UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2016

OR

For the transition period from _______________ to _______________

Commission File Number: 001-37756

 

Global Water Resources, Inc.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Registrant’s telephone number, including area code: (480) 360-7775

 

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.   o  Yes    x  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).   x  Yes    o  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.

 

 

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

As of June 9, 2016, the registrant had 19,581,266 shares of common stock, $0.01 par value per share, outstanding.

 

 

 

 

---

 

EXPLANATORY NOTE

On April 28, 2016, the Company effected a 100.68 to 1.00 stock split.  Certain prior period information has been adjusted to conform to the current year presentation to reflect the stock split.  All share and per share amounts presented within the financial statements and management’s discussion and analysis of financial condition and results of operations have been retrospectively adjusted to reflect the impact of the stock split.

 

 

 

 

TABLE OF CONTENTS

 

 

 

 

 

---

 

PART I—FINANCIAL INFORMATION

GLOBAL WATER RESOURCES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

As of March 31, 2016 and December 31, 2015

(Unaudited)

 

 

See accompanying notes to the condensed consolidated financial statements

 

 

-3-

---

 

GLOBAL WATER RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

For the Three Months Ended March 31, 2016 and 2015

(Unaudited)

 

 

See accompanying notes to the condensed consolidated financial statements

 

 

-4-

---

 

GLOBAL WATER RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

For the Three Months Ended March 31, 2016 and 2015

(Unaudited)

 

 

See accompanying notes to the condensed consolidated financial statements

 

 

-5-

---

 

GLOBAL WATER RESOURCES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Three Months Ended March 31, 2016 and 2015

(Unaudited)

 

 

See accompanying notes to the condensed consolidated financial statements

 

 

 

-6-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

Basis of Presentation and Principles of Consolidation – The condensed consolidated financial statements of Global Water Resources, Inc. (the “Company”, “GWRI”, “we”, “us”, or “our”) and related disclosures as of March 31, 2016 and for the three months ended March 31, 2016 and 2015 are unaudited. The December 31, 2015 condensed consolidated balance sheet data was derived from the Company’s audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These financial statements follow the same accounting policies and methods of their application as the Company’s most recent annual consolidated financial statements. These financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2015.  In our opinion, these financial statements include all normal and recurring adjustments necessary for the fair statement of the results for the interim period. The results of operations for the three months ended March 31, 2016 are not necessarily indicative of the results to be expected for the full year.  Further, due to the seasonality of our business, the results for the three months ended March 31, 2016 may not be consistent with results of operations for the full year.

We prepare our financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The preparation of the financial statements in conformity with U.S. 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 income and expenses during the reporting period. Actual results could differ from those estimates. The U.S. dollar is our reporting currency and the Company’s functional currency.

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), under the rules and regulations of the SEC. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies.  We elected to take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We have elected to take advantage of some of the reduced disclosure obligations regarding financial statements.  Also, as an emerging growth company we can elect to delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We are choosing to take advantage of this extended accounting transition provision.

Certain prior period information has been adjusted to conform to the current year presentation to reflect a 100.68 to 1.00 stock split effectuated on April 28, 2016.  All share and per share amounts presented in these financial statements have been retrospectively adjusted to reflect the impact of the stock split.

Corporate Transactions — Sale of certain MXA and WMA contracts — In September 2013, the Company sold its Wastewater Facilities Main Extension Agreements (“MXA”) and Offsite Water Management Agreements (“WMA") for the contemplated Loop 303 service area along with their related rights and obligations to EPCOR Water Arizona Inc. (“EPCOR”) (collectively the “Transfer of Project Agreement”, or “Loop 303 Contracts”).  Pursuant to the Transfer of Project Agreement, EPCOR agreed to pay GWRI approximately $4.1 million over a multi-year period.  As part of the consideration, GWRI agreed to complete certain engineering work required in the WMAs, which work had been completed prior to January 1, 2015.   As the engineering work has been completed, the Company effectively has no further obligations under the WMAs, the MXAs or the Transfer of Project Agreement.  Prior to January 1, 2015, the Company had received $2.8 million of proceeds and recognized income of approximately $3.3 million within other income (expense) in the statement of operations related to the gain on sale of these agreements and the proceeds received prior to January 1, 2015 for engineering work required in the WMAs.  The Company received additional proceeds of approximately $296,000 in April 2015 and recognized those amounts as income at that time.  Receipt of the remaining $1.0 million of proceeds will occur and be recorded as additional income over time as certain milestones are met between EPCOR and the developers/landowners.

