Company Quick10K Filing
Aquaventure Holdings
Price18.99 EPS-1
Shares32 P/E-30
MCap602 P/FCF30
Net Debt204 EBIT-18
TEV806 TEV/EBIT-45
TTM 2019-09-30, in MM, except price, ratios
10-K 2019-12-31 Filed 2020-03-06
10-Q 2019-09-30 Filed 2019-11-06
10-Q 2019-06-30 Filed 2019-08-07
10-Q 2019-03-31 Filed 2019-05-08
10-K 2018-12-31 Filed 2019-03-11
10-Q 2018-09-30 Filed 2018-11-07
10-Q 2018-06-30 Filed 2018-08-08
10-Q 2018-03-31 Filed 2018-05-08
10-K 2017-12-31 Filed 2018-03-12
10-Q 2017-09-30 Filed 2017-11-13
10-Q 2017-06-30 Filed 2017-08-14
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-27
10-Q 2016-09-30 Filed 2016-11-18
8-K 2020-03-30 Leave Agreement, M&A, Shareholder Rights, Control, Officers, Amend Bylaw, Other Events, Exhibits
8-K 2020-03-16 Shareholder Vote, Other Events, Exhibits
8-K 2020-03-05 Earnings, Exhibits
8-K 2020-03-05 Other Events
8-K 2020-01-28 Other Events
8-K 2019-12-23 Enter Agreement, Other Events, Exhibits
8-K 2019-11-06 Earnings, Exhibits
8-K 2019-08-07 Earnings, Exhibits
8-K 2019-08-05 Officers
8-K 2019-07-10 Enter Agreement, Other Events, Exhibits
8-K 2019-06-07 Shareholder Vote
8-K 2019-05-08 Earnings, Exhibits
8-K 2019-04-26 Other Events, Exhibits
8-K 2019-04-14 Officers, Exhibits
8-K 2019-02-27 Earnings, Exhibits
8-K 2019-02-19 Officers
8-K 2018-12-20 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-12-18 M&A, Exhibits
8-K 2018-11-07 Earnings, Exhibits
8-K 2018-11-01 Officers, Exhibits
8-K 2018-11-01 Officers, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-06-08 Shareholder Vote
8-K 2018-05-08 Earnings, Exhibits
8-K 2018-03-02 Earnings, Exhibits

WAAS 10K Annual Report

Part I
Item 1. Business.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Item 3. Legal Proceedings.
Item 4. Mine Safety Disclosures.
Part II
Item 5. Market for Registrant’S Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Item 6. Selected Financial Data.
Item 7. Management’S Discussion and Analysis of Financial Condition and Results of Operations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Item 9B. Other Information.
Part III
Item 10. Directors, Executive OffiCers and Corporate Governance.
Item 11. Executive Compensation.
Item 12. Security Ownership of Certain BenefiCial Owners and Management and Related Stockholder Matters.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Item 14. Principal Accounting Fees and Services.
Part IV
Item 15. Exhibits, Financial Statement Schedules.
Item 16. Form 10 - K Summary
EX-4.3 waas-20191231ex43764de72.htm
EX-21.1 waas-20191231ex211cf9737.htm
EX-23.1 waas-20191231ex231b4249d.htm
EX-31.1 waas-20191231ex3117f862f.htm
EX-31.2 waas-20191231ex3127ff65c.htm
EX-32.1 waas-20191231ex3216293cc.htm

Aquaventure Holdings Earnings 2019-12-31

Balance SheetIncome StatementCash Flow
80064048032016002015201620182020
Assets, Equity
554229163-102015201620182020
Rev, G Profit, Net Income
120865218-16-502015201620182020
Ops, Inv, Fin

10-K 1 waas-20191231x10k.htm 10-K waas_Current_Folio_10K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

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

For the fiscal year ended December 31, 2019

OR

 

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

 

For the transition period from                                          to                                        

 

Commission File Number:  001-37903

 

AquaVenture Holdings Limited

(Exact name of registrant as specified in its charter)

 

 

 

 

 

British Virgin Islands

    

98-1312953

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

c/o Conyers Corporate Services (B.V.I.) Limited

Commerce House, Wickhams Cay 1

    

 

P.O. Box 3140 Road Town

British Virgin Islands VG1110

 

(813) 855‑8636

(Registrant’s telephone

(Address of principal executive office)

 

number, including area code)

 

 

 

 

 

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

 

 

 

 

 

 

Title of each class

    

Trading Symbol

    

Name on each exchange on which registered

Ordinary Shares, no par value

 

WAAS

 

The New York Stock Exchange (NYSE)

 

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

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ☐    No    ☒

 

 

Indicate by check mark if the registrant is not required to file reports to Section 13 or Section 15(d) of the Exchange Act.  Yes  ☐    No    ☒

 

 

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

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit). Yes    ☒  No  ☐

 

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

 

 

 

 

Large accelerated filer  ☐

 

Accelerated filer    ☒

 

 

 

Non-accelerated filer   ☐

 

Smaller reporting company    ☐

 

Emerging growth company ☒

 

 

 

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

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

 

 

The aggregate market value of ordinary shares held by non-affiliates of the registrant, based on the closing price of the registrant’s ordinary shares on June 30, 2019, as reported by the New York Stock Exchange on such date was approximately $285,836,202. For purposes of this determination, ordinary shares held by each officer and director and by each person who owns 10% or more of the registrant’s outstanding ordinary shares have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

 

The total number of Ordinary Shares outstanding as  of March 2, 2020 was 31,969,792.

 

 

Documents Incorporated By Reference

None.

 

 

AQUAVENTURE HOLDINGS LIMITED

ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2019

TABLE OF CONTENTS

9

 

 

 

 

PAGE

 

 

 

 

Forward-looking Statements

 

PART I 

2

Item 1. 

Business

2

Item 1A. 

Risk Factors

17

Item 1B. 

Unresolved Staff Comments

48

Item 2. 

Properties

48

Item 3. 

Legal Proceedings

48

Item 4. 

Mine Safety Disclosures

49

PART II 

50

Item 5. 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

50

Item 6. 

Selected Consolidated Financial Data

52

Item 7. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

53

Item 7A. 

Quantitative and Qualitative Disclosures About Market Risk

84

Item 8. 

Financial Statements and Supplementary Data

85

Item 9. 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

144

Item 9A. 

Controls and Procedures

144

Item 9B. 

Other Information

145

PART III 

145

Item 10. 

Directors, Executive Officers and Corporate Governance

145

Item 11. 

Executive Compensation

151

Item 12. 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

160

Item 13. 

Certain Relationships and Related Transactions, and Director Independence

163

Item 14. 

Principal Accounting Fees and Services

164

PART IV 

165

Item 15. 

Exhibits and Financial Statement Schedules

165

Item 16. 

Form 10-K Summary

165

SIGNATURES 

169

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless otherwise specified, references in this report to the “Company”, “AquaVenture”, “we”, “us” and “our” refer to both AquaVenture Holdings LLC and its subsidiaries prior to our corporate reorganization effected immediately prior to our initial public offering and AquaVenture Holdings Limited and its subsidiaries following our corporate reorganization in 2016.

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act.   Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us up to, and including, the date of this document. We expressly disclaim any obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date hereof. Such forward-looking statements are subject to risks, uncertainties and other important factors which could cause our actual results could differ materially from those discussed herein. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” set forth under Part I, Item 1A and elsewhere in this Annual Report on Form 10-K. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future. 

Introductory Note

 

On December 23, 2019, we announced that we entered into an agreement and plan of merger, or Merger Agreement, to be acquired by Culligan International Company, or Culligan, a Delaware corporation. Pursuant to the Merger Agreement, and subject to the satisfaction or waiver of the conditions therein, Amberjack Merger Sub Limited, or Merger Sub, a business incorporated under the laws of the British Virgin Islands and wholly-owned subsidiary of Culligan will merge with and into the Company  (the “Merger”). As a result of the Merger, the Company will become a wholly-owned subsidiary of Culligan. The closing of the Merger remains subject to the satisfaction or waiver of the remaining conditions to the Merger set forth in the Merger Agreement. We expect the Merger to close no later than the end of the second quarter of 2020.

 

PART  I

Item 1. Business.

Our Company

Overview

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

We deliver our WAAS solutions through two operating platforms: Seven Seas Water and Quench. Seven Seas Water is a multinational provider of desalination, wastewater treatment, and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Our desalination solutions provide more than 8.5 billion gallons per year of potable, high purity industrial grade and ultra‑pure water (which is water that is treated to meet higher purity standards required for industrial, semiconductor, utility or pharmaceutical applications).  Our wastewater treatment and water reuse solutions, which include plants ranging in capacity from 5,000 gallons per day, or GPD, to more than 1.5 million GPD, are provided through 105 leases with

2

customers. Quench is a U.S.‑based provider of Point‑of‑Use, or POU, filtered water systems and related services through direct and indirect sales channels. Through its direct sales channel, Quench primarily rents and services POU units to approximately 60,000 institutional and commercial customers in the United States and Canada, including more than half of the Fortune 500. Quench’s typical initial rental contract is three years in duration and contains an automatic renewal provision.  Our annual unit attrition rate, at December 31, 2019, was less than 7.5%, implying an average rental period of more than 12 years. We define “annual unit attrition rate” as a ratio, the numerator of which is the total number of removals of company‑owned and billed rental units during the trailing 12‑month period, and the denominator of which is the average number of company‑owned and billed rental units during the same 12‑month period. Through our indirect sales channel, we provide POU systems, filters, parts and services to networks of approximately 260 dealers and retailers predominantly in North America. 

We are led by a talented management team with extensive industry experience, engineering knowledge, operational expertise and financial expertise. We leverage our operating and engineering expertise to develop and deliver highly reliable WAAS solutions by applying proven water purification and wastewater technologies. We believe that we are well positioned to capitalize on global growth opportunities driven by population growth, increasing urbanization and water scarcity, increasing focus on health and wellness, wastewater treatment and water reuse solutions, and the environmental impact of bottled water consumption. We believe our focus on delivering best‑in‑class service and efficiency to our customers will continue to lead to substantial new business, contract extensions and customer expansion opportunities. In addition, we also have a demonstrated track record of identifying, executing and integrating acquisitions, with Seven Seas Water and Quench having completed 23 transactions since our initial public offering, of which eight have occurred since the beginning of 2019. We plan to continue to pursue acquisitions that will expand our geographic presence, broaden our service offerings and allow us to move into additional markets.

As of December 31, 2019, we had 780 employees.

Seven Seas Water

Our Seven Seas Water operating platform offers WAAS solutions by providing outsourced desalination, wastewater treatment and water reuse solutions for governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Our desalination solutions utilize seawater reverse osmosis, or SWRO, and other purification technologies to produce potable and high purity industrial process water in high volumes for customers operating in regions with limited access to potable water. Our wastewater treatment and water reuse products and solutions include scalable modular treatment plants, field-erected treatment plants and temporary bypass plants that are used by our customers to treat and convert wastewater into effluent or reclaimed water prior to being released back into the environment.

Desalination Solutions

For our desalination solutions, we either design, build and operate our desalination plants or acquire, refurbish and expand existing desalination plants. We assume responsibility for operating and maintaining the plants, including procuring all required equipment and supplies. In exchange, we typically enter into long‑term agreements to sell to our customers agreed‑upon quantities of water that meet specified quality standards for a contracted period, for which we are paid based on actual or minimum required unit consumption. We typically enter into contracts with a term of 10 to 20 years, except in situations in which emergency water is needed or we assume an existing contract from an existing owner or operator. With this approach, our customers benefit from a highly reliable, long‑term clean water supply with predictable pricing, low customer capital investment and outsourced management of operations and maintenance.

We offer customized solutions, often implemented using containerized or modular equipment, which allows us to quickly commission, expand, curtail or move production capacity. We design, procure and engineer systems to meet the customer’s specific requirements with regard to source water conditions and specific water quality and quantity needs. Once a plant commences operations, customer water demand typically increases over time, often leading to plant expansion and contract extension opportunities. We also offer quick deployment solutions to address emergency water shortages, such as those caused by natural disasters or failure and/or overburdening of existing water production infrastructure, and water reuse solutions for industrial users seeking to reuse and/or minimize wastewater.

We are a leading provider of water to the Caribbean market, where we are currently the primary supplier to the United States Virgin Islands, or the USVI, St. Maarten and the British Virgin Islands, or the BVI. We also maintain

3

significant plant operations in Trinidad, Peru and Anguilla. We currently operate ten  water treatment facilities in the Caribbean region and South America producing more than 8.5 billion gallons of purified water per year under long‑term contracts.

We expect to grow our Seven Seas Water business by expanding existing operations as customer demand increases and by selectively entering underserved markets through both new project development and acquisitions. We believe that there are a large number of medium‑scale desalination plants (which we define as plants with approximately 2 million GPD to 13 million GPD of output capacity) in operation globally that could benefit from our ownership and operating expertise. Leveraging our strength in the Caribbean market and our reputation for reliability, quality and operating efficiency, we are pursuing new opportunities in North America, the Caribbean, South America, Africa, the Middle East and other select markets.

Own, Operate and Maintain

Providing WAAS solutions to our customers is central to our desalination solution. We typically own, operate and maintain the desalination plants and sell water to our customers pursuant to long‑term contracts. We either design, build and operate our desalination plants or acquire, refurbish and expand existing desalination plants. We assume responsibility for operating and maintaining the plants, including procuring all required equipment and supplies. We typically design our desalination plants to exceed contractually required production capacity to ensure reliability, enable expansion to meet increased demand and to have more predictable lifecycle costs. In building our plants, we often use containerized units and modular skids with preconstructed components of the plant, which enables us to commission a plant and commence production more quickly. We also use standardized designs and equipment which help us operate and maintain our plants more efficiently and cost‑effectively and simplify spare parts management.

Under our WAAS business model, we manage the entire lifecycle of a desalination plant on an outsourced basis for our customers. Typically, a customer commits to purchase water at a fixed price per gallon, subject to adjustment based on a specified index, which meets agreed upon quality standards. Certain of our contracts require customers to purchase a minimum volume of water on a take‑or‑pay basis, and in some cases, we satisfy a customer’s water requirements by utilizing our plants as its exclusive water producer. Our water purchase agreements typically provide for initial terms of up to 20 years. However, customers may ask us to increase the capacity of plants or to build additional plants to satisfy increased demand for the reliable, high-quality water we produce. In those cases where customers ask us to expand the capacity of the plants, we typically extend the term of the initial contract and reduce the unit cost that the customer pays. The facilities in our portfolio are both operated and maintained, as needed, by Seven Seas Water employees. To ensure we continue to provide reliable and high-quality water, while remaining efficient and cost-effective, we monitor the plants we operate, both remotely and on site.

For our water supply agreements where we build, own and operate, we generally have the right to decommission and remove our desalination plants upon the expiration or termination of the term of the water supply agreement. Certain of our water supply agreements, however, provide for the transfer of the plant to our customer either at the end of the term of the agreement, upon the termination of the agreement or upon exercise of contractual buyout rights.  The purchase prices payable upon exercise of the buyout rights are specified in the agreement and may be either fixed or variable based on factors set forth in the agreement. Our plants are generally built on property leased from the customer or its related parties pursuant to leases with terms that typically extend longer than the water purchase agreement, so that we may decommission and remove the plant.

4

Our Desalination Plants

We currently operate ten water treatment facilities with design capacities of at least 0.5 million GPD in the Caribbean and South America. Six exclusively provide water to the local government or government‑owned utility companies and four serve private customers.

 

 

 

 

 

 

 

 

    

 

    

Contract

    

Design

 

 

 

 

Expiration

 

Capacity

Location

 

Customer

 

Date

 

Million GPD

Trinidad: Point Fortin

 

WASA

 

2030

 

6.7

United States Virgin Islands:

 

  

 

  

 

  

St. Croix

 

VIWAPA

 

2033

 

3.7

St. Thomas

 

VIWAPA

 

2033

 

3.3

St. Croix

 

Limetree Bay Terminals, LLC

 

2024

 

1.7

St. Maarten

 

Government of St. Maarten

 

2025

 

5.8

Bahamas

 

Clearview Enterprises Limited

 

2028

 

1.0

Turks and Caicos

 

Retail water sales

 

N/A

 

0.5

BVI: Paraquita Bay

 

The Government of the Virgin Islands

 

2030

 

2.8

Peru: Bayovar

 

Compañia Minera Miski Mayo S.R.L.

 

2037

 

2.7

Anguilla

 

Water Corporation of Anguilla

 

2029

 

1.0

 

In addition, during 2019, we owned and operated a desalination facility in Curaçao with an aggregate design capacity of 4.9 million GPD. We sold the industrial quality water produced at this facility on a take or pay basis to Curaçao Refinery Utilities Company B.V., or CRU, a government-owned utility that provides utility services to a refinery it has leased to Petróleos de Venezuela S.A., or PDVSA, a state owned oil company of Venezuela. The contract, which expired on December 31, 2019, included a buy-out right that enabled the customer to purchase the desalination plant pursuant to the water supply agreement. On December 31, 2019, CRU exercised its right to purchase the desalination facilities, and the Company received a cash payment of $3.5 million in connection with the exercise of this buy-out right.

Trinidad

We built, own and operate a desalination plant currently with a design capacity of 6.7 million GPD located at Point Fortin, Trinidad. Under the terms of the water sale agreement with the Water & Sewerage Authority of Trinidad and Tobago, which we refer to as the Trinidad Water Sale Agreement, we are required to provide a minimum supply of water each month equal to a certain percentage of the design capacity of the plant. The Water & Sewerage Authority of Trinidad and Tobago, or WASA, is required to purchase all of the water we produce each month up to a certain percentage of the design capacity of the plant. If production levels fall below agreed upon contractual minimums, then the water payment owed by WASA to us is reduced. On September 3, 2015, we entered into a fourth amendment to expand the existing desalination plant capacity by approximately 21% and extend the initial term of the agreement, which was set to expire in 2026, by 50 months. This expansion was completed in July 2016 and added 1.2 million GPD of capacity to the plant.

The Trinidad Water Sale Agreement may be terminated upon default. If WASA terminates the Agreement early or is in default, a penalty that is based on estimated future production of the plant will be imposed. Upon termination, we have 120 days to remove our equipment from the site.

Under the Trinidad Water Sale Agreement, WASA is obligated to provide the electricity needed to operate our plant at no charge to us. We are not responsible for loss of production arising from a disruption to our electrical supply or a change in the quality or quantity of feedwater.

We sublease the site where the Point Fortin plant is located from WASA, which leases the site from Petrotrin, a state‑owned oil company. The term of the lease, as extended, expires in June 2030.

5

United States Virgin Islands

We built and currently own and operate three principal desalination plants in the USVI with an aggregate design capacity of 8.7 million GPD.

We sell the water produced at our Richmond Generation Plant on St. Croix and our Randolph Harley Generation Plant on St. Thomas on an as‑demanded basis to the Water & Power Authority of the United States Virgin Islands, or VIWAPA, pursuant to a series of water purchase agreements entered into with VIWAPA, which we refer to as the USVI Water Purchase Agreements, the current terms of which expire in 2033. Although the USVI Water Purchase Agreements do not specify a minimum consumption level, they stipulate that Seven Seas Water will be VIWAPA’s exclusive supplier. The current design capacity of our Richmond Generation Plant and the Randolph Harley Generation Plant are 3.7 million GPD and 3.3 million GPD, respectively. Under the USVI Water Purchase Agreements, VIWAPA is obligated to provide the electricity needed to operate our plants at no charge to us, provided that our electrical consumption per thousand gallons of water produced does not exceed certain thresholds. If our electrical consumption exceeds such thresholds, we are required to reimburse VIWAPA at its then-current electricity production cost, subject to adjustment for feedwater quality. We lease the sites where these plants are located from VIWAPA. The leases terminate 180 days after the contract expiration dates to enable us to remove our equipment.

In addition, we built and currently own and operate a desalination plant with the design capacity of 1.7 million GPD on St. Croix. We sell the water produced by this plant under a water sales agreement to support a storage terminal, refinery and marine facility owned by Limetree Bay Terminals, LLC. We sell the water produced at this plant on a take‑or‑pay basis. The original agreement with the customer was terminated during 2019 and the Company subsequently entered into a new agreement that expires in 2024 and included an expansion of the existing desalination plant capacity. The expansion was completed in November 2019 and added 1.0 million GPD of capacity to the plant.

St. Maarten

We own and operate three desalination plants with an aggregate design capacity of 5.8 million GPD in St. Maarten. We built two of these plants and acquired and refurbished the third. We sell the water produced at these plants on a take‑or‑pay basis to the Government of St. Maarten pursuant to the St. Maarten Water Purchase Agreements.  Pursuant to an amendment in April 2018, the required minimum monthly water purchase by our customer was reduced, in exchange for a four-year extension to the water contract which will now expire in 2025. The reduction in the required minimum monthly water purchase will remain in effect for three years, at which time the average monthly minimum purchase will then revert to previous minimum requirements for the remainder of the contract. Our customer has the option to extend the lower minimum volumes for an additional two years, which, if exercised, would also extend the contract expiry from 2025 to 2027. Under the St. Maarten Water Purchase Agreements, we are obligated to pay for the electricity needed to operate our plant at a fixed rate. We lease the sites where these plants are located. The St. Maarten Water Purchase Agreements require us to transfer ownership of the plants to the government upon the expiration of the water purchase agreements and under other certain circumstances.

