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

 

 

 —

 

 

1,048

 

Product sales

 

 

 

 

 

 

 

 

 

 

Construction of plants

 

 

 —

 

 

 —

 

 

 —

 

Sale of equipment, coffee and consumables

 

 

 —

 

 

3,811

 

 

3,811

 

Total product sales

 

 

 —

 

 

3,811

 

 

3,811

 

Total revenues

 

$

14,744

 

$

17,770

 

$

32,514

 

 

Contract Assets and Liabilities

 

Contract assets include amounts related to our contractual right to consideration for completed performance obligations not yet invoiced. Contract liabilities include payments received in advance of performance under the contract or for differences between the amount billed to a customer and the revenue recognized for the completed performance obligation.

 

The following table provides information about contract assets and contract liabilities from contracts with customers at March 31, 2019 and December 31, 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

 

2018

    

Contract assets

 

 

 

 

 

 

 

Trade receivables, net

 

$

22,578

 

$

21,437

 

Current portion of long-term receivables

 

 

7,099

 

 

6,538

 

Long-term receivables

 

 

38,250

 

 

40,574

 

Total contract assets

 

$

67,927

 

$

68,549

 

 

 

 

 

 

 

 

 

Contract liabilities

 

 

 

 

 

 

 

Deferred revenue, current

 

$

4,298

 

$

3,890

 

Deferred revenue, non-current

    

 

10,741

 

 

10,690

 

Total contract liabilities

 

$

15,039

 

$

14,580

 

 

Significant changes in the contract asset and the contract liability balances during the period are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Three months ended

 

 

 

March 31, 2019

 

March 31, 2018

 

 

    

Contract assets
increase/(decrease)

 

Contract liabilities
(increase)/decrease

    

Contract assets
increase/(decrease)

 

Contract liabilities
(increase)/decrease

    

Revenue recognized that was included in the contract liability balance at January 1, 2018

 

$

 —

 

$

4,197

 

$

 —

 

$

2,733

 

Deferred revenue acquired during the period

 

$

 —

 

$

 —

 

$

 —

 

$

(356)

 

 

The Company had no asset impairment charges related to contract assets during the three months ended March 31, 2019 and March 31, 2018.

 

23


 

Transaction Price Allocated to Remaining Performance Obligations

 

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied (or partially unsatisfied) at the end of the reporting period (in thousands). The estimated revenue does not include amounts of variable consideration, including revenues based on changes to consumer price indices that are constrained. In addition, the estimated revenue is based on current contracts with customers and does not take into consideration contract terms not legally enforceable with the customer.

 

 

 

 

 

 

Remainder of 2019

    

$

48,184

    

2020

 

$

47,250

 

2021

 

$

47,098

 

2022

 

$

45,297

 

2023

 

$

45,297

 

Thereafter

 

$

314,342

 

 

The amounts presented in the table above primarily consist of bulk water sales and service, service concession arrangements and construction revenues for certain product sales contracts. The amounts presented in the table above do not include the rental of equipment accounted for as operating leases as these are included within the disclosure in Note 6—Leases. The transaction price for bulk water sales and service and service concession arrangements are based on contractual minimum monthly charges and the expected amount of variable consideration related to the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and the contractual rates. The remaining performance obligations to be performed generally include the delivery of bulk water or performance of O&M services with revenues being recognized as the remaining performance obligations are delivered to the customer. The transaction price for the construction revenues are based on the contractual price with the customer. The remaining performance obligations to be performed generally include the completed construction of the infrastructure.

 

5. Fair Value Measurements

 

At March 31, 2019 and December 31, 2018, the Company had the following assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:

 

·

U.S. Treasury securities are measured on a recurring basis and are recorded at fair value based on quoted market value in an active market, which is considered a Level 1 input.

 

·

Money market funds are measured on a recurring basis and are recorded at fair value based on each fund’s quoted market value per share in an active market, which is considered a Level 1 input.

 

·

Acquisition contingent consideration is measured on a recurring basis and is recorded at fair value based on a probability‑weighted discounted cash flow model which utilizes unobservable inputs such as the forecasted achievement of performance targets throughout the earn‑out period, which is considered a Level 3 input.

 

There were no transfers into or out of Level 1, 2 or 3 assets during the three months ended March 31, 2019. Transfers between levels are deemed to have occurred if the lowest level of input were to change.

 

24


 

The Company’s fair value measurements as of March 31, 2019 and December 31, 2018 were as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

 

    

Quoted Prices in

    

Significant

    

 

 

 

 

 

 

 

 

Active Markets

 

Other

 

Significant

 

 

 

Asset/

 

for Identical

 

Observable

 

Unobservable

 

Assets/Liabilities Measured at Fair Value

 

(Liability)

 

Assets (Level 1)

 

Inputs (Level 2)

 

Inputs (Level 3)

 

As of March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

4,089

 

$

4,089

 

$

 —

 

$

 —

 

U.S. Treasury securities

 

$

30,080

 

$

30,080

 

$

 —

 

$

 —

 

Acquisition contingent consideration

 

$

2,486

 

$

 —

 

$

 —

 

$

2,486

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

Money market funds

 

$

42,135

 

$

42,135

 

$

 —

 

$

 —

 

Acquisition contingent consideration

 

$

3,109

 

$

 —

 

$

 —

 

$

3,109

 

 

 

See Note 9—“Commitments and Contingencies” for changes in the estimated fair value and additional information on the acquisition contingent consideration.

 

6. 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 expiring at various dates with some containing escalation in rent clauses, rent concessions and/or renewal options. Minimum lease payments under operating leases are recognized on a straight-line basis over the term of the lease, including any periods of free rent.

The components of lease cost were as follows (in thousands):

 

 

 

 

 

 

 

Three Months Ended

 

 

March 31, 2019

Lease Cost

 

 

 

Operating lease cost

 

$

717

Short-term lease cost

 

 

118

Variable lease cost

 

 

 4

Total lease cost

 

$

839

 

The weighted-average remaining lease term and weighted-average discount rate for operating leases as of March 31, 2019 is 8.0 years and 9.9%, respectively. Cash paid for operating leases that are included in the measurement of lease liabilities during the three months ended March 31, 2019 was $0.5 million.

25


 

 

As of March 31, 2019, the maturities of the Company’s operating lease liabilities were as follows (in thousands):

 

 

 

 

 

 

Remainder of 2019

 

$

1,668

 

2020

 

 

1,684

 

2021

 

 

1,672

 

2022

 

 

1,561

 

2023

 

 

1,172

 

Thereafter

 

 

5,657

 

Total future minimum lease payments

 

 

13,414

 

Less imputed lease interest

 

 

(4,508)

 

Total lease liabilities

 

$

8,906

 

 

As of December 31, 2018, f uture minimum lease payments under non‑cancelable operating leases are summarized as follows (in thousands):

 

 

 

 

 

 

2019

 

$

2,097

 

2020

 

 

905

 

2021

 

 

990

 

2022

 

 

856

 

2023

 

 

773

 

Thereafter

 

 

5,117

 

Total future minimum lease payments

 

$

10,738

 

 

Lessor accounting

 

The components of lease income were as follows (in thousands):

 

 

 

 

 

 

 

Three Months Ended

 

    

March 31, 2019

Lease income: sales-type leases

 

 

 

Profit at lease commencement

 

$

 -

Interest income on lease receivables

 

 

788

Total lease income: sales-type leases

 

 

788

Lease income: operating leases

 

 

21,807

Total lease income

 

$

22,595

Future minimum rental revenues to be generated from the leased assets under non-cancelable operating leases are summarized as follows (in thousands):

 

 

 

 

 

Remainder of 2019

    

$

43,949

2020

 

$

39,370

2021

 

$

25,633

2022

 

$

16,192

2023

 

$

11,737

Thereafter

 

$

2,931

26


 

Included in long-term receivables, current and long-term receivables in the consolidated balance sheets are sales-type lease receivables for the Company’s sales-type leases. As of March 31, 2019, the maturities of the Company’s sales-type lease receivables are as follows (in thousands):

 

 

 

 

 

 

Remainder of 2019

 

$

603

 

2020

 

 

761

 

2021

 

 

600

 

2022

 

 

473

 

2023

 

 

409

 

Thereafter

 

 

 —

 

Total future minimum lease payments

 

 

2,846

 

Less imputed lease interest

 

 

(443)

 

Total sales-type lease receivables

 

$

2,403

 

 

7. Share‑Based Compensation

 

AquaVenture Equity Awards

The AquaVenture Holdings Limited 2016 Share Option and Incentive Plan (the “2016 Plan”) allows for the issuance of incentive share options, non-qualified share options, share appreciation rights, restricted share units, restricted share awards, unrestricted share awards, cash-based awards, performance share awards and dividend equivalent rights to officers, employees, managers, directors and other key persons, including consultants to the Company. The aggregate number of ordinary shares initially authorized for issuance, subject to adjustment upon a change in capitalization, under the 2016 Plan was 5.0 million shares. The shares authorized for issuance increase annually by 4% of the number of ordinary shares issued and outstanding on the immediately preceding December 31. As of March 31, 2019, the number of ordinary shares authorized for issuance under the 2016 Plan was 8.2 million shares.

 

During the three months ended March 31, 2019, the Company granted an aggregate of 0.4 million restricted share units to employees, non-employee consultants and certain members of the Company’s board of directors. Restricted share units granted to employees and non-employee consultants had a time-based vesting schedule with 25% vesting on the first anniversary of the date of grant and the remaining 75% vesting quarterly over the remaining three years. Restricted share units granted to certain members of the Company’s board of directors vest in full on the first anniversary of the date of the grant. The aggregate grant date fair value of restricted share units granted during the three months ended March 31, 2019 was approximately $7.6 million.

 

Employee Stock Purchase Plan

 

Under the 2016 Employee Stock Purchase Plan (“2016 ESPP”), the Company offers eligible employee participants the right to purchase the Company’s ordinary shares at a price equal to the lesser of 85 percent of the closing market price on the first or last day of an established offering period. Based on the timing of the offering period, there were no shares sold to eligible employees under the 2016 ESPP during the three months ended March 31, 2019 . Share-based compensation expense is recognized based on the fair value of the employees’ purchase rights under the 2016 ESPP and is amortized on a straight-line basis over the offering period. As of March 31, 2019, the number of ordinary shares authorized for issuance under the 2016 ESPP was 0.9 million.

