UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 8-K


CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934


Date of Report (Date of earliest event reported):      April 26, 2019

AquaVenture Holdings Limited
(Exact name of registrant as specified in Charter)

 

 

 

 

British Virgin Islands

001-37903

98-1312953

(State or other jurisdiction of

(Commission

(IRS Employer

incorporation or organization)

File No.)

Identification No.)

 

 

 

 

c/o Conyers Corporate Services (BVI) Limited

Commerce House, Wickhams Cay 1

P.O. Box 3140 Road Town

British Virgin Islands VG1110

(Address of principal executive office)

 

 

 

 

 

(813) 855-8636

(Registrant’s telephone number, including area code)

 

 


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.    ☒

 

 


 

Item 8.01 Other Information.

 

On November 1, 2018, AquaVenture Holdings, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited (the “Company”), acquired all of the issued and outstanding membership interests of AUC Acquisition Holdings, LLC (“AUC”) from AUC’s members pursuant to a membership interest purchase agreement (“AUC Acquisition”).

 

On December 18, 2018, Quench USA, Inc., a wholly-owned subsidiary of 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”).

 

In connection with the Company’s Registration Statement on Form S-3, as filed on March 11, 2019 (File No. 333-230195)(the “Registration Statement”), this Current Report on Form 8-K is being filed to provide certain unaudited historical interim financial statements for AUC and certain unaudited pro forma financial information reflecting the AUC Acquisition and PHSI Acquisition.

 

 

Item 9.01 Financial Statements and Exhibits.

 

(a) Financial Statements.

 

The unaudited condensed consolidated interim financial statements of AUC 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 99.1 and incorporated herein by reference.  

 

(b) Pro Forma Financial Information.

 

The unaudited pro forma condensed combined financial information of the Company and its subsidiaries for the year ended December 31, 2018, including the notes related thereto, are filed as Exhibit 99.2 and incorporated herein by reference.

 

(d) Exhibits

 

The following materials are attached as exhibits to this Current Report on Form 8-K:

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

 

 

 

 

 

Date: April 26, 2019

 

AquaVenture Holdings Limited

 

 

 

 

 

 

 

 

By:

 

/s/ Lee S. Muller

 

 

 

 

Lee S. Muller

 

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

2

 


Exhibit 99.1

 

AUC Acquisition Holdings, LLC and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets

 

 

 

 

 

 

 

 

September 30 and December 31,

    

2018

    

2017

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

Cash and cash equivalents

 

$

628,115

 

$

383,587 

Restricted cash held in escrow

 

 

100,000 

 

 

100,000 

Rentals and contracts receivable

 

 

2,093,526 

 

 

1,963,645 

Current portion of financing receivables

 

 

767,361 

 

 

1,059,593 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

955,796 

 

 

1,472,273 

Inventory

 

 

962,081 

 

 

449,835 

Prepaid federal income tax

 

 

397,692 

 

 

397,692 

Prepaid and other assets

 

 

229,281 

 

 

194,154 

Due from prior owner

 

 

147,695 

 

 

147,695 

 

 

 

 

 

 

 

Total current assets

 

 

6,281,547 

 

 

6,168,474 

 

 

 

 

 

 

 

Property and equipment, net

 

 

31,273,674 

 

 

26,327,381 

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

 

Financing receivables, net of current portion

 

 

1,554,246

 

 

2,011,358 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

2,588,978

 

 

1,440,477 

Intangible lease contracts, net of accumulated amortization of $3,298,607 and $2,462,341, respectively

 

 

5,621,572 

 

 

6,457,838 

Service backlog, net of accumulated amortization of $1,292,475 and $1,179,620, respectively

 

 

 

 

112,855 

Goodwill

 

 

36,426,362 

 

 

36,426,362 

 

 

 

 

 

 

 

Total other assets

 

 

46,191,158 

 

 

46,448,890 

 

 

 

 

 

 

 

Total assets

 

$

83,746,379 

 

$

78,944,745 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

-  1  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets (Continued)

 

 

 

 

 

 

 

 

September 30 and December 31,

    

2018

    

2017

 

 

 

 

 

Liabilities and members' equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,707,835 

 

$

2,175,686 

Retainage payable

 

 

80,509 

 

 

27,181 

Advance rent payments

 

 

849,735 

 

 

479,257 

Income tax payable

 

 

9,751 

 

 

42,375 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

370,954 

 

 

378,652 

Acquisition escrow payable

 

 

100,000 

 

 

100,000 

Other note payable

 

 

 

 

62,856 

Current maturities of notes payable

 

 

4,072,563 

 

 

2,461,263 

 

 

 

 

 

 

 

Total current liabilities

 

 

8,191,347 

 

 

5,727,270 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

Notes payable, net of current maturities

 

 

34,457,457 

 

 

19,542,582 

Subordinated debt

 

 

 

 

15,000,000 

Lease deposits

 

 

1,647,609

 

 

1,382,665 

Deferred income tax liability

 

 

3,143,593 

 

 

2,504,731 

 

 

 

 

 

 

 

Total long-term liabilities

 

 

39,248,659 

 

 

38,429,978 

 

 

 

 

 

 

 

Total liabilities

 

 

47,440,006 

 

 

44,157,248 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Members' equity

 

 

36,306,373

 

 

34,787,497 

 

 

 

 

 

 

 

Total liabilities and members' equity

 

$

83,746,379 

 

$

78,944,745 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

-  2  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Unaudited Condensed Consolidated Statements of Operations

 

 

 

 

 

 

 

 

For the nine-month periods ended September 30,

    

2018

    

2017

 

 

 

 

 

Revenue

 

 

 

 

 

 

Services and contract revenue

 

$

6,961,773 

 

$

7,327,801

Rental revenue

 

 

8,031,650 

 

 

6,763,009

Interest on financed projects

 

 

143,219 

 

 

174,908

 

 

 

 

 

 

 

Total revenue

 

 

15,136,642

 

 

14,265,718

 

 

 

 

 

 

 

Cost of revenue

 

 

 

 

 

 

Services and contract revenue

 

 

5,701,557

 

 

5,083,235

Rental revenue

 

 

2,839,698 

 

 

2,560,816

 

 

 

 

 

 

 

Total cost of revenue

 

 

8,541,255 

 

 

7,644,051

 

 

 

 

 

 

 

Gross profit

 

 

6,595,387 

 

 

