AquaVenture Holdings Limited Announces Second Quarter 2017 Earnings Results

New Corporate Debt Financing.  On August 4, 2017, AquaVenture entered into a $150.0 million senior secured credit agreement that provides a four-year, non-amortizing term loan that bears interest at LIBOR plus 6.00%.  Total loan proceeds were approximately $147 million, net of debt financing and origination fees, of which the Company used approximately $100 million to repay in full the outstanding principal on the existing indebtedness of our Trinidad, USVI, Curacao and Quench subsidiaries.  The remaining proceeds will be used for acquisition and project development opportunities, and working capital needs. 

BVI Matters.  On August 4, 2017, the Company and the Government of the British Virgin Islands ("BVI") amended the Paraquita Bay water purchase agreement ("WPA") to reduce the water rate, modify contractual formulas applied to calculate increases in the water rate and revise the original WPA payment profile, effective January 1, 2017.  As disclosed previously, AquaVenture's BVI subsidiary has been working with the BVI Government since mid-2016 to amend the WPA to, among other things, help lower the water rate and expand the water supply to the people of the BVI. 

The Company believes the amendment to the contractual formulas will bring future water rate increases more in line with the cost-of-living based rate increases in its other water purchase agreements. In return for the reduction in the water rate and change to the contractual formula, the original payment profile was modified to include a total of $10 million in quarterly cash payments over the next five years.  In addition to the amended terms of the WPA, the BVI Government consented to the June 2015 transaction in which AquaVenture acquired its BVI subsidiary, consented to the amendments to the existing BVI credit agreement described below, and agreed to work with the Company to explore opportunities to expand the water supply in the BVI.  As a reminder, the Company's reported 2017 results and forecasts included the expected impacts of this amendment, including the lower water rate.

"We are pleased to announce the completion of this amendment, which reflects both our commitment to our long-term customer relationships as well as to our shareholders by arriving at mutually beneficial results.  The WPA amendment addresses a vital concern of our customer, while positioning us to maintain this important long-term relationship.  In addition, we look forward to working with the BVI Government to create opportunities to improve the water supply on the west side of Tortola," said Doug Brown.

In parallel with the execution of the Water Purchase Agreement amendment, the Company also amended the BVI loan agreement.  This amendment provides for an approximately one-year extension of the amortization schedule of the current loan and reduces the current spread applied to the LIBOR base by 50 basis points, each of which increases distributable cash from the project subsidiary. The United Kingdom Export Finance also extended its participation in the project by one year to match the extended term of the loan.

Consolidated Financial and Operating Overview

For the second quarter of 2017, total revenues of $29.9 million increased 5.8% over prior year period revenues of $28.3 million. On a segment basis, revenues for our Seven Seas Water and Quench increased 9.1% and 2.7%, respectively, from the prior year period. Total gross margin of 46.4% for the second quarter of 2017 decreased 280 basis points compared to 49.2% in the prior year period.

Total selling, general and administrative expenses ("SG&A") increased to $16.7 million in the second quarter of 2017 from $14.5 million in the prior year period.  The $2.3 million increase was primarily driven by an increase in share-based compensation resulting from equity grants made in connection with our initial public offering ("IPO") during the fourth quarter of 2016 (the "IPO Grant").

Net loss for the second quarter of 2017 was $5.5 million, compared to a net loss of $4.2 million in the prior year period.  Adjusted EBITDA remained flat at $9.4 million for the second quarter of 2017 compared to the prior year period.  Adjusted EBITDA Margin of 31.4% for the second quarter of 2017 decreased 170 basis points from 33.1% in the prior year period.  Adjusted EBITDA plus the cash collected on the design and construction contract was $11.4 million in the second quarter of 2017 compared to $9.4 million in the prior year period, an increase of 22.0%. 

Net cash provided by operating activities for the quarter ended June 30, 2017 was $5.3 million compared to $5.5 million for the comparable period of 2016.  Capital expenditures and long-term contract expenditures were $4.3 million for the quarter ended June 30, 2017 compared to $5.4 million in the prior year period. 

As of June 30, 2017, cash and cash equivalents was $82.9 million and total debt was $130.6 million.

