10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2019

OR

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

For the transition period from              to             

Commission file number 001-37903

AquaVenture Holdings Limited

(Exact name of registrant as specified in its charter)

British Virgin Islands	98-1312953
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)
c/o Conyers Corporate Services (BVI) Limited Commerce House, Wickhams Cay 1
P.O. Box 3140 Road Town British Virgin Islands	VG1110
(Address of principal executive office)	(Zip Code)

(813) 855 8636
(Registrant’s telephone number, including area code)

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

Title of each class:	Trading Symbol	Name of each exchange on which registered:
Ordinary Shares	WAAS	New York Stock Exchange (NYSE)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Smaller reporting company	☒
Emerging growth company	☒

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

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

The total number of ordinary shares outstanding as of November 4, 2019 was 31,739,691.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER  30, 2019 

TABLE OF CONTENTS

9
		Page
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements.	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Operating Results.	38
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	63
Item 4.	Controls and Procedures.	64
PART II—OTHER INFORMATION
Item 1.	Legal Proceedings.	65
Item 1A.	Risk Factors.	65
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	65
Item 3.	Defaults upon Senior Securities.	65
Item 4.	Mine Safety Disclosures.	65
Item 5.	Other Information.	65
Item 6.	Exhibits.	66

2

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless otherwise specified, references in this report to the “Company”, “AquaVenture”, “we”, “us” and “our” refer to AquaVenture Holdings Limited and its subsidiaries.

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are often identified by the use of words such as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “will,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would,” and similar expressions or variations intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us up to, and including, the date of this document. We expressly disclaim any obligation to update any such forward-looking statements to reflect events or circumstances that arise after the date hereof. Such forward-looking statements are subject to risks, uncertainties and other important factors which could cause our actual results to differ materially from those discussed herein.

This Quarterly Report on Form 10-Q may contain estimates, projections and other information concerning our industry, the general business environment, and markets, including estimates regarding the potential size of those markets. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events, circumstances or numbers, including actual market size, may differ materially from the information reflected in this Quarterly Report on Form 10-Q. Unless otherwise expressly stated, we obtained this industry, business information, market data, prevalence information and other data from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, general publications, government data, and similar sources, in some cases applying our own assumptions and analysis that may, in the future, prove not to have been accurate.

Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the section titled “Risk Factors” set forth under Part I, Item 1A of the Annual Report on Form 10-K for the fiscal year ended December 31, 2018,  as amended, as updated by our subsequent filings with the SEC, including the section entitled “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

3

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

	September 30,		December 31,
	2019		2018
ASSETS
Current Assets:
Cash and cash equivalents	$	109,520	$	56,618
Trade receivables, net of allowances of $1,109 and $1,034, respectively		24,441		21,437
Inventory		18,330		15,496
Current portion of long-term receivables		7,403		6,538
Prepaid expenses and other current assets		8,846		8,272
Total current assets		168,540		108,361
Property, plant and equipment, net		162,458		150,064
Construction in progress		21,346		15,427
Right-of-use assets		10,982		—
Restricted cash		4,268		4,153
Long-term receivables		34,468		40,574
Other assets		11,006		6,251
Deferred tax asset		4,473		4,191
Intangible assets, net		180,395		205,443
Goodwill		199,194		190,999
Total assets	$	797,130	$	725,463
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	7,881	$	8,235
Accrued liabilities		21,487		25,116
Current portion of long-term debt		7,269		6,494
Deferred revenue		4,621		3,890
Total current liabilities		41,258		43,735
Long-term debt		310,307		313,215
Deferred tax liability		18,036		18,465
Other long-term liabilities		13,650		13,450
Operating lease liabilities, non-current		10,090		—
Total liabilities		393,341		388,865
Commitments and contingencies (see Note 9)
Shareholders' Equity
Ordinary shares, no par value, 250,000 shares authorized; 31,722 and 26,780 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		—		—
Additional paid-in capital		662,225		582,127
Accumulated other comprehensive income		(252)		(421)
Accumulated deficit		(258,184)		(245,108)
Total shareholders' equity		403,789		336,598
Total liabilities and shareholders' equity	$	797,130	$	725,463

See accompanying notes to the unaudited condensed consolidated financial statements.

4

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2019		2018		2019		2018
Revenues:
Bulk water	$	14,992	$	14,626	$	44,916	$	42,682
Rental		24,286		16,261		68,660		45,041
Product sales		12,769		4,952		34,511		13,012
Financing		900		985		2,809		3,048
Total revenues		52,947		36,824		150,896		103,783
Cost of revenues:
Bulk water		6,958		6,771		20,481		20,021
Rental		11,245		7,130		30,898		20,240
Product sales		8,271		3,256		22,157		8,624
Total cost of revenues		26,474		17,157		73,536		48,885
Gross profit		26,473		19,667		77,360		54,898
Selling, general and administrative expenses		23,518		20,826		69,256		59,689
Income (loss) from operations		2,955		(1,159)		8,104		(4,791)
Other expense:
Interest expense, net		(6,214)		(3,396)		(19,282)		(10,000)
Other expense, net		(233)		(228)		(381)		(520)
Loss before income tax expense		(3,492)		(4,783)		(11,559)		(15,311)
Income tax expense (benefit)		445		(2,051)		1,517		(1,312)
Net loss		(3,937)		(2,732)		(13,076)		(13,999)
Other comprehensive income:
Foreign currency translation adjustment		(67)		106		169		(84)
Comprehensive loss	$	(4,004)	$	(2,626)	$	(12,907)	$	(14,083)
Loss per share – basic and diluted	$	(0.13)	$	(0.10)	$	(0.46)	$	(0.53)
Weighted-average shares outstanding – basic and diluted		31,201		26,590		28,354		26,544

See accompanying notes to the unaudited condensed consolidated financial statements.

5

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(IN THOUSANDS)

	Ordinary Shares
				Additional		Accumulated Other		Accumulated
	Shares	Amount		Paid-In Capital		Comprehensive Income		Deficit		Total
Balance, December 31, 2018	26,780	$	—	$	582,127	$	(421)	$	(245,108)	$	336,598
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings	72		—		(620)		—		—		(620)
Exercise of options	82		—		1,472		—		—		1,472
Share-based compensation expense	—		—		1,011		—		—		1,011
Net loss	—		—		—		—		(5,664)		(5,664)
Foreign currency translation adjustment	—		—		—		120		—		120
Balance, March 31, 2019	26,934	$	—	$	583,990	$	(301)	$	(250,772)	$	332,917
Employee Share Purchase Plan	10		—		177		—		—		177
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings	19		—		(150)		—		—		(150)
Exercise of options	22		—		311		—		—		311
Share-based compensation expense	—		—		1,275		—		—		1,275
Net loss	—		—		—		—		(3,475)		(3,475)
Foreign currency translation adjustment	—		—		—		116		—		116
Balance, June 30, 2019	26,985	$	—	$	585,603	$	(185)	$	(254,247)	$	331,171
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings	20		—		(135)		—		—		(135)
Exercise of options	2		—		29		—		—		29
Share-based compensation expense	—		—		1,323		—		—		1,323
Issuance of ordinary shares, net of issuance costs	4,715		—		75,405		—		—		75,405
Net loss	—		—		—		—		(3,937)		(3,937)
Foreign currency translation adjustment	—		—		—		(67)		—		(67)
Balance, September 30, 2019	31,722	$	—	$	662,225	$	(252)	$	(258,184)	$	403,789

	Ordinary Shares
				Additional		Accumulated Other		Accumulated
	Shares	Amount		Paid-In Capital		Comprehensive Income		Deficit		Total
Balance, December 31, 2017	26,482	$	—	$	568,593	$	(17)	$	(224,380)	$	344,196
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings	19		—		(112)		—		—		(112)
Exercise of options	2		—		15		—		—		15
Share-based compensation expense	—		—		3,283		—		—		3,283
Net loss	—		—		—		—		(6,346)		(6,346)
Foreign currency translation adjustment	—		—		—		(83)		—		(83)
Balance, March 31, 2018	26,503	$	—	$	571,779	$	(100)	$	(230,726)	$	340,953
Employee Share Purchase Plan	10		—		132		—		—		132
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings	59		—		(91)		—		—		(91)
Exercise of options	8		—		71		—		—		71
Share-based compensation expense	—		—		3,366		—		—		3,366
Net loss	—		—		—		—		(4,921)		(4,921)
Foreign currency translation adjustment	—		—		—		(107)		—		(107)
Balance, June 30, 2018	26,580	$	—	$	575,257	$	(207)	$	(235,647)	$	339,403
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings	20		—		(104)		—		—		(104)
Share-based compensation expense	—		—		3,353		—		—		3,353
Net loss	—		—		—		—		(2,732)		(2,732)
Foreign currency translation adjustment	—		—		—		106		—		106
Balance, September 30, 2018	26,600	$	—	$	578,506	$	(101)	$	(238,379)	$	340,026

See accompanying notes to the unaudited condensed consolidated financial statements.

6

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

	Nine Months Ended September 30,
	2019		2018
Cash flows from operating activities:
Net loss	$	(13,076)	$	(13,999)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		39,454		24,761
Share-based compensation expense		3,609		10,002
Provision for bad debts		813		695
Deferred income tax provision		(260)		(2,882)
Provision for inventory		184		253
Loss on disposal of assets		1,554		1,506
Amortization of deferred financing fees		765		712
Accretion of and adjustments to acquisition contingent consideration		251		—
Other		12		38
Change in operating assets and liabilities:
Trade receivables		(3,616)		236
Inventory		(3,970)		(1,407)
Prepaid expenses and other current assets		(16)		142
Long-term receivables		5,200		4,596
Right-of-use assets		1,288		—
Other assets		(8,524)		(2,643)
Current liabilities		(4,161)		(253)
Operating lease liabilities		(120)		—
Long-term liabilities		824		291
Net cash provided by operating activities		20,211		22,048
Cash flows from investing activities:
Capital expenditures		(28,639)		(12,930)
Net cash paid for acquisition of assets or business		(7,941)		(27,097)
Other		331		16
Net cash used in investing activities		(36,249)		(40,011)
Cash flows from financing activities:
Payments of long-term debt		(5,074)		(4,975)
Payment of deferred financing fees		—		(71)
Payments of secured borrowings		(372)		—
Payments of acquisition contingent consideration		(2,033)		—
Proceeds from exercise of stock options		1,812		86
Shares withheld to cover minimum tax withholdings on equity awards		(905)		(307)
Proceeds from the issuance of Employee Share Purchase Plan shares		177		132
Proceeds from issuance of ordinary shares, net of issuance costs		75,438		—
Net cash provided by (used in) financing activities		69,043		(5,135)
Effect of exchange rates on cash, cash equivalents and restricted cash		12		(7)
Change in cash, cash equivalents and restricted cash		53,017		(23,105)
Cash, cash equivalents and restricted cash at beginning of period		60,771		122,359
Cash, cash equivalents and restricted cash at end of period	$	113,788	$	99,254

See accompanying notes to the unaudited condensed consolidated financial statements.

7

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. Description of the Business

AquaVenture Holdings Limited is a British Virgin Islands (“BVI”) company that was formed on June 17, 2016. AquaVenture Holdings Limited and its subsidiaries (collectively, “AquaVenture” or the “Company”) provides its customers Water‑as‑a‑Service® (“WAAS  ®”) solutions through two operating platforms: Seven Seas Water and Quench. Both operations are critical to AquaVenture, which is headquartered in the BVI.

Seven Seas Water offers WAAS solutions by providing outsourced desalination, wastewater treatment and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Seven Seas Water’s desalination solutions utilize reverse osmosis and other purification technologies to produce potable and high purity industrial process water in high volumes for customers operating in regions with limited access to potable water. Through this outsourced desalination service model, Seven Seas Water assumes responsibility for designing, financing, constructing, operating and maintaining the water treatment facilities. In exchange, Seven Seas Water enters into long‑term agreements to sell to customers agreed‑upon quantities of water that meet specified water quality standards. For its wastewater treatment and water reuse solutions, Seven Seas Water designs, fabricates and installs plants which can be sold or leased to customers for a contractual term. The wastewater treatment and water reuse solutions offered include scalable modular treatment plants, field-erected plants and temporary bypass plants.

Seven Seas Water currently operates in the Caribbean region, the United States and in South America and is pursuing new opportunities in North America, the Caribbean, South America, Africa, the Middle East and other select markets. Seven Seas Water is supported by operations centers in Tampa, Florida and Houston, Texas, which provide business development, engineering, field service support, procurement and administrative functions.

Quench offers WAAS solutions by providing bottleless filtered water coolers and related services through direct and indirect sales channels. Through its direct sales channel, Quench primarily rents and services point-of-use (“POU”) units to institutional and commercial customers. Quench’s typical initial rental contract ranges from two to four years in duration and contains an automatic renewal provision. Quench’s indirect sales channel provides POU systems, filters, parts and services to a network of approximately 250 dealers and retailers.

Quench primarily operates throughout the United States and Canada. Quench is supported by a primary operations center in King of Prussia, Pennsylvania, which provides marketing and business development, field service and supply chain support, customer care and administrative functions.

2. Summary of Significant Accounting Policies

Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 2—“Summary of Significant Accounting Policies” of the notes to the audited consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnotes normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended. In management’s opinion, the accompanying unaudited

8

condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of September 30, 2019, the unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2019 and 2018, the unaudited condensed consolidated statements of changes in equity for the three and nine months ended September 30, 2019 and 2018, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018. The unaudited condensed consolidated balance sheet as of December 31, 2018 was based on the audited consolidated balance sheet as of December 31, 2018, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, but restated for adoption of new accounting guidance which is further explained in the “Adoption of New Accounting Pronouncements” section below.

The unaudited condensed consolidated financial statements include the accounts of AquaVenture Holdings Limited and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include: accounting for revenue from contracts with customers and the determination of transaction prices and allocation of revenues to remaining performance obligations; accounting for leases and the determination of operating lease liabilities and right-of-use assets; accounting for goodwill and identifiable intangible assets and any related impairment; property, plant and equipment and any related impairment; contract costs and any related impairment; share‑based compensation; allowance for doubtful accounts; obligations for asset retirement; acquisition contingent consideration; and valuation of deferred income taxes. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Leases

Lessee accounting

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

At the time of contract inception, the Company determines if an arrangement is or contains a lease. If the arrangement contains a lease, the Company recognizes a right-of-use asset and an operating lease liability at the lease commencement date. Lease expense for lease payments made is recognized on a straight-line basis over the lease term.

The operating lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. The current portion of the Company’s operating lease liabilities are recorded within accrued liabilities in the consolidated balance sheets.

The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the operating lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the operating lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Right-of-use assets are periodically reviewed for impairment whenever events or changes in circumstances arise. During the three and nine months ended September 30, 2019, the Company had incurred no impairment charges related to right-of-use assets.

Key estimates and judgments in determining both the operating lease liability and right-of-use asset include the determination of (i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) the lease term and (iii) the lease payments.

9

The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally derives an incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

Lease payments included in the measurement of operating lease liabilities are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and

· the exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise the option.

In certain instances, the Company's leases include non-lease components, such as equipment maintenance or common area maintenance. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company has not elected the practical expedient to account for the lease and non-lease components as a single lease component and has elected (for all classes of underlying assets) to account for these components separately. The Company allocates the consideration in the contract to the lease and non-lease components based on each component's relative standalone price. The Company determines standalone prices for the lease components based on the prices for which other lessors lease similar assets on a standalone basis. The Company determines standalone prices for the non-lease components based on the prices that suppliers might charge for those types of services on a standalone basis. If observable standalone prices are not readily available, the Company estimates the standalone prices maximizing the use of observable information.

The Company has elected to utilize the short-term lease exemption and not recognize a right-of-use asset and corresponding operating lease liability for leases with expected terms of 12 months or less. The Company recognizes the lease payments associated with its short-term leases on a straight-line basis over the lease term.

Lessor accounting

The Company generates revenues through the lease of its bulk water facilities, wastewater treatment and water reuse equipment, and filtered water and related systems equipment to customers. In certain instances, the Company enters into a contract with a customer but must construct the underlying asset, including bulk water facilities and wastewater treatment and water reuse equipment, prior to its lease.

At the time of contract inception, the Company determines if an arrangement is or contains a lease.

Customer contracts that contain leases, which can be explicit or implicit in the contract, are generally classified as either operating leases or sales-type leases and can contain both lease and non-lease components, including operating and maintenance services (“O&M”) of the Company-owned equipment. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company elected the practical expedient for all classes of underlying assets to not separate the lease and non-lease components if certain conditions are met, including the classification of the lease component as operating and the revenue recognition pattern of both the lease and non-lease components. The Company will account for the contract with the customer as a combined component under the respective authoritative guidance for the predominant element in the contract, the lease or non-lease component.

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

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If the customer contract contains or is accounted for as a lease, the key estimates and judgments used by the Company in accounting for the lease as a lessor include the following: (i) lease term, (ii) the economic life of the underlying leased asset, (iii) determination of lease payments and (iv) determination of the fair value at the time of contract inception and the residual value of the underlying leased asset.

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the Company. Contracts entered into with customers can include either the option to renew or an auto-renewing provision that results in the automatic extension of the existing contract. In certain instances, key provisions such as the lease payment or term of the renewal are not stated and are subject to negotiation.

The economic life of the underlying leased asset is determined to be either the period over which the asset is expected to be economically usable, or where the benefits it can produce exceed the cost to replace or undertake major repairs. In certain instances, the economic life of the underlying leased asset can exceed the useful life assigned by the Company.

Lease payments that are accounted for as rental revenue are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date;

· the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise the option; and

· payments for penalties for the termination of a lease if the term reflects the lessee terminating the lease.

The Company’s leases do not typically include a requirement for the customer to guarantee the residual value of the underlying leased asset. Variable lease payments that do not depend on an index or rate are excluded from the determination of lease payments.

The fair value of the underlying leased asset at contract inception and residual value of underlying leased asset at the end of the term of the lease are determined based on the price that would be received to sell an asset in an orderly transaction at the time of valuation. The Company’s risk management strategy for protecting the residual value of the underlying assets include the ongoing maintenance by the Company during the lease term as well as clauses and other protections within the lease agreements which require the lessee to return the underlying asset in working condition at the end of the lease term.

At contract inception, the Company determines the lease classification of the underlying asset. The Company considers inputs such as the lease term, lease payments, fair value of the underlying asset and residual value of the underlying asset when assessing the classification. The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease. The rate implicit in the lease is the rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that the Company expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the Company and (2) any deferred initial direct costs of the Company.

In certain instances, contracts with customers may also include the option for the customer to purchase the underlying asset at the end of the lease term. When applicable and certain conditions are met, the Company will incorporate the stated purchase price into the determination of its implied interest rate.

Revenue Recognition

Through the Seven Seas Water and Quench operating platforms, the Company generates revenues from the following primary sources: (i) bulk water sales and services; (ii) service concession arrangements; (iii) rental of equipment; and (iv) product sales. The revenue recognition policy for each of the primary sources of revenue are as follows:

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Bulk Water Sales and Services.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers with a single performance obligation to deliver bulk water or a series of performance obligations to perform substantially the same services with the same pattern of transfer, which can include the operations and maintenance (“O&M”) of a customer-owned or leased plant. The Company recognizes revenues from the delivery of bulk water or the performance of bulk water services at the time the water or services are delivered to the customers in accordance with the contractual agreements. Billings to the customer for both bulk water and the bulk water services are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for bulk water sales and service can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenue will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. Estimates of revenue for unbilled water are recorded when meter readings occur at a time other than the end of a period. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period. Revenues generated from both the delivery of bulk water and performance of services related to bulk water are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Certain contracts with customers which require the construction of facilities to provide bulk water to a specific customer include two performance obligations, including an implicit lease for the bulk water facilities and bulk water services, and a non-lease component related to O&M services. The implicit lease performance obligation is generally accounted for as an operating lease as a result of the provisions of the contract. As the bulk water services are deemed to be the more predominant element, the Company considers the arrangement to be a combined bulk water component. The calculated transaction price can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and contractually established rates. The revenue recognition pattern for both the lease and non-lease components are the same, with revenues being recognized ratably over the contract period as water is delivered to the customer. Revenues generated from both the lease and non-lease performance obligations are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Service Concession Arrangements.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers that are determined to be service concession arrangements. Service concession arrangements are agreements entered into with a public sector entity which controls both (i) the ability to modify or approve the services and prices provided by the operating company and (ii) beneficial entitlement to, or residual interest in, the infrastructure at the end of the term of the agreement. Service concession arrangements typically include more than one performance obligation, including the construction of infrastructure for the customer and an obligation to provide O&M services for the infrastructure constructed for the customer. Billings to the customer for service concession arrangements are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for service concession arrangements includes, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. The transaction price is allocated to the identified performance obligations based on the relative standalone selling prices of the identified performance obligations.

The transaction price allocated to the construction of infrastructure performance obligation is recognized as product sales within the consolidated statements of operations and comprehensive income. Product sales are recognized over time, using the input method based on cost incurred, which typically begins at commencement of the construction with revenue being fully recognized upon the completion of the infrastructure as control of the infrastructure is, or is deemed to be, transferred to the customer. In addition, service concession contracts typically include a difference in timing of when control is, or is deemed to be, transferred and the collection of cash receipts, which are collected over the term of the entire arrangement. The timing difference could result in a significant financing component for the

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construction performance obligations if determined to be a material component of the transaction price. If a significant financing component is identified, the future cash flows included in the transaction price allocated to the construction performance obligations are discounted using a discount rate comparable to a market-based borrowing rate specific to both the customer and terms of the contract. The resulting present value of the allocated future cash flows is recorded as construction revenue with a related long-term receivable as control of the infrastructure is, or is deemed to be, transferred to the customer while the discount amount is considered to be the significant financing component. Future cash flows received from the customer related to the construction performance obligations are bifurcated between principal repayment of the long-term receivable and the imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income as providing financing to our customers is a core component of our business model.

The transaction price allocated to the O&M performance obligation is recorded as bulk water revenue within the consolidated statements of operations and comprehensive income as the services are provided to the customer. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period.

Rental of Equipment.  Through the Seven Seas Water and Quench operating platforms, the Company generates revenues through the rental of its wastewater treatment and water reuse equipment and filtered water and related systems to customers. Rental agreements classified as operating leases can contain both lease and non-lease components, including O&M services on Company-owned equipment. For rental agreements that meet all conditions of the elected practical expedient to not separate lease and non-lease components and where the lease component is determined to be the predominant element of the contract, the Company allocates all revenues under the contract to the lease component of the contract. Billings to the customer for the rental of this equipment, which generally occur either monthly or quarterly, are based on the rental rate as stated within the rental agreement. The transaction price is based on the minimum lease payment as stated within the rental agreement. Rental revenues, including revenues in connection with certain installation type activities are recognized ratably over the rental agreement term and amounts paid by customers in excess of recognizable revenue are recorded as a contract liability, or deferred revenue, in the consolidated balance sheets.

Certain revenues associated with shipping, delivery, installation or similar activities that occur prior to lease commencement do not provide a service to the lessee and are not a non-lease component of the contract. Payments for these activities are recorded as prepaid lease payments which are recognized ratably with the rental revenue over the lease term. Upon the expiration of the initial rental agreement term, the Company may enter into rental agreement extensions in which revenues are recognized ratably over the extension term.

Revenues generated under these rental agreements are recorded as rental revenue within the consolidated statements of operations and comprehensive income.

Product Sales.  Through both the Seven Seas Water and Quench operating platforms, the Company enters into contracts to construct desalination and wastewater treatment and water reuse equipment and facilities and to sell customers water and related filtration equipment, coffee and consumables, which may include contracts accounted for as sales-type leases.

Contracts with customers to sell water and related filtration equipment and coffee and consumables typically include a single performance obligation. The Company recognizes revenues at the time the equipment, coffee or consumables is transferred to the customer, which can be upon either shipment or delivery to the customer. The transaction price is based on the contractual price with the customer. Shipping and handling costs paid by the customer are included in revenues. Billings to the customer for the sale of water and related filtration equipment, coffee and consumables occur at the time the product is transferred to the customer and are based on contract price.

Contracts with customers to construct desalination and wastewater treatment and water reuse equipment and facilities typically include a single performance obligation. Construction and equipment revenues are recognized over time, using the input method based on cost incurred, which typically begins at the later of commencement of the construction or at the time the infrastructure is, or is deemed to be, transferred to the customer with revenue being fully recognized upon the completion of the infrastructure. Billings to the customer to construct desalination and wastewater treatment and water reuse equipment and facilities can occur at contractual intervals throughout the construction period,

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at the time the equipment or facility is deemed transferred to the customer, or, in the case of sales-type leases, as stated within the rental agreement. The transaction price is based on the contractual price with the customer.

For contracts deemed to be, or that include a sales-type lease, the transaction price is based on the minimum lease payments as stated within the rental agreement. For contracts that contain both a lease and non-lease components, the transaction price is allocated based on the relative standalone selling prices of the lease and non-lease components. The transaction price, excluding variable lease payments, allocated to the lease component is discounted at the implicit rate of the contract and is recognized as revenue upon commencement of the lease.

Revenues generated under these contracts are recorded as product sales revenue within the consolidated statements of operations and comprehensive income.

Future cash flows received from sales-type leases are bifurcated between principal repayment of the long-term receivable and the related imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income.

Contract Costs

Contract costs includes contract acquisition costs and contract fulfillment costs, which are all recorded within other assets in the consolidated balance sheets.

Contract Acquisition Costs.    Prior to January 1, 2019, the Company accounted for initial direct costs incurred by the Company to originate leases as deferred lease costs. The costs capitalized were directly related to the negotiation and execution of leases and primarily consisted of internal compensation and benefits as lease origination activities were performed internally by the Company. Deferred lease costs capitalized prior to the adoption of the authoritative guidance on leases will be amortized on a straight-line basis over the remaining lease term.

For all leases originated on or after January 1, 2019, subsequent to the adoption of authoritative guidance on leases, the incremental costs incurred by the Company to originate contracts with customers are capitalized as contract acquisition costs. Contract acquisition costs, which generally include commissions and other costs that are only incurred as a result of obtaining a contract, are capitalized when the incremental costs are expected to be recovered over the contract period. All other costs incurred regardless of obtaining a contract are expensed as incurred. Contract acquisition costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the initial contract term, on a basis consistent with the transfer of goods or services to the customer to which the costs relate.

Contract acquisition costs, net as of September 30, 2019 and December 31, 2018 were $4.8 million and $3.7 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Contract Fulfillment Costs. Costs incurred by the Company to fulfill a contract with a customer are capitalized when the costs generate or enhance resources that will be used in satisfying future performance obligations of the contract and the costs are expected to be recovered. Capitalized contract fulfillment costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to fulfill the contract, including shipping and installation activities. Contract fulfillment costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the initial contract term, on a basis consistent with the transfer of good or services to the customer to which the costs relate.

Contract fulfillment costs, net as of September 30, 2019 and December 31, 2018 were $5.4 million and $1.5 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Total contract costs amortization expense for the three and nine months ended September 30, 2019 were $1.5 million and $3.6 million, respectively. Total contract cost amortization expense for the three and nine months ended September 30, 2018 were $0.7 million and $2.0 million respectively.

Contract costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company had no impairment charges related to contract costs during the three and nine months ended September 30, 2019 and 2018.

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Adoption of New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. During 2018, the FASB issued additional authoritative guidance which, among other things, provided an option to apply transition provisions under the standard at adoption date rather than the earliest comparative period presented as well as added a practical expedient that would permit lessors to not separate non-lease components from the associated lease components if certain conditions are met. These amendments are effective, in conjunction with the new lease standard, for annual reporting periods beginning on or after December 15, 2018, including interim periods within those annual periods.

The Company adopted this guidance on a modified retrospective basis on January 1, 2019 with the cumulative effect of the transition as of the date of adoption.

The Company has elected the package of practical expedients provided for within the authoritative guidance which exempts the Company from having to reassess: (i) whether expired or existing contracts contain leases, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. In addition, the Company has elected the practical expedient that permits lessors to not separate non-lease components from the associated lease components if certain conditions are met. Lastly, the Company has utilized the short-term exemption for lessees and established an accounting policy to not recognize a right-of-use asset or lease liability for any lease with a term of less than 12 months. The Company did not elect to utilize any of the other practical expedients. 

The impacts of the new lease standard are as follows:

Lessee accounting - The adoption has had a material impact on the consolidated balance sheets, including an increase to both assets and liabilities, as a result of the recognition of a right-of-use asset and corresponding lease liability for operating leases. As the Company has made a policy election for the short-term lease exemption, a right-of-use asset and corresponding lease liability are only recorded for leases with expected terms of more than 12 months. The adoption did not have a material impact on the consolidated statements of operations and comprehensive income for situations in which the Company is a lessee.

Lessor accounting - As the Company has elected the transitional practical expedients for leases, there are not any material impacts to the consolidated financial statements for leases in situations which the Company is a lessor and the lease commenced prior to January 1, 2019. To conform with the guidance, the Company has updated its policies for costs incurred for the acquisition and fulfillment of the lease contracts, including commissions and installation costs.

Adoption of the new lease standard did not impact our historically reported results. On January 1, 2019, the Company recorded $8.7 million of right-of-use assets and $8.9 million of operating lease liabilities, including the classification of $0.2 million from straight-line rent liabilities to operating lease liabilities, in the consolidated balance sheets.

New Accounting Pronouncements to be Adopted

In June 2016, the FASB issued authoritative guidance regarding implementation of measurement of credit losses on financial instruments. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the disclosure requirements on the consolidated financial statements.

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In August 2018, the FASB issued authoritative guidance regarding the disclosure requirements for fair value measurements. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In March 2019, the FASB issued authoritative guidance regarding targeted changes to lessor accounting. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

3. Business Combinations and Asset Acquisitions

Business Combinations

Pure Health Solutions, Inc.

On December 18, 2018, Quench USA, Inc. (“Quench”), a wholly-owned subsidiary of AquaVenture Holdings Limited, acquired all of the issued and outstanding shares of Pure Health Solutions, Inc. (“PHSI”) pursuant to a stock purchase agreement (the “PHSI Acquisition”). PHSI, which is based outside of Chicago, is a leading provider of filtered water coolers and related services through direct and indirect sales channels. The Company paid approximately $56.6 million, in the aggregate, which included approximately $39.1 million of cash related to the purchase price of PHSI, net of adjustments to reduce the purchase price by $1.6 million, and approximately $17.5 million of cash accounted for as a post-combination payoff of factored contract liabilities which had been classified as a secured borrowing. The factored contract liabilities were adjusted to fair value as of the acquisition date based on the present value of the factored contract liabilities using a discount rate of approximately 7% and any penalties associated with the payoff.

Acquisition-related costs incurred by the Company related to the PHSI Acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively, which were expensed as incurred within selling, general and administrative (“SG&A”) expenses in the consolidated statements of operations and comprehensive income.

The Quench business completed the PHSI Acquisition to expand its installed base of POU systems and to be able to participate more broadly in the global POU market through the PHSI dealer network. In addition, the PHSI Acquisition enhances Quench’s ability to develop, source and manufacture exclusive coolers and purification offerings. Lastly, it offers us the opportunity to develop relationships with POU dealers that could lead to future acquisitions.

