Energy Recovery(ERII) - 2019 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Energy Recovery, Inc.'s unaudited condensed consolidated financial statements for Q1 2019, including balance sheets, income, equity, cash flows, and related accounting notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total Assets | $179,841 | $180,022 | +$181 | | Total Liabilities | $66,463 | $60,102 | -$6,361 | | Total Stockholders' Equity | $113,378 | $119,920 | +$6,542 | | Cash and Cash Equivalents | $21,955 | $16,992 | -$4,963 | | Accounts Receivable, net | $10,212 | $17,408 | +$7,196 | | Contract Assets | $4,083 | $1,107 | -$2,976 | | Accrued Expenses and Other Current Liabilities | $8,019 | $5,112 | -$2,907 | | Contract Liabilities | $42,809 | $38,887 | -$3,922 | - Total assets increased slightly from $179,841 thousand at December 31, 2018, to $180,022 thousand at March 31, 2019, while total liabilities decreased by $6,361 thousand, leading to a $6,542 thousand increase in total stockholders' equity[9] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except EPS) | Metric (in thousands, except EPS) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Product Revenue | $16,072 | $11,058 | +$5,014 | +45.3% | | License and Development Revenue | $3,723 | $2,749 | +$974 | +35.4% | | Total Revenue | $19,795 | $13,807 | +$5,988 | +43.4% | | Product Gross Profit | $11,137 | $7,744 | +$3,393 | +43.8% | | Total Operating Expenses | $12,151 | $11,824 | +$327 | +2.8% | | Income (Loss) from Operations | $2,709 | $(1,331)| +$4,040 | N/A | | Net Income (Loss) | $2,654 | $(726) | +$3,380 | N/A | | Diluted EPS | $0.05 | $(0.01) | +$0.06 | N/A | - The company reported a net income of $2,654 thousand for Q1 2019, a significant improvement from a net loss of $726 thousand in Q1 2018, driven by a 43% increase in total revenue and a shift to positive income from operations[13] Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------- | :------ | :------ | :--------- | | Net Income (Loss) | $2,654 | $(726) | +$3,380 | | Other Comprehensive Income (Loss), net of tax: | | | | | Foreign currency translation adjustments | $(24) | $21 | -$45 | | Unrealized gain (loss) on investments | $84 | $(64) | +$148 | | Total Other Comprehensive Income (Loss) | $60 | $(43) | +$103 | | Comprehensive Income (Loss) | $2,714 | $(769) | +$3,483 | - Comprehensive income significantly improved to $2,714 thousand in Q1 2019 from a loss of $769 thousand in Q1 2018, primarily due to the positive net income and an unrealized gain on investments[15] Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total Stockholders' Equity | $113,378 | $119,920 | +$6,542 | | Net Income | N/A | $2,654 | N/A | | Issuance of Common Stock | N/A | $2,157 | N/A | | Employee Stock-based Compensation | N/A | $1,671 | N/A | | Accumulated Deficit | $(14,466) | $(11,812) | +$2,654 | - Total stockholders' equity increased by $6,542 thousand to $119,920 thousand at March 31, 2019, primarily driven by net income, common stock issuance, and employee stock-based compensation[18] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------- | :------ | :------ | :--------- | | Net Cash Used in Operating Activities | $(5,951) | $(6,333) | +$382 | | Net Cash (Used in) Provided by Investing Activities | $(1,165) | $11,062 | -$12,227 | | Net Cash Provided by (Used in) Financing Activities | $2,157 | $(1,898) | +$4,055 | | Net Change in Cash, Cash Equivalents and Restricted Cash | $(4,963) | $2,817 | -$7,780 | | Cash, Cash Equivalents and Restricted Cash, End of Period | $17,175 | $33,443 | -$16,268 | - Net cash used in operating activities decreased by $0.4 million in Q1 2019, while investing activities shifted from providing $11.1 million to using $1.2 million. Financing activities provided $2.2 million, a significant improvement from cash used in the prior year[21] Notes to Condensed Consolidated Financial Statements - The notes provide detailed explanations for the unaudited financial statements, prepared in accordance with SEC rules and GAAP, and should be read in conjunction with the 2018 Form 10-K[26] - Management's estimates and judgments are critical for revenue recognition, R&D asset capitalization, stock option valuation, goodwill impairment, inventory valuation, deferred taxes, and contingencies[29] - No material accounting pronouncements were adopted in Q1 2019, but ASU 2018-15 (Intangibles - Goodwill and Other - Internal-Use Software) is being evaluated for future impact[30][34] Note 1 — Description of Business and Significant Accounting Policies - Energy Recovery, Inc. is an energy solutions provider for industrial fluid flow markets, specializing in fluid dynamics and advanced material