UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, ~~2017~~2018

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

For the transition period from to

Commission file number 001-37903

AquaVenture Holdings Limited

(Exact name of registrant as specified in its charter)


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

c/o Conyers Corporate Services (B.V.I.) Limited Commerce House, Wickhams Cay 1
P.O. Box 3140 Road Town British Virgin Islands VG11110		(813) 855‑8636 (Registrant’s telephone
(Address of principal executive office)		number, including area code)

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~~5, 2018 was ~~26,453,039.~~26,731,120.

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AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, ~~2017~~2018

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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.

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 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, 2017, 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,		September 30,		December 31,
	2017		2016		2018		2017
ASSETS
Current Assets:
Cash and cash equivalents	$	118,070	$	95,334	$	93,617	$	118,090
Restricted cash		166		166		2,000		—
Trade receivables, net of allowances of $951 and $1,166, respectively		17,761		15,473
Trade receivables, net of allowances of $782 and $1,045, respectively						19,497		19,593
Inventory		8,710		6,246		9,703		8,228
Current portion of long-term receivables						6,257		6,878
Prepaid expenses and other current assets		8,612		6,401		3,855		3,874
Total current assets		153,319		123,620		134,929		156,663
Property, plant and equipment, net		113,908		116,092		114,969		112,771
Construction in progress		10,602		9,398		9,773		10,437
Long-term contract costs		82,061		87,512
Restricted cash		4,147		5,895		3,637		4,269
Long-term receivables						39,823		43,796
Other assets		41,114		44,311		5,139		4,307
Deferred tax asset		376		515		3,157		38
Intangible assets, net		53,919		51,330		129,333		122,169
Goodwill		99,526		98,023		108,244		99,495
Total assets	$	558,972	$	536,696	$	549,004	$	553,945
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable	$	4,533	$	3,880	$	4,425	$	3,508
Accrued liabilities		11,922		13,075		12,763		12,837
Current portion of long-term debt		6,063		27,963		6,400		6,483
Deferred revenue		3,302		2,820		3,412		2,454
Total current liabilities		25,820		47,738		27,000		25,282
Long-term debt		168,983		115,753		164,719		167,772
Deferred tax liability		4,665		2,874		5,502		5,266
Other long-term liabilities		2,414		2,825		11,757		11,429
Total liabilities		201,882		169,190		208,978		209,749
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; 26,600 and 26,482 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively						—		—
Additional paid-in capital		566,958		558,141		578,506		568,593
Accumulated other comprehensive income		(13)		—		(101)		(17)
Accumulated deficit		(209,855)		(190,635)		(238,379)		(224,380)
Total shareholders' equity		357,090		367,506		340,026		344,196
Total liabilities and shareholders' equity	$	558,972	$	536,696	$	549,004	$	553,945

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,		Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenues:
Bulk water	$	14,206	$	13,879	$	43,238	$	40,951	$	14,626	$	12,972	$	42,682	$	39,551
Rental		13,428		12,396		39,238		36,153		16,261		13,428		45,041		39,238
Financing										985		1,118		3,048		3,451
Other		2,259		2,583		6,318		7,147		4,952		2,259		13,012		6,318
Total revenues		29,893		28,858		88,794		84,251		36,824		29,777		103,783		88,558
Cost of revenues:
Bulk water		7,904		7,683		25,903		22,976		6,771		5,975		20,021		20,415
Rental		6,083		5,256		17,508		15,989		7,130		6,083		20,240		17,508
Other		1,385		1,356		3,692		3,863		3,256		1,385		8,624		3,692
Total cost of revenues		15,372		14,295		47,103		42,828		17,157		13,443		48,885		41,615
Gross profit		14,521		14,563		41,691		41,423		19,667		16,334		54,898		46,943
Selling, general and administrative expenses		17,734		15,112		50,964		43,264		20,826		18,430		59,689		53,040
Loss from operations		(3,213)		(549)		(9,273)		(1,841)		(1,159)		(2,096)		(4,791)		(6,097)
Other expense:
Interest expense, net		(2,055)		(2,802)		(5,574)		(8,231)		(3,396)		(2,942)		(10,000)		(8,303)
Other expense, net		(1,453)		(86)		(1,728)		(221)		(228)		(1,453)		(520)		(1,728)
Loss before income tax expense		(6,721)		(3,437)		(16,575)		(10,293)		(4,783)		(6,491)		(15,311)		(16,128)
Income tax expense		846		1,275		2,645		2,633
Income tax expense (benefit)										(2,051)		797		(1,312)		2,451
Net loss		(7,567)		(4,712)		(19,220)		(12,926)		(2,732)		(7,288)		(13,999)		(18,579)
Other comprehensive income:
Foreign currency translation adjustment		(13)		—		(13)		—		106		(13)		(84)		(13)
Comprehensive loss	$	(7,580)	$	(4,712)	$	(19,233)	$	(12,926)	$	(2,626)	$	(7,301)	$	(14,083)	$	(18,592)

Loss per share – basic and diluted~~(1)~~	$	(0.29)			$	(0.73)			$	(0.10)	$	(0.28)	$	(0.53)	$	(0.70)

Weighted-average shares outstanding – basic and diluted~~(1)~~		26,441				26,414				26,590		26,441		26,544		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.~~

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,				Nine Months Ended September 30,
	2017		2016		2018		2017
Cash flows from operating activities:
Net loss	$	(19,220)	$	(12,926)	$	(13,999)	$	(18,579)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		23,831		22,463		24,761		21,776
Adjustment to asset retirement obligation		37		86
Share-based compensation expense		9,052		1,455		10,002		9,052
Provision for bad debts		450		712		695		450
Deferred income tax provision		1,930		2,216		(2,882)		1,736
Inventory adjustment		153		142		253		153
Loss on extinguishment of debt		1,389		—		—		1,389
Loss on disposal of assets		884		939		1,506		884
Amortization of debt financing fees		624		568		712		624
Adjustment to acquisition contingent consideration		—		(51)
Accretion of debt		60		271
Other		—		75		38		97
Change in operating assets and liabilities:
Trade receivables		(2,312)		(1,329)		236		(2,312)
Inventory		(1,766)		(958)		(1,407)		(1,766)
Prepaid expenses and other current assets		(1,146)		(1,179)		142		(1,146)
Long-term receivable						4,596		4,674
Other assets		(2,017)		(1,807)		(2,643)		(2,017)
Current liabilities		(4)		359		(253)		(45)
Long-term liabilities		(69)		855		291		(398)
Net cash provided by operating activities		11,876		11,891		22,048		14,572
Cash flows from investing activities:
Capital expenditures		(11,286)		(15,037)		(12,930)		(11,245)
Long-term contract expenditures		(613)		(1,524)
Net cash paid for acquisition of assets or business		(9,921)		(100)		(27,097)		(9,921)
Principal collected on note receivable		3,350		—
Other		22		3		16		22
Net cash used in investing activities		(18,448)		(16,658)		(40,011)		(21,144)
Cash flows from financing activities:
Proceeds from long-term debt		150,000		23,675		—		150,000
Payments of long-term debt		(117,028)		(11,891)		(4,975)		(117,028)
Payment of debt financing fees		(3,579)		(340)		(71)		(3,579)
Payments related to debt extinguishment		(433)		—		—		(433)
Payment of acquisition contingent consideration		—		(864)
Proceeds from exercise of stock options		49		2		86		49
Shares withheld to cover minimum tax withholdings on equity awards		(356)		—		(307)		(356)
Proceeds from the issuance of Employee Stock Purchase Plan shares		75		—		132		75
Issuance costs from issuance of ordinary shares in IPO		(1,169)		—		—		(1,169)
Net cash provided by financing activities		27,559		10,582
Net cash (used in) provided by financing activities						(5,135)		27,559
Effect of exchange rates on cash, cash equivalents and restricted cash		1		—		(7)		1
Change in cash, cash equivalents and restricted cash		20,988		5,815		(23,105)		20,988
Cash, cash equivalents and restricted cash at beginning of period		101,395		25,026		122,359		101,395
Cash, cash equivalents and restricted cash at end of period	$	122,383	$	30,841	$	99,254	$	122,383

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 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. AquaVenture Holdings Limited and its subsidiaries (collectively, “AquaVenture” or the “Company”) provides its customers Water‑as‑a‑Service (“WAAS”) solutions through two operating platforms: Seven Seas Water and Quench. Both operations are critical to AquaVenture, which is headquartered in the BVI.

Seven Seas Water offers WAAS solutions by providing outsourced desalination and wastewater treatment services for governmental, municipal, industrial and hospitality customers. These 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 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. Seven Seas Water currently operates primarily throughout the Caribbean region and in South America and is pursuing new opportunities in North America, the Caribbean, South America, Africa and other select markets. Seven Seas Water is supported by an operations center in Tampa, Florida, which provides 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 and coffee brewers, to customers throughout ~~North America.~~the United States and in Canada. Quench’s point‑of‑use (“POU”) systems purify a customer’s existing water supply. Quench offers solutions to a broad mix of industries, including government, education, medical, manufacturing, retail, and hospitality. Quench installs and maintains its filtered water systems typically under multi‑year contracts that renew automatically. 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

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~~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.~~2017.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“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.~~2017. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of September 30, ~~2017,~~2018, the unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017. The unaudited condensed consolidated balance sheet as of December 31, ~~2016~~2017 was ~~derived from~~based on the audited consolidated balance sheet as of December 31, ~~2016,~~2017, as presented in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2017 but restated for adoption of new accounting guidance which is further explained in the “Adoption of New Accounting Pronouncements” section below.

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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 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; and 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~~Revenue Recognition

Through the Seven Seas Water and Quench operating platforms, the Company generates revenue from the following primary sources: (i) bulk water sales and service (excluding service concession arrangements); (ii) service concession arrangements; (iii) rental of ~~New Accounting Pronouncements~~water filtration and related equipment; (iv) sale of water filtration and related equipment, coffee and consumables and (v) water filtration-related services, including installation and maintenance. The revenue recognition policy for each of the primary sources of revenue are as follows:

~~In November 2016,~~Bulk Water Sales and Service. Through the ~~FASB issued authoritative guidance that requires inclusion~~Seven Seas Water operating platform, the Company enters into contracts with customers with a single performance obligation to deliver bulk water or a series of ~~cash~~performance obligations to perform substantially the same services with the same pattern of transfer, which can include the operations and ~~cash equivalents that have restrictions on withdrawal~~maintenance (“O&M”) of a customer-owned plant. The Company recognizes revenues from the delivery of bulk water or ~~use~~the performance of bulk water services at the time the water or services are delivered to the customers in ~~total cash~~accordance with the contractual agreements. Billings to the customer for both bulk water and ~~cash equivalents~~the bulk water services are typically based on the ~~statement~~volume of ~~cash flows. This guidance~~water supplied to a customer and typically contain a minimum monthly charge provision which allows the Company to invoice the customer for the greater of the water supplied or a minimum monthly charge. The volume of water supplied is based on meter readings performed at or near the end of the month. The transaction price calculated for bulk water sales and service can include, if applicable, contractual minimum monthly charges and the expected amount of variable consideration to the extent it is probable that a significant reversal of the cumulative revenue will not occur. The variable consideration generally includes the amount of water in excess of contractual minimum volumes, if applicable, or the amount of water expected to be ~~effective~~supplied at contractually established rates. Estimates of revenue for ~~annual reporting periods beginning on~~unbilled water are recorded when meter readings occur at a time other than the end of a period. A contract asset or ~~after December 15, 2017,~~liability may be recognized in instances where there is a difference between the amount billed to a customer and the revenue recognized for the completed O&M performance obligations during the period. Revenues generated from both the delivery of bulk water and performance of services related to bulk water are recorded as bulk water revenue within the consolidated statements of operations and comprehensive income.

Certain contracts with customers which require the construction of facilities to provide bulk water to a specific customer include two performance obligations, including ~~interim periods within those annual periods,~~an implicit lease for the bulk water facilities and ~~early adoption~~bulk water services, a non-lease component related to O&M services. The implicit lease performance obligation is ~~permitted.~~generally accounted for as an operating lease as a result of the provisions of the contract. The Company ~~has adopted this guidance on January 1, 2017.~~considers the implicit lease and bulk water services a single performance obligation and 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 ~~Company now presents~~variable consideration generally includes the ~~changes~~amount of water in excess of contractual minimum volumes, if applicable, or the ~~total~~amount of ~~cash, cash equivalents, restricted cash~~water expected to be supplied and ~~restricted cash equivalents in~~contractually established rates. The revenue recognition pattern for both the ~~statement~~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 ~~cash flows~~operations and ~~no longer presents transfers between cash and cash equivalents and~~comprehensive income.

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~~restricted cash~~

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

The transaction price allocated to the construction of infrastructure performance obligation is recognized as construction revenue within the consolidated statements of operations and comprehensive income. Construction revenues 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 ~~flows. Cash,~~receipts, which are collected over the term of the entire arrangement. The timing difference could result in a significant financing component for the construction performance obligations if determined to be a material component of the transaction price. If a significant financing component is identified, the future cash ~~equivalents~~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 ~~restricted~~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 Water Filtration and Related Equipment. Through the Quench operating platform, the Company generates revenues through the rental of its filtered water and related systems to customers. The rental agreements, which include related executory costs, are accounted for as operating leases and are considered a single unit of account. Billings to the customer for the rental of water filtration and related 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. Revenues 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 ~~unaudited statement~~balance sheets. 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 contracts are recorded as rental revenue within the consolidated statements of operations and comprehensive income.

Sale of Water and Related Filtration Equipment, Coffee and Consumables. Through the Quench operating platform, the Company enters into contracts with customers with a single performance obligation to sell customers water and related filtration equipment, coffee and consumables. 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

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

Services on Water and Related Filtration Equipment. Through the Quench operating platform, the Company enters into contracts with customers with a single performance obligation to provide services, including maintenance, on customer-owned water and related filtration equipment. Billings to the customer for services, which generally occur either monthly or quarterly, are based on the service rate as stated within the service agreement. The transaction price is based on service rate as stated within the service agreement. The Company recognizes revenues as the services are provided to the customer. Amounts paid by customers in excess of recognizable revenue are recorded as a contract liability, or deferred revenue, on the consolidated balance sheets. Revenues generated under these service contracts are recorded as other revenue within the consolidated statements of operations and comprehensive income.

Contract Costs

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

Contract acquisition costs consist of incremental costs incurred by the Company to originate contracts with customers. 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, ~~represent~~which is generally over the ~~addition~~contract term, on a basis consistent with the transfer of ~~cash~~goods or services to the customer to which the costs relate. There were no contract acquisition costs as of September 30, 2018 and ~~cash equivalents, restricted cash classified~~December 31, 2017.

Deferred lease costs consist of initial direct costs incurred by the Company to originate leases, which generally include water filtration and related equipment by the Quench operating platform. The costs capitalized are directly related to the negotiation and execution of leases and primarily consist of internal compensation and benefits as ~~current~~lease origination activities are performed internally by the Company. Deferred lease costs are amortized on a straight‑line basis over the lease term. Deferred lease costs, net as of September 30, 2018 and ~~restricted cash classified as non-current line items~~December 31, 2017 were $3.6 million and $3.2 million, respectively and are recorded in other assets in the ~~unaudited condensed~~ consolidated balance ~~sheet. The adoption was~~sheets.

Contract fulfillment costs consist of costs incurred by the Company to fulfill a contract with a customer and 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. Contract fulfillment costs capitalized generally include contracted services, direct labor, materials, and allocable overhead directly related to resources required to fulfill the contract. 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 ~~retrospective~~ basis consistent with the transfer of good or services to the customer to which the costs relate. Contract fulfillment costs, net as of September 30, 2018 and December 31, 2017 were $1.3 million and $0.8 million, respectively, and are recorded in other assets in the ~~unaudited condensed~~ consolidated ~~statement of cash flows~~balance sheets.

Contract costs are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company had no impairment charges related to contract costs during the three and nine months ended September 30, ~~2016~~2018.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the aggregate purchase price over the fair value of the net assets acquired in a business combination. Goodwill is reviewed for impairment at least annually during the fourth quarter and more frequently if a change in circumstances or the occurrence of events indicates that potential impairment exists. The Company first performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If it is determined to be more likely than not that the fair value of a

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reporting unit is less than its carrying amount, the Company performs the quantitative analysis of the goodwill impairment test. Otherwise, the quantitative test is optional.

