Purchase of interest in Aerex Industries, Inc.

3 Months Ended

Mar. 31, 2016

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

3. Purchase of interest in Aerex Industries, Inc.

 

On February 11, 2016 (the “Closing Date”), the Company, through its wholly-owned subsidiary, CW-Holdings, entered into a stock purchase agreement (the “Purchase Agreement”) with Aerex and Thomas Donnick, Jr. (“Donnick”), Aerex’s sole shareholder prior to the Closing Date. Pursuant to the terms of the Purchase Agreement, CW-Holdings purchased a 51% ownership interest in Aerex for an aggregate purchase price of approximately $7.7 million in cash. After giving effect to the transactions contemplated by the Purchase Agreement, CW-Holdings owns 51% of the outstanding capital stock of Aerex and Donnick owns 49% of the outstanding capital stock of Aerex. CW-Holdings also acquired from Donnick an option to compel Donnick to sell, and granted to Donnick an option to require CW-Holdings to purchase, Donnick’s 49% ownership interest in Aerex at a price based upon the fair market value of Aerex at the time of the exercise of the option. The options are exercisable on or after the third anniversary of the Closing Date. In connection with the Purchase Agreement, the Company guaranteed the obligations of CW-Holdings with respect to the option granted to Donnick to require CW-Holdings to purchase Donnick’s 49% ownership interest in Aerex.

Aerex is an original equipment manufacturer and service provider of a wide range of products and services applicable to municipal water treatment and industrial water and wastewater treatment. Its products include membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance services to its customers. Aerex is an American Society of Mechanical Engineers (ASME) code accredited manufacturer and maintains the ASME U and S and the National Board NB and R Certificates of Authorization. Its corporate offices and manufacturing facilities are located in Fort Pierce, Florida.

In connection with the Purchase Agreement, CW-Holdings, Aerex and Donnick entered into a shareholders agreement, pursuant to which CW-Holdings and Donnick agreed to certain rights and obligations with respect to the governance of Aerex. Immediately following the acquisition, Aerex’s prior sole stockholder and the Company loaned $490,000 and $510,000, respectively, to Aerex. These loans have a maturity date of August 10, 2016 and bear interest at 1% per annum.

The purchase price for Aerex is summarized as follows:

	February 11, 2016
Cash consideration
Purchase price (excluding working capital)	$	7,140,000
Working capital adjustment		605,179
Cash acquired		(2,326)
Total cash consideration	$	7,742,853

The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:

 

	February 11, 2016
Financial assets	$	456,664
Inventory		70,487
Costs and estimated earnings in excess of billings		784,465
Property, plant and equipment		2,159,401
Identifiable intangible assets		5,900,000
Deferred tax liability		(2,451,298)
Accounts payable and accrued liabilities		(116,893)
Net liability arising from put/call options		(383,000)
Total identifiable net assets		6,419,826
Non-controlling interest in Aerex		(6,712,184)
Goodwill		8,035,211
	$	7,742,853

The identifiable intangible assets consist of the following items with amortization calculated using a straight line method over the useful life of the asset: 

	February 11, 2016		Useful life
Non-compete agreement	$	400,000		5 years
Trade name		1,400,000		15 years
Certifications/programs		2,000,000		3 years
Customer backlog		100,000		1 year
Customer relationships		2,000,000		4 years
	$	5,900,000

The results of operations of Aerex are included in our consolidated financial statements from the date of acquisition. The total revenue and net income generated by Aerex for the period February 11, 2016 to March 31, 2016, were approximately $619,000 and $22,000, respectively, and are included in the services segment. General and administrative expenses incurred by the Company for the Aerex acquisition were approximately $83,500 for the three months ended March 31, 2016. 

The following pro forma financial information presents the results of operations of the Company for the three months ended March 31, 2016 and 2015, as if the acquisition of Aerex had taken place on January 1, 2015. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually occurred had the transaction taken place on January 1, 2015, or of future results of operations: 

	Three Months Ended March 31,
	2016		2015
Revenues	$	14,566,024	$	20,573,746
Cost of revenues		8,236,741		12,793,952
Gross profit		6,329,283		7,779,794
General and administrative expenses		4,736,257		4,325,631
Income from operations		1,593,026		3,454,163
Other income (expense), net		391,061		(215,945)
Income before income taxes		1,984,087		3,238,218
Provision for (benefit from) income taxes		(136,432)		438,035
Net income		2,120,519		2,800,183
Income attributable to non-controlling interests		85,924		562,280
Net income attributable to Consolidated Water Co. Ltd. stockholders	$	2,034,595	$	2,237,903
Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders	$	0.14	$	0.15
Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders	$	0.14	$	0.15
Weighted average number of common shares used in the determination of:
Basic earnings per share		14,783,380		14,718,757
Diluted earnings per share		14,864,125		14,764,169