science, with products converting wasted pressure energy and preserving pumping technology[24] - The financial statements are condensed and unaudited, prepared under SEC rules and GAAP, relying on management's judgments and estimates for key areas like revenue recognition and asset valuation[26][28][29] - No material accounting pronouncements were adopted in Q1 2019, and ASU 2018-15 regarding cloud computing implementation costs is under evaluation[30][34] Note 2 — Revenues Revenue by Type and Segment (in thousands) | Revenue Type (in thousands) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :-------------------------- | :------ | :------ | :--------- | :--------- | | Total Revenue | $19,795 | $13,807 | +$5,988 | +43% | | Water Segment Revenue | $15,968 | $11,048 | +$4,920 | +45% | | Oil & Gas Segment Revenue | $3,827 | $2,759 | +$1,068 | +39% | | PX, pumps and turbo devices | $15,968 | $11,048 | +$4,920 | +45% | | License and development | $3,723 | $2,749 | +$974 | +35% | | Contract Assets (end of period) | $1,107 | $4,083 | -$2,976 | -73% | | Contract Liabilities (end of period) | $38,887 | $42,809 | -$3,922 | -9% | - Total revenue for Q1 2019 increased by 43% to $19,795 thousand, with the Water segment contributing 81% of total revenue and License and development revenue making up 19%[40] - Contract assets decreased significantly from $4,083 thousand to $1,107 thousand, while contract liabilities also decreased from $42,809 thousand to $38,887 thousand[41][42] - Estimated future revenue from unsatisfied performance obligations totals $37,426 thousand, with $10,821 thousand expected in the remaining nine months of 2019[47] Note 3 — Income (Loss) Per Share Income (Loss) Per Share (in thousands, except per share) | Metric (in thousands, except per share) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------------------------- | :------ | :------ | :--------- | | Net income (loss) | $2,654 | $(726) | +$3,380 | | Basic weighted average common shares outstanding | 54,116 | 53,987 | +129 | | Diluted weighted average common shares outstanding | 55,368 | 53,987 | +1,381 | | Basic EPS | $0.05 | $(0.01) | +$0.06 | | Diluted EPS | $0.05 | $(0.01) | +$0.06 | | Anti-dilutive shares excluded | 2,461 | 5,414 | -2,953 | - Basic and diluted net income per share for Q1 2019 was $0.05, a significant improvement from a loss of $(0.01) in Q1 2018, with a decrease in anti-dilutive shares excluded from the calculation[54] Note 4 — Other Financial Information Other Financial Information (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total cash, cash equivalents, and restricted cash | $22,138 | $17,175 | -$4,963 | | Inventories, net | $7,138 | $7,307 | +$169 | | Accrued expenses and other current liabilities | $8,019 | $5,112 | -$2,907 | | Accumulated other comprehensive loss | $(133) | $(73) | +$60 | - Total cash, cash equivalents, and restricted cash decreased by $4,963 thousand, while inventories slightly increased. Accrued expenses and other current liabilities decreased by $2,907 thousand, mainly due to lower payroll and commissions payable[59][61][63] - Accumulated other comprehensive loss improved from $(133) thousand to $(73) thousand, driven by unrealized gains on investments[68] Note 5 — Investments and Fair Value Measurements Investments and Fair Value Measurements (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total cash, cash equivalents and marketable securities | $96,562 | $91,311 | -$5,251 | | Total available-for-sale investments | $74,607 | $74,319 | -$288 | | Gross Unrealized Losses (AFS) | $(90) | $(23) | +$67 | - Total cash, cash equivalents, and marketable securities decreased by $5,251 thousand. All investments are classified as available-for-sale, with no sales in Q1 2019 or Q1 2018[73][74] - Fair value measurements are categorized into Level 1 and Level 2, with corporate notes and bonds and U.S. Treasury securities primarily in Level 2. Gross unrealized losses on available-for-sale investments decreased from $(90) thousand to $(23) thousand[80][85][86][91] Note 6 — Goodwill and Intangible Assets Goodwill and Intangible Assets (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Goodwill | $12,790 | $12,790 | $0 | | Intangible assets, net | $640 | $484 | -$156 | - The net carrying amount of goodwill remained stable at $12.8 million, with no impairment recorded. Net identifiable intangible assets decreased by $156 thousand due to accumulated amortization[95][97] Note 7 — Lines of Credit - The company has a Loan and Pledge Agreement with a committed revolving credit line of $16.0 million and an uncommitted line of $4.0 million, extended to March 31, 2020[101] - Amendments in April 2019 