UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
Amendment No. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): November 1, 2018
AquaVenture Holdings Limited
(Exact name of registrant as specified in Charter)
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British Virgin Islands |
001-37903 |
98-1312953 |
(State or other jurisdiction of |
(Commission |
(IRS Employer |
incorporation or organization) |
File No.) |
Identification No.) |
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c/o Conyers Corporate Services (B.V.I.) Limited Commerce House, Wickhams Cay 1 P.O. Box 3140 Road Town British Virgin Islands VG1111 (Address of principal executive office) |
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(813) 855-8636 (Registrant’s telephone number, including area code) |
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Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§ 230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§ 240.12b-2 of this chapter).
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. ☒
EXPLANATORY NOTE
On November 1, 2018, AquaVenture Holdings, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited (the “Company”), acquired all of the issued and outstanding membership interests of AUC Acquisition Holdings, LLC (“AUC”) from AUC’s members pursuant to a membership interest purchase agreement (“AUC Acquisition”).
This Amendment No. 1 on Form 8-K/A amends and supplements Item 9.01 of the Current Report on Form 8-K filed by the Company on November 2, 2018 (the “Original Form 8-K”) to provide certain historical financial statements and certain pro forma financial information in connection with the AUC Acquisition. All of the other information in the Original Form 8-K remains unchanged. This amendment should be read in conjunction with the Original Form 8-K.
Item 9.01 Financial Statements and Exhibits.
(a) Financial Statements.
The audited consolidated financial statements of AUC and its subsidiaries as of and for the year ended December 31, 2017, including the notes related thereto and the report of independent public accounting firm thereon, are filed as Exhibit 99.1 and incorporated herein by reference.
The unaudited condensed consolidated interim financial statements of AUC and its subsidiaries as of June 30, 2018 and for the six months ended June 30, 2018 and 2017, including the notes related thereto, are filed as Exhibit 99.2 and incorporated herein by reference.
(b) Pro Forma Financial Information.
The unaudited pro forma condensed combined financial information of the Company and AUC for the year ended December 31, 2017 and as of and for the six months ended June 30, 2018, including the notes related thereto, are filed as Exhibit 99.3 and incorporated herein by reference.
(d) Exhibits
The following materials are attached as exhibits to this Current Report on Form 8-K:
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Exhibit No. |
Description |
23.1 |
Consent of Carr, Riggs & Ingram, LLC, independent auditor of AUC |
99.1 |
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99.2 |
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99.3 |
1
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
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Date: January 4, 2019 |
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AquaVenture Holdings Limited |
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By: |
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/s/ Lee S. Muller |
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Lee S. Muller |
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Chief Financial Officer |
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2
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
AquaVenture Holdings Limited:
We consent to the incorporation by reference in the registration statement (Nos. 333-223590, 333-219962 and 333-213990) on Form S-8 of AquaVenture Holdings Limited of our report dated May 3, 2018, except as to Note 2 which is as of January 4, 2019, relating to our audit of the consolidated financial statements of AUC Acquisition Holdings, LLC and Subsidiaries as of and for the year ended December 31, 2017, included in this Current Report on Form 8-K/A.
/s/ Carr, Riggs & Ingram, LLC
Houston, Texas
January 4, 2019
Exhibit 99.1
AUC Acquisition Holdings, LLC
and Subsidiaries
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
AUC Acquisition Holdings, LLC and Subsidiaries
Table of Contents
December 31, 2017
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REPORT |
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Independent Auditors’ Report |
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CONSOLIDATED FINANCIAL STATEMENTS |
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Consolidated Balance Sheet as of December 31, 2017 |
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Consolidated Statement of Operations for the year ended December 31, 2017 |
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Consolidated Statement of Changes in Members’ Equity for the year ended December 31, 2017 |
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Consolidated Statement of Cash Flows for the year ended December 31, 2017 |
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Notes to Consolidated Financial Statements |
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INDEPENDENT AUDITORS’ REPORT
To the Members
AUC Acquisition Holdings, LLC
Houston, Texas
We have audited the accompanying consolidated financial statements of AUC Acquisition Holdings, LLC and subsidiaries (collectively, the “Company”), which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of operations, changes in members’ equity, and cash flows for the year then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AUC Acquisition Holdings, LLC and subsidiaries as of December 31, 2017, and the results of their operations and their cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ Carr, Riggs & Ingram, LLC
Houston, Texas
May 3, 2018, except for Note 2
which is as of January 4, 2019
- 2 -
AUC Acquisition Holdings, LLC and Subsidiaries
Consolidated Balance Sheet
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December 31, |
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2017 |
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Assets |
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Current assets |
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Cash and cash equivalents |
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$ |
383,587 |
Restricted cash held in escrow |
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100,000 |
Rentals and contracts receivable |
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1,963,645 |
Current portion of financing receivables |
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1,059,593 |
Costs and estimated earnings in excess of billings on uncompleted contracts |
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1,472,273 |
Inventory |
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449,835 |
Prepaid federal income tax |
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397,692 |
Prepaid and other assets |
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194,154 |
Due from prior owner |
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147,695 |
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Total current assets |
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6,168,474 |
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Property and equipment, net |
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26,327,381 |
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Other assets |
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Financing receivables, net of current portion |
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2,011,358 |
Costs and estimated earnings in excess of billings on uncompleted contracts |
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1,440,477 |
Intangible lease contracts, net of accumulated amortization of $2,462,341 |
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6,457,838 |
Service backlog, net of accumulated amortization of $1,179,620 |
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112,855 |
Goodwill |
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36,426,362 |
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Total other assets |
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46,448,890 |
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Total assets |
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$ |
78,944,745 |
T he accompanying notes are an integral part of these consolidated financial statements.
- 3 -
AUC Acquisition, Holdings LLC and Subsidiaries
Consolidated Balance Sheet (Continued)
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December 31, |
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2017 |
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Liabilities and members' equity |
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Current liabilities |
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Accounts payable and accrued expenses |
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$ |
2,175,686 |
Retainage payable |
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27,181 |
Advance rent payments |
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479,257 |
Income tax payable |
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42,375 |
Billings in excess of costs and estimated earnings on uncompleted contracts |
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378,652 |
Acquisition escrow payable |
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100,000 |
Other note payable |
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62,856 |
Current maturities of notes payable to bank |
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2,461,263 |
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Total current liabilities |
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5,727,270 |
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Long-term liabilities |
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Notes payable to bank, net of current maturities |
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19,542,582 |
Subordinated debt |
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15,000,000 |
Lease deposits |
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1,382,665 |
Deferred income tax liability |
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2,504,731 |
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Total long-term liabilities |
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38,429,978 |
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Total liabilities |
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44,157,248 |
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Commitments and contingencies |
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Members' equity |
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34,787,497 |
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Total liabilities and members' equity |
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$ |
78,944,745 |
The accompanying notes are an integral part of these consolidated financial statements.
- 4 -
AUC Acquisition Holdings, LLC and Subsidiaries
Consolidated Statement of Operations
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For the year ended December 31, |
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2017 |
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Revenue |
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Services and contracts |
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$ |
10,429,892 |
Rental |
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9,217,713 |
Interest on financed projects |
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238,249 |
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Total revenue |
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19,885,854 |
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Cost of revenue |
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Services and contract |
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7,978,979 |
Rental |
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3,266,201 |
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Total cost of revenue |
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11,245,180 |
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Gross profit |
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8,640,674 |
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General and administrative expenses |
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Gain on sale of rental plant equipment |
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534,336 |
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Income from operations |
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6,993,211 |
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Other expenses |
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Amortization |
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Interest expense |
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Total other expenses |
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Income before income tax benefit |
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3,101,119 |
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Income tax benefit |
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285,743 |
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Net income |
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$ |
3,386,862 |
The accompanying notes are an integral part of these consolidated financial statements.
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AUC Acquisition Holdings, LLC and Subsidiaries
Consolidated Statement of Changes in
Members’ Equity
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For the year ended December 31, 2017 |
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Common |
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Preferred |
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Retained |
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Units |
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Units |
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Earnings |
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Total |
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Balance, December 31, 2016 |
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$ |
3,098 |
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$ |
30,996,902 |
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$ |
400,635 |
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$ |
31,400,635 |
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Net income |
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3,386,862 |
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3,386,862 |
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Balance, December 31, 2017 |
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$ |
3,098 |
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$ |
30,996,902 |
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$ |
3,787,497 |
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$ |
34,787,497 |
The accompanying notes are an integral part of these consolidated financial statements.
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AUC Acquisition Holdings, LLC and Subsidiaries
Consolidated Statement of Cash Flows
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For the year ended December 31, |
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2017 |
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Operating activities |
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Net income |
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$ |
3,386,862 |
Adjustments to reconcile net income to net cash provided by operating activities |
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Deferred tax benefit |
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Depreciation |
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3,112,754 |
Amortization |
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1,153,522 |
Deferred loan costs amortized to interest expense |
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63,379 |
Gain on sale of rental plant equipment |
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Construction revenues funded through financing receivables |
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Change in operating assets and liabilities |
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Rentals and contracts receivable |
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455,157 |
Costs and estimated earnings in excess of billings on uncompleted contracts |
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Inventory |
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Prepaid federal income tax |
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403,885 |
Prepaid and other assets |
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Accounts payable and accrued expenses |
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757,903 |
Retainage payable |
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Advance rent payments |
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76,619 |
Income tax payable |
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7,000 |
Billings in excess of costs and estimated earnings on uncompleted contracts |
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Lease deposits |
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287,903 |
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Net cash provided by operating activities |
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5,885,532 |
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Investing activities |
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Purchases of property and equipment |
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Proceeds from the sale of property and equipment |
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1,287,898 |
Payments received on financing receivables |
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957,744 |
Cash paid from escrow |
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Net cash used in investing activities |
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The accompanying notes are an integral part of these consolidated financial statements.
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AUC Acquisition Holdings, LLC and Subsidiaries
Consolidated Statement of Cash Flows (Continued)
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For the year ended December 31, |
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2017 |
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Financing activities |
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Repayments on subordinated debt |
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$ |
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Repayments on notes payable to bank |
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Payment of deferred loan costs |
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Net cash used in financing activities |
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Net decrease in cash and cash equivalents |
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Cash and cash equivalents and restricted cash, beginning of year |
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880,449 |
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Cash and cash equivalents and restricted cash, end of year |
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$ |
483,587 |
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Components of total cash for the periods presented in the consolidated statement of cash flows are as follows: |
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Cash and cash equivalents |
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$ |
383,587 |
Restricted cash |
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100,000 |
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$ |
483,587 |
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Supplemental cash flow information |
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Cash paid for interest |
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$ |
2,681,133 |
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Cash refund for income taxes (net of taxes paid of $65,000) |
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$ |
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Supplemental disclosure of noncash operating, investing and financing activities |
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Property and equipment financed with debt |
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$ |
1,861,856 |
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Net transfer of assets between inventory and property and equipment |
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$ |
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Transfer of costs and estimated earnings in excess of billings on uncompleted contracts to financing receivables |
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$ |
525,468 |
The accompanying notes are an integral part of these consolidated financial statements.
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NOTE 1: ORGANIZATION
AUC Acquisition Holdings, LLC (individually, “AUC Acquisition”, and collectively with its subsidiaries, the “Company”) was incorporated in the state of Delaware on September 14, 2015. AUC Acquisition wholly owns AUC Holdings Corp. (“AUC Holdings”). AUC Holdings wholly owns (i) the limited partnership interests in AUC Group, L.P. (“AUC LP”), a Texas limited partnership, (ii) AUC Management, L.L.C. (“AUC LLC”), a Texas limited liability company and the general partner of AUC LP, and (iii) Carl R. Baker, Inc., dba Gaylord Investment Company and Gaylord Environmental (“Gaylord”), a Texas corporation. The Company designs, fabricates and installs wastewater treatment plants which may be sold to customers for cash or pursuant to financing arrangements. The Company also leases owned plants to customers for a contractual term and provides contract services for general site development and installation of the wastewater treatment plants. The Company’s customers are municipal utility districts, government units or developers.
The Company is managed by a Board of Managers selected in accordance with the AUC Acquisition LLC Agreement (the “LLC Agreement”) and members are generally unable to bind the Company. Except as may be required by law or expressly provided in the LLC Agreement, no member shall be personally liable for the liabilities or debts of the Company or be required to lend or contribute funds to the Company. The Company shall continue in existence in perpetuity.
NOTE 2: RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
As more fully described in Note 17, in November 2018, all of the issued and outstanding membership interests of AUC Acquisition were acquired by an entity subject to periodic reporting with the Securities and Exchange Commission (the “SEC”). As a result, the Company’s consolidated financial statements are being reissued to reflect certain conforming changes to allow the consolidated financial statements to be filed as part of the acquiring company’s Form 8-K with the SEC. These changes are a result of differences in the reporting guidance applied to a “publicly held company” rather than a “privately owned company” under accounting principles generally accepted in the United States of America (GAAP). The most notable conforming change is a reversal of the Company’s election under the Private Company Council alternatives to amortize goodwill which is not permitted for SEC reporting. Additionally, the adoption of certain standards under GAAP are accelerated for “publicly held companies” from the adoption date required by “privately owned companies”. In this regard and as further discussed in Note 3, these consolidated financial statements reflect the adoption of new standards governing the presentation of restricted cash within the consolidated statement of cash flows and the manner in which deferred income taxes are classified in the consolidated balance sheet. As further discussed in Note 3, the Company has not adopted the provisions of ASU 2014-09, Revenue from Contracts with Customers (Topic 606).
The effects of the restatement from the conforming change which eliminated amortization of goodwill, was to increase goodwill and members’ equity by $8,043,308 and $4,400,563 as of December 31, 2017 and 2016, respectively, and to reduce amortization expense and increase net income by $3,642,745 for the year ended December 31, 2017. The remaining conforming changes had no effect on net income or members’ equity as of and for the year ended December 31, 2017 other than the manner in which certain items are presented in the accompanying consolidated financial statements or related disclosures.
