Energy Recovery, Inc. - FORM 10-Q - May 3, 2018

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EX-32.1 - EXHIBIT 32.1 CEO AND CFO CERTIFICATION - Energy Recovery, Inc.eriiex321q1201810-q.htm
EX-31.1 - EXHIBIT 31.1 CEO AND CFO CERTIFICATION - Energy Recovery, Inc.eriiex311q1201810-q.htm
EX-10.1 - EXHIBIT 10.1 CITIBANK AGREEMENT - Energy Recovery, Inc.ex101citibankloanandpledge.htm
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
(Mark One) 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ____________ to __________
Commission File Number: 001-34112

erilogoh.jpg
Energy Recovery, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
01-0616867
(State or Other Jurisdiction of
(I.R.S. Employer
Incorporation or Organization)
Identification No.)

1717 Doolittle Drive, San Leandro, CA 94577
(Address of Principal Executive Offices)  (Zip Code)

(510) 483-7370
(Registrant’s Telephone Number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
 
(Do not check if a smaller reporting company)
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2).  Yes o No x

As of April 27, 2018, there were 53,503,435 shares of the registrant’s common stock outstanding.


 



ENERGY RECOVERY, INC.
TABLE OF CONTENTS
 
 
Page No.
Item 1.
 
 
Condensed Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017
 
Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2018 and 2017
 
Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three Months Ended March 31, 2018 and 2017
 
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2018 and 2017
 
Item 2.
Item 3. 
Item 4.    
 
 
 
Item 1.      
Item 1A.  
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 


– 2 –


PART I — FINANCIAL INFORMATION

Item 1 — Financial Statements (unaudited)

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
 
March 31,
2018
 
December 31,
2017
 
(In thousands, except share data and par value)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
32,153

 
$
27,780

Restricted cash
1,205

 
2,664

Short-term investments
58,108

 
70,020

Accounts receivable, net of allowance for doubtful accounts of $77 and $103 at March 31, 2018 and December 31, 2017, respectively
12,754

 
12,465

Contract assets
4,948

 
6,278

Inventories
7,328

 
5,514

Prepaid expenses and other current assets
1,545

 
1,342

Total current assets
118,041

 
126,063

Restricted cash, non-current
85

 
182

Deferred tax assets, non-current
8,309

 
7,933

Property and equipment, net
12,742

 
13,393

Operating lease, right of use asset
2,511

 
2,843

Goodwill
12,790

 
12,790

Other intangible assets, net
1,112

 
1,269

Other assets, non-current
267

 
12

Total assets
$
155,857

 
$
164,485

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
2,341

 
$
4,091

Accrued expenses and other current liabilities
3,990

 
7,948

Lease liabilities
1,641

 
1,603

Income taxes payable
429

 
432

Accrued warranty reserve
359

 
366

Contract liabilities
16,831

 
15,909

Current portion of long-term debt
12

 
11

Total current liabilities
25,603

 
30,360

Long-term debt, less current portion
13

 
16

Lease liabilities, non-current
1,273

 
1,698

Contract liabilities, non-current
37,239

 
40,517

Other non-current liabilities
255

 
—

Total liabilities
64,383

 
72,591

Commitments and Contingencies (Note 9)

 

Stockholders’ equity:
 
 
 
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding at March 31, 2018 and December 31, 2017
—

 
—

Common stock, $0.001 par value; 200,000,000 shares authorized; 58,699,997 shares issued and 54,027,314 shares outstanding at March 31, 2018 and 58,168,433 shares issued and 53,905,600 shares outstanding at December 31, 2017
59

 
58

Additional paid-in capital
152,850

 
149,006

Accumulated comprehensive loss
(168
)
 
(125
)
Treasury stock, at cost, 4,672,683 shares repurchased at March 31, 2018 and 4,262,833 shares repurchased at December 31, 2017
(23,981
)
 
(20,486
)
Accumulated deficit
(37,286
)
 
(36,559
)
Total stockholders’ equity
91,474

 
91,894

Total liabilities and stockholders’ equity
$
155,857

 
$
164,485

See Accompanying Notes to Condensed Consolidated Financial Statements

– 3 –


ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands, except per share data)
Product revenue
$
11,058

 
$
12,245

Product cost of revenue
3,314

 
4,612

Product gross profit
7,744

 
7,633

 
 
 
 
License and development revenue
2,749

 
2,248

 
 
 
 
Operating expenses:
 
 
 
General and administrative
5,837

 
4,408

Sales and marketing
1,912

 
2,453

Research and development
3,917

 
2,509

Amortization of intangible assets
158

 
158

Total operating expenses
11,824

 
9,528

(Loss) income from operations
(1,331
)
 
353

 
 
 
 
Other income (expense):
 
 
 
Interest income
301

 
171

Interest expense
—

 
(1
)
Other non-operating expense, net
(53
)
 
(53
)
Total other income, net
248

 
117

(Loss) income before income taxes
(1,083
)
 
470

(Benefit from) provision for income taxes
(357
)
 
48

Net (loss) income
$
(726
)
 
$
422

 
 
 
 
(Loss) income per share:
 
 
 
Basic
$
(0.01
)
 
$
0.01

Diluted
$
(0.01
)
 
$
0.01

 
 
 
 
Number of shares used in per share calculations:
 
 
 
Basic
53,987

 
53,825

Diluted
53,987

 
56,056


See Accompanying Notes to Condensed Consolidated Financial Statements



– 4 –


ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
Net (loss) income
$
(726
)
 
$
422

Other comprehensive (loss) income, net of tax:
 
 
 
Foreign currency translation adjustments
21

 
10

Unrealized (loss) income on investments
(64
)
 
1

Other comprehensive (loss) income, net of tax
(43
)
 
11

Comprehensive (loss) income
$
(769
)
 
$
433


See Accompanying Notes to Condensed Consolidated Financial Statements



– 5 –


ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
Cash Flows From Operating Activities:
 
 
 
Net (loss) income
$
(726
)
 
$
422

Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Stock-based compensation
2,242

 
1,113

Depreciation and amortization
1,124

 
881

Amortization of premiums on investments
90

 
113

Provision for warranty claims
48

 
55

Reversal of accruals related to expired warranties
(50
)
 
(63
)
Unrealized loss (gain) on foreign currency translation
113

 
(15
)
Provision for doubtful accounts
8

 
4

Adjustments for excess or obsolete inventory
4

 
71

Deferred income taxes
(376
)
 
(93
)
Loss on disposal of fixed assets
21

 
—

Other non-cash adjustments
3

 
(31
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(297
)
 
2,581

Contract assets
1,330

 
(3,556
)
Inventories
(1,824
)
 
(343
)
Prepaid and other assets
(127
)
 
(553
)
Accounts payable
(1,467
)
 
189

Accrued expenses and other liabilities
(4,092
)
 
(3,566
)
Income taxes payable
(3
)
 
124

Contract liabilities
(2,354
)
 
(2,157
)
Net cash used in operating activities
(6,333
)
 
(4,824
)
Cash Flows From Investing Activities:
 
 
 
Maturities of marketable securities
25,623

 
9,646

Purchases of marketable securities
(13,935
)
 
(9,355
)
Capital expenditures
(626
)
 
(532
)
Net cash provided by (used in) investing activities
11,062

 
(241
)
Cash Flows From Financing Activities:
 
 
 
Net proceeds from issuance of common stock
1,636

 
2,992

Tax payment for employee shares withheld
(37
)
 
(153
)
Repayment of long-term debt
(2
)
 
(2
)
Repurchase of common stock
(3,495
)
 
—

Net cash (used in) provided by financing activities
(1,898
)
 
2,837

Effect of exchange rate differences on cash and cash equivalents
(14
)
 
