UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2016 

OR

For the transition period from              to             

Commission file number 001-37903 

AquaVenture Holdings Limited

(Exact name of registrant as specified in its charter)

(813) 855‑8636

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☐    No  ☒

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

The total number of ordinary shares outstanding as of November 15, 2016 was 26,388,016.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

QUARTERLY REPORT ON FORM 10-Q

FOR THE PERIOD ENDED SEPTEMBER 30, 2016

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS)

See accompanying notes to the unaudited condensed consolidated financial statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(IN THOUSANDS)

See accompanying notes to the unaudited condensed consolidated financial statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)

See accompanying notes to the unaudited condensed consolidated financial statements.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

1. Description of the Business

AquaVenture Holdings Limited is a British Virgin Islands (“BVI”) company, which was formed on June 17, 2016 for the purpose of completing an initial public offering (“IPO”) as the SEC registrant and carry on the business of AquaVenture Holdings LLC and its subsidiaries. AquaVenture Holdings Limited and its subsidiaries (collectively, “AquaVenture” or the “Company”) provides its customers Water‑as‑a‑Service (“WAAS”) solutions through two operating platforms: Seven Seas Water and Quench. Both operations are critical to AquaVenture, which is headquartered in Tampa, Florida.

Seven Seas Water offers WAAS solutions by providing outsourced desalination and wastewater treatment services for governmental, municipal, industrial and hospitality customers. These solutions utilize reverse osmosis and other purification technologies to produce potable and high purity industrial process water in high volumes for customers operating in regions with limited access to potable water. Through this outsourced service model, Seven Seas Water assumes responsibility for designing, financing, constructing, operating and maintaining the water treatment facilities. In exchange, Seven Seas Water enters into long‑term agreements to sell to customers agreed‑upon quantities of water that meet specified water quality standards. Seven Seas Water currently operates primarily throughout the Caribbean region and is pursuing new opportunities in North America, Latin America, India and the Middle East. Seven Seas Water is supported by an operations center in Tampa, Florida, which provides business development, engineering, field service support, procurement and administrative functions.

Quench offers WAAS solutions by providing bottleless filtered water coolers and other products that use filtered water as an input, such as ice machines, sparkling water dispensers and coffee brewers, to customers across the United States. Quench’s point‑of‑use systems purify a customer’s existing water supply. Quench offers solutions to a broad mix of industries, including government, education, medical, manufacturing, retail, and hospitality. Quench installs and maintains its filtered water systems typically under multi‑year contracts that renew automatically. Quench is supported by an operations center in King of Prussia, Pennsylvania.

Corporate Reorganization

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

The reorganization transactions are considered transactions between entities under common control. As a result, the financial statements for periods prior to the IPO and the reorganization transactions are the financial statements of AquaVenture Holdings LLC as the predecessor to the Company for accounting and reporting purposes. Unless otherwise specified, the “Company” refers to the operations of both AquaVenture Holdings Limited and AquaVenture Holdings LLC throughout the remainder of these notes.

Initial Public Offering

On October 5, 2016, the Company’s IPO was declared effective and on October 12, 2016, the Company completed the IPO of 7,475,000 ordinary shares at a public offering price of $18.00 per share. The Company received net proceeds of approximately $119.9 million, after deducting underwriting discounts and commissions and estimated offering expenses.

2. Summary of Significant Accounting Policies

Unless otherwise noted below, there have been no material changes to the accounting policies presented in Note 2—“Summary of Significant Accounting Policies” of the notes to the audited consolidated financial statements of the Company for the year ended December 31, 2015, included in the Company’s final prospectus for the IPO, which was filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”), on October 6, 2016.