- 9 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Additionally, Notes 9 and 17 were modified to reflect additional disclosures regarding subsequent events effecting the December 31, 2017 consolidated financial statements.
NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the consolidated financial statements. The consolidated financial statements and notes are the representations of management, who is responsible for their integrity and objectivity. The accounting policies reflect industry practices, which conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the consolidated financial statements.
Basis of Accounting and Presentation
The consolidated financial statements include the accounts of AUC Holdings and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. The Company maintains its accounts on the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with original maturities of three months or less at time of purchase. Restricted cash consists of escrow amounts required by a contractual agreement set aside for the payment of amounts due to prior owners.
Revenue and Cost Recognition
The Company recognizes services and contract revenue using the percentage of completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. General and administrative costs are charged to expense as incurred, including advertising costs. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Revisions in cost and revenue estimates are reflected in the accounting period in which facts that require the revision become known. If estimated total cost on a contract exceeds estimated total revenue on that contract, the Company recognizes the loss currently.
The length of the Company’s contracts varies but are typically less than one year. Therefore, assets and liabilities are generally classified as current because the contract related items in the consolidated balance sheet have realization and liquidation periods not extending beyond one year, except as described in Notes 4 and 5. The asset, “Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts,” represents revenue recognized in excess of amounts billed. The liability, “Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts” represents billings in excess of revenue recognized.
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AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
The Company recognizes rental revenue from leasing activities on a straight-line basis over the respective lease terms. Rents received in advance of the lease period are recorded as advance rent payments. Deposits received under leasing arrangements are reflected as a lease deposit liability in the accompanying consolidated financial statements.
In certain circumstances, lease payments due from customers include components for the financing of Company services and the lease rental of the plant equipment. In all such cases, the services are completed prior to the rent commencement of the lease. Revenue from the services is recognized following the percentage of completion method or upon completion if minimal time is required to complete the project. The revenue from the two components is allocated between the service component and the lease rental based on management’s estimate of the relative values of such activities at the inception of the contract. Cancellation or termination provisions are delineated in normal contract provisions and do not differ from those where services and leasing activities are separately contracted.
Interest from financing receivables is recognized by the interest method using a constant periodic rate over the financing period. Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful.
Allowance for Doubtful Accounts
The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance when collection becomes doubtful. Allowances are made based upon a specific review of all outstanding invoices. Any receivables determined to be uncollectible are charged against the allowance. As of December 31, 2017, no allowance was considered necessary for rentals, contracts and financing receivables. For the year ended December 31, 2017, the Company incurred no bad debt expense.
Credit Quality of Financing Receivables
All financing receivables are principally with municipal utility districts and are current with respect to payments. Financing receivables are considered past due if payment is not made within 30 days of the date due. Receivables are considered nonperforming and are moved to nonaccrual status once it is likely that the Company will not collect all of the principal and interest contractually required by the financing agreement. None of the financing receivables are on nonaccrual status at December 31, 2017.
The Company monitors the credit quality of its financing receivables by monitoring the payment history of each debtor or through direct communication with the respective municipal utility district’s attorney regarding when payment will be expected.
Inventory
Inventory consists principally of products used to fabricate wastewater treatment plants. Inventory is stated at the lower of actual cost based on the specific identification method or net realizable value.
- 11 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Property and Equipment
Property and equipment are stated at acquisition cost. The Company provides for depreciation utilizing the straight-line method over estimated useful lives ranging from three to ten years. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income from operations.
Property and equipment are reviewed for impairment whenever events or circumstances indicate the recorded cost may not be recoverable. Management believes no impairment has occurred with respect to property and equipment at December 31, 2017.
Goodwill and Intangible Assets
Goodwill represents the excess of the fair value of consideration transferred to acquire an entity over the fair value of the identifiable net assets acquired. The Company amortizes goodwill on a straight-line basis over a 10 year life and evaluates goodwill for impairment at the entity level when a triggering event occurs. During the year ended December 31, 2017, the Company did not identify any triggering events that would require impairment testing.
The Company’s identifiable intangible assets consist of lease contracts and service backlog. Identifiable intangible assets with defined lives are amortized over their useful lives, with no residual value. The Company has no identifiable intangible assets with indefinite lives.
Management of the Company reviews intangible assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. There was no impairment for the year ended December 31, 2017.
Deferred Loan Costs
Deferred loan costs and related amortization expense are included in the consolidated statement of operations. The unamortized costs are a direct deduction from the face amount of the debt. Deferred loan cost amortization is included with interest expense in the consolidated statement of operations.
Deferred loan costs are amortized to interest expense using the effective interest method. Amortization of deferred financing costs totaled $63,379 the year ended December 31, 2017. Annual amortization is expected to approximate $64,000 for each of the next three years and $32,000 in 2021.
Fair Value Considerations
The Company uses fair value to measure financial assets and liabilities and nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the consolidated financial statements on a recurring basis (at least annually). Fair value is defined as the price that would be received to sell an asset or paid to transfer a
- 12 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
liability in an orderly transaction between market participants. The fair value hierarchy established and prioritized fair value measurements into three levels based on the nature of the inputs. The hierarchy gives the highest priority to inputs based on market data from independent sources (observable inputs-Level 1) and the lowest priority to a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (unobservable inputs-Level 3).
The fair value option allows entities to choose, at specified election dates, to measure eligible financial assets and financial liabilities at fair value that are not otherwise required to be measured at fair value. If an entity elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. The Company did not elect the fair value option for the measurement of any eligible assets or liabilities.
The Company’s financial instruments (primarily cash and cash equivalents, receivables, payables and debt) are carried in the accompanying consolidated balance sheet at amounts which reasonably approximate fair value.
Income Taxes
AUC Acquisition is a limited liability company recognized as a partnership for income tax purpose. Accordingly, federal income taxes on taxable income of AUC Acquisition is payable by the members individually and no provision for federal income taxes is included in the accompanying consolidated financial statements.
AUC Holdings, AUC LP and Gaylord are considered “C” Corporations and use the liability method of accounting for income taxes. Deferred income taxes are recognized based on the differences between the financial statement and income tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income tax represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
AUC Holdings, AUC LP and Gaylord are subject to Texas franchise tax, commonly referred to as the Texas margin tax, for the year ended December 31, 2017. Accordingly, a provision and liability for state income tax has been included in the accompanying consolidated financial statements.
Amounts due from prior owner as of December 31, 2017, represent the estimated amount of federal and state income taxes payable by AUC Holdings for periods prior to its acquisition by AUC Acquisition on October 16, 2015.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. Accordingly, only those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities are recognized. The Company‘s management has reviewed the Company’s tax positions and determined there were no significant outstanding or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities.
Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its consolidated financial statements. The Company’s evaluation was performed with respect to itself
- 13 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
and the predecessor tax activities of AUC Holdings, as applicable, for the tax periods ended December 31, 2013 through December 31, 2017 for U.S. Federal and applicable states, the tax periods which principally remain subject to examination by major tax jurisdictions as of December 31, 2017. Any liability associated with tax uncertainties of AUC Holdings prior to the acquisition by AUC Acquisition are subject to indemnification by the prior owners.
Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Adoption of New Accounting Pronouncements
In November 2016, the Financial Accounting Standards Board (“ FASB”) issued authoritative guidance that requires inclusion of cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. The Company adopted this guidance on January 1, 2017. The Company now presents the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows and no longer presents transfers between cash and cash equivalents and restricted cash and restricted cash investments in the statement of cash flows. Cash, cash equivalents and restricted cash stated in the consolidated statement of cash flows represent the addition of cash and cash equivalents and restricted cash classified as current and non-current line items in the consolidated balance sheet. The adoption did not have any impact on the consolidated balance sheet or statement of operations.
In November 2015, the FASB issued authoritative guidance that requires presentation of deferred income tax liabilities and assets as noncurrent in a classified statement of financial position. The Company adopted this guidance on January 1, 2017. Accordingly, all deferred income taxes are presented in the accompanying consolidated balance sheet as long‐term assets or liabilities. This change in accounting principle had the effect of reclassifying $23,700 from current deferred income tax liability to long-term deferred income tax liability as of December 31, 2017. The adoption did not have any impact on the consolidated statement of operations or cash flows.
Recent Financial Accounting Pronouncements
FASB issued ASU 2016‐02, Leases (Topic 842), the new standard on lease accounting. Under the new ASU, lessees will recognize lease assets and liabilities on their balance sheet for all leases with terms of more than 12 months. The new lessee accounting model retains two types of leases and is consistent with the lessee accounting model under existing accounting principles generally accepted in the United States of America. One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for today. The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with today’s operating leases. Lessor accounting under the new standard is fundamentally consistent with existing U.S. GAAP.
- 14 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Lessees and lessors would be required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities.
For non‐public entities, the final leases standard will be effective for fiscal years beginning after December 15, 2019, and interim periods thereafter. Early application is permitted. Management has not early adopted, nor evaluated the impact on future accounting periods.
FASB issued ASU 2014‐09, Revenue from Contracts with Customers (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued updated guidance with ASU 2015‐14 and deferred the effective date of ASU 2014‐09 by one year. The guidance in ASU 2014‐09 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods.
In March 2016, the FASB issued an ASU that further clarifies guidance under ASU 2014‐09 with respect to principal versus agent considerations in revenue from contracts with customers. In the second quarter of 2016, the FASB issued two ASUs that provide additional guidance when identifying performance obligations and licenses as well as allowing for certain narrow scope improvements and practical expedients. In May 2017, the FASB issued an ASU that provides guidance on the identification of the customer in a service concession arrangement. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective).
The Company plans to adopt this new guidance on a full retrospective basis on January 1, 2019 applying the guidance to all contracts that were not completed as of January 1, 2019. Results for periods beginning after January 1, 2019 will be adjusted to conform to the adopted guidance while periods prior to January 1, 2019 will continue to be reported under the accounting standards in effect for the prior periods.
NOTE 4: RENTALS AND CONTRACTS RECEIVABLE
Rentals and contracts receivable as of December 31, 2017 consist of the following:
|
|
|
|
December 31, |
|
2017 |
|
Rentals receivable |
|
$ |
283,274 |
Billed: |
|
|
|
Contracts receivable |
|
|
1,187,318 |
Retainage receivable |
|
|
493,053 |
|
|
|
|
|
|
$ |
1,963,645 |
- 15 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Future minimum rental income to be received under noncancellable operating leases are as follows:
|
|
|
|
Years ending December 31, |
|
|
|
|
|
|
|
2018 |
|
$ |
6,363,886 |
2019 |
|
|
5,322,760 |
2020 |
|
|
4,089,503 |
2021 |
|
|
2,608,368 |
2022 |
|
|
739,946 |
|
|
|
|
|
|
$ |
19,124,463 |
Future minimum rental and contracts receivable include projects where an expected commencement date can be estimated, but exclude those with a currently indeterminate commencement date. Substantially all leases have automatic renewal provisions subject to lessee cancellation prior to the end of the current lease term.
Credit risk associated with outstanding receivables is measured on an individual contract basis. To reduce the potential for risk concentration, the Company, to the extent possible, ascertains that funds have been escrowed and are available for payment before entering into an agreement. In the event of nonpayment or dispute, the Company has contractual rights and remedies available to collect amounts due. Furthermore, a mechanics lien can be filed against the property in most cases on a basis consistent with industry practice and state law.
NOTE 5: FINANCING RECEIVABLES
The Company finances the sale of wastewater treatment facilities to various customers and, in certain situations, installation fees, under agreements with monthly payments at an implicit interest rate due to the Company. The financing receivables have varying effective interest rates ranging from 6.5% to 10% and terms ranging from four to five years. In the event of nonperformance, the Company has the right to remove and retain ownership of the wastewater treatment facilities.
NOTE 6: UNCOMPLETED CONTRACTS
Information on uncompleted contracts is summarized as follows:
|
|
|
|
December 31, |
|
2017 |
|
Costs incurred on uncompleted contracts |
|
$ |
5,208,340 |
Estimated earnings |
|
|
1,949,715 |
|
|
|
7,158,055 |
Less: billings to date |
|
|
4,623,957 |
|
|
|
|
|
|
$ |
2,534,098 |
- 16 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
These items are included in the accompanying consolidated balance sheet as follows:
|
|
|
|
December 31, |
|
2017 |
|
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
$ |
2,912,750 |
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
|
|
|
|
|
|
|
$ |
2,534,098 |
Certain uncompleted contracts are expected to be realized through long term financing receivables or otherwise billed and collected after one year. Cost and estimated earning in excess of billings classified as a long term asset is $1,440,477 as of December 31, 2017.
NOTE 7: PROPERTY AND EQUIPMENT
The major asset categories together with their related estimated useful life and cost are as follows:
|
|
|
|
|
|
December 31, |
|
|
|
2017 |
|
|
|
Life (Years) |
|
|
|
Rental plant equipment |
|
10 |
|
$ |
31,386,169 |
Construction equipment |
|
3 to 5 |
|
|
204,523 |
Storage building |
|
5 |
|
|
38,682 |
Vehicles |
|
5 |
|
|
513,759 |
Furniture and fixtures |
|
7 |
|
|
77,111 |
Computer equipment and software |
|
3 |
|
|
91,068 |
Leasehold improvement |
|
5 |
|
|
21,031 |
|
|
|
|
|
32,332,343 |
Accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
26,327,381 |
- 17 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 8: INTANGIBLE ASSETS
Intangible assets together with their estimated useful life are as follows:
|
|
|
|
|
|
December 31, |
|
|
|
2017 |
|
|
|
Life (Years) |
|
|
|
Lease contracts |
|
8 |
|
$ |
8,920,179 |
Less: accumulated amortization |
|
|
|
|
|
|
|
|
|
|
6,457,838 |
|
|
|
|
|
|
Service backlog |
|
2 |
|
|
1,292,475 |
Less: accumulated amortization |
|
|
|
|
|
|
|
|
|
|
112,855 |
|
|
|
|
|
|
Intangible assets, net |
|
|
|
$ |
6,570,693 |
Amortization of intangible assets for the year ended December 31, 2017 totaled $1,153,522. The weighted average remaining lives of intangible assets is approximately 6.1 years. Estimated future amortization expense for the years ending subsequent to December 31, 2017 is expected to approximate $1,228,000 for the year ending December 31, 2018, $1,115,000 for each of the remaining years through December 31, 2022 and $882,000 for the year ending December 31, 2023.
