Attached files
file | filename |
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EX-10.5 - EXHIBIT 10.5 - THIRD AMENDMENT LOAN AND PLEDGE AGREEMENT - Energy Recovery, Inc. | er11ex105-loanandpledgeagr.htm |
EX-32.1 - EXHIBIT 32.1 - Energy Recovery, Inc. | eriiex321q3201810-q.htm |
EX-31.2 - EXHIBIT 31.2 - Energy Recovery, Inc. | eriiex312q3201810-q.htm |
EX-31.1 - EXHIBIT 31.1 - Energy Recovery, Inc. | eriiex311q3201810-q.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 September 30, 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

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, every Interactive Data File required to be submitted 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 |
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 October 29, 2018, there were 53,862,290 shares of the registrant’s common stock outstanding.
ENERGY RECOVERY, INC.
TABLE OF CONTENTS
Page No. | ||
PART I. FINANCIAL INFORMATION | ||
Item 1. | ||
Condensed Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017 | ||
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2018 and 2017 | ||
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017 | ||
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017 | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. OTHER INFORMATION | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
Exhibit List |
– 2 –
PART I — FINANCIAL INFORMATION
Item 1 — Financial Statements (unaudited)
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2018 | December 31, 2017 | ||||||
(In thousands, except share data and par value) | |||||||
ASSETS | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 33,394 | $ | 27,780 | |||
Restricted cash | 509 | 2,664 | |||||
Short-term investments | 65,446 | 70,020 | |||||
Accounts receivable, net of allowance for doubtful accounts of $384 and $103 at September 30, 2018 and December 31, 2017, respectively | 7,666 | 12,465 | |||||
Contract assets | 3,237 | 6,278 | |||||
Inventories | 6,275 | 5,514 | |||||
Income Tax Receivable | 205 | — | |||||
Prepaid expenses and other current assets | 2,329 | 1,342 | |||||
Total current assets | 119,061 | 126,063 | |||||
Restricted cash, non-current | 86 | 182 | |||||
Contract assets, non-current | 108 | — | |||||
Long-term investments | 2,341 | — | |||||
Deferred tax assets, non-current | 18,082 | 7,933 | |||||
Property and equipment, net | 15,634 | 13,393 | |||||
Operating lease, right of use asset | 12,428 | 2,843 | |||||
Goodwill | 12,790 | 12,790 | |||||
Other intangible assets, net | 796 | 1,269 | |||||
Other assets, non-current | 287 | 12 | |||||
Total assets | $ | 181,613 | $ | 164,485 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 4,515 | $ | 4,091 | |||
Accrued expenses and other current liabilities | 6,646 | 7,948 | |||||
Lease liabilities | 764 | 1,603 | |||||
Income taxes payable | — | 432 | |||||
Accrued warranty reserve | 409 | 366 | |||||
Contract liabilities | 15,899 | 15,909 | |||||
Current portion of long-term debt | 12 | 11 | |||||
Total current liabilities | 28,245 | 30,360 | |||||
Long-term debt, less current portion | 7 | 16 | |||||
Lease liabilities, non-current | 12,797 | 1,698 | |||||
Contract liabilities, non-current | 30,727 | 40,517 | |||||
Other non-current liabilities | 242 | — | |||||
Total liabilities | 72,018 | 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 September 30, 2018 and December 31, 2017 | — | — | |||||
Common stock, $0.001 par value; 200,000,000 shares authorized; 59,230,828 shares issued and 53,774,893 shares outstanding at September 30, 2018 and 58,168,433 shares issued and 53,905,600 shares outstanding at December 31, 2017 | 59 | 58 | |||||
Additional paid-in capital | 157,008 | 149,006 | |||||
Accumulated comprehensive loss | (101 | ) | (125 | ) | |||
Treasury stock, at cost, 5,455,935 shares repurchased at September 30, 2018 and 4,262,833 shares repurchased at December 31, 2017 | (30,486 | ) | (20,486 | ) | |||
Accumulated deficit | (16,885 | ) | (36,559 | ) | |||
Total stockholders’ equity | 109,595 | 91,894 | |||||