Basis of Presentation

The unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. Accordingly, certain information and footnotes normally required by accounting principles generally accepted in the United States of America (“GAAP”) for complete financial statements have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements of AquaVenture Holdings LLC and its Subsidiaries for the year ended December 31, 2015. In management’s opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair presentation of the Company’s unaudited condensed consolidated balance sheet as of September 30, 2016, the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 and the unaudited condensed consolidated statements of cash flows for the nine months ended September 30, 2016 and 2015. The unaudited condensed consolidated balance sheet as of December 31, 2015 was derived from the audited consolidated balance sheet as of December 31, 2015, as presented in the audited consolidated financial statements of AquaVenture Holdings LLC and its Subsidiaries for the year ended December 31, 2015, in the Company’s final prospectus for the IPO, which was filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act, on October 6, 2016.

               The unaudited condensed consolidated financial statements include the accounts of AquaVenture Holdings Limited and its subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates

             The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include: accounting for goodwill and identifiable intangible assets and any related impairment; property, plant and equipment and any related impairment; long‑term contract costs and any related impairment; share‑based compensation; allowance for doubtful accounts; obligations for asset retirement; acquisition contingent consideration; and deferred income taxes. Although these and other estimates and assumptions are based on the best available information, actual results could be materially different from these estimates.

New Accounting Pronouncements

In February 2016, the FASB issued authoritative guidance regarding leases, which requires lessees to recognize a lease liability and right‑of‑use asset for operating leases, with the exception of short‑term leases. In addition, lessor accounting was modified to align, where necessary, with lessee accounting modifications and the authoritative guidance regarding revenue from contracts with customers. This guidance will be effective for annual reporting periods beginning on or after December 15, 2018, including interim periods within those annual periods, and early adoption is permitted. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on its unaudited condensed consolidated financial statements.

In May 2014, the FASB issued authoritative guidance regarding revenue from contracts with customers, which specifies that revenue should be recognized when promised goods or services are transferred to customers in an amount that reflects the consideration which the company expects to be entitled in exchange for those goods or services. This guidance will be effective for annual reporting periods beginning on or after December 15, 2017 and interim periods within those annual periods and will require enhanced disclosures. The Company is currently evaluating the potential impact of the accounting and disclosure requirements on its unaudited condensed consolidated financial statements. The Company expects to finalize its assessment during 2017.             

3. Business Combinations

Biwater (BVI) Holdings Limited

On June 11, 2015, AquaVenture Water Corporation, a BVI company, and an indirect wholly‑owned subsidiary of AquaVenture, acquired 100% of the capital stock of Biwater (BVI) Holdings Limited (“the BVI Acquiree”), pursuant to a Stock Purchase and Sale Agreement (the “BVI Purchase Agreement”). Under the terms of the BVI Purchase Agreement, all of the capital stock of the BVI Acquiree was acquired for a total purchase price of $47.8 million, including $44.5 million in cash and a note payable of $5.6 million to the seller with a fair value at the date of acquisition of $3.3 million. The note payable: (i) bears no interest; (ii) is payable in equal annual installments of $375 thousand beginning on the first anniversary of the BVI Purchase Agreement; (iii) terminates if the water purchase agreement with the government of the BVI is terminated under certain circumstances; and (iv) is unsecured and subordinated to all other indebtedness of the Company. Included in the liabilities of the BVI Acquiree is long‑term debt between Biwater (BVI) Ltd., an indirect wholly‑owned subsidiary of the Company, and a bank with a remaining unpaid balance as of the date of the BVI Purchase Agreement of $40.8 million, which approximates fair value. Biwater (BVI) Ltd. was subsequently renamed Seven Seas Water (BVI) Limited.

Seven Seas Water (BVI) Ltd. provides potable water to the island of Tortola, BVI for a contracted fee payable by the government of BVI under a service concession arrangement, which expires in 2030. The revenue‑producing operations of Seven Seas Water (BVI) Ltd. under the service concession arrangement commenced during November 2014. The Company acquired the stock of the BVI Acquiree to expand its installed base of seawater reverse osmosis desalination facilities used to provide WAAS.

The operations of the BVI Acquiree are included in the Seven Seas Water reporting segment for periods after the date of acquisition.

