e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington D.C. 20549
Form 10-K
|
|
|
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the fiscal year ended December 31, 2008
|
|
|
|
|
|
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
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
01-0616867
(I.R.S. Employer
Identification No.)
|
1908 Doolittle Drive, San Leandro, CA 94577
(Address of Principal Executive
Offices)
Registrants telephone number, including area code:
(510) 483-7370
Securities registered pursuant to Section 12(b) of the
Securities Exchange Act of 1934:
|
|
|
Title of each class
|
|
Name of exchange on which
registered
|
Common stock, $0.001 par value
|
|
The NASDAQ Stock Market LLC
|
Securities registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934:
None
Indicate by check mark whether the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large accelerated filer o
|
|
Accelerated filer o
|
|
Non-accelerated filer þ
(Do not check if a smaller reporting company)
|
|
Smaller reporting company o
|
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
As of June 30, 2008, the last business day of the
registrants most recently completed second quarter, there
was no established trading market for the registrants
common stock.
The number of shares of the registrants common stock
outstanding as of March 24, 2009 was 50,096,887.
DOCUMENTS
INCORPORATED BY REFERENCE
Parts of the Proxy Statement for the Registrants Annual
Meeting of Shareholders to be held in June 2009 are incorporated
by reference into Part III of this Annual Report on
Form 10-K
PART I
Overview
Energy Recovery, Inc. develops, manufactures and sells
high-efficiency energy recovery devices for use in seawater
desalination. Our products make desalination affordable by
reducing energy costs. We have one operating segment, the
manufacture and sale of high efficiency energy recovery products
and related services. Additional information on segment
reporting is contained in Note 10 of Notes to the
Consolidated Financial Statements in this
Form 10-K.
Our company was incorporated in Virginia in April 1992 and
reincorporated in Delaware in March 2001. We became a public
company in July 2008. The company has three subsidiaries:
Osmotic Power, Inc., Energy Recovery, Inc. International, and
Energy Recovery Iberia, S.L. They were incorporated in September
2005, July 2006 and September 2006, respectively.
The mailing address of our headquarters is 1908 Doolittle Drive,
San Leandro, California 94577. Our main telephone number is
(510) 483-7370.
Additional information about ERI is available on our website at
http://www.energyrecovery.com.
Information contained in the website is not part of this report.
Our Annual Report on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K
and all amendments to those reports and the Proxy Statement for
our Annual Meeting of Stockholders are made available, free of
charge, on our website,
http://www.energyrecovery.com,
as soon as reasonably practicable after the reports have been
filed with or furnished to the Securities and Exchange
Commission.
Our
Products
Energy Recovery, Inc. makes energy recovery devices for use in
the desalination industry. There are two primary methods of
producing drinking water from seawater: thermal distillation and
membrane or reverse osmosis desalination. Thermal distillation
involves heating seawater, capturing the vapor and condensing it
as potable water. Reverse osmosis desalination entails
pressurizing seawater and driving it into filtering membranes to
produce pure water and a concentrated brine, which is carried
away in a high pressure reject stream.
Our energy recovery products are used in reverse osmosis
desalination. They reduce energy costs by capturing and reusing
up to 98% of the otherwise lost pressure energy from the reject
stream, reducing the workload of the high pressure pump. Use of
our devices can reduce energy consumption by up to an estimated
60% compared to reverse osmosis plants without energy recovery.
By reducing energy costs, our devices increase the
cost-competitiveness of reverse osmosis desalination compared to
other means of fresh water production, including thermal
desalination. Our products are sold under the trademarks
ERI®,
PX®,
Pressure
Exchanger®
and PX Pressure
Exchanger®.
Current Product Lines: We develop and sell different
models and sizes of our PX Pressure Exchanger products to
address a range of process flow rates, plant designs and sizes.
Our products are designed to operate in parallel to accommodate
a range of plant sizes. Their modular design also provides
system redundancy and minimizes the need for costly plant
shut-downs. Our current offerings include:
|
|
|
|
|
The 65 Series. Our 65-Series of PX devices is designed
for reverse osmosis desalination plants capable of producing
more than 120 gallons per minute or 27 cubic meters per hour.
The PX-220, introduced in 2002, and the PX-260, introduced in
late 2007, are currently our most popular products.
|
|
|
|
|
|
|
|
Capacity gallons per minute (cubic meters per
|
Model
|
|
|
hour)
|
PX-260
|
|
|
180 260 gpm (41 59
m3/hr)
|
PX-220
|
|
|
140 220 gpm (32 50
m3/hr)
|
PX-180
|
|
|
100 180 gpm (23 41
m3/hr)
|
|
|
|
|
1
|
|
|
|
|
The 45 Series. The smaller 45-Series of PX devices are
adapted for plants that process between 25 to 300 gallons per
minute or 6 to 68 cubic meters per hour.
|
|
|
|
|
|
|
|
Capacity gallons per minute (cubic meters per
|
Model
|
|
|
hour)
|
PX-140S
|
|
|
90 140 gpm (20 32
m3/hr)
|
PX-90S
|
|
|
60 90 gpm (14 20
m3/hr)
|
PX-70S
|
|
|
40 70 gpm (9 16
m3/hr)
|
PX-45S
|
|
|
30 45 gpm (7 10
m3/hr)
|
PX-30S
|
|
|
20 30 gpm (4 7
m3/hr)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PX-30S. The PX-30S is a smaller PX device designed for
pilot desalination projects. It helps municipalities qualify PX
technology for use in larger projects. The product was released
in October 2007. In addition to serving as a test unit, it
has found application in smaller marine-based or solar-powered
desalination processes.
|
|
|
|
Brackish PX devices. Brackish water has a lower
concentration of salt than seawater. Given its lower salt
content, brackish water typically requires less energy than
seawater to desalinate. Our line of PX devices for the
desalination of brackish water is designed to reduce energy
costs and improve energy consumption in this lower pressure
process.
|
New PX devices. We are in the process of testing two new
PX devices designed for different ends of the desalination
market.
|
|
|
|
|
The Comp PX. Our new lower-priced Comp PX product is designed
for operators of small to medium-sized plants which are
sensitive to initial costs
and/or are
located in regions where energy costs are low. We expect to
release the Comp PX device commercially in 2009.
|
|
|
|
The Titan PX. The Titan PX product is designed to process up to
1,200 gallons per minute or 273 cubic meters per hour, more
than four times the capacity of our PX-260. Field testing began
in February 2009. We expect to evaluate the Titan PX device in a
production environment for at least two years before releasing
it for commercial use.
|
Technical Support and Replacement Parts. We provide
engineering and technical support to customers during product
installation and plant commissioning. We have dedicated
technical support personnel based in Spain, the United Arab
Emirates, China and the United States.
As our installed base of PX devices increases and ages, we
expect sales of replacement PX device parts and services to
increase. Our PX devices may also be used to retrofit or replace
older energy recovery devices in existing desalination plants.
High Pressure Circulation Pumps. We manufacture and sell
a line of high pressure circulation pumps for use in small to
medium-sized plants. These low-powered pumps are used with our
products to move high-pressure water through our energy recovery
devices and the membranes array.
Customers
As of December 31, 2008, we had shipped approximately 5,900
PX devices to desalination plants worldwide. Our products are
used in approximately 300 plants in operation or under
construction including major plants in Australia, Spain, Africa,
South America, the Middle East, China, the Caribbean and India.
We sell directly to our customers, which include large
engineering and construction firms and original equipment
manufacturers (OEMs).
Large engineering and construction firms. Most of our
revenue comes from sales of our products to the international
engineering and construction firms that design and build large
desalination plants or
2
mega-projects.
We work with these firms to specify our products for their
plants. The time between project tender to product shipment can
range from six to 16 months. Each large mega-project
typically represents a revenue opportunity of between
$2 million to $7 million.
A limited number of these engineering and construction firms
account for a substantial portion of our net revenue. In 2008,
sales to Hyflux Ltd. and Befesa Agua, S.A. and affiliated joint
ventures accounted for approximately 16% and 11%, respectively,
of our total revenue. In 2007, sales to Acciona Agua S.A.; Geida
and its member companies; and Doosan Heavy
Industries & Construction Co., Ltd. represented
approximately 20%, 23% and 13%, respectively, of our total sales
(Geida is a consortium of Befesa Agua, a subsidiary of Abengoa
S.A; Cobra-Tedagua, a subsidiary of ACS Actividades de
Construcción y Servicios, S.A.; and Sadyt S.A., a
subsidiary of Sacyr Vallehermoso, S. A.). Sales to GE Water and
Process Technologies (formerly GE Ionics) and Geida and its
member companies represented approximately 18% and 11%
respectively of our total sales in 2006. No other customers
accounted for more than 10% of our total revenue during any of
these periods.
Original Equipment Manufacturers. We also sell our
products and services to suppliers of pumps and other
water-related equipment for assembly and use in small to
medium-sized desalination plants for hotels, power plants,
cruise ships, farming operations, island bottlers, and small
municipalities. These original equipment manufacturers also
purchase our products for quick water or emergency
water solutions. In this market, the time from project tender to
shipment ranges from one to three months.
Competition
The market for energy recovery devices in desalination plants is
competitive. As the demand for fresh water increases and the
market expands, we expect competition to persist and intensify.
We have three main competitors: Calder AG based in Switzerland;
Fluid Equipment Development Company (FEDCO) based in Monroe,
Michigan and Pump Engineering Incorporated (PEI) based in
Monroe, Michigan. We compete with these companies on the basis
of price, technology, materials, efficiency and life cycle
maintenance costs. We believe that our products have a
competitive advantage, even though these competitors may offer
their products at prices lower than ours, because our product is
the most cost effective energy recovery device for reverse
osmosis desalination over time.
In the market for large desalination projects, our PX devices
compete primarily with Calders DWEER product. Like our
products, the DWEER uses isobaric or pressure-equalizing
technology to transfer pressure energy directly from the brine
reject stream to seawater. We believe that we have a competitive
advantage because our products are made with highly durable and
corrosion-proof ceramic parts, have a simple design with one
moving part and a small physical footprint, provide system
redundancy and scaling capability, and offer lower life cycle
maintenance costs.
In the market for small to medium-sized desalination plants, we
compete with turbine technology from Calder, FEDCO and PEI.
Unlike products that use isobaric or pressure-equalizing
technology, turbine-based energy recovery products use the
reject stream to turn a hydraulic turbine wheel that is coupled
to a high-pressure pump. These products reduce energy costs by
reducing the workload of the high pressure pump. These devices
convert pressure energy to mechanical energy and back to
pressure energy, and can recycle the pressure energy from the
reject stream with a net transfer efficiency of between 50%-79%.
We believe that our products have a competitive advantage
because they provide up to 98% energy transfer efficiency, have
lower life cycle maintenance costs, are made of highly durable
and corrosion-proof ceramic parts and feature a modular design.
Sales and
Marketing
Our sales and marketing groups work with companies that design
and build desalination plants to specify our PX technology in
their plants early in the design phase. We market and sell our
products directly to these customers through our regional sales
organization. In some countries, we also work with industry
consultants.
3
Our sales organization has two groups, the Mega-Projects Group,
which is responsible for sales opportunities for desalination
projects exceeding 50,000 cubic meters per day, and our OEM
Group, which targets projects designed to produce less than
50,000 cubic meters per day.
Since many of the large engineering and construction firms that
specialize in mega-projects are located in Spain and other
European countries, we maintain a sales and technical center in
Madrid. We have an office in Dubai, United Arab Emirates to
serve the Middle East where many desalination plants and key
engineering and construction firms are located. We also have an
office in China where we have many small and medium projects and
opportunities for several large desalination projects. Our China
office is located in Shanghai. Our U.S. sales offices are
located in California and Florida.
Manufacturing
We assemble, test and package all of our finished products in
our manufacturing facility in San Leandro, California. We
purchase unfinished ceramic components for our PX products from
several suppliers. We depend on three suppliers for our vessel
housing and single suppliers for our end covers and stainless
steel castings. We perform finish machining and assembly
in-house on all ceramic components to protect the proprietary
nature of our methods of manufacturing and product designs and
to maintain our quality control standards.
For a discussion of risks attendant to our manufacturing
activities, see Risk Factors We depend on
third-party suppliers, and our revenue and gross margin could
suffer if we fail to manage supplier issues properly, in
Item 1A, which is incorporated herein by reference.
Research
and Development
Design, quality and innovation are key elements of our culture.
Our development efforts are focused on designing and testing new
PX devices adapted for different niches of the seawater reverse
osmosis desalination market and creating new applications for
our technology outside of desalination. We are also committed to
developing know-how in the material science and manufacturing of
ceramics. Research and development expense totaled
$2.4 million for 2008, $1.7 million for 2007 and
$1.3 million for 2006.
For a discussion of risks attendant to our research and
development activities, see Risk Factors The
success of our business depends in part on our ability to
develop new products and services and increase the functionality
of our current products, in Item 1A, which is
incorporated herein by reference.
Intellectual
Property
We seek patent protection for inventions and improvements that
are likely to be incorporated into our products. We rely on
trade secret law and contractual safeguards to protect the
proprietary tooling, processing techniques and other know-how
used in the production of our products.
We have five U.S. patents and eleven patents outside the U.S.
that are counterparts to one of the U.S. patents. The U.S.
patents expire between 2011 and 2025, and the corresponding
international patents expire at various dates through 2021. We
have also applied for two additional U.S. patents and seven
pending international applications corresponding to the U.S.
patents and patent applications.
We have registered the following trademarks with the United
States Patent and Trademark office: ERI,
PX, PX Pressure Exchanger,
Pressure Exchanger, the ERI logo, and Making
Desalination Affordable. We have also applied for and
received registrations in international trademark offices.
For a discussion of risks attendant to intellectual property
rights, see Risk Factors If we are unable to
protect our technology or enforce our intellectual property
rights, our competitive position could be harmed and we could be
required to incur significant expenses to enforce our
rights. in Item 1A, which is incorporated herein by
reference.
4
Employees
As of December 31, 2008, we had 89 employees: 26 in
manufacturing, 21 in sales and marketing; 34 in corporate
services and management; and eight in engineering/research and
development. Nine of these employees were located outside of the
United States. We also from time to time engage a relatively
small number of independent contractors. We have not experienced
any work stoppages. Our employees are not unionized.
We
have relied and expect to continue to rely on sales of our PX
devices for almost all of our revenue; a decline in demand for
desalination, reverse osmosis desalination or our PX devices
will reduce demand for our products and will cause our sales and
revenue to decline.
Our primary product is the PX device, and sales of our PX device
historically have accounted for approximately 95% of our
revenue. While we sell a variety of models of the PX device
depending on the design of the desalination plant and its
desired output, all of our models rely on the same basic
technology developed and refined over the past 12 years. We
expect that the revenue from our PX devices will continue to
account for most of our revenue for the foreseeable future. Any
factors adversely affecting the demand for desalination,
including changing weather patterns, increased precipitation,
new technology for producing fresh water, new energy technology
or reduced energy costs, changes in the global economy, and
political changes, would reduce the demand for PX devices and
would cause a significant decline in our revenue. For example,
desalination projects have in the past been cancelled or delayed
due to political issues, changes in precipitation and problems
with financing. Similarly, any other factors adversely affecting
the demand for our PX devices, including new methods of reverse
osmosis desalination that reduce pressure and energy
requirements, improvements in membrane technology, new energy
recovery technology, increased competition, changes in customer
spending priorities and industry regulations would also cause a
significant decline in our revenue. Some of the factors that may
affect sales of our PX device may be out of our control.
We
depend on the construction of new desalination plants for
revenue, and as a result, our operating results have
experienced, and may continue to experience, significant
variability due to volatility in capital spending, availability
of project financing, and other factors affecting the water
desalination industry.
We derive substantially all of our revenue from sales of
products and services used in desalination plants for
municipalities, hotels and resorts and agricultural operations
in dry or drought-ridden regions of the world. The demand for
our products may decrease if the construction of desalination
plants declines, especially in these regions. Other factors
could affect the number and capacity of desalination plants
built or the timing of their completion, including the current
weak global economy, the current crisis in the credit and
banking systems, changes in government priorities, changes in
governmental regulations, reduced capital spending for
desalination and lower energy costs, which could result in
cancelled orders or delays in plant construction and the
installation of our products. As a result of these factors, we
have experienced and may in the future experience significant
variability in our revenue, on both an annual and a quarterly
basis. Pronounced variability, extended delays or reductions in
spending with respect to the construction of desalination plants
could negatively impact our sales and revenue and make it
difficult for us to accurately forecast our future sales, which
could lead to increased spending by us that is not matched by
equivalent or higher revenue.
New
planned seawater reverse osmosis projects can be cancelled
and/or delayed, and cancellations and/or delays may negatively
impact our revenue.
Planned seawater reverse osmosis desalination projects can be
cancelled or delayed due to delays in, or failure to obtain,
financing or the approval of or permitting for, plant
construction because of political factors, adverse and
increasingly uncertain financing conditions or other factors,
especially in countries with political unrest. Even though we
may have a signed contract to provide a certain number of PX
devices by a certain date, if a customer requests a delay of
shipment and we delay shipment of our PX devices, our results of
operations and revenue will be negatively impacted.
5
We
rely on a limited number of engineering and construction firms
for a large portion of our revenue. If these customers delay or
cancel their commitments or do not purchase our products in
connection with future projects, our revenue could significantly
decrease, which would adversely affect our financial condition
and future growth.
A limited number of our customers can account for a substantial
portion of our net revenue. Revenue from engineering and
construction firms and other customers representing 10% or more
of total revenue varies from year to year. For the twelve months
ended December 31, 2008, sales to two customers, Hyflux Ltd
and Befesa Agua S.A. represented 27% of our net revenues. For
the twelve months ended December 31, 2007, three customers
represented approximately 56% of net revenue. No other customer
accounted for more than 10% of our net revenue during any of
these periods. We do not have long-term contracts with our
customers; instead, we sell to them on a purchase order or
project basis or under individual stand-alone contracts. Orders
may be postponed or delayed by our customers on short or no
notice. If these customers reduce their purchases, our projected
revenue may significantly decrease, which will adversely affect
our financial condition and future growth. If one of our
engineering and construction firm customers delays or cancels
one or more of its projects, or if it fails to pay amounts due
to us or delays its payments, our revenue or operating results
could be negatively affected. There are a limited number of
engineering and construction firms which are involved in the
desalination industry. Thus, if one of them decides not to
continue to use our energy recovery devices in its future
projects, we may not be able replace such a lost customer with
another such customer and our net revenue would be negatively
affected.
Our
operating results may fluctuate significantly, which makes our
future operating results difficult to predict and could cause
our operating results to fall below expectations or our
guidance.
Our operating results may fluctuate due to a variety of factors,
many of which are outside of our control. Due to the fact that a
single order for our PX devices for a particular desalination
plant may represent significant revenue, we have experienced
significant fluctuations in revenue from quarter to quarter, and
we expect such fluctuations to continue. As a result, comparing
our operating results on a period-to-period basis may not be
meaningful. You should not rely on our past results as an
indication of our future performance. If our revenue or
operating results fall below the expectations of investors or
securities analysts or below any guidance we may provide to the
market, the price of our common stock would likely decline
substantially.
