AQUAVENTURE : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-K)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the section titled "Selected
Consolidated Financial Data" and financial statements and related notes thereto
included elsewhere in this Annual Report on Form 10-K. This discussion contains
forward­looking statements that involve risks and uncertainties. Our actual
results could differ materially from those discussed below. Factors that

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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"
included elsewhere in this Annual Report on Form 10-K.

                                    Overview

AquaVenture Holdings Limited and its subsidiaries (the "Company", "AquaVenture",
"we", "us" and "our") is a multinational provider of Water­as­a­Service®, or
WAAS®, solutions that provide our customers with a reliable and cost­effective
source of clean drinking water, processed water and wastewater treatment and
water reuse solutions primarily under long­term contracts that minimize capital
investment by the customer. We believe our WAAS business model offers a
differentiated value proposition that generates long­term customer
relationships, recurring revenue, predictable cash flow and attractive rates of
return. We generate revenue from our operations in North America, the Caribbean
and South America and are pursuing expansion opportunities in North America, the
Caribbean, South America, Africa, the Middle East and other select markets.

We deliver our WAAS solutions through two operating platforms: Seven Seas Water
and Quench. Seven Seas Water is a multinational provider of desalination,
wastewater treatment and water reuse solutions to governmental, municipal
(including utility districts), industrial, property developer and hospitality
customers. Our desalination solutions provide more than 8.5 billion gallons per
year of potable, high purity industrial grade and ultra-pure water (which is
water that is treated to meet higher purity standards required for industrial,
semiconductor, utility or pharmaceutical applications). Our wastewater treatment
and water reuse solutions, which include plants ranging in capacity from 5,000
gallons per day, or GPD, to more than 1.5 million GPD, are provided through 105
leases with customers as well as through the sale of equipment. Quench, is a
U.S.­based provider of Point­of­Use, or POU, filtered water systems and related
services through direct and indirect sales channels to approximately 60,000
institutional and commercial customers, including more than half of the Fortune
500, throughout the United States and Canada.

Our Seven Seas Water platform generates recurring revenue through long­term
contracts for our desalination and wastewater treatment and water reuse
solutions. For the year ended December 31, 2019, the significant majority of our
Seven Seas Water revenue is derived from our desalination solutions in six
different locations:

· The USVI: Seven Seas Water provides all of the municipal potable water needs

for the islands of St. Croix, St. Thomas and St. John through its two seawater

desalination plants, one on St. Croix and one on St. Thomas, having a combined

capacity of approximately 7.0 million GPD. We also provide ultrapure water for

use in power generation units by further processing a portion of the potable

water we produce for certain of our customers.

· St. Maarten: Seven Seas Water is the primary supplier of municipal potable

water needs for St. Maarten through its three seawater desalination plants,

which have a combined capacity of approximately 5.8 million GPD.

· Curaçao: Seven Seas Water provided industrial grade water through seawater and

brackish water desalination facilities having a combined capacity of

approximately 4.9 million GPD.

· Trinidad: Seven Seas Water provides potable water to southern Trinidad through

its seawater desalination plant having a capacity of approximately

5.5 million GPD. Upon completion of an expansion during July 2016, total

capacity was increased to 6.7 million GPD.

· The 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.

· 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.




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On June 28, 2019, we received formal notice from Curaçao Refinery Utilities B.V.
("CRU") that it is exercising its right to purchase our desalination facilities
pursuant to the terms of the existing water supply agreement. The existing water
supply agreement with CRU began in December 2008, with the Company providing
water from a desalination plant with an initial design capacity of 0.5 million
gallons per day under a five-year contract. This agreement has been amended
several times, resulting in both expanded water production to the current design
capacity of 4.9 million GPD and an extended contract expiration date of December
31, 2019. Pursuant to the terms of the water supply agreement, the applicable
buy-out amount, upon consummation of the buyout right by CRU, was $3.5 million
due upon the contract expiration date of December 31, 2019. On December 31,
2019, CRU consummated the execution of its buy-out right, and the Company
received a cash payment of $3.5 million.



Through our Seven Seas Water wastewater treatment and water reuse solutions, we
design, fabricate and install plants that are leased under a contractual term or
sold to customers. The wastewater treatment and water reuse solutions offered to
customers include scalable modular treatment plants, field-erected plants and
temporary bypass plants ranging from 5,000 GPD to more than 1.5 million GPD.
These solutions are provided through 105 leases with customers. With the
November 1, 2018 AUC Acquisition, in which we acquired all of the issued and
outstanding membership interests of AUC pursuant to a membership interest
purchase agreement, we significantly increased our wastewater treatment and
water reuse solutions, which has contributed significantly to our Seven Seas
Water revenues.

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

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 owned equipment.
Quench also generates revenue from the sale of coffee and consumables under
agreements requiring customers to purchase a minimum amount monthly in exchange
for the use of a coffee brewer. Our annual unit attrition rate at December 31,
2019 was less than 7.5%, implying an average rental period of more than 12
years. Through our direct sales channel, we receive recurring fees for the units
we rent or service throughout the life of our customer relationship. In
addition, we also receive non-recurring revenue from some customers for the sale
of equipment and for certain services, such as the installation, relocation or
removal of equipment. Through our indirect sales channel, we receive
re-occurring revenue from the sale of equipment, parts and filters to dealers
and retailers. We achieve an attractive return on our rental assets due to
strong customer retention. We provide our systems and services to a broad mix of
industries, including government, education, medical, manufacturing, retail, and
hospitality, among others. We operate principally throughout the United States
and Canada and are supported by a primary operations center in King of Prussia,
Pennsylvania.



For the fiscal years ended December 31, 2019 and 2018, our consolidated revenue
was $203.5 million and $145.6 million, respectively. The $57.9 million increase
from 2018 to 2019 was primarily due to inclusion of incremental revenues from
our acquisitions during 2018 and 2019 in addition to organic growth of existing
operations. Including both organic and inorganic growth, our CAGR for revenue
was 24.8% from 2014 to 2019.



Agreement and Plan of Merger

On December 23, 2019, we entered into an Agreement and Plan of Merger, or Merger
Agreement, with Culligan International Company, or Culligan, a Delaware
corporation, and Amberjack Merger Sub Limited, or Merger Sub, a business
incorporated under the laws of the British Virgin Islands and wholly-owned
subsidiary of Culligan. Pursuant to the Merger Agreement, and subject to the
satisfaction or waiver of the conditions therein, Merger Sub will merge with and
into the Company  (the "Merger"). As a result of the Merger, the Company will
become a wholly-owned subsidiary of Culligan. The closing of the Merger remains
subject to the satisfaction or waiver of the remaining conditions to the Merger
set forth in the Merger Agreement. We expect the Merger to close no later than
the end of the second quarter of 2020.

2019 Acquisition Activities

On June 1, 2019, we acquired substantially all of the water filtration assets
and assumed certain liabilities of Aguaman, Inc. ("Aguaman"), a POU water
filtration company based in Miami, Florida, pursuant to an asset purchase
agreement. The aggregate purchase price, subject to adjustments, was $1.5
million, which included approximately $1.1 million of cash, $0.2 million payable
on the one-year anniversary of the transaction and $0.2 million acquisition
contingent

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consideration payable to the seller on or before the one-year anniversary of the
transaction. The assets acquired consist primarily of in-place lease agreements
and the related POU systems in the United States.

On July 15, 2019, we acquired substantially all of the assets and assumed
certain liabilities of Carolina Pure Water Systems, LLC ("Carolina Pure"), a POU
water filtration company based in Raleigh, North Carolina, pursuant to an asset
purchase agreement. The aggregate purchase price, subject to adjustments, was
$7.3 million, which included approximately $6.8 million of cash and $0.5 million
payable on the one-year anniversary of the transaction. The assets acquired
consist primarily of in-place lease agreements and the related POU systems in
the United States.

On October 1, 2019, we acquired substantially all of the assets and assumed
certain liabilities of Mirex AquaPure Solutions L.P., d/b/a Mirex AquaPure
Solutions ("Mirex"), a POU water filtration company based in Houston, Texas,
pursuant to an asset purchase agreement. The estimated aggregate purchase price,
subject to adjustments, was $11.6 million, which included approximately $10.3
million of cash, $0.9 million payable on the one-year anniversary of the
transaction, $0.3 million payable on the two-year anniversary of the transaction
and approximately $0.1 million of acquisition contingent consideration. The
assets acquired consist primarily of in-place lease agreements and the related
POU systems in the United States.

On October 1, 2019, we acquired substantially all of the assets and assumed
certain liabilities of 1920277 Alberta Inc., d/b/a Flowline Canada ("Flowline"),
a POU water filtration company based in Edmonton, Canada, pursuant to an asset
purchase agreement. The estimated aggregate purchase price, subject to
adjustments, was $0.9 million, which included approximately $0.8 million of cash
and $0.1 million payable on the one-year anniversary of the transaction. The
assets acquired consist primarily of in-place lease agreements and the related
POU systems in Canada.

On December 2, 2019, we acquired substantially all of the assets and assumed
certain liabilities of Pure Planet Water, Inc. ("Pure Planet"), a POU water
filtration company based in Palm Desert, California, pursuant to an asset
purchase agreement. The estimated aggregate purchase price, subject to
adjustments, was $0.2 million, which included approximately $0.1 million of cash
and $0.1 million payable on the one-year anniversary of the transaction. The
assets acquired consist primarily of in-place lease agreements and the related
POU systems in the United States.

On December 16, 2019, we acquired substantially all of the assets and assumed
certain liabilities of Jonli Water Services, Inc. ("Jonli"), a POU water
filtration company based in Quebec, Canada pursuant to an asset purchase
agreement. The estimated aggregate purchase price, subject to adjustments, was
$0.4 million, which was paid in cash. The assets acquired consist primarily of
in-place maintenance agreements in Canada.

