Energy Recovery, Inc 10-Q for FY2020 Q1

Energy Recovery, Inc. (ERII)

10-Q 2020-05-01 For: 2020-03-31

Added on April 08, 2026

About this 10-Q

Energy Recovery, Inc filed this 10-Q on May 1, 2020, covering the quarter ended March 31, 2020 (FY2020 Q1).

Headline figures

Quarter ended March 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.

Revenue: $21.54M; up 8.8% from $19.8M a year earlier
Net income: $621K; down 76.6% from net income of $2.65M a year earlier
Diluted EPS: $0.01; down 80.0% from $0.05 a year earlier

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	Delaware		01-0616867
	(State or Other Jurisdiction of Incorporation)		(I.R.S. Employer Identification No.)



Title of each class	Trading Symbol	Name of each exchange on which registered
Common	ERII	The Nasdaq Stock Market LLC



		Page No.
PART I
FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019	3
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019	4
	Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2020 and 2019	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 and 2019	6
	Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020 and 2019	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4	Controls and Procedures	33

PART II
OTHER INFORMATION
Item 1	Legal Proceedings	34
Item 1A	Risk Factors	34
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3	Defaults Upon Senior Securities	35
Item 4	Mine Safety Disclosures	35
Item 5	Other Information	35
Item 6	Exhibits	36
Signatures		37



	March 31, 2020			December 31, 2019
	(In thousands, except share data and par value)
ASSETS
Current assets:
Cash and cash equivalents	$	32,842		$	26,387
Short-term investments	40,995			58,736
Accounts receivable, net	13,841			12,979
Inventories, net	10,938			10,317
Prepaid expenses and other current assets	5,187			4,548
Total current assets	103,803			112,967
Long-term investments	19,361			15,419
Deferred tax assets, non-current	16,932			16,897
Property and equipment, net	19,780			18,843
Operating lease, right of use asset	17,253			11,195
Goodwill	12,790			12,790
Other intangible assets, net	61			65
Other assets, non-current	632			598
Total assets	$	190,612		$	188,774
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,868		$	1,192
Accrued expenses and other current liabilities	6,156			9,869
Lease liabilities	1,209			1,023
Contract liabilities	16,509			15,746
Total current liabilities	25,742			27,830
Lease liabilities, non-current	17,523			11,533
Contract liabilities, non-current	8,805			13,120
Other non-current liabilities	277			278
Total liabilities	52,347			52,761
Commitments and contingencies (Note 8)
Stockholders’ equity:
Common stock	61			61
Additional paid-in capital	171,954			170,028
Accumulated other comprehensive loss	(332		)	(37		)
Treasury stock	(30,486		)	(30,486		)
Accumulated deficit	(2,932		)	(3,553		)
Total stockholders’ equity	138,265			136,013
Total liabilities and stockholders’ equity	$	190,612		$	188,774



	Three Months Ended March 31,
	2020			2019
	(In thousands, except per share data)
Product revenue	$	19,001		$	16,072
Product cost of revenue	5,684			4,935
Product gross profit	13,317			11,137

License and development revenue	2,543			3,723

Operating expenses:
General and administrative	6,881			5,579
Sales and marketing	2,138			2,162
Research and development	6,709			4,254
Amortization of intangible assets	4			156
Total operating expenses	15,732			12,151
Income from operations	128			2,709

Other income (expense):
Interest income	420			523
Other non-operating expense, net	(12		)	(24		)
Total other income, net	408			499
Income before income taxes	536			3,208
(Benefit from) provision for income taxes	(85		)	554
Net income	$	621		$	2,654

Earnings per share:
Basic	$	0.01		$	0.05
Diluted	$	0.01		$	0.05

Number of shares used in per share calculations:
Basic	55,412			54,116
Diluted	56,542			55,368



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ____________ to __________



	Three Months Ended March 31, 2020						Three Months Ended March 31, 2019
	Water		Oil & Gas		Total		Water		Oil & Gas		Total
	(In thousands)
Primary geographical market
Middle East and Africa	$	16,231	$	—	$	16,231	$	8,698	$	104	$	8,802
Americas	1,201		2,543		3,744		4,023		3,723		7,746
Europe	794		—		794		1,113		—		1,113
Asia	775		—		775		2,134		—		2,134
Total revenue	$	19,001	$	2,543	$	21,544	$	15,968	$	3,827	$	19,795

