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): December 18, 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 VG1110 (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 December 18, 2018, Quench USA, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited (the “Company”), acquired all of the issued and outstanding shares of Pure Health Solutions, Inc. (“PHSI”, dba “Pure Water Technology”) from U.S. Water, LLC pursuant to a stock purchase agreement (“PHSI 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 December 20, 2018 (the “Original Form 8-K”) to provide certain historical financial statements and certain pro forma financial information in connection with the AUC Acquisition, which was not available at the time of the Original Form 8-K. 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 PHSI 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 PHSI and its subsidiaries as of September 30, 2018 and for the nine months ended September 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 for the year ended December 31, 2017 and as of and for the nine months ended September 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 |
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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: February 27, 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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EXHIBIT 23.1
Consent of Independent Auditor
We consent to the incorporation by reference in the Registration Statements (Nos. 333-223590, 333-2139962 and 333-2139900) on Form S-8 of AquaVenture Holdings Limited of our report dated March 30, 2018, relating to the consolidated financial statements of Pure Health Solutions, Inc., appearing in this Current Report on Form 8-K/A.
/s/ RSM US LLP
Chicago, Illinois
February 27, 2019
Exhibit 99.1
Pure Health Solutions, Inc.
Consolidated Financial Report
December 31, 2017
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Financial statements |
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2-3 |
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7-16 |
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Board of Directors
Pure Health Solutions, Inc.
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Pure Health Solutions, Inc. and Subsidiaries (the Company), which comprise the consolidated balance sheet as of December 31, 2017, and the related consolidated statements of operations, stockholder’s equity (deficit), and cash flows for the year then ended, and the related notes to the consolidated financial statements (collectively, financial statements).
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these 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 financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these 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 audits to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the 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 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 financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Opinion
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Pure Health Solutions, Inc. and Subsidiaries as of December 31, 2017, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Chicago, Illinois
March 30, 2018
1
Pure Health Solutions, Inc.
December 31, 2017
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Assets |
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Current assets: |
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Cash |
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$ |
848,199 |
Accounts receivable, net |
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1,021,722 |
Inventories, net |
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1,790,827 |
Prepaid expenses and other current assets |
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435,096 |
Current portion of deferred lease costs |
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665,177 |
Total current assets |
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4,761,021 |
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Plant, property and equipment, net |
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1,042,043 |
Rental equipment, net |
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3,132,560 |
Holdback receivable |
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51,857 |
Deferred lease costs |
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1,383,557 |
Intangible assets, net |
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4,805,303 |
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Total |
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$ |
15,176,341 |
(Continued)
2
Pure Health Solutions, Inc.
Consolidated Balance Sheet (Continued)
December 31, 2017
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Liabilities and Stockholder's Equity (Deficit) |
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Current liabilities: |
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Accounts payable |
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$ |
587,596 |
Amounts collected owed to third parties |
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39,000 |
Funding advance |
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106,367 |
Accrued compensation |
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744,498 |
Accrued expenses |
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706,466 |
Income tax payable |
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93,738 |
Current portion of deferred rental revenue, net |
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3,656,192 |
Other current liabilities |
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39,013 |
Total current liabilities |
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5,972,870 |
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Long-term liabilities: |
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Related-party notes payable |
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19,500,417 |
Related-party liabilities |
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9,433,641 |
Deferred rental revenue, net |
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7,678,390 |
Deferred income taxes |
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875,006 |
Other long-term liabilities |
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90,690 |
Total long-term liabilities |
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37,578,144 |
Total liabilities |
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43,551,014 |
Commitments (Note 9) |
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Stockholder's equity (deficit): |
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Common stock (no par value), 5,000,000 shares authorized; 1,000,000 shares issued and outstanding at amount paid in |
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33,236,834 |
Accumulated deficit |
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Total stockholder's equity (deficit) |
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Total |
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$ |
15,176,341 |
See notes to consolidated financial statements.
3
Pure Health Solutions, Inc.
Consolidated Statement of Operations
Year Ended December 31, 2017
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Net sales |
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$ |
13,313,276 |
Rental income |
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5,970,514 |
Other revenues |
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625,113 |
Total revenue |
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19,908,903 |
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Cost of goods sold: |
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Net sales |
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7,117,622 |
Rental income |
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2,025,657 |
Other revenues |
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164,690 |
Total cost of goods sold |
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9,307,969 |
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Gross profit |
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10,600,934 |
Operating expenses: |
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Selling, general and administrative |
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15,234,683 |
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Operating loss |
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Other expenses: |
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Interest expense, net |
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3,011,405 |
Other, net |
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62,167 |
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3,073,572 |
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Net loss before income taxes |
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Income tax (benefit) |
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Net loss |
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$ |
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See notes to consolidated financial statements.
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Pure Health Solutions, Inc.
Consolidated Statement of Stockholder's Equity (Deficit)
Year Ended December 31, 2017
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Common Stock |
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Accumulated |
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Shares |
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Amount |
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Deficit |
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Total |
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Equity (deficit) balance - January 1, 2017 |
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1,000,000 |
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$ |
33,036,834 |
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$ |
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$ |
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Equity contribution |
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- |
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200,000 |
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- |
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200,000 |
Net loss |
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- |
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- |
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Equity (deficit) balance - December 31, 2017 |
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1,000,000 |
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$ |
33,236,834 |
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$ |
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$ |
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See notes to consolidated financial statements.
5
Pure Health Solutions, Inc.
Consolidated Statement of Cash Flows
Year Ended December 31, 2017
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Cash flows from operating activities: |
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Net loss |
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$ |
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Adjustments to reconcile net loss to net cash flows used in operating activities: |
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Depreciation and amortization of property, plant and equipment |
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240,701 |
Depreciation of rental equipment |
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634,072 |
Amortization of intangible assets |
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1,246,581 |
Amortization of deferred lease costs |
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633,404 |
Loss on sale of rental equipment |
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120,253 |
Non-cash interest on related-party liabilities |
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1,728,742 |
Holdback receivable |
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554,082 |
Deferred revenue |
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Deferred income taxes |
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Changes in operating assets and liabilities: |
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Accounts receivable |
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Inventories |
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Prepaid expenses, deferred lease costs and other current assets |
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Accounts payable |
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Accrued expenses, related-party liabilities and other liabilities |
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Proceeds from operating leases |
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5,256,815 |
Income tax payable |
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85,774 |
Net cash flows used in operating activities |
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Cash flows from investing activities: |
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Purchases of property, plant and equipment |
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Purchases of rental equipment |
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Net cash flows used in investing activities |
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Cash flows from financing activities: |
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Restricted cash |
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41,535 |
Proceeds from issuance related-party notes payable |
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3,579,895 |
Proceeds from equity contribution |
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200,000 |
(Payments) proceeds from funding advance |
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Net cash flows provided by financing activities |
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3,731,478 |
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Decrease in cash |
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Cash and cash equivalents - beginning of year |
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1,336,139 |
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Cash - end of year |
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$ |
848,199 |
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Supplemental cash flow disclosures: |
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Income taxes paid |
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$ |
114,360 |
Interest paid |
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$ |
1,061,422 |
See notes to consolidated financial statements.
6
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business : Pure Health Solutions, Inc. (PHSI or the Company) was incorporated in 1996 under the laws of Idaho and is located in Vernon Hills, Illinois. The primary business of the Company is the manufacturing and sale of state-of-the art drinking water purification systems. Enstar, a wholly-owned Korean subsidiary, manufactures the Company's water purifiers, which it sells to the Company and to customers throughout Asia and Europe. Sales from foreign operations amount to approximately $332,000 for the year ended December 31, 2017. The Company sells the water purifiers to a network of dealers throughout the United States and sells or leases its water purifiers directly to national account customers and also to local small business customers through its branch operations in Illinois, California, Texas, Indiana, Missouri and Ohio. The Company also sells coffee and related products through an online store. A portion of the Company's revenues results from financing transactions involving the purchase of lease contracts from dealers and the sale of those contracts to independent financing companies.
Operations : As of and for the year ended December 31, 2017, the Company experienced net losses, negative cash flows from operations, negative working capital and has a stockholder’s deficit. The Company received $3,502,500 of funding in the form of notes from ClearLight Partners, LLC, (CLP) in 2017, which are included within proceeds from issuance of related-party notes payable in the consolidated statement of cash flows. Although management plans to reduce negative cash flows from operations by adding new customers, the current long term plan expects negative cash flows and financing by the majority owner for the foreseeable future. The driver for negative cash flows continues to be additions of new branches. The Company’s management has assessed the entity’s ability to continue as going concern, and the majority owner has agreed to finance operations through at least April 30, 2019.
Principles of consolidation : The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Use of estimates : The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Cash : The Company maintains cash in bank deposit accounts, which at times may exceed the federally insured limits. The Company and is subsidiary have not experienced any losses in bank accounts and management believes the Company is not exposed to any significant credit risk or cash deposits. As of December 31, 2017, cash in foreign bank accounts amounted to approximately $85,000.
Receivables : Trade accounts receivable are carried at the original invoice amount less an estimate made for doubtful receivables. Management determines the collectability of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was approximately $140,000 as of December 31, 2017.
Inventories : Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value as of December 31, 2017. As of December 31, 2017, the Company had reserves for slow-moving or obsolete parts and filters amounting to approximately $303,000.
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Deferred lease costs : When a customer enters into a lease agreement with the Company the direct lease costs to initiate the lease are paid in cash, which primarily consist of sales commissions. The Company has the right to reimbursement of the sales commissions paid in cash if the customer defaults on their payments or if the employee leaves the Company. The Company capitalizes the sales commissions paid to deferred lease costs, as these costs are directly related to initiating the lease. The capitalized commissions are then expensed over the term of the lease. The current portion represents the amount of deferred lease costs to be expensed in the following year. For equipment sales the entire commissions are expensed when paid.
Property, plant and equipment : Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is computed over the assets’ estimated useful lives using straight-line methods. Asset lives range from 2 to 15 years. Assets related to leasehold improvements are amortized at the lesser of the term of the lease or useful life of the asset.
Rental equipment : Rental equipment represents the leased purifiers for which the Company has retained title (see Note 2). The Company depreciates the rental equipment over the lease term, which typically ranges between 3 and 5 years.
Intangible assets : Intangible assets are comprised of customer lists, patents and trade names with estimated useful lives between 3 and 15 years. Intangible assets are amortized over their estimated lives using the straight-line method.
Impairment of long-lived assets : Long-lived assets are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding tax and interest charges) is less than the carrying value of the assets, the assets will be written down to the estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. Management identified there were indications that the asset group might not be recoverable and performed an undiscounted cash flow test, which determined that no impairment of long-lived assets existed as of December 31, 2017.
Revenue recognition :
Net sales: Sales are recognized when revenue is realized or realizable and has been earned. Most revenue transactions represent sales of inventory (equipment, filters, parts and freight) and are recognized when the product is shipped, net of any associated discounts. The revenue recorded is presented net of sales and other taxes and amounted to approximately $13,300,000 for the year ended December 31, 2017.