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

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 year ended December 31, 2019, revenues for the Seven Seas
Water and Quench segments represented approximately 43% and 57%, respectively,
of our consolidated revenues.



In addition to the Seven Seas Water and Quench segments, we record certain
general and administrative costs that are not allocated to either of the
reportable segments within "Corporate and Other" for the CODM and for segment
reporting purposes. These costs include, but are not limited to, professional
service fees and other expenses to support the activities of the registrant
holding company. Corporate and Other does not include any labor allocations from
the Seven Seas Water and Quench segments. We believe this presentation more
accurately portrays the results of the core operations of each of the operating
and reportable segments to the CODM. The Corporate and Other administration
function is not treated as a segment.

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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

Management reviews the results of operations using a variety of measurements and
procedures including an analysis of the statements of operations and
comprehensive income which management considers an important aspect of our
performance analysis. To help the reader better understand the discussion of
operating results, details regarding certain line items have been provided
below.

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 did not have a cash impact and, therefore,
does not affect the economics of our underlying customer contracts. The adoption
did, however, result in differences in the way our revenues, gross profit and
net loss are determined compared to historical periods as presented within our
Annual Report on Form 10-K for the 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 Adopted Revenue Guidance, please refer to Note 2-"Summary of Significant Accounting Policies" to the Consolidated Financial Statements, included elsewhere in this Annual Report on Form 10-K.

Revenues

Seven Seas Water

Our Seven Seas Water business generates revenue from our desalination and
wastewater treatment and water reuse solutions provided to governmental,
municipal (including utility districts), industrial, property developer and
hospitality customers. Revenues from our desalination solutions are primarily
generated from contracts with customers to deliver treated bulk water, through
both bulk water sales and service and service concession arrangements. Revenues
from our wastewater treatment and water reuse solutions are primarily generated
from capital and financed equipment sales, and leasing arrangements of up to
five years.

Bulk water sales and service, which represent our desalination solutions, 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 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.

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 obligation is
generally accounted for as an operating lease as a result of the provisions of
the contract. 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 take­or­pay provisions and contractual unit
pricing.

Service concession arrangements are agreements entered into with a public­sector
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.

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Our wastewater treatment and water reuse solutions generate recurring revenue
from the rental of wastewater treatment and water reuse equipment. Our equipment
is typically rented under multi-year term, automatically renewing contracts. We
record the recurring fees received as revenue for the units we rent ratably
throughout the term of each contract period.

Revenues related to the construction of infrastructure, or product sales
revenue, for both our desalination and wastewater treatment and water reuse
solutions are recognized over time, using the input method based on cost
incurred, which typically begins at the later of commencement of the
construction or transfer of control, 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.

Quench

Our Quench direct sales channel 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 customer­owned
equipment. In addition, we also receive non-recurring revenue from some
customers from the sale of equipment and for certain services, such as the
installation, relocation or removal of equipment. Quench also generates revenue
from the sale of coffee and consumables. Through our indirect sales channel, we
receive re-occurring revenue from the sale of equipment, parts and filters to
dealers and retailers.

The majority of Quench's direct sales channel customers rent our systems under
multi­year, automatically renewing contracts. We record the recurring fees
received as revenue for the units we rent ratably throughout the term of each
contract period. Non-recurring revenues are recorded at the time services are
performed or upon the customer taking control of the equipment and/or products
sold.

Cost of Revenues

Seven Seas Water

Cost of revenues for our Seven Seas Water business consists primarily of the
cost of equipment depreciation; cost of equipment constructed for sale; and
costs for operating and maintaining equipment on behalf of the customer.
Expenditures in connection with the installation of our leased equipment are
capitalized as contract fulfillment costs and depreciated to cost of revenues
over the estimated useful life of the contract.

Equipment 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 equipment and future acquisitions. Equipment depreciation is
calculated using a straight­line 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 equipment is placed into service.

Equipment construction related to product sales revenue 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 desalination or wastewater plant or the complexity
of the application, number of projects and the prevailing labor market for the
level of employees needed in the jurisdiction where the plant is being
constructed.

Operating costs for operating and maintaining the equipment on behalf of the
customer, which is primarily related to our desalination solutions, includes
personnel costs (including compensation and other related personnel costs for
employees), electric power, repairs and maintenance, personnel and travel costs
for field engineering services and the cost of consumables. Labor costs are
generally consistent within a normal range of plant production but can vary from

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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.

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 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 post­production processes to meet the water quality and attribute specifications of our customers.

Quench

Cost of revenues for our Quench business consists primarily of the cost of
personnel and travel for our field service, supply chain and technician
scheduling and dispatch teams; depreciation of rental equipment and field
service vehicles; the cost of equipment purchased or manufactured for resale;
the cost of coffee and related consumables; the cost of filters and repair
parts; and freight costs. Expenditures incurred in connection with the
installation of our rental equipment are capitalized and depreciated to cost of
revenues over their estimated useful life.

Selling, General and Administrative Expenses

Each segment reports the selling, general and administrative expenses that
pertain to its business. General and administrative costs that are not allocated
to either of the reportable segments are reported in "Corporate and Other" for
the CODM and for segment reporting purposes. These costs include, but are not
limited to, professional service fees and other expenses to support the
activities of the registrant holding company. Corporate and Other does not
include any labor allocations from the Seven Seas Water and Quench segments. We
believe this presentation more accurately portrays the results of the core
operations of each of the operating and reportable segments to the CODM. The
Corporate and Other administration function is not treated as a segment.

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), third­party 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 and 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 specific
revenue generating projects; 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.

Quench

Selling, general and administrative expenses for Quench include costs related to
our selling and marketing functions as well as general and administrative costs
associated with our operations center and operating locations, including
information systems, finance, customer care, and human resources. Such costs
include personnel costs

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(including salaries, benefits and share­based compensation), non-capitalized
commissions, amortization of deferred lease costs, expenses related to lead
generation, amortization expense associated with intangible assets acquired in
connection with business combinations, which are amortized over their expected
useful lives, fees for third­party professional services (including consulting,
legal, accounting and tax services), travel, depreciation of non­service
equipment and other administrative expenses.

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 to support our organic and inorganic growth. 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 this Annual Report on Form 10-K.

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 solutions with new and existing
governmental, municipal, industrial, property developer and hospitality
customers. Our performance and the comparability of results over time are
largely driven by the timing of events such as acquisitions of existing plants,
securing new plant projects (including bulk water sales and service), rental
agreements and product sales, plant expansions, and the extension, termination
or expiration of water supply agreements and rental agreements for wastewater
treatment and water reuse equipment. The timing of many of these events is
unpredictable. New plant projects, plant expansions and plant acquisitions, when
they do occur, may require significant levels of cash and company resources
before and after the commencement of revenue and their impact on our results of
operations can be significant.

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The table below summarizes significant events in 2019 and 2018 that affect the
performance and comparability of financial results for these and future periods:


                                                                                Capacity
                                                                                (Million    Commencement
Plant Name                                       Location          Event          GPD)          Date
                                                               Contract
Point Blanche                                   St. Maarten    amendment (1)         N/A    April 2018
                                                               Plant
Anguilla                                        Anguilla       acquisition           0.5    October 2018
                                                               Plant
Anguilla                                        Anguilla       expansion             0.5    March 2019
                                                               New contract
                                                               with
Limetree Bay Terminal                           St. Croix      expansion (2)         1.0    November 2019
                                                               Contract
                                                               expiration
CRU Refinery                                    Curaçao        (3)                   N/A    (3)

--------------------------------------------------------------------------------

(1) 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 four-year extension to the

water contract. The reduction in the required minimum monthly water purchase

will remain in effect for three years, after 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.

(2) Effective November 1, 2019, we terminated our original agreement in St. Croix

      and subsequently entered new agreement with the customer. Under the new
      agreement, which expires in 2024, we expanded the design capacity of the
      plant by 1.0 million GPD.

(3) On December 31, 2019, our water supply agreement in Curaçao expired and our

customer, CRU, exercised its right to purchase the desalination facilities

pursuant to the terms of the existing water supply agreement. The applicable

buy-out amount, upon consummation of the buyout right, is $3.5 million due

upon the contract expiration date. On December 31, 2019, CRU consummated the

execution of its buy-out right and the Company received a cash payment of

$3.5 million. This payment was recorded as a gain on sale of property, plant

and equipment, which is reflected within SG&A in our Seven Seas Water

segment.

In addition to the table above, we also acquired all of the issued and
outstanding membership interests of AUC on November 1, 2018. The acquired
wastewater treatment and water reuse solutions, which include plants ranging in
capacity from 5,000 GPD to more than 1.5 million GPD, are provided through 105
leases with customers.

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 development.
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. In the case of a newly constructed
desalination plant, there is typically a ramp­up period during which the plant
operates below normal capacity.

Existing Customer Relationships

We expect to continue to grow our business with existing customers by expanding
and extending the contractual term for existing plants to meet an expected
increase in customer demand, each of which will impact our performance and
comparability of results. As customer demand increases for either the volume of
water produced and delivered or the wastewater treated, we typically experience
increased sales volume through the use of additional capacity built into
existing desalination plants or through the renegotiation of an existing
contract and deployment of

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incremental equipment to meet customer demands. Similarly, contract extensions
and renewals provide economic benefits for both the customer and us. By the time
we 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.