Major product/service line
PX Pressure Exchangers, pumps and turbo devices	$	19,001	$	—	$	19,001	$	15,968	$	104	$	16,072
License and development	—		2,543		2,543		—		3,723		3,723
Total revenue	$	19,001	$	2,543	$	21,544	$	15,968	$	3,827	$	19,795



	March 31, 2020
	(In thousands)
Year:
2020 (remaining nine months)	$	26,185
2021	17,931
2022	661
2023	646
2024 and thereafter	4,385
Total performance obligation	$	49,808



	March 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Short-term investments
U.S. treasury securities	$	3,558	$	33	$	—		$	3,591
Corporate notes and bonds	37,540		5		(141		)	37,404
Total short-term investments	41,098		38		(141		)	40,995
Long-term investments
U.S. treasury securities	809		13		—			822
Corporate notes and bonds	18,751		11		(223		)	18,539
Total long-term investments	19,560		24		(223		)	19,361
Total available-for-sale investments	$	60,658	$	62	$	(364	)	$	60,356



	December 31, 2019
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Short-term investments
U.S. treasury securities	$	2,746	$	1	$	—		$	2,747
Corporate notes and bonds	55,951		49		(11		)	55,989
Total short-term investments	58,697		50		(11		)	58,736
Long-term investments
Corporate notes and bonds	15,415		9		(5		)	15,419
Total long-term investments	15,415		9		(5		)	15,419
Total available-for-sale investments	$	74,112	$	59	$	(16	)	$	74,155



	March 31, 2020
	Total		Level 1		Level 2		Level 3
	(In thousands)
Cash equivalents
Money market securities	$	20,638	$	20,638	$	—	$	—
Total cash equivalents	20,638		20,638		—		—
Short-term investments
U.S. treasury securities	3,591		—		3,591		—
Corporate notes and bonds	37,404		—		37,404		—
Total short-term investments	40,995		—		40,995		—
Long-term investments
U.S. treasury securities	822		—		822		—
Corporate notes and bonds	18,539		—		18,539		—
Total long-term investments	19,361		—		19,361		—
Total fair value of financial assets	$	80,994	$	20,638	$	60,356	$	—



Weighted average remaining lease term	9.1 years
Weighted average discount rate	7.0%



	Lease Amounts
	(In thousands)
Year:
2020 (remaining nine months)	$	1,956
2021	2,468
2022	2,650
2023	2,580
2024	2,812
2025 and thereafter	13,198
Total	25,664
Less imputed lease interest	(6,932		)
Total lease liabilities	$	18,732



		Three Months Ended March 31,
	Segment	2020	2019
Customer A	Water	25%	**
Customer B	Water	20%	29%
Customer C	Water	10%	**
Customer D	Water	**	14%
Customer E	Water	**	12%
Customer F	Water	**	10%



	Three Months Ended March 31,
	2020			2019
	(In thousands)
Cash flows from operating activities:
Net income	$	621		$	2,654
Adjustments to reconcile net income to cash used in operating activities
Stock-based compensation	1,503			1,678
Depreciation and amortization	1,258			900
Amortization (accretion) of premiums and discounts on investments	220			(26		)
Deferred income taxes	(35		)	549
Provision for warranty claims	98			152
Other non-cash adjustments	47			(68		)
Changes in operating assets and liabilities:
Accounts receivable, net	(902		)	(7,162		)
Contract assets	(244		)	2,977
Inventories, net	(692		)	(218		)
Prepaid and other assets	(428		)	(140		)
Accounts payable	745			18
Accrued expenses and other liabilities	(4,514		)	(3,353		)
Income taxes	3			10
Contract liabilities	(3,552		)	(3,922		)
Net cash used in operating activities	(5,872		)	(5,951		)
Cash flows from investing activities:
Sales of marketable securities	4,974			—
Maturities of marketable securities	21,195			19,599
Purchases of marketable securities	(12,855		)	(19,198		)
Capital expenditures	(1,380		)	(1,566		)
Net cash provided by (used in) investing activities	11,934			(1,165		)
Cash flows from financing activities:
Net proceeds from issuance of common stock	440			2,191
Tax payment for employee shares withheld	(22		)	(34		)
Net cash provided by financing activities	418			2,157
Effect of exchange rate differences on cash and cash equivalents	(25		)	(4		)
Net change in cash, cash equivalents and restricted cash	6,455			(4,963		)
Cash, cash equivalents and restricted cash, beginning of year	26,488			22,138
Cash, cash equivalents and restricted cash, end of period	$	32,943		$	17,175



