Purchase of interest in Aerex Industries, Inc.

12 Months Ended

Dec. 31, 2016

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

11. 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, Donnick and the Company loaned $490,000 and $510,000, respectively, to Aerex. These loans bear interest at 1% per annum and mature June 30, 2017. In February 2017, the Company and the former sole shareholder of Aerex loaned Aerex an additional $408,000 and $392,000, respectively, in the form of notes payable which mature on September 30, 2017 and bear interest at 1% per annum.

The purchase price for Aerex is summarized as follows: 

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:

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 consisted of the following items: 

	Amount		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

Aerex’s actual results of operations for the period subsequent to its acquisition by the Company on February 11, 2016 fell significantly short of the projected results for this period that were included in the overall cash flow projections utilized by the Company to determine the purchase price for Aerex and the fair values of its assets and liabilities. Due to this negative variance in actual results compared to projected results, the Company tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the discounted cash flow method. As a result of this impairment testing, the Company determined that the carrying value of its Aerex reporting unit exceeded its fair value, and recorded an impairment loss for the three months ended September 30, 2016 of $1,750,000 for the goodwill associated with the Aerex acquisition to reduce the goodwill balance associated with the Aerex acquisition to $6,285,211.

The results of operations of Aerex included in the Company’s results of operations for the period February 11, 2016 to December 31, 2016 are as follows:

	Year Ended December 31, 2016
Revenues	$	3,887,284
Gross profit		796,450
Amortization of intangibles		(1,320,000)
Impairment loss		(1,750,000)
Net loss		(1,566,281)

The following unaudited pro forma financial information presents the results of operations of the Company for the years ended December 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:

	Year Ended December 31,
	2016		2015
Revenues	$	58,381,424	$	75,919,627
Cost of revenues		33,892,238		47,624,001
Gross profit		24,489,186		28,295,626
General and administrative expenses		18,992,301		17,266,335
Impairment loss on long-lived assets		2,000,000		-
Impairment of goodwill		1,750,000		-
Income from operations		1,746,885		11,029,291
Other income (expense), net		419,458		226,762
Income before income taxes		2,166,343		11,256,053
Provision for (benefit from) income taxes		(608,970)		1,127,911
Net income		2,775,313		10,128,142
Income (loss) attributable to non-controlling interests		(1,148,675)		1,719,425
Net income attributable to Consolidated Water Co. Ltd. stockholders	$	3,923,988	$	8,408,717
Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders	$	0.26	$	0.57
Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders	$	0.26	$	0.57
Weighted average number of common shares used in the determination of:
Basic earnings per share		14,809,909		14,741,748
Diluted earnings per share		14,944,028		14,827,755