 

27


 

Independent Directors’ Deferred Compensation Program

 

Under the Independent Directors' Deferred Compensation Program (the “Deferred Compensation Program”), eligible members of the Company’s board of directors (“Eligible Directors”) are able to defer all or a portion of the cash compensation or equity awards which they are due in the form of phantom share units. Each phantom share unit is the economic equivalent of one ordinary share of the Company. The number of phantom share units credited to the Eligible Director’s deferred account is equal to 120% of the aggregate deferred cash fees that would otherwise be payable on such date divided by the closing price of the Company’s ordinary shares on the award date. No premium is given to the directors for deferral of their equity awards. Phantom share units are settled in ordinary shares upon the earlier of the Eligible Director’s death, disability, separation from the board, sale event, or end of the first full fiscal year after the grant date. The phantom share units issued in lieu of the cash retainers have no vesting period and cannot be forfeited. The phantom share units issued in lieu of the restricted units have a stated vesting period but will then have a deferred delivery once vested.

 

Share-based compensation expense for the phantom share units issued in lieu of the cash retainers is recognized on the date of grant, while share-based compensation expense for the phantom share units issued in lieu of the restricted units is recognized over the requisite service period, which is typically 12 months.  

 

During the three months ended March 31, 2019, the Company granted approximately 19 thousand phantom shares to Eligible Directors, including 17 thousand phantom shares which vest in full on the first anniversary of the date of the grant and 2 thousand phantom shares that are immediately vested. The aggregate grant date fair value of the awards granted during the three months ended March 31, 2019 was $0.4 million.

 

During the three months ended March 31, 2019, approximately 9 thousand phantom share units were forfeited pursuant to the terms in the Deferred Compensation Program. During the three months ended March 31, 2019, approximately 4 thousand phantom share units were converted to 4 thousand ordinary shares of the Company pursuant to the terms in the Deferred Compensation Program.

 

At March 31, 2019, approximately 53 thousand phantom shares remained outstanding.

 

Share‑Based Compensation Expense

 

Total share‑based compensation expense recognized for all equity awards during the three months ended March 31, 2019 and 2018 was $1.0 million and $3.3 million, respectively. For the three months ended March 31, 2019, $0.9 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income. For the three months ended March 31, 2018, $3.2 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income.

 

There was no related tax benefit for the three months ended March 31, 2019 and 2018.

 

8. Loss per Share

 

Basic earnings (loss) per share is computed by dividing net earnings (loss) attributable to ordinary shareholders for the period by the weighted-average number of ordinary shares outstanding during the same period. Basic weighted-average shares outstanding excludes unvested shares of restricted share awards, restricted share units and phantom share units. Diluted earnings (loss) per share is computed by dividing net earnings (loss) attributable to ordinary shareholders for the period by the weighted-average number of ordinary shares outstanding adjusted to give effect to potentially dilutive securities using the treasury stock method, except where the effect of including the effect of such securities would be anti-dilutive.

 

28


 

The following table provides information for calculating net loss applicable to ordinary shareholders (in thousands, except per share amounts):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Numerator:

 

 

 

 

 

 

 

Net loss

 

$

(5,664)

 

$

(6,346)

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted-average ordinary shares outstanding - basic and diluted

 

 

26,865

 

 

26,491

 

 

 

 

 

 

 

 

 

Loss per share - basic and diluted

 

$

(0.21)

 

$

(0.24)

 

 

Given that the Company had a net loss for the three months ended March 31, 2019 and 2018, the calculation of diluted loss per share is computed using basic weighted average ordinary shares outstanding.

 

Approximately 4.2 million weighted-average outstanding share awards for the three months ended March 31, 2019 were excluded from the calculation of diluted earnings per share because their effect was antidilutive. Approximately 4.1 million weighted-average outstanding share awards for the three months ended March 31, 2018 were excluded from the calculation of diluted earnings per share because their effect was antidilutive.

 

9. Commitments and Contingencies

 

Asset Retirement Obligations

 

Asset retirement obligation (“ARO”) liabilities, which arise from contractual requirements to perform certain asset retirement activities and is generally recorded when the asset is constructed, are based on the Company’s engineering estimates of future costs to dismantle and remove equipment from a customer’s plant site and to restore the site to a specified condition at the conclusion of a contract. As appropriate, the Company revises certain of its liabilities based on changes in the projected costs for future removal and shipping activities. These revisions, along with accretion expense, are included in cost of revenues in the consolidated statements of operations and comprehensive income.

 

During the three months ended March 31, 2019 and 2018, the Company recorded accretion expense of $13 thousand and $12 thousand, respectively. In addition, the Company performed certain asset retirement activities and recorded a valuation adjustment of $24 thousand during the three months ended March 31, 2019, which was recorded in cost of revenues in the consolidated statements of operations and comprehensive income. No valuation adjustments were recorded during the three months ended March 31, 2018.

 

At March 31, 2019 and December 31, 2018, the current portion of the ARO liabilities was $0.6 and $0.7 million, respectively,  which are recorded in accrued liabilities in the consolidated balance sheets. At March 31, 2019 and December 31, 2018, the long‑term portion of the ARO liabilities was $0.5 million and $0.5 million, respectively, which are recorded in other long‑term liabilities in the consolidated balance sheets.

 

29


 

Acquisition Contingent Consideration

 

Acquisition contingent consideration represents earnouts or additional purchase price that was derived in connection with certain acquisitions. 

 

A reconciliation of the beginning and ending amounts of the acquisition contingent consideration is as follows (in thousands):

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 2019

 

Acquisition contingent consideration at beginning of the period

 

$

3,109

 

Payments

 

 

(670)

 

Valuation adjustments

 

 

 9

 

Interest accretion

 

 

38

 

Acquisition contingent consideration at end of the period

 

$

2,486

 

 

A portion of the acquisition contingent consideration liabilities are contingent on the future collection of certain acquired receivables and are recorded at fair value based on collectability and a discount factor. The remaining acquisition contingent consideration liabilities are contingent on the future performance of the acquired business and are recorded at fair value based on a Monte Carlo Simulation which utilizes unobservable inputs, including forecasted revenues.

  

The Company recorded interest accretion expense within the consolidated statements of operations and comprehensive income of $38 thousand and $0 for the three months ended March 31, 2019 and 2018, respectively. The Company also recorded valuation adjustments of $9 thousand for the change in fair value during the three months ended March 31, 2019, which was composed of (i) $64 thousand which was recorded in SG&A in the consolidated statements of operations and comprehensive income and (ii) $(55) thousand that was part of final purchase price allocation adjustments.

 

At March 31, 2019 and December 31, 2018, $2.4 million and $2.7 million, respectively, were deemed current and were recorded in accrued liabilities in the consolidated balance sheets. At March 31, 2019 and December 31, 2018, $0.1 million and $0.4 million, respectively, were deemed long-term and were recorded in other long-term liabilities in the consolidated balance sheets.

 

Litigation, Claims and Administrative Matters

 

The Company, may, from time to time, be a party to legal proceedings, claims, and administrative matters that arise in the normal course of business. The Company has made accruals with respect to certain of these matters, where appropriate, that are reflected in the consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, the Company has not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, the Company currently does not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on its consolidated financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its consolidated financial position, results of operations, or cash flows. The Company maintains liability insurance in such amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that the Company insures against are customer lawsuits caused by damage or nonperformance, workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, employment practices liability and fidelity losses. There can be no assurance that the Company’s liability insurance will cover any or all events or that the limits of coverage will be sufficient to fully cover all liabilities. As of March 31, 2019, the Company determined there are no matters for which a material loss is reasonably possible or the Company has either determined that the range of loss is not reasonably estimable or that any reasonably estimable range of loss is not material to the consolidated financial statements.

 

30


 

10. Cash Flow Information

 

Supplemental cash flow information is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

    

Cash paid during the period:

 

 

 

 

 

 

 

Income taxes, net

 

$

876

 

$

746

 

Interest, net

 

$

6,282

 

$

3,030

 

Non-Cash Transaction Information:

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for new operating lease liabilities

 

$

175

 

 

 —

 

Non-cash capital expenditures

 

$

1,264

 

$

184

 

 

 

 

 

 

 

 

 

 

 

The components of total ending cash for the periods presented in the consolidated statement of cash flows are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of

 

 

 

March 31, 

 

 

 

2019

    

2018

 

Cash and cash equivalents

 

$

47,357

 

$

109,950

 

Restricted cash, current

 

 

 —

 

 

2,000

 

Restricted cash, non-current

 

 

4,211

 

 

4,010

 

Cash, cash equivalents and restricted cash

 

$

51,568

 

$

115,960

 

 

 

 

 

 

 

 

 

 

 

 

11. Segment Reporting

 

The Company has two operating and reportable segments, Seven Seas Water and Quench. This determination is supported by, among other factors, the existence of individuals responsible for the operations of each segment and who also report directly to the Company’s chief operating decision maker (“CODM”), the nature of the segment’s operations and information presented to the Company’s CODM.

 

Seven Seas Water provides outsourced desalination solutions and wastewater treatment and water reuse solutions for governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Quench rents and sells bottleless filtered water coolers and other products that use filtered water as an input, such as ice machines, sparkling water dispensers and coffee brewers, to customers throughout the United States and Canada.

In addition to the Seven Seas Water and Quench segments, the Company records certain general and administrative costs that are not allocated to either of the reportable segments within “Corporate and Other” for the CODM and for segment reporting purposes. These costs include, but are not limited to, professional service fees and other expenses to support the activities of the registrant holding company. Corporate and Other does not include any labor allocations from the Seven Seas Water and Quench segments. The Company believes this presentation more accurately portrays the results of the core operations of each of the operating and reportable segments to the CODM. The Corporate and Other administration function is not treated as a segment.

 

As part of the segment reconciliation below, intercompany interest expense and the associated intercompany interest income are included but are eliminated in consolidation.