NOTE 9: DEBT
Bank Loan Agreement
AUC Holdings has various loan agreements with a financial institution (the “Loan Agreement”) that provides for a $22 million term loan, a $5 million guidance line of credit and a $1 million revolving line of credit, as of December 31, 2017. As a result of an amendment in November 2017, borrowings under the initial guidance line of credit ceased and were converted to a term note (the “Guidance Term Note”) and a new $5 million guidance line of credit was provided.
The $22 million term loan is repayable in monthly installments of principal of $183,333 plus interest with the balance due at final maturity in November 2021. Amounts borrowed under this agreement bear interest rate of 1-month LIBOR plus 2.75% to 3.25%, depending upon the company’s leverage ratio, as defined by the Loan Agreement (3.86% at December 31, 2017). The balance due under the term loan totals $19,616,667 as of December 31, 2017.
The Guidance Term Note is repayable in fixed monthly payments of principal and interest based on a 120-month amortization period through maturity in November 2021. Interest is payable at a fixed annual rate of 4.25% (4.25% at December 31, 2017). As of December 31, 2017, $2,612,633 was due under the Guidance Term Note.
The new $5 million guidance line of credit is used to finance the acquisition or construction of wastewater treatment plants and draws are available from February 2018 to February 2019. Any borrowings under the guidance line of
- 18 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
credit bear interest only payments due monthly through March 2019. Thereafter, principal and interest is due in monthly payments based on a 120-month amortization period through maturity in February 2023, at which time any remaining balance is due This guidance line of credit accrues interest at a rate equal to the 1-month LIBOR plus 2.75% (3.86% at December 31, 2017). No amounts were borrowed under the guidance line of credit as of December 31, 2017.
In 2017, the Company amended the revolving line of credit to extend its maturity to November 2018. The amount available to the Company under this revolving line of credit is for working capital and in support of letters of credit up to a maximum of $1 million. Interest only on amounts outstanding is payable monthly through final maturity, at which time all amounts are due. The interest accrues at the rate of 1-month LIBOR plus 2.75% (3.86% at December 31, 2017). No amounts were borrowed under the revolving line of credit as of December 31, 2017.
All obligations under the Loan Agreement are secured by a first priority lien on substantially all assets of the Company and by guarantees by AUC Acquisition, AUC LP, AUC LLC and Gaylord.
Debt under the Loan Agreement is summarized as follows:
|
|
|
|
December 31, |
|
2017 |
|
|
|
|
|
Term loan |
|
$ |
19,616,667 |
Guidance term note |
|
|
2,612,633 |
|
|
|
22,229,300 |
Less: Unamortized deferred loan costs |
|
|
|
|
|
|
22,003,845 |
Less: Current portion |
|
|
|
|
|
|
|
Notes payable to bank, net of current portion |
|
$ |
19,542,582 |
Future maturities of the term and guidance term notes are as follows:
|
|
|
|
Years ending December 31, |
|
2017 |
|
|
|
|
|
2018 |
|
$ |
2,461,263 |
2019 |
|
|
2,461,263 |
2020 |
|
|
2,461,263 |
2021 |
|
|
14,845,511 |
2022 |
|
|
- |
|
|
|
|
|
|
$ |
22,229,300 |
- 19 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Subordinated Loan Agreement
The Company also maintains a $15 million senior subordinated loan from a member. This loan is subordinate to amounts borrowed pursuant to the Loan Agreement. Interest is payable monthly through maturity in April 2021, at which time all amounts are due. Interest accrues at a per annum rate equal to 12%, however, on the date of each scheduled payment of interest in respect of the subordinated loan, the borrowers shall only be required to pay in cash an amount of interest equal to 10% per annum and the remaining 2%, if not paid, shall accrue on unpaid principal balance and payment shall be deferred until maturity date. The balance due under the subordinated loan totaled $15,000,000 as of December 31, 2017. Interest on the subordinated note for the year ended December 31, 2017 approximated $1.8 million. The subordinated loan is secured by a second priority lien on substantially all assets of the Company and guarantees by AUC Acquisition, AUC Holdings, AUC LP, AUC LLC and Gaylord.
Pursuant to the Loan Agreement, the Company was required to refinance the subordinated loan during 2018 or otherwise extend the term of the subordinated loan. These actions did not occur by the specified due date representing a default under the Loan Agreement; however, the bank waived this violation. The Company and the bank entered into an amendment to the Loan Agreement on May 3, 2018 that provides a term loan for $15 million to refinance the subordinated debt. The new term loan is payable in monthly principal installments ranging from $125,000 to $250,000 through maturity in May 2023. Amounts borrowed under this agreement bear interest at a rate equal to the 1-month LIBOR plus 2.50% to 2.75%, depending upon the Company’s leverage ratio, as defined by the Loan Agreement.
Other Note Payable
The Company has a note payable to Ford Motor Credit Company for $62,856 as of December 31, 2017. This note is secured by a vehicle and payable in monthly installments. The note was fully repaid in 2018 and, accordingly, is classified as a current liability.
Compliance
Both the Loan Agreement and the subordinated loan agreement require AUC Holdings to comply with certain financial covenants, including a maximum leverage ratio and a minimum debt service coverage ratio. As of December 31, 2017, AUC Holdings was in compliance with those covenants.
- 20 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 10: INCOME TAXES
The provision for income tax consisted of the following components:
|
|
|
|
December 31, |
|
2017 |
|
Current: |
|
|
|
Federal |
|
$ |
- |
State |
|
|
71,494 |
Deferred - federal |
|
|
|
|
|
|
|
Total income tax benefit |
|
$ |
|
On December 22, 2017, the United States enacted tax reform legislation known as the H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (“TCJ Act”), resulting in significant modifications to existing law. Among other changes, the TCJ Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35% effective for tax years beginning after December 31, 2017. As a result of the reduction of the corporate federal income tax rate, net deferred tax assets and liabilities were revalued as of December 31, 2017 and the Company recorded an income tax benefit of approximately $1.5 million related to the TCJ Act in December 2017. The other provisions of the TCJ Act are not expected to have a material impact on the unaudited condensed consolidated financial statements.
The actual tax provision differs from the expected tax provision (computed at the U.S. corporate rate of 34% applied to income before income tax expense) as follows:
|
|
|
|
December 31, |
|
2017 |
|
Computed “expected” tax benefit |
|
$ |
1,054,380 |
Change in income tax expense resulting from: |
|
|
|
State income tax, net of federal benefit |
|
|
47,186 |
Effect on deferred income taxes of a reduction in future effective tax rates |
|
|
|
Adjustment of prior year estimated net operating loss carryforward |
|
|
149,812 |
Other |
|
|
13,427 |
|
|
|
|
Total income tax benefit |
|
$ |
|
- 21 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
The net deferred income tax liability consisted of the following:
|
|
|
|
December 31, |
|
2017 |
|
Basis differences related to: |
|
|
|
Property and equipment |
|
$ |
|
Lease contracts |
|
|
|
Service backlog |
|
|
|
Tax goodwill of prior acquired businesses |
|
|
1,334,766 |
Acquisition transaction costs |
|
|
25,013 |
Deferred loan costs |
|
|
22,212 |
Net operating loss |
|
|
522,688 |
|
|
|
|
Net deferred tax liabilities |
|
$ |
|
At June 30, 2018, the Company has a tax net operating loss carryforward of approximately $2.1 million that is available to be carried forward to tax years ranging from 2036 to 2037.
NOTE 11: MEMBERS’ EQUITY
The Company is authorized to issue 31,000,000 membership units in two classes – Common Units (3,098 authorized units) and Preferred Units (30,966,902 authorized units). All Common Units and Preferred Units are issued and outstanding. Each unit has an initial value of $1.00. In general, the Preferred Units are entitled to a preferred return equal to 8% per annum of their capital investment, compounded quarterly.
Any payments required with respect to the Common Units or Preferred Units are generally subordinated in right and time of payment to all obligations associated with the Company’s borrowings or guarantee of borrowings, including but not limited to bonds, debentures, notes or credit agreements and as further defined in the Company’s Amended and Restated Articles of Incorporation
Distributions are made from available cash, as defined in the LLC Agreement. All distributions, except for tax distributions, are at the discretion of the Board of Managers. Tax distributions are made by the Board of Managers using commercially reasonable efforts. Distributions are to be made in the following priority.
|
· |
|
For required tax distributions; |
|
· |
|
For payment of preferred returns due to Preferred Unit holders; |
|
· |
|
To return capital contributions to Preferred Unit holders; and finally |
|
· |
|
To Common Unit holders. |
Transfers of member units are normally restricted without prior written consent of the Board of Managers. The LLC Agreement also contains provisions regarding co-sale and drag-along rights, as such are defined, as well as provisions governing member or Company rights of first refusal to acquire member units proposed to be transferred to third parties.
- 22 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 12: RETIREMENT PLAN
The Company maintains a Simple IRA plan (the “Plan”). The Plan covers those employees who meet the eligibility requirements. Employer contributions are discretionary and are not to exceed, in total, 3% of the total compensation earned by the Plan participants for the year. For the year ended December 31, 2017, the Company contributed $64,663 to the Plan.
NOTE 13: RELATED PARTY TRANSACTIONS
During 2017, the Company leased nine wastewater plants to an entity that is partially owned by a member. The operating leases generated rental revenue of $429,725 as of December 31, 2017. Additionally, the related entity has prepaid rent for $33,000 on these leases as of December 31, 2017, which is included in advance rent payments in the consolidated balance sheet. As of December 31, 2017, the Company held lease deposits of $50,336 for the related party leases.
NOTE 14: CONCENTRATIONS
Financial instruments that subject the Company to concentrations of credit risk include cash and cash equivalents and receivables. At various times during the year, the Company has bank deposits significantly in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. Management believes any credit risk is low due to the overall financial strength of the financial institution.
For the year ended December 31, 2017, two customers, individually, accounted for 17% and 15% of the Company’s total revenue for services and contracts. Additionally, one customer accounted for approximately 15% of the total contracts receivable at December 31, 2017.
For the year ended December 31, 2017, one vendor accounted for approximately 10% of the Company’s purchases and approximately 17% of the total accounts payable at December 31, 2017.
NOTE 15: COMMITMENTS
Operating Leases
The Company leases office space and a storage yard under non-cancelable operating leases that expire at various dates through April 2023. Rent expense totaled $173,386 for the year ended December 31, 2017.
- 23 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
Future minimum lease commitments as of December 31, 2017 are as follows:
|
|
|
|
Years ending December 31, |
|
|
|
|
|
|
|
2018 |
|
$ |
178,556 |
2019 |
|
|
179,434 |
2020 |
|
|
180,085 |
2021 |
|
|
172,511 |
2022 |
|
|
74,845 |
Thereafter |
|
|
25,112 |
|
|
|
|
|
|
$ |
|
Employment and Non-Compete Agreements
The Company has employment agreements with two key employees expiring through October 2018. Under these agreements each of the key employees are to be employed and compensated in accordance with the terms set forth in each agreement. Pursuant to separate non-compete agreements, these employees are restricted from certain activities as defined in the agreements for a minimum period of five years, or one year after employment terminates, if later.
NOTE 16: BACKLOG
The following schedule summarizes changes in backlog on contracts during the year ended December 31, 2017. Backlog represents the amount of revenue the Company expects to realize from uncompleted contracts in progress at year end and from contractual agreements on which work has not yet begun:
|
|
|
|
December 31, |
|
2017 |
|
|
|
|
|
Balance, beginning of the year |
|
$ |
4,525,126 |
Add: new contracts and contract adjustments during the year |
|
|
13,868,022 |
|
|
|
18,393,148 |
Less: services and contract revenue earned during the year |
|
|
10,429,892 |
|
|
|
|
Balance, end of the year |
|
$ |
7,963,256 |
- 24 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 17: SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the consolidated financial statements were initially available for issuance on May 3, 2018 and later on January 4, 2019. No matters were identified affecting the consolidated financial statements or related disclosures that have not been disclosed below or elsewhere in these consolidated financial statements.
In November 2018, all of the issued and outstanding membership interests of AUC Acquisition were acquired by AquaVenture Holdings, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited (“AquaVenture”), pursuant to a membership interest purchase agreement. The aggregate sales price was approximately $130 million , including $128 million cash and approximately 122 thousand ordinary shares of AquaVenture, or $2 million. At the closing of the transaction, all existing term debt and notes payable of the Company were paid off.