Stipulated condemnation of Valencia — On March 17, 2015, the Company reached a settlement agreement for a stipulated condemnation to sell the utility operating as Valencia Water Company, Inc. (“Valencia”) to the City of Buckeye (“Buckeye”), which was approved by Buckeye's City Council on March 19, 2015 and by the Maricopa County Superior Court on June 9, 2015.  On July 14, 2015, the Company closed the stipulated condemnation of Valencia with Buckeye.  Terms of the condemnation were agreed upon through a settlement agreement in March 2015, pursuant to which Buckeye acquired the operations and assets of Valencia and assumed operations of the utility upon close.  Buckeye paid the Company $55.0 million at close, plus an additional $108,000 in working capital adjustments. As a result of the transaction, the Company recorded a gain of $43.0 million net of tax liability of $20.2 million for the year ended December 31, 2015. Buckeye will also pay a growth

-7-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

premium equal to $3,000 for each new water meter installed within Valencia's prior service areas for a 20-year period ending December 31, 2034, subject to a maximum payout of $45.0 million over the term of the agreement. For the three months ended March 31, 2016, the Company recognized $252,000 in other income within the consolidated financial statements related to the growth premium.

In consideration of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 205-20-45-1, the condemnation of Valencia transaction does not meet the criteria of discontinued operations. As the transaction did not change the services provided or the manner in which the Company operates, it was determined the transaction did not represent a strategic shift and therefore does not qualify for presentation as a discontinued operation.

Sale of Willow Water Valley Co., Inc. — On March 23, 2015, the Company reached an agreement to sell the operations and assets of Willow Water Valley Co., Inc. (“Willow Valley”) to EPCOR. EPCOR purchased the operations, assets and rights used by Willow Valley to operate the utility system for approximately $2.3 million, subject to current rate base calculations and certain post-closing adjustments. The transaction was approved by the Arizona Corporation Commission (“ACC”) on March 10, 2016, and the transaction closed on May 9, 2016.

Per ASC 360-10-45-9, the assets and liabilities in the sale of Willow Valley were determined to meet the criteria to be classified as held for sale beginning with our March 31, 2015 consolidated financial statements. The criteria utilized to make this determination were: (i) management had the authority and had entered into an agreement to sell the assets of Willow Valley; (ii) the assets and liabilities were available for immediate sale in their present condition; (iii) the approval from the ACC was probable within the next year; (iv) a reasonable price had been agreed upon; and (v) it was unlikely that significant changes to the agreement would occur prior to approval. In consideration of ASC 205-20-45-1, the Willow Valley transaction did not meet the criteria for discontinued operations. As the transaction did not change the services provided nor the manner in which the Company operates, it was determined the transaction did not represent a strategic shift and therefore did not qualify for presentation as a discontinued operation.

Additionally, as the carrying value of the assets and liabilities of Willow Valley were greater than the agreed upon sales price, a loss of $176,000 was recorded in other expense during the first quarter of 2015, when the assets and liabilities were classified as held for sale, to adjust the carrying value of the assets to the agreed upon fair value less cost to sell. The assets and liabilities included within the agreements are as follows:

 

 

Merger of GWR Global Water Resources Corp. (“GWRC”) — On May 3, 2016, the Company completed the merger of GWRC into GWRI.  At the time of the merger, GWRC ceased to exist as a British Columbia corporation and the Company continued as the surviving entity of the merger.  See Note 7 and Note 14.

