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~~June 30, ~~2017~~2019

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

For the transition period from to

Commission file number 001-37903

AquaVenture Holdings Limited

(Exact name of registrant as specified in its charter)


British Virgin Islands		98-1312953
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

c/o Conyers Corporate Services ~~(B.V.I.)~~(BVI) Limited Commerce House, Wickhams Cay 1
P.O. Box 3140 Road Town British Virgin Islands ~~VG11110~~		~~(813) 855‑8636~~ ~~(Registrant’s telephone~~VG1110
(Address of principal executive office)		~~number, including area code)~~(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 ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ 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 ~~and post~~ 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 ~~☒ (Do not check if a smaller reporting company)~~☐	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 7, 2017~~August 5, 2019 was ~~26,453,039.~~

31,717,305.

Table of Contents

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED ~~SEPTEMBER~~JUNE 30, ~~2017~~2019

TABLE OF CONTENTS

Table of Contents

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless otherwise specified, references in this report to the “Company”, “AquaVenture”, “we”, “us” and “our” refer to ~~both AquaVenture Holdings LLC and its subsidiaries prior to our corporate reorganization effected immediately prior to our initial public offering and~~ AquaVenture Holdings Limited and its ~~subsidiaries following our corporate reorganization.~~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 ~~could~~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 discussed in the section titled “Risk Factors” set forth under Part I, Item 1A of the ~~2016~~ 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. 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.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)


	September 30,		December 31,		June 30,		December 31,
	2017		2016		2019		2018
ASSETS
Current Assets:
Cash and cash equivalents	$	118,070	$	95,334	$	41,312	$	56,618
Restricted cash		166		166
Trade receivables, net of allowances of $951 and $1,166, respectively		17,761		15,473
Trade receivables, net of allowances of $956 and $1,034, respectively						23,962		21,437
Inventory		8,710		6,246		17,810		15,496
Current portion of long-term receivables						7,251		6,538
Prepaid expenses and other current assets		8,612		6,401		10,066		8,272
Total current assets		153,319		123,620		100,401		108,361
Property, plant and equipment, net		113,908		116,092		153,726		150,064
Construction in progress		10,602		9,398		17,089		15,427
Long-term contract costs		82,061		87,512
Right-of-use assets						9,285		—
Restricted cash		4,147		5,895		4,249		4,153
Long-term receivables						36,379		40,574
Other assets		41,114		44,311		9,652		6,251
Deferred tax asset		376		515		4,370		4,191
Intangible assets, net		53,919		51,330		196,472		205,443
Goodwill		99,526		98,023		190,846		190,999
Total assets	$	558,972	$	536,696	$	722,469	$	725,463
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	4,533	$	3,880	$	8,451	$	8,235
Accrued liabilities		11,922		13,075		20,912		25,116
Current portion of long-term debt		6,063		27,963		7,058		6,494
Deferred revenue		3,302		2,820		3,884		3,890
Total current liabilities		25,820		47,738		40,305		43,735
Long-term debt		168,983		115,753		311,109		313,215
Deferred tax liability		4,665		2,874		18,548		18,465
Other long-term liabilities		2,414		2,825		12,953		13,450
Operating lease liabilities, non-current						8,383		—
Total liabilities		201,882		169,190		391,298		388,865
Commitments and contingencies (see Note 8)
Commitments and contingencies (see Note 9)
Shareholders' Equity
Ordinary shares, no par value, 250,000 shares authorized; 26,452 and 26,388 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively		—		—
Ordinary shares, no par value, 250,000 shares authorized; 26,985 and 26,780 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively						—		—
Additional paid-in capital		566,958		558,141		585,603		582,127
Accumulated other comprehensive income		(13)		—		(185)		(421)
Accumulated deficit		(209,855)		(190,635)		(254,247)		(245,108)
Total shareholders' equity		357,090		367,506		331,171		336,598
Total liabilities and shareholders' equity	$	558,972	$	536,696	$	722,469	$	725,463

See accompanying notes to the unaudited condensed consolidated financial statements.

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AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(IN ~~THOUSANDS)~~THOUSANDS, EXCEPT PER SHARE AMOUNTS)

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,



2017

2016

2017

2016

Revenues:

Bulk water

$
14,206

$
13,879

$
43,238

$
40,951

Rental

13,428

12,396

39,238

36,153

Other

2,259

2,583

6,318

7,147

Total revenues

29,893

28,858

88,794

84,251

Cost of revenues:

Bulk water

7,904

7,683

25,903

22,976

Rental

6,083

5,256

17,508

15,989

Other

1,385

1,356

3,692

3,863

Total cost of revenues

15,372

14,295

47,103

42,828

Gross profit

14,521

14,563

41,691

41,423

Selling, general and administrative expenses

17,734

15,112

50,964

43,264

Loss from operations

(3,213)

(549)

(9,273)

(1,841)

Other expense:

Interest expense, net

(2,055)

(2,802)

(5,574)

(8,231)

Other expense, net

(1,453)

(86)

(1,728)

(221)

Loss before income tax expense

(6,721)

(3,437)

(16,575)

(10,293)

Income tax expense

846

1,275

2,645

2,633

Net loss

(7,567)

(4,712)

(19,220)

(12,926)

Other comprehensive income:

Foreign currency translation adjustment

(13)

—

(13)

—

Comprehensive loss

$
(7,580)

$
(4,712)

$
(19,233)

$
(12,926)

Loss per share – basic and diluted(1)

$
(0.29)

$
(0.73)

Weighted-average shares outstanding – basic and diluted(1)

26,441

26,414

~~(1)~~

~~Represents loss per share and weighted-average shares outstanding for the period following the Corporate Reorganization and IPO.~~ ~~There were no ordinary shares outstanding prior to October 6, 2016 and, therefore, no loss per share information has been presented for any period prior to that date.~~


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
Revenues:
Bulk water	$	15,614	$	14,360	$	29,924	$	28,056
Rental		22,567		14,821		44,374		28,780
Product sales		12,269		4,249		21,742		8,060
Financing		937		1,015		1,909		2,063
Total revenues		51,387		34,445		97,949		66,959
Cost of revenues:
Bulk water		6,941		6,743		13,523		13,250
Rental		10,047		6,654		19,653		13,110
Product sales		7,827		2,842		13,886		5,368
Total cost of revenues		24,815		16,239		47,062		31,728
Gross profit		26,572		18,206		50,887		35,231
Selling, general and administrative expenses		22,869		19,289		45,738		38,863
Income (loss) from operations		3,703		(1,083)		5,149		(3,632)
Other expense:
Interest expense, net		(6,508)		(3,354)		(13,068)		(6,604)
Other expense, net		(199)		(152)		(148)		(292)
Loss before income tax expense		(3,004)		(4,589)		(8,067)		(10,528)
Income tax expense		471		332		1,072		739
Net loss		(3,475)		(4,921)		(9,139)		(11,267)
Other comprehensive income:
Foreign currency translation adjustment		116		(107)		236		(190)
Comprehensive loss	$	(3,359)	$	(5,028)	$	(8,903)	$	(11,457)

Loss per share – basic and diluted	$	(0.13)	$	(0.19)	$	(0.34)	$	(0.42)

Weighted-average shares outstanding – basic and diluted		26,949		26,550		26,907		26,521

See accompanying notes to the unaudited condensed consolidated financial statements.

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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




	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

See accompanying notes to the unaudited condensed consolidated financial statements.

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AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)


	Nine Months Ended September 30,				Six Months Ended June 30,
	2017		2016		2019		2018
Cash flows from operating activities:
Net loss	$	(19,220)	$	(12,926)	$	(9,139)	$	(11,267)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		23,831		22,463		24,536		16,051
Adjustment to asset retirement obligation		37		86
Share-based compensation expense		9,052		1,455		2,286		6,649
Provision for bad debts		450		712		435		473
Deferred income tax provision		1,930		2,216		(91)		(300)
Inventory adjustment		153		142
Loss on extinguishment of debt		1,389		—
Provision for inventory						120		106
Loss on disposal of assets		884		939		752		938
Amortization of debt financing fees		624		568
Amortization of deferred financing fees						512		475
Adjustment to acquisition contingent consideration		—		(51)		136		—
Accretion of debt		60		271
Other		—		75		85		25
Change in operating assets and liabilities:
Trade receivables		(2,312)		(1,329)		(2,892)		2,964
Inventory		(1,766)		(958)		(2,420)		(1,878)
Prepaid expenses and other current assets		(1,146)		(1,179)		(1,269)		77
Long-term receivable						3,717		3,108
Right-of-use assets						834		—
Other assets		(2,017)		(1,807)		(5,577)		(1,671)
Current liabilities		(4)		359		(4,964)		(2,195)
Operating lease liabilities, non-current						(609)		—
Long-term liabilities		(69)		855		94		216
Net cash provided by operating activities		11,876		11,891		6,546		13,771
Cash flows from investing activities:
Capital expenditures		(11,286)		(15,037)		(16,935)		(7,215)
Long-term contract expenditures		(613)		(1,524)
Net cash paid for acquisition of assets or business		(9,921)		(100)		(1,175)		(12,457)
Principal collected on note receivable		3,350		—
Other		22		3		21		16
Net cash used in investing activities		(18,448)		(16,658)		(18,089)		(19,656)
Cash flows from financing activities:
Proceeds from long-term debt		150,000		23,675
Payments of long-term debt		(117,028)		(11,891)		(3,285)		(3,369)
Payment of debt financing fees		(3,579)		(340)
Payments related to debt extinguishment		(433)		—
Payment of acquisition contingent consideration		—		(864)
Payment of deferred financing fees						—		(71)
Payments of secured borrowings						(196)		—
Payments of acquisition contingent consideration						(1,389)		—
Proceeds from exercise of stock options		49		2		1,783		86
Shares withheld to cover minimum tax withholdings on equity awards		(356)		—		(770)		(203)
Proceeds from the issuance of Employee Stock Purchase Plan shares		75		—
Issuance costs from issuance of ordinary shares in IPO		(1,169)		—
Net cash provided by financing activities		27,559		10,582
Proceeds from the issuance of Employee Share Purchase Plan shares						177		132
Net cash used in financing activities						(3,680)		(3,425)
Effect of exchange rates on cash, cash equivalents and restricted cash		1		—		13		(12)
Change in cash, cash equivalents and restricted cash		20,988		5,815		(15,210)		(9,322)
Cash, cash equivalents and restricted cash at beginning of period		101,395		25,026		60,771		122,359
Cash, cash equivalents and restricted cash at end of period	$	122,383	$	30,841	$	45,561	$	113,037

See accompanying notes to the unaudited condensed consolidated financial statements.

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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 ~~which~~that was formed on June 17, ~~2016 for the purpose of completing an initial public offering (“IPO”) as the SEC registrant and carrying on the business of AquaVenture Holdings LLC and its subsidiaries.~~2016. AquaVenture Holdings Limited and its subsidiaries (collectively, “AquaVenture” or the “Company”) provides its customers Water‑as‑a‑Service® (“~~WAAS”~~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, ~~and~~ wastewater treatment ~~services for~~and water reuse solutions to governmental, municipal (including utility districts), industrial, property developer and hospitality customers. ~~These~~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 ~~primarily throughout~~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 an operations ~~center~~centers in Tampa, Florida and Houston, Texas, which ~~provides~~provide business development, engineering, field service support, procurement and administrative functions.

Quench offers WAAS solutions by providing bottleless filtered water coolers and ~~other products that use filtered water as an input, such as ice machines, sparkling water dispensers~~related services through direct and ~~coffee brewers, to customers throughout North America. Quench’s point‑of‑use~~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, ~~purify a customer’s existing water supply. Quench offers solutions~~filters, parts and services to a ~~broad mix~~network of ~~industries, including government, education, medical, manufacturing, retail,~~approximately 250 dealers and ~~hospitality.~~ retailers.

Quench ~~installs~~primarily operates throughout the United States and ~~maintains its filtered water systems typically under multi‑year contracts that renew automatically.~~Canada. Quench is supported by an operations center in King of Prussia, Pennsylvania, which provides marketing and business development, field service and supply chain support, customer care and administrative functions.

~~Corporate Reorganization~~

~~Prior to the completion of the IPO on October 12, 2016, the Company and AquaVenture Holdings LLC completed a series of reorganization transactions which are described below:~~

On July 1, 2016, AquaVenture Holdings LLC contributed all of the stock of its wholly-owned subsidiary, AquaVenture Holdings Curaçao N.V., to AquaVenture Holdings Limited in exchange for 1,000,000 ordinary shares of the Company.

On October 4, 2016, AquaVenture Holdings LLC contributed to AquaVenture Holdings Limited: (i) the stock of Quench USA, Inc. and Seven Seas Water Corporation and (ii) all cash and other remaining assets and liabilities (other than the shares of AquaVenture Holdings Limited it held). Subsequently, AquaVenture Holdings LLC merged with a newly formed subsidiary of AquaVenture Holdings Limited, resulting in each Class A Preferred share, Class B share, Class Q share, Common share, and Management Incentive Plan (“MIP”) share being converted into ordinary shares of AquaVenture Holdings Limited pursuant to the terms of AquaVenture Holdings LLC’s limited liability company agreement. Quench USA Holdings LLC, a member of AquaVenture Holdings LLC, then merged with a separate newly formed subsidiary of AquaVenture Holdings Limited, resulting in the distribution of shares of AquaVenture Holdings Limited to its members pursuant to the terms of Quench USA Holdings LLC’s limited liability company agreement.

The reorganization transactions are considered transactions between entities under common control. As a result, the financial statements for periods prior to the IPO and the reorganization transactions are the financial statements of AquaVenture Holdings LLC as the predecessor to the Company for accounting and reporting purposes. Unless otherwise

~~Table of Contents~~

~~specified, the “Company” refers to the operations of both AquaVenture Holdings Limited and AquaVenture Holdings LLC throughout the remainder of these notes.~~

~~Initial Public Offering~~

On October 5, 2016, the Company’s IPO was declared effective and on October 12, 2016, the Company completed the IPO of 7,475,000 ordinary shares at a public offering price of $18.00 per share. The Company received net proceeds of $118.8 million, after deducting underwriting discounts and commissions and offering expenses.

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, ~~2016.~~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 ~~(“SEC”~~(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, ~~2016.~~2018, as amended. In management’s opinion, the accompanying unaudited

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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~~June 30, ~~2017,~~2019, the unaudited condensed consolidated statements of operations and comprehensive income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018, the unaudited condensed consolidated statements of changes in equity for the three and six months ended June 30, 2019 and 2018, and the unaudited condensed consolidated statements of cash flows for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016.~~2018. The unaudited condensed consolidated balance sheet as of December 31, ~~2016~~2018 was ~~derived from~~based on the audited consolidated balance sheet as of December 31, ~~2016,~~2018, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~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; ~~long‑term~~ 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.

~~Adoption~~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~~Pronouncements” section below for information regarding this adoption.

~~In November 2016,~~

At the ~~FASB issued authoritative guidance that requires inclusion~~time of ~~cash~~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 ~~cash equivalents that have restrictions~~an operating lease liability at the lease commencement date. Lease expense for lease payments made is recognized on ~~withdrawal~~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 ~~use in total cash and cash equivalents on~~before the ~~statement~~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 ~~cash flows. This guidance will be effective~~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 ~~annual reporting periods beginning on~~impairment whenever events or ~~after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. The Company has adopted this guidance on January 1, 2017. The Company now presents the~~ changes in circumstances arise. During the ~~total~~three and six months ended June 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 ~~cash, cash equivalents, restricted cash~~(i) the discount rate it uses to discount the unpaid lease payments to present value, (ii) the lease term and ~~restricted cash equivalents in~~(iii) the ~~statement of cash flows and no longer presents transfers between cash and cash equivalents and~~lease payments.

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~~restricted cash and restricted cash investments~~

The discount rate applied to the unpaid lease payments is the interest rate implicit in the ~~statement of cash flows. Cash, cash equivalents and restricted cash stated~~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 consolidated unaudited statement of cash flows represent the addition of cash and cash equivalents, restricted cash classified as current and restricted cash classified as non-current line items in the unaudited condensed consolidated balance sheet. The adoption was on a retrospective basis and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016 has been adjusted to reflect the adoption. The adoptionlease 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 ~~impact~~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 ~~unaudited condensed consolidated balance sheet or statement~~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 ~~operations.~~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.

~~New Accounting Pronouncements~~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 ~~October 2016,~~certain instances, the ~~FASB issued~~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 ~~that requires~~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 ~~income tax consequences~~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 ~~intercompany~~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, ~~transfers other than inventory~~(iii) determination of lease payments and (iv) determination of the fair value at the time of contract inception and the residual fair 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 fair 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 ~~date. This guidance will be effective~~at the time of valuation. The Company’s risk management strategy for ~~annual reporting periods beginning on or after December 15, 2017, including interim periods~~protecting the residual fair value of the underlying assets include the ongoing maintenance by the Company during the lease term as well as clauses and other protections within ~~those annual periods, and early adoption is permitted.~~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 ~~is currently evaluating~~considers inputs such as the ~~potential impact~~lease term, lease payments, fair value of the ~~accounting~~underlying asset and ~~disclosure requirements on~~residual fair value of the ~~consolidated financial statements.~~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 ~~finalize~~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 ~~assessment during 2017.~~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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~~In January 2017,~~Bulk Water Sales and Services. Through the ~~FASB issued authoritative guidance that simplifies~~Seven Seas Water operating platform, the ~~test for goodwill impairment. This guidance will be effective for annual reporting periods beginning on~~Company enters into contracts with customers with a single performance obligation to deliver bulk water or ~~after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted upon interim~~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 ~~annual goodwill impairment tests performed on testing dates after January 1, 2017.~~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 ~~early adopt this guidance~~not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the ~~fourth quarter~~amount of ~~2017~~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 ~~conjunction with its annual goodwill impairment testing~~instances where there is a difference between the amount billed to a customer and the revenue recognized for ~~2017.~~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.

~~In May 2014,~~Certain contracts with customers which require the ~~FASB issued authoritative guidance regarding~~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 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 ~~specifies that revenue should be recognized when promised goods or services~~ are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods and will require enhanced disclosures. For contracts determined to be service concession ~~contracts,~~arrangements. Service concession arrangements are agreements entered into with a public sector entity which controls both (i) the ~~Company has concluded~~ability to modify or approve the ~~revenue recognition for assets constructed under~~services and prices provided by the ~~contract~~operating company and (ii) beneficial entitlement to, ~~occur~~or residual interest in, the infrastructure at the time control transfers to the customer for accounting purposes. This revenue recognition pattern varies from the revenue recognition pattern under the current authoritative guidance. While the Company has not quantified the impact of this change asend of the ~~date~~term of ~~filing,~~ the adoption may significantly affect the financial results as reported under the current authoritative guidance. The Company does not anticipate any other material changes to the timing of revenue recognition for other contracts with customers except in circumstances whereagreement. Service concession arrangements typically include more than one performance obligation, ~~exists.~~ 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 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 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 ~~where more than one performance obligation exists,~~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 is currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements. The Company expects to finalize its assessment during the fourth quarter of 2017. The Company will adopt the guidance on a retrospective basis on January 1, 2018. In conjunction with this adoption,accounted for initial direct costs incurred by the Company ~~will also adopt~~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 ~~issued~~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 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 June 30, 2019 and December 31, 2018 were $4.5 million and $3.7 million, respectively, and were recorded in ~~March 2017 regarding~~other assets in the ~~determination~~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 contract term, on a basis consistent with the transfer of good or services to the customer ~~in a service concession arrangement.~~to which the costs relate.