Pro Forma Financial Information

The following unaudited pro forma financial information (in thousands) for the Company gives effect to the acquisitions of the stock of the BVI Acquiree, which occurred on June 11, 2015, as if it had occurred on January 1, 2015. These unaudited pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that actually would have resulted had the acquisitions occurred on the date indicated, or that may result in the future.

4. Property, Plant and Equipment

During the nine months ended September 30, 2016, the Company began the implementation of a new enterprise resource planning (“ERP”) system for the Quench reportable segment to replace its existing ERP system. Based on the current ERP project implementation plan, the Company reduced the remaining useful life and accelerated the depreciation on its existing ERP system as the new ERP system will be fully functional prior to the existing ERP system becoming fully depreciated. Depreciation expense, as reflected in selling, general and administrative expenses, was approximately $219 thousand and $655 thousand higher for the three and nine months ended September 30, 2016, respectively, as a result of the change in estimate. In addition, both the Company’s loss from operations and net loss in the unaudited condensed consolidated statements of operations were approximately $219 thousand and $655 thousand higher for the three and nine months ended September 30, 2016, respectively.

5. Fair Value Measurements

At September 30, 2016 and December 31, 2015, the Company had the following assets and liabilities measured at fair value on a recurring basis in the unaudited condensed consolidated balance sheets:

At December 31, 2015, the Company determined goodwill related to the Quench reporting unit was impaired. As a result, the Company measured the fair value of goodwill on a non‑recurring basis.

There were no transfers into or out of Level 1, 2 or 3 assets during the three or nine months ended September 30, 2016. Transfers between levels are deemed to have occurred if the lowest level of input were to change.

The Company’s fair value measurements on as of September 30, 2016 and December 31, 2015 were as follows (in thousands):

The following table sets forth the changes in the estimated fair value for the Level 3 classified warrant liability (in thousands):

The following assumptions were used to determine the fair value of the warrant liability as of September 30, 2016: (i) expected term of 4.7 years; (ii) expected volatility of 32.0%; (iii) risk‑free rate of 1.2%; and (iv) expected dividends of 0%. The Company recorded a gain on the change in fair value during the three months ended September 30, 2016 and 2015 of $5 thousand and $2 thousand, respectively. During the nine months ended September 30, 2016 and 2015, the Company recorded a gain on the change in fair value of $10 thousand and $21 thousand, respectively. Changes in fair value related to the warrant liability are recorded in other expense in the unaudited condensed consolidated statements of operations.

See Note 8—“Commitments and Contingencies” for changes in the estimated fair value and additional information on the acquisition contingent consideration. At September 30, 2016, there were no remaining acquisition contingent consideration obligations as a result of final payments being made during the nine months ended September 30, 2016.

6. Long‑Term Debt

During the nine months ended September 30, 2016, the following changes occurred to existing debt agreements:

Quench Loan Agreement

On January 23, 2016, the Amended Loan and Security Agreement consisting of a loan between a lender and Quench USA, Inc. (“Quench Loan Agreement”) was amended to defer the commencement of principal payments under the Quench Loan Agreement until July 2016. The Quench Loan Agreement was subsequently amended on July 25, 2016 to defer the commencement of principal payments until January 2017 and modify the principal payment amounts. Pursuant to the July 25, 2016 loan amendment, the aggregate unpaid principal balance for all Tranches outstanding on December 23, 2016 shall be repaid in 23 equal monthly principal payments of $1.0 million, commencing on January 23, 2017 and one payment of $17.0 million on December 23, 2018. In addition, the amendment requires the payment of $350 thousand payable upon the earlier of December 23, 2018 or the repayment of the entire outstanding principal balance of the Quench Loan Agreement. All other significant terms of the Quench Loan Agreement remained unchanged.

