Energy Recovery(ERII) - 2020 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the three months ended March 31, 2020 Item 1 — Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Energy Recovery, Inc. for the three months ended March 31, 2020 and 2019, including balance sheets, statements of operations, comprehensive income, cash flows, and stockholders' equity, along with detailed notes on business description, accounting policies, revenue, earnings per share, investments, goodwill, lines of credit, commitments, income taxes, business segments, and concentrations Condensed Consolidated Balance Sheets This table presents the company's financial position, including assets, liabilities, and stockholders' equity, as of March 31, 2020, and December 31, 2019 | ASSETS (In thousands) | March 31, 2020 | December 31, 2019 | | :-------------------- | :------------- | :---------------- | | 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 | | Total current assets | $103,803 | $112,967 | | Total assets | $190,612 | $188,774 | | LIABILITIES AND STOCKHOLDERS' EQUITY (In thousands) | March 31, 2020 | December 31, 2019 | | :------------------------------------------------ | :------------- | :---------------- | | Total current liabilities | $25,742 | $27,830 | | Total liabilities | $52,347 | $52,761 | | Total stockholders' equity | $138,265 | $136,013 | | Total liabilities and stockholders' equity | $190,612 | $188,774 | Condensed Consolidated Statements of Operations This table details the company's revenues, costs, and net income for the three months ended March 31, 2020, and 2019 | (In thousands, except per share data) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | 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 | | Total operating expenses | $15,732 | $12,151 | | Income from operations | $128 | $2,709 | | Net income | $621 | $2,654 | | Earnings per share: | | | | Basic | $0.01 | $0.05 | | Diluted | $0.01 | $0.05 | Condensed Consolidated Statements of Comprehensive Income This table outlines the company's net income and other comprehensive income components for the three months ended March 31, 2020, and 2019 | (In thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income | $621 | $2,654 | | Other comprehensive (loss) income, net of tax | $(295) | $60 | | Comprehensive income | $326 | $2,714 | Condensed Consolidated Statements of Cash Flows This table summarizes the company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2020, and 2019 | (In thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash used in operating activities | $(5,872) | $(5,951) | | Net cash provided by (used in) investing activities | $11,934 | $(1,165) | | Net cash provided by financing activities | $418 | $2,157 | | Net change in cash, cash equivalents and restricted cash | $6,455 | $(4,963) | | Cash, cash equivalents and restricted cash, end of period | $32,943 | $17,175 | Condensed Consolidated Statements of Stockholders' Equity This table details changes in the company's stockholders' equity, including common stock and total equity, for the three months ended March 31, 2020, and 2019 | (In thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------------- | :-------------------------------- | :-------------------------------- | | 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 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1 — Description of Business and Significant Accounting Policies This note describes the company's business operations and outlines its significant accounting policies and recent pronouncements - Energy Recovery, Inc. designs and manufactures solutions for industrial fluid flow markets, focusing on reducing waste, improving efficiency, and lowering production costs for clean water and oil & gas. Key trademarks include ERI®, PX®, Pressure Exchanger®, VorTeq™, and IsoBoost®[19] - The company adopted ASU 2016-13 (CECL model) and ASU 2020-03 on January 1, 2020, with no material impact on financial statements. It is currently evaluating ASU 2020-04 (Reference Rate Reform) for potential impacts[29][30][31] - The COVID-19 pandemic and reduced oil and gas demand introduce uncertainty, but as of May 1, 2020, the company is not aware of specific events requiring updates to estimates or asset/liability valuations[26] Note 2 — Revenue This note provides a detailed breakdown of the company's revenue by geographical market, product/service line, and contract balances Total Revenue by Primary Geographical Market (In thousands) | Region | March 31, 2020 (In thousands) | March 31, 2019 (In thousands) | | :--------------------- | :---------------------------- | :---------------------------- | | Middle East and Africa | $16,231 | $8,802 | | Americas | $3,744 | $7,746 | | Europe | $794 | $1,113 | | Asia | $775 | $2,134 | | Total revenue | $21,544 | $19,795 | Total