In addition, factors that may affect our operating results
include, among others:
|
|
|
|
|
fluctuations in demand, adoption, sales cycles and pricing
levels for our products and services;
|
|
|
|
the cyclical nature of purchasing for seawater reverse osmosis
desalination plant construction, which typically reflects a
seasonal increase in shipments of PX devices in the fourth
quarter;
|
|
|
|
changes in customers budgets for desalination plants and
the timing of their purchasing decisions;
|
|
|
|
adverse changes in the local or global financing conditions
facing our customers;
|
|
|
|
delays or postponements in the construction of desalination
plants;
|
|
|
|
our ability to develop, introduce and ship in a timely manner
new products and product enhancements that meet customer demand,
certification requirements and technical requirements;
|
|
|
|
the ability of our customers to obtain other key components of a
plant such as high pressure pumps or membranes;
|
|
|
|
our ability to implement scalable internal systems for
reporting, order processing, product delivery, purchasing,
billing and general accounting, among other functions;
|
|
|
|
unpredictability of governmental regulations and political
decision-making as to the approval or building of a desalination
plant;
|
|
|
|
our ability to control costs, including our operating expenses;
|
|
|
|
our ability to purchase key PX components, principally ceramics,
from third party suppliers;
|
6
|
|
|
|
|
our ability to compete against other companies that offer energy
recovery solutions;
|
|
|
|
our ability to attract and retain highly skilled employees,
particularly those with relevant industry experience; and
|
|
|
|
general economic conditions in our domestic and international
markets.
|
If we
are unable to collect unbilled receivables, our operating
results will be adversely affected.
Our customer contracts generally contain holdback provisions
pursuant to which the final installments to be paid under such
sales contracts are due up to 24 months after the product
has been shipped to the customer and revenue has been
recognized. Typically, between 10 and 20%, and in some instances
up to 30% of the revenue we receive pursuant to our customer
contracts are subject to such holdback provisions and are
accounted for as unbilled receivables until we deliver invoices
for payment. As of December 31, 2008, we had approximately
$4.9 million of current unbilled receivables and
approximately $1.9 million of non-current unbilled
receivables. If we are unable to invoice and collect, or if our
customers fail to make payments due under our sales contracts,
our results of operations will be adversely affected.
If we
lose key personnel upon whom we are dependent, we may not be
able to execute our strategies. Our ability to increase our
revenue will depend on hiring highly skilled professionals with
industry-specific experience, particularly given the unique and
complex nature of our devices.
Given the specialized nature of our business, we must hire
highly skilled professionals with industry-specific experience.
Our ability to successfully grow depends on recruiting skilled
and experienced employees. We often compete with larger, better
known companies for talented employees. Also, retention of key
employees, such as our chief executive officer, who has over
30 years of experience in the water treatment industry, is
vital to the successful execution of our growth strategies. Our
failure to retain existing or attract future key personnel could
harm our business.
The
success of our business depends in part on our ability to
develop new products and services and increase the functionality
of our current products.
Since 2004, we have invested more than $5 million in
research and development costs associated with our PX products.
From time to time, our customers have expressed a need for
greater processing efficiency. In response, and as part of our
strategy to enhance our energy recovery solutions and grow our
business, we plan to continue to make substantial investments in
the research and development of new technologies. For instance,
we are in the process of developing the Titan PX as a product
for use in increasingly larger desalination plants and the Comp
PX for use in smaller desalination operations. While these
products have the potential to meet specified needs of key
markets, their pricing may not meet customer expectations and
they may not perform as well as our other PX devices. It is
possible that potential customers may not accept the new pricing
structure. It is also possible that the release of this product
may be delayed if testing reveals unexpected flaws. Our future
success will depend in part on our ability to continue to design
and manufacture new products, to enhance our existing products
and to provide new value-added services. We may experience
unforeseen problems in the performance of our existing and new
technologies or products. Furthermore, we may not achieve market
acceptance of our new products and solutions. If we are unable
to develop competitive new products, or if the market does not
accept such products, our business and results of operations
will be adversely affected.
Our
plans to manufacture a portion of our ceramic components may
prove to be more costly or less reliable than
outsourcing.
We currently outsource the production of our ceramic components
from several ceramic vendors. To diversify our supply of
ceramics and retain more control over our intellectual property,
we intend to vertically integrate by producing a portion of our
ceramic component needs in house. Recent contraction in the
ceramics manufacturing business has accelerated our schedule for
this initiative. If we are less efficient at producing our
ceramic components or are unable to achieve required yields that
are equal to or greater than the vendors to
7
which we outsource, then our cost of revenue may be adversely
affected. If we are unable to initiate the production of our
ceramics parts on schedule, unable to manufacture these parts
in-house efficiently
and/or
another of our ceramics suppliers goes out of business, we may
be exposed to increased risk of supply chain disruption and
capacity shortages.
Our
revenue and growth model depend upon the continued viability and
growth of the seawater reverse osmosis desalination industry
using current technology.
If there is a downturn in the seawater reverse osmosis
desalination industry, our sales would be directly and adversely
impacted. Changes in seawater reverse osmosis desalination
technology could also reduce the demand for our devices. For
example, a reduction in the operating pressure used in seawater
reverse osmosis desalination plants could reduce the need for
and viability of our energy recovery devices. Membrane
manufacturers are actively working on lower pressure membranes
for seawater reverse osmosis desalination that could potentially
be used on a large scale to desalinate seawater at a much lower
pressure than is currently necessary. Engineers are also
evaluating the possibility of diluting seawater prior to reverse
osmosis desalination to reduce the required membrane pressure.
Similarly, an increase in the recovery rate would reduce the
number of energy recovery devices required and would reduce the
demand for our product. A significant reduction in the cost of
power may reduce demand for our product or favor a less
expensive product from a competitor. Any of these changes would
adversely impact our revenue and growth.
The
durable nature of the PX device may reduce or delay potential
aftermarket revenue opportunities.
Our PX devices utilize ceramic components that have to date
demonstrated high durability, high corrosion resistance and long
life in seawater reverse osmosis desalination applications.
Because most of our PX devices have only been installed for
several years, it is difficult to accurately predict their
performance or endurance over a longer period of time. In the
event that our products are more durable than expected, our
opportunity for aftermarket revenue may be deferred.
Our
sales cycle can be long and unpredictable, and our sales efforts
require considerable time and expense. As a result, our sales
are difficult to predict and may vary substantially from quarter
to quarter, which may cause our operating results to
fluctuate.
Our sales efforts involve substantial education of our current
and prospective customers about the use and benefits of our PX
products. This education process can be time consuming and
typically involves a significant product evaluation process.
While the sales cycle for our OEM customers, which are involved
with smaller desalination plants, averages one to three months,
the average sales cycle for our international engineering and
construction firm customers, which are involved with larger
desalination plants, ranges from nine to 16 months and has,
in some cases, extended up to 24 months. In addition, these
customers generally must make a significant commitment of
resources to test and evaluate our technologies. As a result,
our sales process involving these customers is often subject to
delays associated with lengthy approval processes that typically
accompany the design, testing and adoption of new,
technologically complex products. This long sales cycle makes
quarter-by-quarter
revenue predictions difficult and results in our investing
significant resources well in advance of orders for our products.
Since
a significant portion of our annual sales typically occurs
during the fourth quarter, any delays could affect our fourth
quarter and annual revenue and operating results.
A significant portion of our annual sales typically occurs
during the fourth quarter, which we believe generally reflects
engineering and construction firm customer buying patterns. Any
delays or cancellation of expected sales during the fourth
quarter would reduce our quarterly and annual revenue from what
we anticipated. Such a reduction might cause our quarterly and
annual revenue or quarterly and annual operating results to fall
below the expectations of investors or securities analysts or
below any guidance we may provide to the market, causing the
price of our common stock to decline.
8
We
depend on three vendors for our supply of ceramics, which is a
key component of our products. If any of our ceramics vendors
cancels its commitments or is unable to meet our demand and/or
requirements, our business could be harmed.
We rely on a limited number of vendors to produce the ceramics
used in our products. For the year ended December 31, 2008,
three ceramics suppliers represented approximately 60% of our
purchases from all of our suppliers. For the year ended
December 31, 2007, two ceramics suppliers represented
approximately 52% of our purchases from all of our suppliers. If
any of our ceramic suppliers were to have financial
difficulties, cancel or materially change their commitments with
us or fail to meet the quality or delivery requirements needed
to satisfy customer orders for our products, we could lose
customer orders, be unable to develop or sell our products
cost-effectively or on a timely basis, if at all, and have
significantly decreased revenue, which would harm our business,
operating results and financial condition.
We
depend on single suppliers for some of our components, including
stainless steel castings. If our suppliers are not able to meet
our demand and/or requirements, our business could be
harmed.
We rely on single suppliers to produce all of our stainless
steel castings and some other components for use in our PX
products. Our reliance on single manufacturers for these parts
involves a number of significant risks, including reduced
control over delivery schedules, quality assurance,
manufacturing yields, production costs and lack of guaranteed
production capacity or product supply. We do not have a long
term supply agreement with these suppliers and instead secure
manufacturing availability on a purchase order basis. Our
suppliers have no obligation to supply products to us for any
specific period, in any specific quantity or at any specific
price, except as set forth in a particular purchase order. Our
requirements represent a small portion of the total production
capacities of these suppliers and our suppliers may reallocate
capacity to other customers, even during periods of high demand
for our products. We have in the past experienced and may in the
future experience quality control issues and delivery delays
with our suppliers due to factors such as high industry demand
or the inability of our vendors to consistently meet our quality
or delivery requirements. If our suppliers were to cancel or
materially change its commitment with us or fail to meet the
quality or delivery requirements needed to satisfy customer
orders for our products, we could lose time-sensitive customer
orders, be unable to develop or sell our products
cost-effectively or on a timely basis, if at all, and have
significantly decreased revenue, which would harm our business,
operating results and financial condition. We may qualify
additional suppliers in the future which would require time and
resources. If we do not qualify additional suppliers, we may be
exposed to increased risk of capacity shortages due to our
complete dependence on our current supplier.
We
face competition from a number of companies that offers
competing energy recovery solutions. If any of these companies
produces superior technology or offers more cost effective
products, our competitive position in the market could be harmed
and our profits may decline.
The market for energy recovery devices for desalination plants
is competitive and continually evolving. The PX device competes
with slow cycle isobaric, turbine and hydraulic energy recovery
devices. Our three primary competitors are Calder AG, Fluid
Equipment Development Company and Pump Engineering Incorporated.
Other potential competitors may enter the market. We expect
competition to persist and intensify as the desalination market
opportunity grows. Some of our current and potential competitors
may have significantly greater financial, technical, marketing
and other resources than we do and may be able to devote greater
resources to the development, promotion, sale and support of
their products. Also, our competitors may have more extensive
customer bases and broader customer relationships than we do,
including long-standing relationships or exclusive contracts
with our current or potential customers. For instance, we have
had difficulties penetrating some of the Caribbean markets
because Consolidated Water Co. Ltd., a major builder of seawater
reverse osmosis desalination plants in that area, has an
exclusive agreement with Calder AG to use Calders
technology. In addition, our competitors may have longer
operating histories and greater name recognition than we do. Our
competitors may be in a stronger position to respond quickly to
new technologies and may be able to market and sell their
products more effectively. Moreover, if one or more of our
competitors were to merge or partner with another of our
competitors or with current or potential customers,
9
the change in the competitive landscape could adversely affect
our ability to compete effectively which would affect our
business, operating results and financial condition.
We are
subject to risks related to product defects, which could lead to
warranty claims in excess of our warranty provisions or result
in a large number of warranty claims in any given
year.
We warranty our products for a period of one to two years and
provide a five year warranty for the ceramic components of our
products. We test our products in our manufacturing facilities
through a variety of means. However, there can be no assurance
that our testing will reveal latent defects in our products,
which may not become apparent until after the products have been
sold into the market. Accordingly, there is a risk that warranty
claims may be filed due to product defects. We may incur
additional operating expenses if our warranty provisions do not
reflect the actual cost of resolving issues related to defects
in our products. If these additional expenses are significant,
they could adversely affect our business, financial condition
and results of operations. While the number of warranty claims
has not been significant to date, we have offered a five year
warranty on our ceramic components for new sales agreements
executed after August 7, 2007. Accordingly, we cannot
quantify the error rate of the ceramic components of our
products with statistical accuracy and cannot assure that a
large number of warranty claims will not be filed in a given
year. As a result, our operating expenses may increase if a
large number of warranty claims are filed in any specific year,
particularly towards the end of any given warranty period.
If we
are unable to protect our technology or enforce our intellectual
property rights, our competitive position could be harmed and we
could be required to incur significant expenses to enforce our
rights.
Our competitive position depends on our ability to establish and
maintain proprietary rights in our technology and to protect our
technology from copying by others. We rely on trade secret,
patent, copyright and trademark laws and confidentiality
agreements with employees and third parties, all of which may
offer only limited protection. We hold five United States
patents and eleven patents outside the U.S. that are
counterparts to one of the U.S. patents. The expiration terms of
the U.S. patents range from 2011 to 2025, at which time we
could become more vulnerable to increased competition. In
addition, we have applied for two new United States patents and
seven pending international applications corresponding to the
U.S. patents and patent applications. We do not hold patents in
many of the countries into which we sell our PX devices,
including Saudi Arabia, Algeria and China, and accordingly, the
protection of our intellectual property in those countries may
be limited. We also do not know whether any of our pending
patent applications will result in the issuance of patents or
whether the examination process will require us to narrow our
claims, and even if patents are issued, they may be contested,
circumvented or invalidated. Moreover, while we believe our
remaining issued patents are essential to the protection of the
PX technology, the rights granted under any of our issued
patents or patents that may be issued in the future may not
provide us with proprietary protection or competitive
advantages, and, as with any technology, competitors may be able
to develop similar or superior technologies to our own now or in
the future. In addition, our granted patents may not prevent
misappropriation of our technology, particularly in foreign
countries where intellectual property laws may not protect our
proprietary rights as fully as those in the United States. This
may render our patents impaired or useless and ultimately expose
us to currently unanticipated competition. Protecting against
the unauthorized use of our products, trademarks and other
proprietary rights is expensive, difficult and, in some cases,
impossible. Litigation may be necessary in the future to enforce
or defend our intellectual property rights or to determine the
validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and diversion of
management resources, either of which could harm our business.
Claims
by others that we infringe their proprietary rights could harm
our business.
Third parties could claim that our technology infringes their
proprietary rights. In addition, we may be contacted by third
parties suggesting that we obtain a license to certain of their
intellectual property rights they may believe we are infringing.
We expect that infringement claims against us may increase as
the number of products and competitors in our market increases
and overlaps occur. In addition, to the extent that we gain
greater visibility, we believe that we will face a higher risk
of being the subject of intellectual property
10
infringement claims. Any claim of infringement by a third party,
even those without merit, could cause us to incur substantial
costs defending against the claim, and could distract our
management from our business. Furthermore, a party making such a
claim, if successful, could secure a judgment that requires us
to pay substantial damages. A judgment against us could also
include an injunction or other court order that could prevent us
from offering our products. In addition, we might be required to
seek a license for the use of such intellectual property, which
may not be available on commercially reasonable terms, or at
all. Alternatively, we may be required to develop non-infringing
technology, which could require significant effort and expense
and may ultimately not be successful. Any of these events could
seriously harm our business. Third parties may also assert
infringement claims against our customers. Because we generally
indemnify our customers if our products infringe the proprietary
rights of third parties, any such claims would require us to
initiate or defend protracted and costly litigation on their
behalf, regardless of the merits of these claims. If any of
these claims succeeds, we may be forced to pay damages on behalf
of our customers.
If we
fail to expand our manufacturing facilities to meet our future
growth, our operating results could be adversely
affected.
Our existing manufacturing facilities are capable of meeting
current demand and demand for the foreseeable future. However,
the future growth of our business depends on our ability to
successfully expand our manufacturing, research and development
and technical testing facilities. Larger products currently
under development require a larger manufacturing facility with
greater capacity. We have entered into a 10 year lease for
a 124,000 square foot facility in San Leandro,
California. While this space will be available to accommodate
the consolidation of our U.S. operations and the expansion
of our manufacturing operations, the space is being built out
and will not be available until September 2009 or later. If the
build-out is delayed, our production capability could be
limited, which could adversely affect our operating results.
If we
need additional capital to fund future growth, it may not be
available on favorable terms, or at all.
We have historically relied on outside financing to fund our
operations, capital expenditures and expansion. In our initial
public offering in July 2008, we issued approximately
10,000,000 shares of common equity at $8.50 per share
before underwriting discount and issuing expenses. We may
require additional capital from equity or debt financing in the
future to fund our operations, or respond to competitive
pressures or strategic opportunities. We may not be able to
secure such additional financing on favorable terms, or at all.
The terms of additional financing may place limits on our
financial and operating flexibility. If we raise additional
funds through further issuances of equity, convertible debt
securities or other securities convertible into equity, our
existing stockholders could suffer significant dilution in their
percentage ownership of our company, and any new securities we
issue could have rights, preferences or privileges senior to
those of existing or future holders of our common stock,
including shares of common stock sold in this offering. If we
are unable to obtain necessary financing on terms satisfactory
to us, if and when we require it, our ability to grow or support
our business and to respond to business challenges could be
significantly limited.
If
foreign and local government entities no longer guarantee and
subsidize, or are willing to engage in, the construction and
maintenance of desalination plants and projects, the demand for
our products would decline and adversely affect our
business.
Our products are used in seawater reverse osmosis desalination
plants which are often times constructed and maintained through
government guarantees and subsidies. The rate of construction of
desalination plants depends on each governments
willingness and ability to allocate funds for such projects,
which may be affected by the current crisis in the financial
system and credit markets and the weak global economy. In
addition, some desalination projects in the Middle East and
North Africa have been funded by budget surpluses resulting from
once high crude oil and natural gas prices. Since prices for
crude oil and natural gas have fallen, governments in those
countries may not have budget surpluses to fund such projects
and may cancel such projects or divert funds allocated for them
to other projects. As a result, the demand for our products
could decline and negatively affect our revenue base, which
could harm the overall profitability of our business.
11
In addition, various water management agencies could alter
demand for fresh water by investing in water reuse initiatives
or limiting the use of water for certain agricultural purposes.
Certain uses of water considered to be wasteful could be
curtailed, resulting in more available water and less demand for
alternative solutions such as desalination.
Our
products are highly technical and may contain undetected flaws
or defects which could harm our business and our reputation and
adversely affect our financial condition.
The manufacture of our products is highly technical, and our
products may contain latent defects or flaws. We test our
products prior to commercial release and during such testing
have discovered and may in the future discover flaws and defects
that need to be resolved prior to release. Resolving these flaws
and defects can take a significant amount of time and prevent
our technical personnel from working on other important tasks.
In addition, our products have contained and may in the future
contain one or more flaws that were not detected prior to
commercial release to our customers. Some flaws in our products
may only be discovered after a product has been installed and
used by customers. Any flaws or defects discovered in our
products after commercial release could result in loss of
revenue or delay in revenue recognition, loss of customers and
increased service and warranty cost, any of which could
adversely affect our business, operating results and financial
condition. In addition, we could face claims for product
liability, tort or breach of warranty. Our contracts with our
customers contain provisions relating to warranty disclaimers
and liability limitations, which may not be upheld. Defending a
lawsuit, regardless of its merit, is costly and may divert
managements attention and adversely affect the
markets perception of us and our products. In addition, if
our business liability insurance coverage proves inadequate or
future coverage is unavailable on acceptable terms or at all,
our business, operating results and financial condition could be
harmed.