 

31


 

The following table provides information by reportable segment and a reconciliation to the consolidated results for the three months ended March 31, 2019 and 2018 (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Seven Seas

 

 

 

 

Corporate

 

 

 

 

 

 

Water

    

Quench

    

    & Other    

    

Total

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk water

 

$

14,310

 

$

 —

 

$

 —

 

$

14,310

 

Rental

 

 

3,139

 

 

18,668

 

 

 —

 

 

21,807

 

Product sales

 

 

1,696

 

 

7,777

 

 

 —

 

 

9,473

 

Financing

 

 

972

 

 

 —

 

 

 —

 

 

972

 

Total revenues

 

 

20,117

 

 

26,445

 

 

 —

 

 

46,562

 

Gross profit:

 

 

  

 

 

  

 

 

 

 

 

 

 

Bulk water

 

 

7,728

 

 

 —

 

 

 —

 

 

7,728

 

Rental

 

 

2,336

 

 

9,865

 

 

 —

 

 

12,201

 

Product sales

 

 

293

 

 

3,121

 

 

 —

 

 

3,414

 

Financing

 

 

972

 

 

 —

 

 

 —

 

 

972

 

Total gross profit

 

 

11,329

 

 

12,986

 

 

 —

 

 

24,315

 

Selling, general and administrative expenses

 

 

7,300

 

 

14,201

 

 

1,368

 

 

22,869

 

Income (loss) from operations

 

 

4,029

 

 

(1,215)

 

 

(1,368)

 

 

1,446

 

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

(6,509)

 

Loss before income tax expense

 

 

 

 

 

 

 

 

 

 

 

(5,063)

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

601

 

Net loss

 

 

 

 

 

 

 

 

 

 

$

(5,664)

 

Other information:

 

 

  

 

 

  

 

 

 

 

 

 

 

Depreciation and amortization

 

$

5,696

 

$

6,262

 

$

 —

 

$

11,958

 

Expenditures for long-lived assets

 

$

4,381

 

$

2,796

 

$

 —

 

$

7,177

 

Amortization of deferred financing fees

 

$

69

 

$

51

 

$

134

 

$

254

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

 

 

Seven Seas

 

 

 

 

Corporate

 

 

 

 

 

 

Water

    

Quench

    

    & Other    

    

Total

 

Revenues:

 

 

  

    

 

  

    

 

 

 

 

 

 

Bulk water

 

$

13,696

 

$

 —

 

$

 —

 

$

13,696

 

Rental

 

 

 —

 

 

13,959

 

 

 —

 

 

13,959

 

Product sales

 

 

 —

 

 

3,811

 

 

 —

 

 

3,811

 

Financing

 

 

1,048

 

 

 —

 

 

 —

 

 

1,048

 

Total revenues

 

 

14,744

 

 

17,770

 

 

 —

 

 

32,514

 

Gross profit:

 

 

  

 

 

  

 

 

 

 

 

 

 

Bulk water

 

 

7,189

 

 

 —

 

 

 —

 

 

7,189

 

Rental

 

 

 —

 

 

7,503

 

 

 —

 

 

7,503

 

Product sales

 

 

 —

 

 

1,285

 

 

 —

 

 

1,285

 

Financing

 

 

1,048

 

 

 —

 

 

 —

 

 

1,048

 

Total gross profit

 

 

8,237

 

 

8,788

 

 

 —

 

 

17,025

 

Selling, general and administrative expenses

 

 

7,603

 

 

10,719

 

 

1,252

 

 

19,574

 

Income (loss) from operations

 

 

634

 

 

(1,931)

 

 

(1,252)

 

 

(2,549)

 

Other expense, net

 

 

 

 

 

 

 

 

 

 

 

(3,390)

 

Loss before income tax expense

 

 

 

 

 

 

 

 

 

 

 

(5,939)

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

407

 

Net loss

 

 

 

 

 

 

 

 

 

 

$

(6,346)

 

Other information:

 

 

  

 

 

  

 

 

 

 

 

 

 

Depreciation and amortization

 

$

3,564

 

$

4,296

 

$

 —

 

$

7,860

 

Expenditures for long-lived assets

 

$

515

 

$

2,332

 

$

 —

 

$

2,847

 

Amortization of deferred financing fees

 

$

66

 

$

51

 

$

122

 

$

239

 

 

 

 

 

 

 

32


 

 

12. Significant Concentrations, Risks and Uncertainties

 

The Company is exposed to interest rate risk resulting from its variable rate loans outstanding that adjust with movements in LIBOR.

 

For the three months ended March 31, 2019, a significant portion of the Company’s revenues were derived from territories and countries in the Caribbean region. Demand for water in the Caribbean region is impacted by, among other things, levels of rainfall, natural disaster or other catastrophic events, the tourism industry and demand from our industrial clients. Destruction caused by tropical storms and hurricanes, high levels of rainfall, downturn in the level of tourism and demand for real estate could all adversely impact the future performance of the Company as well as cause delays in collections from the Company’s customers.

 

At March 31, 2019, a significant portion of the Company’s property, plant and equipment is located in the Caribbean region. The Caribbean islands are situated in a geography where tropical storms and hurricanes occur with regularity, especially during certain times of the year. The Company designs its plant facilities to withstand such conditions; however, a major storm could result in plant damage or periods of reduced consumption or unavailability of electricity or source seawater needed to produce water in one or more of our locations. It is the Company’s policy to maintain adequate levels of property and casualty insurance; however, the Company only insures certain of its plants for wind damage.

 

The operation of desalination plants requires significant amounts of electricity which typically is provided by the local utility of the jurisdiction in which the plant is located. A shortage of electricity supply caused by force majeure or material increases in electricity costs could adversely impact the Company’s operating results. To mitigate the risk of electricity cost increases, the Company has generally contracted with major customers for those cost increases to be borne by the customers and has invested in energy efficient technology. Management believes that rising energy costs and availability of its supply of electricity would not have a material adverse effect on its future performance.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Operating Results.

The following discussion and analysis of our financial condition and operating results should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and the related management’s discussion and analysis of our financial condition and operating results included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.  This discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

Overview

 

AquaVenture Holdings Limited and its subsidiaries (the “Company”, “AquaVenture”, “we”, “us” and “our”) is a multinational provider of Water as a Service   ® , or WAAS   ® , solutions that provide our customers with a reliable and cost-effective source of clean drinking water, processed water and wastewater treatment and water reuse solutions primarily under long term contracts that minimize capital investment by the customer. We believe our WAAS business model offers a differentiated value proposition that generates long term customer relationships, recurring revenue, predictable cash flow and attractive rates of return. We generate revenue from our operations in North America, the Caribbean and South America and are pursuing expansion opportunities in North America, the Caribbean, South America, Africa, the Middle East and other select markets.

 

We deliver our WAAS solutions through two operating platforms: Seven Seas Water and Quench. Seven Seas Water is a multinational provider of desalination, wastewater treatment and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Our desalination solutions provide more than 8.5 billion gallons per year of potable, high purity industrial grade and ultra-pure water (which is water that is treated to meet higher purity standards required for industrial, semiconductor, utility or pharmaceutical applications). Our wastewater treatment and water reuse solutions, which include plants ranging in capacity from 5,000 gallons per day, or GPD, to more than 1.5 million GPD, are provided through approximately 90

33


 

leases with customers. Quench is a U.S. based provider of Point of Use, or POU, filtered water systems and related services through direct and indirect sales channels to approximately 50,000 institutional and commercial customers, including more than half of the Fortune 500, throughout the United States and Canada.

 

Through our Seven Seas Water desalination solutions, we generate recurring revenue through long‑term contracts for the delivery of treated bulk water, generally based on the amount of water we deliver. As of March 31, 2019, the significant majority of our Seven Seas Water revenue is derived from our operations in six different locations:

 

·

The U.S. Virgin Islands (“USVI”): Seven Seas Water provides all of the municipal potable water needs for the islands of St. Croix, St. Thomas and St. John through its two seawater desalination plants, one on St. Croix and one on St. Thomas, having a combined capacity of approximately 7.0 million GPD. We also provide ultrapure water for use in power generation units by further processing a portion of the potable water we produce for certain of our customers.

 

·

St. Maarten: Seven Seas Water is the primary supplier of municipal potable water needs for St. Maarten through its three seawater desalination plants, which have a combined capacity of approximately 5.8 million GPD.

 

·

Curaçao: Seven Seas Water provides industrial grade water through seawater and brackish water desalination facilities having a combined capacity of approximately 4.9 million GPD.

 

·

Trinidad: Seven Seas Water provides potable water to southern Trinidad through its seawater desalination plant having a capacity of approximately 6.7 million GPD.  

 

·

The British Virgin Islands (“BVI”): Seven Seas Water is the primary supplier of Tortola’s potable water needs through its seawater desalination plant having a capacity of approximately 2.8 million GPD.

 

·

Peru: Seven Seas Water provides seawater and desalinated process water to a phosphate mine through a pipeline and seawater reverse osmosis facility having a capacity of approximately 2.7 million GPD, which we began operating after we completed the acquisition of all the outstanding shares of Aguas de Bayovar S.A.C. (“ADB”) and all the rights and obligations under a design and construction contract for a desalination plant and related infrastructure located in Peru (the “Peru Acquisition”) on October 31, 2016.

 

Through our Seven Seas Water wastewater treatment and water reuse solutions, we design, fabricate and install plants that are leased under a contractual term or sold to customers. The wastewater treatment and water reuse solutions offered to customers include scalable modular treatment plants, field-erected plants and temporary bypass plants ranging from 5,000 GPD to more than 1.5 million GPD. These solutions are provided through approximately 90 leases with customers. With the acquisition of AUC Acquisition Holdings (“AUC”) on November 1, 2018, in which we acquired all of the issued and outstanding membership interests of AUC pursuant to a membership interest purchase agreement (the “AUC Acquisition”), we significantly increased our wastewater treatment and water reuse solutions.

 

We are supported by operation centers in Tampa, Florida and Houston, Texas, which provides business development, engineering, field service support, procurement, accounting, finance and other administrative functions.

 

Our Quench platform generates recurring revenue from the rental and servicing of POU water filtration systems and related equipment, such as ice and sparkling water machines, and from the contracted maintenance of customer owned equipment. Quench also generates revenue from the sale of coffee and other consumables pursuant to agreements which require customers to purchase a minimum monthly amount in exchange for the use of a coffee brewer. Our annual unit attrition rate at March 31, 2019 was approximately 7.5%, implying an average rental period of more than 12 years. We define “annual unit attrition” as a ratio, the numerator of which is the total number of removals of company-owned and billed rental units during the trailing 12 month period, and the denominator of which is the average number of company-owned and billed rental units during the same 12 month period. Through our direct sales channel, we receive recurring fees for the units we rent or service throughout the life of our customer relationship. In addition, we also receive non-recurring revenue from some customers for the sale of equipment and for certain services, such as the installation, relocation or removal of equipment. Through our indirect sales channel, we receive re-occurring revenue from the sale of equipment, parts and filters to dealers and retailers. We achieve an attractive return on our rental assets due to strong customer retention. We provide our systems and services to a broad mix of industries, including

34


 

government, education, medical, manufacturing, retail and hospitality, among others. We operate principally throughout the United States and Canada and are supported by a primary operations center in King of Prussia, Pennsylvania.

 

While we routinely identify and evaluate potential acquisition candidates and engage in discussions and negotiations regarding potential acquisitions there can be no assurance that any of our discussions or negotiations will result in an acquisition. If we enter into definitive agreements, there can be no assurances that all the conditions precedent to completing those acquisitions will be satisfied or waived, or that the acquisitions will be completed. Further, if we make any acquisitions, there can be no assurance that we will be able to operate or integrate any acquired businesses profitably or otherwise successfully implement our expansion strategy.