British Virgin Islands

In June 2015, we purchased the capital stock of Biwater Holdings, a subsidiary of which owns and operates a desalination plant with the design capacity of 2.8 million GPD located on Tortola, BVI. We sell the water produced at this plant on a take‑or‑pay basis to the government of the BVI pursuant to a water purchase agreement, the current term of which expires in 2030. Under this water purchase agreement, our customer is obligated to provide the electricity needed to operate our plant at no charge to us. We lease the site where this plant is located. We are required to transfer ownership of the plant to the government of the BVI upon the expiration of the water purchase agreement and upon the termination of the agreement under certain other circumstances. On August 4, 2017, we entered into an amendment to the water purchase agreement with the government of the BVI to modify, effective January 1, 2017, certain contractual provisions related to the calculation of the water rate and the overall cash payment profile in exchange for other actions between us and the customer. All other terms of the original water purchase agreement remained unchanged.

Peru

In October 2016, we completed the acquisition of all the outstanding shares of Aguas de Bayovar S.A.C., or ADB, and all the rights and obligations under a design and construction contract for a desalination plant and related

6

infrastructure located in Peru (the “Peru Acquisition”).  We sell both seawater and desalinated process water on a take-or-pay basis to Compañia Minera Miski Mayo S.R.L under an operating and maintenance agreement. Compañia Minera Miski Mayo S.R.L uses the water to operate its Bayovar phosphate mine, which is located in north western Peru. The desalination plant and related infrastructure have the capacity to deliver more than 7.9 million GPD of seawater to the mine via a 24-mile pipeline and 2.7 million GPD of desalinated process water from a SWRO facility located at the mine site. The current term of the operating and maintenance agreement expires in 2037. The plant is constructed on property controlled by Compañia Minera Miski Mayo S.R.L, which owns the plant and related infrastructure. The rights to the design and construction contract include monthly installment payments for the construction of the desalination plant and related infrastructure, which are guaranteed by the principal shareholder of our customer and continue until 2024. These payments are accounted for as a note receivable.

Other Plants

We operate a desalination plant with the design capacity of 1.0 million GPD on the Island of Great Exuma, The Bahamas. We sell the water produced at this plant on a take‑or‑pay basis to Clearview Enterprises Limited, which is part of the Sandals Group. The original agreement with the customer expired in 2019. However, on August 1, 2019, we entered into a new agreement with the customer which expires in 2028.

We own and operate a desalination plant with the design capacity of 1.0 million GPD in Anguilla, which we began operating in October 2018. We sell the water produced by this plant to the Water Corporation of Anguilla, the public water utility of Anguilla. During 2019, we expanded the existing desalination plant design capacity by an incremental 0.5 million GPD to produce the current design capacity of 1.0 million GPD. The term of the agreement expires in May 2029.

We own and operate two desalination plants with the design capacity of an aggregate of 0.5 million GPD on Providenciales, Turks and Caicos Islands. We built one of these plants and acquired and refurbished the other. We sell the water produced at these plants to local customers and own the sites where these plants are located. 

Wastewater Treatment and Water Reuse Solutions

For our wastewater treatment and water reuse solutions, we design, fabricate and install plants that are leased under a contractual term or sold to customers.  The wastewater treatment and water reuse solutions offered to customers include scalable modular treatment plants, field-erected plants and temporary bypass plants ranging from 5,000 GPD to more than 1.5 million GPD.    

The modular wastewater treatment plant is a scalable design that can be expanded to meet increases in customer demand. An example of this would be a residential property developer that needs a wastewater treatment plant for its development. As each new phase of the property development is completed, the wastewater processing demand increases with the addition of new homes. Additional modules can be added to the waste processing plant to meet this increased processing demand. Field-erected treatment plants are similar to the modular plants, including the customers they serve, with the main difference being that they are generally larger in size. The third solution offered is temporary bypass plants. These temporary transportable plants are deployed to maintain continuity of treatment services when a customer’s centralized wastewater treatment plant is not operating to enable significant maintenance or repair.

The contractual term for our modular and field-erected wastewater treatment and water reuse plants leased to customers typically range from three to five years while our temporary bypass solutions are leased under short-term contracts of less than one year. As of December 31, 2019, we had 105 leases of wastewater treatment and water reuse plants with our customers. Plants sold to the customer are designed, fabricated and installed typically over a period of typically 6 to 12 months. While operations and maintenance of the plants are typically the responsibility of the customer, we do perform these services, in limited instances, for the customer.

We currently offer our wastewater treatment and water reuse solutions in North America, including Texas where we believe we are a leading provider for modular and field-erected designs, and in the Caribbean where we operate and maintain plants owned by certain of our desalination solution customers. 

7

Customers

Customers for our desalination solutions generally fall into three categories: (i) municipal customers or government‑owned utility companies, (ii) industrial, power, refining, mining and/or other manufacturing companies which require a reliable source of industrial quality water for their operations, or (iii) resorts and/or private entities. These customers may (a) contract with us to build and operate plants, (b) become our customers after their initial plant owner or operator sells its interest in a plant or (c) become our customer after replacing an operator with Seven Seas Water. Our important target market opportunities include municipal customers or government owned utility companies that wish to contract to have a plant constructed to increase water production for residential or industrial purposes or seek our experience in operating an existing plant. Under these arrangements, the municipal customers or government owned utility company is typically responsible for distributing water, providing power and a minimum purchase guarantee. Another target market is industrial customers that require clean water for an industrial purpose. Historically, prospective industrial customers generated their own water, but increasingly more industrial users have outsourced the production of water to focus on their core competencies.

Customers for our wastewater treatment and water reuse solutions generally include property developer and municipal customers, including utility districts. These customers may contract with us to build a plant and often add more of our solutions as their property is further developed.

For the year ended December 31, 2019, revenues earned from our customer in Trinidad represented approximately 7% of our total consolidated revenues.

Business Development

Our Seven Seas Water platform focuses on desalination, wastewater treatment and water reuse solutions opportunities.

For our desalination solutions, we focus on opportunities to own and operate desalination plants designed to produce approximately 2 million GPD to 13 million GPD of water for governmental, municipal, industrial and hospitality customers, a relatively underserved sub‑segment of the desalination market with limited comparable solutions and competitors. We pursue these opportunities by participating in request for proposal processes, developing plans for plants in underserved areas, acquiring existing plants and providing emergency water services. Geographically, we continue to pursue opportunities to expand in the Caribbean region, while seeking opportunities in North America, South America, Africa, the Middle East and other select markets.

For our wastewater treatment and water reuse solutions, we focus on leasing equipment for a contractual term or selling equipment to governmental, municipal (including utility districts), industrial and property developer customers.  The wastewater treatment and water reuse solutions offered to customers include scalable modular treatment plants, field-erected plants and temporary bypass plants ranging from 5,000 GPD to more than 1.5 million GPD. We pursue opportunities throughout North America, including Texas where we believe we are a leading provider for modular and field-erected designs, and in the Caribbean.

We believe our desalination, wastewater treatment and water reuse solutions are complementary and can result in cross selling opportunities to customers.

Our business development function is organized into teams dedicated to pursuing opportunities in specific target markets. Company personnel focused on the North American, Caribbean, African and Middle Eastern markets operate primarily from our Tampa, Florida and Houston, Texas offices.

As part of our expansion strategy, we may acquire additional desalination, wastewater treatment and water reuse plants or businesses. Potential acquisition candidates include individual plants and businesses that operate multiple plants. We frequently evaluate potential acquisition candidates and engage in discussions and negotiations regarding potential acquisitions.

We also pursue opportunities to deploy our mobile containerized desalination solutions and our bypass wastewater treatment solutions to help parties address short-term or immediate needs. To address this business opportunity, we maintain a fleet of mobile containerized plants and bypass wastewater treatment solutions. Our ability to

8

quickly deploy, commission and commence operation of these plants and solutions provides us a competitive advantage in these situations. We provide these rapid deploy services pursuant to contracts that typically have terms that range from less than one year up to five years. By assisting customers with their short-term or immediate needs, we are often well positioned to expand such customer relationships into long‑term arrangements.

Competition

For our desalination solutions, Seven Seas Water generally targets projects for medium‑scale plants that it can own and operate that are accompanied by long‑term contracts to sell water to customers. We compete primarily on the basis of the unit price at which water is sold to our customers, as well as our ability to build, commission, operate and maintain our plants to provide customers with a reliable long‑term water supply. Our pricing depends on many factors, including the length of the water supply agreement term, the volume of water to be supplied, factors relating to the feedwater quality and location of the plant, infrastructure availability, electric power availability and costs (including who is responsible for paying those costs), and our cost of capital, among other factors.

The competitors in our market generally fall into three categories: (i) engineering, procurement and construction, or EPC, companies, (ii) large project developers, and (iii) other outsourced service model companies. EPC companies, which contract to build plants that satisfy specific requirements, often do not operate such plants after completion. Large project developers focus on large‑scale municipal desalination projects and prefer to take the role as lead developer for a customer sponsor and often do not operate plants after completion. Many of these companies, among others, currently operate in areas in which we would like to expand our desalination business. In addition, some already maintain worldwide operations and have greater financial, managerial and other resources than we do. We believe that our low overhead costs, knowledge of local markets and our efficient manner of operating desalination water production equipment will provide us a competitive advantage in many medium scale applications and projects.

For our wastewater treatment and water reuse solutions, Seven Seas Water generally targets plants ranging from 5,000 GPD to more than 1.5 million GPD delivered to the customer through capital and financed equipment sales, and leasing arrangements. Further, our modular wastewater treatment plants provide customers with the ability to scale their plants based on demand. While we compete directly with other regional, national and international companies, many of our competitors do not offer similar modular design, financing or leasing solutions that we believe our core markets demand.

Quench

Our Quench business offers WAAS solutions by providing bottleless filtered water coolers and other products that use filtered water as an input, such as ice machines, sparkling water dispensers and coffee brewers, to customers throughout the United States and Canada. Our POU systems purify a customer’s existing water supply, offering a cost‑effective, convenient, and environmentally‑friendly alternative to traditional bottled water coolers, or BWC. We offer our solutions to a broad mix of industries, including government, education, medical, manufacturing, retail and hospitality, among others.

Through our direct sales channel, we install and maintain our filtered water systems in exchange for a monthly rental fee, typically under multi‑year contracts that renew automatically. With an installed base of approximately 160,000 company‑owned rental systems, we believe that we are one of the largest POU‑focused water services companies operating in North America. We are able to service our rental customers across the United States and Canada, with Quench employee service technicians covering more than 330 metropolitan statistical areas, as defined in the 2010 U.S. Census and the 2016 Canadian Census. We generate sales by leveraging our team of field and inside sales representatives, supported by a marketing team with expertise in digital and traditional media. We believe the geographic scale of our platform, the diversity of product offering, and our customer-centric service provide us a competitive advantage. These capabilities also help to create customer loyalty and preserve our market share.

Through our indirect sales channel, we offer POU systems to networks of approximately 260 dealers and retailers predominantly in North America. The indirect sales channel expands our participation in the growing POU market domestically and internationally. In addition, this channel enhances our ability to develop, source and manufacture innovative, exclusive, bottleless filtered water coolers and related offerings. Lastly, the channel offers us the opportunity to develop deep relationships with POU dealers that could potentially lead to future acquisitions.

9

Products

Our filtered water systems offer customers a cost‑effective, convenient and environmentally‑friendly alternative to traditional BWCs. Our systems are connected to a customer’s existing water supply, which is filtered at the point of use to reduce impurities and other contaminants. Once a POU system is installed, ongoing service requirements, including routine maintenance, repair and filter changes, are typically covered under a rental agreement for our rental customers.

We offer our customers filtered water systems with varying capacities to serve low, medium and high usage environments, which are available in floor‑standing, countertop, under‑counter and under‑sink model forms. Our systems offer a variety of water dispensing options, including hot, cold, ambient and sparkling water. These systems are also available with various features, such as hands‑free dispensing, anti‑microbial surfaces and leak detection. Depending on the customer’s purification requirements, Quench systems can employ various technologies such as carbon filtration, reverse osmosis filtration, deionization and ultraviolet sanitization.

In addition, we offer a line of ice machines and commercial coffee brewers, both of which utilize our water filtration systems. To our coffee brewer customers, we also offer a selection of coffees, teas and other break room supplies.

Our filtered water systems and related equipment are sourced both internally from our company-owned manufacturing facility in South Korea, and externally from a variety of domestic and international manufacturers. We also refurbish rental equipment that is returned from customer locations for future redeployment. We intend to continue working with our suppliers and leveraging our market knowledge to refine our water cooler product offerings and our other related water‑enabled products, such as ice machines, sparkling water systems and coffee brewers. Some of our recent acquisitions have provided manufacturing operations and expertise and exclusive sourcing agreements, which enhance our ability to develop and source new and innovative POU products.

We provide our rental services generally under automatically‑renewing contracts with a typical initial term of three years, however these contracts can range from month‑to‑month to four years. Our annual unit attrition rate, at December 31, 2019 was less than 7.5%, implying an average rental period of more than 12 years. In these rental agreements, we bear the up‑front cost of purchasing and installing systems as well as the ongoing cost of maintaining them in exchange for a recurring fee. In certain circumstances, we sell water filtration systems to end customers, which may be accompanied by a maintenance contract or serviced on a time-and-materials basis. In 2017, we began selling certain water filtration systems exclusively through our indirect sales channel of POU dealers and retailers.

Sales and Marketing

We market our products and services through a variety of digital and traditional methods. Digital marketing activities include search engine marketing, email marketing, affiliate marketing and display advertising. Traditional marketing activities include telemarketing and trade shows. Marketing messages emphasize the benefits of water filtration versus those of delivered water, which include convenience, reliability of supply, cost savings, wellness and environmental sustainability. According to a 2016 study by Zenith International, or Zenith, POU system penetration in 2015 was 11.1% of the U.S. commercial water cooler market, by revenue, which we believe provides a significant opportunity for additional organic growth.

We have a team of Quench sales and marketing professionals dedicated to new customer acquisition activities across the United States and Canada. Our field sales representatives are focused on increasing penetration in the largest metropolitan markets in the United States and Canada. We also have specialized sales teams focused on large enterprises and specific industries to expand our market penetration. We maintain a presence in online advertising and lead generation, supported by an in‑house team of digital marketing personnel.

Our Quench platform is also well‑positioned to increase sales to existing customers. In addition to our sales team, our customer care representatives generate revenue by selling additional products to existing customers. In addition, as we service our rental equipment, we routinely identify opportunities to reassess our customers’ needs and offer additional services and system upgrades. Frequently, Quench rental customers will add systems during the course of their relationship with Quench.

10

We intend to continue to differentiate our offering to customers by adding new and innovative water filtration products and related water‑enabled products. We are also considering additional international and residential market expansion in our POU business.

Customers

Within our direct sales channel, we target businesses across the United States and Canada with an emphasis on companies with 20 or more employees, as well as those operating in several key industries, such as government, education, medical, retail and hospitality. We maintain a highly diversified customer base of approximately 60,000 customers. Within our indirect sales channel, we sell to established networks with approximately 260 POU dealers and retailers in the United States and Canada, and we are actively expanding this network through our ongoing sales and marketing activities.

Customer Service

Our service technicians are trained to service our rental POU systems to ensure a convenient, reliable water supply. In larger metropolitan areas in the United States and Canada, we service rental equipment via local employee service technicians, who perform installations, preventive maintenance and repairs. In areas without local employees, Quench technicians travel to handle installations and preventive maintenance. When necessary, Quench engages third‑party contractors for certain types of service calls.

Competition

We compete directly with other POU filtration, BWC, and office coffee service, or OCS, companies, as well as with retail stores and internet sites where similar products and services may be purchased. Municipal tap water is also a substitute for our POU filtration services. The POU filtration market is highly fragmented, with many small, local service providers. There are also a number of larger national competitors, including Cott Corporation, Nestlé, Aramark, Canteen and Waterlogic International. Our competitive position is based on our pricing, national service coverage and product quality.

Although Zenith reported that in 2015 the POU segment we serve accounted for 11.1% by revenue of the $4.2 billion per year, the number of POU units has been growing consistently and is projected to continue to grow at the expense of BWCs. We believe POU systems offer an attractive alternative to BWCs primarily due to cost, convenience, health benefits and environmental considerations. In 2015, approximately 29% of all new POU accounts (commercial and residential) in the United States were attributed to BWC conversions. We believe that the quality and reliability of our service, both in the field and in the back office, are differentiators within our markets.

Market Opportunity

We primarily operate in three water sectors—desalination, wastewater treatment and water reuse and commercial water filtration. We believe these sectors offer us opportunities for significant organic and inorganic growth due to their size, positive long‑term growth trends and fragmentation.

A number of key macroeconomic factors shape the global water sector, including population growth, an increasing water supply‑demand imbalance, urbanization, industrialization, and consumers’ heightened health and environmental awareness. Global water demand has outpaced population growth, leading to chronic water scarcity in many regions around the world. According to data from the United Nations, global water demand (excluding irrigation) will grow three times faster than the global population. According to the 2018 United Nations World Water Development Report, an estimated 3.6 billion people live in areas that are potential water scarce at least one month per year, and this population could increase between 4.8 and 5.7 billion by 2050.  Further, the 2030 Water Resources Group, a public-private-civil society collaboration facilitated by the International Finance Corporation, estimates that global water demand will exceed supply by 40% by 2030. The United Nations Environment Programme, an agency of the United Nations that coordinates environmental programs, estimates that roughly half of the world’s population currently lives within 40 miles of the sea. Because of the proximity of population centers to saltwater bodies, we believe desalination through our Seven Seas Water platform is a viable solution to address future water shortages.

11

As clean water demand continues to grow, we believe the need for water treatment technologies, such as desalination, wastewater treatment and POU filtration, will increase, and we believe both of our operating platforms are well positioned to benefit from these trends.

Global Desalination Market

In recent years, there has been a rapid increase in the installation of new seawater desalination capacity. According to a January 2020 update by Global Water Intelligence’s (GWI) Desaldata, total estimated desalination market capital expenditures are estimated to reach approximately $8 billion in 2020 and exceed approximately $7 billion annually through 2024. Many of the existing medium scale plants are owned and operated by local governments and companies, and operating desalination facilities is generally not their core competency. As a result, we believe a large number of these plants could benefit from our ownership and operating expertise to generate more reliable and lower cost clean water.

According to the World Resources Institute’s Aqueduct rankings, the Caribbean is one of the most water‑scarce regions of the world in terms of fresh water availability, comparable to the Western Sahara and parts of the Middle East. We believe our Seven Seas Water platform is a leading desalination solution provider in the Caribbean, where we currently operate nine water treatment facilities. Our installed capacity in the Caribbean has grown from 9.2 million GPD in 2010 to 26.5 million GPD as of December 31, 2019. We believe we represent a significant portion of the existing medium‑scale desalination plant capacity in the Caribbean. Many of the Caribbean region’s current desalination facilities utilize older thermal technologies that are more costly to operate than membrane‑based SWRO systems. We believe replacing these thermal plants with new SWRO plants is a significant additional opportunity for us. Given our compelling value proposition, extensive presence, and operational expertise in SWRO plants, we believe we are well positioned to further grow our Caribbean business.

We currently have a presence or targeted business development activities primarily in the Caribbean, South America, the Middle East, Africa and North America. The total installed capacity of medium‑scale reverse osmosis desalination plants in these locations is more than 1.5 billion GPD. We target specific attractive end markets, such as the municipal drinking water, mining, oil and gas, and ultra‑pure industrial process water markets, in both large and mature markets in North America and the Middle East, as well as in fast‑growing developing markets in South America, Africa and the Caribbean. We believe we are well positioned to pursue opportunities in these markets through new project development, partnerships with local firms and strategic acquisitions.

Wastewater Treatment and Water Reuse Market

Wastewater treatment processes improve water quality by reducing the toxins that cause harm to humans and pollute rivers, lakes and oceans. According to the American Society of Civil Engineers (ASCE) 2017 Infrastructure report card, it is estimated that the demand on existing wastewater treatment plants will grow by more than 23% by 2032 and that $271 billion is needed in wastewater infrastructure over the next 25 years. Evidence of the funding gap in wastewater infrastructure exists already in the United States and ASCE’s 2016 Failure to Act report estimates that 900 billion gallons of untreated sewage is discharged into the environment each year. Part of the solution for reducing stress on existing centralized wastewater treatment plants will be the addition of wastewater treatment capacity through decentralized solutions. Decentralized wastewater treatment solutions reduce the need for extensive upgrades and expansion of larger, centralized plants. In addition, these decentralized wastewater treatment solutions have faster implementation cycles, have higher potential for onsite water reuse and are more capital-efficient as modular designs can be expanded as capacity is needed.