Under the quantitative analysis, the recoverability of goodwill is measured at each of the Seven Seas Water and Quench reporting unit levels, which the Company has ~~been adjusted~~determined to ~~reflect~~be consistent with its operating segments, by comparing the ~~adoption.~~reporting unit’s carrying amount, including goodwill, to the fair market value of the reporting unit. The ~~adoption does not have any impact~~Company determines the fair value of its reporting units based on a weighting of the present value of projected future cash flows (the “Income Approach”) and a comparative market approach under both the guideline company method and guideline transaction method (collectively, the “Market Approach”). Fair value using the Income Approach is based on the ~~unaudited condensed~~Company’s estimated future cash flows on a discounted basis. The Market Approach compares each of the Company’s reporting units to other comparable companies based on valuation multiples derived from operational and transactional data to arrive at a fair value. Factors requiring significant judgment include, among others, the determination of comparable companies, assumptions related to forecasted operating results, discount rates, long‑term growth rates, and market multiples. Changes in economic or operating conditions, or changes in the Company’s business strategies, that occur after the annual impairment analysis and which impact these assumptions, may result in a future goodwill impairment charges, which could be material to the Company’s consolidated ~~balance sheet~~financial statements.

Other intangible assets consist of certain trade names, customer relationships, contract intangibles and non‑compete agreements. Contract intangibles includes the fair value of future cash flows from contracts with customers in excess of the fair value for the remaining performance obligations under such contracts. Trade names and non‑compete agreements which have a finite life are amortized over their estimated useful lives on a straight‑line basis. Customer relationships and contract intangibles which have a finite life are amortized on an accelerated basis based on the projected economic value of the asset over its useful life. Intangible assets with a finite life are reviewed for impairment whenever events or ~~statement~~changes in circumstances indicate that the carrying amount of ~~operations.~~an asset may not be recoverable. Indefinite‑lived intangible assets, which consist of certain trade names, are not amortized but are tested for impairment at least annually or more frequently if events or circumstances indicate the asset may be impaired.

Adoption of New Accounting Pronouncements

In October 2016, the ~~FASB~~Financial Accounting Standards Board (“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, including interim periods within those annual periods, and early adoption is ~~permitted.~~permitted as of the beginning of an annual period. The Company ~~is currently evaluating the potential~~adopted this guidance on January 1, 2018 on a modified retrospective basis. There was no impact ~~of the accounting and disclosure requirements on~~to the consolidated financial ~~statements. The Company expects to finalize its assessment during 2017.~~

In January 2017, the FASB issued authoritative guidance that simplifies the test for goodwill impairment. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted upon interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will early adoptstatements as a result of this ~~guidance in the fourth quarter of 2017 in conjunction with its annual goodwill impairment testing for 2017.~~adoption.

In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers ~~that~~which 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~~In addition, the FASB issued authoritative guidance in March 2017 related to bethe determination of the customer in a service concession arrangement, which is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods.

The Company adopted the guidance regarding both revenue from contracts with customers and the ~~Company has concluded~~determination of the ~~revenue recognition~~customer in a service concession contract (together referred to as the “Adopted Revenue Guidance”) on a full retrospective basis on January 1, 2018 by applying the guidance to all contracts that were not completed as of January 1, 2016. Results for ~~assets constructed under the contract~~periods beginning after January 1, 2016 have been adjusted to ~~occur at the time control transfers~~conform 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 as of the date of filing, the adoption may significantly affect the financial results asAdopted Revenue Guidance while periods prior to January 1, 2016 continue to be reported under the ~~current authoritative guidance. The Company~~accounting standards in effect for the prior periods. Several of the Company’s contracts were impacted primarily due to the identification of multiple performance obligations within a single contract. However, the Adopted Revenue Guidance has had no cash impact and, therefore, does not ~~anticipate any other material changes~~affect the economics of our underlying customer contracts. As a result of the adoption, the Company recorded a cumulative net increase of $8.4 million to accumulated deficit as of January 1, 2016.

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For periods prior to January 1, 2018, the Company restated both the consolidated financial statements and the materially impacted notes to the ~~timing~~consolidated financial statements for the Adopted Revenue Guidance. The impacts to the previously reported results are as follows (in thousands, except per share amounts):


	December 31, 2017
Consolidated balance sheets	As Reported		As Adjusted
Current portion of long-term receivables	$	—	$	6,878
Prepaid expenses and other current assets		8,789		3,874
Long-term contract costs		80,865		—
Deferred tax asset		—		38
Long-term receivables		—		43,796
Other assets		39,815		4,307
Intangible assets, net		52,298		122,169
Deferred tax liability		5,700		5,266
Other long-term liabilities		3,749		11,429
Accumulated deficit		(216,429)		(224,380)
Shareholders' equity		352,147		344,196


	Three Months Ended September 30, 2017
Consolidated statements of operations and comprehensive income	As Reported		As Adjusted
Revenues	$	29,893	$	29,777
Cost of revenues		15,372		13,443
Gross profit		14,521		16,334
Selling, general and administrative expenses		17,734		18,430
Loss from operations		(3,213)		(2,096)
Other expense:
Interest expense, net		(2,055)		(2,942)
Other expense, net		(1,453)		(1,453)
Loss before income tax expense		(6,721)		(6,491)
Income tax expense		846		797
Net loss	$	(7,567)	$	(7,288)

Loss per share - basic and diluted	$	(0.29)	$	(0.28)


	Nine Months Ended September 30, 2017
Consolidated statements of operations and comprehensive income	As Reported		As Adjusted
Revenues	$	88,794	$	88,558
Cost of revenues		47,103		41,615
Gross profit		41,691		46,943
Selling, general and administrative expenses		50,964		53,040
Loss from operations		(9,273)		(6,097)
Other expense:
Interest expense, net		(5,574)		(8,303)
Other expense, net		(1,728)		(1,728)
Loss before income tax expense		(16,575)		(16,128)
Income tax expense		2,645		2,451
Net loss	$	(19,220)	$	(18,579)

Loss per share - basic and diluted	$	(0.73)	$	(0.70)

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In addition, the impacts to the consolidated statements of cash flows for ~~other contracts with customers except~~the nine months ended September 30, 2017 included a reduction to net cash provided by operating activities of $0.7 million and an increase to net cash used in ~~circumstances where more than one performance obligation exists. For contracts where more than one performance obligation exists,~~investing activities of $0.7 million.

New Accounting Pronouncements to be Adopted

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. 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, the Company will also adopt the authoritative guidance issued in March 2017 regarding the determination of the customer in a service concession arrangement.

In February 2016, the FASB issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. ~~This~~Throughout 2018, the FASB has 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 will be 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. During the fourth quarter of 2017, the Company decided to forego early adoption and has decided to adopt the standard on January 1, 2019. The Company ~~has developed its assessment approach and has begun evaluating~~will adopt on a modified retrospective basis, with the ~~potential impact~~cumulative effect of transition as of the ~~accounting and disclosure requirements on the consolidated financial statements.~~ effective date of adoption.

The Company ~~expects to~~concluded that it will elect the package of practical expedients provided for within the authoritative guidance which exempts the Company from having to reassess: (i) whether expired or existing contracts contain leases, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. ~~For lessor~~In addition, the Company concluded that it will elect 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 will utilize the short-term exemption for lessees and establish an accounting policy to not recognize a right-of-use asset or lease liability for any lease with a term of less than 12 months. Although the Company is still performing its evaluation, it does not expect to elect any of the other practical expedients.

Lessee accounting - The Company expects the adoption will have a material impact on the consolidated balance sheet, 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~~will make 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~~will only be recorded for ~~operating~~ leases with ~~a term~~expected terms of more than 12 months. The Company does not expect the adoption will have a material impact on the consolidated statements of operations and comprehensive income for situations which the Company is ~~reevaluating whether~~a lessee. While the Company is nearing the completion of its assessment of the adoption of the authoritative guidance for lessees, it is still assessing the inputs to ~~early adopt~~ the ~~guidance~~right-of-use asset and corresponding lease liability calculations. As a result, the Company has not yet quantified the cumulative effect adjustment to be recorded on ~~a retrospective basis effective~~ January 1, ~~2018 in conjunction with the guidance regarding revenue from contracts with customers.~~2019. The Company ~~will make this determination~~expects to finalize its assessment and provide the expected impact during the fourth quarter of ~~2017.~~2018.

Lessor accounting - As the Company has elected the transitional practical expedients for leases, the Company does not expect any material impacts to the consolidated financial statements for leases in situations which the Company is a lessor and the lease commenced prior to January 1, 2019. The Company is still assessing the impacts of the authoritative guidance and establishing its policies for costs incurred for the acquisition and fulfillment of the lease contracts, including commissions and installation costs. While the Company is nearing the completion of its assessment of the adoption of the authoritative guidance for lessors, it has not yet quantified the cumulative effect adjustment to be recorded on January 1, 2019. The Company expects to finalize its assessment and provide the expected impact during the fourth quarter of 2018.

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Reclassification

The Company has historically classified the receipt of principal on long-term receivables as a cash inflow from investing activities in the consolidated statements of cash flows. During the first quarter of 2018, the Company reclassified the receipt of principal on long-term receivables as a cash inflow from operating activities in the consolidated statements of cash flows. The Company believes the change in classification is preferable as the presentation of the collection of principal on long-term receivables as a cash inflow from operating activities more clearly reflects cash received from the Company’s core operating activities as long-term receivables. In addition, the reclassification is expected to improve transparency of cash flows generated from existing operations. This reclassification, which has been applied retrospectively to all periods prior to January 1, 2018, did not result in a change to the consolidated balance sheets, or the consolidated statements of operations and comprehensive income, or any component therein, including loss from operations, comprehensive income, current assets, total assets or shareholders’ equity. In the consolidated statements of cash flows for the nine months ended September 30, 2017, the Company reclassified $3.4 million of principal collected on long-term receivables from cash flows from investing activities to cash flows from operating activities. Inclusive of both the impacts for the Adopted Revenue Guidance noted previously and the reclassification of the principal collected on long-term receivables, net cash provided from operating activities for the nine months ended September 30, 2017 was adjusted to $14.6 million from $11.9 million and net cash used in investing activities for the nine months ended September 30, 2017 was adjusted to $(21.1) million from $(18.4) million. Cash equivalents and restricted cash at September 30, 2017 remained unchanged.

3. Business Combinations and Asset Acquisitions

Business Combinations

~~Wellsys USA Corporation~~Alpine Water Systems, LLC

On ~~September 8, 2017,~~August 6, 2018, Quench ~~USA, Inc., a wholly-owned subsidiary of AquaVenture Holdings Limited,~~ acquired substantially all of the assets and assumed certain liabilities of ~~Wellsys USA Corporation~~Alpine Water Systems, LLC (“~~Wellsys”~~Alpine”), a POU water filtration company based in Las Vegas, Nevada, pursuant to an asset purchase agreement ~~for an~~(“Alpine Acquisition”). The aggregate purchase price, subject to working capital adjustments, of ~~$6.9~~the Alpine Acquisition was $15.2 million, including $14.6 million in cash, ~~including a final working capital adjustment~~$0.4 million payable on August 6, 2020, and $0.2 million of ~~$165 thousand (“Wellsys Acquisition”)~~acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future performance of the acquired assets. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $0.3 million. In addition, the asset purchase agreement includes contingent payments with the ultimate payout based upon the future performance of the acquired assets. The contingent payments are automatically forfeited if the employment of certain selling shareholders terminates. The Company has determined that the contingent payments will be postcombination compensation expense, which will be accreted to their estimated payout amount of $0.6 million throughout the substantive service period. The undiscounted range of outcomes for the postcombination compensation payout amount is ~~expected~~$0 to ~~be received from~~$1.1 million. The assets acquired consist primarily of in-place lease agreements and the ~~escrow agent during the three months ended December 31, 2017. Wellsys is a supplier of high quality branded and private-labeled~~related POU ~~water coolers and purifications systems. Headquartered~~systems in ~~the greater Phoenix, Arizona area, Wellsys sells its products to a network of dealers throughout~~ the United States ~~Canada, Mexico~~ and ~~South Africa.~~Canada.

~~Transaction-related~~Related transaction costs incurred by the Company during both the three and nine months ended September 30, ~~2017~~2018 were ~~$21 thousand,~~$0.2 million, 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 Acquisition~~asset acquisition to ~~be able to participate more broadly in the global~~expand its installed base of POU market through the Wellsys distribution network. In addition, the acquisition provides an opportunity to develop, source and distribute Quench-exclusive innovative coolers and purification offerings, and to develop relationships with Wellsys dealers that could ultimately lead to potential acquisitions.systems.

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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	$	321	$	506
Inventory		884		141
Intangible assets		4,300
Property, plant and equipment				1,779
Identified intangible assets				7,240
Goodwill		1,503		6,538
Total assets acquired		7,008		16,204
Liabilities assumed:
Customer deposits		(153)
Accounts payable and accrued liabilities				(479)
Deferred revenue				(565)
Total liabilities assumed		(153)		(1,044)
Total purchase price	$	6,855	$	15,160

Due primarily to the timing of the acquisition and the complexities involved with determining fair value of the intangible assets acquired, the Company has not yet completed the valuations of the identified intangibles. The preliminary purchase price allocation has been developed based on preliminary estimates of fair values using the historical financial statements of ~~Wellsys~~Alpine 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 purchase price allocation that could result in changes to the preliminary fair values allocated, assigned useful lives and associated amortization recorded.

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

The results of the operations of ~~Wellsys~~the acquired Alpine assets are included in the Quench reportable segment ~~after~~from the date of acquisition. The resulting amount of revenues and net ~~income of Wellsys~~loss included in the ~~unaudited condensed~~ consolidated statements of operations and comprehensive income since acquisition ~~was $0.4~~were approximately $0.9 million and ~~$12 thousand,~~$0.1 million, respectively.

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~~Aguas De Bayovar S.A.C.~~Wa-2 Water Company Ltd.

On ~~October 31, 2016, AquaVenture Holdings Peru S.A.C. ("AVH Peru")~~March 1, 2018, Quench Canada, Inc., a ~~Peruvian company and an indirect~~ wholly-owned subsidiary of ~~AquaVenture Holdings Limited,~~the Company, acquired ~~100% of the outstanding shares of Aguas de Bayovar S.A.C. (‘‘ADB’’) and~~substantially all of the ~~rights~~water filtration assets and ~~obligations under a design and construction contract for a desalination plant and related infrastructure located in Peru~~assumed certain liabilities of Wa-2 Water Company Ltd. (“Wa-2”), pursuant to an asset purchase agreement for an aggregate purchase price of ~~$46.5~~$5.1 million in cash, including a final working capital adjustment of ~~$186~~approximately $5 thousand ~~(the “Peru Acquisition”)~~ which was paid in ~~February 2017. The desalination plant and related infrastructure, which was completed~~June 2018 (the “Wa-2 Acquisition”). Approximately $0.3 million of the aggregate purchase price, subject to adjustment, is held 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 waterescrow for a ~~contracted fee on~~period of one year by a ~~take-or-pay basis~~third party for seller indemnifications. Wa-2 is a ~~phosphate mining~~POU water filtration company ~~pursuant to an operating~~based in Vancouver, British Columbia. The assets acquired consist primarily of in-place lease agreements 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.~~POU systems.

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

~~Transaction-related~~Related transaction costs incurred by the Company during the three and nine months ended September 30, ~~2016~~2018 were ~~$0.4 million~~$0 and ~~$0.9~~$0.1 million, respectively, ~~and~~which 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~~Wa-2 Acquisition to expand its installed base of ~~seawater reverse~~

~~osmosis desalination facilities used to provide WAAS, its presence~~POU systems in ~~South America and the industries served.~~Canada.

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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

As of September 30, ~~2017,~~2018, the purchase price allocated to the fair value of assets acquired, including intangibles recorded in conjunction with the business combination, and liabilities assumed remains preliminary. During the second quarter of 2018, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships, trade names and non-compete agreements. The fair value of the customer relationships was determined using the multi-period excess earnings method which is based on the present value of expected cash flows generated by the revenues under the contract with the customer using a discount rate of 12.9%. The fair value of the trade names was determined using the relief from royalty method which is based on the present value of royalty fees derived from projected revenues using a discount rate of 12.9%. The fair value of the non-compete agreements was determined using the comparative business valuation method which is based on the present value of potential revenue loss using a discount rate of 12.9%. The Company determined the weighted average useful life at the date of valuation for the customer relationships, trade names and non-compete agreements to be 20 years, 12 years, and 5 years, respectively.