 

For the three months ended March 31, 2019, our consolidated revenues were $46.6 million, which represents an increase of 43.2% over consolidated revenues of $32.5 million for the three months ended March 31, 2018. The increases in consolidated revenues for the three months ended March 31, 2019 were composed of increases in our Seven Seas Water segment of 36.4% and increases in our Quench segment of 48.8% over the same period of 2018. The increase in revenue for our Seven Seas Water segment was primarily driven by the inclusion of AUC operations and higher revenues in our USVI and BVI operations. The increase in revenue for our Quench segment was mainly the result of the inclusion of revenues from acquisitions during late 2018, an increase in product sales revenue and an increase in rental revenues due to additional units placed under new leases in excess of unit attrition.

 

Operating Segments

 

We have two reportable segments that align with our operating platforms, Seven Seas Water and Quench. The segment determination is supported by, among other factors, the existence of individuals responsible for the operations of each segment and who also report directly to our chief operating decision maker (“CODM”), the nature of the segment’s operations and information presented to our CODM. For the three months ended March 31, 2019, revenues for the Seven Seas Water and Quench segments represented approximately 43% and 57%, respectively, of our consolidated revenues.

 

In addition to the Seven Seas Water and Quench segments, we record certain general and administrative costs that are not allocated to either of the reportable segments within “Corporate and Other” for the CODM and for segment reporting purposes. These costs include, but are not limited to, professional service fees and other expenses to support the activities of the registrant holding company. Corporate and Other does not include any labor allocations from the Seven Seas Water and Quench segments. We believe this presentation more accurately portrays the results of the core operations of each of the operating and reportable segments to the CODM. The Corporate and Other administration function is not treated as a segment.

 

As part of the segment reconciliation, intercompany interest expense and the associated intercompany interest income are included but are eliminated in consolidation.

 

Components of Revenues and Expenses

For a discussion on our accounting policies as restated in accordance with the adoption, please refer to Note 2—“Summary of Significant Accounting Policies—New Accounting Pronouncements” to the consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q. There have been no material changes to the components of revenues and expenses from those described in “Management’s discussion and analysis of financial condition and results of operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

Key Factors Affecting Our Performance and Comparability of Results

A number of key factors have affected and will continue to affect our performance and the comparison of our operating results, including matters discussed below and those items described in the section entitled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, and subsequent filings.

35


 

Seven Seas Water

The financial performance of our Seven Seas Water business has been, and will continue to be, significantly affected by our ability to identify and consummate acquisitions of, or to identify and secure new projects for, desalination, wastewater treatment and water reuse solutions with new and existing governmental, municipal, industrial, property developer and hospitality customers. Our performance and the comparability of results over time are largely driven by the timing of events such as acquisitions of existing plants, securing new plant projects (including bulk water sales and service), rental agreements and product sales, plant expansions, and the extension, termination or expiration of water supply agreements and rental agreements for wastewater treatment and water reuse equipment. The timing of many of these events is unpredictable. New plant projects, plant expansions and plant acquisitions, when they do occur, may require significant levels of cash and company resources before and after the commencement of revenue and their impact on our results of operations can be significant.

Time and Expense Associated with New Business Development

The period of time required to develop an opportunity and secure an award can be lengthy, historically taking multiple years during which significant amounts of business development expense may be incurred. Our business development organization seeks to identify new project opportunities for both competitive bid situations and through unsolicited negotiated arrangements. Governmental water customers generally require a competitive bid for new plant development. Participation in a formal bid process and in negotiated arrangements can require significant costs, the timing of which can impact the comparability of our financial results. While our proposed pricing factors in such costs, there is no assurance that we will secure the contract and ultimately recover our costs.

The period from contract award to the commissioning of a new plant (and commencement of revenues) can also vary greatly due to, among other things, the size and complexity of the plant. In the case of a newly constructed desalination plant, there is typically a ramp‑up period during which the plant operates below normal capacity.

Existing Customer Relationships

We expect to continue to grow our business with existing customers by expanding and extending the contractual term for existing plants to meet an expected increase in customer demand, each of which will impact our performance and comparability of results. As customer demand increases for either the volume of water produced and delivered or the wastewater treated, we typically experience increased sales volume through the use of additional capacity built into existing desalination plants or through the renegotiation of an existing contract and deployment of incremental equipment to meet customer demands. Similarly, contract extensions and renewals provide economic benefits for both the customer and us. By the time we enter into an extension or renewal we have typically recovered meaningful portions of our capital investment and only incremental capital investment may be required. These factors provide a competitive advantage in a contract extension (or renewal) process and may enable us to reduce unit prices, sustain profitability and achieve an improved and continuing return on our invested capital .

Acquisition of Existing Operations

Revenue and expenses will increase upon an acquisition of existing assets or businesses from a third party. In addition, the time, cost and capital required to complete an acquisition are significant. Specifically, the costs incurred prior to the acquisition can include professional fees, travel costs and, in certain instances, success fees paid to third parties. These costs may be incurred well in advance of the completion of an acquisition. Upon completion of the acquisition, certain assets, including desalination plants, may experience periods of downtime or reduced production levels as well as additional capital investment while we bring the plant up to our engineering and operating standards. Acquisitions are a part of our Seven Seas Water growth strategy and accordingly our ability to grow could be impacted by our effectiveness in completing and integrating our acquisitions.

Entry into New Markets

Our future performance will be affected by our investment and success in securing business in new markets. While continuing to penetrate the Caribbean market, we have also expanded our business development efforts to pursue a global business footprint in North America, South America, Africa, the Middle East and other select markets. As we continue to pursue entry into new markets, we may incur increasing expenses for business development that may be

36


 

sustained for long periods of time before realizing the benefit of incremental revenues. In addition, our entry into some new markets may be better served through partnering arrangements such as joint ventures, which may result in a minority position. Such an arrangement may be economically attractive even though, in some circumstances, we may not be able to consolidate the operating results of a partnering arrangement with our own operating results .

Changes to Sales Volume, Costs of Sales and Operating Expenses

For our desalination solutions, our profitability is affected by changes in the volume of water delivered above any minimum required customer purchases, our ability to control plant production costs, and our ability to control equipment manufacturing costs and operating expenses. For our wastewater treatment and water reuse solutions, our profitability is affected by the number and profitability of construction projects commenced and completed during the period and the number of new leases entered into with customers.

Due to the capital-intensive nature of our desalination solutions and the relatively high level of fixed costs such as depreciation and contract cost amortization, our Seven Seas Water business model is characterized by high levels of operating leverage. As a result, significant swings in bulk water production volume could favorably or unfavorably impact profitability more significantly than business models with less operating leverage. We have mitigated the downside risk of declines in bulk water plant production through the inclusion of minimum customer purchase requirements in a majority of our water supply contracts. In the water supply contracts that do not, we have contractual rights to be the exclusive water supplier or our customer must purchase all the water we produce and we must provide volume at a specified percentage of installed capacity. We design our plants to meet or exceed contractual supply requirements but our failure to meet minimum supply requirements could result in penalties that may adversely affect our financial performance.

Operating costs for our desalination solutions can have a significant impact on the profitability of our operations. Electrical costs are a major expense in connection with the operation of a water treatment plant. Our major customers either, directly or through related parties, provide the electricity needed to run the plant without cost to us or reimburse us for this cost on a pass‑through basis. In general, our contracts require us to maintain electrical usage at or below a specified level of kilowatt hours for each gallon of water produced. As a result, our cost risk is principally with respect to our ability to use electrical power efficiently. We have made investments in plant equipment and configuration to maintain required levels of electrical efficiency.

Personnel costs are another major cost element for plant operations. Our contracts provide for price adjustments based on inflation. Profitability, however, could be adversely affected by significant increases in market prices for labor, social taxes and benefits or changes in operations requiring additional personnel. 

Repairs and maintenance can be a significant cost of the business. Because we assume the responsibility to operate and maintain our desalination plants over a long period of time, we use plant designs and equipment that seek to minimize repairs and maintenance and optimize long-term performance. We may however, from time to time experience equipment failures outside of warranty coverage which could result in significant costs to repair.

Our operations centers in Tampa, Florida and Houston, Texas, and our organization in Santiago, Chile incur significant selling, general and administrative expenses that are intended to support our plans for future growth. Certain of these expenses, in particular those related to business development, are largely discretionary and not correlated specifically to short‑term changes in revenue. Direct engineering cost, including allocated overhead, for personnel at our operations centers are capitalized as a project cost based on hours incurred on active plant construction projects which can change from period to period. The timing of new hires, the utilization of engineering personnel and the spending in these areas may affect the comparability of our results.

Contractually Scheduled and Negotiated Changes to Terms and Conditions

Our Seven Seas Water business is conducted in accordance with the terms of long‑term water supply contracts that, among other things, may provide for minimum customer purchases, guaranteed supply volumes and specified levels of pricing based on the volume of water purchased during the billing period. These contractual features are key determinants of plant revenue and plant profitability. Certain of our contracts provide for contractually scheduled price changes. In addition, our contracts may include provisions to increase prices in accordance with a specified inflation

37


 

index such as the consumer price index. From time to time, we may also negotiate pricing changes with our customers as part of an arrangement to, among other things, extend or renew a contract or increase capacity by expanding the plant.

Revenues and operating income can be expected to decrease, potentially by a significant amount, upon a decrease in contracted services or contract renegotiation, termination or expiration.

Customer Demand and Certain Other External Factors

For our desalination solutions, we design plant capacity to exceed the minimum purchase requirements contained in our contracts to meet anticipated customer needs and maintain sufficient excess capacity. Our customer’s water demand and our ability to meet that demand can vary among quarters and annual periods for a variety of reasons over which we have little control, including:

·

the timing and length of shutdowns of customer facilities or infrastructure due to factors such as equipment failures, power outages, feedstock interruptions, regular scheduled maintenance and severe weather which can adversely affect customer demand;

·

seasonal fluctuations or downturns in the general economy can be expected to adversely affect demand from customers for whom tourism is a significant economic driver, including our municipal or resort customers;

·

economic cycles or political events may affect the industrial customers we serve, especially those in the energy and mining sectors where volatility in commodity prices or consolidation of capacity could adversely affect customer demand;

·

excessive periods of rain or drought can impact primary demand;

·

destruction caused by floods, tropical storms and hurricanes can impact primary demand as well as cause delays in collections from our customers;

·

the non-renewal of contracts by customers;

·

various environmental factors and natural or man‑made conditions impacting the quality of source water, such as bacteria levels or contaminants in source water, and require additional pretreatment thus adding cost and reducing the level of production throughput; and

·

technological advances especially in new filtration technologies, reverse osmosis membranes, energy recovery equipment and energy efficient plant designs may affect future operating performance and the cost competitiveness of our services in the market.