According to the United States Environmental Protection Agency’s 2017 Potable Reuse Compendium, long-term water scarcity is expected to increase over time in many parts of the United States which will drive the increase for wastewater reuse. In 2017, the WateReuse Association estimated the market for wastewater reuse in the United States was $1.8 billion, which is expected to grow by 27% by 2027. As water scarcity increases, so will the need to reuse wastewater. There is a significant opportunity to reuse wastewater in the United States as currently only approximately 7 to 8% of wastewater is reclaimed for reuse, leaving a large potential for additional reuse capacity. 

12

While a majority of our wastewater treatment and water reuse solutions in the United States are concentrated in Texas, we are focused on and believe we are capable of providing, solutions across all 50 states and internationally. According to GWI, global installed reuse capacity has more than doubled since 2010 with this growth trend expected to continue into the future. 

U.S. Water Cooler Market

A 2016 study by Zenith estimates that the U.S. water cooler market will generate $4.2 billion of revenues in 2015, on an install base of more than 5.8 million BWC and POU units. POU units represent $467 million of these revenues and 1.4 million of the installed units, of which 94% are within the commercial market segment, which we target. We believe that POU units are taking market share from BWC units for a variety of reasons, including cost, convenience, health benefits and environmental concerns. Zenith reports that in the United States, the average BWC customer will spend $50.85 per month for bottles (5.01 bottles per month at an average price of $10.15 each) plus $19.80 per month to rent the base unit, implying an average total monthly spend of $70.65 per BWC unit. This compares with Zenith’s estimated average monthly rental rate for a POU unit in the United States of $35.15. Zenith indicates that from 2010 to 2015, the market share of POU on an installed unit basis grew from 16.4% to 23.5%, which represents a unit CAGR of 10% for that period. Zenith expects the total number of POU units to grow at a CAGR of approximately 9% between 2015‑2020, while the number of total installed BWC units is projected to grow at a CAGR of only 1% during the same period.

We estimate that our rental market share is less than 10% of commercial POU systems on an installed unit basis based on the industry installed unit data per the Zenith study. The U.S. POU water cooler market is highly fragmented with hundreds of small regional providers, representing an opportunity for consolidation. Given the size of our addressable market and the fragmentation of the industry, we believe we are well positioned to realize growth with our focus on the commercial POU market.

Our Strengths

Differentiated Water‑as‑a‑Service Business Model

Our WAAS business model offers an attractive value proposition to our customers by providing clean drinking water, processed water and wastewater treatment and water reuse solutions in a reliable, capital‑efficient, cost‑effective and flexible manner. Our long‑term, service‑focused model minimizes customer capital investment and yields long‑term customer relationships. We invest capital in developing and installing engineered water systems, and generate predictable and steady revenue, earnings and cash flow, as well as an attractive unit economics.

Excellence in Execution Driven by Engineering and Operational Expertise

Our experience in implementing, operating and servicing water filtration technologies is at the core of our water solutions. Our expertise drives our ability to offer customized solutions to satisfy our customers’ needs. Our engineering experience and expertise is critical in developing desalination and wastewater treatment and water reuse solutions that meet each customer’s specific needs. Another important aspect of engineering expertise is reliability, as evidenced by our ability to achieve an average plant availability of approximately 97% since 2013, which provides our customers with a highly reliable water supply.

Our Quench POU filtered water systems utilize a variety of water purification technologies, including reverse osmosis, carbon filtration, deionization, ozonation and ultraviolet sanitization. Our service technicians are trained to maintain and service our POU systems to provide a convenient, reliable and high-quality water supply.

Experienced Management Team with Demonstrated Track Record

Our Seven Seas Water and Quench management teams, led by our President and Chief Executive Officer, Anthony Ibarguen, have extensive industry experience. These teams have a demonstrated track record of managing costs, adapting to changing market conditions, developing a comprehensive safety culture and financing, acquiring, integrating and operating new businesses and solutions.

13

Strong Competitive Position Supported by Long‑Term Customer Relationships

We have long‑standing customer relationships. In our experience, customers typically extend their contracts significantly beyond the original term, as the need for the specific solution continues and the customer realizes the value proposition of our WAAS business model. Furthermore, we believe our operating and engineering expertise, experienced management team, and scale put us at the forefront of our industry, and that significant investment would be required for others to replicate our platforms.

Our water supply agreements under our Seven Seas Water platform typically provide for initial terms of up to 20 years and typically contain contractual provisions for cost pass‑through and minimum volume requirements. In addition, we have a reputation for quality and customer service. We have a track record of expanding and extending our initial contracts into longer‑term agreements with increasing water purchase volumes, in part, because we provide our customers with a cost‑effective and reliable water solution.

Our lease agreements for wastewater treatment and water reuse solutions under our Seven Seas Water platform typically provide for initial terms of up to five years with automatic renewal provisions. With annual lease customer attrition of less than 5%, our customer relationships typically extend for 15 years or longer. Further, as our customers’ needs for additional wastewater treatment equipment expands, we believe our modular based solutions provide a strategic solution for our customers to meet the increased demand through incremental long-term agreements.

In the 2016 study by Zenith International, our Quench platform was named one of the top five companies in the POU industry based on the number of POU units rented or sold. For company-owned and billed rental units, our current typical initial contract term is three years with an automatic renewal provision, and our annual unit attrition rate, at December 31, 2019, was less than 7.5%, implying an average rental period of more than 12 years, in part, because we provide highly reliable and efficient services. We believe our scale, product breadth and reliability, and customer service are key differentiators in a highly fragmented industry primarily composed of smaller providers.

Significant Experience Identifying and Integrating Acquisitions

Identifying and executing value‑enhancing acquisitions are core to our growth strategy. Under our Seven Seas Water platform, we have acquired two operating desalination facilities and one wastewater treatment and water reuse company since our initial public offering. Quench has completed 20 acquisitions since our initial public offering, of which eight have occurred since the beginning of 2019. We believe the recent acquisitions are indicative of the opportunity for future inorganic growth to increase our market share and expand our service coverage footprint. We routinely evaluate opportunities for acquisitions and believe our experience and success in identifying, executing, integrating and operating acquisitions enable us to deploy capital effectively, create shareholder value and increase our market share.

Strong Financial Performance

We have demonstrated sustained revenue growth with attractive margins under long‑term customer relationships.

Our revenues grew at a CAGR of 24.8% from 2014 through 2019. We believe we can continue our revenue growth by acquiring projects and customers, expanding our relationships with our customers, expanding into new geographies and complementary services, and selectively acquiring related water services businesses.

Our net losses for the years ended December 31, 2019, 2018 and 2017 were $20.1 million, $20.7 million and $24.9 million, respectively. See Item 8. “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K for more information.

Our Strategy

Continue to be an Industry Leader in Quality, Service and Efficiency

We will continue to focus on servicing our customers and responding to changing customer needs and emergency situations in the water industry. Our WAAS business model helps us to control reliability and quality and

14

ensure compliance with health standards and customer specifications. Our desalination plants operate safely and efficiently with an average availability of approximately 97% since 2013, providing an uninterrupted supply of water for our customers. Our wastewater treatment and water reuse equipment is based on a conventional, proven design to ensure reliability of all operating components. Our Quench platform benefits from significant economies of scale that are expected to continue as the business grows.

Drive Sustainable and Profitable Growth

We are focused on long‑term, sustainable equity returns and intend to continue to deploy capital in attractive rate of return opportunities. Across both our Seven Seas Water and Quench platforms, we have recurring revenue that is derived from predictable and contractually‑obligated payments. In addition, certain of our Seven Seas Water margins benefit from contractual inflation‑protection and cost pass‑through provisions.

We believe our differentiated WAAS business model results in attractive unit economics. As a result, we believe our growth will enhance operating leverage and drive margin expansion for both the Seven Seas Water and Quench platforms.

Develop New Business Opportunities and Add New Customers for Growth

We intend to continue to develop new business opportunities and add new customers supported by our experienced sales and marketing teams. Our Seven Seas Water platform has dedicated business development teams focusing on new project development and acquisition opportunities globally. We strategically focus on providing desalination and wastewater treatment and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers in North America, the Middle East, South America, Africa, new territories in the Caribbean and other select international markets.

Quench has an experienced and growing team of sales and marketing professionals responsible for new customer acquisition and expansion of existing customer relationships. Our sales representatives leverage our innovative, internet‑focused marketing and lead generation platform to add new customers. We also have dedicated sales teams targeting certain industries, such as government, education and medical, as well as large enterprise, dealer and wholesale opportunities.

Drive Growth through Increased Sales to Current Customers

Both our Seven Seas Water and Quench platforms are well positioned to realize growth through incremental sales to current customers due to our longstanding relationships developed as a result of our reliable operating performance, competitive pricing and highly‑rated customer service.

Our Seven Seas Water platform has a track record of increasing sales to current customers through expansions of existing facilities to meet increasing demands for the customer and extensions of existing contracts to provide water over a longer period of time.

In addition, Seven Seas Water maintains a fleet of containerized and bypass wastewater treatment solutions for rapid deployment and commissioning. This gives us a competitive advantage when responding to short-term or immediate needs. Once these systems are operating, we have the opportunity to demonstrate the high reliability our plants have achieved elsewhere. With respect to our desalination solutions, we have had significant success converting these short‑term customer relationships into much longer (10 to 20 years) contractual agreements.

Within Quench’s direct sales channel, our existing customers continue to provide significant opportunities for us to offer additional products and services. Many of our rental customers add water coolers or upgrade them during their relationship with us, and many also opt to rent equipment from our newer product lines enabled by POU water filtration, such as ice machines, sparkling water coolers and coffee brewers. Within Quench’s indirect sales channel, many of our dealers are also opting to purchase equipment from our newer product lines, such as ice machines.

15

Continued Development of New Product Offerings to Open New Market Opportunities

We intend to pursue new market opportunities and customers with our Seven Seas Water platform by leveraging our emergency response capabilities and specialized water supply systems for large‑scale industrial operations such as mining, power generation and high volume water consumption manufacturing activities. We invest in containerized and bypass wastewater treatment plants to enable us to provide rapid solutions for customers who require services quickly, including in emergency situations. We are also actively examining and pursuing governmental, municipal, industrial and hospitality wastewater recovery opportunities as well as opportunities to treat water associated with oil and gas exploration.

In our Quench business, we intend to continue leveraging our manufacturing capabilities, exclusive supply relationships, and market knowledge, to expand and refine our water cooler product offerings and our other related water‑enabled products, such as ice machines, sparkling water systems and coffee brewers. 

Selectively Pursue Acquisitions

Acquisitions have historically been a major growth driver for us, and we expect to continue to pursue acquisitions in the future. Both Seven Seas Water and Quench have dedicated teams that actively identify opportunities to expand our business and geographic presence, broaden our service offerings and allow us to move into additional markets.

Through our Seven Seas Water platform, we intend to continue to selectively acquire complementary businesses that will align with our current offerings. Our strategy includes proactive deal sourcing where we identify and pursue the acquisition of assets or businesses from companies that align or complement our existing Seven Seas Water offerings. As it relates to targeted desalination assets or businesses, we intend to purchase, upgrade, expand and operate existing water treatment and desalination facilities in new and current markets, including those from companies which own and operate a single desalination facility. We believe we can often operate these desalination facilities more efficiently and reliably than current operators by leveraging our engineering and operating expertise.

We believe the highly fragmented nature of the POU filtered water market will allow Quench to continue to identify and acquire POU companies to increase penetration of our current markets, broaden our product offerings and expand geographically.

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

 

Recent Acquisitions

On June 1, 2019, we acquired substantially all of the water filtration assets and assumed certain liabilities of Aguaman, Inc. (“Aguaman”), a POU water filtration company based in Miami, Florida, pursuant to an asset purchase agreement. The aggregate purchase price, subject to adjustments, was $1.5 million, which included approximately $1.1 million of cash, $0.2 million payable on the one-year anniversary of the transaction and $0.2 million acquisition contingent consideration payable to the seller on or before the one-year anniversary of the transaction. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States.

On July 15, 2019, we acquired substantially all of the assets and assumed certain liabilities of Carolina Pure Water Systems, LLC (“Carolina Pure”), a POU water filtration company based in Raleigh, North Carolina, pursuant to an asset purchase agreement. The aggregate purchase price, subject to adjustments, was $7.3 million, which included approximately $6.8 million of cash and $0.5 million payable on the one-year anniversary of the transaction. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States.

16

On October 1, 2019, we acquired substantially all of the assets and assumed certain liabilities of Mirex AquaPure Solutions L.P., d/b/a Mirex AquaPure Solutions (“Mirex”), a POU water filtration company based in Houston, Texas, pursuant to an asset purchase agreement. The estimated aggregate purchase price, subject to adjustments, was $11.6 million, which included approximately $10.3 million of cash, $0.9 million payable on the one-year anniversary of the transaction, $0.3 million payable on the two-year anniversary of the transaction and approximately $0.1 million of acquisition contingent consideration. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States.

On October 1, 2019, we acquired substantially all of the assets and assumed certain liabilities of 1920277 Alberta Inc., d/b/a Flowline Canada (“Flowline”), a POU water filtration company based in Edmonton, Canada, pursuant to an asset purchase agreement. The estimated aggregate purchase price, subject to adjustments, was $0.9 million, which included approximately $0.8 million of cash and $0.1 million payable on the one-year anniversary of the transaction. The assets acquired consist primarily of in-place lease agreements and the related POU systems in Canada.

On December 2, 2019, we acquired substantially all of the assets and assumed certain liabilities of Pure Planet Water, Inc. (“Pure Planet”), a POU water filtration company based in Palm Desert, California, pursuant to an asset purchase agreement. The estimated aggregate purchase price, subject to adjustments, was $0.2 million, which included approximately $0.1 million of cash and $0.1 million payable on the one-year anniversary of the transaction. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States.

On December 16, 2019, we acquired substantially all of the assets and assumed certain liabilities of Jonli Water Services, Inc. (“Jonli”), a POU water filtration company based in Quebec, Canada pursuant to an asset purchase agreement. The estimated aggregate purchase price, subject to adjustments, was $0.4 million, which was paid in cash. The assets acquired consist primarily of in-place maintenance agreements in Canada.

Available Information

We maintain a website with the address http://aquaventure.com.  We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.  We make available free of charge through our website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission.  Our Code of Business and Ethics is also available free of charge through our website.

In addition, the public may read and copy any materials that we file with the Securities and Exchange Commission through the Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system at www.sec.gov.  

 

Item 1A. Risk Factors

Risks related to the Merger

We may not complete the Merger within the time frame we anticipate or at all, which could have an adverse effect on our business, financial results and/or operations.

Completion of the Merger is subject to a number of closing conditions, including obtaining approval of our shareholders. Each party’s obligation to consummate the Merger is also subject to the accuracy of the representations and warranties of the other party (subject to certain qualifications and exceptions) and the performance in all material respects of the other party’s covenants under the Merger Agreement, including, with respect to us, covenants regarding operation of our business prior to closing. In addition, the Merger Agreement may be terminated under certain specified circumstances, including, but not limited to, the mutual consent of the parties or, subject to compliance with specified process and notice requirements, our exercise of a “fiduciary out” to terminate the Merger Agreement in order to enter into an agreement providing for a “Superior Proposal” (as such term is defined in the Merger Agreement). As a result, we cannot assure you that the Merger will be completed, even if our shareholders approve the merger, or that, if completed, it will be exactly on the terms set forth in the Merger Agreement or within the expected time frame.

17

If the Merger is not completed within the expected time frame or at all, we may be subject to a number of material risks. The price of our ordinary shares may decline to the extent that current market prices reflect a market assumption that the Merger will be completed. Further, under specified circumstances resulting in termination of the Merger Agreement, including if we exercise the “fiduciary out”, we could be required to pay Culligan a break-up fee in the amount of $34,132,500. The failure to complete the Merger may result in negative publicity and negatively affect our relationship with our shareholders, employees and clients. We may also be required to devote significant time and resources to litigation related to any failure to complete the Merger or related to any enforcement proceeding commenced against us to perform our obligations under the Merger Agreement.

The Merger Agreement provides us with limited remedies in the event of a breach by Culligan that results in termination of the Merger Agreement, including the right to a Parent Termination Fee (as such term is defined in the Merger Agreement) in the amount of $54,611,815, payable under certain specified circumstances. We cannot assure you that a remedy will be available to us in the event of such a breach or that the damages we incur in connection with such breach will not exceed the amount of the Parent Termination Fee. In addition, Culligan has obtained significant equity and debt financing commitments for the transactions contemplated by the Merger Agreement, but the obligations of any lenders to provide the debt financing under the Debt Commitment Letter (as such term is defined in the Merger Agreement) are subject to a number of conditions, including the receipt of executed loan documentation, accuracy of representations and warranties, consummation of the transactions contemplated in the Merger Agreement and contribution of the equity contemplated by the Equity Commitment Letter (as such term is defined in the Merger Agreement).

The announcement and pendency of the Merger could adversely affect our business, financial results and/or operations.

Our efforts to complete the Merger could cause substantial disruptions in, and create uncertainty surrounding, our business, which may materially adversely affect our results of operation and our business. Uncertainty as to whether the Merger will be completed may affect our ability to recruit prospective employees or to retain and motivate existing employees. Employee retention may be particularly challenging while the Merger is pending because employees may experience uncertainty about their roles following the Merger. A substantial amount of our management’s and employees’ attention is being directed toward the completion of the Merger and thus is being diverted from our day-to-day operations. Uncertainty as to our future could adversely affect our business and our relationship with clients and potential clients. For example, clients and other counterparties may defer decisions concerning working with us, or seek to change existing business relationships with us. Changes to or termination of existing business relationships could adversely affect our revenue, earnings and financial condition, as well as the market price of our ordinary shares. The adverse effects of the pendency of the Merger could be exacerbated by any delays in completion of the merger or termination of the Merger Agreement.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities, including, among other things, restrictions on our ability to acquire other businesses and assets, dispose of our assets, make investments, enter into certain contracts, repurchase or issue securities, pay dividends, make capital expenditures, take certain actions relating to intellectual property, amend our organizational documents and incur indebtedness. These restrictions could prevent us from pursuing strategic business opportunities, taking actions with respect to our business that we may consider advantageous and responding effectively and/or timely to competitive pressures and industry developments, and may as a result materially adversely affect our business, results of operations and financial condition.

In certain instances, the Merger Agreement requires us to pay a termination fee to Culligan, which could affect the decisions of a third party considering making an alternative acquisition proposal.

Under the terms of the Merger Agreement, we may be required to pay Culligan a termination fee of up to $34,132,500 if the Merger Agreement is terminated under specific circumstances. In particular, we may be obligated to pay Culligan a break-up fee in the amount of $34,132,500 if AquaVenture exercises its “fiduciary out” to terminate the Merger Agreement in order to enter into an agreement providing for a Superior Proposal (as defined in the Merger Agreement). This payment could affect the structure, pricing and terms proposed by a third party seeking to acquire or merge with us and could discourage a third party from making a competing acquisition proposal, including a proposal that would be more favorable to our stockholders than the Merger.

18

We have incurred, and will continue to incur, direct and indirect costs as a result of the Merger.

We have incurred, and will continue to incur, significant costs and expenses, including fees for professional services and other transaction costs, in connection with the Merger. We must pay substantially all of these costs and expenses whether or not the Merger is completed. There are a number of factors beyond our control that could affect the total amount or the timing of these costs and expenses.

Legal proceedings in connection with the Merger, the outcomes of which are uncertain, could delay or prevent the completion of the Merger.

Since the announcement of the Merger Agreement on December 23, 2019, three putative class actions have been filed in connection with the proposed Merger. On February 4, 2020, in connection with the merger, a putative class action lawsuit, Post v. AquaVenture Holdings Ltd., et al., 1:20-cv-174, was filed by purported shareholder Joseph Post against our Company and our directors in the United States District Court for the District of Delaware.  On February 12, 2020, in connection with the merger, a lawsuit, Hamilton v. AquaVenture Holdings Ltd., et al., 1:19-cv-01227, was filed as an individual action by purported shareholder Peter Hamilton against our Company and our directors in the United States District Court for the Southern District of New York. On February 20, 2020, purported shareholder Christopher Jagt filed an individual lawsuit against the Company and its directors in the United States District Court for the Eastern district of New York, captioned Jagt v. AquaVenture Holdings Ltd., et. al. 1:20-cv-931. These complaints allege that, because the proxy statement concerning the Merger is materially deficient in certain respects, all of the defendants violated Sections 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and that the directors additionally violated Section 20(a) of the Exchange Act. The complaints seek, among other things, (1) injunctive relief preventing consummation of the Merger, (2) rescissory damage or rescission of the Merger if it has already occurred; and (3) costs and fees, including attorney and expert fees, related to the actions. The defendants believe that the respective allegations asserted against them in the lawsuits are without merit and intend to defend against the lawsuits vigorously. Similar cases may also be filed in connection with the merger. These legal proceedings could delay or prevent the Merger from becoming effective.