Rental income: The Company enters into certain lease arrangements with national accounts and local small business accounts which are accounted for as operating leases (see Note 9). Rental income from leases is recorded when earned and amounted to approximately $6,000,000 for the year ended December 31, 2017. When the Company receives upfront proceeds for the lease arrangements, the proceeds are recorded as deferred rental revenue on the consolidated balance sheet (see Note 9).
Other revenues: The Company purchases certain lease contracts from third-party dealers and transfers those assets to an independent financing company. The difference between the rates charged to the third-party dealers and the rates charged by the independent financing company is recorded as finance revenue. Revenue from the dealers’ nominal lease residual option payment is recognized when invoiced at lease maturity. In addition, other revenue includes service fees, late fees and other miscellaneous fees charged to customers. Total other revenue amounted to approximately $625,000 for the year ended December 31, 2017.
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Advertising : Advertising and marketing costs are charged to expense as incurred and totaled $212,337 in 2017.
Shipping costs : The costs of shipping relating to purchases and sales of products are included in cost of goods sold in the accompanying consolidated statement of operations.
Income taxes : Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Investment tax credits are accounted for by the flow-through method whereby they reduce income taxes currently payable and the provision for income taxes in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized on the Company's tax return, deferred tax assets, subject to considerations about the need for a valuation allowance, are recognized for the carry-forward amount.
The Company recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination.
Foreign currency transactions : The functional currency for Enstar is the U.S. dollar. Assets and liabilities of foreign operations have been translated to U.S. dollars using year-end exchange rates or historical rates. Income and expense accounts have been translated to U.S. dollars using average exchange rates. Gains and losses from foreign currency transactions are included in determining net income. The foreign currency transactions resulted in a loss of approximately $70,400 for the year ended December 31, 2017. The foreign currency transactions are recorded within other expenses on the consolidated statement of operations.
Recent accounting pronouncements :
Revenue recognition:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) , requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14 which defers the effective date of ASU 2014-09 one year making it effective for annual reporting periods beginning after December 15, 2018. Earlier application is permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the standard will have on the financial statements.
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Leases:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases . Under the new guidance, lessees and lessors are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the new standard on the financial statements.
Cash flows:
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) . This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for financial statements issued for annual periods beginning after December 15, 2018. Early adoption is permitted, and this ASU requires it to be applied retrospectively to all periods presented. The Company has not yet adopted this ASU and is currently evaluating the impact of the pending adoption of the new standard on the financial statements.
Subsequent events : The Company has evaluated subsequent events through March 30, 2018, the date the financial statements were available to be issued.
Note 2. Financing Arrangements
The Company sells water purifiers to dealers who enter into long-term contracts (usually three to five years) for leasing of water purifiers to their customers. Dealers that elect to sell their lease contracts to the Company may do so under the Company’s Dealer Financing Agreement (the Agreement). Under the Agreement, the Company may purchase the dealers’ lease contracts at a discounted cash settlement price. The Company typically exercises their right to purchase only when they have credit approval for the purchase of the lease contract from independent financing companies. The Company obtains title to the leased purifiers as part of the agreement. The title is immediately transferred or assigned to an independent financing company until the end of the lease term and the Company receives the cash proceeds from the independent financing company upon transferring the title. The dealers have an option to purchase the leased purifiers from the Company upon the expiration of the related leases for a nominal amount. Revenue from the dealers’ nominal lease residual option payment is recognized when invoiced at lease maturity.
These receivables are accounted for under FASB ASC 860, Transfers and Servicing , whereby the Company recognizes financial assets it controls and the liabilities it has incurred and derecognizes financial assets when control has been surrendered. Under ASC 860, control is considered to have been surrendered only if (i) the transferred financial assets have been isolated from the transferor and its creditors, even in bankruptcy or other receivership, (ii) the transferee has the right to pledge or exchange the transferred financial assets it received, and (iii) the transferor does not maintain effective control over the transferred financial assets through an agreement that both entitles and obligates it to repurchase or redeem those assets prior to maturity, through an agreement that provides the transferor the unilateral ability to cause the holder to return
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specific financial assets and a more-than-trivial benefit attributable to that ability, or an agreement that permits the transferee to require the transferor to repurchase the transferred financial assets at a price that is so favorable to the transferee that it is probable that the transferee will require repurchase. The Company has determined that these receivables qualify for sales treatment and, accordingly, the purchases and proceeds are included in net cash flows provided by financing activities in the consolidated statement of cash flows.
Finance income, included in other revenues in the accompanying consolidated statement of operations, totaled approximately $430,000 for the year ended December 31, 2017.
As part of previous funding arrangement, 5 percent of the selected proceeds on the transfers of assets were retained by the financing company until all receivables have been collected. These amounts are included on the consolidated balance sheet as holdback receivables and are reported net of allowance for losses of $51,857 as of December 31, 2017.
For those arrangements accounted for as a sale, servicing obligations are recognized as separate liabilities when the sale occurs. Servicing liabilities include billing and collection expenses through completion of original lease term. Servicing liabilities are initially recorded at their fair value as a component of the sale proceeds. The fair value is based on an analysis of discounted cash flows that incorporates market servicing costs. Servicing liabilities are amortized as finance income in proportion to, and over the period of, the estimated future net servicing expense of the underlying rental payments. The fair value of servicing liabilities at December 31, 2017 was determined using a discount rate of 6.85 percent. The rate was derived by management as average borrowing rate on secured operating lease borrowings. The portion of lease contracts covered by the service obligation agreement expired in 2017. Under the new agreement, the financing company is obligated to service the leases and therefore no liability is recognized for servicing for the year ended December 31, 2017. Changes in the balances of servicing liabilities subsequently measured using the amortization method for the year ended December 31, 2017 was $22,163.
Note 3. Inventories
Inventories at December 31, 2017, consist of the following:
|
|
|
|
Raw materials |
|
$ |
296,761 |
Finished goods |
|
|
871,048 |
Parts and filters, net |
|
|
623,018 |
|
|
$ |
1,790,827 |
11
Note 4. Property, Plant and Equipment
Property, plant and equipment at December 31, 2017, consist of the following:
|
|
|
|
Land |
|
$ |
|
Buildings and improvements |
|
|
|
Machinery and tools |
|
|
|
Vehicles |
|
|
|
Furniture and fixtures |
|
|
|
Software |
|
|
|
|
|
|
|
Less: accumulated depreciation |
|
|
|
|
|
|
|
|
|
$ |
|
Depreciation expense for year ended December 31, 2017, was $240,701.
Note 5. Rental Equipment
Rental equipment at December 31, 2017, consist of the following:
|
|
|
|
Rental equipment |
|
$ |
|
Less: accumulated depreciation |
|
|
|
|
|
$ |
|
Depreciation expense for year ended December 31, 2017, was $634,072.
Note 6. Intangible Assets
As of December 31, 2017, intangible assets consist of the following:
|
|
|
|
|
|
|
|
Estimated |
|
|
|
|
|
Useful Life |
|
|
|
Trademarks and tradenames |
|
15 years |
|
$ |
2,784,644 |
Customer relationships |
|
8-15 years |
|
|
7,489,100 |
Patents and technology |
|
10 years |
|
|
4,818,400 |
Noncompete agreements |
|
1-3 years |
|
|
1,700,000 |
|
|
|
|
|
16,792,144 |
Less: accumulated amortization |
|
|
|
|
|
|
|
|
|
$ |
4,805,303 |
12
Amortization expense for the year ended December 31, 2017, was approximately $1,247,000. Estimated future amortization expenses related to intangible assets for the five years ended after December 31, 2017, are as follows:
|
|
|
|
Years ending December 31, |
|
|
|
2018 |
|
$ |
1,246,582 |
2019 |
|
|
991,027 |
2020 |
|
|
541,027 |
2021 |
|
|
506,667 |
2022 |
|
|
506,667 |
Thereafter |
|
|
1,013,333 |
Note 7. Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related to temporary differences between the basis of lease servicing cost, acquired intangibles, warranty allowance, and lease residuals for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences which will either be taxable or deductible when the assets and liabilities are recovered or settled. No U.S. income tax liability or asset is provided on undistributed earnings or losses of the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries, which reflect provisions for foreign taxes when applicable, are currently indefinitely reinvested in the foreign operations or will be remitted substantially free of additional tax.
Net deferred tax liabilities consist of the following components as of December 31, 2017:
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
Allowance for doubtful accounts |
|
$ |
35,629 |
Inventories |
|
|
555,060 |
Accrued expenses |
|
|
239,919 |
Loss carryforwards |
|
|
8,923,415 |
Gross deferred tax assets |
|
|
9,754,023 |
Less valuation allowance |
|
|
|
Deferred tax assets, net |
|
|
945,021 |
|
|
|
|
Deferred tax liabilities: |
|
|
|
Intangible assets |
|
|
968,130 |
Other assets |
|
|
851,897 |
Deferred tax liabilities |
|
|
1,820,027 |
|
|
|
|
Deferred tax liability, net |
|
$ |
|
The deferred tax amounts above have been classified as long-term liabilities as of December 31, 2017. Approximately $86,000 of the total deferred tax liability relates to foreign taxes.
13
The provision for income taxes charged to operations for the year ended December 31, 2017, consists of the following:
|
|
|
|
Income tax expense (benefit): |
|
|
|
State |
|
$ |
5,382 |
Deferred |
|
|
|
Non-U.S. |
|
|
85,774 |
Total income tax (benefit) |
|
$ |
|
The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the year ended December 31, 2017, due to the following:
|
|
|
|
Computed "expected" tax benefit |
|
$ |
|
Increase (decrease) in income taxes resulting from: |
|
|
|
State income tax, net of federal tax benefit |
|
|
|
Nondeductible expenses |
|
|
25,615 |
Impact of rate change from tax reform |
|
|
|
Change in valuation allowance |
|
|
2,452,690 |
Other |
|
|
5,382 |
Total income tax (benefit) |
|
$ |
|
U.S. income and foreign withholding taxes have not been recognized on the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that are essentially permanent in duration. This amount becomes taxable upon a repatriation of assets from the subsidiary or a sale or liquidation of the subsidiary. Determination of the amount of any unrecognized deferred income tax liability on this temporary difference is not practicable.
The Company had foreign income tax expense of $85,776. The income before taxes for Enstar was approximately $351,000 for the year ended December 31, 2017. As a result, the net loss before income taxes for domestic operations was $8,058,321.
The Company has federal and state net operating losses of approximately $35,025,796 at December 31, 2017, with expiration dates from 5 to 20 years. At December 31, 2017, the Company has recorded a valuation allowance in the amount of $8,809,002 with respect to deferred tax assets since realization of those assets, arising primarily from the future benefit of loss carryforwards, is dependent upon the Company generating sufficient taxable income in future periods prior to the reversal of the temporary differences giving rise to the deferred tax assets or expiration of the net operating loss carryforwards.
The change in the valuation allowance, inclusive of the impacts from tax reform, was $1,715,590 for the year ended December 31, 2017
The Company files U.S., state, and foreign income tax returns in jurisdictions with various statutes of limitations. The federal returns for the 2014 through 2016 tax years remain subject to examination at December 31, 2017. Various state income tax returns can be examined for the years 2011 through 2016. Finally, the foreign returns for the years 2011 through 2016 are eligible for examination by various taxing authorities.