For our wastewater treatment and water reuse solutions, we utilize a modular design that enables us to expand capacity with increasing customer demand. The plants are designed to treat peak volumes of wastewater produced by our customers. Our customer’s demand for our wastewater treatment and water reuse solutions can vary among quarters and annual periods for a variety of reasons over which we have little control, including:

·

individual developers or customers inability to procure funding to initiate building or expanding certain residential developments;

·

residential development specific construction delays such as weather-related delays, changes in specifications or inability of ancillary contractors to perform works;

·

downturns in the general economy and housing market that can decrease demand for new housing developments thus limiting increases in demand for wastewater treatment;

·

replacement of our solutions by a larger, centralized facility or the connecting of customers to a centralized wastewater treatment or water reuse solution; and

38


 

·

potential changes in the regulatory environment that could impede development of further decentralized wastewater treatment systems.

Quench

Attracting New Customers

Our performance will be affected by our ability to continue to attract new customers. We believe that the U.S. commercial water cooler market is underpenetrated by POU water filtration, which, according to a 2016 study by Zenith International, represented only 11.1% by revenue of a $4.2 billion per year market in 2015. We intend to continue to invest in selling and marketing efforts to attract new customers for our filtered water systems, both within our existing geographic territories and in additional targeted territories. Our ability to attract new customers may vary from period to period for several reasons, including the effectiveness of our selling and marketing efforts, our ability to hire and retain salespeople, competitive dynamics, variability in our sales cycle (particularly related to opportunities to serve larger enterprises), the timing of the roll‑out of large‑enterprise orders and general economic conditions.

Customer Relationships

We believe that our existing customers continue to provide significant opportunities for us to offer additional products and services. These opportunities include the rental of additional or upgraded water coolers, as well as the rental of equipment from our newer product lines enabled by POU water filtration, such as ice machines, sparkling water coolers and coffee brewers. In addition, we expect to invest to grow the sales of consumables associated with our systems, such as coffee and related consumables, and continue to pursue the resale of equipment to customers who prefer to own, rather than lease, their equipment.

Typically, we rent our systems to customers on multi‑year, automatically‑renewing contracts, and we anticipate extending our relationships with existing customers beyond the initial contract term. Some customers terminate their agreements during the agreement term, typically due to financial constraints, and others cancel at the end of the term. Our annual unit attrition rate at March 31, 2019 was approximately 7.5%, implying an average rental period of more than 12 years. Our ability to retain our existing customer relationships will affect our performance and is affected by a number of factors, including the effectiveness of our retention efforts, the quality of our products and service, our pricing, competitive dynamics in the industry, product availability, and the health of the economy. In addition, the non-recurring revenue from the sale of equipment, coffee and consumables, is less predictable and can change based on fluctuations in demand in a specific period.

Strategic Acquisitions

The POU water filtration industry is highly fragmented, with a large number of local competitors and several larger regional operators. Quench has completed 23 acquisitions since 2008, and nine of which occurred during 2018. We believe our recent acquisition activity is indicative of the opportunity for future inorganic growth.

Through our indirect sales channel, we offer POU systems to networks of approximately 250 dealers and retailers predominantly in North America. The indirect sales channel expands our participation in the growing POU market domestically and internationally. In addition, the channel enhances our ability to develop, source and manufacture innovative, exclusive coolers and purification offerings. Lastly, the channel offers us the opportunity to develop deeper relationships with POU dealers that could lead to future acquisitions.

We expect to continue to pursue select acquisitions to increase our scale, customer density and geographic service area, as well as to increase our participation in the broader international market for POU systems. Our ability to complete acquisitions is a function of many factors, including competition, purchase price and our short‑term business priorities. Accordingly, it is impossible to predict whether any current or future discussions will lead to the successful completion of any acquisitions. Since acquisitions are a part of our growth strategy, the inability to complete, integrate and profitably operate acquisitions may adversely affect our operating results.

39


 

Changes to Cost of Sales and Operating Expenses

Profitability of our Quench platform will be affected by our ability to control our costs of sales and operating expenses.

A majority of Quench rental agreements are priced at fixed rates for multi-year periods ranging up to four years. As a result, our gross margins are exposed to potential cost of sales increases that cannot be immediately offset by price adjustments. The volume, mix and pricing of equipment and consumables purchased for immediate resale (as opposed to rental) can impact the consistency and comparability of our results. The overall compensation of field service and supply chain support (along with the costs of associated vehicles), as well as the use of outside service providers, may affect our gross margins.

Quench incurs selling, general and administrative costs to support a national sales force, a widely dispersed installed base of customers, and a high volume of recurring business transactions. A portion of such costs is composed of new customer acquisition costs, such as lead generation expenses and certain sales commissions, which are expensed upfront and recovered over the periods following the execution of a customer contract and any subsequent renewal. Commissions and other costs that are directly related to the negotiation and execution of leases, considered contract acquisition costs, are capitalized and amortized on a straight‑line basis over the contract period. Selling, general and administrative costs also include certain costs to complete business acquisitions, which precede the realization of revenues generated by the acquired new business, and discretionary investments in infrastructure to support our plans for Quench’s future long‑term growth. The timing of these expenditures and their impact relative to the revenues generated can affect our performance and comparability of results .

Corporate and Other

Changes to Operating Expenses

We expect to incur increased legal, accounting and other expenses as we pursue our expansion strategy and as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the listing requirements of the New York Stock Exchange (“NYSE”). We anticipate that such operating costs as a percentage of revenue will moderate over the long-term if and as our revenues increase or as a result of certain other corporate activities or projects.

Presentation of Financial Information

 

We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”). In the preparation of these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. To the extent that there are material differences between these estimates and actual results, our financial condition or operating results would be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We refer to accounting estimates of this type as critical accounting policies and estimates, which we discuss below.

 

Adoption of New Accounting Pronouncements

Under the Jumpstart Our Business Startups Act, or JOBS Act, we meet the definition of an “emerging growth company.” We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

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

40


 

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.

We adopted this guidance on a modified retrospective basis on January 1, 2019 with the cumulative effect of transition as of the effective date of adoption. For a discussion on the impacts of the authoritative guidance on our financial statements, please refer to Note 2—“Summary of Significant Accounting Policies— Adoption of New Accounting Pronouncements” to the consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q.

 

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. We are 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. We are currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

Critical Accounting Policies and Estimates

 

Our management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts in our financial statements. On an ongoing basis, we evaluate our estimates and judgments used. Actual results may differ from these estimates under different assumptions or conditions. In making estimates and judgments, management employs critical accounting policies.

 

There have been no material changes to our critical accounting policies from those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, except as follows:

 

Leases

 

Lessee accounting

 

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

 

At contract inception, we determine if an arrangement is or contains a lease. If the arrangement contains a lease, we recognize 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 our 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, we

41


 

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.

 

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, our incremental borrowing rate. Generally, we cannot determine the interest rate implicit in the lease because we do not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, we generally derive an incremental borrowing rate as the discount rate for the lease. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

 

The lease term for all of our leases includes the noncancelable period of the lease, plus any additional periods covered by either our option to extend (or not to terminate) the lease that we are 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 our option to purchase the underlying asset if we are reasonably certain to exercise the option.

 

In certain instances, our 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, we have not elected the practical expedient to account for the lease and non-lease components as a single lease component and have elected (for all classes of underlying assets) to account for these components separately. We have allocated the consideration in the contract to the lease and non-lease components based on each component's relative standalone price. We determine standalone prices for the lease components based on the prices for which other lessors lease similar assets on a standalone basis. We determine standalone prices for the non-lease components based on the prices that suppliers might charge for those type of services on a standalone basis. If observable standalone prices are not readily available, we estimate the standalone prices maximizing the use of observable information.

 

We have 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. We recognize the lease payments associated with its short-term leases on a straight-line basis over the lease term.

 

Lessor accounting

 

We generate 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, we enter 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, we determine 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 our adoption of authoritative guidance on leases on January 1, 2019, we 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. We 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.

42


 

 

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

 

If the customer contract contains or is accounted for as a lease, the key estimates and judgments used 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 all of our 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 us. 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 and term of the renewal are not stated and are subject to renewal.  

 

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 we assign.

 

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

 

Our 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. Our risk management strategy for protecting the residual fair value of the underlying assets include our ongoing maintenance 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 we determine the lease classification of the underlying asset. We consider 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 we expect 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 and (2) any deferred initial direct costs we incur.

 

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, we will incorporate the stated purchase price into the determination of its implied interest rate.

43


 

 

Results of Operations

 

The operating expenses of the parent, AquaVenture Holdings Limited, are reported separately from the two operating and reportable segments below. See “Operating Segments” located in the “Overview” section above for more information.

 

The following table sets forth the components of our consolidated statements of operations and comprehensive income for each of the periods presented.

 

 

 

 

 

 

 

 

 

 

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 (expense) income, net

 

 

51

 

 

(140)

 

Loss before income tax expense

 

 

(5,063)

 

 

(5,939)

 

Income tax expense

 

 

601

 

 

407

 

Net loss

 

$

(5,664)

 

$

(6,346)

 

 

 

44


 

The following table sets forth the components of our consolidated statements of operations and comprehensive income for each of the periods presented as a percentage of revenue.

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

March 31, 

 

 

 

    

2019

    

2018

 

 

Revenues:

 

 

 

 

 

 

Bulk water

 

30.7

%  

42.1

%

 

Rental

 

46.8

%  

42.9

%

 

Product sales

 

20.4

%

3.2

%

 

Financing

 

2.1

%  

11.8

%

 

Total revenues

 

100.0

%  

100.0

%

 

Cost of revenues:

 

 

 

 

 

 

Bulk water

 

14.1

%  

20.0

%

 

Rental

 

20.6

%  

19.9

%

 

Product sales

 

13.0

%  

7.8

%

 

Total cost of revenues

 

47.7

%  

47.7

%

 

Gross profit

 

52.2

%  

52.4

%

 

Selling, general and administrative expenses

 

49.1

%  

60.2

%

 

Income (loss) from operations

 

3.1

%  

(7.8)

%

 

Other expense:

 

 

 

 

 

 

Interest expense, net

 

(14.1)

%  

(10.0)

%

 

Other (expense) income, net

 

0.1

%  

(0.4)

%

 

Loss before income tax expense

 

(10.9)

%  

(18.2)

%

 

Income tax expense

 

1.3

%  

1.3

%

 

Net loss

 

(12.2)

%  

(19.5)

%

 

 

Comparison of the Three Months Ended March 31, 2019 and 2018

 

Revenues

 

The following table presents revenue for each of our two operating segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31, 

 

Change

 

 

    

2019

    

2018

    

Dollars

    

Percent

 

 

 

(dollars in thousands)

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Seven Seas Water

 

 

 

 

 

 

 

 

 

 

 

 

Bulk water

 

$

14,310

 

$

13,696

 

$

614

 

4.5

%

Rental

 

 

3,139

 

 

 —

 

 

3,139

 

NM

 

Product sales

 

 

1,696

 

 

 —

 

 

1,696

 

NM

 

Financing

 

 

972

 

 

1,048

 

 

(76)

 

(7.3)

%

Total Seven Seas Water

 

$

20,117

 

$

14,744

 

$

5,373

 

36.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Quench

 

 

 

 

 

 

 

 

 

 

 

 

Rental

 

$

18,668

 

$

13,959

 

$

4,709

 

33.7

%

Product sales

 

 

7,777

 

 

3,811

 

 

3,966

 

104.1

%

Total Quench

 

$

26,445

 

$

17,770

 

$

8,675

 

48.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

 

$

46,562

 

$

32,514

 

$

14,048

 

43.2

%

 

Our total revenues of $46.6 million for the three months ended March 31, 2019 increased $14.0 million, or 43.2%, from $32.5 million for the three months ended March 31, 2018 through a combination of organic and inorganic growth. In calculating organic and inorganic revenue growth, (i) organic growth represents estimated revenue from operations that existed in both the current and comparable periods, and (ii) inorganic growth includes the estimated revenue from acquisitions for the 12 months following an acquisition and any revenue contributions from divested businesses for the months in the prior year period in which the business did not exist in the current year period.