6,621,667

 

 

 

 

 

 

 

General and administrative expenses

 

 

(1,793,441)

 

 

(1,646,611)

Gain on sale of rental plant equipment

 

 

308,207 

 

 

359,688 

 

 

 

 

 

 

 

Income from operations

 

 

5,110,153 

 

 

5,334,745 

 

 

 

 

 

 

 

Other expenses

 

 

 

 

 

 

Amortization

 

 

(949,122)

 

 

(836,860)

Interest expense

 

 

(1,957,157)

 

 

(2,052,216)

 

 

 

 

 

 

 

Total other expenses

 

 

(2,906,279)

 

 

(2,889,076)

 

 

 

 

 

 

 

Income before income tax benefit

 

 

2,203,874

 

 

2,445,669 

 

 

 

 

 

 

 

Income tax expense

 

 

(684,998)

 

 

(930,235)

 

 

 

 

 

 

 

Net income

 

$

1,518,876 

 

$

1,515,434 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

-  3  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Unaudited Condensed Consolidated Statements of Changes in Members’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Common

    

Preferred

    

Retained

    

 

For the nine-month period ended September 30, 2018

 

Units

 

Units

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

Balance, January 1, 2018

 

$

3,098 

 

$

30,996,902 

 

$

3,787,497 

 

$

34,787,497 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

 

1,518,876 

 

 

1,518,876 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

$

3,098 

 

$

30,996,902 

 

$

5,306,373

 

$

36,306,373 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Common

    

Preferred

    

Retained

    

 

For the nine-month period ended September 30, 2017

 

Units

 

Units

 

Earnings

 

Total

 

 

 

 

 

 

 

 

 

Balance, January 1, 2017

 

$

3,098 

 

$

30,996,902 

 

$

400, 635 

 

$

31,400,635 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

-

 

 

 

 

1,515,434

 

 

1,515,434 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

$

3,098 

 

$

30,996,902 

 

$

1,916,069

 

$

32,916,069 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

-  4  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

 

For the nine-month periods ended September 30,

    

2018 

    

2017 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

Net income

 

$

1,518,876 

 

$

1,515,434 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

 

Deferred tax liability

 

 

638,862 

 

 

860,576 

Depreciation

 

 

2,515,835 

 

 

2,296,828 

Amortization

 

 

949,122

 

 

836,860 

Deferred loan costs amortized to interest expense

 

 

194,087 

 

 

47,351 

Gain on sale of rental plant equipment

 

 

(308,207)

 

 

(359,688)

Construction revenues funded by financing receivables

 

 

(320,488)

 

 

(248,807)

Change in operating assets and liabilities

 

 

 

 

 

 

Rentals and contracts receivable

 

 

(129,881) 

 

 

772,023 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

 

(632,024)

 

 

(1,907,715)

Inventory

 

 

(4,977) 

 

 

4,297

Prepaid and other assets

 

 

(35,128) 

 

 

(2,649)

Accounts payable and accrued expenses

 

 

532,149

 

 

433,424

Retainage payable

 

 

53,328 

 

 

(37,618)

Advance rent payments

 

 

370,478 

 

 

99,271 

Income tax payable

 

 

(32,625) 

 

 

(11,000)

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

(7,698)

 

 

(93,019)

Lease deposits

 

 

264,945 

 

 

226,353 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

 

5,566,654 

 

 

4,431,921 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

Purchases of property and equipment

 

 

(8,638,443)

 

 

(4,234,815)

Proceeds from the sale of property and equipment

 

 

1,093,666 

 

 

621,702 

Payments received on financing receivables

 

 

1,069,831 

 

 

666,856 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(6,474,946)

 

 

(2,946,257)

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

-  5  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows (Continued)

 

 

 

 

 

 

 

 

For the nine-month periods ended September 30,

  

2018 

    

2017 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

Repayments on subordinated debt, net

   

$

(15,000,000)

 

$

(293,643)

Proceeds from borrowings on notes payable to bank

 

 

18,600,000 

 

 

443,011 

Repayments on notes payable to bank

 

 

(2,435,048)

 

 

(1,650,000)

Payment of deferred loan costs

 

 

(12,132)

 

 

(5,188)

 

 

 

 

 

 

 

Net cash provided by (used) in financing activities

 

 

1,152,820 

 

 

(1,505,820)

 

 

 

 

 

 

 

Net change in cash and cash equivalents and restricted cash

 

 

244,528

 

 

(20,156) 

 

 

 

 

 

 

 

Cash and cash equivalents and restricted cash ,   beginning of period

 

 

483,587 

 

 

880,449 

 

 

 

 

 

 

 

Cash and cash equivalents and restricted cash, end of period

 

$

728,115 

 

$

860,293 

Components of total cash for the periods presented in the unaudited condensed consolidated statement of cash flows are as follows:

Cash and cash equivalents

  

$

628,115 

    

$

510,293 

Restricted cash held in escrow

 

 

100,000 

 

 

350,000 

 

 

$

728,115 

 

$

860,293 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,812,859 

 

$

2,012,191 

 

 

 

 

 

 

 

Cash paid for income taxes

 

$

94,624

 

$

64,122

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of noncash operating, investing and financing activities

 

 

 

 

 

 

 

 

 

 

 

 

 

Property and equipment financed with debt

 

$

116,412 

 

$

555,989 

 

 

 

 

 

 

 

Net transfers between inventory and property and equipment

 

$

(507,269)

 

$

240,020 

 

 

 

 

 

 

 

Transfer of costs and estimated earnings in excess of billings on uncompleted contracts to financing receivables

 

$

 

$

525,468

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

-  6  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

NOTE 1: ORGANIZATION

 

AUC Acquisition Holdings, LLC (individually, “AUC Acquisition”, and collectively with its subsidiaries, the “Company”) was incorporated in the state of Delaware on September 14, 2015.  AUC Acquisition wholly owns AUC Holdings Corp. (“AUC Holdings”).  AUC Holdings wholly owns (i) the limited partnership interests in AUC Group, L.P. (“AUC LP”), a Texas limited partnership, (ii) AUC Management, L.L.C. (“AUC LLC”), a Texas limited liability company and the general partner of AUC LP, and (iii) Carl R. Baker, Inc., dba Gaylord Investment Company and Gaylord Environmental (“Gaylord”), a Texas corporation.  The Company designs, fabricates and installs wastewater treatment plants which may be sold to customers for cash or pursuant to financing arrangements. The Company also leases owned plants to customers for a contractual term and provides contract services for general site development and installation of the wastewater treatment plants.  The Company’s customers are municipal utility districts, government units or developers.

