was 26,950,744.

 

 

 

 

 


 

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED MARCH 31, 2019 

 

TABLE OF CONTENTS

 

 

2


 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless otherwise specified, references in this report to the “Company”, “AquaVenture”, “we”, “us” and “our” refer to AquaVenture Holdings Limited and its subsidiaries.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us up to, and including, the date of this document. We expressly disclaim any obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date hereof. Such forward-looking statements are subject to risks, uncertainties and other important factors which could cause our actual results could differ materially from those discussed herein.

 

This Quarterly Report on Form 10-Q may contain estimates, projections and other information concerning our industry, the general business environment, and markets, including estimates regarding the potential size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual market size, may differ materially from the information reflected in this Quarterly Report on Form 10-Q. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

 

Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors” set forth under Part I, Item 1A of the Annual Report on Form 10-K, as amended, for the fiscal year ended December 31, 2018, as updated by our subsequent filings with the SEC. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

 

 

3


 

PART I—FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET S

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

 

2019

 

2018

 

ASSETS

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

47,357

 

$

56,618

 

Trade receivables, net of allowances of $1,019 and $1,034, respectively

 

 

22,578

 

 

21,437

 

Inventory

 

 

14,770

 

 

15,496

 

Current portion of long-term receivables

 

 

7,099

 

 

6,538

 

Prepaid expenses and other current assets

 

 

10,154

 

 

8,272

 

Total current assets

 

 

101,958

 

 

108,361

 

Property, plant and equipment, net

 

 

149,493

 

 

150,064

 

Construction in progress

 

 

17,538

 

 

15,427

 

Right-of-use assets

 

 

8,549

 

 

 —

 

Restricted cash

 

 

4,211

 

 

4,153

 

Long-term receivables

 

 

38,250

 

 

40,574

 

Other assets

 

 

7,696

 

 

6,251

 

Deferred tax asset

 

 

4,206

 

 

4,191

 

Intangible assets, net

 

 

200,251

 

 

205,443

 

Goodwill

 

 

191,178

 

 

190,999

 

Total assets

 

$

723,330

 

$

725,463

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

Accounts payable

 

$

6,918

 

$

8,235

 

Accrued liabilities

 

 

21,452

 

 

25,116

 

Current portion of long-term debt

 

 

6,574

 

 

6,494

 

Deferred revenue

 

 

4,298

 

 

3,890

 

Total current liabilities

 

 

39,242

 

 

43,735

 

Long-term debt

 

 

312,112

 

 

313,215

 

Deferred tax liability

 

 

18,555

 

 

18,465

 

Other long-term liabilities

 

 

12,780

 

 

13,450

 

Operating lease liabilities, non-current

 

 

7,724

 

 

 —

 

Total liabilities

 

 

390,413

 

 

388,865

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

Ordinary shares, no par value, 250,000 shares authorized; 26,934 and 26,780 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively

 

 

 —

 

 

 —

 

Additional paid-in capital

 

 

583,990

 

 

582,127

 

Accumulated other comprehensive income

 

 

(301)

 

 

(421)

 

Accumulated deficit

 

 

(250,772)

 

 

(245,108)

 

Total shareholders' equity

 

 

332,917

 

 

336,598

 

Total liabilities and shareholders' equity

 

$

723,330

 

$

725,463

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

4


 

 

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATION S AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

 

Revenues:

 

 

 

 

 

 

 

Bulk water

 

$

14,310

 

$

13,696

 

Rental

 

 

21,807

 

 

13,959

 

Product sales

 

 

9,473

 

 

3,811

 

Financing

 

 

972

 

 

1,048

 

Total revenues

 

 

46,562

 

 

32,514

 

Cost of revenues:

 

 

 

 

 

 

 

Bulk water

 

 

6,582

 

 

6,507

 

Rental

 

 

9,606

 

 

6,456

 

Product sales

 

 

6,059

 

 

2,526

 

Total cost of revenues

 

 

22,247

 

 

15,489

 

Gross profit

 

 

24,315

 

 

17,025

 

Selling, general and administrative expenses

 

 

22,869

 

 

19,574

 

Income (loss) from operations

 

 

1,446

 

 

(2,549)

 

Other expense:

 

 

 

 

 

 

 

Interest expense, net

 

 

(6,560)

 

 

(3,250)

 

Other income (expense), net

 

 

51

 

 

(140)

 

Loss before income tax expense

 

 

(5,063)

 

 

(5,939)

 

Income tax expense (benefit)

 

 

601

 

 

407

 

Net loss

 

 

(5,664)

 

 

(6,346)

 

Other comprehensive income:

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

120

 

 

(83)

 

Comprehensive loss

 

$

(5,544)

 

$

(6,429)

 

 

 

 

 

 

 

 

 

Loss per share – basic and diluted

 

$

(0.21)

 

$

(0.24)

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding – basic and diluted

 

 

26,865

 

 

26,491

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5


 

 

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

Accumulated

 

 

 

 

    

Shares

    

Amount

    

Paid-In Capital

    

Comprehensive Income

    

Deficit

    

Total

Balance, December 31, 2018

 

26,780

 

$

 —

 

$

582,127

 

$

(421)

 

$

(245,108)

 

$

336,598

Issuance for share-based compensation, net of forfeitures

 

72

 

 

 —

 

 

(620)

 

 

 —

 

 

 —

 

 

(620)

Exercise of options

 

82

 

 

 —

 

 

1,472

 

 

 —

 

 

 —

 

 

1,472

Share-based compensation

 

 —

 

 

 —

 

 

1,011

 

 

 —

 

 

 —

 

 

1,011

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(5,664)

 

 

(5,664)

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

120

 

 

 —

 

 

120

Balance, March 31, 2019

 

26,934

 

$

 —

 

$

583,990

 

$

(301)

 

$

(250,772)

 

$

332,917

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ordinary Shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

Accumulated

 

 