45


 

 

Seven Seas Water revenues for the three months ended March 31, 2019 increased $5.4 million, or 36.4%, compared to the same period of 2018, which were comprised of 34.5% inorganic growth and 1.9% organic growth.  Bulk water revenues increased $0.6 million, or 4.5%, compared to the prior year period, primarily due to: (i) an increase of $0.3 million from our USVI operations due to higher production volumes in the current quarter compared to the same period of 2018; (ii) an increase of $0.2 million in connection with the commencement of our water contract in Anguilla; and (iii) an increase of $0.2 million in our BVI operations driven by increases in the water rate compared to the prior year period. This was partially offset by $0.2 million lower revenue in our Peru operations due to revenue received in the prior year period in connection with non-routine services performed for the customer. Rental revenues and product sales increased $3.1 million and $1.7 million respectively, due to the inclusion of the AUC operation which was acquired in November 2018.

 

Quench revenues for the three months ended March 31, 2019 increased $8.7 million, or 48.8%, compared to the same period of 2018, and were comprised of 36.7% of inorganic growth and 12.1% organic growth. Partially offsetting this increase was $1.1 million lower revenue due to the divestiture of the Atlas High Purity Solutions business in October 2018. Rental revenues increased $4.7 million, or 33.7%, compared to the prior year period, which was comprised of 26.6% inorganic growth from acquisitions and 7.1% of organic growth due to additional units placed under new leases in excess of unit attrition. Product sales increased $4.0 million compared to the same period of 2018, which included $2.9 million of inorganic growth primarily due to the acquisitions of PHSI and Bluline in December 2018, and $1.1 million of organic growth driven by higher indirect dealer equipment sales and coffee sales.

 

Cost of revenues, gross profit and gross margin

 

The following table presents the major components of cost of revenues, gross profit and gross margin for our two operating segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

 

Change

 

 

    

2019

    

2018

    

    

Percent

 

Gross Margin:

 

 

 

 

 

 

 

 

 

 

Seven Seas Water

 

 

 

 

 

 

 

 

 

 

Bulk water

 

 

54.0

%

 

52.5

%

 

1.5

%

Rental

 

 

74.4

%

 

 —

%

 

NM

 

Product sales

 

 

17.3

%

 

 —

%

 

NM

 

Financing

 

 

100.0

%

 

100.0

%

 

 —

%

Total Seven Seas Water

 

 

56.3

%

 

55.9

%

 

0.4

%

 

 

 

 

 

 

 

 

 

 

 

Quench

 

 

 

 

 

 

 

 

 

 

Rental

 

 

52.8

%

 

53.8

%

 

(1.0)

%

Product sales

 

 

40.1

%

 

33.7

%

 

6.4

%

Total Quench

 

 

49.1

%

 

49.5

%

 

(0.4)

%

 

 

 

 

 

 

 

 

 

 

 

Total gross margin

 

 

52.2

%  

 

52.4

%  

 

(0.2)

%

 

Total gross margin for the three months ended March 31, 2019 decreased 20 basis points to 52.2% from 52.4% for the same period in 2018.

 

Seven Seas Water gross margin for the three months ended March 31, 2019 increased 40 basis points to 56.3% compared to 55.9% in the prior year period. Bulk water gross margin of 54.0% increased 150 basis points compared to 52.5% in the prior year period primarily due to lower cost as a percentage of revenue in our Curacao operations due to lower production volumes in relation to the minimum purchase requirement and higher revenues in our BVI operations without a commensurate increase in costs, partially offset by a lower gross margin in Trinidad due to an adverse effect on production volumes caused by higher seasonal levels of organic material in the source water. Rental and product sales gross margin of 74.4% and 17.3%, respectively, for the three months ended March 31, 2019 had no comparative period as both related to the acquisition of the AUC operations in November 2018. Financing gross margin is 100% but causes a decrease to the overall gross margin compared to the prior year period as a result of the lower relative contribution of financing revenues to overall revenues.

 

46


 

Quench gross margin for the three months ended March 31, 2019 decreased 40 basis points to 49.1% from 49.5% for the same period of 2018, primarily due to a decrease in rental gross margin, partially offset by an increase in product sales gross margin. Rental gross margin for the first quarter of 2019 was 52.8%, a decrease of 100 basis points from 53.8% in the prior year period, primarily due to an increase in filtration and parts expenses due to the timing of annual maintenance on equipment on lease and higher freight expense, partially offset by lower compensation and benefits as a percentage of revenues due to continued leveraging of the platform. Product sales gross margin increased to 40.1% for the three months ended March 31, 2019 from 33.7% in the prior year period, primarily driven by the higher-margin indirect dealer equipment sales in connection with the PHSI Acquisition.  

 

Selling, general and administrative expenses

 

The following table presents the components of SG&A expenses for our two operating segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31, 

 

Change

 

 

    

2019

    

2018

    

Dollars

    

Percent

 

 

 

(dollars in thousands)

 

Selling, General and Administrative Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Seven Seas Water

 

$

7,300

 

$

7,603

 

$

(303)

 

(4.0)

%

Quench

 

 

14,201

 

 

10,719

 

 

3,482

 

32.5

%

Corporate and Other

 

 

1,368

 

 

1,252

 

 

116

 

9.3

%

Total selling, general and administrative expenses

 

$

22,869

 

$

19,574

 

$

3,295

 

16.8

%

 

Total SG&A expenses for the three months ended March 31, 2019 increased $3.3 million, or 16.8%, compared to the same period of 2018.

 

Seven Seas Water SG&A expenses for the three months ended March 31, 2019 decreased $0.3 million to $7.3 million compared to the prior year period. The decrease was primarily due to a decrease of $1.5 million in share-based compensation expense driven by the completion of the vesting of certain equity grants made in connection with our initial public offering in 2016, partially offset by an increase of $1.2 million in amortization expense of definite lived intangible assets primarily due to the acquisition of the AUC business in November 2018. Seven Seas Water SG&A expenses as a percentage of revenue were 36.3% for the three months ended March 31, 2019, a decline compared to 51.6% for the same period of 2018.

 

Quench SG&A expenses for the three months ended March 31, 2019 increased $3.5 million to $14.2 million over the prior year period. The increase was primarily due to $1.2 million higher compensation and benefits expense primarily driven by increased headcount from the inclusion of staff added from certain acquisitions, $1.2 million higher amortization expense primarily related to an increase in intangible assets from recent acquisitions, and a $0.2 million increase in loss on disposal of assets. Partially offsetting this increase was a $0.5 million decrease in share-based compensation expense driven by the completion of the vesting of certain equity grants made in connection with our initial public offering. Quench SG&A expenses as a percentage of revenue were 53.7% for the three months ended March 31, 2019, a decline compared to 60.3% for the same period of 2018.  

 

Corporate and Other SG&A expenses for the three months ended March 31, 2019 increased $0.1 million compared to the same period of 2018.

 

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.

 

47


 

Other expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

 

March 31, 

 

Change

 

 

    

2019

    

2018

    

Dollars

    

Percent

 

 

 

(dollars in thousands)

 

Interest expense, net

 

$

(6,560)

 

$

(3,250)

 

$

(3,310)

 

101.8

%

Other expense, net

 

 

51

 

 

(140)

 

 

191

 

(136.4)

%

Total other expense

 

$

(6,509)

 

$

(3,390)

 

$

(3,119)

 

92.0

%

 

Interest expense, net for the three months ended March 31, 2019 increased $3.3 million compared to the prior year period. The increase was primarily due to incremental borrowings of $150 million in connection with expansion of our senior secured credit agreement in November and December and higher interest rates compared to the prior year period.

 

Other expense, net for the three months ended March 31, 2019 increased $0.2 million compared to the prior year period, primarily due to favorable changes in foreign exchange rates.

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

March 31, 

 

Change in

 

 

    

2019

    

2018

    

Dollars

 

 

 

(dollars in thousands)

 

Income tax expense (benefit)

 

$

601

 

$

407

 

$

194

 

Effective tax rate

 

 

(11.9)

%  

 

(6.9)

%  

 

 

 

 

We operate through multiple legal entities in a variety of domestic and international jurisdictions, some of which do not impose an income tax. Within these jurisdictions, our operations generate a mix of income and losses, which cannot be offset when calculating income tax expense or benefit for each legal entity. Income tax benefits are not recorded for losses generated in jurisdictions where either the jurisdictions do not impose an income tax, or we do not believe it is more likely than not that we will realize the benefit of such losses.

 

For the three months ended March 31, 2019, we incurred a consolidated pre-tax loss of $5.1 million, which was composed of: (i) an aggregate of $7.0 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of $1.9 million of pre-tax income in taxable jurisdictions. For the three months ended March 31, 2018, we incurred a consolidated pre-tax loss of $5.9 million, which was composed of: (i) an aggregate of $7.6 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of $1.7 million of pre-tax income in taxable jurisdictions.