 

Risks Related to Our Business

 

Our results of operations may fluctuate significantly based on a number of factors.

 

We deliver our Water‑as‑a‑Service, or WAAS, solutions through two operating platforms: Seven Seas Water and Quench. Seven Seas Water is a multinational provider of desalination and wastewater treatment solutions, and Quench is a U.S.‑based provider of Point‑of‑Use, or POU, filtered water systems and related services. For each of our business platforms, there are a number of factors that may negatively impact our operating results.

For our Seven Seas Water business, these factors include:

 

·

our ability to identify and successfully complete acquisitions and to integrate and operate any acquired assets or businesses profitably;

 

·

limitations under the Merger Agreement on our ability to pursue acquisitions;

 

·

the timing of the commencement of any operations of new, expanded or acquired desalination or wastewater treatment plants;

 

·

variations in the customer demand, volume or price of water purchased by our customers;

 

·

 the timing or delay of collections from a customer, including those arising from credit issues of the customer;

 

·

the amendment, disposition, termination or expiration of, or non-compliance with, a water supply agreement for a desalination or wastewater treatment plant;

 

19

·

the timing, size and accounting treatment of acquisitions, the impact of those acquisitions on our business and financial statements, and the market perception of the benefits of those acquisitions;

 

·

any disruptions in the operations of our plants due to severe weather conditions, natural disasters, climate change, equipment failures, power outages, extended maintenance, pandemics or other factors, including environmental factors (such as bacteria levels or contaminants in source water), that can reduce our production volume;

 

·

changes in capital spending;

 

·

our ability to raise sufficient debt or equity capital to fund the construction or acquisition of new plants;

 

·

our inability to recruit and retain skilled labor and personnel changes;

 

·

changes in the political, social and economic conditions of our markets; and

 

·

general economic conditions.

 

 

For our Quench business, these factors include:

 

·

our ability to identify and successfully complete acquisitions and to integrate and operate any acquired assets or businesses profitably;

 

·

limitations under the Merger Agreement on our ability to pursue acquisitions;

 

·

increased customer attrition at our Quench business;

 

·

increased competitive pressures in the POU filtration market;

 

·

the introduction and market acceptance of new products and new variations of existing products;

 

·

changes in our mix of products including changes in the mix of installed rental units and sold units, and the mix in the type of rental units installed;

 

·

information technology systems or network infrastructure failure and cyber-attacks, which could result in loss of operational capacities or critical data or cause delays in our billing and collection cycles; and

 

·

general economic conditions.

 

The future growth of our business is dependent on our ability to identify and successfully complete acquisitions for both our Seven Seas Water and Quench businesses, and to operate any acquired assets or businesses profitably.

 

Acquisitions have historically been a major part of our expansion strategy, and we expect to continue to grow through acquisitions in the future, either in transactions permitted under the Merger Agreement or otherwise, if the Merger is not consummated. We expect to continue to evaluate potential strategic acquisitions of businesses or products with the intention to expand our customer and revenue bases, widen our geographic coverage and increase our product breadth. As part of the expansion strategy for our Seven Seas Water business, we may seek to acquire additional desalination and water treatment facilities. Potential acquisition candidates include individual plants and businesses that operate multiple plants. For our Quench business, we may seek to acquire additional portfolios of equipment or businesses with local, regional, national or international customer bases. Identifying attractive acquisition candidates and willing sellers, particularly for our Seven Seas Water business, has been and continues to be challenging. We routinely evaluate potential acquisition candidates and engage in discussions and negotiations regarding potential acquisitions. There is significant competition for acquisition and expansion opportunities in our businesses. We compete for acquisition and expansion opportunities with companies that have significantly greater financial and management resources. There can be no assurance that any of our discussions or negotiations will result in an acquisition. In addition,

20

even if we have executed a definitive agreement for an acquisition, there can be no assurance that we will consummate the transaction within the anticipated closing timeframe, or at all.

 

The anticipated benefits from any of these potential acquisitions may not be achieved unless the operations of the acquired facilities, portfolios or businesses are successfully integrated in a timely manner. The integration of our acquisitions will require substantial attention from management and operating personnel to ensure that the acquisition does not disrupt any existing operations, or affect our customers’ or investors’ opinions and perceptions of our services, products or customer support.

 

Whether we realize the anticipated benefits from these acquisitions depends, to a significant extent, on a number of factors, including the following:

 

·

the integration of the target businesses into our company;

 

·

the performance and development of the underlying assets, businesses, services or technologies;

 

·

acceptance by our target’s customers;

 

·

the retention of key employees;

 

·

unforeseen legal, regulatory, contractual, labor or other issues arising out of the acquisitions; and

 

·

our correct assessment of assumed liabilities and the management of the relevant operations.

 

The process of integrating the various facilities, portfolios or businesses could cause the interruption of, or delays in, the activities of some or all of the existing facilities, portfolios or businesses, which could have a material adverse effect on our operations and financial results. Some acquisitions involve new management teams taking over day-to-day operations of a business. These new management teams may fail to execute at the same level as the former management team, which could reduce the cash flow of the client available to service the loan or other debt product, as well as reduce the value of the client as a going concern. Acquisitions also place a burden on our information, financial and operating systems and our employees and management. Investigation of target businesses, and negotiations and financial arrangements to acquire them, require significant management efforts and involve substantial costs for accountants, attorneys and others. The diversion of management’s attention and any difficulties encountered in the transition and integration processes could harm our business, financial condition and operating results. In addition, we may fail to accurately forecast the financial impact of an acquisition transaction, including tax and accounting charges. Acquisitions may also result in our recording of significant additional expenses to our results of operations and recording of substantial finite-lived intangible assets on our balance sheet upon closing. 

 

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) requires our management to assess the effectiveness of the internal control over financial reporting for the companies we acquire. In order to comply with the Sarbanes-Oxley Act, we will need to implement or enhance internal control over financial reporting at any company we acquire and evaluate the internal controls. We do not conduct a formal evaluation of companies’ internal control over financial reporting prior to an acquisition. We may be required to hire or engage additional resources and incur substantial costs to implement the necessary new internal controls should we acquire any companies. Any failure to implement required internal controls, or difficulties encountered in their implementation, could harm our operating results or increase the risk of material weaknesses in internal controls, which could, if not remediated, adversely affect our ability to report our financial condition and results of operations in a timely and accurate manner.

 

Our ability to manage our growth effectively and integrate the operations of acquired facilities, portfolios or businesses, or newly expanded or developed facilities, will require us to continue to attract, train, motivate, manage and retain key employees and to expand our information technology, operational and financial systems. If we are unable to manage our growth effectively, we may spend time and resources on such acquisitions that do not ultimately increase our profitability or that cause loss of, or harm to, relationships with employees, and customers as a result of the integration of new businesses.

 

21

Our Seven Seas Water desalination business is dependent on a small group of customers for a significant amount of our revenue.

 

Our Seven Seas Water desalination business focuses on large and complex projects. Consequently, we are dependent on a small number of customers for a significant amount of our revenue. Our desalination projects usually conduct business under long‑term water supply agreements with one or a limited number of customers or a single government or quasi‑government entity that purchase the majority of, and in some cases all of, the relevant facility’s output over the term of the agreement. This customer concentration exposes us to increased risk of termination, expiration, cancellation or breach of existing contracts or delay of new projects, which may cause high volatility of our revenues. For example, the aggregate of our five largest Seven Seas Water desalination customers accounted for approximately 26% of AquaVenture Holding Limited’s consolidated revenue for the year ended December 31, 2019. While we intend to maintain long‑term water supply agreements for each of our facilities, due to market conditions, regulatory regimes and other factors, it may be difficult for us to secure long‑term agreements where our current contracts are expiring or for new development projects. In addition, the financial performance of our facilities is dependent on the credit quality of, and continued performance by, our customers. If any significant customer ceases or delays payments to us, cancels or delays a project or otherwise ceases doing business with us, our business, results of operations and financial condition could be materially and adversely affected. Also, the failure of our customer in the BVI to pay us on a timely basis, or at all, could cause our BVI subsidiary to be in default on its debt, which could permit the lenders of that debt to accelerate its repayment. Further, if we are required to transfer or sell one or more of our desalination plants to our customers, our business, results of operations and financial condition could be materially and adversely affected. While in certain cases we serve quasi‑governmental agency customers, those water supply agreements are neither guaranteed by the related government nor supported by the full faith and credit of such government, and no assurance can be given that such government would provide financial support.

 

We also may be unable to maintain the long-term nature and economic structure of our current contract portfolio over time. Depending on prevailing market conditions at the time of a contract renewal, our customers may desire to enter into contracts with reduced fees, and may be unwilling to enter into long-term contracts at all.

 

Our ability to renew or replace our expiring contracts on terms similar to, or more attractive than, those of our existing contracts is uncertain and depends on a number of factors beyond our control, including:

 

·

the level of existing and new competition to provide competing services in our markets;

 

·

the cost of our services as compared to the cost of services offered by our competitors;

 

·

dissatisfaction with our services or products attached to services we provide;

 

·

our clients selecting alternative technologies to replace us;

 

·

the extent to which the current and potential customers in our markets are willing to provide commitments on a long-term basis; and

 

·

the effects of federal, state or local laws or regulations on the contracting practices of our customers.

 

To the extent we are unable to renew or replace our existing contracts on terms that are favorable to us or successfully manage the long-term nature and economic structure of our contract profile over time, our revenues and cash flows could decline and our ability to service our debt could be materially and adversely affected.

 

22

Failure to retain certain key personnel or the inability to attract and retain new qualified personnel could negatively impact our ability to operate or grow our business.

 

The success of our business will continue to depend to a significant extent on our ability to retain or attract key personnel, particularly management, engineering, sales and operating personnel. Our management team, led by our Chairman, Douglas R. Brown, our President and Chief Executive Officer, Anthony Ibarguen, and our Chief Financial Officer, Lee S. Muller, and other key personnel have extensive industry experience. Our ability to attract or retain these employees will depend on our ability to offer competitive compensation, training and benefits. If we are unable to continue to hire and retain skilled management, technical, engineering, sales, service and operating personnel, we will have trouble operating and expanding our business, including developing and operating our existing and new or acquired desalination plants. Our success depends largely upon the continued service of our management, technical, engineering, sales, service and operating personnel and our ability to attract, retain and motivate highly skilled personnel. We face significant competition for such personnel from other businesses and other organizations which may be better able to attract such personnel. The ability to attract or retain these employees will depend on our ability to offer competitive compensation, training and benefits. The loss of key personnel or our inability to hire and retain personnel who have the necessary management, technical, engineering, sales, service and operating backgrounds could materially adversely affect our business and our financial performance.

Our water sales agreement in Curaçao was terminated on December 31, 2019 when our customer exercised its right to purchase our Curaçao desalination facilities, which will adversely impact the revenues, results of operations and cash flows of our Seven Seas Water business.

Our former desalination facility in Curaçao sold industrial quality water to Curaçao Refinery Utilities B.V. ("CRU"), a government owned utility that provides utility services to a refinery owned by Refineria di Korsou ("RdK") that is leased to Petróleos de Venezuela S.A., or PDVSA (the state-owned oil company of Venezuela).

On June 28, 2019, we received formal notice from CRU that it is exercising its right to purchase our desalination facilities pursuant to the terms of the existing water supply agreement. The terms of the contractual buy-out right require payment to be made at the contract expiration date. The applicable buy-out amount, which was paid on December 31, 2019, was $3.5 million. For the year ended December 31, 2019, our revenue under this water supply agreement was $8.1 million, or 4.0% of our total consolidated revenue. The expiration of this water supply agreement and purchase of the desalination facilities will adversely impact the revenues, results of operations and cash flows of our Seven Seas Water business.

The future growth of our Seven Seas Water business is dependent on our ability to identify and secure new project opportunities in a competitive environment.

 

We are currently pursuing new opportunities for our Seven Seas Water business in North America, the Caribbean, South America, Africa, the Middle East and other select markets, as permitted under the Merger Agreement. Any new project we implement will require achievement of critical milestones in order to commence construction, the first of which is to successfully identify markets for such projects and secure contracts with proposed customers to sell water in sufficient quantities and at prices that make the projects financially viable.

 

Our Seven Seas Water business typically incurs significant business development expenses in the pursuit of new projects and markets, and such expenses have had, and could have, an adverse impact on our results of operations and cash flows. We currently operate our desalination business primarily in the Caribbean where we have successfully identified markets that accept our build, own and operate, or BOO, model. We currently operate our wastewater treatment and water reuse solutions business primarily in Texas where we have successfully identified markets that accept our business model. However, we expect to face challenges when we enter new markets, including identifying and establishing relationships with appropriate local partners, locating potential sites for new plants and convincing potential customers about the benefits of our business model. New markets may also have competitive conditions and governmental or regulatory regimes that are different from our existing markets. Any failure on our part to recognize or respond competitively to these differences may adversely affect the success of our business development efforts or operations in those markets, which in turn could materially and adversely affect our results of operations.

 

23

In most cases for our desalination business, we must sign a contract and sometimes obtain, or renew, various licenses, permits and authorizations from regulatory authorities. The competition and/or negotiation process that must be followed to win such contracts is often long, costly, complex and hard to predict. The same applies to the permit authorization process for activities that may affect the environment, which are often preceded by increasingly complex studies and public investigation. We may invest significant resources in a project or public tender without obtaining the right to build the plant. This could arise for many reasons, including the failure to obtain necessary licenses, permits or authorizations or inability to respond competitively. As a result, it may increase the overall cost of our activities or, if the resulting costs were to become too high, it could potentially force us to abandon certain projects. Should such situations become more frequent, the scope and profitability of our business, growth rate, predictability of earnings and cash flow generation could be materially and adversely affected.

 

As part of the bidding process that must be followed to win contracts, we must, at times, share our know‑how and confidential information with third parties. The need to share other confidential information and know‑how increases the risk that such know‑how and confidential information become known by our competitors, are incorporated into the product development of others or are disclosed or used in a way that disadvantages our business. Given that our proprietary position is based, in part, on our know‑how and confidential information, a competitor’s discovery of our know‑how and confidential information or other unauthorized use or disclosure would impair our competitive position and may have a material adverse effect on our business.

 

We may also decide to enter new markets by building reverse osmosis desalination plants before we have obtained a contract for the sale of water to be produced by the new plant or before we have established a customer base for the water to be produced by the new plant. Therefore, if we are unable to obtain a contract or sufficient number of customers for the plant, we may be unable to recover the cost of our investment in the plant, which could have a material adverse effect on our results of operations, cash flows and financial condition.

 

For our wastewater treatment and water reuse solutions business, our property developer customers obtain the necessary licenses, permits and authorizations from regulatory authorities.  Delays in a customer obtaining the necessary licenses, permits and authorizations, or delays in building or expanding the property being developed, could materially and adversely affect the scope and profitability of our business, growth rate, predictability of earnings and cash flow generation.

 

A number of factors may prevent or delay our Seven Seas Water business from building new plants and expanding our existing plants, including our dependence on third‑party suppliers and construction companies and the terms of the Merger Agreement. 

 

A number of factors may prevent or delay construction, expansion or deployment of our facilities, including our dependence on third‑party suppliers of equipment and materials, our dependence on third‑party construction companies, and the timing of equipment purchases, and constraints on our use of and disposition of capital pursuant to the Merger Agreement. 

 

The equipment and materials required for the uninterrupted service of our Seven Seas Water plants are supplied by only a limited number of manufacturers and could only be replaced with difficulty or at significant added cost. Some materials or equipment may become scarce or difficult to obtain in the market, or they may increase in price. This could adversely affect the lead‑time within which we receive the materials or components, and in turn affect our commitments to our customers, or could adversely affect the material cost or quality. The failure of any of these suppliers to fulfill their obligations to us or our subsidiaries could have a material adverse effect on our financial results. Consequently, the financial performance of our desalination facilities is dependent in part on the credit quality of, and continued performance by, our suppliers.

 

We also engage in long‑term engineering, procurement and construction contracts associated with developing our new desalination projects. If a construction company we have hired to build a new project defaults or fails to fulfill its contractual obligations, we could face significant delays and cost overruns. Any construction delays could have a material adverse impact on us.

 

In addition, the timing of equipment purchases can pose financial risks to us. We attempt to make purchases of equipment and/or material as needed. However, from time to time, there may be excess demand for certain types of equipment with substantial delays between the time we place orders and receive delivery. In those instances, to avoid

24

construction delays or service disruptions associated with the inability to own and place such equipment and/or materials into service when needed, we may place orders well in advance of deployment or when actual damage to the equipment and/or materials occurs. Thus, there is a risk that at the time of delivery of such equipment or materials, there may not yet be a need to use them; however, we are still required to accept delivery and make payment. In addition, due to the customization of some of our equipment and/or materials, there may be a limited market for resale of such equipment or material. This can result in our having to incur material equipment and/or material costs, with no use for or ability to resell such equipment.

 

Our ability to meet customer needs is dependent on the successful and efficient operation of our Seven Seas Water desalination facilities, which can be adversely impacted by a number of factors.

 

Our ability to meet our customers’ needs, as well as achieve our targeted level of financial performance, depends on the successful operation of our facilities in our Seven Seas Water business. We currently own or operate ten water treatment facilities in the Caribbean region and South America, which generate substantially all of the revenue of our Seven Seas Water business. Some of these facilities serve governmental and municipal customers which provide water to the ultimate consumers. If these customers fail to provide adequate service, our reputation will suffer, and our competitive position may be impaired. In addition, if the risks involved in our operations are not appropriately managed or mitigated, our operations may not be successful, and this could adversely affect our results of operations. The continued operation and maintenance of our desalination facilities may be disrupted by a number of technical problems, including:

 

·

breakdown or failure of equipment or processes;

 

·

contamination of, or other problems with, the raw feedwater that we process, including from environmental factors (such as bacteria levels or contaminants in source water) that can reduce our production volumes;

 

·

service disruptions, stoppages or variations in our supply of electricity transmitted by third parties to our desalination plants resulting in service interruptions;

 

·

availability of materials used in the desalination process;

 

·

problems with, or delays in availability of, water distribution infrastructure or our customers’ ability to take delivery of the water we produce;

 

·

operating hazards such as mechanical problems and accidents caused by human error, which could impact public safety, reliability and customer confidence;

 

·

disruption in the functioning of our information technology and network infrastructure which are vulnerable to disability, failures and unauthorized access;

 

·

natural disasters, hurricanes, floods and other extreme weather;

 

·

the ability to secure and retain qualified labor; and

 

·

other unanticipated operational and maintenance liabilities and expenses.

 

If we do not operate our business to appropriately manage or mitigate these problems, we may breach our water supply agreement, harm our customer relationships or both, which could lead to the termination of the related water supply agreement. A decrease in, or the elimination of, the revenues generated by our key plants or a substantial increase in the costs of operating such plants could materially impact our reputation, performance, financial results and financial condition.

 

25

Our negotiations of changes to existing desalination customer contracts may not be successful and may adversely affect our business and results of operations.

 

Our Seven Seas Water desalination business is generally conducted in accordance with the terms of long-term water supply contracts that, among other things, may provide for minimum customer purchases, guaranteed supply volumes and specified levels of pricing based on the volume of water purchased during the billing period. These contractual features are key determinants of plant revenue and plant profitability. Certain of our contracts provide for contractually scheduled price changes. In addition, most of our contracts include provisions to increase prices in accordance with a specified inflation index such as the consumer price index. Following the completion of acquisitions, we are typically bound by the contracts we acquire, which may include terms that either we or our customer might desire to change. From time to time, we also negotiate pricing or other changes with our existing customers which include, but are not limited to, extending or renewing a contract, expanding plant capacity, adjusting minimum volumes pursuant to a take-or-pay agreement, adjusting water rates or the indexation thereof, or a combination thereof. We have recently entered into, or proposed to enter into, amendments to certain of our contracts that have resulted in reductions or delays in the revenues we derive from those contracts in exchange for changes we believe are beneficial to us in the long run. As our customers are often governmental entities or affiliates, these negotiations can take considerable time and effort, and in certain situations, proposed amendments may require the approval of certain of governmental or quasi-governmental parties, our lenders or other third parties, resulting in negotiations with multiple parties. There can be no assurances that any specific negotiations will result in an amendment on a timely basis or at all, or that such amendment will be beneficial to us. The terms and timing of any such amendments may negatively impact our operating results, fail to meet our expectations or result in greater variability in our operating results from period to period. Failure to successfully conclude any such negotiations may require us to update previous public statements regarding our expected financial results, adversely affect our relationship with our customer, which could result in our customer exercising its rights under the contract (including, in certain circumstances, the right to purchase the desalination plant), or result in negative publicity, all of which could have a material adverse effect on our business and results of operations. Because we are dependent on a small number of customers for a significant amount of our Seven Seas Water bulk water revenues, any significant changes in prices or other terms of our contracts with any of those customers could significantly reduce our revenues, operating results and cash flows in specific periods or for the long term. Further, the political, economic and social conditions prevailing from time to time may lead our customers to more aggressively pursue cost reduction initiatives and contract amendments, which could adversely affect our business, revenues and operating results.