- 25 -
Exhibit 99.2
AUC Acquisition Holdings, LLC and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
June 30 and December 31, |
|
2018 |
|
2017 |
||
|
|
|
|
|
||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
329,995 |
|
$ |
383,587 |
Restricted cash held in escrow |
|
|
100,000 |
|
|
100,000 |
Rentals and contracts receivable |
|
|
1,550,092 |
|
|
1,963,645 |
Current portion of financing receivables |
|
|
744,130 |
|
|
1,059,593 |
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
1,419,093 |
|
|
1,472,273 |
Inventory |
|
|
493,009 |
|
|
449,835 |
Prepaid federal income tax |
|
|
397,692 |
|
|
397,692 |
Prepaid and other assets |
|
|
178,416 |
|
|
194,154 |
Due from prior owner |
|
|
147,695 |
|
|
147,695 |
|
|
|
|
|
|
|
Total current assets |
|
|
5,360,122 |
|
|
6,168,474 |
|
|
|
|
|
|
|
Property and equipment, net |
|
|
29,340,033 |
|
|
26,327,381 |
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
Financing receivables, net of current portion |
|
|
1,510,931 |
|
|
2,011,358 |
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
2,135,332 |
|
|
1,440,477 |
Intangible lease contracts, net of accumulated amortization of $3,019,852 and $2,462,341, respectively |
|
|
5,900,327 |
|
|
6,457,838 |
Service backlog, net of accumulated amortization of $1,215,452 and $1,179,620, respectively |
|
|
77,023 |
|
|
112,855 |
Goodwill |
|
|
36,426,362 |
|
|
36,426,362 |
|
|
|
|
|
|
|
Total other assets |
|
|
46,049,975 |
|
|
46,448,890 |
|
|
|
|
|
|
|
Total assets |
|
$ |
80,750,130 |
|
$ |
78,944,745 |
See accompanying notes to the unaudited condensed financial statements.
- 1 -
AUC Acquisition, Holdings LLC and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets (Continued)
|
|
|
|
|
|
|
June 30 and December 31, |
|
2018 |
|
2017 |
||
|
|
|
|
|
||
Liabilities and members' equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
$ |
1,768,449 |
|
$ |
2,175,686 |
Retainage payable |
|
|
48,309 |
|
|
27,181 |
Advance rent payments |
|
|
641,213 |
|
|
479,257 |
Income tax payable |
|
|
78,375 |
|
|
42,375 |
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
307,006 |
|
|
378,652 |
Acquisition escrow payable |
|
|
100,000 |
|
|
100,000 |
Other note payable |
|
|
- |
|
|
62,856 |
Current maturities of notes payable to bank |
|
|
3,980,450 |
|
|
2,461,263 |
|
|
|
|
|
|
|
Total current liabilities |
|
|
6,923,802 |
|
|
5,727,270 |
|
|
|
|
|
|
|
Long-term liabilities |
|
|
|
|
|
|
Notes payable to bank, net of current maturities |
|
|
34,077,744 |
|
|
19,542,582 |
Subordinated debt |
|
|
- |
|
|
15,000,000 |
Lease deposits |
|
|
1,401,733 |
|
|
1,382,665 |
Deferred income tax liability |
|
|
2,793,329 |
|
|
2,504,731 |
|
|
|
|
|
|
|
Total long-term liabilities |
|
|
38,272,806 |
|
|
38,429,978 |
|
|
|
|
|
|
|
Total liabilities |
|
|
45,196,608 |
|
|
44,157,248 |
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
Members' equity |
|
|
35,553,522 |
|
|
34,787,497 |
|
|
|
|
|
|
|
Total liabilities and members' equity |
|
$ |
80,750,130 |
|
$ |
78,944,745 |
See accompanying notes to the unaudited condensed financial statements.
- 2 -
AUC Acquisition Holdings, LLC and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
For the six-month periods ended June 30, |
|
2018 |
|
2017 |
||
|
|
|
|
|
||
Revenue |
|
|
|
|
|
|
Services and contract revenue |
|
$ |
4,263,920 |
|
$ |
4,544,932 |
Rental revenue |
|
|
5,285,070 |
|
|
4,470,250 |
Interest on financed projects |
|
|
96,232 |
|
|
115,598 |
|
|
|
|
|
|
|
Total revenue |
|
|
9,645,222 |
|
|
9,130,780 |
|
|
|
|
|
|
|
Cost of revenue |
|
|
|
|
|
|
Services and contract revenue |
|
|
3,549,576 |
|
|
2,980,915 |
Rental revenue |
|
|
1,804,470 |
|
|
1,560,261 |
|
|
|
|
|
|
|
Total cost of revenue |
|
|
5,354,046 |
|
|
4,541,176 |
|
|
|
|
|
|
|
Gross profit |
|
|
4,291,176 |
|
|
4,589,604 |
|
|
|
|
|
|
|
General and administrative expenses |
|
|
|
|
|
|
Gain on sale of rental plant equipment |
|
|
308,206 |
|
|
225,000 |
|
|
|
|
|
|
|
Income from operations |
|
|
3,362,540 |
|
|
3,697,685 |
|
|
|
|
|
|
|
Other expenses |
|
|
|
|
|
|
Amortization |
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax benefit |
|
|
1,155,023 |
|
|
1,765,859 |
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
766,025 |
|
$ |
1,087,639 |
See accompanying notes to the unaudited condensed financial statements.
- 3 -
AUC Acquisition Holdings, LLC and Subsidiaries
Unaudited Condensed Consolidated Statements of Changes in Members’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common |
|
Preferred |
|
Retained |
|
|
||||
For the six-month period ended June 30, 2018 |
|
Units |
|
Units |
|
Earnings |
|
Total |
||||
|
|
|
|
|
|
|
|
|
||||
Balance, January 1, 2018 |
|
$ |
3,098 |
|
$ |
30,996,902 |
|
$ |
3,787,497 |
|
$ |
34,787,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
- |
|
|
766,025 |
|
|
766,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2018 |
|
$ |
3,098 |
|
$ |
30,996,902 |
|
$ |
4,553,522 |
|
$ |
35,553,522 |
See accompanying notes to the unaudited condensed financial statements.
- 4 -
AUC Acquisition Holdings, LLC and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
For the six-month periods ended June 30, |
|
2018 |
|
2017 |
||
|
|
|
|
|
||
Operating activities |
|
|
|
|
|
|
Net income |
|
$ |
766,025 |
|
$ |
1,087,639 |
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
Deferred tax expense |
|
|
288,598 |
|
|
642,220 |
Depreciation |
|
|
1,589,266 |
|
|
1,484,985 |
Amortization |
|
|
593,343 |
|
|
579,928 |
Deferred loan costs amortized to interest expense |
|
|
189,631 |
|
|
31,434 |
Gain on sale of rental plant equipment |
|
|
|
|
|
|
Construction revenues funded by financing receivables |
|
|
|
|
|
|
Change in operating assets and liabilities |
|
|
|
|
|
|
Rentals and contracts receivable |
|
|
413,553 |
|
|
715,100 |
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
|
|
|
|
|
Inventory |
|
|
511,543 |
|
|
|
Prepaid and other assets |
|
|
15,738 |
|
|
|
Accounts payable and accrued expenses |
|
|
|
|
|
|
Retainage payable |
|
|
21,128 |
|
|
|
Advance rent payments |
|
|
161,956 |
|
|
129,774 |
Income tax payable |
|
|
36,000 |
|
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
|
|
|
|
Lease deposits |
|
|
19,068 |
|
|
218,303 |
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
3,134,905 |
|
|
3,642,746 |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
|
Purchases of property and equipment |
|
|
|
|
|
|
Proceeds from the sale of property and equipment |
|
|
1,094,130 |
|
|
225,000 |
Payments received on financing receivables |
|
|
858,070 |
|
|
473,560 |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
|
|
|
|
See accompanying notes to the unaudited condensed financial statements.
- 5 -
AUC Acquisition Holdings, LLC and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows (Continued)
|
|
|
|
|
|
|
For the six-month periods ended June 30, |
|
2018 |
|
2017 |
||
|
|
|
|
|
||
Financing activities |
|
|
|
|
|
|
Repayments on subordinated debt, net |
$ |
|
|
|
$ |
|
Proceeds from borrowings on notes payable to bank |
|
|
17,247,750 |
|
|
- |
Repayments on notes payable to bank |
|
|
|
|
|
|
Payment of deferred loan costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used) in financing activities |
|
|
799,612 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents and restricted cash |
|
|
|
|
|
263,634 |
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash , beginning of period |
|
|
483,587 |
|
|
880,449 |
|
|
|
|
|
|
|
Cash and cash equivalents and restricted cash, end of period |
|
$ |
429,995 |
|
$ |
1,144,083 |
Components of total cash for the periods presented in the unaudited condensed consolidated statement of cash flows are as follows:
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
329,995 |
|
$ |
794,083 |
Restricted cash |
|
|
100,000 |
|
|
350,000 |
|
|
$ |
429,995 |
|
$ |
1,144,083 |
|
|
|
|
|
|
|
Supplemental cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,359,892 |
|
$ |
1,331,598 |
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
64,400 |
|
$ |
65,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of noncash operating, investing and financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment financed with debt |
|
$ |
2,250 |
|
$ |
499,000 |
|
|
|
|
|
|
|
Net transfers from (to) inventory (from) to property and equipment |
|
$ |
|
|
$ |
3,333 |
|
|
|
|
|
|
|
Transfer of costs and estimated earnings in excess of billings on uncompleted contracts to financing receivables |
|
$ |
1,689,144 |
|
$ |
525,648 |
See accompanying notes to the unaudited condensed financial statements.
- 6 -
NOTE 1: ORGANIZATION
AUC Acquisition Holdings, LLC (individually, “AUC Acquisition”, and collectively with its subsidiaries, the “Company”) was incorporated in the state of Delaware on September 14, 2015. AUC Acquisition wholly owns AUC Holdings Corp. (“AUC Holdings”). AUC Holdings wholly owns (i) the limited partnership interests in AUC Group, L.P. (“AUC LP”), a Texas limited partnership, (ii) AUC Management, L.L.C. (“AUC LLC”), a Texas limited liability company and the general partner of AUC LP, and (iii) Carl R. Baker, Inc., dba Gaylord Investment Company and Gaylord Environmental (“Gaylord”), a Texas corporation. The Company designs, fabricates and installs wastewater treatment plants which may be sold to customers for cash or pursuant to financing arrangements. The Company also leases owned plants to customers for a contractual term and provides contract services for general site development and installation of the wastewater treatment plants. The Company’s customers are municipal utility districts, government units or developers.
The Company is managed by a Board of Managers selected in accordance with the AUC Acquisition LLC Agreement (the “LLC Agreement”) and members are generally unable to bind the Company. Except as may be required by law or expressly provided in the LLC Agreement, no member shall be personally liable for the liabilities or debts of the Company or be required to lend or contribute funds to the Company. The Company shall continue in existence in perpetuity.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the unaudited condensed consolidated financial statements. The unaudited condensed consolidated financial statements and notes are the representations of management, who is responsible for their integrity and objectivity. The accounting policies reflect industry practices, which conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the unaudited condensed consolidated financial statements.
Basis of Accounting and Presentation
The unaudited condensed consolidated financial statements include the accounts of AUC Holdings and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“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 notes thereto.
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 June 30, 2018, the unaudited condensed consolidated statements of operations for the six-months ended June 30, 2018 and 2017 and the unaudited
- 7 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
condensed consolidated statements of cash flows for the six-months ended June 30, 2018 and 2017. The unaudited condensed consolidated balance sheet as of December 31, 2017 was based on the audited consolidated balance sheet as of December 31, 2017.
Cash and Cash Equivalents
For purposes of the consolidated statement of cash flows, cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with original maturities of three months or less at time of purchase. Restricted cash consists of escrow amounts required by a contractual agreement set aside for the payment of amounts due to prior owners.
Revenue and Cost Recognition
The Company recognizes services and contract revenue using the percentage of completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. General and administrative costs are charged to expense as incurred, including advertising costs. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Revisions in cost and revenue estimates are reflected in the accounting period in which facts that require the revision become known. If estimated total cost on a contract exceeds estimated total revenue on that contract, the Company recognizes the loss currently.
The length of the Company’s contracts varies but are typically less than one year. Therefore, assets and liabilities are generally classified as current because the contract related items in the unaudited condensed consolidated balance sheet have realization and liquidation periods not extending beyond one year, except as described in Notes 4 and 5. The asset, “Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts,” represents revenue recognized in excess of amounts billed. The liability, “Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts” represents billings in excess of revenue recognized.
The Company recognizes rental revenue from leasing activities on a straight-line basis over the respective lease terms. Rents received in advance of the lease period are recorded as advance rent payments. Deposits received under leasing arrangements are reflected as a lease deposit liability in the accompanying unaudited condensed consolidated financial statements.
In certain circumstances, lease payments due from customers include components for the financing of Company services and the lease rental of the plant equipment. In all such cases, the services are completed prior to the rent commencement of the lease. Revenue from the services is recognized following the percentage of completion method or upon completion if minimal time is required to complete the project. The revenue from the two components is allocated between the service component and the lease rental based on management’s estimate of the relative values of such activities at the inception of the contract. Cancellation or termination provisions are delineated in normal contract provisions and do not differ from those where services and leasing activities are separately contracted.
- 8 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Interest from financing receivables is recognized by the interest method using a constant periodic rate over the financing period. Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful.
Allowance for Doubtful Accounts
The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance when collection becomes doubtful. Allowances are made based upon a specific review of all outstanding invoices. Any receivables determined to be uncollectible are charged against the allowance. As of June 30, 2018 and December 31, 2017, no allowance was considered necessary for rentals, contracts and financing receivables. During the six-month periods ended June 30, 2018 and 2017, the Company incurred no bad debt expense.
Credit Quality of Financing Receivables
All financing receivables are principally with municipal utility districts and are current with respect to payments. Financing receivables are considered past due if payment is not made within 30 days of the date due. Receivables are considered nonperforming and are moved to nonaccrual status once it is likely that the Company will not collect all of the principal and interest contractually required by the financing agreement. None of the financing receivables are on nonaccrual status at June 30, 2018 and 2017.
The Company monitors the credit quality of its financing receivables by monitoring the payment history of each debtor or through direct communication with the respective municipal utility district’s attorney regarding when payment will be expected.
Inventory
Inventory consists principally of equipment parts used to fabricate wastewater treatment plants. Inventory is stated at the lower of actual cost based on the specific identification method or net realizable value.
Property and Equipment
Property and equipment are stated at acquisition cost. The Company provides for depreciation utilizing the straight-line method over estimated useful lives ranging from three to ten years. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income from operations.
