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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to __________
Commission File Number: 001-34112
Energy Recovery, Inc.
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | | | | | | | |
| Delaware | | 01-0616867 | |
| (State or Other Jurisdiction of Incorporation) | | (I.R.S. Employer Identification No.) | |
1717 Doolittle Drive, San Leandro, California 94577
(Address of Principal Executive Offices) (Zip Code)
(510) 483-7370
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.001 par value | | ERII | | The Nasdaq Stock Market LLC |
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. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted 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). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ☐ No ☑
As of July 30, 2021, there were 57,152,300 shares of the registrant’s common stock outstanding.
ENERGY RECOVERY, INC.
TABLE OF CONTENTS
Energy Recovery, Inc. | Q2'2021 Form 10-Q
Forward-Looking Information
This Quarterly Report on Form 10-Q for the three and six months ended June 30, 2021, including Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (the “MD&A”) and certain information incorporated by reference, contain forward-looking statements within the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this report include, but are not limited to, statements about our expectations, objectives, anticipations, plans, hopes, beliefs, intentions or strategies regarding the future.
Forward-looking statements represent our current expectations about future events, are based on assumptions, and involve risks and uncertainties. If the risks or uncertainties occur or the assumptions prove incorrect, then our results may differ materially from those set forth or implied by the forward-looking statements. Our forward-looking statements are not guarantees of future performance or events.
Words such as “expects,” “anticipates,” “aims,” “projects,” “intends,” “plans,” “believes,” “estimates,” “seeks, “continue,” “could,” “may,” “potential,” “should, “will,” “would,” variations of such words and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and assumptions that are difficult to predict; therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Readers are directed to risks and uncertainties identified under Part II, Item 1A, “Risk Factors,” and elsewhere in this report for factors that may cause actual results to be different from those expressed in these forward-looking statements. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statements for any reason.
Forward-looking statements in this report include, without limitation, statements about the following:
•our belief that the pressure exchanger is the industry standard for energy recovery in the seawater reverse osmosis (“SWRO”) industry;
•our belief that pressure exchanger technology can provide benefits to our customers, including the reduction of capital expenditures and energy use;
•our belief that the integration of Environmental, Social and Governance (“ESG”) principles into our corporate and risk management strategies can strengthen our existing business as well as our efforts to develop new applications of pressure exchanger technology for high-pressure fluid-flow environments;
•our belief that our enhanced safety measures will allow us to help contain the spread of coronavirus (“COVID-19”);
•the development of major public health concerns, including the COVID-19 outbreak or other pandemics arising globally, and the future impact of such major public health concerns, and specifically in the short-term the COVID-19 pandemic, on our business and operations;
•our belief that our pressure exchanger technology can address inefficiencies and waste within industrial systems and processes that involve high-pressure and low-pressure fluid flows;
•our belief that our PX® Pressure Exchanger® (“PX”) has helped make SWRO desalination an economically viable and more sustainable option in the production of potable water;
•our belief that markets not traditionally associated with desalination, including the United States of America (“U.S.”) will inevitably develop and provide further revenue growth opportunities;
•our belief that, as the existing thermal technology is replaced with reverse osmosis (“RO”) technology, demand for our products will be created;
•our belief that ongoing operating costs rather than capital expenditures is the key factor in the selection of an energy recovery device (“ERD”) solution for megaproject (“MPD”) customers;
•our belief that our PX offers market-leading efficiency and reduction of total lifecycle cost to the end client;
•our estimate that MPD customer projects represent revenue opportunities from approximately $1 million to $18 million;
•our belief that initial capital expenditure rather than future ongoing operating costs is the key factor in selection of an ERD solution for original equipment manufacturer (“OEM”) projects;
•our belief that our PX has a competitive advantage, as compared to the Flowserve Corporation’s DWEER product, because our devices are made with highly durable and corrosion-resistant aluminum oxide (“alumina”) ceramic parts that are designed for a life of more than 25 years, are warrantied for high efficiencies, and cause minimal unplanned downtime, resulting in lower lifecycle costs;
Energy Recovery, Inc. | Q2'2021 Form 10-Q | FLS 1
•our belief that our PX has a distinct competitive advantage over Fluid Equipment Development Company’s (“FEDCO”) turbochargers and Danfoss Group’s iSave ERDs because our devices provide up to 98% efficiency, have lower lifecycle maintenance costs, and are made of highly durable and corrosion-resistant alumina ceramic parts;
•our belief that our Turbochargers compete favorably with FEDCO’s turbochargers based on efficiency, price, and because our Turbochargers have design advantages that enhance efficiency, operational flexibility and serviceability;
•our belief that our existing cash and cash equivalents, our short-term investments, and the ongoing 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 we will be able to enforce our intellectual property (“IP”) rights;
•our expectation that the adoption of new accounting standards will not have a material impact on our financial position or results of operations; and
•other factors disclosed under the MD&A and Item 3, “Quantitative and Qualitative Disclosures about Market Risk,” and elsewhere in this Form 10-Q.