Revenue by Major Product/Service Line (In thousands) | Product/Service Line | March 31, 2020 (In thousands) | March 31, 2019 (In thousands) | | :------------------------------------ | :---------------------------- | :---------------------------- | | PX Pressure Exchangers, pumps and turbo devices | $19,001 | $16,072 | | License and development | $2,543 | $3,723 | | Total revenue | $21,544 | $19,795 | Contract Balances (In thousands) | Category | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :---------------------------- | :---------------------------- | :------------------------------- | | Accounts receivable, net | $13,841 | $12,979 | | Total contract assets | $936 | $692 | | Total current contract liability | $16,509 | $15,746 | | Total non-current contract liability | $8,805 | $13,120 | | Total contract liability | $25,314 | $28,866 | Transaction Price Allocated to Remaining Performance Obligation (In thousands) | Year | Amount (In thousands) | | :------------------- | :-------------------- | | 2020 (remaining nine months) | $26,185 | | 2021 | $17,931 | | 2022 | $661 | | 2023 | $646 | | 2024 and thereafter | $4,385 | | Total performance obligation | $49,808 | Note 3 — Earnings per Share This note details the calculation of basic and diluted earnings per share, including the impact of dilutive and anti-dilutive stock awards Earnings Per Share (In thousands, except per share amounts) | Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------------------------ | :-------------------------------- | :-------------------------------- | | Net income | $621 | $2,654 | | Basic common shares outstanding | 55,412 | 54,116 | | Dilutive stock awards | 1,130 | 1,252 | | Diluted common shares outstanding | 56,542 | 55,368 | | Earnings per share: | | | | Basic | $0.01 | $0.05 | | Diluted | $0.01 | $0.05 | - Anti-dilutive stock awards excluded from diluted EPS calculations were 2,495 thousand in Q1 2020, up from 2,461 thousand in Q1 2019[46] Note 4 — Other Financial Information This note provides additional financial details on cash, accounts receivable, inventories, and accrued expenses Cash, Cash Equivalents and Restricted Cash (In thousands) | Category | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :------------------------------------------- | :---------------------------- | :------------------------------- | | Cash and cash equivalents | $32,842 | $26,387 | | Restricted cash, non-current | $101 | $101 | | Total cash, cash equivalents and restricted cash | $32,943 | $26,488 | Accounts Receivable, net (In thousands) | Category | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :---------------------------- | :---------------------------- | :------------------------------- | | Accounts receivable, gross | $14,189 | $13,287 | | Allowance for doubtful accounts | $(348) | $(308) | | Accounts receivable, net | $13,841 | $12,979 | Inventories (In thousands) | Category | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--------------- | :---------------------------- | :------------------------------- | | Raw materials | $4,947 | $3,742 | | Work in process | $2,230 | $2,141 | | Finished goods | $3,761 | $4,434 | | Inventories, net | $10,938 | $10,317 | - Due to COVID-19, the company expensed $0.5 million to product cost of revenue in Q1 2020 related to reduced manufacturing facility utilization[51] Accrued Expenses and Other Current Liabilities (In thousands) | Category | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :------------------------------------------- | :---------------------------- | :------------------------------- | | Payroll, incentives and commissions payable | $3,538 | $6,040 | | Accrued warranty reserve | $665 | $631 | | Other accrued expenses and current liabilities | $1,953 | $3,198 | | Total accrued expenses and other current liabilities | $6,156 | $9,869 | Note 5 — Investments and Fair Value Measurements This note details the company's investments and fair value measurements, including cash equivalents and marketable securities Total Cash Equivalents and Marketable Securities (In thousands) | Category | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--------------------------------------- | :---------------------------- | :------------------------------- | | Cash equivalents | $20,638 | $11,668 | | Short-term investments | $40,995 | $58,736 | | Long-term investments | $19,361 | $15,419 | | Total cash equivalents and marketable securities | $80,994 | $85,823 | - The company sold $4.974 million in corporate notes and bonds (available-for-sale investments) during Q1 2020, compared to none in Q1 2019[58] Fair Value of Financial Assets by Level (March 31, 2020, In thousands) | Category | Total (In thousands) | Level 1 (In thousands) | Level 2 (In thousands) | Level 3 (In