Our
international sales and operations subject us to additional
risks that may adversely affect our operating
results.
Historically, we have derived a significant portion of our
revenue from customers whose seawater reverse osmosis
desalination facilities utilizing the PX device are outside the
United States. Many of such customers projects are in
emerging growth countries with relatively young and unstable
market economies and volatile political environments. These
countries may also be affected significantly by the current
crisis in the global financial system and credit markets and the
weak global economy. We have sales and technical support
personnel stationed in Spain, Asia and the Middle East, among
other regions, and we expect to continue to add personnel in
other countries. As a result, any governmental changes or
reforms or disruptions in the business, regulatory or political
environments of the countries in which we operate or sell our
products could have a material adverse effect on our business,
financial condition and results of operations.
Sales of our products have to date been denominated principally
in U.S. dollars. The U.S. dollar has recently
strengthened against most other currencies, which has
effectively increased the price of our products in the currency
of the countries in which our customers are located. This may
result in our customers seeking lower-priced suppliers, which
could adversely impact our operating results. A larger portion
of our international revenue may be denominated in foreign
currencies in the future, which would subject us to increased
risks associated with fluctuations in foreign exchange rates.
Our international contracts and operations subject us to a
variety of additional risks, including:
|
|
|
|
|
political and economic uncertainties, which the current global
economic crisis may exacerbate;
|
|
|
|
reduced protection for intellectual property rights;
|
|
|
|
trade barriers and other regulatory or contractual limitations
on our ability to sell and service our products in certain
foreign markets;
|
|
|
|
difficulties in enforcing contracts, beginning operations as
scheduled and collecting accounts receivable, especially in
emerging markets;
|
12
|
|
|
|
|
increased travel, infrastructure and legal compliance costs
associated with multiple international locations;
|
|
|
|
competing with
non-U.S. companies
not subject to the U.S. Foreign Corrupt Practices Act;
|
|
|
|
difficulty in attracting, hiring and retaining qualified
personnel; and
|
|
|
|
increasing instability in the capital markets and banking
systems worldwide, especially in developing countries, that may
limit project financing availability for the construction of
desalination plants.
|
As we continue to expand our business globally, our success will
depend, in large part, on our ability to anticipate and
effectively manage these and other risks associated with our
international operations. Our failure to manage any of these
risks successfully could harm our international operations and
reduce our international sales, which in turn could adversely
affect our business, operating results and financial condition.
Global
economic conditions and the current crisis in the financial
markets could have an adverse effect on our business and results
of operations.
Current economic conditions may negatively impact our business
and make forecasting future operating results more difficult and
uncertain. A weakening global economy may cause our customers to
delay or push out orders for our products or may result in the
delay, postponement or cancelling of planned or new desalination
projects or retrofits, which would reduce our revenue. Turmoil
in the financial and credit markets may also make it difficult
for our customers to obtain needed project financing, resulting
in lower sales. Negative economic conditions may also affect our
suppliers, which could impede their ability to remain in
business and supply us with parts, resulting in delays in the
availability of our products. In addition, most of our cash and
cash equivalents are currently invested in money market funds
backed by United States Treasury securities; however, given the
current weak global economy and the instability of financial
institutions, we cannot be assured that we will not experience
losses on our deposits, which would adversely affect our
financial condition. If current economic conditions persist or
worsen and negatively impact the desalination industry, our
business, financial condition or results of operations could be
materially and adversely affected.
If we
fail to manage future growth effectively, our business would be
harmed.
Future growth in our business, if it occurs, will place
significant demands on our management, infrastructure and other
resources. To manage any future growth, we will need to hire,
integrate and retain highly skilled and motivated employees. We
will also need to continue to improve our financial and
management controls, reporting and operational systems and
procedures. If we do not effectively manage our growth, our
business, operating results and financial condition would be
adversely affected.
Our
failure to achieve or maintain adequate internal control over
financial reporting in accordance with SEC rules or prevent or
detect material misstatements in our annual or interim
consolidated financial statements in the future could materially
harm our business and cause our stock price to
decline.
As a public company, SEC rules require that we maintain internal
control over financial reporting to provide reasonable assurance
regarding the reliability of financial reporting and preparation
of published financial statements in accordance with generally
accepted accounting principles. Accordingly, we will be required
to document and test our internal controls and procedures to
assess the effectiveness of our internal control over financial
reporting. In addition, our independent registered public
accounting firm will be required to report on the effectiveness
of our internal control over financial reporting. In the future,
we may identify material weaknesses and deficiencies which we
may not be able to remediate in a timely manner. Material
weaknesses may exist when we are first required to report on the
effectiveness of our internal control over financial reporting
in our Annual Report on
Form 10-K
for the year ending December 31, 2009. If there are
material weaknesses or deficiencies in our internal control, we
will not be able to conclude that we have maintained effective
internal control over financial reporting or our independent
registered public accounting firm may not be able to issue an
unqualified report on the effectiveness of our internal control
over financial reporting. As a result, our ability to report our
financial results on a timely and accurate basis may be
13
adversely affected and investors may lose confidence in our
financial information, which in turn could cause the market
price of our common stock to decrease. We may also be required
to restate our financial statements from prior periods. In
addition, testing and maintaining internal control will require
increased management time and resources. Any failure to maintain
effective internal control over financial reporting could impair
the success of our business and harm our financial results and
you could lose all or a significant portion of your investment.
If we have material weaknesses in our internal control over
financial reporting, the accuracy and timing of our financial
reporting may be adversely affected.
Changes
to financial accounting standards may affect our results of
operations and cause us to change our business
practices.
We prepare our financial statements to conform to generally
accepted accounting principles, or GAAP, in the United States.
These accounting principles are subject to interpretation by the
SEC and various other bodies. A change in those policies can
have a significant effect on our reported results and may affect
our reporting of transactions completed before a change is
announced. Changes to those rules or the interpretation of our
current practices may adversely affect our reported financial
results or the way we conduct our business.
We may
engage in future acquisitions that could disrupt our business,
cause dilution to our stockholders and harm our financial
condition and operating results.
In the future, we may acquire companies or assets that we
believe may enhance our market position. We may not be able to
find suitable acquisition candidates and we may not be able to
complete acquisitions on favorable terms, if at all. If we do
complete acquisitions, we cannot assure you that they will
ultimately strengthen our competitive position or that they will
not be viewed negatively by customers, financial markets or
investors. In addition, any acquisitions that we make could lead
to difficulties in integrating personnel and operations from the
acquired businesses and in retaining and motivating key
personnel from these businesses. Acquisitions may disrupt our
ongoing operations, divert management from day-to-day
responsibilities, increase our expenses and harm our operating
results or financial condition. Future acquisitions may reduce
our cash available for operations and other uses and could
result in an increase in amortization expense related to
identifiable assets acquired, potentially dilutive issuances of
equity securities or the incurrence of debt, any of which could
harm our business, operating results and financial condition.
Insiders
will continue to have substantial control over us after this
offering and will be able to influence corporate
matters.
Our directors and executive officers and their affiliates
beneficially own, in the aggregate, approximately 14% of our
outstanding common stock as of March 19, 2009. As a result,
these stockholders will be able to exercise significant
influence over all matters requiring stockholder approval,
including the election of directors and approval of significant
corporate transactions, such as a merger or other sale of our
company or its assets.
Anti-takeover
provisions in our charter documents and under Delaware law could
discourage, delay or prevent a change in control of our company
and may affect the trading price of our common
stock.
Provisions in our amended and restated certificate of
incorporation and bylaws may have the effect of delaying or
preventing a change of control or changes in our management. Our
amended and restated certificate of incorporation and amended
and restated bylaws include provisions that:
|
|
|
|
|
authorize our board of directors to issue, without further
action by the stockholders, up to 10,000,000 shares of
undesignated preferred stock;
|
|
|
|
require that any action to be taken by our stockholders be
effected at a duly called annual or special meeting and not by
written consent;
|
14
|
|
|
|
|
specify that special meetings of our stockholders can be called
only by our board of directors, the chairman of the board, the
chief executive officer or the president;
|
|
|
|
establish an advance notice procedure for stockholder approvals
to be brought before an annual meeting of our stockholders,
including proposed nominations of persons for election to our
board of directors;
|
|
|
|
establish that our board of directors is divided into three
classes, Class I, Class II and Class III, with
each class serving staggered terms;
|
|
|
|
provide that our directors may be removed only for cause;
|
|
|
|
provide that vacancies on our board of directors may be filled
only by a majority vote of directors then in office, even though
less than a quorum;
|
|
|
|
specify that no stockholder is permitted to cumulate votes at
any election of directors; and
|
|
|
|
require a super-majority of votes to amend certain of the
above-mentioned provisions.
|
In addition, we are subject to the provisions of
Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. Section 203 generally
prohibits us from engaging in a business combination with an
interested stockholder subject certain exceptions.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None.
We lease approximately 29,000 square feet of space in
San Leandro, California, under a lease that expires in June
2010, for product manufacturing, research and development and
executive headquarters. We also lease approximately
9,000 square feet for corporate office space in a building
located approximately two miles away from our headquarters under
a lease that expires in March 2010. In November 2008, we entered
into a 10 year lease for approximately 124,000 square
feet of space in a building located near our current
headquarters and scheduled for occupancy in late 2009. This new
building will house all of our manufacturing, research and
development and executive staff and allow for the expansion of
our manufacturing operations. We also lease sales offices in
Spain, the United Arab Emirates, China and Florida. We believe
these facilities will be adequate for our purposes for the
foreseeable future.
|
|
Item 3.
|
Legal
Proceedings
|
We are not party to any material litigation, and we are not
aware of any pending or threatened litigation against us that we
believe would adversely affect our business, operating results,
financial condition or cash flows. In the future, we may be
subject to legal proceedings in the ordinary course of our
business.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders
|
There were no submissions of matters to a vote of security
holders in the quarter ended December 31, 2008.
15
PART II
Item 5. Market
for the Registrants Common Stock Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Market
Information
Since July 2, 2008, our common stock has been quoted on the
Nasdaq Global Market under the symbol ERII.
The following table sets forth the high and low sales prices of
our common stock for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2008
|
|
|
|
|
|
|
|
|
Third Quarter (from July 2, 2008)
|
|
$
|
13.25
|
|
|
$
|
6.89
|
|
Fourth Quarter
|
|
$
|
10.12
|
|
|
$
|
4.57
|
|
Stockholders
As of March 24, 2009, there were approximately 75
stockholders of record of our common stock.
Use of
Proceeds
On July 1, 2008, our registration statement
(No. 333-150007)
on
Form S-1
was declared effective for our initial public offering, pursuant
to which we registered the offering and sale of an aggregate
16,100,000 shares of common stock, including the
underwriters over-allotment option, at a public offering
price of $8.50 per share, or aggregate offering price of
$136.9 million, of which $86.5 million related to
10,178,566 shares sold by us and $50.4 million related
to 5,921,434 shares sold by selling stockholders. The
offering closed on July 8, 2008 with respect to the primary
shares and on July 11, 2008 with respect to the
over-allotment shares. The managing underwriters were Citigroup
Global Markets Inc. and Credit Suisse Securities (USA) LLC.
As a result of the offering, we received net proceeds of
approximately $76.7 million, after deducting underwriting
discounts and commissions of $6.1 million and additional
offering-related expenses of approximately $3.7 million. No
payments for such expenses were made directly or indirectly to
(i) any of our officers or directors or their associates,
(ii) any persons owning 10% or more of any class of our
equity securities, or (iii) any of our affiliates. We
anticipate that we will use the remaining net proceeds from our
IPO for working capital and other general corporate purposes,
including to finance our growth, develop new products, fund
capital expenditures, or to expand our existing business through
acquisitions of other businesses, products or technologies.
However, we do not have agreements or commitments for
acquisitions at this time. Pending such uses, we have deposited
a substantial amount of the net proceeds in a U.S. Treasury
based money market fund as of December 31, 2008. There has
been no material change in the planned use of proceeds from our
IPO from that described in the final prospectus filed with the
SEC pursuant to Rule 424(b).
Dividend
Policy
We have never declared or paid any cash dividends on our capital
stock and we do not currently intend to pay any cash dividends
on our capital stock for the foreseeable future. We expect to
retain future earnings, if any, to fund the development and
growth of our business. Any future determination to pay
dividends on our capital stock will be, subject to applicable
law, at the discretion of our board of directors and will depend
upon, among other factors, our results of operations, financial
condition, capital requirements and contractual restrictions in
loan agreements or other agreements.
Stock
Performance Graph
The following graph shows the cumulative total shareholder
return of an investment of $100 on July 2, 2008 in
(i) our common stock and (ii) a selected group of peer
issuers (Peer Group) and (iii) on
June 30, 2008
16
in the Nasdaq Composite Index. The total return for our stock
and each index and peer group assumes the reinvestment of
dividends, although dividends have never been declared on our
stock, and is based on the returns of the component companies
weighted according to their capitalizations as of the end of
each quarterly period. The Nasdaq Composite Index tracks the
aggregate price performance of equity securities traded on the
Nasdaq. The Peer Group tracks the weighted average price
performance of equity securities of seven companies in our
industry, including Consolidated Water Company Limited,
Flowserve Corporation, Hyflux Ltd, Kurita Water Industries
Limited, Pentair Inc., Tetra Tech, Inc. and The Gorman-Rupp
Company. The returns of each component issuer of the Peer Group
is weighted according to the respective issuers stock
market capitalization at the beginning of each period for which
a return is indicated. Our stock price performance shown in the
graph below is not indicative of future stock price performance.
The following graph and its related information is not
soliciting material, is not deemed filed
with the SEC, and is not to be incorporated by reference into
any filing of the Company under the 1933 Act or
1934 Act, whether made before or after the date hereof and
irrespective of any general incorporation language contained in
such filing.
COMPARISON
OF 6 MONTH CUMULATIVE TOTAL RETURN*
Among
Energy Recovery Inc., The NASDAQ Composite Index
And A Peer Group
* $100 invested on 7/2/08 in
Energy Recovery, Inc. or peer group stock or on 6/30/08 in
index, including reinvestment of dividends. Fiscal year ending
December 31.
|
|
|
|
|
|
|
|
|
|
|
6/30/08 or
|
|
|
|
|
|
|
7/2/08(1)
|
|
|
12/31/08
|
|
|
Energy Recovery, Inc.
|
|
|
100.00
|
|
|
|
77.11
|
|
NASDAQ Composite
|
|
|
100.00
|
|
|
|
67.14
|
|
Peer Group
|
|
|
100.00
|
|
|
|
62.14
|
|
|
|
|
(1) |
|
The index measurement date is 6/30/08; stock measurement dates
are 7/2/08 |
Recent
Sales of Unregistered Securities
None.
17
Purchases
of Equity Securities by the Issuer and Affiliated
Purchasers
Stock repurchase activity during the three months ended
December 31, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Dollar
|
|
|
|
Total Number of
|
|
|
Average
|
|
|
Shares Purchased as
|
|
|
Value that May Yet
|
|
|
|
Shares
|
|
|
Price Paid
|
|
|
Part of Publicly
|
|
|
be Purchased Under
|
|
Period
|
|
Purchased(1)
|
|
|
per Share
|
|
|
Announced Programs
|
|
|
the Programs
|
|
|
October 1, 2008- October 31, 2008
|
|
|
1,667
|
|
|
$
|
0.25
|
|
|
|
|
|
|
$
|
|
|
November 1, 2008- November 30, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
December 1, 2008- December 31, 2008
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The company exercised its rights to repurchase 1,667 unvested
shares related to the early exercise of stock options. The
unvested shares were repurchased from a shareholder in exchange
for cash and were cancelled upon completion of the repurchase. |
|
|
Item 6.
|
Selected
Financial Data
|
The following selected financial data should be read in
conjunction with the Managements Discussion and
Analysis of Financial Condition and Results of Operations
and the financial statements and notes thereto included in this
Report on
Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008(1)
|
|
|
2007(1)
|
|
|
2006(1)
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Statement of Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
52,119
|
|
|
$
|
35,414
|
|
|
$
|
20,058
|
|
|
$
|
10,689
|
|
|
$
|
4,047
|
|
Cost of revenue(2)
|
|
|
18,933
|
|
|
|
14,852
|
|
|
|
8,131
|
|
|
|
4,685
|
|
|
|
2,015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
33,186
|
|
|
|
20,562
|
|
|
|
11,927
|
|
|
|
6,004
|
|
|
|
2,032
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative(2)
|
|
|
11,321
|
|
|
|
4,299
|
|
|
|
3,372
|
|
|
|
2,458
|
|
|
|
1,055
|
|
Sales and marketing(2)
|
|
|
6,549
|
|
|
|
5,230
|
|
|
|
3,648
|
|
|
|
1,779
|
|
|
|
1,037
|
|
Research and development(2)
|
|
|
2,415
|
|
|
|
1,705
|
|
|
|
1,267
|
|
|
|
630
|
|
|
|
340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,285
|
|
|
|
11,234
|
|
|
|
8,287
|
|
|
|
4,867
|
|
|
|
2,432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,901
|
|
|
|
9,328
|
|
|
|
3,640
|
|
|
|
1,137
|
|
|
|
(400
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(79
|
)
|
|
|
(105
|
)
|
|
|
(77
|
)
|
|
|
(216
|
)
|
|
|
(54
|
)
|
Interest and other income
|
|
|
873
|
|
|
|
517
|
|
|
|
58
|
|
|
|
35
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
13,695
|
|
|
|
9,740
|
|
|
|
3,621
|
|
|
|
956
|
|
|
|
(453
|
)
|
Provision for income taxes
|
|
|
5,032
|
|
|
|
3,947
|
|
|
|
1,239
|
|
|
|
62
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,663
|
|
|
$
|
5,793
|
|
|
$
|
2,382
|
|
|
$
|
894
|
|
|
$
|
(506
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share-basic
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
Earnings per share-diluted
|
|
$
|
0.18
|
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
|
$
|
0.02
|
|
|
$
|
(0.02
|
)
|
Number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
44,848
|
|
|
|
39,060
|
|
|
|
38,018
|
|
|
|
36,790
|
|
|
|
32,161
|
|
Diluted
|
|
|
47,392
|
|
|
|
41,433
|
|
|
|
40,244
|
|
|
|
38,454
|
|
|
|
32,161
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2008
|
|
|
2007(4)
|
|
|
2006(4)
|
|
|
2005
|
|
|
2004
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
|
$
|
79,287
|
|
|
$
|
240
|
|
|
$
|
42
|
|
|
$
|
261
|
|
|
$
|
140
|
|
Total assets
|
|
|
120,612
|
|
|
|
28,227
|
|
|
|
17,937
|
|
|
|
8,496
|
|
|
|
3,054
|
|
Long-term liabilities
|
|
|
420
|
|
|
|
620
|
|
|
|
234
|
|
|
|
306
|
|
|
|
11
|
|
Total liabilities
|
|
|
13,613
|
|
|
|
8,166
|
|
|
|
9,810
|
|
|
|
3,794
|
|
|
|
2,061
|
|
Total stockholders equity
|
|
|
106,999
|
|
|
|
20,061
|
|
|
|
8,127
|
|
|
|
4,702
|
|
|
|
993
|
|
|
|
|
(1) |
|
Effective January 1, 2006, we adopted the fair value
recognition provisions of Statement of Financial Accounting
Standards No. 123 (revised 2004), Share-Based
Payment, or SFAS 123(R), using the prospective
transition method, which requires the application of the
provisions of SFAS 123(R) only to share-based payment
awards granted, modified, repurchased or cancelled on or after
the modification date. Under this method, we recognize
stock-based compensation expense for all share-based payment
awards granted after December 31, 2005 in accordance with
SFAS 123(R). |
|
(2) |
|
Includes employee and non-employee stock-based compensation as
follows: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004(3)
|
|
|
Cost of revenue
|
|
$
|
103
|
|
|
$
|
117
|
|
|
$
|
143
|
|
|
$
|
88
|
|
|
|
|
|
General and administrative
|
|
|
512
|
|
|
|
388
|
|
|
|
428
|
|
|
|
731
|
|
|
|
|
|
Sales and marketing
|
|
|
279
|
|
|
|
372
|
|
|
|
310
|
|
|
|
86
|
|
|
|
|
|
Research and development
|
|
|
140
|
|
|
|
159
|
|
|
|
183
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
1,034
|
|
|
$
|
1,036
|
|
|
$
|
1,064
|
|
|
$
|
1,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
No stock-based compensation expense was recognized as we used
the intrinsic method of accounting and the options were granted
with an exercise price equal to the fair market value. |
|
(4) |
|
Certain prior period balances have been reclassified to conform
to the current period presentation. |
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
This Annual Report on
Form 10-K
and certain information incorporated by reference contain
forward-looking statements within the safe harbor
provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements in this report include, but are
not limited to, statements about our expectations, objectives,
anticipations, plans, hopes, beliefs, intentions or strategies
regarding the future.