You should not place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of the filing of this Quarterly Report on Form 10-Q. All forward-looking statements included in this document are subject to additional risks and uncertainties further discussed under Part II, Item 1A, “Risk Factors,” and are based on information available to us as of August 6, 2021. We assume no obligation to update any such forward-looking statements, certain risks and uncertainties which could cause actual results to differ materially from those projected in the forward-looking statements, as disclosed from time to time in our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q and Current Reports on Form 8‑K filed with or furnished to the Securities and Exchange Commission (the “SEC”), as well as in Part II, Item 1A, “Risk Factors,” within this Quarterly Report on Form 10-Q. It is important to note that our actual results could differ materially from the results set forth or implied by our forward-looking statements. The factors that could cause our actual results to differ from those included in such forward-looking statements are set forth under the heading Item 1A, “Risk Factors,” in our Quarterly Reports on Form 10-Q, and in our Annual Reports on Form 10-K, and from time-to-time, in our results disclosed on our Current Reports on Form 8-K.
We provide our Annual Reports on Form 10‑K, Quarterly Reports on Form 10‑Q, Current Reports on Form 8‑K, Proxy Statements, Forms 3, 4 and 5 filed by or on behalf of directors, executive officers and certain large shareholders, and any amendments to those documents filed or furnished pursuant to the Securities Exchange Act of 1934, free of charge on the Investor Relations section of our website, www.energyrecovery.com. These filings will become available as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. From time to time, we may use our website as a channel of distribution of material company information.
We also make available in the Investor Relations section of our website our corporate governance documents including our code of business conduct and ethics and the charters of the audit, compensation and nominating and governance committees. These documents, as well as the information on the website, are not intended to be part of this Quarterly Report on Form 10-Q. We use the Investor Relations section of our website as a means of complying with our disclosure obligations under Regulation FD. Accordingly, you should monitor the Investor Relations section of our website in addition to following our press releases, SEC filings and public conference calls and webcasts.
Energy Recovery, Inc. | Q2'2021 Form 10-Q | FLS 2
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements (unaudited)
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| |
| June 30, 2021 | | December 31, 2020 |
| (In thousands) |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 103,302 | | | $ | 94,255 | |
Short-term investments | 17,394 | | | 20,446 | |
Accounts receivable, net | 7,599 | | | 11,792 | |
Inventories, net | 15,289 | | | 11,748 | |
| | | |
Prepaid expenses and other assets, current | 4,265 | | | 4,950 | |
Total current assets | 147,849 | | | 143,191 | |
| | | |
Deferred tax assets, net | 12,471 | | | 11,030 | |
Property and equipment, net | 20,443 | | | 20,176 | |
Operating lease, right of use asset | 15,383 | | | 16,090 | |
Goodwill and other intangible assets | 12,833 | | | 12,839 | |
Other assets, non-current | 365 | | | 988 | |
Total assets | $ | 209,344 | | | $ | 204,314 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 2,278 | | | $ | 1,118 | |
Accrued expenses and other liabilities, current | 8,397 | | | 11,816 | |
Lease liabilities, current | 1,473 | | | 1,243 | |
Contract liabilities, current | 1,117 | | | 1,552 | |
Total current liabilities | 13,265 | | | 15,729 | |
Lease liabilities, non-current | 15,682 | | | 16,443 | |
| | | |
| | | |
| | | |
Other liabilities, non-current | 571 | | | 518 | |
Total liabilities | 29,518 | | | 32,690 | |
Commitments and contingencies (Note 7) | | | |
Stockholders’ equity: | | | |
| | | |
Common stock | 63 | | | 62 | |
| | | |