thousands) | | :----------------------- | :------------------- | :--------------------- | :--------------------- | :--------------------- | | Money market securities | $20,638 | $20,638 | — | — | | U.S. treasury securities | $3,591 | — | $3,591 | — | | Corporate notes and bonds | $37,404 | — | $37,404 | — | | U.S. treasury securities (long-term) | $822 | — | $822 | — | | Corporate notes and bonds (long-term) | $18,539 | — | $18,539 | — | | Total fair value of financial assets | $80,994 | $20,638 | $60,356 | — | - As of March 31, 2020, available-for-sale investments with unrealized loss positions totaled $47.237 million, with gross unrealized losses of $(364) thousand, primarily in corporate notes and bonds[68] Note 6 — Goodwill and Intangible Assets This note provides information on the company's goodwill and other intangible assets, including their carrying amounts and amortization - The net carrying amount of goodwill remained at $12.8 million as of March 31, 2020, and was not impaired[69] Other Intangible Assets, Net (In thousands) | Category | March 31, 2020 (In thousands) | December 31, 2019 (In thousands) | | :--------------------------- | :---------------------------- | :------------------------------- | | Finite-lived intangible assets | $286 | $6,386 | | Accumulated amortization | $(225) | $(6,321) | | Intangible assets, net | $61 | $65 | - The reduction in gross other intangible assets and accumulated amortization from December 31, 2019, to March 31, 2020, was due to the retirement of fully amortized patent assets[71] Note 7 — Lines of Credit This note outlines the company's revolving credit facilities and outstanding letters of credit - The company has a Loan and Pledge Agreement expiring June 30, 2022, providing a committed revolving credit line of $16.0 million and an uncommitted line of $4.0 million. No debt was outstanding as of March 31, 2020, or December 31, 2019[72][73] - Outstanding Stand-By Letters of Credit (SBLCs) were $11.6 million as of March 31, 2020, secured by pledged U.S. investments[75][74] Note 8 — Commitments and Contingencies This note details the company's lease agreements, warranty reserves, purchase obligations, and litigation status - The company entered into a new industrial lease in Katy, Texas, for an oil & gas commercial development center, commencing January 1, 2020, with annual base rent of approximately $0.3 million over a 120-month term[77] - A new lease agreement for additional office and warehouse space in Tracy, California, commenced March 1, 2020, with an annual base rent of approximately $0.4 million over a 122-month term[79] Operating Lease Activities (In thousands) | Metric | Three Months Ended March 31, 2020 (In thousands) | Three Months Ended March 31, 2019 (In thousands) | | :------------------------------------------ | :----------------------------------------------- | :----------------------------------------------- | | Operating lease expense | $603 | $477 | | Cash payments | $490 | $447 | | Non-cash lease liabilities arising from obtaining right-of-use assets | $6,384 | — | Minimum Lease Payments (In thousands) | Year | Lease Amounts (In thousands) | | :-------------------------- | :--------------------------- | | 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 | Accrued Product Warranty Reserve (In thousands) | Metric | Three Months Ended March 31, 2020 (In thousands) | Three Months Ended March 31, 2019 (In thousands) | | :--------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Warranty reserve balance, beginning of period | $631 | $478 | | Warranty costs charged to cost of revenue | $98 | $152 | | Utilization charges against reserve | $(1) | $(12) | | Release of accrual related to expired warranties | $(63) | $(47) | | Warranty reserve balance, end of period | $665 | $571 | - As of March 31, 2020, the company had approximately $11.3 million in open cancellable purchase order arrangements for raw materials, components, and capital equipment[86] - As of March 31, 2020, there were no material losses from litigation that were probable or reasonably possible[88] Note 9 — Income Taxes This note explains the company's income tax benefit/expense and effective tax rates for the periods presented - For Q1 2020, the company recognized an income tax benefit of $0.1 million, including a $0.2 million discrete tax benefit from stock-based compensation windfalls. This contrasts with an income tax expense of $0.6 million in Q1 2019[89] - The effective tax rate for Q1 2020 was (15.9%), compared to 17.3% for Q1 2019. Excluding discrete items, the effective tax rate was 19.5% in Q1 2020 (vs. 21.3% in Q1 2019), primarily due to higher anticipated R&D credits[90] Note 10 — Business Segment This note provides financial information segmented by the company's Water and Oil & Gas operations - The company operates in two reportable segments: Water and Oil & Gas. The Water segment focuses on reverse