 

Income tax expense for the three months ended March 31, 2019 and 2018 was $0.6 million and $0.4 million, respectively. Income tax expense for the three months ended March 31, 2019 and 2018 was composed of a current tax expense of $0.5 million and $0.6 million, respectively, and deferred tax expense (benefit) of $0.1 million and $(0.2) million, respectively. The increase in income tax expense for the three months ended March 31, 2019 as compared to the same period in 2018 was due to: (i) an increase in tax expense in certain jurisdictions due to either the release of a valuation allowance in the prior year period or the existence of a valuation allowance in the prior year period which was subsequently released during the third quarter of 2018 and (ii) and increase in tax expense resulting from companies acquired during the second half of 2018. These increases were partially offset by a decrease in current tax expense related to lower withholding taxes payable in certain jurisdictions.

 

Cash paid for income taxes was $0.9 million and $0.7 million during the three months ended March 31, 2019 and 2018, respectively.

48


 

 

Liquidity and Capital Resources

Overview

 

As of March 31, 2019 and December 31, 2018, our principal sources of liquidity on a consolidated basis were cash and cash equivalents (excluding restricted cash) of $47.4 million and  $56.6 million, respectively,  which were held for working capital, investment and general corporate purposes. In addition, as of both March 31, 2019 and December 31, 2018,   we had an aggregate of $4.2 million, respectively, of restricted cash related to debt service reserve funds and minimum balance requirements for one of our borrowings. Our working capital as of March 31, 2019 was $62.7 million   compared to $64.6 million as of December 31, 2018.

 

Our cash and cash equivalents are held by our holding company and our subsidiaries primarily in demand deposits with domestic and international banks, money market accounts, and U.S. Treasury bills. We utilize a combination of equity financing and corporate and project debt financing through international commercial banks and other financial institutions to fund our cash needs and the growth of our business. Our debt financing arrangements contain financial covenants and provisions which govern distributions by the borrowers and may limit our ability to transfer cash among us and our subsidiaries. Based on our current level of operations, we believe our cash flow from operations and available cash will be adequate to meet the future liquidity needs of our current operations for at least the next twelve months.

 

Our expected future liquidity and capital requirements consist principally of:

 

·

capital expenditures and investments in infrastructure under concession arrangements related to maintaining or expanding our existing operations;

 

·

development of new projects and new markets;

 

·

inventory;

 

·

acquisitions;

 

·

costs and expenses relating to our ongoing business operations; and

 

·

debt service requirements on our existing and future debt.

 

Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, as well as future acquisitions, will depend on our future operating performance which, in turn, will be subject to general economic, financial, business, competitive, political, legislative, regulatory and other conditions, many of which are beyond our control.

 

We may in the future be required to seek additional equity or debt financing to meet these future capital and liquidity requirements. If additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired or needed, our business, operating results, cash flow and financial condition would be adversely affected. We currently intend to use our available funds and any future cash flow from operations for the conduct and expansion of our business, debt service requirements and general corporate purposes.

 

Subsidiary Distribution Policy

 

A significant portion of our cash flow is provided by operations from our principal operating subsidiaries and borrowings made at the corporate level.

 

With respect to our Seven Seas Water segment, unless cash balances are expected to be redeployed for further growth opportunities in the same jurisdiction, our distribution policy is to efficiently distribute cash from our international operating subsidiaries to our non-U.S. intermediate holding companies for redeployment in the manner intended to optimize our return on invested capital.   However, one of our subsidiaries, as of March 31, 2019, has a loan agreement that restricts distributions to related parties in the event certain financial or nonfinancial covenants are not

49


 

met, which could reduce our ability to redeploy cash. Distributions are typically in the form of principal and interest payments on intercompany loans, repayment of intercompany advances or other intercompany arrangements, including billings from our Tampa operations center, and dividends. When considering the amount and timing of such distributions, our Seven Seas Water operating subsidiaries must maintain sufficient funds for future capital investment, debt service and general working capital purposes.

 

With respect to our Quench operating segment, our current intent is for Quench to retain cash for working capital, investment for future growth within the segment and future debt repayment.

 

Although the governing boards of our subsidiaries have discretion over intercompany dividends or other future distributions, the form, frequency and amount of such distributions will depend on our subsidiaries’ future operations and earnings, capital requirements and surplus, general financial condition, contractual requirements of our lenders, tax considerations and other factors that may be deemed relevant.

 

Cash Flows

 

The following table summarizes our cash flows for the periods:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2019

    

2018

 

 

 

(in thousands)

 

Cash (used in) provided by operating activities

 

$

(429)

 

$

5,084

 

Cash used in investing activities

 

 

(7,166)

 

 

(9,500)

 

Cash used in financing activities

 

 

(1,616)

 

 

(1,976)

 

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

 

 

 8

 

 

(7)

 

Net change in cash, cash equivalents and restricted cash

 

$

(9,203)

 

$

(6,399)

 

 

Operating Activities

 

The significant variations of cash provided by operating activities and net losses are principally related to adjustments to eliminate non-cash and non-operating charges including, but not limited to, amortization, depreciation, share-based compensation, changes in the deferred income tax provision, charges related to the disposal of assets and impairment charges. The largest source of operating cash flow is the collection of trade receivables and our largest use of cash flows is the payment of costs associated with revenue and SG&A expenses.

 

Cash (used in) provided by operations during the three months ended March 31, 2019 and 2018 was $(0.4) million and $5.1 million, respectively. The decrease in cash flow from operations was primarily due higher cash interest expense of approximately $3.3 million relating to incremental borrowings of $150 million in connection with the expansion of our senior secured credit agreement in November and December and higher operating cash outflows of approximately $1.0 million relating to the adoption of the new lease accounting guidance which requires certain cash outflows to be categorized in operating activities.

 

Investing Activities

 

Cash used in investing activities during the three months ended March 31, 2019 and 2018 was $7.2 million and $9.5 million, respectively. The decrease in cash used in investing activities was primarily attributable to the completion of acquisitions of $6.7 million during the three months ended March 31, 2018. This was partially offset by an increase in capital expenditures during the three months ended March 31, 2019 as compared to the prior year period.

 

During the three months ended March 31, 2019 and 2018, there were $4.4 million and $0.5 million, respectively, of capital expenditures by Seven Seas Water for new plants, plant expansions and capacity upgrades and $2.8 million and $2.3 million, respectively, of capital expenditures for Quench to support growth and its existing operations.

 

50


 

Financing Activities

 

Cash used in financing activities during the three months ended March 31, 2019 and March 31, 2018 was $1.6 million and $2.0 million, respectively. This $0.4 million decrease is primarily attributable to an increase in cash proceeds of $1.5 million from the exercise of stock options partially offset by the $0.7 million increase in payments of acquisition contingent consideration.

 

Our long‑term debt is summarized in the table below and further described in the sections that follow. As of March 31, 2019 and December 31, 2018, long‑term debt included the following (in thousands):

 

 

 

 

 

 

 

 

 

 

    

March 31, 

    

December 31, 

 

 

    

2019

    

2018

 

Corporate Credit Agreement

 

$

300,000

 

$

300,000

 

BVI Loan Agreement

 

 

19,101

 

 

20,468

 

Vehicle financing

 

 

1,932

 

 

1,842

 

Total face value of long-term debt

 

$

321,033

 

$

322,310

 

 

 

 

 

 

 

 

 

Face value of long-term debt, current

 

$

6,613

 

$

6,536

 

Less: Current portion of unamortized debt discounts and deferred financing fees

 

 

(39)

 

 

(42)

 

Current portion of long-term debt, net of debt discounts and deferred financing fees

 

$

6,574

 

$

6,494

 

 

 

 

 

 

 

 

 

Face value of long-term debt, non-current

 

$

314,420

 

$

315,774

 

Less: Non-current portion of unamortized debt discounts and deferred financing fees

 

 

(2,308)

 

 

(2,559)

 

Long-term debt, net of debt discounts and deferred financing fees

 

$

312,112

 

$

313,215

 

 

Corporate Credit Agreement

 

On August 4, 2017, AquaVenture Holdings Limited, AquaVenture Holdings Peru S.A.C., an indirect wholly-owned subsidiary of the Company, and Quench USA, Inc., a wholly-owned subsidiary of the Company, (collectively the “Borrowers”), entered into a $150.0 million senior secured credit agreement (the “Corporate Credit Agreement”) with a syndicate of lenders. The Corporate Credit Agreement is non-amortizing, matures in August 2021 and, at the time it was incurred, bore interest at LIBOR plus 6.0% with a LIBOR floor of 1.0%. Interest only payments are due quarterly with principal due in full upon maturity.

 

On November 17, 2017, the Corporate Credit Agreement was amended to convert the interest rate applicable to 50% of the then-outstanding principal balance, or $75.0 million, from a variable interest rate of LIBOR plus 6.0% with a LIBOR floor of 1.0% to a fixed rate of 8.2%. The remaining 50% of the then-outstanding outstanding principal balance, of $75.0 million, continued to bear interest at LIBOR plus 6.0% with a LIBOR floor of 1.0%. All other material terms of the original credit agreement remained substantially unchanged.

 

On August 28, 2018, the Corporate Credit Agreement was amended to modify certain agreement definitions and non-financial covenants. All other material terms of the original credit agreement remained substantially unchanged.

 

On November 1, 2018, the Corporate Credit Agreement was amended (“Amended Corporate Credit Agreement”) to: (i) add AquaVenture Holdings Inc., a wholly-owned subsidiary of the Company, as a borrower under the Amended Corporate Credit Agreement, (ii) increase our net borrowings by $110.0 million to an aggregate principal amount of $260.0 million, (iii) reduce the interest rate for the original $150.0 million borrowings by 50 basis points on both the variable and fixed interest portions and (iv) amend certain financial covenant requirements. Of the incremental net borrowing of $110.0 million, $70.0 million bears interest at a variable rate of LIBOR plus 5.5% with a LIBOR floor of 1.0%, and the remaining $40.0 million bears interest at a fixed rate of 8.7%. In the aggregate, including the aforementioned interest rate reduction, $145.0 million of borrowings bear interest at a variable rate of LIBOR plus 5.5% with a LIBOR floor of 1.0% and the remaining $115.0 million of borrowings bear interest at a weighted average fixed rate of 8.0%. A declining prepayment fee on the incremental borrowing is due upon repayment if it occurs prior to November 1, 2019. All other material terms of the Amended Corporate Credit Agreement remained substantially unchanged.

 

51


 

On December 20, 2018, the Corporate Credit Agreement was amended to increase its borrowings by $40.0 million to an aggregate principal amount of $300.0 million. The incremental borrowings bear interest at a variable rate of LIBOR plus 5.5% with a LIBOR floor of 1.0%. A prepayment fee on the incremental borrowing, which declines over time, is due upon repayment if it occurs prior to December 20, 2019. These additional borrowings are non-amortizing and mature in August 2021. All other terms of the Corporate Credit Agreement remained substantially unchanged.


As of March 31, 2019, the weighted average interest rate was 8.1%.   