14
On December 22, 2017, the Tax Cuts and Jobs Act tax reform legislation was signed into law. This legislation makes significant changes in the U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The law is required to be accounted for in the period of enactment, which for the Company will be in 2018. While the Company continues to assess the impact of the tax reform legislation on its business and financial statements, the legislation will reduce the U.S. corporate tax rate from the current rate of 35 percent to 21 percent. Because of the enacted law, the Company was required to revalue deferred tax assets and liabilities as of December 31, 2017, at the enacted rate. This revaluation resulted in a benefit of approximately $466,000 to income tax expense and a corresponding reduction in the deferred tax liability.
Note 8. Related-Party Notes Payable and Related-Party Transactions
Debt consists of the following at December 31, 2017:
|
|
|
|
Note payable - Related party A |
|
$ |
19,301,448 |
Note payable - Related party B |
|
|
120,743 |
Note payable - Related party C |
|
|
49,857 |
Note payable - Related party D |
|
|
28,369 |
|
|
$ |
19,500,417 |
The Company has notes payable with four shareholders of the Company’s parent. The notes payable mature on December 31, 2019, and bear interest at 10 percent annually with both principal and interest due at maturity. The notes payable are secured by substantially all assets of the Company.
Total interest accrued on the notes as of December 31, 2017, amounted to $7,311,952, and is included in related-party liabilities on the consolidated balance sheet.
The Company has an annual management fee to CLP of $400,000 plus interest on the unpaid portion. As of December 31, 2017, the Company had accrued management fees of $2,121,689 which are included in related-party liabilities on the consolidated balance sheet.
Note 9. Commitments
The Company enters into operating leases with local small businesses and targeted national accounts to supply products and services, which generally have initial lease terms of 36-60 months. These operating leases are used as collateral to secure funding with a financing company. The Company accounts for the cash proceeds from the proceeds as deferred revenue on the consolidated balance sheet, which is amortized using the effective interest method over the life of the lease contracts. The Company obtained cash proceeds from operating leases for the year ended December 31, 2017, in the amounts of $5,256,815. The deferred revenues are recorded on the consolidated balance sheet at the present value of lease commitments. Customer payments on the operating leases are used to repay the financing company.
A portion of the monthly rental payments paid to the financing company represent interest expense incurred by the Company associated with the funding and advance proceeds received. The Company’s interest expense for the year ended December 31, 2017, was $1,055,108.
15
The total liability balance of the deferred rental revenue related to the operating leases was $11,334,582 as of December 31, 2017. The following table represents the expiration year of leases and the total deferred rental revenue liability as of December 31, 2017, for leases expiring in such years.
|
|
|
|
Years ending December 31, |
|
|
|
2018 |
|
$ |
224,858 |
2019 |
|
|
986,625 |
2020 |
|
|
1,664,835 |
2021 |
|
|
3,011,778 |
2022 |
|
|
5,313,694 |
Thereafter |
|
|
132,792 |
|
|
$ |
11,334,582 |
Future rental income on operating leases to be recorded by the Company totals $14,871,910 as of December 31, 2017. The following table represents the expiration year of leases and the total rental income to be recorded over the life of such leases expiring in that year.
|
|
|
|
Years ending December 31, |
|
|
|
2018 |
|
$ |
312,202 |
2019 |
|
|
1,294,233 |
2020 |
|
|
2,153,782 |
2021 |
|
|
3,940,687 |
2022 |
|
|
6,988,804 |
Thereafter |
|
|
182,202 |
|
|
$ |
14,871,910 |
The Company has operating leases for its office and warehouse facilities with agreements through March 31, 2023. The remaining payments required under such leases are summarized as follows:
|
|
|
|
Years ending December 31, |
|
|
|
2018 |
|
$ |
|
2019 |
|
|
|
2020 |
|
|
|
2021 |
|
|
|
2022 |
|
|
|
Thereafter |
|
|
|
|
|
$ |
|
For the year ended December 31, 2017, lease expense totaled $200,493.
16
Pure Health Solutions, Inc.
Consolidated Financial Report
For the Nine-Month Period Ended
September 30, 2018
Financial statements |
|
|
|
1-2 |
|
|
|
|
|
|
|
Unaudited consolidated statements of stockholder's equity (deficit) |
|
|
|
|
|
|
|
6-13 |
Pure Health Solutions, Inc.
Unaudited Consolidated Balance Sheets
September 30, 2018 and December 31, 2017
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2018 |
|
2017 |
|
||
Assets |
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
Cash |
|
$ |
507,112 |
|
$ |
848,199 |
|
Accounts receivable, net |
|
|
1,383,576 |
|
|
1,021,722 |
|
Inventories, net |
|
|
2,716,579 |
|
|
1,790,827 |
|
Prepaid expenses and other current assets |
|
|
565,403 |
|
|
435,096 |
|
Current portion of deferred lease costs |
|
|
799,097 |
|
|
665,177 |
|
Total current assets |
|
|
5,971,767 |
|
|
4,761,021 |
|
Plant, property and equipment, net |
|
|
1,207,815 |
|
|
1,042,043 |
|
Rental equipment, net |
|
|
3,988,533 |
|
|
3,132,560 |
|
Holdback receivable |
|
|
51,857 |
|
|
51,857 |
|
Deferred lease costs |
|
|
1,888,147 |
|
|
1,383,557 |
|
Intangible assets, net |
|
|
3,870,367 |
|
|
4,805,303 |
|
Total |
|
$ |
16,978,486 |
|
$ |
15,176,341 |
|
(Continued)
1
Pure Health Solutions, Inc.
Unaudited Consolidated Balance Sheets (Continued)
September 30, 2018 and December 31, 2017
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2018 |
|
2017 |
|
||
Liabilities and Stockholder's Equity (Deficit) |
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,124,776 |
|
$ |
587,596 |
|
Amounts collected owed to third parties |
|
|
59,919 |
|
|
39,000 |
|
Funding advance |
|
|
147,478 |
|
|
106,367 |
|
Accrued compensation |
|
|
855,255 |
|
|
744,498 |
|
Accrued expenses |
|
|
805,370 |
|
|
706,466 |
|
Income tax payable |
|
|
155,435 |
|
|
93,738 |
|
Current portion of deferred rental revenue, net |
|
|
4,512,939 |
|
|
3,656,192 |
|
Other current liabilities |
|
|
53,028 |
|
|
39,013 |
|
Total current liabilities |
|
|
7,714,200 |
|
|
5,972,870 |
|
Long-term liabilities: |
|
|
|
|
|
|
|
Related-party notes payable |
|
|
21,766,417 |
|
|
19,500,417 |
|
Related-party liabilities |
|
|
11,536,173 |
|
|
9,433,641 |
|
Deferred rental revenue, net |
|
|
9,735,545 |
|
|
7,678,390 |
|
Deferred income taxes |
|
|
660,797 |
|
|
875,006 |
|
Other long-term liabilities |
|
|
106,162 |
|
|
90,690 |
|
Total long-term liabilities |
|
|
43,805,094 |
|
|
37,578,144 |
|
Total liabilities |
|
|
51,519,294 |
|
|
43,551,014 |
|
Commitments (Note 9) |
|
|
|
|
|
|
|
Stockholder's equity (deficit): |
|
|
|
|
|
|
|
Common stock (no par value), 5,000,000 shares authorized; 1,000,000 shares issued and outstanding at amount paid in |
|
|
33,236,834 |
|
|
33,236,834 |
|
Accumulated deficit |
|
|
|
|
|
|
|
Total stockholder's equity (deficit) |
|
|
|
|
|
|
|
Total |
|
$ |
16,978,486 |
|
$ |
15,176,341 |
|
See notes to unaudited consolidated financial statements.
2
Pure Health Solutions, Inc.
Unaudited Consolidated Statements of Operations
Nine-Month Periods Ended September 30, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
Nine-Month |
|
Nine-Month |
|
||
|
|
Period Ended |
|
Period Ended |
|
||
|
|
September 30, |
|
September 30, |
|
||
|
|
2018 |
|
2017 |
|
||
Net sales |
|
$ |
10,142,374 |
|
$ |
9,944,122 |
|
Rental income |
|
|
5,499,815 |
|
|
4,378,633 |
|
Other revenues |
|
|
442,575 |
|
|
484,417 |
|
Total revenue |
|
|
16,084,764 |
|
|
14,807,172 |
|
Cost of goods sold: |
|
|
|
|
|
|
|
Net sales |
|
|
4,890,069 |
|
|
4,940,407 |
|
Rental income |
|
|
1,737,223 |
|
|
1,464,242 |
|
Other revenues |
|
|
72,588 |
|
|
101,592 |
|
Total cost of goods sold |
|
|
6,699,880 |
|
|
6,506,241 |
|
Gross profit |
|
|
9,384,884 |
|
|
8,300,931 |
|
Operating expenses: |
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
12,956,777 |
|
|
11,361,270 |
|
Operating loss |
|
|
|
|
|
|
|
Other expenses: |
|
|
|
|
|
|
|
Interest expense, net |
|
|
2,765,895 |
|
|
2,196,365 |
|
Other, net |
|
|
|
|
|
48,743 |
|
|
|
|
2,742,870 |
|
|
2,245,108 |
|
Net loss before income taxes |
|
|
|
|
|
|
|
Income tax (benefit) |
|
|
|
|
|
|
|
Net loss |
|
$ |
|
|
$ |
|
|
See notes to unaudited consolidated financial statements.
3
Pure Health Solutions, Inc.
Unaudited Consolidated Statements of Stockholder's Equity (Deficit)
Nine-Month Periods Ended September 30, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock |
|
Accumulated |
|
|
|
|||||
|
|
Shares |
|
Amount |
|
Deficit |
|
Total |
|
|||
Stockholder's equity (deficit) balance, January 1, 2017 |
|
1,000,000 |
|
$ |
33,036,834 |
|
$ |
|
|
$ |
|
|
Net loss |
|
— |
|
|
— |
|
|
|
|
|
|
|
Stockholder's equity (deficit), September 30, 2017 |
|
1,000,000 |
|
$ |
33,036,834 |
|
$ |
|
|
$ |
|
|
Stockholder's equity (deficit), January 1, 2018 |
|
1,000,000 |
|
$ |
33,236,834 |
|
$ |
|
|
$ |
|
|
Net loss |
|
— |
|
|
— |
|
|
|
|
|
|
|
Stockholder's equity (deficit), September 30, 2018 |
|
1,000,000 |
|
$ |
33,236,834 |
|
$ |
|
|
$ |
|
|
See notes to unaudited consolidated financial statements.
4
Pure Health Solutions, Inc.
