Energy Recovery(ERII) - 2025 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Presents the company's unaudited financial statements and management's discussion and analysis for the reporting period Item 1 Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income (loss), stockholders' equity, and cash flows, along with their accompanying notes, for the periods ended June 30, 2025, and December 31, 2024 Condensed Consolidated Balance Sheets Presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates | Metric | Dec 31, 2024 (in thousands) | Jun 30, 2025 (in thousands) | Change (in thousands) | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Assets | $242,792 | $212,275 | $(30,517) | | Total Liabilities | $32,782 | $27,068 | $(5,714) | | Total Stockholders' Equity | $210,010 | $185,207 | $(24,803) | | Cash and cash equivalents | $29,627 | $57,050 | $27,423 | | Short-term investments | $48,392 | $22,467 | $(25,925) | | Accounts receivable, net | $64,066 | $32,587 | $(31,479) | | Inventories, net | $24,906 | $32,660 | $7,754 | - Total assets decreased by $30.517 million from December 31, 2024, to June 30, 2025, primarily due to reductions in short-term investments and accounts receivable, partially offset by an increase in cash and cash equivalents[18][19] Condensed Consolidated Statements of Operations Details the company's revenues, expenses, and net income or loss over specific periods | Metric (in thousands) | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :-------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Revenue | $28,051 | $27,199 | $852 | $36,116 | $39,289 | $(3,173) | | Gross profit | $17,954 | $17,566 | $388 | $22,412 | $24,701 | $(2,289) | | Operating expenses | $16,480 | $19,580 | $(3,100) | $33,500 | $37,649 | $(4,149) | | Income (loss) from operations | $1,474 | $(2,014) | $3,488 | $(11,088) | $(12,948) | $1,860 | | Net income (loss) | $2,054 | $(642) | $2,696 | $(7,826) | $(8,902) | $1,076 | | Basic EPS | $0.04 | $(0.01) | $0.05 | $(0.14) | $(0.16) | $0.02 | | Diluted EPS | $0.04 | $(0.01) | $0.05 | $(0.14) | $(0.16) | $0.02 | - Net income for the three months ended June 30, 2025, was $2.054 million, a significant improvement from a net loss of $(0.642) million in the prior year, while the six-month period saw a reduced net loss of $(7.826) million compared to $(8.902) million[20] Condensed Consolidated Statements of Comprehensive Income (Loss) Reports net income or loss and other comprehensive income or loss for the specified periods | Metric (in thousands) | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :-------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Net income (loss) | $2,054 | $(642) | $2,696 | $(7,826) | $(8,902) | $1,076 | | Foreign currency translation adjustments | $53 | $9 | $44 | $37 | $37 | $0 |\n| Unrealized loss on investments | $(91) | $(10) | $(81) | $(98) | $(54) | $(44) | | Total other comprehensive loss, net of tax | $(38) | $(1) | $(37) | $(61) | $(17) | $(44) | | Comprehensive income (loss) | $2,016 | $(643) | $2,659 | $(7,887) | $(8,919) | $1,032 | - Comprehensive income for the three months ended June 30, 2025, was $2.016 million, a significant improvement from a loss of $(0.643) million in the prior year, primarily influenced by net income/loss and foreign currency translation adjustments[22] Condensed Consolidated Statements of Stockholders' Equity Outlines changes in the company's equity accounts, including retained earnings and treasury stock | Metric (in thousands) | Dec 31, 2024 | Jun 30, 2025 | Change | | :-------------------- | :----------- | :----------- | :----- | | Total stockholders' equity | $210,010 | $185,207 | $(24,803) | | Treasury stock (6M) | $(130,870) | $(152,660) | $(21,790) | | Retained earnings (6M) | $105,706 | $97,880 | $(7,826) | - Total stockholders' equity decreased by $24.803 million from December 31, 2024, to June 30, 2025, primarily due to common stock repurchases totaling $21.790 million and a net loss of $7.826 million during the six months ended June 30, 2025[19][23] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities | Metric (in thousands) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----- | | Net cash provided by operating activities | $14,824 | $14,570 | $254 | | Net cash provided by (used in) investing activities | $33,566 | $(43,830) | $77,396 | | Net cash (used in) provided by financing activities | $(21,026) | $1,502 | $(22,528) | | Net change in cash, cash equivalents and restricted cash | $27,424 | $(27,782) | $55,206 | | Cash, cash equivalents and restricted cash, end of period | $57,181 | $40,443 | $16,738 | - Net cash provided by investing activities significantly increased to $33.566 million from a net use of $(43.830) million, primarily due to less cash used for marketable debt instrument purchases[24][129] - Net cash used in financing activities increased to $(21.026) million due to common stock repurchases under the February 2025 Authorization and associated excise tax payments[24][130][131] Notes to Condensed Consolidated Financial Statements Provides detailed explanations and additional information supporting the condensed consolidated financial statements Note 1 — Description of Business and Significant Accounting Policies Describes the company's operations and the key accounting principles applied in its financial reporting - Energy Recovery, Inc. designs and manufactures high-performance solutions for energy efficiency and carbon emission reduction, primarily leveraging its pressure exchanger technology in fluid-flow and gas markets[25] - Key markets include seawater and wastewater desalination, natural gas, chemical-based refrigeration, and CO2 systems[25] - No material changes to significant accounting policies or newly issued accounting pronouncements not yet adopted were reported for the six months ended June 30, 2025[33][34] Note 2 — Revenue Details the company's revenue streams, segmented by channel and geographical market | Channel | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :-------------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Megaproject | $14,802 | $15,815 | $(1,013) | $14,838 | $19,915 | $(5,077) | | Original equipment manufacturer | $8,357 | $6,945 | $1,412 | $12,358 | $10,291 | $2,067 | | Aftermarket | $4,892 | $4,439 | $453 | $8,920 | $9,083 | $(163) | | Total revenue | $28,051 | $27,199 | $852 | $36,116 | $39,289 | $(3,173) | | Geographical Market | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :------------------ | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Middle East and Africa | $9,416 | $14,712 | $(5,296) | $12,297 | $19,498 | $(7,201) | | Asia | $8,073 | $7,998 | $75 | $11,511 | $9,977 | $1,534 | | Europe | $9,111 | $2,522 | $6,589 | $10,186 | $3,908 | $6,278 | | Americas | $1,451 | $1,967 | $(516) | $2,122 | $5,906 | $(3,784) | - Megaproject revenue decreased by 6% for the three months and 25% for the six months ended June 30, 2025, primarily due to lower shipments to MEA, Asia, and Americas markets[101][102] - OEM revenue increased by 20% for both the three and six months ended June 30, 2025, driven by higher shipments to Europe and Asia markets for wastewater and desalination[102][103] - Remaining performance obligations as of June 30, 2025, totaled $8.517 million, expected to be recognized in the remaining six months of 2025[44] Note 3 — Net Income (Loss) Per Share Explains the calculation of basic and diluted earnings per share for the reported periods | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) | $2,054 | $(642) | $(7,826) | $(8,902) | | Basic common shares outstanding | 54,257 | 57,366 | 54,578 | 57,234 | | Diluted common shares outstanding | 54,486 | 57,366 | 54,578 | 57,234 | | Basic EPS | $0.04 | $(0.01) | $(0.14) | $(0.16) | | Diluted EPS | $0.04 | $(0.01) | $(0.14) | $(0.16) | - Anti-dilutive equity awards excluded from diluted EPS calculations were 1.992 million shares for the three months and 3.038 million shares for the six months ended June 30, 2025[48] Note 4 — Other Financial Information Presents supplementary financial details, including cash, receivables, and inventory breakdowns | Metric | Jun 30, 2025 | Dec 31, 2024 | | :------------------------------------------ | :----------- | :----------- | | Cash and cash equivalents | $57,050 | $29,627 | | Restricted cash, non-current | $131 | $130 | | Total cash, cash equivalents and restricted cash | $57,181 | $29,757 | | Metric | Jun 30, 2025 | Dec 31, 2024 | | :-------------------------- | :----------- | :----------- | | Accounts receivable, gross | $32,808 | $64,287 | | Allowance for doubtful accounts | $(221) | $(221) | | Accounts receivable, net | $32,587 | $64,066 | | Metric | Jun 30, 2025 | Dec 31, 2024 | | :------------------------------------ | :----------- | :----------- | | Raw materials | $9,119 | $8,829 | | Work in process | $7,989 | $6,417 | | Finished goods | $16,465 | $10,463 | | Inventories, gross | $33,573 | $25,709 | | Valuation adjustments for excess and obsolete inventory | $(913) | $(803) | | Inventories, net | $32,660 | $24,906 | - A restructuring charge of $0.5 million was recorded during the six months ended June 30, 2025, related to workforce reductions, with the plan substantially complete by the end of Q1 2025[57][58] Note 5 — Investments and Fair Value Measurements Discusses the company's investment portfolio and fair value measurement methodologies | Metric | Jun 30, 2025 | Dec 31, 2024 | | :-------------------------------- | :----------- | :----------- | | Total short and long-term investments | $36,600 | $70,224 | | Total cash equivalents | $21,396 | $2,580 | - The company's total short and long-term investments decreased from $70.224 million at December 31, 2024, to $36.600 million at June 