Acquisition of Existing Assets or Business

Revenue and expenses will increase upon an acquisition of existing assets or
businesses from a third party. In addition, the time, cost and capital required
to complete an acquisition are significant. 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 acquisition. Upon completion of
the acquisition, certain assets, including desalination plants, may experience
periods of downtime or reduced production levels as well as additional capital
investment while we bring the plant up to our engineering and operating
standards. 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.

Entry into New Markets

Our future performance will be affected by our investment and success in
securing business in new markets. While continuing to penetrate the Caribbean
market, we have also expanded our business development efforts to pursue a
global business footprint in North America, South America, Africa, the Middle
East and other select markets. As we continue to pursue entry into new markets,
we may incur increasing expenses for business development that may be sustained
for long periods of time before realizing the benefit of incremental revenues.
In addition, our entry into some new markets may be better served through
partnering arrangements such as joint ventures, which may result in a minority
position. Such an arrangement may be economically attractive even though, in
some circumstances, we may not be able to consolidate the operating results of a
partnering arrangement with our own operating results.

Changes to Sales Volume, Costs of Sales and Operating Expenses

For our desalination solutions, our profitability is affected by changes in the
volume of water delivered above any minimum required customer purchases, our
ability to control plant production costs, and our ability to control equipment
manufacturing costs and operating expenses. For our wastewater treatment and
water reuse solutions, our profitability is affected by the number and
profitability of construction projects commenced and completed during the period
and the number of new leases entered into with customers.

Due to the capital-intensive nature of our desalination solutions and the
relatively high level of fixed costs such as depreciation and contract cost
amortization, our Seven Seas Water business model is characterized by high
levels of operating leverage. As a result, significant swings in bulk water
production volume could favorably or unfavorably impact profitability more
significantly than business models with less operating leverage. We have
mitigated the downside risk of declines in bulk water plant production through
the inclusion of minimum customer purchase requirements in a majority of our
eight water supply contracts with our major customers. In the other two water
supply contracts, we have contractual rights to be the exclusive water supplier
or our customer must purchase all the water we produce and we must provide
volume at a specified percentage of installed capacity. We design our plants to
meet or exceed contractual supply requirements but our failure to meet minimum
supply requirements could result in penalties that may adversely affect our
financial performance.

Operating costs for our desalination solutions can have a significant impact on
the profitability of our operations. Electrical costs are a major expense in
connection with the operation of a water treatment plant. Our major customers
either, directly or through related parties, provide the electricity needed to
run the plant without cost to us or reimburse us for this cost on a pass­through
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.

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Personnel costs are another major cost element for plant operations. Our contracts provide for price adjustments based on inflation. Profitability, however, could be adversely affected by significant increases in market prices for labor, social taxes and benefits or changes in operations requiring additional personnel.

Repairs and maintenance can be a significant cost of the business. Because we
assume the responsibility to operate and maintain our desalination plants over a
long period of time, we use plant designs and equipment that seek to minimize
repairs and maintenance and optimize long-term performance. We may however, from
time to time experience equipment failures outside of warranty coverage which
could result in significant costs to repair.

Our operations centers in Tampa, Florida and Houston, Texas incur significant
selling, general and administrative 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 short­term changes in revenue. Direct engineering cost,
including allocated overhead, for personnel at our operations centers are
capitalized as a project cost based on hours incurred on active plant
construction projects which can change from period to period. The timing of new
hires, the utilization of engineering personnel and the spending in these areas
may affect the comparability of our results.

Contractually Scheduled and Negotiated Changes to Terms and Conditions

Our Seven Seas Water business is conducted in accordance with the terms of
long­term water supply contracts that, among other things, may provide for
minimum customer purchases, guaranteed supply volumes and specified levels 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, our contracts may include provisions to increase
prices in accordance with a specified inflation index such as the consumer price
index. From time to time, we may also negotiate pricing changes with our
customers as part of an arrangement to, among other things, extend or renew a
contract or increase capacity by expanding the plant.

Revenues and operating income can be expected to decrease, potentially by a significant amount, upon a decrease in contracted services or contract renegotiation, termination or expiration.

Customer Demand and Certain Other External Factors

For our desalination solutions, we design plant capacity to exceed the minimum
purchase requirements contained in our contracts to meet anticipated customer
needs and maintain sufficient excess capacity. Our customer's water demand and
our ability to meet that demand can vary among quarters and annual periods for a
variety of reasons over which we have little control, including:

· the timing and length of shutdowns of customer facilities or infrastructure due

to factors such as equipment failures, power outages, regular scheduled

maintenance and severe weather which can adversely affect customer demand;

· seasonal fluctuations or downturns in the general economy 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 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 can impact primary demand;

· destruction caused by floods, tropical storms and hurricanes which can impact

primary demand as well as cause delays in collections from our customers;

 ·  the non-renewal of contracts by customers;


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· various environmental factors and natural or man­made conditions impacting the

quality of source water, such as bacteria levels or contaminants in source

water, can require additional pretreatment thus adding cost and reducing the

level of production throughput; and

· technological advances especially in new filtration technologies, reverse

osmosis membranes, energy recovery equipment and energy efficient plant designs

may affect future operating performance and the cost competitiveness of our

services in the market.

For our wastewater treatment and water reuse solutions, we utilize a modular
design that enables us to expand capacity with increasing customer demand. The
plants are designed to treat peak volumes of wastewater produced by our
customers. Our customer's demand for our wastewater treatment and water reuse
solutions can vary among quarters and annual periods for a variety of reasons
over which we have little control, including:

· individual developers or customers inability to procure funding to initiate

building or expanding certain residential developments;

· residential development specific construction delays such as weather-related

delays, changes in specifications or inability of ancillary contractors to

    preform works;

· downturns in the general economy and housing market that can decrease demand

for new housing developments thus limiting increases in demand for wastewater

treatment;

· replacement of our solutions by a larger, centralized facility or the

connecting of customers to a centralized wastewater treatment or water reuse

solution; and

· potential changes in the regulatory environment that could impede development

of further decentralized wastewater treatment systems.

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 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 targeted
additional territories in the United States and internationally. 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 roll­out of large­enterprise orders and general economic
conditions.

Customer Relationships

We believe that our existing customers continue to provide significant
opportunities for us to offer additional products and services. In our direct
sales channel, 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 consumables,
and continue to pursue the resale of equipment to dealers, retailers and end
customers who prefer to own, rather than lease, their equipment.

Typically, we rent our systems to customers on multi­year,
automatically­renewing 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 December 31, 2019 was less than 7.5%, implying an average rental period
of more than 12 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-

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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 20
acquisitions since our initial public offering, of which 8 have occurred since
the beginning of 2019. We believe our recent acquisition activity is indicative
of the opportunity for future inorganic growth.

Through our indirect sales channel, we offer POU systems to networks of
approximately 260 dealers and retailers predominantly in North America. The
indirect sales channel expands our participation in the growing POU market
domestically and internationally. In addition, the channel enhances our ability
to develop, source and manufacture innovative, exclusive coolers and
purification offerings. Lastly, the channel offers us the opportunity to develop
deeper relationships with POU dealers that could lead to future acquisitions.

We expect to continue to pursue select acquisitions to increase our scale,
customer density and geographic service area, as well as to increase our
participation in the broader international market for POU systems. Our ability
to complete acquisitions is a function of many factors, including competition,
purchase price and our short­term business priorities. Accordingly, it is
impossible to predict whether any current or future discussions will lead to the
successful completion of any acquisitions. Since acquisitions are a part of our
growth strategy, the inability to complete, integrate and profitably operate
acquisitions may adversely affect our operating results.

Changes to Cost of Sales and Operating Expenses

Profitability of our Quench platform will be affected by our ability to control our costs of sales and operating expenses.

A majority of Quench rental agreements are priced at fixed rates for multi-year
periods ranging up to four years. As a result, our gross margins are exposed to
potential cost of sales increases that cannot be immediately offset by price
adjustments. The volume, mix and pricing of equipment and consumables purchased
for immediate resale (as opposed to rental) can impact the consistency and
comparability of our results. The overall compensation of field service and
supply chain support (along with the costs of associated vehicles), may affect
our gross margins.

Quench incurs selling, general and administrative costs to support a North
American sales force, a widely dispersed installed base of customers, and a high
volume of recurring business transactions. A portion of such costs is composed
of new customer acquisition costs, such as lead generation expenses, which are
expensed upfront and recovered over the periods following the execution of a
customer contract and any subsequent renewal. Commissions and other costs that
are directly related to the negotiation and execution of leases, considered
contract acquisition costs, are capitalized and amortized on a straight­line
basis over the contract period. Selling, general and administrative costs also
include certain costs to complete business acquisitions, which precede the
realization of revenues generated by the acquired new business, and
discretionary investments in infrastructure to support our plans for Quench's
future long­term growth. The timing of these expenditures and their impact
relative to the revenues generated can affect our performance and comparability
of results.

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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
(the "Exchange Act"), and the listing requirements of the New York Stock
Exchange. 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 ("GAAP"). In the preparation
of these consolidated financial statements, we are required to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenue, costs and expenses and related disclosures. To the extent that there
are material differences between these estimates and actual results, our
financial condition or operating results would be affected. We base our
estimates on past experience and other assumptions that we believe are
reasonable under the circumstances, and we evaluate these estimates on an
ongoing basis. We refer to accounting estimates of this type as critical
accounting policies and estimates, which we discuss below.

Adoption of New Accounting Pronouncements

Under the Jumpstart Our Business Startups Act, or JOBS Act, we meet the definition of an "emerging growth company." We have irrevocably elected to opt out of the extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act.