For the six months ended June 30, 2017, total revenues increased 6.3% to $58.9 million from $55.4 million in the prior year period.  Gross margin for the six months ended June 30, 2017 was 46.1% compared to 48.5% in the prior year period, a decline of 240 basis points.  Total SG&A increased to $33.2 million for the first half of 2017, compared to $28.1 million in the prior year period.  The $5.1 million increase in SG&A was primarily due to an increase in share-based compensation resulting from the IPO Grant.  Net loss for the six months ended June 30, 2017 was $11.7 million compared to $8.2 million in the prior year period.  Diluted loss per share for the six months ended June 30, 2017 was $(0.44).  There were no ordinary shares outstanding prior to October 6, 2016. Therefore, no diluted loss per share information is available for the six months ended June 30, 2016.

Adjusted EBITDA was $17.9 million for the six months ended June 30, 2017, a 3.3% increase over Adjusted EBITDA of $17.3 million in the prior year period.  Adjusted EBITDA Margin declined 90 basis points to 30.4%, compared to 31.3% in the prior year period.  Adjusted EBITDA plus the cash collected on the design and construction contract was $22.0 million for the six months ended June 30, 2017 compared to $17.3 million in the prior year period, an increase of 26.7%.

Net cash provided by operating activities for the six months ended June 30, 2017 was $10.6 million compared to $10.9 million for the comparable period of 2016.  Capital expenditures and long-term contract expenditures were $7.7 million for the six months ended June 30, 2017 compared to $11.6 million in the prior year period. 

Second Quarter 2017 Segment Results

Seven Seas Water

Seven Seas Water revenues of $14.8 million for the second quarter of 2017 increased 9.1% from $13.6 million in the prior year period.  This increase was mainly due to an increase of $1.0 million in revenues from our Peru operations and a $0.5 million increase in revenues at our Trinidad plant resulting from a plant expansion completed in 2016.  These increases were partially offset by a $0.4 million decrease in revenues at our BVI operations primarily due to contingent rate adjustments in connection with the contract amendment that was recently finalized.  On an organic basis, revenues for the current quarter increased $0.2 million, or 1.8%, compared to the prior year period.

Seven Seas Water gross margin for the second quarter of 2017 decreased 570 basis points to 38.1% from 43.8% in the prior year period.  The decrease was mainly due to the inclusion of our Peru operations, which negatively impacted gross margin due to the lower margin profile of the standalone O&M contract included in our operating results and elevated repairs and maintenance expense during the second quarter, part of which were planned as part of our post-acquisition integration and part of which were driven by adverse weather conditions in Peru.  The decrease was also due to the reduction in gross margin for our BVI operations from the aforementioned contract amendment.  These decreases were partially offset by improvements in gross margin in our Trinidad, Turks and Caicos, Saint Maarten and USVI operations.

Seven Seas Water SG&A for the second quarter of 2017 increased $1.2 million, or 26.2%, to $5.9 million from $4.7 million in the prior year period.  The increase was mainly due to a $1.7 million increase in share-based compensation resulting from the IPO Grant, partially offset by $0.3 million lower acquisition-related expenses in the current quarter compared to the prior year period. 

Net loss for our Seven Seas Water segment was $2.2 million for the three months ended June 30, 2017, compared to a net loss of $1.4 million for the prior year period.  Adjusted EBITDA of $6.1 million for the second quarter of 2017 remained flat compared to the prior year period.  Adjusted EBITDA Margin decreased 360 basis points to 41.5% in the second quarter of 2017 from 45.1% in the prior year period.  The decrease in Adjusted EBITDA Margin was due to the aforementioned impacts of the lower margin profile Peru O&M contract and the elevated repairs and maintenance expense in Peru, as well as the impact of the BVI contract amendment.  Adjusted EBITDA plus cash collected on the design and construction contract was $8.2 million in the second quarter of 2017 compared to $6.1 million in the prior year period, an increase of 33.5%. 