30, 2025, primarily due to reductions in short-term corporate notes and bonds and long-term municipal and agency notes and bonds[60] - As of June 30, 2025, available-for-sale investments with unrealized loss positions totaled $3.811 million, primarily in U.S. treasury securities and corporate notes and bonds[62] Note 6 — Lines of Credit Describes the company's available credit facilities and their utilization - The company has a committed revolving credit line of $50.0 million with JPMorgan Chase Bank, N.A., expiring December 21, 2026[63] - As of June 30, 2025, $16.8 million of the credit line was utilized for outstanding letters of credit (LCs) and stand-by letters of credit (SBLCs), with no revolving loans outstanding[64][65] Note 7 — Commitments and Contingencies Outlines the company's contractual commitments and potential contingent liabilities - The company entered into a sublease agreement for its Katy, Texas operating lease, resulting in an impairment charge of $0.4 million during the six months ended June 30, 2025[67][69] - As of June 30, 2025, the company was not involved in any lawsuits, legal proceedings, or claims that would have a material effect on its financial position, results of operations, or cash flows[70] Note 8 — Income Taxes Provides information on the company's income tax provision, effective tax rates, and related factors | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for (benefit from) income taxes | $334 | $242 | $(1,269) | $(1,043) | | Effective tax rate | 14.0% | (60.5%) | 14.0% | 10.5% | | Effective tax rate, excluding discrete items | 13.0% | (76.2%) | 13.7% | 9.1% | - The effective tax rate for the six months ended June 30, 2025, differed from the prior year primarily due to lower projected R&D tax credits, increased non-deductible officer stock-based compensation, and lower projected foreign-derived intangible income (FDII) benefits[73][121] - The company is currently assessing the impact of the recently signed One Big Beautiful Bill (OBBA) Act, which includes broad tax reform provisions, on its financial statements[73] Note 9 — Segment Reporting Presents financial data broken down by the company's operating segments | Segment | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Water | $11,706 | $10,751 | $10,103 | $11,119 | | Emerging Technologies | $(3,946) | $(5,562) | $(7,962) | $(11,638) | | Corporate | $(6,286) | $(7,203) | $(13,229) | $(12,429) | | Total Operating Income (Loss) | $1,474 | $(2,014) | $(11,088) | $(12,948) | - The company operates in two reportable segments: Water and Emerging Technologies, with the Water segment being the primary driver of operating income[74][75] Note 10 — Concentrations Identifies significant concentrations of revenue from key customers | Customer | Segment | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------- | :------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Customer A | Water | 21% | ** | 17% | ** | | Customer B | Water | 16% | ** | 13% | ** | | Customer C | Water | ** | 19% | ** | 13% | | Customer D | Water | ** | 18% | ** | 12% | | Customer E | Water | ** | 15% | ** | 11% | - Customer A and Customer B each accounted for over 10% of total revenue for the three and six months ended June 30, 2025, both within the Water segment[77] - Revenue concentration among a limited number of customers is typical but shifts regularly, reflecting specific contracts rather than long-term trends[76] Note 11 — Stockholders' Equity Details changes in stockholders' equity, including share repurchase programs - The company repurchased 1,557,208 shares for $21.6 million under the February 2025 Authorization during the six months ended June 30, 2025, with $8.4 million remaining[80][81] - A new $25.0 million share repurchase program (August 2025 Authorization) was announced, expected to commence in Q3 2025[82][126] - Cumulatively, the company has repurchased 13.0 million shares for an aggregate cost of $152.1 million under all share repurchase programs[78][125] Note 12 — Stock-based Compensation Explains the company's stock-based compensation plans and related expenses - New Performance Restricted Stock Unit (PRSU) awards were granted in Q2 2025, totaling 55 thousand for the three months and 300.75 thousand for the six months ended June 30, 2025[83] - PRSUs generally vest over three years, contingent on continued employment and meeting cumulative revenue and adjusted EBITDA targets[84] - No expense has been recognized for these PRSUs as the performance conditions are not yet considered probable[84] 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 results of operations for the three and six months ended June 30, 2025, compared to the prior year periods, covering revenue, gross profit, operating expenses, other income, income taxes, and liquidity Overview Introduces the company's business model, core technologies, and