osmosis desalination, while the Oil & Gas segment includes hydraulic fracturing, gas processing, and chemical processing[91] Segment Financial Information (In thousands) | Category | Water (2020) (In thousands) | Oil & Gas (2020) (In thousands) | Total (2020) (In thousands) | Water (2019) (In thousands) | Oil & Gas (2019) (In thousands) | Total (2019) (In thousands) | | :---------------------------- | :-------------------------- | :------------------------------ | :-------------------------- | :-------------------------- | :------------------------------ | :-------------------------- | | Product revenue | $19,001 | — | $19,001 | $15,968 | $104 | $16,072 | | Product gross profit (loss) | $13,317 | — | $13,317 | $11,221 | $(84) | $11,137 | | License and development revenue | — | $2,543 | $2,543 | — | $3,723 | $3,723 | | Total operating expenses | $2,987 | $6,046 | $9,033 | $3,144 | $3,990 | $7,134 | | Operating income (loss) | $10,330 | $(3,503) | $6,827 | $8,077 | $(351) | $7,726 | | Corporate operating expenses | | | $6,699 | | | $5,017 | | Income from operations | | | $128 | | | $2,709 | Note 11 — Concentrations This note identifies significant customer concentrations for product and license revenue Customer Concentration for Product Revenue (Q1 2019) | Customer | Segment | % of Product Revenue | | :--------- | :------ | :------------------- | | Customer B | Water | 29% | | Customer D | Water | 14% | | Customer E | Water | 12% | | Customer F | Water | 10% | - One international Oil & Gas segment customer accounted for 100% of the company's license and development revenue for both Q1 2020 and Q1 2019[97] Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and operational results for the three months ended March 31, 2020, compared to the same period in 2019. It includes forward-looking statements, an overview of the business segments (Water and Oil & Gas), quarterly highlights, detailed analysis of revenue, gross profit, operating expenses, other income, income taxes, and a discussion of liquidity and capital resources, including cash flows and contractual obligations Forward Looking Information This section outlines the company's future expectations and plans, subject to various risks and uncertainties - The report contains forward-looking statements regarding future expectations, objectives, and plans, subject to risks and uncertainties, particularly those identified under 'Part II, Item 1A – Risk Factors'[100][101][102] - Cash on hand, marketable securities, and ongoing cash from operations are expected to cover capital requirements for the next 12 months - Gross margins will likely be negatively affected until manufacturing facilities operate as planned prior to COVID-19 - The company believes it can fulfill most, if not all, existing delivery obligations in fiscal year 2020 - Expects to continue relying on desalination market sales for a substantial portion of revenue, with new markets providing opportunities - Anticipates increased R&D and S&M expenses due to diversification outside desalination[103] Overview This section provides a general description of the company's business, technologies, and reportable segments - Energy Recovery, Inc. develops technologies for industrial fluid flow markets, focusing on clean water and oil & gas, with its PX Pressure Exchanger technology being an industry standard in reverse osmosis desalination[109][111] - The company's reportable segments are Water and Oil & Gas. Corporate operating expenses support both segments and future R&D[112] - The Water segment generates revenue from ERDs, high-pressure, and circulation pumps sold to mega-project development (MPD), OEM, and aftermarket (AM) channels. MPD sales typically range from $1 million to $18 million[113] - The Oil & Gas segment primarily derives license and development revenue from solutions in hydraulic fracturing, gas processing, and chemical processing, following significant R&D investment[114] Quarterly Highlights This section summarizes key events and their impact on the company's operations and financial condition during the quarter - In response to COVID-19, the company temporarily suspended manufacturing in mid-March 2020, resuming limited operations in early April. The pandemic did not materially impact Q1 2020 financial results but negatively affected gross margin due to reduced manufacturing levels[115][116] - The company believes its cash on hand, marketable securities, and ongoing cash from operations will cover capital requirements for the next 12 months, despite COVID-19 uncertainties[116] - A new office and warehouse space in Tracy, California, was opened to supplement existing manufacturing and distribution for the Water segment, with commissioning expected in summer 2020, subject to COVID-19 delays[118] Results of Operations This section analyzes the company's