 

The Company is managed by a Board of Managers selected in accordance with the AUC Acquisition LLC Agreement (the “LLC Agreement”) and members are generally unable to bind the Company.  Except as may be required by law or expressly provided in the LLC Agreement, no member shall be personally liable for the liabilities or debts of the Company or be required to lend or contribute funds to the Company.  The Company shall continue in existence in perpetuity.

 

NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

This summary of significant accounting policies of the Company is presented to assist in understanding the unaudited condensed consolidated financial statements.  The unaudited condensed consolidated financial statements and notes are the representations of management, who is responsible for their integrity and objectivity.  The accounting policies reflect industry practices, which conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the unaudited condensed consolidated financial statements.

 

Basis of Accounting and Presentation

 

The unaudited condensed consolidated financial statements include the accounts of AUC Holdings and its wholly-owned subsidiaries.  All significant intercompany accounts and transactions have been eliminated in consolidation.

 

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

 

In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of September 30, 2018, the unaudited condensed consolidated statements of operations for the nine-months ended September 30, 2018 and 2017,  the unaudited

-  7  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

condensed consolidated statements of changes in members’ equity for the nine-months ended September 30, 2018 and 2017 and the unaudited condensed consolidated statements of cash flows for the nine-months ended September 30, 2018 and 2017. The unaudited condensed consolidated balance sheet as of December 31, 2017 was based on the audited consolidated balance sheet as of December 31, 2017.

 

Cash and Cash Equivalents

 

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash on hand, cash in banks and all highly liquid investments with original maturities of three months or less at time of purchase. Restricted cash consists of escrow amounts required by a contractual agreement set aside for the payment of amounts due to prior owners.

 

Revenue and Cost Recognition

 

The Company recognizes services and contract revenue using the percentage of completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts.  Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and repairs. General and administrative costs are charged to expense as incurred, including advertising costs.  Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Revisions in cost and revenue estimates are reflected in the accounting period in which facts that require the revision become known.  If estimated total cost on a contract exceeds estimated total revenue on that contract, the Company recognizes the loss currently.

 

The length of the Company’s contracts varies but are typically less than one year.  Therefore, assets and liabilities are generally classified as current because the contract related items in the unaudited condensed consolidated balance sheet have realization and liquidation periods not extending beyond one year, except as described in Notes 4 and 5.  The asset, “Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts,” represents revenue recognized in excess of amounts billed. The liability, “Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts” represents billings in excess of revenue recognized.

 

The Company recognizes rental revenue from leasing activities on a straight-line basis over the respective lease terms.  Rents received in advance of the lease period are recorded as advance rent payments.  Deposits received under leasing arrangements are reflected as a lease deposit liability in the accompanying unaudited condensed consolidated financial statements.

 

In certain circumstances, lease payments due from customers include components for the financing of Company services and the lease rental of the plant equipment.  In all such cases, the services are completed prior to the rent commencement of the lease.  Revenue from the services is recognized following the percentage of completion method or upon completion if minimal time is required to complete the project. The revenue from the two components is allocated between the service component and the lease rental based on management’s estimate of the relative values of such activities at the inception of the contract.  Cancellation or termination provisions are delineated in normal contract provisions and do not differ from those where services and leasing activities are separately contracted.

 

-  8  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Interest from financing receivables is recognized by the interest method using a constant periodic rate over the financing period.  Accrual of interest income is suspended if credit quality indicators suggest full collection of principal and interest is doubtful.

 

Allowance for Doubtful Accounts

 

The Company makes judgments as to its ability to collect outstanding receivables and provides an allowance when collection becomes doubtful.  Allowances are made based upon a specific review of all outstanding invoices.  Any receivables determined to be uncollectible are charged against the allowance. As of September 30, 2018 and December 31, 2017, no allowance was considered necessary for rentals, contracts and financing receivables.  During the nine-month periods ended September 30, 2018 and 2017, the Company incurred no bad debt expense.

 

Credit Quality of Financing Receivables

 

Financing receivables are principally with municipal utility districts and are current with respect to payments.  Financing receivables are considered past due if payment is not made within 30 days of the date due.  Receivables are considered nonperforming and are moved to nonaccrual status once it is likely that the Company will not collect all of the principal and interest contractually required by the financing agreement.  None of the financing receivables are on nonaccrual status at September 30, 2018 and December 31, 2017.

 

The Company monitors the credit quality of its financing receivables by monitoring the payment history of each debtor or through direct communication with the respective municipal utility district’s attorney regarding when payment will be expected.

 

Inventory

 

Inventory consists principally of equipment parts used to fabricate wastewater treatment plants.  Inventory is stated at the lower of actual cost based on the specific identification method or net realizable value.

 

Property and Equipment

 

Property and equipment are stated at acquisition cost. The Company provides for depreciation utilizing the straight-line method over estimated useful lives ranging from three to ten years. Expenditures for additions, major renewals and betterments are capitalized, and expenditures for maintenance and repairs are charged against income as incurred.  When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in income from operations.

 

Property and equipment are reviewed for impairment whenever events or circumstances indicate the recorded cost may not be recoverable. Management believes no impairment has occurred with respect to property and equipment at September 30, 2018 and December 31, 2017.

 

Goodwill and Intangible Assets

 

Goodwill represents the excess of the fair value of consideration transferred to acquire an entity over the fair value of the identifiable net assets acquired. Goodwill has an indefinite life and is not amortized; however, goodwill is 

-  9  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

subject to an impairment assessment at least annually. The Company has assessed various qualitative factors to determine whether it was necessary to perform a goodwill impairment test. If, from an evaluation of these qualitative factors, it was determined that it was more likely than not that the fair value of the reporting unit was less than the carrying value of goodwill, an impairment test would be performed. Based on the results of the assessment, the Company concluded that the more likely than not criteria was not met and no impairment testing was necessary for the nine-month periods ended September 30, 2018 and 2017.

 

The Company’s identifiable intangible assets consist of lease contracts and service backlog. Identifiable intangible assets with defined lives are amortized over their useful lives, with no residual value. The Company has no identifiable intangible assets with indefinite lives.