There was not a material impact on the amortization expense recorded during the three and nine months ended September 30, 2018 as a result of the updates made to the purchase price allocation.

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

The results of the operations of the acquired Wa-2 assets are included in the Quench reportable segment after the date of acquisition. The resulting amount of revenues and net income included in the consolidated statements of operations and comprehensive income since acquisition were $1.3 million and $0.1 million, respectively.

Wellsys USA Corporation

On September 8, 2017, Quench USA, Inc. (“Quench”), a wholly-owned subsidiary of AquaVenture Holdings Limited, 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 in cash, including a final working capital adjustment of $165 thousand (the “Wellsys Acquisition”) which was received from the escrow agent in October 2017. Wellsys is a supplier of high quality branded and private-labeled POU water coolers and purification 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.

There were no related transaction costs incurred by the Company during the three and nine months ended September 30, 2018. Related transaction costs incurred by the Company during the three and nine months ended September 30, 2017 were $21 thousand, which were expensed as incurred within SG&A expenses in the ~~Company made certain adjustments~~consolidated

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statements of operations and comprehensive income.

The Quench business completed the Wellsys Acquisition to be able to participate more broadly in the global POU market through the Wellsys distribution network. In addition, the acquisition provides an opportunity to develop, source and distribute Quench-exclusive innovative coolers and purification offerings, and to develop relationships with Wellsys dealers that could ultimately lead to potential acquisitions.

The following table summarizes the purchase price ~~allocation for certain liabilities, including tax, that existed prior to October 31, 2016. The Company believes the liabilities are fully indemnified pursuant~~allocated to the ~~purchase and sale agreement for the Peru Acquisition. As a result, the Company updated the purchase price allocation as~~fair value of ~~September 30, 2017 to record a liability in the amount of $0.9 million which was~~assets acquired, including intangibles recorded in ~~accrued~~conjunction with the business combination, and liabilities ~~and an indemnification receivable in the amount of $0.9 million, which was recorded in prepaids and other assets in the unaudited condensed consolidated balance sheet as of September 30, 2017.~~ assumed (in thousands):


Assets acquired:
Trade receivables	$	321
Inventory		883
Customer relationships		2,801
Trade names		945
Non-compete agreements		392
Vendor agreement		193
Goodwill		1,472
Total assets acquired		7,007
Liabilities assumed:
Customer deposits		(153)
Total liabilities assumed		(153)
Total purchase price	$	6,854

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~~Alpine, Wa-2 and Wellsys, which occurred on ~~October 31, 2016~~August 6, 2018, March 1, 2018 and September 8, 2017, respectively, as if they had occurred on January 1, ~~2016.~~2017. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future.

Three months ended

Nine months ended


September 30,

September 30,


2017

2016

2017

2016

Revenues

$
31,077

$
31,300

$
93,530

$
90,848

Net loss

$
(7,410)

$
(3,502)

$
(18,593)

$
(9,282)

Loss per share(1)

$
(0.28)

$
(0.70)

~~(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.~~


	Three months ended				Nine months ended
	September 30,				September 30,
	2018		2017		2018		2017
Revenues	$	37,273	$	31,584	$	107,318	$	95,060
Net loss	$	(2,802)	$	(7,046)	$	(14,461)	$	(17,758)
Loss per share	$	(0.11)	$	(0.27)	$	(0.54)	$	(0.67)

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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 asset acquisition to expand its installed base of POU systems in North Carolina.

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

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La Ferla Group LLC

On June 4, 2018, Quench acquired substantially all of the assets and assumed certain liabilities of La Ferla Group LLC, d/b/a Avalon Water (“Avalon”), a POU water filtration company based in Atlanta, Georgia, pursuant to an asset purchase agreement. The assets acquired consist primarily of in-place lease agreements and the related POU systems.

The purchase price for this acquisition was approximately $5.4 million, including $5.2 million in cash and $0.2 million payable on the one-year anniversary of the transaction that is subject to adjustment.

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 Avalon asset acquisition to expand its installed base of POU systems in the United States.

Related transaction costs incurred by the Company in connection with this acquisition during the three and nine months ended September 30, 2018 were $0 and $14 thousand, respectively.

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



Trade receivables	$	31	$	108
Property, plant and equipment		325		704
Inventory				13
Customer relationships		1,690		4,349
Non-compete agreements				413
Deferred revenue		(28)		(153)
Accrued liabilities		(12)
Net assets acquired	$	2,006	$	5,434

During the third quarter of 2018, the Company updated its allocation of the purchase price to the assets acquired and liabilities assumed. The assets and liabilities in the purchase price allocation are stated at fair value based on estimates of fair value using available information and making assumptions management believes are reasonable. Intangibles identified and valued related to the transaction include customer relationships 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 12.1%. 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 12.1%. The Company determined the weighted average useful life at the date of valuation for the customer relationships and non-compete agreements to be 17 years and 5 years, respectively.

There was not a material impact on the amortization expense recorded during the three and nine months ended September 30, 2018 as a result of the updates made to the purchase price allocation.

Clarus Services, Inc., Watermark USA LLC, and JMS Group, Inc.

On January 15, 2018, Quench separately acquired substantially all the assets and assumed certain liabilities of Clarus Services Inc. (“Clarus”), a POU water filtration company based in Richmond, Virginia, and Watermark USA LLC (“Watermark”), a POU water filtration company based outside of Philadelphia, Pennsylvania, pursuant to asset purchase agreements. The assets acquired consist primarily of in-place lease agreements and the related POU systems.

On April 2, 2018, Quench acquired substantially all of the assets and assumed certain liabilities of JMS Group, Inc., d/b/a Aqua Coolers (“Aqua Coolers”), a POU water filtration company based in Chicago, Illinois, pursuant to an asset purchase agreement. The assets acquired consist primarily of in-place lease agreements and the related POU systems.

The aggregate purchase price for these three acquisitions was approximately $2.2 million, including $2.1 million in cash and $0.1 million payable on the one-year anniversary of the transactions that is subject to adjustment.

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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 Clarus, Watermark and Aqua Coolers asset acquisitions to expand its installed base of POU systems in the United States.

Related transaction costs incurred by the Company in connection with these acquisitions during the three and nine months ended September 30, 2018 were $0 and $41 thousand, respectively.

The following table summarizes the aggregate amounts for the Clarus, Watermark and Aqua Coolers acquisitions which were allocated to the fair value of aggregated net assets acquired (in thousands):



Trade receivables	$	92
Property, plant and equipment		182
Inventory		12
Customer relationships		1,952
Deferred revenue		(47)
Net assets acquired	$	2,191

The assets in the ~~initial~~ purchase price ~~allocation~~allocations 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 and nine months ended September 30, 2018 and 2017, along with the reportable segment for each category (in thousands):


		Three months ended				Nine months ended
		September 30,				September 30,
	Segment	2018		2017		2018		2017
Bulk water
Water delivery	Seven Seas Water	$	9,242	$	8,301	$	26,773	$	25,276
Operating and maintenance	Seven Seas Water		5,384		4,671		15,909		14,275
Total Bulk water			14,626		12,972		42,682		39,551
Rental	Quench		16,261		13,428		45,041		39,238
Financing	Seven Seas Water		985		1,118		3,048		3,451
Other
Sale of water and related filtration equipment, coffee and consumables	Quench		4,773		2,099		12,647		5,914
Services on water and related filtration equipment	Quench		179		160		365		404
Total Other			4,952		2,259		13,012		6,318
Total revenues		$	36,824	$	29,777	$	103,783	$	88,558

Total Seven Seas Water revenues		$	15,611	$	14,090	$	45,730	$	43,002
Total Quench revenues		$	21,213	$	15,687	$	58,053	$	45,556

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

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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 (in thousands) at September 30, 2018 and December 31, 2017:


	September 30,		December 31,
	2018		2017
Contract assets
Trade receivables, net	$	19,497	$	19,593
Current portion of long-term receivables		6,257		6,878
Long-term receivables		39,823		43,796
Total contract assets	$	65,577	$	70,267

Contract liabilities
Deferred revenue, current	$	3,412	$	2,454
Deferred revenue, non-current		10,642		10,351
Total contract liabilities	$	14,054	$	12,805

Significant changes in the contract asset and the contract liability balances during the period are as follows (in thousands):


	Three months ended				Nine months ended
	September 30, 2018				September 30, 2018
	Contract assets increase/(decrease)		Contract liabilities (increase)/decrease		Contract assets increase/(decrease)		Contract liabilities (increase)/decrease
Revenue recognized that was included in the contract liability balance at January 1, 2018	$	—	$	323	$	—	$	3,360
Deferred revenue acquired during the period	$	—	$	(714)	$	—	$	(1,093)

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

Transaction Price Allocated to the Remaining Performance Obligation

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 2018	$	24,653
2019	$	82,255
2020	$	59,963
2021	$	50,473
2022	$	46,312
Thereafter	$	347,973

The amounts presented in the table above primarily consist of bulk water sales and service, service concession arrangements, the rental of water filtration and related equipment and services on water and related filtration equipment. 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 rental of water filtration and related equipment and services on water and related filtration equipment are based on the rental or service rates as stated within the agreements. The remaining performance

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obligations to be performed generally include the continued rental of the water filtration and related equipment or the performance of services with revenues being recognized as the remaining performance obligations are delivered to the customer.

5. Fair Value Measurements

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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 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 orand nine months ended September 30, ~~2017.~~2018. Transfers between levels are deemed to have occurred if the lowest level of input were to change.

The Company’s fair value measurements as of September 30, 2018 and December 31, 2017 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, 2018
Recurring basis:
Money market funds	$	22,508	$	22,508	$	—	$	—
U.S. Treasury securities	$	45,749	$	45,749	$	—	$	—
Acquisition contingent consideration	$	(149)	$	—	$	—	$	(149)
As of December 31, 2017
Recurring basis:
Money market funds	$	11,333	$	11,333	$	—	$	—
U.S. Treasury securities	$	83,999	$	83,999	$	—	$	—

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

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6. Other Intangible Assets

The ~~Company’s fair value measurements~~gross and net carrying values of other intangible assets by major intangible asset class as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 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

$
—

$
—

~~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~~

On 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 only payments 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”);


	September 30, 2018
	Gross Carrying		Accumulated		Carrying
	Amount		Amortization		Value
Definite-lived intangible assets
Customer relationships	$	122,034	$	(31,938)	$	90,096
Off-market contract intangibles		39,800		(8,473)		31,327
Trade names		6,783		(1,073)		5,710
Non-compete agreements		2,125		(350)		1,775
Other		240		(88)		152
Indefinite-lived intangible assets
Trade names		273		—		273
Total	$	171,255	$	(41,922)	$	129,333

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”);


	December 31, 2017
	Gross Carrying		Accumulated		Carrying
	Amount		Amortization		Value
Definite-lived intangible assets
Customer relationships	$	107,798	$	(25,054)	$	82,744
Off-market contract intangibles		39,800		(6,544)		33,256
Trade names		6,093		(818)		5,275
Non-compete agreements		582		(175)		407
Other		242		(28)		214
Indefinite-lived intangible assets
Trade names		273		—		273
Total	$	154,788	$	(32,619)	$	122,169

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~~Amortization expense for these intangible assets for the three months ended September 30, 2018 and 2017 ~~related to prepayment fees, breakage costs~~was 3.3 million and ~~accelerated amortization~~$1.4 million, respectively, of ~~debt financing fees,~~ which $0.6 million and $0.6 million, respectively, was recorded ~~in other expense~~as contra-revenue within the ~~unaudited~~ consolidated ~~statement~~statements of operations and comprehensive income.

~~BVI Loan Agreement~~

~~On August 4, 2017, Seven Seas Water (BVI) Ltd., an indirect wholly owned subsidiary of~~Amortization expense for these intangible assets for 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~~nine months ended September 30, 2018 and 2017 was $9.3 million and $7.9 million, respectively, of which $1.9 million and $1.9 million, respectively, was recorded as contra-revenue within the ~~weighted‑average interest rate was 4.3%.~~

consolidated statements of operations and comprehensive income.

~~Maturities~~Amortization expense for these intangible assets for the remainder of ~~Long~~‑~~Term Debt~~2018, 2019, 2020, 2021 and 2022 is expected to be $3.4 million, $13.3 million, $12.7 million, $12.1 million and $11.6 million, respectively.

~~Maturities of long~~‑~~term debt were as follows as of~~There was no impairment expense related to other intangible assets recorded during the three and nine months ended September 30, ~~2017 (in thousands):~~2018 and 2017.

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

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6.7. 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,~~September 30, 2018, the number of ordinary shares ~~available~~authorized for issuance under the 2016 Plan ~~is 6.1~~was 7.1 million shares.

On October 4, 2016, the outstanding equity awards of the AquaVenture Holdings LLC Amended and Restated Equity Incentive Plans were converted to equity awards of AquaVenture Holdings Limited, with the underlying security being ordinary shares of the AquaVenture Holdings Limited. In addition, the Quench USA Holdings LLC 2014 Equity Incentive Plan and Quench USA, Inc. 2008 Stock Plan (“Quench Equity Plans”) were assumed by AquaVenture Holdings Limited on October 4, 2016. All outstanding awards of the Quench Equity Plans were also converted to equity awards of AquaVenture Holdings Limited, with the underlying security being ordinary shares of the AquaVenture Holdings Limited. The authority to grant additional equity awards under the AquaVenture Holdings LLC Amended and Restated Equity Incentive Plan, Quench USA Holdings LLC 2014 Equity Incentive Plan and Quench USA, Inc. 2008 Stock Plan ceased effective October 5, 2016 at the time of the initial public offering. As a result, no additional equity award grants may be made under these plans.

During the nine months ended September 30, ~~2017,~~2018, the Company granted options to purchase 62 thousand ordinary shares to eligible recipients at a weighted average exercise price of $16.48 per share. The options to purchase ordinary shares have a time-based vesting schedule of four years with 25% on the first anniversary and the remaining 75% vesting quarterly over the remaining three years.

~~In addition, the Company granted 57 thousand~~0.4 million restricted share ~~units during the nine months ended September 30, 2017. Certain~~units. Substantially all of the ~~restricted share units were~~ granted ~~to 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, primarily with 25% vesting on the first anniversary of the date of grant and the remaining 75% vesting quarterly over the remaining three years. The 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. The aggregate grant date fair value of the awards granted during the nine months ended September 30, 2018 was $6.3 million.

Employee Stock Purchase Plan

Under the 2016 Employee Stock 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, 610 thousand shares were sold to eligible employees during the ~~three and~~ nine months ended September 30, ~~2017.~~2018. 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. AtAs of September 30, ~~2017, 0.4 million~~2018, the number of ordinary shares ~~were available~~authorized for ~~future~~ issuance under the 2016 ~~ESPP.~~ESPP was 0.7 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 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 months ended September 30, ~~2017,~~2018, the Company granted 3approximately 46 thousand phantom shares to Eligible ~~Directors.~~Directors, including 37 thousand phantom shares subject to a 12 month vesting period and 9 thousand phantom shares that are immediately vested. The aggregate grant date fair value of the awards granted during the nine months ended September 30, 2018 was $0.6 million. At September 30, ~~2017, 3~~2018, approximately 51 thousand phantom shares remained outstanding.

Share‑Based Compensation Expense

Total share‑based compensation expense recognized for all equity awards during the three months ended September 30, 2018 and 2017 was $3.4 million and ~~2016 was~~ $3.1 million, respectively. For the three months ended September 30, 2018, $3.3 million and ~~$0.4~~$0.1 million ~~respectively.~~were recorded in SG&A and cost of revenues, respectively, within the consolidated statements of operations and comprehensive income. For the three months ended September 30, 2017, $3.0 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~~

Total share-based compensation expense recognized for all equity awards during the ~~three~~nine months ended September 30, ~~2016, $0.4~~2018 and 2017 was $10.0 million and $0$9.1 million, respectively. For the nine months ended September 30, 2018, $9.8 million and $0.2 million were recorded in SG&A and cost of revenues, respectively, within the ~~unaudited condensed~~ consolidated statements of operations and comprehensive income.

~~Total share‑based compensation expense recognized during the nine months ended September 30, 2017 and 2016 was $9.1 million and $1.5 million, respectively.~~ For the nine months ended September 30, 2017, $8.8 million and $0.3 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 months ended September 30, 2016, $1.5 million and $0 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 months ended September 30, ~~2017~~2018 and ~~2016 as a full deferred tax asset valuation allowance was recorded in the United States for domestic operations.~~2017.