financial performance, including revenue, gross profit, and operating expenses Total Revenue This section analyzes the company's total revenue, broken down by business segment and product/service line Total Revenue by Segment (In thousands, except percentages) | Segment | 2020 ($) (In thousands) | % of Total Revenue (2020) | 2019 ($) (In thousands) | % of Total Revenue (2019) | Change ($) (In thousands) | Change (%) | | :---------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | :------------------------ | :--------- | | Water | $19,001 | 88% | $15,968 | 81% | $3,033 | 19% | | Oil & Gas | — | —% | $104 | —% | $(104) | (100%) | | Product revenue | $19,001 | 88% | $16,072 | 81% | $2,929 | 18% | | License and development revenue | $2,543 | 12% | $3,723 | 19% | $(1,180) | (32%) | | Total revenue | $21,544 | 100% | $19,795 | 100% | $1,749 | 9% | - Water segment product revenue increased by $3.0 million (19%) in Q1 2020, primarily due to higher shipments to MPD customers, despite lower shipments to AM and OEM customers. Oil & Gas product revenue decreased by $0.1 million due to no product sales in Q1 2020[122][124] - Oil & Gas license and development revenue decreased by $1.2 million (32%) in Q1 2020, attributed to decreased expenditures and reallocation of resources to VorTeq activities unrelated to license revenue recognition[124] Product Gross Profit and Gross Margin This section analyzes the company's product gross profit and gross margin by business segment Product Gross Profit and Gross Margin by Segment (In thousands, except percentages) | Segment | Gross Profit (2020) (In thousands) | Gross Margin (2020) | Gross Profit (2019) (In thousands) | Gross Margin (2019) | Change Gross Profit (In thousands) | Change Gross Margin | | :---------------------------------- | :--------------------------------- | :------------------ | :--------------------------------- | :------------------ | :--------------------------------- | :------------------ | | Water | $13,317 | 70.1% | $11,221 | 70.3% | $2,096 | (0.2%) | | Oil & Gas | — | —% | $(84) | (80.8%) | $84 | —% | | Product gross profit and gross margin | $13,317 | 70.1% | $11,137 | 69.3% | $2,180 | 0.8% | - Product gross profit increased by $2.2 million (19.6%) in Q1 2020 due to higher product volume. Product gross margin increased by 80 basis points to 70.1%, driven by a favorable product mix, despite a $0.5 million increase in cost of product revenue due to reduced manufacturing utilization from COVID-19[127][128] Operating Expenses This section details the company's operating expenses, including general and administrative, sales and marketing, and research and development Total Operating Expenses (In thousands, except percentages) | Category | 2020 ($) (In thousands) | % of Total Revenue (2020) | 2019 ($) (In thousands) | % of Total Revenue (2019) | Change ($) (In thousands) | Change (%) | | :-------------------------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | :------------------------ | :--------- | | General and administrative | $6,881 | 32% | $5,579 | 28% | $1,302 | 23% | | Sales and marketing | $2,138 | 10% | $2,162 | 11% | $(24) | (1%) | | Research and development | $6,709 | 31% | $4,254 | 22% | $2,455 | 58% | | Amortization of intangible assets | $4 | —% | $156 | 1% | $(152) | (97%) | | Total operating expenses | $15,732 | 73% | $12,151 | 61% | $3,581 | 30% | - G&A expenses increased by $1.3 million (23%) in Q1 2020, mainly due to higher employee-related costs (recruitment, severance, salaries) and professional services[129] - R&D expenses increased by $2.5 million (58%) in Q1 2020, driven by higher testing supplies ($1.5 million), increased employee-related costs ($0.6 million), and depreciation of test equipment[131] - Oil & Gas segment operating expenses increased by $2.1 million (52%) in Q1 2020, primarily due to higher R&D costs related to testing supplies and increased employee-related costs[135] - Corporate operating expenses increased by $1.7 million (34%) in Q1 2020, mainly due to higher employee-related costs (CEO search recruitment, salaries), facility, and professional service costs[136] Other Income, Net This section analyzes the company's other income and expenses, primarily interest income Other Income, Net (In thousands, except percentages) | Category | 2020 ($) (In thousands) | % of Total Revenue (2020) | 2019 ($) (In thousands) | % of Total Revenue (2019) | | :--------------------------- | :---------------------- | :------------------------ | :---------------------- | :------------------------ | | Interest income | $420 | 2% | $523 | 3% | | Other non-operating expense, net | $(12) | —% | $(24) | —% | | Total other income, net | $408 | 2% | $499 | 3% | - Total other income, net, decreased by $0.1 million in Q1 2020, primarily due to a decrease in interest income[139] Income Taxes This