Total liabilities and stockholders’ equity | $ | 181,613 | $ | 164,485 |
See Accompanying Notes to Condensed Consolidated Financial Statements
– 3 –
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
Product revenue | $ | 18,578 | $ | 13,860 | $ | 47,042 | $ | 36,969 | |||||||
Product cost of revenue | 5,022 | 4,217 | 14,312 | 12,401 | |||||||||||
Product gross profit | 13,556 | 9,643 | 32,730 | 24,568 | |||||||||||
License and development revenue | 3,661 | 3,197 | 9,768 | 8,495 | |||||||||||
Operating expenses: | |||||||||||||||
General and administrative | 5,266 | 4,034 | 16,030 | 12,369 | |||||||||||
Sales and marketing | 1,873 | 2,061 | 5,643 | 6,688 | |||||||||||
Research and development | 4,270 | 3,038 | 11,792 | 8,624 | |||||||||||
Amortization of intangible assets | 158 | 157 | 474 | 473 | |||||||||||
Total operating expenses | 11,567 | 9,290 | 33,939 | 28,154 | |||||||||||
Income from operations | 5,650 | 3,550 | 8,559 | 4,909 | |||||||||||
Other income (expense): | |||||||||||||||
Interest income | 369 | 243 | 1,043 | 612 | |||||||||||
Interest expense | — | (1 | ) | (1 | ) | (2 | ) | ||||||||
Other non-operating expense, net | (22 | ) | (10 | ) | (66 | ) | (150 | ) | |||||||
Total other income, net | 347 | 232 | 976 | 460 | |||||||||||
Income before income taxes | 5,997 | 3,782 | 9,535 | 5,369 | |||||||||||
(Benefit from) provision for income taxes | 1,339 | 310 | (10,140 | ) | 546 | ||||||||||
Net income | $ | 4,658 | $ | 3,472 | $ | 19,675 | $ | 4,823 | |||||||
Income per share: | |||||||||||||||
Basic | $ | 0.09 | $ | 0.06 | $ | 0.37 | $ | 0.09 | |||||||
Diluted | $ | 0.08 | $ | 0.06 | $ | 0.36 | $ | 0.09 | |||||||
Number of shares used in per share calculations: | |||||||||||||||
Basic | 53,665 | 53,580 | 53,719 | 53,717 | |||||||||||
Diluted | 55,295 | 55,140 | 55,382 | 55,571 |
See Accompanying Notes to Condensed Consolidated Financial Statements
– 4 –
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In thousands) | |||||||||||||||
Net income | $ | 4,658 | $ | 3,472 | $ | 19,675 | $ | 4,823 | |||||||
Other comprehensive income, net of tax: | |||||||||||||||
Foreign currency translation adjustments | 5 | 13 | (7 | ) | 48 | ||||||||||
Unrealized gain (loss) on investments | 88 | (3 | ) | 31 | (7 | ) | |||||||||
Other comprehensive income, net of tax | 93 | 10 | 24 | 41 | |||||||||||
Comprehensive income | $ | 4,751 | $ | 3,482 | $ | 19,699 | $ | 4,864 |
See Accompanying Notes to Condensed Consolidated Financial Statements
– 5 –
ENERGY RECOVERY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, | |||||||
2018 | 2017 | ||||||
(In thousands) | |||||||
Cash Flows From Operating Activities: | |||||||
Net income | $ | 19,675 | $ | 4,823 | |||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||
Stock-based compensation | 4,226 | 3,136 | |||||
Depreciation and amortization | 2,898 | 2,704 | |||||
Amortization of premiums on investments | 380 | 379 | |||||
Provision for warranty claims | 213 | 145 | |||||
Reversal of accruals related to expired warranties | (171 | ) | (237 | ) | |||
Unrealized loss on foreign currency translation | — | 69 | |||||
Provision for doubtful accounts | 336 | 16 | |||||
Adjustments for excess or obsolete inventory | 132 | (230 | ) | ||||
Deferred income taxes | (10,150 | ) | (244 | ) | |||
Loss on disposal of fixed assets | 58 | — | |||||
Other non-cash adjustments | — | (145 | ) | ||||
Changes in operating assets and liabilities: | |||||||
Accounts receivable | 4,463 | (186 | ) | ||||
Contract assets | 2,934 | (2,956 | ) | ||||
Inventories | (894 | ) | (1,503 | ) | |||
Prepaid and other assets | (445 | ) | (350 | ) | |||
Accounts payable | (2,198 | ) | 1,831 | ||||
Accrued expenses and other liabilities | (1,270 | ) | (2,232 | ) | |||
Income taxes | (638 | ) | 718 | ||||
Contract liabilities | (9,800 | ) | (7,910 | ) | |||
Net cash provided by (used in) operating activities | 9,749 | (2,172 | ) | ||||
Cash Flows From Investing Activities: | |||||||
Maturities of marketable securities | 62,213 | 30,977 | |||||
Purchases of marketable securities | (60,334 | ) | (64,530 | ) | |||