For the six months ended June 30, 2017, Seven Seas Water revenues were $29.0 million, an increase of 7.2% over the prior year period revenues of $27.1 million.  Gross margin for the six months ended June 30, 2016 decreased 550 basis points to 38.0% from 43.5% in the prior year period.  Total SG&A expenses for the six months ended June 30, 2017 increased $3.1 million to $12.1 million from $9.0 million in the prior year period.  Net loss for the six months ended June 30, 2017 was $5.1 million, compared to a net loss of $2.2 million in the prior year period.  Adjusted EBITDA was $11.8 million for the six months ended June 30, 2017, a 5.4% decrease from $12.4 million in the prior year period.  Adjusted EBITDA Margin decreased 540 basis points to 40.5% from 45.9% in the prior year period.  Adjusted EBITDA plus cash collected on the design and construction contract was $15.8 million for the six months ended June 30, 2017 compared to $12.4 million in the prior year period, an increase of 27.3%.

Quench

Quench revenues of $15.1 million for the second quarter of 2017 increased 2.7% from $14.7 million in the prior year period.  The increase in revenues included an increase in rental revenues of $1.0 million due to net additional units placed under new leases, including a small contribution from the PWI acquisition.  These increases in our rental revenue were partially offset by a decrease in other revenues of $0.6 million primarily due to a reduction in non-recurring equipment sales, primarily related to a single large customer, offset in part by an increase in coffee and consumables sales.

Quench gross margin for the second quarter of 2017 improved 50 basis points to 54.6% from 54.1% in the prior year period, primarily due to operating efficiencies in the rental operation.

Quench SG&A for the second quarter of 2017 increased $0.6 million, or 7.1%, to $9.7 million from $9.1 million in the prior year period.  The increase was mainly due to a $0.6 million increase in share-based compensation resulting from the IPO Grant and a $0.3 million increase in amortization expense of deferred lease costs related to the increase in the units placed on lease, partially offset by a $0.3 million decrease in depreciation expense related to the acceleration of depreciation in the prior year on an existing enterprise resource planning system.

Quench reported a net loss of $2.6 million for the second quarter of 2017 compared to a net loss of $2.2 million in the prior year period.  Adjusted EBITDA of $4.1 million for the second quarter of 2017 increased 17.4% from $3.5 million in the prior year period.  Adjusted EBITDA Margin increased 340 basis points to 27.3% in second quarter of 2017 from 23.9% in the prior year period.

For the six months ended June 30, 2017, Quench reported total revenues of $29.9 million, a $1.5 million or 5.5%, increase compared to the prior year period revenues of $28.3 million.  Gross margin for the six months ended June 30, 2017 increased 70 basis points to 54.0% from 53.3% in the prior year period.  Total SG&A expenses for the six months ended June 30, 2017 increased $1.1 million to $19.2 million, compared to $18.1 million in the prior year period.  Net loss for the six months ended June 30, 2017 was $5.2 million, compared to a net loss of $5.1 million in the prior year period.  Adjusted EBITDA was $7.9 million for the six months ended June 30, 2017, a 43.3% increase from Adjusted EBITDA of $5.5 million for the six months ended June 30, 2016.  Adjusted EBITDA Margin also increased 700 basis points to 26.6% for the six months ended June 30, 2016 from 19.6% for the first half of 2016. 

Corporate and Other

Corporate and Other SG&A for the second quarter of 2017 increased $0.4 million to $1.1 million from $0.7 million in the prior year period.  The increase was mainly due to a $0.2 million increase in share-based compensation resulting from incremental equity awards granted to certain members of our Board of Directors in late 2016 and early 2017, and increases in insurance expense and professional fees, including higher legal, audit and consulting and advisory costs, since becoming a public company in October of 2016.

For the six months ended June 30, 2017, Corporate and Other SG&A increased to $2.0 million from $1.0 million in the prior year period.  The increase was driven by a $0.2 million increase in share-based compensation resulting from incremental equity awards granted to certain members of our Board of Directors in late 2016 and early 2017, $0.2 million higher insurance expense and $0.5 million higher professional fees, including higher legal, audit and consulting and advisory costs, since becoming a public company in October of 2016.

2017 Outlook

When 2017 guidance was originally developed, the Company incorporated projected results from unannounced acquisitions.  However, due to the episodic nature of the Company's acquisition activity and the unpredictability of which deals will be completed and when, the Company has decided to change its guidance policy to focus on results generated from its existing asset base.  Future acquisitions will add upside to this base as they are executed.