In June 2016, the FASB issued authoritative guidance regarding implementation of
measurement of credit losses on financial instruments. This guidance will be
effective for annual reporting periods beginning on or after December 15, 2019,
including interim periods within those annual periods, and early adoption is
permitted. We adopted this guidance on a modified retrospective basis on January
1, 2019 with the cumulative effect of transition as of the effective date of
adoption. For a discussion on the impacts of the authoritative guidance on our
financial statements, please refer to Note 2-"Summary of Significant Accounting
Policies" to the consolidated financial statements, included elsewhere in this
Annual Report on Form 10-K.

In March 2019, the FASB issued authoritative guidance regarding targeted changes
to lessor accounting. This guidance will be effective for annual reporting
periods beginning on or after December 15, 2019, including interim periods
within those annual periods, and early adoption is permitted. We adopted this
guidance on a retrospective basis as of January 1, 2019 (the original adoption
date of the lease pronouncement). For a discussion on the impacts of the
authoritative guidance on our financial statements, please refer to Note
2-"Summary of Significant Accounting Policies" to the consolidated financial
statements, included elsewhere in this Annual Report on Form 10-K.

In February 2016, the Financial Accounting Standards Board, or FASB, issued
authoritative guidance regarding leases that requires lessees to recognize a
lease liability and right of use asset for operating leases, with the exception
of short-term leases. In addition, lessor accounting was modified to align,
where necessary, with lessee accounting modifications and the authoritative
guidance regarding revenue from contracts with customers. During 2018, the FASB
issued additional authoritative guidance which, among other things, provided an
option to apply transition provisions under the standard at adoption date rather
than the earliest comparative period presented as well as added a practical
expedient that would permit lessors to not separate non-lease components from
the associated lease components if certain conditions are met. These amendments
are effective, in conjunction with the new lease standard, for annual reporting
periods beginning on or after December 15, 2018, including interim periods
within those annual periods.

We adopted this guidance on a modified retrospective basis on January 1, 2019
with the cumulative effect of transition as of the effective date of adoption.
For a discussion on the impacts of the authoritative guidance on our financial
statements, please refer to Note 2-"Summary of Significant Accounting
Policies" to the consolidated financial statements, included elsewhere in this
Annual Report on Form 10-K.

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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. We adopted this guidance on January 1, 2020 on a
prospective basis. Although certain implementation costs we incur going forward
may now be capitalizable, there is no material impact expected to the
consolidated financial statements as a result of this adoption.

In August 2018, the FASB issued authoritative guidance regarding fair value
measurements. 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 adopted this guidance on
January 1, 2020 on a prospective basis. Beginning with all periods subsequent to
the adoption date, we will prepare the enhanced disclosures within the
consolidated financial statements as a result of this adoption.

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.



Our significant accounting policies are discussed in Note 2-"Summary of
Significant Accounting Policies" to the Consolidated Financial Statements,
included elsewhere in this Annual Report on Form 10-K. Management believes that
the following accounting estimates are the most critical to aid in fully
understanding and evaluating our reported financial results, and they require
management's most difficult, subjective or complex judgments, resulting from the
need to make estimates about the effect of matters that are inherently
uncertain.

Leases



Lessee accounting

We lease space and operating assets, including offices, office equipment, warehouses, storage yards and storage units under non-cancelable operating leases. We account for these leases in accordance with the authoritative guidance adopted as of January 1, 2019. Please see "Adoption of New Accounting Pronouncements" section above for information regarding this adoption.

At contract inception, we determine if an arrangement is or contains a lease. If the arrangement contains a lease, we recognize a right-of-use asset and an operating lease liability at the lease commencement date. Lease expense for lease payments made is recognized on a straight-line basis over the lease term.

The operating lease liability is initially measured at the present value of the
unpaid lease payments at the lease commencement date. The current portion of our
operating lease liabilities are recorded within accrued liabilities in the
consolidated balance sheets.



The right-of-use asset is initially measured at cost, which is comprised of the
initial amount of the operating lease liability adjusted for lease payments made
at or before the lease commencement date, plus any initial direct costs incurred
less any lease incentives received. The right-of-use asset is subsequently
measured throughout the lease term at the carrying amount of the operating lease
liability, plus initial direct costs, plus (minus) any prepaid (accrued) lease
payments, less the unamortized balance of lease incentives received.
Right-of-use assets are periodically reviewed for impairment whenever events or
changes in circumstances arise.



Key estimates and judgments in determining both the operating lease liability
and right-of-use asset include the determination of (i) the discount rate it
uses to discount the unpaid lease payments to present value, (ii) the lease term
and (iii) the lease payments.



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The discount rate applied to the unpaid lease payments is the interest rate
implicit in the lease or, if that rate cannot be readily determined, our
incremental borrowing rate. Generally, we cannot determine the interest rate
implicit in the lease because we do not have access to the lessor's estimated
residual value or the amount of the lessor's deferred initial direct costs.
Therefore, we generally derive an incremental borrowing rate as the discount
rate for the lease. Our incremental borrowing rate for a lease is the rate of
interest we would have to pay on a collateralized basis to borrow an amount
equal to the lease payments under similar terms.



The lease term for all of our leases includes the noncancelable period of the
lease, plus any additional periods covered by either our option to extend (or
not to terminate) the lease that we are reasonably certain to exercise, and/or
an option to extend (or not to terminate) the lease controlled by the lessor.

Lease payments included in the measurement of operating lease liabilities are comprised of the following:

 ·  fixed payments;

· variable lease payments that depend on an index or rate, initially measured

using the index or rate at the lease commencement date; and

· the exercise price of our option to purchase the underlying asset if we are

    reasonably certain to exercise the option.




In certain instances, our leases include non-lease components, such as equipment
maintenance or common area maintenance. As part of its adoption of authoritative
guidance on leases on January 1, 2019, we have not elected the practical
expedient to account for the lease and non-lease components as a single lease
component and have elected (for all classes of underlying assets) to account for
these components separately. We have allocated the consideration in the contract
to the lease and non-lease components based on each component's relative
standalone price. We determine standalone prices for the lease components based
on the prices for which other lessors lease similar assets on a standalone
basis. We determine standalone prices for the non-lease components based on the
prices that suppliers might charge for those type of services on a standalone
basis. If observable standalone prices are not readily available, we estimate
the standalone prices maximizing the use of observable information.



We have elected to utilize the short-term lease exemption and not recognize a
right-of-use asset and corresponding operating lease liability for leases with
expected terms of 12 months or less. We recognize the lease payments associated
with its short-term leases on a straight-line basis over the lease term.



Lessor accounting



We generate revenues through the lease of our bulk water facilities, wastewater
treatment and water reuse equipment, and filtered water and related systems
equipment to customers. In certain instances, we enter into a contract with a
customer but must construct the underlying asset, including bulk water
facilities and wastewater treatment and water reuse equipment, prior to its
lease.

At the time of contract inception, we determine if an arrangement is or contains a lease.

Customer contracts that contain leases, which can be explicit or implicit in the
contract, are generally classified as either operating leases or sales-type
leases and can contain both lease and non-lease components, including operating
and maintenance services ("O&M") of the Company-owned equipment. As part of our
adoption of authoritative guidance on leases on January 1, 2019, we elected the
practical expedient for all classes of underlying assets to not separate the
lease and non-lease components if certain conditions are met, including the
classification of the lease component as operating and the revenue recognition
pattern of both the lease and non-lease components. We will account for the
contract with the customer as a combined component under the respective
authoritative guidance for the predominant element in the contract, the lease or
non-lease component.



For leases classified as sales-type leases, we allocate the transaction price
based on the relative standalone selling prices of the identified performance
obligations.

If the customer contract contains or is accounted for as a lease, the key estimates and judgments used in accounting for the lease as a lessor include the following: (i) lease term, (ii) the economic life of the underlying leased

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asset, (iii) determination of lease payments and (iv) determination of the fair
value at the time of contract inception and the residual value of the underlying
leased asset.



The lease term for all of our leases includes the noncancelable period of the
lease, plus any additional periods covered by either a lessee option to extend
(or not to terminate) the lease that the lessee is reasonably certain to
exercise, and/or an option to extend (or not to terminate) the lease controlled
by us. Contracts entered into with customers can include either the option to
renew or an auto-renewing provision that results in the automatic extension of
the existing contract. In certain instances, key provisions such as the lease
payment and term of the renewal are not stated and are subject to renewal.



The economic life of the underlying leased asset is determined to be either the
period over which the asset is expected to be economically usable, or where the
benefits it can produce exceed the cost to replace or undertake major repairs.
In certain instances, the economic life of the underlying leased asset can
exceed the useful life we assign.

Lease payments that are accounted for as rental revenue are comprised of the following:

 ·  fixed payments;

· variable lease payments that depend on an index or rate, initially measured

using the index or rate at the lease commencement date;

· the exercise price of a lessee option to purchase the underlying asset if the

lessee is reasonably certain to exercise the option; and

· payments for penalties for the termination of a lease if the term reflects the

    lessee terminating the lease.




Our leases do not typically include a requirement for the customer to guarantee
the residual value of the underlying leased asset. Variable lease payments that
do not depend on an index or rate are excluded from the determination of lease
payments.



The fair value of the underlying leased asset at contract inception and residual
value of underlying leased asset at the end of the term of the lease are
determined based on the price that would be received to sell an asset in an
orderly transaction at the time of valuation. Our risk management strategy for
protecting the residual value of the underlying assets include our ongoing
maintenance during the lease term as well as clauses and other protections
within the lease agreements which require the lessee to return the underlying
asset in working condition at the end of the lease term.