clarified terms and allowed Letters of Credit to extend up to two years and Standby Letters of Credit (SBLCs) up to one year past the loan agreement expiration[101] - No debt was outstanding under the agreement as of March 31, 2019, but $10.7 million in SBLCs were outstanding, which are deducted from the revolving credit line[102] Note 8 — Commitments and Contingencies Commitments and Contingencies (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total lease liabilities | N/A | $13,265 | N/A | | Accrued product warranty reserve | $478 | $571 | +$93 | | Open cancellable purchase order arrangements | N/A | $8,400 | N/A | | Stand-by letters of credit | $8,800 | $10,700 | +$1,900 | - The company has operating lease obligations totaling $13,265 thousand and is constructing a new commercial development center in Katy, Texas, with future lease payments detailed[107] - Accrued product warranty reserve increased to $571 thousand, and outstanding stand-by letters of credit for guarantees increased to $10.7 million[109][115] - The company is involved in legal proceedings, including an appeal related to a former SVP's labor claim, for which a potential loss has been accrued and is not believed to be material in excess of amounts accrued[119][121] Note 9 — Income Taxes Income Taxes | Metric | Q1 2019 | Q1 2018 | | :-------------- | :------ | :------ | | Effective tax rate | 17.3% | 33.0% | | Pretax book income (loss) | $3.2M | $(1.1)M | | Effective tax rate (excl. discrete benefits) | 21.3% | (3.5)% | - The effective tax rate for Q1 2019 was 17.3% on pretax income of $3.2 million, significantly lower than 33.0% on a pretax loss of $1.1 million in Q1 2018. This reduction is attributed to reporting losses in Q1 2018 in a jurisdiction where tax benefits could not be recognized[125] Note 10 — Stock-based Compensation Stock-based Compensation (in thousands) | Metric (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------- | :------ | :------ | :--------- | | Total stock-based compensation expense | $1,678 | $2,243 | -$565 | | Unamortized Compensation Costs | $11,621 | N/A | N/A | | Total grant date fair value of vested stock options and RSUs | $2,291 | $1,770 | +$521 | | Stock options outstanding (shares) | 4,670 | N/A | N/A | | RSUs outstanding (shares) | 675 | N/A | N/A | - Total stock-based compensation expense decreased by $0.565 million in Q1 2019, primarily due to a $0.7 million reduction from a non-recurring charge in Q1 2018 related to the former CEO's equity awards[129][188] - Unamortized stock-based compensation costs totaled $11,621 thousand, and the total grant date fair value of vested stock options and RSUs increased to $2,291 thousand[132][137] Note 11 — Business Segment and Geographic Information Business Segment and Geographic Information (in thousands) | Metric (in thousands) | Q1 2019 Water | Q1 2019 Oil & Gas | Q1 2018 Water | Q1 2018 Oil & Gas | | :-------------------- | :------------ | :---------------- | :------------ | :---------------- | | Product revenue | $15,968 | $104 | $11,048 | $10 | | License and development revenue | $0 | $3,723 | $0 | $2,749 | | Operating income (loss) | $8,077 | $(351) | $5,668 | $(1,987) | - The company operates in Water and Oil & Gas segments. Water segment product revenue increased by 45% to $15,968 thousand, and Oil & Gas product revenue increased by 940% to $104 thousand[147][148] - License and development revenue, primarily from Oil & Gas, increased by 35% to $3,723 thousand. Operating income for Water was $8,077 thousand, while Oil & Gas had an operating loss of $(351) thousand[148] - International customers accounted for 98% of product revenue in Q1 2019, with the United Arab Emirates (30%), Chile (22%), and Saudi Arabia (12%) being major contributors[151] Note 12 — Concentrations Customer and Vendor Concentrations | Customer/Vendor | Segment | Q1 2019 Product Revenue (%) | Dec 31, 2018 A/R & Contract Assets (%) | Mar 31, 2019 A/P (%) | | :---------------- | :-------- | :-------------------------- | :------------------------------------- | :------------------- | | Customer A | Water | 10% | N/A | N/A | | Customer C | Water | 29% | ** | N/A | | Customer D | Water | 14% | N/A | N/A | | Customer H | Water | 12% | N/A | N/A | | One Int'l O&G Customer | Oil & Gas | 100% (License & Dev) | N/A | N/A | | Customer E | Water | N/A | 20% | N/A | | Customer G | Oil & Gas | N/A | 26% | N/A | | Vendor A | Oil & Gas | N/A | N/A | 16% | | Vendor C | Oil & Gas | N/A | N/A | 11% | | Vendor D | Water | N/A | N/A | 11% | - In Q1 2019, Customer C, D, H, and A in the Water segment each accounted for 10% or more of product revenue. One international Oil & Gas customer accounted for 100% of