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

Assets acquired:
Cash and cash equivalents	$	260
Trade receivables		1,167
Inventory		1,603
Prepaid expenses and other current assets		447
Property, plant and equipment		6,945
Deferred tax asset		108
Customer relationships		21,409
Trade names		2,360
Non-compete agreements		1,776
Goodwill		26,473
Total assets acquired		62,548
Liabilities assumed:
Accounts payable and accrued liabilities		(22,652)
Deferred revenue		(329)
Other long-term liabilities		(450)
Total liabilities assumed		(23,431)
Total purchase price	$	39,117

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As of September 30, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles, recorded in conjunction with the PHSI Acquisition remained preliminary and is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above. During the third quarter of 2019, the Company updated its preliminary allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 15.8%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 15.8%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 15.8%.

The estimated weighted average useful life for customer relationships, trade names, and non-compete agreements is 15 years, 12 years, and 5 years, respectively.

As a result of the measurement period adjustments made to the purchase price allocation during the third quarter of 2019, the Company recorded additional amortization expense, as reflected in SG&A, of $1.1 million. For both the three and nine months ended September 30, 2019, the Company’s loss from operations and net loss in the consolidated statements of operations were approximately $1.1 million higher as a result of the measurement period adjustments. For both the three and nine months ended September 30, 2019, the Company’s net loss per share increased by $0.04 per share as a result of the measurement period adjustments.

Goodwill is composed of the acquired workforce and synergies not valued and is not deductible for tax purposes. Goodwill for the PHSI Acquisition is recorded within the Quench reportable segment.

The results of the operations of the acquired PHSI assets are included in the Quench reportable segment after the date of the PHSI Acquisition.

The Company identified certain liabilities, including tax matters that existed prior to December 18, 2018. The Company believes the liabilities are indemnified pursuant to the stock purchase agreement for the PHSI Acquisition. As a result, as of the date of acquisition, the Company recorded a liability in the amount of $0.8 million, which was recorded in accrued liabilities, and a corresponding indemnification receivable in the amount of $0.8 million, which was recorded in prepaids and other current assets in the consolidated balance sheet. The amounts were reflected within the purchase price allocation.

Commencing on December 18, 2018, the Company initiated a restructuring of the PHSI organization which included the reduction of headcount for PHSI executive management and other employee positions determined to be duplicative with those at Quench (the “PHSI Restructuring Plan”). Certain of the positions were backfilled with additional positions at Quench depending on the needs of the business. The expected net effect of the restructuring will allow Quench to recognize synergies of reduced employee costs subsequent to the PHSI Acquisition. The restructuring was determined to be a post-combination transaction. During the three and nine months ended September 30, 2019, the Company incurred an incremental restructuring-related charge related to severance, termination benefits and related taxes of $0 and $0.1 million, respectively, which was recorded within SG&A expenses in the consolidated statements of operations and comprehensive income. As of September 30, 2019 and December 31, 2018, the Company had accrued approximately $0.1 million and $0.8 million, respectively, within accrued liabilities on the consolidated balance sheets. The Company completed the PHSI Restructuring Plan during the second quarter of 2019.

FB Global Development, Inc., d/b/a Bluline

On December 3, 2018, Quench acquired substantially all the assets and assumed certain liabilities of FB Global Development, Inc., d/b/a Bluline (“Bluline”) pursuant to an asset purchase agreement (the “Bluline Acquisition”). Bluline, based in South Florida, is a provider of filtered water coolers and related services through direct and indirect sales channels. The aggregate purchase price, subject to adjustments, of the Bluline Acquisition was $2.5 million in cash and a $0.3 million payable to the seller which is expected to be paid in full by December 2019.

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There were no acquisition-related costs incurred by the Company related to the Blueline Acquisition during the three and nine months ended September 30, 2019.

The Quench business completed the Bluline Acquisition to expand its installed base of POU systems and to be able to participate more broadly in the global POU market through its indirect sales channel. 

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

Assets acquired:
Trade receivables	$	90
Inventory		345
Property, plant and equipment		331
Customer relationships		1,292
Non-compete agreements		170
Goodwill		645
Total assets acquired		2,873
Liabilities assumed:
Deferred revenue		(10)
Total liabilities assumed		(10)
Total purchase price	$	2,863

The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed recorded in conjunction with the Bluline Acquisition is considered final. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements.The fair value of the customer relationships were developed using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a weighted average discount rate of 20.0%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a weighted average discount rate of 20.0%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 20 years and 5 years, respectively.

Goodwill for this acquisition is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reportable segment.

The results of the operations of the acquired Bluline assets are included in the Quench reportable segment from and after the date of acquisition.

AUC Acquisition Holdings

On November 1, 2018, AquaVenture Holdings Inc., a wholly owned subsidiary of AquaVenture, acquired all of the issued and outstanding membership interests of AUC Acquisition Holdings (“AUC”), a provider of wastewater treatment and water reuse solutions based in Houston, Texas, pursuant to a membership interest purchase agreement (the “AUC Acquisition”). The aggregate purchase price was $130.9 million, including $127.0 million cash (including net working capital adjustments of $0.4 million), approximately 122 thousand ordinary shares of AquaVenture, or $2.0 million, and $1.9 million of acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future collection of assumed receivables. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $2.0 million.

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Acquisition-related costs incurred by the Company related to the AUC Acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively, which were expensed as incurred within SG&A expenses in the consolidated statements of operations and comprehensive income.

The Company completed the AUC Acquisition to expand its WAAS offerings in the wastewater treatment and water reuse businesses and broaden the Company’s existing portfolio in the United States.

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

Assets acquired:
Cash and cash equivalents	$	849
Trade receivables		1,763
Inventory		2,642
Current portion of long-term receivables		521
Prepaid expenses and other current assets		1,673
Property, plant and equipment		39,848
Other assets		25
Long-term receivables		306
Customer relationships		31,740
Trade names		2,680
Non-compete agreements		2,090
Backlog		870
Goodwill		64,940
Total assets acquired		149,947
Liabilities assumed:
Accounts payable and accrued liabilities		(4,286)
Deferred revenue		(1,021)
Other long-term liabilities		(1,706)
Deferred tax liability		(12,034)
Total liabilities assumed		(19,047)
Total purchase price	$	130,900

The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed recorded in conjunction with the AUC Acquisition is considered final. During the third quarter of 2019, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The fair value of the property, plant and equipment was determined using a combination of the indirect cost approach, direct cost approach and market approach, depending on asset type. The assets and liabilities (excluding property, plant and equipment) in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names, non-compete agreements and backlog. The fair value of customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 10.9%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 10.9%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 10.9%. The fair value of the backlog, which represents revenues and the related profit for contracts executed but not yet completed, was determined using the multi-period excess earnings methodwhich is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 10.9%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names, non-compete agreements and backlog is 19 years, 15 years, 4.9 years, and 0.7 years, respectively.

As a result of the measurement period adjustments made to the purchase price allocation during the third quarter of 2019, the Company recorded additional depreciation expense of $0.7 million, as reflected in cost of revenues,

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and a reduction of amortization expense of $0.1 million, as reflected in SG&A. For both the three and nine months ended September 30, 2019, the Company’s loss from operations and net loss in the consolidated statements of operations were approximately $0.6 million higher as a result of the measurement period adjustments. For both the three and nine months ended September 30, 2019, the Company’s net loss per share increased by $0.02 per share as a result of the measurement period adjustments.

Goodwill is composed of the acquired workforce and synergies not valued and is not deductible for tax purposes. Goodwill for the AUC Acquisition is recorded within the Seven Seas Water reportable segment.

The results of the operations of the acquired AUC assets are included in the Seven Seas Water reportable segment after the date of acquisition.

Alpine Water Systems, LLC

On August 6, 2018, Quench acquired substantially all the assets and assumed certain liabilities of Alpine Water Systems, LLC (“Alpine”), a POU water filtration company based in Las Vegas, Nevada, pursuant to an asset purchase agreement (the “Alpine Acquisition”). The aggregate purchase price of the Alpine Acquisition was $15.0 million, including $14.5 million in cash (including final working capital adjustment of $0.1 million which was received during the three months ended March 31, 2019), $0.4 million payable on August 6, 2020, and $0.1 million of acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future performance of the acquired assets. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $0.3 million. In addition, the asset purchase agreement includes contingent payments with the ultimate payout based upon the future performance of the acquired assets. The contingent payments are automatically forfeited if the employment of certain selling shareholders terminates. The Company has determined that the contingent payments will be post-combination compensation expense, which will be accreted to their estimated payout amount of $0.4 million throughout the substantive service period. The undiscounted range of outcomes for the post-combination compensation payout amount is $0 to $1.1 million. Payments related to the final acquisition contingent consideration and post-combination expense were made during the third quarter of 2019. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States and Canada.

Acquisition-related costs incurred by the Company related to the Alpine Acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively, which were expensed as incurred within SG&A expenses in the consolidated statements of operations and comprehensive income.

The Quench business completed the asset acquisition to expand its installed base of POU systems.

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

Assets acquired:
Trade receivables	$	556
Inventory		141
Prepaid expenses and other current assets		153
Property, plant and equipment		1,562
Customer relationships		6,280
Non-compete agreements		1,149
Goodwill		6,006
Total assets acquired		15,847
Liabilities assumed:
Accounts payable and accrued liabilities		(295)
Deferred revenue		(565)
Total liabilities assumed		(860)
Total purchase price	$	14,987

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The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed recorded in conjunction with the Alpine Acquisition is considered final. During the first quarter of 2019, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 13.4%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 13.4%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 15 years and 5 years, respectively.

Goodwill is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reportable segment.

The results of the operations of the acquired Alpine assets are included in the Quench reportable segment from and after the date of acquisition.

Wa-2 Water Company Ltd.

On March 1, 2018, Quench Canada, Inc., a wholly-owned subsidiary of the Company, acquired substantially all of the water filtration assets and assumed certain liabilities of Wa-2 Water Company Ltd. (“Wa-2”), pursuant to an asset purchase agreement for an aggregate purchase price of $5.1 million in cash, including a final working capital adjustment of approximately $5 thousand which was paid in June 2018 (the “Wa-2 Acquisition”). Approximately $0.3 million of the aggregate purchase price was held in escrow for a period of one year by a third party for seller indemnifications. Wa-2 is a POU water filtration company based in Vancouver, British Columbia. The assets acquired consist primarily of in-place lease agreements and the related POU systems.

Acquisition-related costs incurred by the Company related to the Wa-2 Acquisition during the three and nine months ended September 30, 2018 were $9 thousand and $86 thousand, respectively. There were no acquisition-related costs incurred by the Company during the three and nine months ended September 30, 2019.

The Quench business completed the Wa-2 Acquisition to expand its installed base of POU systems in Canada.

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

Assets acquired:
Trade receivables	$	134
Inventory		158
Prepaid expenses and other current assets		6
Property, plant and equipment		424
Customer relationships		1,561
Trade names		700
Non-compete agreements		298
Goodwill		2,239
Total assets acquired		5,520
Liabilities assumed:
Accounts payable and accrued liabilities		(86)
Deferred revenue		(328)
Total liabilities assumed		(414)
Total purchase price	$	5,106

The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed

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recorded in conjunction with the Wa-2 Acquisition is considered final. During the second quarter of 2018, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 12.9%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 12.9%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss using a discount rate of 12.9%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names and non-compete agreements to be 20 years, 12 years, and 5 years, respectively.

Goodwill is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reporting segment.

The results of the operations of the acquired Wa-2 assets are included in the Quench reportable segment from and after the date of acquisition.

Pro Forma Financial Information

The following unaudited pro forma financial information (in thousands, except for per share amounts) for the Company gives effect to the acquisitions of: (i) PHSI, which occurred on December 18, 2018; (ii) Bluline, which occurred on December 3, 2018; (iii) AUC, which occurred on November 1, 2018; (iv) Alpine, which occurred on August 6, 2018; and (v) Wa-2, which occurred on March 1, 2018, as if each had occurred on January 1, 2018. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future.

	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenues	$	52,947	$	48,986	$	150,896	$	140,290
Net loss	$	(3,937)	$	(3,566)	$	(13,076)	$	(20,344)
Loss per share	$	(0.13)	$	(0.13)	$	(0.46)	$	(0.77)

Asset Acquisitions

The following acquisitions did not meet the definition of a business combination, so the Company accounted for these transactions as asset acquisitions. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets. In addition, acquisition-related costs are capitalized and allocated to the net assets acquired on a relative fair value basis.

Carolina Pure Water Systems, LLC

On July 15, 2019, Quench 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.

The revenues and related expenses from the acquired in-place lease agreements are included in the Quench reportable segment from the date of acquisition. The Quench business completed the Carolina Pure acquisition to expand its installed base of POU systems in the United States.

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Acquisition-related costs incurred by the Company in connection with this acquisition during both the three and nine months ended September 30, 2019 were $0.1 million.

The following table summarizes the amounts for the Carolina Pure acquisition which were allocated to the fair value of aggregated net assets acquired (in thousands):

Trade receivables	$	137
Property, plant and equipment		1,350
Inventory		39
Customer relationships		4,812
Non-compete agreements		1,217
Deferred revenue		(230)
Net assets acquired	$	7,325

The assets in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 11.8%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss using a discount rate of 11.8%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 15 years and 5 years, respectively.

Aguaman, Inc.

On June 1, 2019, Quench acquired substantially all of the 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 acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future performance of the acquired assets and the resolution of certain matters as set forth in the asset purchase agreement. The undiscounted range of outcomes for the acquisition contingent considerations is $0 to $0.2 million. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States.

The revenues and related expenses from the acquired in-place lease agreements are included in the Quench reportable segment from the date of acquisition. The Quench business completed the Aguaman acquisition to expand its installed base of POU systems in the United States.

Acquisition-related costs incurred by the Company in connection with this acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively.

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The following table summarizes the amounts for the Aguaman acquisition which were allocated to the fair value of aggregated net assets acquired (in thousands):

Trade receivables	$	62
Property, plant and equipment		49
Inventory		6
Customer relationships		1,464
Deferred revenue		(37)
Net assets acquired	$	1,544

The assets in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 13.0%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships to be 12 years.

4. Revenue

Disaggregation of Revenue

The following table represents a disaggregation of revenue for the three months ended September 30, 2019 and 2018, along with the reportable segment for each category (in thousands):

	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	9,008	$	—	$	9,008	$	9,242	$	—	$	9,242
Operating and maintenance		5,984		—		5,984		5,384		—		5,384
Total bulk water		14,992		—		14,992		14,626		—		14,626
Rental
Lease of equipment		3,921		20,365		24,286		—		16,261		16,261
Total rental		3,921		20,365		24,286		—		16,261		16,261
Product sales
Construction of plants		2,429		—		2,429		—		—		—
Sale of equipment, coffee and consumables		—		10,340		10,340		—		4,952		4,952
Total product sales		2,429		10,340		12,769		—		4,952		4,952
Financing		900		—		900		985		—		985
Total revenues	$	22,242	$	30,705	$	52,947	$	15,611	$	21,213	$	36,824

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The following table represents a disaggregation of revenue for the nine months ended September 30, 2019 and 2018, along with the reportable segment for each category (in thousands):

	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	27,450	$	—	$	27,450	$	26,773	$	—	$	26,773
Operating and maintenance		17,466		—		17,466		15,909		—		15,909
Total bulk water		44,916		—		44,916		42,682		—		42,682
Rental
Lease of equipment		10,630		58,030		68,660		—		45,041		45,041
Total rental		10,630		58,030		68,660		—		45,041		45,041
Product sales
Construction of plants		6,860		—		6,860		—		—		—
Sale of equipment, coffee and consumables		—		27,651		27,651		—		13,012		13,012
Total product sales		6,860		27,651		34,511		—		13,012		13,012
Financing		2,809		—		2,809		3,048		—		3,048
Total revenues	$	65,215	$	85,681	$	150,896	$	45,730	$	58,053	$	103,783

Contract Assets and Liabilities

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

The following table provides information about contract assets and contract liabilities from contracts with customers at September 30, 2019 and December 31, 2018 (in thousands):

	September 30,		December 31,
	2019		2018
Contract assets
Trade receivables, net	$	24,441	$	21,437
Current portion of long-term receivables		7,403		6,538
Long-term receivables		34,468		40,574
Total contract assets	$	66,312	$	68,549
Contract liabilities
Deferred revenue, current	$	4,621	$	3,890
Deferred revenue, non-current		11,148		10,690
Total contract liabilities	$	15,769	$	14,580

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Significant changes in the contract asset and the contract liability balances during the three months ended September 30, 2019 and 2018 are as follows (in thousands):

	Three months ended				Three months ended
	September 30, 2019				September 30, 2018
	Contract assets increase/(decrease)		Contract liabilities (increase)/decrease		Contract assets increase/(decrease)		Contract liabilities (increase)/decrease
Revenue recognized that was included in the contract liability balance at the beginning of respective period	$	—	$	315	$	—	$	323
Deferred revenue acquired during the period	$	—	$	(229)	$	—	$	(714)

Significant changes in the contract asset and the contract liability balances during the nine months ended September 30, 2019 and 2018 are as follows (in thousands):

	Nine months ended				Nine months ended
	September 30, 2019				September 30, 2018
	Contract assets increase/(decrease)		Contract liabilities (increase)/decrease		Contract assets increase/(decrease)		Contract liabilities (increase)/decrease
Revenue recognized that was included in the contract liability balance at the beginning of respective period	$	—	$	4,824	$	—	$	3,360
Deferred revenue acquired during the period	$	—	$	(266)	$	—	$	(1,093)

The Company had no asset impairment charges related to contract assets during the three and nine months ended September 30, 2019 and 2018.

Transaction Price Allocated to Remaining Performance Obligations

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

Remainder of 2019	$	20,478
2020	$	50,808
2021	$	49,924
2022	$	49,924
2023	$	49,924
Thereafter	$	332,056

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

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5. Fair Value Measurements

At September 30, 2019 and December 31, 2018, the Company had the following assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:

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

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

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

There were no transfers into or out of Level 1, 2 or 3 assets during the three and nine months ended September 30, 2019. Transfers between levels are deemed to have occurred if the lowest level of input were to change.

The Company’s fair value measurements as of September 30, 2019 and December 31, 2018 were as follows (in thousands):

			Quoted Prices in		Significant
			Active Markets		Other		Significant
	Asset/		for Identical		Observable		Unobservable
Assets/Liabilities Measured at Fair Value	(Liability)		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
As of September 30, 2019
Recurring basis:
Money market funds	$	838	$	838	$	—	$	—
U.S. Treasury securities	$	68,486	$	68,486	$	—	$	—
Acquisition contingent consideration	$	(2,257)	$	—	$	—	$	(2,257)
As of December 31, 2018
Recurring basis:
Money market funds	$	42,135	$	42,135	$	—	$	—
Acquisition contingent consideration	$	(3,109)	$	—	$	—	$	(3,109)

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

6. Leases

Lessee accounting

The Company leases space and operating assets, including offices, office equipment, warehouses, storage yards and storage units under non-cancelable operating leases expiring at various dates with some containing escalation in rent clauses, rent concessions and/or renewal options. Minimum lease payments under operating leases are recognized on a straight-line basis over the term of the lease, including any periods of free rent.

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

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Lease Cost
Operating lease cost	$	769	$	2,140
Short-term lease cost		120		370
Variable lease cost		2		10
Total lease cost	$	891	$	2,520

The weighted-average remaining lease term and weighted-average discount rate for operating leases as of September 30, 2019 is 7.2 years and 10.0%, respectively. Cash paid for operating leases that are included in the measurement of lease liabilities during the nine months ended September 30, 2019 was $1.7 million.

As of September 30, 2019, the maturities of the Company’s operating lease liabilities were as follows (in thousands):

Remainder of 2019	$	685
2020		2,537
2021		2,552
2022		2,451
2023		2,065
Thereafter		6,305
Total future minimum lease payments		16,595
Less imputed lease interest		(5,023)
Total lease liabilities	$	11,572

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

2019	$	2,097
2020		905
2021		990
2022		856
2023		773
Thereafter		5,117
Total future minimum lease payments	$	10,738

Lessor accounting

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

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Lease income: sales-type leases
Profit at lease commencement	$	—	$	—
Interest income on lease receivables		45		143
Total lease income: sales-type leases		45		143
Lease income: operating leases		24,286		68,660
Total lease income	$	24,331	$	68,803

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

Remainder of 2019	$	18,863
2020	$	53,881
2021	$	34,973
2022	$	22,444
2023	$	15,735
Thereafter	$	6,612

Included in long-term receivables, current and long-term receivables in the consolidated balance sheets are sales-type lease receivables for the Company’s sales-type leases. As of September 30, 2019, the maturities of the Company’s sales-type lease receivables are as follows (in thousands):

Remainder of 2019	$	190
2020		761
2021		602
2022		469
2023		416
Thereafter		—
Total future minimum lease payments		2,438
Less imputed lease interest		(326)
Total sales-type lease receivables	$	2,112

7. Share‑Based Compensation

AquaVenture Equity Awards

The AquaVenture Holdings Limited 2016 Share Option and Incentive Plan (the “2016 Plan”) allows for the issuance of incentive share options, non-qualified share options, share appreciation rights, restricted share units, restricted share awards, unrestricted share awards, cash-based awards, performance share awards and dividend equivalent rights to officers, employees, managers, directors and other key persons, including consultants to the Company. The aggregate number of ordinary shares initially authorized for issuance, subject to adjustment upon a change in capitalization, under the 2016 Plan was 5.0 million shares. The shares authorized for issuance increase annually by 4% of the number of ordinary shares issued and outstanding on the immediately preceding December 31. As of September 30, 2019, the number of ordinary shares authorized for issuance under the 2016 Plan was 8.2 million shares.

During the nine months ended September 30, 2019, the Company granted an aggregate of 0.4 million restricted share units to employees, non-employee consultants and certain members of the Company’s board of directors. Restricted share units granted to employees and non-employee consultants typically have a time-based vesting schedule with 25% vesting on the first anniversary of the date of grant and the remaining 75% vesting quarterly over the remaining three years. Restricted share units granted to certain members of the Company’s board of directors typically vest in full on the first anniversary of the date of the grant. The aggregate grant date fair value of restricted share units granted during the nine months ended September 30, 2019 was approximately $8.4 million.

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Independent Directors’ Deferred Compensation Program

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

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

During the nine months ended September 30, 2019, the Company granted approximately 22 thousand phantom shares to Eligible Directors, including 17 thousand phantom shares which vest in full on the first anniversary of the date of the grant and 5 thousand phantom shares that are immediately vested. The aggregate grant date fair value of the awards granted during the nine months ended September 30, 2019 was $0.5 million.

During the nine months ended September 30, 2019, approximately 9 thousand phantom share units were forfeited pursuant to the terms in the Deferred Compensation Program. During the nine months ended September 30, 2019, approximately 4 thousand phantom share units were converted to 4 thousand ordinary shares of the Company pursuant to the terms in the Deferred Compensation Program.

At September 30, 2019, approximately 56 thousand phantom shares remained outstanding.

Employee Share Purchase Plan

Under the 2016 Employee Share Purchase Plan (“2016 ESPP”), the Company offers eligible employee participants the right to purchase the Company’s ordinary shares at a price equal to the lesser of 85 percent of the closing market price on the first or last day of an established offering period. Under the 2016 ESPP, 10 thousand ordinary shares were sold to eligible employees during the nine months ended September 30, 2019. Share-based compensation expense is recognized based on the fair value of the employees’ purchase rights under the 2016 ESPP and is amortized on a straight-line basis over the offering period. The shares authorized for issuance under the 2016 ESPP increase annually on January 1, through 2021, by the lesser of: (i) 1 % percent 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. As of September 30, 2019, the number of ordinary shares authorized for issuance under the 2016 ESPP was 0.9 million. 

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Share‑Based Compensation Expense

Total share‑based compensation expense recognized for all equity awards during the three months ended September 30, 2019 and 2018 was $1.3 million and $3.4 million, respectively. For the three months ended September 30, 2019, $1.2 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income. For the three months ended September 30, 2018, $3.3 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income.

Total share‑based compensation expense recognized for all equity awards during the nine months ended September 30, 2019 and 2018 was $3.6 million and $10.0 million, respectively. For the nine months ended September 30, 2019, $3.5 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income. For the nine months ended September 30, 2018, $9.8 million and $0.2 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income.

There was no related tax benefit for the three or nine months ended September 30, 2019 and 2018.

8. Loss per Share

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Numerator:
Net loss	$	(3,937)	$	(2,732)	$	(13,076)	$	(13,999)
Denominator:
Weighted-average ordinary shares outstanding - basic and diluted		31,201		26,590		28,354		26,544
Loss per share - basic and diluted	$	(0.13)	$	(0.10)	$	(0.46)	$	(0.53)

Given that the Company had a net loss for the three and nine months ended September 30, 2019 and 2018, the calculation of diluted loss per share is computed using basic weighted average ordinary shares outstanding.

Approximately 4.1 million weighted-average outstanding share awards for both the three and nine months ended September 30, 2019, respectively, were excluded from the calculation of diluted earnings per share because their effect was antidilutive. Approximately 4.1 million weighted-average outstanding share awards for the three and nine months ended September 30, 2018, respectively, were excluded from the calculation of diluted earnings per share because their effect was antidilutive.

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9. Commitments and Contingencies

Asset Retirement Obligations

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

During the three months ended September 30, 2019 and 2018, the Company recorded accretion expense of $13 thousand and $13 thousand, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded accretion expense of $39 thousand and $38 thousand, respectively. During the nine months ended September 30, 2019, the Company performed certain asset retirement activities upon the conclusion of one of its contracts. The Company recorded a valuation adjustment of $0 and $24 thousand during the three and nine months ended September 30, 2019, respectively, which were recorded in cost of revenues in the consolidated statements of operations and comprehensive income. No valuation adjustments were recorded during the three and nine months ended September 30, 2018.

At September 30, 2019 and December 31, 2018, the current portion of the ARO liabilities was $0.7 million and $0.7 million, respectively, which are recorded in accrued liabilities in the consolidated balance sheets. At September 30, 2019 and December 31, 2018, the long‑term portion of the ARO liabilities was $0.5 million and $0.5 million, respectively, which are recorded in other long‑term liabilities in the consolidated balance sheets.

Acquisition Contingent Consideration

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

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

	Nine Months Ended
	September 30, 2019
Acquisition contingent consideration at beginning of the period	$	3,109
Acquired during the period		930
Payments		(2,033)
Valuation adjustments		136
Interest accretion		115
Acquisition contingent consideration at end of the period	$	2,257

Acquisition contingent consideration liabilities consist of (i) payments held for potential adjustments or claims as set forth in the purchase agreements which are recorded at fair value based on collectability and a discount factor, (ii) payments contingent on the future collection of certain acquired receivables which are recorded at fair value based on collectability and a discount factor and (iii) payments that are contingent on the future performance of the acquired business and are recorded at fair value based on a Monte Carlo Simulation which utilizes unobservable inputs, including forecasted revenues.

The Company recorded interest accretion expense within the consolidated statements of operations and comprehensive income of $29 thousand and $0 for the three months ended September 30, 2019 and 2018, respectively. There were no valuation adjustments recorded for the three months ended September 30, 2019 and 2018.

The Company recorded interest accretion expense within the consolidated statements of operations and comprehensive income of $115 thousand and $0 for the nine months ended September 30, 2019 and 2018, respectively. The Company also recorded valuation adjustments of $136 thousand for the change in fair value during the nine months ended September 30, 2019, which was composed of (i) $191 thousand which was recorded in SG&A in the consolidated

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statements of operations and comprehensive income and (ii) $(55) thousand that was part of final purchase price allocation adjustments. There were no valuation adjustments for the nine months ended September 30, 2018.

At September 30, 2019 and December 31, 2018, $2.3 million and $2.7 million, respectively, were deemed current and were recorded in accrued liabilities in the consolidated balance sheets. At September 30, 2019 and December 31, 2018, $0 and $0.4 million, respectively, were deemed long-term and were recorded in other long-term liabilities in the consolidated balance sheets.

Litigation, Claims and Administrative Matters

The Company, may, from time to time, be a party to legal proceedings, claims, and administrative matters that arise in the normal course of business. The Company has made accruals with respect to certain of these matters, where appropriate, that are reflected in the consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, the Company has not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, the Company currently does not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on its consolidated financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its consolidated financial position, results of operations, or cash flows. The Company maintains liability insurance in such amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that the Company insures against are customer lawsuits caused by damage or nonperformance, workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, employment practices liability and fidelity losses. There can be no assurance that the Company’s liability insurance will cover any or all events or that the limits of coverage will be sufficient to fully cover all liabilities. As of September 30, 2019, the Company determined there are no matters for which a material loss is reasonably possible or the Company has either determined that the range of loss is not reasonably estimable or that any reasonably estimable range of loss is not material to the consolidated financial statements.

10. Cash Flow Information

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

	Nine Months Ended
	September 30,
	2019		2018
Cash paid during the period:
Income taxes, net	$	1,017	$	1,631
Interest, net	$	18,634	$	9,325
Non-Cash Transaction Information:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	3,539	$	—
Non-cash capital expenditures	$	3,509	$	1,331
Unpaid offering costs	$	33	$	—

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

	As of
	September 30,
	2019		2018
Cash and cash equivalents	$	109,520	$	93,617
Restricted cash, current		—		2,000
Restricted cash, non-current		4,268		3,637
Cash, cash equivalents and restricted cash	$	113,788	$	99,254

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11. Segment Reporting

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

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

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

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

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The following table provides information by reportable segment and a reconciliation to the consolidated results for the three months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30, 2019								Three Months Ended September 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	14,992	$	—	$	—	$	14,992	$	14,626	$	—	$	—	$	14,626
Rental		3,921		20,365		—		24,286		—		16,261		—		16,261
Product sales		2,429		10,340		—		12,769		—		4,952		—		4,952
Financing		900		—		—		900		985		—		—		985
Total revenues		22,242		30,705		—		52,947		15,611		21,213		—		36,824
Gross profit:
Bulk water		8,034		—		—		8,034		7,855		—		—		7,855
Rental		2,109		10,932		—		13,041		—		9,131		—		9,131
Product sales		413		4,085		—		4,498		—		1,696		—		1,696
Financing		900		—		—		900		985		—		—		985
Total gross profit		11,456		15,017		—		26,473		8,840		10,827		—		19,667
Selling, general and administrative expenses		6,914		15,487		1,117		23,518		7,616		12,194		1,016		20,826
Income (loss) from operations		4,542		(470)		(1,117)		2,955		1,224		(1,367)		(1,016)		(1,159)
Other expense, net								(6,447)								(3,624)
Loss before income tax expense								(3,492)								(4,783)
Income tax expense (benefit)								445								(2,051)
Net loss							$	(3,937)							$	(2,732)
Other information:
Depreciation and amortization	$	6,319	$	8,599	$	—	$	14,918	$	3,672	$	5,038	$	—	$	8,710
Expenditures for long-lived assets	$	7,121	$	4,583	$	—	$	11,704	$	396	$	5,319	$	—	$	5,715
Amortization of deferred financing fees	$	68	$	51	$	134	$	253	$	64	$	51	$	122	$	237

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The following table provides information by reportable segment and a reconciliation to the consolidated results for the nine months ended September 30, 2019 and 2018 (in thousands):

	Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	44,916	$	—	$	—	$	44,916	$	42,682	$	—	$	—	$	42,682
Rental		10,630		58,030		—		68,660		—		45,041		—		45,041
Product sales		6,860		27,651		—		34,511		—		13,012		—		13,012
Financing		2,809		—		—		2,809		3,048		—		—		3,048
Total revenues		65,215		85,681		—		150,896		45,730		58,053		—		103,783
Gross profit:
Bulk water		24,435		—		—		24,435		22,661		—		—		22,661
Rental		7,046		30,716		—		37,762		—		24,801		—		24,801
Product sales		1,139		11,215		—		12,354		—		4,388		—		4,388
Financing		2,809		—		—		2,809		3,048		—		—		3,048
Total gross profit		35,429		41,931		—		77,360		25,709		29,189		—		54,898
Selling, general and administrative expenses		21,532		44,085		3,639		69,256		22,361		34,101		3,227		59,689
Income (loss) from operations		13,897		(2,154)		(3,639)		8,104		3,348		(4,912)		(3,227)		(4,791)
Other expense, net								(19,663)								(10,520)
Loss before income tax expense								(11,559)								(15,311)
Income tax expense (benefit)								1,517								(1,312)
Net loss							$	(13,076)							$	(13,999)
Other information:
Depreciation and amortization	$	17,917	$	21,537	$	—	$	39,454	$	10,911	$	13,850	$	—	$	24,761
Expenditures for long-lived assets	$	17,544	$	11,095	$	—	$	28,639	$	1,261	$	11,669	$	—	$	12,930
Amortization of deferred financing fees	$	211	$	152	$	402	$	765	$	194	$	152	$	366	$	712

12. Significant Concentrations, Risks and Uncertainties

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

For the three and nine months ended September 30, 2019, a significant portion of the Company’s revenues were derived from territories and countries in the Caribbean region. Demand for water in the Caribbean region is impacted by, among other things, levels of rainfall, natural disaster or other catastrophic events, the tourism industry and demand from our industrial clients. Destruction caused by tropical storms and hurricanes, high levels of rainfall, downturn in the level of tourism and demand for real estate could all adversely impact the future performance of the Company as well as cause delays in collections from the Company’s customers.