Forward-looking statements represent our current expectations
about future events and are based on assumptions and involve
risks and uncertainties. If the risks or uncertainties occur or
the assumptions prove incorrect, then our results may differ
materially from those set forth or implied by the
forward-looking statements. Our forward-looking statements are
not guarantees of future performance or events.
Forward-looking statements in this report include, without
limitation, statements about the following:
|
|
|
|
|
our belief that our PX devices make seawater reverse osmosis
a more affordable means of fresh water production;
|
|
|
our plan to enhance our existing PX devices and to develop
and manufacture new PX devices;
|
|
|
our plans to release the Titan and Comp PX devices in the
future;
|
|
|
our belief that our ceramics components are highly durable
and corrosion-proof;
|
|
|
our objective of finding new applications for our technology
outside of desalination and expanding and diversifying our
product offerings;
|
|
|
our plan to integrate vertically and manufacture a portion of
our ceramics components internally;
|
19
|
|
|
|
|
our expectation that our expenditures for research and
development will increase;
|
|
|
our expectation that we will continue to rely on sales of our
PX devices for a substantial portion of our revenue;
|
|
|
our expectation that a significant portion of our annual
sales will continue to occur during the fourth quarter;
|
|
|
our belief that our current facilities will be adequate
through 2009;
|
|
|
our expectation that sales outside of the United States will
remain a significant portion of our revenue;
|
|
|
our expectation that future sales and marketing expense will
increase;
|
|
|
our belief that our existing cash balances and cash generated
from our operations will be sufficient to meet our anticipated
capital requirements for at least the next 12 months;
and
|
|
|
our expectation that, as we expand our international sales, a
portion of our revenue could continue to be denominated in
foreign currencies.
|
All forward-looking statements included in this document are
subject to additional risks and uncertainties further discussed
under Item 1A: Risk Factors and are based on
information available to us as of March 26, 2009. We assume
no obligation to update any such forward-looking statements. It
is important to note that our actual results could differ
materially from the results set forth or implied by our
forward-looking statements. The factors that could cause our
actual results to differ from those included in such
forward-looking statements are set forth under the heading
Item 1A: Risk Factors, and our results
disclosed from time to time in our reports on
Forms 10-Q
and 8-K and
our Annual Reports to Stockholders.
The following discussion should be read in conjunction with
our Consolidated Financial Statements and related notes included
elsewhere in this report.
Overview
We are in the business of designing, developing and
manufacturing energy recovery devices for sea water reverse
osmosis desalination. Our company was founded in 1992 and we
introduced the initial version of our energy recovery device,
the
PX®,
in early 1997. As of December 31, 2008, we had shipped
approximately 5,900 PX devices to desalination plants worldwide.
A majority of our net revenue has been generated by sales to
large engineering and construction firms, which are involved
with the design and construction of larger desalination plants.
Sales to these firms often involve a long sales cycle, which can
range from six to 16 months. A single large desalination
project can generate an order for numerous PX devices and
generally represents an opportunity for significant revenue. We
also sell PX devices to original equipment manufacturers, or
OEMs, which commission smaller desalination plants, order fewer
PX devices per plant and have shorter sales cycles.
Due to the fact that a single order for PX devices by a large
engineering and construction firm for a particular plant may
represent significant revenue, we often experience significant
fluctuations in net revenue from quarter to quarter. In
addition, our engineering and construction firm customers tend
to order a significant amount of equipment for delivery in the
fourth quarter and, as a consequence, a significant portion of
our annual sales typically occurs during that quarter.
A limited number of our customers accounts for a substantial
portion of our net revenue. Five customers accounted for
approximately 82% of our accounts receivable at December 31,
2008. As of December 31, 2007, three customers accounted
for approximately 74% of accounts receivable.
Revenue from customers representing 10% or more of total revenue
varies from year to year. For the year ended December 31,
2008, two customers, Hyflux Ltd. and Befesa Agua, S.A. and
affiliated joint ventures accounted for approximately 16% and
11% of our net revenue, respectively. For the year ended
December 31, 2007, three customers represented
approximately 20%, 23% and 13% of our net revenue
specifically Acciona Agua, Geida and its member companies, and
Doosan Heavy Industries, respectively. In 2006, two customers,
GE Water and Process Technologies (formerly GE Ionics) and
Geida, including its member companies, accounted for
approximately 18% and 11% of our net revenue, respectively. No
other customer
20
accounted for more than 10% of net revenue during any of these
periods. Geida is a consortium of Befesa Agua S.A., a subsidiary
of Abengoa S.A; Cobra-Tedagua, a subsidiary of ACS Actividades
de Construcción y Servicios, S.A.; and Sadyt S.A., a
subsidiary of Sacyr Vallehermoso, S. A.
During the years ended December 31, 2008, 2007 and 2006
most of our revenue was attributable to sales outside of the
United States. We expect sales outside of the United States to
remain a significant portion of our revenue for the foreseeable
future.
Our revenue is principally derived from the sales of our PX
devices. We receive a small amount of revenue from the sale of
high pressure circulation pumps, which we manufacture and sell
in connection with PX devices to smaller desalination plants. We
also receive incidental revenue from services, such as product
support, that we provide to our PX customers.
21
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with generally accepted accounting principles in the United
States, or GAAP. These accounting principles require us to make
estimates and judgments that can affect the reported amounts of
assets and liabilities as of the date of the consolidated
financial statements as well as the reported amounts of revenue
and expense during the periods presented. We believe that the
estimates and judgments upon which we rely are reasonable based
upon information available to us at the time that we make these
estimates and judgments. To the extent there are material
differences between these estimates and actual results, our
consolidated financial results will be affected. The accounting
policies that reflect our more significant estimates and
judgments and which we believe are the most critical to aid in
fully understanding and evaluating our reported financial
results are revenue recognition, warranty costs, stock-based
compensation, inventory valuation, allowances for doubtful
accounts and income taxes.
Revenue
Recognition
We recognize revenue in accordance with SEC Staff Accounting
Bulletin No. 104, Revenue Recognition. Revenue
is recognized when the earnings process is complete, as
evidenced by an agreement with the customer, transfer of title
occurs, fixed pricing is determinable and collection is
reasonably assured. Transfer of title typically occurs upon
shipment of the equipment pursuant to a written purchase order
or contract. Emerging Issues Task Force
No. 00-21,
Revenue Arrangements with Multiple Deliverables requires
us to allocate the purchase price between the device and the
value of the undelivered services by applying the residual value
method. Under this method, revenue allocated to undelivered
elements is based on vendor objective evidence of fair value of
such undelivered elements, and the residual revenue is allocated
to the delivered elements, assuming that the delivered elements
have stand-alone value. Vendor objective evidence of fair value
for such undelivered elements is based upon the price we charge
for such product or service when it is sold separately. We may
modify our pricing practices in the future, which could result
in changes to our vendor objective evidence of fair value for
such undelivered elements. Our purchase agreements typically
provide for the provision by us of field services and training
for commissioning of a desalination plant. Recognition of the
revenue in respect of those services is deferred until provision
of those services is complete. The services element of our
contracts represent an incidental portion of the total contract
price.
Under our revenue recognition policy, evidence of an arrangement
has been met when we have an executed purchase order or a
stand-alone contract. Typically, our smaller projects utilize
purchase orders that conform to our standard terms and
conditions that require the customer to remit payment generally
within 30 to 90 days from product delivery. In some cases,
if credit worthiness cannot be determined, prepayment is
required from the smaller customers.
For our large projects, stand-alone contracts are utilized. For
these contracts, consistent with industry practice, the
customers typically require their suppliers, including our
company, to accept contractual holdback provisions whereby the
final amounts due under the sales contract are remitted over
extended periods of time. These retention payments typically
range between 10% and 20%, and in some instances up to 30%, of
the total contract amount and are due and payable when the
customer is satisfied that certain specified product performance
criteria have been met upon commissioning of the desalination
plant, which in the case of our PX device may be 12 months
to 24 months from the date of product delivery as described
further below.
The specified product performance criteria for our PX device
generally pertains to the ability of our products to meet our
published performance specifications and warranty provisions,
which our products have demonstrated on a consistent basis. This
factor, combined with our historical performance metrics
measured over the past 10 years, provides us with a
reasonable basis to conclude that the PX device will perform
satisfactorily upon commissioning of the plant. To help ensure
this successful product performance, we provide service,
consisting principally of advisory, consulting and training
services to the customers during the commissioning of the plant.
The installation of the PX device is relatively simple, requires
no customization and is performed by the customer with the
consultation of our personnel. We defer the value of the service
and training component of the contract and recognize such
revenue as services are rendered. Based on these
22
factors, we have concluded that delivery and performance have
been completed when the product has been delivered (title
transfers) to the customer.
We perform an evaluation of credit worthiness on an individual
contract basis to assess whether collectability is reasonably
assured. As part of this evaluation, we consider many factors
about the individual customer, including the underlying
financial strength of the customer
and/or
partnership consortium and our prior history or industry
specific knowledge about the customer and its supplier
relationships. To date, we have been able to conclude that
collectability was reasonably assured on our sales contracts at
the time the product was delivered and title has transferred;
however, to the extent that we conclude that we are unable to
determine that collectability is reasonably assured at the time
of product delivery, we will defer all or a portion of the
contract amount based on the specific facts and circumstances of
the contract and the customer.
Under the stand-alone contracts, the usual payment arrangements
are summarized as follows:
|
|
|
|
|
An advance payment, typically 10% to 20% of the total contract
amount, is due upon execution of the contract;
|
|
|
|
A payment upon delivery of the product, typically in the range
of 50% to 70% of the total contract amount, is due on average
between 90 and 150 days from product delivery, and in some
cases up to 180 days;
|
|
|
|
A retention payment, typically in the range of 10% to 20%, and
in some cases up to 30%, of the total contract amount is due
subsequent to product delivery as described further below.
|
Under the terms of the retention payment component, we are
generally required to issue to the customer a product
performance guarantee in the form of an irrevocable standby
letter of credit, which is issued to the customer approximately
12 to 24 months after the product delivery date. The letter
of credit is either collateralized by restricted cash on deposit
with our financial institution (see Restricted Cash under
Summary of Significant Accounting Policies) or funds
available through a credit facility. The letter of credit
remains in place for the performance period as specified in the
contract, which is generally 12 to 36 months and, in some
cases, up to 65 months from issuance. The performance
period generally runs concurrent with our standard product
warranty period. Once the letter of credit has been put in
place, we invoice the customer for this final retention payment
under the sales contract. During the time between the product
delivery and the issuance of the letter of credit, the amount of
the final retention is classified on the balance sheet as
unbilled receivable, of which a portion may be classified as
long term to the extent that the billable period extends beyond
one year. Once the letter of credit is issued, we invoice the
customer and reclassify the retention amount from unbilled
receivable to accounts receivable where it remains until
payment, typically 90 to 150 days after invoicing, and in
some cases up to 180 days (see Note 3
Balance Sheet Information: Unbilled Receivables).
Shipping and handling charges billed to customers are included
in sales. The cost of shipping to customers is included in cost
of revenue.
We do not provide our customers with a right to return our
products. However, we accept returns of products that are deemed
to be damaged or defective when delivered, subject to the
provisions of the product warranty. Historically, product
returns have not been significant.
We sell our products to large engineering and construction firms
that are not subject to sales tax. Accordingly, the adoption of
EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross versus Net Presentation), does not
have an impact on our consolidated financial statements.
Warranty
Costs
We sell products with a limited warranty generally for a period
of one to two years. In August 2007, we modified the warranty to
offer a five-year term on the ceramic components for new sales
agreements executed after August 7, 2007. We accrue for
warranty costs based on estimated product failure rates,
historical activity and expectations of future costs. We
periodically evaluate and adjust the warranty costs to the
extent actual warranty costs vary from the original estimates.
23
We may offer extended warranties on an exception basis and these
are accounted for in accordance with Financial Accounting
Standards Board Technical
Bulletin 90-1,
Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts for Sales of Extended
Warranties.
Stock-Based
Compensation
Prior to January 1, 2006, we accounted for stock-based
employee compensation arrangements in accordance with the
provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, or APB 25, and
FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation
of APB Opinion No. 25, or FIN 44, and had adopted the
disclosure provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based
Compensation, or SFAS 123, and SFAS No. 148,
Accounting for Share-Based Compensation
Transition and Disclosure, or SFAS 148.
In February 2005, we offered to each of our employees the option
to borrow from us an amount equal to the aggregate exercise
price for all of their outstanding options pursuant to full
recourse promissory notes at 3.76% interest, which are due in
February 2010. The interest rate on the notes was deemed to be
below market rate, resulting in a change in the deemed exercise
price for the options. As a result, we are accounting for these
options as variable option awards. For 2008, 2007 and 2006, we
recorded $155,000, $783,000, and $1.1 million,
respectively, of stock-based compensation related to the options
exercised with promissory notes. All of our executive officers
and directors have subsequently repaid their notes.
Effective January 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123(R),
Share-Based Payment, using the prospective transition
method, which requires us to apply the provisions of
SFAS 123(R) only to awards granted, modified, repurchased
or cancelled after the adoption date. Upon adoption of
SFAS 123(R), we selected the Black-Scholes option pricing
model as the most appropriate method for determining the
estimated fair value for stock-based awards. The Black-Scholes
model requires the use of highly subjective and complex
assumptions to determine the fair value of stock-based awards,
including the options expected term and the price
volatility of the underlying stock. The value of the portion of
the award that is ultimately expected to vest is recognized as
expense over the requisite vesting period on a straight-line
basis in our consolidated statements of income. SFAS 123(R)
requires forfeitures to be estimated at the time of grant and
revised, if necessary, in subsequent periods if actual
forfeitures differ from those estimates. For the years ended
December 31, 2008, 2007 and 2006 we recognized stock-based
compensation under SFAS 123(R) and
EITF 96-18
related to employees and consultants of $879,000, $253,000 and
$13,000, respectively.
We use the Black-Scholes options pricing model to determine the
fair value of stock options. The determination of the fair value
of stock-based payment awards on the date of grant is affected
by stock price as well as assumptions regarding a number of
complex and subjective variables. These variables include
expected stock price volatility over the term of the awards,
actual and projected employee stock option exercise behaviors,
risk-free interest rates and expected dividends. The estimated
grant date fair values of the employee stock options were
calculated using the Black-Scholes options pricing model, based
on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected term
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
48%
|
|
|
|
50%
|
|
|
|
50%
|
|
Risk-free interest rate
|
|
|
1.55-3.41%
|
|
|
|
3.41-4.92%
|
|
|
|
4.45-5.10%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected Term. Under our option plans, the expected term
of options granted is determined using the weighted average
period during which the stock options are expected to remain
outstanding and is based on the options vesting term,
contractual terms and disclosure information from similar
publicly traded companies
24
to develop reasonable expectations about future exercise
patterns and post-vesting employment termination behavior.
Expected Volatility. Since we are a newly public entity
with limited historical data regarding the volatility of our
common stock price, the expected volatility used is based on
volatility of a representative industry peer group. In
evaluating similarity, we considered factors such as industry,
stage of life cycle and size.
Risk-Free Interest Rate. The risk-free rate is based on
U.S. Treasury issues with remaining terms similar to the
expected term on the options.
Dividend Yield. We have never declared or paid any cash
dividends and do not plan to pay cash dividends in the
foreseeable future, and, therefore, used an expected dividend
yield of zero in the valuation model.
Forfeitures. SFAS No. 123R also requires us to
estimate forfeitures at the time of grant, and revise those
estimates in subsequent periods if actual forfeitures differ
from those estimates. We use 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 our actual
forfeiture rate is materially different from our estimate, the
stock-based compensation expense could be significantly
different from what we have recorded in the current period.
The absence of an active market for our common stock prior to
July 2008 required management and the board of directors to
estimate the fair value of its common stock for purposes of
granting options and for determining stock-based compensation
expense for options granted prior to July 2008. In response to
these requirements, management and the board of directors
estimated the fair market value of common stock based on factors
such as the price of the most recent common stock sales to
investors, the valuations of comparable companies, the status of
development and sales efforts, our cash and working capital
amounts, revenue growth, and additional objective and subjective
factors relating to our business on an annual basis.
Stock-based compensation expense related to awards granted and
or modified to employees was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of revenue
|
|
$
|
103
|
|
|
$
|
117
|
|
|
$
|
143
|
|
General and administrative
|
|
|
419
|
|
|
|
383
|
|
|
|
425
|
|
Sales and marketing
|
|
|
274
|
|
|
|
349
|
|
|
|
310
|
|
Research and development
|
|
|
140
|
|
|
|
159
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
936
|
|
|
$
|
1,008
|
|
|
$
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To calculate the excess tax benefits available as of the date of
adoption for use in offsetting future tax shortfalls, we elected
the short-form method in accordance with FASB Staff
Position
FAS No. 123R-3,
Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards.
Stock-Based
Compensation Non-Employees
We account for awards granted to non-employees other than
members of our board of directors in accordance with
SFAS 123 and the EITF Abstract
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services, which require such awards to be recorded
at their fair value on the measurement date. The measurement of
stock-based compensation is subject to periodic adjustment as
the underlying awards vest. We amortize compensation expense
related to non-employee awards in accordance with FASB
Interpretation No. 28, Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans.