Unaudited Consolidated Statements of Cash Flows
Nine-Month Periods Ended September 30, 2018 and 2017
|
|
|
|
|
|
|
|
|
|
Nine-Month |
|
Nine-Month |
|
||
|
|
Period Ended |
|
Period Ended |
|
||
|
|
September 30, |
|
September 30, |
|
||
|
|
2018 |
|
2017 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net loss |
|
$ |
|
|
$ |
|
|
Adjustments to reconcile net loss to net cash flows used in operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization of property, plant and equipment |
|
|
143,914 |
|
|
113,995 |
|
Depreciation of rental equipment |
|
|
617,983 |
|
|
480,553 |
|
Amortization of intangible assets |
|
|
934,936 |
|
|
934,936 |
|
Amortization of deferred lease costs |
|
|
588,480 |
|
|
459,573 |
|
Loss on sale of rental equipment |
|
|
89,100 |
|
|
— |
|
Non-cash interest on related-party liabilities |
|
|
1,802,532 |
|
|
1,428,394 |
|
Holdback receivable |
|
|
— |
|
|
551,642 |
|
Deferred revenue |
|
|
|
|
|
|
|
Deferred income taxes |
|
|
|
|
|
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
Accounts receivable |
|
|
|
|
|
|
|
Inventories |
|
|
|
|
|
|
|
Prepaid expenses, deferred lease costs and other current assets |
|
|
|
|
|
|
|
Accounts payable |
|
|
537,180 |
|
|
186,421 |
|
Accrued expenses, related-party liabilities and other liabilities |
|
|
560,067 |
|
|
|
|
Proceeds from operating leases |
|
|
4,999,480 |
|
|
4,049,173 |
|
Income tax payable |
|
|
61,697 |
|
|
— |
|
Net cash flows used in operating activities |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
|
|
|
|
|
Purchases of rental equipment |
|
|
|
|
|
|
|
Net cash flows used in investing activities |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Restricted cash |
|
|
— |
|
|
41,535 |
|
Proceeds from issuance of related-party notes payable |
|
|
2,266,000 |
|
|
2,510,076 |
|
Proceeds (payments) from funding advance |
|
|
41,111 |
|
|
|
|
Net cash flows provided by financing activities |
|
|
2,307,111 |
|
|
2,494,656 |
|
Decrease in cash and cash equivalents |
|
|
|
|
|
|
|
Cash and cash equivalents - beginning of period |
|
|
848,199 |
|
|
1,336,139 |
|
Cash - end of period |
|
$ |
507,112 |
|
$ |
723,524 |
|
Supplemental cash flow disclosures: |
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
— |
|
$ |
— |
|
Interest paid |
|
$ |
963,363 |
|
$ |
767,971 |
|
See notes to unaudited consolidated financial statements.
5
Note 1. Nature of Business and Summary of Significant Accounting Policies
Nature of business : Pure Health Solutions, Inc. (PHSI or the Company) was incorporated in 1996 under the laws of Idaho and is located in Lincolnshire, Illinois. The primary business of the Company is the manufacturing and sale of state-of-the art drinking water purification systems. Enstar, a wholly-owned Korean subsidiary, manufactures the Company's water purifiers, which it sells to the Company and to customers throughout Asia and Europe. Sales from foreign operations were approximately $233,000 and $259,000 for the nine-month periods ended September 30, 2018 and 2017, respectively. The Company sells the water purifiers to a network of dealers throughout the United States and sells or leases its water purifiers directly to national account customers and also to local small business customers through its branch operations in Illinois, California, Texas, Indiana, Missouri and Ohio. The Company also sells coffee and related products through an online store. A portion of the Company's revenues results from financing transactions involving the purchase of lease contracts from dealers and the sale of those contracts to independent financing companies.
Basis of presentation : The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of interim financial reporting. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company's December 31, 2017, consolidated financial statements. In management's opinion, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company's unaudited consolidated balance sheet as of September 30, 2018, and the unaudited consolidated statements of operations for the nine months ended September 30, 2018 and 2017. The consolidated balance sheet as of December 31, 2017, was based on the audited consolidated balance sheet as of December 31, 2017, as presented in the Company's December 31, 2017, consolidated financial statements.
Principles of consolidation : The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
Use of estimates : The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP) requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from those estimates.
Cash : The Company maintains cash in bank deposit accounts, which at times may exceed the federally insured limits. The Company and its subsidiaries have not experienced any losses in bank accounts and management believes the Company is not exposed to any significant credit risk on cash deposits. As of September 30, 2018 and December 31, 2017, cash in foreign bank accounts amounts to approximately $427,000 and $85,000, respectively.
Receivables : Trade accounts receivable are carried at the original invoice amount less an estimate made for doubtful receivables. Management determines the collectability of accounts by regularly evaluating individual customer receivables and considering a customer’s financial condition, credit history, and current economic conditions. Recoveries of trade receivables previously written off are recorded when received. The allowance for doubtful accounts was approximately $163,000 and $140,000 as of September 30, 2018 and December 31, 2017, respectively.
Inventories : Inventories are stated at the lower of cost (first-in, first-out basis) or net realizable value as of September 30, 2018 and December 31, 2017. Inventories of finished goods are manufactured only on current models requiring no general reserve for slow-moving or obsolete inventory. As of September 30, 2018 and
6
December 31, 2017, the Company had reserves for slow-moving or obsolete parts and filters amounting to approximately $249,000 and $303,000, respectively.
Deferred lease costs : When a customer enters into a lease agreement with the Company the direct lease costs to initiate the lease are paid in cash, which primarily consist of sales commissions. The Company has the right to reimbursement of the sales commissions paid in cash if the customer defaults on their payments or if the employee leaves the Company. The Company capitalizes the sales commissions paid to deferred lease costs, as these costs are directly related to initiating the lease. The capitalized commissions are then expensed over the term of the lease. The current portion represents the amount of deferred lease costs to be expensed in the following year. For equipment sales the entire commissions are expensed when paid.
Property, plant and equipment : Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is computed over the assets’ estimated useful lives using straight-line methods. Asset lives range from 2 to 15 years. Assets related to leasehold improvements are amortized at the lesser of the life of the lease or useful life of the asset.
Rental equipment : Rental equipment represents the leased purifiers for which the Company has retained title (see Note 2). The Company depreciates the rental equipment over the lease term, which typically ranges between 3 and 5 years.
Intangible assets : Intangible assets are comprised of customer lists, patents and trade names with estimated useful lives between 3 and 15 years. Intangible assets are amortized over their estimated lives using the straight-line method.
Impairment of long-lived assets : Long-lived assets are evaluated for impairment whenever events or changes in circumstances have indicated that an asset may not be recoverable and are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. If the sum of the projected undiscounted cash flows (excluding tax and interest charges) is less than the carrying value of the assets, the assets will be written down to the estimated fair value and such loss is recognized in income from continuing operations in the period in which the determination is made. Management determined that no impairment of long-lived assets existed as of September 30, 2018 and December 31, 2017.
Revenue recognition :
Net sales: Sales are recognized when revenue is realized or realizable and has been earned. Most revenue transactions represent sales of inventory (equipment, filters, parts and freight) and are recognized when the product is shipped, net of any associated discounts. The revenue recorded is presented net of sales discounts and other taxes and amounted to approximately $10,142,000 and $9,089,000 for the nine-month periods ended September 30, 2018 and 2017, respectively.
Rental income: The Company enters into certain lease arrangements with national accounts and local small business accounts which are accounted for as operating leases (see Note 9). Rental income from leases is recorded when earned and amounted to approximately $5,500,000 and $4,400,000 for the nine-month periods ended September 30, 2018 and 2017, respectively. When the Company receives upfront proceeds for the lease arrangements, the proceeds are recorded as deferred rental revenue on the unaudited consolidated balance sheets (see Note 9).
Other revenues: The Company purchases certain lease contracts from third-party dealers and transfers those assets to an independent financing company. The difference between the rates charged to the third-party dealers and the rates charged by the independent financing company is recorded as finance revenue. Revenue from the dealers’ nominal lease residual option payment is recognized when invoiced at lease
7
maturity. In addition, other revenue includes service fees, late fees and other miscellaneous fees charged to customers. Total other revenue amounted to approximately $443,000 and $484,000 for the nine-month periods ended September 30, 2018 and 2017, respectively.
Advertising : Advertising and marketing costs are charged to expense as incurred and totaled approximately $350,000 and $165,000 for the nine-month periods ended September 30, 2018 and 2017, respectively.
Shipping costs : The costs of shipping relating to purchases and sales of products are included in cost of goods sold in the accompanying unaudited consolidated statements of operations.
Income taxes : Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Investment tax credits are accounted for by the flow-through method whereby they reduce income taxes currently payable and the provision for income taxes in the period the assets giving rise to such credits are placed in service. To the extent such credits are not currently utilized on the Company's tax return, deferred tax assets, subject to considerations about the need for a valuation allowance, are recognized for the carry-forward amount.
The Company recognizes the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax law, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination.
Foreign currency transactions : The functional currency for Enstar is the U.S. dollar. Assets and liabilities of foreign operations have been translated to U.S. dollars using year-end exchange rates or historical rates. Income and expense accounts have been translated to U.S. dollars using average exchange rates. Gains and losses from foreign currency transactions are included in determining net income. The foreign currency transactions resulted in a loss of approximately $68,000 and $57,000 for the nine-month periods ended September 30, 2018 and 2017, respectively. The foreign currency transactions are recorded within other expenses on the unaudited consolidated statements of operations.
Recent accounting pronouncements :
Revenue recognition:
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606) , requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 one year, making it effective for annual reporting periods beginning after December 15, 2018. Earlier application is permitted. The Company has not yet selected a transition method and is currently evaluating the effect that the standard will have on the unaudited consolidated financial statements.
8
Leases:
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) . The guidance in this ASU supersedes the leasing guidance in Topic 840, Leases . Under the new guidance, lessees and lessors are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact of the pending adoption of the new standard on the unaudited consolidated financial statements.
Cash flows:
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) . This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for financial statements issued for annual periods beginning after December 15, 2018. Early adoption is permitted, and this ASU requires it to be applied retrospectively to all periods presented. The Company has not yet adopted this ASU in the current year and is currently evaluating the impact of the pending adoption of the new standard on the unaudited consolidated financial statements.
Subsequent events : The Company has evaluated subsequent events through the date the financial statements were available to be issued.
On December 18, 2018, 100 percent of the Company’s stockholder’s equity was acquired by AquaVenture Holdings Limited for an approximate purchase price of $58,800,000. As a result of the acquisition, all of the Company’s related-party notes payable and liabilities disclosed in Note 8 were settled in full.
Note 2. Financing Arrangements
The Company sells water purifiers to dealers who enter into long-term contracts (usually three to five years) for leasing of water purifiers to their customers. Dealers that elect to sell their lease contracts to the Company may do so under the Company’s Dealer Financing Agreement (the Agreement). Under the Agreement, the Company may purchase the dealers’ lease contracts at a discounted cash settlement price. The Company typically exercises their right to purchase only when they have credit approval for the purchase of the lease contract from independent financing companies. The Company obtains title to the leased purifiers as part of the agreement. The title is immediately transferred or assigned to an independent financing company until the end of the lease term and the Company receives the cash proceeds from the independent financing company upon transferring the title. The dealers have an option to purchase the leased purifiers from the Company upon the expiration of the related leases for a nominal amount. Revenue from the dealers’ nominal lease residual option payment is recognized when invoiced at lease maturity.