Curaçao Credit Facility

On June 18, 2015, AquaVenture Holdings Curaçao N.V., a wholly-owned subsidiary, entered into a $35.0 million credit facility with a bank (the "Curaçao Credit Facility"). The Curaçao Credit Facility consists of a term loan of $20.0 million and a delayed draw term loan of up to $15.0 million which was available to be drawn through March 18, 2016. On March 9, 2016, AquaVenture Holdings Curaçao N.V. drew the full $15.0 million of available borrowing under the facility. On July 1, 2016, the Curaçao Credit Facility was amended to add AquaVenture Holdings Limited as a guarantor. All other significant terms of the Curaçao Credit Agreement remained unchanged.

Trinidad Credit Facility

On April 9, 2012, Seven Seas Water (Trinidad) Unlimited, an indirect wholly-owned subsidiary of the Company, entered into a credit agreement as a borrower with a bank to partially finance the construction of a water plant in Trinidad. On April 18, 2016, the Company entered into an amended and restated Trinidad Credit Agreement to, among other things, establish a new non‑revolving facility for up to $8.0 million. On May 16, 2016, the Company drew approximately $7.0 million of the facility. On August 15, 2016, the Company drew the remaining $1.0 million of the facility. Principal on the non‑revolving facility will be due in full on April 15, 2019 while interest is payable monthly. In addition, the amended and restated Trinidad Credit Agreement eliminated the debt service reserve requirement of the original agreement, which released $1.5 million of restricted cash for general use. On September 21, 2016, the Trinidad

Credit Agreement was amended to add AquaVenture Holdings Limited as a guarantor. All other significant terms of the Trinidad Credit Agreement remained unchanged.

7. Share‑Based Compensation

As described in Note 1—“Description of the Business”, the Company completed a reorganization on October 4, 2016, which resulted in the conversion, pursuant to the terms of AquaVenture Holdings LLC’s limited liability agreement, of all outstanding equity awards of AquaVenture Holdings LLC to equity awards of AquaVenture Holdings Limited, with the underlying security being ordinary shares of AquaVenture Holdings Limited. The conversion retained the same economics of each of the outstanding equity awards. All other terms, including vesting, remained unchanged. The Class B shares, MIP shares and certain of the Incentive shares were converted into zero ordinary shares of AquaVenture Holdings Limited as the fair value of the shares was below the respective hurdle prices, as defined by AquaVenture Holdings LLC’s limited liability agreement, at the time of the reorganization. No incremental share-based compensation expense will be recorded subsequent to October 4, 2016 for the Class B shares, MIP shares and the Incentive shares that converted to zero ordinary shares.  

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

On September 22, 2016, the Company approved and adopted the AquaVenture Holdings Limited 2016 Share Option and Incentive Plan (“2016 Plan”), which allows for the issuance of incentive share options, non-qualified share options, share appreciation rights, restricted share units, restricted share awards, unrestricted share awards, cash-based awards, performance share awards and dividend equivalent rights to officers, employees, managers, directors and other key persons, including consultants to the Company. The aggregate number of ordinary shares initially available for issuance, subject to adjustment upon a change in capitalization, under the 2016 Plan is 5.0 million shares. The shares available for issuance will increase annually by 4% of the number of ordinary shares issued and outstanding on the immediately preceding December 31, but shall not exceed 5.0 million shares available for issuance. Vesting of equity instruments is determined on a grant-by-grant basis. Options expire at the end of 10 years from the date of grant.

On October 6, 2016, the Company granted options to purchase 3.5 million ordinary shares with an exercise price of $18.00 per share. The options to purchase ordinary shares will have a time-based vesting schedule ranging from two to four years. The grant date fair value of the granted options to purchase ordinary shares was approximately $20 million, which will be recognized over the requisite service period. In addition, the Company granted 0.2 million restricted stock units on November 15, 2016. The restricted stock units have a time-based vesting schedule of two years. The grant date fair value of the granted restricted stock units was approximately $4 million, which will be recognized over the requisite service period.