25
The fair value of stock options issued to consultants was
calculated using the Black-Scholes options pricing model, based
on the following assumptions:
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Expected term
|
|
1-10 years
|
|
1-10 years
|
|
10 years
|
Expected volatility
|
|
48%
|
|
50%
|
|
50%
|
Risk-free interest rate
|
|
1.55% 2.46%
|
|
3.45%-4.92%
|
|
4.70%
|
Dividend yield
|
|
0%
|
|
0%
|
|
0%
|
Stock-based compensation expense related to awards granted
and/or
modified to non-employees was allocated as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
General and administrative
|
|
$
|
93
|
|
|
$
|
23
|
|
|
$
|
|
|
Sales and marketing
|
|
|
5
|
|
|
|
5
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98
|
|
|
$
|
28
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
Inventories are stated at the lower of cost (using the weighted
average cost method) or market. We calculate inventory reserves
for excess and obsolete inventories based on estimated future
demand of the products and spare parts. Cost of inventory is
determined in accordance with Statement of Financial Accounting
Standards No. 151, Inventory Costs, an amendment of
ARB No. 43, Chapter 4, or SFAS 151.
Allowances
for Doubtful Accounts
We record a provision for doubtful accounts based on our
historical experience and a detailed assessment of the
collectability of our accounts receivable. In estimating the
allowance for doubtful accounts, our management considers, among
other factors, (1) the aging of the accounts receivable,
(2) our historical
write-offs,
(3) the credit worthiness of each customer and
(4) general economic conditions. Our allowance for doubtful
accounts was $59,000, $121,000 and $230,000 as of
December 31, 2008, 2007 and 2006, respectively. If we were
to experience unanticipated collections issues, it could have an
adverse affect on our operating results in future periods.
Income
Taxes
We account for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes, or
SFAS 109, issued by the Financial Accounting Standards
Board, or FASB. SFAS 109 requires an entity to recognize
deferred tax liabilities and assets. Deferred tax assets and
liabilities are recognized for the future tax consequence
attributable to the difference between the tax bases of assets
and liabilities and their reported amounts in the financial
statements. Deferred tax assets and liabilities are measured
using the enacted tax rate expected to apply to taxable income
in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income
in the period that included the enactment date. Valuation
allowances are provided if, based upon the available evidence,
management believes it is more likely than not that some or all
of the deferred assets will not be realized or the use of prior
years net operating losses may be limited.
On July 13, 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109, or FIN 48. FIN 48 clarifies the
accounting for uncertainty in income taxes recognized in any
entitys financial statements in accordance with
SFAS 109 and prescribes a recognition threshold and
measurement attributes for financial statement disclosure of tax
positions taken or expected to be taken on a tax return. Under
FIN 48, the impact of an uncertain income tax position on
the
26
income tax return must be recognized at the largest amount that
is more likely than not to be sustained upon audit by the
relevant taxing authority. An uncertain income tax position will
not be recognized if it has less than a 50% likelihood of being
sustained. Additionally, FIN 48 provides guidance on
de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We
adopted the provisions of FIN 48 on January 1, 2007.
Measurement under FIN 48 is based on judgment regarding the
largest amount that is greater than 50% likely of being realized
upon ultimate settlement with a taxing authority. The total
amount of unrecognized tax benefits as of the date of adoption
was immaterial. As a result of the implementation of
FIN 48, there was no change to our tax liability.
We adopted the accounting policy that interest recognized in
accordance with Paragraph 15 of FIN 48 and penalty
recognized in accordance with Paragraph 16 of FIN 48
are classified as part of income taxes. The amounts of interest
and penalty recognized in the statement of income and statement
of financial position for 2008 and 2007 were insignificant.
Our operations are subject to income and transaction taxes in
the United States and in foreign jurisdictions. Significant
estimates and judgments are required in determining our
worldwide provision for income taxes. Some of these estimates
are based on interpretations of existing tax laws or
regulations. The ultimate amount of tax liability may be
uncertain as a result.
We are subject to taxation in the U.S. and various states
and foreign jurisdictions. There are no ongoing examinations by
taxing authorities at this time. Our various tax years from 1995
through 2008 remain open in various taxing jurisdictions.
Results
of Operations
2008
Compared to 2007
The following table sets forth certain data from our historical
operating results as a percentage of revenue for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Year Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Increase (Decrease)
|
|
|
Results of Operations:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
52,119
|
|
|
|
100.0%
|
|
|
$
|
35,414
|
|
|
|
100.0%
|
|
|
$
|
16,705
|
|
|
|
47.2%
|
|
Cost of revenue
|
|
|
18,933
|
|
|
|
36.3%
|
|
|
|
14,852
|
|
|
|
41.9%
|
|
|
|
4,081
|
|
|
|
27.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
33,186
|
|
|
|
63.7%
|
|
|
|
20,562
|
|
|
|
58.1%
|
|
|
|
12,624
|
|
|
|
61.4%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
11,321
|
|
|
|
21.7%
|
|
|
|
4,299
|
|
|
|
12.1%
|
|
|
|
7,022
|
|
|
|
163.3%
|
|
Sales and marketing
|
|
|
6,549
|
|
|
|
12.6%
|
|
|
|
5,230
|
|
|
|
14.8%
|
|
|
|
1,319
|
|
|
|
25.2%
|
|
Research and development
|
|
|
2,415
|
|
|
|
4.6%
|
|
|
|
1,705
|
|
|
|
4.8%
|
|
|
|
710
|
|
|
|
41.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
20,285
|
|
|
|
38.9%
|
|
|
|
11,234
|
|
|
|
31.7%
|
|
|
|
9,051
|
|
|
|
80.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,901
|
|
|
|
24.8%
|
|
|
|
9,328
|
|
|
|
26.3%
|
|
|
|
3,573
|
|
|
|
38.3%
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense & finance charges
|
|
|
(79
|
)
|
|
|
(0.2)%
|
|
|
|
(105
|
)
|
|
|
(0.3)%
|
|
|
|
(26
|
)
|
|
|
(24.8)%
|
|
Interest and other income
|
|
|
873
|
|
|
|
1.7%
|
|
|
|
517
|
|
|
|
1.5%
|
|
|
|
356
|
|
|
|
68.9%
|
|
Provision for income tax expense
|
|
|
5,032
|
|
|
|
9.7%
|
|
|
|
3,947
|
|
|
|
11.1%
|
|
|
|
1,085
|
|
|
|
27.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8,663
|
|
|
|
16.6%
|
|
|
$
|
5,793
|
|
|
|
16.4%
|
|
|
$
|
2,870
|
|
|
|
49.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Percentages may not add up to 100% due to rounding. |
27
Net
Revenue
Our net revenue increased by $16.7 million, or 47%, to
$52.1 million for the year ended December 31, 2008
from $35.4 million for the year ended December 31,
2007. This increase was primarily due to higher sales of our
PX-220 device and the newly introduced PX-260 device. Greater
market acceptance of the PX devices and the overall growth of
the desalination market drove the increased demand for the
products. The net revenue increase from the higher sales volume
was offset in part by a decrease in our average unit selling
price of approximately 6%. For the year ended December 31,
2008, the sales of PX devices accounted for approximately 95% of
our revenue, pump sales accounted for approximately 3% and spare
parts and service accounted for 2%. For the year ended
December 31, 2007, the sales of PX devices accounted for
approximately 94% of revenue, pump sales accounted for
approximately 4%, and spare parts and service accounted for the
remainder.
The following geographic information includes net revenue to our
domestic and international customers based on the
customers requested delivery locations, except for certain
cases in which the customer directed us to deliver our products
to a location that differs from the known ultimate location of
use. In such cases, the ultimate location of use is reflected in
the table below instead of the delivery location. The amounts
below are in thousands, except percentage data.
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Domestic net revenue
|
|
$
|
3,517
|
|
|
$
|
2,125
|
|
International net revenue
|
|
|
48,602
|
|
|
|
33,289
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
52,119
|
|
|
$
|
35,414
|
|
|
|
|
|
|
|
|
|
|
Revenue by country:
|
|
|
|
|
|
|
|
|
Algeria
|
|
|
24%
|
|
|
|
12%
|
|
Spain
|
|
|
16
|
|
|
|
35
|
|
China
|
|
|
11
|
|
|
|
8
|
|
United Arab Emirates
|
|
|
7
|
|
|
|
2
|
|
Saudi Arabia
|
|
|
*
|
|
|
|
13
|
|
Others
|
|
|
42
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
* Less than 1%
The impact of the current global economic climate on future
demand for our products is uncertain. The weakening global
economy may cause our customers to delay or cancel plans for
future orders of our products.
Gross
Profit
Gross profit represents our net revenue less our cost of
revenue. Our cost of revenue consists primarily of raw
materials, personnel costs (including stock-based compensation),
manufacturing overhead, warranty costs, capital costs, excess
and obsolete inventory expense, and manufactured components. The
largest component of our cost of revenue is raw materials,
primarily ceramic materials, which we obtain from several
suppliers. For the year ended December 31, 2008, gross
profit as a percentage of net revenue was 63.7%, as compared to
58.1% for the year ended December 31, 2007. The increase in
gross margin as a percentage of revenue of 5.6% was comprised of
the following: (1) the reversal of a warranty provision in
the amount of $688,000, or 1.3% of revenue, related to the
cancellation of an extended product warranty contract and
(2) an increase in
28
PX-260 and PX-220 devices, which have higher margins than our
other product offerings, as a component of our sales mix in 2008
versus 2007.
Stock-based compensation expense included in the cost of revenue
was $103,000 for the year ended December 31, 2008 and
$117,000 for the year ended December 31, 2007.
Future gross profit is highly dependent on the product and
customer mix of our net revenues. Accordingly, we are not able
to predict our future gross profit levels with certainty.
General
and Administrative Expense
General and administrative expense increased by
$7.0 million, or 163%, to $11.3 million for the year
ended December 31, 2008 from $4.3 million for the year
ended December 31, 2007. As a percentage of net revenue,
general and administrative expense was 22% for the year ended
December 31, 2008 and 12% for the year ended
December 31, 2007. The increase of general and
administrative expense was attributable primarily to the
increase in general and administrative headcount and
professional services to support our growth in operations and to
support the requirements for operating as a public company. This
increase reflected in part the increase in general and
administrative employees to 34 at December 31, 2008 from 13
at December 31, 2007.
Of the $7.0 million increase in general and administrative
expense, $2.8 million was related to professional services,
$2.6 million was related to compensation and
employee-related benefits, $0.4 million was related to
Value Added Taxes (VAT), $0.6 million was related to
occupancy costs, $0.1 million related to export credit
insurance, $0.1 million related to bad debt expense and
$0.4 million related to other administrative costs.
Stock-based compensation expense included in general and
administrative expense was $512,000 for the year ended
December 31, 2008 and $388,000 for the year ended
December 31, 2007.
Sales and
Marketing Expense
Sales and marketing expense increased by $1.3 million, or
25%, to $6.5 million for the year ended December 31,
2008 from $5.2 million for the year ended December 31,
2007. This increase was primarily related to growth in our sales
that resulted in higher headcount with sales and marketing
employees increasing to 21 at December 31, 2008 from 17 at
December 31, 2007. In addition, our sales team is
compensated in part by commissions, resulting in increased sales
expense as our sales levels increase.
As a percentage of our net revenue, sales and marketing expense
decreased to 13% for the year ended December 31, 2008 from
15% for the year ended December 31, 2007. The decrease in
2008 was attributable primarily to the significant increase in
our net revenue that period, which grew at a greater rate than
our sales and marketing expense.
Of the $1.3 million net increase in sales and marketing
expense for the year ended December 31, 2008,
$1.1 million related to compensation, employee-related
benefits and commissions to outside sales representatives,
$0.2 million related to sales and marketing efforts.
Stock-based compensation expense included in sales and marketing
expense was $279,000 for the year ended December 31, 2008
and $372,000 for the year ended December 31, 2007.
We expect that our future sales and marketing expense will
increase in absolute dollars as our revenue increases.
Research
and Development Expense
Research and development expense increased by $710,000, or 42%,
to $2.4 million for the year ended December 31, 2008
from $1.7 million for the year ended December 31,
2007. Of the $710,000 increase, compensation and
employee-related benefits accounted for $340,000, consulting and
professional service fees accounted for $160,000, research and
development direct project costs accounted for $190,000, and
occupancy and other miscellaneous costs accounted for $20,000.
29
Headcount in our research and development department increased
to eight at December 31, 2008 from six at December 31,
2007. Stock-based compensation expense included in research and
development expense was $140,000 for year ended
December 31, 2008 and $159,000 for the year ended
December 31, 2007.
We anticipate that our research and development expenditures
will increase in the future as we expand and diversify our
product offerings.
Other
Income (Expense), Net
Other net income (expense) increased by $382,000 to $794,000 for
the year ended December 31, 2008 from $412,000 for the year
ended December 31, 2007. The increase from 2007 to 2008 was
primarily due to higher interest earnings of $486,000 resulting
from IPO net proceeds of $76.7 million received in July 2008 and
by a decrease in net interest expense of $27,000 resulting from
the reduction of equipment loans outstanding. The increase was
in part offset by a reduction in foreign currency transaction
gains in the amount of $131,000 related to accounts receivable
denominated in foreign currencies.
2007
Compared to 2006
The following table sets forth certain data from our historical
operating results as a percentage of revenue for the years
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Increase(decrease)
|
|
|
Results of Operations:*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
35,414
|
|
|
|
100.0%
|
|
|
$
|
20,058
|
|
|
|
100.0%
|
|
|
$
|
15,356
|
|
|
|
76.6%
|
|
Cost of revenue
|
|
|
14,852
|
|
|
|
41.9%
|
|
|
|
8,131
|
|
|
|
40.5%
|
|
|
|
6,721
|
|
|
|
82.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
20,562
|
|
|
|
58.1%
|
|
|
|
11,927
|
|
|
|
59.5%
|
|
|
|
8,635
|
|
|
|
72.4%
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,299
|
|
|
|
12.1%
|
|
|
|
3,372
|
|
|
|
16.8%
|
|
|
|
927
|
|
|
|
27.5%
|
|
Sales and marketing
|
|
|
5,230
|
|
|
|
14.8%
|
|
|
|
3,648
|
|
|
|
18.2%
|
|
|
|
1,582
|
|
|
|
43.4%
|
|
Research and development
|
|
|
1,705
|
|
|
|
4.8%
|
|
|
|
1,267
|
|
|
|
6.3%
|
|
|
|
438
|
|
|
|
34.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
11,234
|
|
|
|
31.7%
|
|
|
|
8,287
|
|
|
|
41.3%
|
|
|
|
2,947
|
|
|
|
35.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,328
|
|
|
|
26.3%
|
|
|
|
3,640
|
|
|
|
18.1%
|
|
|
|
5,688
|
|
|
|
156.3%
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense & finance charges
|
|
|
(105
|
)
|
|
|
(0.3)%
|
|
|
|
(77
|
)
|
|
|
(0.4)%
|
|
|
|
28
|
|
|
|
36.4%
|
|
Interest and other income
|
|
|
517
|
|
|
|
1.5%
|
|
|
|
58
|
|
|
|
0.3%
|
|
|
|
459
|
|
|
|
791.4%
|
|
Provision for income tax expense
|
|
|
3,947
|
|
|
|
11.1%
|
|
|
|
1,239
|
|
|
|
6.2%
|
|
|
|
2,708
|
|
|
|
218.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
5,793
|
|
|
|
16.4%
|
|
|
$
|
2,382
|
|
|
|
11.9%
|
|
|
$
|
3,411
|
|
|
|
143.2%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Percentages may not add up to 100% due to rounding.
Net
Revenue
Our net revenue increased by $15.4 million, or 77%, to
$35.4 million in 2007 from $20.1 million in 2006.
These increases were principally due to higher sales of our
PX-220 device, which resulted primarily from increased market
acceptance of the device and the overall growth of the
desalination market. Prices were relatively constant for our PX
devices in 2007 and 2006. For the year ended December 31,
2007, the sales of PX devices accounted for approximately 94% of
revenue, pump sales accounted for approximately 4%, and spare
parts and service accounted for the remainder. For the year
ended December 31, 2006, the sales of PX devices accounted
for approximately 92% of revenue, pump sales accounted for
approximately 4%, and spare parts and service accounted for the
remainder.
30
The following geographic information includes net revenue to our
domestic and international customers based on the
customers requested delivery locations, except for certain
cases in which the customer directed us to deliver our products
to a location that differs from the known ultimate location of
use. In such cases, the ultimate location of use is reflected in
the table below instead of the delivery location. The amounts
below are in thousands, except percentage data.
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Domestic net revenue
|
|
$
|
2,125
|
|
|
$
|
1,003
|
|
International net revenue
|
|
|
33,289
|
|
|
|
19,055
|
|
|
|
|
|
|
|
|
|
|
Total net revenue
|
|
$
|
35,414
|
|
|
$
|
20,058
|
|
|
|
|
|
|
|
|
|
|
Revenue by country:
|
|
|
|
|
|
|
|
|
Algeria
|
|
|
12%
|
|
|
|
30%
|
|
Spain
|
|
|
35
|
|
|
|
9
|
|
China
|
|
|
8
|
|
|
|
5
|
|
United Arab Emirates
|
|
|
2
|
|
|
|
10
|
|
Saudi Arabia
|
|
|
13
|
|
|
|
*
|
|
Others
|
|
|
30
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100%
|
|
|
|
100%
|
|
|
|
|
|
|
|
|
|
|
* Less than 1%.
Gross
Profit
Gross profit represents our net revenue less our cost of
revenue. Our cost of revenue consists primarily of raw
materials, personnel costs (including stock-based compensation),
manufacturing overhead, warranty costs, capital costs, excess
and obsolete inventory expense, and manufactured components. The
largest component of our cost of revenue is raw materials,
principally ceramic materials, which we obtain from several
suppliers. Gross profit, as a percentage of net revenue,
remained relatively constant at 58.1% in 2007 as compared to
59.5% in 2006. Stock compensation expense included in cost of
revenue was $117,000 in 2007 and $143,000 in 2006.
General
and Administrative Expense
General and administrative expense increased by $927,000, or
28%, to $4.3 million in 2007 from $3.4 million in
2006. These increases reflected in part the increase in general
and administrative employees to 13 at December 31, 2007
from eight at December 31, 2006.
As a percentage of our net revenue, general and administrative
expense was 12% in 2007 and 17% in 2006. The decrease of general
and administrative expense as a percentage of net revenue was
attributable principally to the significant increases in our net
revenue.
The primary reason for the increase in general and
administrative expense was the growth in our operations that
resulted in higher headcount including the recruitment of an
officer, renting of additional facility space, increased travel
and increased bank fees. With respect to the $927,000 increase
in such expense in 2007, $513,000 related to compensation,
employee-related benefits and professional services fees,
$139,000 related to bank charges, $46,000 related to office
supplies and equipment, $89,000 related to occupancy costs, and
$324,000 related to other expense (general recruiting, patent
amortization and travel), offset by $184,000 related to bad
debt. Stock-based compensation expense included in general and
administrative expense was $388,000 in 2007 and $428,000 in 2006.