license and development revenue[156] - Customer G (Oil & Gas) and Customer E (Water) were significant for accounts receivable and contract assets at Dec 31, 2018. Vendor A, C (Oil & Gas), and D (Water) were notable for accounts payable at Mar 31, 2019[158][159] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q1 2019 financial performance, highlighting revenue and operating income improvements, segment results, expense changes, and liquidity and capital resources Overview - Energy Recovery, Inc. is an engineering-driven technology company providing solutions for industrial fluid flow processes, focusing on cost savings and operational efficiencies[171] - The company operates in two markets: Water (seawater, brackish, and wastewater reverse osmosis desalination) and Oil & Gas (hydraulic fracturing, gas processing, and chemical processing)[171][173] - The Water segment's revenue is primarily from ERDs and pumps sold to mega-project, OEM, and After-Market channels, with MPD sales typically ranging from $1 million to $10 million[174] - The Oil & Gas segment's Q1 2019 revenue is primarily from license and development, following significant R&D and sales & marketing investments to expand into the oil & gas industry[175] - A new commercial development center for Oil & Gas field testing and training is under construction in Texas, expected to be completed in 2019[172] Results of Operations - Total revenue increased by $5.988 million (43%) to $19.795 million in Q1 2019, driven by strong performance in both product and license/development revenue[177] - Product revenue grew by $5.014 million (45%) to $16.072 million, with the Water segment contributing $4.9 million of this increase due to higher MPD shipments[178][179] - License and development revenue increased by $0.974 million (35%) to $3.723 million, primarily due to higher costs incurred based on input measure of progress[181] - Product gross profit increased by $3.4 million (44%) to $11.137 million, mainly from higher MPD volume, while product gross margin slightly decreased to 69.3% from 70.0%[183][185] - Operating income significantly improved to $7.726 million in Q1 2019 from $3.681 million in Q1 2018, reflecting the revenue growth[187] Total Revenue Total Revenue by Segment (in thousands) | Revenue Type (in thousands) | Q1 2019 | % of Total Revenue (2019) | Q1 2018 | % of Total Revenue (2018) | Change ($) | Change (%) | | :-------------------------- | :------ | :------------------------ | :------ | :------------------------ | :--------- | :--------- | | Water | $15,968 | 81% | $11,048 | 80% | +$4,920 | +45% | | Oil & Gas (Product) | $104 | 0% | $10 | 0% | +$94 | +940% | | Product Revenue Total | $16,072 | 81% | $11,058 | 80% | +$5,014 | +45% | | License & Development Revenue | $3,723 | 19% | $2,749 | 20% | +$974 | +35% | | Total Revenue | $19,795 | 100% | $13,807 | 100% | +$5,988 | +43% | - Total revenue for Q1 2019 increased by 43% to $19,795 thousand, with the Water segment's product revenue growing by 45% and Oil & Gas product revenue by 940%[177] - License and development revenue also saw a 35% increase, contributing 19% to total revenue[177] Product Gross Profit and Margin Product Gross Profit and Margin | Metric | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :-------------- | :------ | :------ | :--------- | :--------- | | Product Gross Profit | $11,137 | $7,744 | +$3,393 | +43.8% | | Product Gross Margin | 69.3% | 70.0% | -0.7% | N/A | - Product gross profit increased by $3.4 million (44%) in Q1 2019, primarily due to a $4.8 million impact from higher MPD volume, partially offset by lower OEM and AM volumes and an unfavorable price and mix impact[183] - Product gross margin slightly decreased to 69.3% in Q1 2019 from 70.0% in Q1 2018[182][185] Operating Expenses Operating Expenses (in thousands) | Operating Expense (in thousands) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :------------------------------- | :------ | :------ | :--------- | :--------- | | General and Administrative | $5,579 | $5,837 | -$258 | -4.4% | | Sales and Marketing | $2,162 | $1,912 | +$250 | +13.1% | | Research and Development | $4,254 | $3,917 | +$337 | +8.6% | | Amortization of Intangible Assets | $156 | $158 | -$2 | -1.3% | | Total Operating Expenses | $12,151 | $11,824 | +$327 | +2.8% | - General and administrative expense decreased by $0.3 million (4%) due to a $0.7 million reduction in stock-based compensation from a non-recurring charge in Q1 2018[188] - Sales and marketing expense increased by $0.2 million (13%) due to higher sales incentives in the Water segment[189] - Research and development expense increased by $0.3 million (9%) due to higher