Capital expenditures | (2,029 | ) | (6,843 | ) | |||
Net cash used in investing activities | (150 | ) | (40,396 | ) | |||
Cash Flows From Financing Activities: | |||||||
Net proceeds from issuance of common stock | 3,873 | 3,722 | |||||
Tax payment for employee shares withheld | (115 | ) | (228 | ) | |||
Repayment of long-term debt | (8 | ) | (8 | ) | |||
Repurchase of common stock | (10,000 | ) | (4,276 | ) | |||
Net cash used in financing activities | (6,250 | ) | (790 | ) | |||
Effect of exchange rate differences on cash and cash equivalents | 14 | (55 | ) | ||||
Net change in cash, cash equivalents and restricted cash | 3,363 | (43,413 | ) | ||||
Cash, cash equivalents and restricted cash, beginning of year | 30,626 | 65,748 | |||||
Cash, cash equivalents and restricted cash, end of period | $ | 33,989 | $ | 22,335 |
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 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, 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 September 30, 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; valuation of right of use asset and lease liability; 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 the “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 “ASU 2014-09”, “ASU 2016-08” and “ASU 2016-10” (the combination is also known as “ASC 606” or “New Revenue Standard”) 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. 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”) under ASC 605 was recognized on a straight-line basis over the fifteen-year term of the license, while the two subsequent milestone payments of $25.0 million each that could be earned under the VorTeq License Agreement were to be recognized in full when achieved under milestone accounting.
License and development revenue under ASC 606, 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 | |||||
Increase in revenue due to adoption of 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 | |||
Decrease in contract liability due to adoption of the New Revenue Standard | 9,465 | 3,359 | |||||
License and development contract liability, as adjusted | $ | 54,493 | $ | 65,599 |
For license and development revenue, 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 and travel expenses 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 determines 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 at January 1, 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 effective January 1, 2018.
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
As Previously Reported | Adoption of New Revenue Standard | As Adjusted | As Previously Reported | Adoption of New Revenue Standard | As Adjusted | ||||||||||||||||||
(In thousands, except for per share data) | |||||||||||||||||||||||
Product revenue | $ | 13,834 | $ | 26 | $ | 13,860 | $ | 37,017 | $ | (48 | ) | $ | 36,969 | ||||||||||
Product cost of revenue | 4,254 | (37 | ) | 4,217 | 12,394 | 7 | 12,401 | ||||||||||||||||
Product gross profit | $ | 9,580 | $ | 63 | $ | 9,643 | $ | 24,623 | $ | (55 | ) | $ | 24,568 | ||||||||||
License and development revenue | $ | 1,250 | $ | 1,947 | $ | 3,197 | $ | 3,750 | $ | 4,745 | $ | 8,495 | |||||||||||
Income from operations | 1,540 | 2,010 | 3,550 | 219 | 4,690 | 4,909 | |||||||||||||||||
Income before income taxes | 1,772 | 2,010 | 3,782 | 679 | 4,690 | 5,369 | |||||||||||||||||
(Benefit from) provision for income taxes | 66 | 244 | 310 | (46 | ) | 592 | 546 | ||||||||||||||||
Net income | 1,706 | 1,766 | 3,472 | 725 | 4,098 | 4,823 | |||||||||||||||||
Income per share: | |||||||||||||||||||||||
Basic | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.01 | $ | 0.08 | $ | 0.09 | |||||||||||
Diluted | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.01 | $ | 0.08 | $ | 0.09 | |||||||||||
Number of shares used in per share calculations: | |||||||||||||||||||||||
Basic | 53,580 | — | 53,580 | 53,717 | — | 53,717 | |||||||||||||||||
Diluted | 55,140 | — | 55,140 | 55,571 | — | 55,571 |
– 12 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 effective January 1, 2018.