	Three Months Ended March 31,
	2020			2019
	(In thousands)
Common stock
Beginning balance	$	61		$	59
Issuance of common stock, net	—			1
Ending balance	61			60

Additional paid-in capital
Beginning balance	170,028			158,404
Issuance of common stock, net	418			2,156
Stock-based compensation	1,508			1,671
Ending balance	171,954			162,231

Accumulated other comprehensive loss
Beginning balance	(37		)	(133		)
Other comprehensive (loss) income
Foreign currency translation adjustments	(25		)	(24		)
Unrealized (loss) gain on investments	(270		)	84
Total other comprehensive (loss) income, net	(295		)	60
Ending balance	(332		)	(73		)

Treasury stock
Beginning and ending balance	(30,486		)	(30,486		)

Accumulated deficit
Beginning balance	(3,553		)	(14,466		)
Net income	621			2,654
Ending balance	(2,932		)	(11,812		)

Total stockholders’ equity	$	138,265		$	119,920

Common stock issued (number of shares)
Beginning balance	60,718			59,396
Issuance of common stock, net	281			523
Ending balance	60,999			59,919

Treasury stock (number of shares)



	March 31, 2020			December 31, 2019
	(In thousands)
Contract assets balance, beginning of year	$	692		$	4,083
Transferred to trade receivables	(5,579		)	(13,155		)
Additions to contract assets	5,823			9,764
Contract assets balance, end of period	$	936		$	692



	March 31, 2020			December 31, 2019
	(In thousands)
Contract liabilities balance, beginning of year	$	28,866		$	42,809
Revenue recognized	(3,980		)	(15,247		)
Increase due to cash received, excluding amounts recognized as revenue during the period	428			1,304
Contract liabilities balance, end of period	$	25,314		$	28,866


•	our belief that the cash on hand, marketable securities and ongoing cash generated from operations should be sufficient to cover the Company’s capital requirements for the next 12 months;


•	our belief that our gross margins will continue to be negatively affected until we are able to operate our manufacturing facilities as originally planned prior to the novel coronavirus (“COVID-19”) global pandemic;


•	our belief that we will be able to fulfill most, if not all, of our existing delivery obligations in fiscal year 2020.


•	our belief that levels of gross profit margin are sustainable to the extent that volume grows, we experience a favorable product mix, pricing remains stable and we continue to realize cost savings through production efficiencies and enhanced yields;


•	our plan to improve our existing energy recovery devices and to develop and manufacture new and enhanced versions of these devices;


•	our belief that our PX^® energy recovery devices are the most cost-effective energy recovery devices over time and will result in low life-cycle costs;


•	our belief that our turbocharger devices have long operating lives;


•	our objective of finding new applications for our technology and developing new products for use outside of desalination, including oil & gas applications;


•	our expectation that our expenses for research and development and sales and marketing may increase as a result of diversification into markets outside of desalination;


•	our expectation that we will continue to rely on sales of our energy recovery devices in the desalination market for a substantial portion of our revenue, and that new desalination markets, including the U.S., will provide revenue opportunities to us;


•	our ability to meet projected new product development dates, anticipated cost reduction targets or revenue growth objectives for new products;


•	our belief that we can commercialize the VorTeq^™ hydraulic fracturing system;


•	our belief that the VorTeq hydraulic fracturing system enables oilfield services (“OFS”) companies to migrate to more efficient pumping technology;


•	our belief that we will be able to enter into a long-term licensing agreement to bring the MTeq^™ solution to market;


•	our belief that customers will accept and adopt our new products;


•	our belief that our current facilities will be adequate for the foreseeable future;


•	our expectation that sales outside of the U.S. will remain a significant portion of our revenue;


•	the timing of our receipt of payment for products or services from our customers;


•	our belief that our existing cash balances and cash generated from our operations will be sufficient to meet our anticipated liquidity needs for the foreseeable future, with the exception of a decision to enter into an acquisition and/or fund investments in our latest technology arising from rapid market adoption that could require us to seek additional equity or debt financing;


•	our expectation that, as we expand our international sales, a portion of our revenue could be denominated in foreign currencies and the impact of changes in exchange rates on our cash and cash equivalents and operating results;