 

Management of the Company reviews intangible assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable based on the undiscounted future cash flows of the asset. There was no impairment for the nine-month periods ended September 30, 2018 and 2017.

 

Deferred Loan Costs

 

Deferred loan costs and related amortization expense are included in the unaudited condensed consolidated statements of operations. The unamortized costs are a direct deduction from the face amount of the debt. Deferred loan cost amortization is included with interest expense in the unaudited condensed consolidated statements of operations.

 

Deferred loan costs are amortized to interest expense using the effective interest method. Amortization of deferred financing costs totaled $194,087 and $47,351 during the nine-month periods ended September 30, 2018 and 2017, respectively.

 

Fair Value Considerations

 

The Company uses fair value to measure financial assets and liabilities and nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the unaudited condensed consolidated financial statements on a recurring basis (at least annually).  Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.  The fair value hierarchy established and prioritized fair value measurements into three levels based on the nature of the inputs.  The hierarchy gives the highest priority to inputs based on market data from independent sources (observable inputs-Level 1) and the lowest priority to a reporting entity’s internal assumptions based upon the best information available when external market data is limited or unavailable (unobservable inputs-Level 3).

 

The fair value option allows entities to choose, at specified election dates, to measure eligible financial assets and financial liabilities at fair value that are not otherwise required to be measured at fair value.  If an entity elects the fair value option for an eligible item, changes in that item’s fair value in subsequent reporting periods must be recognized in current earnings.  The Company did not elect the fair value option for the measurement of any eligible assets or liabilities.

 

-  10  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

The Company’s financial instruments (primarily cash and cash equivalents, receivables, payables and debt) are carried in the accompanying unaudited condensed consolidated balance sheets at amounts which reasonably approximate fair value.

 

Income Taxes

 

AUC Acquisition is a limited liability company recognized as a partnership for income tax purposes. Accordingly, federal income taxes on taxable income of AUC Acquisition is payable by the members individually and no provision for federal income taxes is included in the accompanying unaudited condensed consolidated financial statements.

 

AUC Holdings, AUC LP and Gaylord are considered “C” corporations and use the liability method of accounting for income taxes.  Deferred income taxes are recognized based on the differences between the financial statement and income tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income tax represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

 

AUC Holdings, AUC LP and Gaylord are subject to Texas franchise tax, commonly referred to as the Texas margin tax, for the nine-month periods ended September 30, 2018 and 2017. Accordingly, a provision and liability for state income tax has been included in the accompanying unaudited condensed consolidated financial statements.

 

Amounts due from prior owner as of September 30, 2018 and December 31, 2017 represent the estimated amount of federal and state income taxes payable by AUC Holdings for periods prior to its acquisition by AUC Acquisition on October 16, 2015.

 

The Company applies a more-likely-than-not recognition threshold for all tax uncertainties.  Accordingly, only those tax benefits that have a greater than fifty percent likelihood of being sustained upon examination by the taxing authorities are recognized.  The Company‘s management has reviewed the Company’s tax positions and determined there were no significant outstanding or retroactive tax positions with less than a 50% likelihood of being sustained upon examination by the taxing authorities.

 

Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its unaudited condensed consolidated financial statements. The Company’s evaluation was performed with respect to itself and the predecessor tax activities of AUC Holdings, as applicable, for the tax periods ended December 31, 2014 through September 30, 2018 for U.S. Federal and applicable states, the tax periods which principally remain subject to examination by major tax jurisdictions as of September 30, 2018.  Any liability associated with tax uncertainties of AUC Holdings prior to the acquisition by AUC Acquisition are subject to indemnification by the prior owners.

 

Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities

-  11  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

 

Recent Financial Accounting Pronouncements

 

The Financial Accounting Standards Board (FASB) issued ASU 2016‐02, Leases (Topic 842), the new standard on lease accounting. Under the new ASU, lessees will recognize lease assets and liabilities on their balance sheet for all leases with terms of more than 12 months. The new lessee accounting model retains two types of leases and is consistent with the lessee accounting model under existing accounting principles generally accepted in the United States of America. One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for today. The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with today’s operating leases. Lessor accounting under the new standard is fundamentally consistent with existing U.S. GAAP.

 

Lessees and lessors would be required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities.

 

For non‐public entities, the final leases standard will be effective for fiscal years beginning after December 15, 2019, and interim periods thereafter. Early application is permitted. Management has not early adopted, nor evaluated the impact on future accounting periods.

 

FASB issued ASU 2014‐09, Revenue from Contracts with Customer (Topic 606). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued updated guidance with ASU 2015‐14 and deferred the effective date of ASU 2014‐09 by one year. The guidance in ASU 2014‐09 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods.

 

In March 2016, the FASB issued an ASU that further clarifies guidance under ASU 2014‐09 with respect to principal versus agent considerations in revenue from contracts with customers. In the second quarter of 2016, the FASB issued two ASUs that provide additional guidance when identifying performance obligations and licenses as well as allowing for certain narrow scope improvements and practical expedients. In May 2017, the FASB issued an ASU that provides guidance on the identification of the customer in a service concession arrangement. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective). 

 

The impacts of the adoption on the Company’s primary sources of revenue and related costs are as follows:

 

Services and contract revenue. S ervices and contract revenue includes services related to the construction of wastewater treatment plants, which includes both equipment sales and installation services, and installation services related to the leasing of modular wastewater treatment plants. For the construction of wastewater treatment plants, the Company has historically accounted for these contracts on a percentage of completion basis as services are performed. Revenue recognition begins as costs are incurred on the construction of the wastewater treatment plant,

-  12  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

which is typically prior to the delivery of the equipment to the customer site. Under ASC 606, the Company determined that the equipment sales and installation services are considered a single performance obligation as the installation services are not considered distinct in the context of the agreement and are integral to the functionality of the equipment. Revenues for the construction of wastewater treatment plants is recognized as revenue as the construction is performed, using the input method, which typically begins once the equipment is delivered to the customer site, which is the point at which control of the wastewater treatment plant construction has been transferred to the customer.  As a result, the timing of revenue recognition under ASC 606 will commence at a later date than under the previous revenue recognition standard.