15

Net change in cash, cash equivalents and restricted cash
2,817

 
(2,213
)
Cash, cash equivalents and restricted cash, beginning of year
30,626

 
65,748

Cash, cash equivalents and restricted cash, end of period
$
33,443

 
$
63,535


See Accompanying Notes to Condensed Consolidated Financial Statements

– 6 –


ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 — Description of Business and Significant Accounting Policies

Energy Recovery, Inc. and its wholly-owned subsidiaries (the “Company,” “Energy Recovery,” “our,” “us,” or “we”) is an energy solutions provider to industrial fluid flow markets worldwide. The Company’s core competencies are fluid dynamics and advanced material science. The Company’s products make industrial processes more operationally and capital expenditure efficient. The Company’s solutions convert wasted pressure energy into a reusable asset and preserve or eliminate pumping technology in hostile processing environments. The Company’s solutions are marketed and sold in fluid flow markets, such as water, oil & gas, and chemical processing, under the trademarks ERI®, PX®, Pressure Exchanger®, PX Pressure Exchanger®, VorTeq™, MTeq™, IsoBoost®, IsoGen®, AT™, and AquaBold™. The Company owns, manufactures, and/or develops its solutions, in whole or in part, in the United States of America (“U.S.”) and the Republic of Ireland (“Ireland”).

Basis of Presentation

The Company’s Condensed Consolidated Financial Statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying Condensed Consolidated Financial Statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in the financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. The December 31, 2017 Condensed Consolidated Balance Sheet was derived from audited financial statements, and may not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information presented not misleading. The March 31, 2018 unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 8, 2018.

In the opinion of management, all adjustments, consisting of normal recurring adjustments that are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods, have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Use of Estimates

The preparation of the Condensed Consolidated Financial Statements in conformity with GAAP requires the Company’s management to make judgments, assumptions, and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying Notes to Condensed Consolidated Financial Statements. The accounting policies that reflect the Company’s more significant estimates and judgments and that the Company believes are the most critical to aid in fully understanding and evaluating the Company’s reported financial results are revenue recognition; capitalization of research and development assets; allowance for doubtful accounts; allowance for product warranty; valuation of stock options; valuation and impairment of goodwill and acquired intangible assets; useful lives for depreciation and amortization; valuation adjustments for excess and obsolete inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies. Those estimates could change, and as a result, actual results could differ materially from those estimates.


– 7 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 2 — Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 (“ASU 2014-09”), Revenue from Contracts with Customers (Topic 606), referred to as Accounting Standards Codification (“ASC”) 606 (“ASC 606”) or “New Revenue Standard.” ASC 606 supersedes the revenue recognition requirements of ASC 605, Revenue Recognition, and requires entities to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services.

The update also requires more detailed disclosures to enable readers of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. ASC 606 permits the use of either the full retrospective or cumulative effect transition (modified retrospective) method upon adoption.

In March and April 2016, the FASB issued ASU No. 2016-08 (“ASU 2016-08”), Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU No. 2016-10 (“ASU 2016-10”), Revenue from Contracts with Customers (Topic 606) Identifying Performance Obligations and Licensing, respectively. The amendments in these updates are intended to improve the operability and understandability of the implementation guidance on principal versus agent considerations and to clarify two aspects of ASC 606: identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The effective date and transition requirements for both ASU 2016-08 and ASU 2016-10 are the same as those for ASU 2014-09, as referred.

The Company adopted ASC 606 as of January 1, 2018 using the full retrospective transition method. To assess the impact of and to implement ASC 606, the Company formed a project team, which has operated since 2014, to evaluate internal processes. The Company has implemented changes to its current policies and practices, and internal controls over financial reporting to address the requirements of the standard.

Water Segment Revenue. Performance obligations identified under ASC 606, are consistent with deliverables identified under ASC 605. Revenue recognition for performance obligations accounted for under ASC 606 is consistent with ASC 605 given the transfer of control of the promised goods or services follows the same pattern. Adoption of ASC 606 did not have a material impact on the timing of revenue and expense recognition.

Oil & Gas Segment - Cost-to-Total Cost (“CTC”) Revenue. Performance obligations identified under ASC 606, are consistent with deliverables identified under ASC 605. Revenue recognition for performance obligations accounted for under ASC 606 is consistent with ASC 605 given the transfer of control of the promised goods or services follows the same pattern. Adoption of ASC 606 did not have a material impact on the timing of revenue and expense recognition.

Oil & Gas Segment - License and Development Revenue. Under ASC 605, license and development revenue associated with the up-front non-refundable $75.0 million exclusivity payment received in connection with the VorTeq license agreement (the “VorTeq License Agreement”) that the Company entered into with Schlumberger Technology Corporation (the “VorTeq Licensee”) was recognized on a straight-line basis over the fifteen-year term of the license, while the two substantive milestone payments of $25.0 million each that could be earned under the license agreement were to be recognized in full when achieved under milestone accounting.

Under ASC 606, license and development revenue, which includes both the upfront non-refundable $75.0 million exclusivity payment and the two milestone payments of $25.0 million each, when determined probable, is comprised of:

•
revenue recognition over time based on an input measure of progress based on a cost driver which management has determined is the best estimate of the progress made on the project during the period from inception until full commercialization for the amount allocated to the exclusive Missile (as defined in Note 14, “VorTeq Partnership and License Agreement”) license and research and development services, and


– 8 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

•
revenue recognition related to stand-ready when and if available upgrades subsequent to full commercialization, recognized over time ratably over the period, which matches the transfer of benefit to the customer on a daily basis, commencing after full commercial launch until the expiration of the contract.

The changes in license and development revenue due to the adoption of ASC 606 are as follows.
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
License and development revenue, as previously reported
$
5,000

 
$
5,000

 
$
1,042

Change in revenue due to adoption the New Revenue Standard
6,106

 
3,069

 
290

License and development revenue, as adjusted
$
11,106

 
$
8,069

 
$
1,332


The changes in the contract liability balance related to license and development revenue due to the adoption of ASC 606 are as follows.
 
December 31,
2017
 
December 31,
2016
 
(In thousands)
License and development contract liability, as previously reported
$
63,958

 
$
68,958

Change in contract liability due to adoption the New Revenue Standard
9,465

 
3,359

License and development contract liability, as adjusted
$
54,493

 
$
65,599


Performance obligations identified under ASC 606 differs somewhat from contingent and non-contingent deliverables identified under ASC 605 due to transfer of control considerations.

Under ASC 606, the Company concluded that the Missile license represents functional intellectual property and that the license is not distinct from the research and development services to be provided prior to product commercialization. The transaction price allocated to this combined performance obligation of a continually evolving license will be recognized over the estimated period required to result in full commercial launch using an input measure of progress of the cost of salaries and wages related to the project prior to full commercial launch.

The milestone method of accounting has been eliminated under ASC 606. Instead of recognizing the full amount of each milestone payment as revenue in the period in which it is achieved, the Company will revise its estimate of the transaction price to include development milestone payments only when they become probable of achievement and revenue will be recognized consistent with the input measure of progress.

The Company has concluded that its obligation to provide when and if available updates to its technology in the period subsequent to full commercial launch represents a performance obligation. The transaction price allocated to this stand-ready performance obligation will be recognized ratably over the period commencing after full commercial launch until the expiration of the contract.

See Note 14, “VorTeq Partnership and License Agreement” for additional discussion on the VorTeq License Agreement, and Note 3, “Revenues,” for further discussion of revenue recognition.

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), also referred to as “ASC 842” or “New Lease Standard,” which supersedes ASC 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB has continued to clarify this guidance through the issuance of additional ASUs. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases.