These receivables are accounted for under Accounting Standards Codification (ASC) 860, Transfers and Servicing , whereby the Company recognizes financial assets it controls and the liabilities it has incurred and derecognizes financial assets when control has been surrendered. Under ASC 860, control is considered to have been surrendered only if (i) the transferred financial assets have been isolated from the transferor and its creditors, even in bankruptcy or other receivership, (ii) the transferee has the right to pledge or exchange
9
the transferred financial assets it received, and (iii) the transferor does not maintain effective control over the transferred financial assets through an agreement that both entitles and obligates it to repurchase or redeem those assets prior to maturity, through an agreement that provides the transferor the unilateral ability to cause the holder to return specific financial assets and a more-than-trivial benefit attributable to that ability, or an agreement that permits the transferee to require the transferor to repurchase the transferred financial assets at a price that is so favorable to the transferee that it is probable that the transferee will require repurchase. The Company has determined that these receivables qualify for sales treatment and, accordingly, the purchases and proceeds are included in net cash flows provided by financing activities in the unaudited consolidated statements of cash flows.
Finance income, included in other revenues in the accompanying unaudited consolidated statements of operations, totaled approximately $210,000 and $252,000 for the nine-month periods ended September 30, 2018 and 2017, respectively.
As part of a previous funding arrangement, 5 percent of the selected proceeds on the transfers of assets were retained by the financing company until all receivables had been collected. These amounts are included on the unaudited consolidated balance sheets as holdback receivables and are reported net of allowance for losses of $51,587 as of September 30, 2018 and December 31, 2017, respectively.
Note 3. Inventories
Inventories at September 30, 2018 and December 31, 2017, consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2018 |
|
2017 |
|
||
Raw materials |
|
$ |
542,789 |
|
$ |
300,071 |
|
Finished goods |
|
|
1,447,866 |
|
|
867,738 |
|
Parts and filters, net |
|
|
725,924 |
|
|
623,018 |
|
|
|
$ |
2,716,579 |
|
$ |
1,790,827 |
|
Note 4. Property, Plant and Equipment
Property, plant and equipment at September 30, 2018 and December 31, 2017, consist of the following:
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2018 |
|
2017 |
|
||
Land |
|
$ |
560,454 |
|
$ |
560,454 |
|
Buildings and improvements |
|
|
695,865 |
|
|
675,049 |
|
Machinery and tools |
|
|
1,301,233 |
|
|
1,311,166 |
|
Vehicles |
|
|
438,102 |
|
|
368,025 |
|
Furniture and fixtures |
|
|
341,588 |
|
|
335,270 |
|
Software |
|
|
742,760 |
|
|
519,383 |
|
|
|
|
4,080,002 |
|
|
3,769,347 |
|
Less: accumulated depreciation |
|
|
|
|
|
|
|
|
|
$ |
1,207,815 |
|
$ |
1,042,043 |
|
Depreciation expense for the nine-month periods ended September 30, 2018 and 2017, was approximately $144,000 and $114,000, respectively.
10
Note 5. Rental Equipment
Rental equipment as of September 30, 2018 and December 31, 2017, consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2018 |
|
2017 |
|
||
Rental equipment |
|
$ |
|
|
$ |
|
|
Less: accumulated depreciation |
|
|
|
|
|
|
|
|
|
$ |
|
|
$ |
|
|
Depreciation expense for the nine-month periods ended September 30, 2018 and 2017, was approximately $618,000 and $481,000, respectively.
Note 6. Intangible Assets
As of September 30, 2018 and December 31, 2017, intangible assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
September 30, |
|
December 31, |
|
||
|
|
Useful Life |
|
2018 |
|
2017 |
|
||
Trademarks and tradenames |
|
15 years |
|
$ |
2,784,644 |
|
$ |
2,784,644 |
|
Customer relationships |
|
8-15 years |
|
|
7,489,100 |
|
|
7,489,100 |
|
Patents and technology |
|
10 years |
|
|
4,818,400 |
|
|
4,818,400 |
|
Noncompete agreements |
|
1-3 years |
|
|
1,700,000 |
|
|
1,700,000 |
|
|
|
|
|
|
16,792,144 |
|
|
16,792,144 |
|
Less: accumulated amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,870,367 |
|
$ |
4,805,303 |
|
Amortization expense for both of the nine-month periods ended September 30, 2018 and 2017, was approximately $935,000. Estimated amortization expenses related to intangible assets for the period from October 1, 2018 to December 31, 2018 and for future fiscal years ending December 31 are as follows:
|
|
|
|
|
Years ending December 31, |
|
|
|
|
2018 |
|
$ |
311,646 |
|
2019 |
|
|
991,027 |
|
2020 |
|
|
541,027 |
|
2021 |
|
|
506,667 |
|
2022 |
|
|
506,667 |
|
Thereafter |
|
|
1,013,333 |
|
Note 7. Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related to temporary differences between the basis of lease servicing cost, acquired intangibles, warranty allowance, and lease residuals for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences which will either be taxable or deductible when the assets and liabilities are recovered or settled. No U.S. income tax liability or asset is provided on undistributed earnings or losses of the Company’s foreign subsidiaries. The earnings of the foreign subsidiaries, which reflect provisions for foreign taxes when applicable, are currently indefinitely reinvested in the foreign operations or will be remitted substantially free of additional tax.
11
The provision for income taxes charged to operations for the nine-month periods ended September 30, 2018 and 2017, consists of the following:
|
|
|
|
|
|
|
|
|
|
September 30, |
|
September 30, |
|
||
|
|
2018 |
|
2017 |
|
||
Income tax expense (benefit): |
|
|
|
|
|
|
|
State |
|
$ |
3,885 |
|
$ |
5,382 |
|
Deferred |
|
|
|
|
|
|
|
Non-U.S. |
|
|
61,696 |
|
|
63,950 |
|
Total income tax (benefit) |
|
$ |
|
|
$ |
|
|
On December 22, 2017, the Tax Cuts and Jobs Act tax reform legislation was signed into law. This legislation made significant changes to the U.S. tax law including a reduction in the corporate tax rates, changes to net operating loss carryforwards and carrybacks, and a repeal of the corporate alternative minimum tax. The law was required to be accounted for in the period of enactment, which for the Company was January 1, 2018. The legislation reduced the U.S. corporate tax rate from 35 percent to 21 percent. The income taxes for the nine-month period ended September 30, 2017, were subject to the U.S. corporate tax rate of 35 percent.
Note 8. Related-Party Notes Payable, Related-Party Transactions and Subsequent Events
Debt consists of the following at September 30, 2018 and December 31, 2017:
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2018 |
|
2017 |
|
||
Note payable - Related party A |
|
$ |
21,567,448 |
|
$ |
19,301,448 |
|
Note payable - Related party B |
|
|
120,743 |
|
|
120,743 |
|
Note payable - Related party C |
|
|
49,857 |
|
|
49,857 |
|
Note payable - Related party D |
|
|
28,369 |
|
|
28,369 |
|
|
|
$ |
21,766,417 |
|
$ |
19,500,417 |
|
The Company had notes payable with four shareholders of the Company’s parent. The notes payable were scheduled to mature on December 31, 2019, and accrued interest at 10 percent annually with both principal and interest due at maturity. The notes payable were secured by substantially all assets of the Company. As discussed further in Note 1 to the unaudited consolidated financial statements, the notes payable were paid off subsequent to September 30, 2018.
Total interest accrued on the notes as of September 30, 2018 and December 31, 2017, amounted to $8,889,156 and $7,311,952, respectively, and is included in related-party liabilities on the unaudited consolidated balance sheets.
The Company had an annual management fee to CLP of $400,000 plus interest on the unpaid portion. As of September 30, 2018 and December 31, 2017, the Company had accrued management fees of $2,647,017 and $2,121,689, respectively, which are included in related-party liabilities on the unaudited consolidated balance sheets.
Note 9. Commitments
The Company enters into operating leases with local small businesses and targeted national accounts to supply products and services, which generally have initial lease terms of 36-60 months. These operating
12
leases are used as collateral to secure funding with a financing company. The Company accounts for the cash proceeds from the proceeds as deferred revenue on the unaudited consolidated balance sheets, which is amortized using the effective interest method over the life of the lease contracts. The Company obtained cash proceeds from operating leases in the amounts of $4,999,480 and $4,049,173 for the nine-month periods ended September 30, 2018 and 2017, respectively. The deferred revenues are recorded on the unaudited consolidated balance sheets at the present value of lease commitments. Customer payments on the operating leases are used to repay the financing company.
A portion of the monthly rental payments paid to the financing company represent interest expense incurred by the Company associated with the funding and advance proceeds received. The Company’s interest expense for the nine-month periods ended September 30, 2018 and 2017, was $958,012 and $770,145, respectively.