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				Nine Months Ended
	September 30,		September 30,		September 30,				September 30,
	2017		2017		2018		2017		2018		2017
Numerator:
Net loss	$	(7,567)	$	(19,220)	$	(2,732)	$	(7,288)	$	(13,999)	$	(18,579)

Denominator:
Weighted-average ordinary shares outstanding - basic and diluted		26,441		26,414		26,590		26,441		26,544		26,414

Loss per share - basic and diluted	$	(0.29)	$	(0.73)	$	(0.10)	$	(0.28)	$	(0.53)	$	(0.70)

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

Approximately 4.1 million weighted-average outstanding share awards for both the three and nine months ended September 30, 2018, respectively, were excluded from the calculation of diluted earnings per share because their effect was antidilutive. Approximately 3.9 million weighted-average outstanding share awards for both the three and nine months ended September 30, 2017 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, is 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 30, ~~2017~~2018 and ~~2016,~~2017, the Company recorded accretion expense of $13 thousand and ~~$12~~$13 thousand, respectively. During the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the Company recorded accretion expense of ~~$37~~$38 thousand and ~~$31~~$37 thousand, respectively. No valuation adjustments were recorded during the three or nine months ended September 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~~2018 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.~~2017.

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

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Acquisition Contingent Consideration

Acquisition contingent consideration represents the additional purchase price that is contingent on the future performance of an acquired business. The acquisition contingent consideration was derived in connection with the Alpine Acquisition.

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


	Nine Months Ended
	September 30,
	2018
Acquisition contingent consideration at beginning of year	$	—
Acquired during the period		149
Acquisition contingent consideration at end of year	$	149

At September 30, 2018, the entire $149 thousand was deemed current and was recorded in accrued liabilities in the consolidated balance sheets.

The acquisition contingent consideration liabilities were recorded at fair value as of September 30, 2018 based on a Monte Carlo Simulation which utilizes unobservable inputs, including forecasted revenues. Any change in the valuation of the acquisition contingent consideration will be recorded as a valuation adjustment within SG&A expenses in the consolidated statements of operations and comprehensive income. There was no change in fair value for the three and nine months ended September 30, 2018.

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 Company’s liability insurance will cover any or all events or that the limits of coverage will be sufficient to fully cover all liabilities. As of September 30, ~~2017,~~2018, 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.

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10. Cash Flow Information

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


	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2018		2017
Cash paid during the period:
Income taxes, net	$	1,138	$	71	$	1,631	$	1,138
Interest, net	$	8,381	$	7,500	$	9,325	$	8,381
Non-Cash Transaction Information:
Non-cash capital expenditures	$	611	$	1,078	$	1,331	$	606
Unpaid offering costs	$	—	$	1,113
Unpaid debt financing costs	$	111	$	—	$	—	$	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,				September 30,
	2017		2016		2018		2017
Cash and cash equivalents	$	118,070	$	25,000	$	93,617	$	118,070
Restricted cash, current		166		283		2,000		166
Restricted cash, non-current		4,147		5,558		3,637		4,147
	$	122,383	$	30,841
Cash, cash equivalents and restricted cash					$	99,254	$	122,383

~~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 for governmental, municipal, industrial and hospitality customers internationally under ~~long‑term~~long-term contracts. Quench provides 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,~~the United States and in Canada, typically under multi‑year contracts. Revenues reported under 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, the Company included the majority of certain general and administrative costs, primarily professional service fees 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 certain general and administrative costs that are not allocated to either of the reportable segments. 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. ~~As a result of this change, the Company has restated prior periods for segment reporting purposes.~~

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

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


	Three Months Ended September 30, 2017								Three Months Ended September 30, 2016								Three Months Ended September 30, 2018								Three Months Ended September 30, 2017
	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	$	14,206	$	—	$	—	$	14,206	$	13,879	$	—	$	—	$	13,879	$	14,626	$	—	$	—	$	14,626	$	12,972	$	—	$	—	$	12,972
Rental		—		13,428		—		13,428		—		12,396		—		12,396		—		16,261		—		16,261		—		13,428		—		13,428
Financing																		985		—		—		985		1,118		—		—		1,118
Other		—		2,259		—		2,259		—		2,583		—		2,583		—		4,952		—		4,952		—		2,259		—		2,259
Total revenues		14,206		15,687		—		29,893		13,879		14,979		—		28,858		15,611		21,213		—		36,824		14,090		15,687		—		29,777
Gross profit:
Bulk water		6,302		—		—		6,302		6,196		—		—		6,196		7,855		—		—		7,855		6,997		—		—		6,997
Rental		—		7,345		—		7,345		—		7,140		—		7,140		—		9,131		—		9,131		—		7,345		—		7,345
Financing																		985		—		—		985		1,118		—		—		1,118
Other		—		874		—		874		—		1,227		—		1,227		—		1,696		—		1,696		—		874		—		874
Total gross profit		6,302		8,219		—		14,521		6,196		8,367		—		14,563		8,840		10,827		—		19,667		8,115		8,219		—		16,334
Selling, general and administrative expenses		6,607		9,828		1,299		17,734		4,962		9,602		548		15,112		7,616		12,194		1,016		20,826		7,303		9,828		1,299		18,430
Income (loss) from operations		(305)		(1,609)		(1,299)		(3,213)		1,234		(1,235)		(548)		(549)		1,224		(1,367)		(1,016)		(1,159)		812		(1,609)		(1,299)		(2,096)
Other (expense) income, net		(1,764)		(1,359)		(385)		(3,508)		(1,896)		(1,027)		35		(2,888)
Other expense, net																								(3,624)								(4,395)
Loss before income tax expense		(2,069)		(2,968)		(1,684)		(6,721)		(662)		(2,262)		(513)		(3,437)								(4,783)								(6,491)
Income tax expense		790		56		—		846		1,275		—		—		1,275
Income tax expense (benefit)																								(2,051)								797
Net loss	$	(2,859)	$	(3,024)	$	(1,684)	$	(7,567)	$	(1,937)	$	(2,262)	$	(513)	$	(4,712)							$	(2,732)							$	(7,288)
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
Depreciation and amortization																	$	3,672	$	5,038	$	—	$	8,710	$	3,589	$	3,856	$	—	$	7,445
Loss on extinguishment of debt	$	820	$	569	$	—	$	1,389	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	820	$	569	$	—	$	1,389
Expenditures for long-lived assets	$	1,108	$	3,135	$	—	$	4,243	$	1,810	$	3,104	$	—	$	4,914	$	396	$	5,319	$	—	$	5,715	$	922	$	3,135	$	—	$	4,057
Amortization of deferred financing fees	$	93	$	37	$	79	$	209	$	150	$	47	$	—	$	197	$	64	$	51	$	122	$	237	$	93	$	37	$	79	$	209

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


	Nine Months Ended September 30, 2017								Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2018								Nine Months Ended September 30, 2017
	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	$	42,682	$	—	$	—	$	42,682	$	39,551	$	—	$	—	$	39,551
Rental		—		39,238		—		39,238		—		36,153		—		36,153		—		45,041		—		45,041		—		39,238		—		39,238
Financing																		3,048		—		—		3,048		3,451		—		—		3,451
Other		—		6,318		—		6,318		—		7,147		—		7,147		—		13,012		—		13,012		—		6,318		—		6,318
Total revenues		43,238		45,556		—		88,794		40,951		43,300		—		84,251		45,730		58,053		—		103,783		43,002		45,556		—		88,558
Gross profit:
Bulk water		17,335		—		—		17,335		17,975		—		—		17,975		22,661		—		—		22,661		19,136		—		—		19,136
Rental		—		21,730		—		21,730		—		20,164		—		20,164		—		24,801		—		24,801		—		21,730		—		21,730
Financing																		3,048		—		—		3,048		3,451		—		—		3,451
Other		—		2,626		—		2,626		—		3,284		—		3,284		—		4,388		—		4,388		—		2,626		—		2,626
Total gross profit		17,335		24,356		—		41,691		17,975		23,448		—		41,423		25,709		29,189		—		54,898		22,587		24,356		—		46,943
Selling, general and administrative expenses		18,692		28,988		3,284		50,964		14,003		27,718		1,543		43,264		22,361		34,101		3,227		59,689		20,768		28,988		3,284		53,040
Income (loss) from operations		(1,357)		(4,632)		(3,284)		(9,273)		3,972		(4,270)		(1,543)		(1,841)		3,348		(4,912)		(3,227)		(4,791)		1,819		(4,632)		(3,284)		(6,097)
Other (expense) income, net		(4,139)		(3,395)		232		(7,302)		(5,428)		(3,065)		41		(8,452)
Other expense, net																								(10,520)								(10,031)
Loss before income tax expense		(5,496)		(8,027)		(3,052)		(16,575)		(1,456)		(7,335)		(1,502)		(10,293)								(15,311)								(16,128)
Income tax expense		2,424		221		—		2,645		2,633		—		—		2,633
Income tax expense (benefit)																								(1,312)								2,451
Net loss	$	(7,920)	$	(8,248)	$	(3,052)	$	(19,220)	$	(4,089)	$	(7,335)	$	(1,502)	$	(12,926)							$	(13,999)							$	(18,579)
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
Depreciation and amortization																	$	10,911	$	13,850	$	—	$	24,761	$	10,716	$	11,060	$	—	$	21,776
Loss on extinguishment of debt	$	820	$	569	$	—	$	1,389	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	820	$	569	$	—	$	1,389
Expenditures for long-lived assets	$	2,810	$	9,089	$	—	$	11,899	$	7,697	$	8,864	$	—	$	16,561	$	1,261	$	11,669	$	—	$	12,930	$	2,156	$	9,089	$	—	$	11,245
Amortization of deferred financing fees	$	363	$	182	$	79	$	624	$	455	$	113	$	—	$	568	$	194	$	152	$	366	$	712	$	363	$	182	$	79	$	624

The following table provides information by reportable segment and a reconciliation to the consolidated results as of September 30, 2017, total assets for the Seven Seas Water 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.

~~As of September 30, 2017~~2018 and December 31, ~~2016, total assets for Corporate and Other were $95.6 million and $69.0 million, respectively.~~2017 (in thousands):


	September 30, 2018								December 31, 2017
	Seven Seas				Corporate				Seven Seas				Corporate
	Water		Quench		& Other		Consolidated		Water		Quench		& Other		Consolidated
Total assets	$	248,519	$	233,976	$	66,509	$	549,004	$	254,202	$	202,456	$	97,287	$	553,945

~~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 months ended September 30, ~~2017,~~2018, 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,

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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 30, ~~2017,~~2018, 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.

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 nine months ended September 30, 2018. The subsequent events included the following:

On October 2, 2018, effective October 1, 2018, Quench sold substantially all of the assets and assigned certain liabilities of its Atlas High Purity Solutions business unit (“Atlas HP”), to a buyer pursuant to an asset purchase agreement. The estimated aggregate sale price, subject to working capital adjustments, was $3.0 million, including $2.7 million in cash and a receivable from the buyer of $0.3 million. As of September 30, 2018, the assets and liabilities were not classified as held-for-sale as the approval of the transaction by the Board of Directors of AquaVenture Holdings Limited, or management having the authority to approve the action, occurred on October 1, 2018. As of October 1, 2018, the current assets, long-term assets, current liabilities and long-term liabilities classified as held-for-sale and ultimately disposed had an estimated balance of $1.8 million, $0.8, million $1.0 million and $0.1 million, respectively. The preliminary gain on the sale of Atlas HP is estimated at $0.1 million, net of transaction expenses. The operations of Atlas HP did not qualify for presentation as discontinued operations upon disposition.

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 aggregate purchase price was approximately $130 million, including $128 million cash and approximately 122 thousand ordinary shares of AquaVenture, or $2 million. The estimated aggregate purchase price is subject to adjustments as provided in the purchase agreement including payment of up to $2 million contingent upon the collection of certain assumed receivables.

The Company completed the acquisition to expand its WAAS offerings in the wastewater and water reuse businesses and broaden the Company’s existing portfolio in the United States. Due primarily to the timing of the acquisition, the Company has not yet completed the allocation of the purchase price to the net assets acquired.

On November 1, 2018, the Company entered into the third amendment to its corporate credit agreement (the “Amended Corporate Credit Agreement”) with a syndicate of lenders to, among other things: (i) increase its net borrowings by $110.0 million to an aggregate principal amount of $260.0 million, (ii) reduce the interest rate for the original $150.0 million borrowings by 50 basis points on both the variable and fixed interest portions and (iii) 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

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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.

The Company is still assessing whether the amendment is considered a debt modification or debt extinguishment and reissuance. The Company will complete its assessment during the fourth quarter of 2018.

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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, 2017. 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, 2017.

Overview

AquaVenture Holdings Limited and its subsidiaries (the “Company”, “AquaVenture”, “we”, “us” and “our”) is a multinational provider of Water as a Service (“WAAS”), solutions that provide our customers with a reliable and cost-effective source of clean drinking and process water primarily under long-term contracts that minimize capital investment by the customer. We believe our WAAS business model offers a differentiated value proposition that generates long-term customer relationships, recurring revenue, predictable cash flow and attractive rates of return. We generate revenue from our operations in North America, the Caribbean and South America and are pursuing expansion opportunities in North America, the Caribbean, South America, Africa 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 solutions, providing ~~approximately 8~~more than 8.5 billion gallons of potable, high purity industrial grade and ultra‑pure water per year to governmental, municipal, industrial and hospitality customers. Quench ~~which we acquired in June 2014,~~ is a U.S.‑based provider of Point‑of‑Use (“POU”) filtered water systems and related services to ~~approximately 40,000~~more than 45,000 institutional and commercial customers as of September 30, 2018, including more than half of the Fortune ~~500.~~500, throughout the United States and in Canada.

Our Seven Seas Water platform generates recurring revenue through long‑term contracts for the delivery of treated bulk water, generally based on the amount of water we deliver. The significant majority of our Seven Seas Water revenue is derived from our operations in six different locations as of September 30, ~~2017:~~2018:

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.~~gallons per day (“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 having~~facilities in Curaçao which have 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.

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.GPD.

On October 4, 2018, we entered into an agreement with the Water Corporation of Anguilla, the public water utility of Anguilla, to supply potable water under a 10-year contract. Water production, which will commence

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immediately, will be at an initial capacity of 500 thousand gallons per day and is expected to expand to 750 thousand gallons per day within the next several months.

Seven Seas Water offers solutions that utilize reverse osmosis and other purification technologies to convert seawater or brackish water into potable, high purity industrial grade and ultra‑pure water in large volumes for customers operating in regions with limited access to usable water. Our WAAS solutions allow our customers to outsource the management of the entire lifecycle of a desalination plant. We are supported by an operations center in Tampa, Florida, 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 30, ~~2017~~2018 was approximately 8%, implying an average rental period of more than 11 years. We define “annual unit ~~attrition rate”~~attrition” as a ratio, the numerator of which is the total number of removals of ~~company-owned~~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~~company owned and billed rental units during the same ~~12-month~~12 month period. We receive recurring fees for the units we rent or service throughout the life of our customer relationship. We also receive ~~non‑recurring~~non-recurring revenue from some customers for certain services, such as installation, relocation or removal of equipment, ~~as well as~~and from the resale of ~~equipment.~~equipment to both direct consumers and dealers. 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 in Canada and are supported by a primary operations center in King of Prussia, Pennsylvania, which provides marketing and business development, field service and supply chain support, customer care and administrative functions.

On January 15, 2018, we separately acquired substantially all of the assets and assumed certain liabilities of Clarus Services Inc. (the “Clarus Acquisition”), a POU water filtration company based in Richmond, Virginia, and Watermark USA LLC (the “Watermark Acquisition”), a POU water filtration company based outside of Philadelphia, Pennsylvania, with an aggregate purchase price of $1.6 million (collectively, the “Clarus and Watermark Acquisitions”). The assets acquired consist primarily of in-place lease agreements and the related POU systems.