– 9 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company early adopted ASU 2016-02 on January 1, 2018 concurrent with the Company’s adoption of the New Revenue Standard and elected the available practical expedients. The adoption of ASU 2016-02 had no impact on the Company’s Condensed Consolidated Statements of Operations. The most significant impact was the recognition of right of use assets and liabilities for operating leases. Adoption of the standard required the Company to restate certain previously reported results, including the recognition of additional operating lease right of use assets and liabilities.

In November 2016, the FASB issued ASU 2016-18 (“ASU 2016-18”), Statement of Cash Flows (Topic 230): Restricted Cash, also referred to as “New Cash Flow Presentation Standard.” ASU 2016-18 is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the Consolidated Statement of Cash Flows. ASU 2016-18 requires that the Consolidated Statement of Cash Flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The standard also requires reconciliation between the total cash and equivalents and restricted cash presented on the Consolidated Statement of Cash Flows and the cash and cash equivalents balance presented on the Consolidated Balance Sheet. ASU 2016-18 is effective retrospectively on January 1, 2018. The Company adopted ASU 2016-18 on January 1, 2018. The Company recast its Condensed Consolidated Statements of Cash Flows for the prior period presented based on the restricted cash balance on the balance sheet date and has provided a reconciliation of cash, cash equivalents and restricted cash in Note 5, “Other Financial Information.”

In January 2016, the FASB issued ASU No. 2016-01 (“ASU 2016-01”), Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 modifies certain aspects of the recognition, measurement, presentation, and disclosure of financial instruments. For public entities, ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company adopted ASU 2016-01 on January 1, 2018. The adoption ASU 2016-01 did not have a material impact on the Company’s financial position or results of operations.

In August 2016, the FASB issued ASU No. 2016-15 (“ASU 2016-15”), Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 impacts all entities that are required to present a statement of cash flows under ASC 230, Statement of Cash Flows. The amendment provides guidance on eight specific cash flow issues. For public entities, ASU 2016-15 is effective for fiscal periods beginning after December 15, 2017 and interim periods within those years. Adoption should be applied using a retrospective transition method to each period presented. The Company adopted ASU 2016-15 on January 1, 2018. The adoption of ASU 2016-15 did not have a material impact on the Company’s financial position or results of operations.

In October 2016, the FASB issued ASU 2016-16 (“ASU 2016-16”), Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16 requires recognition of the current and deferred income tax effects of an intra-entity asset transfer, other than inventory, when the transfer occurs, as opposed to legacy GAAP, which requires companies to defer the income tax effects of intra-entity asset transfers until the asset has been sold to an outside party. The income tax effects of intra-entity inventory transfers will continue to be deferred until the inventory is sold. ASU 2016-16 is effective on January 1, 2018, with early adoption permitted. The update is required to be adopted on a modified retrospective basis with the cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. The Company adopted ASU 2016-16 on January 1, 2018. The adoption of ASU 2016-16 did not have a material impact on the Company’s financial position or results of operations.

In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-base payment award require an entity to apply modification accounting under ASC 718, Compensation – Stock Compensation. ASU 2017-09 is effective for annual periods and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have an impact on the Company’s financial position or results of operations.

– 10 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Impact of Recently Adopted Accounting Pronouncements

The following table illustrates changes in the Condensed Consolidated Balance Sheets as previously reported prior to, and as adjusted subsequent to, the adoption of the New Revenue Standard and New Lease Standard in the first quarter of 2018.
 
December 31, 2017
 
As Previously Reported
 
Adoption of New Revenue Standard
 
Adoption of New Lease Standard
 
As Adjusted
 
(In thousands)
Assets
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Contract assets
$
6,411

 
$
(133
)
 
$
—

 
$
6,278

Total current assets
126,196

 
(133
)
 
—

 
126,063

Non-current assets
 
 

 
 
 
 
Deferred tax assets, non-current
7,902

 
31

 
—

 
7,933

Operating lease, right of use asset
—

 
—

 
2,843

 
2,843

Total assets
161,744

 
(102
)
 
2,843

 
164,485

 
 
 

 
 
 
 
Liabilities and Stockholders’ Equity
 
 

 
 
 
 
Current liabilities:
 
 

 
 
 
 
Accrued expenses and other current liabilities
8,517

 
(469
)
 
(100
)
 
7,948

Lease liabilities
—

 
—

 
1,603

 
1,603

Contract liabilities
6,416

 
9,493

 
—

 
15,909

Total current liabilities
19,833

 
9,024

 
1,503

 
30,360

Non-current liabilities
 
 

 
 
 
 
Lease liabilities, non-current
—

 
—

 
1,698

 
1,698

Contract liabilities, non-current
59,006

 
(18,489
)
 
—

 
40,517

Other non-current liabilities
358

 
—

 
(358
)
 
—

Total liabilities
79,213

 
(9,465
)
 
2,843

 
72,591

Stockholders’ equity:
 
 

 
 
 
 
Accumulated deficit
(45,922
)
 
9,363

 
—

 
(36,559
)
Total stockholders’ equity
82,531

 
9,363

 
—

 
91,894

Total liabilities and stockholders’ equity
161,744

 
(102
)
 
2,843

 
164,485



– 11 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table illustrates changes in the Condensed Consolidated Statement of Operations as previously reported prior to, and as adjusted subsequent to, the adoption of the New Revenue Standard in the first quarter of 2018.
 
Three Months Ended March 31, 2017
 
As Previously Reported
 
Adoption of New Revenue Standard
 
As Adjusted
 
(In thousands, except for per share data)
Product revenue
$
12,261

 
$
(16
)
 
$
12,245

Product cost of revenue
4,610

 
2

 
4,612

Product gross profit
$
7,651

 
$
(18
)
 
$
7,633

 
 
 

 
 
License and development revenue
$
1,250

 
$
998

 
$
2,248

 
 
 

 
 
Income (loss) from operations
(627
)
 
980

 
353

Income (loss) before income taxes
(510
)
 
980

 
470

(Benefit from) provision for income taxes
(77
)
 
125

 
48

Net income (loss)
(433
)
 
855

 
422

 
 
 

 
 
Income (loss) per share:
 
 

 
 
Basic
$
(0.01
)
 
$
0.02

 
$
0.01

Diluted
$
(0.01
)
 
$
0.02

 
$
0.01

Number of shares used in per share calculations:
 
 
 
 
 
Basic
53,825

 
—

 
53,825

Diluted
53,825

 
2,231

 
56,056


The following table illustrates changes in the Company’s segment activities as previously reported prior to, and as adjusted subsequent to, the adoption of the New Revenue Standard in the first quarter of 2018.
 
Three Months Ended March 31, 2017
 
As Previously Reported
 
Adoption of New Revenue Standard
 
As Adjusted
 
(In thousands)
Water
 
 
 
 
 
Product revenue
$
10,716

 
$
—

 
$
10,716

Product cost of revenue
3,522

 
2

 
3,524

Product gross profit
$
7,194

 
$
(2
)
 
$
7,192

 
 
 

 
 
Income (loss) from operations
$
4,957

 
$
(2
)
 
$
4,955

 
 
 
 
 
 
Oil & Gas
 
 
 
 
 
Product revenue
$
1,545

 
$
(16
)
 
$
1,529

Product cost of revenue
1,088

 
—

 
1,088

Product gross profit
$
457

 
$
(16
)
 
$
441

 
 
 
 
 
 
License and development revenue
$
1,250

 
$
998

 
$
2,248

 
 
 
 
 
 
Income (loss) from operations
(1,529
)
 
982

 
(547
)


– 12 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table illustrates changes in the Condensed Consolidated Statement of Comprehensive Income (Loss) as previously reported prior to, and as adjusted subsequent to, the adoption of the New Revenue Standard in the first quarter of 2018.
 