Property and equipment are reviewed for impairment whenever events or circumstances indicate the recorded cost may not be recoverable. Management believes no impairment has occurred with respect to property and equipment at June 30, 2018 and 2017.
Goodwill and Intangible Assets
Goodwill represents the excess of the fair value of consideration transferred to acquire an entity over the fair value of the identifiable net assets acquired. Goodwill has an indefinite life and is not amortized; however, goodwill will
- 9 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
be subject to an impairment assessment at least annually. The Company has assessed various qualitative factors to determine whether it was necessary to perform a goodwill impairment test. If, from an evaluation of these qualitative factors, it was determined that it was more likely than not that the fair value of the reporting unit was less than the carrying value of goodwill, an impairment test would be performed. Based on the results of the assessment, the Company concluded that the more likely than not criteria was not met and no impairment testing was necessary for the six-month periods ended June 30, 2018 and 2017.
The Company’s identifiable intangible assets consist of lease contracts and service backlog. Identifiable intangible assets with defined lives are amortized over their useful lives, with no residual value. The Company has no identifiable intangible assets with indefinite lives.
Management of the Company reviews intangible assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. There was no impairment for the six-month periods ended June 30, 2018 and 2017.
Deferred Loan Costs
Deferred loan costs and related amortization expense are included in the unaudited condensed consolidated statement of operations. The unamortized costs are a direct deduction from the face amount of the debt. Deferred loan cost amortization is included with interest expense in the unaudited condensed consolidated statement of operations.
Deferred loan costs are amortized to interest expense using the effective interest method. Amortization of deferred financing costs totaled $189,631 and $31,434 during the six-month periods ended June 30, 2018 and 2017, respectively.
Fair Value Considerations
The Company uses fair value to measure financial assets and liabilities and nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a recurring basis (at least annually). Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The fair value hierarchy established and prioritized fair value measurements into three levels based on the nature of the inputs. The hierarchy gives the highest priority to inputs based on market data from independent sources (observable inputs-Level 1) and the lowest priority to a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (unobservable inputs-Level 3).
The fair value option allows entities to choose, at specified election dates, to measure eligible financial assets and financial liabilities at fair value that are not otherwise required to be measured at fair value. If an entity elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings. The Company did not elect the fair value option for the measurement of any eligible assets or liabilities.
- 10 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The Company’s financial instruments (primarily cash and cash equivalents, receivables, payables and debt) are carried in the accompanying unaudited condensed consolidated balance sheets at amounts which reasonably approximate fair value.
Income Taxes
AUC Acquisition is a limited liability company recognized as a partnership for income tax purpose. Accordingly, federal income taxes on taxable income of AUC Acquisition is payable by the members individually and no provision for federal income taxes is included in the accompanying unaudited condensed consolidated financial statements.
AUC Holdings, AUC LP and Gaylord are considered “C” Corporations and use the liability method of accounting for income taxes. Deferred income taxes are recognized based on the differences between the financial statement and income tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income tax represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
AUC Holdings, AUC LP and Gaylord are subject to Texas franchise tax, commonly referred to as the Texas margin tax, for the six-month periods ended June 30, 2018 and 2017. Accordingly, a provision and liability for state income tax has been included in the accompanying unaudited condensed consolidated financial statements.
Amounts due from prior owner as of June 30, 2018 and 2017 represent the estimated amount of federal and state income taxes payable by AUC Holdings for periods prior to its acquisition by AUC Acquisition on October 16, 2015.
The Company applies a more-likely-than-not recognition threshold for all tax uncertainties. Accordingly, only those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities are recognized. The Company‘s management has reviewed the Company’s tax positions and determined there were no significant outstanding or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities.
Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its unaudited condensed consolidated financial statements. The Company’s evaluation was performed with respect to itself and the predecessor tax activities of AUC Holdings, as applicable, for the tax periods ended December 31, 2013 through June 30, 2018 for U.S. Federal and applicable states, the tax periods which principally remain subject to examination by major tax jurisdictions as of June 30, 2018. Any liability associated with tax uncertainties of AUC Holdings prior to the acquisition by AUC Acquisition are subject to indemnification by the prior owners.
Estimates
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
- 11 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
Adoption of New Accounting Pronouncements
In November 2016, the FASB issued authoritative guidance that requires inclusion of cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. This guidance will be effective for annual reporting periods beginning on or after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. The Company adopted this guidance on January 1, 2017. The Company now presents the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows and no longer present transfers between cash and cash equivalents and restricted cash and restricted cash investments in the statement of cash flows. Cash, cash equivalents and restricted cash stated in the consolidated statement of cash flows represent the addition of cash and cash equivalents and restricted cash classified as current and non-current line items in the unaudited condensed consolidated balance sheet. The adoption did not have any impact on the unaudited condensed consolidated balance sheets or unaudited condensed statements of operations.
In November 2015, the FASB issued authoritative guidance that requires presentation of deferred income tax liabilities and assets as noncurrent in a classified statement of financial position. The Company adopted this guidance on January 1, 2017. Accordingly, all deferred income taxes are presented in the accompanying consolidated balance sheet as long‐term assets or liabilities. This change in accounting principle had the effect of reclassifying $23,700 from current deferred income tax liability to long-term deferred income tax liability. The adoption did not have any impact on the consolidated statement of operations or cash flows.
Recent Financial Accounting Pronouncements
The Financial Accounting Standards Board (FASB) issued ASU 2016‐02, Leases (Topic 842), the new standard on lease accounting. Under the new ASU, lessees will recognize lease assets and liabilities on their balance sheet for all leases with terms of more than 12 months. The new lessee accounting model retains two types of leases and is consistent with the lessee accounting model under existing accounting principles generally accepted in the United States of America. One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for today. The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with today’s operating leases. Lessor accounting under the new standard is fundamentally consistent with existing U.S. GAAP.
Lessees and lessors would be required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities.
For non‐public entities, the final leases standard will be effective for fiscal years beginning after December 15, 2019, and interim periods thereafter. Early application is permitted. Management has not early adopted, nor evaluated the impact on future accounting periods.
FASB issued ASU 2014‐09, Revenue from Contracts with Customer (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or
- 12 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
services. In August 2015, the FASB issued updated guidance with ASU 2015‐14 and deferred the effective date of ASU 2014‐09 by one year. The guidance in ASU 2014‐09 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods.
In March 2016, the FASB issued an ASU that further clarifies guidance under ASU 2014‐09 with respect to principal versus agent considerations in revenue from contracts with customers. In the second quarter of 2016, the FASB issued two ASUs that provide additional guidance when identifying performance obligations and licenses as well as allowing for certain narrow scope improvements and practical expedients. In May 2017, the FASB issued an ASU that provides guidance on the identification of the customer in a service concession arrangement. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective).
The Company plans to adopt this new guidance on a full retrospective basis on January 1, 2019 applying the guidance to all contracts that were not completed as of January 1, 2019. Results for periods beginning after January 1, 2019 will be adjusted to conform to the adopted guidance while periods prior to January 1, 2019 will continue to be reported under the accounting standards in effect for the prior periods.
The impacts of the adoption on the Company’s primary sources of revenue and related costs are as follows:
Services and contract revenue. S ervices and contract revenue includes services related to the construction of wastewater treatment plants, which includes both equipment sales and installation services, and installation services related to the leasing of modular wastewater treatment plants. For the construction of wastewater treatment plants, the Company has historically accounted for these contracts on a percentage of completion basis as services are performed. Revenue recognition begins as costs are incurred on the construction of the wastewater treatment plant, which is typically prior to the delivery of the equipment to the customer site. Under ASC 606, the Company determined that the equipment sales and installation services are considered a single performance obligation as the installation services are not considered distinct in the context of the agreement and are integral to the functionality of the equipment. Revenues for the construction of wastewater treatment plants is recognized as revenue as the construction is performed, using the input method, which typically begins once the equipment is delivered to the customer site, which is the point at which control of the wastewater treatment plant construction has been transferred to the customer. As a result, the timing of revenue recognition under ASC 606 will commence at a later date than under the previous revenue recognition standard.
Installation services related to the leasing of modular wastewater treatment plants can be both embedded within a lease agreement or explicit in a separate contract with a third party. For contracts where the installation services are embedded within a lease agreement, the Company has historically allocated the revenue under the contract based on the relative fair value of the installation services and lease of equipment. The Company determined the installation services were a non-lease component of the contract with revenues being recognized on a percentage of completion basis as services are performed. Long-term receivables, which were established for the revenue recognized for the non-lease component, were amortized over the lease term as the cash from the customer was received and allocated. Revenues allocated to the lease component were recognized over the lease term. Under ASC 606, the Company determined the installation services embedded within a lease agreement, which are performed prior to lease commencement, do not meet the definition of a separate performance obligation as the services are not capable of being distinct within the context of the agreement. As a result, the Company will account for the
- 13 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
installation services as a component of the lease and revenues for the entire contract, including both the installation and lease of equipment, will be recognized on a straight-line basis over the lease term.
Contract Costs. Historically, AUC has not recognized initial direct costs for contracts. Upon the adoption of ASC 606 and the conclusions reached with respect to installation services embedded within a lease agreement, the costs related to the installation services were determined to be an initial direct cost of the contract and, as a result, should be deferred and amortized over the initial term of the lease. The initial direct costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to install the related wastewater treatment equipment.
NOTE 3: RENTALS AND CONTRACTS RECEIVABLE
Rentals and contracts receivable consists of the following:
|
|
|
|
|
|
|
June 30 and December 31, |
|
2018 |
|
2017 |
||
Rentals receivable |
|
$ |
293,874 |
|
$ |
283,274 |
Billed: |
|
|
|
|
|
|
Contracts receivable |
|
|
771,074 |
|
|
1,187,318 |
Retainage receivable |
|
|
485,144 |
|
|
493,053 |
|
|
|
|
|
|
|
|
|
$ |
1,550,092 |
|
$ |
1,963,645 |
Future minimum rental income to be received under non-cancellable operating leases are as follows:
|
|
|
|
Periods ending December 31, |
|
|
|
2018 |
|
$ |
3,401,694 |
2019 |
|
|
6,032,835 |
2020 |
|
|
4,683,777 |
2021 |
|
|
3,419,900 |
2022 |
|
|
1,545,063 |
Thereafter |
|
|
349,300 |
|
|
|
|
|
|
$ |
19,432,569 |
Future minimum rental and contracts receivable include projects where an expected commencement date can be estimated, but exclude those with a currently indeterminate commencement date. Substantially all leases have automatic renewal provisions subject to lessee cancellation prior to the end of the current lease term.
Credit risk associated with outstanding receivables is measured on an individual contract basis. To reduce the potential for risk concentration, the Company, to the extent possible, ascertains that funds have been escrowed and are available for payment before entering into an agreement. In the event of nonpayment or dispute, the Company has contractual rights and remedies available to collect amounts due. Furthermore, a mechanics lien can be filed against the property in most cases on a basis consistent with industry practice and state law.
- 14 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 4: FINANCING RECEIVABLES
The Company finances the sale of wastewater treatment facilities to various customers and, in certain situations, installation fees, under agreements with monthly payments at an implicit interest rate due to the Company. The financing receivables have varying effective interest rates ranging from 6.5% to 10% and terms ranging from four to five years. In the event of nonperformance, the Company has the right to remove and retain ownership of the wastewater treatment facilities.
NOTE 5: UNCOMPLETED CONTRACTS
Information on uncompleted contracts is summarized as follows:
|
|
|
|
|
|
|
June 30 and December 31, |
|
2018 |
|
2017 |
||
Costs incurred on uncompleted contracts |
|
$ |
7,160,525 |
|
$ |
5,208,340 |
Estimated earnings |
|
|
2,883,486 |
|
|
1,949,715 |
|
|
|
10,044,011 |
|
|
7,158,055 |
Less: billings to date |
|
|
6,796,592 |
|
|
4,623,957 |
|
|
|
|
|
|
|
|
|
$ |
3,247,419 |
|
$ |
2,534,098 |
Included in the accompanying unaudited condensed consolidated balance sheet as follows:
|
|
|
|
|
|
|
June 30 and December 31, |
|
2018 |
|
2017 |
||
Costs and estimated earnings in excess of billings on uncompleted contracts |
|
$ |
3,554,425 |
|
$ |
2,912,750 |
Billings in excess of costs and estimated earnings on uncompleted contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,247,419 |
|
$ |
2,534,098 |
Certain uncompleted contracts are expected to be realized through long term financing receivables or otherwise billed and collected after one year. Cost and estimated earning in excess of billings classified as a long term asset is $2,135,332 and $1,440,477 as of June 30, 2018 and December 31, 2017, respectively.
- 15 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 6: PROPERTY AND EQUIPMENT
The major asset categories together with their related estimated useful life and cost are as follows:
|
|
|
|
|
|
|
|
|
June 30 and December 31, |
|
|
|
2018 |
|
2017 |
||
|
|
Life (Years) |
|
|
|
|
||
Rental plant equipment |
|
10 |
|
$ |
35,854,593 |
|
$ |
31,386,169 |
Construction equipment |
|
3 to 5 |
|
|
224,860 |
|
|
204,523 |
Storage building |
|
5 |
|
|
38,682 |
|
|
38,682 |
Vehicles |
|
5 |
|
|
513,848 |
|
|
513,759 |
Furniture and fixtures |
|
7 |
|
|
77,111 |
|
|
77,111 |
Computer equipment and software |
|
3 |
|
|
98,143 |
|
|
91,068 |
Leasehold improvement |
|
5 |
|
|
38,563 |
|
|
21,031 |
|
|
|
|
|
36,845,800 |
|
|
32,332,343 |
Accumulated depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
29,340,033 |
|
$ |
26,327,381 |
NOTE 7: DEBT
Bank Loan Agreement
AUC Holdings has various loan agreements with a financial institution (the “Loan Agreement”) that provides for a $22 million term loan, a $5 million guidance line of credit and a $1 million revolving line of credit as of June 30, 2017. As a result of an amendment in November 2017, borrowings under the initial guidance line of credit ceased and were converted to a term note (the “Guidance Term Note”) and a new $5 million guidance line of credit was provided.