 

If the rental portion of our business experiences a higher annual unit attrition rate than forecasted, our revenues could decline and our costs could increase, which would reduce our profits and increase the need for additional funding.

 

Attrition is generally the result of competitive offerings, customers’ ceasing or reducing their use of our solutions, customer financial distress, customer dissatisfaction and other factors. If our unit attrition rate is higher than expected, it would reduce our revenues and could require increased marketing costs to attract the replacement customers required to sustain our growth plan, both of which would reduce our profits and profit margins. In addition, our ability to generate positive operating cash flow in future periods will be dependent on our ability to obtain additional funding to increase our customer acquisition activities to out‑pace customer attrition and absorb operating expenses. There can be no assurance that we will be able to obtain additional funding, increase our customer base at a rate in excess of our customer attrition rate or achieve positive operating cash flows in future periods. In the absence of our raising additional funding to finance increased selling and marketing activities and new customer acquisition, our customer attrition may exceed the rate at which we can replace such customers’ business. In such case, our revenues could be reduced and our profit margin could be affected.

 

Increased competition could hurt our Quench business.

 

The water cooler markets in the United States and Canada are intensely competitive. The POU filtration market is highly fragmented, with many small, local service providers. There are also a number of larger national competitors, including Cott Corporation, Nestlé, Aramark, Canteen and Waterlogic International. Municipal tap water is also a substitute for our POU filtration services. Our competitive position is based on our pricing, national service coverage and product quality. Many of these larger businesses have substantially greater financial and management resources than we do. Our ability to gain or maintain market share may be limited as a result of actions by competitors. If we do not succeed in effectively differentiating ourselves from our competitors, based on pricing, service, value proposition,

26

quality of products, desirability of brands or otherwise, our competitive position may be weakened, which could also jeopardize our strategy to include the rental of additional or upgraded water coolers and the rental of equipment from our product lines enabled by POU water filtration. If we are unable to convince current and potential customers of the advantages of our services, our ability to sell our services may be limited.

 

Certain of our long‑term water supply contracts under our Seven Seas Water business require us to transfer ownership of the desalination plant to the customer upon expiration or termination of the contract, or permit the customer to purchase the desalination plant in accordance with the contract before the expiration or termination of the contract. 

 

Certain of our long‑term water supply contracts under our Seven Seas Water business require us to transfer ownership of the desalination plant to the customer upon expiration or termination of the supply contract, either for a specified amount or for no additional payment. Some of our long‑term water supply contracts permit the customer to purchase the plant for amounts determined in accordance with the contract before the expiration or termination of the contract, typically with notice of six months or less. In addition, most of our long‑term water supply contracts grant us the right to remove our equipment from the site of the facility in the event that the contract terminates due to a default by the customer or otherwise. If we are required to transfer or sell a desalination plant to our customer or are unable to remove our equipment upon termination of the contract for whatever reason, including customer interference, our revenue, earnings and cash flows from that desalination plant will cease, unless we are retained by the customer to continue to operate and maintain the plant. There can be no assurances that we will be retained by a customer to continue to operate and maintain the plant after its transfer to or purchase by such customer. As a result, our revenue, earnings and cash flows would decrease materially if we were to be required to transfer or sell a desalination plant. In addition, if we are required to transfer or sell a desalination plant to a customer for less than our carrying value of the plant or no consideration, we may not recoup our investment in the plant, may not receive sufficient proceeds to enable the subsidiary that owns the plant to repay any outstanding project finance debt in full, and may have to write down or write off the remaining value of the plant, any of which could materially and adversely affect our business, assets, earnings and debt covenant compliance. See “Business—Seven Seas Water—Our Desalination Plants.”

 

The political, economic and social conditions impacting our geographic markets may adversely affect our Seven Seas Water business.

 

Currently, substantially all of our operating desalination plants are located in the Caribbean region. We often market our services, and sell the water we produce, to governments and governmental entities run by elected or politically appointed officials. Various constituencies, including our competitors, existing suppliers, local investors, developers, environmental groups and conservation groups, have competing agendas with respect to the development of desalination plants and sale of water in the areas in which we operate, which means that decisions affecting our business are based on many factors other than economic and business considerations.

 

Political concerns and governmental procedures and policies have hindered or delayed, and in the future are expected to hinder or delay, our ability to develop desalination plants or to enter into, amend or renew water supply contracts. We cannot predict whether changes in political administrations will result in changes in governmental policy and whether such changes will affect our business. For example, our market development activities and operations can be adversely affected by lengthy government bidding, contracting, licensing, permitting, approval and procurement processes, immigration or work permit restrictions, local laws, restrictive exchange controls or other factors that limit our customers’ access to U.S. dollars and nationalization or expropriation of property. In addition, we may need to spend significant time and resources to inform newly elected officials, local authorities and others about the benefits of outsourced management of desalination plants and other water and wastewater treatment infrastructure.

 

Our customers may suffer significant financial difficulties, including those due to downturns in the economy, political developments, severe weather events (such as hurricanes) or commodity price fluctuations. Some of our customers could be unable to pay amounts owed to us or renew contracts with us at current or increased rates, which would negatively affect our financial performance. Certain of the customers and governments that we serve derive significant revenue from tourism, the sale of certain commodities such as oil, petrochemicals, natural gas, precious metals and other minerals, and our customers may be adversely impacted if demand or prices for these commodities were to decline for a prolonged period. Therefore, a decline in international or regional demand or prices for certain commodities may indirectly impact the demand for the water we produce and the credit worthiness of our customers.

 

27

Furthermore, many of our targeted markets are in developing countries undergoing rapid and unpredictable economic and social changes. Many of these countries have suffered significant political, economic and social crises in the past, and these events may occur again in the future. Adverse political, economic and social conditions may affect existing operations and the development of new operations due to the resulting political economic and social changes, the inability to accurately assess the demand for water and the inability to begin operations as scheduled. Such conditions may also affect the creditworthiness of affected clients who rely on or do business in impacted countries or regions.

 

We expect to continue to be subject to risks associated with dealing with governments and governmental entities, and political concerns and governmental procedures and policies may hinder or delay our ability to enter into supply agreements or develop our plants. The political, economic and social conditions impacting our geographic markets may adversely affect our business.

 

Severe weather conditions or natural or man‑made disasters may disrupt our operations and affect the demand for water produced by our Seven Seas Water business or ability to produce water, any of which could adversely affect our financial condition, results of operations and cash flows.

 

Our Seven Seas Water business, operating results and financial condition could be materially and adversely affected by severe weather, floods, natural disasters (such as hurricanes, particularly in the Caribbean), hazards (such as fire, explosion, collapse or machinery failure), environmental factors, or be the target of terrorist or other deliberate attacks. Repercussions of these catastrophic events may include:

 

·

shutting down or curtailing the operation of our plants for limited or extended periods;

 

·

fluctuations in short-term customer demand;

 

·

the need to obtain necessary equipment or supplies, including electricity, which may not be available to us in a timely manner or at a reasonable cost;

 

·

evacuation of and/or injury to personnel;

 

·

damage or catastrophic loss to our equipment, facilities and project work sites, resulting in suspension of operations or delays in building or maintaining our plants;

 

·

loss of productivity;

 

·

the deterioration of the financial health of our customers; and

 

·

interruption to any projects that we may have in process.

 

Large‑scale or repetitive natural disasters, such as hurricanes, tropical storms, floods or earthquakes, can also lead to the damage or destruction of certain infrastructure (such as electricity supply, water storage tanks, water distribution infrastructure, roads and means of communication) on which we depend for the conduct of our business and can cause damage to the infrastructure for which we are responsible.

 

In addition, hazards (such as fire, explosion, collapse or machinery failure) are inherent risks in our operations, which may occur as a result of inadequate internal processes, technological flaws, human error or certain events beyond our control. Our Seven Seas Water facilities could also be the target of terrorist or other deliberate attacks which could harm our business, financial condition and results of operations. We maintain security measures at our facilities, and we have and will continue to bear increases in costs for security precautions to protect our facilities, operations, and supplies. Despite our security measures, we may not be in a position to control the outcome of terrorist events, or other attacks on our facilities, should they occur. Such an event could harm our business, financial condition and results of operations and cash flows.

 

Any contamination resulting from a natural or man‑made disaster to our raw feedwater supply may result in disruption in our services, additional costs and litigation, which could harm our business, financial condition, results of

28

operations and cash flows. Damage or destruction to our facilities and infrastructure could temporarily inhibit our ability to deliver water as required by our contracts, which may enable our customers to terminate such contracts.

 

We face possible risks associated with the physical effects of climate change.

 

The physical effects of climate change could have a material adverse effect on our properties, operations, and business. However, the impacts of climate change on our operations are highly uncertain and their significance will vary depending on type and geographic location of any physical impact. The impacts of climate change could include changing temperatures, flooding, water shortages, changes in weather and rainfall patterns, and changing storm patterns and intensities. Many climate change predictions, if true, present several potential challenges to water and wastewater utilities, such as increased precipitation and flooding, potential degradation of water quality, and changes in demand for water services. To the extent that climate change impacts changes in weather patterns, some of our properties could experience increases in storm intensity and rising sea levels. Climate change may also have indirect effects on our business by increasing the cost of, or availability of, property insurance on terms we find acceptable, increasing the cost of energy, or adversely affecting our customers (including their creditworthiness and cash flows). There can be no assurance that climate change will not have a material adverse effect on our properties, operations, or business.

 

We may sustain losses that exceed or are excluded from our insurance coverage or for which we are not insured.

 

We may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. Because of the location of our Seven Seas Water facilities, we are exposed to risks posed by severe weather and other natural disasters, such as hurricanes, floods, earthquakes and tsunamis. In addition to natural hazards, other hazards such as fire, explosion, collapse, riot, civil commotion, machinery failure and electrical service interruption are inherent in our operations. Liability from these hazards and other risks may occur as a result of inadequate internal processes, technological flaws, human error or events beyond our control. The hazards described above can cause significant personal injury or loss of life, severe damage to and destruction of property, plant and equipment and contamination of, or damage to, the environment and suspension of operations. The occurrence of any of these events may result in our being subject to investigation, required to perform remediation and/or named as a defendant in lawsuits asserting claims for substantial damages, environmental cleanup costs, personal injury, natural resource damages and fines and/or penalties. In addition, such events may affect the availability of personnel, proper functioning of our information technology infrastructure and availability of third parties on whom we rely, any of which consequences could have a material adverse effect on our business and results of operations.

 

Our Seven Seas Water facility in Tortola and our two large facilities in the U.S. Virgin Islands which serve VIWAPA are insured against earthquake, flood and hurricane damage, while our other desalination facilities are not. Our Seven Seas Water facility in Trinidad is insured against earthquake, flood and windstorm damage. The leases for certain of our wastewater treatment and water reuse equipment in the United States require the lessee to maintain insurance against earthquake, flood and hurricane damage. These insurance policies have various sub-limits, exclusions and limitations that can preclude coverage, and insurance companies may seek to deny claims we might make. Each policy includes deductibles or self-insured retentions and maximum policy limits for covered claims. As a result, we may sustain self-insured losses that are: (i) below our deductibles and self-insured retentions, (ii) exceed our policy limits or (iii) excluded from our insurance coverages. Catastrophic events can result in decreased coverage limits, more limited coverage, increased premiums and deductibles with respect to the insurance policies covering these facilities.

 

Our Seven Seas Water facilities are fortified to withstand damage caused by severe weather, and we have not experienced any material loss or damage resulting from the natural disasters that have impacted our facilities. However, we cannot assure that our facilities will withstand all natural disasters in the future, and an unforeseen natural disaster may cause damage to or the destruction of one or more of our facilities. In addition, an accident or safety incident could expose us to significant liability and a public perception that our operations are unsafe or unreliable. Although we conduct ongoing, comprehensive safety programs, a major accident could expose us to significant personal injury or property claims by third parties or employees. Even if we or our lessees have purchased insurance, the adverse impact on our business, including both costs and lost revenue, could greatly exceed the amounts, if any, that we might recover from the insurers. We could also suffer significant construction delays or substantial fluctuations in the pricing or availability of materials for any projects we have in process. Any of these events could cause a decrease in our revenue, cash flow and earnings.

 

29

In our Quench business, we maintain liability insurance covering our facilities and operations, including installations of company‑owned equipment in the field, which could fail and cause significant property damage, personal injury and/or loss of life. We also maintain cyber and privacy liability coverage for risks related to our network and related data. However, we can make no assurance that the adverse impact of any claim will not materially exceed the amounts that we might recover from our customers, suppliers or insurers. Moreover, significant insurance claims, even if covered, can result in decreased coverage limits, more limited coverage, increased premium costs or deductibles. Any of these events could adversely affect our operations.

 

Our Seven Seas Water desalination operations may be affected by tourism and seasonal fluctuations which could affect the demand for our water.

 

Our desalination operations may be affected by the levels of tourism and seasonal variations in the areas in which we operate. Demand for our water can be affected by variations in the level of tourism, demand for real estate and rainfall levels. Tourism in our service areas is affected by the economies of the tourists’ home countries (primarily the United States and Europe), severe weather events (such as hurricanes), terrorist activity and perceived threats thereof, the cruise industry and costs of fuel and airfares. In addition, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China, resulting in extended holidays, travel restrictions and certain supply chain and other business disruptions. At this point, the extent to which the coronavirus may impact levels of tourism and seasonal variations in the areas in which we operate, or disruption in the supply and equipment that we use in our business or business generally,  is still uncertain. A downturn in tourism or greater than expected rainfall in the locations we serve could adversely affect our revenues, cash flows and results of operations.

 

Quench’s largest customers account for a significant percentage of Quench’s revenues, and our business would be harmed were we to lose these customers.

 

We estimate Quench’s twenty largest customers accounted for approximately 8% of the revenue of our Quench business during the year ended December 31, 2019. A material reduction in purchases by, or services provided to, these customers could have a significant adverse effect on the business and operating results of our Quench business. In addition, pressures by these customers that would cause us to materially reduce the price of our products could result in a reduction to our operating margins.

 

Certain of our water supply contracts do not contain “take‑or‑pay” obligations, which may adversely affect Seven Seas Water’s financial position and results of operation.

 

Our water supply contracts may require customers to purchase a minimum volume of water on a take‑or‑pay basis over the term of those contracts. Take‑or‑pay provisions allow us to protect against short‑term demand risk by guaranteeing minimum payments from such customers regardless of their actual requirements. However, two of our ten water supply contracts do not contain such provisions, and therefore, periods of low production requirements by our customers under such contracts may adversely affect our financial position and results of operation.

 

Our ability to compete successfully for acquisition opportunities and otherwise implement successfully our expansion strategy depends, in part, on the availability of sufficient cash resources, including proceeds from debt and equity financings.

 

Our ability to compete successfully for acquisition opportunities and otherwise implement successfully our expansion strategy depends, in part, on the availability of sufficient cash resources, including proceeds from debt and equity financings. Our growth strategies include developing projects, the success of which depends on our ability to find new sites suitable for development into viable projects and developing those sites and projects. Any new project development or expansion project requires us to invest substantial capital. We finance some of our projects with borrowings, which are repaid in part from the project’s revenues, and secured by the share capital, physical assets, contracts and cash flow of that project subsidiary and by us. This type of financing is usually referred to as project financing. Commercial lending institutions sometimes refuse to provide project financing in certain less developed countries, and in these situations, we have sought and will continue to seek direct or indirect (through credit support or guarantees) project financing from a limited number of multilateral or bilateral international financial institutions or agencies. As a precondition to making such project financing available, the lending institutions may also require governmental guarantees of certain project and sovereign related risks. We may also acquire companies that benefit from these protections. There can be no assurance, however, that project financing from international financial agencies or

30

that governmental guarantees will be available when needed, and if they are not, we may have to abandon the project or invest more of our own funds, which may not be in line with our investment objectives and would leave fewer funds for other projects and needs. Further, while the Merger Agreement is in effect, we are restricted from disposing of certain assets, which may leave us with fewer of our own funds for such investment.

 

If the demand for our products and services declines when we are raising capital, we may not realize the expected benefits from our new facility or expansion project. Furthermore, our new or modified facilities may not operate at designed capacity or may cost more to operate than we expect. The inability to complete any new project development or expansion projects or to complete them on a timely basis and in turn grow our business could adversely affect our business and results of operations.

 

We believe that our future capital requirements will depend upon a number of factors, including cash generated from operations and the rate at which we acquire additional facilities, portfolios or businesses. We expect to fund such capital expenditures with cash from operations and proceeds from debt and equity financings. However, we may be unable to raise capital or may be unable to raise capital on terms acceptable to us, which would have a material adverse effect on our business.

 

Financing risk has also increased as a result of the deterioration of the global economy and the recent crisis in the financial markets and, as a result, we may forgo certain development opportunities. We believe that capitalized costs for projects under development are recoverable; however, there can be no assurance that any individual project will be completed and reach commercial operation. If these development efforts are not successful, we may abandon a project under development and write off the costs incurred in connection with such project. At the time of abandonment, we would expense all capitalized development costs incurred in connection therewith and could incur additional losses associated with any related contingent liabilities.

 

Our substantial indebtedness could affect our business adversely and limit our ability to plan for or respond to changes in our business, and we may be unable to generate sufficient cash flows to satisfy our liquidity needs.

 

Our ability to comply with the terms of the documents governing our outstanding indebtedness, to make cash payments with respect to the outstanding indebtedness or to refinance any of such obligations will depend on our future performance, which in turn, is subject to prevailing economic conditions and financial and many other factors beyond our control.

 

The terms of the documents governing our outstanding indebtedness contain a number of covenants that, among other things, restrict our ability to incur additional indebtedness, pay dividends, prepay subordinated debt, dispose of certain assets, make investments, enter into sale and leaseback transactions, create liens, make capital expenditures and make certain payments, investments or acquisitions and otherwise restrict corporate activities. In addition, we are required to satisfy specified financial covenants. Our ability to comply with such provisions may be affected by events beyond our control. The breach of any of these covenants could result in a default under some or all of the documents governing our outstanding indebtedness. In the event of any such default, depending on the actions taken by the lenders under our outstanding indebtedness, such lenders could elect to declare all amounts borrowed under such indebtedness, together with accrued interest, to be due and payable. Certain of our loans have cross‑default provisions that may be triggered upon our default under the documents governing our other indebtedness and, in addition, a default may restrict our ability to effect intercompany transfers of funds.

 

As of December 31, 2019, we had approximately $316.6 million of outstanding consolidated indebtedness. Although our cash flow from operations has been sufficient to meet our debt service obligations in the past, there can be no assurance that our operating results will continue to be sufficient for us to meet our debt service obligations and financial covenants. Certain of our outstanding indebtedness is collateralized by our assets, including the share capital of certain of our subsidiaries, and certain assets of our subsidiaries. If we were unable to repay borrowings, the lenders could proceed against their collateral. If the lenders or the holders of any other secured indebtedness were to foreclose on the collateral securing our obligations to them, there could be insufficient assets required for the continued operation of our business remaining after satisfaction in full of all such indebtedness. In addition, the loan instruments governing the indebtedness of certain of our subsidiaries contain certain restrictive covenants which limit the payment of dividends and distributions and the transfer of assets to us and require such subsidiaries to satisfy specific financial covenants.

 

31

The degree to which we are leveraged could have important consequences to the holders of our shares, including:

 

·

our ability to obtain additional financing for acquisitions, capital expenditures, working capital, payment of dividends or general corporate purposes may be impaired in the future;

 

·

the impact of negative pledges and financial covenants on our financial profile;

 

·

a substantial portion of our cash flow from operations may be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for our future growth, operations and other purposes;

 

·

most of our borrowings are and will continue to be at variable rates of interest, which exposes us to the risk of increased interest costs; and

 

·

we may be substantially more leveraged and at higher costs than certain of our competitors, which may place us at a competitive disadvantage and make us more vulnerable to changing market conditions and regulations.

 

We have significant cash requirements and limited sources of liquidity.

 

We require cash primarily to fund:

 

·

debt service obligations;

 

·

acquisitions;

 

·

construction and other project commitments;

 

·

inventory and equipment purchases;

 

·

refurbishment, enhancement and improvements of existing facilities;

 

·

other capital commitments, including business development investments;

 

·

taxes; and

 

·

selling and marketing and other overhead costs.

 

Our principal sources of liquidity are:

 

·

operating cash flows from our existing operations;

 

·

debt and equity financing;

 

·

dividends and other distributions from our subsidiaries;

 

·

intercompany receivables;

 

·

repayment of principal and interest on intercompany loans; and

 

·

proceeds from debt financings at the subsidiary level.