 

 

 

    

Shares

    

Amount

    

Paid-In Capital

    

Comprehensive Income

    

Deficit

    

Total

 

Balance, December 31, 2017

 

26,482

 

$

 —

 

$

568,593

 

$

(17)

 

$

(224,380)

 

$

344,196

 

Issuance for share-based compensation, net of forfeitures

 

19

 

 

 —

 

 

(112)

 

 

 —

 

 

 —

 

 

(112)

 

Exercise of options

 

 2

 

 

 —

 

 

15

 

 

 —

 

 

 —

 

 

15

 

Share-based compensation

 

 —

 

 

 —

 

 

3,283

 

 

 —

 

 

 —

 

 

3,283

 

Net loss

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(6,346)

 

 

(6,346)

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 

 —

 

 

(83)

 

 

 —

 

 

(83)

 

Balance, March 31, 2018

 

26,503

 

$

 —

 

$

571,779

 

$

(100)

 

$

(230,726)

 

$

340,953

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

 

 

 

 

6


 

 

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW S

(IN THOUSANDS)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

 

$

(5,664)

 

$

(6,346)

 

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

11,958

 

 

7,860

 

Share-based compensation expense

 

 

1,011

 

 

3,283

 

Provision for bad debts

 

 

186

 

 

249

 

Deferred income tax provision

 

 

77

 

 

(155)

 

Inventory adjustment

 

 

60

 

 

52

 

Loss on disposal of assets

 

 

529

 

 

553

 

Amortization of deferred financing fees

 

 

254

 

 

239

 

Other

 

 

33

 

 

12

 

Change in operating assets and liabilities:

 

 

 

 

 

  

 

Trade receivables

 

 

(1,325)

 

 

1,103

 

Inventory

 

 

671

 

 

(512)

 

Prepaid expenses and other current assets

 

 

(1,200)

 

 

708

 

Long-term receivable

 

 

1,722

 

 

1,656

 

Right-of-use assets

 

 

416

 

 

 —

 

Other assets

 

 

(2,358)

 

 

(1,023)

 

Current liabilities

 

 

(6,599)

 

 

(2,717)

 

Operating lease liabilities, non-current

 

 

(257)

 

 

 —

 

Long-term liabilities

 

 

57

 

 

122

 

Net cash (used in) provided by operating activities

 

 

(429)

 

 

5,084

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Capital expenditures

 

 

(7,177)

 

 

(2,847)

 

Proceeds from sale of fixed assets

 

 

11

 

 

 —

 

Net cash paid for acquisition of assets or business

 

 

 —

 

 

(6,653)

 

Net cash used in investing activities

 

 

(7,166)

 

 

(9,500)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Payments of long-term debt

 

 

(1,640)

 

 

(1,808)

 

Payment of deferred financing fees

 

 

 —

 

 

(71)

 

Payments of secured borrowings

 

 

(158)

 

 

 —

 

Payments of acquisition contingent consideration

 

 

(670)

 

 

 —

 

Proceeds from exercise of stock options

 

 

1,472

 

 

15

 

Shares withheld to cover minimum tax withholdings on equity awards

 

 

(620)

 

 

(112)

 

Net cash used in financing activities

 

 

(1,616)

 

 

(1,976)

 

Effect of exchange rates on cash, cash equivalents and restricted cash

 

 

 8

 

 

(7)

 

Change in cash, cash equivalents and restricted cash

 

 

(9,203)

 

 

(6,399)

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

60,771

 

 

122,359

 

Cash, cash equivalents and restricted cash at end of period

 

$

51,568

 

$

115,960

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

7


 

 

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

 

 

1. Description of the Business

 

AquaVenture Holdings Limited is a British Virgin Islands (“BVI”) company, which was formed on June 17, 2016 for the purpose of completing an initial public offering (“IPO”) as the U.S. Securities and Exchange Commission (the “SEC”) registrant and carrying on the business of AquaVenture Holdings LLC and its subsidiaries. AquaVenture Holdings Limited and its subsidiaries (collectively, “AquaVenture” or the “Company”) provides its customers Water‑as‑a‑Service ® (“WAAS   ® ”) solutions through two operating platforms: Seven Seas Water and Quench. Both operations are critical to AquaVenture, which is headquartered in the BVI.

 

Seven Seas Water offers WAAS solutions by providing outsourced desalination, wastewater treatment and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Seven Seas Water’s desalination solutions utilize reverse osmosis and other purification technologies to produce potable and high purity industrial process water in high volumes for customers operating in regions with limited access to potable water. Through this outsourced desalination service model, Seven Seas Water assumes responsibility for designing, financing, constructing, operating and maintaining the water treatment facilities. In exchange, Seven Seas Water enters into long‑term agreements to sell to customers agreed‑upon quantities of water that meet specified water quality standards. For its wastewater treatment and water reuse solutions, Seven Seas Water designs, fabricates and installs plants which can be sold or leased to customers for a contractual term. The wastewater treatment and water reuse solutions offered include scalable modular treatment plants, field-erected plants and temporary bypass plants.

 

Seven Seas Water currently operates in the Caribbean region, the United States and in South America and is pursuing new opportunities in North America, the Caribbean, South America, Africa, the Middle East and other select markets. Seven Seas Water is supported by operations centers in Tampa, Florida and Houston, Texas, which provide business development, engineering, field service support, procurement and administrative functions.

Quench offers WAAS solutions by providing bottleless filtered water coolers and related services through direct and indirect sales channels. Through its direct sales channel, Quench primarily rents and services point-of-use (“POU”) units to institutional and commercial customers. Quench’s typical initial rental contract ranges from two to four years in duration and contains an automatic renewal provision. Quench’s indirect sales channel provides POU systems, filters, parts and services to networks of approximately 250 dealers and retailers.

Quench primarily operates throughout the United States and Canada. Quench is supported by an operations center in King of Prussia, Pennsylvania, which provides marketing and business development, field service and supply chain support, customer care and administrative functions.