The $22 million term loan is repayable in monthly installments of principal of $183,333 plus interest with the balance due at final maturity in November 2021. Amounts borrowed under this agreement bear interest at a rate equal to the 1-month LIBOR plus 2.50% to 2.75%, depending upon the company’s leverage ratio, as defined by the Loan Agreement (4.48% as of June 30, 2018). The balance due under the term loan totaled $18,516,667 and $19,616,667 as of June 30, 2018 and 2017, respectively.
The Guidance Term Note is repayable in fixed monthly payments of principal and interest based on a 120-month amortization period through maturity in November 2021. Interest is payable at a fixed annual rate of 4.25% (4.25% at June 30, 2018). As of June 30, 2018 and 2017, $2,508,640 and $2,612,633 was due under the Guidance Term Note.
The new $5 million guidance line of credit is used to finance the acquisition or construction of wastewater treatment plants and draws are available from February 2018 to February 2019. Any borrowings under the guidance line of credit bear interest only payments due monthly through March 2019. Thereafter, principal and interest is due in monthly payments based on a 120-month amortization period through maturity in February 2023, at which time any remaining balance is due This guidance line of credit accrues interest at a rate equal to the 1-month LIBOR plus 2.75% (4.73% at June 30, 2018). The balance due under the guidance line of credit totaled $2,250,000 as of June 30, 2018.
- 16 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
In 2017, the Company amended the revolving line of credit to extend its maturity to November 2018. The amount available to the Company under this revolving line of credit is for working capital and in support of letters of credit up to a maximum of $1 million. In May 2018, the line of credit was reduced to $250,000. Interest only on amounts outstanding is payable monthly through final maturity, at which time all amounts are due. The interest accrues at the rate of 1-month LIBOR plus 2.75% (4.73% at June 30, 2018). No amounts were borrowed under the revolving line of credit as of June 30, 2018 and 2017.
Pursuant to the Loan Agreement, the Company was required to refinance its subordinated loan during 2018 or otherwise extend the term of the subordinated loan. The Company and the bank entered into an amendment to the Loan Agreement on May 3, 2018 that provides a term loan for $15 million to refinance the subordinated debt. The new term loan is payable in monthly principal installments ranging from $125,000 to $250,000 through maturity in May 2023. Amounts borrowed under this agreement bear interest at a rate equal to the 1-month LIBOR plus 2.50% to 2.75%, depending upon the Company’s leverage ratio, as defined by the Loan Agreement (4.73% as of June 30, 2018). As of June 30, 2018, $14,875,000 was due under this term loan.
Debt under the Loan Agreement is summarized as follows:
|
|
|
|
|
|
|
June 30 and December 31, |
|
2018 |
|
2017 |
||
|
|
|
|
|
||
Term loans |
|
$ |
33,391,667 |
|
$ |
19,616,667 |
Guidance term note and guidance line of credit |
|
|
4,758,640 |
|
|
2,612,633 |
|
|
|
38,150,307 |
|
|
22,229,300 |
Less: Unamortized deferred loan costs |
|
|
|
|
|
|
|
|
|
38,058,194 |
|
|
22,003,845 |
Less: Current portion |
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to bank, net of current portion |
|
$ |
34,077,744 |
|
$ |
19,542,582 |
Future maturities of the term and guidance term notes are as follows:
|
|
|
|
Periods ending December 31, |
|
|
|
2018 |
|
$ |
1,958,739 |
2019 |
|
|
4,134,241 |
2020 |
|
|
4,215,561 |
2021 |
|
|
17,436,082 |
2022 |
|
|
4,030,684 |
Thereafter |
|
|
6,375,000 |
|
|
|
|
|
|
$ |
38,150,307 |
Subordinated Loan Agreement
During 2017, the Company also maintained a $15 million senior subordinated loan from a member. This loan was subordinate to amounts borrowed pursuant to the Loan Agreement. Interest was payable monthly through maturity in April 2021, at which time all amounts were due. Interest accrued at a per annum rate equal to 12%, however, on
- 17 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
the date of each scheduled payment of interest in respect of the subordinated loan, the borrowers were only required to pay in cash an amount of interest equal to 10% per annum and the remaining 2%, if not paid, accrued on the unpaid principal balance and payment was deferred until maturity date. The balance due under the subordinated loan totaled $15,000,000 as of June 30, 2017 and December 31, 2017. In May 2018, the senior subordinated loan was paid in full by a term note with the Company’s financial institution lender. Interest on the subordinated note for the six-month periods ended June 30, 2017 and June 30, 2018 approximated $0.9 million and $0.8 million, respectively. The subordinated loan was secured by a second priority lien on substantially all assets of the Company and guarantees by AUC Acquisition, AUC Holdings, AUC LP, AUC LLC and Gaylord.
Compliance
Both the Loan Agreement and the subordinated loan agreement, prior to repayment, required AUC Holdings to comply with certain financial covenants, including a maximum leverage ratio and a minimum debt service coverage ratio. As of June 30, 2018 and 2017, AUC Holdings was in compliance with those covenants.
Other Note Payable
The Company has a note payable to Ford Motor Credit Company for $62,856 as of December 31, 2017. This note is secured by a vehicle and payable in monthly installments. The note was fully repaid in 2018 and, accordingly, is classified as a current liability.
NOTE 8: INCOME TAXES
The provision for income tax consisted of the following components:
|
|
|
|
|
|
|
For the six-months ended June 30, |
|
2018 |
|
2017 |
||
Current |
|
|
|
|
|
|
Federal |
|
$ |
- |
|
$ |
- |
State |
|
|
100,400 |
|
|
36,000 |
Deferred - federal |
|
|
288,598 |
|
|
642,220 |
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
388,998 |
|
$ |
678,220 |
On December 22, 2017, the United States enacted tax reform legislation known as the H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (“TCJ Act”), resulting in significant modifications to existing law. Among other changes, the TCJ Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35% effective for tax years beginning after December 31, 2017. As a result of the reduction of the corporate federal income tax rate, net deferred tax assets were revalued as of December 31, 2017 and the Company recorded an income tax benefit of approximately $1.5 million related to the TCJ Act in December 2017. The other provisions of the TCJ Act are not expected to have a material impact on the unaudited condensed consolidated financial statements.
- 18 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
The actual tax provision differs from the expected tax provision (computed at the U.S. corporate rate of 34% for 2017 and 21% for 2018 applied to income before income tax expense) as follows:
|
|
|
|
|
|
|
For the six-months ended June 30, |
|
2018 |
|
2017 |
||
Computed “expected” tax expense |
|
$ |
242,555 |
|
$ |
600,392 |
Change in income tax expense resulting from |
|
|
|
|
|
|
State income tax, net of federal benefit |
|
|
79,316 |
|
|
23,760 |
Adjustment of prior year estimated net operating loss carryforward |
|
|
75,321 |
|
|
50,937 |
Other |
|
|
|
|
|
3,131 |
|
|
|
|
|
|
|
Total income tax expense |
|
$ |
388,998 |
|
$ |
678,220 |
The net deferred income tax liability consisted of the following:
|
|
|
|
June 30, |
|
2018 |
|
Basis differences related to: |
|
|
|
Property and equipment |
|
$ |
|
Lease contracts |
|
|
|
Service backlog |
|
|
|
Tax goodwill of prior acquired businesses |
|
|
1,252,203 |
Other |
|
|
31,043 |
Net operating loss |
|
|
551,196 |
|
|
|
|
Net deferred tax liabilities |
|
$ |
|
|
|
|
|
December 31, |
|
2017 |
|
Basis differences related to: |
|
|
|
Property and equipment |
|
$ |
|
Lease contracts |
|
|
|
Service backlog |
|
|
|
Tax goodwill of prior acquired businesses |
|
|
1,334,766 |
Other |
|
|
47,225 |
Net operating loss |
|
|
522,688 |
|
|
|
|
Net deferred tax liabilities |
|
$ |
|
At June 30, 2018, the Company has a tax net operating loss carryforward of approximately $2.5 million, of which approximately $2.1 million is available to be carried forward to tax years ranging from 2036 to 2037 and the remainder can be carried forward indefinitely.
NOTE 9: MEMBERS’ EQUITY
The Company is authorized to issue 31,000,000 membership units in two classes – Common Units (3,098 authorized units) and Preferred Units (30,966,902 authorized units). All Common Units and Preferred Units are issued and
- 19 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
outstanding. Each unit has an initial value of $1.00. In general, the Preferred Units are entitled to a preferred return equal to 8% per annum of their capital investment, compounded quarterly.
Any payments required with respect to the Common Units or Preferred Units are generally subordinated in right and time of payment to all obligations associated with the Company’s borrowings or guarantee of borrowings, including but not limited to bonds, debentures, notes or credit agreements and as further defined in the Company’s Amended and Restated Articles of Incorporation.
Distributions are made from available cash, as defined in the LLC Agreement. All distributions, except for tax distributions, are at the discretion of the Board of Managers. Tax distributions are made by the Board of Managers using commercially reasonable efforts. Distributions are to be made in the following priority.
For required tax distributions;
For payment of preferred returns due to Preferred Unit holders;
To return capital contributions to Preferred Unit holders; and finally
To Common Unit holders.
Transfers of member units are normally restricted without prior written consent of the Board of Managers. The LLC Agreement also contains provisions regarding co-sale and drag-along rights, as such are defined, as well as provisions governing member or Company rights of first refusal to acquire member units proposed to be transferred to third parties.
NOTE 10: RETIREMENT PLAN
The Company maintains a Simple IRA plan (the “Plan”). The Plan covers those employees who meet the eligibility requirements. Employer contributions are discretionary and are not to exceed, in total, 3% of the total compensation earned by the Plan participants for the year. For the six-month periods ended June 30, 2018 and 2017, the Company contributed $35,146 and $25,630, respectively, to the Plan.
NOTE 11: RELATED PARTY TRANSACTIONS
During 2018, the Company leased nine wastewater plants to an entity that is partially owned by a member. The operating leases generated rental revenue of $198,000 as of June 30, 2018. Additionally, the related entity has prepaid rent for $33,000 on these leases as of June 30, 2018, which is included in advance rent payments in the unaudited condensed consolidated balance sheet. As of June 30, 2018, there were no lease deposits held for the related party leases.
During 2017, the Company leased nine wastewater plants to an entity that is partially owned by a member. The operating leases generated rental revenue of $231,725 as of June 30, 2017. Additionally, the related entity has prepaid rent for $33,000 on these leases as of June 30, 2017, which is included in advance rent payments in the unaudited condensed consolidated balance sheet. As of June 30, 2017, the Company held lease deposits of $50,336 for the related party leases.
- 20 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 12: CONCENTRATIONS
Financial instruments that subject the Company to concentrations of credit risk include cash and cash equivalents and receivables. At various times during the year, the Company has bank deposits significantly in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits. Management believes any credit risk is low due to the overall financial strength of the financial institution.
For the six-month periods ended June 30, 2018 and 2017, one and three customers, respectively, accounted for 10% and 42% of the Company’s total revenue for services and contracts. There were no concentrations within contracts receivable at June 30, 2018. One customer accounted for approximately 15% of total contracts receivable at December 31, 2017.
For the periods ended June 30, 2018 and 2017, one vendor accounted for approximately 17% and 22%, respectively, of the Company’s purchases. There were no concentrations within accounts payable at June 30, 2018. One customer accounted for approximately 17% of total accounts payable at December 31, 2017.
NOTE 13: COMMITMENTS
Employment and Non-Compete Agreements
The Company has employment agreements with two key employees expiring through October 2018. Under these agreements each of the key employees are to be employed and compensated in accordance with the terms set forth in each agreement. Pursuant to separate non-compete agreements, these employees are restricted from certain activities as defined in the agreements for a minimum period of five years, or one year after employment terminates, if later.
Operating Leases
The Company leases office space and a storage yard under non-cancelable operating leases that expire at various dates through April 2023. Rent expense totaled $90,702 and $83,598 for the six-month periods ended June 30, 2018 and 2017, respectively.
Future minimum lease commitments as of June 30, 2018 are as follows:
|
|
|
|
Periods ending December 31, |
|
|
|
2018 |
|
$ |
91,474 |
2019 |
|
|
178,674 |
2020 |
|
|
180,085 |
2021 |
|
|
172,511 |
2022 |
|
|
74,845 |
Thereafter |
|
|
25,112 |
|
|
|
|
|
|
$ |
722,701 |
- 21 -
AUC Acquisition Holdings, LLC and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
NOTE 14: BACKLOG
The following schedule summarizes changes in backlog on contracts. Backlog represents the amount of revenue the Company expects to realize from uncompleted contracts in progress at period end and from contractual agreements on which work has not yet begun:
|
|
|
|
|
|
|
June 30 and December 31, |
|
2018 |
|
2017 |
||
|
|
|
|
|
||
Balance, beginning of the period |
|
$ |
7,970,756 |
|
$ |
4,525,126 |
Add: new contracts and contract adjustments during the year |
|
|
3,249,250 |
|
|
13,868,022 |
|
|
|
11,220,006 |
|
|
18,393,148 |
Less: services and contract revenue earned during the period |
|
|
4,263,920 |
|
|
10,429,892 |
|
|
|
|
|
|
|
Balance, end of the period |
|
$ |
6,956,086 |
|
$ |
7,963,256 |
NOTE 15: SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the date the unaudited condensed consolidated financial statements were available for issuance on January 4, 2019. No matters were identified affecting the unaudited condensed consolidated financial statements or related disclosures that have not been disclosed below or elsewhere in these unaudited condensed consolidated financial statements.