 

Installation services related to the leasing of modular wastewater treatment plants can be both embedded within a lease agreement or explicit in a separate contract with a third party. For contracts where the installation services are embedded within a lease agreement, the Company has historically allocated the revenue under the contract based on the relative fair value of the installation services and lease of equipment. The Company determined the installation services were a non-lease component of the contract with revenues being recognized on a percentage of completion basis as services are performed. Long-term receivables, which were established for the revenue recognized for the non-lease component, were amortized over the lease term as the cash from the customer was received and allocated. Revenues allocated to the lease component were recognized over the lease term. Under ASC 606, the Company determined the installation services embedded within a lease agreement, which are performed prior to lease commencement, do not meet the definition of a separate performance obligation as the services are not capable of being distinct within the context of the agreement. As a result, the Company will account for the installation services as a component of the lease and revenues for the entire contract, including both the installation and lease of equipment, will be recognized on a straight-line basis over the lease term.

 

Contract Costs. Historically, AUC has not recognized initial direct costs for contracts. Upon the adoption of ASC 606 and the conclusions reached with respect to installation services embedded within a lease agreement, the costs related to the installation services were determined to be an initial direct cost of the contract and, as a result, should be deferred and amortized over the initial term of the lease. The initial direct costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to install the related wastewater treatment equipment.

 

NOTE 3:  RENTALS AND CONTRACTS RECEIVABLE

 

Rentals and contracts receivable consisted of the following:

 

 

 

 

 

 

 

 

September 30 and December 31,

    

2018

    

2017

Rentals receivable

 

$

67,389 

 

$

283,274 

Billed:

 

 

 

 

 

 

Contracts receivable

 

 

1,560,793 

 

 

1,187,318 

Retainage receivable

 

 

465,344 

 

 

493,053 

 

 

 

 

 

 

 

 

 

$

2,093,526 

 

$

1,963,645 

 

-  13  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Future minimum rental income to be received under non-cancellable operating leases are as follows:

 

 

 

 

 

Periods ending December 31,

    

 

2018

 

$

1,821,729 

2019

 

 

6,365,871 

2020

 

 

5,293,696 

2021

 

 

3,887,236 

2022

 

 

2,036,516 

Thereafter

 

 

959,352 

 

 

 

 

 

 

$

20,364,400 

 

Future minimum rental and contracts receivable include projects where an expected commencement date can be estimated, but exclude those with a currently indeterminate commencement date.  Substantially all leases have automatic renewal provisions subject to lessee cancellation prior to the end of the current lease term.

 

Credit risk associated with outstanding receivables is measured on an individual contract basis.  To reduce the potential for risk concentration, the Company, to the extent possible, ascertains that funds have been escrowed and are available for payment before entering into an agreement.  In the event of nonpayment or dispute, the Company has contractual rights and remedies available to collect amounts due.  Furthermore, a mechanics lien can be filed against the property in most cases on a basis consistent with industry practice and state law.

 

NOTE 4:  FINANCING RECEIVABLES

 

The Company finances the sale of wastewater treatment facilities to various customers and, in certain situations, installation fees, under agreements with monthly payments at an implicit interest rate due to the Company. The financing receivables have varying effective interest rates ranging from 6.5% to 10% and terms ranging from four to five years. In the event of nonperformance, the Company has the right to remove and retain ownership of the wastewater treatment facilities.

 

NOTE 5: UNCOMPLETED CONTRACTS

 

Information on uncompleted contracts is summarized as follows:

 

 

 

 

 

 

 

 

September 30 and December 31,

    

2018 

    

2017 

Costs incurred on uncompleted contracts

 

$

5,895,415 

 

$

5,208,340 

Estimated earnings

 

 

2,575,488 

 

 

1,949,715 

 

 

 

8,470,903

 

 

7,158,055 

Less:  billings to date

 

 

5,297,083 

 

 

4,623,957 

 

 

 

 

 

 

 

 

 

$

3,173,820 

 

$

2,534,098 

 

-  14  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Uncompleted contracts are included in the accompanying unaudited condensed consolidated balance sheets as follows:

 

 

 

 

 

 

 

 

September 30 and December 31,

    

2018 

    

2017 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

$

3,544,774 

 

$

2,912,750 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

 

(370,954)

 

 

(378,652)

 

 

 

 

 

 

 

 

 

$

3,173,820

 

$

2,534,098 

 

Certain uncompleted contracts are expected to be realized through long term financing receivables or otherwise billed and collected after one year.  Cost and estimated earning in excess of billings classified as a long-term asset was $2,588,978 and $1,440,477 as of September 30, 2018 and December 31, 2017, respectively.

 

 

 

NOTE 6: DEBT

 

Bank Loan Agreement

 

AUC Holdings has various loan agreements with a financial institution (the “Loan Agreement”) that provide for a $22 million term loan, a $5 million guidance line of credit and a $1 million revolving line of credit as of December 31, 2017.  As a result of an amendment in November 2017, borrowings under the initial guidance line of credit ceased and were converted to a term note (the “Guidance Term Note”) and a new $5 million guidance line of credit was provided.

 

The $22 million term loan is repayable in monthly installments of principal of $183,333 plus interest with the balance due at final maturity in November 2021.  Amounts borrowed under this agreement bear interest at a rate equal to the 1-month LIBOR plus 2.50% to 2.75%, depending upon the company’s leverage ratio, as defined by the Loan Agreement (4.58% as of September 30, 2018).  The balance due under the term loan totaled $17,966,666 and $19,616,667 as of September 30, 2018 and December 31, 2017, respectively.

 

The Guidance Term Note is repayable in fixed monthly payments of principal and interest based on a 120-month amortization period through maturity in November 2021.  Interest is payable at a fixed annual rate of 4.25% (4.25% at September 30, 2018). As of September 30, 2018 and December 31, 2017, $2,446,836 and $2,612,633, respectively, was due under the Guidance Term Note.

 

The new $5 million guidance line of credit is used to finance the acquisition or construction of wastewater treatment plants and draws are available from February 2018 to February 2019.  Any borrowings under the guidance line of credit bear interest only payments due monthly through March 2019.  Thereafter, principal and interest is due in monthly payments based on a 120-month amortization period through maturity in February 2023, at which time any remaining balance is due. This guidance line of credit accrues interest at a rate equal to the 1-month LIBOR plus 2.75% (4.83% at September 30, 2018). The balance due under the guidance line of credit totaled $3,600,000 as of September 30, 2018.  No amounts were borrowed under the guidance line of credit as of December 31, 2017.