31
Sales and
Marketing Expense
Sales and marketing expense increased by $1.6 million, or
43%, to $5.2 million in 2007 from $3.6 million in
2006. These increases were primarily related to growth in our
sales that resulted in higher headcount with sales and marketing
employees increasing to 17 at December 31, 2007 from six at
December 31, 2006. In addition, our sales team is
compensated in part by commissions, resulting in increased sales
expense as our sales levels increase.
As a percentage of our net revenue, sales and marketing expense
decreased to 15% in 2007 from 18% in 2006. The decrease in 2007
was attributable principally to the significant increase in our
net revenue that year, which grew at a greater rate than our
sales and marketing expense.
With respect to the $1.6 million increase in sales and
marketing expense in 2007, $0.7 million of such increase
related to compensation and employee related benefits,
$0.3 million related to consultant fees, $0.2 million
related to travel and related expense, $0.2 million related
to increased occupancy costs and $0.2 million related to
sales and marketing efforts. Stock-based compensation expense
included in sales and marketing expense was $372,000 in 2007 and
$310,000 in 2006.
Research
and Development Expense
Research and development expense increased by $438,000, or 35%,
to $1.7 million in 2007 from $1.3 million in 2006. As
a percentage of our net revenue, research and development
expense decreased to 5% in 2007 from 6% in 2006.
Compensation, employee-related benefits, consulting services and
depreciation of development equipment accounted for $151,000 of
the $438,000 increase from 2006 to 2007. The remainder of the
increase in 2007 was attributable to $173,000 in product
development costs and $114,000 in travel and other expense.
Stock-based compensation expense included in research and
development expense was $159,000 in 2007 and $183,000 in 2006.
Other
Income (Expense), Net
Other income (expense), net increased by $431,000 to $412,000 in
2007 from $(19,000) in 2006. The increase in net interest and
other income from 2006 to 2007 was primarily attributable to
gains on foreign currency transactions of $355,000 in 2007 and
higher average cash balances, which resulted in higher interest
income in 2007.
Liquidity
and Capital Resources
Our primary source of cash historically has been proceeds from
the issuance of common stock, customer payments for our products
and services, and borrowings under our credit facility. From
January 1, 2005 through December 31, 2008, we issued
common stock for aggregate net proceeds of $83.3 million,
excluding common stock issued in exchange for promissory notes.
The proceeds from the sales of common stock have been used to
fund our operations and capital expenditures.
As of December 31, 2008, our principal sources of liquidity
consisted of cash and cash equivalents of $79.3 million,
which are invested primarily in money market funds, and accounts
receivable of $20.6 million. In July 2008, we received
approximately $76.7 million of net proceeds from the IPO.
On March 27, 2008 we entered into a new credit agreement
(credit agreement) with our existing financial
institution that replaced a $2.0 million credit facility
and $3.5 million revolving note. In September 2008 and
December 2008, we modified the credit agreement to increase
the allowable borrowings on the credit facility and to extend
the credit facility term. The modified credit agreement allows
borrowings of up to $12.0 million on a revolving basis at
LIBOR plus 2.75%, expires on March 31, 2009 and is secured
by our accounts receivable, inventories, property, equipment and
other intangibles except intellectual property. We are subject
to certain financial and administrative covenants under the new
credit agreement. As of December 31, 2008, we were
non-compliant with one financial covenant related to financial
reporting. In January 2009, the
32
lender granted a waiver for this non-compliance. There were no
outstanding borrowings under the credit agreement as of
December 31, 2008.
During the years ended December 31, 2008 and 2007, we
provided certain customers with irrevocable standby letters of
credit to secure our obligations for the delivery and
performance of products in accordance with sales arrangements.
These letters of credit were issued largely under our revolving
note credit facility in 2007 and our credit agreement in 2008.
The letters of credit generally terminate within 12 to
36 months, and in some cases up to 65 months from
issuance. At December 31, 2008, the amounts outstanding on
the letters of credit totaled approximately $8.7 million of
which $8.4 million were issued under our credit agreement.
In February 2009, the Company terminated the March 2008 credit
agreement. As a result, the Company transferred
$9.1 million in cash to a restricted cash account as
collateral for outstanding irrevocable standby letters of credit
that were collateralized by the credit agreement as of the date
of termination.
In January 2009, the Company entered into a new loan and
security agreement with another financial institution which
became effective in February 2009 and provides a total available
credit line of $15.0 million. Under this new agreement, the
Company is allowed to draw advances up to $10.0 million on
a revolving line of credit or utilize up to $14.8 million
as collateral for irrevocable standby letters of credit,
provided that the aggregate of the advances and the collateral
do not exceed $15.0 million. Advances under the revolving
line of credit incur interest based on either a prime rate index
or LIBOR plus 1.375%. The new loan and security agreement
expires on December 31, 2009 and is collateralized by
substantially all of the Companys assets. The Company is
subject to certain financial and administrative covenants under
this new agreement.
We have unbilled receivables pertaining to customer contractual
holdback provisions, whereby we invoice the final installment
due under a sales contract 12 to 24 months after the
product has been shipped to the customer and revenue has been
recognized. Long-term unbilled receivables as of
December 31, 2008 consisted of unbilled receivables from
customers due more than one year subsequent to period end. The
customer holdbacks represent amounts intended to provide a form
of security for the customer rather than a form of long-term
financing; accordingly, these receivables have not been
discounted to present value. At December 31, 2008, we had
$4.9 million of current unbilled receivables and
$1.9 million of non-current unbilled receivables. At
December 31, 2007, we had $1.7 million of current
unbilled receivables and $2.5 million of non-current
unbilled receivables.
On March 28, 2007, we entered into a $1.0 million
equipment promissory note. The equipment promissory note bears
an interest rate of cost of funds plus 2.75% and matures in
September 2012. The amounts outstanding on the equipment
promissory note as of December 31, 2008 and 2007 was
$468,000 and $596,000, respectively. The interest rate for the
equipment promissory note at December 31, 2008 and 2007 was
7.81%.
On December 1, 2005, we entered into a $222,000 fixed
rate-installment note, or fixed note, with maturity date of
December 15, 2010. The fixed note bears an annual interest
rate of 10%. These notes are secured by our accounts receivable,
inventories, property, equipment and other general intangibles
except for intellectual property. The amounts outstanding on the
fixed note as of December 31, 2008 and 2007 was $89,000 and
$133,000, respectively. In February 2009, the Company paid the
remaining balance of the fixed promissory note for a total of
$83,000, including accrued interest.
Cash
Flows from Operating Activities
Net cash provided by (used in) operating activities was
$1.4 million and $(2.8) million for the years ended
December 31, 2008 and 2007, respectively. For the years
ended December 31, 2008 and 2007, cash provided by net
income of $8.7 million and $5.8 million, respectively,
was adjusted to $10.1 million and $7.6 million,
respectively, by non-cash items (depreciation, amortization,
unrealized gains and losses on foreign exchange, stock-based
compensation, provisions for doubtful accounts, warranty
reserves and excess and obsolete inventory) totaling
$1.4 million and $1.8 million, respectively. The net
cash outflow effect from changes in assets and liabilities was
$(8.7) million and $(10.4) million for the year ended
December 31, 2008 and 2007, respectively. Net changes in
assets and liabilities are primarily attributable to increases
in inventory
33
as a result of the growth of our business, changes in accounts
receivable, unbilled receivables as a result of timing of
invoices and collections for large projects, and changes in
prepaid expenses and accrued liabilities as a result of the
timing of payments to employees, vendors and other third parties.
Net cash provided by (used in) operating activities was
$(2.8) million and $822,000 for 2007 and 2006,
respectively. The $3.7 million increase in net cash used in
operating activities from 2006 to 2007 was primarily
attributable to increases in receivables and inventory and
decreases in deferred revenue billings.
Within changes in assets and liabilities, changes in accounts
and unbilled receivables used $(5.7) million in cash in
2007 compared to $(7.6) million used in 2006 due to the
timing of invoices for large projects at the end of 2007, along
with a 77%, or $15.4 million, increase in net sales for the
year. Changes in inventory used $(2.0) million in cash in
2007 compared to $(960,000) in 2006 primarily as a result of the
growth of our business. Changes in accounts payable provided
$583,000 in 2007 compared to $270,000 in 2006 due to the timing
of payments. Changes in accrued liabilities (including income
taxes) used $(29,000) in cash in 2007 compared to provided
$2.3 million in 2006, primarily due to timing of payments.
Lastly, decreases in deferred revenue used ($2.9) million
in cash in 2007 compared to provided $4.0 million in 2006,
primarily due to an increase in revenue recognized on product
deliveries previously billed in advance.
Cash
Flows from Investing Activities
Cash flows used in investing activities primarily relate to
capital expenditures to support our growth, as well as increases
in our restricted cash used to collateralize our letters of
credit.
Net cash provided by (used in) investing activities was $650,000
and $(2.0) million for the years ended December 31,
2008, and 2007, respectively. The increase in net cash provided
by investing activities was primarily attributable to the
release of restricted cash of $1.3 million in 2008 compared
to an increase in restricted cash of $1.0 million in 2007.
The remaining portion of the increase resulted from a reduction
in property and equipment purchases of $251,000.
Net cash (used in) investing activities was $(2.0) million
in 2007 and $(511,000) in 2006. $1.0 million of the
increase in net cash used in investing activities from 2006 to
2007 was attributable to the increase in restricted cash
balances and the balance of the increase was due largely to an
increase in purchases of property and equipment in 2007 compared
to 2006.
Cash
Flows from Financing Activities
Net cash provided by financing activities increased
$72.0 million to $77.1 million for the year ended
December 31, 2008 from $5.1 million for the year ended
December 31, 2007. The $72.0 million increase in cash
flows from financing activities is primarily attributable to the
receipt of net proceeds of $76.7 million from the sale of common
stock in our IPO during the year ended December 31, 2008
versus the receipt of net proceeds of $5.0 million from a
private placement of common stock and $143,000 from the exercise
of warrants during the year ended December 31, 2007.
Additionally, repayments of promissory notes by stockholders
increased $551,000 for the year ended December 31, 2008
over 2007.
Net cash provided by financing activities was $5.1 million
in 2007 and net cash used was $(530,000) in 2006. The increase
in net cash provided by financing activities in 2007 from 2006
was primarily attributable to our issuance of common stock in a
private placement.
We believe that our existing cash balances and cash generated
from our operations will be sufficient to meet our anticipated
capital requirements for at least the next 12 months.
However, we may need to raise additional capital or incur
additional indebtedness to continue to fund our operations in
the future. Our future capital requirements will depend on many
factors, including our rate of revenue growth, if any, the
expansion of our sales and marketing and research and
development activities, the timing and extent of our expansion
into new geographic territories, the timing of introductions of
new products and the continuing market acceptance of our
products. Although we currently are not a party to any agreement
or letter of intent with respect to potential material
investments in, or acquisitions of, complementary businesses,
services or
34
technologies, we may enter into these types of arrangements in
the future, which could also require us to seek additional
equity or debt financing. Additional funds may not be available
on terms favorable to us or at all.
Contractual
Obligations
We lease facilities under fixed non-cancelable operating leases
that expire on various dates through 2019. In the course of our
normal operations, we also entered into purchase commitments
with our suppliers for various key raw materials and component
parts. The purchase commitments covered by these arrangements
are subject to change based on our sales forecasts for future
deliveries.
The following is a summary of our contractual obligations as of
December 31, 2008 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
|
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
|
|
Notes payable
|
|
$
|
557
|
|
|
$
|
172
|
|
|
$
|
300
|
|
|
$
|
85
|
|
|
$
|
|
|
|
|
|
|
Operating lease obligations (1)
|
|
|
15,828
|
|
|
|
4,050
|
|
|
|
2,501
|
|
|
|
2,282
|
|
|
|
6,995
|
|
|
|
|
|
Capital lease obligations (including interest) (2)
|
|
|
72
|
|
|
|
43
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual purchase obligations
|
|
|
250
|
|
|
|
|
|
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16,707
|
|
|
$
|
4,265
|
|
|
$
|
3,080
|
|
|
$
|
2,367
|
|
|
$
|
6,995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes $3 million for obligations related to tenant
improvement costs. Estimates for such costs range from $2
million to $3 million and are expected to be realized in
less than one year.
|
(2) Present value of net minimum capital lease payments is
$64, as reflected on the balance sheet.
This table excludes agreements with guarantees or indemnity
provisions that we have entered into with customers and others
in the ordinary course of business. Based on our historical
experience and information known to us as of December 31,
2008, we believe that our exposure related to these guarantees
and indemnities as of December 31, 2008 was not material.
Supplier
Concentration
Certain of the raw materials and components that we use in the
manufacturing of our products are available from a limited
number of suppliers. We do not enter into long-term supply
contracts with these suppliers. For instance, we purchase the
ceramic components for the PX device pursuant to standard
purchase orders that specify the quantity and price of various
component parts to be delivered over a three-month period. We
then update the pricing and quantity of our purchase orders
based upon our most current forecast on a quarterly basis.
Shortages could occur in these essential materials and
components due to an interruption of supply or increased demand
in the industry. If we are unable to procure certain of such
materials or components, we would be required to reduce our
manufacturing operations, which could have a material adverse
effect on our results of operations.
For the year ended December 31, 2008, four suppliers (of
which three were ceramics suppliers) represented approximately
72% of our total purchases. For the years ended 2007 and 2006,
three suppliers (of which two were ceramics suppliers)
represented approximately 66% and 71%, respectively, of our
total purchases. As of December 31, 2008 and 2007,
approximately 68% and 60%, respectively, of our accounts payable
were due to these suppliers.
Off-Balance
Sheet Arrangements
During the periods presented, we did not have any relationships
with unconsolidated entities or financial partnerships, such as
entities often referred to as structured finance or special
purpose entities, which would have been established for the
purpose of facilitating off-balance sheet arrangements or other
contractually narrow or limited purpose.
35
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements, or SFAS 157. SFAS 157
defines fair value, establishes a framework for measuring fair
value, and enhances fair value measurement disclosure. In
February 2008, the FASB issued FASB Staff Position
157-1,
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13, or
FSP 157-1,
and
FSP 157-2,
Effective Date of FASB Statement No. 157, or
FSP 157-2.
FSP 157-1
amends SFAS 157 to remove certain leasing transactions from
its scope.
FSP 157-2
delays the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the
beginning of the first quarter of 2009. The measurement and
disclosure requirements related to financial assets and
financial liabilities are effective for us beginning in the
first quarter of 2008. The adoption of SFAS 157 for
financial assets and financial liabilities in the three months
ended March 31, 2008 did not have a significant impact on
our consolidated financial statements. We are currently
evaluating the impact that SFAS 157 will have on our
consolidated financial statements when it is applied to
non-financial assets and non-financial liabilities beginning in
the first quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities, or SFAS 159. SFAS 159 permits
companies to choose to measure certain financial instruments and
other items at fair value. The standard requires that unrealized
gains and losses are reported in earnings for items measured
using the fair value option. SFAS 159 is effective for us
beginning in the first quarter of 2008. The adoption of
SFAS 159 did not have an impact on our consolidated
financial statements.
In December 2007, the SEC issued SAB 110 to amend the
SECs views discussed in SAB 107 regarding the use of
the simplified method in developing an estimate of expected life
of share options in accordance with SFAS 123R. SAB 110
is effective for us beginning in the first quarter of 2008. As
of December 31, 2007, we did not use the simplified method
and the adoption of SAB 107, as amended by SAB 110,
did not have an impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations, or
FAS 141(R). FAS 141(R) will change how business
acquisitions are accounted for. FAS 141(R) is effective for
fiscal years beginning on or after December 15, 2008. The
adoption of FAS 141(R) is not expected to have a material
impact on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51. SFAS No. 160
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated.
SFAS No. 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners.
SFAS No. 160 is effective for fiscal years beginning
after December 15, 2008. The adoption of
SFAS No. 160 is not expected to have a material impact
on our consolidated financial statements.
In March 2008, the FASB issued FAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement
No. 133 (FAS 161). FAS 161 requires us
to provide greater transparency about how and why we use
derivative instruments, how the instruments and related hedged
items are accounted for under FAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (FAS 133), and how the instruments and
related hedged items affect our financial position, results of
operations, and cash flows. FAS 161 became effective for us
on January 1, 2009. We do not expect the adoption of
FAS 161 to have an effect on our consolidated financial
statements.
In April 2008, the FASB has issued FASB Staff Position
142-3
(FSP 142-3),
Determination of the Useful Life of Intangible Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under
36
FASB Statement No. 142, Goodwill and Other Intangible
Asset. The intent of
FSP 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under FASB Statement No. 142
and the period of expected cash flows used to measure the fair
value of the asset under FAS 141(R), and other
U.S. generally accepted accounting principles.
FSP 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. We do not expect the adoption of
FSP 142-3
to have an effect on our consolidated financial statements.
|
|
Item 7A.
|
Quantitative
and Qualitative Disclosure About Market Risk
|
Foreign
Currency Risk
Currently, the majority of our revenue contracts have been
denominated in United States dollars. In some circumstances, we
have priced certain international sales in Euros and to a much
lesser degree in Maltese Liras. The amount of revenue
transactions denominated in Euros amounted to approximately
$7.1 million, $10.0 million and zero in 2008, 2007 and
2006, respectively. In 2006, $1.0 million of our revenue
was denominated in Maltese Liras. There were no revenue
contracts denominated in Maltese Liras in either 2008 or 2007.
We experienced a net foreign currency gain (loss) of
approximately a $220,000, $351,000 and $(4,000) related to our
revenue contracts for the years ended December 31, 2008,
2007 and 2006, respectively.
As we expand our international sales, we expect that a portion
of our revenue could continue to be denominated in foreign
currencies. As a result, our cash and cash equivalents and
operating results could be increasingly affected by changes in
exchange rates. Our international sales and marketing operations
incur expense that is denominated in foreign currencies. This
expense could be materially affected by currency fluctuations.
Our exposures are to fluctuations in exchange rates for the
United States dollar versus the Euro. Changes in currency
exchange rates could adversely affect our consolidated operating
results or financial position. Additionally, our international
sales and marketing operations maintain cash balances
denominated in foreign currencies. In order to decrease the
inherent risk associated with translation of foreign cash
balances into our reporting currency, we have not maintained
excess cash balances in foreign currencies. We have not hedged
our exposure to changes in foreign currency exchange rates
because expenses in foreign currencies have been insignificant
to date, and exchange rate fluctuations have had little impact
on our operating results and cash flows.
Interest
Rate Risk
We had cash and cash equivalents totaling $79.3 million,
$240,000 and $42,000 at December 31, 2008, 2007 and 2006,
respectively. These amounts were invested primarily in money
market funds. The unrestricted cash and cash equivalents are
held for working capital purposes. We do not enter into
investments for trading or speculative purposes. We believe that
we do not have any material exposure to changes in the fair
value as a result of changes in interest rates due to the short
term nature of our cash equivalents and short-term investments.
Declines in interest rates, however, would reduce future
investment income.
Concentration
of Credit Rate Risk
The market risk inherent in our financial instruments and in our
financial position represents the potential loss arising from
disruptions caused by recent financial market conditions.