In November 2018, all of the issued and outstanding membership interests of AUC Acquisition were acquired by AquaVenture Holdings, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited (“AquaVenture’), pursuant to a membership interest purchase agreement. The aggregate sales price was approximately $130 million , including $128 million cash and approximately 122 thousand ordinary shares of AquaVenture, or $2 million. At the closing of the transaction, all existing term debt and notes payable of the Company were paid off.
- 22 -
EXHIBIT 99.3
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information is based on the historical financial statements of AquaVenture Holdings Limited (“AquaVenture” or the “Company”) and AUC Acquisition Holdings LLC (“AUC”) after giving effect to the acquisition of AUC and the related financing and after applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements. The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the acquisition of AUC and related financing as if they had occurred on June 30, 2018. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 and six months ended June 30, 2018 gives effect to the acquisition of AUC and the related financing as if they had occurred on January 1, 2017.
The pro forma adjustments, which are based upon available information and upon assumptions that management believes to be reasonable, are described in the accompanying notes. The unaudited pro forma condensed combined financial information is for informational purposes only and should not be considered indicative of actual results that would have been achieved had the transactions noted previously actually been consummated on the dates indicated and does not purport to be indicative of results of operations as of any future date or for any future period.
The unaudited pro forma condensed combined financial information reflects the acquisition accounted for under the acquisition method of accounting. Under the acquisition method of accounting, the purchase price of an acquisition is allocated to the underlying assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. To the extent the purchase price exceeds the estimated fair value of the net identifiable tangible and intangible assets acquired and liabilities assumed, such excess is allocated to goodwill. The pro forma purchase price adjustments have been made for the purpose of providing unaudited pro forma condensed combined financial information based on current estimates and currently available information, and are subject to revision based on final, independent determinations of fair value and final allocation of purchase price to the assets and liabilities of the business acquired.
The unaudited pro forma condensed combined financial information and the related notes hereto should be read in conjunction with the historical consolidated financial statements contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2017, the unaudited condensed combined interim financial statements in the Company’s quarterly report on Form 10-Q for the period ended June 30, 2018, and AUC’s historical financial statements included in Exhibits 99.1 and 99.2 to this Current Report on Form 8-K/A.
Unaudited Pro Forma Condensed Combined Balance Sheet
As of June 30, 2018
(
In Thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
Pro Forma |
|
|||||||
|
|
|
|
AUC |
|
Pro Forma |
|
Pro Forma |
|
||||
|
|
AquaVenture |
|
(as adjusted) |
|
Adjustments |
|
Combined |
|
||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
107,402 |
|
$ |
330 |
|
$ |
(17,796) |
(a) |
$ |
89,936 |
|
Restricted cash |
|
|
2,000 |
|
|
100 |
|
|
— |
|
|
2,100 |
|
Trade receivables, net |
|
|
16,483 |
|
|
2,969 |
|
|
328 |
(b) |
|
19,780 |
|
Inventory |
|
|
10,177 |
|
|
493 |
|
|
1,614 |
(c) |
|
12,284 |
|
Current portion of long-term receivables |
|
|
6,127 |
|
|
744 |
|
|
(211) |
(d) |
|
6,660 |
|
Prepaid expenses and other current assets |
|
|
3,906 |
|
|
724 |
|
|
(251) |
(e) |
|
4,379 |
|
Total current assets |
|
|
146,095 |
|
|
5,360 |
|
|
(16,316) |
|
|
135,139 |
|
Property, plant and equipment, net |
|
|
112,568 |
|
|
29,340 |
|
|
— |
|
|
141,908 |
|
Construction in progress |
|
|
9,722 |
|
|
— |
|
|
— |
|
|
9,722 |
|
Restricted cash |
|
|
3,635 |
|
|
— |
|
|
— |
|
|
3,635 |
|
Long-term receivables |
|
|
41,440 |
|
|
1,511 |
|
|
(585) |
(d) |
|
42,366 |
|
Other assets |
|
|
4,843 |
|
|
2,135 |
|
|
(1,974) |
(e) |
|
5,004 |
|
Deferred tax asset |
|
|
407 |
|
|
— |
|
|
— |
|
|
407 |
|
Intangible assets, net |
|
|
125,168 |
|
|
5,977 |
|
|
43,713 |
(f) |
|
174,858 |
|
Goodwill |
|
|
101,666 |
|
|
36,426 |
|
|
25,558 |
(g) |
|
163,650 |
|
Total assets |
|
$ |
545,544 |
|
$ |
80,749 |
|
$ |
50,396 |
|
$ |
676,689 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4,588 |
|
$ |
1,768 |
|
$ |
(492) |
(h) |
$ |
5,864 |
|
Accrued liabilities |
|
|
10,150 |
|
|
533 |
|
|
3,482 |
(i) |
|
14,165 |
|
Current portion of long-term debt |
|
|
6,246 |
|
|
3,980 |
|
|
(3,980) |
(j) |
|
6,246 |
|
Deferred revenue |
|
|
2,687 |
|
|
641 |
|
|
— |
|
|
3,328 |
|
Total current liabilities |
|
|
23,671 |
|
|
6,922 |
|
|
(990) |
|
|
29,603 |
|
Long-term debt |
|
|
165,466 |
|
|
34,078 |
|
|
75,922 |
(k) |
|
275,466 |
|
Deferred tax liability |
|
|
5,334 |
|
|
2,793 |
|
|
10,345 |
(l) |
|
18,472 |
|
Other long-term liabilities |
|
|
11,670 |
|
|
1,402 |
|
|
— |
|
|
13,072 |
|
Total liabilities |
|
|
206,141 |
|
|
45,195 |
|
|
85,277 |
|
|
336,613 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares, no par value, 250,000 shares authorized; 26,580 and 26,482 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Additional paid-in capital |
|
|
575,257 |
|
|
— |
|
|
2,043 |
(m) |
|
577,300 |
|
Accumulated other comprehensive income |
|
|
(207) |
|
|
— |
|
|
— |
|
|
(207) |
|
Accumulated deficit |
|
|
(235,647) |
|
|
35,554 |
|
|
(36,924) |
(n) |
|
(237,017) |
|
Total shareholders' equity |
|
|
339,403 |
|
|
35,554 |
|
|
(34,881) |
|
|
340,076 |
|
Total liabilities and shareholders' equity |
|
$ |
545,544 |
|
$ |
80,749 |
|
$ |
50,396 |
|
$ |
676,689 |
|
See accompanying notes to the unaudited pro forma condensed combined financial information.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2017
( In Thousands )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
Pro Forma |
|
|||||||
|
|
|
|
AUC |
|
Pro Forma |
|
Pro Forma |
|
||||
|
|
AquaVenture |
|
(as adjusted) |
|
Adjustments |
|
Combined |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
$ |
58,358 |
|
$ |
— |
|
$ |
— |
|
$ |
58,358 |
|
Rental |
|
|
52,997 |
|
|
9,218 |
|
|
— |
|
|
62,215 |
|
Financing income |
|
|
— |
|
|
238 |
|
|
— |
|
|
238 |
|
Other |
|
|
9,796 |
|
|
10,430 |
|
|
— |
|
|
20,226 |
|
Total revenues |
|
|
121,151 |
|
|
19,886 |
|
|
— |
|
|
141,037 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
|
34,617 |
|
|
— |
|
|
— |
|
|
34,617 |
|
Rental |
|
|
23,484 |
|
|
3,266 |
|
|
— |
|
|
26,750 |
|
Other |
|
|
5,779 |
|
|
7,979 |
|
|
— |
|
|
13,758 |
|
Total cost of revenues |
|
|
63,880 |
|
|
11,245 |
|
|
— |
|
|
75,125 |
|
Gross profit |
|
|
57,271 |
|
|
8,641 |
|
|
— |
|
|
65,912 |
|
Selling, general and administrative expenses |
|
|
69,648 |
|
|
2,802 |
|
|
2,983 |
(o) |
|
75,433 |
|
Loss from operations |
|
|
(12,377) |
|
|
5,839 |
|
|
(2,983) |
|
|
(9,521) |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(7,945) |
|
|
(2,739) |
|
|
(5,465) |
(p) |
|
(16,149) |
|
Other (expense) income, net |
|
|
(1,850) |
|
|
— |
|
|
|
|
|
(1,850) |
|
Loss before income tax expense |
|
|
(22,172) |
|
|
3,100 |
|
|
(8,448) |
|
|
(27,520) |
|
Income tax expense (benefit) |
|
|
3,622 |
|
|
(286) |
|
|
(2,872) |
(q) |
|
464 |
|
Net loss |
|
|
(25,794) |
|
|
3,386 |
|
|
(5,576) |
|
|
(27,984) |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(17) |
|
|
— |
|
|
— |
|
|
(17) |
|
Comprehensive loss |
|
$ |
(25,811) |
|
$ |
3,386 |
|
$ |
(5,576) |
|
$ |
(28,001) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted |
|
$ |
(0.98) |
|
|
|
|
|
|
|
$ |
(1.05) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – basic and diluted |
|
|
26,426 |
|
|
|
|
|
122 |
(r) |
|
26,548 |
|
See accompanying notes to the unaudited pro forma condensed combined financial information.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 2018
( In Thousands )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical |
|
|
Pro Forma |
|
|||||||
|
|
|
|
AUC |
|
Pro Forma |
|
Pro Forma |
|
||||
|
|
AquaVenture |
|
(as adjusted) |
|
Adjustments |
|
Combined |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
$ |
28,056 |
|
$ |
— |
|
$ |
— |
|
$ |
28,056 |
|
Rental |
|
|
28,780 |
|
|
5,285 |
|
|
643 |
(s) |
|
34,708 |
|
Financing |
|
|
2,063 |
|
|
96 |
|
|
(36) |
(s) |
|
2,123 |
|
Other |
|
|
8,060 |
|
|
4,264 |
|
|
(516) |
(s) |
|
11,808 |
|
Total revenues |
|
|
66,959 |
|
|
9,645 |
|
|
91 |
|
|
76,695 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
|
13,250 |
|
|
— |
|
|
— |
|
|
13,250 |
|
Rental |
|
|
13,110 |
|
|
1,804 |
|
|
2 |
(s) |
|
14,916 |
|
Other |
|
|
5,368 |
|
|
3,550 |
|
|
(377) |
(s) |
|
8,541 |
|
Total cost of revenues |
|
|
31,728 |
|
|
5,354 |
|
|
(375) |
|
|
36,707 |
|
Gross profit |
|
|
35,231 |
|
|
4,291 |
|
|
466 |
|
|
39,988 |
|
Selling, general and administrative expenses |
|
|
38,863 |
|
|
1,522 |
|
|
1,315 |
(t) |
|
41,700 |
|
Loss from operations |
|
|
(3,632) |
|
|
2,769 |
|
|
(849) |
|
|
(1,712) |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(6,604) |
|
|
(1,614) |
|
|
(2,774) |
(u) |
|
(10,992) |
|
Other expense, net |
|
|
(292) |
|
|
— |
|
|
— |
|
|
(292) |
|
Loss before income tax expense |
|
|
(10,528) |
|
|
1,155 |
|
|
(3,623) |
|
|
(12,996) |
|
Income tax expense |
|
|
739 |
|
|
389 |
|
|
(761) |
(v) |
|
367 |
|
Net loss |
|
|
(11,267) |
|
|
766 |
|
|
(2,862) |
|
|
(13,363) |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(190) |
|
|
— |
|
|
— |
|
|
(190) |
|
Comprehensive loss |
|
$ |
(11,457) |
|
$ |
766 |
|
$ |
(2,862) |
|
$ |
(13,553) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted |
|
$ |
(0.42) |
|
|
|
|
|
|
|
$ |
(0.50) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – basic and diluted |
|
|
26,521 |
|
|
|
|
|
122 |
(w) |
|
26,643 |
|
See accompanying notes to the unaudited pro forma condensed combined financial information.
Notes to Unaudited Pro Forma Condensed Combined Financial Information
|
1. |
|
Description of Transaction and Basis of Pro Forma Presentation |
The unaudited pro forma condensed combined financial information was prepared in accordance with U.S. GAAP and pursuant to the rules and regulations of SEC Regulation S-X and presents the pro forma financial position and results of operations of the combined companies based upon the historical data of AquaVenture and AUC.
Description of Transaction
On November 1, 2018, AquaVenture Holdings, Inc., a wholly owned subsidiary of AquaVenture, acquired all of the issued and outstanding membership interests of AUC from AUC’s members pursuant to a membership interest purchase agreement (the “Purchase Agreement”). The aggregate purchase price was approximately $131.7 million, including $127.8 million of cash, $2.0 million of AquaVenture ordinary shares (or 121,956 shares), and $1.9 million contingent consideration based on the collection of certain receivables. The aggregate purchase price is subject to final adjustment in accordance with the Purchase Agreement.
On November 1, 2018, the Company entered into the Third Amendment to Credit Agreement (the “Amended Corporate Credit Agreement”) with a syndicate of lenders, including Deutsche Bank AG, London Branch, Citibank, N.A., Sequoia IDF Asset Holdings S.A., Comvest Capital IV, L.P., and Comvest Capital IV (Luxembourg) Master Fund, SCSP (the “Lenders”), and Wells Fargo Bank, N.A., as administrative agent for the Lenders. Proceeds from the Amended Corporate Credit Agreement were used to partially fund the acquisition of AUC. The Amended Corporate Credit Agreement: (i) added AquaVenture Holdings, Inc. as a borrower, (ii) increased its borrowings by $110 million to an aggregate principal amount of $260 million, (iii) reduced the interest rate on both the variable and fixed interest portions for the original $150 million borrowings by 50 basis points, and (iv) amended certain financial covenant requirements. Of the incremental borrowing of $110 million, $70 million bears interest at a variable rate of LIBOR plus 5.5% with a LIBOR floor of 1.0%, and the remaining $40 million bears interest at a fixed rate of 8.7%. The principal is due in full in August 2021 and is non-amortizing.