At contract inception, we determine the lease classification of the underlying
asset. We consider inputs such as the lease term, lease payments, fair value of
the underlying asset and residual value of the underlying asset when assessing
the classification. The discount rate applied to the unpaid lease payments is
the interest rate implicit in the lease. The rate implicit in the lease is the
rate of interest that, at a given date, causes the aggregate present value of
(a) the lease payments and (b) the amount that the we expect to derive from the
underlying asset following the end of the lease term to equal the sum of (1) the
fair value of the underlying asset minus any related investment tax credit
retained and expected to be realized and (2) any deferred initial direct costs
we incur.



In certain instances, contracts with customers may also include the option for
the customer to purchase the underlying asset at the end of the lease term. When
applicable and certain conditions are met, we will incorporate the stated
purchase price into the determination of the interest rate implied in the lease.

Recoverable Amount of Goodwill and 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 associated
with our business combinations has been and is expected to continue increasing
in the future as further acquisitions are completed. Goodwill is reviewed for
impairment at least annually in the fourth quarter and more frequently if a
change in circumstances or the occurrence of events indicates that potential
impairment exists. We first perform 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 reporting unit is less than its carrying amount, we
perform the quantitative analysis of the goodwill impairment test. Otherwise,
the quantitative test is optional.

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Under the quantitative analysis, the recoverability of goodwill is measured at
each reporting unit by comparing the reporting unit's carrying amount, including
goodwill, to the fair market value of the reporting unit. We determine the fair
market value of our reporting units based on a weighting of the present value of
projected future cash flows, which we refer to as the Income Approach, and a
comparative market approach under both the guideline company method and
guideline transaction method, which we refer to as the Market Approach. Fair
market value using the Income Approach is based on our estimated future cash
flows on a discounted basis. The Market Approach compares each of our 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,
long­term growth rates, and market multiples. Changes in economic or operating
conditions, or changes in our business strategies, that occur after the annual
impairment analysis and which impact these assumptions, may result in a future
goodwill impairment charge, which could be material to our consolidated
financial statements.

In determining its reporting units, the Company reviews its operating segments
to determine the number of components within each segment. If an operating
segment contains only a single component, the operating segment is deemed a
reporting unit. If an operating segment contains more than one component, the
Company aggregates into a single reporting unit those components determined to
have similar economic characteristics. Components determined to have dissimilar
economic characteristics are considered a separate reporting unit. As of both
December 31, 2019 and 2018, the Quench segment was determined to be composed of
a single reporting unit. As of both December 31, 2019 and 2018, the Seven Seas
Water segment was determined to be composed of two reporting units.

For the 2019 and 2018 goodwill impairment assessments, we performed a
qualitative assessment of each reporting unit that existed at the time of the
impairment assessment. Based upon the qualitative assessments, it was determined
that there was substantial evidence that it was more likely than not that the
fair value for each reporting unit were more than the carrying values. As such,
no quantitative assessment was deemed necessary.

Other intangible assets consist of certain trade names, customer relationships
and non­compete agreements. Intangible assets which have a finite life are
amortized over their estimated useful lives on a straight­line basis. Customer
relationships 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 changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Indefinite­lived 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. No impairment was recorded during the years ended December 31, 2019
and 2018.

Business Combinations

In accordance with accounting for business combinations, we allocate the
purchase price of an acquired business to its identifiable assets and
liabilities based on estimated fair values. The excess of the purchase price
over the amount allocated to the assets and liabilities, if any, is recorded as
goodwill.

Our purchase price allocation methodology contains uncertainties because it
requires management to make assumptions and to apply judgment to estimate the
fair value of acquired assets and liabilities. Management estimates the fair
value of assets and liabilities based upon quoted market prices, the carrying
value of the acquired assets and widely accepted valuation techniques, including
discounted cash flows and market multiple analyses. Unanticipated events or
circumstances may occur which could affect the accuracy of our fair value
estimates.

The valuation of net assets acquired in a business combination determines the
allocation of purchase price to specific assets and the subsequent recognition
of expense. A change in our estimate of the value assigned to intangibles or a
change in our estimate of useful life for the intangibles could impact the
amount of amortization expense recorded in any period. A 10% change in the
amortization expense recorded for the year ended December 31, 2019 would have
impacted our pre­tax net loss by approximately $2.3 million.

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If an acquisition does not meet the definition of a business combination, then
we account for the transaction as an asset acquisition. In an asset acquisition,
goodwill is not recognized, but rather any excess consideration transferred over
the fair value of the net assets acquired is allocated on a relative fair value
basis to the identifiable net assets. In addition, transaction-related expenses
are capitalized and allocated to the net assets acquired on a relative fair
value basis.

Share­Based Compensation

We account for share­based compensation by measuring the cost of employee
services received in exchange for an award of equity instruments based on the
grant­date fair value. The cost is recognized over the requisite service period,
net of adjustments for forfeitures as they occur.

We have several equity award plans, including plans which were established prior
to the corporate reorganization and IPO and one which became effective upon the
effectiveness of the IPO. See Note 12-"Share-based Compensation" in the Notes to
Consolidated Financial Statements, included in Item 8. Financial Statements and
Supplementary Data of this Annual Report on Form 10-K for a complete discussion
on all our equity award plans.

We expense the fair value of share­based compensation awards over the requisite
service period, which is typically the vesting period. The expense is then
adjusted for forfeitures as they occur. We estimate the grant date fair value of
options and other equity awards with hurdle rates using the Black­Scholes
option­pricing model that requires management to apply judgment and make
estimates, including:

· expected volatility, which is calculated based on reported volatility data for

a representative group of publicly traded companies for which historical

information is available. Because we only recently completed our IPO, we have

continued to use an average of expected volatility based on the volatilities of

a representative group of publicly traded companies for a period approximating

the expected term of the grant;

· the risk­free interest rate, which is based on the U.S. Treasury yield curve in

effect on the date of grant commensurate with the expected term assumption;

· expected term, which we calculate using the simplified method, as we have

insufficient historical information regarding our equity awards to provide a

basis for an estimate;

· fair value of the underlying securities, which is determined using the

option­pricing model or by reasonably contemporaneous arm's length transactions

prior to our IPO and closing prices as reported by the New York Stock Exchange

on or after the IPO; and

· dividend yield, which is zero based on the fact that we never paid cash

dividends and do not expect to pay any cash dividends in the foreseeable

future.

Prior to our IPO, there were significant judgments and estimates inherent in the
determination of the fair value of our shares. These judgments and estimates
included assumptions regarding our future operating performance, the time to
completing an initial public offering, or other liquidity event, the related
company valuations associated with such events, and the determinations of the
appropriate valuation methods. If we had made different assumptions, our
share­based compensation expense and net loss could have been significantly
different. A 10% change in share­based compensation expense recorded for the
year ended December 31, 2019 would have impacted our pre­tax net loss by
approximately $0.5 million.

Income Taxes

We account for income taxes using the asset and liability approach to the
recognition of deferred tax assets and liabilities for the expected future tax
consequences of differences between the financial statement carrying amounts and
the tax basis of assets and liabilities. We are required to exercise judgment
with respect to the realization of our net deferred tax assets. Management
evaluates all positive and negative evidence and exercises judgment regarding
past and future events to determine if it is more likely than not that all or
some portion of the deferred tax assets may not be realized. If appropriate, a
valuation allowance is recorded against deferred tax assets to offset future tax
benefits that

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may not be realized. We evaluate tax positions that have been taken or are
expected to be taken in our tax returns, and we record a liability for uncertain
tax positions. We use a two­step approach to recognize and measure uncertain tax
positions. First, tax positions are recognized if the weight of available
evidence indicates that it is more likely than not that the position will be
sustained upon examination, including resolution of related appeals or
litigation processes, if any. Second, tax positions are measured as the largest
amount of tax benefit that has a greater than 50% likelihood of being realized
upon settlement. We recognize interest and penalties related to unrecognized tax
benefits in the provision for income taxes in the accompanying consolidated
financial statements.

AquaVenture Holdings Limited is incorporated in the British Virgin Islands,
which does not impose income taxes. Certain of our subsidiaries file separate
tax returns and are subject to federal income taxes at the corporate level in
the United States or in foreign jurisdictions. Certain other subsidiaries
operate in jurisdictions that do not impose taxes based on income.

Various internal and external factors may have favorable or unfavorable,
material or immaterial effects on our effective income tax rate and therefore,
impact net income and earnings per share. These factors include, but are not
limited to changes in tax rates; changes in tax laws, regulations and rulings;
changes in interpretations of existing laws, regulations and rulings; changes in
the evaluation of our ability to realize deferred tax assets, and changes in
accounting principles; changes in current pre-tax income as well as changes in
forecasted pre-tax income; changes in the mix of earnings among countries with
different tax rates; and acquisitions and changes in our corporate structure.
These factors may result in periodic revisions to our effective income tax rate,
which could affect our cash flow and results of operations. We recorded a
valuation allowance of $28.5 million as of December 31, 2019 related primarily
to net operating losses.

A 0.50% change in our effective income tax rate would have impacted our net loss for the year ended December 31, 2019 by approximately $0.1 million.

                             Results of Operations

We have omitted discussion of the earliest of the three years covered by our
consolidated financial statements presented in this report because that
disclosure was already included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2018, as amended. You are encouraged to reference Part
II, Item 7, within that report, as amended, for a discussion of our financial
condition and result of operations for the year ended December 31, 2017 compared
to the year ended December 31, 2018.

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.

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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.