Additional paid-in capital | 191,087 | | | 179,161 | |
Accumulated other comprehensive (loss) income | (53) | | | 53 | |
Treasury stock | (42,040) | | | (30,486) | |
Retained earnings | 30,769 | | | 22,834 | |
Total stockholders’ equity | 179,826 | | | 171,624 | |
Total liabilities and stockholders’ equity | $ | 209,344 | | | $ | 204,314 | |
| | | |
| | | |
| | | |
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 1
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | |
| (In thousands, except per share data) |
Product revenue | $ | 20,607 | | | $ | 19,256 | | | $ | 49,547 | | | $ | 38,257 | | | |
Product cost of revenue | 7,181 | | | 6,549 | | | 16,162 | | | 12,233 | | | |
Product gross profit | 13,426 | | | 12,707 | | | 33,385 | | | 26,024 | | | |
| | | | | | | | | |
License and development revenue | — | | | 24,352 | | | — | | | 26,895 | | | |
| | | | | | | | | |
Operating expenses: | | | | | | | | | |
General and administrative | 6,175 | | | 5,599 | | | 12,781 | | | 12,480 | | | |
Sales and marketing | 2,537 | | | 1,497 | | | 5,240 | | | 3,635 | | | |
Research and development | 4,424 | | | 6,352 | | | 8,926 | | | 13,061 | | | |
Amortization of intangible assets | 3 | | | 4 | | | 7 | | | 8 | | | |
| | | | | | | | | |
Impairment of long-lived assets | — | | | 2,332 | | | — | | | 2,332 | | | |
| | | | | | | | | |
| | | | | | | | | |
Total operating expenses | 13,139 | | | 15,784 | | | 26,954 | | | 31,516 | | | |
Income from operations | 287 | | | 21,275 | | | 6,431 | | | 21,403 | | | |
| | | | | | | | | |
Other income (expense): | | | | | | | | | |
Interest income | 51 | | | 255 | | | 143 | | | 675 | | | |
| | | | | | | | | |
Other non-operating expense, net | (12) | | | (18) | | | (22) | | | (30) | | | |
Total other income, net | 39 | | | 237 | | | 121 | | | 645 | | | |
Income before income taxes | 326 | | | 21,512 | | | 6,552 | | | 22,048 | | | |
(Benefit from) provision for income taxes | (743) | | | 4,586 | | | (1,383) | | | 4,501 | | | |
Net income | $ | 1,069 | | | $ | 16,926 | | | $ | 7,935 | | | $ | 17,547 | | | |
| | | | | | | | | |
Net income per share: | | | | | | | | | |
Basic | $ | 0.02 | | | $ | 0.30 | | | $ | 0.14 | | | $ | 0.32 | | | |
Diluted | $ | 0.02 | | | $ | 0.30 | | | $ | 0.13 | | | $ | 0.31 | | | |
| | | | | | | | | |
Number of shares used in per share calculations: | | | | | | | | | |
Basic | 57,253 | | | 55,614 | | | 57,066 | | | 55,513 | | | |
Diluted | 58,999 | | | 56,371 | | | 58,822 | | | 56,438 | | | |
| | | | | | | | | |
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 2
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | |
| (In thousands) |
Net income | $ | 1,069 | | | $ | 16,926 | | | $ | 7,935 | | | $ | 17,547 | | | |
Other comprehensive (loss) income, net of tax | | | | | | | | | |
Foreign currency translation adjustments | 5 | | | 10 | | | (20) | | | (15) | | | |
Unrealized (loss) gain on investments | (38) | | | 441 | | | (86) | | | 171 | | | |
Total other comprehensive (loss) income, net of tax | (33) | | | 451 | | | (106) | | | 156 | | | |
Comprehensive income | $ | 1,036 | | | $ | 17,377 | | | $ | 7,829 | | | $ | 17,703 | | | |
| | | | | | | | | |
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 3
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | |
| (In thousands, except shares) |
Common stock | | | | | | | | | |
Beginning balance | $ | 63 | | | $ | 61 | | | $ | 62 | | | $ | 61 | | | |
Issuance of common stock, net | — | | | — | | | 1 | | | — | | | |
Ending balance | 63 | | | 61 | | | 63 | | | 61 | | | |
| | | | | | | | | |
Additional paid-in capital | | | | | | | | | |
Beginning balance | 187,083 | | | 171,954 | | | 179,161 | | | 170,028 | | | |
Issuance of common stock, net | 2,638 | | | 687 | | | 8,696 | | | 1,105 | | | |
Stock-based compensation | 1,366 | | | 1,088 | | | 3,230 | | | 2,596 | | | |
Ending balance | 191,087 | | | 173,729 | | | 191,087 | | | 173,729 | | | |
| | | | | | | | | |
Accumulated other comprehensive (loss) income | | | | | | | | | |
Beginning balance | (20) | | | (332) | | | 53 | | | (37) | | | |
Other comprehensive (loss) income | | | | | | | | | |
Foreign currency translation adjustments | 5 | | | 10 | | | (20) | | | (15) | | | |