Basis of Presentation
The historical financial information has been adjusted to give pro forma effect to events that are: (a) directly attributable to the acquisition of AUC and the related financing, (b) factually supportable, and (c) with respect to the unaudited pro forma condensed combined statement of operations, expected to have a continuing impact on the combined results. The unaudited pro forma adjustments related to the AUC acquisition are preliminary and based on estimates of the fair value and useful lives of the assets acquired and liabilities assumed and have been prepared to illustrate the estimated effect of the transaction and certain other adjustments. The final determination of the purchase price allocation will be based on the final valuation of the fair values of assets acquired and liabilities assumed as of the actual closing date of the transaction. The unaudited pro forma adjustments related to the financing are preliminary in nature and reflect the Company’s best estimates of the proceeds and related interest assumptions at the time of the preparation of the unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined balance sheet as of June 30, 2018 gives effect to the acquisition of AUC and related financing as if they had occurred on June 30, 2018. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 and six months ended June 30, 2018 give effect to the acquisition of AUC and the related financing as if they had occurred on January 1, 2017, the beginning of AUC’s most recently completed fiscal year.
|
2. |
|
Significant Accounting Policies |
The unaudited pro forma condensed combined financial information has been prepared using the significant accounting policies set forth in the Company’s annual report filed on Form 10-K for the year ended December 31, 2017 and, as updated, within the Company’s quarterly report filed on form 10-Q for the period ended June 30, 2018.
Except as discussed below, the Company has not identified any significant differences in the accounting policies used by the Company or AUC in the preparation of the unaudited pro forma condensed combined financial
information. The Company is in the process of completing a more detailed review of AUC’s significant accounting policies and, as a result, differences could be identified between the accounting policies of the Company and AUC that, when conformed, could have a material impact on the financial statements.
Revenues and Contract Costs
The Company adopted Accounting Standards Codification (“ASC”) 606 Revenue from Contracts with Customers and Subtopic 340-40 Other Assets and Deferred Costs – Contracts with Customers (collectively, “New Guidance”) on a full retrospective basis on January 1, 2018. AUC, a private company, had not adopted the New Guidance, and as a result, the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2018 and unaudited pro forma condensed combined balance sheet as of June 30, 2018 include the impact of the New Guidance on the AUC historical financial information.
The impacts of the adoption on AUC’s primary sources of revenue and related costs are as follows:
Services and contract revenue . Services and contract revenue includes services related to the construction of wastewater treatment plants, which includes both equipment sales and installation services, and installation services related to the leasing of modular wastewater treatment plants. For the construction of wastewater treatment plants, AUC has historically accounted for these contracts on a percentage of completion basis as services are performed. Revenue recognition begins as costs are incurred on the construction of the wastewater treatment plant, which is typically prior to the delivery of the equipment to the customer site. Under ASC 606, AUC determined that the equipment sales and installation services are considered a single performance obligation as the installation services are not considered distinct in the context of the agreement and are integral to the functionality of the equipment. Revenues for the construction of wastewater treatment plants is recognized as revenue as the construction is performed, using the input method, which typically begins once the equipment is delivered to the customer site, which is the point at which control of the wastewater treatment plant construction has been transferred to the customer. As a result, the timing of revenue recognition under ASC 606 will commence at a later date than under the previous revenue recognition standard.
Installation services related to the leasing of modular wastewater treatment plants can be both embedded within a lease agreement or explicit in a separate contract with a third party. For contracts where the installation services are embedded within a lease agreement, AUC has historically allocated the revenue under the contract based on the relative fair value of the installation services and lease of equipment. AUC determined the installation services were a non-lease component of the contract with revenues being recognized on a percentage of completion basis as services are performed. Long-term receivables, which were established for the revenue recognized for the non-lease component, were amortized over the lease term as the cash from the customer was received and allocated. Revenues allocated to the lease component were recognized over the lease term. Under ASC 606, AUC determined the installation services embedded within a lease agreement, which are performed prior to lease commencement, do not meet the definition of a separate performance obligation as the services are not capable of being distinct within the context of the agreement. As a result, AUC will account for the installation services as a component of the lease and revenues for the entire contract, including both the installation and lease of equipment, will be recognized on a straight-line basis over the lease term.
Contract Costs . Historically, AUC has not recognized initial direct costs for contracts. Upon the adoption of ASC 606 and the conclusions reached with respect to installation services embedded within a lease agreement, the costs related to the installation services were determined to be an initial direct cost of the contract and, as a result, should be deferred and amortized over the initial term of the lease. The initial direct costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to install the related wastewater treatment equipment.
Reclassifications
Certain amounts in the historical consolidated financial statements of AUC have been reclassified within the “as adjusted” column in the unaudited pro forma condensed combined financial information so that presentation would conform with AquaVenture’s financial statement presentation and existing financial statement line items. These
reclassifications have no effect on previous reported total assets, total liabilities, and shareholders’ equity, or net income (loss) of AUC or AquaVenture.
These reclassifications include certain amounts reallocated between financial statement line items, including the separation of accounts payable and accrued expenses as described in Note 4 and the reclassification of amortization expense for intangible assets to selling, general and administrative expenses from other expense, as historically reported by AUC.
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3. |
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Preliminary Purchase Price Allocation |
The aggregate purchase price, which is subject to final adjustments, for the acquisition of AUC was approximately $131.7 million, including $127.8 million of cash, $2.0 million, or 121,956, of AquaVenture ordinary shares, and $1.9 million contingent consideration. The AquaVenture ordinary shares issued were based on a closing stock price of $16.75 on October 31, 2018, the day immediately prior to the transaction date. The $1.9 million of contingent consideration, which is stated at its estimated fair value, relates to the payment of up to $2 million contingent upon the collection of certain notes receivable which is expected to occur over the period of approximately 18 months after the closing of the acquisition.
Of the $127.8 million of cash purchase price, approximately $110.0 million was funded from the proceeds of the Amended Corporate Credit Agreement while the remaining $17.8 million was funded from existing cash and cash equivalents.
The following table summarizes the preliminary purchase price allocated to the estimated fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed based on AUC’s unaudited condensed combined balance sheet as of June 30, 2018 and is for illustrative purposes only: (in thousands):
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Assets acquired: |
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Cash and cash equivalents |
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$ |
330 |
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Restricted cash |
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100 |
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Accounts receivable |
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3,297 |
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Current portion of notes receivable |
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533 |
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Inventory |
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2,107 |
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Other current assets |
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473 |
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Property, plant and equipment |
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29,340 |
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Notes receivable, noncurrent |
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926 |
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Other long-term assets |
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161 |
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Intangible assets, net |
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49,690 |
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Goodwill |
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61,984 |
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Total assets acquired |
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148,941 |
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Liabilities assumed: |
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Accounts payable and accrued liabilities |
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(2,037) |
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Deferred revenue |
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(641) |
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Long-term liabilities |
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(1,402) |
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Deferred tax liability |
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(13,138) |
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Total liabilities assumed |
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(17,218) |
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Total purchase price |
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$ |
131,723 |
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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 pro forma 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 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 estimated weighted average useful life for customer relationships, trade names, non-compete agreements and backlogs is 15 years, 15 years, 3 years, and 0.7 years, respectively.
Goodwill is composed of the acquired workforce and synergies not valued, and is not deductible for tax purposes.
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4. |
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Unaudited Pro Forma Adjustments |
The following is a description of the unaudited pro forma adjustments reflected in the unaudited pro forma condensed combined financial statements:
Adjustments to the Unaudited Pro Forma Condensed Combined Balance Sheet
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(a) |
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To record the cash portion of the purchase consideration which was funded from cash and cash equivalents. |
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(b) |
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New Guidance adoption adjustments to record additional receivables related to the completion of certain performance obligations. |
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(c) |
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New Guidance adoption adjustments adjust for the timing of revenue recognition as it relates to certain installment sales. |
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(d) |
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New Guidance adoption adjustments to adjust notes receivable, current and long-term portion, related to installation services embedded in a lease contract. |
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(e) |
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New Guidance adjustments to adjust costs incurred in excess of billings, current and long-term, related to the timing of revenue recognized on projects. |
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(f) |
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To record the estimated fair value of intangible assets of $49.7 million as described in Note 3 net of the $6.0 million write-off of prior acquired intangible assets as reported historically by AUC. The net impact of the adjustment is $43.7 million. |
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(g) |
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To record the preliminary estimate of goodwill of $62.0 million as a result of the acquisition of AUC net of the $36.4 million write-off of historical goodwill reported historically by AUC. The net impact of the adjustment is $25.6 million. |
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(h) |
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To reclassify accrued expenses to conform with the AquaVenture financial statement presentation. |
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(i) |
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The net increase to accrued liabilities of $3.5 million was composed of the following: (i) an increase of $1.2 million to record an accrual for AquaVenture’s estimated acquisition-related costs that are not reflected within the historical financial statements; (ii) an increase of $170 thousand to record an accrual for estimated third party costs incurred by AquaVenture for the Amended Corporate Credit Agreement that were not able to be classified as deferred financing fees and, instead, were expensed as incurred; (iii) an |
increase of $492 thousand to reclassify accrued expenses to accrued liabilities from accounts payable to conform with AquaVenture financial statement presentation; (iv) a reduction of $264 thousand to reflect the repayment of the accrued interest related to the historical long-term debt of AUC that was repaid at the closing of the AUC acquisition; and (v) to record $1.9 million of contingent consideration for the acquisition of AUC. |
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(j) |
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To reflect the repayment of the current portion of long-term debt of AUC in connection with the acquisition. |
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(k) |
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The net increase to long-term debt of $75.9 million was composed of the following: (i) a decrease $34.1 million related to the repayment of long-term debt of AUC in connection with the acquisition; and (ii) an increase of $110.0 million related to the issuance of $110.0 million of incremental debt under the Amended Corporate Credit Agreement, net of estimated deferred financing fees of $145 thousand used to finance part of the acquisition of AUC as discussed in Note 1. |
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(l) |
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To record an increase in the deferred tax liability related to the estimated fair value of identified intangibles determined in purchase accounting. |
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(m) |
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To record the fair value of the 121,956 of AquaVenture ordinary shares issued as a component of the purchase consideration. The fair value of the ordinary shares was based on a closing stock price of $16.75 on October 31, 2018. |
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(n) |
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The increase to the accumulated deficit of $36.9 million was composed of the following: (i) an increase of $35.6 million related to the elimination of the historical members’ equity of AUC; (ii) an increase of $1.2 million related to AquaVenture’s estimated acquisition-related costs that are not reflected within the historical financial statements; and (iii) an increase of $170 thousand for estimated third party costs incurred by AquaVenture for the Amended Corporate Credit Agreement that were not able to be classified as deferred financing fees and, instead, were expensed as incurred. |
Adjustments to the Unaudited Pro Forma Condensed Combined Statement of Operations
The following pro forma adjustments are related to the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017:
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(o) |
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The net increase to selling, general and administrative expenses of $3.0 million was composed of the following: (i) a reduction of $1.2 million of AUC’s historical amortization expense related to intangible assets and (ii) an increase of $4.1 million of amortization expense related to the estimated fair value of assigned to the identifiable intangibles assets calculated using the estimated useful lives assigned, as identified in Note 3, on a straight-line basis. |
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(p) |
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The increase to interest expense, net, of $5.5 million was composed of the following: (i) a reduction of $2.7 million to reflect AUC’s historical interest expense as the long-term debt of AUC was repaid concurrent with the closing of the AUC acquisition; and (ii) an increase of $8.2 million related to interest expense from both the $110 million of incremental debt used to finance part of the acquisition of AUC at a weighted-average interest rate of 7.4% and the amortization of deferred financing fees using the effective interest method over the term of the Amended Corporate Credit Agreement. A 1/8% change in the weighted-average interest rate during the period would result in a $137 thousand change to pre-tax loss. |
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(q) |
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To record the tax effects of the unaudited pro forma adjustments calculated using the statutory tax rate of AUC of 34% for the year ended December 31, 2017. |
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(r) |
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Represents the increase in the weighted-average shares outstanding – basic and diluted from the issuance of 121,956 AquaVenture ordinary shares in the acquisition of AUC. |
The following pro forma adjustments are related to the unaudited pro forma condensed combined statement of operations for the six months ended June 30, 2018:
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(s) |
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New guidance adoption adjustments related to the timing and classification of revenue recognized. In addition, cost of revenues has been adjusted for the timing of certain costs incurred and for the classification of certain costs as contract costs, which are deferred and amortized, for certain contracts. |
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(t) |
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The net increase to selling, general and administrative expenses of $1.3 million was composed of the following: (i) a reduction of $593 thousand of AUC’s historical amortization expense related to intangible assets and (ii) an increase of $1.9 million of amortization expense related to the estimated fair value assigned to the identifiable intangibles assets calculated using the estimated useful lives assigned, as identified in Note 3, on a straight-line basis. |
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(u) |
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The increase to interest expense, net, of $2.8 million was composed of the following: (i) a reduction of $1.6 million to reflect AUC’s historical interest expense as the long-term debt of AUC was repaid concurrent with the closing of the AUC acquisition; and (ii) an increase of $4.4 million related to interest expense from both the $110 million of incremental debt used to finance part of the acquisition of AUC at a weighted-average interest rate of 7.9% and the amortization of deferred financing fees using the effective interest method over the term of the Amended Corporate Credit Agreement. A 1/8% change in the weighted-average interest rate during the period would result in a $69 thousand change to pre-tax loss. |
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(v) |
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To record the tax effects of the unaudited pro forma adjustments calculated using the statutory tax rate of AUC of 21% for the six months ended June 30, 2018. |
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(w) |
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Represents the increase in the weighted-average shares outstanding – basic and diluted from the issuance of 121,956 AquaVenture ordinary shares in the acquisition of AUC. |