On February 9, 2018, we entered into a binding agreement with Abengoa Water, S.L.U. to purchase a majority interest in a desalination plant in Accra, Ghana. The plant has the capacity to deliver approximately 18.5 million GPD of potable water to Ghana Water Company Limited (“GWCL”) under a long-term, U.S. dollar denominated water purchase agreement. The transaction is structured as the purchase of the entire share capital of Abengoa's subsidiary that holds a 56% economic interest in Befesa Desalination Developments Ghana Limited (“BDDG”), the Ghanaian company that owns the plant. The base purchase price for this interest is approximately $26 million, which is expected to be paid in cash, and is subject to adjustment based on the results of negotiations with GWCL regarding changes to the water purchase agreement and with BDDG's lenders regarding the existing financing arrangements, among other things. Completion of the purchase is subject to the satisfaction of certain conditions precedent, including: (i) the receipt of required approvals from BDDG's other shareholders, as well as those required under BDDG's financing arrangements, (ii) the execution of legally binding heads of terms among the Government of Ghana, GWCL and BDDG in which the parties agree to revise the water rates charged under the water purchase agreement and the indexation of those rates, (iii) the receipt of the approval of the credit committees of BDDG's lenders to changes to the terms and conditions of BDDG's financing arrangements, and (iv) there being no material breach by BDDG under the project or financing documents, as well as certain other customary closing conditions. On September 25, 2018, we entered into an agreement with Abengoa Water, S.L.U. to extend the long-stop date of the binding agreement to December 31, 2018.

On February 15, 2018, we entered into an agreement to purchase all of the shares of Matrix BLI, Ltd. for a cash purchase price of approximately $3.0 million, subject to adjustment in accordance with the purchase agreement. This agreement was terminated in October 2018.

On March 1, 2018, we acquired substantially all the water filtration assets and assumed certain liabilities of Wa-2 Water Company Ltd., a POU water filtration company based in Vancouver, British Columbia, for an aggregate purchase price of $5.1 million (the “Wa-2 Acquisition”). The assets acquired consist primarily of in-place lease agreements and the related POU systems.

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Effective April 1, 2018, we entered into an amendment to the water purchase agreement in St. Maarten. The amendment reduced the required minimum monthly water purchase by our customer, in exchange for a 4-year extension to the water contract. The reduction in the required minimum monthly water purchase will remain in effect for three years, at which time the average monthly minimum purchase will then revert to previous minimum requirements for the remainder of the contract. Our customer has the option to extend the lower minimum volumes for an additional two years, which, if exercised, would also extend the contract expiry from 2025 to 2027.

On April 2, 2018, we acquired substantially all of the assets and assumed certain liabilities of JMS Group, Inc., d/b/a Aqua Coolers, a POU water filtration company based in Chicago, Illinois, for an aggregate purchase price of $0.6 million (the “Aqua Coolers Acquisition”). The assets acquired consist primarily of in-place lease agreements and the related POU systems.

On June 4, 2018, we acquired substantially all of the assets and assumed certain liabilities of La Ferla Group LLC, d/b/a Avalon Water, a POU water filtration company based in Atlanta, Georgia, for an aggregate purchase price of $5.4 million (the “Avalon Acquisition”). The assets acquired consist primarily of in-place lease agreements and the related POU systems.

On August 6, 2018, we 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, for an aggregate purchase price of $15.2 million (the “Alpine Acquisition”). The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States and Canada.

On November 1, 2018, we 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 (“AUC Acquisition”). The aggregate purchase price was approximately $130 million, including $128 million cash and approximately 122 thousand ordinary shares of AquaVenture Holdings Limited, or $2 million, subject to adjustment as provided in the purchase agreement.

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

For the three months ended September 30, ~~2017,~~2018, our consolidated revenues were ~~$29.9~~$36.8 million, which represents an increase of ~~3.6%~~23.7% over the same period of ~~2016.~~2017. The increases in consolidated revenues for the three months ended September 30, ~~2017~~2018 were composed of increases in our Seven Seas Water segment of ~~2.4%~~10.8% and increases in our Quench segment of ~~4.7%~~35.2% over the same period of ~~2016.~~2017. The increase in revenue for our Seven Seas Water segment during the three months ended September 30, ~~2017~~2018 over the same period of ~~2016~~2017 was mainly ~~due to the inclusion of~~driven by higher revenues ~~from~~in our ~~Peru Acquisition in October 2016.~~USVI and St. Maarten operations. The increase in revenue for our Quench segment during the three months ended September 30, ~~2017~~2018 over the same period of ~~2016~~2017 was mainly ~~due to~~from an increase in rental revenues due to additional units placed under new leases in excess of unit attrition, an increase in dealer equipment sale revenue and acquisitions made during ~~2017.~~late 2017 and throughout 2018.

For the nine months ended September 30, ~~2017,~~2018, our consolidated revenues were ~~$88.8~~$103.8 million, which represents an increase of ~~5.4%~~17.2% over the same period of ~~2016.~~2017. The increases in consolidated revenues for the nine months ended September 30, ~~2017~~2018 were composed of increases in our Seven Seas Water segment of ~~5.6%~~6.3% and increases in our Quench segment of ~~5.2%~~27.4% over the same period of ~~2016.~~2017. The increase in revenue for our Seven Seas Water segment during the nine months ended September 30, ~~2017~~2018 over the same period of ~~2016~~2017 was ~~primarily due to the inclusion of~~mainly driven by higher revenues ~~from~~in our USVI and Peru ~~Acquisition in October 2016.~~operations. The increase in revenue for our Quench segment during the nine months ended September 30, ~~2017~~2018 over the same period of ~~2016~~2017 was ~~primarily due to~~mainly from an increase in rental revenues due to additional units placed under new leases in excess of unit attrition, an increase in dealer equipment sale revenue and acquisitions made during ~~2017.~~late 2017 and throughout 2018.

~~On June 1, 2017, we acquired substantially all~~

Table 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.Contents

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.

Operating Segments

We have two reportable segments that align with our operating platforms, Seven Seas Water and Quench. The segment determination is supported by, among other factors, the existence of individuals responsible for the operations of each segment and who also report directly to our chief operating decision maker (“CODM”), the nature of the segment’s operations and information presented to our CODM. For the ~~nine~~three months ended September 30, ~~2017,~~2018, revenues for the Seven Seas Water and Quench segments represented approximately ~~49%~~42% and ~~51%~~58%, respectively, of our consolidated revenues.

~~Table~~ For the nine months ended September 30, 2018, revenues for the Seven Seas Water and Quench segments represented approximately 44% and 56%, respectively, of ~~Contents~~

our consolidated revenues.

Prior to January 1, 2017, we included the majority of certain general and administrative costs, primarily professional service fees and other expenses to support the activities of the registrant holding company, within the Seven Seas reportable segment. Beginning January 1, 2017, 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 certain general and administrative costs that are not allocated to either of the reportable segments. 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. ~~As a result of this change, we have restated prior periods for segment reporting purposes.~~

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

On January 1, 2018, the Company adopted the guidance regarding both revenue from contracts with customers and the determination of the customer in a service concession contract on a full retrospective basis (the “Adopted Revenue Guidance”). Several of the Company’s contracts were impacted primarily due to the identification of multiple performance obligations within a single contract. However, the Adopted Revenue Guidance will have no cash impact and, therefore, will not affect the economics of our underlying customer contracts. The adoption did, however, result in differences in the way our revenues, gross profit, net loss are determined compared to historical periods as presented within our Annual Report on Form 10-K for the fiscal year ended December 31, 2017. More specifically, the Adopted Revenue Guidance impacted contracts with customers in our Seven Seas Water segment determined to be service concession arrangements and the classification of financing income. Contracts with customers within the Quench segment remained substantially unchanged.

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, 2017 except as follows:

Revenues

Seven Seas Water

Our Seven Seas Water business generates revenue primarily from contracts with customers to deliver treated bulk water to governmental, municipal, industrial and hospitality customers. We generally recognize revenue from bulk water sales and service and service concession arrangements.

Bulk water sales and service can include the delivery of bulk water or bulk water services, including the operations and maintenance of a customer-owned plant. We recognize 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. Certain agreements 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

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water supplied is based on meter readings performed at or near the end of the month. Estimates of revenue for unbilled water are recorded when meter readings occur at a time other than the end of a period.

Our Seven Seas Water business operates on a water outsourcing model. Certain contracts with customers which require the construction of facilities to provide bulk water to a specific customer contain multiple obligations, including an implicit lease for the bulk water facilities and bulk water services, including operations and maintenance. The implicit lease obligations are generally accounted for as operating leases as a result of the provisions of the contracts. Revenues for contracts with both implicit lease and non-lease components are generally recognized ratably over the contract period as delivered to the customer after taking into consideration our analysis of contingent rent, any minimum take‑or‑pay provisions and contractual unit pricing.

Service concession arrangements are agreements entered into with a public‑sector entity which controls both (i) the ability to modify or approve the services and prices provided by the operating company and (ii) beneficial entitlement to, or residual interest in, the infrastructure at the end of the term of the agreement. Service concession arrangements typically include the construction of infrastructure for the customer and an obligation to provide operations and maintenance on the infrastructure constructed.

Revenues related to the construction of infrastructure, or construction revenue, 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 transferred to the customer. Timing differences between when the construction performance obligations are completed and when cash is received from the customer could result in a significant financing component. If a significant financing component is identified, the Company will recognize interest income, or financing revenues, on a long-term receivable established upon the completion of the construction of the infrastructure. Future cash flows received from the customer related to the long-term receivable are bifurcated between the principal repayment of the long-term receivable and the related financing revenue. Revenues related to the operations and maintenance are recognized as revenues as the services are provided to the customer.

Cost of Revenues

Seven Seas Water

Cost of revenues for our Seven Seas Water business consists primarily of the cost of plant depreciation, plant construction, plant personnel costs (including compensation and other related personnel costs for plant employees), electric power, repairs and maintenance, personnel and travel costs for field engineering services and the cost of consumables.

Plant depreciation is the largest component of our cost of revenues. In the future, we expect that our depreciation and cost of revenue will increase with the addition of new water plants and future acquisitions. Plant depreciation is calculated using a straight‑line method with an allowance for estimated residual values. Depreciation rates are determined based on the estimated useful lives of the assets. Depreciation commences when the plant is placed into service.

Plant construction related to construction revenues can include the cost of equipment and related installation services, including construction labor costs, field engineering costs, and third-party services. Such expenses can vary depending on the size of the plant and the complexity of the water application, number of projects and the prevailing labor market for the level of employees needed in the jurisdiction where the plant is being constructed.

Plant labor costs are generally consistent within a normal range of plant production but can vary from plant to plant depending on the size of the plant and the complexity of the water application. Costs of labor can vary depending on the prevailing labor market for the level of employees needed in the jurisdiction where the plant is located.

Electrical power for our large plants is generally provided by the customer or charged by us to the customer as a pass-through cost; however, our contracts normally require us to maintain electrical usage at or below a specified level of kilowatt hours for each gallon of water produced.

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Expenditures for repairs and maintenance are expensed as incurred whereas betterments for property, plant and equipment owned by us that add capacity, significantly improve operating efficiency or extend the asset life are capitalized.

Field engineering services include mainly the cost of labor and travel for our specially trained and skilled employees who are deployed to our plant sites under the direction of our Tampa, Florida services center. These personnel are utilized to handle more complex maintenance tasks and to troubleshoot performance issues with our plant equipment and systems. Such expenses can vary depending on the number of projects and the time and extent of the maintenance requirements.

Consumables are typically chemical additives used in the pre‑ and post‑production processes to meet the water quality and attribute specifications of our customers.

Selling, General and Administrative Expenses

Seven Seas Water

Selling, general and administrative expenses for Seven Seas Water consist primarily of compensation and benefits (including salaries, benefits and share-based compensation), third‑party professional service fees and travel. Such expenses include personnel and travel costs of our business development organization, third party and internal engineering costs incurred in connection with new project feasibility studies or proposals, and costs for operating business development offices and activities. Selling, general and administrative expenses also include personnel and related costs for our executive, engineering, procurement, finance, human resources organizations and other administrative employees; third-party professional service fees for consulting, legal, accounting and tax services; depreciation of office equipment and improvements and computer systems and software not directly related to the production of water or other water services; amortization expense associated with intangible assets acquired in connection with business combinations, which are amortized over their expected useful lives; and other corporate expenses. In the future, we expect that our selling, general and administrative expenses will increase due to business development efforts in new markets and the general infrastructure to support our future growth.

Other Expense and Income

Other expense and income consists mainly of interest expense and interest income. Interest expense primarily relates to bank and private lender debt. In the future, we expect that our interest expense will increase as a result of the use of debt financing for new plant construction and business acquisitions. Interest income primarily relates to interest received on certain cash and cash equivalent investments of three months or less.

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~~2017 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 with new and existing governmental, municipal, industrial, 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 driven by the timing of events such as acquisitions of existing plants, securing new plant projects, plant expansions ~~acquisitions of existing plants,~~ and the extension, termination or expiration of water supply agreements. The timing of many of these events is unpredictable. New plant projects, plant expansions and plant acquisitions, when they do occur, 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~~

Table of ~~financial results for the three and nine months ended September 30, 2017 and 2016 as well as future periods:~~Contents


			~~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. In the case of a newly constructed 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 expected increasing customer demand, each of which will impact our performance and comparability of results. As the volume of water produced at an existing plant increases, we typically experience increased sales volume and a lower cost for each incremental gallon produced, and our customers benefit from an increased and reliable supply of water. 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.

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% 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.

~~Plant Acquisitions~~

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Acquisition of Existing Operations

Revenue and expenses will increase upon an acquisition of an existing plant operations from a third party, which could be a new customer, an existing customer, a ~~third‑party~~third-party project developer or a facility owner. ~~The~~In addition, the time, cost and capital required to complete a plant 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~~acquisition. Upon acquisition, plant operations 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 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.

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

Changes to Sales Volume, Costs of Sales and Operating Expenses

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 operating expenses.

Due to the capital-intensive nature of our business and the relatively high level of fixed costs such as depreciation and long‑term contract amortization, our Seven Seas Water business model is characterized by high levels of operating leverage. As a result, significant swings in production volume will favorably or unfavorably impact profitability more significantly than business models with less operating leverage. We have mitigated the downside risk of declines in plant production through the inclusion of minimum customer purchase requirements in ~~six~~certain of our ~~eight~~ water supply contracts with our major customers. In the ~~other two,~~water supply contracts without a customer purchase requirement, 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.

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 in market prices for labor, social taxes and benefits or changes in operations requiring additional personnel. Because we assume responsibility to run plants over long periods of time, we use plant designs, equipment and equipment maintenance programs that seek to minimize future repairs and optimize long‑term cost performance. We may however, from time to time experience

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equipment failures outside of warranty coverage or unexpected repairs and maintenance which could result in significant costs to ~~repair.~~us.

Our operations center in Tampa, Florida 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 are capitalized as a project cost based on hours incurred on ~~active~~certain 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 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.

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

Customer Demand and Certain Other External Factors

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, 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~~ 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;

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

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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.

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 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 30, ~~2017~~2018 was approximately 8%, implying an average rental period of more than 11 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~~20 acquisitions since 2008, ~~six~~12 of which occurred after our acquisition of Quench in 2014, ~~and~~ three of which occurred during ~~2017. We believe the three acquisitions made~~2017 and six of which occurred during the nine months ended September 30, ~~2017~~2018. We believe the nine recent acquisitions are indicative of the opportunity for future inorganic ~~growth.~~

~~The PWI Acquisition on June 1, 2017 and the Quench Canada Acquisition on August 2, 2017 are examples of opportunities~~growth to increase our market share and expand our service coverage ~~footprint in the core direct rental portion of our business.~~ footprint.

On September 8, 2017, we completed ~~the Wellsys Acquisition.~~our acquisition of Wellsys. Unlike Quench’s existing direct customer equipment sales business model, Wellsys systems are sold exclusively through an indirect channel of dealers in the United States, Canada, Mexico, Chile and South Africa, which expands our participation in the growing POU market domestically and internationally. In addition, the acquisition provides an opportunity to develop, source and distribute Quench-exclusive innovative coolers and purification offerings, and to develop relationships with Wellsys dealers that ~~we believe~~ could ~~ultimately~~ lead to potential ~~acquisitions.~~acquisitions, as evidenced by the Avalon Acquisition in June 2018.

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.

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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.

A majority of Quench rental agreements are priced at fixed rates for periods ~~of up~~from three to five 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 sales force, a widely dispersed installed base of ~~customers,~~POU systems, 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 costs, including internal salaries and benefits, directly related to the negotiation and execution of leases, considered lease origination costs, are capitalized as deferred lease costs. Deferred lease costs are amortized on a straight‑line basis over the average lease term. Selling, general and administrative costs also include certain costs to complete business acquisitions, which precede the realization of revenues generated by the acquired new business, and discretionary investments in infrastructure to support our plans for Quench’s future long‑term growth. The timing of these expenditures and their impact relative to the revenues generated can affect our performance and comparability of results.