Contract fulfillment costs, net as of June 30, 2019 and December 31, 2018 were $4.3 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 six months ended June 30, 2019 were $1.2 million and $2.1 million, respectively. Total contract cost amortization expense for the three and six months ended June 30, 2018 were $0.6 million and $1.3 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 six months ended June 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. ~~This~~During 2018, the FASB issued additional authoritative guidance ~~will be~~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, and early adoption is permitted.~~ 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 ~~developed its assessment approach and has begun evaluating~~elected the ~~potential impact~~package of ~~the accounting and disclosure requirements on the consolidated financial statements. The Company expects to elect the~~ 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. ~~For lessor~~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 ~~electing~~ the ~~practical expedients provided,~~recognition of a right-of-use asset and corresponding lease liability for operating leases. As the Company ~~does not anticipate material changes to~~has made a policy election for the ~~accounting for operating leases or sales-type leases that existed at the adoption date. For lessee accounting, the Company expects to recognize~~short-term lease exemption, a right-of-use asset and corresponding lease liability ~~and right-of-use asset~~are only recorded for ~~operating~~ leases with ~~a term~~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 ~~reevaluating whether~~a lessee.

Lessor accounting - As the Company has elected the transitional practical expedients for leases, there are not any material impacts to ~~early adopt~~ the ~~guidance on~~consolidated financial statements for leases in situations which the Company is a ~~retrospective basis effective~~lessor and the lease commenced prior to January 1, ~~2018 in conjunction~~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 ~~revenue from contracts with customers.~~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 ~~will make this determination during~~is currently evaluating the ~~fourth quarter~~potential impact of ~~2017.~~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 accounting and disclosure requirements on the consolidated financial statements.

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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

~~Wellsys USA Corporation~~Pure Health Solutions, Inc.

On ~~September 8, 2017,~~December 18, 2018, Quench USA, Inc. (“Quench”), a wholly-owned subsidiary of AquaVenture Holdings Limited, acquired ~~substantially~~ all of the ~~assets~~issued and ~~assumed certain liabilities~~outstanding shares of ~~Wellsys USA Corporation~~Pure Health Solutions, Inc. (“~~Wellsys”~~PHSI”) pursuant to ~~an asset~~a stock purchase agreement ~~for an~~(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 ~~$6.9~~PHSI, net of adjustments to reduce the purchase price by $1.6 million, inand approximately $17.5 million of cash ~~including~~accounted for as a ~~final working capital adjustment~~post-combination payoff of ~~$165 thousand (“Wellsys Acquisition”)~~factored contract liabilities which ~~is expected~~had been classified as a secured borrowing. The factored contract liabilities were adjusted to ~~be received from~~fair value as of the ~~escrow agent during~~acquisition date based on the ~~three months ended December 31, 2017. Wellsys is~~present value of the factored contract liabilities using a ~~supplier~~discount rate of ~~high quality branded~~approximately 7% and ~~private-labeled POU water coolers and purifications systems. Headquartered in~~any penalties associated with the ~~greater Phoenix, Arizona area, Wellsys sells its products to a network of dealers throughout the United States, Canada, Mexico and South Africa.~~payoff.

~~Transaction-related~~Acquisition-related costs incurred by the Company during the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 were ~~$21 thousand,~~$0.1 million and $0.1 million, respectively, which were expensed as incurred within selling, general and administrative (“SG&A”) expenses in the ~~unaudited condensed~~ consolidated statements of operations and comprehensive income.

The Quench business completed the ~~Wellsys~~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 ~~Wellsys~~PHSI distribution network. In addition, the ~~acquisition provides an opportunity~~PHSI Acquisition enhances Quench’s ability to develop, source and ~~distribute Quench-exclusive innovative~~manufacture exclusive coolers and purification ~~offerings, and~~offerings. Lastly, it offers us the opportunity to develop relationships with ~~Wellsys~~POU dealers that could ~~ultimately~~ lead to ~~potential~~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	$	321		1,167
Inventory		884		2,606
Intangible assets		4,300
Prepaid expenses and other current assets				447
Property, plant and equipment				6,410
Deferred tax asset				108
Identified intangible assets				31,550
Goodwill		1,503		20,000
Total assets acquired		7,008		62,548
Liabilities assumed:
Customer deposits		(153)
Accounts payable and accrued liabilities				(22,652)
Deferred revenue				(329)
Other long-term liabilities				(450)
Total liabilities assumed		(153)		(23,431)
Total purchase price	$	6,855	$	39,117

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~~Due primarily~~As of June 30, 2019, the purchase price allocated to the ~~timing of the acquisition and the complexities involved with determining~~ fair value of ~~the intangible~~ assets acquired, including intangibles recorded in conjunction with the ~~Company has not yet completed the valuations of the identified intangibles.~~business combination, and liabilities assumed remains preliminary. The preliminary purchase price allocation has been developed based on ~~preliminary~~ estimates of fair values using the historical financial statements of ~~Wellsys~~PHSI prior to the acquisition along with assumptions made by management. Although the Company does not expect the final allocation to vary significantly, there may be adjustments made to the preliminary purchase price allocation that could result in changes to the preliminary fair values allocated, assigned useful lives and associated amortization recorded. The assets and liabilities in the preliminary 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 final valuation of the intangibles identified is dependent upon certain valuation and other studies that have not yet been finalized. Accordingly, the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above.

The estimated weighted average useful life for customer relationships, trade names, and non-compete agreements is 20 years, 12 years, and 5 years, respectively.

There was no impact on the amortization expense recorded during the three and six months ended June 30, 2019 as a result of the measurement period adjustments made to the purchase price allocation during the second quarter of 2019.

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

The results of the operations of ~~Wellsys~~the acquired PHSI assets are included in the Quench reportable segment after the date of ~~acquisition.~~ 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 ~~revenues~~$0.8 million, which was recorded in accrued liabilities, and ~~net income of Wellsys included~~a corresponding indemnification receivable in the ~~unaudited condensed~~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 preliminary 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 six months ended June 30, 2019, the Company incurred an incremental restructuring-related charge related to severance, termination benefits and related taxes of $0.1 million and $0.1 million, respectively, which was recorded within SG&A expenses in the consolidated statements of operations and comprehensive ~~income since acquisition was $0.4~~income. As of June 30, 2019 and December 31, 2018, the Company had accrued approximately $0.2 million and ~~$12 thousand, respectively.~~ $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 working capital 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 during the three and six months ended June 30, 2019.

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~~Aguas De Bayovar S.A.C.~~

On October 31, 2016, AquaVenture Holdings Peru S.A.C. ("AVH Peru"), a Peruvian company and an indirect wholly-owned subsidiary of AquaVenture Holdings Limited, acquired 100% of the outstanding shares of Aguas de Bayovar S.A.C. (‘‘ADB’’) and all of the rights and obligations under a design and construction contract for a desalination plant and related infrastructure located in Peru for an aggregate purchase price of $46.5 million in cash, including a working capital adjustment of $186 thousand (the “Peru Acquisition”) which was paid in February 2017. The desalination plant and related infrastructure, which was completed in 2010, has a design capacity of 2.7 million gallons per day, and ADB operates and maintains the desalination plant and related infrastructure constructed under the design and construction agreement to produce water for a contracted fee on a take-or-pay basis for a phosphate mining company pursuant to an operating and maintenance contract, which expires in 2037. The rights to the design and construction contract are accounted for as a note receivable that requires monthly installment payments from the customer for the construction of the desalination plant and related infrastructure, which continue until 2024.

~~The operations of ADB are included in the Seven Seas Water reportable segment for the periods after the date of acquisition.~~

Transaction-related costs incurred by the Company during the three and nine months ended September 30, 2016 were $0.4 million and $0.9 million, respectively, and were expensed as incurred within SG&A expenses in the unaudited condensed consolidated statements of operations and comprehensive income.

~~The Seven Seas Water~~Quench business completed the ~~Peru~~Bluline Acquisition to expand its installed base of ~~seawater reverse~~

~~osmosis desalination facilities used~~POU systems and to ~~provide WAAS,~~be able to participate more broadly in the global POU market through its ~~presence in South America and the industries served.~~indirect sales channel.

~~As of September 30, 2017,~~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:
Trade receivables	$	90
Inventory		345
Property, plant and equipment		331
Identified intangibles		1,462
Goodwill		645
Total assets acquired		2,873
Liabilities assumed:
Deferred revenue		(10)
Total liabilities assumed		(10)
Total purchase price	$	2,863

As of June 30, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the Bluline Acquisition, and liabilities assumed remains preliminary. ~~During~~The preliminary purchase price allocation has been developed based on estimates of fair values using the ~~nine~~historical financial statements of Bluline prior to the acquisition along with assumptions made by management. Although the Company does not expect the final allocation to vary significantly, there may be adjustments made to the preliminary purchase price allocation that could result in changes to the preliminary fair values allocated, assigned useful lives and associated amortization recorded. The assets and liabilities in the preliminary 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 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 during the three and six months ended ~~September~~June 30, ~~2017,~~2019 were $0.1 million 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 ~~made~~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.

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Assets acquired:
Cash and cash equivalents	$	849
Trade receivables		1,763
Inventory		2,642
Current portion of long-term receivables		521
Prepaid expenses and other current assets		1,673
Property, plant and equipment		32,266
Other assets		25
Long-term receivables		306
Identified intangible assets		47,310
Goodwill		63,041
Total assets acquired		150,396
Liabilities assumed:
Accounts payable and accrued liabilities		(4,286)
Deferred revenue		(1,021)
Other long-term liabilities		(1,706)
Deferred tax liability		(12,483)
Total liabilities assumed		(19,496)
Total purchase price	$	130,900

As of June 30, 2019, the purchase price allocated to the fair value of assets acquired, including intangibles, recorded in conjunction with the AUC Acquisition remains preliminary. Intangibles identified and valued related to the transaction include customer relationships, trade names, non-compete agreements and backlog. The final valuation of certain property, plant and equipment and the intangibles identified are dependent upon certain valuations and other studies that have not yet been finalized. Accordingly, the preliminary purchase price allocation is subject to further adjustment as additional information becomes available and as additional analyses and final valuations are completed. There can be no assurances that these additional analyses and final valuations will not result in material changes to the estimates of fair value set forth above. The estimated fair value of the property, plant and equipment was determined using the acquired book values of those assets. The estimated fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer. The estimated fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues. The estimated fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue and cash flow loss. The estimated fair value of the backlog, which represents revenues and the related profit for contracts executed but not yet completed, was determined using the multi-period excess earnings method.

The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names, non-compete agreements and backlog is 20 years, 15 years, 4.9 years, and 0.7 years, respectively.

There was not a material impact on the amortization expense recorded during the three and six months ended June 30, 2019 as a result of the measurement period adjustments made to the purchase price allocation during the first quarter of 2019.

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.

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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 ~~tax, that existed prior~~$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 ~~October 31, 2016.~~$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 ~~believes~~has determined that the ~~liabilities are fully indemnified pursuant~~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. 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 during the three and six months ended June 30, 2019 were $0.1 million 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 ~~sale agreement for~~liabilities assumed recorded in conjunction with the ~~Peru Acquisition. As a result,~~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 asare stated at fair value based on estimates of ~~September 30, 2017~~fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to ~~record~~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 ~~liability~~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

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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 ~~amount~~Quench reportable segment from and after the date of ~~$0.9~~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, subject to adjustment, 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 during the three and six months ended June 30, 2018 were $9 thousand and $86 thousand, respectively. There were no acquisition-related costs incurred by the Company during the three and six months ended June 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 ~~accrued~~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 ~~an indemnification receivable~~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 ~~amount~~purchase price allocation are stated at fair value based on estimates of ~~$0.9 million,~~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

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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 ~~in prepaids and other~~within the Quench reporting segment.

The results of the operations of the acquired Wa-2 assets are included in the ~~unaudited condensed consolidated balance sheet as~~Quench reportable segment from and after the date of ~~September 30, 2017.~~ 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 ADB and Wellsys,~~of: (i) PHSI, which occurred on ~~October 31, 2016~~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 ~~September 8, 2017, respectively,~~(v) Wa-2, which occurred on March 1, 2018, as if ~~they~~each had occurred on January 1, ~~2016.~~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				Three months ended				Six months ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Revenues	$	31,077	$	31,300	$	93,530	$	90,848	$	51,387	$	47,077	$	97,949	$	91,305
Net loss	$	(7,410)	$	(3,502)	$	(18,593)	$	(9,282)	$	(3,475)	$	(6,733)	$	(9,139)	$	(17,083)
Loss per share~~(1)~~	$	(0.28)			$	(0.70)			$	(0.13)	$	(0.25)	$	(0.34)	$	(0.63)

~~(1)~~

~~Represents loss per share for the period following the Corporate Reorganization and IPO.~~ ~~There were no ordinary shares outstanding prior to October 6, 2016 and, therefore, no loss per share information has been presented for any period prior to that date.~~

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Asset Acquisitions

~~Pure Water Innovations, Inc.~~

On June 1, 2017, Quench USA, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited, acquired substantially all of the assets of Pure Water Innovations, Inc. (“PWI”) pursuant to an asset purchase agreement. The assets acquired consisted primarily of in-place lease agreements and the related POU systems, which are generally located in North Carolina. The aggregate purchase price of $2.0 million, consisted of a cash payment and $50 thousand of contingent consideration, which was deemed probable of payment on the date of the acquisition. In addition, transaction-related expenses incurred by the Company were not material during the three and nine months ended September 30, 2017.

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

~~As the acquisition of PWI~~ did not meet the definition of a business combination, so the Company accounted for ~~the~~this transaction as an asset acquisition. 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, ~~transaction-related expenses~~acquisition-related costs are capitalized and allocated to the net assets acquired on a relative fair value basis.

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 for this acquisition was $1.5 million, including $1.1 million in cash and $0.4 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 $0.4 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 both the three and six months ended June 30, 2019 were $0.1 million.

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



Trade receivables	$	31	$	62
Property, plant and equipment		325		49
Inventory				6
Customer relationships		1,690		1,464
Deferred revenue		(28)		(37)
Accrued liabilities		(12)
Net assets acquired	$	2,006	$	1,544

The assets in the ~~initial~~ 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 customer relationships were valued using an excess earnings approach, which is based on the present value of expected cash flows generated by the revenues under the contract with the customer. The weighted average useful life of the acquired customer relationships is approximately 12 years from the date of acquisition.

4. Revenue

Disaggregation of Revenue

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



	Three Months Ended June 30, 2019						Three Months Ended June 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	9,729	$	—	$	9,729	$	9,092	$	—	$	9,092
Operating and maintenance		5,885		—		5,885		5,268		—		5,268
Total bulk water		15,614		—		15,614		14,360		—		14,360
Rental
Lease of equipment		3,570		18,997		22,567		—		14,821		14,821
Total rental		3,570		18,997		22,567		—		14,821		14,821
Product sales
Construction of plants		2,735		—		2,735		—		—		—
Sale of equipment, coffee and consumables		—		9,534		9,534		—		4,249		4,249
Total product sales		2,735		9,534		12,269		—		4,249		4,249
Financing		937		—		937		1,015		—		1,015
Total revenues	$	22,856	$	28,531	$	51,387	$	15,375	$	19,070	$	34,445

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


	Six Months Ended June 30, 2019						Six Months Ended June 30, 2018
	Seven Seas						Seven Seas
	Water		Quench		Total		Water		Quench		Total
Bulk water
Water delivery	$	18,442	$	—	$	18,442	$	17,531	$	—	$	17,531
Operating and maintenance		11,482		—		11,482		10,525		—		10,525
Total bulk water		29,924		—		29,924		28,056		—		28,056
Rental
Lease of equipment		6,709		37,665		44,374		—		28,780		28,780
Total rental		6,709		37,665		44,374		—		28,780		28,780
Product sales
Construction of plants		4,431		—		4,431		—		—		—
Sale of equipment, coffee and consumables		—		17,311		17,311		—		8,060		8,060
Total product sales		4,431		17,311		21,742		—		8,060		8,060
Financing		1,909		—		1,909		2,063		—		2,063
Total revenues	$	42,973	$	54,976	$	97,949	$	30,119	$	36,840	$	66,959

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 June 30, 2019 and December 31, 2018 (in thousands):


	June 30,		December 31,
	2019		2018
Contract assets
Trade receivables, net	$	23,962	$	21,437
Current portion of long-term receivables		7,251		6,538
Long-term receivables		36,379		40,574
Total contract assets	$	67,592	$	68,549

Contract liabilities
Deferred revenue, current	$	3,884	$	3,890
Deferred revenue, non-current		11,048		10,690
Total contract liabilities	$	14,932	$	14,580

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


	Three months ended				Three months ended
	June 30, 2019				June 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	$	—	$	1,733	$	—	$	304
Deferred revenue acquired during the period	$	—	$	(37)	$	—	$	(23)

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


	Six months ended				Six months ended
	June 30, 2019				June 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	$	—	$	4,509	$	—	$	3,037
Deferred revenue acquired during the period	$	—	$	(37)	$	—	$	(379)

The Company had no asset impairment charges related to contract assets during the three and six months ended June 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	$	34,366
2020	$	47,341
2021	$	47,189
2022	$	45,274
2023	$	45,274
Thereafter	$	314,133

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.

5. Fair Value Measurements

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the Company had the following assets and liabilities measured at fair value on a recurring basis in the ~~unaudited condensed~~ 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

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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 ~~or nine~~and six months ended ~~September~~June 30, ~~2017.~~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 June 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 June 30, 2019
Recurring basis:
Money market funds	$	22,711	$	22,711	$	—	$	—
U.S. Treasury securities	$	221	$	221	$	—	$	—
Acquisition contingent consideration	$	(2,310)	$	—	$	—	$	(2,310)
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.

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


	Three Months Ended		Six Months Ended
	June 30, 2019		June 30, 2019
Lease Cost
Operating lease cost	$	654	$	1,371
Short-term lease cost		132		250
Variable lease cost		4		8
Total lease cost	$	790	$	1,629

The weighted-average remaining lease term and weighted-average discount rate for operating leases as of June 30, 2019 is 7.7 years and 10.1%, respectively. Cash paid for operating leases that are included in the measurement of lease liabilities during the six months ended June 30, 2019 was $1.0 million.