Share‑Based Compensation Expense

               Total share‑based compensation expense recognized related to all equity awards during the three months ended September 30, 2016 and 2015 was $0.4 million and $0.8 million, respectively, which included $50 thousand and $200 thousand, respectively, related to the Quench USA Holdings, LLC equity awards. For the nine months ended September 30, 2016 and 2015, total share‑based compensation expense recognized related to all equity awards was $1.5 million and $2.5 million, respectively, which included $156 thousand and $602 thousand, respectively, related to the Quench USA Holdings, LLC equity awards. There was no related tax benefit for the three and nine months ended September 30, 2016 and 2015 as a full deferred tax asset valuation allowance was recorded for all subsidiaries which had share-based compensation expenses

Historical AquaVenture Equity Awards

The AquaVenture Equity Incentive Plan, which was amended on June 6, 2014 and October 27, 2014, allowed for the issuance of MIP shares, Incentive shares and Class B shares, and the grant of options to purchase Common shares (including both Incentive shares and ordinary shares) and Class B shares, to officers, employees, managers, directors and

other key persons, including consultants to AquaVenture Holdings LLC(collectively, the “Participants”). All such grants were subject to time‑based vesting, which was determined on a grant‑by‑grant basis, and certain other restrictions.

As of September 30, 2016 and December 31, 2015, the aggregate number of shares by class authorized for grant under the Equity Incentive Plan, subject to adjustment upon a change in capitalization, was: (i) 7.9 million MIP shares; (ii) 10.7 million Common shares (including both Incentive and ordinary shares); and (iii) 6.0 million Class B shares.

Class B shares, MIP shares and Incentive shares granted as “profits interests” for federal tax purposes have a hurdle price equal to their fair value at the time of grant, and options to purchase shares have an exercise price equal to their fair value at time of grant. The contractual term of options awarded is typically ten years, while all other award types contain no contractual term. Holders of the Class B shares, MIP shares and Incentive shares are entitled to receive distributions (i) with respect to their vested shares, when such distributions are made, and (ii) with respect to their unvested shares, when such shares vest. Upon termination of a recipient’s business relationship with the Company, the Company has the right, but not the obligation, to repurchase the vested “profits interests” or shares issued upon exercise of an option, at the then fair value of such shares during periods specified in the awards. Unvested shares and options expire on the termination of the recipient’s business relationship.

There were no grants of equity awards during the nine months ended September 30, 2016 and no significant changes to the awards previously granted.

Historical Quench USA Holdings LLC Equity Awards

In addition to being eligible for AquaVenture equity awards, employees of Quench remain eligible for continued vesting of Quench USA Holdings, LLC equity awards granted before June 6, 2014 and remained eligible for new grants of equity awards of Quench USA Holdings, LLC through October 4, 2016.

The Company recognizes share‑based compensation expense for equity awards that will continue to vest and for awards granted by Quench USA Holdings, LLC to the extent such expense was not previously recorded. The equity awards that will continue to vest subsequent to June 6, 2014 include options to purchase ordinary shares of Quench USA Holdings, LLC and incentive shares of Quench USA Holdings, LLC granted as “profits interests” for federal income tax purposes. Equity awards granted after June 6, 2014 included options to purchase ordinary shares of Quench USA Holdings, LLC. The awards granted pursuant to the Quench USA Holdings, LLC equity incentive plan are typically subject to time‑based vesting terms from the vesting commencement date and certain other restrictions. Both options and incentive shares granted as “profits interests” are typically subject to a time‑based vesting term, which is determined on a grant‑by‑grant basis. Incentive shares granted as “profits interests” have a hurdle price equal to their fair value at the time of grant, and options to purchase shares have an exercise price equal to their fair value at time of grant. The contractual term of options awarded is ten years, while the incentive shares contain no contractual term. Holders of incentive shares are entitled to receive distributions (i) with respect to their vested shares, when such distributions are made, and (ii) with respect to their unvested shares, when such shares vest. Upon termination of a recipient’s business relationship with the Company, the Company has the right, but not the obligation, to repurchase the vested “profits interests” or shares issued upon exercise of an option, at the then fair value of such shares during periods specified in the award. Unvested shares and options expire on the termination of the recipient’s business relationship.