Currently, our cash and cash equivalents are primarily deposited
in a money market fund backed by U.S. Treasury securities;
however, substantially all of our cash and cash equivalents are
in excess of federally insured limits at a very limited number
of financial institutions. This represents a high concentration
of credit risk.
37
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
Energy Recovery, Inc.
We have audited the accompanying consolidated balance sheets of
Energy Recovery, Inc. as of December 31, 2008 and 2007 and
the related consolidated statements of income,
stockholders equity and comprehensive income, and cash
flows for each of the three years in the period ended
December 31, 2008. In connection with our audits of the
financial statements, we have also audited the financial
statement schedule (schedule) listed in
Item 15(a)(2). These financial statements and schedule are
the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements and schedule, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements
and schedule. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Energy Recovery, Inc. at December 31, 2008 and
2007, and the results of its operations and its cash flows for
each of the three years in the period ended December 31,
2008, in conformity with accounting principles generally
accepted in the United States of America.
Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ BDO Seidman, LLP
San Jose, California
March 26, 2009
38
ENERGY
RECOVERY, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
79,287
|
|
|
$
|
240
|
|
Restricted cash
|
|
|
246
|
|
|
|
366
|
|
Accounts receivable, net of allowance for doubtful accounts of
$59 and $121 at December 31, 2008 and 2007, respectively
|
|
|
20,615
|
|
|
|
13,772
|
|
Unbilled receivables, current
|
|
|
4,948
|
|
|
|
1,733
|
|
Notes receivable from stockholders
|
|
|
|
|
|
|
20
|
|
Inventories
|
|
|
8,493
|
|
|
|
4,791
|
|
Deferred tax assets, net
|
|
|
1,755
|
|
|
|
1,052
|
|
Prepaid expenses and other current assets
|
|
|
984
|
|
|
|
369
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
116,328
|
|
|
|
22,343
|
|
Unbilled receivables, non-current
|
|
|
1,929
|
|
|
|
2,457
|
|
Restricted cash, non-current
|
|
|
19
|
|
|
|
1,221
|
|
Property and equipment, net
|
|
|
1,845
|
|
|
|
1,671
|
|
Intangible assets, net
|
|
|
321
|
|
|
|
345
|
|
Deferred tax assets, non-current, net
|
|
|
119
|
|
|
|
148
|
|
Other assets, non-current
|
|
|
51
|
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
120,612
|
|
|
$
|
28,227
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,270
|
|
|
$
|
1,697
|
|
Accrued expenses and other current liabilities
|
|
|
4,787
|
|
|
|
1,868
|
|
Liability for early exercise of stock options
|
|
|
|
|
|
|
20
|
|
Income taxes payable
|
|
|
1,657
|
|
|
|
1,154
|
|
Accrued warranty reserve
|
|
|
270
|
|
|
|
868
|
|
Deferred revenue
|
|
|
4,000
|
|
|
|
1,729
|
|
Current portion of long-term debt
|
|
|
172
|
|
|
|
172
|
|
Current portion of capital lease obligations
|
|
|
37
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
13,193
|
|
|
|
7,546
|
|
Long-term debt
|
|
|
385
|
|
|
|
557
|
|
Capital lease obligations, non-current
|
|
|
27
|
|
|
|
63
|
|
Other non-current liabilities
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
13,613
|
|
|
|
8,166
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 200,000,000 shares
authorized; 50,015,718 and 39,777,446 shares issued and
outstanding at December 31, 2008 and 2007, respectively
|
|
|
50
|
|
|
|
40
|
|
Additional paid-in capital
|
|
|
98,527
|
|
|
|
20,762
|
|
Notes receivable from stockholders
|
|
|
(296
|
)
|
|
|
(835
|
)
|
Accumulated other comprehensive loss
|
|
|
(44
|
)
|
|
|
(5
|
)
|
Retained earnings
|
|
|
8,762
|
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
106,999
|
|
|
|
20,061
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
120,612
|
|
|
$
|
28,227
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
39
ENERGY
RECOVERY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Net revenue
|
|
$
|
52,119
|
|
|
$
|
35,414
|
|
|
$
|
20,058
|
|
Cost of revenue
|
|
|
18,933
|
|
|
|
14,852
|
|
|
|
8,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
33,186
|
|
|
|
20,562
|
|
|
|
11,927
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
11,321
|
|
|
|
4,299
|
|
|
|
3,372
|
|
Sales and marketing
|
|
|
6,549
|
|
|
|
5,230
|
|
|
|
3,648
|
|
Research and development
|
|
|
2,415
|
|
|
|
1,705
|
|
|
|
1,267
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
20,285
|
|
|
|
11,234
|
|
|
|
8,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
12,901
|
|
|
|
9,328
|
|
|
|
3,640
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(79
|
)
|
|
|
(105
|
)
|
|
|
(77
|
)
|
Interest and other income
|
|
|
873
|
|
|
|
517
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before provision for income taxes
|
|
|
13,695
|
|
|
|
9,740
|
|
|
|
3,621
|
|
Provision for income taxes
|
|
|
5,032
|
|
|
|
3,947
|
|
|
|
1,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
8,663
|
|
|
$
|
5,793
|
|
|
$
|
2,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
$
|
0.06
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
Number of shares used in per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
44,848
|
|
|
|
39,060
|
|
|
|
38,018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
47,392
|
|
|
|
41,433
|
|
|
|
40,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
40
ENERGY
RECOVERY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
Years Ended December 31, 2008, 2007 and 2006
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
|
Accumulated
|
|
|
Retained
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Receivable
|
|
|
Other
|
|
|
Earnings
|
|
|
Total
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
from
|
|
|
Comprehensive
|
|
|
(Accumulated
|
|
|
Stockholders
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Stockholders
|
|
|
Income
|
|
|
Deficit)
|
|
|
Equity
|
|
|
|
|
|
Balance at December 31, 2005
|
|
|
37,769
|
|
|
$
|
38
|
|
|
$
|
13,313
|
|
|
$
|
(573
|
)
|
|
$
|
|
|
|
$
|
(8,076
|
)
|
|
$
|
4,702
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,382
|
|
|
|
2,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
453
|
|
|
|
|
|
|
|
142
|
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Interest on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,061
|
|
|
|
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
38,222
|
|
|
|
38
|
|
|
|
14,519
|
|
|
|
(736
|
)
|
|
|
|
|
|
|
(5,694
|
)
|
|
|
8,127
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,793
|
|
|
|
5,793
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,788
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
1,555
|
|
|
|
2
|
|
|
|
5,207
|
|
|
|
(91
|
)
|
|
|
|
|
|
|
|
|
|
|
5,118
|
|
|
|
|
|
Interest on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
|
(31
|
)
|
|
|
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
Employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
1,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,008
|
|
|
|
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
39,777
|
|
|
|
40
|
|
|
|
20,762
|
|
|
|
(835
|
)
|
|
|
(5
|
)
|
|
|
99
|
|
|
|
20,061
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,663
|
|
|
|
8,663
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
|
|
|
10,238
|
|
|
|
10
|
|
|
|
76,717
|
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
76,707
|
|
|
|
|
|
Interest on notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
|
|
Repayment of notes receivable from stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
574
|
|
|
|
|
|
Stock option income tax benefit
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
|
|
|
|
|
|
Employee stock-based compensation
|
|
|
1
|
|
|
|
|
|
|
|
936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
936
|
|
|
|
|
|
Non-employee stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008
|
|
|
50,016
|
|
|
$
|
50
|
|
|
$
|
98,527
|
|
|
$
|
(296
|
)
|
|
$
|
(44
|
)
|
|
$
|
8,762
|
|
|
$
|
106,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
41
ENERGY
RECOVERY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,663
|
|
|
$
|
5,793
|
|
|
$
|
2,382
|
|
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
522
|
|
|
|
323
|
|
|
|
231
|
|
Impairment of intangible assets
|
|
|
|
|
|
|
31
|
|
|
|
|
|
Interest accrued on notes receivables from stockholders
|
|
|
(15
|
)
|
|
|
(31
|
)
|
|
|
(31
|
)
|
Stock-based compensation
|
|
|
1,034
|
|
|
|
1, 036
|
|
|
|
1,064
|
|
Loss (gain) on foreign currency transactions
|
|
|
373
|
|
|
|
(351
|
)
|
|
|
4
|
|
Provision for doubtful accounts
|
|
|
7
|
|
|
|
(105
|
)
|
|
|
80
|
|
Provision for warranty claims
|
|
|
(495
|
)
|
|
|
850
|
|
|
|
61
|
|
Provision for excess or obsolete inventory
|
|
|
26
|
|
|
|
47
|
|
|
|
30
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,622
|
)
|
|
|
(3,554
|
)
|
|
|
(5,911
|
)
|
Unbilled receivables
|
|
|
(2,687
|
)
|
|
|
(2,189
|
)
|
|
|
(1,719
|
)
|
Inventories
|
|
|
(3,728
|
)
|
|
|
(1,950
|
)
|
|
|
(960
|
)
|
Deferred tax assets, net
|
|
|
(674
|
)
|
|
|
(341
|
)
|
|
|
(859
|
)
|
Prepaid and other assets
|
|
|
(624
|
)
|
|
|
(49
|
)
|
|
|
(135
|
)
|
Accounts payable
|
|
|
573
|
|
|
|
583
|
|
|
|
270
|
|
Accrued expenses and other liabilities
|
|
|
3,223
|
|
|
|
214
|
|
|
|
1,002
|
|
Income taxes payable
|
|
|
517
|
|
|
|
(243
|
)
|
|
|
1,334
|
|
Deferred revenue
|
|
|
2,271
|
|
|
|
(2,893
|
)
|
|
|
3,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,364
|
|
|
|
(2,829
|
)
|
|
|
822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(667
|
)
|
|
|
(918
|
)
|
|
|
(328
|
)
|
Restricted cash
|
|
|
1,322
|
|
|
|
(1,043
|
)
|
|
|
(109
|
)
|
Other
|
|
|
(5
|
)
|
|
|
(84
|
)
|
|
|
(74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
650
|
|
|
|
(2,045
|
)
|
|
|
(511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
|
|
|
639
|
|
|
|
118
|
|
Repayment of long-term debt
|
|
|
(172
|
)
|
|
|
(98
|
)
|
|
|
(164
|
)
|
Repayment of revolving note, net
|
|
|
|
|
|
|
(438
|
)
|
|
|
(563
|
)
|
Repayment of capital lease obligation
|
|
|
(37
|
)
|
|
|
(38
|
)
|
|
|
(60
|
)
|
Net proceeds from issuance of common stock (see Note 9)
|
|
|
76,707
|
|
|
|
5,118
|
|
|
|
5
|
|
Repayment of notes receivable from stockholders
|
|
|
574
|
|
|
|
23
|
|
|
|
5
|
|
Other short term financing activities
|
|
|
|
|
|
|
(129
|
)
|
|
|
129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
77,072
|
|
|
|
5,077
|
|
|
|
(530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate differences on cash and cash
equivalents
|
|
|
(39
|
)
|
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
79,047
|
|
|
|
198
|
|
|
|
(219
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
240
|
|
|
|
42
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
79,287
|
|
|
$
|
240
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
75
|
|
|
$
|
97
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes
|
|
$
|
5,144
|
|
|
$
|
4,555
|
|
|
$
|
764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash transactions
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock in exchange for notes receivable from
stockholders
|
|
$
|
20
|
|
|
$
|
91
|
|
|
$
|
137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment purchased under capital leases
|
|
$
|
|
|
|
$
|
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying Notes to Consolidated Financial Statements
42
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description
of Business
Energy Recovery, Inc. (the Company or
ERI) was established in 1992, and is a leading
global developer and manufacturer of highly efficient energy
recovery devices utilized in the water desalination industry.
The Company operates primarily in the sea water reverse osmosis
(SWRO) segment of the industry, which uses pressure
to drive sea water through filtering membranes to produce fresh
water. The Companys primary energy recovery device is the
PX Pressure
Exchanger®
(PX device), which helps optimize the energy
intensive SWRO process by reducing energy consumption. Products
are manufactured in the United States of America
(U.S.) at ERIs headquarters located in
San Leandro, California, and shipped from this location to
specified customer locations worldwide. The Company has direct
sales offices and technical support centers in Madrid, Dubai,
Shanghai and Fort Lauderdale and the research and
development center is located in San Leandro, California.
The Company was incorporated in Virginia in April 1992 and
reincorporated in Delaware in March 2001. The Company
incorporated its wholly owned subsidiaries, Osmotic Power, Inc.,
Energy Recovery, Inc. International and Energy Recovery Iberia,
S.L., in September 2005, July 2006 and September 2006,
respectively.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Basis
of Presentation
The consolidated financial statements include the accounts of
the Company and its foreign wholly owned subsidiaries. All
significant intercompany accounts and transactions have been
eliminated in consolidation.
Certain prior period balances have been reclassified to conform
to the current period presentation. Specifically, we
reclassified $923,000 of contra accounts receivable and $318,000
of customer deposits to deferred revenue as of December 31,
2007, related to advance payments. The Company believes that
reclassifying these amounts presents a more useful
representation of accounts receivable, unearned revenue and
deferred liabilities.
Use of
Estimates
The preparation of consolidated financial statements in
conformity with U.S. generally accepted accounting
principles (U.S. GAAP) requires management to
make judgments, estimates and assumptions that affect the
amounts reported in the consolidated financial statements and
accompanying notes. The Companys most significant
estimates and judgments involve the determination of revenue
recognition, allowance for doubtful accounts, allowance for
product warranty, valuation of the Companys stock and
stock-based compensation, reserve for excess and obsolete
inventory, deferred taxes and valuation allowances on deferred
tax assets. Actual results could materially differ from those
estimates.
Cash
and Cash Equivalents
The Company considers all highly liquid investments with an
original or remaining maturity of three months or less at the
time of purchase to be cash equivalents. Cash equivalents are
stated at cost, which approximates fair value. Our cash and cash
equivalents are maintained in demand deposit accounts with large
financial institutions and invested in institutional money
market funds. The Company frequently monitors the
creditworthiness of the financial institutions and institutional
money market funds in which it invests its surplus funds. The
Company has not experienced any credit losses from its cash
investments.
Restricted
Cash
The Company has irrevocable standby letters of credit with two
financial institutions securing performance and warranty
commitments under contracts with customers and lessors. These
standby letters of credit
43
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
are collateralized by either a line of credit (see
Note 4) or restricted cash. At December 31, 2008
and 2007, the amount of irrevocable standby letters of credit
collateralized by restricted cash was $265,000 and $1,587,000,
respectively. The company has deposited a corresponding amount
into money market accounts and certificates of deposit.
Allowances
of Doubtful Accounts
The Company records a provision for doubtful accounts based on
its historical experience and a detailed assessment of the
collectability of its accounts receivable. In estimating the
allowance for doubtful accounts, the Companys management
considers, among other factors, (1) the aging of the
accounts receivable, (2) the Companys historical
write-offs, (3) the credit worthiness of each customer and
(4) general economic conditions.
Inventories
Inventories are stated at the lower of cost (using the weighted
average cost method) or market. The Company calculates inventory
reserves for excess and obsolete inventories based on current
inventory levels, expected useful life and estimated future
demand of the products and spare parts. Cost of inventory is
determined in accordance with Statement of Financial Accounting
Standards (SFAS) No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4.
Property
and Equipment
Property and equipment are stated at cost and depreciated over
the estimated useful lives of the assets (generally three to
seven years) using the straight-line method. A portion of
equipment for the Companys manufacturing facility is
acquired under capital lease obligations. These assets are
amortized over periods consistent with depreciation of owned
assets of similar types, generally five years. Lease
improvements represent the remodeling expenses for the leased
office space and are depreciated over the shorter of either the
estimated useful lives or the term of the lease using the
straight-line method. Software purchased for internal use
consists primarily of amounts paid for perpetual licenses to
third party software providers and are depreciated over the
estimated useful lives, generally three to five years.
SFAS No. 143, Accounting for Asset Retirement
Obligations and Interpretation No. 47, Accounting
for Conditional Asset Retirement Obligations, an
interpretation of SFAS 143, requires the recognition of a
liability for the fair value of a legally required conditional
asset retirement obligation when incurred, if the
liabilitys fair value can be reasonably estimated.
Management reviewed the Companys facility lease and
concluded that the cost, if any of potential physical
reinstatement obligations is not reasonably determinable, and as
such, no asset retirement obligation was recorded in the
financial statements for the years presented.
Maintenance and repairs are charged directly to expense as
incurred, whereas improvements and renewals are generally
capitalized in their respective property accounts. When an item
is retired or otherwise disposed of, the cost and applicable
accumulated depreciation are removed and the resulting gain or
loss is recognized in the results of operations.
Intangible
Assets
Intangible assets represent patents owned by the Company and are
recorded at cost (i.e., the cost of obtaining the patent) and
are amortized on a straight-line basis over their expected
useful life of 16 to 20 years.
44
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Impairment
of Long-Lived Assets
The Company accounts for its long-lived assets, including
property and equipment and intangibles, in accordance with
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The Company evaluates its
long-lived assets for indicators of possible impairment whenever
events or changes in business circumstances indicate that the
carrying amount of the assets may not be fully recoverable. An
impairment loss would be recognized when estimated undiscounted
future cash flows expected to result from the use of an asset
and its eventual disposition are less than its carrying amount.
During 2007, the Company determined that a patent was impaired
as a result of the development of a new patent which effectively
superseded and replaced an existing patent; accordingly, the
Company recorded an impairment reserve of $31,000 for the year
ended December 31, 2007, and this amount was included in
research and development expense in the consolidated statement
of income. No impairment expense was recorded for the years
ended December 31, 2008 and 2006.
Revenue
Recognition
The Company recognizes revenue in accordance with
U.S. Securities and Exchange Commission (SEC)
Staff Accounting Bulletin (SAB) No. 104,
Revenue Recognition (SAB 104). The
Company recognizes revenue when the earnings process is
complete, as evidenced by an agreement with the customer,
transfer of title occurs, fixed pricing is determinable and
collection is reasonably assured. Transfer of title typically
occurs upon shipment of the equipment pursuant to a written
purchase order or contract. The portion of the sales agreement
related to the field services and training for commissioning of
a desalination plant is deferred per guidance of Emerging Issues
Task Force (EITF)
No. 00-21,
Revenue Arrangements with Multiple Deliverables, by
applying the residual value method. Under this method, revenue
allocated to undelivered elements is based on vendor objective
evidence of fair value of such undelivered elements, and the
residual revenue is allocated to the delivered elements,
assuming that the delivered elements have stand-alone value.
Vendor objective evidence of fair value for such undelivered
elements is based upon the price the Company charges for such
product or service when it is sold separately. The Company may
modify its pricing in the future, which could result in changes
to our vendor objective evidence of fair value for such
undelivered elements. The services element of the Companys
contracts represents an incidental portion of the total contract
price.
Under the Companys revenue recognition policy, evidence of
an arrangement has been met when it has an executed purchase
order or a stand-alone contract. Typically, smaller projects
utilize purchase orders that conform to standard terms and
conditions that require the customer to remit payment generally
within 30 to 90 days from product delivery. In some cases,
if credit worthiness cannot be determined, prepayment is
required from the smaller customers.