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~~The~~As of June 30, 2019, the maturities of the Company’s ~~fair value measurements as of September 30, 2017 and December 31, 2016~~operating lease liabilities 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, 2017

Recurring basis:

Money market funds

$
13,571

$
13,571

$
—

$
—

U.S. Treasury securities

$
83,791

$
83,791

$
—

$
—

As of December 31, 2016

Recurring basis:

Money market funds

$
29,523

$
29,523

$
—

$
—

U.S. Treasury securities

$
24,777

$
24,777

$
—

$
—


Remainder of 2019	$	1,244
2020		2,023
2021		2,012
2022		1,895
2023		1,498
Thereafter		5,840
Total future minimum lease payments		14,512
Less imputed lease interest		(4,689)
Total lease liabilities	$	9,823

~~5. Long-Term Debt~~

As of ~~September 30, 2017 and~~ December 31, ~~2016, long‑term debt included the following (in thousands):~~

September 30,

December 31,


2017

2016

Corporate Credit Agreement

$
150,000

$
—

BVI Loan Agreement

27,076

31,432

Vehicle financing

1,513

1,783

Trinidad Credit Agreement

—

24,071

USVI Credit Agreement

—

12,923

Quench Loan Agreement

—

40,000

Curaçao Credit Facility

—

35,000

Total face value of long-term debt

$
178,589

$
145,209

Face value of long-term debt, current

$
6,063

$
27,963

Less: Current portion of unamortized debt discounts and deferred financing fees

—

—

Current portion of long-term debt, net of debt discounts and deferred financing fees

$
6,063

$
27,963

Face value of long-term debt, non-current

$
172,526

$
117,246

Less: Non-current portion of unamortized debt discounts and deferred financing fees

(3,543)

(1,493)

Long-term debt, net of debt discounts and deferred financing fees

$
168,983

$
115,753

~~Corporate Credit Agreement~~

2018, fOn August 4, 2017, the Company, AVH Peru and Quench USA, Inc. (collectively the “Borrowers”) entered into a $150.0 million senior secured credit agreement (the “Corporate Credit Agreement”) with a bank. The Credit Agreement is non-amortizing, matures in August 2021 and bears interest at LIBOR plus 6.00% with a LIBOR floor of 1%. Interest onlyuture minimum lease payments under non‑cancelable operating leases are ~~due quarterly with principal due in full upon maturity. As of September 30, 2017, the weighted‑average interest rate was 7.3%.~~

The Corporate Credit Agreement is guaranteed by the Company 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 Company financial information 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

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~~amendments to documents. The Company was in compliance with, or received waivers for breaches of, all such covenants as of September 30, 2017.~~

The Company may prepay, in whole or in part, the outstanding principal and accrued unpaid interest under the Corporate Credit Agreement. A prepayment fee is due upon repayment if it occurs prior to August 4, 2018. The Corporate Credit Agreement is collateralized by certain ~~of the assets of the Borrowers and stated guarantors.~~

~~On August 4, 2017, the Company utilized approximately $100 million of the proceeds from the Corporate Credit Agreement to repay in full the outstanding principal on the following debt obligations:~~

An Amended and Restated Credit Agreement, dated April 18, 2016 (as amended, restated, or modified or supplemented from time to time), between a bank and Seven Seas Water (Trinidad) Unlimited, an indirect wholly-owned subsidiary of the Company (“Trinidad Credit Agreement”);

A Credit Agreement, dated March 27, 2013 (as amended, restated, amended and restated, or modified or supplemented from time to time), among two banks and Seven Seas Water (USVI), an indirect wholly-owned subsidiary of the Company (“USVI Credit Agreement”);

A Loan and Security agreement, dated October 7, 2011 (as amended, restated, amended and restated, or modified or supplemented from time to time), between a lender and Quench USA, Inc. (“Quench Loan Agreement”); and

A Credit Agreement, dated June 18, 2015 (as amended, restated, amended and restated, or modified or supplemented from time to time), among a bank, the Company, Aqua Venture Holdings Curaçao N.V., a wholly-owned subsidiary of the Company, Seven Seas Water Corporation, a wholly-owned subsidiary of the Company and AquaVenture Capital Limited, an indirect wholly-owned subsidiary of the Company (“Curaçao Credit Facility”).

The Company recorded a loss on debt extinguishment of $1.4 million during the three months ended September 30, 2017 related to prepayment fees, breakage costs and accelerated amortization of debt financing fees, which was recorded in other expense within the unaudited consolidated statement of operations and comprehensive income.

~~BVI Loan Agreement~~

On August 4, 2017, Seven Seas Water (BVI) Ltd., an indirect wholly owned subsidiary of the Company, amended the credit facility between Seven Seas Water (BVI) Ltd. and a bank (“BVI Loan Agreement”) to extend the amortization 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, 2017, the weighted‑average interest rate was 4.3%.~~

~~Maturities of Long~~‑~~Term Debt~~

~~Maturities of long~~‑~~term debt were~~summarized as follows ~~as of September 30, 2017~~ (in thousands):

Amount Due

Remainder of 2017

$
1,217

2018

6,409

2019

6,018

2020

6,073

2021

156,037

2022 and thereafter

2,835

Total face value of long-term debt

$
178,589


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		Six Months Ended
	June 30, 2019		June 30, 2019
Lease income: sales-type leases
Profit at lease commencement	$	—	$	—
Interest income on lease receivables		47		98
Total lease income: sales-type leases		47		98
Lease income: operating leases		22,566		44,373
Total lease income	$	22,613	$	44,471

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	$	32,916
2020	$	43,227
2021	$	28,071
2022	$	17,402
2023	$	12,175
Thereafter	$	3,880

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


Remainder of 2019	$	380
2020		761
2021		602
2022		470
2023		415
Thereafter		—
Total future minimum lease payments		2,628
Less imputed lease interest		(369)
Total sales-type lease receivables	$	2,259

7. Share‑Based Compensation

AquaVenture Equity Awards

As described in Note 1—“Description of the Business”, the Company completed a reorganization on October 4, 2016, which resulted in the conversion, pursuant to the terms of AquaVenture Holdings LLC’s limited liability agreement, of all outstanding equity awards of AquaVenture Holdings LLC to equity awards of AquaVenture Holdings Limited, with the underlying security being ordinary shares of AquaVenture Holdings Limited. The ~~conversion retained the same economics of each of the outstanding equity awards. All other terms, including vesting, remained unchanged.~~

The Quench USA Holdings LLC 2014 Equity Incentive Plan and Quench USA, Inc. 2008 Stock Plan (collectively, the “Quench Equity Plans”) were assumed by AquaVenture Holdings Limited on October 4, 2016. All outstanding awards of the Quench Equity Plans were converted to equity awards of AquaVenture Holdings Limited, with the underlying security being ordinary shares of AquaVenture Holdings Limited. Consistent with the effects of the conversion on the AquaVenture Holding LLC equity awards, economics for each outstanding award were retained and all terms, including vesting, remained unchanged.

Issuances of securities under the AquaVenture Holdings LLC Amended and Restated Equity Incentive Plan and the Quench Equity Plans ceased at the time of the effectiveness of the IPO on October 5, 2016. As a result, no securities remain available for issuance under these plans.

~~On September 22, 2016, the Company approved and adopted the~~ AquaVenture Holdings Limited 2016 Share Option and Incentive Plan (the “2016 Plan”)~~, which~~ 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 ~~available~~authorized for issuance, subject to adjustment upon a change in capitalization, under the 2016 Plan was 5.0 million shares. The shares ~~available~~authorized for issuance ~~will~~ increase annually by 4% of the number of ordinary shares issued and outstanding on the immediately preceding December 31. As of ~~January 1, 2017,~~June 30, 2019, the number of ordinary shares ~~available~~authorized for issuance under the 2016 Plan ~~is 6.1~~was 8.2 million shares.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company granted ~~options~~an aggregate of 0.4 million restricted share units to ~~purchase 62 thousand ordinary shares~~employees, non-employee consultants and certain members of the Company’s board of directors. Restricted share units granted to ~~eligible recipients at a weighted average exercise price of $16.48 per share. The options to purchase ordinary shares~~employees and non-employee consultants typically have a time-based vesting schedule ~~of four years~~ with 25% vesting on the first anniversary of the date of grant and the remaining 75% vesting quarterly over the remaining three years.

~~In addition, the Company granted 57 thousand restricted~~ Restricted share units ~~during the nine months ended September 30, 2017. Certain of the restricted share units were~~ granted to certain members of the Company’s board of directors ~~and have time-based vesting schedule of one year from the date of grant. All other restricted share units have a time-based vesting schedule of four years with 25%~~typically vest in full on the first anniversary ~~and~~of the ~~remaining 75% vesting quarterly over~~date of the ~~remaining three years.~~grant. The aggregate grant date fair ~~market~~ value of restricted share units ~~is determined based on the closing share price of the Company’s ordinary shares on the date of grant, and is amortized on a straight-line basis over the requisite service period.~~

~~Employee Stock Purchase Plan~~

Under the 2016 Employee Stock Purchase Plan (“2016 ESPP”), the Company offers eligible employee participants 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, 6 thousand shares were sold to eligible employeesgranted during the ~~three and nine~~six months ended ~~September~~June 30, 2017. 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. At September 30, 2017, 0.4 million ordinary shares were available for future issuance under the 2016 ESPP.2019 was approximately $8.2 million.

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Independent Directors’ Deferred Compensation Program

Under the Independent Directors' Deferred Compensation Program (the ~~"Deferred~~“Deferred Compensation ~~Program"~~Program”) ~~which was established under the Issuer's 2016 Plan,~~, 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 ~~other~~ premium is given to the directors for deferral of their equity awards. Phantom share units ~~shall be~~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 ~~will~~ 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 ~~will be~~is recognized on the date of grant, while share-based compensation expense for the phantom share units issued in lieu of the restricted units ~~will be~~is recognized over the requisite service ~~period.~~period, which is typically 12 months.

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the Company granted 3approximately 20 thousand phantom shares to Eligible ~~Directors. At September 30, 2017,~~Directors, including 17 thousand phantom shares which vest in full on the first anniversary of the date of the grant and 3 thousand phantom shares that are immediately vested. The aggregate grant date fair value of the awards granted during the six months ended June 30, 2019 was $0.5 million.

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During the six months ended June 30, 2019, approximately 9 thousand phantom share units were forfeited pursuant to the terms in the Deferred Compensation Program. During the six months ended June 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 June 30, 2019, approximately 55 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 six months ended June 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 June 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~~June 30, ~~2017~~2019 and ~~2016~~2018 was ~~$3.1~~$1.3 million and ~~$0.4~~$3.4 million, respectively. For the three months ended ~~September~~June 30, ~~2017, $3.0~~2019, $1.2 million and $0.1 million were recorded in SG&A and cost of revenues, respectively, within the ~~unaudited condensed~~ consolidated statements of operations and comprehensive income. For the three months ended ~~September~~June 30, ~~2016, $0.4~~2018, $3.3 million and $0$0.1 million were recorded in SG&A and cost of revenues, respectively, within the ~~unaudited condensed~~ consolidated statements of operations and comprehensive income.

Total share‑based compensation expense recognized for all equity awards during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 was ~~$9.1~~$2.3 million and ~~$1.5~~$6.6 million, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2017, $8.8~~2019, $2.2 million and ~~$0.3~~$0.1 million were recorded in SG&A and cost of revenues, respectively, within the ~~unaudited condensed~~ consolidated statements of operations and comprehensive income. For the ~~nine~~six months ended ~~September~~June 30, ~~2016, $1.5~~2018, $6.5 million and $0$0.1 million were recorded in SG&A and cost of revenues, respectively, within the ~~unaudited condensed~~ consolidated statements of operations and comprehensive income.

There was no related tax benefit for the three or ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016 as a full deferred tax asset valuation allowance was recorded in the United States for domestic operations.~~2018.

7.8. 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.~~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.

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~~There were no ordinary shares outstanding prior to October 6, 2016, therefore no loss per share information has been presented for any period prior to that date.~~ 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		Three Months Ended				Six Months Ended
	September 30,		September 30,		June 30,				June 30,
	2017		2017		2019		2018		2019		2018
Numerator:
Net loss	$	(7,567)	$	(19,220)	$	(3,475)	$	(4,921)	$	(9,139)	$	(11,267)

Denominator:
Weighted-average ordinary shares outstanding - basic and diluted		26,441		26,414		26,949		26,550		26,907		26,521

Loss per share - basic and diluted	$	(0.29)	$	(0.73)	$	(0.13)	$	(0.19)	$	(0.34)	$	(0.42)

Given that the Company had a net loss for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019 and 2018, the calculation of diluted loss per share is computed using basic weighted average ordinary shares outstanding.

Approximately ~~3.9~~4.2 million weighted-average outstanding share awards for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, respectively, were excluded from the calculation of diluted earnings per share because their effect was antidilutive. Approximately 4.2 million and 4.1 million weighted-average outstanding share awards for the three and six months ended June 30, 2018, respectively, were excluded from the calculation of diluted earnings per share because their effect was antidilutive.

8.9. 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, isare 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 ~~unaudited condensed~~ consolidated ~~statement~~statements of ~~operations.~~operations and comprehensive income.

During the three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recorded accretion expense of $13 thousand and ~~$12~~$13 thousand, respectively. During the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, the Company recorded accretion expense of ~~$37~~$26 thousand and ~~$31~~$25 thousand, respectively. During the six months ended June 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 six months ended June 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 ~~or nine~~and six months ended ~~September~~June 30, 2017. During the three months ended September 30, 2016, certain of the Company’s existing contracts were extended. As a result, the Company recorded a gain of $55 thousand during both the three and nine months ended September 30, 2016 for the revaluation of the ARO based on changes in the projected costs for future removal and shipping activities.2018.

At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the current portion of the ARO liabilities was ~~$26 thousand~~$0.6 million and ~~$0,~~$0.7 million, respectively, ~~and was~~which are recorded in accrued liabilities in the ~~unaudited condensed~~ consolidated balance sheets. At ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, the long‑term portion of the ARO liabilities was ~~$1.1~~$0.5 million and ~~$1.1~~$0.5 million, respectively, ~~and was~~which are recorded in other long‑term liabilities in the ~~unaudited condensed~~consolidated balance sheets.

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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):


	Six Months Ended
	June 30, 2019
Acquisition contingent consideration at beginning of the period	$	3,109
Acquired during the period		368
Payments		(1,389)
Valuation adjustments		136
Interest accretion		86
Acquisition contingent consideration at end of the period	$	2,310

A portion of the acquisition contingent consideration liabilities are contingent on the future collection of certain acquired receivables and are recorded at fair value based on collectability and a discount factor. The remaining acquisition contingent consideration liabilities 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 $48 thousand and $0 for the three months ended June 30, 2019 and 2018, respectively. The Company also recorded valuation adjustments of $127 thousand for the change in fair value during the three months ended June 30, 2019, which was recorded in SG&A in the consolidated statements of operations and comprehensive income. There were no valuation adjustments for the three months ended June 30, 2018.

The Company recorded interest accretion expense within the consolidated statements of operations and comprehensive income of $86 thousand and $0 for the six months ended June 30, 2019 and 2018, respectively. The Company also recorded valuation adjustments of $136 thousand for the change in fair value during the six months ended June 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 six months ended June 30, 2018.

At June 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 June 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 ~~unaudited condensed~~ 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 ~~the unaudited condensed~~its consolidated financial position, results of

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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 ~~the unaudited condensed~~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, ~~cybersecurity and cyber incidents,~~ errors and omissions, employment practices liability and fidelity losses. There can be no assurance that the

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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~~June 30, ~~2017,~~2019, the Company ~~has~~ 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 ~~unaudited condensed~~ consolidated financial statements.

9.10. Cash Flow Information

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


	Nine Months Ended				Six Months Ended
	September 30,				June 30,
	2017		2016		2019		2018
Cash paid during the period:
Income taxes, net	$	1,138	$	71	$	953	$	1,376
Interest, net	$	8,381	$	7,500	$	12,527	$	6,186
Non-Cash Transaction Information:
Right-of-use assets obtained in exchange for new operating lease liabilities					$	1,388	$	—
Non-cash capital expenditures	$	611	$	1,078	$	3,967	$	602
Unpaid offering costs	$	—	$	1,113	$	255	$	—
Unpaid debt financing costs	$	111	$	—

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


	As of				As of
	September 30,				June 30,
	2017		2016		2019		2018
Cash and cash equivalents	$	118,070	$	25,000	$	41,312	$	107,402
Restricted cash, current		166		283		—		2,000
Restricted cash, non-current		4,147		5,558		4,249		3,635
	$	122,383	$	30,841
Cash, cash equivalents and restricted cash					$	45,561	$	113,037

~~10.~~

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 internationally under long‑term contracts.~~customers. Quench ~~provides~~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 ~~North America, typically under multi‑year contracts. Revenues reported under~~the United States and Canada.

In addition to the Seven Seas Water ~~reportable segment primarily represent bulk water sales~~ and ~~service, including revenues generated from service concession arrangements, whereas revenues reported under the~~ Quench ~~reportable segment primarily represent rental of filtered water and related systems.~~

~~Prior to January 1, 2017,~~segments, the Company included the majority of certain general and administrative costs, primarily professional service and other expenses to support the activities of the registrant holding company, within the Seven Seas reportable segment. Beginning January 1, 2017, the Company began separating “Corporate and Other” for the CODM and for segment reporting purposes. The Corporate and Other administration function is not treated as a

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~~segment but includes~~records certain general and administrative costs that are not allocated to either of the reportable ~~segments.~~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. AsThe Corporate and Other administration function is not treated as a ~~result of this change, the Company has restated prior periods for segment reporting purposes.~~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, 2017 and 2016 (in thousands):~~

Three Months Ended September 30, 2017

Three Months Ended September 30, 2016

Seven Seas

Corporate

Seven Seas

Corporate


Water

Quench

& Other

Total

Water

Quench

    & Other

    Total

Revenues:













Bulk water

$
14,206

$
—

$
—

$
14,206

$
13,879

$
—

$
—

$
13,879

Rental

—

13,428

—

13,428

—

12,396

—

12,396

Other

—

2,259

—

2,259

—

2,583

—

2,583

Total revenues

14,206

15,687

—

29,893

13,879

14,979

—

28,858

Gross profit:

Bulk water

6,302

—

—

6,302

6,196

—

—

6,196

Rental

—

7,345

—

7,345

—

7,140

—

7,140

Other

—

874

—

874

—

1,227

—

1,227

Total gross profit

6,302

8,219

—

14,521

6,196

8,367

—

14,563

Selling, general and administrative expenses

6,607

9,828

1,299

17,734

4,962

9,602

548

15,112

Income (loss) from operations

(305)

(1,609)

(1,299)

(3,213)

1,234

(1,235)

(548)

(549)

Other (expense) income, net

(1,764)

(1,359)

(385)

(3,508)

(1,896)

(1,027)

35

(2,888)

Loss before income tax expense

(2,069)

(2,968)

(1,684)

(6,721)

(662)

(2,262)

(513)

(3,437)

Income tax expense

790

56

—

846

1,275

—

—

1,275

Net loss

$
(2,859)

$
(3,024)

$
(1,684)

$
(7,567)

$
(1,937)

$
(2,262)

$
(513)

$
(4,712)

Other information:

Depreciation and amortization expense

$
4,278

$
3,856

$
—

$
8,134

$
4,183

$
3,519

$
—

$
7,702

Interest expense (income), net

$
880

$
790

$
385

$
2,055

$
1,806

$
1,027

$
(31)

$
2,802

Loss on extinguishment of debt

$
820

$
569

$
—

$
1,389

$
—

$
—

$
—

$
—

Expenditures for long-lived assets

$
1,108

$
3,135

$
—

$
4,243

$
1,810

$
3,104

$
—

$
4,914

Amortization of deferred financing fees

$
93

$
37

$
79

$
209

$
150

$
47

$
—

$
197

1932

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The following table provides information by reportable segment and a reconciliation to the consolidated results for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018 (in thousands):