Initial Public Offering — On April 27, 2016, the SEC declared effective the registration statement relating to the public offering of our common stock.  On May 3, 2016, the Company completed the initial public offering of 1,164,800 shares of common stock at $6.25 per share for gross proceeds of approximately $7.3 million (the “U.S. IPO”).  The Company granted the underwriter the option to purchase up to an additional 174,720 shares of common stock at the same price, which was exercised

-8-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

by the underwriter on May 11, 2016, for additional gross proceeds of $1.1 million. Our shares of common stock are listed on the NASDAQ Global Market and the Toronto Stock Exchange under the symbols “GWRS” and “GWR”, respectively.

Sonoran Acquisition Liability — On March 17, 2016, the Company entered into an agreement with Sonoran Utility Services, LLC (“Sonoran”) to amend certain provisions of the purchase and sale agreement related to the acquisition of Sonoran’s assets on June 15, 2005.  The amended agreement allows the Company to reduce its acquisition liability due to Sonoran to $2.8 million, if the Company settles the amount due within ten days of the closing of the note purchase agreement (See Note 14).  As of March 31, 2016, the acquisition liability carried a balance of $3.8 million.  The amended provisions of the agreement are contingent on the closing of note purchase agreement, which is expected to close on June 24, 2016.

New Accounting Pronouncements

In April 2015, the FASB issued Accounting Standard Update (“ASU”) No. 2015-03, Interest—Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”), which requires debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the associated debt liability, consistent with the accounting of debt discounts. The adoption of this guidance resulted in the reclassification of the unamortized debt issuance costs of $2.2 million from debt issuance costs to a reduction in long-term debt as of both March 31, 2016 and December 31, 2015.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 requires lessees record a right-of-use asset and corresponding lease obligation for lease arrangements with a term of greater than twelve months.  ASU 2016-02 requires additional disclosures about leasing arrangements and requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements.  This guidance will be effective for public companies for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted.  For all other entities, the guidance is effective for annual periods beginning after December 31, 2019, and interim periods within fiscal years beginning after December 15, 2020.  The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, as well as certain classifications on the statement of cash flows. This guidance is effective for public companies for annual periods beginning after December 15, 2016 and interim periods within those annual periods.  For all other entities, the guidance is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018.  Early adoption is permitted.  The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and footnote disclosures.

 

 

Our regulated utilities and certain other balances are subject to regulation by the ACC and meet the requirements for regulatory accounting found within ASC Topic 980, Regulated Operations.

In accordance with ASC Topic 980, rates charged to utility customers are intended to recover the costs of the provision of service plus a reasonable return in the same period. Changes to the rates are made through formal rate applications with the ACC, which we have done for all of our operating utilities and which are described below.

-9-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

On July 11, 2012, we filed formal rate applications with the ACC to adjust the revenue requirements for seven utilities representing a collective rate increase of approximately 28% over 2011’s revenue.  In August 2013, the Company entered into a settlement agreement with ACC Staff, the Residential Utility Consumers Office, the City of Maricopa, and other parties to the rate case.  The settlement required approval by the ACC’s Commissioners before it could take effect.   In February 2014, the rate case proceedings were completed and the ACC issued Rate Decision No. 74364, effectively approving the settlement agreement.  The rulings of the decision include, but are not limited to, the following:

 

 

Whereas this phase-in of additional revenues was determined using a 2011 test year, to the extent that the number of active service connections increases from 2011 levels, the additional revenues may be greater than the amounts set forth above.  On the other hand, if active connections decrease or we experience declining usage per customer, we may not realize all of the anticipated revenues.

The following provides additional discussion on accounting and policy changes resulting from Rate Decision No. 74364.

Infrastructure Coordination and Financing Agreements – ICFAs are agreements with developers and homebuilders whereby GWRI, the indirect parent of the operating utilities, provides services to plan, coordinate and finance the water and wastewater infrastructure that would otherwise be required to be performed or subcontracted by the developer or homebuilder.