There were no grants of equity awards during the nine months ended September 30, 2016 and no significant changes to the awards previously granted.

8. Commitments and Contingencies

Asset Retirement Obligations

Asset retirement obligation (“ARO”) liabilities, which arise from contractual requirements to perform certain asset retirement activities and is generally recorded when the asset is constructed, is based on the Company’s engineering estimates of future costs to dismantle and remove equipment from a customer’s plant site and to restore the site to a specified condition at the conclusion of a contract. As appropriate, the Company revises certain of its liabilities based on changes in the projected costs for future removal and shipping activities. These revisions, along with accretion expense, are included in cost of revenues in the unaudited condensed consolidated statement of operations.

The following table sets forth the changes of the ARO for the nine months ended September 30, 2016 (in thousands):

During the three months ended September 30, 2016, certain of the Company’s existing contracts were extended. As a result, the Company recorded a gain of $55 thousand during both the three and nine months ended September 30, 2016 for the revaluation of the ARO based on changes in the projected costs for future removal and shipping activities. No valuation adjustments were recorded during the three and nine months ended September 30, 2015. During the three months ended September 30, 2016 and 2015, the Company recorded accretion expense of $12 thousand and $9 thousand, respectively. Accretion expense recorded during the nine months ended September 30, 2016 and 2015 was $31 thousand and $27 thousand, respectively.

At September 30, 2016 and December 31, 2015, the current portion of the ARO liabilities was $0 and $209 thousand, respectively, and was recorded in accrued liabilities in the unaudited condensed consolidated balance sheets. At September 30, 2016 and December 31, 2015, the long‑term portion of the ARO liabilities was $1.0 million $848 thousand, respectively, and was recorded in other long‑term liabilities in the unaudited condensed consolidated balance sheets. As a result of a contract extension during 2016, $209 thousand was reclassified from accrued liabilities to other long‑term liabilities as of September 30, 2016.

Acquisition Contingent Consideration

Acquisition contingent consideration represents the net present value of the additional purchase price that is contingent on the future performance of an acquired business. The acquisition contingent consideration was derived in connection with certain historical acquisitions made by Quench prior to June 6, 2014.

The following table sets forth the changes of the acquisition contingent consideration for the nine months ended September 30, 2016 (in thousands):

The acquisition contingent consideration liabilities are recorded at fair value as of December 31, 2015 based on a probability‑weighted discounted cash flow model which utilizes unobservable inputs such as the forecasted achievement of performance targets throughout the earn‑out period, the term of the earn‑out period and a discount rate of 10%. Any change in the valuation of the acquisition contingent consideration is recorded as a valuation adjustment within selling, general and administrative expenses in the unaudited condensed consolidated statements of operations. During the three and nine months ended September 30, 2016, the Company recorded a gain on the change in fair value of $86 thousand, which was recorded in selling, general and administrative expenses in the consolidated statements of operations. There was no change in fair value for the three and nine months ended September 30, 2015.

At September 30, 2016, there were no acquisition contingent consideration obligations remaining as a result of final payments being made during the nine months ended September 30, 2016. In April 2016, a payment of

$850 thousand was made along with the final payment of $14 thousand which was paid in September 2016. At December 31, 2015, the remaining balance of the acquisition contingent consideration was $915 thousand which was classified as current and recorded in accrued liabilities in the unaudited condensed consolidated balance sheets. During the three months ended September 30, 2016 and 2015, the Company recorded accretion expense of $2 thousand and $23 thousand, respectively. The Company recorded accretion expense of $35 thousand and $95 thousand during the nine months ended September 30, 2016 and 2015, respectively.