Three Months Ended March 31, 2017
 
As Previously Reported
 
Adoption of New Revenue Standard
 
As Adjusted
 
(In thousands)
Net income (loss)
$
(433
)
 
$
855

 
$
422

Comprehensive income (loss)
(422
)
 
855

 
433


The following table illustrates changes in the Condensed Consolidated Statement of Cash Flows as previously reported prior to, and as adjusted subsequent to, the adoption of the New Revenue Standard and New Cash Flow Presentation Standard in the first quarter of 2018.
 
Three Months Ended March 31, 2017
 
As Previously Reported
 
Adoption of New Revenue Standard
 
Adoption of New Cash Flow Presentation Standard
 
As Adjusted
 
(In thousands)
Net (loss) income
$
(433
)
 
$
855

 
$
—

 
$
422

Changes in operating assets and liabilities:
 
 

 
 
 
 
Accounts receivable
2,571

 
10

 
—

 
2,581

Contract assets
(3,572
)
 
16

 
—

 
(3,556
)
Inventories
(345
)
 
2

 
—

 
(343
)
Accrued expenses and other liabilities
(3,162
)
 
(404
)
 
—

 
(3,566
)
Contract liabilities
(1,553
)
 
(604
)
 
—

 
(2,157
)
Net cash used in operating activities
(4,824
)
 
—

 
—

 
(4,824
)
 
 
 
 
 
 
 
 
Restricted cash
(460
)
 
—

 
460

 
—

Net cash used in investing activities
(701
)
 
—

 
460

 
(241
)
 
 
 
 
 

 
 
Net change in cash, cash equivalents and restricted cash
(2,673
)
 
—

 
460

 
(2,213
)
Cash, cash equivalents and restricted cash, beginning of year
61,364

 
—

 
4,384

 
65,748

Cash, cash equivalents and restricted cash, end of period
58,691

 
—

 
4,844

 
63,535



– 13 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recently issued accounting pronouncement not yet adopted

In January 2017, the FASB issued ASU No. 2017-04 (“ASU 2017-04”), Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. ASU 2017-04 eliminates Step 2 of the goodwill impairment quantitative test and allows for the determination of impairment by comparing the fair value of the reporting unit with its carrying amount. The amendments in this update should be applied on a prospective basis. For public entities which are SEC filers, this amendment is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for testing dates after January 1, 2017. The Company expects to adopt this standard on January 1, 2020 and does not expect the adoption of ASU 2017-04 to have a material impact on its financial statements.

In February 2018, the FASB issued ASU No. 2018-02 (“ASU 2018-02”), Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 was issued to address the income tax accounting treatment of the stranded tax effects within other comprehensive income due to the prohibition of backward tracing due to an income tax rate change that was initially recorded in other comprehensive income. This issue came about from the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the “Tax Act”) that changed the Company’s income tax rate from 35% to 21%. ASU 2018-02 changed current accounting whereby an entity may elect to reclassify the stranded tax effect from accumulated other comprehensive income to retained earnings. The ASU 2018-02 is effective for periods beginning after December 15, 2018 although early adoption is permitted. The Company does not expect the adoption of ASU 2018-02 to have a material impact on its financial position or results of operations.


– 14 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 3 — Revenues

Adoption of ASC 606, Revenue from Contracts with Customers

On January 1, 2018, the Company adopted ASC 606 using the full retrospective transition method. The Company recorded a net reduction to opening retained earnings of $0.3 million as of January 1, 2016, due to the cumulative impact of adopting ASC 606. The impact to revenues as a result of applying ASC 606 was an increase of $1.0 million for the three months ended March 31, 2017.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. At the inception of each contract, performance obligations are identified and the total transaction price is allocated to the performance obligations.

The Company’s payment terms vary based on the credit risk of its customer. For certain customer types, the Company requires payment before the products or services are delivered to the customer. The Company performs an evaluation of customer credit worthiness on an individual contract basis to assess whether collectability is reasonably assured at the inception of the contract. As part of this evaluation, the Company considers many factors about the individual customer, including the underlying financial strength of the customer and/or partnership consortium and the Company’s prior history or industry-specific knowledge about the customer and its supplier relationships. For smaller projects, the Company requires the customer to remit payment generally within 30 to 60 days after product delivery. In some cases, if credit worthiness cannot be determined, prepayment or other security is required.

Sales commissions are expensed as incurred when product revenue is earned. These costs are recorded within sales and marketing expenses.

The following table presents the Company’s revenues disaggregated by geography, based on the shipped to addresses of the Company’s customers and revenue source. Sales and usage-based taxes are excluded from revenues.
 
Three Months Ended March 31, 2018
 
Water
 
Oil & Gas
 
Total
 
(In thousands)
Primary geographical market
 
 
 
 
 
Middle East and Africa
$
6,102

 
$
10

 
$
6,112

Americas
1,101

 
2,749

 
3,850

Asia
2,673

 
—

 
2,673

Europe
1,172

 
—

 
1,172

Total
$
11,048

 
$
2,759

 
$
13,807

 
 
 
 
 
 
Major product/service line
 
 
 
 
 
PX, pumps and turbo devices
$
11,048

 
$
—

 
$
11,048

License and development
—

 
2,749

 
2,749

Oil & gas products
—

 
10

 
10

Total
$
11,048

 
$
2,759

 
$
13,807



– 15 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
Three Months Ended March 31, 2017
 
Water
 
Oil & Gas
 
Total
 
(In thousands)
Primary geographical market
 
 
 
 
 
Middle East and Africa
$
6,073

 
$
1,530

 
$
7,603

Americas
1,073

 
2,248

 
3,321

Asia
2,414

 
—

 
2,414

Europe
1,155

 
—

 
1,155

Total
$
10,715

 
$
3,778

 
$
14,493

 
 
 
 
 
 
Major product/service line
 
 
 
 
 
PX, pumps and turbo devices
$
10,715

 
$
—

 
$
10,715

License and development
—

 
2,248

 
2,248

Oil & gas products
—

 
1,530

 
1,530

Total
$
10,715

 
$
3,778

 
$
14,493


Arrangements with Multiple Performance Obligations and Termination for Convenience

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company allocates revenue to each performance obligation based on its relative stand-alone selling price. The Company generally determines standalone selling prices based on the prices charged to customers.

With respect to termination, the Company does not have the ability to cancel the contract for convenience. In general, customers can cancel for convenience upon the payment of a termination fee that covers costs and profit. It is rare for customers to cancel contracts.

Practical Expedients and Exemptions

In the Water segment, the time period between when the Company transfers control of products to the customer and the payment for the products is, in general, less than one year and, therefore, the practical expedient with respect to a financing component has been adopted by the Company.

With respect to taxes, the Company has made the policy election to exclude taxes from the measurement of the transaction price.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice for services performed.

– 16 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Contract Balances

Contract balances by category are presented in the following table. Prior year amounts have been adjusted for the adoption of ASC 606 in the first quarter of 2018. See Note 2, “Recent Accounting Pronouncements,” for reconciliation of prior year “As Previously Reported” and “As Adjusted” amounts.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Trade receivables
$
12,754

 
$
12,465

Contract assets:
 
 
 
Unbilled receivables
$
1,413

 
$
1,413

Unbilled receivables, projects
3,535

 
4,865

Total contract assets
$
4,948

 
$
6,278

 
 
 
 
Current contract liabilities:
 
 
 
Customer deposits
$
894

 
$
414

Deferred revenue:
 
 
 
Cost and estimated earnings in excess of billings
773

 
805

License and development
14,568

 
14,024

Product
469

 
550

Service
127

 
116

Total current contract liability
16,831

 
15,909

Non-current contract liabilities, deferred revenue
 
 
 
License and development
37,176

 
40,469

Product
63

 
48

Total non-current contract liability
37,239

 
40,517

Total contract liability
$
54,070

 
$
56,426


The Company records unbilled receivables as contract assets. Significant changes in contract assets during the period were as follows.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Balance, beginning of year
$
6,278

 
$
2,015

Transferred to receivables
(1,340
)
 
(2,909
)
Cumulative catch-up adjustments
10

 
7,172

Balance, end of period
$
4,948

 
$
6,278


The Company records contract liabilities when cash payments are received or due in advance of the Company’s performance. Significant changes in contract liabilities during the period were as follows.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Balance, beginning of year
$
56,426

 
$
62,232

Revenue recognized
(2,775
)
 
(5,892
)
Cash received
419

 
86

Balance, end of period
$
54,070

 
$
56,426



– 17 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Transaction Price Allocated to the Remaining Performance Obligation

The following table includes estimated revenue expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at March 31, 2018.
 