At September 30, 2019, a significant portion of the Company’s property, plant and equipment is located in the Caribbean region. The Caribbean islands are situated in a geography where tropical storms and hurricanes occur with regularity, especially during certain times of the year. The Company designs its plant facilities to withstand such conditions; however, a major storm could result in plant damage or periods of reduced consumption or unavailability of electricity or source seawater needed to produce water in one or more of our locations. It is the Company’s policy to maintain adequate levels of property and casualty insurance; however, the Company only insures certain of its plants for wind damage.

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

13. Subsequent Events

The Company has evaluated subsequent events through the date of issuance of the unaudited condensed consolidated financial statements for the period ended September 30, 2019. The subsequent events included the following:

· On October 1, 2019, Quench 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.

Due primarily to the timing of the acquisition and the complexities involved with determining fair value of assets acquired, the Company has not yet completed the allocation of the net assets acquired.

The revenues and related expenses from the acquired in-place lease agreements will be included in the Quench reportable segment from the date of acquisition. The Quench business completed the acquisition of Mirex to expand its installed base of POU systems in the United States.

· On October 1, 2019, Quench acquired substantially all of the assets and assumed certain liabilities of Flowline Canada, Inc. (“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.

Due primarily to the timing of the acquisition and the complexities involved with determining fair value of assets acquired, the Company has not yet completed the allocation of the net assets acquired.

The revenues and related expenses from the acquired in-place lease agreements will be included in the Quench reportable segment from the date of acquisition. The Quench business completed the acquisition of Flowline to expand its installed base of POU systems in Canada.

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

The following discussion and analysis of our financial condition and operating results should be read in conjunction with the financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our audited financial statements and the related management’s discussion and analysis of our financial condition and operating results included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.  This discussion contains forward‑looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in the sections titled “Risk Factors” previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, and in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019.

Overview

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

We deliver our WAAS solutions through two operating platforms: Seven Seas Water and Quench. Seven Seas Water is a multinational provider of desalination, wastewater treatment and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Our desalination solutions provide more than 8.5 billion gallons per year of potable, high purity industrial grade and ultra-pure water (which is water that is treated to meet higher purity standards required for industrial, semiconductor, utility or pharmaceutical applications). Our wastewater treatment and water reuse solutions, which include plants ranging in capacity from 5,000 gallons per day, or GPD, to more than 1.5 million GPD, are provided through 102 leases with customers and through the sale of equipment. Quench is a U.S. based provider of Point of Use, or POU, filtered water systems and related services through direct and indirect sales channels to approximately 55,000 institutional and commercial customers, including more than half of the Fortune 500, throughout the United States and Canada.

Through our Seven Seas Water desalination solutions, we generate recurring revenue through long‑term contracts for the delivery of treated bulk water, generally based on the amount of water we deliver. As of September 30, 2019, the significant majority of our Seven Seas Water revenue is derived from our operations in six different locations:

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

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

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

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

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

· Peru: Seven Seas Water provides seawater and desalinated process water to a phosphate mine through a pipeline and seawater reverse osmosis facility having a capacity of approximately 2.7 million GPD.

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On June 28, 2019, we received formal notice from Curacao Refinery Utilities B.V. ("CRU") that it is exercising its right to purchase our desalination facilities pursuant to the terms of the existing water supply agreement. The existing water supply agreement with CRU began in December 2008, with the Company providing water from a desalination plant with an initial design capacity of 0.5 million gallons per day under a five-year contract. This agreement has been amended several times, resulting in both expanded water production to the current design capacity of 4.9 million gallons per day and an extended contract expiration date of December 31, 2019. In addition, pursuant to the terms of the existing water supply agreement, the contract expiration date will be extended to December 31, 2022 if CRU's contract with Refineria di Korsou ("RdK"), the owner of the refinery, is extended as a result of negotiations by RdK with the current operator of the refinery, Petroleos de Venezuela, S.A.The terms of the contractual buy-out right require payment to be made at the contract expiration date. The applicable buy-out amount, if the buyout right is consummated by CRU, will be $3.5 million if made on December 31, 2019 or, if CRU's contract with RdK is extended, $2.5 million if made on December 31, 2022. For the three and nine months ended September 30, 2019, our revenue under this water supply agreement was $2.2 million and $6.1 million, respectively, or 4.2% and 4.1% of our total consolidated revenue, respectively.

On February 9, 2018, we entered into a binding agreement with Abengoa Water, S.L.U. to purchase a majority interest in a desalination plant in Accra, Ghana. On November 5, 2019, we terminated the binding agreement with Abengoa Water, S.L.U. as certain of the conditions precedent contained within the agreement were not satisfied.

Through our Seven Seas Water wastewater treatment and water reuse solutions, we design, fabricate and install plants that are leased under a contractual term or sold to customers. The wastewater treatment and water reuse solutions offered to customers include scalable modular treatment plants, field-erected plants and temporary bypass plants ranging from 5,000 GPD to more than 1.5 million GPD. These solutions are provided through 102 leases with customers. With the acquisition of AUC Acquisition Holdings (“AUC”) on November 1, 2018, in which we acquired all of the issued and outstanding membership interests of AUC pursuant to a membership interest purchase agreement (the “AUC Acquisition”), we significantly increased our wastewater treatment and water reuse solutions.

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

Our Quench platform generates recurring revenue from the rental and servicing of POU water filtration systems and related equipment, such as ice and sparkling water machines, and from the contracted maintenance of customer owned equipment. Quench also generates revenue from the sale of coffee and other consumables pursuant to agreements which require customers to purchase a minimum monthly amount in exchange for the use of a coffee brewer. Our annual unit attrition rate at September 30, 2019 was less than 7.5%, implying an average rental period of more than 12 years. We define “annual unit attrition” as a ratio, the numerator of which is the total number of removals of company-owned and billed rental units during the trailing 12 month period, and the denominator of which is the average number of company-owned and billed rental units during the same 12 month period. Through our direct sales channel, we receive recurring fees for the units we rent or service throughout the life of our customer relationship. In addition, we also receive non-recurring revenue from some customers for the sale of equipment and for certain services, such as the installation, relocation or removal of equipment. Through our indirect sales channel, we receive re-occurring revenue from the sale of equipment, parts and filters to dealers and retailers. We achieve an attractive return on our rental assets due to strong customer retention. We provide our systems and services to a broad mix of industries, including government, education, medical, manufacturing, retail and hospitality, among others. We operate principally throughout the United States and Canada and are supported by a primary operations center in King of Prussia, Pennsylvania.

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

For the three months ended September 30, 2019, our consolidated revenues were $52.9 million, which represents an increase of 43.8% over consolidated revenues of $36.8 million for the three months ended September 30, 2018. The increases in consolidated revenues for the three months ended September 30, 2019 were composed of

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increases in our Seven Seas Water segment of 42.5% and increases in our Quench segment of 44.7% over the same period of 2018. The increase in revenue for our Seven Seas Water segment was primarily driven by the inclusion of AUC operations and the commencement of our water contract in Anguilla. The increase in revenue for our Quench segment was mainly the result of the inclusion of revenues from acquisitions during late 2018, an increase in product sales revenue and an increase in rental revenues due to additional units placed under new leases in excess of unit attrition.

For the nine months ended September 30, 2019, our consolidated revenues were $150.9 million, which represents an increase of 45.4% over consolidated revenues of $103.8 million for the nine months ended September 30, 2018. The increases in consolidated revenues for the nine months ended September 30, 2019 were composed of increases in our Seven Seas Water segment of 42.6% and increases in our Quench segment of 47.6% over the same period of 2018. The increase in revenue for our Seven Seas Water segment was primarily driven by the inclusion of AUC operations, the commencement of our water contract in Anguilla and higher revenues in our USVI operations. The increase in revenue for our Quench segment was mainly the result of the inclusion of revenues from acquisitions during late 2018, an increase in product sales revenue and an increase in rental revenues due to additional units placed under new leases in excess of unit attrition.

Operating Segments

We have two reportable segments that align with our operating platforms, Seven Seas Water and Quench. The segment determination is supported by, among other factors, the existence of individuals responsible for the operations of each segment and who also report directly to our chief operating decision maker (“CODM”), the nature of the segment’s operations and information presented to our CODM. For the three months ended September 30, 2019, revenues for the Seven Seas Water and Quench segments represented approximately 42% and 58%, respectively, of our consolidated revenues. For the nine months ended September 30, 2019, revenues for the Seven Seas Water and Quench segments represented approximately 43% and 57%, respectively, of our consolidated revenues.

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

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

Components of Revenues and Expenses

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

Key Factors Affecting Our Performance and Comparability of Results

A number of key factors have affected and will continue to affect our performance and the comparison of our operating results, including matters discussed below and those items described in the section entitled “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, and subsequent filings, including the section entitled “Risk Factors” in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019.

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Seven Seas Water

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

Time and Expense Associated with New Business Development

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

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

Existing Customer Relationships

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

Acquisition of Existing Operations

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

Entry into New Markets

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

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

Changes to Sales Volume, Costs of Sales and Operating Expenses

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

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

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

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

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

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

Contractually Scheduled and Negotiated Changes to Terms and Conditions

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

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

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

Customer Demand and Certain Other External Factors

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

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

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

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

· excessive periods of rain or drought can impact primary demand;

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

· the non-renewal of contracts by customers;

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

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

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

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

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

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

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

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

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Quench

Attracting New Customers

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

Customer Relationships

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

Typically, we rent our systems to customers on multi‑year, automatically‑renewing contracts, and we anticipate extending our relationships with existing customers beyond the initial contract term. Some customers terminate their agreements during the agreement term, typically due to financial constraints, and others cancel at the end of the term. Our annual unit attrition rate at September 30, 2019 was less than 7.5%, implying an average rental period of more than 12 years. Our ability to retain our existing customer relationships will affect our performance and is affected by a number of factors, including the effectiveness of our retention efforts, the quality of our products and service, our pricing, competitive dynamics in the industry, product availability, and the health of the economy. In addition, the non-recurring revenue from the sale of equipment, coffee and consumables, is less predictable and can change based on fluctuations in demand in a specific period.

Strategic Acquisitions

The POU water filtration industry is highly fragmented, with a large number of local competitors and several larger regional operators. Quench has completed 16 acquisitions since our initial public offering, of which 13 have occurred since the beginning of 2018. We believe our recent acquisition activity is indicative of the opportunity for future inorganic growth.

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

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

Changes to Cost of Sales and Operating Expenses

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

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

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

Corporate and Other

Changes to Operating Expenses

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

Presentation of Financial Information

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

Adoption of New Accounting Pronouncements

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

In February 2016, the Financial Accounting Standards Board, or FASB, issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right of use asset for operating leases, with the exception of short-term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. During 2018, the FASB issued additional authoritative guidance which, among other things, provided an option to apply transition provisions under the standard at adoption date rather than the earliest comparative period presented as well as added a practical expedient that would permit lessors to not separate non-lease components from the associated lease components if certain conditions are met. These amendments are effective, in conjunction with the new lease standard, for annual reporting periods beginning on or after December 15, 2018, including interim periods within those annual periods.

We adopted this guidance on a modified retrospective basis on January 1, 2019 with the cumulative effect of transition as of the effective date of adoption. For a discussion on the impacts of the authoritative guidance on our financial statements, please refer to Note 2—“Summary of Significant Accounting Policies— Adoption of New

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Accounting Pronouncements” to the consolidated financial statements, included elsewhere in this Quarterly Report on Form 10-Q.

New Accounting Pronouncements to be Adopted

In June 2016, the FASB issued authoritative guidance regarding implementation of measurement of credit losses on financial instruments. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. We are currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

 In August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. We are currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. We are currently evaluating the potential impact of the disclosure requirements on the consolidated financial statements.

In March 2019, the FASB issued authoritative guidance regarding targeted changes to lessor accounting. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. We are currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

Critical Accounting Policies and Estimates

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

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

Leases

Lessee accounting

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

At contract inception, we determine if an arrangement is or contains a lease. If the arrangement contains a lease, we recognize a right-of-use asset and an operating lease liability at the lease commencement date. Lease expense for lease payments made is recognized on a straight-line basis over the lease term.

The operating lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. The current portion of our operating lease liabilities are recorded within accrued liabilities in the consolidated balance sheets.

The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the operating

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lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the operating lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Right-of-use assets are periodically reviewed for impairment whenever events or changes in circumstances arise.

Key estimates and judgments in determining both the operating lease liability and right-of-use asset include the determination of (i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) the lease term and (iii) the lease payments.

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

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

Lease payments included in the measurement of operating lease liabilities are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and

· the exercise price of our option to purchase the underlying asset if we are reasonably certain to exercise the option.

In certain instances, our leases include non-lease components, such as equipment maintenance or common area maintenance. As part of its adoption of authoritative guidance on leases on January 1, 2019, we have not elected the practical expedient to account for the lease and non-lease components as a single lease component and have elected (for all classes of underlying assets) to account for these components separately. We have allocated the consideration in the contract to the lease and non-lease components based on each component's relative standalone price. We determine standalone prices for the lease components based on the prices for which other lessors lease similar assets on a standalone basis. We determine standalone prices for the non-lease components based on the prices that suppliers might charge for those type of services on a standalone basis. If observable standalone prices are not readily available, we estimate the standalone prices maximizing the use of observable information.

We have elected to utilize the short-term lease exemption and not recognize a right-of-use asset and corresponding operating lease liability for leases with expected terms of 12 months or less. We recognize the lease payments associated with its short-term leases on a straight-line basis over the lease term.

Lessor accounting

We generate revenues through the lease of our bulk water facilities, wastewater treatment and water reuse equipment, and filtered water and related systems equipment to customers. In certain instances, we enter into a contract with a customer but must construct the underlying asset, including bulk water facilities and wastewater treatment and water reuse equipment, prior to its lease.

At the time of contract inception, we determine if an arrangement is or contains a lease.

Customer contracts that contain leases, which can be explicit or implicit in the contract, are generally classified as either operating leases or sales-type leases and can contain both lease and non-lease components, including operating and maintenance services (“O&M”) of the Company-owned equipment. As part of our adoption of authoritative guidance on leases on January 1, 2019, we elected the practical expedient for all classes of underlying assets to not

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separate the lease and non-lease components if certain conditions are met, including the classification of the lease component as operating and the revenue recognition pattern of both the lease and non-lease components. We will account for the contract with the customer as a combined component under the respective authoritative guidance for the predominant element in the contract, the lease or non-lease component.

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

If the customer contract contains or is accounted for as a lease, the key estimates and judgments used in accounting for the lease as a lessor include the following: (i) lease term, (ii) the economic life of the underlying leased asset, (iii) determination of lease payments and (iv) determination of the fair value at the time of contract inception and the residual value of the underlying leased asset.

The lease term for all of our leases includes the noncancelable period of the lease, plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by us. Contracts entered into with customers can include either the option to renew or an auto-renewing provision that results in the automatic extension of the existing contract. In certain instances, key provisions such as the lease payment and term of the renewal are not stated and are subject to renewal.  

The economic life of the underlying leased asset is determined to be either the period over which the asset is expected to be economically usable, or where the benefits it can produce exceed the cost to replace or undertake major repairs. In certain instances, the economic life of the underlying leased asset can exceed the useful life we assign.

Lease payments that are accounted for as rental revenue are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date;

· the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise the option; and

· payments for penalties for the termination of a lease if the term reflects the lessee terminating the lease.

Our leases do not typically include a requirement for the customer to guarantee the residual value of the underlying leased asset. Variable lease payments that do not depend on an index or rate are excluded from the determination of lease payments.

The fair value of the underlying leased asset at contract inception and residual value of underlying leased asset at the end of the term of the lease are determined based on the price that would be received to sell an asset in an orderly transaction at the time of valuation. Our risk management strategy for protecting the residual value of the underlying assets include our ongoing maintenance during the lease term as well as clauses and other protections within the lease agreements which require the lessee to return the underlying asset in working condition at the end of the lease term.

At contract inception, we determine the lease classification of the underlying asset. We consider inputs such as the lease term, lease payments, fair value of the underlying asset and residual value of the underlying asset when assessing the classification. The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease. The rate implicit in the lease is the rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that the we expect to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized and (2) any deferred initial direct costs we incur.

In certain instances, contracts with customers may also include the option for the customer to purchase the underlying asset at the end of the lease term. When applicable and certain conditions are met, we will incorporate the stated purchase price into the determination of its implied interest rate.

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Results of Operations

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
	(in thousands)
Revenues:
Bulk water	$	14,992	$	14,626	$	44,916	$	42,682
Rental		24,286		16,261		68,660		45,041
Product sales		12,769		4,952		34,511		13,012
Financing		900		985		2,809		3,048
Total revenues		52,947		36,824		150,896		103,783
Cost of revenues:
Bulk water		6,958		6,771		20,481		20,021
Rental		11,245		7,130		30,898		20,240
Product sales		8,271		3,256		22,157		8,624
Total cost of revenues		26,474		17,157		73,536		48,885
Gross profit		26,473		19,667		77,360		54,898
Selling, general and administrative expenses		23,518		20,826		69,256		59,689
Income (loss) from operations		2,955		(1,159)		8,104		(4,791)
Other expense:
Interest expense, net		(6,214)		(3,396)		(19,282)		(10,000)
Other expense, net		(233)		(228)		(381)		(520)
Loss before income tax expense		(3,492)		(4,783)		(11,559)		(15,311)
Income tax expense (benefit)		445		(2,051)		1,517		(1,312)
Net loss	$	(3,937)	$	(2,732)	$	(13,076)	$	(13,999)

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenues:
Bulk water	28.3	%	39.7	%	29.8	%	41.1	%
Rental	45.9	%	44.2	%	45.4	%	43.4	%
Product sales	24.1	%	13.4	%	22.9	%	12.6	%
Financing	1.7	%	2.7	%	1.9	%	2.9	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues:
Bulk water	13.1	%	18.4	%	13.6	%	19.3	%
Rental	21.2	%	19.4	%	20.5	%	19.5	%
Product sales	15.6	%	8.8	%	14.7	%	8.3	%
Total cost of revenues	49.9	%	46.6	%	48.8	%	47.1	%
Gross profit	50.0	%	53.4	%	51.3	%	52.9	%
Selling, general and administrative expenses	44.4	%	56.6	%	45.9	%	57.5	%
Income (loss) from operations	5.6	%	(3.2)	%	5.4	%	(4.6)	%
Other expense:
Interest expense, net	(11.7)	%	(9.2)	%	(12.8)	%	(9.6)	%
Other expense, net	(0.4)	%	(0.6)	%	(0.3)	%	(0.5)	%
Loss before income tax expense	(6.5)	%	(13.0)	%	(7.7)	%	(14.7)	%
Income tax expense (benefit)	0.8	%	(5.6)	%	1.0	%	(1.3)	%
Net loss	(7.3)	%	(7.4)	%	(8.7)	%	(13.4)	%

Comparison of the Three Months Ended September 30, 2019 and 2018

Revenues

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

	Three Months Ended
	September 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Revenues:
Seven Seas Water
Bulk water	$	14,992	$	14,626	$	366	2.5	%
Rental		3,921		—		3,921	NM
Product sales		2,429		—		2,429	NM
Financing		900		985		(85)	(8.6)	%
Total Seven Seas Water	$	22,242	$	15,611	$	6,631	42.5	%
Quench
Rental		20,365		16,261		4,104	25.2	%
Product sales		10,340		4,952		5,388	108.8	%
Total Quench	$	30,705	$	21,213	$	9,492	44.7	%
Total revenues	$	52,947	$	36,824	$	16,123	43.8	%

Total revenues of $52.9 million for the three months ended September 30, 2019 increased $16.1 million, or 43.8%, compared to the prior year period through a combination of organic and inorganic growth. In calculating organic and inorganic revenue growth, (i) organic growth represents estimated revenue from operations that existed in both the

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current and comparable periods, and (ii) inorganic growth includes the estimated revenue from acquisitions for the 12 months following an acquisition and any revenue contributions from divested businesses for the months in the prior year period in which the business did not exist in the current year period.

Seven Seas Water revenues for the three months ended September 30, 2019 increased $6.6 million, or 42.5%, compared to the prior year period, which were comprised of 42.0% inorganic growth and 0.5% organic growth. Bulk water revenues increased $0.4 million, or 2.5%, compared to the prior year period, primarily due to an increase in connection with the commencement of our water contract in Anguilla which began in October 2018. Rental revenues and product sales increased $3.9 million and $2.4 million, respectively, primarily due to the inclusion of the AUC operations which were acquired in November 2018.

Quench revenues for the three months ended September 30, 2019 increased $9.5 million, or 44.7% compared to the prior year period, which were comprised of 26.5% of inorganic net growth and 18.2% organic growth. The prior year period included $1.3 million of revenue from the Atlas High Purity Solutions business which was divested in October 2018. Rental revenues increased $4.1 million, or 25.2%, compared to the prior year period, which was comprised of 15.9% inorganic net growth from acquisitions and 9.3% of organic growth due to additional units placed under new leases in excess of unit attrition. Product sales increased $5.4 million compared to the prior year period, which included $3.2 million of inorganic net growth primarily due to the acquisitions of PHSI and Bluline in December 2018, and $2.2 million of organic growth driven by higher indirect dealer equipment sales and coffee sales.

Cost of revenues, gross profit and gross margin

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

	Three Months Ended
	September 30,
	2019			2018			Percent
Gross Margin:
Seven Seas Water
Bulk water		53.6	%		53.7	%	(0.1)	%
Rental		53.8	%		—	%	NM
Product sales		17.0	%		—	%	NM
Financing		100.0	%		100.0	%	—	%
Total Seven Seas Water		51.5	%		56.6	%	(5.1)	%
Quench
Rental		53.7	%		56.2	%	(2.5)	%
Product sales		39.5	%		34.2	%	5.3	%
Total Quench		48.9	%		51.0	%	(2.1)	%
Total gross margin		50.0	%		53.4	%	(3.4)	%

Total gross margin for the three months ended September 30, 2019 decreased 340 basis points to 50.0% from 53.4% in the prior year period.

Seven Seas Water gross margin for the three months ended September 30, 2019 decreased 510 basis points to 51.5% compared to 56.6% in the prior year period. Bulk water gross margin of 53.6% remained relatively flat compared to the prior year period. The current quarter reflected a decrease in gross margin at our St. Maarten operations due to the timing of incurring certain repairs and maintenance expense, offset by an increase in gross margin due to lower cost as a percentage of revenue in our Curacao operations driven by lower production volumes in relation to the minimum purchase requirement. Rental and product sales gross margin of 53.8% and 17.0%, respectively, for the three months ended September 30, 2019 had no comparative period as both primarily related to the acquisition of the AUC operations in November 2018. Impacting the rental gross margin for the three months ended September 30, 2019 was $0.7 million of additional depreciation expense on property, plant and equipment related to the finalization of purchase accounting for the AUC Acquisition. Financing gross margin is 100% as the revenues have no corresponding costs.

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Quench gross margin for the three months ended September 30, 2019 decreased 210 basis points to 48.9% from 51.0% for the prior year period. Rental gross margin for the three months ended September 30, 2019 was 53.7%, a decrease from 56.2% in the prior year period, primarily due to an increase in depreciation and amortization expense as a percentage of revenues related to additional units placed on lease and higher freight expense. The decrease was partially offset by lower compensation and benefits as a percentage of revenues due to the continued leveraging of the platform and lower filtration and parts expense. Product sales gross margin increased to 39.5% for the three months ended September 30, 2019 from 34.2% in the prior year period, primarily driven by the higher-margin indirect PHSI dealer equipment sales.

Selling, general and administrative expenses

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

	Three Months Ended
	September 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Selling, General and Administrative Expenses:
Seven Seas Water	$	6,914	$	7,616	$	(702)	(9.2)	%
Quench		15,487		12,194		3,293	27.0	%
Corporate and Other		1,117		1,016		101	9.9	%
Total selling, general and administrative expenses	$	23,518	$	20,826	$	2,692	12.9	%

Total SG&A expenses for the three months ended September 30, 2019 increased $2.7 million, or 12.9%, compared to the prior year period.

Seven Seas Water SG&A expenses of $6.9 million for the three months ended September 30, 2019 decreased $0.7 million compared to the prior year period. The decrease was primarily due to lower share-based compensation expense of $1.5 million driven by the completion of the vesting of certain equity grants made in connection with our initial public offering in 2016. This decrease was partially offset by $0.7 million higher amortization expense and $0.1 million higher compensation and benefits expense primarily due to the acquisition of the AUC operations in November 2018. Seven Seas Water SG&A expenses as a percentage of revenue were 31.1% for the three months ended September 30, 2019, a decline compared to 48.8% in the prior year period.

Quench SG&A expenses for the three months ended September 30, 2019 increased $3.3 million to $15.5 million compared to the prior year period. The increase was driven by $2.3 million higher amortization expense primarily related to the addition of intangible assets from recent acquisitions, $0.7 million higher compensation and benefits primarily driven by increased headcount from the inclusion of staff added from certain acquisitions and a $0.2 million increase in the bad debt reserve. Partially offsetting this increase was lower share-based compensation expense of $0.5 million driven by the completion of the vesting of certain equity grants made in connection with our initial public offering in 2016. Quench SG&A expenses as a percentage of revenue were 50.4% for the three months ended September 30, 2019, a decline compared to 57.5% in the prior year period.

Corporate and Other SG&A expenses for the three months ended September 30, 2019 increased $0.1 million compared to the prior year period.

Commencing on December 18, 2018, the Company initiated a restructuring of the PHSI organization which included the reduction of headcount for PHSI executive management and other employee positions determined to be duplicative with those at Quench (the “PHSI Restructuring Plan”). Certain of the positions were backfilled with additional positions at Quench depending on the needs of the business. The expected net effect of the restructuring will allow Quench to recognize synergies of reduced employee costs subsequent to the PHSI Acquisition. The restructuring was determined to be a post-combination transaction. The Company did not incur an incremental restructuring-related charge related to severance, termination benefits and related taxes during the three months ended September 30, 2019. As of September 30, 2019 and December 31, 2018, the Company had accrued approximately $0.1 million and $0.8 million, respectively, within accrued liabilities on the consolidated balance sheets. The Company completed the PHSI Restructuring Plan during the second quarter of 2019.

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Other expense

	Three Months Ended
	September 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Interest expense, net	$	(6,214)	$	(3,396)	$	(2,818)	83.0	%
Other expense, net		(233)		(228)		(5)	2.2	%
Total other expense	$	(6,447)	$	(3,624)	$	(2,823)	77.9	%

Interest expense, net for the three months ended September 30, 2019 increased $2.8 million compared to the prior year period. The increase was primarily due to incremental borrowings of $150 million in connection with expansion of our senior secured credit agreement in November and December 2018.

Other expense, net of $0.2 million for the three months ended September 30, 2019 remained relatively flat compared to the prior year period.

Income tax expense

	Three Months Ended
	September 30,						Change in
	2019			2018			Dollars
	(dollars in thousands)
Income tax expense (benefit)	$	445		$	(2,051)		$	2,496
Effective tax rate		(12.7)	%		42.9	%

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

For the three months ended September 30, 2019, we incurred a consolidated pre-tax loss of $3.5 million, which was composed of: (i) an aggregate of $4.5 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of $1.0 million of pre-tax income in taxable jurisdictions. For the three months ended September 30, 2018, we incurred a consolidated pre-tax loss of $4.7 million, which was composed of: (i) an aggregate of $6.5 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of $1.8 million of pre-tax income in taxable jurisdictions.

Income tax expense for the three months ended September 30, 2019 and 2018 was $0.4 million and $(2.1) million, respectively. Income tax expense for the three months ended September 30, 2019 and 2018 was composed of a current tax expense of $0.6 million and $0.5 million, respectively, and deferred tax benefit of $0.2 million and $(2.6) million, respectively. The increase in income tax expense for the three months ended September 30, 2019 as compared to the same period in 2018 was primarily due to: (i) the recording of a $3.1 million income tax benefit in the prior year period resulting from the full release of a valuation allowance in a certain jurisdiction; (ii) an increase in tax expense related to higher withholding taxes payable in certain jurisdictions; and (iii) higher income tax expense related to entities acquired in the fourth quarter of 2018. These increases were partially offset by a decrease in a deferred tax liability for an indefinite-lived asset and lower pretax book income in certain jurisdictions.

Cash paid for income taxes was $0.1 million and $0.2 million during the three months ended September 30, 2019 and 2018, respectively.

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Comparison of the Nine Months Ended September 30, 2019 and 2018

Revenues

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

	Nine Months Ended
	September 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Revenues:
Seven Seas Water
Bulk water	$	44,916	$	42,682	$	2,234	5.2	%
Rental		10,630		—		10,630	NM
Product sales		6,860		—		6,860	NM
Financing		2,809		3,048		(239)	(7.8)	%
Total Seven Seas Water	$	65,215	$	45,730	$	19,485	42.6	%
Quench
Rental	$	58,030	$	45,041	$	12,989	28.8	%
Product sales		27,651		13,012		14,639	112.5	%
Total Quench	$	85,681	$	58,053	$	27,628	47.6	%
Total revenues	$	150,896	$	103,783	$	47,113	45.4	%

Total revenues of $150.9 million for the nine months ended September 30, 2019 increased $47.1 million, or 45.4%, compared to the prior year period.

Seven Seas Water revenues for the nine months ended September 30, 2019 increased $19.5 million, or 42.6%, compared to the prior year period, which were comprised of 40.2% inorganic growth and 2.4% organic growth. Bulk water revenues increased $2.2 million, or 5.2%, compared to the prior year period, primarily due to: (i) an increase of $0.9 million from our USVI operations and $0.5 million from our St. Maarten operations due to higher production volumes compared to the same period of 2018; (ii) an increase of $1.0 million in connection with the commencement of our water contract in Anguilla; and (iii) an increase of $0.3 million in our BVI operations driven by increases in the water rate compared to the prior year period. This was partially offset by $0.3 million lower revenue in our Peru operations primarily due to revenue received in the prior year period in connection with non-routine services performed for the customer. Rental revenues and product sales increased $10.6 million and $6.9 million, respectively, primarily due to the inclusion of the AUC operations which were acquired in November 2018.