employee-related expenses for water growth initiatives, partially offset by timing of VorTeq R&D testing[190] Other Income (Expense), net Other Income (Expense), net (in thousands) | Other Income (Expense) (in thousands) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :------------------------------------ | :------ | :------ | :--------- | :--------- | | Interest Income | $523 | $301 | +$222 | +74% | | Other Non-Operating Expense, net | $(24) | $(53) | +$29 | -55% | | Total Other Income, net | $499 | $248 | +$251 | +101% | - Total other income, net, increased by $0.251 million (101%) in Q1 2019, primarily driven by a 74% increase in interest income due to higher investment balances[194] Income Taxes Income Taxes | Metric | Q1 2019 | Q1 2018 | | :-------------- | :------ | :------ | | Effective tax rate | 17.3% | 33.0% | | Pretax book income (loss) | $3.2M | $(1.1)M | | Effective tax rate (excl. discrete benefits) | 21.3% | (3.5)% | - The effective tax rate for Q1 2019 was 17.3% on pretax income of $3.2 million, significantly lower than 33.0% on a pretax loss of $1.1 million in Q1 2018. This is due to reporting losses in Q1 2018 in a jurisdiction where tax benefits could not be recognized[195] Liquidity and Capital Resources - Primary liquidity sources at March 31, 2019, included $17.0 million in unrestricted cash and cash equivalents, $71.8 million in short-term investments, and $17.4 million in accounts receivable[198] - The company has a $16.0 million committed and $4.0 million uncommitted revolving credit line, with no outstanding debt but $10.7 million in SBLCs deducted from the line[200][202][203] - Cash used in operating activities decreased by $0.4 million to $(5.951) million in Q1 2019, primarily due to increased net income and timing of collections[208] - Cash used in investing activities was $1.2 million in Q1 2019, a shift from $11.1 million provided in Q1 2018, mainly due to higher purchases of marketable securities and capital expenditures[211][212] - Cash provided by financing activities was $2.2 million in Q1 2019, driven by proceeds from common stock issuance through stock option exercises, compared to cash used in Q1 2018 due to share repurchases[213][214] - Management believes existing resources and cash from operations will be sufficient for the next 12 months, but additional financing may be sought for future acquisitions or rapid market adoption of new technology[216] Overview - The company's primary sources of cash are customer payments and common stock issuance[197] - As of March 31, 2019, principal liquidity sources included $17.0 million in unrestricted cash and cash equivalents, $71.8 million in short-term investments, and $17.4 million in net accounts receivable[198] - Short-term contract assets (unbilled receivables) were $1.1 million at March 31, 2019, down from $4.1 million at December 31, 2018[199] Loan Agreements - The company has a Loan and Pledge Agreement with a $16.0 million committed and $4.0 million uncommitted revolving credit line, extended to March 31, 2020[200][201] - Amendments in April 2019 clarified terms and allowed Letters of Credit to extend up to two years and Standby Letters of Credit (SBLCs) up to one year past the loan agreement expiration[201] - As of March 31, 2019, no debt was outstanding, but $10.7 million in SBLCs were outstanding, deducted from the credit line, and the company was in compliance with loan covenants[202][203] Share Repurchase Programs - The March 2018 Authorization for share repurchases, allowing up to $10.0 million, expired in September 2018[204] - As of March 31, 2019, 1,193,102 shares were repurchased for $10.0 million under this authorization[204] - Since initial authorization in 2012, the company has repurchased 5.5 million shares for an aggregate of $30.4 million, with no other authorization currently in place[204] Cash Flows Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------------------- | :------ | :------ | :--------- | | Net cash used in operating activities | $(5,951) | $(6,333) | +$382 | | Net cash (used in) provided by investing activities | $(1,165) | $11,062 | -$12,227 | | Net cash provided by (used in) financing activities | $2,157 | $(1,898) | +$4,055 | | Net change in cash, cash equivalents and restricted cash | $(4,963) | $2,817 | -$7,780 | - Net cash used in operating activities decreased by $0.4 million in Q1 2019, primarily due to increased net income and timing of collections[208] - Net cash used in investing activities was $1.2 million in Q1 2019, a significant shift from $11.1 million provided in Q1 2018, mainly due to higher purchases of marketable securities and capital expenditures[211][212] - Net cash