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
As Previously Reported | Adoption of New Revenue Standard | As Adjusted | As Previously Reported | Adoption of New Revenue Standard | As Adjusted | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Water | |||||||||||||||||||||||
Product revenue | $ | 13,227 | $ | — | $ | 13,227 | $ | 33,707 | $ | — | $ | 33,707 | |||||||||||
Product cost of revenue | 3,818 | (44 | ) | 3,774 | 10,003 | — | 10,003 | ||||||||||||||||
Product gross profit | $ | 9,409 | $ | 44 | $ | 9,453 | $ | 23,704 | $ | — | $ | 23,704 | |||||||||||
Income from operations | $ | 7,306 | $ | 44 | $ | 7,350 | $ | 17,417 | $ | — | $ | 17,417 | |||||||||||
Oil & Gas | |||||||||||||||||||||||
Product revenue | $ | 607 | $ | 26 | $ | 633 | $ | 3,310 | $ | (48 | ) | $ | 3,262 | ||||||||||
Product cost of revenue | 436 | 7 | 443 | 2,391 | 7 | 2,398 | |||||||||||||||||
Product gross profit | $ | 171 | $ | 19 | $ | 190 | $ | 919 | $ | (55 | ) | $ | 864 | ||||||||||
License and development revenue | $ | 1,250 | $ | 1,947 | $ | 3,197 | $ | 3,750 | $ | 4,745 | $ | 8,495 | |||||||||||
Income (loss) from operations | (2,040 | ) | 1,966 | (74 | ) | (5,785 | ) | 4,690 | (1,095 | ) |
The following table illustrates changes in the Condensed Consolidated Statement of Comprehensive Income as previously reported prior to, and as adjusted subsequent to, the adoption of the New Revenue Standard effective January 1, 2018.
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
As Previously Reported | Adoption of New Revenue Standard | As Adjusted | As Previously Reported | Adoption of New Revenue Standard | As Adjusted | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Net income | $ | 1,706 | $ | 1,766 | $ | 3,472 | $ | 725 | $ | 4,098 | $ | 4,823 | |||||||||||
Comprehensive income | 1,716 | 1,766 | 3,482 | 766 | 4,098 | 4,864 |
– 13 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 effective January 1, 2018.
Nine Months Ended September 30, 2017 | |||||||||||||||
As Previously Reported | Adoption of New Revenue Standard | Adoption of New Cash Flow Presentation Standard | As Adjusted | ||||||||||||
(In thousands) | |||||||||||||||
Net income | $ | 725 | $ | 4,098 | $ | — | $ | 4,823 | |||||||
Changes in operating assets and liabilities: | |||||||||||||||
Accounts receivable | (186 | ) | — | — | (186 | ) | |||||||||
Contract assets | (3,011 | ) | 55 | — | (2,956 | ) | |||||||||
Inventories | (1,503 | ) | — | — | (1,503 | ) | |||||||||
Prepaid and other assets | (350 | ) | — | — | (350 | ) | |||||||||
Accounts payable | 1,831 | 1,831 | |||||||||||||
Accrued expenses and other liabilities | (1,728 | ) | (504 | ) | — | (2,232 | ) | ||||||||
Income taxes | 126 | 592 | — | 718 | |||||||||||
Contract liabilities | (3,669 | ) | (4,241 | ) | — | (7,910 | ) | ||||||||
Net cash used in operating activities | (2,172 | ) | — | — | (2,172 | ) | |||||||||
Restricted cash | 1,294 | — | (1,294 | ) | — | ||||||||||
Net cash used in investing activities | (39,102 | ) | — | (1,294 | ) | (40,396 | ) | ||||||||
Net change in cash, cash equivalents and restricted cash | (42,119 | ) | — | (1,294 | ) | (43,413 | ) | ||||||||
Cash, cash equivalents and restricted cash, beginning of year | 61,364 | — | 4,384 | 65,748 | |||||||||||
Cash, cash equivalents and restricted cash, end of period | 19,245 | — | 3,090 | 22,335 |
Recently issued accounting pronouncement not yet adopted
In June 2016, the FASB issued ASU 2016-13 (“ASU 2016-13”), “Financial Instruments - Credit Losses” (Topic 326). The FASB issued this update to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in this update replace the existing guidance of incurred loss impairment methodology with an approach that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption of the update is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently evaluating the impact of this guidance on our consolidated financial statements and related disclosures.
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.
– 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 $2.0 million and $4.7 million for the three and nine months ended September 30, 2017, respectively.