Quench revenues for the nine months ended September 30, 2019 increased $27.6 million, or 47.6%, compared to the prior year period, which were comprised of 32.3% of inorganic growth and 15.3% organic growth. The prior year period included $3.5 million of revenue from the Atlas High Purity Solutions business that was divested in October 2018. Rental revenues increased $13.0 million, or 28.8%, compared to the prior year period, which was comprised of 21.1% inorganic net growth from acquisitions and 7.7% of organic growth due to additional units placed under new leases in excess of unit attrition. Product sales increased $14.6 million compared to the prior year period, which included $9.6 million of inorganic net growth primarily due to the acquisitions of PHSI and Bluline in December 2018, and $5.0 million of organic growth driven by higher indirect dealer equipment sales and coffee sales.

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Cost of revenues, gross profit and gross margin

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

	Nine Months Ended
	September 30,						Change
	2019			2018			Percent
Gross Margin:
Seven Seas Water
Bulk water		54.4	%		53.1	%	1.3	%
Rental		66.3	%		—	%	NM
Product sales		16.6	%		—	%	NM
Financing		100.0	%		100.0	%	—	%
Total Seven Seas Water		54.3	%		56.2	%	(1.9)	%
Quench
Rental		52.9	%		55.1	%	(2.2)	%
Product sales		40.6	%		33.7	%	6.9	%
Total Quench		48.9	%		50.3	%	(1.4)	%
Total gross margin		51.3	%		52.9	%	(1.6)	%

Total gross margin for the nine months ended September 30, 2019 decreased 160 basis points to 51.3% from 52.9% in the prior year period.

Seven Seas Water gross margin for the nine months ended September 30, 2019 decreased 190 basis points to 54.3% compared to 56.2% in the prior year period. Bulk water gross margin of 54.4% increased 130 basis points compared to 53.1% in the prior year period primarily due to higher revenues in our BVI and USVI operations without a commensurate increase in costs and lower cost as a percentage of revenue in our Curacao operations due to lower production volumes in relation to the minimum purchase requirement. This was partially offset by a decrease in gross margin at our St. Maarten operations due to the timing of incurring certain repairs and maintenance expense. Rental and product sales gross margin of 66.3% and 16.6%, respectively, for the nine months ended September 30, 2019 had no comparative period as both related to the acquisition of the AUC operations in November 2018. Impacting the rental gross margin for the nine months ended September 30, 2019 was $0.7 million of additional depreciation expense on property, plant and equipment related to the finalization of purchase accounting for the AUC acquisition.

Quench gross margin for the nine months ended September 30, 2019 decreased 140 basis points to 48.9% from 50.3% in the prior year period. Rental gross margin of 52.9% decreased from 55.1% in the prior year period, primarily due to an increase in depreciation and amortization expense as a percentage of revenue related to additional units placed on lease, higher filtration and parts expenses due to the timing of annual maintenance on equipment on lease, and higher freight expense. Partially offsetting this was lower compensation and benefits as a percentage of revenues due to continued leveraging of the platform. Product sales gross margin increased to 40.6% for the nine months ended September 30, 2019 from 33.7% in the prior year period, primarily driven by the higher-margin indirect PHSI dealer equipment sales.

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Selling, general and administrative expenses

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

	Nine Months Ended
	September 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Selling, General and Administrative Expenses:
Seven Seas Water	$	21,532	$	22,361	$	(829)	(3.7)	%
Quench		44,085		34,101		9,984	29.3	%
Corporate and Other		3,639		3,227		412	12.8	%
Total selling, general and administrative expenses	$	69,256	$	59,689	$	9,567	16.0	%

Total SG&A expenses for the nine months ended September 30, 2019 increased $9.6 million, or 16.0%, compared to the prior year period.

Seven Seas Water SG&A expenses for the nine months ended September 30, 2019 decreased $0.8 million to $21.5 million compared to the prior year period, which was primarily due to a decrease of $4.4 million in share-based compensation expense driven by the completion of the vesting of certain equity grants made in connection with our initial public offering in 2016. Partially offsetting this decrease was an increase of $3.1 million in amortization expense of definite lived intangible assets and $0.5 million higher compensation and benefits expense primarily due to the acquisition of the AUC operations in November 2018. Seven Seas Water SG&A expenses as a percentage of revenue were 33.0% for the nine months ended September 30, 2019, a decline compared to 48.9% for the prior year period.      

Quench SG&A expenses for the nine months ended September 30, 2019 increased $10.0 million to $44.1 million compared to the prior year period. The increase was driven by $4.7 million higher amortization expense primarily related to an increase in intangible assets from recent acquisitions, $2.8 million higher compensation and benefits primarily driven by increased headcount from the inclusion of staff added from certain acquisitions, $1.0 million higher acquisition-related expenses primarily due to adjustments associated with purchase consideration recorded for acquired employees, a $1.0 million increase in general expenses primarily to support the expansion of our operations and a $0.4 million increase in the bad debt reserve. Partially offsetting this increase was a $1.6 million decrease in share-based compensation expense driven by the completion of the vesting of certain equity grants made in connection with our initial public offering in 2016. Quench SG&A expenses as a percentage of revenue were 51.5% for the nine months ended September 30, 2019, a decline compared to 58.7% for the prior year period.

Corporate and Other SG&A expenses for the nine months ended September 30, 2019 increased $0.4 million compared to the prior year period, primarily due to higher professional fees in connection with corporate activities.

During the nine months ended September 30, 2019, the Company incurred an incremental restructuring-related charge in connection with the PHSI Restructuring Plan related to severance, termination benefits and related taxes of $0.1 million, which was recorded within SG&A expenses in the consolidated statements of operations and comprehensive income. The Company completed the PHSI Restructuring Plan during the second quarter of 2019.

Other expense

	Nine Months Ended
	September 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Interest expense, net	$	(19,282)	$	(10,000)	$	(9,282)	92.8	%
Other expense, net		(381)		(520)		139	(26.7)	%
Total other expense	$	(19,663)	$	(10,520)	$	(9,143)	86.9	%

Interest expense, net for the nine months ended September 30, 2019 increased $9.3 million compared to the prior year period. The increase was primarily due to incremental borrowings of $150 million in connection with expansion of our senior secured credit agreement in November and December 2018.

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Other expense, net for the nine months ended September 30, 2019 remained relatively flat compared to the prior year period.

Income tax expense

	Nine Months Ended
	September 30,						Change in
	2019			2018			Dollars
	(dollars in thousands)
Income tax expense (benefit)	$	1,517		$	(1,312)		$	2,829
Effective tax rate		(13.1)	%		8.6	%

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

For the nine months ended September 30, 2019, we incurred a consolidated pre-tax loss of $11.6 million, which was composed of: (i) an aggregate of $15.7 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of $4.1 million of pre-tax income in taxable jurisdictions. For the nine months ended September 30, 2018, we incurred a consolidated pre-tax loss of $15.3 million, which was composed of: (i) an aggregate of $20.2 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of $4.9 million of pre-tax income in taxable jurisdictions.

Income tax expense for the nine months ended September 30, 2019 and 2018 was $1.5 million and $(1.3) million, respectively. Income tax expense for the nine months ended September 30, 2019 and 2018 was composed of a current tax expense of $1.8 million and $1.6 million, respectively, and deferred tax benefit of $(0.3) million and $(2.9) million, respectively. The increase in income tax expense for the nine months ended September 30, 2019 as compared to the same period in 2018 was primarily due to: (i) the recording of a $3.1 million income tax benefit in the prior year period resulting from the release of a valuation allowance in a certain jurisdiction; (ii) an increase in tax expense related to higher withholding taxes payable in certain jurisdictions; and (iii) an increase in tax expense related to entities acquired in the fourth quarter of 2018. These increases were partially offset by a decrease in deferred tax expense related to lower pretax book income in certain jurisdictions.

Cash paid for income taxes was $1.0 million and $1.6 million during the nine months ended September 30, 2019 and 2018, respectively.

Liquidity and Capital Resources

Overview

As of September 30, 2019 and December 31, 2018, our principal sources of liquidity on a consolidated basis were cash and cash equivalents (excluding restricted cash) of $109.5 million and $56.6 million, respectively, which were held for working capital, investment and general corporate purposes. In addition, as of September 30, 2019 and December 31, 2018, we had an aggregate of $4.3 million and $4.2 million, respectively, of restricted cash related to debt service reserve funds and minimum balance requirements for one of our borrowings. Our working capital as of September 30, 2019 was $127.3 million compared to $64.6 million as of December 31, 2018.

In July 2019, we completed an underwritten sale of 4.7 million ordinary shares at a public offering price of $16.88 per share. We received net proceeds of $75.4 million, after deducting underwriting discounts and commissions and offering expenses.

Our cash and cash equivalents are held by our holding company and our subsidiaries primarily in demand deposits with domestic and international banks, money market accounts and U.S. Treasury bills. We utilize a combination of equity financing and corporate and project debt financing through international commercial banks and

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other financial institutions to fund our cash needs and the growth of our business. Our debt financing arrangements contain financial covenants and provisions which govern distributions by the borrowers and may limit our ability to transfer cash among us and our subsidiaries. Based on our current level of operations, we believe our cash flow from operations and available cash will be adequate to meet the future liquidity needs of our current operations for at least the next twelve months.

Our expected future liquidity and capital requirements consist principally of:

· capital expenditures and investments in infrastructure related to maintaining or expanding our existing operations;

· development of new projects and new markets;

· inventory;

· acquisitions;

· costs and expenses relating to our ongoing business operations; and

· debt service requirements on our existing and future debt.

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

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

Subsidiary Distribution Policy

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

With respect to our Seven Seas Water segment, unless cash balances are expected to be redeployed for further growth opportunities in the same jurisdiction, our distribution policy is to efficiently distribute cash from our international operating subsidiaries to our non-U.S. intermediate holding companies for redeployment in the manner intended to optimize our return on invested capital.  However, one of our subsidiaries, as of September 30, 2019, has a loan agreement that restricts distributions to related parties in the event certain financial or nonfinancial covenants are not met, which could reduce our ability to redeploy cash. Distributions are typically in the form of principal and interest payments on intercompany loans, repayment of intercompany advances or other intercompany arrangements, including billings from our Tampa operations center, and dividends. When considering the amount and timing of such distributions, our Seven Seas Water operating subsidiaries must maintain sufficient funds for future capital investment, debt service and general working capital purposes.

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

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

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Cash Flows

The following table summarizes our cash flows for the periods:

	Nine Months Ended September 30,
	2019		2018
	(in thousands)
Cash provided by operating activities	$	20,211	$	22,048
Cash used in investing activities		(36,249)		(40,011)
Cash provided by (used in) financing activities		69,043		(5,135)
Effect of exchange rates on cash, cash equivalents and restricted cash		12		(7)
Net change in cash, cash equivalents and restricted cash	$	53,017	$	(23,105)

Operating Activities

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

Cash provided by operations during the nine months ended September 30, 2019 and 2018 was $20.2 million and $22.0 million, respectively. The decrease in cash flow from operations was primarily due to higher cash interest expense related to incremental borrowings of $150 million in connection with the expansions of our senior secured credit agreement in November and December 2018,  higher operating cash outflows related to the adoption of the new lease accounting guidance which requires certain cash outflows to be categorized in operating activities and higher working capital needs principally driven by the substantial year-over-year growth in our Quench segment. 

Investing Activities

Cash used in investing activities during the nine months ended September 30, 2019 and 2018 was $36.2 million and $40.0 million, respectively. The decrease in cash used in investing activities was primarily attributable to a decrease of $19.2 million of net cash paid for acquisitions during the nine months ended September 30, 2019 as compared to the prior year period. This was partially offset by an increase of $15.7 million in capital expenditures during the nine months ended September 30, 2019 as compared to the prior year period.

During the nine months ended September 30, 2019 and 2018, there were $17.5 million and $1.3 million, respectively, of capital expenditures by Seven Seas Water for new plants, plant expansions and capacity upgrades and $11.1 million and $11.7 million, respectively, of capital expenditures for Quench to support growth and its existing operations.

Financing Activities

Cash provided by financing activities during the nine months ended September 30, 2019 was $69.0 million. Cash used in financing activities during the nine months ended September 30, 2018 was $5.1 million. The  $74.2 million net increase in cash provided by financing activities is primarily attributable to the net proceeds of $75.4 million received in connection with issuance of 4.7 million ordinary shares at a public offering price of $16.88 per share in July 2019. In addition, there was an increase in net cash proceeds of $1.7 million from the exercise of stock options. Partially offsetting these increases were a $2.0 million increase in payments of acquisition contingent consideration and $0.6 million increase in employee taxes paid as a result of vested RSUs.

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Our long‑term debt is summarized in the table below and further described in the sections that follow. As of September 30, 2019 and December 31, 2018, long‑term debt included the following (in thousands):

	September 30,		December 31,
	2019		2018
Corporate Credit Agreement	$	300,000	$	300,000
BVI Loan Agreement		16,278		20,468
Vehicle financing		3,127		1,842
Total face value of long-term debt	$	319,405	$	322,310
Face value of long-term debt, current	$	7,301	$	6,536
Less: Current portion of unamortized debt discounts and deferred financing fees		(32)		(42)
Current portion of long-term debt, net of debt discounts and deferred financing fees	$	7,269	$	6,494
Face value of long-term debt, non-current	$	312,104	$	315,774
Less: Non-current portion of unamortized debt discounts and deferred financing fees		(1,797)		(2,559)
Long-term debt, net of debt discounts and deferred financing fees	$	310,307	$	313,215

Corporate Credit Agreement

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

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

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

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

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

As of September 30, 2019, the weighted average interest rate was 7.8%.   

60

The Corporate Credit Agreement is guaranteed by AquaVenture Holdings Limited along with certain subsidiaries and contains financial and nonfinancial covenants. The financial covenants include minimum interest coverage ratio and maximum leverage ratio requirements, as defined in the Corporate Credit Agreement, and are calculated using consolidated financial information of AquaVenture Holdings Limited excluding the results of AquaVenture (BVI) Holdings Limited and its subsidiary Seven Seas Water (BVI) Limited. In addition, the Corporate Credit Agreement contains customary negative covenants limiting, among other things, indebtedness, investments, liens, dispositions of assets, restricted payments (including dividends), transactions with affiliates, prepayments of indebtedness, capital expenditures, changes in nature of business and amendments to documents. As of September 30, 2019, we were in compliance with, or received waivers for breaches of, all such covenants.

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

BVI Loan Agreement

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

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

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

As of September 30, 2019, the weighted‑average interest rate was 5.1%. Seven Seas Water (BVI) Ltd. may prepay the principal amounts of the loans prior to the maturity date, in whole or in part.

The BVI Loan Agreement includes both financial and nonfinancial covenants, limits the amount of additional indebtedness that Seven Seas Water (BVI) Ltd. can incur and places annual limits on capital expenditures for this subsidiary. The BVI Loan Agreement also places restrictions on distributions made by Seven Seas Water (BVI) Ltd. which is only permitted to make distributions to shareholders and affiliates of AquaVenture Holdings Limited is in compliance with all loan covenants and if specified debt service coverage and loan life coverage ratios have been met. The BVI Loan Agreement contains a number of negative covenants restricting, among other things, indebtedness, investments, liens, dispositions of assets, restricted payments (including dividends), mergers and acquisitions, accounting changes, transactions with affiliates, prepayments of indebtedness, capital expenditures, and changes in nature of business and joint ventures. In addition, Seven Seas Water (BVI) Ltd is subject to quarterly financial covenant compliance, including minimum debt service and loan life coverage ratios, and must maintain a minimum debt service reserve fund and a maintenance reserve fund with the bank in addition to other minimum balance requirements as set forth in the agreement. As of September 30, 2019, Seven Seas Water (BVI) Ltd. was in compliance with, or received waivers for breaches of, all such covenants.

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Other Debt

We finance our vehicles primarily under three‑year terms with interest rates ranging from 3.4% to 6.3% per annum.

Contractual Obligations and Other Commitments

Please refer to Note 9—“Commitments and Contingencies” to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information. There were no material changes to our contractual obligations during the nine months ended September 30, 2019 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended. For a complete discussion of our contractual obligations, please refer to our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

Off‑Balance Sheet Arrangements

At September 30, 2019, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities that would have been established for the purpose of facilitating off‑balance sheet arrangements or other contractually narrow or limited purposes.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

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

Credit Risk

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

Interest Rate Risk

We had cash and cash equivalents totaling $109.5 million as of September 30, 2019. This amount was invested primarily in demand deposits with domestic and international banks, money market accounts, and U.S. Treasury bills. The cash and cash equivalents are held for investment and working capital purposes. Our cash deposits are maintained for capital preservation purposes. We do not enter into investments for trading or speculative purposes. As of September 30, 2019, we had variable rate loans outstanding of $201.3 million that adjust with interest rate movements in LIBOR except when interest rate floors apply. Accordingly, we are subject to interest rate risk to the extent that LIBOR, or any successor thereto, changes. A hypothetical 100 bps increase in our interest rates in effect at September 30, 2019 would have a $2.0 million increase to our interest expense on an annualized basis. A hypothetical 100 bps decrease in our interest rates in effect at September 30, 2019 would have a $2.0 million decrease to our interest expense on an annualized basis. We believe our mixture of fixed rate and variable rate loans helps reduce our overall exposure to interest rate risk. See “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” in Part II, Item IA. Risk Factors of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019. 

Foreign Exchange Risk

For both the three and nine months ended September 30, 2019, approximately 3% of our consolidated revenues were denominated or paid in a foreign currency. To help minimize our exposure to foreign exchange risk, we utilize payments collected in local currencies other than the U.S. dollar for payment obligations we may incur in the same local currency related to labor, construction, consumables or materials costs, manufacturing of inventory, or if our procurement orders are denominated in a currency other than U.S. dollars. If any of these local currencies change in value versus the U.S. dollar, our cost in U.S. dollars would change which could adversely affect our results of operations. We do not currently hedge our foreign currency exchange risk. However, we believe that our strategy to carefully manage the exposure to foreign currencies as well as ensure that a majority of our revenues are denominated in the U.S. dollar, helps reduce our overall exposure to foreign exchange risk.

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Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

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

As of September 30, 2019, our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act). Our principal executive officer and principal financial officer have concluded, based upon the evaluation described above, that, as of September 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance level.

Inherent Limitations of Internal Controls

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended September 30, 2019 that has materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.Legal Proceedings

From time to time we may become involved in legal proceedings or be subject to claims arising in the ordinary course of our business. Although the results of litigation and claims cannot be predicted with certainty, as of September 30, 2019, we were not party to any legal proceedings that we would expect to have a material adverse effect on our business, operating results, financial condition or cash flows. Regardless of any such outcome, litigation can have an adverse impact on us because of defense and settlement costs, diversion of management resources and other factors.

Item 1A.Risk Factors

The matters discussed in this Quarterly Report on Form 10-Q include forward-looking statements that involve risks or uncertainties. These statements are neither promises nor guarantees, but are based on various assumptions by management regarding future circumstances, over many of which we have little or no control. A number of important risks and uncertainties, including those identified under the caption “Risk Factors” in Item 1A in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, under the caption “Risk Factors” in Item 1A in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019, and in subsequent filings as well as risks and uncertainties discussed elsewhere in this Quarterly Report on Form 10-Q, could cause actual results to differ materially from those in the forward-looking statements. There were no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019.

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.Defaults upon Senior Securities

None.

Item 4.Mine Safety Disclosures

Not applicable.

Item 5.Other Information

None.

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Item 6.Exhibits

(a)Exhibits:

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

Exhibit Number	Description
31.1	Certification of Chief Executive Officer required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.  †
31.2	Certification of Chief Financial Officer required by Rules 13a-14 and 15d-14 under the Securities Exchange Act of 1934.  †
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *†
101.INS	XBRL Instance Document †
101.SCH	XBRL Taxonomy Extension Schema Document †
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document †
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document †
101.LAB	XBRL Taxonomy Extension Label Linkbase Document †
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document †

†    Filed herewith.

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

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SIGNATURES

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

	AquaVenture Holdings Limited
Date: November 6, 2019	By:	/s/ LEE S. MULLER
		Lee S. Muller
		Chief Financial Officer (Principal Financial Officer)

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EX-31.1

EXHIBIT 31.1

CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO

RULE 13a-14(a) / RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I,  Anthony Ibarguen, certify that:

1.     I have reviewed this Quarterly  Report on Form 10-Q of AquaVenture Holdings Limited;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 6, 2019
/s/ Anthony Ibarguen
Anthony Ibarguen
Chief Executive Officer
Principal Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER PURSUANT TO

RULE 13a-14(a) / RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED

I, Lee S. Muller, certify that:

1.     I have reviewed this Quarterly  Report on Form 10-Q of AquaVenture Holdings Limited;

2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.     Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)    Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)    Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)    Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)    Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)    All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)    Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date:	November 6, 2019
/s/ Lee S. Muller
Lee S. Muller
Chief Financial Officer
Principal Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATIONS OF CEO AND CFO PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with this Quarterly Report on Form 10-Q of AquaVenture Holdings Limited (the “Company”) for the period ended September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned, Anthony Ibarguen, Chief Executive Officer of the Company, and Lee S. Muller, Chief Financial Officer of the Company, hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/
Dated: November 6, 2019	/s/ Anthony Ibarguen
	Anthony Ibarguen
	Chief Executive Officer
	Principal Executive Officer

Dated: November 6, 2019	/s/ Lee S. Muller
	Lee S. Muller
	Chief Financial Officer
	Principal Financial Officer

XML

Summary of Significant Accounting Policies - Adoption of New Accounting Pronouncements (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019
Other Nonoperating Income (Expense) [Abstract]
Right-of-use assets	$ 10,982
Lease liabilities	$ 11,572
ASU 2016-02 | Adjustment
Other Nonoperating Income (Expense) [Abstract]
Right-of-use assets		$ 8,700
Lease liabilities		8,900
Straight-line rent liabilities to operating lease liabilities		$ 200

XML

Business Combinations and Asset Acquisitions - Alpine Water System, LLC (Details) - USD ($) $ in Thousands		3 Months Ended	9 Months Ended
	Aug. 06, 2018	Sep. 30, 2019	Sep. 30, 2019	Dec. 31, 2018
Business Acquisition [Line Items]
Contingent consideration		$ 2,257	$ 2,257	$ 3,109
Assets acquired:
Goodwill		199,194	199,194	$ 190,999
Alpine Water System, LLC | Selling, General and Administrative Expenses
Business Acquisition [Line Items]
Transaction related costs		0	100
Quench | Alpine Water System, LLC
Business Acquisition [Line Items]
Purchase price	$ 15,000
Cash paid for acquisition	14,500
Working capital adjustment	100
Notes payable	400
Contingent consideration	100
Contingent consideration range of outcomes minimum	0
Contingent consideration range of outcomes maximum	300
Contingent consideration ultimate payout		$ 400	$ 400
Assets acquired:
Trade receivables	556
Inventory	141
Prepaid expenses and other current assets	153
Property, plant and equipment	1,562
Goodwill	6,006
Total assets acquired	15,847
Liabilities assumed:
Accounts payable and accrued liabilities	(295)
Deferred revenue	(565)
Total liabilities assumed	(860)
Net assets acquired	14,987
Quench | Alpine Water System, LLC | Minimum
Business Acquisition [Line Items]
Undiscounted range of outcomes for the post combination compensation payout	0
Quench | Alpine Water System, LLC | Maximum
Business Acquisition [Line Items]
Undiscounted range of outcomes for the post combination compensation payout	1,100
Quench | Alpine Water System, LLC | Customer Relationships
Business Acquisition [Line Items]
Discounted rate			13.40%
Weighted average useful life of intangible assets			15 years
Assets acquired:
Identified intangible assets	6,280
Quench | Alpine Water System, LLC | Non-compete agreements
Business Acquisition [Line Items]
Discounted rate			13.40%
Weighted average useful life of intangible assets			5 years
Assets acquired:
Identified intangible assets	$ 1,149

XML

Commitments and Contingencies

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure

Commitments and Contingencies

9. Commitments and Contingencies

Asset Retirement Obligations

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

During the three months ended September 30, 2019 and 2018, the Company recorded accretion expense of $13 thousand and $13 thousand, respectively. During the nine months ended September 30, 2019 and 2018, the Company recorded accretion expense of $39 thousand and $38 thousand, respectively. During the nine months ended September 30, 2019, the Company performed certain asset retirement activities upon the conclusion of one of its contracts. The Company recorded a valuation adjustment of $0 and $24 thousand during the three and nine months ended September 30, 2019, respectively, which were recorded in cost of revenues in the consolidated statements of operations and comprehensive income. No valuation adjustments were recorded during the three and nine months ended September 30, 2018.

At September 30, 2019 and December 31, 2018, the current portion of the ARO liabilities was $0.7 million and $0.7 million, respectively, which are recorded in accrued liabilities in the consolidated balance sheets. At September 30, 2019 and December 31, 2018, the long‑term portion of the ARO liabilities was $0.5 million and $0.5 million, respectively, which are recorded in other long‑term liabilities in the consolidated balance sheets.

Acquisition Contingent Consideration

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

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

	Nine Months Ended
	September 30, 2019
Acquisition contingent consideration at beginning of the period	$	3,109
Acquired during the period		930
Payments		(2,033)
Valuation adjustments		136
Interest accretion		115
Acquisition contingent consideration at end of the period	$	2,257

Acquisition contingent consideration liabilities consist of (i) payments held for potential adjustments or claims as set forth in the purchase agreements which are recorded at fair value based on collectability and a discount factor, (ii) payments contingent on the future collection of certain acquired receivables which are recorded at fair value based on collectability and a discount factor and (iii) payments that are contingent on the future performance of the acquired business and are recorded at fair value based on a Monte Carlo Simulation which utilizes unobservable inputs, including forecasted revenues.

The Company recorded interest accretion expense within the consolidated statements of operations and comprehensive income of $29 thousand and $0 for the three months ended September 30, 2019 and 2018, respectively. There were no valuation adjustments recorded for the three months ended September 30, 2019 and 2018.

The Company recorded interest accretion expense within the consolidated statements of operations and comprehensive income of $115 thousand and $0 for the nine months ended September 30, 2019 and 2018, respectively. The Company also recorded valuation adjustments of $136 thousand for the change in fair value during the nine months ended September 30, 2019, which was composed of (i) $191 thousand which was recorded in SG&A in the consolidated statements of operations and comprehensive income and (ii) $(55) thousand that was part of final purchase price allocation adjustments. There were no valuation adjustments for the nine months ended September 30, 2018.

At September 30, 2019 and December 31, 2018, $2.3 million and $2.7 million, respectively, were deemed current and were recorded in accrued liabilities in the consolidated balance sheets. At September 30, 2019 and December 31, 2018, $0 and $0.4 million, respectively, were deemed long-term and were recorded in other long-term liabilities in the consolidated balance sheets.

Litigation, Claims and Administrative Matters

The Company, may, from time to time, be a party to legal proceedings, claims, and administrative matters that arise in the normal course of business. The Company has made accruals with respect to certain of these matters, where appropriate, that are reflected in the consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, the Company has not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, the Company currently does not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on its consolidated financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on its consolidated financial position, results of operations, or cash flows. The Company maintains liability insurance in such amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that the Company insures against are customer lawsuits caused by damage or nonperformance, workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, employment practices liability and fidelity losses. There can be no assurance that the Company’s liability insurance will cover any or all events or that the limits of coverage will be sufficient to fully cover all liabilities. As of September 30, 2019, the Company determined there are no matters for which a material loss is reasonably possible or the Company has either determined that the range of loss is not reasonably estimable or that any reasonably estimable range of loss is not material to the consolidated financial statements.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Measurements

Fair Value Measurements

5. Fair Value Measurements

At September 30, 2019 and December 31, 2018, the Company had the following assets and liabilities measured at fair value on a recurring basis in the consolidated balance sheets:

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

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

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

There were no transfers into or out of Level 1, 2 or 3 assets during the three and nine months ended September 30, 2019. Transfers between levels are deemed to have occurred if the lowest level of input were to change.

The Company’s fair value measurements as of September 30, 2019 and December 31, 2018 were as follows (in thousands):

			Quoted Prices in		Significant
			Active Markets		Other		Significant
	Asset/		for Identical		Observable		Unobservable
Assets/Liabilities Measured at Fair Value	(Liability)		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
As of September 30, 2019
Recurring basis:
Money market funds	$	838	$	838	$	—	$	—
U.S. Treasury securities	$	68,486	$	68,486	$	—	$	—
Acquisition contingent consideration	$	(2,257)	$	—	$	—	$	(2,257)
As of December 31, 2018
Recurring basis:
Money market funds	$	42,135	$	42,135	$	—	$	—
Acquisition contingent consideration	$	(3,109)	$	—	$	—	$	(3,109)

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

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Subsequent Events

9 Months Ended

Sep. 30, 2019

Subsequent Events

Subsequent Events

13. Subsequent Events

The Company has evaluated subsequent events through the date of issuance of the unaudited condensed consolidated financial statements for the period ended September 30, 2019. The subsequent events included the following:

· On October 1, 2019, Quench 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.

Due primarily to the timing of the acquisition and the complexities involved with determining fair value of assets acquired, the Company has not yet completed the allocation of the net assets acquired.

The revenues and related expenses from the acquired in-place lease agreements will be included in the Quench reportable segment from the date of acquisition. The Quench business completed the acquisition of Mirex to expand its installed base of POU systems in the United States.

· On October 1, 2019, Quench acquired substantially all of the assets and assumed certain liabilities of Flowline Canada, Inc. (“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.

Due primarily to the timing of the acquisition and the complexities involved with determining fair value of assets acquired, the Company has not yet completed the allocation of the net assets acquired.

The revenues and related expenses from the acquired in-place lease agreements will be included in the Quench reportable segment from the date of acquisition. The Quench business completed the acquisition of Flowline to expand its installed base of POU systems in Canada.

