3. Business Combinations and Asset Acquisitions

Business Combinations

Alpine Water Systems, LLC

On August 6, 2018, Quench acquired substantially all the assets and assumed certain liabilities of Alpine Water Systems, LLC (“Alpine”), a POU water filtration company based in Las Vegas, Nevada, pursuant to an asset purchase agreement (“Alpine Acquisition”). The aggregate purchase price, subject to working capital adjustments, of the Alpine Acquisition was $15.2 million, including $14.6 million in cash, $0.4 million payable on August 6, 2020, and $0.2 million of acquisition contingent consideration. The acquisition contingent consideration is recorded at its estimated fair value with the ultimate payout based upon the future performance of the acquired assets. The undiscounted range of outcomes for the acquisition contingent consideration is $0 to $0.3 million. In addition, the asset purchase agreement includes contingent payments with the ultimate payout based upon the future performance of the acquired assets. The contingent payments are automatically forfeited if the employment of certain selling shareholders terminates. The Company has determined that the contingent payments will be 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 $0 to $1.1 million. The assets acquired consist primarily of in-place lease agreements and the related POU systems in the United States and Canada.

Related transaction costs incurred by the Company during both the three and nine months ended September 30, 2018 were $0.2 million, which were expensed as incurred within selling, general and administrative (“SG&A”) expenses in the consolidated statements of operations and comprehensive income.

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

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	$	506
Inventory		141
Property, plant and equipment		1,779
Identified intangible assets		7,240
Goodwill		6,538
Total assets acquired		16,204
Liabilities assumed:
Accounts payable and accrued liabilities		(479)
Deferred revenue		(565)
Total liabilities assumed		(1,044)
Total purchase price	$	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 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 the acquired Alpine assets are included in the Quench reportable segment from the date of acquisition. The resulting amount of revenues and net loss included in the consolidated statements of operations and comprehensive income since acquisition were approximately $0.9 million and $0.1 million, respectively.

Wa-2 Water Company Ltd.

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

Related transaction costs incurred by the Company during the three and nine months ended September 30, 2018 were $0 and $0.1 million, respectively, which were expensed as incurred within SG&A expenses in the consolidated statements of operations and comprehensive income.

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


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, 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 consolidated 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 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
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 Alpine, Wa-2 and Wellsys, which occurred on August 6, 2018, March 1, 2018 and September 8, 2017, respectively, as if they had occurred on January 1, 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,
	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)

Asset Acquisitions

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

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	$	108
Property, plant and equipment		704
Inventory		13
Customer relationships		4,349
Non-compete agreements		413
Deferred revenue		(153)
Net assets acquired	$	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.

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 purchase price 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.