Under the ICFAs, GWRI has a contractual obligation to ensure physical capacity exists through its regulated utilities for water and wastewater to the landowner/developer when needed. This obligation persists regardless of connection growth. Fees for these services are typically a negotiated amount per equivalent dwelling unit for the specified development or portion of land. Payments are generally due in installments, with a portion due upon signing of the agreement, a portion due upon completion of certain milestones, and the final payment due upon final plat approval or sale of the subdivision. The payments are non-refundable. The agreements are generally recorded against the land and must be assumed in the event of a sale or transfer. The regional planning and coordination of the infrastructure in the various service areas has been an important part of GWRI’s business model.

Prior to January 1, 2010, GWRI accounted for funds received under ICFAs as revenue once the obligations specified in the ICFA were met. As these arrangements are with developers and not with the end water or wastewater customer, the timing of

-10-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

revenue recognition coincided with the completion of GWRI’s performance obligations under the agreement with the developer and with GWRI’s ability to provide fitted capacity for water and wastewater service through its regulated subsidiaries.

The 2010 Regulatory Rate Decision No. 71878 established new rates for the recovery of reasonable costs incurred by the utilities and a return on invested capital.  In determining the new annual revenue requirement, the ACC imputed a reduction to rate base for all amounts related to ICFA funds collected by the Company that the ACC deemed to be CIAC for rate making purposes.  As a result of the decision by the ACC, GWRI changed its accounting policy for the accounting of ICFA funds. Effective January 1, 2010, GWRI recorded ICFA funds received as CIAC.  Thereafter, the ICFA-related CIAC was amortized as a reduction of depreciation expense over the estimated depreciable life of the utility plant at the related utilities.  

With the issuance of Rate Decision No. 74364, in February 2014, the ACC again changed how ICFA funds would be characterized and accounted for going forward.  Most notably, ICFA funds would no longer be required to reduce future rates as a result of the ratemaking process.  In conjunction with Rate Decision No. 74364, we eliminated the CIAC liability and reversed the associated regulatory liability brought about by the 2010 ruling.  ICFA funds already received or which had become due prior to the date of Rate Decision No. 74364 were accounted for in accordance with the Company’s ICFA revenue recognition policy that had been in place prior to the 2010 Regulatory Rate Decision, wherein the funds received are recognized as revenue once the obligations specified in the ICFA were met.  Rate Decision No. 74364 prescribes that of the ICFA funds which come due and are paid subsequent to December 31, 2013, 70% of the ICFA funds will be recorded in the associated utility subsidiary as a hook-up fee (“HUF”) liability, with the remaining 30% to be recorded as deferred revenue, to be accounted for in accordance with the Company's ICFA revenue recognition policy.

The Company will account for the portion allocated to the HUF as a CIAC contribution.  However, in accordance with the ACC directives the CIAC is not deducted from rate base until the HUF funds are expended for utility plant.  Such funds will be segregated in a separate bank account and used for plant.  A HUF liability will be established and will be amortized as a reduction of depreciation expense over the useful life of the related plant once the HUF funds are utilized for the construction of plant.  For facilities required under a HUF or ICFA, the utilities must first use the HUF moneys received, after which, it may use debt or equity financing for the remainder of construction.  The Company will record the 30% as deferred revenue, which is to be recognized as revenue once the obligations specified within the ICFA are met.  As of March 31, 2016 and December 31, 2015, ICFA deferred revenue recorded on the consolidated balance sheet totaled $19.7 million, which represents deferred revenue recorded for ICFA funds received on contracts that had become due prior to Rate Decision No. 74364.  For ICFA contracts coming due after December 31, 2013, 30% will be added to this balance with the remaining 70% recorded to a HUF liability.

Regulatory asset – Under ASC Topic 980, rate regulated entities defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the rate making process in a period different from the period in which they would have been reflected in income by an unregulated company. Certain costs associated with our rate cases have been deferred on our balance sheet as regulatory assets as approved by the ACC.   At March 31, 2016 and December 31, 2015, the Company had one regulatory asset in the amount of $199,000 and $227,000, respectively, related to costs incurred in connection with our most recent rate case.  This amount began to amortize in January 2015, and will amortize over a three-year period.