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Subsequent Events (Details) - Subsequent Event - Quench $ in Millions	Oct. 01, 2019 USD ($)
Mirex
Total purchase price	$ 11.6
Purchase price paid	10.3
Asset Acquisition, Consideration Liability	0.1
Asset acquisition liability due on first anniversary	0.9
Asset acquisition due on second anniversary	0.3
Flowline
Total purchase price	0.9
Purchase price paid	0.8
Asset Acquisition, Consideration Liability	$ 0.1

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Commitments and Contingencies - Asset Retirement Obligations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Asset Retirement Obligation, Roll Forward Analysis [Roll Forward]
Accretion of obligation	$ 13	$ 13	$ 39	$ 38
Valuation adjustment	0	$ 0	24	$ 0
Current portion of the ARO liabilities	700		700		$ 700
Long-term portion of the ARO liabilities	$ 500		$ 500		$ 500

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CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME - USD ($) shares in Thousands, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Total revenues	$ 52,947	$ 36,824	$ 150,896	$ 103,783
Cost of revenues	26,474	17,157	73,536	48,885
Gross profit	26,473	19,667	77,360	54,898
Selling, general and administrative expenses	23,518	20,826	69,256	59,689
Income (loss) from operations	2,955	(1,159)	8,104	(4,791)
Other expense:
Interest expense, net	(6,214)	(3,396)	(19,282)	(10,000)
Other expense, net	(233)	(228)	(381)	(520)
Loss before income tax expense	(3,492)	(4,783)	(11,559)	(15,311)
Income tax expense (benefit)	445	(2,051)	1,517	(1,312)
Net loss	(3,937)	(2,732)	(13,076)	(13,999)
Other comprehensive income:
Foreign currency translation adjustment	(67)	106	169	(84)
Comprehensive loss	$ (4,004)	$ (2,626)	$ (12,907)	$ (14,083)
Loss per share – basic and diluted	$ (0.13)	$ (0.10)	$ (0.46)	$ (0.53)
Weighted-average shares outstanding – basic and diluted	31,201	26,590	28,354	26,544
Bulk water
Total revenues	$ 14,992	$ 14,626	$ 44,916	$ 42,682
Cost of revenues	6,958	6,771	20,481	20,021
Gross profit	8,034	7,855	24,435	22,661
Rental
Total revenues	24,286	16,261	68,660	45,041
Cost of revenues	11,245	7,130	30,898	20,240
Gross profit	13,041	9,131	37,762	24,801
Product sales
Total revenues	12,769	4,952	34,511	13,012
Cost of revenues	8,271	3,256	22,157	8,624
Gross profit	4,498	1,696	12,354	4,388
Financing
Total revenues	900	985	2,809	3,048
Gross profit	$ 900	$ 985	$ 2,809	$ 3,048

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 2—“Summary of Significant Accounting Policies” of the notes to the audited consolidated financial statements, included in Item 8. Financial Statements and Supplementary Data of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnotes normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of September 30, 2019, the unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2019 and 2018, the unaudited condensed consolidated statements of changes in equity for the three and nine months ended September 30, 2019 and 2018, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018. The unaudited condensed consolidated balance sheet as of December 31, 2018 was based on the audited consolidated balance sheet as of December 31, 2018, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, but restated for adoption of new accounting guidance which is further explained in the “Adoption of New Accounting Pronouncements” section below.

The unaudited condensed consolidated financial statements include the accounts of AquaVenture Holdings Limited and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include: accounting for revenue from contracts with customers and the determination of transaction prices and allocation of revenues to remaining performance obligations; accounting for leases and the determination of operating lease liabilities and right-of-use assets; accounting for goodwill and identifiable intangible assets and any related impairment; property, plant and equipment and any related impairment; contract costs and any related impairment; share‑based compensation; allowance for doubtful accounts; obligations for asset retirement; acquisition contingent consideration; and valuation of deferred income taxes. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Leases

Lessee accounting

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

At the time of contract inception, the Company determines if an arrangement is or contains a lease. If the arrangement contains a lease, the Company recognizes a right-of-use asset and an operating lease liability at the lease commencement date. Lease expense for lease payments made is recognized on a straight-line basis over the lease term.

The operating lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. The current portion of the Company’s operating lease liabilities are recorded within accrued liabilities in the consolidated balance sheets.

The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the operating lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the operating lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Right-of-use assets are periodically reviewed for impairment whenever events or changes in circumstances arise. During the three and nine months ended September 30, 2019, the Company had incurred no impairment charges related to right-of-use assets.

Key estimates and judgments in determining both the operating lease liability and right-of-use asset include the determination of (i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) the lease term and (iii) the lease payments.

The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally derives an incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

Lease payments included in the measurement of operating lease liabilities are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and

· the exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise the option.

In certain instances, the Company's leases include non-lease components, such as equipment maintenance or common area maintenance. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company has not elected the practical expedient to account for the lease and non-lease components as a single lease component and has elected (for all classes of underlying assets) to account for these components separately. The Company allocates the consideration in the contract to the lease and non-lease components based on each component's relative standalone price. The Company determines standalone prices for the lease components based on the prices for which other lessors lease similar assets on a standalone basis. The Company determines standalone prices for the non-lease components based on the prices that suppliers might charge for those types of services on a standalone basis. If observable standalone prices are not readily available, the Company estimates the standalone prices maximizing the use of observable information.

The Company has elected to utilize the short-term lease exemption and not recognize a right-of-use asset and corresponding operating lease liability for leases with expected terms of 12 months or less. The Company recognizes the lease payments associated with its short-term leases on a straight-line basis over the lease term.

Lessor accounting

The Company generates revenues through the lease of its bulk water facilities, wastewater treatment and water reuse equipment, and filtered water and related systems equipment to customers. In certain instances, the Company enters into a contract with a customer but must construct the underlying asset, including bulk water facilities and wastewater treatment and water reuse equipment, prior to its lease.

At the time of contract inception, the Company determines if an arrangement is or contains a lease.

Customer contracts that contain leases, which can be explicit or implicit in the contract, are generally classified as either operating leases or sales-type leases and can contain both lease and non-lease components, including operating and maintenance services (“O&M”) of the Company-owned equipment. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company elected the practical expedient for all classes of underlying assets to not separate the lease and non-lease components if certain conditions are met, including the classification of the lease component as operating and the revenue recognition pattern of both the lease and non-lease components. The Company will account for the contract with the customer as a combined component under the respective authoritative guidance for the predominant element in the contract, the lease or non-lease component.

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

If the customer contract contains or is accounted for as a lease, the key estimates and judgments used by the Company in accounting for the lease as a lessor include the following: (i) lease term, (ii) the economic life of the underlying leased asset, (iii) determination of lease payments and (iv) determination of the fair value at the time of contract inception and the residual value of the underlying leased asset.

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the Company. Contracts entered into with customers can include either the option to renew or an auto-renewing provision that results in the automatic extension of the existing contract. In certain instances, key provisions such as the lease payment or term of the renewal are not stated and are subject to negotiation.

The economic life of the underlying leased asset is determined to be either the period over which the asset is expected to be economically usable, or where the benefits it can produce exceed the cost to replace or undertake major repairs. In certain instances, the economic life of the underlying leased asset can exceed the useful life assigned by the Company.

Lease payments that are accounted for as rental revenue are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date;

· the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise the option; and

· payments for penalties for the termination of a lease if the term reflects the lessee terminating the lease.

The Company’s leases do not typically include a requirement for the customer to guarantee the residual value of the underlying leased asset. Variable lease payments that do not depend on an index or rate are excluded from the determination of lease payments.

The fair value of the underlying leased asset at contract inception and residual value of underlying leased asset at the end of the term of the lease are determined based on the price that would be received to sell an asset in an orderly transaction at the time of valuation. The Company’s risk management strategy for protecting the residual value of the underlying assets include the ongoing maintenance by the Company during the lease term as well as clauses and other protections within the lease agreements which require the lessee to return the underlying asset in working condition at the end of the lease term.

At contract inception, the Company determines the lease classification of the underlying asset. The Company considers inputs such as the lease term, lease payments, fair value of the underlying asset and residual value of the underlying asset when assessing the classification. The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease. The rate implicit in the lease is the rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that the Company expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the Company and (2) any deferred initial direct costs of the Company.

In certain instances, contracts with customers may also include the option for the customer to purchase the underlying asset at the end of the lease term. When applicable and certain conditions are met, the Company will incorporate the stated purchase price into the determination of its implied interest rate.

Revenue Recognition

Through the Seven Seas Water and Quench operating platforms, the Company generates revenues from the following primary sources: (i) bulk water sales and services; (ii) service concession arrangements; (iii) rental of equipment; and (iv) product sales. The revenue recognition policy for each of the primary sources of revenue are as follows:

Bulk Water Sales and Services.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers with a single performance obligation to deliver bulk water or a series of performance obligations to perform substantially the same services with the same pattern of transfer, which can include the operations and maintenance (“O&M”) of a customer-owned or leased plant. The Company recognizes revenues from the delivery of bulk water or the performance of bulk water services at the time the water or services are delivered to the customers in accordance with the contractual agreements. Billings to the customer for both bulk water and the bulk water services are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for bulk water sales and service can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenue will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. Estimates of revenue for unbilled water are recorded when meter readings occur at a time other than the end of a period. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period. Revenues generated from both the delivery of bulk water and performance of services related to bulk water are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Certain contracts with customers which require the construction of facilities to provide bulk water to a specific customer include two performance obligations, including an implicit lease for the bulk water facilities and bulk water services, and a non-lease component related to O&M services. The implicit lease performance obligation is generally accounted for as an operating lease as a result of the provisions of the contract. As the bulk water services are deemed to be the more predominant element, the Company considers the arrangement to be a combined bulk water component. The calculated transaction price can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and contractually established rates. The revenue recognition pattern for both the lease and non-lease components are the same, with revenues being recognized ratably over the contract period as water is delivered to the customer. Revenues generated from both the lease and non-lease performance obligations are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Service Concession Arrangements.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers that are determined to be service concession arrangements. Service concession arrangements are agreements entered into with a public sector entity which controls both (i) the ability to modify or approve the services and prices provided by the operating company and (ii) beneficial entitlement to, or residual interest in, the infrastructure at the end of the term of the agreement. Service concession arrangements typically include more than one performance obligation, including the construction of infrastructure for the customer and an obligation to provide O&M services for the infrastructure constructed for the customer. Billings to the customer for service concession arrangements are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for service concession arrangements includes, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. The transaction price is allocated to the identified performance obligations based on the relative standalone selling prices of the identified performance obligations.

The transaction price allocated to the construction of infrastructure performance obligation is recognized as product sales within the consolidated statements of operations and comprehensive income. Product sales are recognized over time, using the input method based on cost incurred, which typically begins at commencement of the construction with revenue being fully recognized upon the completion of the infrastructure as control of the infrastructure is, or is deemed to be, transferred to the customer. In addition, service concession contracts typically include a difference in timing of when control is, or is deemed to be, transferred and the collection of cash receipts, which are collected over the term of the entire arrangement. The timing difference could result in a significant financing component for the construction performance obligations if determined to be a material component of the transaction price. If a significant financing component is identified, the future cash flows included in the transaction price allocated to the construction performance obligations are discounted using a discount rate comparable to a market-based borrowing rate specific to both the customer and terms of the contract. The resulting present value of the allocated future cash flows is recorded as construction revenue with a related long-term receivable as control of the infrastructure is, or is deemed to be, transferred to the customer while the discount amount is considered to be the significant financing component. Future cash flows received from the customer related to the construction performance obligations are bifurcated between principal repayment of the long-term receivable and the imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income as providing financing to our customers is a core component of our business model.

The transaction price allocated to the O&M performance obligation is recorded as bulk water revenue within the consolidated statements of operations and comprehensive income as the services are provided to the customer. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period.

Rental of Equipment.  Through the Seven Seas Water and Quench operating platforms, the Company generates revenues through the rental of its wastewater treatment and water reuse equipment and filtered water and related systems to customers. Rental agreements classified as operating leases can contain both lease and non-lease components, including O&M services on Company-owned equipment. For rental agreements that meet all conditions of the elected practical expedient to not separate lease and non-lease components and where the lease component is determined to be the predominant element of the contract, the Company allocates all revenues under the contract to the lease component of the contract. Billings to the customer for the rental of this equipment, which generally occur either monthly or quarterly, are based on the rental rate as stated within the rental agreement. The transaction price is based on the minimum lease payment as stated within the rental agreement. Rental revenues, including revenues in connection with certain installation type activities are recognized ratably over the rental agreement term and amounts paid by customers in excess of recognizable revenue are recorded as a contract liability, or deferred revenue, in the consolidated balance sheets.

Certain revenues associated with shipping, delivery, installation or similar activities that occur prior to lease commencement do not provide a service to the lessee and are not a non-lease component of the contract. Payments for these activities are recorded as prepaid lease payments which are recognized ratably with the rental revenue over the lease term. Upon the expiration of the initial rental agreement term, the Company may enter into rental agreement extensions in which revenues are recognized ratably over the extension term.

Revenues generated under these rental agreements are recorded as rental revenue within the consolidated statements of operations and comprehensive income.

Product Sales.  Through both the Seven Seas Water and Quench operating platforms, the Company enters into contracts to construct desalination and wastewater treatment and water reuse equipment and facilities and to sell customers water and related filtration equipment, coffee and consumables, which may include contracts accounted for as sales-type leases.

Contracts with customers to sell water and related filtration equipment and coffee and consumables typically include a single performance obligation. The Company recognizes revenues at the time the equipment, coffee or consumables is transferred to the customer, which can be upon either shipment or delivery to the customer. The transaction price is based on the contractual price with the customer. Shipping and handling costs paid by the customer are included in revenues. Billings to the customer for the sale of water and related filtration equipment, coffee and consumables occur at the time the product is transferred to the customer and are based on contract price.

Contracts with customers to construct desalination and wastewater treatment and water reuse equipment and facilities typically include a single performance obligation. Construction and equipment revenues are recognized over time, using the input method based on cost incurred, which typically begins at the later of commencement of the construction or at the time the infrastructure is, or is deemed to be, transferred to the customer with revenue being fully recognized upon the completion of the infrastructure. Billings to the customer to construct desalination and wastewater treatment and water reuse equipment and facilities can occur at contractual intervals throughout the construction period, at the time the equipment or facility is deemed transferred to the customer, or, in the case of sales-type leases, as stated within the rental agreement. The transaction price is based on the contractual price with the customer.

For contracts deemed to be, or that include a sales-type lease, the transaction price is based on the minimum lease payments as stated within the rental agreement. For contracts that contain both a lease and non-lease components, the transaction price is allocated based on the relative standalone selling prices of the lease and non-lease components. The transaction price, excluding variable lease payments, allocated to the lease component is discounted at the implicit rate of the contract and is recognized as revenue upon commencement of the lease.

Revenues generated under these contracts are recorded as product sales revenue within the consolidated statements of operations and comprehensive income.

Future cash flows received from sales-type leases are bifurcated between principal repayment of the long-term receivable and the related imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income.

Contract Costs

Contract costs includes contract acquisition costs and contract fulfillment costs, which are all recorded within other assets in the consolidated balance sheets.

Contract Acquisition Costs.    Prior to January 1, 2019, the Company accounted for initial direct costs incurred by the Company to originate leases as deferred lease costs. The costs capitalized were directly related to the negotiation and execution of leases and primarily consisted of internal compensation and benefits as lease origination activities were performed internally by the Company. Deferred lease costs capitalized prior to the adoption of the authoritative guidance on leases will be amortized on a straight-line basis over the remaining lease term.

For all leases originated on or after January 1, 2019, subsequent to the adoption of authoritative guidance on leases, the incremental costs incurred by the Company to originate contracts with customers are capitalized as contract acquisition costs. Contract acquisition costs, which generally include commissions and other costs that are only incurred as a result of obtaining a contract, are capitalized when the incremental costs are expected to be recovered over the contract period. All other costs incurred regardless of obtaining a contract are expensed as incurred. Contract acquisition costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the initial contract term, on a basis consistent with the transfer of goods or services to the customer to which the costs relate.

Contract acquisition costs, net as of September 30, 2019 and December 31, 2018 were $4.8 million and $3.7 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Contract Fulfillment Costs. Costs incurred by the Company to fulfill a contract with a customer are capitalized when the costs generate or enhance resources that will be used in satisfying future performance obligations of the contract and the costs are expected to be recovered. Capitalized contract fulfillment costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to fulfill the contract, including shipping and installation activities. Contract fulfillment costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the initial contract term, on a basis consistent with the transfer of good or services to the customer to which the costs relate.

Contract fulfillment costs, net as of September 30, 2019 and December 31, 2018 were $5.4 million and $1.5 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Total contract costs amortization expense for the three and nine months ended September 30, 2019 were $1.5 million and $3.6 million, respectively. Total contract cost amortization expense for the three and nine months ended September 30, 2018 were $0.7 million and $2.0 million respectively.

Contract costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company had no impairment charges related to contract costs during the three and nine months ended September 30, 2019 and 2018.

Adoption of New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. During 2018, the FASB issued additional authoritative guidance which, among other things, provided an option to apply transition provisions under the standard at adoption date rather than the earliest comparative period presented as well as added a practical expedient that would permit lessors to not separate non-lease components from the associated lease components if certain conditions are met. These amendments are effective, in conjunction with the new lease standard, for annual reporting periods beginning on or after December 15, 2018, including interim periods within those annual periods.

The Company adopted this guidance on a modified retrospective basis on January 1, 2019 with the cumulative effect of the transition as of the date of adoption.

The Company has elected the package of practical expedients provided for within the authoritative guidance which exempts the Company from having to reassess: (i) whether expired or existing contracts contain leases, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. In addition, the Company has elected the practical expedient that permits lessors to not separate non-lease components from the associated lease components if certain conditions are met. Lastly, the Company has utilized the short-term exemption for lessees and established an accounting policy to not recognize a right-of-use asset or lease liability for any lease with a term of less than 12 months. The Company did not elect to utilize any of the other practical expedients. 

The impacts of the new lease standard are as follows:

Lessee accounting - The adoption has had a material impact on the consolidated balance sheets, including an increase to both assets and liabilities, as a result of the recognition of a right-of-use asset and corresponding lease liability for operating leases. As the Company has made a policy election for the short-term lease exemption, a right-of-use asset and corresponding lease liability are only recorded for leases with expected terms of more than 12 months. The adoption did not have a material impact on the consolidated statements of operations and comprehensive income for situations in which the Company is a lessee.

Lessor accounting - As the Company has elected the transitional practical expedients for leases, there are not any material impacts to the consolidated financial statements for leases in situations which the Company is a lessor and the lease commenced prior to January 1, 2019. To conform with the guidance, the Company has updated its policies for costs incurred for the acquisition and fulfillment of the lease contracts, including commissions and installation costs.

Adoption of the new lease standard did not impact our historically reported results. On January 1, 2019, the Company recorded $8.7 million of right-of-use assets and $8.9 million of operating lease liabilities, including the classification of $0.2 million from straight-line rent liabilities to operating lease liabilities, in the consolidated balance sheets.

New Accounting Pronouncements to be Adopted

In June 2016, the FASB issued authoritative guidance regarding implementation of measurement of credit losses on financial instruments. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the disclosure requirements on the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance regarding the disclosure requirements for fair value measurements. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In March 2019, the FASB issued authoritative guidance regarding targeted changes to lessor accounting. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

XML

Revenue - Contract Assets And Liabilities (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Contract assets
Trade receivables, net	$ 24,441		$ 24,441		$ 21,437
Current portion of long-term receivables	7,403		7,403		6,538
Long-term receivables	34,468		34,468		40,574
Total contract assets	66,312		66,312		68,549
Contract liabilities
Deferred revenue, current	4,621		4,621		3,890
Deferred revenue, non-current	11,148		11,148		10,690
Total contract liabilities	15,769		15,769		$ 14,580
Changes in contract assets and liabilities
Revenue recognized that was included in the contract liability balance at the beginning of respective period	315	$ 323	4,824	$ 3,360
Deferred revenue acquired during the period	(229)	(714)	(266)	(1,093)
Contract assets impairment	$ 0	$ 0	$ 0	$ 0

XML

Leases - Maturities of operating lease liabilities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Lessee, Operating Lease, Liability, Payment, Due [Abstract]
Remainder of 2019	$ 685
2020	2,537
2021	2,552
2022	2,451
2023	2,065
Thereafter	6,305
Total future minimum lease payments	16,595
Less imputed lease interest	(5,023)
Total lease liabilities	$ 11,572
2019		$ 2,097
2020		905
2021		990
2022		856
2023		773
Thereafter		5,117
Total		$ 10,738

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Cash Flow Information (Tables)

9 Months Ended

Sep. 30, 2019

Cash Flow Information

Cash Flow Information

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

	Nine Months Ended
	September 30,
	2019		2018
Cash paid during the period:
Income taxes, net	$	1,017	$	1,631
Interest, net	$	18,634	$	9,325
Non-Cash Transaction Information:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	3,539	$	—
Non-cash capital expenditures	$	3,509	$	1,331
Unpaid offering costs	$	33	$	—

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

	As of
	September 30,
	2019		2018
Cash and cash equivalents	$	109,520	$	93,617
Restricted cash, current		—		2,000
Restricted cash, non-current		4,268		3,637
Cash, cash equivalents and restricted cash	$	113,788	$	99,254

XML

Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Measurements

Schedule of fair value measurements

The Company’s fair value measurements as of September 30, 2019 and December 31, 2018 were as follows (in thousands):

			Quoted Prices in		Significant
			Active Markets		Other		Significant
	Asset/		for Identical		Observable		Unobservable
Assets/Liabilities Measured at Fair Value	(Liability)		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
As of September 30, 2019
Recurring basis:
Money market funds	$	838	$	838	$	—	$	—
U.S. Treasury securities	$	68,486	$	68,486	$	—	$	—
Acquisition contingent consideration	$	(2,257)	$	—	$	—	$	(2,257)
As of December 31, 2018
Recurring basis:
Money market funds	$	42,135	$	42,135	$	—	$	—
Acquisition contingent consideration	$	(3,109)	$	—	$	—	$	(3,109)

XML

Business Combinations and Asset Acquisitions

9 Months Ended

Sep. 30, 2019

Business Combinations and Asset Acquisitions

Business Combinations and Asset Acquisitions

3. Business Combinations and Asset Acquisitions

Business Combinations

Pure Health Solutions, Inc.

On December 18, 2018, Quench USA, Inc. (“Quench”), a wholly-owned subsidiary of AquaVenture Holdings Limited, acquired all of the issued and outstanding shares of Pure Health Solutions, Inc. (“PHSI”) pursuant to a stock purchase agreement (the “PHSI Acquisition”). PHSI, which is based outside of Chicago, is a leading provider of filtered water coolers and related services through direct and indirect sales channels. The Company paid approximately $56.6 million, in the aggregate, which included approximately $39.1 million of cash related to the purchase price of PHSI, net of adjustments to reduce the purchase price by $1.6 million, and approximately $17.5 million of cash accounted for as a post-combination payoff of factored contract liabilities which had been classified as a secured borrowing. The factored contract liabilities were adjusted to fair value as of the acquisition date based on the present value of the factored contract liabilities using a discount rate of approximately 7% and any penalties associated with the payoff.

Acquisition-related costs incurred by the Company related to the PHSI Acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively, which were expensed as incurred within selling, general and administrative (“SG&A”) expenses in the consolidated statements of operations and comprehensive income.

The Quench business completed the PHSI Acquisition to expand its installed base of POU systems and to be able to participate more broadly in the global POU market through the PHSI dealer network. In addition, the PHSI Acquisition enhances Quench’s ability to develop, source and manufacture exclusive coolers and purification offerings. Lastly, it offers us the opportunity to develop relationships with POU dealers that could lead to future acquisitions.

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

Assets acquired:
Cash and cash equivalents	$	260
Trade receivables		1,167
Inventory		1,603
Prepaid expenses and other current assets		447
Property, plant and equipment		6,945
Deferred tax asset		108
Customer relationships		21,409
Trade names		2,360
Non-compete agreements		1,776
Goodwill		26,473
Total assets acquired		62,548
Liabilities assumed:
Accounts payable and accrued liabilities		(22,652)
Deferred revenue		(329)
Other long-term liabilities		(450)
Total liabilities assumed		(23,431)
Total purchase price	$	39,117

As of September 30, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles, recorded in conjunction with the PHSI Acquisition remained preliminary and is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above. During the third quarter of 2019, the Company updated its preliminary allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 15.8%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 15.8%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 15.8%.  

The estimated weighted average useful life for customer relationships, trade names, and non-compete agreements is 15 years, 12 years, and 5 years, respectively.

As a result of the measurement period adjustments made to the purchase price allocation during the third quarter of 2019, the Company recorded additional amortization expense, as reflected in SG&A, of $1.1 million. For both the three and nine months ended September 30, 2019, the Company’s loss from operations and net loss in the consolidated statements of operations were approximately $1.1 million higher as a result of the measurement period adjustments. For both the three and nine months ended September 30, 2019, the Company’s net loss per share increased by $0.04 per share as a result of the measurement period adjustments.

Goodwill is composed of the acquired workforce and synergies not valued and is not deductible for tax purposes. Goodwill for the PHSI Acquisition is recorded within the Quench reportable segment.

The results of the operations of the acquired PHSI assets are included in the Quench reportable segment after the date of the PHSI Acquisition.

The Company identified certain liabilities, including tax matters that existed prior to December 18, 2018. The Company believes the liabilities are indemnified pursuant to the stock purchase agreement for the PHSI Acquisition. As a result, as of the date of acquisition, the Company recorded a liability in the amount of $0.8 million, which was recorded in accrued liabilities, and a corresponding indemnification receivable in the amount of $0.8 million, which was recorded in prepaids and other current assets in the consolidated balance sheet. The amounts were reflected within the purchase price allocation.

Commencing on December 18, 2018, the Company initiated a restructuring of the PHSI organization which included the reduction of headcount for PHSI executive management and other employee positions determined to be duplicative with those at Quench (the “PHSI Restructuring Plan”). Certain of the positions were backfilled with additional positions at Quench depending on the needs of the business. The expected net effect of the restructuring will allow Quench to recognize synergies of reduced employee costs subsequent to the PHSI Acquisition. The restructuring was determined to be a post-combination transaction. During the three and nine months ended September 30, 2019, the Company incurred an incremental restructuring-related charge related to severance, termination benefits and related taxes of $0 and $0.1 million, respectively, which was recorded within SG&A expenses in the consolidated statements of operations and comprehensive income. As of September 30, 2019 and December 31, 2018, the Company had accrued approximately $0.1 million and $0.8 million, respectively, within accrued liabilities on the consolidated balance sheets. The Company completed the PHSI Restructuring Plan during the second quarter of 2019.

FB Global Development, Inc., d/b/a Bluline

On December 3, 2018, Quench acquired substantially all the assets and assumed certain liabilities of FB Global Development, Inc., d/b/a Bluline (“Bluline”) pursuant to an asset purchase agreement (the “Bluline Acquisition”). Bluline, based in South Florida, is a provider of filtered water coolers and related services through direct and indirect sales channels. The aggregate purchase price, subject to adjustments, of the Bluline Acquisition was $2.5 million in cash and a $0.3 million payable to the seller which is expected to be paid in full by December 2019.

There were no acquisition-related costs incurred by the Company related to the Blueline Acquisition during the three and nine months ended September 30, 2019.

The Quench business completed the Bluline Acquisition to expand its installed base of POU systems and to be able to participate more broadly in the global POU market through its indirect sales channel. 

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

Assets acquired:
Trade receivables	$	90
Inventory		345
Property, plant and equipment		331
Customer relationships		1,292
Non-compete agreements		170
Goodwill		645
Total assets acquired		2,873
Liabilities assumed:
Deferred revenue		(10)
Total liabilities assumed		(10)
Total purchase price	$	2,863

The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed recorded in conjunction with the Bluline Acquisition is considered final. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements.The fair value of the customer relationships were developed using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a weighted average discount rate of 20.0%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a weighted average discount rate of 20.0%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 20 years and 5 years, respectively.

Goodwill for this acquisition is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reportable segment.

The results of the operations of the acquired Bluline assets are included in the Quench reportable segment from and after the date of acquisition.

AUC Acquisition Holdings

On November 1, 2018, AquaVenture Holdings Inc., a wholly owned subsidiary of AquaVenture, acquired all of the issued and outstanding membership interests of AUC Acquisition Holdings (“AUC”), a provider of wastewater treatment and water reuse solutions based in Houston, Texas, pursuant to a membership interest purchase agreement (the “AUC Acquisition”). The aggregate purchase price was $130.9 million, including $127.0 million cash (including net working capital adjustments of $0.4 million), approximately 122 thousand ordinary shares of AquaVenture, or $2.0 million, and $1.9 million of acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future collection of assumed receivables. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $2.0 million.

Acquisition-related costs incurred by the Company related to the AUC Acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively, which were expensed as incurred within SG&A expenses in the consolidated statements of operations and comprehensive income.

The Company completed the AUC Acquisition to expand its WAAS offerings in the wastewater treatment and water reuse businesses and broaden the Company’s existing portfolio in the United States.

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

Assets acquired:
Cash and cash equivalents	$	849
Trade receivables		1,763
Inventory		2,642
Current portion of long-term receivables		521
Prepaid expenses and other current assets		1,673
Property, plant and equipment		39,848
Other assets		25
Long-term receivables		306
Customer relationships		31,740
Trade names		2,680
Non-compete agreements		2,090
Backlog		870
Goodwill		64,940
Total assets acquired		149,947
Liabilities assumed:
Accounts payable and accrued liabilities		(4,286)
Deferred revenue		(1,021)
Other long-term liabilities		(1,706)
Deferred tax liability		(12,034)
Total liabilities assumed		(19,047)
Total purchase price	$	130,900

The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed recorded in conjunction with the AUC Acquisition is considered final. During the third quarter of 2019, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The fair value of the property, plant and equipment was determined using a combination of the indirect cost approach, direct cost approach and market approach, depending on asset type. The assets and liabilities (excluding property, plant and equipment) in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names, non-compete agreements and backlog. The fair value of customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 10.9%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 10.9%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 10.9%. The fair value of the backlog, which represents revenues and the related profit for contracts executed but not yet completed, was determined using the multi-period excess earnings methodwhich is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 10.9%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names, non-compete agreements and backlog is 19 years, 15 years, 4.9 years, and 0.7 years, respectively.

As a result of the measurement period adjustments made to the purchase price allocation during the third quarter of 2019, the Company recorded additional depreciation expense of $0.7 million, as reflected in cost of revenues, and a reduction of amortization expense of $0.1 million, as reflected in SG&A. For both the three and nine months ended September 30, 2019, the Company’s loss from operations and net loss in the consolidated statements of operations were approximately $0.6 million higher as a result of the measurement period adjustments. For both the three and nine months ended September 30, 2019, the Company’s net loss per share increased by $0.02 per share as a result of the measurement period adjustments.

Goodwill is composed of the acquired workforce and synergies not valued and is not deductible for tax purposes. Goodwill for the AUC Acquisition is recorded within the Seven Seas Water reportable segment.

The results of the operations of the acquired AUC assets are included in the Seven Seas Water reportable segment after the date of acquisition.

Alpine Water Systems, LLC

On August 6, 2018, Quench acquired substantially all the assets and assumed certain liabilities of Alpine Water Systems, LLC (“Alpine”), a POU water filtration company based in Las Vegas, Nevada, pursuant to an asset purchase agreement (the “Alpine Acquisition”). The aggregate purchase price of the Alpine Acquisition was $15.0 million, including $14.5 million in cash (including final working capital adjustment of $0.1 million which was received during the three months ended March 31, 2019), $0.4 million payable on August 6, 2020, and $0.1 million of acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future performance of the acquired assets. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $0.3 million. In addition, the asset purchase agreement includes contingent payments with the ultimate payout based upon the future performance of the acquired assets. The contingent payments are automatically forfeited if the employment of certain selling shareholders terminates. The Company has determined that the contingent payments will be post-combination compensation expense, which will be accreted to their estimated payout amount of $0.4 million throughout the substantive service period. The undiscounted range of outcomes for the post-combination compensation payout amount is $0 to $1.1 million. Payments related to the final acquisition contingent consideration and post-combination expense were made during the third quarter of 2019. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States and Canada.

Acquisition-related costs incurred by the Company related to the Alpine Acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively, which were expensed as incurred within SG&A expenses in the consolidated statements of operations and comprehensive income.

The Quench business completed the asset acquisition to expand its installed base of POU systems.

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

Assets acquired:
Trade receivables	$	556
Inventory		141
Prepaid expenses and other current assets		153
Property, plant and equipment		1,562
Customer relationships		6,280
Non-compete agreements		1,149
Goodwill		6,006
Total assets acquired		15,847
Liabilities assumed:
Accounts payable and accrued liabilities		(295)
Deferred revenue		(565)
Total liabilities assumed		(860)
Total purchase price	$	14,987

The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed recorded in conjunction with the Alpine Acquisition is considered final. During the first quarter of 2019, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 13.4%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 13.4%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 15 years and 5 years, respectively.