 

2. Summary of Significant Accounting Policies

 

Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 2—“Summary of Significant Accounting Policies” of the notes to the audited consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended. 

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC regarding interim financial reporting. Accordingly, certain information and footnotes normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying

8


 

notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of March 31, 2019, the unaudited condensed consolidated statements of operations and comprehensive income for the three months ended March 31, 2019 and 2018, the unaudited condensed consolidated statements of changes in equity for the three months ended March 31, 2019 and 2018, and the unaudited condensed consolidated statements of cash flows for the three months ended March 31, 2019 and 2018. The unaudited condensed consolidated balance sheet as of December 31, 2018 was based on the audited consolidated balance sheet as of December 31, 2018, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

 

The unaudited condensed consolidated financial statements include the accounts of AquaVenture Holdings Limited and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with GAAP requires management 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include: accounting for revenue from contracts with customers and the determination of transaction prices and allocation of revenues to remaining performance obligations; accounting for leases and the determination of operating lease liabilities and right-of-use assets; accounting for goodwill and identifiable intangible assets and any related impairment; property, plant and equipment and any related impairment; contract costs and any related impairment; share‑based compensation; allowance for doubtful accounts; obligations for asset retirement; acquisition contingent consideration; and valuation of deferred income taxes. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

 

Leases

 

Lessee accounting

 

The Company leases space and operating assets, including offices, office equipment, warehouses, storage yards and storage units under non-cancelable operating leases. The Company accounts for these leases in accordance with the authoritative guidance adopted as of January 1, 2019. Please see “Adoption of New Accounting Pronouncements” section below for information regarding this adoption.

 

At the time of contract inception, the Company determines if an arrangement is or contains a lease. If the arrangement contains a lease, the Company recognizes a right-of-use asset and an operating lease liability at the lease commencement date. Lease expense for lease payments made is recognized on a straight-line basis over the lease term.

 

The operating lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. The current portion of the Company’s operating lease liabilities are recorded within accrued liabilities in the consolidated balance sheets.

 

The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the operating lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the operating lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Right-of-use assets are periodically reviewed for impairment whenever events or changes in circumstances arise. During the three months ended March 31, 2019, the Company had incurred no impairment charges related to right-of-use assets.

 

Key estimates and judgments in determining both the operating lease liability and right-of-use asset include the determination of (i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) the lease term and (iii) the lease payments.

9


 

 

The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally derives an incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

 

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

 

Lease payments included in the measurement of operating lease liabilities are comprised of the following:

 

·

fixed payments;

·

variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and

·

the exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise the option.

 

In certain instances, the Company's leases include non-lease components, such as equipment maintenance or common area maintenance. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company has not elected the practical expedient to account for the lease and non-lease components as a single lease component and has elected (for all classes of underlying assets) to account for these components separately. The Company allocates the consideration in the contract to the lease and non-lease components based on each component's relative standalone price. The Company determines standalone prices for the lease components based on the prices for which other lessors lease similar assets on a standalone basis. The Company determines standalone prices for the non-lease components based on the prices that suppliers might charge for those types of services on a standalone basis. If observable standalone prices are not readily available, the Company estimates the standalone prices maximizing the use of observable information.

 

The Company has elected to utilize the short-term lease exemption and not recognize a right-of-use asset and corresponding operating lease liability for leases with expected terms of 12 months or less. The Company recognizes the lease payments associated with its short-term leases on a straight-line basis over the lease term.

 

Lessor accounting

 

The Company generates revenues through the lease of its bulk water facilities, wastewater treatment and water reuse equipment, and filtered water and related systems equipment to customers. In certain instances, the Company enters into a contract with a  customer but must construct the underlying asset, including bulk water facilities and wastewater treatment and water reuse equipment, prior to its lease.

 

At the time of contract inception, the Company determines if an arrangement is or contains a lease.

 

Customer contracts that contain leases, which can be explicit or implicit in the contract, are generally classified as either operating leases or sales-type leases and can contain both lease and non-lease components, including operating and maintenance services (“O&M”) of the Company-owned equipment. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company elected the practical expedient for all classes of underlying assets to not separate the lease and non-lease components if certain conditions are met, including the classification of the lease component as operating and the revenue recognition pattern of both the lease and non-lease components. The Company will account for the contract with the customer as a combined component under the respective authoritative guidance for the predominant element in the contract, the lease or non-lease component.

 

For leases classified as sales-type leases, the Company allocates the transaction price based on the relative standalone selling prices of the identified performance obligations.

 

10


 

If the customer contract contains or is accounted for as a lease, the key estimates and judgments used by the Company in accounting for the lease as a lessor include the following: (i) lease term, (ii) the economic life of the underlying leased asset, (iii) determination of lease payments and (iv) determination of the fair value at the time of contract inception and the residual fair value of the underlying leased asset.

 

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the Company. Contracts entered into with customers can include either the option to renew or an auto-renewing provision that results in the automatic extension of the existing contract. In certain instances, key provisions such as the lease payment or term of the renewal are not stated and are subject to negotiation.  

 

The economic life of the underlying leased asset is determined to be either the period over which the asset is expected to be economically usable, or where the benefits it can produce exceed the cost to replace or undertake major repairs. In certain instances, the economic life of the underlying leased asset can exceed the useful life assigned by the Company.

 

Lease payments that are accounted for as rental revenue are comprised of the following:

 

·

fixed payments;

·

variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date;

·

the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise the option; and

·

payments for penalties for the termination of a lease if the term reflects the lessee terminating the lease; and

 

The Company’s leases do not typically include a requirement for the customer to guarantee the residual value of the underlying leased asset. Variable lease payments that do not depend on an index or rate are excluded from the determination of lease payments.