	Nine Months Ended September 30, 2017								Nine Months Ended September 30, 2016								Three Months Ended June 30, 2019								Three Months Ended June 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate				Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Total		Water		Quench		& Other		Total		Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	43,238	$	—	$	—	$	43,238	$	40,951	$	—	$	—	$	40,951	$	15,614	$	—	$	—	$	15,614	$	14,360	$	—	$	—	$	14,360
Rental		—		39,238		—		39,238		—		36,153		—		36,153		3,570		18,997		—		22,567		—		14,821		—		14,821
Other		—		6,318		—		6,318		—		7,147		—		7,147
Product sales																		2,735		9,534		—		12,269		—		4,249		—		4,249
Financing																		937		—		—		937		1,015		—		—		1,015
Total revenues		43,238		45,556		—		88,794		40,951		43,300		—		84,251		22,856		28,531		—		51,387		15,375		19,070		—		34,445
Gross profit:
Bulk water		17,335		—		—		17,335		17,975		—		—		17,975		8,673		—		—		8,673		7,617		—		—		7,617
Rental		—		21,730		—		21,730		—		20,164		—		20,164		2,601		9,919		—		12,520		—		8,167		—		8,167
Other		—		2,626		—		2,626		—		3,284		—		3,284
Product sales																		433		4,009		—		4,442		—		1,407		—		1,407
Financing																		937		—		—		937		1,015		—		—		1,015
Total gross profit		17,335		24,356		—		41,691		17,975		23,448		—		41,423		12,644		13,928		—		26,572		8,632		9,574		—		18,206
Selling, general and administrative expenses		18,692		28,988		3,284		50,964		14,003		27,718		1,543		43,264		7,318		14,397		1,154		22,869		7,142		11,188		959		19,289
Income (loss) from operations		(1,357)		(4,632)		(3,284)		(9,273)		3,972		(4,270)		(1,543)		(1,841)		5,326		(469)		(1,154)		3,703		1,490		(1,614)		(959)		(1,083)
Other (expense) income, net		(4,139)		(3,395)		232		(7,302)		(5,428)		(3,065)		41		(8,452)
Other expense, net																								(6,707)								(3,506)
Loss before income tax expense		(5,496)		(8,027)		(3,052)		(16,575)		(1,456)		(7,335)		(1,502)		(10,293)								(3,004)								(4,589)
Income tax expense		2,424		221		—		2,645		2,633		—		—		2,633								471								332
Net loss	$	(7,920)	$	(8,248)	$	(3,052)	$	(19,220)	$	(4,089)	$	(7,335)	$	(1,502)	$	(12,926)							$	(3,475)							$	(4,921)
Other information:
Depreciation and amortization expense	$	12,771	$	11,060	$	—	$	23,831	$	12,271	$	10,192	$	—	$	22,463
Interest expense (income), net	$	2,980	$	2,826	$	(232)	$	5,574	$	5,197	$	3,065	$	(31)	$	8,231
Loss on extinguishment of debt	$	820	$	569	$	—	$	1,389	$	—	$	—	$	—	$	—
Depreciation and amortization																	$	5,902	$	6,676	$	—	$	12,578	$	3,675	$	4,516	$	—	$	8,191
Expenditures for long-lived assets	$	2,810	$	9,089	$	—	$	11,899	$	7,697	$	8,864	$	—	$	16,561	$	6,042	$	3,716	$	—	$	9,758	$	350	$	4,018	$	—	$	4,368
Amortization of deferred financing fees	$	363	$	182	$	79	$	624	$	455	$	113	$	—	$	568	$	74	$	50	$	134	$	258	$	64	$	50	$	122	$	236

Table of ~~September 30, 2017, total assets~~Contents

The following table provides information by reportable segment and a reconciliation to the consolidated results for the ~~Seven Seas Water~~six months ended June 30, 2019 and Quench reportable segments were $259.0 million and $204.4 million, respectively. As of December 31, 2016, total assets for the Seven Seas Water and Quench reportable segments were $274.2 million and $193.4 million, respectively.2018 (in thousands):


	Six Months Ended June 30, 2019								Six Months Ended June 30, 2018
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Revenues:
Bulk water	$	29,924	$	—	$	—	$	29,924	$	28,056	$	—	$	—	$	28,056
Rental		6,709		37,665		—		44,374		—		28,780		—		28,780
Product sales		4,431		17,311		—		21,742		—		8,060		—		8,060
Financing		1,909		—		—		1,909		2,063		—		—		2,063
Total revenues		42,973		54,976		—		97,949		30,119		36,840		—		66,959
Gross profit:
Bulk water		16,401		—		—		16,401		14,806		—		—		14,806
Rental		4,937		19,784		—		24,721		—		15,670		—		15,670
Product sales		726		7,130		—		7,856		—		2,692		—		2,692
Financing		1,909		—		—		1,909		2,063		—		—		2,063
Total gross profit		23,973		26,914		—		50,887		16,869		18,362		—		35,231
Selling, general and administrative expenses		14,618		28,598		2,522		45,738		14,745		21,907		2,211		38,863
Income (loss) from operations		9,355		(1,684)		(2,522)		5,149		2,124		(3,545)		(2,211)		(3,632)
Other expense, net								(13,216)								(6,896)
Loss before income tax expense								(8,067)								(10,528)
Income tax expense								1,072								739
Net loss							$	(9,139)							$	(11,267)
Other information:
Depreciation and amortization	$	11,598	$	12,938	$	—	$	24,536	$	7,239	$	8,812	$	—	$	16,051
Expenditures for long-lived assets	$	10,423	$	6,512	$	—	$	16,935	$	865	$	6,350	$	—	$	7,215
Amortization of deferred financing fees	$	143	$	101	$	268	$	512	$	130	$	101	$	244	$	475

~~As of September 30, 2017 and December 31, 2016, total assets for Corporate and Other were $95.6 million and $69.0 million, respectively.~~

~~11.~~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 or the lending bank’s prime lending rate.~~LIBOR.

For the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~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 ~~disasters~~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

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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~~June 30, ~~2017,~~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 ~~one plant~~certain of its plants for ~~wind.~~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 June 30, 2019. The subsequent events included the following:

On July 10, 2019, the Company made a public offering of 4,715,000 ordinary shares, including 615,000 ordinary shares issued upon the underwriters’ full exercise of their option to purchase additional shares, at a public offering price of $16.88 per share. The aggregate net proceeds received by the Company from the offering were approximately $75 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by the Company.

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 estimated aggregate purchase price for this acquisition was $7.3 million, which included approximately $4.6 million of cash related to the purchase price of Carolina Pure, subject to adjustments, $0.5 million payable on the one year anniversary of the transaction, subject to adjustments and approximately $2.2 million of cash accounted for as a post-combination payoff of factored contract liabilities which had been accounted for as a secured borrowing. 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 Carolina Pure to expand its installed base of POU systems in the United States.

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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 section titled “Risk Factors” previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, as amended.

Overview

AquaVenture Holdings Limited and its subsidiaries (the “Company”, “AquaVenture”, “we”, “us” and “our”) is a multinational provider of Water as a Service ~~(“WAAS”)~~ ®, or WAAS ®, solutions that provide our customers with a reliable and cost-effective source of clean drinking water, processed water and ~~process~~wastewater treatment and water reuse solutions primarily under ~~long-term~~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~~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, ~~and~~ wastewater treatment and water reuse solutions ~~providing approximately 8~~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~~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 ~~year~~day, or GPD, to ~~governmental, municipal, industrial and hospitality~~more than 1.5 million GPD, are provided through 97 leases with customers. Quench ~~which we acquired in June 2014,~~ is a U.S.‑based provider of ~~Point‑of‑~~Point of Use, ~~(“POU”)~~or POU, filtered water systems and related services through direct and indirect sales channels to approximately ~~40,000~~50,000 institutional and commercial customers, including more than half of the Fortune ~~500.~~500, throughout the United States and Canada.

~~Our~~Through our Seven Seas Water ~~platform generates~~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. ~~The~~As of June 30, 2019, the significant majority of our Seven Seas Water revenue is derived from our operations in six different ~~locations as of September 30, 2017:~~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, ~~having~~which have a combined capacity of approximately 5.8 million GPD.

Curaçao: Seven Seas Water provides industrial grade water through a seawater and brackish water desalination ~~facility~~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, which we began operating after we acquired the capital stock of Biwater (BVI) Holdings Limited on June 11, 2015.~~GPD.

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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, which we began operating after we completed the acquisition of all the outstanding shares of Aguas de Bayovar S.A.C. (“ADB”), and all the rights and obligations under a design and construction contract for a desalination plant and related infrastructure located in Peru (the “Peru Acquisition”) on October 31, 2016.

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 5-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 six months ended June 30, 2019, our revenue under this water supply agreement was $2.0 million and $3.9 million, respectively, or 3.8% and 4.0% of our total consolidated revenue, respectively.

Through our Seven Seas Water ~~offers~~wastewater treatment and water reuse solutions, we design, fabricate and install plants that ~~utilize reverse osmosis~~are leased under a contractual term or sold to customers. The wastewater treatment and ~~other purification technologies~~water reuse solutions offered to ~~convert seawater or brackish water into potable, high purity industrial grade~~customers include scalable modular treatment plants, field-erected plants and ~~ultra‑pure water~~temporary bypass plants ranging from 5,000 GPD to more than 1.5 million GPD. These solutions are provided through 97 leases with customers. With the acquisition of AUC Acquisition Holdings (“AUC”) on November 1, 2018, in ~~large volumes for customers operating in regions with limited access to usable water. Our WAAS solutions allow our customers to outsource the management~~which we acquired all of the ~~entire lifecycle~~issued and outstanding membership interests of AUC pursuant to a ~~desalination plant.~~ membership interest purchase agreement (the “AUC Acquisition”), we significantly increased our wastewater treatment and water reuse solutions.

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

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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‑~~customer owned equipment. Quench also generates revenue from the sale of coffee and ~~consumables.~~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~~June 30, ~~2017~~2019 was ~~approximately 8%~~less than 7.5%, implying an average rental period of more than 1112 years. We define “annual unit ~~attrition rate”~~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~~12 month period, and the denominator of which is the average number of company-owned and billed rental units during the same ~~12-month~~12 month period. WeThrough our direct sales channel, we receive recurring fees for the units we rent or service throughout the life of our customer relationship. WeIn addition, we also receive ~~non‑recurring~~non-recurring revenue from some customers for the sale of equipment and for certain services, such as the installation, relocation or removal of ~~equipment, as well as~~equipment. Through our indirect sales channel, we receive re-occurring revenue from the ~~resale~~sale of ~~equipment.~~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 ~~North America~~the United States and Canada and are supported by a primary operations center in King of Prussia, ~~Pennsylvania, which provides marketing~~Pennsylvania.

While we routinely identify and ~~business development, field service~~evaluate potential acquisition candidates and ~~supply chain support, customer care~~engage in discussions and ~~administrative functions.~~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~~June 30, ~~2017,~~2019, our consolidated revenues were ~~$29.9~~$51.4 million, which represents an increase of ~~3.6%~~49.2% over consolidated revenues of $34.4 million for the ~~same period of 2016.~~three months ended June 30, 2018. The increases in consolidated revenues for the three months ended ~~September~~June 30, ~~2017~~2019 were composed of increases in our Seven Seas Water

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segment of ~~2.4%~~48.7% and increases in our Quench segment of ~~4.7%~~49.6% over the same period of ~~2016.~~2018. The increase in revenue for our Seven Seas Water segment ~~during the three months ended September 30, 2017 over the same period of 2016~~ was ~~mainly due to~~primarily driven by the inclusion of AUC operations, the commencement of our water contract in Anguilla and higher revenues ~~from~~in our ~~Peru Acquisition in October 2016.~~USVI operations. The increase in revenue for our Quench segment ~~during the three months ended September 30, 2017 over the same period of 2016~~ was mainly ~~due to~~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 and acquisitions made during 2017.~~attrition.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, our consolidated revenues were ~~$88.8~~$97.9 million, which represents an increase of ~~5.4%~~46.3% over consolidated revenues of $67.0 million for the ~~same period of 2016.~~six months ended June 30, 2018. The increases in consolidated revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 were composed of increases in our Seven Seas Water segment of ~~5.6%~~42.7% and increases in our Quench segment of ~~5.2%~~49.2% over the same period of ~~2016.~~2018. The increase in revenue for our Seven Seas Water segment ~~during the nine months ended September 30, 2017 over the same period of 2016~~ was primarily ~~due to~~driven by the inclusion of AUC operations, the commencement of our water contract in Anguilla and higher revenues ~~from~~in our ~~Peru Acquisition in October 2016.~~USVI operations. The increase in revenue for our Quench segment was mainly the result of the inclusion of revenues from acquisitions during ~~the nine months ended September 30, 2017 over the same period of 2016 was primarily due to~~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 and acquisitions made during 2017.~~

On June 1, 2017, we acquired substantially all of the assets of Pure Water Innovations, Inc. (“PWI”) pursuant to an asset purchase agreement for an aggregate purchase price of $2.0 million (“PWI Acquisition”). The assets acquired consisted primarily of in-place lease agreements and the related POU systems, which are generally located in North Carolina.

On August 2, 2017, effective August 1, 2017, we acquired substantially all of the assets and assumed certain liabilities of Quench Water Canada, Inc., pursuant to an asset purchase agreement for an aggregate purchase price of $758 thousand (“Quench Canada Acquisition”). The assets acquired consisted primarily of in-place lease agreements and the related POU systems, which are generally located in Ontario, Canada, and certain intellectual property.

On September 8, 2017, we acquired substantially all of the assets and assumed certain liabilities of Wellsys USA Corporation (“Wellsys”) pursuant to an asset purchase agreement for an aggregate purchase price of $6.9 million (“Wellsys Acquisition”). Wellsys is a supplier of high quality branded and private-labeled POU water coolers and purifications systems. Headquartered in the greater Phoenix, Arizona area, Wellsys sells its products to a network of dealers throughout the United States, Canada, Mexico and South Africa.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 both the ~~nine~~three and six months ended ~~September~~June 30, ~~2017,~~2019, revenues for the Seven Seas Water and Quench segments represented approximately ~~49%~~44% and ~~51%~~56%, respectively, of our consolidated revenues.

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~~Prior~~In addition to January 1, 2017, we included the majority of certain general and administrative costs, primarily professional service and other expenses to support the activities of the registrant holding company, within the Seven Seas ~~reportable segment. Beginning January 1, 2017,~~Water and Quench segments, we ~~began separating “Corporate and Other” for the CODM and for segment reporting purposes. The Corporate and Other administration function is not treated as a segment but includes~~record certain general and administrative costs that are not allocated to either of the reportable ~~segments.~~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. AsThe Corporate and Other administration function is not treated as a ~~result of this change, we have restated prior periods for segment reporting purposes.~~ 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, ~~2016~~2018, as amended, and subsequent filings.

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 ~~services~~solutions with new and existing governmental, municipal, industrial, property developer and hospitality customers. ~~Performance of an existing plant site is generally consistent over time.~~ Our performance and the comparability of results over time ~~however,~~ are largely

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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, ~~acquisitions of existing plants,~~ and the extension, termination or expiration of water supply ~~agreements.~~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.

The table below summarizes recent significant events that affect performance and comparability of financial results for the three and nine months ended September 30, 2017 and 2016 as well as future periods:


			~~Capacity~~
			~~(Million~~	~~Commencement~~
~~Plant Name~~	~~Location~~	~~Event~~	~~GPD)~~	~~Date~~
~~Point Blanche~~	~~St. Maarten~~	~~Plant expansion - Phase 2~~	~~1.0~~	~~March 2016~~
~~Point Fortin~~	~~Trinidad~~	~~Plant expansion~~	~~1.2~~	~~July 2016~~
~~Aguas de Bayovar~~	~~Peru~~	~~Plant acquisition~~	~~2.7~~	~~October 2016~~

On August 4, 2017, we entered into an amended water purchase agreement with our customer in the British Virgin Islands (“BVI Amended WPA”) to modify, effective January 1, 2017, certain contractual provisions related to the calculation of the water rate and the overall cash payment profile in exchange for other actions between us and the customer. All other terms of the original water purchase agreement remained unchanged. As a result of this contract amendment, we expect gross margins for our Seven Seas Water segment to be lower than the comparable periods in 2016 for the remainder of the year.

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

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development. ~~We believe our build, own and operate model provides a significant distinction from many of our competitors in a bid or other selection process.~~ 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, the customer water specification, the suitability of the plant site and our ability to use existing infrastructure, the lead times for any required custom made or made to order equipment, and the ability to obtain required permits and licenses.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.

To increase opportunities for new business with shortened sales cycles, we have, since 2008, pursued and achieved significant additional business and established long‑term customer relationships as a result of our rapid deployment capabilities, which allow us to respond to short‑term emergency water shortages in our target markets, often without a competitive bid requirement. Our current business in the USVI and Curaçao is attributable in large part to earlier deployments of our mobile containerized units to address emergency shortages. We continue to maintain this capability through our investment in containerized and modular water plants that include components having long procurement lead times.

To optimize our returns, we may seek to finance a portion of the investment, including projects and acquisitions, through debt. The timing, extent and terms of such debt financing and the ensuing increase to interest expense can vary from project to project.

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 ~~increasing~~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 ~~at an existing plant increases,~~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 ~~a lower cost for each~~deployment of incremental ~~gallon produced, and our customers benefit from an increased and reliable supply of water.~~equipment to meet customer demands. Similarly, contract extensions and renewals provide economic benefits for both the customer and us. By the time ofwe 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.~~capital.

Historically, additional plant expansions and contract extensions have followed our initial installations. For example, in Curaçao, at the customer’s request, we expanded plant production capacity in 2012 and again in 2013, in both cases also extending the contract term. In 2014, we assumed responsibility for retrofitting and operating customer‑owned equipment, and we now provide approximately 80%Acquisition of the water used at this customer’s facility. We have also had capacity expansions in the USVI and St. Maarten and have had contract extensions at each of our first four major plants. In addition, on September 3, 2015, we amended our water sale agreement with a customer in Trinidad to expand the existing desalination plant capacity by approximately 21% and extend the term of the contract by 50 months.Existing Operations

~~Plant Acquisitions~~

Revenue and expenses will increase upon an acquisition of an existing ~~plant~~assets or businesses from a third ~~party, which could be a new customer, an existing customer, a third‑party project developer or a facility owner. The~~party. In addition, the time, cost and capital required to complete ~~a plant~~an acquisition are significant. ~~Initially~~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 ~~acquired plant~~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. We have completed seven acquisitions of existing plant operations since inception. In October 2016, we completed the Peru Acquisition for an aggregate purchase price of $46.5 million. Results after the date of acquisition are included in the results of operations for the Seven Seas Water segment. 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.

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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 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.~~results.

Our future performance will also be affected by our efforts and ability to secure new or expanded business from new outsourcing applications such as highly specialized water for industrial companies, municipal and industrial wastewater treatment and reuse, and processing

Table of ~~produced water generated from oil and gas exploration. We may incur additional costs to develop industry specific knowledge about such opportunities.~~Contents

Changes to Sales Volume, Costs of Sales and Operating Expenses

~~Our~~For our desalination solutions, our profitability is affected by changes in the volume of water delivered above any minimum required customer purchases, ~~and~~ 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 ~~business~~desalination solutions and the relatively high level of fixed costs such as depreciation and ~~long‑term~~ 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 ~~will~~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 ~~six~~a majority of our ~~eight~~water supply contracts. In the water supply contracts ~~with our major customers. In the other two,~~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 ~~for~~based on inflation. Profitability, however, could be adversely affected by significant ~~increase~~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 ~~run~~operate and maintain our desalination plants over a long ~~periods~~period of time, we use plant designs ~~equipment~~ and equipment ~~maintenance programs~~ that seek to minimize ~~future~~ repairs and maintenance and optimize ~~long‑term cost~~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 ~~center~~centers in Tampa, Florida and Houston, Texas, and our organization in Santiago, Chile incur significant selling, general and administrative ~~(“SG&A”)~~ 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 ~~center~~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

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of pricing based on the volume of water purchased during the billing period. These contractual features are key determinants of plant revenue and plant profitability. Certain of our contracts provide for contractually scheduled price changes. In addition, ~~most of~~ our contracts may include provisions to increase prices in accordance with a specified inflation 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 ~~expand plant capacity~~ or increase ~~minimum volumes pursuant to a take‑or‑pay agreement or a combination thereof.~~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, termination or expiration. ~~We seek to mitigate the risk~~

Table of ~~such events by establishing a track record for reliability and leveraging the cost advantages of being the incumbent provider.~~Contents

Customer Demand and Certain Other External Factors

WeFor 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 ~~which~~ 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 ~~which~~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 ~~which~~ can impact primary demand;

destruction caused by floods, tropical storms and hurricanes ~~which~~ 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 ~~which can impact~~impacting the quality of source water, such as bacteria levels or contaminants in source water, and ~~can~~ 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, ~~per~~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 ~~additional~~ 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.