The total liability balance of the deferred rental revenue related to the operating leases was $14,248,484 and $11,334,582 as of September 30, 2018 and December 31, 2017, respectively. The following table represents the expiration year of leases on the total deferred rental revenue liability as of September 30, 2018, for leases expiring during the period from October 1, 2018 to December 31, 2018 and in future fiscal years ending December 31:
|
|
|
|
2018 |
|
$ |
5,860 |
2019 |
|
|
474,235 |
2020 |
|
|
1,128,394 |
2021 |
|
|
2,707,288 |
2022 |
|
|
4,383,850 |
Thereafter |
|
|
5,548,857 |
|
|
$ |
14,248,484 |
Future rental income on operating leases to be recorded by the Company totals $18,711,081 as of September 30, 2018. The following table represents the expiration year of leases and the total rental income to be recorded over the life of such leases expiring during the period from October 1, 2018 to December 31, 2018 and future fiscal years ending December 31:
13
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”), AUC Acquisition Holdings LLC (“AUC”) and Pure Health Solutions, Inc. (“PHSI”) after giving effect to: (i) the acquisition of AUC, (ii) the AUC acquisition related financing, (iii) the acquisition of PHSI, (iv) the post combination payoff of certain factored contracts accounted for as a secured borrowing, and (iv) applying the assumptions and adjustments described in the accompanying notes to the unaudited pro forma condensed combined financial statements (collectively, the “Pro Forma Transactions”). The unaudited pro forma condensed combined balance sheet as of September 30, 2018 gives effect to Pro Forma Transactions as if they had occurred on September 30, 2018. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 and nine months ended September 30, 2018 gives effect to the Pro Forma Transactions 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 Pro Forma Transactions 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 AUC and PHSI acquisitions 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 following:
|
· |
|
the historical consolidated financial statements of the Company and its subsidiaries 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 of the Company and its subsidiaries contained in the Company’s quarterly report on Form 10-Q for the period ended September 30, 2018; |
|
· |
|
PHSI’s historical consolidated financial statements for the fiscal year ended December 31, 2017 and the unaudited interim financial statements for the nine months ended September 30, 2018 and 2017 included in Exhibits 99.1 and 99.2 to this Current Report on Form 8-K/A, respectively; |
|
· |
|
AUC’s historical consolidated financial statements for the fiscal year ended December 31, 2017 and AUC’s unaudited interim financial statements for the six months ended June 30, 2018 and 2017, included in Exhibits 99.1 and 99.2, respectively, to the Company’s Current Report on Form 8-K/A filed with the SEC on January 4, 2019. |
Unaudited Pro Forma Condensed Combined Balance Sheet
As of September 30, 2018
(
In Thousands
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUC |
|
|
Pro Forma, as |
|
PHSI |
|
|
|
|
|
||||||||
|
|
AquaVenture |
|
Historical |
|
Pro Forma |
|
|
Adjusted for |
|
Historical |
|
Pro Forma |
|
|
Pro Forma |
|
|||||||
|
|
Historical |
|
(as adjusted) |
|
Adjustments |
|
|
AUC Acquisition |
|
(as adjusted) |
|
Adjustments |
|
|
Combined |
|
|||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
93,617 |
|
$ |
628 |
|
$ |
(17,414) |
(a) |
|
$ |
76,831 |
|
$ |
507 |
|
$ |
(57,474) |
(q) |
|
$ |
19,864 |
|
Restricted cash |
|
|
2,000 |
|
|
100 |
|
|
— |
|
|
|
2,100 |
|
|
— |
|
|
— |
|
|
|
2,100 |
|
Trade receivables, net |
|
|
19,497 |
|
|
1,919 |
|
|
84 |
(b) |
|
|
21,500 |
|
|
1,384 |
|
|
— |
|
|
|
22,884 |
|
Inventory |
|
|
9,703 |
|
|
962 |
|
|
1,643 |
(c) |
|
|
12,308 |
|
|
2,717 |
|
|
200 |
(r) |
|
|
15,225 |
|
Current portion of long-term receivables |
|
|
6,257 |
|
|
767 |
|
|
(467) |
(d) |
|
|
6,557 |
|
|
— |
|
|
— |
|
|
|
6,557 |
|
Prepaid expenses and other current assets |
|
|
3,855 |
|
|
775 |
|
|
441 |
(e) |
|
|
5,071 |
|
|
1,364 |
|
|
402 |
(s) |
|
|
6,837 |
|
Total current assets |
|
|
134,929 |
|
|
5,151 |
|
|
(15,713) |
|
|
|
124,367 |
|
|
5,972 |
|
|
(56,872) |
|
|
|
73,467 |
|
Property, plant and equipment, net |
|
|
114,969 |
|
|
31,274 |
|
|
— |
|
|
|
146,243 |
|
|
5,197 |
|
|
591 |
(t) |
|
|
152,031 |
|
Construction in progress |
|
|
9,773 |
|
|
— |
|
|
— |
|
|
|
9,773 |
|
|
— |
|
|
— |
|
|
|
9,773 |
|
Restricted cash |
|
|
3,637 |
|
|
— |
|
|
— |
|
|
|
3,637 |
|
|
— |
|
|
— |
|
|
|
3,637 |
|
Long-term receivables |
|
|
39,823 |
|
|
3,419 |
|
|
(2,820) |
(d) |
|
|
40,422 |
|
|
— |
|
|
— |
|
|
|
40,422 |
|
Other assets |
|
|
5,139 |
|
|
1,680 |
|
|
(598) |
(f) |
|
|
6,221 |
|
|
1,940 |
|
|
(1,888) |
(u) |
|
|
6,273 |
|
Deferred tax asset |
|
|
3,157 |
|
|
— |
|
|
— |
|
|
|
3,157 |
|
|
— |
|
|
108 |
(v) |
|
|
3,265 |
|
Intangible assets, net |
|
|
129,333 |
|
|
5,300 |
|
|
42,010 |
(g) |
|
|
176,643 |
|
|
3,870 |
|
|
27,680 |
(w) |
|
|
208,193 |
|
Goodwill |
|
|
108,244 |
|
|
36,426 |
|
|
28,375 |
(h) |
|
|
173,045 |
|
|
— |
|
|
18,221 |
(x) |
|
|
191,266 |
|
Total assets |
|
$ |
549,004 |
|
$ |
83,250 |
|
$ |
51,254 |
|
|
$ |
683,508 |
|
$ |
16,979 |
|
$ |
(12,160) |
|
|
$ |
688,327 |
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4,425 |
|
$ |
2,718 |
|
$ |
(547) |
(i) |
|
$ |
6,596 |
|
$ |
1,126 |
|
$ |
— |
|
|
$ |
7,722 |
|
Accrued liabilities |
|
|
12,763 |
|
|
562 |
|
|
3,271 |
(j) |
|
|
16,596 |
|
|
6,589 |
|
|
(1,613) |
(y) |
|
|
21,572 |
|
Current portion of long-term debt |
|
|
6,400 |
|
|
3,972 |
|
|
(3,972) |
(k) |
|
|
6,400 |
|
|
— |
|
|
— |
|
|
|
6,400 |
|
Deferred revenue |
|
|
3,412 |
|
|
674 |
|
|
866 |
(l) |
|
|
4,952 |
|
|
— |
|
|
— |
|
|
|
4,952 |
|
Total current liabilities |
|
|
27,000 |
|
|
7,926 |
|
|
(382) |
|
|
|
34,544 |
|
|
7,715 |
|
|
(1,613) |
|
|
|
40,646 |
|
Long-term debt |
|
|
164,719 |
|
|
34,558 |
|
|
75,184 |
(m) |
|
|
274,461 |
|
|
21,766 |
|
|
(21,766) |
(z) |
|
|
274,461 |
|
Deferred tax liability |
|
|
5,502 |
|
|
3,144 |
|
|
11,298 |
(n) |
|
|
19,944 |
|
|
661 |
|
|
(661) |
(v) |
|
|
19,944 |
|
Other long-term liabilities |
|
|
11,757 |
|
|
1,648 |
|
|
— |
|
|
|
13,405 |
|
|
21,378 |
|
|
(20,822) |
(aa) |
|
|
13,961 |
|
Total liabilities |
|
|
208,978 |
|
|
47,276 |
|
|
86,100 |
|
|
|
342,354 |
|
|
51,520 |
|
|
(44,862) |
|
|
|
349,012 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares, no par value |
|
|
— |
|
|
— |
|
|
— |
|
|
|
— |
|
|
— |
|
|
|
|
|
|
— |
|
Additional paid-in capital |
|
|
578,506 |
|
|
— |
|
|
2,043 |
(o) |
|
|
580,549 |
|
|
33,237 |
|
|
(33,237) |
(bb) |
|
|
580,549 |
|
Accumulated other comprehensive income |
|
|
(101) |
|
|
— |
|
|
— |
|
|
|
(101) |
|
|
— |
|
|
|
|
|
|
(101) |
|
Accumulated deficit |
|
|
(238,379) |
|
|
35,974 |
|
|
(36,889) |
(p) |
|
|
(239,294) |
|
|
(67,778) |
|
|
65,939 |
(cc) |
|
|
(241,133) |
|
Total shareholders' equity |
|
|
340,026 |
|
|
35,974 |
|
|
(34,846) |
|
|
|
341,154 |
|
|
(34,541) |
|
|
32,702 |
|
|
|
339,315 |
|
Total liabilities and shareholders' equity |
|
$ |
549,004 |
|
$ |
83,250 |
|
$ |
51,254 |
|
|
$ |
683,508 |
|
$ |
16,979 |
|
$ |
(12,160) |
|
|
$ |
688,327 |
|
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 )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUC |
|
|
Pro Forma, as |
|
PHSI |
|
|
|
|
|
|||||||||
|
|
AquaVenture |
|
Historical |
|
Pro Forma |
|
|
Adjusted for |
|
Historical |
|
Pro Forma |
|
|
Pro Forma |
|
|||||||
|
|
Historical |
|
(as adjusted) |
|
Adjustments |
|
|
AUC Acquisition |
|
(as adjusted) |
|
Adjustments |
|
|
Combined |
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
$ |
58,358 |
|
$ |
— |
|
$ |
— |
|
|
$ |
58,358 |
|
$ |
— |
|
$ |
— |
|
|
$ |
58,358 |
|
Rental |
|
|
52,997 |
|
|
9,218 |
|
|
— |
|
|
|
62,215 |
|
|
5,971 |
|
|
— |
|
|
|
68,186 |
|
Financing income |
|
|
— |
|
|
238 |
|
|
— |
|
|
|
238 |
|
|
— |
|
|
— |
|
|
|
238 |
|
Other |
|
|
9,796 |
|
|
10,430 |
|
|
— |
|
|
|
20,226 |
|
|
13,938 |
|
|
— |
|
|
|
34,164 |
|
Total revenues |
|
|
121,151 |
|
|
19,886 |
|
|
— |
|
|
|
141,037 |
|
|
19,909 |
|
|
— |
|
|
|
160,946 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
|
34,617 |
|
|
— |
|
|
— |
|
|
|
34,617 |
|
|
— |
|
|
— |
|
|
|
34,617 |
|
Rental |
|
|
23,484 |
|
|
3,266 |
|
|
— |
|
|
|
26,750 |
|
|
2,026 |
|
|
16 |
(hh) |
|
|
28,792 |
|
Other |
|
|
5,779 |
|
|
7,979 |
|
|
— |
|
|
|
13,758 |
|
|
7,283 |
|
|
— |
|
|
|
21,041 |
|
Total cost of revenues |
|
|
63,880 |
|
|
11,245 |
|
|
— |
|
|
|
75,125 |
|
|
9,309 |
|
|
16 |
|
|
|
84,450 |
|
Gross profit |
|
|
57,271 |
|
|
8,641 |
|
|
— |
|
|
|
65,912 |
|
|
10,600 |
|
|
(16) |
|
|
|
76,496 |
|
Selling, general and administrative expenses |
|
|
69,648 |
|
|
2,802 |
|
|
2,446 |
(dd) |
|
|
74,896 |
|
|
15,235 |
|
|
663 |
(ii) |
|
|
90,794 |
|
(Loss) income from operations |
|
|
(12,377) |
|
|
5,839 |
|
|
(2,446) |
|
|
|
(8,984) |
|
|
(4,635) |
|
|
(679) |
|
|
|
(14,298) |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(7,945) |
|
|
(2,739) |
|
|
(5,465) |
(ee) |
|
|
(16,149) |
|
|
(3,011) |
|
|
2,684 |
(jj) |
|
|
(16,476) |
|
Other expense, net |
|
|
(1,850) |
|
|
— |
|
|
|
|
|
|
(1,850) |
|
|
(62) |
|
|
— |
|
|
|
(1,912) |
|
(Loss) income before income tax expense |
|
|
(22,172) |
|
|
3,100 |
|
|
(7,911) |
|
|
|
(26,983) |
|
|
(7,708) |
|
|
2,005 |
|
|
|
(32,686) |
|
Income tax expense (benefit) |
|
|
3,622 |
|
|
(286) |
|
|
(2,690) |
(ff) |
|
|
646 |
|
|
(891) |
|
|
758 |
(kk) |
|
|
513 |
|
Net (loss) income |
|
|
(25,794) |
|
|
3,386 |
|
|
(5,221) |
|
|
|
(27,629) |
|
|
(6,817) |
|
|
1,247 |
|
|
|
(33,199) |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(17) |
|
|
— |
|
|
— |
|
|
|
(17) |
|
|
— |
|
|
— |
|
|
|
(17) |
|
Comprehensive (loss) income |
|
$ |
(25,811) |
|
$ |
3,386 |
|
$ |
(5,221) |
|
|
$ |
(27,646) |
|
$ |
(6,817) |
|
$ |
1,247 |
|
|
$ |
(33,216) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted |
|
$ |
(0.98) |
|
|
|
|
|
|
|
|
$ |
(1.04) |
|
|
|
|
|
|
|
|
$ |
(1.25) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – basic and diluted |
|
|
26,426 |
|
|
|
|
|
122 |
(gg) |
|
|
26,548 |
|
|
|
|
|
|
|
|
|
26,548 |
|
See accompanying notes to the unaudited pro forma condensed combined financial information.