 

The fair value of the underlying leased asset at contract inception and residual fair value of underlying leased asset at the end of the term of the lease are determined based on the price that would be received to sell an asset in an orderly transaction at the time of valuation. The Company’s risk management strategy for protecting the residual fair value of the underlying assets include the ongoing maintenance by the Company during the lease term as well as clauses and other protections within the lease agreements which require the lessee to return the underlying asset in working condition at the end of the lease term.

 

At contract inception, the Company determines the lease classification of the underlying asset. The Company considers inputs such as the lease term, lease payments, fair value of the underlying asset and residual fair value of the underlying asset when assessing the classification. The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease. The rate implicit in the lease is the rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that the Company expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the Company and (2) any deferred initial direct costs of the Company.

 

In certain instances, contracts with customers may also include the option for the customer to purchase the underlying asset at the end of the lease term. When applicable and certain conditions are met, the Company will incorporate the stated purchase price into the determination of its implied interest rate.

 

Revenue Recognition

Through the Seven Seas Water and Quench operating platforms, the Company generates revenues from the following primary sources: (i) bulk water sales and services; (ii) service concession arrangements; (iii) rental of equipment; and (iv) product sales. The revenue recognition policy for each of the primary sources of revenue are as follows:

11


 

Bulk Water Sales and Services.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers with a single performance obligation to deliver bulk water or a series of performance obligations to perform substantially the same services with the same pattern of transfer, which can include the operations and maintenance (“O&M”) of a customer-owned or leased plant. The Company recognizes revenues from the delivery of bulk water or the performance of bulk water services at the time the water or services are delivered to the customers in accordance with the contractual agreements. Billings to the customer for both bulk water and the bulk water services are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for bulk water sales and service can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenue will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. Estimates of revenue for unbilled water are recorded when meter readings occur at a time other than the end of a period. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period. Revenues generated from both the delivery of bulk water and performance of services related to bulk water are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Certain contracts with customers which require the construction of facilities to provide bulk water to a specific customer include two performance obligations, including an implicit lease for the bulk water facilities and bulk water services, and a non-lease component related to O&M services. The implicit lease performance obligation is generally accounted for as an operating lease as a result of the provisions of the contract. As the bulk water services are deemed to be the more predominant element, the Company considers the arrangement to be a combined bulk water component. The calculated transaction price can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and contractually established rates. The revenue recognition pattern for both the lease and non-lease components are the same, with revenues being recognized ratably over the contract period as delivered to the customer. Revenues generated from both the lease and non-lease performance obligations are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Service Concession Arrangements.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers that are determined to be service concession arrangements. Service concession arrangements are agreements entered into with a public sector entity which controls both (i) the ability to modify or approve the services and prices provided by the operating company and (ii) beneficial entitlement to, or residual interest in, the infrastructure at the end of the term of the agreement. Service concession arrangements typically include more than one performance obligation, including the construction of infrastructure for the customer and an obligation to provide O&M services for the infrastructure constructed for the customer. Billings to the customer for service concession arrangements are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for service concession arrangements includes, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. The transaction price is allocated to the identified performance obligations based on the relative standalone selling prices of the identified performance obligations.

The transaction price allocated to the construction of infrastructure performance obligation is recognized as product sales within the consolidated statements of operations and comprehensive income. Product sales are recognized over time, using the input method based on cost incurred, which typically begins at commencement of the construction with revenue being fully recognized upon the completion of the infrastructure as control of the infrastructure is, or is deemed to be, transferred to the customer. In addition, service concession contracts typically include a difference in timing of when control is, or is deemed to be, transferred and the collection of cash receipts, which are collected over the term of the entire arrangement. The timing difference could result in a significant financing component for the

12


 

construction performance obligations if determined to be a material component of the transaction price. If a significant financing component is identified, the future cash flows included in the transaction price allocated to the construction performance obligations are discounted using a discount rate comparable to a market-based borrowing rate specific to both the customer and terms of the contract. The resulting present value of the allocated future cash flows is recorded as construction revenue with a related long-term receivable as control of the infrastructure is, or is deemed to be, transferred to the customer while the discount amount is considered to be the significant financing component. Future cash flows received from the customer related to the construction performance obligations are bifurcated between principal repayment of the long-term receivable and the related imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income as providing financing to our customers is a core component of our business model.

The transaction price allocated to the O&M performance obligation is recorded as bulk water revenue within the consolidated statements of operations and comprehensive income as the services are provided to the customer. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period.

Rental of Equipment.  Through the Seven Seas Water and Quench operating platforms, the Company generates revenues through the rental of its wastewater treatment and water reuse equipment and filtered water and related systems to customers. Rental agreements classified as operating leases can contain both lease and non-lease components, including O&M services on Company-owned equipment. For rental agreements that meet all conditions of the elected practical expedient to not separate lease and non-lease components and where the lease component is determined to be the predominant element of the contract, the Company allocates all revenues under the contract to the lease component of the contract. Billings to the customer for the rental of this equipment, which generally occur either monthly or quarterly, are based on the rental rate as stated within the rental agreement. The transaction price is based on the minimum lease payment as stated within the rental agreement. Rental revenues, including revenues in connection with certain installation type activities are recognized ratably over the rental agreement term and amounts paid by customers in excess of recognizable revenue are recorded as a contract liability, or deferred revenue, in the consolidated balance sheets.

Certain revenues associated with shipping, delivery, installation or similar activities that occur prior to lease commencement do not provide a service to the lessee and are not a non-lease component of the contract. Payments for these activities are recorded as prepaid lease payments which are recognized ratably with the rental revenue over the lease term. Upon the expiration of the initial rental agreement term, the Company may enter into rental agreement extensions in which revenues are recognized ratably over the extension term.

Revenues generated under these rental agreements are recorded as rental revenue within the consolidated statements of operations and comprehensive income.

Product Sales.  Through both the Seven Seas Water and Quench operating platforms, the Company enters into contracts to construct desalination and wastewater treatment and water reuse equipment and facilities and to sell customers water and related filtration equipment, coffee and consumables, which may include contracts accounted for as sales-type leases.