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 September 30, 2018 | Nine Months Ended September 30, 2018 | ||||||||||||||||||||||
Water | Oil and Gas | Total | Water | Oil and Gas | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Primary geographical market | |||||||||||||||||||||||
Middle East and Africa | $ | 12,170 | $ | 114 | $ | 12,284 | $ | 27,561 | $ | 414 | $ | 27,975 | |||||||||||
Americas | 1,197 | 3,661 | 4,858 | 3,902 | 9,768 | 13,670 | |||||||||||||||||
Asia | 2,711 | — | 2,711 | 10,041 | — | 10,041 | |||||||||||||||||
Europe | 2,386 | — | 2,386 | 5,124 | — | 5,124 | |||||||||||||||||
Total | $ | 18,464 | $ | 3,775 | $ | 22,239 | $ | 46,628 | $ | 10,182 | $ | 56,810 | |||||||||||
Major product/service line | |||||||||||||||||||||||
PX, pumps and turbo devices | $ | 18,464 | $ | — | $ | 18,464 | $ | 46,628 | $ | — | $ | 46,628 | |||||||||||
License and development | — | 3,661 | 3,661 | — | 9,768 | 9,768 | |||||||||||||||||
Oil & gas products | — | 114 | 114 | — | 414 | 414 | |||||||||||||||||
Total | $ | 18,464 | $ | 3,775 | $ | 22,239 | $ | 46,628 | $ | 10,182 | $ | 56,810 |
– 15 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended September 30, 2017 | Nine Months Ended September 30, 2017 | ||||||||||||||||||||||
Water | Oil and Gas | Total | Water | Oil and Gas | Total | ||||||||||||||||||
(In thousands) | |||||||||||||||||||||||
Primary geographical market | |||||||||||||||||||||||
Middle East and Africa | $ | 5,137 | $ | 618 | $ | 5,755 | $ | 15,485 | $ | 3,247 | $ | 18,732 | |||||||||||
Americas | 2,671 | 3,212 | 5,883 | 4,959 | 8,510 | 13,469 | |||||||||||||||||
Asia | 3,117 | — | 3,117 | 8,255 | — | 8,255 | |||||||||||||||||
Europe | 2,302 | — | 2,302 | 5,008 | — | 5,008 | |||||||||||||||||
Total | $ | 13,227 | $ | 3,830 | $ | 17,057 | $ | 33,707 | $ | 11,757 | $ | 45,464 | |||||||||||
Major product/service line | |||||||||||||||||||||||
PX, pumps and turbo devices | $ | 13,227 | $ | 15 | $ | 13,242 | $ | 33,707 | $ | 15 | $ | 33,722 | |||||||||||
License and development | — | 3,197 | 3,197 | — | 8,495 | 8,495 | |||||||||||||||||
Oil & gas products | — | 618 | 618 | — | 3,247 | 3,247 | |||||||||||||||||
Total | $ | 13,227 | $ | 3,830 | $ | 17,057 | $ | 33,707 | $ | 11,757 | $ | 45,464 |
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 on January 1, 2018. See Note 2, “Recent Accounting Pronouncements,” for reconciliation of prior year “As Previously Reported” and “As Adjusted” amounts.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Trade Receivable | $ | 7,666 | $ | 12,465 | |||
Contract assets: | |||||||
Current contract assets | 3,237 | 6,278 | |||||
Non-current contract assets | 108 | — | |||||
Total contract assets | $ | 3,345 | $ | 6,278 | |||
Current contract liabilities: | |||||||
Customer deposits | $ | 897 | $ | 414 | |||
Deferred revenue: | |||||||
Cost and estimated earnings in excess of billings | 264 | 805 | |||||
License and development | 14,039 | 14,024 | |||||
Product | 469 | 550 | |||||
Service | 230 | 116 | |||||
Total current contract liability | 15,899 | 15,909 | |||||
Non-current contract liabilities, deferred revenue | |||||||
License and development | 30,686 | 40,469 | |||||
Product | 41 | 48 | |||||
Total non-current contract liability | 30,727 | 40,517 | |||||
Total contract liability | $ | 46,626 | $ | 56,426 |
The Company records unbilled receivables as contract assets. Significant changes in contract assets during the period were as follows.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Balance, beginning of year | $ | 6,278 | $ | 2,015 | |||
Transferred to receivables | (6,402 | ) | (2,909 | ) | |||
Additional unbilled receivables | 3,469 | 7,172 | |||||
Balance, end of period | $ | 3,345 | $ | 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.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Balance, beginning of year | $ | 56,426 | $ | 62,232 | |||
Revenue recognized | (9,828 | ) | (5,892 | ) | |||
Cash received | 28 | 86 | |||||
Balance, end of period | $ | 46,626 | $ | 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.