 

In 2017, the Company amended the revolving line of credit to extend its maturity to November 2018. The amount available to the Company under this revolving line of credit is for working capital and in support of letters of credit

-  15  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

up to a maximum of $1 million. In May 2018, the line of credit was reduced to $250,000. Interest only on amounts outstanding is payable monthly through final maturity, at which time all amounts are due.  The interest accrues at the rate of 1-month LIBOR plus 2.75% (4.83% at September 30, 2018).  No amounts were borrowed under the revolving line of credit as of September 30, 2018 and December 31, 2017.

 

Pursuant to the Loan Agreement, the Company was required to refinance its subordinated loan during 2018 or otherwise extend the term of the subordinated loan. The Company and the bank entered into an amendment to the Loan Agreement on May 3, 2018 that provides a term loan for $15 million to refinance the subordinated debt.  The new term loan is payable in monthly principal installments ranging from $125,000 to $250,000 through maturity in May 2023.  Amounts borrowed under this agreement bear interest at a rate equal to the 1-month LIBOR plus 2.50% to 2.75%, depending upon the Company’s leverage ratio, as defined by the Loan Agreement (4.83% as of September 30, 2018).  As of September 30, 2018, $14,500,000 was due under this term loan.

 

Debt is summarized as follows:

 

 

 

 

 

 

 

 

September 30 and December 31,

    

2018

    

2017

 

 

 

 

 

Term loans

 

$

34,913,502

 

$

19,616,667 

Guidance term note and guidance line of credit

 

 

3,600,000 

 

 

2,612,633 

Other

 

 

116,678

 

 

 

 

 

38,630,180 

 

 

22,229,300

Less: Unamortized deferred loan costs

 

 

(100,160)

 

 

(225,455) 

 

 

 

38,530,020 

 

 

22,003,845

Less:  Current portion

 

 

(4,072,563)

 

 

(2,461,263)

 

 

 

 

 

 

 

Notes payable, net of current portion

 

$

34,457,457 

 

$

19,542,582 

 

Future maturities of the term, guidance term and other notes are as follows:

 

 

 

 

 

Periods ending December 31,

    

    

2018

 

$

1,031,703 

2019

 

 

4,208,807 

2020

 

 

4,500,360 

2021

 

 

17,813,888 

2022

 

 

2,985,047 

Thereafter

 

 

8,090,375 

 

 

 

 

 

 

$

38,630,180 

 

Subordinated Loan Agreement

 

During 2017, the Company also maintained a $15 million senior subordinated loan from a member.  This loan was subordinate to amounts borrowed pursuant to the Loan Agreement.  Interest was payable monthly through maturity in April 2021, at which time all amounts were due. Interest accrued at a per annum rate equal to 12%, however, on the date of each scheduled payment of interest in respect of the subordinated loan, the borrowers were only

-  16  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

required to pay in cash an amount of interest equal to 10% per annum and the remaining 2%, if not paid, accrued on the unpaid principal balance and payment was deferred until maturity date.  The balance due under the subordinated loan totaled $15,000,000 as of December 31, 2017.  In May 2018, the senior subordinated loan was paid in full by a term note with the Company’s financial institution lender.  Interest on the subordinated note for the nine-month periods ended September 30, 2018 and 2017 approximated $0.5 million and $0.8 million, respectively. The subordinated loan was secured by a second priority lien on substantially all assets of the Company and guarantees by AUC Acquisition, AUC Holdings, AUC LP, AUC LLC and Gaylord.

 

Compliance

The Loan Agreement required AUC Holdings to comply with certain financial covenants, including a maximum leverage ratio and a minimum debt service coverage ratio.  As of September 30, 2018, AUC Holdings was in compliance with those covenants.

 

Other Note Payable

 

The Company has a note payable to Ford Motor Credit Company for $62,856 as of December 31, 2017.  This note is secured by a vehicle and payable in monthly installments.  The note was fully repaid in 2018 and, accordingly, is classified as a current liability.

 

NOTE 7: INCOME TAXES

 

The provision for income tax consisted of the following components:

 

 

 

 

 

 

 

 

For the nine-months ended September 30,

    

2018 

    

2017 

Current

 

 

 

 

 

 

Federal

 

$

 

$

-

State

 

 

62,000 

 

 

54,000 

Deferred - federal

 

 

622,998 

 

 

876,235 

 

 

 

 

 

 

 

Total income tax expense

 

$

684,998 

 

$

930,235 

 

 

On December 22, 2017, the United States enacted tax reform legislation known as the H.R. 1, commonly referred to as the “Tax Cuts and Jobs Act” (“TCJ Act”), resulting in significant modifications to existing law. Among other changes, the TCJ Act permanently lowers the corporate federal income tax rate to 21% from the existing maximum rate of 35% effective for tax years beginning after December 31, 2017. As a result of the reduction of the corporate federal income tax rate, net deferred tax assets were revalued as of December 31, 2017 and the Company recorded an income tax benefit of approximately $1.5 million  related to the TCJ Act in December 2017. The other provisions of the TCJ Act are not expected to have a material impact on the unaudited condensed consolidated financial statements.

 

NOTE 8: RELATED PARTY TRANSACTIONS

 

During 2018, the Company leased nine wastewater plants to an entity that is partially owned by a member.  The operating leases generated rental revenue of $297,000 for the nine-month period ended September 30, 2018. 

-  17  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Additionally, the related entity has prepaid rent for $33,000 on these leases as of September 30, 2018, which is included in advance rent payments in the unaudited condensed consolidated balance sheets.  As of September 30, 2018, there were no lease deposits held for the related party leases.

 

During 2017, the Company leased nine wastewater plants to an entity that is partially owned by a member.  The operating leases generated rental revenue of $330,725 for the nine-month period ended September 30, 2017.  Additionally, the related entity has prepaid rent for $33,000 on these leases as of December 31, 2017, which is included in advance rent payments in the unaudited condensed consolidated balance sheets.  As of December 31, 2017, the Company held lease deposits of $50,336 for the related party leases.

 

NOTE 9: CONCENTRATIONS

 

Financial instruments that subject the Company to concentrations of credit risk include cash and cash equivalents and receivables.  At various times during the year, the Company has bank deposits significantly in excess of Federal Deposit Insurance Corporation (FDIC) insurance limits.  Management believes any credit risk is low due to the overall financial strength of the financial institution.