Unrealized (loss) gain on investments | (38) | | | 441 | | | (86) | | | 171 | | | |
Total other comprehensive (loss) income, net | (33) | | | 451 | | | (106) | | | 156 | | | |
Ending balance | (53) | | | 119 | | | (53) | | | 119 | | | |
| | | | | | | | | |
Treasury stock | | | | | | | | | |
Beginning balance | (30,486) | | | (30,486) | | | (30,486) | | | (30,486) | | | |
Common stock repurchased | (11,554) | | | — | | | (11,554) | | | — | | | |
| | | | | | | | | |
Ending balance | (42,040) | | | (30,486) | | | (42,040) | | | (30,486) | | | |
| | | | | | | | | |
Retained earnings | | | | | | | | | |
Beginning balance | 29,700 | | | (2,932) | | | 22,834 | | | (3,553) | | | |
Net income | 1,069 | | | 16,926 | | | 7,935 | | | 17,547 | | | |
Ending balance | 30,769 | | | 13,994 | | | 30,769 | | | 13,994 | | | |
| | | | | | | | | |
Total stockholders’ equity | $ | 179,826 | | | $ | 157,417 | | | $ | 179,826 | | | $ | 157,417 | | | |
| | | | | | | | | |
Common stock issued (shares) | | | | | | | | | |
Beginning balance | 62,877,567 | | | 60,999,233 | | | 61,798,004 | | | 60,717,702 | | | |
Issuance of common stock, net | 389,726 | | | 134,084 | | | 1,469,289 | | | 415,615 | | | |
Ending balance | 63,267,293 | | | 61,133,317 | | | 63,267,293 | | | 61,133,317 | | | |
| | | | | | | | | |
Treasury stock (shares) | | | | | | | | | |
Beginning balance | 5,455,935 | | | 5,455,935 | | | 5,455,935 | | | 5,455,935 | | | |
Common stock repurchased | 656,938 | | | — | | | 656,938 | | | — | | | |
| | | | | | | | | |
Ending balance | 6,112,873 | | | 5,455,935 | | | 6,112,873 | | | 5,455,935 | | | |
| | | | | | | | | |
Total common stock outstanding (shares) | 57,154,420 | | | 55,677,382 | | | 57,154,420 | | | 55,677,382 | | | |
| | | | | | | | | |
| | | | | | | | | |
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 4
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | | | | | | | | | | |
| | | Six Months Ended June 30, |
| | | | | 2021 | | 2020 | | |
| | | | | (In thousands) |
Cash flows from operating activities: | | | | | | | | | |
Net income | | | | | $ | 7,935 | | | $ | 17,547 | | | |
Adjustments to reconcile net income to cash provided by (used in) operating activities | | | | | | | | | |
Stock-based compensation | | | | | 3,341 | | | 2,595 | | | |
Depreciation and amortization | | | | | 2,733 | | | 2,751 | | | |
Amortization of premiums and discounts on investments | | | | | 139 | | | 215 | | | |
Deferred income taxes | | | | | (1,441) | | | 4,666 | | | |
Impairment of long-lived assets | | | | | — | | | 2,332 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other non-cash adjustments | | | | | 149 | | | 228 | | | |
Changes in operating assets and liabilities: | | | | | | | | | |
Accounts receivable, net | | | | | 4,193 | | | 101 | | | |
| | | | | | | | | |
Contract assets | | | | | 1,356 | | | (198) | | | |
Inventories, net | | | | | (3,621) | | | 260 | | | |
Prepaid and other assets | | | | | (47) | | | (278) | | | |
Accounts payable | | | | | 1,237 | | | 1,285 | | | |
| | | | | | | | | |
Accrued expenses and other liabilities | | | | | (3,999) | | | (4,009) | | | |
| | | | | | | | | |
Contract liabilities | | | | | (434) | | | (27,789) | | | |
Net cash provided by (used in) operating activities | | | | | 11,541 | | | (294) | | | |
Cash flows from investing activities: | | | | | | | | | |
Sales of marketable securities | | | | | — | | | 9,767 | | | |
Maturities of marketable securities | | | | | 14,861 | | | 43,286 | | | |
Purchases of marketable securities | | | | | (12,034) | | | (12,855) | | | |
Capital expenditures | | | | | (2,449) | | | (4,410) | | | |
Other | | | | | 5 | | | — | | | |
Net cash provided by investing activities | | | | | 383 | | | 35,788 | | | |
Cash flows from financing activities: | | | | | | | | | |
Net proceeds from issuance of common stock | | | | | 8,697 | | | 1,128 | | | |
Tax payment for employee shares withheld | | | | | — | | | (23) | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Repurchase of common stock | | | | | (11,554) | | | — | | | |
Net cash (used in) provided by financing activities | | | | | (2,857) | | | 1,105 | | | |