provided by financing activities was $2.2 million in Q1 2019, driven by proceeds from common stock issuance through stock option exercises, contrasting with cash used in Q1 2018 due to share repurchases[213][214] Liquidity and Capital Resource Requirements - Management believes current resources and operating cash flow will cover capital requirements for at least the next 12 months[216] - Future capital needs depend on market acceptance, revenue growth, new product introductions, R&D expansion, market diversification, and potential acquisitions[216] - Additional equity or debt financing may be required for acquisitions or significant investments in new technology due to rapid market adoption[216] Off-Balance Sheet Arrangements - The company did not have any relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements during the periods presented[218] Recent Accounting Pronouncements - No material accounting pronouncements were adopted during the quarter ended March 31, 2019[219] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily foreign currency risk and interest rate risk, noting potential impacts from exchange rate fluctuations and interest rate changes on its investment portfolio - Foreign currency risk exposures are due to fluctuations in USD versus the British Pound, Saudi Riyal, United Arab Emirates Dirham, Euro, Chinese Yuan, Indian Rupee, and Canadian Dollar[221] - While revenue contracts are USD-denominated, expanding international sales could lead to a portion of revenue being in foreign currencies, increasing exchange rate impact[222] - The company has not hedged foreign currency exposure as its impact on operating results and cash flows has been insignificant to date[225] - The investment portfolio of $74.3 million (as of Mar 31, 2019) consists of fixed-income marketable debt securities, primarily investment-grade corporate and U.S. government instruments[226][227] - A hypothetical 1% increase in interest rates would result in an approximate $0.3 million decrease in the fair value of fixed-income debt securities[227] - Credit risk is minimized through a Board-approved investment policy mandating high credit ratings and concentration limits for single corporate issuers[226] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2019, concluding they were effective with no material changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2019[230] - No material changes in internal control over financial reporting occurred during the period[230] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section refers to the litigation disclosures in the Annual Report on Form 10-K and provides an update on these matters by incorporating discussion from Note 8 of this quarterly report - Information on legal proceedings is provided in Note 16 of the Annual Report on Form 10-K and updated in Note 8 of this Form 10-Q[233][234] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K filed on March 7, 2019 - No material changes in risk factors from those disclosed in the Annual Report on Form 10-K[235] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There was no activity related to the repurchase program for outstanding units during Q1 2019, and the March 2018 share repurchase authorization expired in September 2018 with no new authorization in place - No activity in the unit repurchase program during Q1 2019[236] - The March 2018 Authorization for share repurchases, totaling $10.0 million for 1,193,102 shares, expired in September 2018[237] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the period - No defaults upon senior securities[238] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[239] Item 5. Other Information There is no other information to report under this item - None[240] Item 6. Exhibits This section refers to the Exhibit Index for a list of documents filed or furnished with this report - See the Exhibit Index for a list of exhibits[241] Signatures The report is duly signed on behalf of Energy Recovery, Inc. by Chris Gannon, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer, on May 2, 2019 - Signed by Chris Gannon (President and CEO) and Joshua Ballard (CFO) on May 2, 2019[246] Exhibit List This section provides a list of exhibits filed with the Form 10-Q, including amendments to the Loan and Pledge Agreement, certifications from executive officers, and XBRL documents - Includes Fourth and Fifth Amendments to Loan and Pledge Agreement[248] - Includes Certifications of Principal Executive Officer and Principal Financial Officer (pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) and 18 U.S.C. Section 1350)[248] - Includes XBRL Instance Document and Taxonomy Extension Documents[248]