strategic focus on efficiency and sustainability - Energy Recovery, Inc. designs and manufactures solutions that make industrial processes more efficient and sustainable, leveraging its pressure exchanger technology to lower costs, save energy, and reduce emissions[85] - The PX® Pressure Exchanger® technology, initially for seawater reverse osmosis desalination, is expanding into wastewater filtration and CO2 refrigeration markets[85] - Research and development (R&D) is an essential part of the company's strategy, focusing on the continual evolution of its pressure exchanger technology to enhance environmental sustainability and improve productivity[86] Segments Describes the company's operational segments and how corporate expenses are allocated - The company's reportable operating segments consist of the Water and Emerging Technologies segments, based on the industries served and the type of technology solutions sold[87] - Corporate operating expenses include expenditures in support of both the Water and Emerging Technologies segments[87] Results of Operations Analyzes the company's financial performance, including revenue, gross profit, and operating expenses Revenue Provides a detailed analysis of revenue trends across different channels and geographical markets | Channel | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :-------------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Megaproject | $14,802 | $15,815 | $(1,013) | $14,838 | $19,915 | $(5,077) | | Original equipment manufacturer | $8,357 | $6,945 | $1,412 | $12,358 | $10,291 | $2,067 | | Aftermarket | $4,892 | $4,439 | $453 | $8,920 | $9,083 | $(163) | | Total revenue | $28,051 | $27,199 | $852 | $36,116 | $39,289 | $(3,173) | | Geographical Market | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :------------------ | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Middle East and Africa | $9,416 | $14,712 | $(5,296) | $12,297 | $19,498 | $(7,201) | | Asia | $8,073 | $7,998 | $75 | $11,511 | $9,977 | $1,534 | | Europe | $9,111 | $2,522 | $6,589 | $10,186 | $3,908 | $6,278 | | Americas | $1,451 | $1,967 | $(516) | $2,122 | $5,906 | $(3,784) | - Megaproject revenue decreased by 6% for the three months and 25% for the six months ended June 30, 2025, primarily due to lower shipments to MEA, Asia, and Americas markets[101][102] - OEM revenue increased by 20% for both the three and six months ended June 30, 2025, driven by higher shipments to Europe and Asia markets for wastewater and desalination[102][103] Gross Profit and Gross Margin Examines the company's gross profit and margin performance, highlighting influencing factors | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :----------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Gross profit | $17,954 | $17,566 | $388 | $22,412 | $24,701 | $(2,289) | | Gross margin | 64.0% | 64.6% | (60) bps | 62.1% | 62.9% | (80) bps | - The decrease in gross margin for both the three and six months ended June 30, 2025, was primarily due to costs related to product mix and tariffs[107] Operating Expenses Reviews the company's operating expenses, detailing changes and their underlying causes | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :-------------------- | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Total operating expenses | $16,480 | $19,580 | $(3,100) | $33,500 | $37,649 | $(4,149) | - Overall operating expenses decreased by $3.1 million (15.8%) for the three months and $4.1 million (11.0%) for the six months ended June 30, 2025, primarily due to lower employee compensation costs and the non-recurrence of prior year severance charges[109][113] - Corporate operating expenses for the six months ended June 30, 2025, increased due to higher consulting costs, restructuring charges, and impairment costs associated with the Katy, Texas sublease[115] - A restructuring charge of $0.5 million was recorded during the six months ended June 30, 2025, related to workforce reductions, with the plan substantially complete by the end of Q1 2025[116] Other Income, Net Discusses non-operating income and expenses, primarily focusing on interest income | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | Change (3M) | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change (6M) | | :------------------------ | :-------------------------- | :-------------------------- | :---------- | :-------------------------- | :-------------------------- | :---------- | | Interest income | $940 | $1,663 | $(723) | $2,013 | $3,105 | $(1,092) | | Other non-operating expense, net | $(26) | $(49) | $23 | $(20) | $(102) | $82 | | Total other income, net | $914 | $1,614 | $(700) | $1,993 | $3,003 | $(1,010) | - Total other income, net, decreased for both the three and six months ended June 30, 2025, primarily due to a decrease in interest income from short-term and long-term investments[117] Income