Intangible assets / Regulatory liability — The Company previously recorded certain intangible assets related to ICFA contracts obtained in connection with our Santa Cruz, Palo Verde and Sonoran Utility Services (‘‘Sonoran’’) acquisitions.  The intangible assets represented the benefits to be received over time by virtue of having those contracts.   Prior to January 1, 2010, the ICFA-related intangibles were amortized when ICFA funds were recognized as revenue.  Effective January 1, 2010, in connection with the 2010 Regulatory Rate Decision, these assets became fully offset by a regulatory liability of $11.2 million since the imputation of ICFA funds as CIAC effectively resulted in the Company not being able to benefit (through rates) from the acquired ICFA contracts.

Effective January 1, 2010, the gross ICFAs intangibles began to be amortized when cash was received in proportion to the amount of total cash expected to be received under the underlying agreements. However, such amortization expense was offset by a corresponding reduction of the regulatory liability in the same amount.

As a result of Rate Decision No. 74364, the Company changed its policy around the ICFA related intangible assets.  As discussed above, pursuant to Rate Decision No. 74364, approximately 70% of ICFA funds to be received in the future will be recorded as a HUF at the Company’s applicable utility subsidiary.  The remaining approximate 30% of future ICFA funds will be recorded at the parent company level and will be subject to the Company’s ICFA revenue recognition accounting policy.  As

-11-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

the Company now expects to experience an economic benefit from the 30% portion of future ICFA funds, 30% of the regulatory liability, or $3.4 million, was reversed in 2014.  The remaining 70% of the regulatory liability, or $7.9 million, will continue to be recorded on the balance sheet.  At March 31, 2016 and December 31, 2015, this was the Company's sole regulatory liability.

Subsequent to Rate Decision No. 74364, the intangible assets will continue to amortize when the corresponding ICFA funds are received in proportion to the amount of total cash expected to be received under the underlying agreements.   The recognition of amortization expense will be partially offset by a corresponding reduction of the regulatory liability.

 

Stock Appreciation Rights (“SARs”) — SARs historically were accounted for as liability compensatory awards under ASC 710, Compensation – General, valued using the intrinsic value method, as permitted by ASC 718 for nonpublic entities.  Upon becoming a public company, as defined in ASC 718, in the first quarter of 2016, the Company was required to change its methodology for valuing the SARs.  While the SARs will continue to be re-measured at each quarterly reporting date, the SARs are required to be accounted for prospectively at fair value using a fair value pricing model, such as Black-Scholes. The Company recorded the impact of the change in valuation methods as a cumulative effect of a change in accounting principle, as permitted by ASC 250. The effect of the change increased the SAR liability by $103,000 which was the difference in compensation cost measured using the intrinsic value method and the fair value method.  An equal and offsetting change to accumulated deficit in the consolidated balance sheet was recorded with the revaluation. Any future changes in fair value will be recorded as compensation expense in the consolidated statement of operations.

 

 

Property, plant and equipment at March 31, 2016 and December 31, 2015 consist of the following ($ in thousands):

 

 

 

 

Accounts receivable as of March 31, 2016 and December 31, 2015 consist of the following (in thousands):

 

 

 

-12-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

On June 5, 2013, the Company sold Global Water Management, LLC (“GWM”) to an investor group led by a private equity firm that specializes in the water industry. GWM was a wholly-owned subsidiary of GWRI that owned and operated the FATHOM™ business (“FATHOM™”). In connection with the sale of GWM, the Company made an investment in the FATHOM™ Partnership. This limited partnership investment is accounted for under the equity method due to our investment being considered more than minor.

The original investment in FATHOM™ consisted of an investment of $750,000 in the Series A preferred units and $98,000  of common units. Additionally, the Company invested $750,000 in a 10% convertible promissory note of GWM with an original maturity of December 31, 2014. We accounted for this investment in accordance with relevant accounting guidance for debt and equity securities which requires the fair value measurement of the investment pursuant to ASC Topic 820, Fair Value Measurement. The fair value of the investment in the convertible notes at initial recognition was determined using the transaction price, of which the price paid by the Company was consistent with the price paid by third party investors for comparable convertible notes.