 

While we believe that these sources will be adequate to meet our obligations for the foreseeable future, this belief is based on a number of material assumptions, including, without limitation, assumptions about our ability to access the capital or commercial lending markets, the operating and financial performance of our subsidiaries, exchange

32

rates, the ability of our subsidiaries to pay dividends or repay intercompany loans, and our ability to sell assets. Any number of assumptions could prove to be incorrect and therefore there can be no assurance that these sources will be available when needed or that our actual cash requirements will not be greater than expected. In addition, our cash flow may not be sufficient to repay at maturity the entire principal outstanding of indebtedness, and we may have to refinance such obligations. We have a  significant principal repayment due in August 2021. While the Merger Agreement is in effect, we are restricted from disposing certain assets, which may limit our ability to generate sufficient cash flows to satisfy our debt obligations. There can be no assurance that we will be successful in obtaining such refinancing on terms acceptable to us or at all, and any of these events could have a material effect on us.

 

As a part of our growth strategy, we have used, and expect to continue to use, project financing, which may adversely affect our financial results.

 

We sometimes rely on project financing to fund the costs of our acquisitions and project development. Our subsidiaries have incurred, and in the future, may incur, project financing indebtedness to the extent permitted by existing agreements, and may continue to do so to fund ongoing operations. In addition, we may acquire companies that have significant existing project financing indebtedness. Any such newly incurred subsidiary indebtedness would be added to our current consolidated debt levels. Our project financing debt is, and would likely be structurally senior to certain of our other debt, which could also intensify the risks associated with leverage. In addition, while the Merger Agreement is in effect, we are subject to certain restrictions on our ability to incur additional debt. Separately, failure to obtain project financing could result in delay or cancellation of future transactions or projects, thus limiting our growth and future cash flows.

 

While the lenders to a project subsidiary under our project financings sometimes do not have direct recourse against us (other than to the extent we give any credit support), defaults thereunder can still have important consequences for us, including, without limitation: 

 

·

our failure to receive subsidiary dividends, fees, interest payments, repayment of intercompany loans and other sources of cash, as the project subsidiary will typically be prohibited from distributing cash to us during the pendency of any default;

 

·

triggering our obligation to make payments under any financial guarantee, letter of credit or other credit support which we have provided to or on behalf of such subsidiary;

 

·

causing us to record a loss in the event the lender forecloses on the assets;

 

·

triggering defaults or acceleration on our outstanding debt, and, in some cases, triggering cross‑default provisions;

 

·

the loss or impairment of investor confidence;

 

·

the acceleration of our debt and resulting impact of the accelerated debt on our consolidated financial statements;

 

·

foreclosure on the assets that are pledged under the non‑recourse loans, therefore by eliminating any and all potential future benefits derived from those assets; or

 

·

our repayment of such project financing from other resources that do not secure that financing in an effort to avoid the adverse consequences of a default or acceleration of such project financing.

 

Future revenue for our long‑term water supply agreements under our Seven Seas Water business is based on certain estimates and assumptions, and the actual results may differ materially from such estimated operating results.

 

We operate our Seven Seas Water business based on our current estimate of the revenues we will generate under our long‑term water supply agreements. Many of the costs of operating our facilities are fixed or do not vary materially based on the water produced by the facility, particularly in the short term. Our estimates and assumptions regarding what the water facilities will produce, and the revenues it will generate, during a specific period may not materialize. Unanticipated events may cause unforeseeable downtime, which would cause us to be unable to deliver

33

water to our customers, which could have a material adverse effect on the actual results achieved by us during the periods to which these estimates relate. If revenues generated by the facility are less than estimated, our operating profit, gross margin and profits will be adversely affected.

 

Our emergency response services under our Seven Seas Water business expose us to additional challenges and risks.

 

Our Seven Seas Water business also provides emergency response services in the event of a water crisis caused by water shortages, the failure of existing water producing equipment, and hurricanes or other natural disasters, among other reasons. We build skids, mobile desalination plants and other components in advance of a need to deploy them. To address these situations, we typically install our containerized mobile desalination plants pursuant to water supply agreements with shorter terms, typically with terms of less than five years. Due to the reactive nature of this market, we cannot predict when we will deploy our equipment, if at all, the duration of the deployment or the other terms and conditions applicable to the deployment (including the prices we will be paid for the water purchased from us). Our inability to deploy our containerized mobile desalination plants and components in a timely manner could adversely affect our results of operations, financial condition and cash flows. Further, we rely on our ability to use this equipment in other situations. If our equipment is damaged or requires extensive refurbishing after decommissioning and before it can be redeployed, our return on the investment in that equipment may be adversely affected. If we fail to perform in an emergency as our customer expects, or if our customer perceives that we failed to perform, our reputation and business could be materially and adversely affected. In addition, the deployment of our equipment on a large scale in response to an emergency may divert management’s attention and resources. This could reduce our ability to pursue other opportunities, which could have an adverse effect on our business and results of operations.

 

The profitability of our Seven Seas Water facilities is dependent upon our ability to estimate costs accurately and acquire, construct and operate plants within budget.

 

The cost estimates we prepare in connection with the acquisition, construction and operation of our plants are subject to inherent uncertainties. Any acquisition, construction and operating costs for our plants that significantly exceed our initial estimates could adversely affect our results of operations, financial condition and cash flows. Any delay in the construction of the plant may result in additional costs, and future operational costs could be affected by a variety of factors, including lower than anticipated production efficiencies and hydrological conditions at the plant site that differ materially from those we expected.

 

We must satisfy each customer’s specifications under our contracts, which may require additional processing steps or additional capital expenditures in order to meet such specifications. The terms of our water supply contracts typically require us to supply water for a specified price per unit during the term of the contract, subject to certain annual inflation adjustments, and to assume the risk that the costs associated with producing this water may be greater than anticipated. Because we base our contracted price of water in part on our estimation of future construction and operating costs, the profitability of our plants is dependent on our ability to estimate these costs accurately and remain within budget during the construction and operation of the facilities. In addition, most of our customers are required to supply the electricity we need to operate our desalination plants either for free or at contracted prices under their contracts with us. We will incur additional operating cost if we are required to bear the risks of fluctuations in electricity costs in the future, which may adversely and materially affect our results of operations and cash flows.

 

The cost of equipment, materials and services to build a plant may increase significantly after we submit our bid for, or begin construction of, a plant, which could cause the gross profit and net return on investment for the plant to be less than we anticipated. The profit margins we initially expect to generate from a plant could be further reduced if future operating costs for that plant exceed our estimates of such costs.

 

Failure to comply with laws, regulations and policies, including the U.S. Foreign Corrupt Practices Act or other applicable anti‑corruption legislation, could result in fines, criminal penalties and an adverse effect on our business.

 

We are subject to regulation under a wide variety of U.S. federal and state and non‑U.S. laws, regulations and policies, including laws related to anti‑corruption, export and import compliance, anti‑trust and money laundering, due to our global operations. The U.S. Foreign Corrupt Practices Act, or the FCPA, the U.K. Bribery Act of 2010 and similar anti‑bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. There has been an increase in anti‑bribery law enforcement activity in recent years, with more frequent and aggressive investigations and

34

enforcement proceedings by both the Department of Justice, or DOJ, and the SEC, increased enforcement activity by non‑U.S. regulators, and increases in criminal and civil proceedings brought against companies and individuals. Our policies mandate compliance with these anti‑bribery laws. We operate in many parts of the world that are recognized as having governmental and commercial corruption and in certain circumstances, strict compliance with anti‑bribery laws may conflict with local customs and practices. We cannot assure you that our internal control policies and procedures will always protect us from improper conduct of our employees or business partners. If we believe or have reason to believe that our employees or agents have or may have violated applicable laws, including anti‑corruption laws, we may be required to investigate or have outside counsel investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, and curtailment of operations in certain jurisdictions, and might adversely affect our business, results of operations or financial condition. In addition, actual or alleged violations could damage our reputation and ability to do business.

 

Fluctuations in interest rates may adversely impact our business, financial condition and results of operations.

 

We are exposed to fluctuations in interest rates. As of December 31, 2019, approximately 63% of our outstanding debt was exposed to interest rate fluctuations. We have not entered into arrangements or contracts with third parties that constitute an interest rate hedge. The portion of our debt that bears interest at a fixed rate will vary from time to time. If interest rates significantly deviate from historical ranges, or if volatility or distribution of these changes deviates from historical norms, we may experience significant losses or defaults. As a result, fluctuating interest rates may negatively impact our financial results and cash flows.

 

Our inability to negotiate pricing terms in U.S. dollars may adversely impact our Seven Seas Water desalination business, financial condition and results of operations.

 

Most of our Seven Seas Water bulk water revenue is generated and most of our operations are conducted in developing countries. Currently, customer payment obligations under substantially all of our water supply contracts are denominated in the U.S. dollar. If the U.S. dollar weakens against other foreign currencies, some of our component suppliers may increase the price they charge for their components in order to maintain an equivalent profit margin. In addition, there is no assurance that we will be able to negotiate U.S. dollar denominated pricing terms in the renewal of existing contracts or new contracts in the future. In certain situations, we are exposed to foreign exchange risk to the extent we have payment obligations in a local currency relating to labor, construction, consumable or materials costs or, of our procurement orders that are denominated in a currency other than U.S. dollars. We have not entered into any arrangements or contracts with third parties to hedge against foreign exchange risk. If any of these local currencies change in value relative to the U.S. dollar, our cost in U.S. dollars would change accordingly, which could adversely affect our results of operations.

 

Our business and ability to enforce our rights under agreements relating to our Seven Seas Water business may be adversely affected by changes in the law or regulatory regimes in the jurisdictions in which we operate.

 

Changes in laws governing capital controls, the liquidity of bank accounts or the repatriation of capital, repayment of intercompany loans and dividends could prevent or inhibit our receipt of cash from our foreign subsidiaries, resulting in longer payment cycles or impairment of our collection of accounts receivable. Although we may have legal recourse to enforce our rights under agreements to which we are a party and recover damages for breaches of those agreements, such legal proceedings are costly and may not be successful or resolved in a timely manner, and such resolution may not be enforced. Areas in which we may be affected include:

 

·

forced renegotiation or modification of concessions, purchase agreements, land lease agreements and supply agreements;

 

·

termination of permits or concessions and compensation upon any such termination; and

 

·

threatened withdrawal of countries from international arbitration conventions.

 

Any of these factors may cause our costs to build, own, operate or maintain our desalination plants to increase, may delay the commissioning of such plants, and may delay the time when we receive revenue and cash flows from such plants.

35

 

Operational and execution risks may adversely impact the financial results of our Quench business.

 

Our operating results are reliant on the continued operation of our filtered water systems as well as our delivery fleet. Inherent in our operations are risks that require oversight and control, such as risks related to mechanical or electrical failure, fire, explosion, leaks, chemical use, and vehicle, lift or forklift accidents. We have established policies, procedures and safety protocols requiring ongoing training, oversight and control in an effort to address these risks. However, significant operating failures on our customers’ premises or vehicle accidents could result in personal injury or loss of life, loss of distribution capabilities, and/or damage at the site of the filtered water system, thereby adversely impacting our business, reputation and financial results. These factors could subject us to lost sales, litigation contingencies and reputational risk.

 

Our multi‑year contracts under our business may limit our ability to quickly and effectively react to general economic changes.

 

The conditions under which we initially enter into a contract may change over time. These changes may vary in nature or foreseeability and may result in adverse economic consequences. These consequences may be exacerbated by the multi‑year terms of our contracts, which may hinder our ability to react rapidly and appropriately to changes. For example, we may not be free to adapt our pricing in line with changes in cost or demand. We also are not typically able to suddenly or unilaterally terminate a contract we believe is unprofitable or change its terms. The inability to react to changes, or terminate or change unprofitable contracts could materially affect our business.

 

Changes in demand for our Quench products and services may affect operating results.

 

We believe that the growth of the U.S. and Canadian water cooler markets is due, in part, to consumer preferences for healthy products and consumer taste preferences for treated water over tap water and other beverages. Growth is also affected by the demand from our customers, whose tastes and preferences may be affected by energy efficiency standards and environmental concerns, as well as the form, features and aesthetics of our equipment, among other factors. To the extent such preferences change, demand for our products will be affected, which may materially adversely affect us.

 

In our Quench business, we face the risk that our customers may fail to properly maintain, use and safeguard our equipment, which may negatively affect us as the providers of the systems.

 

It is generally our responsibility to service our Quench filtered water systems throughout the duration of the contract, and our customers are generally required to maintain insurance covering loss, damage or injury caused by our equipment. However, we are not able to monitor our customers’ use or maintenance of their filtered water systems or their compliance with our contracts or usage instructions. A customer’s failure to properly use, maintain or safeguard the filtered water system or the customer’s non‑compliance with insurance requirements may reflect poorly on us as the provider of the filtered water system and, as a result, damage our reputation. In addition, our Quench filtered water systems must be connected to a potable water source in order to be effective. A customer’s failure or inability to connect our filter water system to a potable water source may reflect poorly on us as the provider of the filtered water system and, as a result, damage our reputation or cause the customer to terminate its relationship with us.

 

Many of our Seven Seas Water facilities are located on properties owned by others. If our landlords restrict our access to those properties or damage our facilities or equipment, our ability to develop, operate, maintain and remove our equipment would be adversely affected.

 

Most of our Seven Seas Water facilities are located on property owned by others, some of whom are our customers. Our rights to locate our facilities and equipment on, and to access, those properties are governed by contracts with the applicable landlords. We need access to those properties to develop, operate and maintain our facilities and equipment and, in certain cases, to remove our equipment at the end of a contract term. In certain situations, personnel having access to those properties need security and other clearances. If the landlord restricts our ability to access our facilities, our ability to develop, operate, maintain and remove our equipment, our business would be adversely affected. We cannot guarantee that we will not encounter labor disputes (strikes, walkouts, blocking access to sites, or the destruction of property in extreme cases), including those relating to our landlord’s employees, that could interrupt our operations over a significant period of time. In addition, our personnel, facilities and equipment located on those

36

properties may be harmed by other activities or events occurring on those properties, including being subject to personal injury or death, or damage. Any such restrictions or occurrences could adversely affect our business, reputation, results of operations and financial condition.

 

We rely on information technology and network infrastructure in areas of our operations, and a disruption relating to such technology or infrastructure could harm our business.

 

Seven Seas Water relies on our information technology and network infrastructure for both operations in our headquarters as well as our facilities, where our information technology and network infrastructure are critical for monitoring plant availability and efficiency. If our information technology or network infrastructure were to fail, such failure could lead to an inability to monitor our plant activities, and therefore could lead to noncompliance with health, safety and environmental requirements as well as increased costs and potential losses. Any increase in costs or losses could have an adverse effect on our financial condition and results of operations. In addition, the operation of our facilities relies on internet‑based control systems. Interruption in internet service could limit or eliminate our ability to continue our plant operations, which would have a negative effect on our revenues.

 

Quench relies on our information technology and network infrastructure for field service, customer service, billing, equipment service, inventory control, fixed asset management, financial reporting, accounting, accounts payable, payroll, lead generation, call center operations, sales analysis, vehicle tracking and profitability reporting. Our systems are designed to enable us to track the locations of our installed POU units and ensure customer compliance with payment obligations in connection with such POU units. Any failure or disruption relating to this technology or infrastructure could seriously harm our operations and/or reduce profitability. In addition, we are in the midst of upgrading and enhancing our capabilities, including the replacement of our primary information technology systems. A failure to successfully implement such changes could adversely impact our business and may result in an inability to remain competitive with respect to our service offerings, pricing and collections.

 

Failure to maintain the security of our information and technology networks, including information relating to our service providers, customers and employees, could adversely affect us.

 

We are dependent on information technology networks and systems, including the internet, to process, transmit and store electronic information and, in the normal course of our business, we collect and retain certain information pertaining to our service providers, customers and employees, including credit card information for certain of our customers. In addition, the operation of our facilities relies on internet‑based control systems. If security breaches in connection with the delivery of our solutions allow unauthorized third parties to access any of this data or obtain control of our customers’ systems or the systems controlling our plant operations, our reputation, business, results of operations and financial condition could be harmed.

 

The legal, regulatory and contractual environment surrounding information security, privacy and credit card fraud is constantly evolving and companies that collect and retain such information are under increasing attack by cyber‑criminals around the world. A significant actual or potential theft, ransom, loss, fraudulent use or misuse of service provider, customer, employee or other personally identifiable data, whether by third parties or as a result of employee malfeasance or otherwise, non‑compliance with our contractual or other legal obligations regarding such data or a violation of our privacy and security policies with respect to such data could result in loss of confidential information, damage to our reputation, early termination of our service provider contracts, significant costs, fines, litigation, regulatory investigations or actions and other liabilities or actions against us. Moreover, to the extent that any such exposure leads to credit card fraud or identity theft, we may experience a general decline in existing or prospective customer confidence in our business, which may lead to an increase in attrition rates or may make it more difficult to attract new customers. Such an event could additionally result in adverse publicity and therefore adversely affect the market’s perception of the security and reliability of our services. Security breaches of, or sustained attacks against, this infrastructure could create system disruptions and shutdowns that could result in disruptions to our operations. Techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. We cannot be certain that advances in cyber‑attack capabilities or other developments will not compromise or breach the technology protecting the networks that support our platform and solutions. If any one of these risks materializes our business, financial condition, results of operations and cash flows could be materially and adversely affected. 

37

We have not experienced, but may in the future experience, service disruptions, outages and other performance problems with our information technology due to a variety of factors, including infrastructure changes, malicious actors, human or software errors or capacity constraints. In some instances, we or our third-party service providers may not be able to identify the cause or causes of these performance problems within an acceptable period of time. Although we have recovery plans, any incident affecting our information infrastructure that may be caused by fire, flood, severe storm, earthquake or other natural disasters, cyber-attacks, terrorist or other attacks, and other similar events beyond our control could negatively affect our business, results of operations, cash flows or financial condition.

 

We may experience difficulty obtaining materials or components for our Quench products.

 

Our Quench business utilizes third parties both inside and outside the United States to manufacture our equipment and relies upon these manufacturers to produce and deliver quality equipment on a timely basis and at an acceptable cost. Disruptions to the business, financial stability or operations, including due to strikes, labor disputes, political or governmental issues, pandemics, or other disruptions to the workforce, of these manufacturers, or to their ability to produce the equipment we require in accordance with our and our customers’ requirements could significantly affect our ability to fulfill customer demand on a timely basis which could cause reputational harm, and materially adversely affect our revenues and results of operations. For example, in December 2019, a strain of coronavirus reported to have surfaced in Wuhan, China has slowed international commerce. While at this point, the extent to which the coronavirus may impact our business supply chains or results is uncertain, it may result in delays in receiving key raw materials for our products or decreased demand for our products, which may negatively impact our business results of operations, cash flows or financial condition.

 

Our holding company structure effectively subordinates our parent company to the rights of the creditors of certain of our subsidiaries.

 

A majority of our assets are held by our subsidiaries. As a result, our rights and the rights of our creditors to participate in the distribution of assets of any subsidiary upon such subsidiary’s liquidation or reorganization will be subject to the prior claims of such subsidiary’s creditors, except to the extent that we are reorganized as a creditor of such subsidiary, in which case our claims would still be subject to the claims of any secured creditor of such subsidiary and of any holder of indebtedness of such subsidiary senior to that held by us. As of December 31, 2019, our subsidiaries had approximately $167.0 million of indebtedness (net of discounts and excluding intercompany indebtedness) outstanding, of which AquaVenture Holdings Limited, the ultimate parent company, is jointly and severally liable for $148.9 million (net of discounts).

 

Since operations are conducted through our subsidiaries, our cash flow and ability to service debt is dependent upon the earnings of our subsidiaries and distributions to us. Our subsidiaries are separate and distinct legal entities, and in some cases, have no obligation, contingent or otherwise, to pay amounts due pursuant to indebtedness of other subsidiaries or us or to make any funds available therefor. In addition, the payment of dividends and the making of loan advances to us by our subsidiaries are contingent upon the earnings of those subsidiaries and are subject to various business considerations and, for certain subsidiaries, restrictive loan covenants contained in the instruments governing the indebtedness of such subsidiaries, including covenants which restrict in certain circumstances the payment of dividends and distributions and the transfer of assets to us. 

 

Seven Seas Water may invest in projects with third‑party investors that could result in conflicts.

 

We may from time to time invest in projects with third‑party investors who may possess certain shareholder rights. Actions by an investor could subject our assets to additional risk as a result of any of the following circumstances:

 

·

the investors might have economic or business interests or goals that are inconsistent with our, or the project‑level entity’s, interests or goals; or

 

·

the investor may be in a position to take action contrary to our instructions or requests or contrary to our policies or objectives.

 

Although we generally seek to maintain sufficient control of any investment to permit our objectives to be achieved, we might not be able to take action with respect to certain matters without the approval of the investors or

38

lenders. We may experience strained relations with certain of our investors, resulting in liquidity constraints due to our third‑party investors’ failure to fund their respective capital commitments.

 

Our ability to grow our business could be materially adversely affected if we are unable to raise capital on favorable terms.