Taxes Analyzes the company's income tax provisions and the factors affecting its effective tax rate | Metric | 3 Months Ended Jun 30, 2025 | 3 Months Ended Jun 30, 2024 | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | | :------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Provision for (benefit from) income taxes | $334 | $242 | $(1,269) | $(1,043) | | Effective tax rate | 14.0% | (60.5%) | 14.0% | 10.5% | | Effective tax rate, excluding discrete items | 13.0% | (76.2%) | 13.7% | 9.1% | - The change in effective tax rate for the six months ended June 30, 2025, was primarily due to lower projected R&D tax credits, increased non-deductible officer stock-based compensation, and lower projected FDII benefits[121] Liquidity and Capital Resources Assesses the company's financial flexibility, cash position, and capital management strategies Overview Summarizes the company's current liquidity sources and its ability to meet future financial obligations - As of June 30, 2025, the company's primary liquidity sources included $57.181 million in unrestricted cash and cash equivalents, $36.6 million in short-term and long-term investments, and $32.587 million in net accounts receivable[122] - Management believes existing cash balances and future cash inflows will meet liquidity needs for at least the next 12 months, though additional financing may be sought for acquisitions or rapid market adoption of new technology[122][132] Credit Agreement Details the company's revolving credit facility and its current utilization - The company maintains a $50.0 million revolving credit line with JPMorgan Chase Bank, N.A., expiring December 21, 2026[123] - As of June 30, 2025, no revolving loans were outstanding, but $16.8 million was utilized for letters of credit, and the company was in compliance with all covenants[124] Share Repurchase Program Reports on the company's share repurchase activities and remaining authorizations - The company repurchased 1,557,208 shares for $21.6 million under the February 2025 Authorization during the six months ended June 30, 2025, with $8.4 million remaining[125] - A new $25.0 million August 2025 Authorization for share repurchases was announced, expected to commence in Q3 2025[126] Cash Flows Provides an analysis of cash generated and used in operating, investing, and financing activities | Metric | 6 Months Ended Jun 30, 2025 | 6 Months Ended Jun 30, 2024 | Change | | :------------------------------------------ | :-------------------------- | :-------------------------- | :----- | | Net cash provided by operating activities | $14,824 | $14,570 | $254 | | Net cash provided by (used in) investing activities | $33,566 | $(43,830) | $77,396 | | Net cash (used in) provided by financing activities | $(21,026) | $1,502 | $(22,528) | | Net change in cash, cash equivalents and restricted cash | $27,424 | $(27,782) | $55,206 | - Net cash provided by investing activities significantly increased due to less cash used for marketable debt instrument purchases and a decrease in capital expenditures[129] - Net cash used in financing activities was primarily due to common stock repurchases and associated excise tax payments[130][131] Liquidity and Capital Resource Requirements Outlines the company's anticipated capital needs and potential future financing strategies - The company believes its existing resources and cash generated from operations will be sufficient to meet anticipated capital requirements for at least the next 12 months[132] - Additional capital or indebtedness may be needed in the future to fund operations, support acquisitions, or invest in new technology, depending on market acceptance, revenue growth, and R&D/market expansion[132] Recent Accounting Pronouncements Discusses any recent changes in accounting standards and their impact on the company - There were no material changes to the company's significant accounting policies or newly issued accounting pronouncements not yet adopted that apply to the company during the six months ended June 30, 2025[133] Item 3 Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily focusing on foreign currency fluctuations and interest rate changes affecting its investment portfolio Foreign Currency Risk Assesses the company's exposure to fluctuations in foreign exchange rates and their potential impact - The company's foreign currency exposure is due to fluctuations in exchange rates of the USD versus currencies such as the British pound, Saudi riyal, European euro, Chinese yuan, and Indian rupee[135] - While revenue contracts are USD-denominated, international customers may face difficulties obtaining USD, increasing collection risk; the company also incurs foreign currency expenses for vendors and international operations[136][137] - The company has not hedged its foreign currency exposure, as expenses in foreign currencies