section discusses the company's income tax benefit/expense and effective tax rate - The company recognized an income tax benefit of $0.1 million in Q1 2020 (vs. expense of $0.6 million in Q1 2019), with an effective tax rate of (15.9%) (vs. 17.3% in Q1 2019), primarily due to higher anticipated R&D credits[140][141] - The CARES Act is expected to provide an additional $0.1 million tax refund from minimum tax credits and allows for deferral of federal social security taxes, which the company has applied for[142] Liquidity and Capital Resources This section discusses the company's financial liquidity, capital resources, and ability to meet future obligations Overview This section provides an overview of the company's principal liquidity sources and capital availability - Principal liquidity sources as of March 31, 2020: unrestricted cash and cash equivalents ($32.8 million), short-term investments ($41.0 million), and accounts receivable, net ($13.8 million) - Unrestricted cash, cash equivalents, and short- and long-term investments held outside the U.S. totaled $3.6 million - The company believes existing cash balances and future cash inflows will meet liquidity needs for at least the next 12 months - Short-term contract assets (unbilled trade receivables) were $0.9 million as of March 31, 2020, primarily from Water segment customer contractual holdback provisions[144][145] - The company has a $16.0 million committed and $4.0 million uncommitted revolving credit line, with no outstanding debt as of March 31, 2020. Outstanding SBLCs totaled $11.6 million[146][147] - The company did not avail itself of CARES Act loans (Payroll Protection Program, Economic Injury Disaster Loan Program) as it had not experienced revenue loss or hardship due to COVID-19[148] Cash Flows This section analyzes the company's cash flows from operating, investing, and financing activities Cash Flow Summary (In thousands) | Category | Three Months Ended March 31, 2020 (In thousands) | Three Months Ended March 31, 2019 (In thousands) | | :----------------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash used in operating activities | $(5,872) | $(5,951) | | Net cash provided by (used in) investing activities | $11,934 | $(1,165) | | Net cash provided by financing activities | $418 | $2,157 | | Net change in cash, cash equivalents and restricted cash | $6,455 | $(4,963) | - Net cash used in operating activities was comparable in Q1 2020 and Q1 2019. Changes in assets and liabilities in Q1 2020 included a $4.5 million decrease in accrued expenses, a $3.6 million decrease in contract liabilities, and a $1.1 million net increase in accounts receivable[151][152] - Net cash provided by investing activities was $11.9 million in Q1 2020, primarily from $21.2 million in marketable security maturities and $5.0 million in sales, partially offset by $12.9 million in purchases and $1.4 million in capital expenditures[155] - Net cash provided by financing activities was $0.4 million in Q1 2020, mainly from common stock issuance related to option exercises, net of taxes paid on vested restricted stock units[156] Liquidity and Capital Resource Requirements This section discusses the company's anticipated capital needs and its ability to fund future operations and investments - The company anticipates existing resources and cash from operations will meet capital requirements for at least the next 12 months. However, additional capital may be needed for future acquisitions or investments in new technology due to rapid market adoption[158] Contractual Obligations This section details the company's future contractual obligations, including operating leases and purchase commitments Contractual Obligations as of March 31, 2020 (In thousands) | Type | Total (In thousands) | 1 Year (remaining 9 months of 2020) (In thousands) | 2-3 Years (2021-2022) (In thousands) | 3-4 Years (2023-2024) (In thousands) | 5 Years + (2025 and thereafter) (In thousands) | | :-------------------------- | :------------------- | :------------------------------------------------- | :----------------------------------- | :----------------------------------- | :--------------------------------------------- | | Operating lease obligations | $25,664 | $1,956 | $5,118 | $5,392 | $13,198 | | Purchase obligations | $11,343 | $11,283 | $60 | — | — | | Total contractual obligations | $37,007 | $13,239 | $5,178 | $5,392 | $13,198 | Off-Balance Sheet Arrangements This section confirms the absence of off-balance sheet arrangements with unconsolidated entities - The company had no off-balance sheet arrangements with unconsolidated entities or financial partnerships during the periods presented[162] Recent Accounting Pronouncements This section refers to Note 1 for details on recently adopted and issued accounting standards - Refer to Note 1 for details