 

The Corporate Credit Agreement is guaranteed by AquaVenture Holdings Limited along with certain subsidiaries and contains financial and nonfinancial covenants. The financial covenants include minimum interest coverage ratio and maximum leverage ratio requirements, as defined in the Corporate Credit Agreement, and are calculated using consolidated financial information of AquaVenture Holdings Limited excluding the results of AquaVenture (BVI) Holdings Limited and its subsidiary Seven Seas Water (BVI) Limited. In addition, the Corporate Credit Agreement contains customary negative covenants limiting, among other things, indebtedness, investments, liens, dispositions of assets, restricted payments (including dividends), transactions with affiliates, prepayments of indebtedness, capital expenditures, changes in nature of business and amendments to documents. We were in compliance with, or received waivers for breaches of, all such covenants as of March 31, 2019.

 

We may prepay in whole or in part, the outstanding principal and accrued unpaid interest under the Corporate Credit Agreement. The prepayment fee requirement has expired on the original $150.0 million borrowing. The Corporate Credit Agreement is collateralized by certain of the assets of the Borrowers and stated guarantors.

  

BVI Loan Agreement

 

In connection with our acquisition of the capital stock of Biwater (BVI) Holdings Limited in June 2015, we inherited the $43.0 million credit facility of its subsidiary, Seven Seas Water (BVI) Ltd., arranged by a bank (the “BVI Loan Agreement”). The BVI Loan Agreement closed on November 14, 2013 and was arranged to finance the construction of the 2.8 million GPD desalination facility at Paraquita Bay in Tortola, BVI and other contractual obligations. The BVI Loan Agreement is project financing with recourse only to the stock, assets and cash flow of Seven Seas Water (BVI) Ltd. The BVI Loan Agreement is guaranteed by the United Kingdom Export Finance. As of the acquisition date of June 11, 2015, $40.8 million remained outstanding. In addition, approximately $820 thousand remained available for draw through October 2016. The BVI Loan Agreement was amended on May 7, 2014 and June 11, 2015 to reflect extensions in milestone dates and our acquisition of Seven Seas Water (BVI) Ltd. The BVI Loan Agreement is collateralized by all shares and underlying assets of Seven Seas Water (BVI) Ltd.

Prior to the amendment on August 4, 2017, the BVI Loan Agreement provided for interest on the outstanding borrowings at LIBOR plus 3.5% per annum and interest was paid quarterly. The loan principal is repayable quarterly beginning in March 31, 2015 in 26 quarterly installments that escalate over the term of the loan.

 

On August 4, 2017, Seven Seas Water (BVI) Ltd. further amended the BVI Loan Agreement to extend the amortization on principal to May 2022 and reduce the spread applied to the LIBOR base rate used in the calculation of interest by 50 basis points to LIBOR plus 3.0% per annum. The United Kingdom Export Finance also extended its participation in the project to match the extended term of the amended BVI Loan Agreement. All other material terms of the original loan agreement remained unchanged.

 

As of March 31, 2019, the weighted‑average interest rate was 5.6%. Seven Seas Water (BVI) Ltd. may prepay the principal amounts of the loans prior to the maturity date, in whole or in part.

 

The BVI Loan Agreement includes both financial and nonfinancial covenants, limits the amount of additional indebtedness that Seven Seas Water (BVI) Ltd. can incur and places annual limits on capital expenditures for this subsidiary. The BVI Loan Agreement also places restrictions on distributions made by Seven Seas Water (BVI) Ltd. which is only permitted to make distributions to shareholders and affiliates of AquaVenture Holdings Limited if specified debt service coverage and loan life coverage ratios are met and it is in compliance with all loan covenants. The BVI Loan Agreement contains a number of negative covenants restricting, among other things, indebtedness, investments, liens, dispositions of assets, restricted payments (including dividends), mergers and acquisitions, accounting changes, transactions with affiliates, prepayments of indebtedness, capital expenditures, and changes in nature of business and joint ventures. In addition, Seven Seas Water (BVI) Ltd is subject to quarterly financial

52


 

covenant compliance, including minimum debt service and loan life coverage ratios, and must maintain a minimum debt service reserve fund and a maintenance reserve fund with the bank in addition to other minimum balance requirements as set forth in the agreement. Seven Seas Water (BVI) Ltd. was in compliance with, or received waivers for breaches of, all such covenants as of March 31, 2019.

 

Other Debt

 

We finance our vehicles primarily under three‑year terms with interest rates per annum ranging from 3.4% to 4.5%.

 

Contractual Obligations and Other Commitments

 

Please refer to Note 9—“Commitments and Contingencies” to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information. There were no material changes to our contractual obligations during the three months ended March 31, 2019 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended. For a complete discussion of our contractual obligations, please refer to our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

 

Off‑Balance Sheet Arrangements

 

At March 31, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off‑balance sheet arrangements or other contractually narrow or limited purposes.

53


 

I tem 3. Quantitative and Qualitative Disclosures About Market Risk .

We are exposed to certain market risks in the ordinary course of our business. These risks primarily include credit risk, interest rate risk and foreign exchange risk. 

Credit Risk  

We are exposed to credit risk in our Seven Seas Water segment from our principal bulk water sales to customers in Trinidad, the BVI, the USVI, St. Maarten, Peru and Curaçao. While certain of our bulk water customers are quasi-governmental agencies, such customers may not be supported by sovereign guarantees or direct financial undertakings. 

Interest Rate Risk  

We had cash and cash equivalents totaling $47.4 million as of March 31, 2019.  This amount was invested primarily in demand deposits with domestic and international banks, money market accounts, and U.S. Treasury bills. The cash and cash equivalents are held for investment and working capital purposes. Our cash deposits are maintained for capital preservation purposes. We do not enter into investments for trading or speculative purposes. As of March 31, 2019, we had variable rate loans outstanding of $204.1 million that adjust with interest rate movements in LIBOR except when interest rate floors apply. Accordingly, we are subject to interest rate risk to the extent that LIBOR changes. A hypothetical 100 bps increase in our interest rates in effect at March 31, 2019 would have a $2.0 million increase to our interest expense on an annualized basis. A hypothetical 100 bps decrease in our interest rates in effect at March 31, 2019 would have a $2.0 million decrease to our interest expense on an annualized basis. We believe our mixture of fixed rate and variable rate loans helps reduce our overall exposure to interest rate risk.  

Foreign Exchange Risk  

The U.S. dollar is our functional currency and for the three months ended March 31, 2019,  approximately 3% of our consolidated revenues were denominated or paid in a foreign currency. We utilize these payments, in large part, to help minimize our exposure to foreign exchange risk related to payment obligations we may incur in a local currency related to labor, construction, consumables or materials costs, manufacturing of inventory, or if our procurement orders are denominated in a currency other than U.S. dollars. If any of these local currencies change in value versus the U.S. dollar, our cost in U.S. dollars would change which could adversely affect our results of operations. We do not currently hedge our foreign currency exchange risk. However, we believe that our strategy to carefully manage the exposure to foreign currencies as well as ensure that a majority of our revenues are denominated in the U.S. dollar, helps reduce our overall exposure to foreign exchange risk.

.

 

54


 

Item 4. C ontrols and Procedures.

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is (1) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (2) accumulated and communicated to our management, including our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is also our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of March 31, 2019, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our principal executive officer and principal financial officer have concluded, based upon the evaluation described above, that, as of March 31, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.

Inherent Limitations of Internal Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all errors and all fraud.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of control can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. In addition, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations, misstatements due to error or fraud may occur and not be detected.

 

Changes in Internal Control over Financial Reporting

 

In connection with the adoption of guidance regarding leases, we have implemented additional preventative and detective controls around the recording and disclosure of leases, including but not limited to the accumulation of accurate information, review of critical assumptions, the calculation of right-of-use assets and lease liabilities for the period and the completeness and accuracy of new disclosure requirements. There were no other changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2019 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 

 

55


 

PART II—OTHER INFORMATIO N

 

Item 1.   Legal Proceeding s

 

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, as of March 31, 2019, we were not party to any legal proceedings that we would expect to have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of any such outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.


Item 1A.   Risk Factors

The matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances, over many of which we have little or no control. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, and in subsequent filings as well as risks and uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, could cause actual results to differ materially from those in the forward-looking statements. There were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

 

Item 2.   Unregistered Sales of Equity Securitie s and Use of Proceeds

 

None.

 

 

Item 3.   Defaults upon Senior Securities

 

None.

 

Item 4.   Mine Safety Disclosures

 

Not applicable.

 

Item 5.   Other Information

 

None.

 

 

 

 

 

 

56


 

Item 6.   Exhibits

 

(a) Exhibits:

 

The exhibits listed are filed, furnished or incorporated by reference as part of this report.

 

Exhibit
Number

    

Description

10.1

 

Amendment to Employment Letter dated January 1, 2019 from AquaVenture Holdings Limited and Seven Seas Water Corporation to Douglas R. Brown (filed as Exhibit 10.1 to AquaVenture Holdings Limited’s Form 8-K filed on April 18, 2019) (SEC File No. 001-37903)

10.2

 

Amended and Restated Employment Agreement dated as of January 1, 2019 by and among AquaVenture Holdings Limited, Quench USA, Inc. and Anthony Ibarguen (filed as Exhibit 10.2 to AquaVenture Holdings Limited’s Form 8-K filed on April 18, 2019) (SEC File No. 001-37903)

10.3

 

Key Executive Severance Plan (filed as Exhibit 10.3 to AquaVenture Holdings Limited’s Form 8-K filed on April 18, 2019) (SEC File No. 001-37903)

10.4

 

Form of employee non-competition, non-solicitation, confidentiality and assignment agreement entered into by AquaVenture Holdings Limited and each of Messrs. Brown, Muller and Krohg (filed as Exhibit 10.4 to AquaVenture Holdings Limited’s Form 8-K filed on April 18, 2019) (SEC File No. 001-37903)

31.1

 

Certification of Chief Executive Officer required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.  †

31.2

 

Certification of Chief Financial Officer required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.  †

32.1

 

Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *†

101.INS

 

XBRL Instance Document †

101.SCH

 

XBRL Taxonomy Extension Schema Document

101.CAL

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE

 

XBRL Taxonomy Extension Presentation Linkbase Document


†    Filed herewith.

 

*  The certification furnished in Exhibit 32.1 hereto is deemed to accompany this Quarterly Report on Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference. Such certification will not be deemed to be incorporated by reference into any filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, except to the extent that the Registrant specifically incorporates it by reference.

 

57


 

SIGNATURES

 

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

AquaVenture Holdings Limited

 

 

 

Date: May 8, 2019

By:

/s/ LEE S. MULLER

 

 

Lee S. Muller

 

 

Chief Financial Officer
(Principal Financial Officer)

 

58


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