Energy Recovery(ERII) - 2023 Q2 - Quarterly Report

PART I FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, highlighting a net loss of $8.0 million for the six months ended June 30, 2023, a significant decline from $5.5 million net income in the prior year, driven by a 35% revenue decrease Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Current Assets | $150,291 | $157,867 | | Total Assets | $209,674 | $217,039 | | Total Current Liabilities | $15,189 | $18,302 | | Total Liabilities | $27,892 | $31,701 | | Total Stockholders' Equity | $181,782 | $185,338 | Condensed Consolidated Statements of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $20,723 | $20,292 | $34,124 | $52,838 | | Gross Profit | $13,543 | $13,372 | $21,698 | $36,420 | | Income (Loss) from Operations | $(2,586) | $(2,904) | $(10,697) | $5,318 | | Net Income (Loss) | $(1,665) | $(2,359) | $(7,961) | $5,535 | | Diluted EPS | $(0.03) | $(0.04) | $(0.14) | $0.10 | Condensed Consolidated Statements of Cash Flows Highlights (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,523 | $7,479 | | Net cash used in investing activities | $(17,036) | $(12,979) | | Net cash provided by (used in) financing activities | $379 | $(25,638) | | Net change in cash, cash equivalents and restricted cash | $(12,093) | $(31,134) | Notes to Condensed Consolidated Financial Statements These notes detail accounting policies and financial results, including revenue disaggregation by segment, geography, and channel, segment performance, and customer concentration, highlighting reliance on the Water segment and Middle East/Africa region Revenue by Segment (Six Months Ended June 30, in thousands) | Segment | 2023 Revenue | 2022 Revenue | | :--- | :--- | :--- | | Water | $33,810 | $52,729 | | Emerging Technologies | $314 | $109 | Revenue by Geographical Market (Six Months Ended June 30, 2023, in thousands) | Geographical Market | Revenue | % of Total | | :--- | :--- | :--- | | Middle East and Africa | $13,837 | 40.6% | | Asia | $13,492 | 39.5% | | Americas | $4,567 | 13.4% | | Europe | $2,228 | 6.5% | | Total | $34,124 | 100% | Segment Operating Income (Loss) (Six Months Ended June 30, in thousands) | Segment | 2023 | 2022 | | :--- | :--- | :--- | | Water | $9,672 | $26,433 | | Emerging Technologies | $(10,667) | $(11,730) | - For the six months ended June 30, 2022, Customer A and Customer B accounted for 25% and 15% of total revenue, respectively[84] - For the six months ended June 30, 2023, Customers C, D, and F accounted for 13%, 11%, and 12% of revenue, respectively, indicating a shifting but concentrated customer base[84] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, noting a 35% revenue decrease for the first six months of 2023, a decline in gross margin to 63.6%, and a 4.2% increase in operating expenses, while maintaining a strong liquidity position Results of Operations This section details the 35% revenue decline to $34.1 million for the six months ended June 30, 2023, driven by a 54% drop in Megaproject revenue, alongside a 40.4% decrease in gross profit and a 4.2% rise in operating expenses Revenue by Channel (Six Months Ended June 30, in thousands) | Channel | 2023 Revenue | 2022 Revenue | % Change | | :--- | :--- | :--- | :--- | | Megaproject | $15,454 | $33,910 | (54%) | | Original equipment manufacturer | $11,538 | $12,360 | (7%) | | Aftermarket | $7,132 | $6,568 | 9% | | Total Revenue | $34,124 | $52,838 | (35%) | Gross Profit and Margin (Six Months Ended June 30) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Gross Profit (in thousands) | $21,698 | $36,420 | | Gross Margin | 63.6% | 68.9% | Operating Expenses by Segment (Six Months Ended June 30, 2023, in thousands) | Segment | Operating Expenses | % Change YoY | | :--- | :--- | :--- | | Water | $12,116 | 22.4% | | Emerging Technologies | $10,577 | (10.5%) | | Corporate | $9,702 | 3.4% | | Total | $32,395 | 4.2% | Liquidity and Capital Resources The company's liquidity as of June 30, 2023, includes $44.2 million in cash and $53.3 million in marketable debt instruments, with $4.5 million net cash from operations and a $50.0 million revolving credit line, deemed sufficient for the next 12 months - Principal sources of liquidity as of June 30, 2023, consisted of $44.2 million in cash and cash equivalents, $53.3 million in marketable debt instruments, and $15.4 million in net accounts receivable[118] - The company has a $50.0 million committed revolving credit line expiring in December 2026[119] - As of June 30, 2023, no revolving loans were outstanding, and $20.5 million of the $25.0 million letters of credit sub-limit was utilized[120] Cash Flow Summary (Six Months Ended June 30, in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $4,523 | $7,479 | | Net cash used in investing activities | $(17,036) | $(12,979) | | Net cash provided by (used in) financing activities | $379 | $(25,638) | Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are unhedged foreign currency exposure from vendor payments and interest rate risk on its $53.3 million investment portfolio, where a 1% rate increase would decrease fair value by less than $0.2 million - The company's revenue contracts are denominated in U.S. dollars, but it pays many vendors in foreign currencies, creating exposure to exchange rate fluctuations[134][135] - The company has not hedged this exposure as it has been insignificant to date[136] - The investment portfolio of $53.3 million is subject to interest rate risk[138] - To minimize this, the weighted average maturity of investments is kept under five months[138] - A hypothetical 1% increase in interest rates would cause a decrease of less than $0.2 million in the portfolio's fair value[138] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the quarter - The President and Chief Executive Officer and the Chief Financial Officer concluded that as of June 30, 2023, the company's disclosure controls and procedures were effective[140] - No changes in internal control over financial reporting occurred during the period that have materially affected, or are reasonably likely to materially affect, these controls[141] PART II OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business, financial condition, or operating results - As of the reporting date, the company is not a party to any legal proceedings that it believes are likely to have a material adverse effect on its business[144] Item 1A. Risk Factors No material changes to the company's risk factors have occurred since those disclosed in its 2022 Annual Report on Form 10-K and Q1 2023 Form 10-Q - No material changes in risk factors have occurred since those disclosed in the 2022 Annual Report and the Q1 2023 Form 10-Q[145] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[146] Item 5. Other Information This section discloses the termination of a Rule 10b5-1 trading arrangement by CFO Joshua Ballard on June 7, 2023 - On June 7, 2023, CFO Joshua Ballard terminated a Rule 10b5-1 trading arrangement[150] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL documents - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906, and Inline XBRL data[152]