Effect of exchange rate differences on cash and cash equivalents | | | | | (20) | | | (15) | | | |
Net change in cash, cash equivalents and restricted cash | | | | | 9,047 | | | 36,584 | | | |
Cash, cash equivalents and restricted cash, beginning of year | | | | | 94,358 | | | 26,488 | | | |
Cash, cash equivalents and restricted cash, end of period | | | | | $ | 103,405 | | | $ | 63,072 | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
See Accompanying Notes to Condensed Consolidated Financial Statements
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 5
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 — Description of Business and Significant Accounting Policies
Energy Recovery, Inc. and its wholly-owned subsidiaries (the “Company” or “Energy Recovery”) create technologies that solve complex challenges for industrial fluid-flow markets worldwide. Building on the Company’s pressure exchanger technology platform, the Company designs and manufactures solutions that improve operational efficiency by reducing waste, energy consumption and costs across a range of industrial processes. What began as a game-changing invention for desalination has grown into a global business advancing the environmental sustainability of the Company’s customers’ operations in multiple industries. The Company’s solutions are marketed, sold in, or developed for, the fluid-flow and gas markets, such as water, industrial waste, oil & gas, chemical processing and refrigeration, under the trademarks ERI®, Ultra PX™, PX®, Pressure Exchanger®, PX Pressure Exchanger® (“PX”), PX PowerTrain™, VorTeq™, IsoBoost®, AT™, AquaBold™, and PX G1300™. The Company owns, manufactures and/or develops its solutions, in whole or in part, in the United States of America (“U.S.”).
Basis of Presentation
The Condensed Consolidated Financial Statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
The accompanying Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2020 Condensed Consolidated Balance Sheet was derived from audited financial statements and may not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading.
The June 30, 2021 unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 12, 2021 (the “2020 Annual Report”).
All adjustments consisting of normal recurring adjustments that are necessary to present fairly the financial position, results of operations and cash flows for the interim periods have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.
Reclassifications
Certain prior period amounts have been reclassified in the Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Cash Flows, and certain notes to the Condensed Consolidated Financial Statements, to conform to the current period presentation.
Use of Estimates
The preparation of Condensed Consolidated Financial Statements, in conformity with GAAP, requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes.
The accounting policies that reflect the Company’s more significant estimates and judgments and that the Company believes are the most critical to aid in fully understanding and evaluating its reported financial results are revenue recognition; valuation of stock options; valuation and impairment of goodwill; inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies. Those estimates could change, and as a result, actual results could differ materially from those estimates.
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 6
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Due to the novel coronavirus (“COVID-19”) pandemic, and the impact on the Company’s customers, there has been uncertainty and disruption in the global economy and financial markets. The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a revision of the carrying value of its assets or liabilities as of August 6, 2021, the date of issuance of this Quarterly Report on Form 10-Q. These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these estimates under different assumptions or conditions. The Company undertakes no obligation to update publicly these estimates for any reason after the date of this Quarterly Report on Form 10-Q, except as required by law.