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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 ~~products,~~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~~June 30, ~~2017~~2019 was ~~approximately 8%~~less than 7.5%, implying an average rental period of more than 1112 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 ~~fourteen~~14 acquisitions since ~~2008, six~~our initial public offering, of which 11 have occurred ~~after our acquisition~~since the beginning of ~~Quench in 2014 and three of which occurred during 2017.~~2018. We believe ~~the three acquisitions made during the nine months ended September 30, 2017 are~~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 PWI Acquisition on June 1, 2017 and the Quench Canada Acquisition on August 2, 2017 are examples of opportunities to increase our market share and expand our service coverage footprint in the core direct rental portion of our business.

~~On September 8, 2017, we completed the Wellsys Acquisition. Unlike Quench’s existing direct customer equipment~~indirect sales ~~business model, Wellsys systems are sold exclusively through an indirect~~ channel ~~of dealers in the United States, Canada, Mexico and South Africa, which~~ expands our participation in the growing POU market domestically and internationally. In addition, the ~~acquisition provides an opportunity~~channel enhances our ability to develop, source and ~~distribute Quench-exclusive~~manufacture innovative, exclusive coolers and purification ~~offerings, and~~offerings. Lastly, the channel offers us the opportunity to develop deeper relationships with ~~Wellsys~~POU dealers that ~~we believe~~has led to several acquisitions to date and could ~~ultimately~~ lead to ~~potential~~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‑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 ofranging up to ~~five~~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 ~~timing, number and~~overall compensation of ~~new~~field service ~~hires~~ and supply chain support (along with the costs of associated ~~vehicles,~~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 ~~national~~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

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new customer acquisition costs, such as lead generation expenses and certain sales commissions, which are expensed upfront and recovered over the periods following the execution of a customer contract and any subsequent renewal. ~~A portion of new customer acquisition~~Commissions and other costs ~~including internal salaries and benefits,~~that are directly related to the negotiation and execution of leases, considered ~~lease origination~~contract acquisition costs, are capitalized ~~as deferred lease costs. Deferred lease costs are~~and amortized on a straight‑line basis over the ~~average lease term.~~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.~~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.~~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 (“~~U.S.~~ 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 ~~November~~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 ~~that requires inclusion~~regarding implementation of ~~cash and cash equivalents that have restrictions~~measurement of credit losses on ~~withdrawal or use in total cash and cash equivalents on the statement of cash flows.~~financial instruments. This guidance will be effective for annual reporting periods beginning on or after December 15, 2017, including interim periods within those annual periods, and early adoption is permitted. We have adopted this guidance on January 1, 2017. We now present the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows and no longer present transfers between cash and cash equivalents and restricted cash and restricted cash investments in the statement of cash flows. Cash, cash equivalents and restricted cash stated in the unaudited condensed consolidated statement of cash flows represent the addition of cash and cash equivalents, restricted cash classified as current and restricted cash classified as non-current line items in the unaudited condensed consolidated balance sheet. The adoption was on a retrospective basis and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016 has been adjusted to reflect the adoption. The adoption does not have any impact on our unaudited condensed consolidated balance sheet or statement of operations.

~~New Accounting Pronouncements~~

In October 2016, the FASB issued authoritative guidance that requires the recognition of income tax consequences of intercompany asset transfers other than inventory at the transaction date. This guidance will be effective for annual reporting periods beginning on or after December 15, 2017,2019, 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 ~~our~~the consolidated financial statements. ~~We expect to finalize our assessment during 2017.~~

In ~~January 2017,~~August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in a cloud computing arrangement that ~~simplifies the test for goodwill impairment.~~is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim

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periods within those annual periods. Early adoption is permitted upon interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We will early adopt this guidance in the fourth quarter of 2017 in conjunction with our annual goodwill impairment testing for 2017.

In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers that specifies that revenue should be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. This guidance is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods, and will require enhanced disclosures. For contracts determined to be service concession contracts, we have concluded the revenue recognition for assets constructed under the contract to occur at the time control transfers to the customer for accounting purposes. This revenue recognition pattern varies from the revenue recognition pattern under the current authoritative guidance. While we have not quantified the impact of this change as of the date of filing, theearly adoption ~~may significantly affect the financial results as reported under the current authoritative guidance.~~is permitted. We do not anticipate any other material changes to the timing of revenue recognition for other contracts with customers except in circumstances where more than one performance obligation exists. For contracts where more than one performance obligation exists, we are currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements. We expect to finalize our assessment during the fourth quarter of 2017. We will adopt the guidance on a retrospective basis on January 1, 2018. In conjunction with this adoption, we will also adopt the authoritative guidance issued in March 2017 regarding the determination of the customer in a service concession arrangement.

In ~~February 2016,~~March 2019, the FASB issued authoritative guidance regarding ~~leases that requires lessees~~targeted changes 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.~~accounting. This guidance will be effective for annual reporting periods beginning on or after December 15, ~~2018,~~2019, including interim periods within those annual periods, and early adoption is permitted. We ~~have developed our assessment approach and have begun~~are currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements. We expect to elect the practical expedients provided for within the authoritative guidance which exempts us 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. For lessor accounting, as a result of electing the practical expedients provided, we do not anticipate material changes to the accounting for operating leases or sales-type leases that existed at the adoption date. For lessee accounting, we expect to recognize a lease liability and right-of-use asset for operating leases with a term of more than 12 months. We are reevaluating whether to early adopt the guidance on a retrospective basis effective January 1, 2018 in conjunction with the guidance regarding revenue from contracts with customers. We will make this determination during the fourth quarter of 2017.

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~~Discussion and ~~analysis~~Analysis of ~~financial condition~~Financial Condition and ~~results~~Results of ~~operations”~~Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~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 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.

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~~Results~~

Key estimates and judgments in determining both the operating lease liability and right-of-use asset include the determination of ~~Operations~~(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 ~~following tables set forth~~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 ~~operating results~~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 ~~periods presented.~~ 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 ~~Seven Seas Water segment results~~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 ~~results from the Peru Acquisition~~practical expedient to account for the ~~periods following its completion~~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 ~~October 31, 2016. Through ADB, we sell water,~~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 ~~take-or-pay~~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 ~~our~~customers. In certain instances, we enter into a contract with a customer ~~under~~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 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 ~~while pursuant~~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.

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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 fair 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 ~~design~~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 ~~construction contract,~~term of the renewal are not stated and are subject to renewal.

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 ~~note receivable. These contracts with~~requirement for the customer ~~are structured differently from those with our other Seven Seas Water customers. Only~~to guarantee the operating activities related to the O&M contract are included in revenues and cost of revenues. The payments received on the design and construction contract includes amounts accounted for as principal repayments, which are not reflected in the consolidated statement of operations, and interest income. Because the contracts are structured differently from our other Seven Seas Water customer contracts, the inclusion of our Peru operations has a negative impact on Seven Seas Water gross margins as the profitability profileresidual value of the ~~O&M contract by itself is lower than other Seven Seas Water customer contracts.~~underlying leased asset. Variable lease payments that do not depend on an index or rate are excluded from the determination of lease payments.

The ~~Quench segment results~~fair value of the underlying leased asset at contract inception and residual fair 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 fair 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, the 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 fair 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 ~~results from~~option for the ~~Wellsys acquisition following~~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 ~~completion on September 8, 2017. Through Wellsys, we sell high quality branded and private-labeled POU water coolers and purification systems to a network~~implied interest rate.

Table of dealers in the United States, Canada, Mexico and South Africa. Because the gross margins are typically lower for dealer equipment sales than Quench’s existing direct customer equipment sales business, the inclusion of Wellsys will have a negative impact on Quench’s gross margins.Contents

~~Further, the~~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				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
	(in thousands)								(in thousands)
Revenues:
Bulk water	$	14,206	$	13,879	$	43,238	$	40,951	$	15,614	$	14,360	$	29,924	$	28,056
Rental		13,428		12,396		39,238		36,153		22,567		14,821		44,374		28,780
Other		2,259		2,583		6,318		7,147
Product sales										12,269		4,249		21,742		8,060
Financing										937		1,015		1,909		2,063
Total revenues		29,893		28,858		88,794		84,251		51,387		34,445		97,949		66,959
Cost of revenues:
Bulk water		7,904		7,683		25,903		22,976		6,941		6,743		13,523		13,250
Rental		6,083		5,256		17,508		15,989		10,047		6,654		19,653		13,110
Other		1,385		1,356		3,692		3,863
Product sales										7,827		2,842		13,886		5,368
Total cost of revenues		15,372		14,295		47,103		42,828		24,815		16,239		47,062		31,728
Gross profit		14,521		14,563		41,691		41,423		26,572		18,206		50,887		35,231
Selling, general and administrative expenses		17,734		15,112		50,964		43,264		22,869		19,289		45,738		38,863
Loss from operations		(3,213)		(549)		(9,273)		(1,841)
Income (loss) from operations										3,703		(1,083)		5,149		(3,632)
Other expense:
Interest expense, net		(2,055)		(2,802)		(5,574)		(8,231)		(6,508)		(3,354)		(13,068)		(6,604)
Other expense, net		(1,453)		(86)		(1,728)		(221)		(199)		(152)		(148)		(292)
Loss before income tax expense		(6,721)		(3,437)		(16,575)		(10,293)		(3,004)		(4,589)		(8,067)		(10,528)
Income tax expense		846		1,275		2,645		2,633		471		332		1,072		739
Net loss	$	(7,567)	$	(4,712)	$	(19,220)	$	(12,926)	$	(3,475)	$	(4,921)	$	(9,139)	$	(11,267)

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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				Three Months Ended				Six Months Ended
	September 30,				September 30,				June 30,				June 30,
	2017		2016		2017		2016		2019		2018		2019		2018
Revenues:
Bulk water	47.5	%	48.0	%	48.7	%	48.6	%	30.4	%	41.7	%	30.6	%	41.9	%
Rental	44.9	%	43.0	%	44.2	%	42.9	%	43.9	%	43.0	%	45.3	%	43.0	%
Other	7.6	%	9.0	%	7.1	%	8.5	%
Product sales									23.9	%	12.4	%	22.2	%	12.0	%
Financing									1.8	%	2.9	%	1.9	%	3.1	%
Total revenues	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%
Cost of revenues:
Bulk water	26.4	%	26.6	%	29.2	%	27.3	%	13.5	%	19.6	%	13.8	%	19.8	%
Rental	20.3	%	18.2	%	19.7	%	19.0	%	19.6	%	19.3	%	20.1	%	19.6	%
Other	4.6	%	4.7	%	4.2	%	4.6	%
Product sales									15.2	%	8.3	%	14.2	%	8.0	%
Total cost of revenues	51.3	%	49.5	%	53.1	%	50.9	%	48.3	%	47.2	%	48.1	%	47.4	%
Gross profit	48.6	%	50.5	%	47.0	%	49.2	%	51.7	%	52.9	%	52.0	%	52.6	%
Selling, general and administrative expenses	59.3	%	52.4	%	57.4	%	51.4	%	44.5	%	56.0	%	46.7	%	58.0	%
Loss from operations	(10.7)	%	(1.9)	%	(10.4)	%	(2.2)	%
Income (loss) from operations									7.2	%	(3.1)	%	5.3	%	(5.4)	%
Other expense:
Interest expense, net	(6.9)	%	(9.7)	%	(6.3)	%	(9.8)	%	(12.7)	%	(9.7)	%	(13.3)	%	(9.9)	%
Other expense, net	(4.9)	%	(0.3)	%	(1.9)	%	(0.3)	%	(0.4)	%	(0.4)	%	(0.2)	%	(0.4)	%
Loss before income tax expense	(22.5)	%	(11.9)	%	(18.6)	%	(12.3)	%	(5.9)	%	(13.2)	%	(8.2)	%	(15.7)	%
Income tax expense	2.8	%	4.4	%	3.0	%	3.1	%	0.9	%	1.0	%	1.1	%	1.1	%
Net loss	(25.3)	%	(16.3)	%	(21.6)	%	(15.4)	%	(6.8)	%	(14.2)	%	(9.3)	%	(16.8)	%

Comparison of the Three Months Ended ~~September~~June 30, ~~2017~~2019 and ~~2016~~2018

Revenues

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


	Three Months Ended								Three Months Ended
	September 30,				Change				June 30,				Change
	2017		2016		Dollars		Percent		2019		2018		Dollars		Percent
	(dollars in thousands)								(dollars in thousands)
Revenues:
Seven Seas Water	$	14,206	$	13,879	$	327	2.4	%
Bulk water									$	15,614	$	14,360	$	1,254	8.7	%
Rental										3,570		—		3,570	NM
Product sales										2,735		—		2,735	NM
Financing										937		1,015		(78)	(7.7)	%
Total Seven Seas Water									$	22,856	$	15,375	$	7,481	48.7	%

Quench		15,687		14,979		708	4.7	%
Rental										18,997		14,821		4,176	28.2	%
Product sales										9,534		4,249		5,285	124.4	%
Total Quench									$	28,531	$	19,070	$	9,461	49.6	%

Total revenues	$	29,893	$	28,858	$	1,035	3.6	%	$	51,387	$	34,445	$	16,942	49.2	%

Our total revenues of ~~$29.9~~$51.4 million for the three months ended ~~September~~June 30, ~~2017~~2019 increased ~~$1.0~~$17.0 million, or ~~3.6%~~49.2%, ~~compared to~~from $34.4 million for the ~~same~~three months ended June 30, 2018 through a combination of organic and inorganic growth. In calculating organic and inorganic revenue growth, (i) organic growth represents estimated revenue from

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operations that existed in both the 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 ~~of 2016.~~in which the business did not exist in the current year period.

Seven Seas Water revenues for the three months ended ~~September~~June 30, ~~2017~~2019 increased ~~$0.3~~$7.5 million, or ~~2.4%~~48.7%, compared to the same period of ~~2016. This increase was mainly~~2018, which were comprised of 43.9% inorganic growth and 4.8% organic growth. Bulk water revenues increased $1.3 million, or 8.7%, compared to the prior year period, primarily due to ~~the inclusion~~an increase of ~~incremental revenues of $1.1~~$0.7 million from our ~~Peru operations. These increases were partially offset by $0.6 million of lower revenues related~~USVI operations due to ~~Hurricanes Irma and Maria, which included impacts of $0.4 million, $0.1 million and $0.1 million at our St. Maarten, USVI and BVI plants, respectively. In addition to~~higher production volumes in the ~~hurricane impacts, revenues from our BVI plant decreased $0.4 million~~current quarter compared to the same period of ~~2016 primarily due to rate adjustments~~2018 and an increase of $0.4 million in connection with the ~~August 4, 2017~~commencement of our water contract ~~amendment.~~in Anguilla which began in October 2018. Rental revenues and product sales increased $3.6 million and $2.7 million, respectively, due to the inclusion of the AUC operations which were acquired in November 2018.

Quench revenues for the three months ended ~~September~~June 30, ~~2017~~2019 increased ~~$0.7~~$9.5 million, or ~~4.7%~~49.6%, compared to the same period of ~~2016.~~2018, which were comprised of 34.6% of inorganic net growth and 15.0% organic growth. The prior year period included $1.1 million of revenue from the Atlas High Purity Solutions business which was divested in October 2018. Rental revenues increased ~~$1.0~~$4.2 million, or ~~8.3%~~28.2%, compared to the ~~same~~prior year period, which was comprised of ~~2016,~~21.6% inorganic net growth from acquisitions and 6.6% of organic growth due to additional units placed under new leases in excess of unit ~~attrition, and $0.3~~attrition. Product sales increased $5.3 million ~~from acquisitions. The increase in rental revenue was partially offset by a decrease in other revenues of $0.3 million, or 12.5%,~~ compared to the same period of ~~2016,~~2018, which included $3.5 million of inorganic net growth primarily due to ~~a $0.8~~the acquisitions of PHSI and Bluline in December 2018, and $1.8 million ~~reduction in direct customer~~of organic growth driven by higher indirect dealer equipment sales ~~primarily related to a single large customer, offset in part by $0.4 million of Wellsys dealer equipment sale revenue~~ and ~~a $0.1 million increase in~~ coffee sales.

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~~As a result of the aforementioned BVI contract amendment, we expect revenues recognized from our BVI operations to be lower than the comparable periods in 2016 for the remainder of the year.~~

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										Three Months Ended
	September 30,						Change				June 30,
	2017			2016			Dollars		Percent		2019			2018			Percent
	(dollars in thousands)
Cost of Revenues:
Seven Seas Water	$	7,904		$	7,683		$	221	2.9	%
Quench		7,468			6,612			856	12.9	%
Total cost of revenues	$	15,372		$	14,295		$	1,077	7.5	%
Gross Profit:
Seven Seas Water	$	6,302		$	6,196		$	106	1.7	%
Quench		8,219			8,367			(148)	(1.8)	%
Total gross profit	$	14,521		$	14,563		$	(42)	(0.3)	%
Gross Margin:
Seven Seas Water		44.4	%		44.6	%
Bulk water												55.5	%		53.0	%	2.5	%
Rental												72.9	%		—	%	NM
Product sales												15.8	%		—	%	NM
Financing												100.0	%		100.0	%	—	%
Total Seven Seas Water												55.3	%		56.1	%	(0.8)	%

Quench		52.4	%		55.9	%
Rental												52.2	%		55.1	%	(2.9)	%
Product sales												42.0	%		33.1	%	8.9	%
Total Quench												48.8	%		50.2	%	(1.4)	%

Total gross margin		48.6	%		50.5	%						51.7	%		52.9	%	(1.2)	%

Total gross margin for the three months ended June 30, 2019 decreased 120 basis points to 51.7% from 52.9% for the same period in 2018.

Seven Seas Water gross margin for the three months ended ~~September~~June 30, ~~2017 remained relatively flat at 44.4%~~2019 decreased 80 basis points to 55.3% compared to ~~44.6% for~~56.1% in the ~~same period of 2016. The~~prior year period. Bulk water gross margin of ~~44.4% included~~55.5% increased 250 basis points compared to 53.0% in the prior year period primarily due to higher revenues in our USVI and BVI operations without a ~~decline resulting from~~commensurate increase in costs, partially offset by a lower gross margin in St. Maarten due to the ~~aforementioned BVI contract amendment~~timing of performing certain repairs and ~~an offsetting increase from better-than-expected performance~~maintenance activities. Rental and product sales gross margin of 72.9% and 15.8%, respectively, for the three months ended June 30, 2019 had no comparative period as both related to the acquisition of the AUC operations in ~~Peru during~~November 2018. Financing gross margin is 100% as the ~~current quarter.~~ revenues have no corresponding costs.