In November 2014, FATHOM™ experienced a qualified financing event (qualified financing was defined as an equity financing by FATHOM™ Partnership in which FATHOM™ Partnership sells its units for at least $1.75 per unit and the aggregate proceeds from such financing was at least $15 million, exclusive of convertible note amounts converted).  At the time of the qualified financing, the convertible promissory note was converted into Series B Preferred Units, and accounted for under the equity method.  The Company's resulting ownership of common and preferred units represented an approximate 8.0% ownership (on a fully diluted basis).

In conjunction with the qualified financing, our equity interest in the Series A and Series B preferred shares was adjusted in accordance with ASC 323, Investment-Equity Method & Joint Ventures, wherein we recorded a gain of $1.0 million in the fourth quarter of 2014.  The adjustment to the carrying value of our investments was calculated using our proportionate share of FATHOM™'s adjusted net equity.  The gain was recorded within other income and expense in our consolidated statement of operations. The carrying value of our investment consisted of a balance of $632,000 as of March 31, 2016 and $821,000 as of December 31, 2015, and reflects our initial investment, the adjustment related to the qualified financing and our proportionate share of FATHOM™'s cumulative losses.

We evaluate our investment in FATHOM™ Partnership/GWM for impairment whenever events or changes in circumstances indicate that the carrying value of our investment may have experienced an “other-than-temporary” decline in value. Since the sale of GWM, the losses incurred on the investment were greater than anticipated; however, based upon our evaluation of various relevant factors, including the 2014 equity event and the ability of FATHOM™ to achieve and sustain an earnings capacity that would justify the carrying amount of our investment, as of March 31, 2016 we do not believe the investment to be impaired. 

We have evaluated whether GWM qualifies as a variable interest entity (“VIE”) pursuant to the accounting guidance of ASC 810, Consolidations.  Considering the potential that the total equity investment in FATHOM™ Partnership/GWM may not be sufficient to absorb the losses of FATHOM™, the Company currently views GWM as a VIE.  However, considering the Company’s minority interest and limited involvement with the FATHOM™ business, the Company is not required to consolidate GWM.  Rather, the Company has accounted for its investment under the equity method.

 

 

The carrying value of goodwill was zero as of March 31, 2016. An impairment of $176,000 was recorded against the goodwill recorded in the Willow Valley reporting unit during 2015, to bring its carrying value down to $223,000, which balance was included in assets held for sale as of March 31, 2016.  

-13-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

Intangible assets as of March 31, 2016 and December 31, 2015 consisted of the following (in thousands):

 

 

Acquired ICFAs and Sonoran contract rights are amortized when cash is received in proportion to the amount of total cash expected to be received under the underlying agreements.  Due to the uncertainty of the timing of when cash will be received under ICFA agreements and contract rights, we cannot reliably estimate when the remaining intangible assets' amortization will be recorded.  No amortization was recorded for these balances for the three months ended March 31, 2016 and March 31, 2015.

 

 

On January 19, 2016, GWRC announced that it agreed to pursue a reorganization transaction with the Company that resulted in GWRC merging with and into the Company (the “Reorganization Transaction”). GWRC was organized in 2010 to acquire shares of the Company, and held an approximate 47.8% interest in the Company as of March 31, 2016. The Reorganization Transaction closed on May 3, 2016.  The Reorganization Transaction is part of the Company’s overall plan to simplify its corporate structure by eliminating one level of holding company ownership, refinance its outstanding tax-exempt bonds on more favorable terms (as described below), improve liquidity for shareholders over the medium to long-term and have a single governing jurisdiction in the U.S., where all of the assets, operations and employees of the business are located. As a result of the merger, GWRC ceased to exist as a British Columbia corporation and the Company, governed by the corporate laws of the State of Delaware, is the surviving entity.  The Reorganization Transaction was conditioned upon the concurrent completion of the U.S. IPO.  See Note 14.