Significant Accounting Policies
Except for adopting new accounting pronouncements, as noted under “Recently Adopted Accounting Pronouncements,” there have been no material changes to the Company’s significant accounting policies in Note 1, “Description of Business and Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in Item 8, “Financial Statements and Supplementary Data,” in the 2020 Annual Report.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The new standard is effective for interim and annual periods beginning after December 15, 2020. The Company adopted ASU 2019-12 on January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s consolidated financial condition, results of operations, and cash flows.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) (“ASU 2020-04”), which provided optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The FASB later issued ASU No. 2021-01, Reference Rate Reform (Topic 848): Scope, to clarify the scope of Topic 848 so that derivatives affected by the discounting transition are explicitly eligible for certain optional expedients and exceptions in Topic 848 (“ASU 2021-01”). Entities may apply the provisions of the new standards as of the beginning of the reporting period when the election is made (i.e., as early as the first quarter of 2020). Unlike other topics, the provisions of this update are only available until December 31, 2022, when the reference rate replacement activity is expected to have been completed. An entity may elect to apply amendments prospectively through December 31, 2022. The optional expedients were available to be used upon issuance of this guidance but the Company has not yet applied the guidance because the Company has not yet modified its existing contract for reference rate reform. The Company does not expect the provisions of ASU 2020-04 or ASU 2021-01 to have a material impact on its financial condition, results of operation, and cash flows.
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 7
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 2 — Revenue
Disaggregation of Revenue
The following tables present the disaggregated revenues by product and service line, product revenue by geography based on the “shipped to” addresses of the Company’s customers, product revenue by channel, and product revenue by segment (Water and Emerging Technologies segment). Sales and usage-based taxes are excluded from revenues. See Note 10, “Segment Reporting,” for further discussion related to the Company’s segments.
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| Three Months Ended June 30, 2021 | | | | Six Months Ended June 30, 2021 |
| Water | | Emerging Technologies | | Total | | | | | | | | Water | | Emerging Technologies | | Total |
| (In thousands) |
Revenue by product and service line |
PXs, pumps and turbo devices, and other | $ | 20,568 | | | $ | 39 | | | $ | 20,607 | | | | | | | | | $ | 49,508 | | | $ | 39 | | | $ | 49,547 | |
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Revenue by primary geographical markets |
Middle East and Africa | $ | 16,401 | | | $ | 39 | | | $ | 16,440 | | | | | | | | | $ | 37,361 | | | $ | 39 | | | $ | 37,400 | |
Asia | 2,325 | | | — | | | 2,325 | | | | | | | | | 9,503 | | | — | | | 9,503 | |
Americas | 945 | | | — | | | 945 | | | | | | | | | 1,368 | | | — | | | 1,368 | |
Europe | 897 | | | — | | | 897 | | | | | | | | | 1,276 | | | — | | | 1,276 | |
| | | | | | | | | | | | | | | | | |
Total revenue | $ | 20,568 | | | $ | 39 | | | $ | 20,607 | | | | | | | | | $ | 49,508 | | | $ | 39 | | | $ | 49,547 | |
| | | | | | | | | | | | | | | | | |
Product revenue by channel |
Megaproject | $ | 13,236 | | | $ | 39 | | | $ | 13,275 | | | | | | | | | $ | 36,993 | | | $ | 39 | | | $ | 37,032 | |
Original equipment manufacturer | 4,274 | | | — | | | 4,274 | | | | | | | | | 7,065 | | | — | | | 7,065 | |
Aftermarket | 3,058 | | | — | | | 3,058 | | | | | | | | | 5,450 | | | — | | | 5,450 | |
| | | | | | | | | | | | | | | | | |
Total product revenue | $ | 20,568 | | | $ | 39 | | | $ | 20,607 | | | | | | | | | $ | 49,508 | | | $ | 39 | | | $ | 49,547 | |
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Energy Recovery, Inc. | Q2'2021 Form 10-Q | 8
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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| Three Months Ended June 30, 2020 | | Six Months Ended June 30, 2020 |
| Water | | Emerging Technologies | | Total | | Water | | Emerging Technologies | | Total |
| (In thousands) |
Revenue by product and service line |
PXs, pumps and turbo devices, and other | $ | 19,256 | | | $ | — | | | $ | 19,256 | | | $ | 38,257 | | | $ | — | | | $ | 38,257 | |
| | | | | | | | | | | |
License and development | — | | | 24,352 | | | 24,352 | | | — | | | 26,895 | | | 26,895 | |
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Total revenue | $ | 19,256 | | | $ | 24,352 | | | $ | 43,608 | | | $ | 38,257 | | | $ | 26,895 | | | $ | 65,152 | |