Estimated Revenue
 
(In thousands)
Year:
 
2018 (remaining nine months)
$
11,815

2019
13,457

2020
14,464

2021
6,871

2022 and thereafter
5,677

Total
$
52,284


The Company applies the practical expedient in ASC 606, paragraph 10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less.

The Company applies the practical expedient in ASC 606 paragraph 10-65-1(f)(3) and does not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the Company expects to recognize that amount of revenue for the comparative period ended March 31, 2017.

Contract Costs

The Company recognizes the incremental cost of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized in one year or less. The costs of obtaining contracts are included in sales and marketing expenses.

Product and Service Revenue Recognition - Water Segment

In the Water segment, a contract is established by a written agreement (executed sales order, executed purchase order or stand-alone contract) with the customer with fixed pricing, and a credit risk assessment is completed prior to the signing of the agreement to ensure that collectability is reasonably assured.

The Company does not bundle performance obligations in the Water segment. The Company identifies each performance obligation separately along with its associated relative standalone selling price based on the prices and discounts that the Company would sell a promised good or service separately to a customer.

Generally, performance obligations consist of delivery of products, such as PX energy recovery devices, turbochargers, pumps, and spare parts. These service amounts are deferred as contract liabilities until the services are performed.

The transfer of control for the Company’s products follows transfer of title which typically occurs upon shipment of the equipment in accordance with International Commercial Terms (commonly referred to as “Incoterms”). The specified product performance criteria for the Company’s products pertain to the ability of the Company’s product to meet its published performance specifications and warranty provisions, which the Company’s products have demonstrated on a consistent basis. This factor, combined with historical performance metrics, provides the Company’s management with a reasonable basis to conclude that the products will perform satisfactorily upon commissioning of the plant. Installation is relatively simple, requires no customization, and is performed by the customer under the supervision of the Company’s personnel. Based on these factors, the Company concluded that performance has been completed upon shipment when title transfers based on the shipping terms, and that product revenue is recognized at a point in time.


– 18 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company does not provide its customers with a right of product return; however, the Company will accept returns of products that are deemed to be damaged or defective when delivered that are covered by the terms and conditions of the product warranty. Product warranty is provided consistent with the industry and is considered to be an assurance warranty, not a separate performance obligation. Product returns and warranty charges have not been significant.

Revenue allocable to the Company’s product is limited to the amount that is not contingent upon the delivery of additional items or meeting specified performance conditions. The Company adheres to consistent pricing in the stand-alone sale of products and services and the contractual pricing of products and commissioning of services in bundled arrangements.

For large projects, stand-alone contracts are utilized. For these contracts, consistent with industry practice, the Company’s customers typically require their suppliers, including the Company, to accept contractual holdback provisions (also referred to as a retention payment) whereby the final amounts due under the sales contract are remitted over extended periods of time or alternatively, stand-by letters of credit are issued. These retention payments are generally 10% or less of the total contract amount and are due and payable upon the passage of time, generally up to 24 to 36 months from the date of product delivery. These retention payments are generally replaced by bank guarantees which have had no history of being exercised, and they align with the product warranty period. Given that they are not material in the context of the contract, they are not considered to be a financing component. The Company has no performance obligation and they are recorded as contract assets.

Shipping and handling charges billed to customers is a pass-through from the freight forwarder and is included in product revenue. The cost of shipping to customers is included in cost of revenue.

Cost-to-Total Cost (“CTC”) Revenue Recognition - Oil & Gas Segment

IsoBoost and IsoGen systems are highly engineered, customized solutions that are designed and manufactured over an extended period of time and are built specifically to meet a customer’s specifications. Given the facts and circumstances of these projects, the Company concluded that the CTC method of accounting is appropriate for IsoBoost and IsoGen systems. In the event that a purchase order for an IsoBoost or IsoGen system does not meet these facts and circumstances, then the CTC method of accounting does not apply. The Company had one CTC contract for IsoBoost turbochargers in fiscal years 2016 through 2018, which is expected to be completed and shipped in the second quarter of 2018. A standard assurance type warranty was provided.

Revenue from fixed price contracts is recognized with progress measured in the ratio of costs incurred to estimated final costs. Contract costs include all direct material and labor costs related to contract performance. Pre-contract costs with no future benefit were expensed in the period in which they were incurred. Since the financial reporting of these contracts depends on estimates, which are assessed continually during the term of the contract, recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revisions become known, using the cumulative catchup method. If material, the effects of any changes in estimates are disclosed in the notes to the consolidated financial statements. When estimates indicate that a loss will be incurred on a contract, a provision for the expected loss is recorded in the period in which the loss becomes evident. No loss has been incurred to date. Revenue is recognized only to the extent costs have been recognized in the same period.

– 19 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Cost and estimated earnings on uncompleted contracts is presented in the following table.
 
 
 
December 31, 2017
 
March 31,
2018
 
As Adjusted
 
Adoption of New Revenue Standard
 
As Previously Reported
 
(In thousands)
Estimated earnings to date
$
5,877

 
$
5,867

 
$
(133
)
 
$
6,000

Estimated costs to date
(4,613
)
 
(4,525
)
 
—

 
(4,525
)
Subtotal
1,264

 
1,342

 
(133
)
 
1,475

Net billings to date
1,498

 
2,718

 
—

 
2,718

Total
$
2,762

 
$
4,060

 
$
(133
)
 
$
4,193

 
 
 
 
 
 
 
 
Included in accompanying balance sheets:
 
 
 
 
 
 
 
Unbilled project costs
$
3,535

 
$
4,865

 
$
(133
)
 
$
4,998

Cost and estimated earnings in excess of billings
(773
)
 
(805
)
 
—

 
(805
)
Total
$
2,762

 
$
4,060

 
$
(133
)
 
$
4,193


Unbilled project costs and Cost and estimated earnings in excess of billings are included in Contract assets and Contract liabilities on the Condensed Consolidated Balance Sheets, respectively.

License and Development, and Lease Revenue Recognition - Oil & Gas Segment

License and development revenue is comprised of revenue recognition over time of the upfront non-refundable $75.0 million exclusivity fee received in connection with the VorTeq License Agreement, as well as the revenue recognition over time of the two milestone payments of $25.0 million each when uncertainty of receipt is resolved and receipt of each milestone payment is considered probable.

The VorTeq License Agreement is comprised of a fifteen-year exclusive license for the Company’s VorTeq technology (“VorTeq”). In performing the obligations under the license, the Company provides research and development services to commercialize the technology in accordance with the Key Performance Indicators (“KPIs”), defined in the license agreement.  After commercialization is achieved, payments will be received for the supply and servicing of certain components of the VorTeq.  All payments are non-refundable. See Note 14, “VorTeq Partnership and License Agreement.”