 

From time to time, we rely on access to capital markets as a source of liquidity for capital requirements not satisfied by operating cash flows. Our ability to arrange for financing on either a recourse or non‑recourse basis and the costs of such capital are dependent on numerous factors, some of which are beyond our control, including:

 

·

general economic and capital market conditions;

 

·

the availability of bank credit or access to institutional credit markets;

 

·

access to bilateral or multilateral funding sources;

 

·

investor confidence;

 

·

our financial condition, performance and prospects in general and/or that of any subsidiary requiring the financing as well as companies in our industry or similar financial circumstances; and

 

·

changes in tax and securities laws which are conducive to raising capital.

 

Should future access to capital not be available to us, it may become necessary for us to sell assets or we may decide not to build new plants, expand or improve existing facilities or pursue acquisitions, any of which would affect our future growth, results of operations and financial condition.

 

An impairment in the carrying value of long‑lived assets, contract costs, goodwill or intangible assets would negatively impact our consolidated results of operations and net worth.

 

Long‑lived assets are initially recorded at cost and are amortized or depreciated over their useful lives. Contract costs consist of contract acquisition costs, deferred lease costs and contract fulfillment costs which are all recorded within other assets in the consolidated balance sheets. Contract costs are generally amortized on a straight‑line basis over the remaining contract period or lease term.

 

Long‑lived assets and contract costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recognition and measurement of a potential impairment is performed on assets grouped with other assets and liabilities at the lowest level where identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Recoverability of long‑lived assets are measured by a comparison of the carrying amount of an asset or asset group to future undiscounted cash flows expected to be generated by the asset or asset group. Recoverability of contract costs classified as deferred contract costs are measured by a comparison of the carrying amount of an asset or asset group to undiscounted future cash flows expected to be generated through the performance of the remaining services under the contract. If the carrying amount of an asset or asset group exceeds its estimated undiscounted future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset or asset group exceeds the fair value of the asset or asset group. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third‑party independent appraisals, as considered necessary. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. These events or changes in circumstances and the related analyses could result in additional long‑lived asset impairment charges in the future. Impairment charges could substantially affect our financial results in the periods of such charges.

 

We have significant goodwill and intangible assets that are susceptible to valuation adjustments as a result of events or changes in circumstances. As of December 31, 2019, intangible assets, net and goodwill were $186.4 million and $198.9 million, respectively. We assess the potential impairment of goodwill and indefinite lived intangible assets on an annual basis, as well as when interim events or changes in circumstances indicate that the carrying value may not be recoverable. Events or changes in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include disruptions to our business, failure to realize the economic benefit from

39

acquisitions of other companies and intangible assets, slower industry growth rates and declines in operating results and market capitalization. Determining whether an impairment exists, along with the amount of the potential impairment, involves quantitative data and qualitative criteria that are based on estimates and assumptions requiring significant management judgment. Future events, new information or changes in circumstances may alter management’s valuation of an intangible asset. The timing and amount of impairment charges recorded in our consolidated statements of operations and comprehensive income and write‑downs recorded in our consolidated balance sheets could vary if management’s conclusions change.

 

We did not record any goodwill impairment during 2019, 2018 and 2017 for any of our reporting units.  

 

We may not be able to adapt to changes in technology and government regulation fast enough to remain competitive.

 

The water purification industry is highly technical and thus impacted by changing technology, competitively imposed process standards and regulatory requirements, each of which influences the demand for our products and services. Advances in technology and changes in legislative, regulatory or industrial requirements may render certain of our purification products and processes obsolete or increase our compliance costs. Our inability to adapt to these changes could affect our ability to compete, which could impact our future growth and materially affect our business.

 

Changes in tax law, determinations by tax authorities and/or changes in our effective tax rates may adversely affect our business and financial results.

 

Under current law, we expect to be treated as a non‑U.S. corporation for U.S. federal income tax purposes. However, uncertainties in the relative valuation between our U.S. business and our non‑U.S. business at the time of our corporate reorganization could adversely affect our status as a non‑U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Internal Revenue Code of 1986, as amended, and could adversely affect our effective tax rate. In addition, changes to Section 7874 or the Treasury Regulations promulgated thereunder, other changes in law, or new interpretations of the meaning or scope of these rules, could adversely affect our status as a non‑U.S. corporation for U.S. federal income tax purposes and adversely affect our effective tax rate. Some of the Section 7874 regulations are complex, and as such their application to any particular set of facts is uncertain. While we believe we will be treated as a non‑U.S. corporation for U.S. federal income tax purposes, such belief is based on, among other things, facts that may change or be unclear, valuations which are inherently subjective and judgments that may prove to be incorrect. If such belief is incorrect, there could be a material adverse impact on our expected tax position and effective tax rate.

 

Our Quench business operates in the United States, Canada and South Korea. Our Seven Seas Water customer revenue is generated both inside and outside of the United States in areas such as the Caribbean and South America. In light of the global nature of our business and the fact that we are subject to tax at the federal, state and local levels in the United States and in other countries and jurisdictions, a number of factors may increase our future effective tax rates, including:

 

·

our decision to distribute U.S. or non‑U.S. earnings to the parent company;

 

·

the jurisdictions in which profits are determined to be earned and taxed;

 

·

sustainability of historical income tax rates in the jurisdictions in which we conduct business;

 

·

the resolution of issues arising from tax audits with various tax authorities;

 

·

our ability (or inability) to use net operating loss carry‑forwards to offset future taxable income and any adjustments to the amount of the net operating loss carry‑forwards we can utilize;

 

·

changes in tax laws, including legislative changes, some of which could include fundamental tax reform, that impact favorable tax treatment and/or the deductibility of certain expenses from taxable income; and

 

·

changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation allowances.

 

Any significant increase in our future effective tax rates could reduce net income for future periods.

40

 

We could be adversely impacted by environmental, health and safety legislation, regulation and permits and climate change matters.

 

We are subject to numerous international, national, state and local environmental, health and safety laws and regulations, as well as the requirements of the independent government agencies and development banks that provide financing for many of our projects, which require us to incur significant ongoing costs and capital expenditures and may expose us to substantial liabilities. Such laws and regulations govern, among other things: emissions to air; discharges to water; the generation, handling, storage, transportation, treatment and disposal of waste materials; and the cleanup of contaminated properties. Currently, we believe we are in compliance with these laws and regulations, but there is no assurance that we will not be adversely impacted by any such liabilities, costs or claims in the future, either under present laws and regulations or those that may be adopted or imposed in the future. If we are found not to be in compliance, we may be subject to lawsuits asserting claims or fees, fines, or penalties, which could adversely affect our business.

 

We must obtain, maintain and/or renew a number of permits that impose strict conditions, requirements and obligations, including those relating to various environmental, health and safety matters, in connection with our current and future operations and development of our facilities. The permitting rules and their interpretations are complex, and the level of environmental protection needed to obtain required permits has tended to become more stringent over time. In many cases, the public (including environmental interest groups) is entitled to comment upon and submit objections to permit applications and related environmental analysis, attend public hearings regarding whether such permits should be issued and otherwise participate in the permitting process, including challenging the issuance of permits, validity of environmental analyses and determinations and the manner in which permitted activities are conducted. Permits required for our operations and for the development of our facilities may not be issued, maintained or renewed in a timely fashion or at all, may be issued or renewed upon conditions that restrict our ability to operate or develop our facilities economically or may be subsequently revoked. Any failure to obtain, maintain or renew our permits, as well as other permitting delays and permitting conditions or requirements that are more stringent than we anticipate, could have a material adverse effect on our business, results of operations and financial condition.

 

Foreign, federal, state and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating greenhouse gas emissions and energy policies. If these laws, regulations and requirements become more stringent in the future, we may experience increased liabilities, compliance costs and capital expenditures or difficulty in our ability to comply with applicable requirements or obtain financing for our projects.

 

We are subject to litigation and reputational risk as a result of the nature of our business, which may have a material adverse effect on our business.

 

From time to time, we are involved in lawsuits that arise from our business. Litigation may, for example, relate to product liability claims, personal injury, property damage, vehicle accidents, regulatory issues, contract disputes or employment matters. The occurrence of any of these matters could also create possible damage to our reputation. The defense and ultimate outcome of lawsuits against us may result in higher operating expenses. Higher operating expenses or reputational damage could have a material adverse effect on our business, including to our liquidity, results of operations and financial condition.

 

We will incur significant costs as a result of operating as a public company and in connection with the Merger Agreement, and our management will devote substantial time to new compliance initiatives. We may fail to comply with the rules that apply to public companies, including Section 404 of the Sarbanes‑Oxley Act of 2002, which could result in sanctions or other penalties that would harm our business.

 

As a public company, and particularly in connection with the Merger Agreement and after we cease to be an “emerging growth company,” we will incur significant legal, accounting and other expenses as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, or the Exchange Act, and regulations regarding corporate governance requirements relating to director independence, distributing annual and interim reports, shareholder meetings, approvals and voting, soliciting proxies, conflicts of interest and a code of conduct.  The listing requirements of the New York Stock Exchange, or the NYSE, have imposed various requirements on public companies, including establishment and maintenance of effective disclosure and

41

financial controls and corporate governance practices. Our management and other personnel devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations cause us to incur significant legal and financial compliance costs and make some activities more time-consuming and costly. These reporting requirements, rules and regulations, coupled with the increase in potential litigation exposure associated with being a public company, could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or board committees or to serve as executive officers, or to obtain certain types of insurance, including directors’ and officers’ insurance, on acceptable terms.

 

The Sarbanes Oxley Act requires, among other things, that we assess the effectiveness of our internal control over financial reporting annually and the effectiveness of our disclosure controls and procedures quarterly. In particular, Section 404 of the Sarbanes Oxley Act, or Section 404, requires management to report on, and our independent registered public accounting firm potentially to attest to, the effectiveness of our internal control over financial reporting. As an emerging growth company, we expect to avail ourselves of the exemption from the requirement that our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting under Section 404. However, we may no longer avail ourselves of this exemption when we cease to be an emerging growth company. When our independent registered public accounting firm is required to undertake an assessment of our internal control over financial reporting, the cost of our compliance with Section 404 will correspondingly increase. Our compliance with applicable provisions of Section 404 will require that we incur substantial accounting expense and expend significant management time on compliance related issues as we implement additional corporate governance practices and comply with reporting requirements. Moreover, if we are not able to comply with the requirements of Section 404 applicable to us in a timely manner, or if we or our independent registered public accounting firm identifies deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

We have adopted certain new accounting pronouncements that will result in changes to our previously reported results and forecasts and the patterns of our revenues, gross profit, net loss and other key metrics, including non-GAAP measures.

 

In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers that specifies that revenue should be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods and will require enhanced disclosures. In addition, the FASB issued authoritative guidance in March 2017 related to the determination of the customer in a service concession arrangement, which is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods. We adopted the guidance regarding both revenue from contracts with customers and the determination of the customer in a service concession contract (together referred to as “Adopted Revenue Guidance”) on a full retrospective basis on January 1, 2018 applying the guidance to all contracts that were not completed as of January 1, 2016.

 

While the Adopted Revenue Guidance will have no impact on the amount of cash generated under our contracts, we concluded that the timing and amount of revenue recognized under our contracts that are accounted for as service concession arrangements, including current contracts and those entered into in the future, will be different from the way we have recognized revenue through the year ended December 31, 2017. Under the Adopted Revenue Guidance, we are required to recognize revenue based on the completion of the identifiable performance obligations of the contract, including the construction of infrastructure for the customer and providing operating and maintenance services (“O&M”) on the infrastructure constructed for the customer, and the timing in which control is transferred to the customer for each of the performance obligations. This timing of revenue recognition, among other less material changes to the accounting for our contracts with customers, will have an effect on revenues, gross profit, net loss and other key metrics, including non-GAAP measures, for both current and potential future contracts entered into with customers. The Adopted Revenue Guidance will result in differences in our previously reported amount of revenues, gross profit, net loss and other key metrics, including non-GAAP measures.  See Note 2—“Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further discussion.

 

42

In addition, during February 2016 the FASB issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. This guidance is effective for annual reporting periods beginning on or after December 15, 2018, including interim periods within those annual periods, and early adoption is permitted. The Company adopted this guidance on a modified retrospective basis on January 1, 2019 with the cumulative effect of transition as of the effective date of adoption.  The Company has elected the package of practical expedients provided for within the authoritative guidance which exempts the Company from having to reassess: (i) whether expired or existing contracts contain leases, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. In addition, the Company has elected the practical expedient that permits lessors to not separate non-lease components from the associated lease components if certain conditions are met. Lastly, the Company has utilized the short-term exemption for lessees and establish an accounting policy to not recognize a right-of-use asset or lease liability for any lease with a term of less than 12 months. The Company did not elect to utilize any of the other practical expedients. For lessor accounting, as a result of electing the practical expedients, there were no material impacts to the accounting for operating leases or sales-type leases that existed prior to the adoption date. For lessee accounting, the Company recognized a lease liability and right-of-use asset for operating leases with a term of more than 12 months. The adoption of the lease guidance for lessor accounting could result in a change in the accounting for leases amended or new leases entered into after January 1, 2019 from how we have historically accounted for leases. This change in accounting could result in changes to revenues, gross profit, net loss and other key metrics, including non-GAAP measures and could impact the relative attractiveness of certain transactions from an accounting perspective and potentially limit our investment opportunities. 

 

As a result, our future reported financial results will change from those previously reported, making comparisons based on previously reported financial statements difficult.  While we expect to endeavor to educate the investment community regarding the impacts of adopting these new accounting pronouncements, there can be no assurance that their adoption will not cause confusion in the marketplace, which may adversely impact the trading price for our shares.

 

U.S. holders of our ordinary shares may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

 

Based on the current and anticipated value of our assets and the composition of our income, assets and operations, we do not expect to be a “passive foreign investment company,” or PFIC, for the current taxable year or in the foreseeable future. However, the application of the PFIC rules is subject to uncertainty in several respects, and we cannot assure you that the U.S. Internal Revenue Service, or the IRS, will not take a contrary position. Furthermore, a separate determination must be made after the close of each taxable year as to whether we are a PFIC for that year. Accordingly, we cannot assure you that we will not be a PFIC for our current taxable year or any future taxable year. A non‑U.S. corporation will be considered a PFIC for any taxable year if (i) at least 75% of its gross income is passive income, or (ii) at least 50% of the value of its assets (based on an average of the quarterly values of the assets during a taxable year) is attributable to assets that produce or are held for the production of passive income. The value of our assets generally will be determined by reference to the market price of our Shares, which may fluctuate considerably. If we were to be treated as a PFIC for any taxable year during which a U.S. Holder holds a share, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder.

 

You may be subject to adverse U.S. federal income tax consequences if we are classified as a Controlled Foreign Corporation.

 

Each “Ten Percent Shareholder” (as defined below) in a non‑U.S. corporation that is classified as a “controlled foreign corporation,” or a CFC, for U.S. federal income tax purposes generally is required to include in income for U.S. federal tax purposes such Ten Percent Shareholder’s pro rata share of the CFC’s “Subpart F income” and investment of earnings in U.S. property, even if the CFC has made no distributions to its shareholders. Each Ten Percent Shareholder is also required to include in gross income its “global intangible low-taxed income” (within the meaning of Code Section 951A), which is determined by reference to the income of CFCs of which such Ten Percent Shareholder is a Ten Percent Shareholder. Ten Percent Shareholders that are corporations may be entitled to a deduction equal to the foreign portion of any dividend when a dividend is paid. A non‑U.S. corporation generally will be classified as a CFC for U.S. federal income tax purposes if Ten Percent Shareholders own in the aggregate, directly or indirectly (including pursuant to attribution rules), more than 50% of either the total combined voting power of all classes of stock of such corporation

43

entitled to vote or of the total value of the stock of such corporation. A “Ten Percent Shareholder” is a U.S. person (as defined by the Code), who owns or is considered to own 10% or more of the total combined voting power of all classes of stock entitled to vote of such corporation or 10% or more of the value of all classes of stock of such corporation. The determination of CFC status is complex and includes attribution rules, the application of which is not entirely certain. We believe certain of our non-US subsidiaries are CFCs, and will continue to be CFCs. In addition, even if we or certain of our non-US subsidiaries are not currently CFCs, it is possible that one or more shareholders treated as U.S. persons for U.S. federal income tax purposes will acquire, directly or indirectly (including pursuant to attribution rules), enough shares to be treated as a Ten Percent Shareholder after application of the constructive ownership rules and, together with any other Ten Percent Shareholders of the company, cause us or certain of our non-US subsidiaries to be treated as CFCs for U.S. federal income tax purposes in the future. Holders are urged to consult their own tax advisors with respect to the potential adverse U.S. tax consequences of becoming a Ten Percent Shareholder in a CFC.

 

Comprehensive tax reform legislation could adversely affect our business and financial condition.

 

The U.S. government has recently enacted comprehensive tax legislation that includes significant changes to the taxation of business entities, commonly referred to as the “Tax Cuts and Jobs Act” (“TCJ Act”). These changes include, among others, a permanent reduction to the corporate income tax rate, limiting interest deductions, the elimination or modification of certain previously allowed deductions (including substantially limiting interest deductibility), allowing for the expensing of capital expenditures, and putting into effect the migration from a “worldwide” system of taxation to a territorial system. The overall impact of this tax reform is uncertain, and it is possible that our business and financial condition could be adversely affected. We continue to examine the impact this tax reform legislation may have on our business. We urge our shareholders to consult with their legal and tax advisors with respect to any such legislation and the potential tax consequences of investing in our ordinary shares.

 

Significant developments from the recent and potential changes in U.S. trade policies could have a material adverse effect on us.

 

The U.S. government has announced and, in some cases, implemented a new approach to trade policy, including renegotiating, or potentially terminating, certain existing bilateral or multi-lateral trade agreements, as well as imposing additional tariffs on certain foreign goods, including finished products and raw materials such as steel and aluminum. These tariffs and potential tariffs have resulted or may result in increased prices for certain imported goods and materials and, in some cases may result or have resulted in price increases for domestically sourced goods and materials. Various countries and regions, including, without limitation, China, Mexico, Canada and Europe, have announced plans or intentions to impose or have imposed tariffs on a wide range of U.S. products in retaliation for new U.S. tariffs. Discussions and negotiations around such trade and tariffs are still ongoing and, in January 2020, the U.S. government entered an agreement between the U.S. and China on trade matters pursuant to which certain tariffs are expected to be reduced. At this time, it remains unclear what additional actions, if any, will be taken by the U.S. or other governments with respect to international trade agreements, the imposition of tariffs on goods imported into the U.S., tax policy related to international commerce or other trade matters. These conditions and future actions could have a significant adverse effect on world trade and the world economy.

 

Our Quench business generates revenue from the rental and sale of filtered water coolers and other products that use filtered water as an input, such as ice machines, sparkling water dispensers and coffee brewers, to customers across the United States and Canada. We purchase our systems and related parts and filters from a variety of manufacturers, both in the United States and overseas. As a result of the changes in world trade described above, we have experienced, and may experience further, increased costs for goods imported into the U.S. or make adjustments to our supply chain. Either of these could require us to increase prices to our customers, which may reduce demand, or, if we are unable to increase prices, result in lowering our margin on products sold. We continue to evaluate the impact of these trade policies and actions on our supply chain and to consider appropriate responses in our sourcing of products. For certain products, we have shifted purchases to vendors whose products are not subject to the new tariffs. We cannot predict future trade policy or the terms of any renegotiated trade agreements and their impacts on our business. The adoption or expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could adversely impact our business, financial condition and results of operations.

 

44

Reforms to and uncertainty regarding the London InterBank Offered Rate (“LIBOR”) may adversely affect our business, financial condition, ability to refinance loans and results of operations.

The United Kingdom Financial Conduct Authority announced in July 2017 that it will no longer persuade or require banks to submit rates for LIBOR after 2021. This announcement, in conjunction with financial benchmark reforms more generally and changes in the interbank lending markets, have resulted in uncertainty about the future of LIBOR and certain other rates or indices which have historically been used as interest rate “benchmarks” in financial contracts, including, but not limited to, credit facilities, interest rate swap agreements and interest rate cap agreements. Also, certain of the water supply agreements of our Seven Seas Water desalination business include adjustments based on LIBOR and other benchmarks. These actions and uncertainties may have the effect of triggering future changes in the rules or methodologies used to calculate benchmarks or lead to the discontinuation or unavailability of benchmarks. In addition, there can be no assurance that we and other market participants will be adequately prepared for an actual discontinuation of benchmarks, including LIBOR, that existing payment obligations, assets and liabilities based on or linked to benchmarks will transition successfully to alternative reference rates or benchmarks or of the timing of adoption and degree of integration of such alternative reference rates or benchmarks in the markets. The discontinuation of benchmarks, including LIBOR, may have an unpredictable impact on the contractual mechanics of financial contracts (including, but not limited to, interest rates to be paid to or by us) and certain of our water supply agreements, require renegotiation of outstanding water supply agreements, financial assets and liabilities, cause significant disruption to financial markets that are relevant to our business, increase the risk of litigation, yield increased expenses related to the transition to alternative reference rates or benchmarks, and/or interfere with our ability to refinance loans, among other adverse consequences. In addition, any transition from current benchmarks may alter the Company’s risk profiles and models, valuation tools, cost of financing and effectiveness of hedging strategies. Reforms to and uncertainty regarding transitions from current benchmarks may adversely affect our business, financial condition or results of operations.