Corporate and Other

Changes to Operating Expenses

We expect to incur increased legal, accounting and other expenses as we pursue our expansion strategy and as a public company, including costs resulting from public company reporting obligations under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the listing requirements of the New York Stock ~~Exchange.~~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

In November 2016, the FASB issued authoritative guidance that requires inclusion of cash and cash equivalents that have restrictions on withdrawal or use in total cash and cash equivalents on the statement of cash flows. 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~~Financial Accounting Standards Board (“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, including interim periods within those annual periods, and early adoption is ~~permitted. We are currently evaluating the potential impact~~permitted as of the ~~accounting and disclosure requirements~~beginning of an annual period. We adopted this guidance on ~~our~~January 1, 2018 on a modified retrospective basis. There was no impact to the consolidated financial ~~statements. We expect to finalize our assessment during 2017.~~

~~Table~~statements as a result of ~~Contents~~

~~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.~~adoption.

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periods and will require enhanced disclosures. ~~For contracts determined~~In addition, the FASB issued authoritative guidance in March 2017, related to bethe determination of the customer in a service concession arrangement, which is effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods.

We adopted the guidance regarding both revenue from contracts wewith customers and the determination of the customer in a service concession contract (together referred to as “Adopted Revenue Guidance”) on a full retrospective basis on January 1, 2018 applying the guidance to all contracts that were not completed as of January 1, 2016. Results for periods beginning after January 1, 2016 have ~~concluded the revenue recognition for assets constructed under the contract~~been adjusted to ~~occur at the time control transfers~~conform 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, the adoption may significantly affect the financial results asAdopted Revenue Guidance while periods prior to January 1, 2016 continue to be reported under the ~~current authoritative guidance. We do not anticipate any other material changes~~accounting standards in effect for the prior periods. Several of our contracts were impacted primarily due to the ~~timing~~identification of ~~revenue recognition~~multiple performance obligations within a single contract. However, the Adopted Revenue Guidance has had no cash impact and, therefore, does not affect the economics of our underlying customer contracts. As a result of the adoption, we recorded a cumulative net increase of $8.4 million to accumulated deficit as of January 1, 2016. For a discussion on the impacts of the Adopted Revenue Guidance on our financial statements, please refer to Note 2—“Summary of Significant Accounting Policies—New Accounting Pronouncements” to the consolidated financial statements included in the Annual Report on Form 10-K for ~~other contracts with customers except~~the fiscal year ended December 31, 2017.

New Accounting Pronouncements to be Adopted

In August 2018, the FASB issued authoritative guidance regarding implementation costs incurred in ~~circumstances where more than one performance obligation exists. For contracts where more than one performance obligation exists, we~~a cloud computing arrangement that is a service contract. This guidance will be effective for annual reporting periods beginning on or after December 15, 2019, including interim periods within those annual periods, and early adoption is permitted. We are currently evaluating the potential impact of the accounting and disclosure requirements on the consolidated financial statements. 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, the FASB issued authoritative guidance regarding leases that requires lessees to recognize a lease liability and ~~right‑of‑~~right of use asset for operating leases, with the exception of ~~short‑term~~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~~Throughout 2018, the FASB has 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 will be 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. During the fourth quarter of 2017, we decided to forego early adoption and adopt the standard on January 1, 2019. We ~~have developed our assessment approach and have begun evaluating~~will adopt on a modified retrospective basis, with the ~~potential impact~~cumulative effect of transition, as of the ~~accounting and disclosure requirements on~~effective date of adoption.

We concluded that we will elect the ~~consolidated financial statements. We expect to elect the~~package of 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~~In addition, we concluded that we will elect the practical expedient that permits lessors to not separate non-lease components from the associated lease components if certain conditions are met. Lastly, we will utilize the short-term exemption for lessees and establish an accounting policy to not recognize a right-of-use asset or lease liability for any lease with a term of less than 12 months. Although we are still performing our evaluation, we do not expect to elect any of the other practical expedients.

Lessee accounting – We expect the adoption will have a material impact on the consolidated balance sheet, including an increase to both assets and liabilities, as a result of ~~electing~~ the ~~practical expedients provided, we do not anticipate material changes to the accounting~~recognition of a right-of-use asset and corresponding lease liability for operating ~~leases or sales-type leases that existed at~~leases. As we will make a policy election for the ~~adoption date. For lessee accounting, we expect to recognize~~short-term lease exemption, a right-of-use asset and corresponding lease liability ~~and right-of-use asset~~will only be recorded for ~~operating~~ leases with ~~a term~~expected terms of more than 12 months. We do not expect the adoption will have a material impact on the consolidated statements of operations and comprehensive income for situations in which we are ~~reevaluating whether~~a lessee. While we are nearing the completion of our assessment of the adoption of the authoritative guidance for lessees, we are still assessing the inputs to ~~early adopt~~ the ~~guidance~~right-of-use asset and corresponding lease liability calculations. As a result, we have not yet quantified the cumulative effect adjustment to be recorded on ~~a retrospective basis effective~~ January 1, ~~2018 in conjunction with~~2019. We expect to finalize our assessment and provide the ~~guidance regarding revenue from contracts with customers. We will make this determination~~expected impact during the fourth quarter of ~~2017.~~2018.

Lessor accounting - As we have elected the transitional practical expedients for leases, we do not expect any material impacts to the consolidated financial statements for leases in situations where we are a lessor and the lease

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commenced prior to January 1, 2019. We are still assessing the impacts of the authoritative guidance and establishing our policies for costs incurred for the acquisition and fulfillment of the lease contracts, including commissions and installation costs. While we are nearing the completion of our assessment of the adoption of the authoritative guidance for lessors, we have not yet quantified the cumulative effect adjustment to be recorded on January 1, 2019. We expect to finalize our assessment and provide the expected impact during the fourth quarter of 2018.

Critical Accounting Policies and Estimates

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

There have been no material changes to our critical accounting policies from those described in “Management’s discussion and analysis of financial condition and results of operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2017 except as follows:

Revenue from Contracts with Customers

Accounting for revenues from contracts with customers involves the use of various methods to estimate the total transaction prices of contracts with customers and the allocation of revenues to remaining performance obligations. For the Seven Seas Water segment, the transaction price is generally based on various assumptions including, 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. For the Quench segment, the transaction price is generally based on the minimum lease payments for rental agreements, the sales agreement for product sales and the service rate for service agreements. We review and update our assumptions on the transaction price, including variable consideration, regularly and record the adjustments accordingly in the consolidated statements of operations and comprehensive income.

The allocation of revenues to the remaining performance obligations for contracts with customers involves the determination of the relative stand-alone selling prices for each performance obligation under the contract. The stand-alone selling price is the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods or services. The determination of the stand-alone selling price can be based on the observable price of a good or service when the entity sells that good or service separately in similar circumstances. If an observable market is not available, we will consider all information, including market conditions, entity-specific factors, and information about our customer or class of customer, that is reasonably available and determine the stand-alone selling price by evaluating the market in which we sell goods or services and estimate the price that our customer in that market would be willing to pay for those goods or services, forecasting our expected costs of satisfying a performance obligation and then adding an appropriate margin for that good or service, or using an residual approach, if appropriate, after determining the stand-alone selling price for other goods or services in the contract. Each approach can involve various assumptions, calculations and/or third-party data to arrive at the stand-alone selling price.

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Results of Operations

The ~~following tables set forth our operating results for the periods presented.~~

The Seven Seas Water segment results include the results from the Peru Acquisition for the periods following its completion on October 31, 2016. Through ADB, we sell water, on a take-or-pay basis, to our customer under an operating and maintenance (“O&M”) contract, while pursuant to the design and construction contract, we receive payments that are accounted for as a note receivable. These contracts with the customer are structured differently from those with our other Seven Seas Water customers. Only 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 profile of the O&M contract by itself is lower than other Seven Seas Water customer contracts.

~~The~~ Quench segment results include the results from the acquisition of Wellsys ~~acquisition~~ following 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 of dealers in the United States, Canada, Mexico, South Africa and ~~South Africa.~~other select markets. Because the gross margins are typically lower for dealer equipment sales than Quench’s existing direct customer equipment sales business, the inclusion of Wellsys has had and will continue to have a negative impact on Quench’s gross margins.

Further, 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				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
	(in thousands)								(in thousands)
Revenues:
Bulk water	$	14,206	$	13,879	$	43,238	$	40,951	$	14,626	$	12,972	$	42,682	$	39,551
Rental		13,428		12,396		39,238		36,153		16,261		13,428		45,041		39,238
Financing										985		1,118		3,048		3,451
Other		2,259		2,583		6,318		7,147		4,952		2,259		13,012		6,318
Total revenues		29,893		28,858		88,794		84,251		36,824		29,777		103,783		88,558
Cost of revenues:
Bulk water		7,904		7,683		25,903		22,976		6,771		5,975		20,021		20,415
Rental		6,083		5,256		17,508		15,989		7,130		6,083		20,240		17,508
Other		1,385		1,356		3,692		3,863		3,256		1,385		8,624		3,692
Total cost of revenues		15,372		14,295		47,103		42,828		17,157		13,443		48,885		41,615
Gross profit		14,521		14,563		41,691		41,423		19,667		16,334		54,898		46,943
Selling, general and administrative expenses		17,734		15,112		50,964		43,264		20,826		18,430		59,689		53,040
Loss from operations		(3,213)		(549)		(9,273)		(1,841)		(1,159)		(2,096)		(4,791)		(6,097)
Other expense:
Interest expense, net		(2,055)		(2,802)		(5,574)		(8,231)		(3,396)		(2,942)		(10,000)		(8,303)
Other expense, net		(1,453)		(86)		(1,728)		(221)		(228)		(1,453)		(520)		(1,728)
Loss before income tax expense		(6,721)		(3,437)		(16,575)		(10,293)		(4,783)		(6,491)		(15,311)		(16,128)
Income tax expense		846		1,275		2,645		2,633
Income tax expense (benefit)										(2,051)		797		(1,312)		2,451
Net loss	$	(7,567)	$	(4,712)	$	(19,220)	$	(12,926)	$	(2,732)	$	(7,288)	$	(13,999)	$	(18,579)

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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				Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Revenues:
Bulk water	47.5	%	48.0	%	48.7	%	48.6	%	39.7	%	43.6	%	41.1	%	44.7	%
Rental	44.9	%	43.0	%	44.2	%	42.9	%	44.2	%	45.1	%	43.4	%	44.3	%
Financing									2.7	%	3.8	%	2.9	%	3.9	%
Other	7.6	%	9.0	%	7.1	%	8.5	%	13.4	%	7.5	%	12.6	%	7.1	%
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	%	18.4	%	20.1	%	19.3	%	23.1	%
Rental	20.3	%	18.2	%	19.7	%	19.0	%	19.4	%	20.4	%	19.5	%	19.8	%
Other	4.6	%	4.7	%	4.2	%	4.6	%	8.8	%	4.7	%	8.3	%	4.2	%
Total cost of revenues	51.3	%	49.5	%	53.1	%	50.9	%	46.6	%	45.2	%	47.1	%	47.1	%
Gross profit	48.6	%	50.5	%	47.0	%	49.2	%	53.4	%	54.9	%	52.9	%	53.0	%
Selling, general and administrative expenses	59.3	%	52.4	%	57.4	%	51.4	%	56.6	%	61.9	%	57.5	%	59.9	%
Loss from operations	(10.7)	%	(1.9)	%	(10.4)	%	(2.2)	%	(3.2)	%	(7.0)	%	(4.6)	%	(6.9)	%
Other expense:
Interest expense, net	(6.9)	%	(9.7)	%	(6.3)	%	(9.8)	%	(9.2)	%	(9.9)	%	(9.6)	%	(9.4)	%
Other expense, net	(4.9)	%	(0.3)	%	(1.9)	%	(0.3)	%	(0.6)	%	(4.9)	%	(0.5)	%	(2.0)	%
Loss before income tax expense	(22.5)	%	(11.9)	%	(18.6)	%	(12.3)	%	(13.0)	%	(21.8)	%	(14.7)	%	(18.3)	%
Income tax expense	2.8	%	4.4	%	3.0	%	3.1	%
Income tax expense (benefit)									(5.6)	%	2.7	%	(1.3)	%	2.8	%
Net loss	(25.3)	%	(16.3)	%	(21.6)	%	(15.4)	%	(7.4)	%	(24.5)	%	(13.4)	%	(21.1)	%

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

Revenues

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


	Three Months Ended								Three Months Ended
	September 30,				Change				September 30,				Change
	2017		2016		Dollars		Percent		2018		2017		Dollars		Percent
	(dollars in thousands)								(dollars in thousands)
Revenues:
Seven Seas Water	$	14,206	$	13,879	$	327	2.4	%	$	15,611	$	14,090	$	1,521	10.8	%
Quench		15,687		14,979		708	4.7	%		21,213		15,687		5,526	35.2	%
Total revenues	$	29,893	$	28,858	$	1,035	3.6	%	$	36,824	$	29,777	$	7,047	23.7	%

Our total revenues of ~~$29.9~~$36.8 million for the three months ended September 30, ~~2017~~2018 increased ~~$1.0~~$7.0 million, or ~~3.6%~~23.7%, compared to the same period of ~~2016.~~2017.

Seven Seas Water revenues for the three months ended September 30, ~~2017~~2018 increased ~~$0.3~~organically $1.5 million, or ~~2.4%~~10.8%, compared to the same period of ~~2016.~~2017. This increase was ~~mainly~~comprised of a $1.6 million increase in bulk water revenue, partially offset by a $0.1 million decline in financing income due to the ~~inclusion~~amortization of ~~incremental~~long-term receivables. While the fixed payments on our long-term receivables will continue throughout the contract term, the portion recognized as financing income will continue to decline, consistent with a typical repayment profile of a long-term receivable. The increase in bulk water revenue was mainly driven by (i) $0.5 million higher revenues ~~of $1.1 million from~~in our ~~Peru operations. These~~USVI operations, primarily due to increases were partially offset by $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 toin 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~~2017, (ii) a $0.4 million increase in revenues in our St. Maarten operations due to lower revenues in the prior year period resulting from Hurricanes Irma and Maria, and (iii) $0.4 million increase in revenues in our Trinidad and BVI plants primarily driven by increases in the water rate ~~adjustments in connection with~~compared to the ~~August 4, 2017 contract amendment.~~same period of 2017.

Quench revenues for the three months ended September 30, ~~2017~~2018 increased ~~$0.7~~$5.5 million, or ~~4.7%~~35.2%, compared to the same period of ~~2016.~~2017. This increase was comprised of 26.8% inorganic growth and 8.4% organic growth. Rental revenues increased ~~$1.0~~$2.8 million, or ~~8.3%~~21.1%, compared to the ~~same~~prior year period, which were comprised of ~~2016,~~14.3% inorganic

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growth from acquisitions and 6.8% organic growth due to additional units placed under new leases in excess of unit ~~attrition, and $0.3~~attrition. Other revenues increased $2.7 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,~~2017 due to ~~a $0.8~~an increase of $2.2 million ~~reduction in~~of dealer equipment sale revenue, $0.3 million higher 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 $0.1 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				September 30,						Change
	2017			2016			Dollars		Percent		2018			2017			Dollars		Percent
	(dollars in thousands)										(dollars in thousands)
Cost of Revenues:
Seven Seas Water	$	7,904		$	7,683		$	221	2.9	%	$	6,771		$	5,975		$	796	13.3	%
Quench		7,468			6,612			856	12.9	%		10,386			7,468			2,918	39.1	%
Total cost of revenues	$	15,372		$	14,295		$	1,077	7.5	%	$	17,157		$	13,443		$	3,714	27.6	%
Gross Profit:
Seven Seas Water	$	6,302		$	6,196		$	106	1.7	%	$	8,840		$	8,115		$	725	8.9	%
Quench		8,219			8,367			(148)	(1.8)	%		10,827			8,219			2,608	31.7	%
Total gross profit	$	14,521		$	14,563		$	(42)	(0.3)	%	$	19,667		$	16,334		$	3,333	20.4	%
Gross Margin:
Seven Seas Water		44.4	%		44.6	%						56.6	%		57.6	%
Quench		52.4	%		55.9	%						51.0	%		52.4	%
Total gross margin		48.6	%		50.5	%						53.4	%		54.9	%

Total gross profit for the three months ended September 30, 2018 of $19.7 million increased $3.3 million, or 20.4%, compared to the same period of 2017. Total gross margin for the three months ended September 30, 2018 decreased 150 basis points to 53.4% from 54.9% for the same period in 2017.