Goodwill is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reportable segment.

The results of the operations of the acquired Alpine assets are included in the Quench reportable segment from and after the date of acquisition.

Wa-2 Water Company Ltd.

On March 1, 2018, Quench Canada, Inc., a wholly-owned subsidiary of the Company, acquired substantially all of the water filtration assets and assumed certain liabilities of Wa-2 Water Company Ltd. (“Wa-2”), pursuant to an asset purchase agreement for an aggregate purchase price of $5.1 million in cash, including a final working capital adjustment of approximately $5 thousand which was paid in June 2018 (the “Wa-2 Acquisition”). Approximately $0.3 million of the aggregate purchase price was held in escrow for a period of one year by a third party for seller indemnifications. Wa-2 is a POU water filtration company based in Vancouver, British Columbia. The assets acquired consist primarily of in-place lease agreements and the related POU systems.

Acquisition-related costs incurred by the Company related to the Wa-2 Acquisition during the three and nine months ended September 30, 2018 were $9 thousand and $86 thousand, respectively. There were no acquisition-related costs incurred by the Company during the three and nine months ended September 30, 2019.

The Quench business completed the Wa-2 Acquisition to expand its installed base of POU systems in Canada.

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

Assets acquired:
Trade receivables	$	134
Inventory		158
Prepaid expenses and other current assets		6
Property, plant and equipment		424
Customer relationships		1,561
Trade names		700
Non-compete agreements		298
Goodwill		2,239
Total assets acquired		5,520
Liabilities assumed:
Accounts payable and accrued liabilities		(86)
Deferred revenue		(328)
Total liabilities assumed		(414)
Total purchase price	$	5,106

The purchase price allocated to the fair value of assets acquired, including intangibles, and liabilities assumed recorded in conjunction with the Wa-2 Acquisition is considered final. During the second quarter of 2018, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 12.9%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 12.9%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss using a discount rate of 12.9%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names and non-compete agreements to be 20 years, 12 years, and 5 years, respectively.

Goodwill is composed of synergies not valued, is deductible for tax purposes and is recorded within the Quench reporting segment.

The results of the operations of the acquired Wa-2 assets are included in the Quench reportable segment from and after the date of acquisition.

Pro Forma Financial Information

The following unaudited pro forma financial information (in thousands, except for per share amounts) for the Company gives effect to the acquisitions of: (i) PHSI, which occurred on December 18, 2018; (ii) Bluline, which occurred on December 3, 2018; (iii) AUC, which occurred on November 1, 2018; (iv) Alpine, which occurred on August 6, 2018; and (v) Wa-2, which occurred on March 1, 2018, as if each had occurred on January 1, 2018. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future.

	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenues	$	52,947	$	48,986	$	150,896	$	140,290
Net loss	$	(3,937)	$	(3,566)	$	(13,076)	$	(20,344)
Loss per share	$	(0.13)	$	(0.13)	$	(0.46)	$	(0.77)

Asset Acquisitions

The following acquisitions did not meet the definition of a business combination, so the Company accounted for these transactions as asset acquisitions. In an asset acquisition, goodwill is not recognized, but rather any excess consideration transferred over the fair value of the net assets acquired is allocated on a relative fair value basis to the identifiable net assets. In addition, acquisition-related costs are capitalized and allocated to the net assets acquired on a relative fair value basis.

Carolina Pure Water Systems, LLC

On July 15, 2019, Quench 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.

The revenues and related expenses from the acquired in-place lease agreements are included in the Quench reportable segment from the date of acquisition. The Quench business completed the Carolina Pure acquisition to expand its installed base of POU systems in the United States.

Acquisition-related costs incurred by the Company in connection with this acquisition during both the three and nine months ended September 30, 2019 were $0.1 million.

The following table summarizes the amounts for the Carolina Pure acquisition which were allocated to the fair value of aggregated net assets acquired (in thousands):

Trade receivables	$	137
Property, plant and equipment		1,350
Inventory		39
Customer relationships		4,812
Non-compete agreements		1,217
Deferred revenue		(230)
Net assets acquired	$	7,325

The assets in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 11.8%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss using a discount rate of 11.8%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 15 years and 5 years, respectively.

Aguaman, Inc.

On June 1, 2019, Quench acquired substantially all of the 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 acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future performance of the acquired assets and the resolution of certain matters as set forth in the asset purchase agreement. The undiscounted range of outcomes for the acquisition contingent considerations is $0 to $0.2 million. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States.

The revenues and related expenses from the acquired in-place lease agreements are included in the Quench reportable segment from the date of acquisition. The Quench business completed the Aguaman acquisition to expand its installed base of POU systems in the United States.

Acquisition-related costs incurred by the Company in connection with this acquisition during the three and nine months ended September 30, 2019 were $0 and $0.1 million, respectively.

The following table summarizes the amounts for the Aguaman acquisition which were allocated to the fair value of aggregated net assets acquired (in thousands):

Trade receivables	$	62
Property, plant and equipment		49
Inventory		6
Customer relationships		1,464
Deferred revenue		(37)
Net assets acquired	$	1,544

The assets in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 13.0%.

The Company determined the weighted average useful life at the date of valuation for the customer relationships to be 12 years.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 04, 2019
Document and Entity Information [Abstract]
Entity Registrant Name	AquaVenture Holdings Ltd
Entity Central Index Key	0001422841
Document Type	10-Q
Document Period End Date	Sep. 30, 2019
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		31,739,691
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Entity Shell Company	false
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3

XML

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY - USD ($) shares in Thousands, $ in Thousands	Ordinary Shares	Additional Paid-in Capital	Accumulated Other Comprehensive Income	Accumulated Deficit	Total
Beginning Balance (in shares) at Dec. 31, 2017	26,482
Beginning Balance at Dec. 31, 2017		$ 568,593	$ (17)	$ (224,380)	$ 344,196
Equity Rollforward
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings (in shares)	19
Issuance of share-based compensation, net of shares withheld to cover minimum tax withholdings		(112)			(112)
Exercise of options (number of shares)	2
Exercise of options		15			15
Share-based compensation expense		3,283			3,283
Net loss				(6,346)	(6,346)
Foreign currency translation adjustment			(83)		(83)
Ending Balance (in shares) at Mar. 31, 2018	26,503
Ending Balance at Mar. 31, 2018		571,779	(100)	(230,726)	340,953
Beginning Balance (in shares) at Dec. 31, 2017	26,482
Beginning Balance at Dec. 31, 2017		568,593	(17)	(224,380)	344,196
Equity Rollforward
Net loss					(13,999)
Foreign currency translation adjustment					(84)
Ending Balance (in shares) at Sep. 30, 2018	26,600
Ending Balance at Sep. 30, 2018		578,506	(101)	(238,379)	340,026
Beginning Balance (in shares) at Mar. 31, 2018	26,503
Beginning Balance at Mar. 31, 2018		571,779	(100)	(230,726)	340,953
Equity Rollforward
Employee Share Purchase Plan (in shares)	10
Employee Share Purchase Plan		132			132
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings (in shares)	59
Issuance of share-based compensation, net of shares withheld to cover minimum tax withholdings		(91)			(91)
Exercise of options (number of shares)	8
Exercise of options		71			71
Share-based compensation expense		3,366			3,366
Net loss				(4,921)	(4,921)
Foreign currency translation adjustment			(107)		(107)
Ending Balance (in shares) at Jun. 30, 2018	26,580
Ending Balance at Jun. 30, 2018		575,257	(207)	(235,647)	339,403
Equity Rollforward
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings (in shares)	20
Issuance of share-based compensation, net of shares withheld to cover minimum tax withholdings		(104)			(104)
Share-based compensation expense		3,353			3,353
Net loss				(2,732)	(2,732)
Foreign currency translation adjustment			106		106
Ending Balance (in shares) at Sep. 30, 2018	26,600
Ending Balance at Sep. 30, 2018		578,506	(101)	(238,379)	340,026
Beginning Balance (in shares) at Dec. 31, 2018	26,780
Beginning Balance at Dec. 31, 2018		582,127	(421)	(245,108)	336,598
Equity Rollforward
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings (in shares)	72
Issuance of share-based compensation, net of shares withheld to cover minimum tax withholdings		(620)			(620)
Exercise of options (number of shares)	82
Exercise of options		1,472			1,472
Share-based compensation expense		1,011			1,011
Net loss				(5,664)	(5,664)
Foreign currency translation adjustment			120		120
Ending Balance (in shares) at Mar. 31, 2019	26,934
Ending Balance at Mar. 31, 2019		583,990	(301)	(250,772)	332,917
Beginning Balance (in shares) at Dec. 31, 2018	26,780
Beginning Balance at Dec. 31, 2018		582,127	(421)	(245,108)	336,598
Equity Rollforward
Net loss					(13,076)
Foreign currency translation adjustment					169
Ending Balance (in shares) at Sep. 30, 2019	31,722
Ending Balance at Sep. 30, 2019		662,225	(252)	(258,184)	403,789
Beginning Balance (in shares) at Mar. 31, 2019	26,934
Beginning Balance at Mar. 31, 2019		583,990	(301)	(250,772)	332,917
Equity Rollforward
Employee Share Purchase Plan (in shares)	10
Employee Share Purchase Plan		177			177
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings (in shares)	19
Issuance of share-based compensation, net of shares withheld to cover minimum tax withholdings		(150)			(150)
Exercise of options (number of shares)	22
Exercise of options		311			311
Share-based compensation expense		1,275			1,275
Net loss				(3,475)	(3,475)
Foreign currency translation adjustment			116		116
Ending Balance (in shares) at Jun. 30, 2019	26,985
Ending Balance at Jun. 30, 2019		585,603	(185)	(254,247)	331,171
Equity Rollforward
Issuance for share-based compensation, net of shares withheld to cover minimum tax withholdings (in shares)	20
Issuance of share-based compensation, net of shares withheld to cover minimum tax withholdings		(135)			(135)
Exercise of options (number of shares)	2
Exercise of options		29			29
Share-based compensation expense		1,323			1,323
Issuance of ordinary shares, net of issuance costs		75,405			75,405
Issuance of ordinary shares, net of issuance costs (in shares)	4,715
Net loss				(3,937)	(3,937)
Foreign currency translation adjustment			(67)		(67)
Ending Balance (in shares) at Sep. 30, 2019	31,722
Ending Balance at Sep. 30, 2019		$ 662,225	$ (252)	$ (258,184)	$ 403,789

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Revenue - Performance Obligations (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2019-10-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	3 months
Revenue, remaining performance obligation	$ 20,478
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2020-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	1 year
Revenue, remaining performance obligation	$ 50,808
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2021-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	1 year
Revenue, remaining performance obligation	$ 49,924
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2022-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	1 year
Revenue, remaining performance obligation	$ 49,924
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2023-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period	1 year
Revenue, remaining performance obligation	$ 49,924
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction, Start Date [Axis]: 2024-01-01
Revenue, Remaining Performance Obligation, Expected Timing of Satisfaction [Line Items]
Revenue, remaining performance obligation expected timing of satisfaction period
Revenue, remaining performance obligation	$ 332,056

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Leases - Lease Income (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019
Lease income: sales-type leases
Interest income on lease receivables	$ 45	$ 143
Total lease income: sales-type leases	45	143
Lease income: operating leases	24,286	68,660
Total lease income	$ 24,331	$ 68,803

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Commitments and Contingencies (Tables)

9 Months Ended

Sep. 30, 2019

Commitments and Contingencies Disclosure

Schedule of changes in acquisition contingent consideration

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

	Nine Months Ended
	September 30, 2019
Acquisition contingent consideration at beginning of the period	$	3,109
Acquired during the period		930
Payments		(2,033)
Valuation adjustments		136
Interest accretion		115
Acquisition contingent consideration at end of the period	$	2,257

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Revenue (Tables)

9 Months Ended

Sep. 30, 2019

Revenue

Schedule of disaggregation of revenues

The following table represents a disaggregation of revenue for the three months ended September 30, 2019 and 2018, along with the reportable segment for each category (in thousands):

	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	9,008	$	—	$	9,008	$	9,242	$	—	$	9,242
Operating and maintenance		5,984		—		5,984		5,384		—		5,384
Total bulk water		14,992		—		14,992		14,626		—		14,626
Rental
Lease of equipment		3,921		20,365		24,286		—		16,261		16,261
Total rental		3,921		20,365		24,286		—		16,261		16,261
Product sales
Construction of plants		2,429		—		2,429		—		—		—
Sale of equipment, coffee and consumables		—		10,340		10,340		—		4,952		4,952
Total product sales		2,429		10,340		12,769		—		4,952		4,952
Financing		900		—		900		985		—		985
Total revenues	$	22,242	$	30,705	$	52,947	$	15,611	$	21,213	$	36,824

The following table represents a disaggregation of revenue for the nine months ended September 30, 2019 and 2018, along with the reportable segment for each category (in thousands):

	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	27,450	$	—	$	27,450	$	26,773	$	—	$	26,773
Operating and maintenance		17,466		—		17,466		15,909		—		15,909
Total bulk water		44,916		—		44,916		42,682		—		42,682
Rental
Lease of equipment		10,630		58,030		68,660		—		45,041		45,041
Total rental		10,630		58,030		68,660		—		45,041		45,041
Product sales
Construction of plants		6,860		—		6,860		—		—		—
Sale of equipment, coffee and consumables		—		27,651		27,651		—		13,012		13,012
Total product sales		6,860		27,651		34,511		—		13,012		13,012
Financing		2,809		—		2,809		3,048		—		3,048
Total revenues	$	65,215	$	85,681	$	150,896	$	45,730	$	58,053	$	103,783

Schedule of information and changes to contract assets and contract liabilities

The following table provides information about contract assets and contract liabilities from contracts with customers at September 30, 2019 and December 31, 2018 (in thousands):

	September 30,		December 31,
	2019		2018
Contract assets
Trade receivables, net	$	24,441	$	21,437
Current portion of long-term receivables		7,403		6,538
Long-term receivables		34,468		40,574
Total contract assets	$	66,312	$	68,549
Contract liabilities
Deferred revenue, current	$	4,621	$	3,890
Deferred revenue, non-current		11,148		10,690
Total contract liabilities	$	15,769	$	14,580

Significant changes in the contract asset and the contract liability balances during the three months ended September 30, 2019 and 2018 are as follows (in thousands):

	Three months ended				Three months ended
	September 30, 2019				September 30, 2018
	Contract assets increase/(decrease)		Contract liabilities (increase)/decrease		Contract assets increase/(decrease)		Contract liabilities (increase)/decrease
Revenue recognized that was included in the contract liability balance at the beginning of respective period	$	—	$	315	$	—	$	323
Deferred revenue acquired during the period	$	—	$	(229)	$	—	$	(714)

Significant changes in the contract asset and the contract liability balances during the nine months ended September 30, 2019 and 2018 are as follows (in thousands):

	Nine months ended				Nine months ended
	September 30, 2019				September 30, 2018
	Contract assets increase/(decrease)		Contract liabilities (increase)/decrease		Contract assets increase/(decrease)		Contract liabilities (increase)/decrease
Revenue recognized that was included in the contract liability balance at the beginning of respective period	$	—	$	4,824	$	—	$	3,360
Deferred revenue acquired during the period	$	—	$	(266)	$	—	$	(1,093)

Schedule of the expected timing of satisfaction of the remaining performance obligations

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

Remainder of 2019	$	20,478
2020	$	50,808
2021	$	49,924
2022	$	49,924
2023	$	49,924
Thereafter	$	332,056

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Business Combinations and Asset Acquisitions - Pure Health Solutions, Inc (Details) $ / shares in Units, $ in Thousands		3 Months Ended						9 Months Ended
	Dec. 18, 2018 USD ($)	Sep. 30, 2019 USD ($) $ / shares	Jun. 30, 2019 USD ($)	Mar. 31, 2019 USD ($)	Sep. 30, 2018 USD ($) $ / shares	Jun. 30, 2018 USD ($)	Mar. 31, 2018 USD ($)	Sep. 30, 2019 USD ($) $ / shares	Sep. 30, 2018 USD ($) $ / shares	Dec. 31, 2018 USD ($)
Business Acquisition [Line Items]
Post combination payoff								$ 372
Loss from operations		$ 2,955			$ (1,159)			8,104	$ (4,791)
Net loss		$ (3,937)	$ (3,475)	$ (5,664)	$ (2,732)	$ (4,921)	$ (6,346)	$ (13,076)	$ (13,999)
Increased Loss per share | $ / shares		$ (0.13)			$ (0.10)			$ (0.46)	$ (0.53)
Assets acquired:
Goodwill		$ 199,194						$ 199,194		$ 190,999
Quench | Pure Health Solutions, Inc
Business Acquisition [Line Items]
Purchase price	$ 56,600
Cash paid for acquisition	39,100
Purchase price adjustment	1,600
Post combination payoff	$ 17,500
Contract liabilities discount rate	7
Transaction related costs		0						100
Indemnification liability	$ 800
Indemnification asset	800
Restructuring charges		0						100
Restructuring accrual		$ 100						$ 100		$ 800
Assets acquired:
Cash and cash equivalents	260
Trade receivables	1,167
Inventory	1,603
Prepaid expenses and other current assets	447
Property, plant and equipment	6,945
Deferred tax assets	108
Goodwill	26,473
Total assets acquired	62,548
Liabilities assumed:
Accounts payable and accrued liabilities	(22,652)
Deferred revenue	(329)
Other long-term liabilities	(450)
Total liabilities assumed	(23,431)
Net assets acquired	$ 39,117
Quench | Pure Health Solutions, Inc | Customer Relationships
Business Acquisition [Line Items]
Discount rate for PV of Expected cash flow		15.80%						15.80%
Weighted average useful life of intangible assets	15 years
Assets acquired:
Identified intangible assets	$ 21,409
Quench | Pure Health Solutions, Inc | Trade Names
Business Acquisition [Line Items]
Discount rate for PV of Expected cash flow		15.80%						15.80%
Weighted average useful life of intangible assets	12 years
Assets acquired:
Identified intangible assets	$ 2,360
Quench | Pure Health Solutions, Inc | Non-compete agreements
Business Acquisition [Line Items]
Discount rate for PV of Expected cash flow		15.80%						15.80%
Weighted average useful life of intangible assets	5 years
Assets acquired:
Identified intangible assets	$ 1,776
Quench | Pure Health Solutions, Inc | Adjustment
Business Acquisition [Line Items]
Loss from operations		$ (1,100)						$ (1,100)
Net loss		$ (1,100)						$ (1,100)
Increased Loss per share | $ / shares		$ (0.04)						$ (0.04)
Quench | Pure Health Solutions, Inc | Adjustment | Selling, General and Administrative Expenses
Business Acquisition [Line Items]
Amortization expense		$ 1,100

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Business Combinations and Asset Acquisitions - Wa-2 Water Company Ltd (Details) - USD ($) $ in Thousands		3 Months Ended		9 Months Ended
	Mar. 01, 2018	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Assets acquired:
Goodwill		$ 199,194		$ 199,194		$ 190,999
Quench Canada Inc | Wa-2 Water Company Ltd
Business Acquisition [Line Items]
Purchase price	$ 5,100
Amount held in escrow by third party	$ 300
Escrow deposit period	1 year
Working capital adjustment	$ 5
Transaction related costs		$ 0	$ 9	$ 0	$ 86
Assets acquired:
Trade receivables	134
Inventory	158
Prepaid expenses and other current assets	6
Property, plant and equipment	424
Goodwill	2,239
Total assets acquired	5,520
Liabilities assumed:
Accounts payable and accrued liabilities	(86)
Deferred revenue	(328)
Total liabilities assumed	(414)
Net assets acquired	5,106
Quench Canada Inc | Wa-2 Water Company Ltd | Customer Relationships
Assets acquired:
Identified intangible assets	1,561
Liabilities assumed:
Discounted rate				12.90%
Weighted average useful life of intangible assets				20 years
Quench Canada Inc | Wa-2 Water Company Ltd | Trade Names
Assets acquired:
Identified intangible assets	700
Liabilities assumed:
Discounted rate				12.90%
Weighted average useful life of intangible assets				12 years
Quench Canada Inc | Wa-2 Water Company Ltd | Non-compete agreements
Assets acquired:
Identified intangible assets	$ 298
Liabilities assumed:
Discounted rate				12.90%
Weighted average useful life of intangible assets				5 years

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Significant Concentrations, Risks and Uncertainties

9 Months Ended

Sep. 30, 2019

Significant Concentrations, Risks and Uncertainties

Significant Concentrations, Risks and Uncertainties

12. Significant Concentrations, Risks and Uncertainties

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

For the three and nine months ended September 30, 2019, a significant portion of the Company’s revenues were derived from territories and countries in the Caribbean region. Demand for water in the Caribbean region is impacted by, among other things, levels of rainfall, natural disaster or other catastrophic events, the tourism industry and demand from our industrial clients. Destruction caused by tropical storms and hurricanes, high levels of rainfall, downturn in the level of tourism and demand for real estate could all adversely impact the future performance of the Company as well as cause delays in collections from the Company’s customers.

At September 30, 2019, a significant portion of the Company’s property, plant and equipment is located in the Caribbean region. The Caribbean islands are situated in a geography where tropical storms and hurricanes occur with regularity, especially during certain times of the year. The Company designs its plant facilities to withstand such conditions; however, a major storm could result in plant damage or periods of reduced consumption or unavailability of electricity or source seawater needed to produce water in one or more of our locations. It is the Company’s policy to maintain adequate levels of property and casualty insurance; however, the Company only insures certain of its plants for wind damage.

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

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Loss per Share

9 Months Ended

Sep. 30, 2019

Loss per Share

Loss per Share

8. Loss per Share

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

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Numerator:
Net loss	$	(3,937)	$	(2,732)	$	(13,076)	$	(13,999)
Denominator:
Weighted-average ordinary shares outstanding - basic and diluted		31,201		26,590		28,354		26,544
Loss per share - basic and diluted	$	(0.13)	$	(0.10)	$	(0.46)	$	(0.53)

Given that the Company had a net loss for the three and nine months ended September 30, 2019 and 2018, the calculation of diluted loss per share is computed using basic weighted average ordinary shares outstanding.

Approximately 4.1 million weighted-average outstanding share awards for both the three and nine months ended September 30, 2019, respectively, were excluded from the calculation of diluted earnings per share because their effect was antidilutive. Approximately 4.1 million weighted-average outstanding share awards for the three and nine months ended September 30, 2018, respectively, were excluded from the calculation of diluted earnings per share because their effect was antidilutive.

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Revenue

9 Months Ended

Sep. 30, 2019

Revenue

Revenues

4. Revenue

Disaggregation of Revenue

The following table represents a disaggregation of revenue for the three months ended September 30, 2019 and 2018, along with the reportable segment for each category (in thousands):

	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	9,008	$	—	$	9,008	$	9,242	$	—	$	9,242
Operating and maintenance		5,984		—		5,984		5,384		—		5,384
Total bulk water		14,992		—		14,992		14,626		—		14,626
Rental
Lease of equipment		3,921		20,365		24,286		—		16,261		16,261
Total rental		3,921		20,365		24,286		—		16,261		16,261
Product sales
Construction of plants		2,429		—		2,429		—		—		—
Sale of equipment, coffee and consumables		—		10,340		10,340		—		4,952		4,952
Total product sales		2,429		10,340		12,769		—		4,952		4,952
Financing		900		—		900		985		—		985
Total revenues	$	22,242	$	30,705	$	52,947	$	15,611	$	21,213	$	36,824

The following table represents a disaggregation of revenue for the nine months ended September 30, 2019 and 2018, along with the reportable segment for each category (in thousands):

	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	27,450	$	—	$	27,450	$	26,773	$	—	$	26,773
Operating and maintenance		17,466		—		17,466		15,909		—		15,909
Total bulk water		44,916		—		44,916		42,682		—		42,682
Rental
Lease of equipment		10,630		58,030		68,660		—		45,041		45,041
Total rental		10,630		58,030		68,660		—		45,041		45,041
Product sales
Construction of plants		6,860		—		6,860		—		—		—
Sale of equipment, coffee and consumables		—		27,651		27,651		—		13,012		13,012
Total product sales		6,860		27,651		34,511		—		13,012		13,012
Financing		2,809		—		2,809		3,048		—		3,048
Total revenues	$	65,215	$	85,681	$	150,896	$	45,730	$	58,053	$	103,783

Contract Assets and Liabilities

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

The following table provides information about contract assets and contract liabilities from contracts with customers at September 30, 2019 and December 31, 2018 (in thousands):

	September 30,		December 31,
	2019		2018
Contract assets
Trade receivables, net	$	24,441	$	21,437
Current portion of long-term receivables		7,403		6,538
Long-term receivables		34,468		40,574
Total contract assets	$	66,312	$	68,549
Contract liabilities
Deferred revenue, current	$	4,621	$	3,890
Deferred revenue, non-current		11,148		10,690
Total contract liabilities	$	15,769	$	14,580

Significant changes in the contract asset and the contract liability balances during the three months ended September 30, 2019 and 2018 are as follows (in thousands):

	Three months ended				Three months ended
	September 30, 2019				September 30, 2018
	Contract assets increase/(decrease)		Contract liabilities (increase)/decrease		Contract assets increase/(decrease)		Contract liabilities (increase)/decrease
Revenue recognized that was included in the contract liability balance at the beginning of respective period	$	—	$	315	$	—	$	323
Deferred revenue acquired during the period	$	—	$	(229)	$	—	$	(714)

Significant changes in the contract asset and the contract liability balances during the nine months ended September 30, 2019 and 2018 are as follows (in thousands):

	Nine months ended				Nine months ended
	September 30, 2019				September 30, 2018
	Contract assets increase/(decrease)		Contract liabilities (increase)/decrease		Contract assets increase/(decrease)		Contract liabilities (increase)/decrease
Revenue recognized that was included in the contract liability balance at the beginning of respective period	$	—	$	4,824	$	—	$	3,360
Deferred revenue acquired during the period	$	—	$	(266)	$	—	$	(1,093)

The Company had no asset impairment charges related to contract assets during the three and nine months ended September 30, 2019 and 2018.

Transaction Price Allocated to Remaining Performance Obligations

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

Remainder of 2019	$	20,478
2020	$	50,808
2021	$	49,924
2022	$	49,924
2023	$	49,924
Thereafter	$	332,056

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

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Segment Reporting - Information by Reportable Segment (Details) $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019 USD ($)	Jun. 30, 2019 USD ($)	Mar. 31, 2019 USD ($)	Sep. 30, 2018 USD ($)	Jun. 30, 2018 USD ($)	Mar. 31, 2018 USD ($)	Sep. 30, 2019 USD ($) segment	Sep. 30, 2018 USD ($)
Reportable segment and reconciliation
Number of operating segments | segment							2
Number of reportable segments | segment							2
Total revenues	$ 52,947			$ 36,824			$ 150,896	$ 103,783
Total gross profit	26,473			19,667			77,360	54,898
Selling, general and administrative expenses	23,518			20,826			69,256	59,689
Income (loss) from operations	2,955			(1,159)			8,104	(4,791)
Other expense, net	(6,447)			(3,624)			(19,663)	(10,520)
Loss before income tax expense	(3,492)			(4,783)			(11,559)	(15,311)
Income tax expense (benefit)	445			(2,051)			1,517	(1,312)
Net loss	(3,937)	$ (3,475)	$ (5,664)	(2,732)	$ (4,921)	$ (6,346)	(13,076)	(13,999)
Other information:
Depreciation and amortization	14,918			8,710			39,454	24,761
Expenditures for long-lived assets	11,704			5,715			28,639	12,930
Amortization of deferred financing fees	253			237			765	712
Corporate and other
Reportable segment and reconciliation
Selling, general and administrative expenses	1,117			1,016			3,639	3,227
Income (loss) from operations	(1,117)			(1,016)			(3,639)	(3,227)
Other information:
Amortization of deferred financing fees	134			122			402	366
Seven Seas Water
Reportable segment and reconciliation
Total revenues	22,242			15,611			65,215	45,730
Seven Seas Water | Operating Segments
Reportable segment and reconciliation
Total revenues	22,242			15,611			65,215	45,730
Total gross profit	11,456			8,840			35,429	25,709
Selling, general and administrative expenses	6,914			7,616			21,532	22,361
Income (loss) from operations	4,542			1,224			13,897	3,348
Other information:
Depreciation and amortization	6,319			3,672			17,917	10,911
Expenditures for long-lived assets	7,121			396			17,544	1,261
Amortization of deferred financing fees	68			64			211	194
Quench
Reportable segment and reconciliation
Total revenues	30,705			21,213			85,681	58,053
Quench | Operating Segments
Reportable segment and reconciliation
Total revenues	30,705			21,213			85,681	58,053
Total gross profit	15,017			10,827			41,931	29,189
Selling, general and administrative expenses	15,487			12,194			44,085	34,101
Income (loss) from operations	(470)			(1,367)			(2,154)	(4,912)
Other information:
Depreciation and amortization	8,599			5,038			21,537	13,850
Expenditures for long-lived assets	4,583			5,319			11,095	11,669
Amortization of deferred financing fees	51			51			152	152
Bulk water
Reportable segment and reconciliation
Total revenues	14,992			14,626			44,916	42,682
Total gross profit	8,034			7,855			24,435	22,661
Bulk water | Seven Seas Water
Reportable segment and reconciliation
Total revenues	14,992			14,626			44,916	42,682
Bulk water | Seven Seas Water | Operating Segments
Reportable segment and reconciliation
Total revenues	14,992			14,626			44,916	42,682
Total gross profit	8,034			7,855			24,435	22,661
Rental
Reportable segment and reconciliation
Total revenues	24,286			16,261			68,660	45,041
Total gross profit	13,041			9,131			37,762	24,801
Rental | Seven Seas Water
Reportable segment and reconciliation
Total revenues	3,921						10,630
Rental | Seven Seas Water | Operating Segments
Reportable segment and reconciliation
Total revenues	3,921						10,630
Total gross profit	2,109						7,046
Rental | Quench
Reportable segment and reconciliation
Total revenues	20,365			16,261			58,030	45,041
Rental | Quench | Operating Segments
Reportable segment and reconciliation
Total revenues	20,365			16,261			58,030	45,041
Total gross profit	10,932			9,131			30,716	24,801
Product sales
Reportable segment and reconciliation
Total revenues	12,769			4,952			34,511	13,012
Total gross profit	4,498			1,696			12,354	4,388
Product sales | Seven Seas Water
Reportable segment and reconciliation
Total revenues	2,429						6,860
Product sales | Seven Seas Water | Operating Segments
Reportable segment and reconciliation
Total revenues	2,429						6,860
Total gross profit	413						1,139
Product sales | Quench
Reportable segment and reconciliation
Total revenues	10,340			4,952			27,651	13,012
Product sales | Quench | Operating Segments
Reportable segment and reconciliation
Total revenues	10,340			4,952			27,651	13,012
Total gross profit	4,085			1,696			11,215	4,388
Financing
Reportable segment and reconciliation
Total revenues	900			985			2,809	3,048
Total gross profit	900			985			2,809	3,048
Financing | Seven Seas Water
Reportable segment and reconciliation
Total revenues	900			985			2,809	3,048
Financing | Seven Seas Water | Operating Segments
Reportable segment and reconciliation
Total revenues	900			985			2,809	3,048
Total gross profit	$ 900			$ 985			$ 2,809	$ 3,048