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Quench gross margin for the three months ended ~~September~~June 30, ~~2017~~2019 decreased ~~350~~140 basis points to ~~52.4%~~48.8% from ~~55.9%~~50.2% for the same period of ~~2016. The~~2018. Rental gross margin for the second quarter of 2019 was 52.2%, a decrease ~~was~~from 55.1% in the prior year period, primarily due to ~~(i) increased costs for service personnel~~an increase in depreciation and ~~rental depreciation~~amortization expense as a percentage of revenues related to ~~growth in~~additional units placed on lease and higher freight expense, partially offset by lower compensation and benefits as a percentage of revenues due to continued leveraging of the ~~rental installed base, and (ii) a decline in other~~platform achieved through increased customer density. Product sales gross margin ~~related~~increased to ~~decreases in higher-margin direct customer equipment sales, and growth of lower-margin businesses, including coffee and Wellsys dealer equipment sales.~~

~~Selling, general and administrative expenses~~

~~The following table presents SG&A expenses for our two operating segments and expenditures classified as Corporate and Other:~~

Three Months Ended

September 30,

Change


2017

2016

Dollars

Percent

(dollars in thousands)

Selling, General and Administrative Expenses:

Seven Seas Water

$
6,607

$
4,962

$
1,645

33.2
%
Quench

9,828

9,602

226

2.4
%
Corporate and Other

1,299

548

751

137.0
%
Total selling, general and administrative expenses

$
17,734

$
15,112

$
2,622

17.4
%

~~Total SG&A expenses~~42.0% for the three months ended ~~September~~June 30, ~~2017 increased $2.6 million, or 17.4%, compared to the same period of 2016.~~

Seven Seas Water SG&A expenses for the three months ended September 30, 2017 increased $1.6 million, or 33.2%, compared to the same period of 2016. The increase was mainly due to a $1.8 million increase in share-based compensation resulting2019 from ~~the equity award grants following our initial public offering (“IPO”) in the fourth quarter of~~

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2016 (the “IPO Grant”) and $0.3 million higher acquisition-related expenses in the third quarter of 2017, partially offset by a $0.3 million decrease in compensation and benefits mainly due to elevated discretionary compensation expense in the same period of 2016. Seven Seas Water SG&A expenses as a percentage of revenue were 46.5% for the three months ended September 30, 2017, compared to 35.8% for the same period of 2016, which was mainly due to the increase in share-based compensation expense as discussed above.

Quench SG&A expenses for the three months ended September 30, 2017 increased $0.2 million, or 2.4%, compared to the same period of 2016. The increase was mainly due to a $0.7 million increase in share-based compensation resulting from the IPO Grant, a $0.3 million increase in amortization expense of deferred lease costs related to the increased costs of units placed on lease and $0.1 million of acquisition-related expenses during the third quarter of 2017. These increases were partially offset by $0.8 million lower expenses related to the implementation of a new software-as-a-service (“SAAS”) based enterprise resource planning (“ERP”) system and a $0.3 million decrease in depreciation expense related to the acceleration of depreciation33.1% in the prior year ~~on an existing ERP system. Quench SG&A expenses as a percentage of revenue were 62.7% for~~period, primarily driven by the ~~three months ended September 30, 2017, compared to 64.1% for the same period of 2016.~~

Corporate and Other SG&A expenses for the three months ended September 30, 2017 increased $0.8 million compared to the same period of 2016. The increase was mainly due to a $0.5 million increase in insurance and professional fees, including elevated legal, audit and consulting and advisory costs, since becoming a public company in October of 2016 and in connection with Sarbanes-Oxley Act implementation efforts, and the adoption of the new revenue and lease accounting guidance. In addition, share-based compensation increased $0.2 million from incremental equity awards granted to certain members of our board of directors in late 2016 and early 2017.

~~Other expense~~

Three Months Ended

September 30,

Change


2017

2016

Dollars

Percent

(dollars in thousands)

Interest expense, net

$
(2,055)

$
(2,802)

$
747

(26.7)
%
Other expense, net

(1,453)

(86)

(1,367)

1,589.5
%
Total other expense

$
(3,508)

$
(2,888)

$
(620)

21.5
%

Interest expense, net for the three months ended September 30, 2017 decreased $0.7 million compared to the same period of 2016. The increase was mainly due to $0.9 million of interest income earned on the payments we received on the design and construction contract acquired in the Peru Acquisition and a $0.2 million increase in interest income earned on higher cash balances, partially offset by a $0.3 million increase in interest expense primarily due to increased borrowings in connection with the $150 million senior secured credit agreement entered into on August 4, 2017 (the “Corporate Credit Agreement”).

Other expense for the three months ended September 30, 2017 increased $1.4 million compared to the same period of 2016. The increase was mainly due to $1.4 million of loss on debt extinguishment recorded from the early extinguishment of the debt in Trinidad, USVI, Curaçao and Quench that was replaced with the Corporate Credit Agreement.

~~Income tax expense~~

Three Months Ended

September 30,

Change in


2017

2016

Dollars

(dollars in thousands)

Income tax expense

$
846

$
1,275

$
(429)

Effective tax rate

(12.6)
%

(37.1)
%

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~~believe it is more likely than not that we will realize the benefit of such losses.~~In general, the provision for income taxes for the three months ended September 30, 2017 and 2016 was calculated using an estimated annual effective tax rate excluding jurisdictions with no income tax and entities which anticipate a current year loss for which no tax benefit can be taken. For legal entities that expect marginal profitability for the year and have permanent differences that result in significant variations in the estimated annual effective tax rate, we have calculated the income tax provision based on the actual effective tax rate for the year-to-date period as this is the best estimate for the reporting period.

For the three months ended September 30, 2017, we incurred a consolidated pre-tax loss of $6.7 million, which was composed of: (i) an aggregate of $8.4 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 $1.7 million of pre-tax income in taxable jurisdictions. For the three months ended September 30, 2016, we incurred a consolidated pre-tax loss of $3.4 million, which was composed of: (i) an aggregate of $5.2 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 $1.8 million of pre-tax income in taxable jurisdictions.

Income tax expense for the three months ended September 30, 2017 and 2016 was $0.8 million and $1.3 million, respectively. The decrease was mainly due to a discrete adjustment of $0.6 million recorded during the three months ended September 30, 2016 related to a change in the estimated income tax benefit expected to be received in a taxable international jurisdiction. This decrease was partially offset by taxable income generated by our Peru operations, which were acquired in October 2016.

~~Cash paid for income taxes was $0.5 million and $0.1 million during the three months ended September 30, 2017 and 2016, respectively.~~

~~Comparison of Nine Months Ended September 30, 2017 and 2016~~

~~Revenues~~

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

Nine Months Ended

September 30,

Change


2017

2016

Dollars

Percent

(dollars in thousands)

Revenues:

Seven Seas Water

$
43,238

$
40,951

$
2,287

5.6
%
Quench

45,556

43,300

2,256

5.2
%
Total revenues

$
88,794

$
84,251

$
4,543

5.4
%

~~Our total revenues of $88.8 million for the nine months ended September 30, 2017 increased $4.5 million, or 5.4%, compared to the same period of 2016.~~

Seven Seas Water revenues for the nine months ended September 30, 2017 increased $2.3 million, or 5.6%, compared to the same period of 2016. This was mainly due to the inclusion of incremental revenues of $2.8 million from our Peru operations, which were acquired in October of 2016, and a $1.2 million increase in revenues compared to the same period of 2016 at our Trinidad plant due to an increase in volume of water delivered to our customer resulting from a plant expansion completed in 2016, net of a reduction in the average per unit price charged due to a lower rate being charged for incremental water delivered in excess of certain thresholds. These increases were partially offset by a $0.6 million of lower revenues related to Hurricanes Irma and Maria, which included impacts of $0.4 million, $0.1 million and $0.1 million at our St. Maarten, USVI and BVI plants, respectively. In addition to the hurricane impacts, revenues from our BVI plant decreased $1.2 million due to rate adjustments in connection with the aforementioned contract amendment.

Quench revenues for the nine months ended September 30, 2017 increased $2.3 million, or 5.2%, compared to the same period of 2016. Rental revenues increased $3.1 million, or 8.5%, compared to the same period of 2016, due to additional units placed under new leases in excess of unit attrition, and $0.3 million from acquisitions. The increase in rental revenue was partially offset by a decrease in other revenues of $0.8 million, or 11.6%, due to a $1.4 million

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reduction in direct customer equipment sales, primarily related to a single large customer, offset in part by $0.4 million of Wellsys dealer equipment sale revenue and a $0.2 million increase in coffee sales.

~~As a result of the aforementioned BVI contract amendment, we expect revenues recognized from our BVI operations to be lower than the comparable periods in 2016 for the remainder of the year.~~

~~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


2017

2016

Dollars

Percent

(dollars in thousands)

Cost of Revenues:

Seven Seas Water

$
25,903

$
22,976

$
2,927

12.7
%
Quench

21,200

19,852

1,348

6.8
%
Total cost of revenues

$
47,103

$
42,828

$
4,275

10.0
%
Gross Profit:

Seven Seas Water

$
17,335

$
17,975

$
(640)

(3.6)
%
Quench

24,356

23,448

908

3.9
%
Total gross profit

$
41,691

$
41,423

$
268

0.6
%
Gross Margin:

Seven Seas Water

40.1
%

43.9
%

Quench

53.5
%

54.2
%

Total gross margin

47.0
%

49.2
%

Seven Seas Water gross margin for the nine months ended September 30, 2017 decreased 380 basis points to 40.1% from 43.9% for the same period of 2016. The decrease was mainly due to: (i) the reduction in gross margins for our BVI operations from the aforementioned contract amendment, and (ii) the inclusion of our Peru operations, which negatively impacted gross margin due to the lower margin profile of the operating and maintenance contract included in our operating results and elevated repairs and maintenance expense during 2017, part of which was planned as part of our post-acquisition integration and part of which was due to adverse weather conditions in Peru earlier in the year. As a result of the aforementioned BVI contract amendment and the inclusion of the O&M contract for our Peru operations, we expect gross margins for our Seven Seas Water segment to be lower than the comparable periods in 2016 for the remainder of the year.

Quench gross margin for the nine months ended September 30, 2017 decreased 70 basis points to 53.5% from 54.2% for the same period of 2016. The decrease was primarily due to (i) a decline in other gross margin related to decreases in higher-margin direct customer equipment sales, and growth of lower-margin businesses, including coffee and Wellsys dealer equipment sales, and (ii) increased costs for service personnel and rental depreciation related to growth in the rental installed base. We expect Quench gross margin to decline slightly on a total year basis as compared to the prior year as a result of lower gross margins for other revenues, primarily due to the growth of lower-margin businesses, including the increasing contribution from Wellsysindirect PHSI dealer equipment sales.

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Selling, general and administrative expenses

The following table presents the components of ~~selling, general and administrative~~SG&A expenses ~~(SG&A)~~ for our two operating segments:


	Nine Months Ended								Three Months Ended
	September 30,				Change				June 30,				Change
	2017		2016		Dollars		Percent		2019		2018		Dollars		Percent
	(dollars in thousands)								(dollars in thousands)
Selling, General and Administrative Expenses:
Seven Seas Water	$	18,692	$	14,003	$	4,689	33.5	%	$	7,318	$	7,142	$	176	2.5	%
Quench		28,988		27,718		1,270	4.6	%		14,397		11,188		3,209	28.7	%
Corporate and Other		3,284		1,543		1,741	112.8	%		1,154		959		195	20.3	%
Total selling, general and administrative expenses	$	50,964	$	43,264	$	7,700	17.8	%	$	22,869	$	19,289	$	3,580	18.6	%

Total SG&A expenses for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 increased ~~$7.7~~$3.6 million, or ~~17.8%~~18.6%, compared to the same period of ~~2016.~~2018.

Seven Seas Water SG&A expenses of $7.3 million for the ~~nine~~three months ended ~~September~~June 30, ~~2017 increased $4.7 million, or 33.5%,~~2019 remained relatively flat compared to the ~~same period~~prior year period. The current quarter reflected an increase of ~~2016. The increase was mainly~~$1.2 million in amortization expense of definite-lived intangible assets and $0.2 million higher compensation and benefits expense, both of which were primarily due to the acquisition of the AUC operations in November 2018. Offsetting this was a ~~$5.0~~decrease of $1.5 million ~~increase~~ in share-based compensation ~~primarily resulting from~~expense driven by the ~~IPO Grant, partially offset by $0.3 million lower third-party engineering services associated~~completion of the vesting of certain equity grants made in connection with ~~business development activities.~~our initial public offering in 2016. Seven Seas Water SG&A expenses as a percentage of revenue were ~~43.2%~~32.0% for the ~~nine~~three months ended ~~September~~June 30, ~~2017, compared to 34.2%~~2019, a decline from 46.5% for the same period of ~~2016, which was mainly due to the increase in share-based compensation expense as discussed above.~~ 2018.

Quench SG&A expenses for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 increased ~~$1.3~~$3.2 million ~~or 4.6%,~~to $14.4 million compared to the ~~same period of 2016.~~prior year period. The increase was ~~mainly~~driven by $1.2 million higher amortization expense primarily related to an increase in intangible assets from recent acquisitions, $0.9 million higher acquisition-related expenses primarily due to adjustments associated with purchase consideration recorded for acquired employees, $0.8 million higher compensation and benefits primarily driven by increased headcount from the inclusion of staff added from certain acquisitions and a ~~$1.9~~$0.5 million increase in ~~share-based compensation resulting from the IPO Grant and a $0.8 million increase in amortization expense of deferred lease costs~~general expenses related to the ~~increased costs~~expansion of ~~units placed on lease. These increases were partially offset by~~our operations. Partially offsetting this increase was a ~~$0.9~~$0.5 million decrease in ~~depreciation~~share-based compensation expense ~~related to~~driven by the ~~acceleration~~completion of ~~depreciation~~the vesting of certain equity grants made in ~~the prior year on an existing ERP system, $0.5 million lower compensation and benefits expense and a $0.3 million decrease~~connection with our initial public offering in ~~expense related to the implementation of a new SAAS-based ERP system.~~2016. Quench SG&A expenses as a percentage of revenue were ~~63.6%~~50.5% for the ~~nine~~three months ended ~~September~~June 30, ~~2017, compared to 64.0%~~2019, a decline from 58.7% for the same period of ~~2016.~~ 2018.

Corporate and Other SG&A expenses for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 increased $1.7 million compared to the same period in 2016. The increase was mainly due to a $1.2 million increase in insurance and professional fees, including elevated legal, audit and consulting and advisory costs, since becoming a public company in October of 2016 and in connection with Sarbanes-Oxley Act implementation efforts, and the adoption of the new revenue and lease accounting guidance. In addition, share-based compensation increased $0.4 million from incremental equity awards granted to certain members of our board of directors in late 2016 and early 2017.

~~Other expense~~

Nine Months Ended

September 30,

Change


2017

2016

Dollars

Percent

(dollars in thousands)

Interest expense, net

$
(5,574)

$
(8,231)

$
2,657

(32.3)
%
Other expense, net

(1,728)

(221)

(1,507)

681.9
%
Total other expense

$
(7,302)

$
(8,452)

$
1,150

(13.6)
%

~~Interest expense, net for the nine months ended September 30, 2017 decreased $2.7~~$0.2 million compared to the same period of ~~2016. The decrease was mainly~~2018, primarily due to $2.7 million of interest income earned on the payments we received on the design and construction contract acquired in the Peru Acquisition and a $0.3 million increase in interest income earned on cash balances, partially offset by a $0.3 million increase in interest expense resulting from increased borrowingshigher professional fees in connection with corporate activities including capital raising.

Commencing on December 18, 2018, the ~~Corporate Credit Agreement entered into on August 4, 2017 as well as our draw-downs~~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 ~~Curaçao Credit Facility~~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 months ended June 30, 2019, the Company incurred an incremental restructuring-related charge related to severance, termination benefits and related taxes of $0.1 million, which was recorded within SG&A expenses in ~~March 2016~~the consolidated statements of operations and oncomprehensive income. As of June 30, 2019 and December 31, 2018, the ~~non-revolving credit facility in Trinidad in May 2016.~~

Company had accrued approximately $0.2 million and $0.8

3750

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million, respectively, within accrued liabilities on the consolidated balance sheets. The Company completed the PHSI Restructuring Plan during the second quarter of 2019.

Other expense


	Three Months Ended
	June 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Interest expense, net	$	(6,508)	$	(3,354)	$	(3,154)	94.0	%
Other expense, net		(199)		(152)		(47)	30.9	%
Total other expense	$	(6,707)	$	(3,506)	$	(3,201)	91.3	%

Interest expense, net for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 increased ~~$1.5~~$3.2 million compared to the ~~same period in 2016 mainly~~prior year period. The increase was primarily due to ~~$1.4~~incremental borrowings of $150 million in connection with expansions of ~~loss on debt extinguishment recorded from~~our senior secured credit agreement in November and December 2018.

Other expense, net of $0.2 million for the ~~early extinguishment of~~three months ended June 30, 2019 remained relatively flat compared to the ~~debt in Trinidad, USVI, Curaçao and Quench that was replaced with the Corporate Credit Agreement.~~prior year period.

Income tax expense


	Nine Months Ended								Three Months Ended
	September 30,						Change in		June 30,						Change in
	2017			2016			Dollars		2019			2018			Dollars
	(dollars in thousands)								(dollars in thousands)
Income tax expense	$	2,645		$	2,633		$	12
Income tax expense (benefit)									$	471		$	332		$	139
Effective tax rate		(16.0)	%		(25.6)	%				(15.7)	%		(7.2)	%

For ~~In general,~~ the ~~provision for income taxes for the nine~~three months ended ~~September~~June 30, 2017 and 2016 was calculated using an estimated annual effective tax rate excluding jurisdictions with no income tax and entities which anticipate a current year loss for which no tax benefit can be taken. For legal entities that expect marginal profitability for the year and have permanent differences that result in significant variations in the estimated annual effective tax rate, we have calculated the income tax provision based on the actual effective tax rate for the year-to-date period as this is the best estimate for the reporting period. 2019

~~For the nine months ended September 30, 2017,~~, we incurred a consolidated pre-tax loss of ~~$16.6~~$3.0 million, which was composed of: (i) an aggregate of ~~$20.8~~$3.5 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 ~~$4.2~~$0.5 million of pre-tax income in taxable jurisdictions. For the ~~nine~~three months ended ~~September~~June 30, ~~2016,~~2018, we incurred a consolidated pre-tax loss of ~~$10.3~~$4.6 million, which was composed of: (i) an aggregate of ~~$15.6~~$6.2 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 ~~$5.3~~$1.6 million of pre-tax income in taxable jurisdictions.

Income tax expense for the ~~nine~~three months ended ~~September~~June 30, ~~2017~~ 2019 and ~~2016~~2018 was ~~$2.6~~$0.5 million and ~~$2.6~~$0.3 million, respectively. Income tax expense for the ~~nine~~three months ended ~~September~~June 30, ~~2017 included~~2019 and 2018 was composed of a current tax expense of $0.6 million and $0.5 million, respectively, and deferred tax benefit of $0.1 million and $0.2 million, respectively. The increase in income tax expense for the three months ended June 30, 2019 as compared to the same period in 2018 was primarily due to: (i) an increase of a deferred tax liability for an indefinite-lived asset; (ii) an increase in tax expense related to ~~taxable~~higher withholding taxes payable in certain jurisdictions; (iii) and an increase in tax expense in a certain jurisdiction due to the existence of a valuation allowance in the prior year period which was subsequently released during the third quarter of 2018. These increases were partially offset by a decrease in deferred tax expense related to lower pretax book income ~~generated~~in certain jurisdictions.