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Revenue by primary geographical markets |
Middle East and Africa | $ | 16,504 | | | $ | — | | | $ | 16,504 | | | $ | 32,735 | | | $ | — | | | $ | 32,735 | |
Asia | 617 | | | — | | | 617 | | | 1,392 | | | — | | | 1,392 | |
Americas | 1,161 | | | 24,352 | | | 25,513 | | | 2,362 | | | 26,895 | | | 29,257 | |
Europe | 974 | | | — | | | 974 | | | 1,768 | | | — | | | 1,768 | |
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Total product revenue | $ | 19,256 | | | $ | 24,352 | | | $ | 43,608 | | | $ | 38,257 | | | $ | 26,895 | | | $ | 65,152 | |
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Product revenue by channel |
Megaproject | $ | 11,965 | | | $ | — | | | $ | 11,965 | | | $ | 26,422 | | | $ | — | | | $ | 26,422 | |
Original equipment manufacturer | 4,050 | | | — | | | 4,050 | | | 7,606 | | | — | | | 7,606 | |
Aftermarket | 3,241 | | | — | | | 3,241 | | | 4,229 | | | — | | | 4,229 | |
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Total product revenue | $ | 19,256 | | | $ | — | | | $ | 19,256 | | | $ | 38,257 | | | $ | — | | | $ | 38,257 | |
In June 2020, the Company and Schlumberger Technology Corporation (“Schlumberger”) entered into an agreement to terminate the 2015 license agreement between the Company and Schlumberger (the “VorTeq License Agreement”) to provide Schlumberger with the exclusive worldwide rights to the VorTeq technology. The termination of the VorTeq License Agreement was effective June 1, 2020. As there were no future performance obligations to be recognized under the VorTeq License Agreement after the effective date, the Company recognized in full the remaining deferred revenue balance of $24.4 million in the second quarter of fiscal year 2020. In addition, no future license and development revenue was recognized under the VorTeq License Agreement after the second quarter of fiscal year 2020.
Contract Balances
The following table presents contract balances by category.
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| |
| June 30, 2021 | | December 31, 2020 |
| (In thousands) |
Accounts receivable, net | $ | 7,599 | | | $ | 11,792 | |
Contract assets: | | | |
Contract assets, current (included in prepaid expenses and other assets, current) | $ | 536 | | | $ | 1,309 | |
Contract assets, non-current (included in other assets, non-current) | — | | | 583 | |
Total contract assets | $ | 536 | | | $ | 1,892 | |
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Contract liabilities: | | | |
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Contract liabilities, current | $ | 1,117 | | | $ | 1,552 | |
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Contract liabilities, non-current (included in other liabilities, non-current) | 89 | | | 88 | |
Total contract liabilities | $ | 1,206 | | | $ | 1,640 | |
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 9
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company records contract liabilities when cash payments are received in advance of the Company’s performance. The following table presents significant changes in contract liabilities during the period.
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| | | | | June 30, 2021 | | December 31, 2020 | | |
| | | | | (In thousands) |
Contract liabilities balance, beginning of year | | | | | $ | 1,640 | | | $ | 28,866 | | | |
Revenue recognized | | | | | (1,232) | | | (28,414) | | | |
Cash received, excluding amounts recognized as revenue during the period | | | | | 798 | | | 1,188 | | | |
Contract liabilities balance, end of period | | | | | $ | 1,206 | | | $ | 1,640 | | | |
Transaction Price Allocated to the Remaining Performance Obligations
The following table presents the estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied.
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| June 30, 2021 |
| (In thousands) |
Future performance obligations by year | |
2021 (remaining six months) | $ | 4,036 | |
2022 | 12,191 | |
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| |
| |
Total future performance obligations | $ | 16,227 | |
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 10
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 3 — Net Income Per Share
Net income for the reported period is divided by the weighted average number of common shares outstanding during the reported period to calculate basic net income per common share. Basic net income per share excludes any dilutive effect of stock options and restricted stock units ("RSU").
Diluted net income per common share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for shares of common stock, using the treasury stock method, and the shares of common stock underlying each outstanding RSU were issued (outstanding stock options to purchase common stock and RSUs collectively referred to as, “stock awards”).
The following table presents the computation of basic and diluted net income per share.