 

For the nine-month period ended September 30, 2018, one customer accounted for 10% of the Company’s total revenue for services and contracts.  For the nine-month period ended September 30, 2017, two customers accounted for 30% of the Company’s total revenue for services and contracts.   Three customers accounted for approximately 42% of total contracts receivable at September 30, 2018.  One customer accounted for approximately 15% of total contracts receivable at December 31, 2017.

 

Two vendors accounted for approximately 40% of total accounts payable at September 30, 2018.  One vendor accounted for approximately 17% of total accounts payable at December 31, 2017.

 

NOTE 10: COMMITMENTS

 

Employment and Non-Compete Agreements

 

The Company has employment agreements with two key employees expiring through October 2018. Under these agreements each of the key employees are to be employed and compensated in accordance with the terms set forth in each agreement.  Pursuant to separate non-compete agreements, these employees are restricted from certain activities as defined in the agreements for a minimum period of five years, or one year after employment terminates, if later.

 

Operating Leases

 

The Company leases office space and a storage yard under non-cancelable operating leases that expire at various dates through April 2023. Rent expense totaled $141,437 and $128,667 for the nine-month periods ended September 30, 2018 and 2017, respectively.

 

-  18  -


 

AUC Acquisition Holdings, LLC and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

 

Future minimum lease commitments as of September 30, 2018 are as follows:

 

 

 

 

 

Periods ending December 31,

    

    

2018

 

$

45,933 

2019

 

 

178,674 

2020

 

 

180,085 

2021

 

 

172,511 

2022

 

 

74,845 

Thereafter

 

 

25,112 

 

 

 

 

 

 

$

677,160 

 

 

 

NOTE 11: BACKLOG

 

The following schedule summarizes changes in backlog on contracts.  Backlog represents the amount of revenue the Company expects to realize from uncompleted contracts in progress at period end and from contractual agreements on which work has not yet begun.  

 

 

 

 

 

 

 

 

Nine-month period ending September 30, 2018 and year ended December 31, 2017

    

2018

    

2017

 

 

 

 

 

Balance, beginning of the period

 

$

7,963,256 

 

$

4,525,126 

Add:  new contracts and contract adjustments during the period

 

 

6,593,063 

 

 

13,868,022 

 

 

 

14,556,319 

 

 

18,393,148 

Less:  services and contract revenue earned during the period

 

 

6,961,773 

 

 

10,429,892 

 

 

 

 

 

 

 

Balance, end of the period

 

$

7,594,546 

 

$

7,963,256 

 

 

NOTE 12: SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date the unaudited condensed consolidated financial statements were available for issuance on April 25, 2019. No matters were identified affecting the unaudited condensed consolidated financial statements or related disclosures that have not been disclosed below or elsewhere in these unaudited condensed consolidated financial statements.

 

In November 2018, all of the issued and outstanding membership interests of AUC Acquisition were acquired by AquaVenture Holdings, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited (“AquaVenture”), pursuant to a membership interest purchase agreement.  The aggregate sales price was approximately $130 million , including $128 million cash and approximately 122 thousand ordinary shares of AquaVenture, or $2 million.  At the closing of the transaction, all existing term debt and notes payable of the Company were paid off.

-  19  -


EXHIBIT 99.2

 

 

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 of PHSI 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 information (collectively, the “Pro Forma Transactions”). The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2018 gives effect to the Pro Forma Transactions as if they had occurred on January 1, 2018. 

 

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 date 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, 2018 filed with the SEC on March 11, 2019;  

 

·

AUC’s historical consolidated financial statements for the fiscal year ended December 31, 2017 included in Exhibit 99.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on January 4, 2019 and AUC’s unaudited interim financial statements for the nine months ended September 30, 2018 and 2017, included in Exhibit 99.1 to this Current Report on Form 8-K; and

 

·

PHSI’s historical consolidated financial statements for the fiscal year ended December 31, 2017 and unaudited interim financial statements for the nine months ended September 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 February 27, 2019.

 

 


 

 

 

Unaudited Pro Forma Condensed Combined Statement of Operations

For the Year Ended December 31, 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

 

$

57,262

 

$

 —

 

$

 —

 

 

$

57,262

 

$

 —

 

$

 —

 

 

$

57,262

 

Rental

 

 

64,216

 

 

9,106

 

 

39

(a)

 

 

73,361

 

 

7,268

 

 

 —

 

 

 

80,629

 

Product sales

 

 

20,105

 

 

7,822

 

 

(2,917)

(a)

 

 

25,010

 

 

13,517

 

 

 —

 

 

 

38,527

 

Financing

 

 

4,025

 

 

158

 

 

 —

 

 

 

4,183

 

 

 —

 

 

 —

 

 

 

4,183

 

Total revenues

 

 

145,608

 

 

17,086

 

 

(2,878)

 

 

 

159,816

 

 

20,785

 

 

 —

 

 

 

180,601

 

Cost of revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk water

 

 

26,516

 

 

 —

 

 

 —

 

 

 

26,516

 

 

 —

 

 

 —

 

 

 

26,516

 

Rental

 

 

28,025

 

 

3,154

 

 

 —

 

 

 

31,179

 

 

2,098

 

 

15

(f)

 

 

33,292

 

Product sales

 

 

13,565

 

 

6,815

 

 

(1,762)

(a)

 

 

18,618

 

 

6,557

 

 

 —

 

 

 

25,175

 

Total cost of revenues

 

 

68,106

 

 

9,969

 

 

(1,762)

 

 

 

76,313

 

 

8,655

 

 

15

 

 

 

84,983

 

Gross profit

 

 

77,502

 

 

7,117

 

 

(1,116)

 

 

 

83,503

 

 

12,130

 

 

(15)

 

 

 

95,618

 

Selling, general and administrative expenses

 

 

83,645

 

 

3,201

 

 

(528)

(b)

 

 

86,318

 

 

17,129

 

 

(999)

(g)

 

 

102,448

 

(Loss) income from operations

 

 

(6,143)

 

 

3,916

 

 

(588)

 

 

 

(2,815)

 

 

(4,999)

 

 

984

 

 

 

(6,830)

 

Other expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(15,046)

 

 

(2,118)

 

 

(5,283)

(c)

 

 

(22,447)

 

 

(2,955)

 

 

2,587

(h)

 

 

(22,815)

 

Other (expense) income, net

 

 

(850)

 

 

 —

 

 

 —

 

 

 

(850)

 

 

23

 

 

 —

 

 

 

(827)

 