The Company recognizes license and development revenue in accordance with ASC 606. Revenue is recognized when control of the promised goods or services is transferred to customers. Stand-alone selling price was established at the inception of the contract by taking the transaction to market on a non-exclusive basis, and pricing in an exclusivity premium. Since the agreement included an up-front non-refundable payment at the inception of the agreement and future products and services are provided after initial commercialization, the Company completed an analysis and concluded that there was no material right included in the pricing of the agreement.

Performance obligations have been identified, i.e., the exclusive license to the Missile technology and upgrades prior to and subsequent to the date of full commercial launch. Value has been allocated to the performance obligations, and revenue is recognized over time based on the input measure of progress of the cost of salaries and wages related to the project prior to full commercialization, and ratably for the unspecified upgrades for the period subsequent to full commercialization until the expiration of the contract.

Once commercial launch is achieved and cartridges are provided under the contract, revenue from those royalty payments will be recognized in accordance with ASC 842, with the Company as the lessor. It is expected that the cartridge leases will be classified as short-term operating leases and revenue will be recognized as earned.


– 20 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 4 — (Loss) Income Per Share

Net (loss) income is divided by the weighted average number of common shares outstanding during the year to calculate basic net (loss) income per common share. Basic earnings per share exclude any dilutive effects of stock options and restricted stock units (“RSUs”).

Diluted net (loss) income per common share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for common stock, using the treasury stock method, and the common stock underlying outstanding RSU was issued. Diluted earnings per share for the three months ended March 31, 2018 and 2017, includes the dilutive effects of stock options and RSUs. Certain common stock issuable under stock options and RSUs have been omitted from the three months ended March 31, 2018 and 2017 diluted net income per share calculations because their inclusion is considered anti-dilutive.

The computation of basic and diluted net (loss) income per share is presented in the following table. Prior year amounts have been adjusted for the adoption of ASC 606 in the first quarter of 2018. See Note 2, Recent Accounting Pronouncements, for reconciliation of prior year “As Previously Reported” and “As Adjusted” amounts.
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands, except per share amounts)
Numerator:
 
 
 
Net (loss) income
$
(726
)
 
$
422

 
 
 
 
Denominator:
 
 
 
Basic weighted average common shares outstanding
53,987

 
53,825

Weighted average effect of dilutive stock awards
—

 
2,231

Diluted weighted average common shares outstanding
53,987

 
56,056

 
 
 
 
Net (loss) income per share:
 
 
 
Basic
$
(0.01
)
 
$
0.01

Diluted
$
(0.01
)
 
$
0.01


The potential common shares were excluded from the computation of diluted net (loss) income per share as their effect would have been anti-dilutive is presented in the following table.
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
Anti-dilutive shares excluded from net (loss) income per share calculation
5,414

 
1,279



– 21 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 5 — Other Financial Information

Cash, Cash Equivalents and Restricted Cash

The Company’s Condensed Consolidated Statement of Cash Flows explains the change in the total of cash, cash equivalents, and restricted cash. The following table provides a reconciliation of cash and cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets that sum to the total of such amounts in the Condensed Consolidated Statements of Cash Flows.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Cash and cash equivalents
$
32,153

 
$
27,780

Restricted cash
1,290

 
2,846

Total cash, cash equivalents, and restricted cash
$
33,443

 
$
30,626


The Company pledged cash in connection with certain stand-by letters of credit and company credit cards. The Company deposited corresponding amounts into accounts at several financial institutions. See Note 8, “Long-term Debt and Lines of Credit,” for additional discussion related to the Company’s stand-by letters of credit and restricted cash requirements.

Inventories

Inventories are stated at the lower of cost (using the first-in, first-out method) or net realizable value and are presented by category in the following table.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Raw materials
$
2,342

 
$
1,899

Work in process
2,889

 
2,191

Finished goods
2,097

 
1,424

Inventories, net
$
7,328

 
$
5,514


Valuation adjustments for excess and obsolete inventory, reflected as a reduction of inventory at March 31, 2018 and December 31, 2017 was $0.6 million and $0.7 million, respectively.

Prepaid and Other Current Assets

Prepaid expenses and other current assets by category are presented in the following table.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Insurance
$
205

 
$
256

Interest receivable
443

 
439

Property taxes
255

 
189

Supplier advances
113

 
124

Software license
267

 
193

Other prepaid expenses and current assets
262

 
141

Total prepaid and other current assets
$
1,545

 
$
1,342



– 22 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities by category are presented in the following table.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Payroll and commissions payable
$
2,800

 
$
6,071

Other accrued expenses and current liabilities
1,190

 
1,877

Total accrued expenses and other current liabilities
$
3,990

 
$
7,948


Lease Liabilities

Lease liabilities are presented in the following table.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Lease liabilities
$
1,641

 
$
1,603

Lease liabilities, non-current
1,273

 
1,698

Total lease liabilities
$
2,914

 
$
3,301


Accumulated Other Comprehensive Loss

Changes in accumulated other comprehensive loss by component are presented in the following table.
 
Foreign Currency Translation Adjustments
 
Unrealized Losses on Investments
 
Total Accumulated Other Comprehensive Loss
 
(In thousands)
Balance, December 31, 2017
$
(33
)
 
$
(92
)
 
$
(125
)
Other comprehensive income (loss), net
21

 
(64
)
 
(43
)
Balance, March 31, 2018
$
(12
)
 
$
(156
)
 
$
(168
)

There were no reclassifications of amounts out of accumulated other comprehensive loss, as there have been no sales of securities or translation adjustments that impacted other comprehensive loss during the years presented. The tax impact of the changes in accumulated other comprehensive loss was not material.


– 23 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 6 — Investments and Fair Value Measurements

The Company’s cash, cash equivalents and short-term investments are presented in the following table.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Cash and cash equivalents
$
32,153

 
$
27,780

Short-term investments
58,108

 
70,020

Total cash, cash equivalents and marketable securities
$
90,261

 
$
97,800


As of March 31, 2018, there were no available-for-sale investments reported in Cash and cash equivalents on the Condensed Consolidated Balance Sheets. As of December 31, 2017, available-for-sale investments of $0.3 million were reported in Cash and cash equivalents on the Condensed Consolidated Balance Sheets.

Available-for-Sale Investments

The Company’s investments are all classified as available-for-sale. As of March 31, 2018 and December 31, 2017, all available-for-sale investments were classified as short-term, with maturities less than 12 months. There were no sales of available-for-sale investments during the three months ended March 31, 2018 and 2017.

Available-for-sale investments as of March 31, 2018 and December 31, 2017 are presented in the following tables.
 
March 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
 
Gross
Unrealized
Holding Losses
 
Fair Value
 
(In thousands)
U.S. Treasury securities
$
11,626

 
$
—

 
$
(21
)
 
$
11,605

Corporate notes and bonds
46,390

 
—

 
(135
)
 
46,255

Municipal notes and bonds
248

 
—

 
—

 
248

Total available-for-sale investments
$
58,264

 
$
—

 
$
(156
)
 
$
58,108


 
December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Holding Gains
 
Gross
Unrealized
Holding Losses
 
Fair Value
 
(In thousands)
U.S. Treasury securities
$
16,755

 
$
—

 
$
(14
)
 
$
16,741

Corporate notes and bonds
53,367

 
—

 
(77
)
 
53,290

Municipal notes and bonds
247

 
—

 
—

 
247

Total available-for-sale investments
$
70,369

 
$
—

 
$
(91
)
 
$
70,278


The Company monitors investments for other-than-temporary impairment. It was determined that unrealized gains and losses at March 31, 2018 and December 31, 2017, are temporary in nature because the changes in market value for these securities resulted from fluctuating interest rates rather than a deterioration of the credit worthiness of the issuers. The Company is unlikely to experience gains or losses if these securities are held to maturity. In the event that the Company disposes of these securities before maturity, it is expected that the realized gains or losses, if any, will be immaterial.