Contracts with customers to sell water and related filtration equipment and coffee and consumables typically include a single performance obligation. The Company recognizes revenues at the time the equipment, coffee or consumables is transferred to the customer, which can be upon either shipment or delivery to the customer. The transaction price is based on the contractual price with the customer. Shipping and handling costs paid by the customer are included in revenues. Billings to the customer for the sale of water and related filtration equipment, coffee and consumables occur at the time the product is transferred to the customer and are based on contract price.

Contracts with customers to construct desalination and wastewater treatment and water reuse equipment and facilities typically include a single performance obligation. Construction and equipment revenues are recognized over time, using the input method based on cost incurred, which typically begins at the later of commencement of the construction or at the time the infrastructure is or is deemed to be transferred to the customer with revenue being fully recognized upon the completion of the infrastructure. Billings to the customer to construct desalination and wastewater treatment and water reuse equipment and facilities can occur at contractual intervals throughout the construction period,

13


 

at the time the equipment or facility is deemed transferred to the customer, or, in the case of sales-type leases, as stated within the rental agreement. The transaction price is based on the contractual price with the customer.

For contracts deemed to be, or that include a sales-type lease, the transaction price is based on the minimum lease payments as stated within the rental agreement. For contracts that contain both a lease and non-lease components, the transaction price is allocated based on the relative standalone selling prices of the lease and non-lease components. The transaction price, excluding variable lease payments, allocated to the lease component is discounted at the implicit rate of the contract and is recognized as revenue upon commencement of the lease.

Revenues generated under these contracts are recorded as product sales revenue within the consolidated statements of operations and comprehensive income.

Future cash flows received from sales-type leases are bifurcated between principal repayment of the long-term receivable and the related imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income.

Contract Costs

Contract costs includes contract acquisition costs and contract fulfillment costs, which are all recorded within other assets in the consolidated balance sheets.

Contract Acquisition Costs.     Prior to January 1, 2019, the Company accounted for initial direct costs incurred by the Company to originate leases as deferred lease costs. The costs capitalized were directly related to the negotiation and execution of leases and primarily consisted of internal compensation and benefits as lease origination activities were performed internally by the Company. Deferred lease costs capitalized prior to the adoption of the authoritative guidance on leases will be amortized on a straight-line basis over the remaining lease term.

For all leases originated on or after January 1, 2019, subsequent to the adoption of authoritative guidance on leases, the incremental costs incurred by the Company to originate contracts with customers are capitalized as contract acquisition costs. Contract acquisition costs, which generally include commissions and other costs that are only incurred as a result of obtaining a contract, are capitalized when the incremental costs are expected to be recovered over the contract period. All other costs incurred regardless of obtaining a contract are expensed as incurred. Contract acquisition costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the contract term, on a basis consistent with the transfer of goods or services to the customer to which the costs relate.

Contract acquisition costs, net as of March 31, 2019 and December 31, 2018 were $3.9 million and $3.7 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Contract Fulfillment Costs.     Costs incurred by the Company to fulfill a contract with a customer and are capitalized when the costs generate or enhance resources that will be used in satisfying future performance obligations of the contract and the costs are expected to be recovered. Capitalized contract fulfillment costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to fulfill the contract, including shipping and installation activities. Contract fulfillment costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the contract term, on a basis consistent with the transfer of good or services to the customer to which the costs relate.

Contract fulfillment costs, net as of March 31, 2019 and December 31, 2018 were $2.8 million and $1.5 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Total contract costs amortization expense for the three months ended March 31, 2019 and March 31, 2018 were $0.9 million and $0.6 million respectively.

Contract costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company had no impairment charges related to contract costs during the three months ended March 31, 2019.

14


 

Adoption of New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. During 2018, the FASB issued additional authoritative guidance which, among other things, provided an option to apply transition provisions under the standard at adoption date rather than the earliest comparative period presented as well as added a practical expedient that would permit lessors to not separate non-lease components from the associated lease components if certain conditions are met. These amendments are effective, in conjunction with the new lease standard, for annual reporting periods beginning on or after December 15, 2018, including interim periods within those annual periods.

The Company adopted this guidance on a modified retrospective basis on January 1, 2019 with the cumulative effect of the transition as of the date of adoption.

The Company has elected the package of practical expedients provided for within the authoritative guidance which exempts the Company from having to reassess: (i) whether expired or existing contracts contain leases, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. In addition, the Company has elected the practical expedient that permits lessors to not separate non-lease components from the associated lease components if certain conditions are met. Lastly, the Company has utilized the short-term exemption for lessees and established an accounting policy to not recognize a right-of-use asset or lease liability for any lease with a term of less than 12 months. The Company did not elect to utilize any of the other practical expedients. 

The impacts of the new lease standard are as follows:

Lessee accounting  - The adoption has had a material impact on the consolidated balance sheets, including an increase to both assets and liabilities, as a result of the recognition of a right-of-use asset and corresponding lease liability for operating leases. As the Company has made a policy election for the short-term lease exemption, a right-of-use asset and corresponding lease liability are only recorded for leases with expected terms of more than 12 months. The adoption did not have a material impact on the consolidated statements of operations and comprehensive income for situations in which the Company is a lessee.

Lessor accounting  - As the Company has elected the transitional practical expedients for leases, there are not any material impacts to the consolidated financial statements for leases in situations which the Company is a lessor and the lease commenced prior to January 1, 2019. To conform with the guidance, the Company has updated its policies for costs incurred for the acquisition and fulfillment of the lease contracts, including commissions and installation costs.

Adoption of the new lease standard did not impact our historically reported results. On January 1, 2019, the Company recorded $8.7 million of right-of-use assets and $8.9 million of operating lease liabilities, including the classification of $0.2 million from straight-line rent liabilities to operating lease liabilities, in the consolidated balance sheets.