Change in Control Incentive Bonus Plan

In connection with the Contribution on June 6, 2014, the Company assumed a management incentive bonus (“Quench MIP”) pursuant to which certain employees of Quench are entitled to a special cash bonus upon the occurrence of a sale event. As defined in the Quench MIP, a sale event includes, but is not limited to, an initial public offering. The potential cash bonus pool under the Quench MIP would be the lesser of: (i) 10% of the value of the outstanding securities of Quench USA Holdings LLC in excess of $21 million after giving effect to all payments under the plan; or (ii) $6 million.

As of September 30, 2016 and December 31, 2015, the Company has not recorded any liability related to the Quench MIP as no events had occurred nor was it probable an event would occur that would require payment under the Quench MIP. On October 12, 2016, the Company completed its IPO which triggered payment of the Quench MIP. Based on the terms of the Quench MIP, the Company paid to certain of its employees an aggregate of $6.0 million of cash, which will be recorded in selling, general and administrative (“SG&A”) expenses in the unaudited condensed consolidated statements of operations during the fourth quarter of 2016.

Litigation, Claims and Administrative Matters

               The Company, may, from time to time, be a party to legal proceedings, claims, and administrative matters that arise in the normal course of business. The Company has made accruals with respect to certain of these matters, where appropriate, that are reflected in the unaudited condensed consolidated financial statements but are not, individually or in the aggregate, considered material. For other matters for which an accrual has not been made, the Company has not yet determined that a loss is probable or the amount of loss cannot be reasonably estimated. While the ultimate outcome of the matters cannot be determined, the Company currently does not expect that these proceedings and claims, individually or in the aggregate, will have a material effect on the unaudited condensed consolidated financial position, results of operations, or cash flows. The outcome of any litigation is inherently uncertain, however, and if decided adversely to the Company, or if the Company determines that settlement of particular litigation is appropriate, the Company may be subject to liability that could have a material adverse effect on the unaudited condensed consolidated financial position, results of operations, or cash flows. The Company maintains liability insurance in such amounts and with such coverage and deductibles as management believes is reasonable. The principal liability risks that the Company insures against are customer lawsuits caused by damage or nonperformance, workers’ compensation, personal injury, bodily injury, property damage, directors’ and officers’ liability, errors and omissions, employment practices liability and fidelity losses. There can be no assurance that the Company’s liability insurance will cover all events or that the limits of coverage will be sufficient to fully cover all liabilities. As of September 30, 2016 and December 31, 2015, the Company has determined there are no matters for which a material loss is reasonably possible or the Company has either determined that the range of loss is not reasonably estimable or that any reasonably estimable range of loss is not material to the unaudited condensed consolidated financial statements.

9. Supplemental Cash Flow Information

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

10. Segment Reporting

The Company has two operating and reportable segments including Seven Seas Water and Quench. This determination is supported by, among other factors: the existence of individuals responsible for the operations of each segment and who also report directly to the Company’s chief operating decision maker (“CODM”), the nature of the segment’s operations and information presented to the Company’s board of directors and CODM.

Seven Seas Water provides outsourced desalination solutions and wastewater treatment for governmental, municipal, industrial and hospitality customers internationally under long‑term contracts. Quench provides bottleless filtered water coolers and other products that use filtered water as an input, such as ice machines, sparkling water dispensers and coffee brewers, to customers throughout the United States typically under multi‑year contracts. Revenues reported under the Seven Seas Water reportable segment primarily represent bulk water sales and service, including revenues generated from service concession arrangements, whereas revenues under the Quench reportable segment primarily represent rental of filtered water and related systems.

The Company records all non‑direct general and administrative costs in its Seven Seas Water reportable segment and does not allocate these costs to the Quench reportable segment. All intercompany transactions are eliminated for segment presentation purposes.

The following table provides information by reportable segment for the three months ended September 30, 2016 and 2015 (in thousands):

The following table provides information by reportable segment for the nine months ended September 30, 2016 and 2015 (in thousands):