September 30, 2018 | |||
(In thousands) | |||
Year: | |||
2018 (remaining three months) | $ | 3,814 | |
2019 | 13,667 | ||
2020 | 14,484 | ||
2021 | 7,231 | ||
2022 and thereafter | 5,677 | ||
Total | $ | 44,873 |
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 September 30, 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.
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 fourth 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 | |||||||||||||||
September 30, 2018 | As Adjusted | Adoption of New Revenue Standard | As Previously Reported | ||||||||||||
(In thousands) | |||||||||||||||
Estimated earnings to date | $ | 6,270 | $ | 5,867 | $ | (133 | ) | $ | 6,000 | ||||||
Estimated costs to date | (5,118 | ) | (4,525 | ) | — | (4,525 | ) | ||||||||
Subtotal | 1,152 | 1,342 | (133 | ) | 1,475 | ||||||||||
Net billings to date | 558 | 2,718 | — | 2,718 | |||||||||||
Total | $ | 1,710 | $ | 4,060 | $ | (133 | ) | $ | 4,193 | ||||||
Included in accompanying balance sheets: | |||||||||||||||
Unbilled project costs | $ | 1,974 | $ | 4,865 | $ | (133 | ) | $ | 4,998 | ||||||
Cost and estimated earnings in excess of billings | (264 | ) | (805 | ) | — | (805 | ) | ||||||||
Total | $ | 1,710 | $ | 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 VorTeq 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 VorTeq License Agreement by taking the transaction to market on a non-exclusive basis, and pricing in an exclusivity premium. Since the VorTeq License Agreement included an up-front non-refundable payment at the inception of the VorTeq License 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 VorTeq License Agreement.
Performance obligations, such as the exclusive license to the Missile technology and upgrades prior to and subsequent to the date of full commercial launch, have been identified. 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 VorTeq License Agreement.
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 operating leases, and lease revenue will be recognized as earned.
– 20 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 4 — Income Per Share
Net income is divided by the weighted average number of common shares outstanding during the year to calculate basic net income per common share. Basic earnings per share exclude any dilutive effects of stock options and restricted stock units (“RSUs”).
Diluted net income per common share reflects the potential dilution that would occur if outstanding stock options to purchase common stock were exercised for shares of common stock, using the treasury stock method, and the shares of common stock underlying each outstanding RSU were issued. Diluted earnings per share for the three and nine months ended September 30, 2018 and 2017, includes the dilutive effects of stock options and RSUs. Certain shares of common stock issuable under stock options and RSUs have been omitted from the three and nine months ended September 30, 2018 and 2017 diluted net income per share calculations because their inclusion is considered anti-dilutive.
The computation of basic and diluted net 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 September 30, | Nine Months Ended September 30, | ||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||
(In thousands, except per share amounts) | |||||||||||||||
Numerator: | |||||||||||||||
Net income | $ | 4,658 | $ | 3,472 | $ | 19,675 | $ | 4,823 | |||||||
Denominator: | |||||||||||||||
Basic weighted average common shares outstanding | 53,665 | 53,580 | 53,719 | 53,717 | |||||||||||
Weighted average effect of dilutive stock awards | 1,630 | 1,560 | 1,663 | 1,854 | |||||||||||
Diluted weighted average common shares outstanding | 55,295 | 55,140 | 55,382 | 55,571 | |||||||||||
Net income per share: | |||||||||||||||
Basic | $ | 0.09 | $ | 0.06 | $ | 0.37 | $ | 0.09 | |||||||
Diluted | $ | 0.08 | $ | 0.06 | $ | 0.36 | $ | 0.09 |
The potential common shares were excluded from the computation of diluted net income per share as their effect would have been anti-dilutive is presented in the following table.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||
(In thousands) | |||||||||||
Anti-dilutive shares excluded from net income per share calculation | 2,382 | 4,144 | 2,429 | 3,850 |
– 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.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Cash and cash equivalents | $ | 33,394 | $ | 27,780 | |||
Restricted cash | 595 | 2,846 | |||||
Total cash, cash equivalents, and restricted cash | $ | 33,989 | $ | 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.