 

New Accounting Pronouncements to be Adopted

In August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In March 2019, the FASB issued authoritative guidance regarding targeted changes to lessor accounting. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

 

 

 

15


 

3. Business Combinations and Asset Acquisitions

 

Business Combinations

 

Pure Health Solutions, Inc.

 

On December 18, 2018, Quench USA, Inc. (“Quench”), a wholly-owned subsidiary of AquaVenture Holdings Limited, acquired all of the issued and outstanding shares of Pure Health Solutions, Inc. (“PHSI”) pursuant to a stock purchase agreement (the “PHSI Acquisition”). PHSI, which is based outside of Chicago, is a leading provider of filtered water coolers and related services through direct and indirect sales channels. The Company paid approximately $57.0 million, in the aggregate, which included approximately $39.5 million of cash related to the purchase price of PHSI, net of an estimated adjustment to reduce the purchase price of $1.2 million, and approximately $17.5 million of cash accounted for as a post-combination payoff of factored contract liabilities which had been accounted for as a secured borrowing. The factored contract liabilities were adjusted to fair value as of the acquisition date based on the present value of the factored contract liabilities using a discount rate of approximately 7% and any penalties associated with the payoff, which were accounted for as a post-combination transaction.

 

 Related transaction costs incurred by the Company during the three months ended March 31, 2019 were $0.1 million, which were expensed as incurred within selling, general and administrative (“SG&A”) expenses in the consolidated statements of operations and comprehensive income.

 

The Quench business completed the PHSI Acquisition to expand its installed base of POU systems and to be able to participate more broadly in the global POU market through the PHSI distribution network. In addition, the PHSI Acquisition enhances Quench’s ability to develop, source and manufacture exclusive coolers and purification offerings. Lastly, it offers us the opportunity to develop relationships with POU dealers that could lead to future acquisitions.

 

The following table summarizes the preliminary purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination and liabilities assumed (in thousands):

 

 

 

 

 

 

Assets acquired:

    

 

  

 

Cash and cash equivalents

 

$

260

  

Trade receivables

    

 

1,167

 

Inventory

 

 

2,606

 

Prepaid expenses and other current assets

 

 

447

 

Property, plant and equipment

 

 

6,410

 

Deferred tax asset

 

 

108

 

Identified intangible assets

 

 

31,550

 

Goodwill

 

 

20,374

 

Total assets acquired

 

 

62,922

 

Liabilities assumed:

 

 

 

 

Accounts payable and accrued liabilities

 

 

(22,652)

 

Deferred revenue

 

 

(329)

 

Other long-term liabilities

 

 

(450)

 

Total liabilities assumed

 

 

(23,431)

 

Total purchase price

 

$

39,491

 

16


 

 

As of March 31, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed remains preliminary. The preliminary purchase price allocation has been developed based on estimates of fair values using the historical financial statements of PHSI prior to the acquisition along with assumptions made by management. Although the Company does not expect the final allocation to vary significantly, there may be adjustments made to the preliminary purchase price allocation that could result in changes to the preliminary fair values allocated, assigned useful lives and associated amortization recorded. The assets and liabilities in the preliminary purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The final valuation of the intangibles identified is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above .  

 

The estimated weighted average useful life for customer relationships, trade names, and non-compete agreements is 20 years, 12 years, and 5 years, respectively.

 

Goodwill is composed of the acquired workforce and synergies not valued and is not deductible for tax purposes. Goodwill for the PHSI Acquisition is recorded within the Quench reportable segment.

 

The results of the operations of the acquired PHSI assets are included in the Quench reportable segment after the date of the PHSI Acquisition.

 

The Company identified certain liabilities, including tax matters that existed prior to December 18, 2018. The Company believes the liabilities are indemnified pursuant to the stock purchase agreement for the PHSI Acquisition. As a result, the Company recorded a liability in the amount of $0.8 million which was recorded in accrued liabilities and an indemnification receivable in the amount of $0.8 million, which was recorded in prepaids and other current assets in the consolidated balance sheet as of March 31, 2019.

 

Commencing on December 18, 2018, the Company initiated a restructuring of the PHSI organization which included the reduction of headcount for PHSI executive management and other employee positions determined to be duplicative with those at Quench. Certain of the positions were backfilled with additional positions at Quench depending on the needs of the business. The net effect of the restructuring will allow Quench to recognize synergies of reduced employee costs subsequent to the PHSI Acquisition. The restructuring was determined to be a post-combination transaction. During the three months ended March 31, 2019, the Company incurred an incremental restructuring-related charge related to severance, termination benefits and related taxes of $0.1 million which was recorded within SG&A expenses in the consolidated statements of operations and comprehensive income. As of March 31, 2019 and December 31, 2018, the Company had accrued approximately $0.5 million and $0.8 million, respectively, within accrued liabilities on the consolidated balance sheets. Remaining severance payments are expected to be made during 2019. The Company expects to incur an additional charge of $0.1 million during the second quarter of 2019.

 

FB Global Development, Inc., d/b/a Bluline

 

On December 3, 2018, Quench acquired substantially all the assets and assumed certain liabilities of FB Global Development, Inc., d/b/a Bluline (“Bluline”) pursuant to an asset purchase agreement (the “Bluline Acquisition”). Bluline, based in South Florida, is a provider of filtered water coolers and related services through direct and indirect sales channels. The aggregate purchase price, subject to working capital adjustments, of the Bluline Acquisition was $2.5 million in cash and $0.3 million payable which is expected to be paid in full by December 2019.

 

There were no related transaction costs incurred by the Company during the three months ended March 31, 2019.

 

The Quench business completed the Bluline Acquisition to expand its installed base of POU systems and to be able to participate more broadly in the global POU market through its indirect sales channel. 