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended September 30, 2018
( In Thousands )
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AUC |
|
|
Pro Forma, as |
|
PHSI |
|
|
|
|
|
|||||||||
|
|
AquaVenture |
|
Historical |
|
Pro Forma |
|
|
Adjusted for |
|
Historical |
|
Pro Forma |
|
|
Pro Forma |
|
|||||||
|
|
Historical |
|
(as adjusted) |
|
Adjustments |
|
|
AUC Acquisition |
|
(as adjusted) |
|
Adjustments |
|
|
Combined |
|
|||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
$ |
42,682 |
|
$ |
— |
|
$ |
— |
|
|
$ |
42,682 |
|
$ |
— |
|
$ |
— |
|
|
$ |
42,682 |
|
Rental |
|
|
45,041 |
|
|
8,032 |
|
|
(155) |
(ll) |
|
|
52,918 |
|
|
5,500 |
|
|
— |
|
|
|
58,418 |
|
Financing |
|
|
3,048 |
|
|
143 |
|
|
— |
(ll) |
|
|
3,191 |
|
|
— |
|
|
— |
|
|
|
3,191 |
|
Other |
|
|
13,012 |
|
|
6,962 |
|
|
(3,251) |
(ll) |
|
|
16,723 |
|
|
10,585 |
|
|
— |
|
|
|
27,308 |
|
Total revenues |
|
|
103,783 |
|
|
15,137 |
|
|
(3,406) |
|
|
|
115,514 |
|
|
16,085 |
|
|
— |
|
|
|
131,599 |
|
Cost of revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk water |
|
|
20,021 |
|
|
— |
|
|
— |
|
|
|
20,021 |
|
|
— |
|
|
— |
|
|
|
20,021 |
|
Rental |
|
|
20,240 |
|
|
2,840 |
|
|
— |
|
|
|
23,080 |
|
|
1,737 |
|
|
12 |
(qq) |
|
|
24,829 |
|
Other |
|
|
8,624 |
|
|
5,702 |
|
|
(1,643) |
(ll) |
|
|
12,683 |
|
|
4,963 |
|
|
— |
|
|
|
17,646 |
|
Total cost of revenues |
|
|
48,885 |
|
|
8,542 |
|
|
(1,643) |
|
|
|
55,784 |
|
|
6,700 |
|
|
12 |
|
|
|
62,496 |
|
Gross profit |
|
|
54,898 |
|
|
6,595 |
|
|
(1,763) |
|
|
|
59,730 |
|
|
9,385 |
|
|
(12) |
|
|
|
69,103 |
|
Selling, general and administrative expenses |
|
|
59,689 |
|
|
3,442 |
|
|
(155) |
(mm) |
|
|
62,976 |
|
|
12,957 |
|
|
498 |
(rr) |
|
|
76,431 |
|
(Loss) income from operations |
|
|
(4,791) |
|
|
3,153 |
|
|
(1,608) |
|
|
|
(3,246) |
|
|
(3,572) |
|
|
(510) |
|
|
|
(7,328) |
|
Other expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(10,000) |
|
|
(1,305) |
|
|
(5,330) |
(nn) |
|
|
(16,635) |
|
|
(2,766) |
|
|
2,429 |
(ss) |
|
|
(16,972) |
|
Other (expense) income, net |
|
|
(520) |
|
|
— |
|
|
— |
|
|
|
(520) |
|
|
23 |
|
|
— |
|
|
|
(497) |
|
(Loss) income before income tax expense |
|
|
(15,311) |
|
|
1,848 |
|
|
(6,938) |
|
|
|
(20,401) |
|
|
(6,315) |
|
|
1,919 |
|
|
|
(24,797) |
|
Income tax expense (benefit) |
|
|
(1,312) |
|
|
685 |
|
|
(1,457) |
(oo) |
|
|
(2,084) |
|
|
(149) |
|
|
489 |
(tt) |
|
|
(1,744) |
|
Net (loss) income |
|
|
(13,999) |
|
|
1,163 |
|
|
(5,481) |
|
|
|
(18,317) |
|
|
(6,166) |
|
|
1,430 |
|
|
|
(23,053) |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
(84) |
|
|
— |
|
|
— |
|
|
|
(84) |
|
|
— |
|
|
— |
|
|
|
(84) |
|
Comprehensive (loss) income |
|
$ |
(14,083) |
|
$ |
1,163 |
|
$ |
(5,481) |
|
|
$ |
(18,401) |
|
$ |
(6,166) |
|
$ |
1,430 |
|
|
$ |
(23,137) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per share – basic and diluted |
|
$ |
(0.53) |
|
|
|
|
|
|
|
|
$ |
(0.69) |
|
|
|
|
|
|
|
|
$ |
(0.86) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average shares outstanding – basic and diluted |
|
|
26,544 |
|
|
|
|
|
122 |
(pp) |
|
|
26,666 |
|
|
|
|
|
|
|
|
|
26,666 |
|
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, PHSI and AUC.
Description of Transactions
On December 18, 2018, Quench USA, Inc., a wholly-owned subsidiary of AquaVenture, acquired all of the issued and outstanding shares of PHSI from U.S. Water, LLC pursuant to a stock purchase agreement (“PHSI Purchase Agreement”). PHSI, which is based in Lincolnshire, Illinois, is a leading provider of filtered water coolers and related services through direct and indirect sales channels. The Company paid approximately $57.0 million to the seller, in the aggregate, which included approximately $39.5 million in cash related to the purchase price of PHSI, net of an estimated adjustment to reduce the purchase price of $1.2 million, and approximately $17.5 million of cash accounted for as a post-combination payoff of factored contract liabilities accounted for as a secured borrowing. The factored contract liabilities were adjusted to fair value as of the acquisition date based on the present value of the factored contract liabilities using a discount rate of approximately 7% and any penalties associated with the payoff.
Commencing on December 18, 2018, the Company initiated a restructuring of the PHSI organization which included the reduction of headcount for PHSI executive management and other employee positions determined to be duplicative with those at Quench USA, Inc. Certain of the positions were backfilled with additional positions at Quench USA, Inc. depending on the needs of the business. The restructuring was determined to be a post-combination transaction. As a result of the restructuring, the Company incurred a restructuring-related charge, related to severance, termination benefits and related taxes, of approximately $0.9 million during the fourth quarter of 2018 and expects to incur an additional charge of $0.2 million through the second quarter of 2019. As of December 31, 2018, the Company had accrued approximately $0.8 million within accrued expenses on the consolidated balance sheets which is expected to be paid during 2019. The effects of the restructuring were not included in the unaudited pro forma condensed combined financial information as it was not determined to be factually supported for historical periods.
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 “AUC Purchase Agreement”). The aggregate purchase price was approximately $130.9 million, including $127.0 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 (i) the acquisition of AUC, (ii) the AUC acquisition related financing, (iii) the acquisition of PHSI, and (iv) the post-combination payoff of certain factored contracts accounted for as a secured borrowing; (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 and PHSI acquisitions 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 preliminary 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 September 30, 2018 gives effect to (i) the acquisition of AUC, (ii) the AUC acquisition related financing, (iii) the acquisition of PHSI, and (iv) the post-combination payoff of certain factored contracts accounted for as a secured borrowing as if they had occurred on September 30, 2018. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2017 and nine months ended September 30, 2018 give effect to (i) the acquisition of AUC, (ii) the AUC acquisition related financing, (iii) the acquisition of PHSI, and (iv) the post-combination payoff of certain factored contracts accounted for as a secured borrowing as if they had occurred on January 1, 2017.
|
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 September 30, 2018.
Except as discussed below, the Company has not identified any significant differences in the accounting policies used by the Company, AUC or PHSI 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 and PHSI’s significant accounting policies and, as a result, differences could be identified between the accounting policies of the Company, PHSI 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 nine months ended September 30, 2018 and unaudited pro forma condensed combined balance sheet as of September 30, 2018 include the impact of the New Guidance on the AUC historical financial information. There was no material impact on the PHSI historical financial information and, therefore, no adjustments were made within the pro forma condensed combined financial information for PHSI’s adoption.
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 the New Guidance, 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 the New Guidance 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 the New Guidance, 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 the New Guidance 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 and PHSI 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 previously reported total assets, total liabilities, and shareholders’ equity, or net income (loss) of AUC, PHSI or AquaVenture.
These reclassifications include certain amounts reallocated between financial statement line items, including: (i) the separation of accounts payable and accrued expenses as historically reported by AUC as described in Note 4; (ii) the reclassification of amortization expense for intangible assets to selling, general and administrative expenses from other expense, as historically reported by AUC.
|
3. |
|
Preliminary Purchase Price Allocation |
Pure Health Solutions, Inc.
The cash purchase price, which is subject to final adjustments, for the acquisition of PHSI was approximately $39.5 million, which includes an estimated purchase price adjustment of $1.2 million due from seller.
The following table summarizes the 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 PHSI’s unaudited condensed combined balance sheet as of September 30, 2018 and is for illustrative purposes only (in thousands):
|
|
|
|
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
$ |
507 |
|
Trade receivables |
|
|
1,384 |
|
Inventory |
|
|
2,917 |
|
Prepaid expenses and other current assets |
|
|
565 |
|
Property, plant and equipment |
|
|
5,788 |
|
Other assets |
|
|
52 |
|
Deferred tax asset |
|
|
108 |
|
Intangible assets, net |
|
|
31,550 |
|
Goodwill |
|
|
18,221 |
|
Total assets acquired |
|
|
61,092 |
|
Liabilities assumed: |
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(9,543) |
|
Other long-term liabilities |
|
|
(12,057) |
|
Total liabilities assumed |
|
|
(21,601) |
|
Total purchase price |
|
$ |
39,491 |
|
Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The final valuation of the intangibles identified is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the pro forma preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above . The estimated fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer. The estimated fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues. The estimated fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss.
The estimated weighted average useful life for customer relationships, trade names, and non-compete agreements is 20 years, 12 years, and 5 years, respectively.
Goodwill is composed of the acquired workforce and synergies not valued, and is not deductible for tax purposes.
AUC Acquisition Holdings LLC
The aggregate purchase price, which is subject to final adjustments, for the acquisition of AUC was approximately $130.9 million, including $127.0 million of cash, $2.0 million, or 121,956, of AquaVenture ordinary shares, and $1.9 million contingent consideration. The cash includes an estimated working capital adjustment of $0.4 million due from seller. 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 $2.0 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 $127.0 million of cash purchase price, approximately $110.0 million was funded from the proceeds of the Amended Corporate Credit Agreement while the remaining $17.4 million was funded from existing cash and cash equivalents.