                                                      Year Ended December 31,
                                                        2019             2018
                                                           (in thousands)
     Revenues:
     Bulk water                                     $      60,460     $   57,262
     Rental                                                94,282         64,216
     Product sales                                         45,074         20,105
     Financing                                              3,671          4,025
     Total revenues                                       203,487        145,608
     Cost of revenues:
     Bulk water                                            27,700         26,516
     Rental                                                42,493         28,025
     Product sales                                         29,330         13,565
     Total cost of revenues                                99,523         68,106
     Gross profit                                         103,964         77,502

Selling, general and administrative expenses 95,986 83,645

     Income (loss) from operations                          7,978        (6,143)
     Other expense:
     Interest expense, net                               (25,386)       (15,046)
     Other expense, net                                     (460)          (850)
     Loss before income tax expense (benefit)            (17,868)       

(22,039)

     Income tax expense (benefit)                           2,207        (1,311)
     Net loss                                       $    (20,075)     $ (20,728)


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.



                                                    Year Ended December 31,
                                                     2019             2018
   Revenues:
   Bulk water                                            29.7 %           39.3 %
   Rental                                                46.3 %           44.1 %
   Product sales                                         22.2 %           13.8 %
   Financing                                              1.8 %            2.8 %
   Total revenues                                       100.0 %          100.0 %
   Cost of revenues:
   Bulk water                                            13.6 %           18.2 %
   Rental                                                20.9 %           19.2 %
   Product sales                                         14.4 %            9.3 %
   Total cost of revenues                                48.9 %           46.7 %
   Gross profit                                          51.1 %           53.2 %

Selling, general and administrative expenses 47.2 % 57.4 %

   Income (loss) from operations                          3.9 %          (4.2) %
   Other expense:
   Interest expense, net                               (12.5) %         (10.3) %
   Other expense, net                                   (0.2) %          (0.6) %
   Loss before income tax expense (benefit)             (8.8) %         

(15.1) %

   Income tax expense (benefit)                           1.1 %          (0.9) %
   Net loss                                             (9.9) %         (14.2) %




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Comparison of Year Ended December 31, 2019 and 2018

Revenues

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


                                         Year Ended
                                       December 31,                Change
                                     2019         2018       Dollars     Percent
                                              (dollars in thousands)
         Revenues:
         Seven Seas Water
         Bulk water                $  60,460    $  57,262    $  3,198        5.6 %
         Rental                       14,788        2,318      12,470      538.0 %
         Product sales                 9,418        2,817       6,601      234.3 %
         Financing                     3,671        4,025       (354)      (8.8) %
         Total Seven Seas Water    $  88,337    $  66,422    $ 21,915       33.0 %

         Quench
         Rental                    $  79,494    $  61,898    $ 17,596       28.4 %
         Product sales                35,656       17,288      18,368      106.2 %
         Total Quench              $ 115,150    $  79,186    $ 35,964       45.4 %

         Total revenues            $ 203,487    $ 145,608    $ 57,879       39.7 %




Our total revenues of $203.5 million for the year ended December 31, 2019
increased $57.9 million, or 39.7%, from $145.6 million for the year ended
December 31, 2018 through a combination of organic and inorganic growth. In
calculating organic and inorganic revenue growth, (i) organic growth represents
estimated revenue from operations that existed in both the current and
comparable periods, and (ii) inorganic growth includes the estimated revenue
from acquisitions for the 12 months following an acquisition and any revenue
contributions from divested businesses for the months in the prior year period
in which the business did not exist in the current year period.



Seven Seas Water revenues for the year ended December 31, 2019 increased $21.9
million, or 33.0%, compared to the same period of 2018, which were comprised of
31.2% inorganic growth and 1.8% organic growth. Bulk water revenues increased
$3.2 million, or 5.6%, compared to the prior year period, primarily due to: (i)
increases of $1.4 million from our USVI operations and $0.7 million from our St.
Maarten operations due to higher production volumes compared to the same period
of 2018; (ii) an increase of $1.3 million in connection with the commencement of
our water contract in Anguilla; and (iii) an increase of $0.4 million in our BVI
operations driven by increases in the water rate compared to the prior year.
This was partially offset by $0.3 million lower revenue in our Peru operations
primarily due to revenue received in the prior year in connection with
non-routine services performed for the customer. Rental revenues and product
sales increased $12.5 million and $6.6 million, respectively, primarily due to
the inclusion of the AUC operations which were acquired in November 2018.



Quench revenues for the year ended December 31, 2019 increased $36.0 million, or
45.4%, compared to the same period of 2018, which were comprised of 31.8% of
inorganic growth and 13.6% organic growth. The prior year period included $3.5
million of revenue from the Atlas High Purity Solutions business that was
divested in October 2018. Rental revenues increased $17.6 million, or 28.4%,
compared to the prior year period, which was comprised of 20.5% inorganic net
growth from acquisitions and 7.9% of organic growth due to additional units
placed under new leases in excess of unit attrition. Product sales increased
$18.4 million compared to the prior year, which included $12.8 million of
inorganic net growth primarily due to the acquisitions of PHSI and Bluline in
December 2018, and $5.6 million of organic growth driven by higher indirect
dealer equipment sales and coffee sales.





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Gross margin

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

                                            Year Ended
                                          December 31,           Change
                                         2019       2018         Percent
               Gross Margin:
               Seven Seas Water
               Bulk water                  54.2 %     53.7 %         0.5 %
               Rental                      67.0 %     74.7 %       (7.7) %
               Product sales               15.0 %     17.5 %       (2.5) %
               Financing                  100.0 %    100.0 %           -
               Total Seven Seas Water      54.0 %     55.7 %       (1.7) %

               Quench
               Rental                      52.7 %     55.7 %       (3.0) %
               Product sales               40.2 %     35.0 %         5.2 %
               Total Quench                48.8 %     51.2 %       (2.4) %

               Total gross margin          51.1 %     53.2 %       (2.1) %

Total gross margin for the year ended December 31, 2019 decreased 210 basis points to 51.1% from 53.2% in the prior year period.

Seven Seas Water gross margin for the year ended December 31, 2019 decreased 170
basis points to 54.0% compared to 55.7% in the prior year. Bulk water gross
margin of 54.2% increased 50 basis points compared to 53.7% in the prior year
primarily due to higher revenues in our BVI and USVI operations without a
commensurate increase in costs. This was partially offset by a decrease in gross
margin at our Trinidad operations due to a depreciation expense adjustment in
the prior year in connection with a purchase price refund received on in-service
equipment. Rental gross margin of 67.0% decreased from 74.7% in the prior year
primarily due to additional depreciation expense on property, plant and
equipment related to the finalization of purchase accounting for the AUC
acquisition. Product sales gross margin of 15.0% decreased from 17.5% in the
prior year period primarily due to higher contributions from lower-margin
contracts compared to the prior year.



Quench gross margin for the year ended December 31, 2019 decreased 240 basis
points to 48.8% from 51.2% for the same period of 2018. Rental gross margin of
52.7% decreased from 55.7% in the prior year, primarily due to an increase in
depreciation and amortization expense as a percentage of revenue related to
additional units placed on lease, partially offset by lower compensation and
benefits as a percentage of revenues due to continued leveraging of the
platform. Product sales gross margin increased to 40.2% for the year ended
December 31, 2019 from 35.0% in the prior year, primarily driven by the
higher-margin indirect PHSI dealer equipment sales.



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Selling, general and administrative expenses

The following table presents selling, general and administrative, or SG&A, expenses for our operating segments:

                                                           Year Ended
                                                         December 31,                Change
                                                        2019        2018       Dollars     Percent
                                                                 (dollars in thousands)
Selling, General and Administrative Expenses:
Seven Seas Water                                      $ 24,974    $ 30,143    $ (5,169)     (17.1) %
Quench                                                  59,580      48,670       10,910       22.4 %
Corporate and Other                                     11,432       4,832        6,600      136.6 %
Total selling, general and administrative expenses    $ 95,986    $ 83,645

$ 12,341 14.8 %

Total SG&A expenses for the year ended December 31, 2019 increased $12.3 million, or 14.8%, compared to the same period of 2018.

Seven Seas Water SG&A expenses for the year ended December 31, 2019 decreased
$5.2 million to $25.0 million compared to the prior year, which was primarily
due to (i) a decrease of $4.4 million in share-based compensation expense driven
by the completion of the vesting of certain equity grants made in connection
with our initial public offering in 2016, (ii) a $3.0 million net gain on sale
of property, plant and equipment primarily in connection with our customer in
Curaçao exercising its right to purchase the desalination facilities pursuant to
the water supply agreement, and (iii) $1.6 million of lower professional fees
primarily due to elevated costs in the prior year related to the acquisition of
the AUC operations in November 2018. Partially offsetting this decrease was an
increase of $3.2 million in amortization expense of definite lived intangible
assets and $0.3 million higher compensation and benefits expense primarily due
to the acquisition of the AUC operations in November 2018. Seven Seas Water SG&A
expenses as a percentage of revenue were 28.3% for the year ended December 31,
2019, a decline compared to 45.4% for the same period of 2018.

Quench SG&A expenses for the year ended December 31, 2019 increased $10.9
million to $59.6 million compared to the prior year. The increase was driven by
$6.5 million higher amortization expense primarily related to an increase in
intangible assets from recent acquisitions, $4.1 million higher compensation and
benefits primarily driven by increased headcount from the inclusion of staff
added from certain acquisitions and a $1.3 million increase in general expenses
primarily to support the expansion of our operations. Partially offsetting this
increase was $1.5 million lower acquisition-related expenses and $0.8 million
lower restructuring costs primarily incurred in connection with the PHSI
acquisition in December 2018, and a $1.4 million decrease in share-based
compensation expense driven by the completion of the vesting of certain equity
grants made in connection with our initial public offering in 2016. Quench SG&A
expenses as a percentage of revenue were 51.7% for the year ended December 31,
2019, a decline compared to 61.5% for the same period of 2018.