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | |
| (In thousands, except per share amounts) |
Numerator | | | | | | | | | |
Net income | $ | 1,069 | | | $ | 16,926 | | | $ | 7,935 | | | $ | 17,547 | | | |
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Denominator (weighted average shares) | | | | | | | | | |
Basic common shares outstanding | 57,253 | | | 55,614 | | | 57,066 | | | 55,513 | | | |
Dilutive stock awards | 1,746 | | | 757 | | | 1,756 | | | 925 | | | |
Diluted common shares outstanding | 58,999 | | | 56,371 | | | 58,822 | | | 56,438 | | | |
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Net income per share | | | | | | | | | |
Basic | $ | 0.02 | | | $ | 0.30 | | | $ | 0.14 | | | $ | 0.32 | | | |
Diluted | $ | 0.02 | | | $ | 0.30 | | | $ | 0.13 | | | $ | 0.31 | | | |
Certain shares of common stock issuable under stock awards have been omitted from the diluted net income per share calculations because their inclusion is considered anti-dilutive. The following table presents the weighted potential common shares issuable under stock awards that were excluded from the computation of diluted net income per share.
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| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 | | |
| (In thousands) |
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Anti-dilutive stock awards | 6 | | | 2,893 | | | 457 | | | 1,989 | | | |
Energy Recovery, Inc. | Q2'2021 Form 10-Q | 11
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 4 — Other Financial Information
Cash, Cash Equivalents and Restricted Cash
The Condensed Consolidated Statements of Cash Flows explain the changes in the total of cash, cash equivalents and restricted cash. The following table presents a reconciliation of cash, cash equivalents and restricted cash(1) reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts presented.
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| June 30, 2021 | | December 31, 2020 | | June 30, 2020 | | |
| (In thousands) |
Cash and cash equivalents | $ | 103,302 | | | $ | 94,255 | | | $ | 62,970 | | | |
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Restricted cash, non-current (included in other assets, non-current) | 103 | | | 103 | | | 102 | | | |
Total cash, cash equivalents and restricted cash | $ | 103,405 | | | $ | 94,358 | | | $ | 63,072 | | | |
(1) The Company pledged and deposited cash amounts into restricted cash accounts in connection with the Company’s credit cards.
Accounts Receivable, net
The following table presents the components of accounts receivable, net.
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| |
| June 30, 2021 | | December 31, 2020 |
| (In thousands) |
Accounts receivable, gross | $ | 7,716 | | | $ | 12,189 | |
Allowance for doubtful accounts (1) | (117) | | | (397) | |
Accounts receivable, net | $ | 7,599 | | | $ | 11,792 | |
(1) The Company wrote-off $0.3 million of uncollectible receivables, which had been previously reserved as of December 31, 2020, during the second quarter of 2021.
Inventories
Inventories are stated at the lower of cost or net realizable value, using the first-in, first-out method. The following table presents inventory by category.
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| June 30, 2021 | | December 31, 2020 |
| (In thousands) |
Raw materials | $ | 5,161 | | | $ | 4,260 | |
Work in process | 2,740 | | | 2,360 | |
Finished goods | 7,388 | | | 5,128 | |
Inventories, net | $ | 15,289 | | | $ | 11,748 | |
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Valuation adjustments for excess and obsolete inventory reflected as a reduction of inventory was $0.6 million and $0.5 million at June 30, 2021 and December 31, 2020, respectively.
Prepaid and Other Current Assets
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| |
| June 30, 2021 | | December 31, 2020 |
| (In thousands) |
Contract assets, current | $ | 536 | | | $ | 1,309 | |
Cloud computing arrangement implementation costs | 1,095 | | | 1,087 | |
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Other prepaid expenses and current assets | 2,634 | | | 2,554 | |
Total prepaid and other current assets | $ | 4,265 | | | $ | 4,950 | |
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Energy Recovery, Inc. | Q2'2021 Form 10-Q | 12
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Goodwill and Other Intangible Assets
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| |
| June 30, 2021 | | December 31, 2020 |
| (In thousands) |
Goodwill | $ | 12,790 | | | $ | 12,790 | |
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Other intangible assets | 43 | | | 49 | |
Total goodwill and other intangible assets | $ | 12,833 | | | $ | 12,839 | |
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Accrued Expenses and Other Current Liabilities
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| |
| June 30, 2021 | | December 31, 2020 |
| (In thousands) |
Payroll, incentives and commissions payable | $ | 5,614 | | | $ | 8,400 | |
|