 

17


 

The following table summarizes the preliminary purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed (in thousands):

 

 

 

 

 

 

Assets acquired:

    

 

  

 

Trade receivables

    

$

90

  

Inventory

 

 

345

 

Property, plant and equipment

 

 

331

 

Identified intangibles

 

 

1,462

 

Goodwill

 

 

645

 

Total assets acquired

 

 

2,873

 

Liabilities assumed:

 

 

 

 

Deferred revenue

 

 

(10)

 

Total liabilities assumed

 

 

(10)

 

Total purchase price

 

$

2,863

 

 

As of March 31, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the Bluline Acquisition, and liabilities assumed remains preliminary. The preliminary purchase price allocation has been developed based on estimates of fair values using the historical financial statements of Bluline prior to the acquisition along with assumptions made by management. Although the Company does not expect the final allocation to vary significantly, there may be adjustments made to the preliminary purchase price allocation that could result in changes to the preliminary fair values allocated, assigned useful lives and associated amortization recorded. The assets and liabilities in the preliminary purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements.

 

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 20 years and 5 years, respectively.

 

Goodwill for this acquisition is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reportable segment.

 

The results of the operations of the acquired Bluline assets are included in the Quench reportable segment from and after the date of acquisition.

 

AUC Acquisition Holdings

 

On November 1, 2018, AquaVenture Holdings Inc., a wholly owned subsidiary of AquaVenture, acquired all of the issued and outstanding membership interests of AUC Acquisition Holdings (“AUC”), a provider of wastewater treatment and water reuse solutions based in Houston, Texas, pursuant to a membership interest purchase agreement (the “AUC Acquisition”).  The aggregate purchase price was $130.9 million, including $127.0 million cash (including net working capital adjustments of $0.4 million), approximately 122 thousand ordinary shares of AquaVenture, or $2.0 million, and $1.9 million of acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future collection of assumed receivables. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $2.0 million.

 

Related transaction costs incurred by the Company during the three months ended March 31, 2019 were $0.1 million, which were expensed as incurred within SG&A expenses in the consolidated statements of operations and comprehensive income.

 

The Company completed the AUC Acquisition to expand its WAAS offerings in the wastewater treatment and water reuse businesses and broaden the Company’s existing portfolio in the United States.

18


 

 

The following table summarizes the preliminary purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed (in thousands):

 

 

 

 

 

 

Assets acquired:

    

 

  

 

Cash and cash equivalents

 

$

849

  

Trade receivables

    

 

1,763

 

Inventory

 

 

2,642

 

Current portion of long-term receivables

 

 

521

 

Prepaid expenses and other current assets

 

 

1,673

 

Property, plant and equipment

 

 

32,266

 

Other assets

 

 

25

 

Long-term receivables

 

 

306

 

Identified intangible assets

 

 

47,310

 

Goodwill

 

 

63,041

 

Total assets acquired

 

 

150,396

 

Liabilities assumed:

 

 

 

 

Accounts payable and accrued liabilities

 

 

(4,286)

 

Deferred revenue

 

 

(1,021)

 

Other long-term liabilities

 

 

(1,706)

 

Deferred tax liability

 

 

(12,483)

 

Total liabilities assumed

 

 

(19,496)

 

Total purchase price

 

$

130,900

 

 

During the first quarter of 2019, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. Intangibles identified and valued related to the transaction include customer relationships, trade names, non-compete agreements and backlog. The final valuation of the intangibles identified  is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above . The estimated fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer. The estimated fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues. The estimated fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss. The estimated fair value of the backlog, which represents revenues and the related profit for contracts executed but not yet completed, was determined using the multi-period excess earnings method.

 

The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names, non-compete agreements and backlogs is 20 years, 15 years, 4.9 years, and 0.7 years, respectively.

 

There was not a material impact on the amortization expense recorded during the three months ended March 31, 2019 as a result of the measurement period adjustments made to the purchase price allocation during the three months ended March 31, 2019.

 

Goodwill is composed of the acquired workforce and synergies not valued and is not deductible for tax purposes. Goodwill for the AUC Acquisition is recorded within the Seven Seas Water reportable segment.

 

The results of the operations of the acquired AUC assets are included in the Seven Seas Water reportable segment after the date of acquisition.

 

Alpine Water Systems, LLC

 

On August 6, 2018, Quench acquired substantially all the assets and assumed certain liabilities of Alpine Water Systems, LLC (“Alpine”), a POU water filtration company based in Las Vegas, Nevada, pursuant to an asset purchase

19


 

agreement (the “Alpine Acquisition”). The aggregate purchase price of the Alpine Acquisition was $15.0 million, including $14.5 million in cash (including final working capital adjustment of $0.1 million which was received during the three months ended March 31, 2019), $0.4 million payable on August 6, 2020, and $0.1 million of acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future performance of the acquired assets. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $0.3 million. In addition, the asset purchase agreement includes contingent payments with the ultimate payout based upon the future performance of the acquired assets. The contingent payments are automatically forfeited if the employment of certain selling shareholders terminates. The Company has determined that the contingent payments will be post combination compensation expense, which will be accreted to their estimated payout amount of $0.4 million throughout the substantive service period. The undiscounted range of outcomes for the post combination compensation payout amount is $0 to $1.1 million. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States and Canada.

 

Related transaction costs incurred by the Company during the three months ended March 31, 2019 were $0.2 million, which were expensed as incurred within SG&A expenses in the consolidated statements of operations and comprehensive income.

 

The Quench business completed the asset acquisition to expand its installed base of POU systems.

 

The following table summarizes the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed (in thousands), subject to measurement period adjustments:

 

 

 

 

 

 

 

Assets acquired:

    

 

  

 

Trade receivables

    

$

556

 

Inventory

 

 

141

 

Prepaid expenses and other current assets

 

 

153

 

Property, plant and equipment

 

 

1,562

 

Customer relationships

 

 

6,280

 

Non-compete agreements

 

 

1,149

 

Goodwill

 

 

6,006

 

Total assets acquired

 

 

15,847

 

Liabilities assumed:

 

 

 

 

Accounts payable and accrued liabilities

 

 

(295)

 

Deferred revenue

 

 

(565)

 

Total liabilities assumed

 

 

(860)

 

Total purchase price

 

$

14,987

 

 

As of March 31, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed remains subject to measurement period adjustments. During the first quarter of 2019, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 13.4%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 13.4%.  