Cash paid for income taxes was $0.1 million and $0.4 million during the three months ended June 30, 2019 and 2018, respectively.

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Comparison of the Six Months Ended June 30, 2019 and 2018

Revenues

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


	Six Months Ended
	June 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Revenues:
Seven Seas Water
Bulk water	$	29,924	$	28,056	$	1,868	6.7	%
Rental		6,709		—		6,709	NM
Product sales		4,431		—		4,431	NM
Financing		1,909		2,063		(154)	(7.5)	%
Total Seven Seas Water	$	42,973	$	30,119	$	12,854	42.7	%

Quench
Rental	$	37,665	$	28,780	$	8,885	30.9	%
Product sales		17,311		8,060		9,251	114.8	%
Total Quench	$	54,976	$	36,840	$	18,136	49.2	%

Total revenues	$	97,949	$	66,959	$	30,990	46.3	%

Our total revenues of $97.9 million for the six months ended June 30, 2019 increased $31.0 million, or 46.3%, compared to the same period of 2018.

Seven Seas Water revenues for the six months ended June 30, 2019 increased $12.9 million, or 42.7%, compared to the same period of 2018, which were comprised of 39.3% inorganic growth and 3.4% organic growth. Bulk water revenues increased $1.9 million, or 6.7%, compared to the prior year period, primarily due to: (i) an increase of $1.0 million from our USVI operations and $0.3 million from our St. Maarten operations due to higher production volumes compared to the same period of 2018; (ii) an increase of $0.6 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 $6.7 million and $4.4 million, respectively, due to the inclusion of the AUC operations which were acquired in ~~October 2016, (ii) expense~~November 2018.

Quench revenues for the ~~correction~~six months ended June 30, 2019 increased $18.1 million, or 49.2%, compared to the same period of ~~an immaterial~~2018, which were comprised of 35.6% of inorganic net growth and 13.6% organic growth. The prior year period ~~error~~included $2.3 million of revenue from the Atlas High Purity Solutions business that was divested in October 2018. Rental revenues increased $8.9 million, or 30.9%, compared to the prior year period, which was comprised of 24.0% inorganic net growth from acquisitions and 6.9% of organic growth due to additional units placed under new leases in excess of unit attrition. Product sales increased $9.3 million compared to the same period of 2018, which included $6.5 million of inorganic net growth primarily due to the acquisitions of PHSI and Bluline in December 2018, and $2.8 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:


	Six Months Ended
	June 30,						Change
	2019			2018			Percent
Gross Margin:
Seven Seas Water
Bulk water		54.8	%		52.8	%	2.0	%
Rental		73.6	%		—	%	NM
Product sales		16.4	%		—	%	NM
Financing		100.0	%		100.0	%	—	%
Total Seven Seas Water		55.8	%		56.0	%	(0.2)	%

Quench
Rental		52.5	%		54.4	%	(1.9)	%
Product sales		41.2	%		33.4	%	7.8	%
Total Quench		49.0	%		49.8	%	(0.8)	%

Total gross margin		52.0	%		52.6	%	(0.6)	%

Total gross margin for the six months ended June 30, 2019 decreased 60 basis points to 52.0% from 52.6% for the same period in 2018.

Seven Seas Water gross margin for the six months ended June 30, 2019 decreased 20 basis points to 55.8% compared to 56.0% in the prior year period. Bulk water gross margin of 54.8% increased 200 basis points compared to 52.8% 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. Rental and product sales gross margin of 73.6% and 16.4%, respectively, for the six months ended June 30, 2019 had no comparative period as both related to the acquisition of the AUC operations in November 2018.

Quench gross margin for the six months ended June 30, 2019 decreased 80 basis points to 49.0% from 49.8% for the same period of 2018. Rental gross margin for the first half of 2019 was 52.5%, a ~~change~~decrease from 54.4% 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 primarily achieved through increased customer density. Product sales gross margin increased to 41.2% for the six months ended June 30, 2019 from 33.4% 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:


	Six Months Ended
	June 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Selling, General and Administrative Expenses:
Seven Seas Water	$	14,618	$	14,745	$	(127)	(0.9)	%
Quench		28,598		21,907		6,691	30.5	%
Corporate and Other		2,522		2,211		311	14.1	%
Total selling, general and administrative expenses	$	45,738	$	38,863	$	6,875	17.7	%

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Total SG&A expenses for the six months ended June 30, 2019 increased $6.9 million, or 17.7%, compared to the same period of 2018.

Seven Seas Water SG&A expenses of $14.6 million for the six months ended June 30, 2019 remained relatively flat compared to the prior year period. The current period reflected a decrease of $2.9 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 offset by an increase of $2.4 million in amortization expense of definite lived intangible assets primarily due to the acquisition of the AUC operations in November 2018. Seven Seas Water SG&A expenses as a percentage of revenue were 34.0% for the six months ended June 30, 2019, a decline from 49.0% for the same period of 2018.

Quench SG&A expenses for the six months ended June 30, 2019 increased $6.7 million to $28.6 million compared to the prior year period. The increase was driven by $2.4 million higher amortization expense primarily related to an increase in intangible assets from recent acquisitions, $2.1 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, and a $0.9 million increase in general expenses primarily to support the expansion of our operations. Partially offsetting this increase was a $1.1 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 52.0% for the six months ended June 30, 2019, a decline from 59.5% for the same period of 2018.

Corporate and Other SG&A expenses for the six months ended June 30, 2019 increased $0.3 million compared to the same period of 2018, primarily due to higher professional fees in connection with corporate activities including capital raising.

During the six months ended June 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


	Six Months Ended
	June 30,				Change
	2019		2018		Dollars		Percent
	(dollars in thousands)
Interest expense, net	$	(13,068)	$	(6,604)	$	(6,464)	97.9	%
Other expense, net		(148)		(292)		144	(49.3)	%
Total other expense	$	(13,216)	$	(6,896)	$	(6,320)	91.6	%

Interest expense, net for the six months ended June 30, 2019 increased $6.5 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 for the six months ended June 30, 2019 remained relatively flat compared to the prior year period.

Income tax expense


	Six Months Ended
	June 30,						Change in
	2019			2018			Dollars
	(dollars in thousands)
Income tax expense (benefit)	$	1,072		$	739		$	333
Effective tax rate		(13.3)	%		(7.0)	%

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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 ~~rate~~expense or benefit for each legal entity. Income tax benefits are not recorded for losses generated in ~~a foreign jurisdiction and (iii) expense recorded from~~jurisdictions where either the ~~recognition of a deferred~~jurisdictions do not impose an income tax, ~~liability that was not classified as a source of future taxable income available to offset a net operating loss in a jurisdiction where~~or we do not believe it is more likely than not that we will realize the benefit of such losses. ~~Excluding these increases,~~

For the six months ended June 30, 2019, we incurred a consolidated pre-tax loss of $8.1 million, which was composed of: (i) an aggregate of $10.6 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 $2.5 million of pre-tax income in taxable jurisdictions. For the six months ended June 30, 2018, we incurred a consolidated pre-tax loss of $10.5 million, which was composed of: (i) an aggregate of $13.8 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 $3.3 million of pre-tax income in taxable jurisdictions.

Income tax expense for the six months ended June 30, 2019 and 2018 was $1.1 million and $0.7 million, respectively. Income tax expense for the six months ended June 30, 2019 and 2018 was composed of a current tax expense of $1.2 million and $1.0 million, respectively, and deferred tax benefit of $0.1 million and $0.3 million, respectively. The increase in income tax expense for the ~~nine~~six months ended ~~September~~June 30, ~~2017 decreased~~2019 as compared to the same period in ~~2016~~2018 was primarily due to an increase of a deferred tax liability for an indefinite-lived asset and an increase in tax expense in certain jurisdictions due to the existence of a valuation allowance in the prior year period which was subsequently released during the third quarter of 2018. These increases were partially offset by a decrease in deferred tax expense related to lower pretax book income ~~for~~in certain taxable jurisdictions compared to the same period in 2016 and additional income tax expense recorded during nine months ended September 30, 2016 for a change in an estimated income tax benefit previously recorded in a foreign jurisdiction.jurisdictions.

Cash paid for income taxes was ~~$1.1~~$1.0 million and ~~$0.1~~$1.4 million during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019 and ~~2016,~~2018, respectively. ~~The increase was mainly due to tax payments in Peru.~~

~~Key Metrics~~

We present Adjusted EBITDA, as well as the other financial information discussed below, because we believe it provides a more accurate comparison of our financial results between periods and more accurately reflects how management assesses our financial results. We use Adjusted EBITDA, as well as the other financial information provided below, as key metrics to measure our performance, evaluate growth trends and determine business strategy.

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~~Non-GAAP Financial Data~~

~~Adjusted EBITDA~~

We regularly use Adjusted EBITDA as a supplemental measure to GAAP measures regarding our operating performance. A detailed explanation and reconciliation of Adjusted EBITDA to its most comparable GAAP financial measure is described below.

Adjusted EBITDA, a non‑GAAP financial measure, is defined as earnings (loss) before net interest expense, income taxes, depreciation and amortization as well as adjusting for the following items: share‑based compensation expense, gain or loss on disposal of assets, acquisition‑related expenses, goodwill impairment charges, changes in deferred revenue related to our bulk water business, ERP system implementation charges for a SAAS solution, initial public offering costs, gains (losses) on extinguishment of debt, IPO triggered compensation, gains on bargain purchases and certain adjustments recorded in connection with purchase accounting for acquisitions. Adjusted EBITDA should not be considered a measure of financial performance under GAAP. Management believes that the use of Adjusted EBITDA, which is used by management as a key metric to assess performance, provides consistency and comparability with our past financial performance, and facilitates period‑to‑period comparisons of operations. Management believes that it is useful to exclude certain charges, such as depreciation and amortization, and non‑core operational charges, from Adjusted EBITDA because (1) the amount of such expenses in any specific period may not directly correlate to the underlying performance of our business operations and (2) such expenses can vary significantly between periods. Our use of Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:

~~Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;~~

~~Adjusted EBITDA does not reflect net interest expense, which represents a reduction in cash available to us;~~

~~Adjusted EBITDA does not reflect income tax expenses that may represent a reduction in cash available to us;~~

~~Adjusted EBITDA does not reflect acquisition‑related expenses, which represents a reduction in cash available to us;~~

~~Adjusted EBITDA does not reflect the implementation expenses incurred for a SAAS‑based ERP system, which represents a reduction in cash available to us;~~

~~Adjusted EBITDA includes an adjustment for non‑cash impairment charge, which will not impact working capital;~~

~~Adjusted EBITDA includes an adjustment for changes in deferred revenue related to our bulk water business to reflect cash received from operations;~~

~~Adjusted EBITDA does not reflect initial public offering costs, which represent a reduction in cash available to us;~~

~~Adjusted EBITDA does not reflect gains (losses) on the extinguishment of debt that may represent a reduction or addition in cash available to us;~~

~~Adjusted EBITDA does not reflect IPO triggered compensation, which represents a reduction in cash available to us;~~

~~Adjusted EBITDA includes an adjustment for non‑cash bargain purchase gain, which will not impact working capital;~~

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Although depreciation and amortization are non‑cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect the future need to augment or replace such assets; and

Other companies, including companies in our industry, may rely upon other key metrics or may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure against peer companies.

~~Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income (loss) and our other GAAP results.~~

~~Adjusted EBITDA Margin~~

~~Adjusted EBITDA Margin, a non~~‑~~GAAP financial measure, is defined as Adjusted EBITDA as a percentage of revenue.~~

~~Reconciliation of Non‑GAAP Financial Data~~

~~A reconciliation of our GAAP net loss to Adjusted EBITDA for the periods presented is shown below:~~

Three Months Ended September 30, 2017

Seven Seas

  Corporate


Water

Quench

& Other

Total


(in thousands)

Net loss

$
(2,859)

$
(3,024)

$
(1,684)

$
(7,567)

Depreciation and amortization

4,278

3,856

—

8,134

Interest expense, net

880

790

385

2,055

Income tax expense

790

56

—

846

Share-based compensation expense

2,048

855

239

3,142

Loss (gain) on disposal of assets

(22)

264

—

242

Acquisition-related expenses

738

139

—

877

Changes in deferred revenue related to our bulk water business

210

—

—

210

ERP implementation charges for a SAAS solution

—

373

—

373

Loss on debt extinguishment

820

569

—

1,389

Adjusted EBITDA

$
6,883

$
3,878

$
(1,060)

$
9,701

Adjusted EBITDA Margin

48.5
%

24.7
%

—
%

32.5
%

Three Months Ended September 30, 2016

Seven Seas

  Corporate


Water

Quench

& Other

Total


(in thousands)

Net loss

$
(1,937)

$
(2,262)

$
(513)

$
(4,712)

Depreciation and amortization

4,183

3,519

—

7,702

Interest expense (income), net

1,806

1,027

(31)

2,802

Income tax expense

1,275

—

—

1,275

Share-based compensation expense

178

199

11

388

Loss on disposal of assets

6

410

—

416

Acquisition-related expenses

438

—

—

438

Changes in deferred revenue related to our bulk water business

285

—

—

285

ERP implementation charges for a SAAS solution

—

1,129

—

1,129

Adjusted EBITDA

$
6,234

$
4,022

$
(533)

$
9,723

Adjusted EBITDA Margin

44.9
%

26.9
%

—
%

33.7
%

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Nine Months Ended September 30, 2017

Seven Seas

Corporate


Water

Quench

& Other

Total


(in thousands)

Net loss

$
(7,920)

$
(8,248)

$
(3,052)

$
(19,220)

Depreciation and amortization

12,771

11,060

—

23,831

Interest expense (income), net

2,980

2,826

(232)

5,574

Income tax expense

2,424

221

—

2,645

Share-based compensation expense

6,084

2,528

440

9,052

Loss (gain) on disposal of assets

(22)

906

—

884

Acquisition-related expenses

801

139

—

940

Changes in deferred revenue related to our bulk water business

697

—

—

697

ERP implementation charges for a SAAS solution

—

1,820

—

1,820

Loss on debt extinguishment

820

569

—

1,389

Adjusted EBITDA

$
18,635

$
11,821

$
(2,844)

$
27,612

Adjusted EBITDA Margin

43.1
%

25.9
%

—
%

31.1
%

Nine Months Ended September 30, 2016

Seven Seas

  Corporate


Water

Quench

& Other

Total


(in thousands)

Net loss

$
(4,089)

$
(7,335)

$
(1,502)

$
(12,926)

Depreciation and amortization

12,271

10,192

—

22,463

Interest expense (income), net

5,197

3,065

(31)

8,231

Income tax expense

2,633

—

—

2,633

Share-based compensation expense

843

601

11

1,455

Loss on disposal of assets

6

933

—

939

Acquisition-related expenses

935

—

—

935

Initial public offering costs

—

—

367

367

Changes in deferred revenue related to our bulk water business

855

—

—

855

ERP implementation charges for a SAAS solution

—

2,109

—

2,109

Adjusted EBITDA

$
18,651

$
9,565

$
(1,155)

$
27,061

Adjusted EBITDA Margin

45.5
%

22.1
%

—
%

32.1
%

~~Other Financial Information~~

As part of our Peru Acquisition, we acquired the rights to a design and construction contract for the construction of a desalination plant and related infrastructure. Pursuant to this design and construction contract, we are entitled to receive monthly installment payments, that continue until 2024 and are guaranteed by a major shareholder of the customer. Due to the manner in which this contractual arrangement is structured, these payments are accounted for as a note receivable. As a result of this accounting treatment, which differs from existing contracts in our Seven Seas Water business, the cash collected on this design and construction contract is not recognized as revenue in our consolidated financial statements.

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~~Cash collected on the design and construction contract acquired in the Peru Acquisition, which includes both principal and interest, is shown below.~~

Three Months Ended September 30, 2017

Seven Seas

Corporate


Water

Quench

& Other

Total


(in thousands)

Cash collected on design and construction contract

$
2,025

$
—

$
—

$
2,025

~~Three Months Ended September 30, 2016~~

~~Seven Seas~~

~~Corporate~~

~~Water~~

~~Quench~~

~~& Other~~

~~Total~~

~~(in thousands)~~

~~Cash collected on design and construction contract~~

—

Nine Months Ended September 30, 2017

Seven Seas

Corporate


Water

Quench

& Other

Total


(in thousands)

Cash collected on design and construction contract

$
6,078

$
—

$
—

$
6,078

~~Nine Months Ended September 30, 2016~~

~~Seven Seas~~

~~Corporate~~

~~Water~~

~~Quench~~

~~& Other~~

~~Total~~

~~(in thousands)~~

~~Cash collected on design and construction contract~~

—

We understand that many in the investment community combine our Adjusted EBITDA and the cash we collect from the design and construction contract for purposes of reviewing and analyzing our financial results. Our management and our board of directors also use this combination in evaluating our performance (including in measuring performance for a portion of the compensation of our executive officers) because they believe it is helpful in better understanding the cash generated from our Seven Seas Water operations. In this regard, and for the sake of clarity and convenience, the combination of our Adjusted EBITDA and the cash collected on the design and construction contract is shown below.

Three Months Ended September 30, 2017

  Seven Seas

  Corporate


Water

Quench

& Other

Total


(in thousands)

Adjusted EBITDA plus cash collected on design and construction contract

$
8,908

$
3,878

$
(1,060)

$
11,726

Three Months Ended September 30, 2016

  Seven Seas

  Corporate


Water

Quench

& Other

Total


(in thousands)

Adjusted EBITDA plus cash collected on design and construction contract

$
6,234

$
4,022

$
(533)

$
9,723

Nine Months Ended September 30, 2017

Seven Seas

Corporate


Water

Quench

& Other

Total


(in thousands)

Adjusted EBITDA plus cash collected on design and construction contract

$
24,713

$
11,821

$
(2,844)

$
33,690

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Nine Months Ended September 30, 2016

Seven Seas

  Corporate


Water

Quench

& Other

Total


(in thousands)

Adjusted EBITDA plus cash collected on design and construction contract

$
18,651

$
9,565

$
(1,155)

$
27,061

Liquidity and Capital Resources

Overview

As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, our principal sources of liquidity on a consolidated basis were cash and cash equivalents (excluding restricted cash) of ~~$118.1~~$41.3 million and ~~$95.3~~$56.6 million, respectively, ~~(excluding restricted cash),~~ which were held for working capital, investment and general corporate purposes. In addition, as of ~~September~~both June 30, ~~2017~~2019 and December 31, ~~2016,~~2018, we had an aggregate of ~~$4.3 million and $6.1~~$4.2 million, respectively, of restricted cash related to debt service reserve funds and minimum balance requirements for ~~certain~~one of our ~~borrowings and performance security funds for a vendor agreement.~~borrowings. Our working capital as of ~~September~~June 30, ~~2017~~2019 was ~~$127.5~~$60.1 million as compared to ~~$75.9~~$64.6 million as of December 31, ~~2016.~~2018.

~~As more fully described in~~In July 2019, we completed the ~~“Debt Refinancing” section below, on August 4, 2017, we entered into~~sale of 4.7 million ordinary shares at a ~~new $150.0~~public offering price of $16.88 per share. We received net proceeds of approximately $75 million, ~~credit agreement with a lender in order to refinance a majority of our then existing debt.~~ 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 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 ~~under concession arrangements~~ related to maintaining or expanding our existing operations;

development of new projects and new markets;

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inventory;

acquisitions;

~~debt service requirements on~~costs and expenses relating to our ~~existing and future debt;~~ongoing business operations; and

~~costs~~debt service requirements on our existing and ~~expenses relating to our ongoing business operations.~~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 these 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.