have been insignificant to date, and exchange rate fluctuations have had little impact on operating results and cash flows[138] Interest Rate and Credit Risks Evaluates the company's exposure to interest rate changes and counter-party credit risks in its investment portfolio - The company's investment portfolio of $40.6 million in investment-grade marketable debt instruments is subject to interest rate and counter-party credit risks[140] - Risk mitigation strategies include investing in investment-grade securities, adhering to an investment policy with high credit rating requirements and concentration limits, and maintaining a weighted average maturity of approximately 18 months[139][140] - A hypothetical 1% increase in interest rates would result in a less than $0.3 million decrease in the fair value of the company's marketable debt investments[140] Item 4 Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures and reports on any changes in internal controls over financial reporting Evaluation of Disclosure Controls and Procedures Reports on management's assessment of the effectiveness of the company's disclosure controls and procedures - The company's management, including the President, CEO, and CFO, concluded that its disclosure controls and procedures were effective as of June 30, 2025[142] Changes in Internal Controls Discloses any material changes in the company's internal control over financial reporting during the period - There were no material changes in the company's internal control over financial reporting during the period covered by this report[143] PART II OTHER INFORMATION Provides additional disclosures including legal proceedings, risk factors, and other relevant corporate information Item 1 Legal Proceedings This section reports on any legal proceedings the company is involved in and assesses their potential material impact on its financial condition or operations - The company is not currently a party to any legal proceedings that are believed to have a material adverse effect on its financial condition or operating results[145] - As of June 30, 2025, no material losses from litigation were considered probable or reasonably possible[70][145] Item 1A Risk Factors This section updates the risk factors previously disclosed, specifically addressing the potential impact of changes in U.S. trade policy - No material changes in risk factors were reported from the 2024 Annual Report, except for an updated discussion on U.S. trade policy changes[146] - Changes in U.S. trade policy, including the imposition of or increases in tariffs, particularly with regard to China, could have a material adverse impact on the company's business, results of operations, or financial condition[146][148][149] - While recent tariffs have not had a significant impact due to prior efforts to accumulate and maintain inventories, there is no guarantee that the company can avoid the impact of tariffs and related economic effects in the future[148] Item 2 Unregistered Sales of Equity Securities and Use of Proceeds This section reports on any unregistered sales of equity securities and the use of proceeds from such sales - No unregistered sales of equity securities or use of proceeds were reported[150] Item 3 Defaults Upon Senior Securities Discloses any defaults upon senior securities - No defaults upon senior securities were reported[151] Item 4 Mine Safety Disclosures Provides disclosures related to mine safety - Mine Safety Disclosures are not applicable to the company[152] Item 5 Other Information This section provides other relevant information not covered in previous items, including details on 10b5-1 trading plans 10b5-1 Plans Discloses details of Rule 10b5-1 trading arrangements adopted by company insiders - During the three months ended June 30, 2025, William W. Yeung, Chief Legal Officer, adopted a Rule 10b5-1 trading arrangement on June 12, 2025[154] - The adopted plan covers the sale of 100 thousand shares of the company's common stock and is scheduled to expire on February 5, 2027, or upon the completion of all sales thereunder[155] Item 6 Exhibits This section lists the exhibits filed or furnished with the report, including certifications and XBRL documents Exhibit Index Lists all documents filed as exhibits to the report, including certifications and XBRL data - The report includes certifications from the Principal Executive Officer and Principal Financial Officer (Exhibits 31.1, 31.2, 32.1)[156] - Inline XBRL documents for the consolidated financial statements and accompanying notes, as well as for the cover page, are provided (Exhibits 101, 104)[157] Signatures Confirms the official signing of the quarterly report by authorized executive officers - The report was signed on August 6, 2025, by David W. Moon, President and Chief Executive Officer, and Michael S. Mancini, Chief Financial Officer[162]