With the completion of the U.S. IPO, the Company has the right to redeem all of its outstanding tax-exempt bonds at a price of 103% of the principal amount, plus interest accrued at the redemption date.  As of March 31, 2016 and December 31, 2015, the principal balance of such bonds was $106.7 million.  For a description of our tax-exempt bonds, see Note 9.  Following completion of the U.S. IPO, the Company entered into a note purchase agreement to issue two series of senior secured notes with total principal balance of $115.0 million.  See Note 14.

GWRC was not part of the consolidated Company as of March 31, 2016.  GWRC had no employees and GWRI provided for the ongoing management and general administration of GWRC’s business affairs pursuant to a management agreement between GWRC and GWRI to provide such services.  Accordingly, GWRC was economically dependent on the Company.  Services provided by the Company under the management agreement were provided at no charge to GWRC, and were not monetarily significant.  However, GWRC incurred certain costs not covered by the management agreement.  These include GWRC’s accounting fees, listing fees and other costs directly associated with its former status as a publicly traded company.  Whereas GWRC did not expect to generate cash flows from operating activities, the operating costs incurred by GWRC and other cash requirements were paid by the Company.  Amounts paid by the Company on GWRC’s behalf during the three months ended March 31, 2016 and March 31, 2015 totaled $497,000 and $186,000, respectively.  The Company accounted for such payments as equity distributions to GWRC.

For the three months ended March 31, 2016 no cash advance was provided to GWRC.  For the three months ended March 31, 2015, the Company provided cash advances of approximately $1.1 million to satisfy GWRC's short term cash obligations.  The

-14-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

amount advanced was utilized to fund GWRC's monthly dividend and other cash requirements, as needed.  The related party balance was reduced upon dividend declaration, when the amount declared is presented as a reduction in the Company’s equity.  As of March 31, 2016 and December 31, 2015, the balance of the advance was zero.

We provide medical benefits to our employees through our participation in a pooled plan sponsored by an affiliate of a shareholder and director of the Company. Medical claims paid to the plan were approximately $280,000 and $56,000 for the three months ended March 31, 2016 and March 31, 2015, respectively.

GWM has historically provided billing, customer service and other support services for the Company’s regulated utilities.  Amounts collected by GWM from the Company’s customers that GWM has not yet remitted to the Company are included within the “Due from affiliates” caption on the Company’s consolidated balance sheet.  As of March 31, 2016 and December 31, 2015, the unremitted balance totaled $264,000 and $306,000, respectively.  Notwithstanding the sale of GWM on June 5, 2013, FATHOM™ will continue to provide these services to the Company’s regulated utilities under a long-term service agreement.  Based on current service connections, we estimate that fees to be paid to GWM for FATHOM™ services will be $7.72 per water account/month, which is an annual rate of approximately $1.9 million.  For the three months ended March 31, 2016 and March 31, 2015, the Company incurred FATHOM™ service fees of approximately $472,000 and $611,000, respectively.

Pursuant to the purchase agreement for the sale of GWM, the Company is entitled to quarterly royalty payments based on a percentage of certain of GWM’s recurring revenues for a 10-year period, up to a maximum of $15.0 million.  In addition, the Company entered into a services agreement with GWM whereby the Company has agreed to use the FATHOM™ platform for all of its regulated utility services for an initial term of 10 years.  The services agreement is automatically renewable thereafter for successive 10-year periods, unless notice of termination is given prior to any renewal period. The services agreement may be terminated by either party for default only and the termination of the services agreement will also result in the termination of the royalty payments payable to the Company. The Company made the election to record these quarterly royalty payments prospectively in income as the amounts are earned.  Royalties recorded within other income totaled approximately $88,000 and $79,000 for the three months ended March 31, 2016 and March 31, 2015, respectively.

 

 

Accrued expenses at March 31, 2016 and December 31, 2015 consist of the following (in thousands):

 

 

 

-15-

---

GLOBAL WATER RESOURCES, INC.

Notes to the Condensed Consolidated Financial Statements (Unaudited)

 

 

The outstanding balances and maturity dates for short-term (including the current portion of long-term debt) and long-term debt as of March 31, 2016 and December 31, 2015 are as follows (in thousands):