Corporate and Other SG&A expenses for the year ended December 31, 2019 increased
$6.6 million to $11.4 million compared to the same period of 2018, which was
driven by $6.6 million of expenses incurred in connection with the definitive
merger agreement entered into in December 2019.



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Commencing on December 18, 2018, the Company initiated a restructuring of the
PHSI organization which included the reduction of headcount for PHSI executive
management and other employee positions determined to be duplicative with those
at Quench (the "PHSI Restructuring Plan"). Certain of the positions were
backfilled with additional positions at Quench depending on the needs of the
business. The expected net effect of the restructuring allowed Quench to
recognize synergies of reduced employee costs subsequent to the PHSI
Acquisition. The restructuring was determined to be a post-combination
transaction. During the years ended December 31, 2019 and 2018, the Company
incurred an incremental restructuring-related charge related to severance,
termination benefits and related taxes of $0.1 million and $0.9 million,
respectively, which was recorded within SG&A expenses in the consolidated
statements of operations and comprehensive income. As of December 31, 2019 and
2018, the Company had accrued approximately $0 and $0.8 million, respectively,
within accrued liabilities on the consolidated balance sheets. The Company
completed the PHSI Restructuring Plan during the second quarter of 2019.

Other expense


                                        Year Ended
                                      December 31,                  Change
                                    2019          2018        Dollars      Percent
                                              (dollars in thousands)

Interest expense, net $ (25,386) $ (15,046) $ (10,340)

  68.7 %
        Other expense, net            (460)         (850)           390     (45.9) %
        Total other expense      $ (25,846)    $ (15,896)    $  (9,950)       62.6 %

Interest expense, net for the year ended December 31, 2019 increased $10.3 million compared to the prior year. The increase was primarily due to incremental borrowings of $150 million in connection with expansion of our senior secured credit agreement in November and December 2018.

Other expense, net for the year ended December 31, 2019 decreased $0.4 million
compared to the prior year period primarily due to $0.2 million of loss recorded
in the prior year related to the divestiture of the Atlas High Purity Solutions
business and $0.1 million of gain on foreign currency transactions during 2019
as compared to 2018.

Income tax expense (benefit)


                                               Year Ended
                                              December 31,          Change in
                                            2019        2018         Dollars
                                                 (dollars in thousands)
          Income tax expense (benefit)    $  2,207    $ (1,311)    $     3,518
          Effective tax rate                (12.4) %        5.9 %




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 expense or benefit for each legal
entity. Income tax benefits are not recorded for losses generated in
jurisdictions where either the jurisdictions 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.



For the year ended December 31, 2019, we incurred a consolidated pre-tax loss of
$17.9 million, which was composed of: (i) an aggregate of $26.0 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 $8.1 million of pre-tax income in taxable
jurisdictions. For the year ended December 31, 2018, we incurred a consolidated
pre-tax loss of $22.0 million, which was composed of: (i) an aggregate of $29.3
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 $7.3 million of pre-tax income
in taxable jurisdictions.



Income tax (benefit) expense for the years ended December 31, 2019 and 2018 was
$2.2 million and $(1.3) million, respectively. Income tax expense for the years
ended December 31, 2019 and 2018 were composed of a current tax of $3.2 million
and $2.0 million, respectively, and deferred tax (benefit) expense of $(1.0)
million and $(3.3) million, respectively. The increase in income tax expense for
the year ended December 31, 2019 as compared to the same period

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in 2018 was primarily the result of the recognition $3.4 million tax benefit
recorded in the prior year for the full release of a valuation allowance on
deferred tax assets in one of our foreign jurisdictions, a gain recorded on the
sale of assets in Curacao and an increase in current expense related to
withholding taxes. These increases were partially offset by a decrease in income
tax expense for our other jurisdictions due to lower taxable income in certain
tax paying jurisdictions.

Cash paid for income taxes was $2.3 million and $1.9 million during the years ended December 31, 2019 and 2018, respectively.

                        Liquidity and Capital Resources

Overview

As of December 31, 2019 and 2018, our principal sources of liquidity on a
consolidated basis were cash and cash equivalents of $103.3 million and $56.6
million, respectively (excluding restricted cash), which were held for working
capital, investment and general corporate purposes. In addition, as of both
December 31, 2019 and 2018, we had an aggregate of $4.2 million of restricted
cash related to debt service reserve funds and minimum balance requirements for
one of our borrowings. See Note 2-"Summary of Significant Accounting
Policies-Restricted Cash" to the Consolidated Financial Statements, included
elsewhere in this Annual Report on Form 10-K. Our working capital as of December
31, 2019 was $115.2 million compared to $64.6 million as of December 31, 2018.

In July 2019, we completed an underwritten sale of 4.7 million ordinary shares at a public offering price of $16.88 per share. We received net proceeds of $75.4 million, after deducting underwriting discounts and commissions and offering expenses.

Our cash and cash equivalents are held by our holding company and our
subsidiaries primarily in demand deposits with domestic and international banks,
money market accounts, and U.S. Treasury bills. We utilize a combination of
equity financing and corporate and project debt financing through international
commercial banks and other financial institutions to fund our cash needs and the
growth of our business. Our debt financing arrangements contain financial
covenants and provisions which govern distributions by the borrowers may limit
our ability to transfer cash among us and our subsidiaries. See
Note 10-"Long-Term Debt-Restricted Net Assets" to the Consolidated Financial
Statements, included elsewhere in this Annual Report on Form 10-K, for a summary
of limitations applicable to us and our subsidiaries as of December 31, 2019.
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;


 ·  inventory;


 ·  acquisitions;


 ·  costs and expenses relating to our ongoing business operations; and


 ·  debt service requirements on our existing and future debt.


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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.

Subsidiary Distribution Policy

A significant portion of our cash flow is provided by operations from our principal operating subsidiaries and borrowings made at the corporate level.

With respect to our Seven Seas Water segment, unless cash balances are expected
to 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 December 31, 2019, has a loan
agreement that restricts distributions to related parties in the event certain
financial or nonfinancial covenants are not met, which could reduce our ability
to redeploy cash. Distributions are typically in the form of principal and
interest payments on intercompany loans, repayment of intercompany advances or
other intercompany arrangements, including billings from our Tampa operations
center, and dividends. When considering the amount and timing of such
distributions, our Seven Seas Water operating subsidiaries must maintain
sufficient funds for future capital investment, debt service and general working
capital purposes.

With respect to our Quench operating segment, our current intent is for Quench to retain cash for working capital, investment for future growth within the segment and for 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 following periods:

                                                                 Year Ended December 31,
                                                                   2019            2018

Cash provided by operating activities                          $      31,042    $    26,882
Cash used in investing activities                                   (52,468)      (214,540)
Cash provided by financing activities                                 

68,180 126,095 Effect of exchange rates on cash, cash equivalents and restricted cash

                                                           15           (25)

Net change in cash, cash equivalents and restricted cash $ 46,769 $ (61,588)

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 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 expenses.

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Cash provided by operations during the years ended December 31, 2019 and 2018
was $31.0 million and $26.9 million, respectively. The increase in cash flow
from operations was primarily due to overall higher operating cash inflows
driven by the large acquisitions in late 2018 which was partially offset by
higher cash interest expense related to incremental borrowings of $150 million
in connection with the expansions of our senior secured credit agreement in
November and December 2018.

Investing Activities

Cash used in investing activities during the years ended December 31, 2019 and
2018 was $52.5 million and $214.6 million, respectively. The decrease in cash
used in investing activities was primarily attributable to a decrease of $178.8
million of net cash paid for acquisitions during the year ended December 31,
2019 as compared to the prior year period. This was partially offset by an
increase of $17.0 million in capital expenditures during the year ended December
31, 2019 as compared to the prior year period.

During the year ended December 31, 2019, net cash paid for acquisitions was $19.7 million as compared to $198.5 million for the year ended December 31, 2018. For the years ended December 31, 2019 and 2018 there were $21.0 million and $3.5 million, respectively, of capital expenditures by Seven Seas Water primarily for new plants, plant expansions and capacity upgrades and $15.6 million and $16.1 million, respectively, of capital expenditures for Quench primarily to support existing operations.

Capital Expenditures on Fixed Assets and Investments in Long­Lived Assets

For Seven Seas Water, our primary capital expenditures are composed of
construction costs of our plants, including engineering, procurement and
construction and equipment costs, internal direct labor and project development
costs, which include engineering and environmental studies, permitting and
licensing and certain legal costs. Major repairs and maintenance, which improve
the efficiency or extend the life of our operating plants, are also included in
capital expenditures. In addition to our contractually committed capital
expenditures, we routinely explore project investment opportunities in our
current and new geographic locations and business lines if we believe that any
of the opportunities has the potential to meet our internal investment criteria.
In the course of pursuing these investment opportunities, we may successfully
bid on projects or operating plants that will require additional capital
expenditures. For Quench, our primary capital expenditures are the acquisition
of POU systems and related assets as well as typical capital expenditures for
leasehold improvements, furniture and fixtures, computers, field tablets and
software.

For the fiscal year 2020, we expect to invest approximately $27 million across
our Seven Seas Water and Quench segments in capital expenditures, primarily to
support growth opportunities. We expect that these investments will be financed
through existing cash and cash generated from operations.

Significant 2019 Acquisitions

On June 1, 2019, we completed the acquisition of Aguaman for an aggregate
purchase price of $1.5 million. On July 15, 2019, we completed the acquisition
of Carolina Pure for an aggregate purchase price of $7.3 million. On October 1,
2019, we completed the acquisition of Mirex for an aggregate purchase price of
$11.6 million.