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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, ~~our distribution policy is~~unless cash balances are expected to ~~maximize cash distributions through the repayment of intercompany loans and payables from our international operating subsidiaries, unless~~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~~June 30, ~~2017,~~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,				Six Months Ended June 30,
	2017		2016		2019		2018
	(in thousands)				(in thousands)
Cash provided by operating activities	$	11,876	$	11,891	$	6,546	$	13,771
Cash used in investing activities		(18,448)		(16,658)		(18,089)		(19,656)
Cash (used in) provided by financing activities		27,559		10,582
Cash used in financing activities						(3,680)		(3,425)
Effect of exchange rates on cash, cash equivalents and restricted cash		1		—		13		(12)
Net change in cash and cash equivalents	$	20,988	$	5,815
Net change in cash, cash equivalents and restricted cash					$	(15,210)	$	(9,322)

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~~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.~~&A expenses.

Cash provided by operations during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2019 and ~~2016~~2018 was ~~$11.9~~$6.5 million and ~~$11.9~~$13.8 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 of 2018 and 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. Also impacting operating cash flows is the increase in receivables, inventory and contract costs resulting from recent higher Quench sales volume during the first half of 2019.

Investing Activities

Cash used in investing activities during the ~~nine~~six months ended ~~September~~June 30, ~~2017~~ 2019 and ~~2016~~2018 was ~~$18.4~~$18.1 million and ~~$16.7~~$19.7 million, respectively. ~~For~~The decrease in cash used in investing activities was primarily attributable to the ~~nine~~completion of $12.5 million of acquisitions during the six months ended ~~September~~June 30, ~~2017~~ 2018. This was partially offset by an increase in capital expenditures during the six months ended June 30, 2019 as compared to the prior year period.

During the six months ended June 30, 2019 and ~~2016,~~2018, there were ~~$2.8~~$10.4 million and ~~$7.7~~$0.9 million, respectively, of capital ~~expenditures and long-term contract~~ expenditures by Seven Seas Water for new plants, plant expansions and capacity ~~upgrades. Quench~~upgrades and $6.5 million and $6.4 million, respectively, of capital expenditures for Quench to support growth and its existing ~~operations were $9.1~~operations.

Financing Activities

Cash used in financing activities during the six months ended June 30, 2019 and June 30, 2018 was $3.7 million and ~~$8.9 million, respectively, for the nine months ended September 30, 2017 and 2016. In addition, the Company collected~~ $3.4 million, respectively. This $0.3 million decrease is primarily attributable to a $1.4 million increase in payments of ~~principal during~~acquisition contingent consideration and $0.6 million increase in employee taxes paid as a result of vested RSUs, which was partially offset by an increase in net cash proceeds of $1.7 million from the ~~nine months ended September 30, 2017 related to the design and construction~~exercise of stock options.

4457

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~~contract acquired in our Peru Acquisition in October 2016 and used net cash of $9.7 million for acquisitions during the nine months ended September 30, 2017.~~

For the remainder of fiscal year 2017, we expect to invest approximately $5 million across our Seven Seas Water and Quench businesses in capital expenditures and long-term contract expenditures. We expect that these investments will be financed through existing cash, cash generated from operations and, as needed, incremental debt or equity financing.

~~Financing Activities~~

Cash used in financing activities during the nine months ended September 30, 2017 was $27.6 million, including $120.6 million of repayments of long-term debt and deferred financing fees, and $150.0 million of proceeds from borrowings. Both of these were driven by the debt refinancing which is discussed further in the “Debt Refinancing” section below. Cash provided by financing activities during the nine months ended September 30, 2016 was $10.6 million, including $23.7 million of proceeds from borrowings, which were partially offset by $11.9 million of scheduled repayments of long‑term debt and a $0.9 million of payments towards an acquisition contingent consideration.

Our long‑term debt is summarized in the table below and further described in the sections that follow. As of ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016 and,~~2018, long‑term debt included the following (in thousands):


	September 30,		December 31,		June 30,		December 31,
	2017		2016		2019		2018
Corporate Credit Agreement	$	150,000	$	—	$	300,000	$	300,000
BVI Loan Agreement		27,076		31,432		17,705		20,468
Vehicle financing		1,513		1,783		2,544		1,842
Trinidad Credit Agreement		—		24,071
USVI Credit Agreement		—		12,923
Quench Loan Agreement		—		40,000
Curaçao Credit Facility		—		35,000
Total face value of long-term debt	$	178,589	$	145,209	$	320,249	$	322,310

Face value of long-term debt, current	$	6,063	$	27,963	$	7,094	$	6,536
Less: Current portion of unamortized debt discounts and deferred financing fees		—		—		(36)		(42)
Current portion of long-term debt, net of debt discounts and deferred financing fees	$	6,063	$	27,963	$	7,058	$	6,494

Face value of long-term debt, non-current	$	172,526	$	117,246	$	313,155	$	315,774
Less: Non-current portion of unamortized debt discounts and deferred financing fees		(3,543)		(1,493)		(2,046)		(2,559)
Long-term debt, net of debt discounts and deferred financing fees	$	168,983	$	115,753	$	311,109	$	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 ~~bank.~~syndicate of lenders. The Corporate Credit Agreement is non-amortizing, matures in August 2021 and, ~~bears~~at the time it was incurred, bore interest at LIBOR plus ~~6.00%~~6.0% with a LIBOR floor of 1%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~~June 30, ~~2017,~~2019, the ~~weighted‑~~weighted average interest rate was ~~7.3%~~7.9%.

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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

~~Table of Contents~~

indebtedness, capital expenditures, changes in nature of business and amendments to documents. WeAs of June 30, 2019, we were in compliance with, or received waivers for breaches of, all such ~~covenants as of September 30, 2017.~~covenants.

We may prepay in whole or in part, the outstanding principal and accrued unpaid interest under the Corporate Credit Agreement. AThe prepayment fee ~~is due upon repayment if it occurs prior to August 4, 2018.~~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.

~~Debt Refinancing~~

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 but not by AquaVenture Holdings Limited or any of its other subsidiaries.~~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 and on August 4, 2017 to extend the amortization and reduce the spread applied to LIBOR.~~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. ~~As of September 30, 2017, the weighted‑average interest rate was 4.3%.~~

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 June 30, 2019, the weighted‑average interest rate was 5.3%. Seven Seas Water (BVI) Ltd. may prepay the principal amounts of the loans prior to the maturity date, in whole or in part.

~~Table of Contents~~

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 ~~are met and it is in compliance with all loan covenants.~~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.~~bank in addition to other minimum balance requirements as set forth in the agreement. As of June 30, 2019, Seven Seas Water (BVI) Ltd. was in compliance with, or received waivers for breaches of, all such ~~covenants as of September 30, 2017.~~covenants.

~~Seven Seas Water (BVI) Ltd. may prepay the principal amounts~~

Table of ~~the loans prior to the maturity date, in whole or in part.~~Contents

Other Debt

We finance our vehicles primarily under three‑year terms with interest rates ~~per annum~~ ranging from ~~2.7%~~3.4% to 4.5%. per annum.

Contractual Obligations and Other Commitments

~~The following table summarizes our contractual obligations and other commitments as of September 30, 2017:~~

Payments Due by Period


Less Than

1 to 3

3 to 5

More Than



1 Year

Years

Years

5 Years

Total
Contractual Obligations and Other Commitments:

Long-term debt at face value

$
6,124

$
18,206

$
154,259

$
—

$
178,589
Interest on long-term debt(1)

12,040

23,310

5,882

—

41,232

$
18,164

$
41,516

$
160,141

$
—

$
219,821

~~(1)~~

~~We calculated interest on long~~‑term debt based on payment terms that existed at September 30, 2017. Weighted-average interest rates used are as follows: (i) Corporate Credit Agreement – 7.3%; (ii) BVI Loan Agreement – 4.3%; and (iii) vehicle financing – 3.6%

The contractual obligations and other commitments noted above were significantly changed since our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 principally as a result of the repayment on some of our Debt Refinancing. On August 4, 2017, we amended the BVI Loan Agreement, entered into the Corporate Credit Agreement and utilized some of the proceeds from the Corporate Credit Agreement to repay in full the outstanding principal on some of our other then existing debt obligations. Please refer to Note 8—9—“Commitments and Contingencies” to the Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for more information.

There ~~have been~~were no ~~other~~ material changes to our contractual obligations during the ~~nine~~six months ended ~~September~~June 30, ~~2017 to our other contractual obligations previously~~2019 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018, as amended. For a complete discussion of our contractual obligations, please refer to our “Management’s ~~discussion~~Discussion and ~~analysis~~Analysis of ~~financial condition~~Financial Condition and ~~results~~Results of ~~operations”~~Operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2018, as amended.

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Off‑Balance Sheet Arrangements

At ~~September~~June 30, ~~2017,~~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.

~~Other Matters~~

During the nine months ended September 30, 2017, we made certain adjustments to the purchase price allocation for certain liabilities, including tax, that existed prior to October 31, 2016. We believe the liabilities are fully indemnified pursuant to the purchase and sale agreement for the Peru Acquisition. As a result, we recorded an accrued liability in the amount of $0.9 million and a corresponding indemnification receivable in the amount of $0.9 million, as of September 30, 2017. As a result of the indemnification, the Company does not anticipate any material effect to our operating results, liquidity or financial condition.

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Item 3. Quantitative and Qualitative Disclosures ~~about~~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 ~~$118.1~~$41.3 million as of ~~September~~June 30, ~~2017.~~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~~June 30, ~~2017,~~2019, we ~~have~~had variable rate loans outstanding of ~~$177.1~~$202.7 million that adjust with interest rate movements in LIBOR ~~or the lending bank's prime lending rate~~ except when interest rate floors apply. Accordingly, we are subject to interest rate risk to the extent that LIBOR, or ~~the lending bank's prime lending rate~~any successor thereto, changes. A hypothetical 100 bps increase in our interest rates in effect at ~~September~~June 30, ~~2017~~2019 would have a ~~$1.7~~$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~~June 30, ~~2017~~2019 would have a ~~$0.6~~$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.

Foreign Exchange Risk

~~The U.S. dollar is our functional currency~~For both the three and ~~for the nine~~six months ended ~~September~~June 30, ~~2017, less than~~2019, approximately 3% of our consolidated revenues were denominated or paid in a foreign currency. ~~We utilize these payments, in large part, to~~To help minimize our exposure to foreign exchange risk, ~~related to~~we utilize payments collected in local currencies other than the U.S. dollar for payment obligations we may incur in athe 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 ~~have established~~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 is(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.

~~Our~~As of June 30, 2019, our management, ~~under the supervision and~~ with the participation of our ~~Chief Executive Officer~~principal executive officer and ~~Chief Financial Officer, has~~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 the end of the period covered by this Quarterly Report on Form 10-Q. Management recognizes that any disclosure controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving their objectives. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded thatJune 30, 2019, our disclosure controls and procedures were effective at the reasonable assurance ~~level as~~level.

Inherent Limitations of ~~September 30, 2017.~~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 ~~was~~were no ~~change~~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 ~~nine~~three months ended ~~September~~June 30, ~~2017~~2019 that has materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. We have been reviewing our internal control over financial reporting in light of the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and as we prepare for our first management report on internal control over financial reporting as of December 31, 2017. In connection with this review, we have made and will continue to make changes that enhance the effectiveness of our internal controls.

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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 June 30, 2019, we ~~currently believe~~were not party to any legal proceedings that ~~the final outcome of these ordinary course matters will not~~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, ~~2016~~2018, as amended, 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 are~~Other than the risk factors mentioned below, 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, ~~2016.~~2018, as amended.

Risks Related to our Business

In Curaçao, our customer is dependent on Petróleos de Venezuela S.A., or PDVSA (the state-owned oil company of Venezuela), and any financial or other issues our customer experiences with PDVSA could adversely affect our results of operations and financial condition. Further, our water sales agreement is currently scheduled to terminate on December 31, 2019, unless extended, and our customer has provided notice that it is exercising its right to purchase our Curacao desalination facilities, either of which will adversely impact the revenues, results of operations and cash flows of our Seven Seas Water business.

Our desalination facility in Curaçao sells industrial quality water to Curaçao Refinery Utilities B.V. ("CRU"), a government owned utility that provides utility services to a refinery owned by Refineria di Korsou ("RdK") that is leased to PDVSA. Any financial or other issues RdK experiences with PDVSA could adversely affect our results of operations and financial condition.

The current term of this water sales agreement expires at the end of 2019, but pursuant to the terms of the existing water supply agreement will be extended to the end of 2022 if our customer's contract with RdK is extended as a result of negotiations by RdK with PDVSA.

There can be no assurances that our customer will extend the lease of the refinery to PDVSA or that this water sales agreement will be extended or renewed, whether or not our customer is successful in securing a new tenant for the refinery. The expiration of this water sales agreement would materially reduce the revenues, results of operations and cash flows of our Seven Seas Water business.

In addition, on June 28, 2019, we received formal notice from CRU that it is exercising its right to purchase our desalination facilities pursuant to the terms of the existing water supply agreement. The terms of the contractual buy-out right require payment to be made at the contract expiration date. The applicable buy-out amount, 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 year ended December 31, 2018, our revenue under this water supply agreement was $7.7 million, or 5.3% of our total consolidated revenue. For the three and six months ended June 30, 2019, our revenue under this water supply agreement was $2.0 million and $3.9 million, respectively, or 3.8% and 4.0% of our total consolidated revenue, respectively. The expiration of this water supply agreement and purchase of the desalination facilities will adversely impact the revenues, results of operations and cash flows of our Seven Seas Water business.

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

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

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

~~There has been no material change in the planned use of proceeds from our initial public offering as described~~None.

in our final prospectus filed with the SEC on October 6, 2016 pursuant to Rule 424(b)(4) under the Securities Act. On June 1, 2017, we used $1.9 million of the proceeds to acquire substantially all of the assets of Pure Water Innovations, Inc. pursuant to an asset purchase agreement. On August 2, 2017, we used $0.8 million of the proceeds to acquire substantially all of the assets and assume certain liabilities of Quench Water Canada, Inc., pursuant to an asset purchase agreement. On September 8, 2017 we used $6.9 million of the proceeds to acquire substantially all of the assets and assume certain liabilities of Wellsys USA Corporation pursuant to an asset purchase agreement.

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
~~2.1~~ 10.1		~~Credit Agreement~~Amendment to Employment Letter dated ~~August 4, 2017 between~~January 1, 2019 from AquaVenture Holdings Limited ~~AquaVenture Holdings Peru S.A.C., Quench USA, Inc~~ and ~~Deutsche Bank AG, London Branch~~Seven Seas Water Corporation to Douglas R. Brown (filed as Exhibit ~~1.1~~10.1 to AquaVenture Holdings Limited’s Form 8-K filed on ~~August 7, 2017 and incorporated herein by reference).~~April 18, 2019) (SEC File No. 001-37903)
~~2.2~~ 10.2		~~Amendment, Waiver~~Amended and ~~Consent Letter,~~Restated Employment Agreement dated ~~August 4, 2017, between Seven Seas Water (BVI) Ltd. (f/k/a Biwater (BVI) Ltd.)~~as of January 1, 2019 by and ~~Barclays Bank PLC~~among AquaVenture Holdings Limited, Quench USA, Inc. and Anthony Ibarguen (filed as Exhibit ~~2.2~~10.2 to AquaVenture Holdings Limited’s ~~Quarterly Report on~~ Form ~~10-Q~~8-K filed on ~~August 14, 2017 and incorporated herein by reference).~~April 18, 2019) (SEC File No. 001-37903)
10.3		Key Executive Severance Plan (filed as Exhibit 10.3 to AquaVenture Holdings Limited’s Form 8-K filed on April 18, 2019) (SEC File No. 001-37903)
10.4		Form of employee non-competition, non-solicitation, confidentiality and assignment agreement entered into by AquaVenture Holdings Limited and each of Messrs. Brown, Muller and Krohg (filed as Exhibit 10.4 to AquaVenture Holdings Limited’s Form 8-K filed on April 18, 2019) (SEC File No. 001-37903)
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 ~~Exhibits~~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 9, 2017~~August 7, 2019	By:	/s/ LEE S. MULLER
		Lee S. Muller
		Chief Financial Officer (Principal Financial Officer)

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		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements.	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and ~~Results of Operations.~~Operating Results.	2236
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	4961
Item 4.	Controls and Procedures.	5062

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings.	5163
Item 1A.	Risk Factors.	5163
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	5164
Item 3.	Defaults upon Senior Securities.	5164
Item 4.	Mine Safety Disclosures.	5164
Item 5.	Other Information.	5164
Item 6.	Exhibits.	5265


	Amount Due
Remainder of 2017	$	1,217
2018		6,409
2019		6,018
2020		6,073
2021		156,037
2022 and thereafter		2,835
Total face value of long-term debt	$	178,589


	Three Months Ended September 30, 2017								Three Months Ended September 30, 2016
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Total		Water		Quench		& Other		Total
Revenues:
Bulk water	$	14,206	$	—	$	—	$	14,206	$	13,879	$	—	$	—	$	13,879
Rental		—		13,428		—		13,428		—		12,396		—		12,396
Other		—		2,259		—		2,259		—		2,583		—		2,583
Total revenues		14,206		15,687		—		29,893		13,879		14,979		—		28,858
Gross profit:
Bulk water		6,302		—		—		6,302		6,196		—		—		6,196
Rental		—		7,345		—		7,345		—		7,140		—		7,140
Other		—		874		—		874		—		1,227		—		1,227
Total gross profit		6,302		8,219		—		14,521		6,196		8,367		—		14,563
Selling, general and administrative expenses		6,607		9,828		1,299		17,734		4,962		9,602		548		15,112
Income (loss) from operations		(305)		(1,609)		(1,299)		(3,213)		1,234		(1,235)		(548)		(549)
Other (expense) income, net		(1,764)		(1,359)		(385)		(3,508)		(1,896)		(1,027)		35		(2,888)
Loss before income tax expense		(2,069)		(2,968)		(1,684)		(6,721)		(662)		(2,262)		(513)		(3,437)
Income tax expense		790		56		—		846		1,275		—		—		1,275
Net loss	$	(2,859)	$	(3,024)	$	(1,684)	$	(7,567)	$	(1,937)	$	(2,262)	$	(513)	$	(4,712)
Other information:
Depreciation and amortization expense	$	4,278	$	3,856	$	—	$	8,134	$	4,183	$	3,519	$	—	$	7,702
Interest expense (income), net	$	880	$	790	$	385	$	2,055	$	1,806	$	1,027	$	(31)	$	2,802
Loss on extinguishment of debt	$	820	$	569	$	—	$	1,389	$	—	$	—	$	—	$	—
Expenditures for long-lived assets	$	1,108	$	3,135	$	—	$	4,243	$	1,810	$	3,104	$	—	$	4,914
Amortization of deferred financing fees	$	93	$	37	$	79	$	209	$	150	$	47	$	—	$	197


	Payments Due by Period
	Less Than		1 to 3		3 to 5		More Than
	1 Year		Years		Years		5 Years		Total
Contractual Obligations and Other Commitments:
Long-term debt at face value	$	6,124	$	18,206	$	154,259	$	—	$	178,589
Interest on long-term debt(1)		12,040		23,310		5,882		—		41,232
	$	18,164	$	41,516	$	160,141	$	—	$	219,821