 

 

Risks Related to Our Ordinary Shares

 

Insiders have substantial control over us, which could limit your ability to influence the outcome of key transactions, including a change of control.

 

Our directors, executive officers and each of our shareholders who own greater than 5% of our outstanding ordinary shares and their affiliates, in the aggregate, currently own more than 50% of our outstanding ordinary shares. As a result, these shareholders, if acting together, would be able to influence or control matters requiring approval by our shareholders, including the election of directors and the approval of mergers, acquisitions or other extraordinary transactions. They may have interests that differ from yours and may vote in a way with which you disagree and that may be adverse to your interests. This concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our other shareholders of an opportunity to receive a premium for their ordinary shares as part of a sale of our company and might affect the market price of our ordinary shares.

 

Anti-takeover provisions in our memorandum and articles of association could make an acquisition of us, which may be beneficial to our shareholders, including the Merger Agreement, more difficult and may prevent attempts by our shareholders to replace or remove our current management and limit the market price of our ordinary shares.

 

Provisions in our memorandum and articles of association may have the effect of delaying or preventing a change of control or changes in our management. Our memorandum and articles of association include provisions that:

 

·

Authorize our board of directors to issue, without further action by the shareholders undesignated preferred shares; 

 

·

Require that action by written consent in lieu of a meeting be adopted only if the shareholders unanimously consent to this manner of decision making;

 

·

Establish an advance notice procedure for shareholder approvals to be brought before an annual meeting of our shareholders, including proposed nominations of persons for election to our board of directors; 

 

·

Limit the manner in which our shareholders can remove directors from the board; 

 

45

·

Prohibit certain persons who own in excess of 15% of our outstanding ordinary shares from merging or combining with us for a period of three years after the date of the transaction in which the person acquired in excess of 15% of our outstanding ordinary shares, unless the merger or combination is approved in a prescribed manner; 

 

·

Establish that our board of directors is divided into three classes—Class I, Class II and Class III—with each class serving staggered terms; and 

 

·

Require a super-majority of votes to amend certain of the above-mentioned provisions.

 

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control. These provisions may also frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, which is responsible for appointing the members of our management.

 

Any provision of our memorandum and articles of association or British Virgin Islands law that has the effect of delaying or deterring a change of control could limit the opportunity for our shareholders to receive a premium for their ordinary shares, and could also affect the price that some investors are willing to pay for our ordinary shares.

 

It may be difficult to enforce a U.S. or foreign judgment against us, our directors and officers outside the United States, or to assert U.S. securities laws claims outside of the United States. 

 

We are a company limited by shares incorporated under the laws of the British Virgin Islands. As a result, it may be difficult for a shareholder to effect service of process within the United States upon us, our directors and officers, or to enforce against us, or them, judgments obtained in U.S. courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state therein. Additionally, it may be difficult to assert U.S. securities law claims in actions originally instituted outside of the United States. Foreign courts may refuse to hear a U.S. securities law claim because foreign courts may not be the most appropriate forums in which to bring such a claim. Even if a foreign court agrees to hear a claim, it may determine that the law of the jurisdiction in which the foreign court resides, and not U.S. law, is applicable to the claim. Further, if U.S. law is found to be applicable, the content of applicable U.S. law must be proved as a fact, which can be a time-consuming and costly process, and certain matters of procedure would still be governed by the law of the jurisdiction in which the foreign court resides.

 

As the rights of shareholders under British Virgin Islands law differ from those under U.S. law, you may have fewer protections as a shareholder.

 

Our corporate affairs are governed by our Amended Memorandum and Articles of Association, the British Virgin Island Business Companies Act, 2004, as amended from time to time (the "BVI Act") and the common law of the British Virgin Islands. The rights of shareholders to take legal action against our directors, actions by minority shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are to a large extent governed by the BVI Act and the common law of the British Virgin Islands. The common law of the British Virgin Islands is derived in part from judicial precedent in the British Virgin Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the British Virgin Islands.

 

The rights of shareholders and the fiduciary responsibilities of our directors under British Virgin Islands law are not as clearly established as they would be under statutes or judicial precedents in some jurisdictions in the United States. In particular, the British Virgin Islands has a less developed body of securities laws as compared to the United States, and some states (such as Delaware) have more fully developed and judicially interpreted bodies of corporate law. In addition, British Virgin Islands law does not make a distinction between public and private companies and some of the protections and safeguards (such as statutory pre-emption rights, save to the extent that they are expressly provided for in the Amended Memorandum and Articles of Association) that investors may expect to find in relation to a public company are not provided for under British Virgin Islands corporate statutory law.

 

As a result of all of the above, holders of our ordinary shares may have more difficulty in protecting their interests in the face of actions taken by our management, directors or major shareholders than they would as shareholders of a U.S. company.

 

46

Shareholders in British Virgin Islands companies may not be able to initiate shareholder derivative actions, thereby depriving a shareholder of the ability to protect its interests.

 

While statutory provisions do exist in British Virgin Islands law for derivative actions to be brought in certain circumstances, shareholders in British Virgin Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States. The circumstances in which any such action may be brought, and the procedures and defenses that may be available in respect to any such action, may result in the rights of shareholders of a British Virgin Islands company being more limited than those of shareholders of a company organized in the United States. Accordingly, shareholders may have fewer alternatives available to them if they believe that corporate wrongdoing has occurred. The British Virgin Islands courts are also unlikely to: (i) recognize or enforce against us judgments of courts in the United States based on certain civil liability provisions of U.S. securities laws; or (ii) to impose liabilities against us, in original actions brought in the British Virgin Islands, based on certain civil liability provisions of U.S. securities laws that are penal in nature or that relate to taxes or similar fiscal or revenue obligations or would be viewed as contrary to British Virgin Island public policy or the proceedings pursuant to which judgment was obtained were contrary to natural justice. There is no statutory recognition in the British Virgin Islands of judgments obtained in the United States, although the courts of the British Virgin Islands will in certain circumstances recognize and enforce the non-penal judgment of a foreign court of competent jurisdiction without retrial on the merits.

 

The laws of the British Virgin Islands provide limited protection for minority shareholders, so minority shareholders will not have the same options as to recourse in comparison to the United States if the shareholders are dissatisfied with the conduct of our affairs, including our entry into the Merger Agreement.  

 

Under the laws of the British Virgin Islands, there is limited statutory protection of minority shareholders other than the provisions of the BVI Act dealing with shareholder remedies. The principal protections under statutory law are unfair prejudice relief and an action to enforce the BVI Act or the Amended Memorandum and Articles of Association brought by the shareholders. Shareholders are entitled to have the affairs of the company conducted in accordance with the BVI Act and the Amended Memorandum and Articles of Association.

 

There are common law rights for the protection of shareholders that may be invoked, largely dependent on English company law, since the common law of the British Virgin Islands is limited. Under the general rule pursuant to English company law known as the rule in Foss v. Harbottle, a court will generally refuse to interfere with the management of a company at the insistence of a minority of its shareholders who express dissatisfaction with the conduct of the company's affairs by the majority or the board of directors and that the principal remedy for an aggrieved minority shareholder was presentation of a winding up petition on just and equitable grounds. The BVI Act amplifies this position by providing that a shareholder is not entitled to bring an action or intervene in proceedings in the name of or on behalf of a BVI company. Every shareholder is entitled to have the affairs of the company conducted properly according to British Virgin Islands law and the company's constituent documents.

 

If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our share, our share price and trading volume could decline.

 

The trading market for our ordinary shares will depend on the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts change their recommendation or outlook regarding us or our shares, or provide more favorable relative recommendations or outlooks about our competitors, our share price could likely decline. Additionally, if any of the analysts do not publish or cease publishing research or reports about us, our business or our market, our share price and trading volume could decline.

 

Future sales of our ordinary shares in the public market could cause our share price to fall.

 

Sales of a substantial number of our ordinary shares in the public market or the perception that these sales might occur could significantly reduce the market price of our ordinary shares and impair our ability to raise adequate capital through the sale of additional equity securities. 

 

The holders of certain of our ordinary shares will be entitled to rights with respect to registration of such shares under the Securities Act pursuant to an investors’ rights agreement between such holders and us. If such holders, by exercising their registration rights, sell a large number of shares, the market price for our ordinary shares could be

47

harmed. If we file a registration statement for the purpose of selling additional shares to raise capital and are required to include shares held by these holders pursuant to the exercise of their registration rights, our ability to raise capital may be impaired. We have filed a registration statement on Form S-8 under the Securities Act to register shares for issuance under our equity incentive plans, including our 2016 Share Option and Incentive Plan and our 2016 Employee Share Purchase Plan. Each of these plans provides for automatic increases in the shares reserved for issuance under the plan which could result in additional dilution to our shareholders. Once we register these shares, they can be freely sold in the public market upon issuance and vesting.

 

We do not intend to pay dividends for the foreseeable future.

 

We have never declared or paid any dividends on our ordinary shares. We currently intend to retain any earnings to finance the operation and expansion of our business and do not anticipate paying any cash dividends in the future. In addition, our ability to pay dividends on our ordinary shares may be limited by restrictions under the terms of one of our credit agreements. As a result, you may only receive a return on your investment in our ordinary shares if the market price of our ordinary shares increases.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

On April 20, 2007, we entered into a lease for 18,750 square feet of office space in Tampa, Florida with a lease term that ended on July 30, 2019. We subsequently extended this lease through July 31, 2024. This lease pertains to our Seven Seas Water segment.

On November 1, 2018 we entered into a lease, for approximately 31,758 square feet of office space in King of Prussia, Pennsylvania with a lease term that ends on April 30, 2030. This lease pertains to our Quench segment.

On November 1, 2018, we assumed in the AUC Acquisition, a lease for 5,267 square feet of office space in Houston, Texas with a lease term that ends on November 30, 2022. This lease pertains to our Seven Seas Water segment.

On December 18, 2018, we assumed in the PHSI Acquisition, a lease for 15,657 square feet of warehouse space in Bensenville, Illinois with a lease term that ends on March 31, 2023. This lease pertains to our Quench segment.

On December 18, 2018, we assumed in the PHSI Acquisition, a lease for 14,371 square feet of office space in Lincolnshire, Illinois with a lease term that ends on January 31, 2020. This lease pertains to our Quench segment.

On August 9, 2019, we entered into a lease, for approximately 33,363 square feet of office space in Las Vegas, Nevada with a lease term that ends on October 31, 2024. This lease pertains to our Quench segment.

On September 1, 2019, we entered into a lease, for approximately 53,000 square feet of office space in Audubon, Pennsylvania with a lease term that ends on July 31, 2024. This lease pertains to our Quench segment.

We are a party to numerous other small office, warehouse, storage yard and month‑to‑month storage unit leases. We believe that our warehouse and office space is sufficient to meet our current needs until the expiration of these leases and we expect to lease additional space as we expand our business.

Please refer to “Our Desalination Plants” section within Item 1 included elsewhere in this Annual Report on Form 10-K for information on our desalination plants. 

Item 3. Legal Proceedings.

Since the announcement of the Merger Agreement on December 23, 2019, three putative class actions have been filed in connection with the proposed Merger. On February 4, 2020, in connection with the merger, a putative class action lawsuit, Post v. AquaVenture Holdings Ltd., et al., 1:20-cv-174, was filed by purported shareholder Joseph Post against our Company and our directors in the United States District Court for the District of Delaware.  On February 12,

48

2020, in connection with the merger, a lawsuit, Hamilton v. AquaVenture Holdings Ltd., et al., 1:19-cv-01227, was filed as an individual action by purported shareholder Peter Hamilton against our Company and our directors in the United States District Court for the Southern District of New York. On February 20, 2020, purported shareholder Christopher Jagt filed an individual lawsuit against the Company and its directors in the United States District Court for the Eastern district of New York, captioned Jagt v. AquaVenture Holdings Ltd., et. al. 1:20-cv-931. These complaints allege that, because the proxy statement concerning the Merger is materially deficient in certain respects, all of the defendants violated Sections 14(a) of the Exchange Act and Rule 14a-9 promulgated thereunder, and that the directors additionally violated Section 20(a) of the Exchange Act. The complaints seek, among other things, (1) injunctive relief preventing consummation of the Merger, (2) rescissory damage or rescission of the Merger if it has already occurred; and (3) costs and fees, including attorney and expert fees, related to the actions. The defendants believe that the respective allegations asserted against them in the lawsuits are without merit and intend to defend against the lawsuits vigorously. Similar cases may also be filed in connection with the merger. These legal proceedings could delay or prevent the Merger from becoming effective.

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, we currently believe that the final outcome of these ordinary course matters will not have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of any such outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors. We are not currently aware of any such proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or results of operations. For more information on our litigation see Note 15—“Litigation” in the Notes to Consolidated Financial Statements, included in Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further discussion.

Item 4. Mine Safety Disclosures.

Not applicable.

49

 

PART  II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information

 

Our ordinary shares began trading on the New York Stock Exchange under the symbol “WAAS” on October 6, 2016.

 

Holders

 

As of March 2, 2020, there were approximately 50 holders of record. The actual number of shareholders is greater than this number of record holders and includes shareholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include shareholders whose shares may be held in trust by other entities.

 

Dividends

 

We have not paid any cash dividends on our ordinary shares since inception of the Company and do not anticipate paying cash dividends in the foreseeable future.

 

Securities authorized for issuance under equity compensation plans

 

The following table provides information about our ordinary shares that may be issued under all of our existing equity compensation plans as of December 31, 2019: 

 

 

 

 

 

 

 

 

 

Plan Name

 

Number of Securities
to be Issued Upon
Exercise of
Outstanding Options,
Warrants and Rights (a) (1)

 

Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights (b) (2)

 

Number of Securities
Remaining Available
for Future Issuance
Under Equity Compensation Plans
(Excluding Securities Reflected in Column (a)) (c) (3) (4)

 

Equity compensation plans approved by shareholders

 

 

 

 

 

 

 

 

2016 Employee Stock Purchase Plan

 

 —

 

$

 —

 

588,938

 

2016 Share Option and Incentive Plan

 

3,239,686

 

$

18.01

 

3,751,795

 

AquaVenture Holdings LLC Amended and Restated Equity Incentive Plan

 

59,758

 

$

26.45

 

 —

 

Quench USA Holdings LLC 2014 Equity Incentive Plan

 

56,414

 

$

23.66

 

 —

 

Quench USA, Inc. 2008 Stock Plan

 

1,675

 

$

27.82

 

 —

 

Total

 

3,357,533

 

$

18.26

 

4,340,733

 


(1)

In addition to the number of securities listed in this column, an aggregate 624,949 restricted share units have been granted and remain unvested as of December 31, 2019 and 51,969 phantom share units have been granted and remain unissued as of December 31, 2019 under our existing equity compensation plans. The 624,949 unvested restricted share units and 51,969 phantom share units were issued under the 2016 Share Option and Incentive Plan (“2016 Equity Plan”). 

50

(2)

As of December 31, 2019, no options to purchase ordinary shares under the 2016 Employee Share Purchase Plan (“2016 ESPP”) were outstanding. The 2016 ESPP provides that an additional number of shares will automatically be added to the shares authorized for issuance under the 2016 ESPP on January 1, 2017 and each January 1 thereafter through January 1, 2021. The number of shares added each year will be equal to the lesser of: (i) 1% of the number of shares issued and outstanding on the immediately preceding December 31, (ii) 200,000 shares, or (iii) such number of shares as determined by the administrator of the 2016 ESPP.

(3)

The ordinary shares that remain available for future issuance under the 2016 Equity Plan may be issued in the form of share options, share appreciation rights, restricted share awards, restricted share units, unrestricted share awards, cash-based awards, performance share awards and dividend equivalent rights. Each future grant shall reduce the available shares under the 2016 Share Option and Incentive Plan by an equal amount. The 2016 Equity Plan provides that an additional number of shares will automatically be added to the shares authorized for issuance under the 2016 Equity Plan on January 1 of each year. The number of shares added each year will be equal to 4% of the outstanding shares of the Company on the immediately preceding December 31.

(4)

Issuances of securities under the AquaVenture Holdings LLC Amended and Restated Equity Incentive Plan, Quench USA Holdings LLC 2014 Equity Incentive Plan and Quench USA, Inc. 2008 Stock Plan Incentive Stock Option Plan ceased effective October 5, 2016 at the time of the effectiveness of our initial public offering. As a result, no securities remain available for issuance under these plans, other than issuances upon exercises of outstanding options.

 Use of Proceeds from Registered Securities

None.

 

.

 

 

 

51

Item 6. Selected Financial Data.

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, the consolidated financial statements and related notes, and other financial information included in this Annual Report on Form 10-K.  The related financial data in this section are not intended to replace the consolidated financial statements and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. All financial data for the years ended December 31, 2019 and 2018 included within Item 6 in this Annual Report on Form 10-K has been restated in accordance with the adoption of authoritative guidance issued by the Financial Accounting Standards Board (“FASB”) regarding revenue from contracts with customers and the determination of the customer in a service concession contract (together referred to as the “Adopted Revenue Guidance”) on a full retrospective basis on January 1, 2018. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 

 

 

 

    

2019(8)

    

2018(7)

    

2017(5)(6)

    

2016(2)(3)(4)

    

2015(1)

 

 

 

 

(in thousands)

 

 

Consolidated Statements of Operations and Comprehensive Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bulk water

 

$

60,460

 

$

57,262

 

$

53,436

 

$

50,893

 

$

47,444

 

 

Rental

 

 

94,282

 

 

64,216

 

 

52,997

 

 

48,699

 

 

44,654

 

 

Product sales

 

 

45,074

 

 

20,105

 

 

9,796

 

 

10,267

 

 

8,237

 

 

Financing

 

 

3,671

 

 

4,025

 

 

4,534

 

 

1,713

 

 

 —

 

 

Total revenues

 

 

203,487

 

 

145,608

 

 

120,763

 

 

111,572

 

 

100,335

 

 

Cost of revenues:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Bulk water

 

 

27,700

 

 

26,516

 

 

27,145

 

 

25,525

 

 

29,090

 

 

Rental

 

 

42,493

 

 

28,025

 

 

23,484

 

 

21,437

 

 

20,210

 

 

Product sales

 

 

29,330

 

 

13,565

 

 

5,779

 

 

5,869

 

 

4,190

 

 

Total cost of revenues

 

 

99,523

 

 

68,106

 

 

56,408

 

 

52,831

 

 

53,490

 

 

Gross profit

 

 

103,964

 

 

77,502

 

 

64,355

 

 

58,741

 

 

46,845

 

 

Selling, general and administrative expenses

 

 

95,986

 

 

83,645

 

 

72,421

 

 

70,876

 

 

49,437

 

 

Goodwill impairment

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

27,353

 

 

Income (loss) from operations

 

 

7,978

 

 

(6,143)

 

 

(8,066)

 

 

(12,135)

 

 

(29,945)

 

 

Other expense:

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

Gain on bargain purchase, net of deferred taxes

 

 

 —

 

 

 —

 

 

 —

 

 

1,429

 

 

 —

 

 

Interest expense, net

 

 

(25,386)

 

 

(15,046)

 

 

(11,537)

 

 

(11,147)

 

 

(8,507)

 

 

Other (expense) income, net

 

 

(460)

 

 

(850)

 

 

(1,850)

 

 

1,299

 

 

(364)

 

 

Loss before income tax expense (benefit)

 

 

(17,868)

 

 

(22,039)

 

 

(21,453)

 

 

(20,554)

 

 

(38,816)

 

 

Income tax expense (benefit)

 

 

2,207

 

 

(1,311)

 

 

3,441

 

 

365

 

 

2,973

 

 

Net loss

 

$

(20,075)

 

$

(20,728)

 

$

(24,894)

 

$

(20,919)

 

$

(41,789)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share – basic and diluted (9)

 

$

(0.69)

 

$

(0.78)

 

$

(0.94)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 

  

 

    

2019

    

2018

    

2017

    

2016

    

2015

  

 

 

(in thousands)

  

Consolidated Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Cash and cash equivalents (10)

 

$

103,307

 

$

56,618

 

$

118,090

 

$

95,334

 

$

17,802

  

Working capital

 

$

115,231

 

$

64,626

 

$

131,381

 

$

77,676

 

$

5,619

 

Property, plant and equipment, construction in progress and long-term contract costs

 

$

184,959

 

$

165,491

 

$

123,208

 

$

125,490

 

$

217,193

 

Total assets

 

$

797,581

 

$

725,463

 

$

553,945

 

$

535,724

 

$

425,656

 

Current portion of long-term debt (11)

 

$

7,491

 

$

6,494

 

$

6,483

 

$

27,963