(Loss) income before income tax expense

 

 

(22,039)

 

 

1,798

 

 

(5,871)

 

 

 

(26,112)

 

 

(7,931)

 

 

3,571

 

 

 

(30,472)

 

Income tax expense (benefit)

 

 

(1,311)

 

 

387

 

 

(1,233)

(d)

 

 

(2,157)

 

 

644

 

 

911

(i)

 

 

(602)

 

Net (loss) income

 

 

(20,728)

 

 

1,411

 

 

(4,638)

 

 

 

(23,955)

 

 

(8,575)

 

 

2,660

 

 

 

(29,870)

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

(404)

 

 

 —

 

 

 —

 

 

 

(404)

 

 

 —

 

 

 —

 

 

 

(404)

 

Comprehensive (loss) income

 

$

(21,132)

 

$

1,411

 

$

(4,638)

 

 

$

(24,359)

 

$

(8,575)

 

$

2,660

 

 

$

(30,274)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share – basic and diluted

 

$

(0.78)

 

 

 

 

 

 

 

 

$

(0.90)

 

 

 

 

 

 

 

 

$

(1.12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted-average shares outstanding – basic and diluted

 

 

26,583

 

 

 

 

 

122

(e)

 

 

26,705

 

 

 

 

 

 

 

 

 

26,705

 

 

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,  AUC and PHSI.

 

Description of Transactions

 

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

 

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.

 

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

 

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 $0.1 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 adjustments as it was not determined to be factually supported for historical periods.

 

 

 

 


 

 

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 preliminary 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 statement of operations for the year ended December 31, 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 January 1, 2018.

 

For PHSI, the historical financial statements are derived from the unaudited statement of operations for the period from January 1, 2018 through December 17, 2018. For AUC, the historical financial statements are derived from the unaudited statement of operations for the period from January 1, 2018 through November 1, 2018.

 

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, 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.

 

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 yet been required to adopt the New Guidance, and as a result, the unaudited pro forma condensed combined statement of operations for the year ended December 31, 2018 includes 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 in which 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, shareholders’ equity, or net income (loss) of AUC, PHSI or AquaVenture.

 

These reclassifications include certain amounts reallocated between financial statement line items, including 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.

 

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

 

 


 

 

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

 

 

 

 

 

 

 

Assets acquired:

    

 

  

 

Cash and cash equivalents

    

$

260

 

Trade receivables

 

 

1,167

 

Inventory

 

 

2,606

 

Prepaid expenses and other current assets

 

 

447

 

Property, plant and equipment

 

 

6,410

 

Deferred tax asset

 

 

108

 

Identified intangible assets

 

 

31,550

 

Goodwill

 

 

20,374

 

Total assets acquired

 

 

62,922

 

Liabilities assumed:

 

 

 

 

Accounts payable and accrued liabilities

 

 

(22,652)

 

Deferred revenue

 

 

(329)

 

Other long-term liabilities

 

 

(450)

 

Total liabilities assumed

 

 

(23,431)

 

Total purchase price

 

$

39,491

 

 

Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The final valuation of the intangibles identified is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed.   There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above. The estimated 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

 

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

 

 


 

 

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 $17.0  million was funded from existing cash and cash equivalents.

 

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

 

 

 

 

 

 

Assets acquired:

    

 

  

 

Cash and cash equivalents

    

$

849

 

Trade receivables

 

 

1,763

 

Inventory

 

 

2,642

 

Current portion of long-term receivables

 

 

521

 

Prepaid expenses and other current assets

 

 

1,673

 

Property, plant and equipment

 

 

32,266

 

Other assets

 

 

25

 

Long-term receivables

 

 

306

 

Indentified intangible assets

 

 

47,310

 

Goodwill

 

 

63,041

 

Total assets acquired

 

 

150,396

 

Liabilities assumed:

 

 

 

 

Accounts payable and accrued liabilities

 

 

(4,286)

 

Deferred revenue

 

 

(1,021)

 

Other long-term liabilities

 

 

(1,706)

 

Deferred tax liability

 

 

(12,483)

 

Total liabilities assumed

 

 

(19,496)

 

Total purchase price

 

$

130,900

 

 

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

The 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 to the Unaudited Pro Forma Condensed Combined Statement of Operations for the year ended December 31, 2018:

 

(a)    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.

 

(b)    The net decrease to selling, general and administrative expenses of $0.5 million was composed of the following: (i) a reduction of $1.1 million of AUC’s historical amortization expense related to intangible assets; (ii) an increase of $2.4 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;  and (iii) a reduction of acquisition-related expenditures incurred and presented in the historical financial statements of AquaVenture and AUC of $1.3 million and $0.6 million, respectively.

 

(c)    The increase to interest expense, net, of $5.3 million was composed of the following: (i) a reduction of $2.1 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 $7.4 million related to interest expense from both the $110 million of incremental debt used to finance part of the acquisition of AUC at a weighted-average interest rate of 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 $140 thousand change to pre-tax loss.

 

(d)    To record the tax effects of the unaudited pro forma adjustments calculated using the statutory tax rate of AUC of 21% for the year ended December 31, 2018.  

 

(e)    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.

 

(f)    The increase of rental cost of revenues was due to the increase of $15 thousand to depreciation expense for the fair value adjustments made to certain property, plant and equipment in PHSI purchase accounting.

 

(g)    The net decrease to selling, general and administrative expenses of $1.0 million 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 assigned to the identifiable intangibles assets calculated using the estimated useful lives assigned, as identified in Note 3, on a straight-line basis; (iii) a reduction of acquisition-related expenditures incurred and presented in the historical financial statements of AquaVenture and PHSI of $0.9 million and $0.4 million, respectively; and (iv) a decrease of $0.6 million related to PHSI’s historical amortization of deferred lease costs for lease contracts entered into prior to January 1, 2018 as the balance was not deemed an asset in purchase accounting and, therefore, no longer subject to amortization.

 

(h)    The decrease to interest expense, net, of $2.6 million composed of the following: (i) a reduction of $1.4 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 $1.2 million of PHSI’s historical interest expense as a result of the post-combination payoff of the factored contract liabilities which were recorded at present value using a discount rate of approximately 7% and accreted to interest expense over the term of the liability.

 

(i)    To record the tax effects of the unaudited pro forma adjustments calculated using the statutory tax rate of PHSI of 25.5% for the year ended December 31, 2018.