on recently adopted and issued accounting pronouncements[163] Item 3 — Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily foreign currency and interest rates. It outlines how fluctuations in exchange rates could affect operating results and financial position, and how interest rate changes could impact the fair value of its fixed-income investment portfolio - The company's foreign currency exposure stems from fluctuations in USD against currencies like the British pound, Saudi riyal, European euro, Chinese yuan, Indian rupee, and Canadian dollar. While revenue contracts are USD-denominated, international customers may face difficulties in obtaining USD, increasing collection risk[165][166] - The company has not hedged foreign currency exposure due to insignificant foreign currency expenses and minimal impact on operating results to date[168] - The investment portfolio, primarily in investment-grade marketable debt securities, is subject to interest rate fluctuations. A hypothetical 1% increase in interest rates as of March 31, 2020, would result in an approximately $0.4 million decrease in the fair value of fixed-income debt securities[169][170] Item 4 — Controls and Procedures This section confirms that management, including the CEO and CFO, evaluated the effectiveness of the company's disclosure controls and procedures as of March 31, 2020, and concluded they were effective. It also states that there were no material changes in internal control over financial reporting during the period - Management concluded that disclosure controls and procedures were effective as of March 31, 2020[173] - There were no material changes in internal control over financial reporting during the period covered by the report[174] PART II — OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1 — Legal Proceedings This section refers to Note 8 of the financial statements for information on legal proceedings, indicating that the discussion in the notes is incorporated by reference - Information on legal proceedings is provided in Note 8, 'Commitments and Contingencies – Litigation,' of the Notes to Condensed Consolidated Financial Statements[176][177] Item 1A — Risk Factors This section highlights new or updated risk factors, primarily focusing on the potential adverse impacts of the COVID-19 global pandemic and a sustained downturn in the energy industry on the company's operations, financial condition, and demand for its products and services - The company faces risks related to health epidemics, including the COVID-19 global pandemic, which could materially impact operations through disruptions in travel, product distribution, facility closures, and economic downturns[178][179] - The severity and longevity of COVID-19 could lead to workforce disruptions, inability to fulfill contracts, reduced demand, volatility in product access, and interference with large desalination projects[180] - A sustained downturn in the energy industry, driven by decreased global demand and lower oil/natural gas prices (exacerbated by COVID-19 and over-supply), could negatively impact demand for water products and services by affecting project financing and government spending on desalination plants, especially in the GCC region[182][183] Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds to report[184] Item 3 — Defaults Upon Senior Securities This section indicates that there were no defaults upon senior securities - No defaults upon senior securities to report[185] Item 4 — Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[186] Item 5 — Other Information This section indicates that there is no other information to report - No other information to report[187] Item 6 — Exhibits This section provides a list of exhibits filed or furnished with the report, including a lease agreement, a settlement agreement, and certifications from executive officers Key Exhibits Filed/Furnished | Exhibit Number | Exhibit Description | Filing Date | | :------------- | :---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | :---------- | | 10.1 | Lease Agreement, dated as of February 10, 2020, by and between Energy Recovery, Inc. and Prologis, L.P. | | | 10.2 | Settlement Agreement and Release, dated as of March 24, 2020, by and between Energy Recovery, Inc., and Eric Siebert. | 3/25/2020 | | 31.1 | Certification of Principal Executive Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | 31.2 | Certification of Principal Financial Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | | 32.1* | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | | Signatures This section contains the official signatures of the company's executive officers, certifying the report's accuracy - The report was signed on May 1, 2020, by Robert Yu Lang Mao, Interim President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer[194]