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Loss per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands	3 Months Ended						9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018
Numerator:
Net loss	$ (3,937)	$ (3,475)	$ (5,664)	$ (2,732)	$ (4,921)	$ (6,346)	$ (13,076)	$ (13,999)
Denominator:
Weighted-average ordinary shares outstanding - basic and diluted	31,201			26,590			28,354	26,544
Loss per share - basic and diluted	$ (0.13)			$ (0.10)			$ (0.46)	$ (0.53)
Weighted average outstanding share awards excluded from the calculation of diluted earnings per share	4,100			4,100			4,100	4,100

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Leases - sales-type lease receivables (Details) $ in Thousands	Sep. 30, 2019 USD ($)
sales-type lease receivables
Remainder of 2019	$ 190
2020	761
2021	602
2022	469
2023	416
Total future minimum lease payments	2,438
Less imputed lease interest	(326)
Total sales-type lease receivables	$ 2,112

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Revenue - Disaggregation of Revenues (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Disaggregation of Revenue [Line Items]
Total revenues	$ 52,947	$ 36,824	$ 150,896	$ 103,783
Bulk water
Disaggregation of Revenue [Line Items]
Total revenues	14,992	14,626	44,916	42,682
Water Delivery
Disaggregation of Revenue [Line Items]
Total revenues	9,008	9,242	27,450	26,773
Operating and maintenance
Disaggregation of Revenue [Line Items]
Total revenues	5,984	5,384	17,466	15,909
Rental
Disaggregation of Revenue [Line Items]
Total revenues	24,286	16,261	68,660	45,041
Lease Of Equipment
Disaggregation of Revenue [Line Items]
Total revenues	24,286	16,261	68,660	45,041
Financing
Disaggregation of Revenue [Line Items]
Total revenues	900	985	2,809	3,048
Product sales
Disaggregation of Revenue [Line Items]
Total revenues	12,769	4,952	34,511	13,012
Construction of plants
Disaggregation of Revenue [Line Items]
Total revenues	2,429		6,860
Sale of equipment, coffee and consumables
Disaggregation of Revenue [Line Items]
Total revenues	10,340	4,952	27,651	13,012
Seven Seas Water
Disaggregation of Revenue [Line Items]
Total revenues	22,242	15,611	65,215	45,730
Seven Seas Water | Bulk water
Disaggregation of Revenue [Line Items]
Total revenues	14,992	14,626	44,916	42,682
Seven Seas Water | Water Delivery
Disaggregation of Revenue [Line Items]
Total revenues	9,008	9,242	27,450	26,773
Seven Seas Water | Operating and maintenance
Disaggregation of Revenue [Line Items]
Total revenues	5,984	5,384	17,466	15,909
Seven Seas Water | Rental
Disaggregation of Revenue [Line Items]
Total revenues	3,921		10,630
Seven Seas Water | Lease Of Equipment
Disaggregation of Revenue [Line Items]
Total revenues	3,921		10,630
Seven Seas Water | Financing
Disaggregation of Revenue [Line Items]
Total revenues	900	985	2,809	3,048
Seven Seas Water | Product sales
Disaggregation of Revenue [Line Items]
Total revenues	2,429		6,860
Seven Seas Water | Construction of plants
Disaggregation of Revenue [Line Items]
Total revenues	2,429		6,860
Quench
Disaggregation of Revenue [Line Items]
Total revenues	30,705	21,213	85,681	58,053
Quench | Rental
Disaggregation of Revenue [Line Items]
Total revenues	20,365	16,261	58,030	45,041
Quench | Lease Of Equipment
Disaggregation of Revenue [Line Items]
Total revenues	20,365	16,261	58,030	45,041
Quench | Product sales
Disaggregation of Revenue [Line Items]
Total revenues	10,340	4,952	27,651	13,012
Quench | Sale of equipment, coffee and consumables
Disaggregation of Revenue [Line Items]
Total revenues	$ 10,340	$ 4,952	$ 27,651	$ 13,012

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Leases (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)
Lease Cost
Operating lease cost	$ 769	$ 2,140
Short-term lease cost	120	370
Variable lease cost	2	10
Total lease cost	$ 891	$ 2,520
Weighted-average remaining lease term	7 years 2 months 12 days	7 years 2 months 12 days
Weighted-average remaining lease term	10.00%	10.00%
Cash paid for operating lease		$ 1,700

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CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) shares in Thousands, $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
CONSOLIDATED BALANCE SHEETS
Allowances	$ 1,109	$ 1,034
Common stock par value	$ 0	$ 0
Common stock authorized	250,000	250,000
Common stock issued	31,722	26,780
Common stock outstanding	31,722	26,780

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Description of the Business

9 Months Ended

Sep. 30, 2019

Description of the Business

Description of the Business

1. Description of the Business

AquaVenture Holdings Limited is a British Virgin Islands (“BVI”) company that was formed on June 17, 2016. AquaVenture Holdings Limited and its subsidiaries (collectively, “AquaVenture” or the “Company”) provides its customers Water‑as‑a‑Service® (“WAAS  ®”) solutions through two operating platforms: Seven Seas Water and Quench. Both operations are critical to AquaVenture, which is headquartered in the BVI.

Seven Seas Water offers WAAS solutions by providing outsourced desalination, wastewater treatment and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers. Seven Seas Water’s desalination solutions utilize reverse osmosis and other purification technologies to produce potable and high purity industrial process water in high volumes for customers operating in regions with limited access to potable water. Through this outsourced desalination service model, Seven Seas Water assumes responsibility for designing, financing, constructing, operating and maintaining the water treatment facilities. In exchange, Seven Seas Water enters into long‑term agreements to sell to customers agreed‑upon quantities of water that meet specified water quality standards. For its wastewater treatment and water reuse solutions, Seven Seas Water designs, fabricates and installs plants which can be sold or leased to customers for a contractual term. The wastewater treatment and water reuse solutions offered include scalable modular treatment plants, field-erected plants and temporary bypass plants.

Seven Seas Water currently operates in the Caribbean region, the United States and in South America and is pursuing new opportunities in North America, the Caribbean, South America, Africa, the Middle East and other select markets. Seven Seas Water is supported by operations centers in Tampa, Florida and Houston, Texas, which provide business development, engineering, field service support, procurement and administrative functions.

Quench offers WAAS solutions by providing bottleless filtered water coolers and related services through direct and indirect sales channels. Through its direct sales channel, Quench primarily rents and services point-of-use (“POU”) units to institutional and commercial customers. Quench’s typical initial rental contract ranges from two to four years in duration and contains an automatic renewal provision. Quench’s indirect sales channel provides POU systems, filters, parts and services to a network of approximately 250 dealers and retailers.

Quench primarily operates throughout the United States and Canada. Quench is supported by a primary operations center in King of Prussia, Pennsylvania, which provides marketing and business development, field service and supply chain support, customer care and administrative functions.

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Lease (Tables)

9 Months Ended

Sep. 30, 2019

Leases

Summary of lease cost

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

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Lease Cost
Operating lease cost	$	769	$	2,140
Short-term lease cost		120		370
Variable lease cost		2		10
Total lease cost	$	891	$	2,520

Summary of maturities of operating lease liabilities

As of September 30, 2019, the maturities of the Company’s operating lease liabilities were as follows (in thousands):

Remainder of 2019	$	685
2020		2,537
2021		2,552
2022		2,451
2023		2,065
Thereafter		6,305
Total future minimum lease payments		16,595
Less imputed lease interest		(5,023)
Total lease liabilities	$	11,572

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

2019	$	2,097
2020		905
2021		990
2022		856
2023		773
Thereafter		5,117
Total future minimum lease payments	$	10,738

Summary of components of lease income

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

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Lease income: sales-type leases
Profit at lease commencement	$	—	$	—
Interest income on lease receivables		45		143
Total lease income: sales-type leases		45		143
Lease income: operating leases		24,286		68,660
Total lease income	$	24,331	$	68,803

Summary of future minimum rental revenues to be generated from the leased assets under non-cancelable operating leases

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

Remainder of 2019	$	18,863
2020	$	53,881
2021	$	34,973
2022	$	22,444
2023	$	15,735
Thereafter	$	6,612

Summary of maturities of the Company’s sales-type lease receivables.

As of September 30, 2019, the maturities of the Company’s sales-type lease receivables are as follows (in thousands):

Remainder of 2019	$	190
2020		761
2021		602
2022		469
2023		416
Thereafter		—
Total future minimum lease payments		2,438
Less imputed lease interest		(326)
Total sales-type lease receivables	$	2,112

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Summary of Significant Accounting Policies

Basis of Presentation

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, certain information and footnotes normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of September 30, 2019, the unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, 2019 and 2018, the unaudited condensed consolidated statements of changes in equity for the three and nine months ended September 30, 2019 and 2018, and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018. The unaudited condensed consolidated balance sheet as of December 31, 2018 was based on the audited consolidated balance sheet as of December 31, 2018, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended, but restated for adoption of new accounting guidance which is further explained in the “Adoption of New Accounting Pronouncements” section below.

The unaudited condensed consolidated financial statements include the accounts of AquaVenture Holdings Limited and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include: accounting for revenue from contracts with customers and the determination of transaction prices and allocation of revenues to remaining performance obligations; accounting for leases and the determination of operating lease liabilities and right-of-use assets; accounting for goodwill and identifiable intangible assets and any related impairment; property, plant and equipment and any related impairment; contract costs and any related impairment; share‑based compensation; allowance for doubtful accounts; obligations for asset retirement; acquisition contingent consideration; and valuation of deferred income taxes. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

Lessee accounting

Lessee accounting

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

At the time of contract inception, the Company determines if an arrangement is or contains a lease. If the arrangement contains a lease, the Company recognizes a right-of-use asset and an operating lease liability at the lease commencement date. Lease expense for lease payments made is recognized on a straight-line basis over the lease term.

The operating lease liability is initially measured at the present value of the unpaid lease payments at the lease commencement date. The current portion of the Company’s operating lease liabilities are recorded within accrued liabilities in the consolidated balance sheets.

The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the operating lease liability adjusted for lease payments made at or before the lease commencement date, plus any initial direct costs incurred less any lease incentives received. The right-of-use asset is subsequently measured throughout the lease term at the carrying amount of the operating lease liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of lease incentives received. Right-of-use assets are periodically reviewed for impairment whenever events or changes in circumstances arise. During the three and nine months ended September 30, 2019, the Company had incurred no impairment charges related to right-of-use assets.

Key estimates and judgments in determining both the operating lease liability and right-of-use asset include the determination of (i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) the lease term and (iii) the lease payments.

The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate. Generally, the Company cannot determine the interest rate implicit in the lease because it does not have access to the lessor’s estimated residual value or the amount of the lessor’s deferred initial direct costs. Therefore, the Company generally derives an incremental borrowing rate as the discount rate for the lease. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a Company option to extend (or not to terminate) the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the lessor.

Lease payments included in the measurement of operating lease liabilities are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date; and

· the exercise price of a Company option to purchase the underlying asset if the Company is reasonably certain to exercise the option.

In certain instances, the Company's leases include non-lease components, such as equipment maintenance or common area maintenance. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company has not elected the practical expedient to account for the lease and non-lease components as a single lease component and has elected (for all classes of underlying assets) to account for these components separately. The Company allocates the consideration in the contract to the lease and non-lease components based on each component's relative standalone price. The Company determines standalone prices for the lease components based on the prices for which other lessors lease similar assets on a standalone basis. The Company determines standalone prices for the non-lease components based on the prices that suppliers might charge for those types of services on a standalone basis. If observable standalone prices are not readily available, the Company estimates the standalone prices maximizing the use of observable information.

The Company has elected to utilize the short-term lease exemption and not recognize a right-of-use asset and corresponding operating lease liability for leases with expected terms of 12 months or less. The Company recognizes the lease payments associated with its short-term leases on a straight-line basis over the lease term.

Lessor accounting

Lessor accounting

The Company generates revenues through the lease of its bulk water facilities, wastewater treatment and water reuse equipment, and filtered water and related systems equipment to customers. In certain instances, the Company enters into a contract with a customer but must construct the underlying asset, including bulk water facilities and wastewater treatment and water reuse equipment, prior to its lease.

At the time of contract inception, the Company determines if an arrangement is or contains a lease.

Customer contracts that contain leases, which can be explicit or implicit in the contract, are generally classified as either operating leases or sales-type leases and can contain both lease and non-lease components, including operating and maintenance services (“O&M”) of the Company-owned equipment. As part of its adoption of authoritative guidance on leases on January 1, 2019, the Company elected the practical expedient for all classes of underlying assets to not separate the lease and non-lease components if certain conditions are met, including the classification of the lease component as operating and the revenue recognition pattern of both the lease and non-lease components. The Company will account for the contract with the customer as a combined component under the respective authoritative guidance for the predominant element in the contract, the lease or non-lease component.

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

If the customer contract contains or is accounted for as a lease, the key estimates and judgments used by the Company in accounting for the lease as a lessor include the following: (i) lease term, (ii) the economic life of the underlying leased asset, (iii) determination of lease payments and (iv) determination of the fair value at the time of contract inception and the residual value of the underlying leased asset.

The lease term for the Company’s leases includes the noncancelable period of the lease, plus any additional periods covered by either a lessee option to extend (or not to terminate) the lease that the lessee is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the Company. Contracts entered into with customers can include either the option to renew or an auto-renewing provision that results in the automatic extension of the existing contract. In certain instances, key provisions such as the lease payment or term of the renewal are not stated and are subject to negotiation.

The economic life of the underlying leased asset is determined to be either the period over which the asset is expected to be economically usable, or where the benefits it can produce exceed the cost to replace or undertake major repairs. In certain instances, the economic life of the underlying leased asset can exceed the useful life assigned by the Company.

Lease payments that are accounted for as rental revenue are comprised of the following:

· fixed payments;

· variable lease payments that depend on an index or rate, initially measured using the index or rate at the lease commencement date;

· the exercise price of a lessee option to purchase the underlying asset if the lessee is reasonably certain to exercise the option; and

· payments for penalties for the termination of a lease if the term reflects the lessee terminating the lease.

The Company’s leases do not typically include a requirement for the customer to guarantee the residual value of the underlying leased asset. Variable lease payments that do not depend on an index or rate are excluded from the determination of lease payments.

The fair value of the underlying leased asset at contract inception and residual value of underlying leased asset at the end of the term of the lease are determined based on the price that would be received to sell an asset in an orderly transaction at the time of valuation. The Company’s risk management strategy for protecting the residual value of the underlying assets include the ongoing maintenance by the Company during the lease term as well as clauses and other protections within the lease agreements which require the lessee to return the underlying asset in working condition at the end of the lease term.

At contract inception, the Company determines the lease classification of the underlying asset. The Company considers inputs such as the lease term, lease payments, fair value of the underlying asset and residual value of the underlying asset when assessing the classification. The discount rate applied to the unpaid lease payments is the interest rate implicit in the lease. The rate implicit in the lease is the rate of interest that, at a given date, causes the aggregate present value of (a) the lease payments and (b) the amount that the Company expects to derive from the underlying asset following the end of the lease term to equal the sum of (1) the fair value of the underlying asset minus any related investment tax credit retained and expected to be realized by the Company and (2) any deferred initial direct costs of the Company.

In certain instances, contracts with customers may also include the option for the customer to purchase the underlying asset at the end of the lease term. When applicable and certain conditions are met, the Company will incorporate the stated purchase price into the determination of its implied interest rate.

Revenue Recognition

Revenue Recognition

Through the Seven Seas Water and Quench operating platforms, the Company generates revenues from the following primary sources: (i) bulk water sales and services; (ii) service concession arrangements; (iii) rental of equipment; and (iv) product sales. The revenue recognition policy for each of the primary sources of revenue are as follows:

Bulk Water Sales and Services.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers with a single performance obligation to deliver bulk water or a series of performance obligations to perform substantially the same services with the same pattern of transfer, which can include the operations and maintenance (“O&M”) of a customer-owned or leased plant. The Company recognizes revenues from the delivery of bulk water or the performance of bulk water services at the time the water or services are delivered to the customers in accordance with the contractual agreements. Billings to the customer for both bulk water and the bulk water services are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for bulk water sales and service can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenue will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. Estimates of revenue for unbilled water are recorded when meter readings occur at a time other than the end of a period. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period. Revenues generated from both the delivery of bulk water and performance of services related to bulk water are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Certain contracts with customers which require the construction of facilities to provide bulk water to a specific customer include two performance obligations, including an implicit lease for the bulk water facilities and bulk water services, and a non-lease component related to O&M services. The implicit lease performance obligation is generally accounted for as an operating lease as a result of the provisions of the contract. As the bulk water services are deemed to be the more predominant element, the Company considers the arrangement to be a combined bulk water component. The calculated transaction price can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied and contractually established rates. The revenue recognition pattern for both the lease and non-lease components are the same, with revenues being recognized ratably over the contract period as water is delivered to the customer. Revenues generated from both the lease and non-lease performance obligations are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Service Concession Arrangements.  Through the Seven Seas Water operating platform, the Company enters into contracts with customers that are determined to be service concession arrangements. Service concession arrangements are agreements entered into with a public sector entity which controls both (i) the ability to modify or approve the services and prices provided by the operating company and (ii) beneficial entitlement to, or residual interest in, the infrastructure at the end of the term of the agreement. Service concession arrangements typically include more than one performance obligation, including the construction of infrastructure for the customer and an obligation to provide O&M services for the infrastructure constructed for the customer. Billings to the customer for service concession arrangements are typically based on the volume of water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for service concession arrangements includes, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenues will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be supplied at contractually established rates. The transaction price is allocated to the identified performance obligations based on the relative standalone selling prices of the identified performance obligations.

The transaction price allocated to the construction of infrastructure performance obligation is recognized as product sales within the consolidated statements of operations and comprehensive income. Product sales are recognized over time, using the input method based on cost incurred, which typically begins at commencement of the construction with revenue being fully recognized upon the completion of the infrastructure as control of the infrastructure is, or is deemed to be, transferred to the customer. In addition, service concession contracts typically include a difference in timing of when control is, or is deemed to be, transferred and the collection of cash receipts, which are collected over the term of the entire arrangement. The timing difference could result in a significant financing component for the construction performance obligations if determined to be a material component of the transaction price. If a significant financing component is identified, the future cash flows included in the transaction price allocated to the construction performance obligations are discounted using a discount rate comparable to a market-based borrowing rate specific to both the customer and terms of the contract. The resulting present value of the allocated future cash flows is recorded as construction revenue with a related long-term receivable as control of the infrastructure is, or is deemed to be, transferred to the customer while the discount amount is considered to be the significant financing component. Future cash flows received from the customer related to the construction performance obligations are bifurcated between principal repayment of the long-term receivable and the imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income as providing financing to our customers is a core component of our business model.

The transaction price allocated to the O&M performance obligation is recorded as bulk water revenue within the consolidated statements of operations and comprehensive income as the services are provided to the customer. A contract asset or liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period.

Rental of Equipment.  Through the Seven Seas Water and Quench operating platforms, the Company generates revenues through the rental of its wastewater treatment and water reuse equipment and filtered water and related systems to customers. Rental agreements classified as operating leases can contain both lease and non-lease components, including O&M services on Company-owned equipment. For rental agreements that meet all conditions of the elected practical expedient to not separate lease and non-lease components and where the lease component is determined to be the predominant element of the contract, the Company allocates all revenues under the contract to the lease component of the contract. Billings to the customer for the rental of this equipment, which generally occur either monthly or quarterly, are based on the rental rate as stated within the rental agreement. The transaction price is based on the minimum lease payment as stated within the rental agreement. Rental revenues, including revenues in connection with certain installation type activities are recognized ratably over the rental agreement term and amounts paid by customers in excess of recognizable revenue are recorded as a contract liability, or deferred revenue, in the consolidated balance sheets.

Certain revenues associated with shipping, delivery, installation or similar activities that occur prior to lease commencement do not provide a service to the lessee and are not a non-lease component of the contract. Payments for these activities are recorded as prepaid lease payments which are recognized ratably with the rental revenue over the lease term. Upon the expiration of the initial rental agreement term, the Company may enter into rental agreement extensions in which revenues are recognized ratably over the extension term.

Revenues generated under these rental agreements are recorded as rental revenue within the consolidated statements of operations and comprehensive income.

Product Sales.  Through both the Seven Seas Water and Quench operating platforms, the Company enters into contracts to construct desalination and wastewater treatment and water reuse equipment and facilities and to sell customers water and related filtration equipment, coffee and consumables, which may include contracts accounted for as sales-type leases.

Contracts with customers to sell water and related filtration equipment and coffee and consumables typically include a single performance obligation. The Company recognizes revenues at the time the equipment, coffee or consumables is transferred to the customer, which can be upon either shipment or delivery to the customer. The transaction price is based on the contractual price with the customer. Shipping and handling costs paid by the customer are included in revenues. Billings to the customer for the sale of water and related filtration equipment, coffee and consumables occur at the time the product is transferred to the customer and are based on contract price.

Contracts with customers to construct desalination and wastewater treatment and water reuse equipment and facilities typically include a single performance obligation. Construction and equipment revenues are recognized over time, using the input method based on cost incurred, which typically begins at the later of commencement of the construction or at the time the infrastructure is, or is deemed to be, transferred to the customer with revenue being fully recognized upon the completion of the infrastructure. Billings to the customer to construct desalination and wastewater treatment and water reuse equipment and facilities can occur at contractual intervals throughout the construction period, at the time the equipment or facility is deemed transferred to the customer, or, in the case of sales-type leases, as stated within the rental agreement. The transaction price is based on the contractual price with the customer.

For contracts deemed to be, or that include a sales-type lease, the transaction price is based on the minimum lease payments as stated within the rental agreement. For contracts that contain both a lease and non-lease components, the transaction price is allocated based on the relative standalone selling prices of the lease and non-lease components. The transaction price, excluding variable lease payments, allocated to the lease component is discounted at the implicit rate of the contract and is recognized as revenue upon commencement of the lease.

Revenues generated under these contracts are recorded as product sales revenue within the consolidated statements of operations and comprehensive income.

Future cash flows received from sales-type leases are bifurcated between principal repayment of the long-term receivable and the related imputed interest income related to the customer financing. The interest income is recorded as financing revenue within the consolidated statements of operations and comprehensive income.

Contract Costs

Contract Costs

Contract costs includes contract acquisition costs and contract fulfillment costs, which are all recorded within other assets in the consolidated balance sheets.

Contract Acquisition Costs.    Prior to January 1, 2019, the Company accounted for initial direct costs incurred by the Company to originate leases as deferred lease costs. The costs capitalized were directly related to the negotiation and execution of leases and primarily consisted of internal compensation and benefits as lease origination activities were performed internally by the Company. Deferred lease costs capitalized prior to the adoption of the authoritative guidance on leases will be amortized on a straight-line basis over the remaining lease term.

For all leases originated on or after January 1, 2019, subsequent to the adoption of authoritative guidance on leases, the incremental costs incurred by the Company to originate contracts with customers are capitalized as contract acquisition costs. Contract acquisition costs, which generally include commissions and other costs that are only incurred as a result of obtaining a contract, are capitalized when the incremental costs are expected to be recovered over the contract period. All other costs incurred regardless of obtaining a contract are expensed as incurred. Contract acquisition costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the initial contract term, on a basis consistent with the transfer of goods or services to the customer to which the costs relate.

Contract acquisition costs, net as of September 30, 2019 and December 31, 2018 were $4.8 million and $3.7 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Contract Fulfillment Costs. Costs incurred by the Company to fulfill a contract with a customer are capitalized when the costs generate or enhance resources that will be used in satisfying future performance obligations of the contract and the costs are expected to be recovered. Capitalized contract fulfillment costs generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to fulfill the contract, including shipping and installation activities. Contract fulfillment costs are amortized over the period the costs are expected to contribute directly or indirectly to future cash flows, which is generally over the initial contract term, on a basis consistent with the transfer of good or services to the customer to which the costs relate.

Contract fulfillment costs, net as of September 30, 2019 and December 31, 2018 were $5.4 million and $1.5 million, respectively, and were recorded in other assets in the consolidated balance sheets.

Total contract costs amortization expense for the three and nine months ended September 30, 2019 were $1.5 million and $3.6 million, respectively. Total contract cost amortization expense for the three and nine months ended September 30, 2018 were $0.7 million and $2.0 million respectively.

Contract costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company had no impairment charges related to contract costs during the three and nine months ended September 30, 2019 and 2018.

Adoption of New Accounting Pronouncements

Adoption of New Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board, or FASB, issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. During 2018, the FASB issued additional authoritative guidance which, among other things, provided an option to apply transition provisions under the standard at adoption date rather than the earliest comparative period presented as well as added a practical expedient that would permit lessors to not separate non-lease components from the associated lease components if certain conditions are met. These amendments are effective, in conjunction with the new lease standard, for annual reporting periods beginning on or after December 15, 2018, including interim periods within those annual periods.

The Company adopted this guidance on a modified retrospective basis on January 1, 2019 with the cumulative effect of the transition as of the date of adoption.

The Company has elected the package of practical expedients provided for within the authoritative guidance which exempts the Company from having to reassess: (i) whether expired or existing contracts contain leases, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. In addition, the Company has elected the practical expedient that permits lessors to not separate non-lease components from the associated lease components if certain conditions are met. Lastly, the Company has utilized the short-term exemption for lessees and established an accounting policy to not recognize a right-of-use asset or lease liability for any lease with a term of less than 12 months. The Company did not elect to utilize any of the other practical expedients. 

The impacts of the new lease standard are as follows:

Lessee accounting - The adoption has had a material impact on the consolidated balance sheets, including an increase to both assets and liabilities, as a result of the recognition of a right-of-use asset and corresponding lease liability for operating leases. As the Company has made a policy election for the short-term lease exemption, a right-of-use asset and corresponding lease liability are only recorded for leases with expected terms of more than 12 months. The adoption did not have a material impact on the consolidated statements of operations and comprehensive income for situations in which the Company is a lessee.

Lessor accounting - As the Company has elected the transitional practical expedients for leases, there are not any material impacts to the consolidated financial statements for leases in situations which the Company is a lessor and the lease commenced prior to January 1, 2019. To conform with the guidance, the Company has updated its policies for costs incurred for the acquisition and fulfillment of the lease contracts, including commissions and installation costs.

Adoption of the new lease standard did not impact our historically reported results. On January 1, 2019, the Company recorded $8.7 million of right-of-use assets and $8.9 million of operating lease liabilities, including the classification of $0.2 million from straight-line rent liabilities to operating lease liabilities, in the consolidated balance sheets.

New Accounting Pronouncements to be Adopted

In June 2016, the FASB issued authoritative guidance regarding implementation of measurement of credit losses on financial instruments. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in a cloud computing arrangement that is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the disclosure requirements on the consolidated financial statements.

In August 2018, the FASB issued authoritative guidance regarding the disclosure requirements for fair value measurements. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

In March 2019, the FASB issued authoritative guidance regarding targeted changes to lessor accounting. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements.

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Segment Reporting (Tables)

9 Months Ended

Sep. 30, 2019

Segment Reporting

Schedule of information by reportable segment

The following table provides information by reportable segment and a reconciliation to the consolidated results for the three months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30, 2019								Three Months Ended September 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	14,992	$	—	$	—	$	14,992	$	14,626	$	—	$	—	$	14,626
Rental		3,921		20,365		—		24,286		—		16,261		—		16,261
Product sales		2,429		10,340		—		12,769		—		4,952		—		4,952
Financing		900		—		—		900		985		—		—		985
Total revenues		22,242		30,705		—		52,947		15,611		21,213		—		36,824
Gross profit:
Bulk water		8,034		—		—		8,034		7,855		—		—		7,855
Rental		2,109		10,932		—		13,041		—		9,131		—		9,131
Product sales		413		4,085		—		4,498		—		1,696		—		1,696
Financing		900		—		—		900		985		—		—		985
Total gross profit		11,456		15,017		—		26,473		8,840		10,827		—		19,667
Selling, general and administrative expenses		6,914		15,487		1,117		23,518		7,616		12,194		1,016		20,826
Income (loss) from operations		4,542		(470)		(1,117)		2,955		1,224		(1,367)		(1,016)		(1,159)
Other expense, net								(6,447)								(3,624)
Loss before income tax expense								(3,492)								(4,783)
Income tax expense (benefit)								445								(2,051)
Net loss							$	(3,937)							$	(2,732)
Other information:
Depreciation and amortization	$	6,319	$	8,599	$	—	$	14,918	$	3,672	$	5,038	$	—	$	8,710
Expenditures for long-lived assets	$	7,121	$	4,583	$	—	$	11,704	$	396	$	5,319	$	—	$	5,715
Amortization of deferred financing fees	$	68	$	51	$	134	$	253	$	64	$	51	$	122	$	237

The following table provides information by reportable segment and a reconciliation to the consolidated results for the nine months ended September 30, 2019 and 2018 (in thousands):

	Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	44,916	$	—	$	—	$	44,916	$	42,682	$	—	$	—	$	42,682
Rental		10,630		58,030		—		68,660		—		45,041		—		45,041
Product sales		6,860		27,651		—		34,511		—		13,012		—		13,012
Financing		2,809		—		—		2,809		3,048		—		—		3,048
Total revenues		65,215		85,681		—		150,896		45,730		58,053		—		103,783
Gross profit:
Bulk water		24,435		—		—		24,435		22,661		—		—		22,661
Rental		7,046		30,716		—		37,762		—		24,801		—		24,801
Product sales		1,139		11,215		—		12,354		—		4,388		—		4,388
Financing		2,809		—		—		2,809		3,048		—		—		3,048
Total gross profit		35,429		41,931		—		77,360		25,709		29,189		—		54,898
Selling, general and administrative expenses		21,532		44,085		3,639		69,256		22,361		34,101		3,227		59,689
Income (loss) from operations		13,897		(2,154)		(3,639)		8,104		3,348		(4,912)		(3,227)		(4,791)
Other expense, net								(19,663)								(10,520)
Loss before income tax expense								(11,559)								(15,311)
Income tax expense (benefit)								1,517								(1,312)
Net loss							$	(13,076)							$	(13,999)
Other information:
Depreciation and amortization	$	17,917	$	21,537	$	—	$	39,454	$	10,911	$	13,850	$	—	$	24,761
Expenditures for long-lived assets	$	17,544	$	11,095	$	—	$	28,639	$	1,261	$	11,669	$	—	$	12,930
Amortization of deferred financing fees	$	211	$	152	$	402	$	765	$	194	$	152	$	366	$	712

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Cash Flow Information

9 Months Ended

Sep. 30, 2019

Cash Flow Information

Cash Flow Information

10. Cash Flow Information

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

	Nine Months Ended
	September 30,
	2019		2018
Cash paid during the period:
Income taxes, net	$	1,017	$	1,631
Interest, net	$	18,634	$	9,325
Non-Cash Transaction Information:
Right-of-use assets obtained in exchange for new operating lease liabilities	$	3,539	$	—
Non-cash capital expenditures	$	3,509	$	1,331
Unpaid offering costs	$	33	$	—

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

	As of
	September 30,
	2019		2018
Cash and cash equivalents	$	109,520	$	93,617
Restricted cash, current		—		2,000
Restricted cash, non-current		4,268		3,637
Cash, cash equivalents and restricted cash	$	113,788	$	99,254

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Leases

9 Months Ended

Sep. 30, 2019

Leases

Leases

6. Leases

Lessee accounting

The Company leases space and operating assets, including offices, office equipment, warehouses, storage yards and storage units under non-cancelable operating leases expiring at various dates with some containing escalation in rent clauses, rent concessions and/or renewal options. Minimum lease payments under operating leases are recognized on a straight-line basis over the term of the lease, including any periods of free rent.

