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Purchase of interest in Aerex Industries, Inc.
 9 Months Ended
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