Seven Seas Water gross margin for the three months ended September 30, ~~2017 remained relatively flat at 44.4%~~2018 decreased 100 basis points to 56.6% compared to ~~44.6% for~~57.6% in the ~~same~~prior year period, primarily related to a decline in our bulk water gross margin as well as a decrease in financing revenue, which have no corresponding costs, as a result of ~~2016. The~~the continued amortization of the long-term receivables. Bulk water gross margin of ~~44.4% included a decline resulting~~53.7% decreased 20 basis points from 53.9% in the ~~aforementioned BVI contract amendment and an offsetting increase from~~prior year period. This decrease was primarily due to better-than-expected performance in the prior year period in our Peru ~~during~~operations, including the ~~current quarter.~~ timing of certain repairs and maintenance activities, partially offset by improved margins in BVI driven by higher revenues without a commensurate increase in costs and in St. Maarten primarily due to the aforementioned impact of the hurricanes in the prior year period.

Quench gross margin for the three months ended September 30, ~~2017~~2018 decreased ~~350~~140 basis points to ~~52.4%~~51.0% from ~~55.9%~~52.4% for the same period of ~~2016. The decrease was~~2017, primarily due to ~~(i) increased costs for service personnel and rental depreciation related to growth in the rental installed base, and (ii)~~ a ~~decline~~decrease in other gross margin. Rental gross margin for the third quarter of 2018 was 56.2%, an increase of 150 basis points over 54.7% in the prior year period, primarily due to a higher allocation of service personnel costs to capitalizable installation activities compared to the prior year period, partially offset by an increase in depreciation expense related 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~~additional units placed on lease. Other gross margin was 34.2% for the three months ended September 30, ~~2017 increased $2.6 million, or 17.4%,~~2018, 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 resulting 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 expense38.7% 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 depreciation in the prior year on an existing ERP system. Quench SG&A expenses as a percentage of revenue were 62.7% for 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~~the inclusion of lower-margin product line revenue from our Wellsys business that was acquired in September 2017, which is recorded 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 Wellsys dealer equipment sales.

revenues.

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Selling, general and administrative expenses

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


	Nine Months Ended								Three Months Ended
	September 30,				Change				September 30,				Change
	2017		2016		Dollars		Percent		2018		2017		Dollars		Percent
	(dollars in thousands)								(dollars in thousands)
Selling, General and Administrative Expenses:
Seven Seas Water	$	18,692	$	14,003	$	4,689	33.5	%	$	7,616	$	7,303	$	313	4.3	%
Quench		28,988		27,718		1,270	4.6	%		12,194		9,828		2,366	24.1	%
Corporate and Other		3,284		1,543		1,741	112.8	%		1,016		1,299		(283)	(21.8)	%
Total selling, general and administrative expenses	$	50,964	$	43,264	$	7,700	17.8	%	$	20,826	$	18,430	$	2,396	13.0	%

Total SG&A expenses for the ~~nine~~three months ended September 30, ~~2017~~2018 increased ~~$7.7~~$2.4 million, or ~~17.8%~~13.0%, compared to the same period of ~~2016.~~2017.

Seven Seas Water SG&A expenses for the ~~nine~~three months ended September 30, ~~2017~~2018 increased ~~$4.7~~$0.3 million ~~or 33.5%,~~ compared to the same period of ~~2016.~~ 2017. The increase was mainly due to ~~a $5.0 million increase in~~higher share-based compensation ~~primarily resulting from~~expense due to new equity awards granted in the ~~IPO Grant, partially offset by $0.3 million lower third-party engineering services associated with business development activities.~~first quarter of 2018. Seven Seas Water SG&A expenses as a percentage of revenue were ~~43.2%~~48.8% for the ~~nine~~three months ended September 30, ~~2017,~~2018, a decline compared to ~~34.2%~~51.8% for the same period of ~~2016, which was mainly due to the increase in share-based compensation expense as discussed above.~~ 2017.

Quench SG&A expenses for the ~~nine~~three months ended September 30, ~~2017~~2018 increased ~~$1.3~~$2.4 million ~~or 4.6%,~~ compared to the same period of ~~2016.~~2017. The increase was ~~mainly due to a $1.9~~driven by $0.7 million increase in share-based compensation resulting from the IPO Grant and a $0.8 million increase in amortization expense of deferred lease costs related to the increased costs of units placed on lease. These increases were partially offset by a $0.9 million decrease in depreciation expense related to the acceleration of depreciation in the prior year on an existing ERP system, $0.5 million lowerhigher compensation and benefits expense primarily driven by increased headcount from the inclusion of staff added from certain acquisitions and additional resources to support our inorganic growth strategy, $0.6 million higher amortization expense primarily related to intangible assets from recent acquisitions, a $0.3 million ~~decrease~~increase in loss on disposal of assets and a $0.1 million higher share-based compensation expense ~~related~~due to new equity awards granted in the ~~implementation~~first quarter of ~~a new SAAS-based ERP system.~~2018. Quench SG&A expenses as a percentage of revenue were ~~63.6%~~57.5% for the ~~nine~~three months ended September 30, ~~2017,~~2018, a decline compared to ~~64.0%~~62.7% for the same period of ~~2016.~~ 2017.

Corporate and Other SG&A expenses for the ~~nine~~three months ended September 30, ~~2017 increased $1.7~~2018 decreased $0.3 million compared to the same period ~~in 2016. The increase was mainly~~of 2017, primarily due to ~~a $1.2 million increase in insurance and~~lower 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.on corporate activities.

Other expense


	Nine Months Ended								Three Months Ended
	September 30,				Change				September 30,				Change
	2017		2016		Dollars		Percent		2018		2017		Dollars		Percent
	(dollars in thousands)								(dollars in thousands)
Interest expense, net	$	(5,574)	$	(8,231)	$	2,657	(32.3)	%	$	(3,396)	$	(2,942)	$	(454)	15.4	%
Other expense, net		(1,728)		(221)		(1,507)	681.9	%		(228)		(1,453)		1,225	(84.3)	%
Total other expense	$	(7,302)	$	(8,452)	$	1,150	(13.6)	%	$	(3,624)	$	(4,395)	$	771	(17.5)	%

Interest expense, net for the ~~nine~~three months ended September 30, ~~2017 decreased $2.7~~2018 increased $0.5 million compared to the same period of ~~2016.~~2017. The ~~decrease was mainly due to $2.7~~interest expense, net amount of $3.4 million ~~of interest income earned on~~for the ~~payments we received on the design and construction contract acquired in the Peru Acquisition and~~three months ended September 30, 2018 included a ~~$0.3 million increase in interest income earned on cash balances, partially offset by a $0.3~~$0.6 million increase in interest expense ~~resulting from~~primarily due to increased borrowings in connection with the ~~Corporate Credit Agreement~~$150 million senior secured credit agreement entered into in August 2017 and higher interest rates, partially offset by $0.1 million higher interest income earned.

Other expense, net for the three months ended September 30, 2018 decreased $1.2 million compared to the same period of 2017. This decrease was mainly due to $1.4 million of loss on ~~August 4, 2017 as well as our draw-downs on~~debt extinguishment recorded during the ~~Curaçao Credit Facility in March 2016 and on the non-revolving credit facility in Trinidad in May 2016.~~ three months ended September 30, 2017.

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Other expense for the nine months ended September 30, 2017 increased $1.5 million compared to the same period in 2016 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


	Nine Months Ended								Three Months Ended
	September 30,						Change in		September 30,						Change in
	2017			2016			Dollars		2018			2017			Dollars
	(dollars in thousands)								(dollars in thousands)
Income tax expense	$	2,645		$	2,633		$	12
Income tax expense (benefit)									$	(2,051)		$	797		$	(2,848)
Effective tax rate		(16.0)	%		(25.6)	%				42.9	%		(12.3)	%

For the ~~provision for income taxes for the nine~~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 nine months ended September 30, 2017,~~2018, we incurred a consolidated pre-tax loss of ~~$16.6~~$4.7 million, which was composed of: (i) an aggregate of ~~$20.8~~$6.5 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of ~~$4.2~~$1.8 million of pre-tax income in taxable jurisdictions. For the ~~nine~~three months ended September 30, ~~2016,~~2017, we incurred a consolidated pre-tax loss of ~~$10.3~~$6.5 million, which was composed of: (i) an aggregate of ~~$15.6~~$8.5 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 ~~$5.3~~$2.0 million of pre-tax income in taxable jurisdictions.

Income tax expense (benefit) for the three months ended September 30, 2018 and 2017 was $(2.1) million and $0.8 million, respectively. Income tax expense (benefit) for the three months ended September 30, 2018 and 2017 was composed of a current tax expense of $0.5 million and $0.5 million, respectively, and deferred tax expense (benefit) of $(2.6) million and $0.3 million, respectively. The decrease in income tax expense for the three months ended September 30, 2018 as compared to the same period in 2017 was primarily the result of a $3.1 million tax benefit recorded for the full release of a valuation allowance on deferred tax assets in one of our foreign jurisdictions. We determined sufficient positive evidence became available during the three months ended September 30, 2018 to make it more-likely-than-not the Company would fully utilize its deferred tax assets. Also contributing to the decrease in income tax expense as compared to the same period in 2017 was: (i) a reduction in the tax rate as a result of the United States enacted tax reform legislation known as the H.R. 1, and commonly referred to as the “Tax Cuts and Jobs Act” (“TCJ Act”); (ii) the commencement of the effective period for an economic development program in the USVI; and (iii) lower income in certain tax paying foreign jurisdictions as compared to the prior year period. These decreases were partially offset by an increase in current expense related to withholding taxes. During the three months ended September 30, 2018, there was no adjustment to the preliminary income tax benefit, which remains subject to adjustment during the measurement period, recorded during the three months ended December 31, 2017 as a result of the TCJ Act and the related remeasurement of deferred taxes. We will finalize our adjustments, if any, during the fourth quarter of 2018, however, the Company does not expect a material impact on the financial statements due to the full valuation allowance recorded against all U.S. deferred tax assets.

Cash paid for income taxes was $0.2 million and $0.5 million during the three months ended September 30, 2018 and 2017, respectively.

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Comparison of Nine Months Ended September 30, 2018 and 2017

Revenues

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


	Nine Months Ended
	September 30,				Change
	2018		2017		Dollars		Percent
	(dollars in thousands)
Revenues:
Seven Seas Water	$	45,730	$	43,002	$	2,728	6.3	%
Quench		58,053		45,556		12,497	27.4	%
Total revenues	$	103,783	$	88,558	$	15,225	17.2	%

Our total revenues of $103.8 million for the nine months ended September 30, ~~2017 and 2016 was $2.6~~2018 increased $15.2 million, ~~and $2.6 million, respectively.~~ ~~Income tax expense~~or 17.2%, compared to the same period of 2017.

Seven Seas Water revenues for the nine months ended September 30, 2018 increased organically $2.7 million, or 6.3%, compared to the same period of 2017. This increase was comprised of a $3.1 million increase in bulk water revenue, partially offset by a $0.4 million decline in financing income due to the amortization of long-term receivables. The increase in bulk water revenue was mainly due to (i) higher revenues of $1.0 million and $0.5 million in our USVI and Peru operations, respectively, driven by increases in production volumes compared to the same period of 2017, ~~included (i) expense related~~(ii) higher revenues of $0.6 million in our BVI plant primarily due to ~~taxable income generated~~increases in the water rate compared to the prior year period, and (iii) a $0.4 million increase in revenues in our St. Maarten operations due to lower revenues in the prior year period resulting from Hurricanes Irma and Maria.

Quench revenues for the nine months ended September 30, 2018 increased $12.5 million, or 27.4%, compared to the same period of 2017 , which were comprised of 22.5% inorganic growth and 5.0% organic growth. Rental revenues increased $5.8 million, or 14.8%, compared to the prior year period, which were comprised of 8.9% inorganic growth from acquisitions and 5.9% organic growth due to additional units placed under new leases in excess of unit attrition. Other revenues increased $6.7 million compared to the same period of 2017 due to an increase of $6.4 million of dealer equipment sale revenue and a $0.4 million increase in coffee sales, offset in part by a $0.1 million reduction in other direct customer equipment sales.

Cost of revenues, gross profit and gross margin

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


	Nine Months Ended
	September 30,						Change
	2018			2017			Dollars		Percent
	(dollars in thousands)
Cost of Revenues:
Seven Seas Water	$	20,021		$	20,415		$	(394)	(1.9)	%
Quench		28,864			21,200			7,664	36.2	%
Total cost of revenues	$	48,885		$	41,615		$	7,270	17.5	%
Gross Profit:
Seven Seas Water	$	25,709		$	22,587		$	3,122	13.8	%
Quench		29,189			24,356			4,833	19.8	%
Total gross profit	$	54,898		$	46,943		$	7,955	16.9	%
Gross Margin:
Seven Seas Water		56.2	%		52.5	%
Quench		50.3	%		53.5	%
Total gross margin		52.9	%		53.0	%

Total gross profit for the nine months ended September 30, 2018 of $54.9 million increased $8.0 million, or 16.9%, compared to the same period of 2017. Total gross margin for the nine months ended September 30, 2018

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decreased 10 basis points to 52.9% from 53.0% for the same period in 2017.

Seven Seas Water gross margin for the nine months ended September 30, 2018 increased 370 basis points to 56.2% from 52.5% for the same period in 2017. This increase was primarily due to an increase in the bulk water gross margin and decrease in financing revenues of $0.4 million, which have no corresponding costs, as a result of the continued amortization of the long-term receivables. Bulk water gross margin increased 470 basis points to 53.1% from 48.4% in the prior year period. This increase was primarily due to higher revenues and lower costs at our Peru operations, which ~~were~~had incurred elevated repairs and maintenance expense during the first half of 2017 in connection with planned post-acquisition integration activities and adverse weather conditions, and higher revenues without a commensurate increase in costs in our BVI operations.

Quench gross margin for the nine months ended September 30, 2018 decreased 320 basis points to 50.3% from 53.5% for the same period of 2017. This decrease was primarily due to a decrease in other gross margin. Rental gross margin for the nine months ended September 30, 2018 was 55.1%, a decrease of 30 basis points compared to the prior year period, which was mainly due to an increase in depreciation expense related to additional units placed on lease. Other gross margin was 33.7% for the nine months ended September 30, 2018, compared to 41.6% in the prior year period, primarily due to the inclusion of lower-margin product line revenue from our Wellsys business that was acquired in ~~October 2016, (ii) expense~~September 2017, which is recorded in other revenues.

Selling, general and administrative expenses

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


	Nine Months Ended
	September 30,				Change
	2018		2017		Dollars		Percent
	(dollars in thousands)
Selling, General and Administrative Expenses:
Seven Seas Water	$	22,361	$	20,768	$	1,593	7.7	%
Quench		34,101		28,988		5,113	17.6	%
Corporate and Other		3,227		3,284		(57)	(1.7)	%
Total selling, general and administrative expenses	$	59,689	$	53,040	$	6,649	12.5	%

Total SG&A expenses for the ~~correction~~nine months ended September 30, 2018 increased $6.6 million, or 12.5%, compared to the same period of ~~an immaterial prior~~2017.

Seven Seas Water SG&A expenses for the nine months ended September 30, 2018 increased $1.6 million compared to the same period ~~error~~of 2017. The increase was mainly due to $0.6 million higher compensation and benefits expense related to ~~a change~~the reallocation of personnel to corporate activities from capital projects, $0.4 million higher share-based compensation expense due to new equity awards granted in the first quarter of 2018 and a $0.3 million loss on disposal of assets. Seven Seas Water SG&A expenses as a percentage of revenue were 48.9% for the nine months ended September 30, 2018, compared to 48.3% for the same period of 2017.

Quench SG&A expenses for the nine months ended September 30, 2018 increased $5.1 million compared to the same period of 2017. The increase was driven by $1.7 million higher amortization expense primarily related to intangible assets on recent acquisitions, $1.4 million higher compensation and benefits expense driven by increased headcount from the inclusion of staff added from certain acquisitions and additional resources hired to support our inorganic growth strategy, $0.4 million higher share-based compensation expense due to new equity awards granted in the first quarter of 2018, a $0.4 million increase in loss on the disposal of assets and a $0.3 million increase in the bad debt reserve as a result of lower than normal expense in the prior year period. Quench SG&A expenses as a percentage of revenue were 58.7% for the nine months ended September 30, 2018, a decline compared to 63.6% for the same period of 2017.

Corporate and Other SG&A expenses for the nine months ended September 30, 2018 decreased $0.1 million compared to the same period of 2017.