 

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 15 years and 5 years, respectively.

 

There was not a material impact on the amortization expense recorded during the three months ended March 31, 2019 as a result of the measurement period adjustments made to the purchase price allocation during the three months

20


 

ended March 31, 2019.

 

Goodwill is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reportable segment.

 

The results of the operations of the acquired Alpine assets are included in the Quench reportable segment from and after the date of acquisition.

 

Wa-2 Water Company Ltd.

 

On March 1, 2018, Quench Canada, Inc., a wholly-owned subsidiary of the Company, acquired substantially all of the water filtration assets and assumed certain liabilities of Wa-2 Water Company Ltd. (“Wa-2”), pursuant to an asset purchase agreement for an aggregate purchase price of $5.1 million in cash, including a final working capital adjustment of approximately $5 thousand which was paid in June 2018 (the “Wa-2 Acquisition”). Approximately $0.3 million of the aggregate purchase price, subject to adjustment, was held in escrow for a period of one year by a third party for seller indemnifications. Wa-2 is a POU water filtration company based in Vancouver, British Columbia. The assets acquired consist primarily of in-place lease agreements and the related POU systems.

 

Related transaction costs incurred by the Company during the three months ended March 31, 2018 were $0.1 million. There were no related transaction costs incurred by the Company during the three months ended March 31, 2019.

 

The Quench business completed the Wa-2 Acquisition to expand its installed base of POU systems in Canada.

 

The following table summarizes the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed (in thousands):

 

 

 

 

 

 

Assets acquired:

    

 

  

 

Trade receivables

    

$

134

 

Inventory

 

 

158

 

Prepaid expenses and other current assets

 

 

 6

 

Property, plant and equipment

 

 

424

 

Customer relationships

 

 

1,561

 

Trade names

 

 

700

 

Non-compete agreements

 

 

298

 

Goodwill

 

 

2,239

 

Total assets acquired

 

 

5,520

 

Liabilities assumed:

 

 

 

 

Accounts payable and accrued liabilities

 

 

(86)

 

Deferred revenue

 

 

(328)

 

Total liabilities assumed

 

 

(414)

 

Total purchase price

 

$

5,106

 

 

As of March 31, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed is considered final. During the second quarter of 2018, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 12.9%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 12.9%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss using a discount rate of 12.9%. The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names and non-compete agreements to be 20 years, 12 years, and 5 years, respectively.

21


 

 

There was not a material impact on the amortization expense recorded during the three months ended March 31, 2019 as a result of the measurement period adjustments made to the purchase price allocation during 2018.

 

Goodwill is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reporting segment.

 

The results of the operations of the acquired Wa-2 assets are included in the Quench reportable segment from and after the date of acquisition.

 

Pro Forma Financial Information

 

The following unaudited pro forma financial information (in thousands, except for per share amounts) for the Company gives effect to the acquisitions of: (i) PHSI, which occurred on December 18, 2018; (ii) Bluline, which occurred on December 3, 2018; (iii) AUC, which occurred on November 1, 2018; (iv) Alpine, which occurred on August 6, 2018; and (v) Wa-2, which occurred on March 1, 2018, as if each had occurred on January 1, 2018. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future.

 

 

 

 

 

 

 

 

 

 

 

Three months ended

    

 

 

March 31, 

 

 

    

2019

    

2018

 

Revenues

 

$

46,562

 

$

44,410

 

Net loss

 

$

(5,664)

 

$

(10,005)

 

Loss per share

 

$

(0.21)

 

$

(0.38)

 

 

 

 

 

 

4. Revenue

 

Disaggregation of Revenue

 

The following table represents a disaggregation of revenue for the three months ended March 31, 2019 and 2018, along with the reportable segment for each category (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

  

 

 

Seven Seas

 

 

 

 

 

 

    

Water

 

Quench

 

Total

 

Bulk water

 

 

 

 

 

 

 

 

 

 

Water delivery

 

$

8,713

 

$

 —

 

$

8,713

 

Operating and maintenance

 

 

5,597

 

 

 —

 

 

5,597

 

Total bulk water

 

 

14,310

 

 

 —

 

 

14,310

 

Rental

 

 

 

 

 

 

 

 

 

 

Lease of equipment

 

 

3,139

 

 

18,668

 

 

21,807

 

Total rental

 

 

3,139

 

 

18,668

 

 

21,807

 

Financing

 

 

972

 

 

 —

 

 

972

 

Product sales

 

 

 

 

 

 

 

 

 

 

Construction of plants

 

 

1,696

 

 

 —

 

 

1,696

 

Sale of equipment, coffee and consumables

 

 

 —

 

 

7,777

 

 

7,777

 

Total product sales

 

 

1,696

 

 

7,777

 

 

9,473

 

Total revenues

 

$

20,117

 

$

26,445

 

$

46,562

 

 

22


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

  

 

 

Seven Seas

 

 

 

 

 

 

    

Water

 

Quench

 

Total

 

Bulk water

 

 

 

 

 

 

 

 

 

 

Water delivery

 

$

8,439

 

$

 —

 

$

8,439

 

Operating and maintenance

 

 

5,257

 

 

 —

 

 

5,257

 

Total bulk water

 

 

13,696

 

 

 —

 

 

13,696

 

Rental

 

 

 

 

 

 

 

 

 

 

Lease of equipment

 

 

 —

 

 

13,959

 

 

13,959

 

Total rental

 

 

 —

 

 

13,959

 

 

13,959

 

Financing

 

 

1,048

 

 

 —