– 24 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. The amortized cost and fair value of available-for-sale securities that had stated maturities are shown by contractual maturity in the following table.
 
March 31, 2018
 
Amortized Cost
 
Fair Value
 
(In thousands)
Due in one year or less
$
58,264

 
$
58,108


Fair Value of Financial Instruments

Financial assets and liabilities that are remeasured and reported at fair value at each reporting period are classified and disclosed in one of the following three levels:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and
Level 3 — Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions that market participants would use in pricing.

For the Company’s investments in available-for-sale securities, if quoted prices in active markets for identical investments are not available to determine fair value (Level 1), then the Company uses quoted prices for similar assets or inputs other than quoted prices that are observable either directly or indirectly (Level 2). The investments included in Level 2 consist of corporate notes and bonds, municipal notes and bonds and U.S. Treasury securities.

Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis

The fair value of financial assets and liabilities measured on a recurring basis is presented in the following tables.
 
March 31, 2018
 
Total
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
U.S. Treasury securities
$
11,605

 
$
—

 
$
11,605

 
$
—

Corporate notes and bonds
46,255

 
—

 
46,255

 
—

Municipal notes and bonds
248

 
—

 
248

 
—

Total short-term investments
58,108

 
—

 
58,108

 
—

Total assets
$
58,108

 
$
—

 
$
58,108

 
$
—



– 25 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 
December 31, 2017
 
Total
 
Level 1
Inputs
 
Level 2
Inputs
 
Level 3
Inputs
 
(In thousands)
Assets:
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
Corporate notes and bonds
$
258

 
$
—

 
$
258

 
$
—

Total cash equivalents
258

 
—

 
258

 
—

 
 
 
 
 
 
 
 
Short-term investments
 
 
 
 
 
 
 
U.S. Treasury securities
16,741

 
—

 
16,741

 
—

Corporate notes and bonds
53,032

 
—

 
53,032

 
—

Municipal notes and bonds
247

 
—

 
247

 
—

Total short-term investments
70,020

 
—

 
70,020

 
—

Total assets
$
70,278

 
$
—

 
$
70,278

 
$
—


During the three months ended March 31, 2018, the Company had no transfers of financial assets and liabilities between Level 1 and Level 2.

The fair value and gross unrealized losses on the available-for-sale securities that have been in a continuous unrealized loss position, aggregated by type of investment instrument as of March 31, 2018 and December 31, 2017 are summarized in the following table. All of the Company’s available-for-sale investments were short-term with maturities less than 12 months. Available-for-sale investments that were in an unrealized gain position have been excluded from the following table.
 
March 31, 2018
 
December 31, 2017
 
Fair Value
 
Gross
Unrealized
Losses
 
Fair Value
 
Gross Unrealized Losses
 
(In thousands)
U.S. Treasury securities
$
11,605

 
$
(21
)
 
$
10,162

 
$
(14
)
Corporate notes and bonds
46,255

 
(135
)
 
53,222

 
(77
)
Municipal notes and bonds
248

 
—

 
247

 
—

Total available-for-sale investments
$
58,108

 
$
(156
)
 
$
63,631

 
$
(91
)


– 26 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 7 — Goodwill and Intangible Assets

Goodwill

The net carrying amount of goodwill as of March 31, 2018 and December 31, 2017 was $12.8 million. As of March 31, 2018 and December 31, 2017, no impairment of goodwill was recorded in the accompanying Condensed Consolidated Financial Statements.

Other Intangible Assets

The components of identifiable intangible assets, all of which are finite-lived, as of the date indicated were as follows in the table below. All intangible assets are amortized on a straight-line basis over their useful life.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Finite-lived intangible assets
$
6,643

 
$
6,643

Accumulated amortization
(5,531
)
 
(5,374
)
Intangible assets, net
$
1,112

 
$
1,269



– 27 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 8 — Long-term Debt and Lines of Credit

Loans and Stand-by Letters of Credit

Loan and Pledge Agreement

On January 27, 2017, the Company entered into a loan and pledge agreement (the “Loan and Pledge Agreement”) with a financial institution (“Financial Institution 2”). The Loan and Pledge Agreement provides for a committed revolving credit line of $16.0 million and an uncommitted revolving credit line of $4.0 million. The Loan and Pledge Agreement was amended on March 30, 2018 to extend the termination date of the Loan and Pledge Agreement from March 31, 2018 to March 31, 2020, of which the Company paid closing fees of $16 thousand. No other provisions of the Loan and Pledge Agreement was amended. As of March 31, 2018, no amount under the Loan and Pledge Agreement was outstanding.

Stand-by Letters of Credit

The financial institutions where the outstanding amounts of stand-by letters of credit are collateralized by pledged U.S. investments or restricted cash are presented in the following table.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Financial Institution 1
$
1,148

 
$
1,687

Financial Institution 2
7,309

 
7,745

Financial Institution 3
—

 
990

Total
$
8,457

 
$
10,422


The Company’s total restricted cash balances by financial institution are presented in the following table. Financial Institution 2 requires pledged U.S. investments in lieu of restricted cash balances.
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Financial Institution 1
$
1,205

 
$
1,771

Financial Institution 3
—

 
990

Financial Institution 4
85

 
85

Total
$
1,290

 
$
2,846



– 28 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 9 — Commitments and Contingencies

Operating Lease Obligations

The Company leases office facilities and equipment under operating leases that expire on various dates through 2021.

At March 31, 2018, the Company’s corporate office, research and development lab and manufacturing facilities lease (“Doolittle Lease”), had a renewal term of two additional periods of five years each. In April 2018, the Company renegotiated the Doolittle Lease with the lessor (“New Doolittle Lease”). The New Doolittle Lease is effective from April 2018 through December 2028 and has a renewal term of one additional period of five years. The Company will incur an annual base facility lease payment of $0.8 million in the first year and $19.0 million over the term of the New Doolittle Lease.

The components of lease expense are presented in the following table.
 
Three Months Ended March 31, 2018
 
(In thousands)
Operating Lease Cost
$
380


Other information related to the operating leases are presented in the following table.
 
Three Months Ended March 31, 2018
 
(In thousands, except for discount rate and lease term)
Cash payments
$
435

Weighted average remaining lease term
20 months

Weighted average discount rate
6.19
%

Maturities of lease liabilities as of March 31, 2018 are presented in the following table.
 
Lease Amounts
 
(In thousands)
Year:
 
2018 (remaining nine months)
$
1,319

2019
1,564

2020
148

2021
37

Total
3,068

Less imputed lease interest
(154
)
Total lease liabilities
$
2,914



– 29 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Warranty

Changes in the Company’s accrued product warranty reserve are presented in the following table.
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
Balance, beginning of year
$
366

 
$
406

Warranty costs charged to cost of revenue
48

 
55

Utilization charges against reserve
(50
)
 
(36
)
Release of accrual related to expired warranties
(5
)
 
(27
)
Balance, end of period
$
359

 
$
398


Purchase Obligations

The Company has purchase order arrangements with its vendors for which the Company has not received the related goods or services as of March 31, 2018. These arrangements are subject to change based on the Company’s sales demand forecasts, and the Company has the right to cancel the arrangements prior to the date of delivery. The majority of these purchase order arrangements were related to various raw materials and components parts. As of March 31, 2018, the Company had approximately $3.5 million of open cancellable purchase order arrangements related primarily to materials and parts.

Guarantees

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities, generally limited to personal injury and property damage caused by the Company’s employees at a customer’s desalination plant in proportion to the employee’s percentage of fault for the accident. Damages incurred for these indemnifications would be covered by the Company’s general liability insurance to the extent provided by the policy limitations. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated fair value of these agreements is not material. Accordingly, the Company had no liabilities recorded for these agreements as of March 31, 2018 and December 31, 2017.