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Other expense


	Nine Months Ended
	September 30,				Change
	2018		2017		Dollars		Percent
	(dollars in thousands)
Interest expense, net	$	(10,000)	$	(8,303)	$	(1,697)	20.4	%
Other expense, net		(520)		(1,728)		1,208	(69.9)	%
Total other expense	$	(10,520)	$	(10,031)	$	(489)	4.9	%

Interest expense, net for the nine months ended September 30, 2018 increased $1.7 million compared to the prior year period. The interest expense, net amount of $10.0 million for the nine months ended September 30, 2018 included a $2.3 million increase in interest expense primarily due to increased borrowings in connection with the $150 million senior secured credit agreement entered into in August 2017 and higher interest rates, partially offset by $0.6 million higher interest income earned.

Other expense, net for the nine months ended September 30, 2018 decreased $1.2 million compared to the same period of 2017. This decrease was mainly due to $1.4 million of loss on debt extinguishment recorded during the nine months ended September 30, 2017.

Income tax expense


	Nine Months Ended
	September 30,						Change in
	2018			2017			Dollars
	(dollars in thousands)
Income tax expense (benefit)	$	(1,312)		$	2,451		$	(3,763)
Effective tax rate		8.6	%		(15.2)	%

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 nine months ended September 30, 2018, we incurred a consolidated pre-tax loss of $15.3 million, which was composed of: (i) an aggregate of $20.2 million of pre-tax losses in jurisdictions which either do not impose an income tax or we do not believe it is more likely than not that we will realize the benefit of such losses and (ii) an aggregate of $4.9 million of pre-tax income in taxable jurisdictions. For the nine months ended September 30, 2017, we incurred a consolidated pre-tax loss of $16.1 million, which was composed of: (i) an aggregate of $21.1 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 $5.0 million of pre-tax income in taxable jurisdictions.

Income tax expense (benefit) for the nine months ended September 30, 2018 and 2017 was $(1.3) million and $2.4 million, respectively. Income tax expense (benefit) for the nine months ended September 30, 2018 and 2017 was composed of a current tax expense of $1.6 million and $0.7 million, respectively, and deferred tax expense (benefit) of $(2.9) million and $1.7 million, respectively. The decrease in income tax expense for the nine months ended September 30, ~~2017 decreased~~2018 as compared to the same period in ~~2016~~2017 was primarily ~~due to~~the result of a decrease in pretax book income for 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$3.1 million tax benefit ~~previously~~ recorded for the full release of a valuation allowance on deferred tax assets in aone of our foreign ~~jurisdiction.~~

~~Cash paid for income taxes was $1.1 million and $0.1 million~~jurisdictions. We determined sufficient positive evidence became available during the nine months ended September 30, 2018 to make it more-likely-than-not the Company would fully utilize its deferred tax assets. Also contributing to the decrease in income tax expense as compared to the same period in 2017 ~~and 2016, respectively. The increase was mainly due to~~was: (i) a reduction in the tax ~~payments in Peru.~~

~~Key Metrics~~

~~We present Adjusted EBITDA,~~rate as ~~well~~a result of the United States enacted tax reform legislation known as the ~~other financial information discussed below, because we believe it provides a more accurate comparison of our financial results between periods~~H.R. 1, and ~~more accurately reflects how management assesses our financial results. We use Adjusted EBITDA, as well~~commonly referred to as the ~~other financial information provided below,~~“Tax Cuts and Jobs Act” (“TCJ Act”); (ii) the commencement of the effective period for an economic development program in the USVI; and (iii) lower income in certain tax paying foreign jurisdictions as ~~key metrics~~compared to ~~measure our performance, evaluate growth trends~~the prior year period. These increases were partially offset by an increase in current expense related to withholding taxes. During the nine months ended September 30, 2018, there was no adjustment to the preliminary income tax benefit, which remains subject to adjustment during the measurement period, recorded during the three months ended December 31, 2017 as a result of the TCJ Act and ~~determine business strategy.~~

the related

3852

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~~Non-GAAP Financial Data~~

~~Adjusted EBITDA~~remeasurement of deferred taxes.We will finalize our adjustments, if any, during the fourth quarter of 2018, however, the Company does not expect a material impact on the financial statementsdue to the full valuation allowance recorded against all U.S. deferred tax assets.

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,~~Cash paid for income taxes ~~depreciation~~was $1.6 million and ~~amortization as well as adjusting for~~$1.1 million during 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 purchasesnine months ended September 30, 2018 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:2017, respectively.

~~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 30, ~~2017~~2018 and December 31, ~~2016,~~2017, our principal sources of liquidity on a consolidated basis were cash and cash equivalents of ~~$118.1~~$93.6 million and ~~$95.3~~$118.1 million, respectively (excluding restricted cash), which were held for working capital, investment and general corporate purposes. In addition, as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we had an aggregate of ~~$4.3~~$5.6 million and ~~$6.1~~$4.3 million, respectively, of restricted cash related to debt service reserve funds for ~~certain~~one of our borrowings and ~~performance security funds for a vendor agreement.~~cash held on account related to business development activities. Our working capital as of September 30, ~~2017~~2018 was ~~$127.5~~$107.9 million as compared to ~~$75.9~~$131.4 million as of December 31, ~~2016.~~2017.

As more fully described in the “Debt Refinancing” section below, on August 4, 2017, we entered into a new $150.0 million credit agreement with a lender in order to refinance a majority of our then existing debt.

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~~Certain of 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;

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, 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.

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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 30, ~~2017,~~2018, 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.

Cash Flows

The following table summarizes our cash flows for the periods:


	Nine Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2018		2017
	(in thousands)				(in thousands)
Cash provided by operating activities	$	11,876	$	11,891	$	22,048	$	14,572
Cash used in investing activities		(18,448)		(16,658)		(40,011)		(21,144)
Cash (used in) provided by financing activities		27,559		10,582		(5,135)		27,559
Effect of exchange rates on cash, cash equivalents and restricted cash		1		—		(7)		1
Net change in cash and cash equivalents	$	20,988	$	5,815
Net change in cash, cash equivalents and restricted cash					$	(23,105)	$	20,988

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 months ended September 30, 2018 and 2017 ~~and 2016~~ was ~~$11.9~~$22.0 million and ~~$11.9~~$14.6 million, respectively.

Investing Activities

Cash used in investing activities during the nine months ended September 30, 2018 and 2017 ~~and 2016~~ was ~~$18.4~~$40.0 million and ~~$16.7~~$21.1 million, respectively. ~~For~~The increase in cash used in investing activities was primarily attributable to an increase in net cash paid for acquisitions of $17.2 million over the prior year period. During the nine months ended September 30, ~~2017~~2018, we completed the Clarus Acquisition, Watermark Acquisition, Wa-2 Acquisition, Aqua Coolers Acquisition, Avalon Acquisition and ~~2016,~~Alpine Acquisition. The combined purchase price of these acquisitions was $27.9 million.

During the nine months ended September 30, 2018 and 2017, there were ~~$2.8~~$1.3 million and ~~$7.7~~$2.2 million, respectively, of capital ~~expenditures and long-term contract~~ expenditures by Seven Seas Water for plant expansions and capacity ~~upgrades. Quench~~upgrades and $11.7 million and $9.1 million, respectively, of capital expenditures for Quench to support growth and its existing operations were $9.1 million and $8.9 million, respectively, for the nine months ended September 30, 2017 and 2016. In addition, the Company collected $3.4 million of principal during the nine months ended September 30, 2017 related to the design and constructionoperations.

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~~contract acquired in our Peru~~

On November 1, 2018 we completed the AUC Acquisition ~~in October 2016~~for an aggregate purchase price of approximately $130 million, including $128 million cash and ~~used net cash~~approximately 122 thousand ordinary shares 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 debtAquaVenture Holdings Limited, or ~~equity financing.~~$2 million.

Financing Activities

Cash used in financing activities during the nine months ended September 30, ~~2017~~2018 was ~~$27.6~~$5.1 million, including ~~$120.6~~$5.0 million of scheduled 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.long‑term debt. Cash provided by financing activities during the nine months ended September 30, ~~2016~~2017 was ~~$10.6~~$27.6 million, including ~~$23.7~~$150.0 million of proceeds from borrowings, which ~~were~~was partially offset by ~~$11.9~~$120.6 million of ~~scheduled~~ repayments of ~~long‑term~~long-term debt and deferred financing fees. Both of these were driven by the debt refinancing that occurred in August 2017, which paid off in full certain outstanding amortizing debt and replaced it with a ~~$0.9 million of payments towards an acquisition contingent consideration.~~non-amortizing corporate credit agreement.

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


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
Corporate Credit Agreement	$	150,000	$	—	$	150,000	$	150,000
BVI Loan Agreement		27,076		31,432		21,830		26,090
Vehicle financing		1,513		1,783		1,925		1,491
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	$	173,755	$	177,581

Face value of long-term debt, current	$	6,063	$	27,963	$	6,400	$	6,483
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	$	6,400	$	6,483

Face value of long-term debt, non-current	$	172,526	$	117,246	$	167,355	$	171,098
Less: Non-current portion of unamortized debt discounts and deferred financing fees		(3,543)		(1,493)		(2,636)		(3,326)
Long-term debt, net of debt discounts and deferred financing fees	$	168,983	$	115,753	$	164,719	$	167,772

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.

As of September 30, ~~2017,~~2018, the ~~weighted‑~~weighted average interest rate was ~~7.3%~~8.3%.

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,

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dispositions of assets, restricted payments (including dividends), transactions with affiliates, prepayments of

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indebtedness, capital expenditures, changes in nature of business and amendments to documents. We were in compliance with, or received waivers for breaches of, all such covenants as of September 30, ~~2017.~~2018.

We 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~~We did not make repayment ~~if it occurs~~on the original $150.0 million borrowing prior to August 4, ~~2018.~~2018, and thus did not incur any prepayment fee. The Corporate Credit Agreement is collateralized by certain of the assets of the Borrowers and stated guarantors.

~~Debt Refinancing~~

On ~~August 4, 2017, the Company utilized approximately $100 million of the proceeds from~~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 ~~repay in full~~an aggregate principal amount of $260.0 million, (iii) reduce the ~~outstanding principal~~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 ~~following debt obligations:~~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.

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 described below, the BVI Loan Agreement provided for interest on the outstanding borrowings at LIBOR plus 3.5% per annum and interest was to be 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. amended the BVI Loan Agreement to extend the amortization on principal to May 2022 and reduce the spread applied to the LIBOR base rate used in the calculation of interest by 50 basis points to LIBOR plus 3.0% per annum. The United Kingdom Export Finance also extended its participation in the project to match the extended term of the amended BVI Loan Agreement. All other material terms of the original loan agreement remained unchanged.

As of September 30, 2018, the interest rate was 5.4%. Seven Seas Water (BVI) Ltd. may prepay the principal amounts of the loans at par prior to the maturity date, in whole or in part.

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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 if specified debt service coverage and loan life coverage ratios are met and it is in compliance with all loan covenants. 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

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compliance, including minimum debt service and loan life coverage ratios, and must maintain a minimum debt service reserve fund with the bank. Seven Seas Water (BVI) Ltd. was in compliance with, or received waivers for breaches of, all such covenants as of September 30, ~~2017.~~

~~Seven Seas Water (BVI) Ltd. may prepay the principal amounts of the loans prior to the maturity date, in whole or in part.~~2018.

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%.

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 months ended September 30, ~~2017 to our other contractual obligations previously~~2018 from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~ 2017 except the effects of the following item:

During the nine months ended September 30, 2018, we entered into a new lease for approximately 31,758 square feet of office space in King of Prussia, Pennsylvania. This lease began in October 2018 and will end in March 2030. This new lease will replace an existing lease which expired October 2018. Total future minimum rent payments which we are now required to make are $120 thousand for the remainder of 2018, $0.7 million for 2019, $0.7 million in 2020, $0.7 million in 2021, $0.8 million in 2022 and a total of $6.4 million for the remaining years thereafter.

For a complete discussion of our contractual obligations, please refer to our “Management’s discussion and analysis of financial condition and results of operations” included in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2016.~~2017.

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Off‑Balance Sheet Arrangements

At September 30, ~~2017,~~2018, 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~~$93.6 million as of September 30, ~~2017.~~2018. This amount was invested primarily in demand deposits with domestic and international banks, money market accounts, and U.S. Treasury bills. The cash and cash equivalents are held for investment and working capital purposes. Our cash deposits are maintained for capital preservation purposes. We do not enter into investments for trading or speculative purposes. As of September 30, ~~2017,~~2018, we ~~have~~had variable rate loans outstanding of ~~$177.1~~$96.8 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~~ changes. A hypothetical 100 bps increase in our interest rates in effect at September 30, ~~2017~~2018 would have a ~~$1.7~~$0.9 million increase to our interest expense on an annualized basis. A hypothetical 100 bps decrease in our interest rates in effect at September 30, ~~2017~~2018 would have a ~~$0.6~~$0.9 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.

Foreign Exchange Risk

The U.S. dollar is our functional currency and, for both the three and nine months ended September 30, ~~2017, less than 3%~~2018, approximately 4% of our consolidated revenues were denominated or paid in a foreign currency. We utilize these payments, in large part, to help minimize our exposure to foreign exchange risk related to payment obligations we may incur in a local currency related to labor, construction, consumables or materials costs, 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.

Inflation

Inflation generally affects us by increasing our revenues and costs of labor and operations. We do not believe that inflation had a material effect on our results of operations during the three and nine months ended September 30, 2018 and 2017.

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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 September 30, 2018, 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 thatSeptember 30, 2018, 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

In connection with the adoption of guidance regarding both revenue from contracts with customers and the determination of the customer in a service concession contract (together referred to as “Adopted Revenue Guidance”), we have implemented additional preventative and detective controls around the recording and disclosure of revenue from contracts with customers, including but not limited to the accumulation of accurate information, review of critical assumptions, the calculation of revenue for the period and the completeness and accuracy of new disclosure requirements. There ~~was~~were no ~~change~~other 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 months ended September 30, ~~2017~~2018 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 September 30, 2018, 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~~2017, under the caption “Risk Factors” in Item 1A in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018, 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~~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.~~2017 and our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018.

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

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~~Corporation. On January 15, 2018, we used $1.6 million of the proceeds to ~~an asset purchase agreement.~~acquire substantially all the assets and assume certain liabilities of both Clarus Services Inc. and Watermark USA LLC. On March 1, 2018, we used $5.1 million of the proceeds to acquire substantially all the water filtration assets and assumed certain liabilities of Wa-2 Water Company Ltd.On April 2, 2018, we used $0.6 million of the proceeds to acquire substantially all the assets and assume certain liabilities of JMS Group, Inc., d/b/a Aqua Coolers. On June 4, 2018, we used $5.4 million of the proceeds to acquire substantially all the assets and assume certain liabilities of La Ferla Group LLC, d/b/a Avalon Water. On August 6, 2018, we used $15.2 million of the proceeds to acquire substantially all the assets and assume certain liabilities of Alpine Water Systems, LLC.

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~~		Credit Agreement dated August 4, 2017 between AquaVenture Holdings Limited, AquaVenture Holdings Peru S.A.C., Quench USA, Inc and Deutsche Bank AG, London Branch (filed as Exhibit 1.1 to AquaVenture Holdings Limited’s Form 8-K filed on August 7, 2017 and incorporated herein by reference).
~~2.2~~		Amendment, Waiver and Consent Letter, dated August 4, 2017, between Seven Seas Water (BVI) Ltd. (f/k/a Biwater (BVI) Ltd.) and Barclays Bank PLC (filed as Exhibit 2.2 to AquaVenture Holdings Limited’s Quarterly Report on Form 10-Q filed on August 14, 2017 and incorporated herein by reference).
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 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.

++ Portions of this agreement have been redacted pursuant to a request for confidential treatment submitted to the SEC. Schedules, exhibits, and similar supporting attachments or agreements to the Share Purchase Agreement are omitted pursuant to Item 601(b)(2) of Regulation S-K. AquaVenture Holdings Limited agrees to furnish a supplemental copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request.

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Table of Contents

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~~7, 2018	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.	2232
Item 3.	Quantitative and Qualitative Disclosures about Market Risk.	4958
Item 4.	Controls and Procedures.	5059

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings.	5160
Item 1A.	Risk Factors.	5160
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	5160
Item 3.	Defaults upon Senior Securities.	5160
Item 4.	Mine Safety Disclosures.	5160
Item 5.	Other Information.	5160
Item 6.	Exhibits.	5261


	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


	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