Financing Activities

Cash provided by financing activities during the years ended December 31, 2019
and 2018 was $68.2 million and $126.1 million, respectively. The $57.8 million
net decrease in cash provided by financing activities was primarily attributable
to a decrease of $150.0 million of net proceeds from long-term debt related to
incremental borrowings in connection with the expansions of our senior secured
credit agreement in November and December 2018. This decrease was partially
offset by net proceeds of $75.4 million received in connection with issuance of
4.7 million ordinary shares at a public offering price of $16.88 per share in
July 2019.

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As of December 31, 2019 and 2018, long­term debt included the following (in
thousands):


                                                                December 31,       December 31,
                                                                    2019               2018
Corporate Credit Agreement                                     $       300,000    $       300,000
BVI Loan Agreement                                                      14,838             20,468
Vehicle financing                                                        3,336              1,842
Total face value of long-term debt                             $       

318,174 $ 322,310

Face value of long-term debt, current                          $         

7,520 $ 6,536 Less: Current portion of unamortized debt discounts and deferred financing fees

                                                   (29)               (42)

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

                                    $         

7,491 $ 6,494

Face value of long-term debt, non-current                      $       

310,654 $ 315,774 Less: Non-current portion of unamortized debt discounts and deferred financing fees

                                                (1,550)            (2,559)
Long-term debt, net of debt discounts and deferred
financing fees                                                 $       309,104    $       313,215




Corporate Credit Agreement



On August 4, 2017, AquaVenture Holdings Limited, AquaVenture Holdings Peru
S.A.C., an indirect wholly-owned subsidiary of the Company, and Quench USA,
Inc., a wholly-owned subsidiary of the Company, (collectively the "Borrowers")
entered into a $150.0 million senior secured credit agreement (the "Corporate
Credit Agreement") with a syndicate of lenders. The Corporate Credit Agreement
is non-amortizing, matures in August 2021, at the time it was incurred, bore
interest at LIBOR plus 6.0% with a LIBOR floor of 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
principal balance, of $75.0 million, continued to bear interest at LIBOR plus
6.0% with a LIBOR floor of 1.0%. All other material terms of the original credit
agreement remained substantially unchanged.



On August 28, 2018, the Corporate Credit Agreement was amended to modify certain
agreement definitions and non-financial covenants. All other material terms of
the original credit agreement remained substantially unchanged.



On November 1, 2018, the Corporate Credit Agreement was amended ("Amended
Corporate Credit Agreement") to: (i) add AquaVenture Holdings Inc., a
wholly-owned subsidiary of the Company, as a borrower under the Amended
Corporate Credit Agreement, (ii) increase our net borrowings by $110.0 million
to an aggregate principal amount of $260.0 million, (iii) reduce the interest
rate for the original $150.0 million borrowings by 50 basis points on both the
variable and fixed interest portions and (iv) amend certain financial covenant
requirements. Of the incremental net borrowing of $110.0 million, $70.0 million
bears interest at a variable rate of LIBOR plus 5.5% with a LIBOR floor of 1.0%,
and the remaining $40.0 million bears interest at a fixed rate of 8.7%. In the
aggregate, including the aforementioned interest rate reduction, $145.0 million
of borrowings bear interest at a variable rate of LIBOR plus 5.5% with a LIBOR
floor of 1.0% and the remaining $115.0 million of borrowings bear interest at a
weighted average fixed rate of 8.0%. A declining prepayment fee on the
incremental borrowing was due upon repayment if it occurred prior to November 1,
2019. All other material terms of the Amended Corporate Credit Agreement
remained substantially unchanged.



On December 20, 2018, the Corporate Credit Agreement was amended to increase its
borrowings by $40.0 million to an aggregate principal amount of $300.0 million.
The incremental borrowings bear interest at a variable rate of LIBOR plus 5.5%
with a LIBOR floor of 1.0%. A prepayment fee on the incremental borrowing, which
declines over time, was due upon repayment if it occurred prior to December 20,
2019. These additional borrowings are non-amortizing and mature in August 2021.
All other terms of the Corporate Credit Agreement remained substantially
unchanged.

On December 10, 2019, the Corporate Credit Agreement was amended to modify certain covenants. All other material terms of the original credit agreement remained substantially unchanged.

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As of December 31, 2019, the weighted average interest rate was 7.7%.

The Corporate Credit Agreement is guaranteed by AquaVenture Holdings Limited
along with certain subsidiaries and contains financial and nonfinancial
covenants. The financial covenants include minimum interest coverage ratio and
maximum leverage ratio requirements, as defined in the Corporate Credit
Agreement, and are calculated using consolidated financial information of
AquaVenture Holdings Limited excluding the results of AquaVenture (BVI) Holdings
Limited and its subsidiary Seven Seas Water (BVI) Limited. In addition, the
Corporate Credit Agreement contains customary negative covenants limiting, among
other things, indebtedness, investments, liens, dispositions of assets,
restricted payments (including dividends), transactions with affiliates,
prepayments of indebtedness, capital expenditures, changes in nature of business
and amendments to documents. As of December 31, 2019, we were in compliance
with, or received waivers for breaches of, all such covenants.



We may prepay in whole or in part, the outstanding principal and accrued unpaid
interest under the Corporate Credit Agreement. The prepayment fee requirement
has expired on the original $150.0 million borrowing. The Corporate Credit
Agreement is collateralized by certain of the assets of the Borrowers and stated
guarantors.



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. 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. The BVI Loan Agreement
is collateralized by all shares and underlying assets of Seven Seas Water
(BVI) Ltd.

Prior to the amendment on August 4, 2017, the BVI Loan Agreement provided for
interest on the outstanding borrowings at LIBOR plus 3.5% per annum and interest
was paid quarterly. The loan principal is repayable quarterly beginning in
March 31, 2015 in 26 quarterly installments that escalate over the term of the
loan.



On August 4, 2017, Seven Seas Water (BVI) Ltd. further amended the BVI Loan
Agreement to extend the amortization on principal to May 2022 and reduce the
spread applied to the LIBOR base rate used in the calculation of interest by 50
basis points to LIBOR plus 3.0% per annum. The United Kingdom Export Finance
also extended its participation in the project to match the extended term of the
amended BVI Loan Agreement. All other material terms of the original loan
agreement remained unchanged.

As of December 31, 2019, the weighted­average interest rate was 5.1%. Seven Seas Water (BVI) Ltd. may prepay the principal amounts of the loans prior to the maturity date, in whole or in part.

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 compliance, including minimum debt service and loan life
coverage ratios, and must maintain a minimum debt service reserve fund and a
maintenance reserve fund with the bank in addition to other minimum balance
requirements as set forth in the agreement. As of December 31, 2019, Seven Seas
Water (BVI) Ltd. was in compliance with, or received waivers for breaches of,
all such covenants.



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Other Debt

We finance our vehicles primarily under three­year terms with interest rates per annum ranging from 3.0% to 4.5%.

Contractual Obligations and Other Commitments

The following table summarizes our contractual obligations and other commitments
as of December 31, 2019:


                                                            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           $     7,520    $ 310,654    $       -    $         -    $ 318,174
Interest on long-term debt (1)              23,801       58,174            -              -       81,975
Operating leases(2)                          2,615        5,116        3,796          4,575       16,102
Asset retirement obligations (3)                 -            -            -            547          547
Acquisition contingent
consideration (4)                            3,070          300            -              -        3,370
                                       $    37,006    $ 374,244    $   3,796    $     5,122    $ 420,168

--------------------------------------------------------------------------------

(1) We calculated interest on long­term debt based on payment terms that existed

at December 31, 2019. Weighted­average interest rates used are as follows:

      (i) Corporate Credit Agreement-7.7%; (ii) BVI Loan Agreement-5.1%; and
      (iii) vehicle financing-3.8%.


 (2)  Operating leases include total future minimum rent payments under
      non­cancelable operating lease agreements.


 (3)  The asset retirement obligations represent contractual requirements to

perform certain asset retirement activities and are based on 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. We have included the total undiscounted asset retirement

obligation, as determined at December 31, 2019, in the table above.

(4) Acquisition contingent consideration represents the additional purchase price

that is contingent on the future performance of an acquired business or

collection of certain acquired receivables. We have included the fair value

of the total expected amount as of December 31, 2019.

Off­Balance Sheet Arrangements

At December 31, 2019, we did not have any relationships with unconsolidated
organizations or financial partnerships, such as structured finance or special
purpose entities that would have been established for the purpose of
facilitating off­balance sheet arrangements or other contractually narrow or
limited purposes.

Other Matters

As of December 31, 2019 and 2018, the Company had unrecognized tax benefits of
$0.7 million and $4.6 million, respectively. Of these amounts, $0.1 million and
$3.9 of the Company's unrecognized tax benefits at December 31, 2019 and 2018,
respectively, have been recorded as a reduction to the related deferred tax
asset for the net operating loss in accordance with the FASB issued
authoritative guidance relating to the presentation of an unrecognized tax
benefit when a net operating loss carryforward, a similar tax loss, or a tax
credit carryforward exists for all periods. The remaining $0.6 million and $0.7
million of the Company's unrecognized tax benefits at December 31, 2019 and
2018, respectively, are fully indemnified pursuant to purchase agreements for
business combinations and, if realized, would impact the effective tax rate. In
addition, the amount of accumulated penalties and interest related to the
unrecognized tax benefit was $0.2 million and $0.3 million, respectively, as of
December 31, 2019 and 2018. As of December 31, 2019 and 2018, the Company
recorded, in the aggregate, an accrued liability of $0.9 million and $1.0
million, respectively, and a corresponding indemnification receivable of $0.9
million and $1.0 million, respectively, related to the uncertain tax benefits
and contractual indemnifications. As a result of the indemnifications, the
Company does not anticipate any material effect to our operating results,
liquidity or financial condition.

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