Accounts Receivable, net
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Accounts receivable | $ | 8,050 | $ | 12,568 | |||
Less: Allowance for doubtful accounts | (384 | ) | (103 | ) | |||
Accounts receivable, net | $ | 7,666 | $ | 12,465 |
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.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Raw materials | $ | 2,266 | $ | 1,899 | |||
Work in process | 2,483 | 2,191 | |||||
Finished goods | 1,526 | 1,424 | |||||
Inventories, net | $ | 6,275 | $ | 5,514 |
Valuation adjustments for excess and obsolete inventory, reflected as a reduction of inventory at September 30, 2018 and December 31, 2017 was $0.6 million and $0.7 million, respectively.
– 22 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Prepaid and Other Current Assets
Prepaid expenses and other current assets by category are presented in the following table.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Insurance | $ | 412 | $ | 256 | |||
Interest receivable | 575 | 439 | |||||
Supplier advances | 197 | 124 | |||||
Software license | 260 | 193 | |||||
Other prepaid expenses and current assets | 885 | 330 | |||||
Total prepaid and other current assets | $ | 2,329 | $ | 1,342 |
Property and Equipment
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Property and equipment | $ | 41,807 | $ | 37,535 | |||
Less: Accumulated depreciation and amortization | (26,173 | ) | (24,142 | ) | |||
Property and equipment, net | $ | 15,634 | $ | 13,393 |
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities by category are presented in the following table.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Payroll and commissions payable | $ | 4,782 | $ | 6,071 | |||
Other accrued expenses and current liabilities | 1,864 | 1,877 | |||||
Total accrued expenses and other current liabilities | $ | 6,646 | $ | 7,948 |
– 23 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Lease Liabilities
Lease liabilities are presented in the following table.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Lease liabilities | $ | 764 | $ | 1,603 | |||
Lease liabilities, non-current | 12,797 | 1,698 | |||||
Total lease liabilities | $ | 13,561 | $ | 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 Gains (Losses) on Investments | Total Accumulated Other Comprehensive Gain (Loss) | |||||||||
(In thousands) | |||||||||||
Balance, December 31, 2017 | $ | (33 | ) | $ | (92 | ) | $ | (125 | ) | ||
Other comprehensive gain (loss), net | (7 | ) | 31 | 24 | |||||||
Balance, September 30, 2018 | $ | (40 | ) | $ | (61 | ) | $ | (101 | ) |
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.
– 24 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Investments and Fair Value Measurements
The Company’s cash, cash equivalents, short-term & long-term investments are presented in the following table.
September 30, 2018 | December 31, 2017 | ||||||
(In thousands) | |||||||
Cash and cash equivalents | $ | 33,394 | $ | 27,780 | |||
Short-term investments | 65,446 | 70,020 | |||||
Long-term investments | 2,341 | — | |||||
Total cash, cash equivalents and marketable securities | $ | 101,181 | $ | 97,800 |
As of September 30, 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 September 30, 2018 and December 31, 2017, all available-for-sale investments were classified as short-term, with maturities less than 12 months, and long-term with maturities over 12 months. There were no sales of available-for-sale investments during the three and nine months ended September 30, 2018 and 2017.
– 25 –
ENERGY RECOVERY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Available-for-sale investments as of September 30, 2018 and December 31, 2017 are presented in the following tables.
September 30, 2018 | |||||||||||||||
Amortized Cost | Gross Unrealized Holding Gains | Gross Unrealized Holding Losses | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
U.S. Treasury securities | $ | 4,660 | $ | — | $ | (3 | ) | $ | 4,657 | ||||||
Corporate notes and bonds | 60,844 | 5 | (60 | ) | 60,789 | ||||||||||
Total short-term investments | 65,504 | 5 | (63 | ) | 65,446 | ||||||||||
Long-term investments | |||||||||||||||
U.S. Treasury Securities | 2,343 | — | (2 | ) | 2,341 | ||||||||||
Total long-term investments | 2,343 | — | (2 | ) | 2,341 | ||||||||||
Total available-for-sale investments | $ | 67,847 | $ | 5 | $ | (65 | ) | $ | 67,787 |
December 31, 2017 | |||||||||||||||