In certain cases, the Company issues warranty and product performance guarantees to its customers for amounts generally equal to 10% or less of the total sales agreement to endorse the execution of product delivery and the warranty of design work, fabrication, and operating performance of our devices. These guarantees are generally stand-by letters of credit that typically remain in place in general for periods of 24 to 36 months, and in some cases up to 68 months. All stand-by letters of credit at March 31, 2018 and December 31, 2017, were in the aggregate for amounts of $8.5 million and $10.4 million, respectively. See Note 8, “Long-term Debt and Lines of Credit,” for additional information about the Company’s stand-by letters of credit arrangements.


– 30 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Litigation

The Company is named in and subject to various proceedings and claims in connection with our business. The Company is contesting the allegations in these claims, and the Company believes that there are meritorious defenses in each of these matters. The outcome of matters the Company has been, and currently are, involved in cannot be determined at this time, and the results cannot be predicted with certainty. There can be no assurance that these matters will not have a material adverse effect on our results of operations in any future period and a significant judgment could have a material adverse impact on the Company’s financial condition, results of operations and cash flows. The Company may in the future become involved in additional litigation in the ordinary course of its business, including litigation that could be material to its business.

The Company considers all claims on a quarterly basis and based on known facts assesses whether potential losses are considered reasonably possible, probable and estimable. Based upon this assessment, the Company then evaluates disclosure requirements and whether to accrue for such claims in its consolidated financial statements. The Company records a provision for a liability when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed at least quarterly and adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular case.

On September 10, 2014, the Company terminated the employment of its Senior Vice President, Sales, Borja Blanco, on the basis of breach of duty of trust and conduct leading to conflict of interest. On October 24, 2014, Mr. Blanco filed a labor claim against ERI Iberia in Madrid, Spain, challenging the fairness of his dismissal and seeking compensation (“Case 1”). A hearing was held on November 13, 2015, after which the labor court ruled that it did not have jurisdiction over the matter. Mr. Blanco appealed and the appeals court reversed the labor court’s finding and instructed the labor court to make a ruling on the merits on November 21, 2017. On February 14, 2018, the Company received notice that the labor court issued a ruling in favor of Mr. Blanco declaring the termination an unjustified dismissal and ordered the Company to pay a dismissed severance. The Company appealed the decision on February 21, 2018. The Company denies any allegations of wrongdoing and intends to continue to vigorously defend against this lawsuit. Based on currently available information and review with outside counsel, the Company has estimated and accrued a potential loss.

On November 24, 2014, Mr. Blanco filed a second action based on breach of contract theories in the same court as Case 1 (“Case 2”), but the cases are separate. In Case 2, Mr. Blanco seeks payment of an unpaid bonus, stock options, and non-compete compensation. The court ruled that this case is stayed until a final ruling is issued in Case 1. The Company denies any allegations of wrongdoing and intends to continue to vigorously defend against this lawsuit. Based on currently available information and review with outside counsel, the Company has determined that an award to Mr. Blanco is not probable. While a loss may be reasonably possible, an estimate of loss, if any, cannot reasonably be determined at this time.

On February 18, 2016 and July 27, 2016, two derivative action complaints were filed in connection with the Company’s previously reported stockholder class action lawsuit in the Superior Court for the State of California, County of Alameda where the Company was named as a nominal defendant under the captions, Goldberg v. Rooney, et al., HG 16804359, and Gerald McManiman v. Gay, et al., RG 16824960. The complaints have been consolidated under the caption, In Re Energy Recovery, Inc. Derivative Litigation, HG16804359. The consolidated complaint is styled as a derivative action being brought on behalf of the Company and generally alleges breach of fiduciary duty, waste of corporate assets, and unjust enrichment causes of action against the individually named defendants. In March 2018, the Company and the attorneys representing the plaintiffs reached an agreement in principle to settle all outstanding claims in the case. As part of the settlement agreement, the Company has agreed to certain changes to the Company’s corporate governance policies and procedures, and to pay the attorneys representing the plaintiffs legal fees, which will be paid entirely by the Company’s insurer.


– 31 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 10 — Income Taxes

For the three months ended March 31, 2018, the Company recognized income tax benefit of $0.4 million, which included a discrete tax benefit related to tax deductions from stock-based compensation. For the three months ended March 31, 2017, the Company recognized income tax expense of approximately $48 thousand.

The effective tax rate for the three months ended March 31, 2018 and 2017 was 33.0% and 10.2%, respectively. Excluding the discrete tax income tax items, the effective tax rate for the three months ended March 31, 2018 and 2017 was (3.5%) and 24.0%, respectively. The effective tax rate for March 31, 2018 was adversely impacted by the full valuation allowance related to the losses in the Company’s Irish operations.


– 32 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 11 — Stockholder’s Equity

Stock Repurchase Program

On March 7, 2018, the Board of Directors authorized a stock repurchase program under which the Company, at the discretion of management, may repurchase up to $10.0 million in aggregate cost of the Company’s outstanding common stock (the “March 2018 Authorization”). Under the March 2018 Authorization, purchases of shares of common stock may be made through September 30, 2018, from time to time in the open market, or in privately negotiated transactions, in compliance with applicable state and federal securities laws. The timing and amounts of any purchases will be based on market conditions and other factors including price, regulatory requirements, and capital availability. The March 2018 Authorization does not obligate the Company to acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time without prior notice. Under the March 2018 Authorization, as of March 31, 2018, the Company repurchased 409,850 shares at an aggregate cost of $3.5 million. The Company accounts for stock repurchases using the cost method. The aggregate cost includes fees charged in connection with acquiring the outstanding common stock.


– 33 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 12 — Stock-based Compensation

Stock-based Compensation Expense

Stock-based compensation expense related to the fair value measurement of awards granted to employees by financial line and by type of award is presented in the following table.
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
Stock-based compensation expense by financial line:
 
 
 
Cost of revenue
$
24

 
$
49

General and administrative (1)
1,676

 
567

Sales and marketing
262

 
237

Research and development
281

 
260

Total stock-based compensation expense
$
2,243

 
$
1,113

 
 
 
 
Stock-based compensation expense by type of award:
 
 
 
Options (1)
$
1,664

 
$
889

RSUs (1)
579

 
224

Total stock-based compensation expense
$
2,243

 
$
1,113

 
 
(1) 
First quarter of 2018 amounts include modifications of equity awards.

The Company estimates forfeitures at the time of grant and revise those estimates periodically in subsequent periods if actual forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and record stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods. If the Company’s actual forfeiture rate is materially different from its estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

Modifications of Equity Awards

In the first quarter of 2018, the Company recorded additional stock-based compensation expense of $0.9 million due to an equity award modification charge chiefly related to the modification of certain equity awards held by the Company’s former President and Chief Executive Officer, who resigned on February 24, 2018, in consideration for his entering into a Settlement Agreement and Release.

Unamortized Stock-based Compensation Costs

Stock-based compensation cost related to unvested stock options and RSUs will generally be amortized on a straight-line basis over the remaining average service period of each award. The following table presents the unamortized compensation cost and weighted average service period of all unvested outstanding awards as of March 31, 2018.
 
Unamortized Compensation Costs
 
Weighted Average Service Period
 
(In thousands)
 
(In years)
Stock options
$
6,760

 
2.9
RSUs
3,518

 
2.9
Total
$
10,278

 
 


– 34 –

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Vested Stock Options and RSUs

The total grant date fair value of stock options and RSUs vested during the period are presented in the following table.
 
Three Months Ended March 31,
 
2018
 
2017
 
(In thousands)
Stock options
$
1,261