The following table summarizes the 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 September 30, 2018 and is for illustrative purposes only: (in thousands):
|
|
|
|
|
Assets acquired: |
|
|
|
|
Cash and cash equivalents |
|
$ |
628 |
|
Restricted cash |
|
|
100 |
|
Trade receivables |
|
|
2,003 |
|
Current portion of long-term receivables |
|
|
300 |
|
Inventory |
|
|
2,605 |
|
Prepaid expenses and other current assets |
|
|
775 |
|
Property, plant and equipment |
|
|
31,274 |
|
Long-term receivables |
|
|
599 |
|
Other assets |
|
|
1,082 |
|
Intangible assets, net |
|
|
47,310 |
|
Goodwill |
|
|
64,801 |
|
Total assets acquired |
|
|
151,477 |
|
Liabilities assumed: |
|
|
|
|
Accounts payable and accrued liabilities |
|
|
(2,947) |
|
Deferred revenue |
|
|
(1,540) |
|
Other long-term liabilities |
|
|
(1,648) |
|
Deferred tax liability |
|
|
(14,442) |
|
Total liabilities assumed |
|
|
(20,577) |
|
Total purchase price |
|
$ |
130,900 |
|
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 preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above . The estimated fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer. The estimated fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues. The estimated fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss. The estimated fair value of the backlog, which represents revenues and the related profit for contracts executed but not yet completed, was determined using the multi-period excess earnings method.
The estimated weighted average useful life for customer relationships, trade names, non-compete agreements and backlogs is 20 years, 15 years, 4.9 years, and 0.7 years, respectively.
Goodwill is composed of the acquired workforce and synergies not valued, and is not deductible for tax purposes.
|
4. |
|
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
|
(a) |
|
To record the cash portion of the purchase consideration, excluding the estimated working capital adjustment of $441 thousand due from seller, funded from cash and cash equivalents. |
|
(b) |
|
New Guidance adoption adjustments to record additional receivables related to the completion of certain performance obligations. |
|
(c) |
|
New Guidance adoption adjustments for the timing of revenue recognition as it relates to certain installment sales and the related effect on inventory being delivered to the customer. |
|
(d) |
|
New Guidance adoption adjustments to adjust notes receivable, current and long-term portion, related to installation services embedded in a lease contract. |
|
(e) |
|
The net increase to prepaid expenses and other current assets is related to a receivable due from the seller for the estimated working capital adjustment from the acquisition of AUC. |
|
(f) |
|
New Guidance adjustment to adjust the long-term portion of costs incurred in excess of billings related to the timing of revenue recognized on projects. |
|
(g) |
|
To record the estimated fair value of intangible assets of $47.3 million as described in Note 3 net of the $5.3 million write-off of prior acquired intangible assets as reported historically by AUC. The net impact of the adjustment is $42.0 million. |
|
(h) |
|
To record the preliminary estimate of goodwill of $64.8 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 $28.4 million. |
|
(i) |
|
To reclassify accrued expenses to conform with the AquaVenture financial statement presentation. |
|
(j) |
|
The net increase to accrued liabilities of $3.3 million was composed of the following: (i) an increase of $700 thousand to record an accrual for AquaVenture’s estimated acquisition-related costs that are not reflected within the historical financial statements; (ii) an increase of $470 thousand to record an accrual for estimated third party costs incurred by AquaVenture that are not reflected within the historical financial statements for the Amended Corporate Credit Agreement, of which approximately $260 thousand were capitalized as deferred financing fees and $210 thousand that were not able to be classified as deferred financing fees and, instead, were expensed as incurred; (iii) an increase of $550 thousand to reclassify accrued expenses to accrued liabilities from accounts payable to conform with AquaVenture financial statement presentation; (iv) a reduction of $150 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; (v) a reduction of $180 thousand to reflect an adjustment for the New Guidance adoption to billings in excess of costs for certain customer contracts and (vi) to record $1.9 million of contingent consideration for the acquisition of AUC. |
|
(k) |
|
To reflect the repayment of the current portion of long-term debt of AUC in connection with the acquisition. |
|
(l) |
|
New Guidance adoption adjustments to record deferred revenue related to the timing of revenue recognition for certain contracts. |
|
(m) |
|
The net increase to long-term debt of $75.2 million was composed of the following: (i) a decrease $34.6 million related to the repayment of long-term debt of AUC in connection with the acquisition; and (ii) an increase of $109.7 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 $260 thousand used to finance part of the acquisition of AUC as discussed in Note 1. |
|
(n) |
|
To record an increase in the deferred tax liability related to the estimated fair value of identified intangibles determined in purchase accounting. |
|
(o) |
|
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. |
|
(p) |
|
The increase to the accumulated deficit of $36.9 million was composed of the following: (i) an increase of $36.0 million related to the elimination of the historical members’ equity of AUC; (ii) an increase of $700 thousand related to AquaVenture’s estimated acquisition-related costs that are not reflected within the historical financial statements; and (iii) an increase of $210 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. |
|
(q) |
|
The net decrease in cash of $57.5 million is composed of the following (i) a decrease of $40.7 million to record the cash portion of the purchase consideration, excluding the estimated purchase price adjustment of $1.2 million due from seller, which was funded from cash and cash equivalents and (ii) the repayment of the factored contract liability of $16.8 million at September 30, 2018, which included an unadjusted discounted balance of $13.5 million and a fair value adjustment or prepayment penalty of $3.2 million. |
|
(r) |
|
To record an increase in inventory related to an estimated fair value adjustment as a result of purchase accounting. |
|
(s) |
|
The net increase to prepaid expenses and other current assets of $400 thousand was composed of the following: (i) eliminate the current portion of deferred lease costs of $800 thousand as it is not deemed an asset in purchase accounting and (ii) record a receivable of $1.2 million thousand due from the seller related to the estimated purchase price adjustment. |
|
(t) |
|
To record an increase in property, plant and equipment, net, related to an estimated fair value adjustment as a result of purchase accounting. |
|
(u) |
|
To eliminate the long-term portion of deferred lease costs as it is not deemed an asset in purchase accounting. |
|
(v) |
|
To record changes to deferred taxes related to the estimated fair value of identified intangibles determined in purchase accounting. |
|
(w) |
|
To record the estimated fair value of intangible assets of $31.6 million as described in Note 3 net of the $3.9 million write-off of prior acquired intangible assets as reported historically by PHSI. The net impact of the adjustment is $27.7 million. |
|
(x) |
|
To record the preliminary estimate of goodwill as a result of the acquisition of PHSI. |
|
(y) |
|
The net decrease to accrued liabilities of $1.6 million was composed of the following: (i) the repayment of the current portion of the factored contract liability of $4.3 million at September 30, 2018; (ii) an increase of $810 thousand related to the recording of an estimated tax payable recorded in purchase accounting; and (iii) an increase of $1.8 million to record an accrual for AquaVenture’s estimated acquisition-related costs that are not reflected within the historical financial statements. |
|
(z) |
|
To reflect the repayment of the long-term debt of PHSI in connection with the acquisition of PHSI. |
|
(aa) |
|
The net decrease to other long-term liabilities of $20.8 million was composed of the following: (i) the repayment of the related party liabilities of $11.5 million in connection with the acquisition of PHSI and (ii) the repayment of the long-term portion of the factored contract liability of $9.3 million at September 30, 2018. |
|
(bb) |
|
To reflect the elimination of the historical additional paid-in-capital of PHSI. |
|
(cc) |
|
The reduction to the accumulated deficit of $66.0 million was composed of the following: (i) a reduction of $67.8 million related to the elimination of the historical accumulated deficit of PHSI and (ii) an increase of $1.8 million related to AquaVenture’s estimated acquisition-related costs that are not reflected within the historical financial statements. |
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:
|
(dd) |
|
The net increase to selling, general and administrative expenses of $2.4 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 $3.6 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. |
|
(ee) |
|
The increase to interest expense, net, of $5.5 million was composed of the following: (i) a reduction of $2.7 million of 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 $140 thousand change to pre-tax loss. |
|
(ff) |
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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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(gg) |
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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. |
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(hh) |
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The increase of rental cost of revenues was due to the increase of $20 thousand to depreciation expense for the fair value adjustments made to certain property, plant and equipment in PHSI purchase accounting. |
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(ii) |
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The net increase to selling, general and administrative expenses of $660 thousand was composed of the following: (i) a reduction of $1.2 million of PHSI’s historical amortization expense related to intangible assets; (ii) an increase of $2.2 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; and (iii) a decrease of $270 thousand related to PHSI’s historical amortization of deferred lease costs for lease contracts entered into prior to January 1, 2017 as the balance was not deemed an asset in purchase accounting and, therefore, no longer subject to amortization. |
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(jj) |
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The decrease to interest expense, net, of $2.7 million composed of the following: (i) a reduction of $2.0 million of PHSI’s historical interest expense as the long-term debt of PHSI was repaid concurrent with the closing of the PHSI acquisition and (ii) a reduction of $730 thousand of PHSI’s historical interest expense as a result of the post-combination payoff of the factored contract liabilities which recorded at the present value using a discount rate of approximately 7% and accreted to interest expense over the term of the liability. |
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(kk) |
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To record the tax effects of the unaudited pro forma adjustments calculated using the statutory tax rate of PHSI of 37.8% for the year ended December 31, 2017. |
The following pro forma adjustments are related to the unaudited pro forma condensed combined statement of operations for the nine months ended September 30, 2018:
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(ll) |
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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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(mm) |
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The net decrease to selling, general and administrative expenses of $150 thousand was composed of the following: (i) a reduction of acquisition-related expenditures incurred and presented in the historical financial statements of AquaVenture and AUC of $630 thousand and $140 thousand, respectively; (ii) a reduction of $2.0 million of AUC’s historical amortization expense related to intangible assets; and (iii) an increase of $2.6 |
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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(nn) |
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The increase to interest expense, net, of $5.3 million was composed of the following: (i) a reduction of $1.3 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 $6.6 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 8.0% 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 $100 thousand change to pre-tax loss. |
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(oo) |
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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 nine months ended September 30, 2018. |
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(pp) |
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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. |
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(qq) |
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The increase to rental cost of revenues was due to an increase of $10 thousand to depreciation expense for the fair value adjustments made to certain property, plant and equipment in PHSI purchase accounting. |
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(rr) |
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The net increase to selling, general and administrative expenses of $500 thousand was composed of the following: (i) a reduction of $940 thousand of PHSI’s historical amortization expense related to intangible assets; (ii) an increase of $1.6 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; and (iii) a decrease of $200 thousand related to PHSI’s historical amortization of deferred lease costs for lease contracts entered into prior to January 1, 2017 as the balance was not deemed an asset in purchase accounting and, therefore, no longer subject to amortization. |
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(ss) |
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The decrease to interest expense, net, of $2.4 million was composed of the following: (i) a reduction of $1.8 million of PHSI’s historical interest expense as the long-term debt of PHSI was repaid concurrent with the closing of the PHSI acquisition and (ii) a reduction of $630 thousand of PHSI’s historical interest expense as a result of the post-combination payoff of the factored contract liabilities which recorded at the present value using a discount rate of approximately 7% and accreted to interest expense over the term of the liability. |
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(tt) |
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To record the tax effects of the unaudited pro forma adjustments calculated using the statutory tax rate of PHSI of 25.5% for the nine months ended September 30, 2018. |