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

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Lease Cost
Operating lease cost	$	769	$	2,140
Short-term lease cost		120		370
Variable lease cost		2		10
Total lease cost	$	891	$	2,520

The weighted-average remaining lease term and weighted-average discount rate for operating leases as of September 30, 2019 is 7.2 years and 10.0%, respectively. Cash paid for operating leases that are included in the measurement of lease liabilities during the nine months ended September 30, 2019 was $1.7 million.

As of September 30, 2019, the maturities of the Company’s operating lease liabilities were as follows (in thousands):

Remainder of 2019	$	685
2020		2,537
2021		2,552
2022		2,451
2023		2,065
Thereafter		6,305
Total future minimum lease payments		16,595
Less imputed lease interest		(5,023)
Total lease liabilities	$	11,572

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

2019	$	2,097
2020		905
2021		990
2022		856
2023		773
Thereafter		5,117
Total future minimum lease payments	$	10,738

Lessor accounting

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

	Three Months Ended		Nine Months Ended
	September 30, 2019		September 30, 2019
Lease income: sales-type leases
Profit at lease commencement	$	—	$	—
Interest income on lease receivables		45		143
Total lease income: sales-type leases		45		143
Lease income: operating leases		24,286		68,660
Total lease income	$	24,331	$	68,803

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

Remainder of 2019	$	18,863
2020	$	53,881
2021	$	34,973
2022	$	22,444
2023	$	15,735
Thereafter	$	6,612

Included in long-term receivables, current and long-term receivables in the consolidated balance sheets are sales-type lease receivables for the Company’s sales-type leases. As of September 30, 2019, the maturities of the Company’s sales-type lease receivables are as follows (in thousands):

Remainder of 2019	$	190
2020		761
2021		602
2022		469
2023		416
Thereafter		—
Total future minimum lease payments		2,438
Less imputed lease interest		(326)
Total sales-type lease receivables	$	2,112

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Business Combinations and Asset Acquisitions - Carolina Pure Water Systems, LLC (Details) - Carolina Pure - USD ($) $ in Thousands		9 Months Ended
	Jul. 15, 2019	Sep. 30, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Aggregate purchase price	$ 7,300
Cash	6,800
payables	500
Acquisition related cost		$ 100
Quench
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trade receivables	137
Property, plant and equipment	1,350
Inventory	39
Deferred revenue	(230)
Net assets acquired	7,325
Quench | Customer Relationships
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Discount rate for PV of Expected cash flow		11.80%
Weighted average useful life of intangible assets		15 years
Finite-lived intangible assets	4,812
Quench | Non-compete agreements
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Discount rate for PV of Expected cash flow		11.80%
Weighted average useful life of intangible assets		5 years
Finite-lived intangible assets	$ 1,217

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Summary of Significant Accounting Policies - Contract Costs (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Capitalized Contract Cost [Line Items]
Contract cost amortization	$ 1,500	$ 700	$ 3,600	$ 2,000
Contract assets impairment	0	$ 0	0	$ 0
Contract Acquisition Costs
Capitalized Contract Cost [Line Items]
Contract costs	4,800		4,800		$ 3,700
Contract Fulfillment Costs
Capitalized Contract Cost [Line Items]
Contract costs	$ 5,400		$ 5,400		$ 1,500

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Business Combinations and Asset Acquisitions - AUC Acquisition Holdings (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands		3 Months Ended						9 Months Ended
	Nov. 01, 2018	Sep. 30, 2019	Jun. 30, 2019	Mar. 31, 2019	Sep. 30, 2018	Jun. 30, 2018	Mar. 31, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Business Acquisition [Line Items]
Contingent consideration		$ 2,257						$ 2,257		$ 3,109
Loss from operations		2,955			$ (1,159)			8,104	$ (4,791)
Net loss		$ (3,937)	$ (3,475)	$ (5,664)	$ (2,732)	$ (4,921)	$ (6,346)	$ (13,076)	$ (13,999)
Increased Loss per share		$ (0.13)			$ (0.10)			$ (0.46)	$ (0.53)
Assets acquired:
Goodwill		$ 199,194						$ 199,194		$ 190,999
AUC Acquisition Holdings
Business Acquisition [Line Items]
Transaction related costs		$ 0						$ 100
AquaVenture Holdings, Inc. | AUC Acquisition Holdings
Business Acquisition [Line Items]
Purchase price	$ 130,900
Cash paid for acquisition	127,000
Working capital adjustment	$ 400
Number of shares issued in acquisition	122
Value of shares issued in acquisition	$ 2,000
Contingent consideration	1,900
Contingent consideration range of outcomes minimum	0
Contingent consideration range of outcomes maximum	2,000
Assets acquired:
Cash and cash equivalents	849,000
Trade receivables	1,763,000
Inventory	2,642,000
Current portion of long-term receivables	521,000
Prepaid expenses and other current assets	1,673,000
Property, plant and equipment	39,848,000
Other assets	25,000
Long-term receivables	306,000
Goodwill	64,940,000
Total assets acquired	149,947,000
Liabilities assumed:
Accounts payable and accrued liabilities	(4,286,000)
Deferred revenue	(1,021,000)
Other long-term liabilities	(1,706,000)
Deferred tax liabilities	(12,034,000)
Total liabilities assumed	(19,047,000)
Net assets acquired	$ 130,900,000
AquaVenture Holdings, Inc. | AUC Acquisition Holdings | Customer Relationships
Business Acquisition [Line Items]
Weighted average useful life of intangible assets	19 years
Discount Rate, For Present Value Of Expected Cash Flow		10.90%						10.90%
Assets acquired:
Identified intangible assets	$ 31,740,000
AquaVenture Holdings, Inc. | AUC Acquisition Holdings | Trade Names
Business Acquisition [Line Items]
Weighted average useful life of intangible assets	15 years
Discount Rate, For Present Value Of Expected Cash Flow		10.90%						10.90%
Assets acquired:
Identified intangible assets	$ 2,680,000
AquaVenture Holdings, Inc. | AUC Acquisition Holdings | Non-compete agreements
Business Acquisition [Line Items]
Weighted average useful life of intangible assets	4 years 10 months 24 days
Discount Rate, For Present Value Of Expected Cash Flow		10.90%						10.90%
Assets acquired:
Identified intangible assets	$ 2,090,000
AquaVenture Holdings, Inc. | AUC Acquisition Holdings | Backlogs
Business Acquisition [Line Items]
Weighted average useful life of intangible assets	8 months 12 days
Discount Rate, For Present Value Of Expected Cash Flow		10.90%						10.90%
Assets acquired:
Identified intangible assets	$ 870,000
AquaVenture Holdings, Inc. | Adjustment | AUC Acquisition Holdings
Business Acquisition [Line Items]
Loss from operations		$ (600)						$ (600)
Net loss		$ (600)						$ (600)
Increased Loss per share		$ (0.02)						$ (0.02)
AquaVenture Holdings, Inc. | Adjustment | AUC Acquisition Holdings | Cost of revenues
Business Acquisition [Line Items]
Depreciation		$ 700
AquaVenture Holdings, Inc. | Adjustment | AUC Acquisition Holdings | Selling, General and Administrative Expenses
Business Acquisition [Line Items]
Amortization expense		$ (100)

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Commitments and Contingencies- Acquisition Contingent Consideration (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Business Acquisition, Contingent Consideration [Line Items]
Acquisition contingent consideration at beginning of the period			$ 3,109
Acquired during the period			930
Payments			(2,033)
Valuation adjustments			136	$ 0
Interest accretion	$ 29	$ 0	115	$ 0
Acquisition contingent consideration at end of the period	2,257		2,257
Final purchase price allocation adjustments	(55)		(55)
Remaining balance of the acquisition contingent consideration current	2,300		2,300		$ 2,700
Remaining balance of the acquisition contingent consideration long-term	$ 0		0		$ 400
Selling, General and Administrative Expenses
Business Acquisition, Contingent Consideration [Line Items]
Valuation adjustments			$ 191

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Share-based Compensation - AquaVenture Equity Awards (Details) - USD ($) shares in Millions, $ in Millions	9 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Restricted share units
Granted in period	0.4
Restricted share units granted	$ 8.4
Restricted share units | First Anniversary
Vesting Percentage	25.00%
Restricted share units | Thereafter
Vesting Percentage	75.00%
Vesting Period	3 years
2016 Plan
Aggregate number of shares by class authorized for grant under the Equity Incentive Plan	8.2	5.0
Annual percentage increase in shares available for issuance	4

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Segment Reporting

9 Months Ended

Sep. 30, 2019

Segment Reporting

Segment Reporting

11. Segment Reporting

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

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

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

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

The following table provides information by reportable segment and a reconciliation to the consolidated results for the three months ended September 30, 2019 and 2018 (in thousands):

	Three Months Ended September 30, 2019								Three Months Ended September 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	14,992	$	—	$	—	$	14,992	$	14,626	$	—	$	—	$	14,626
Rental		3,921		20,365		—		24,286		—		16,261		—		16,261
Product sales		2,429		10,340		—		12,769		—		4,952		—		4,952
Financing		900		—		—		900		985		—		—		985
Total revenues		22,242		30,705		—		52,947		15,611		21,213		—		36,824
Gross profit:
Bulk water		8,034		—		—		8,034		7,855		—		—		7,855
Rental		2,109		10,932		—		13,041		—		9,131		—		9,131
Product sales		413		4,085		—		4,498		—		1,696		—		1,696
Financing		900		—		—		900		985		—		—		985
Total gross profit		11,456		15,017		—		26,473		8,840		10,827		—		19,667
Selling, general and administrative expenses		6,914		15,487		1,117		23,518		7,616		12,194		1,016		20,826
Income (loss) from operations		4,542		(470)		(1,117)		2,955		1,224		(1,367)		(1,016)		(1,159)
Other expense, net								(6,447)								(3,624)
Loss before income tax expense								(3,492)								(4,783)
Income tax expense (benefit)								445								(2,051)
Net loss							$	(3,937)							$	(2,732)
Other information:
Depreciation and amortization	$	6,319	$	8,599	$	—	$	14,918	$	3,672	$	5,038	$	—	$	8,710
Expenditures for long-lived assets	$	7,121	$	4,583	$	—	$	11,704	$	396	$	5,319	$	—	$	5,715
Amortization of deferred financing fees	$	68	$	51	$	134	$	253	$	64	$	51	$	122	$	237

The following table provides information by reportable segment and a reconciliation to the consolidated results for the nine months ended September 30, 2019 and 2018 (in thousands):

	Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	44,916	$	—	$	—	$	44,916	$	42,682	$	—	$	—	$	42,682
Rental		10,630		58,030		—		68,660		—		45,041		—		45,041
Product sales		6,860		27,651		—		34,511		—		13,012		—		13,012
Financing		2,809		—		—		2,809		3,048		—		—		3,048
Total revenues		65,215		85,681		—		150,896		45,730		58,053		—		103,783
Gross profit:
Bulk water		24,435		—		—		24,435		22,661		—		—		22,661
Rental		7,046		30,716		—		37,762		—		24,801		—		24,801
Product sales		1,139		11,215		—		12,354		—		4,388		—		4,388
Financing		2,809		—		—		2,809		3,048		—		—		3,048
Total gross profit		35,429		41,931		—		77,360		25,709		29,189		—		54,898
Selling, general and administrative expenses		21,532		44,085		3,639		69,256		22,361		34,101		3,227		59,689
Income (loss) from operations		13,897		(2,154)		(3,639)		8,104		3,348		(4,912)		(3,227)		(4,791)
Other expense, net								(19,663)								(10,520)
Loss before income tax expense								(11,559)								(15,311)
Income tax expense (benefit)								1,517								(1,312)
Net loss							$	(13,076)							$	(13,999)
Other information:
Depreciation and amortization	$	17,917	$	21,537	$	—	$	39,454	$	10,911	$	13,850	$	—	$	24,761
Expenditures for long-lived assets	$	17,544	$	11,095	$	—	$	28,639	$	1,261	$	11,669	$	—	$	12,930
Amortization of deferred financing fees	$	211	$	152	$	402	$	765	$	194	$	152	$	366	$	712

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Share-based Compensation

9 Months Ended

Sep. 30, 2019

Share-based Compensation

Share-Based Compensation

7. Share‑Based Compensation

AquaVenture Equity Awards

The AquaVenture Holdings Limited 2016 Share Option and Incentive Plan (the “2016 Plan”) allows for the issuance of incentive share options, non-qualified share options, share appreciation rights, restricted share units, restricted share awards, unrestricted share awards, cash-based awards, performance share awards and dividend equivalent rights to officers, employees, managers, directors and other key persons, including consultants to the Company. The aggregate number of ordinary shares initially authorized for issuance, subject to adjustment upon a change in capitalization, under the 2016 Plan was 5.0 million shares. The shares authorized for issuance increase annually by 4% of the number of ordinary shares issued and outstanding on the immediately preceding December 31. As of September 30, 2019, the number of ordinary shares authorized for issuance under the 2016 Plan was 8.2 million shares.

During the nine months ended September 30, 2019, the Company granted an aggregate of 0.4 million restricted share units to employees, non-employee consultants and certain members of the Company’s board of directors. Restricted share units granted to employees and non-employee consultants typically have a time-based vesting schedule with 25% vesting on the first anniversary of the date of grant and the remaining 75% vesting quarterly over the remaining three years. Restricted share units granted to certain members of the Company’s board of directors typically vest in full on the first anniversary of the date of the grant. The aggregate grant date fair value of restricted share units granted during the nine months ended September 30, 2019 was approximately $8.4 million.

Independent Directors’ Deferred Compensation Program

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

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

During the nine months ended September 30, 2019, the Company granted approximately 22 thousand phantom shares to Eligible Directors, including 17 thousand phantom shares which vest in full on the first anniversary of the date of the grant and 5 thousand phantom shares that are immediately vested. The aggregate grant date fair value of the awards granted during the nine months ended September 30, 2019 was $0.5 million.

During the nine months ended September 30, 2019, approximately 9 thousand phantom share units were forfeited pursuant to the terms in the Deferred Compensation Program. During the nine months ended September 30, 2019, approximately 4 thousand phantom share units were converted to 4 thousand ordinary shares of the Company pursuant to the terms in the Deferred Compensation Program.

At September 30, 2019, approximately 56 thousand phantom shares remained outstanding.

Employee Share Purchase Plan

Under the 2016 Employee Share Purchase Plan (“2016 ESPP”), the Company offers eligible employee participants the right to purchase the Company’s ordinary shares at a price equal to the lesser of 85 percent of the closing market price on the first or last day of an established offering period. Under the 2016 ESPP, 10 thousand ordinary shares were sold to eligible employees during the nine months ended September 30, 2019. Share-based compensation expense is recognized based on the fair value of the employees’ purchase rights under the 2016 ESPP and is amortized on a straight-line basis over the offering period. The shares authorized for issuance under the 2016 ESPP increase annually on January 1, through 2021, by the lesser of: (i) 1 % percent 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. As of September 30, 2019, the number of ordinary shares authorized for issuance under the 2016 ESPP was 0.9 million. 

Share‑Based Compensation Expense

Total share‑based compensation expense recognized for all equity awards during the three months ended September 30, 2019 and 2018 was $1.3 million and $3.4 million, respectively. For the three months ended September 30, 2019, $1.2 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income. For the three months ended September 30, 2018, $3.3 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income.

Total share‑based compensation expense recognized for all equity awards during the nine months ended September 30, 2019 and 2018 was $3.6 million and $10.0 million, respectively. For the nine months ended September 30, 2019, $3.5 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income. For the nine months ended September 30, 2018, $9.8 million and $0.2 million were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income.

There was no related tax benefit for the three or nine months ended September 30, 2019 and 2018.

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Summary of Significant Accounting Policies - Leases (Details) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019 USD ($)	Sep. 30, 2019 USD ($)
Leases
Impairment charges on right-of-use assets	$ 0	$ 0
Lessee, Operating Lease, Existence of Option to Extend [true false]		true
Lease, Practical Expedient, Lessor Single Lease Component [true false]	false	false

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Business Combinations and Asset Acquisitions - FB Global Development, Inc., d/b/a Bluline (Details) - USD ($) $ in Thousands		3 Months Ended	9 Months Ended
	Dec. 03, 2018	Sep. 30, 2019	Sep. 30, 2019	Dec. 31, 2018
Assets acquired:
Goodwill		$ 199,194	$ 199,194	$ 190,999
Quench | FB Global Development, Inc., d/b/a Bluline
Business Acquisition [Line Items]
Cash paid for acquisition	$ 2,500
Acquisition payable	300
Transaction related costs		$ 0	$ 0
Assets acquired:
Trade receivables	90
Inventory	345
Property, plant and equipment	331
Goodwill	645
Total assets acquired	2,873
Liabilities assumed:
Deferred revenue	(10)
Total liabilities assumed	(10)
Net assets acquired	$ 2,863
Quench | FB Global Development, Inc., d/b/a Bluline | Customer Relationships
Business Acquisition [Line Items]
Weighted average useful life of intangible assets	20 years
Discount Rate, For Present Value Of Expected Cash Flow		20.00%	20.00%
Assets acquired:
Identified intangible assets	$ 1,292
Quench | FB Global Development, Inc., d/b/a Bluline | Non-compete agreements
Business Acquisition [Line Items]
Weighted average useful life of intangible assets	5 years
Discount Rate, For Present Value Of Expected Cash Flow		20.00%	20.00%
Assets acquired:
Identified intangible assets	$ 170

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Business Combinations and Asset Acquisitions - Proforma financial information (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Business Acquisition, Pro Forma Information [Abstract]
Revenues	$ 52,947	$ 48,986	$ 150,896	$ 140,290
Net loss	$ (3,937)	$ (3,566)	$ (13,076)	$ (20,344)
Loss per share	$ (0.13)	$ (0.13)	$ (0.46)	$ (0.77)

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Cash Flow Information (Details) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018	Dec. 31, 2017
Cash paid during the period:
Income taxes, net	$ 1,017	$ 1,631
Interest, net	18,634	9,325
Non-Cash Transaction Information:
Right-of-use assets obtained in exchange for new operating lease liabilities	3,539
Non-cash capital expenditures	3,509	1,331
Unpaid offering costs	33
Components of Total Ending Cash
Cash and cash equivalents	109,520	93,617	$ 56,618
Restricted cash, current		2,000
Restricted cash, non-current	4,268	3,637	4,153
Cash, cash equivalents and restricted cash	$ 113,788	$ 99,254	$ 60,771	$ 122,359

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Share-Based Compensation - Restricted Awards Compensation Expense (Details) - USD ($) $ in Thousands	3 Months Ended				9 Months Ended
	Sep. 30, 2019	Jun. 30, 2019	Sep. 30, 2018	Jun. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Dec. 31, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Ordinary shares issued		$ 177		$ 132
Allocated Share-based Compensation Expense	$ 1,300		$ 3,400		$ 3,600	$ 10,000
Tax benefit	$ 0		0		$ 0	0
2016 Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of ordinary shares authorized for issuance	8,200,000				8,200,000		5,000,000
2016 ESPP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of ordinary shares issued					10,000
Maximum share increase to the authorized shares					200,000
2016 ESPP | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Percentage of purchase price of ordinary shares					85.00%
Restricted share units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted					400,000
Granted in period					400,000
Thereafter | Restricted share units
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting Period					3 years
2016 ESPP
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares authorized for issuance maximum percentage increase					1.00%
Number of ordinary shares authorized for issuance	900,000				900,000
Independent Directors Deferred Compensation Program
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Phantom shares awarded percentage					120.00%
Phantom shares in equivalent ordinary shares					1
Vesting Period					0 years
Independent Directors Deferred Compensation Program | Phantom Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Phantom shares in equivalent ordinary shares					4,000
Requisite service period					12 months
Granted					22,000
Aggregate fair value					$ 500
Forfeited					9,000
Ordinary shares issued					$ 4
Number of shares outstanding	56,000				56,000
Granted in period					22,000
Independent Directors Deferred Compensation Program | Immediately | Phantom Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted					5,000
Granted in period					5,000
Independent Directors Deferred Compensation Program | First Anniversary | Phantom Shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Granted					17,000
Granted in period					17,000
Selling, General and Administrative Expenses
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated Share-based Compensation Expense	$ 1,200		3,300		$ 3,500	9,800
Cost of revenues
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Allocated Share-based Compensation Expense	$ 100		$ 100		$ 100	$ 200

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Business Combinations and Asset Acquisitions - Aguaman, Inc. (Details) - Quench - Aguaman - USD ($) $ in Thousands		3 Months Ended	9 Months Ended
	Jun. 01, 2019	Sep. 30, 2019	Sep. 30, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Total purchase price	$ 1,500
Purchase price paid	1,100
Asset acquisition contingent liability	$ 200
Contingent consideration liability measurement period	1 year
Asset acquisition related costs		$ 0	$ 100
payables	$ 200
Customer Relationships
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Weighted average useful life of acquired customer relationships	12 years
Minimum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent consideration liability outcome range	$ 0
Maximum
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Contingent consideration liability outcome range	200
Nonrecurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Trade receivables	62
Property, plant and equipment	49
Inventory	6
Deferred revenue	(37)
Net assets acquired	1,544
Nonrecurring | Customer Relationships
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]
Finite-lived intangible assets	$ 1,464
Discounted rate	13.00%

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Fair Value Measurements - Fair Value Measurements (Details) - USD ($) $ in Thousands	3 Months Ended	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2019	Dec. 31, 2018
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Abstract]
Asset transfers out of Level 1 into Level 2	$ 0	$ 0
Assets transfers out of Level 2 into Level 1	0	0
Asset transfers into (out of) Level 3	0	0
Recurring
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Abstract]
Money market funds	838	838	$ 42,135
Acquisition contingent consideration	(2,257)	(2,257)	(3,109)
Recurring | Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Abstract]
Money market funds	838	838	42,135
Recurring | Level 3
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Abstract]
Acquisition contingent consideration	(2,257)	(2,257)	$ (3,109)
Recurring | US Treasury securities
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Abstract]
Held-to-maturity securities	68,486	68,486
Recurring | US Treasury securities | Level 1
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Abstract]
Held-to-maturity securities	$ 68,486	$ 68,486

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Leases - Future minimum rental revenues (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Future minimum rental revenues to be generated from the leased assets under non-cancelable operating
Remainder of 2019	$ 18,863
2020	53,881
2021	34,973
2022	22,444
2023	15,735
Thereafter	$ 6,612

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CONSOLIDATED BALANCE SHEETS - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Current Assets:
Cash and cash equivalents	$ 109,520	$ 56,618
Trade receivables, net of allowances of $1,109 and $1,034, respectively	24,441	21,437
Inventory	18,330	15,496
Current portion of long-term receivables	7,403	6,538
Prepaid expenses and other current assets	8,846	8,272
Total current assets	168,540	108,361
Property, plant and equipment, net	162,458	150,064
Construction in progress	21,346	15,427
Right-of-use assets	10,982
Restricted cash	4,268	4,153
Long-term receivables	34,468	40,574
Other assets	11,006	6,251
Deferred tax asset	4,473	4,191
Intangible assets, net	180,395	205,443
Goodwill	199,194	190,999
Total assets	797,130	725,463
Current Liabilities:
Accounts payable	7,881	8,235
Accrued liabilities	21,487	25,116
Current portion of long-term debt	7,269	6,494
Deferred revenue	4,621	3,890
Total current liabilities	41,258	43,735
Long-term debt	310,307	313,215
Deferred tax liability	18,036	18,465
Other long-term liabilities	13,650	13,450
Operating lease liabilities, non-current	10,090
Total liabilities	393,341	388,865
Commitments and contingencies (see Note 9)
Shareholders' Equity
Ordinary shares, no par value, 250,000 shares authorized; 31,722 and 26,780 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively
Additional paid-in capital	662,225	582,127
Accumulated other comprehensive income	(252)	(421)
Accumulated deficit	(258,184)	(245,108)
Total shareholders' equity	403,789	336,598
Total liabilities and shareholders' equity	$ 797,130	$ 725,463

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CONSOLIDATED STATEMENTS OF CASH FLOWS - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Cash flows from operating activities:
Net loss	$ (13,076)	$ (13,999)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	39,454	24,761
Share-based compensation expense	3,609	10,002
Provision for bad debts	813	695
Deferred income tax provision	(260)	(2,882)
Provision for inventory	184	253
Loss on disposal of assets	1,554	1,506
Amortization of deferred financing fees	765	712
Accretion of and adjustments to acquisition contingent consideration	251
Other	12	38
Change in operating assets and liabilities:
Trade receivables	(3,616)	236
Inventory	(3,970)	(1,407)
Prepaid expenses and other current assets	(16)	142
Long-term receivables	5,200	4,596
Right-of-use assets	1,288
Other assets	(8,524)	(2,643)
Current liabilities	(4,161)	(253)
Operating lease liabilities	(120)
Long-term liabilities	824	291
Net cash provided by operating activities	20,211	22,048
Cash flows from investing activities:
Capital expenditures	(28,639)	(12,930)
Net cash paid for acquisition of assets or business	(7,941)	(27,097)
Other	331	16
Net cash used in investing activities	(36,249)	(40,011)
Cash flows from financing activities:
Payments of long-term debt	(5,074)	(4,975)
Payment of deferred financing fees		(71)
Payments of secured borrowings	(372)
Payments of acquisition contingent consideration	(2,033)
Proceeds from exercise of stock options	1,812	86
Shares withheld to cover minimum tax withholdings on equity awards	(905)	(307)
Proceeds from the issuance of Employee Share Purchase Plan shares	177	132
Proceeds from issuance of ordinary shares, net of issuance costs	75,438
Net cash used in financing activities	69,043	(5,135)
Effect of exchange rates on cash, cash equivalents and restricted cash	12	(7)
Change in cash, cash equivalents and restricted cash	53,017	(23,105)
Cash, cash equivalents and restricted cash at beginning of period	60,771	122,359
Cash, cash equivalents and restricted cash at end of period	$ 113,788	$ 99,254

XML

Description of the Business - Corporate Reorganization (Details)	9 Months Ended
	Sep. 30, 2019 item segment
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Number of operating platforms | segment	2
Quench
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Number of dealers and retailers | item	250
Quench | Minimum
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Lease term	2 years
Quench | Maximum
Segment Reporting, Disclosure of Entity's Reportable Segments [Abstract]
Lease term	4 years

XML

Loss per Share (Tables)

9 Months Ended

Sep. 30, 2019

Loss per Share

Schedule of net loss per share

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

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Numerator:
Net loss	$	(3,937)	$	(2,732)	$	(13,076)	$	(13,999)
Denominator:
Weighted-average ordinary shares outstanding - basic and diluted		31,201		26,590		28,354		26,544
Loss per share - basic and diluted	$	(0.13)	$	(0.10)	$	(0.46)	$	(0.53)

XML

Business Combinations and Asset Acquisitions (Tables)

9 Months Ended

Sep. 30, 2019

Business Combination, Separately Recognized Transactions [Line Items]

Pro Forma Financial Information

The following unaudited pro forma financial information (in thousands, except for per share amounts) for the Company gives effect to the acquisitions of: (i) PHSI, which occurred on December 18, 2018; (ii) Bluline, which occurred on December 3, 2018; (iii) AUC, which occurred on November 1, 2018; (iv) Alpine, which occurred on August 6, 2018; and (v) Wa-2, which occurred on March 1, 2018, as if each had occurred on January 1, 2018. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future.

	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenues	$	52,947	$	48,986	$	150,896	$	140,290
Net loss	$	(3,937)	$	(3,566)	$	(13,076)	$	(20,344)
Loss per share	$	(0.13)	$	(0.13)	$	(0.46)	$	(0.77)

Carolina Pure

Business Combination, Separately Recognized Transactions [Line Items]

Schedule of business combination purchase price allocation

The following table summarizes the amounts for the Carolina Pure acquisition which were allocated to the fair value of aggregated net assets acquired (in thousands):

Trade receivables	$	137
Property, plant and equipment		1,350
Inventory		39
Customer relationships		4,812
Non-compete agreements		1,217
Deferred revenue		(230)
Net assets acquired	$	7,325

Aguaman

Business Combination, Separately Recognized Transactions [Line Items]

Schedule of business combination purchase price allocation

The following table summarizes the amounts for the Aguaman acquisition which were allocated to the fair value of aggregated net assets acquired (in thousands):

Trade receivables	$	62
Property, plant and equipment		49
Inventory		6
Customer relationships		1,464
Deferred revenue		(37)
Net assets acquired	$	1,544

Pure Health Solutions, Inc

Business Combination, Separately Recognized Transactions [Line Items]

Schedule of business combination purchase price allocation

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

Assets acquired:
Cash and cash equivalents	$	260
Trade receivables		1,167
Inventory		1,603
Prepaid expenses and other current assets		447
Property, plant and equipment		6,945
Deferred tax asset		108
Customer relationships		21,409
Trade names		2,360
Non-compete agreements		1,776
Goodwill		26,473
Total assets acquired		62,548
Liabilities assumed:
Accounts payable and accrued liabilities		(22,652)
Deferred revenue		(329)
Other long-term liabilities		(450)
Total liabilities assumed		(23,431)
Total purchase price	$	39,117

FB Global Development, Inc., d/b/a Bluline

Business Combination, Separately Recognized Transactions [Line Items]

Schedule of business combination purchase price allocation

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

Assets acquired:
Trade receivables	$	90
Inventory		345
Property, plant and equipment		331
Customer relationships		1,292
Non-compete agreements		170
Goodwill		645
Total assets acquired		2,873
Liabilities assumed:
Deferred revenue		(10)
Total liabilities assumed		(10)
Total purchase price	$	2,863

AUC Acquisition Holdings

Business Combination, Separately Recognized Transactions [Line Items]

Schedule of business combination purchase price allocation

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

Assets acquired:
Cash and cash equivalents	$	849
Trade receivables		1,763
Inventory		2,642
Current portion of long-term receivables		521
Prepaid expenses and other current assets		1,673
Property, plant and equipment		39,848
Other assets		25
Long-term receivables		306
Customer relationships		31,740
Trade names		2,680
Non-compete agreements		2,090
Backlog		870
Goodwill		64,940
Total assets acquired		149,947
Liabilities assumed:
Accounts payable and accrued liabilities		(4,286)
Deferred revenue		(1,021)
Other long-term liabilities		(1,706)
Deferred tax liability		(12,034)
Total liabilities assumed		(19,047)
Total purchase price	$	130,900

Alpine Water System, LLC

Business Combination, Separately Recognized Transactions [Line Items]

Schedule of business combination purchase price allocation

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

Assets acquired:
Trade receivables	$	556
Inventory		141
Prepaid expenses and other current assets		153
Property, plant and equipment		1,562
Customer relationships		6,280
Non-compete agreements		1,149
Goodwill		6,006
Total assets acquired		15,847
Liabilities assumed:
Accounts payable and accrued liabilities		(295)
Deferred revenue		(565)
Total liabilities assumed		(860)
Total purchase price	$	14,987

Wa-2 Water Company Ltd

Business Combination, Separately Recognized Transactions [Line Items]

Schedule of business combination purchase price allocation

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

Assets acquired:
Trade receivables	$	134
Inventory		158
Prepaid expenses and other current assets		6
Property, plant and equipment		424
Customer relationships		1,561
Trade names		700
Non-compete agreements		298
Goodwill		2,239
Total assets acquired		5,520
Liabilities assumed:
Accounts payable and accrued liabilities		(86)
Deferred revenue		(328)
Total liabilities assumed		(414)
Total purchase price	$	5,106