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Purchase of interest in Aerex Industries, Inc. | 9 Months Ended
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Sep. 30, 2016
Business Combinations [Abstract] |
Business Combination Disclosure [Text Block] | 3. Purchase of interest in Aerex Industries, Inc. On February 11, 2016 (the “Closing Date”), the Company, through its wholly-owned subsidiary, CW-Holdings, entered into a stock purchase agreement (the “Purchase Agreement”) with Aerex and Thomas Donnick, Jr. (“Donnick”), Aerex’s sole shareholder prior to the Closing Date. Pursuant to the terms of the Purchase Agreement, CW-Holdings purchased a 51% ownership interest in Aerex for an aggregate purchase price of approximately $7.7 million in cash. After giving effect to the transactions contemplated by the Purchase Agreement, CW-Holdings owns 51% of the outstanding capital stock of Aerex and Donnick owns 49% of the outstanding capital stock of Aerex. CW-Holdings also acquired from Donnick an option to compel Donnick to sell, and granted to Donnick an option to require CW-Holdings to purchase, Donnick’s 49% ownership interest in Aerex at a price based upon the fair market value of Aerex at the time of the exercise of the option. The options are exercisable on or after the third anniversary of the Closing Date. In connection with the Purchase Agreement, the Company guaranteed the obligations of CW-Holdings with respect to the option granted to Donnick to require CW-Holdings to purchase Donnick’s 49% ownership interest in Aerex. Aerex is an original equipment manufacturer and service provider of a wide range of products and services applicable to municipal water treatment and industrial water and wastewater treatment. Its products include membrane separation equipment, filtration equipment, piping systems, vessels and custom fabricated components. Aerex also offers engineering, design, consulting, inspection, training and equipment maintenance services to its customers. Aerex is an American Society of Mechanical Engineers (ASME) code accredited manufacturer and maintains the ASME U and S and the National Board NB and R Certificates of Authorization. Its corporate offices and manufacturing facilities are located in Fort Pierce, Florida. In connection with the Purchase Agreement, CW-Holdings, Aerex and Donnick entered into a shareholders agreement pursuant to which CW-Holdings and Donnick agreed to certain rights and obligations with respect to the governance of Aerex. Immediately following the acquisition, Donnick and the Company loaned $490,000 and $510,000, respectively, to Aerex. These loans bear interest at 1% per annum and mature June 30, 2017. The purchase price for Aerex is summarized as follows:
|  | February 11, 2016 |
Cash consideration |  |  |  |
Purchase price (excluding working capital) |  | $ | 7,140,000 |
Working capital adjustment |  |  | 605,179 |
Cash acquired |  |  | (2,326) |
Total cash consideration |  | $ | 7,742,853 |
The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date:
|  | February 11, 2016 |
Financial assets |  | $ | 456,664 |
Inventory |  |  | 70,487 |
Costs and estimated earnings in excess of billings |  |  | 784,465 |
Property, plant and equipment |  |  | 2,159,401 |
Identifiable intangible assets |  |  | 5,900,000 |
Deferred tax liability |  |  | (2,451,298) |
Accounts payable and accrued liabilities |  |  | (116,893) |
Net liability arising from put/call options |  |  | (383,000) |
Total identifiable net assets |  |  | 6,419,826 |
Non-controlling interest in Aerex |  |  | (6,712,184) |
Goodwill |  |  | 8,035,211 |
|  | $ | 7,742,853 |
The identifiable intangible assets consist of the following items with amortization calculated using a straight line method over the useful life of the asset:
|  | February 11, 2016 |  | Accumulated Amortization |  | September 30, 2016 |  | Useful life
Non-compete agreement |  | $ | 400,000 |  | $ | 53,333 |  | $ | 346,667 |  | 5 years
Trade name |  |  | 1,400,000 |  |  | 62,223 |  |  | 1,337,777 |  | 15 years
Certifications/programs |  |  | 2,000,000 |  |  | 444,444 |  |  | 1,555,556 |  | 3 years
Customer backlog |  |  | 100,000 |  |  | 66,667 |  |  | 33,333 |  | 1 year
Customer relationships |  |  | 2,000,000 |  |  | 333,333 |  |  | 1,666,667 |  | 4 years
|  | $ | 5,900,000 |  | $ | 960,000 |  | $ | 4,940,000 |  |
Aerex’s actual results of operations for the period subsequent to its acquisition by the Company on February 11, 2016 fell significantly short of the projected results for this period that were included in the overall cash flow projections utilized by the Company to determine the purchase price for Aerex and the fair values of its assets and liabilities. Due to this negative variance in actual results compared to projected results, the Company tested Aerex’s goodwill for possible impairment as of September 30, 2016 by estimating its fair value using the discounted cash flow method. As a result of this impairment testing, the Company determined that the carrying value of its Aerex reporting unit exceeded its fair value, and recorded an impairment loss for the three months ended September 30, 2016 of $1,750,000 for the goodwill associated with the Aerex acquisition. The results of operations of Aerex are included in the services segment of the Company’s consolidated financial statements from the date of acquisition. The total revenue and net income (loss) included for Aerex in the Company’s consolidated results of operations for the three months ended September 30, 2016 were approximately $1.4 million and ($956,000), respectively. The total revenue and net income (loss) included for Aerex in the Company’s consolidated results of operations for the period February 11, 2016 to September 30, 2016, were approximately $3.3 million and ($1,275,000), respectively. General and administrative expenses incurred by the Company for the Aerex acquisition reflected in the results of operations for the three and nine months ended September 30, 2016 were $0 and approximately $144,000, respectively. The following pro forma financial information presents the results of operations of the Company for the nine months ended September 30, 2016 and 2015, as if the acquisition of Aerex had taken place on January 1, 2015. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations which would have actually occurred had the transaction taken place on January 1, 2015, or of future results of operations:
|  | Nine Months Ended September 30, |
|  | 2016 |  | 2015 |
Revenues |  | $ | 44,324,477 |  | $ | 60,383,276 |
Cost of revenues |  |  | 25,397,444 |  |  | 38,135,655 |
Gross profit |  |  | 18,927,033 |  |  | 22,247,621 |
General and administrative expenses |  |  | 14,240,156 |  |  | 12,601,144 |
Impairment loss on long-lived assets |  |  | 2,000,000 |  |  | - |
Impairment of goodwill |  |  | 1,750,000 |  |  | - |
Income from operations |  |  | 936,877 |  |  | 9,646,477 |
Other income (expense), net |  |  | 47,202 |  |  | (487,401) |
Income before income taxes |  |  | 984,079 |  |  | 9,159,076 |
Provision for (benefit from) income taxes |  |  | (462,773) |  |  | 1,027,589 |
Net income |  |  | 1,446,852 |  |  | 8,131,487 |
Income (loss) attributable to non-controlling interests |  |  | (920,277) |  |  | 1,417,703 |
Net income attributable to Consolidated Water Co. Ltd. stockholders |  | $ | 2,367,129 |  | $ | 6,713,784 |
Basic earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders |  | $ | 0.16 |  | $ | 0.46 |
Diluted earnings per common share attributable to Consolidated Water Co. Ltd. common stockholders |  | $ | 0.16 |  | $ | 0.45 |
Weighted average number of common shares used in the determination of: |  |  |  |  |  |  |
Basic earnings per share |  |  | 14,803,216 |  |  | 14,734,799 |
Diluted earnings per share |  |  | 14,940,635 |  |  | 14,787,904 |

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