Therefore, excluding unannounced deals, the full year 2017 outlook was revised to be: 

• Revenues expected between $119 and $122 million;
• Adjusted EBITDA expected between $34 and $37 million;
• Cash collected on the design and construction contract acquired in our Peru acquisition continues to be projected at $8.1 million annually (approximately $2 million per quarter); and
• Adjusted EBITDA plus the cash collected on the design and construction contract acquired in our Peru acquisition expected between $42 and $45 million.

"With a robust pipeline and increased capacity in which to fund acquisitions, we anticipate our transaction activity will provide upside to our guidance.  We remain very bullish on the opportunities within our pipeline," said Doug Brown.

The above statements are based on current expectations and supersede previously provided guidance. These statements are forward-looking, and actual results may differ materially.  We do not provide GAAP financial measures on a forward-looking basis because we are unable to predict with reasonable certainty the ultimate outcome of unusual gains and losses, acquisition-related expenses and purchase accounting fair value adjustments, among other factors, without unreasonable effort.  These items are uncertain, depend on various factors, and could be material to our results computed in accordance with GAAP.

About AquaVenture

AquaVenture is a multinational provider of WAAS^TM solutions that provide customers a reliable and cost-effective source of clean drinking and process water primarily under long-term contracts that minimize capital investment by the customer.  AquaVenture is composed of two operating platforms: Quench, a U.S.-based provider of Point-of-Use, or POU, filtered water systems and related services to approximately 40,000 institutional and commercial customers; and Seven Seas Water, a multinational provider of desalination and wastewater treatment solutions, providing approximately 8 billion gallons of potable, high purity industrial grade and ultra-pure water per year to governmental, municipal, industrial and hospitality customers.

Conference Call and Webcast Information

AquaVenture will host an investor conference call on Wednesday, August 9, 2017 at 8:00 a.m. EDT.  Prior to the conference call, AquaVenture will post an investor presentation on the Investor Relations section of the Company's website, www.aquaventure.com.  Interested parties are invited to listen to the conference call by dialing 1-877-407-0789, or, for international callers, 1-201-689-8562 and ask for the AquaVenture conference call.  Replays of the entire call will be available through August 16, 2017 at 1-844-512-2921, or, for international callers, at 1-412-317-6671, conference ID #13666564.  A webcast of the conference call will also be available through the Investor Relations section of the Company's website, www.aquaventure.com.  A copy of this press release is also available on the Company's website.

Safe Harbor Statement

This release contains forward-looking statements that are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933 and of Section 21E of the Securities Exchange Act of 1934.  The forward-looking statements in this release do not constitute guarantees of future performance.  Investors are cautioned that statements in this press release regarding management's future expectations, beliefs, intentions, goals, strategies, plans or prospects, including, without limitation, statements relating to AquaVenture's strategic focus; its forecast of full-year 2017 financial results; its expected margins and the impacts thereon from various customer contracts; its ability to improve plant performance and profitability; and the impacts on operating results of the timing, size and accounting treatment of acquisitions, constitute forward-looking statements.  Forward-looking statements can be identified by terminology such as "anticipate," "believe," "could," "could increase the likelihood," "estimate," "expect," "intend," "is planned," "may," "should," "will," "will enable," "would be expected," "look forward," "may provide," "would" or similar terms, variations of such terms or the negative of those terms.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors including those risks, uncertainties and factors detailed in AquaVenture's filings with the Securities and Exchange Commission.  As a result of such risks, uncertainties and factors, AquaVenture's actual results may differ materially from any future results, performance or achievements discussed in or implied by the forward-looking statements contained herein.  AquaVenture is providing the information in this press release as of this date and assumes no obligations to update the information included in this press release or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

AQUAVENTURE HOLDINGS LIMITED AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
		June 30,			December 31,
		2017			2016
ASSETS
Current Assets:
Cash and cash equivalents		$	82,914		$	95,334
Restricted cash			166			166
Trade receivables, net of allowances of $910 and $1,166, respectively			14,316			15,473
Inventory			6,459			6,246
Prepaid expenses and other current assets			9,921			6,401
Total current assets			113,776			123,620
Property, plant and equipment, net			114,382			116,092
Construction in progress			10,087			9,398
Long-term contract costs			83,978			87,512
Restricted cash			6,081			5,895
Other assets			42,247			44,311
Deferred tax asset			402			515
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