For large projects, stand-alone contracts are utilized. For
these contracts, consistent with industry practice, the
customers typically require their suppliers, including the
Company, to accept contractual holdback provisions whereby the
final amounts due under the sales contract are remitted over
extended periods of time. These retention payments typically
range between 10% and 20%, and in some instances up to 30%, of
the total contract amount and are due and payable when the
customer is satisfied that certain specified product performance
criteria have been met upon commissioning of the desalinization
plant, which in the case of the Companys PX device may be
12 months to 24 months from the date of product
delivery as described further below.
The specified product performance criteria for the
Companys PX device generally pertains to the ability of
the Companys product to meet its published performance
specifications and warranty provisions, which the Companys
products have demonstrated on a consistent basis. This factor,
combined with the Companys historical performance metrics
measured over the past 10 years, provides management with a
reasonable basis to conclude that its PX device will perform
satisfactorily upon commissioning of the plant. To ensure this
45
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
successful product performance, the Company provides service,
consisting principally of supervision of customer personnel, and
training to the customers during the commissioning of the plant.
The installation of the PX device is relatively simple, requires
no customization and is performed by the customer under the
supervision of Company personnel. The Company defers the value
of the service and training component of the contract and
recognizes such revenue as services are rendered. Based on these
factors, management has concluded that delivery and performance
have been completed when the product has been delivered (title
transfers) to the customer.
The Company performs an evaluation of credit worthiness on an
individual contract basis, to assess whether collectability is
reasonably assured. As part of this evaluation, management
considers many factors about the individual customer, including
the underlying financial strength of the customer
and/or
partnership consortium and managements prior history or
industry specific knowledge about the customer and its supplier
relationships. To date, the Company has been able to conclude
that collectability was reasonably assured on its sales
contracts at the time the product was delivered and title has
transferred; however, to the extent that management concludes
that it is unable to determine that collectability is reasonably
assured at the time of product delivery, the Company will defer
all or a portion of the contract amount based on the specific
facts and circumstances of the contract and the customer.
Under the stand-alone contracts, the usual payment arrangements
are summarized as follows:
|
|
|
|
|
an advance payment, typically 10% to 20% of the total contract
amount, is due upon execution of the contract;
|
|
|
|
a payment upon delivery of the product, typically in the range
of 50% to 70% of the total contract amount, is due on average
between 90 and 150 days from product delivery, and in some
cases up to 180 days; and
|
|
|
|
a retention payment, typically in the range of 10% to 20%, and
in some cases up to 30%, of the total contract amount is due
subsequent to product delivery as described further below.
|
Under the terms of the retention payment component, the Company
is generally required to issue to the customer a product
performance guarantee that takes the form of an irrevocable
standby letter of credit, which is issued to the customer
approximately 12 to 24 months after the product delivery
date. The letter of credit is either collateralized by
restricted cash on deposit with the Companys financial
institution (see Restricted Cash under Summary of Significant
Accounting Policies) or funds available through a credit
facility (see Note 4). The letter of credit remains in
place for the performance period as specified in the contract,
which is generally 12 to 36 months and, in some cases, up
to 65 months from issuance. The performance period
generally runs concurrent with the Companys standard
product warranty period. Once the letter of credit has been put
in place, the Company invoices the customer for this final
retention payment under the sales contract. During the time
between the product delivery and the issuance of the letter of
credit, the amount of the final retention payment is classified
on the balance sheet as an unbilled receivable, of which a
portion may be classified as long term to the extent that the
billable period extends beyond one year. Once the letter of
credit is issued, the Company invoices the customer and
reclassifies the retention amount from unbilled receivable to
accounts receivable where it remains until payment, typically 90
to 150 days after invoicing, and in some cases up to
180 days. (See Note 3 Balance Sheet
Information: Unbilled Receivables).
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 returns have not been significant.
Reserves are established for possible product returns related to
the advance replacement of products pending the determination of
a warranty claim.
Shipping and handling charges billed to customers are included
in sales. The cost of shipping to customers is included in cost
of revenue.
46
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The Company sells its product to resellers and engineering and
construction firms which are not subject to sales tax.
Accordingly, the adoption of EITF Issue
No. 06-3,
How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That is, Gross versus Net Presentation), does not
have an impact on the Companys consolidated financial
statements.
Warranty
Costs
The Company sells products with a limited warranty for a period
ranging from one to five years. The Company accrues for warranty
costs based on estimated product failure rates, historical
activity and expectations of future costs. The Company
periodically evaluates and adjusts the warranty costs to the
extent actual warranty costs vary from the original estimates.
The Company may offer extended warranties on an exception basis
and these are accounted for in accordance with Financial
Accounting Standards Board (FASB) Technical
Bulletin 90-1,
Accounting for Separately Priced Extended Warranty and
Product Maintenance Contracts for Sales of Extended
Warranties.
Income
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109, Accounting for Income
Taxes (SFAS 109), issued by FASB.
SFAS 109 requires an entity to recognize deferred tax
assets and liabilities. Deferred tax assets and liabilities are
recognized for the future tax consequence attributable to the
difference between the tax bases of assets and liabilities and
their reported amounts in the financial statements. Deferred tax
assets and liabilities are measured using the enacted tax rate
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that included
the enactment date. Valuation allowances are provided if, based
upon the available evidence, management believes it is more
likely than not that some or all of the deferred assets will not
be realized or the use of prior years net operating losses
may be limited.
On July 13, 2006, the FASB issued Interpretation
No. 48, Accounting for Uncertainty in Income
Taxes An Interpretation of FASB Statement
No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in any entitys financial statements in
accordance with SFAS 109 and prescribes a recognition
threshold and measurement attributes for financial statement
disclosure of tax positions taken or expected to be taken on a
tax return. Under FIN 48, the impact of an uncertain income
tax position on the income tax return must be recognized at the
largest amount that is more likely than not to be sustained upon
audit by the relevant taxing authority. An uncertain income tax
position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally, FIN 48
provides guidance on
de-recognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company adopted the
provisions of FIN 48 on January 1, 2007. Measurement
under FIN 48 is based on judgment regarding the largest
amount that is greater than 50% likely of being realized upon
ultimate settlement with a taxing authority. The total amount of
unrecognized tax benefits as of the date of adoption was
immaterial. As a result of the implementation of FIN 48,
the Company recognized no increase in the liability for
unrecognized tax benefits.
The Company adopted the accounting policy that interest
recognized in accordance with Paragraph 15 of FIN 48
and penalty recognized in accordance with Paragraph 16 of
FIN 48 are classified as part of its income taxes. The
amounts of interest and penalty recognized in the statement of
income and statement of financial position for the years ended
December 31, 2008 and 2007 were insignificant.
The Companys operations are subject to income and
transaction taxes in the U.S. and in foreign jurisdictions.
Significant estimates and judgments are required in determining
the Companys worldwide provision for income taxes. Some of
these estimates are based on interpretations of existing tax
laws or regulations. The ultimate amount of tax liability may be
uncertain as a result.
47
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Stock-Based
Compensation Employees
Prior to January 1, 2006, the Company accounted for
stock-based compensation to employees and members of the
Companys board of directors under the recognition and
measurement principles of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees
(APB 25), and related interpretations. Under APB
25, compensation expense for stock-based payment awards is based
on the difference, if any, on the date of the grant, between the
value of the Companys stock and the exercise price and is
recognized over the vesting period of the awards. Accordingly,
prior to January 1, 2006, no stock-based compensation
expense was recognized in the Companys statements of
income for stock options granted to employees and directors that
had an exercise price equal to the value of the Companys
stock on the date of grant. The Company also followed the
disclosure requirements of SFAS No. 123, Accounting
for Stock-Based Compensation, amended by
SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure and used the minimum
value method for pro-forma disclosures based on the disclosure
provisions that was available for non public
companies.
On January 1, 2006, the Company adopted
SFAS No. 123 (revised 2004), Share-Based Payment
(SFAS 123R), which requires the measurement
and recognition of compensation expense in the statement of
income for all awards made to employees and members of the
Companys board of directors using estimated fair values.
Under the provisions of SFAS 123R, share-based compensation
expense is measured at the grant date, based on the fair value
of the award, and is recognized as an expense over the
employees requisite service period, generally the vesting
period of the awards. Under SFAS 123R, non-public companies
that used the minimum value method under disclosure provisions
of SFAS 148 shall apply the provisions of SFAS 123R
prospectively to new
and/or
modified awards at the adoption date, and shall continue to
account for any portion of awards outstanding at the adoption
date, using the accounting principles originally applied to
those awards. Accordingly, for awards granted prior to
January 1, 2006 for which the requisite service period had
not been performed as of December 31, 2005, the Company
continued to recognize compensation expense on the remaining
unvested awards under the intrinsic-value method of APB 25. In
accordance with the requirements of SFAS 123R for
non-public companies, the Company has not provided pro-forma
disclosures for the year ended December 31, 2005 since the
Company used the minimum value method for pro-forma disclosures
for awards granted prior to January 1, 2006. For all awards
granted or modified after December 31, 2005, the Company
began recognizing compensation expense of the fair value, less
expected forfeitures, on a straight-line basis over the vesting
period.
To determine the inputs for the Black-Scholes options pricing
model, the Company is required to develop several assumptions,
which are highly subjective. These assumptions include:
|
|
|
|
|
the length of its options lives, which is based on
anticipated future exercises;
|
|
|
|
its common stocks volatility;
|
|
|
|
the number of shares of common stock pursuant to which options
which will ultimately be forfeited;
|
|
|
|
the risk-free rate of return; and
|
|
|
|
future dividends.
|
48
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The estimated grant date fair values of the employee stock
options were calculated using the Black-Scholes options pricing
model, based on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected term
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
5 years
|
|
Expected volatility
|
|
|
48%
|
|
|
|
50%
|
|
|
|
50%
|
|
Risk-free interest rate
|
|
|
1.55 - 3.41%
|
|
|
|
3.41 - 4.92%
|
|
|
|
4.45 - 5.10%
|
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0%
|
|
Expected Term. Under the Companys option plans, the
expected term of options granted is determined using the
weighted average period during which the stock options are
expected to remain outstanding and is based on the options
vesting term, contractual terms and disclosure information from
similar publicly traded companies to develop reasonable
expectations about future exercise patterns and post-vesting
employment termination behavior.
Expected Volatility. Since the Company is a newly public
entity with limited historical data regarding the volatility of
its common stock price, the expected volatility used is based on
volatility of a representative industry peer group. In
evaluating similarity, the Company considered factors such as
industry, stage of life cycle and size.
Risk-Free Interest Rate. The risk-free rate is based on
U.S. Treasury issues with remaining terms similar to the
expected term on the options.
Dividend Yield. The Company has never declared or paid
any cash dividends and does not plan to pay cash dividends in
the foreseeable future, and, therefore, used an expected
dividend yield of zero in the valuation model.
Forfeitures. SFAS No. 123R also requires the
Company to estimate forfeitures at the time of grant, and revise
those estimates in subsequent periods if actual forfeitures
differ from those estimates. The Company uses historical data to
estimate pre-vesting option forfeitures and records 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
Companys 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.
The absence of an active market for its common stock prior to
July 2008 required management and the board of directors to
estimate the fair value of its common stock for purposes of
granting options and for determining stock-based compensation
expense for options granted prior to July 2008. In response to
these requirements, management and the board of directors
estimated the fair market value common stock based on factors
such as the price of the most recent common stock sales to
investors, the valuations of comparable companies, the status of
the Companys development and sales efforts, its cash and
working capital amounts, revenue growth, and additional
objective and subjective factors relating to its business on an
annual basis.
49
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Stock-based compensation expense related to awards granted and
or modified to employees was allocated as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Cost of revenue
|
|
$
|
103
|
|
|
$
|
117
|
|
|
$
|
143
|
|
General and administrative
|
|
|
419
|
|
|
|
383
|
|
|
|
425
|
|
Sales and marketing
|
|
|
274
|
|
|
|
349
|
|
|
|
310
|
|
Research and development
|
|
|
140
|
|
|
|
159
|
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
936
|
|
|
$
|
1,008
|
|
|
$
|
1,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To calculate the excess tax benefits available as of the date of
adoption for use in offsetting future tax shortfalls, the
Company elected the short-form method in accordance
with FASB Staff Position
FAS No. 123R-3,
Transition Election Related to Accounting for the Tax Effects
of Share-Based Payment Awards.
Stock-Based
Compensation Non-Employees
The Company accounts for awards granted to non-employees other
than members of the Companys board of directors in
accordance with SFAS 123 and the EITF Abstract
No. 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling
Goods or Services
(EITF 96-18),
which require such awards to be recorded at their fair value
on the measurement date. The measurement of stock-based
compensation is subject to periodic adjustment as the underlying
awards vest. The Company amortizes compensation expense related
to non-employee awards in accordance with FASB Interpretation
No. 28, Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans.
The fair value of stock options issued to consultants was
calculated using the Black-Scholes options pricing model, based
on the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Expected term
|
|
|
1-10 years
|
|
|
|
1-10 years
|
|
|
|
10 years
|
|
Expected volatility
|
|
|
48%
|
|
|
|
50%
|
|
|
|
50
|
%
|
Risk-free interest rate
|
|
|
1.55% - 2.46%
|
|
|
|
3.45% - 4.92%
|
|
|
|
4.70
|
%
|
Dividend yield
|
|
|
0%
|
|
|
|
0%
|
|
|
|
0
|
%
|
Stock-based compensation expense related to awards granted
and/or
modified to non-employees was allocated as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
General and administrative
|
|
$
|
93
|
|
|
$
|
5
|
|
|
$
|
3
|
|
Sales and marketing
|
|
|
5
|
|
|
|
23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
98
|
|
|
$
|
28
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
The Companys reporting currency is the U.S. dollar,
while the functional currencies of the Companys foreign
subsidiaries are their respective local currencies. The asset
and liability accounts of the Companys foreign
50
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
subsidiaries are translated from their local currencies at the
rates in effect at the balance sheet date. Revenue and expenses
are translated at average rates of exchange prevailing during
the period. Translation adjustments are accumulated and reported
as a component of stockholders equity. Foreign currency
transaction gains and losses which result from transactions with
customers that are denominated in a currency other than the
entitys functional currency are recorded in other income
and expense in the consolidated statements of income.
Advertising
Expense
Advertising expense is charged to operations in the year in
which it is incurred. Total advertising expense amounted to
$103,000, $118,000, and $68,000 for the years ended
December 31, 2008, 2007, and 2006, respectively.
Comprehensive
Income
In accordance with SFAS No. 130, Reporting
Comprehensive Income, the Company is required to display
comprehensive income and its components as part of the
Companys full set of consolidated financial statements.
Comprehensive income is composed of net income and other
comprehensive income, including foreign currency translation
adjustments.
Fair
Value of Financial Instruments
The carrying amount of cash, cash equivalents and restricted
cash are reasonable estimates of their fair value because of the
short maturity of these items.
The carrying amount of long-term debt reasonably approximates
its fair value as the majority of the borrowings are at interest
rates that fluctuate with current market conditions.
The Company has determined that it is not practicable to
estimate the fair value of its non-current unbilled receivables
as there is no ready market for such instruments. See
Note 3 Balance Sheet Information: Unbilled
Receivables for additional information.
Earnings
Per Share
In accordance with SFAS No. 128, Earnings per Share,
the following table sets forth the computation of basic and
diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,663
|
|
|
$
|
5,793
|
|
|
$
|
2,382
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
44,848
|
|
|
|
39,060
|
|
|
|
38,018
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested shares
|
|
|
5
|
|
|
|
4
|
|
|
|
|
|
Stock options
|
|
|
635
|
|
|
|
438
|
|
|
|
318
|
|
Warrants
|
|
|
1,904
|
|
|
|
1,931
|
|
|
|
1,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares for purpose of calculating diluted net income per
share
|
|
|
47,392
|
|
|
|
41,433
|
|
|
|
40,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.19
|
|
|
$
|
0.15
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.18
|
|
|
$
|
0.14
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following potential common shares were excluded from the
computation of diluted net income per share because their effect
would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
December 31,
|
|
|
2008
|
|
2007
|
|
2006
|
|
Nonvested shares
|
|
|
|
|
|
|
78
|
|
|
|
481
|
|
Stock options
|
|
|
669
|
|
|
|
283
|
|
|
|
38
|
|
Recent
Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for
measuring fair value, and enhances fair value measurement
disclosure. In February 2008, the FASB issued FASB Staff
Position
157-1,
Application of FASB Statement No. 157 to FASB Statement
No. 13 and Other Accounting Pronouncements That Address
Fair Value Measurements for Purposes of Lease Classification or
Measurement under Statement 13
(FSP 157-1)
and
FSP 157-2,
Effective Date of FASB Statement No. 157.
FSP 157-1
amends SFAS 157 to remove certain leasing transactions from
its scope.
FSP 157-2
delays the effective date of SFAS 157 for all non-financial
assets and non-financial liabilities, except for items that are
recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually), until the
beginning of the first quarter of 2009. The measurement and
disclosure requirements related to financial assets and
financial liabilities are effective for the Company beginning in
the first quarter of 2008. The adoption of SFAS 157 for
financial assets and financial liabilities in the first quarter
of 2008 did not have a significant impact on the Companys
consolidated financial statements. The Company is currently
evaluating the impact that SFAS 157 will have on its
consolidated financial statements when it is applied to
non-financial assets and non-financial liabilities beginning in
the first quarter of 2009.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits companies
to choose to measure certain financial instruments and other
items at fair value. The standard requires that unrealized gains
and losses are reported in earnings for items measured using the
fair value option. SFAS 159 is effective for the Company
beginning in the first quarter of 2008. The adoption of
SFAS 159 did not have an impact on the Companys
consolidated financial statements.
In December 2007, the SEC issued SAB 110 to amend the
SECs views discussed in SAB 107 regarding the use of
the simplified method in developing an estimate of expected life
of share options in accordance with SFAS 123R. SAB 110
is effective for the Company beginning in the first quarter of
2008. As of December 31, 2007, the Company did not use the
simplified method and the adoption of SAB 107, as amended
by SAB 110, did not have an impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141
(revised 2007), Business Combinations
(SFAS 141(R)). SFAS 141(R) will change
how business acquisitions are accounted for. SFAS 141(R) is
effective for fiscal years beginning on or after
December 15, 2008. The adoption of SFAS 141(R) is not
expected to have a material impact on the Companys
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements an amendment of Accounting Research
Bulletin No. 51. SFAS No. 160
establishes accounting and reporting standards for ownership
interests in subsidiaries held by parties other than the parent,
the amount of consolidated net income attributable to the parent
and to the noncontrolling interest, changes in a parents
ownership interest, and the valuation of retained noncontrolling
equity investments when a subsidiary is deconsolidated.
SFAS No. 160 also establishes disclosure requirements
that clearly identify and distinguish between the interests of
the parent and the interests of the noncontrolling owners.
SFAS No. 160 is effective
52
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
for fiscal years beginning after December 15, 2008. The
adoption of SFAS No. 160 is not expected to have a
material impact on the Companys consolidated financial
statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133
(SFAS 161). SFAS 161 requires the Company to
provide greater transparency about how and why it uses
derivative instruments, how the instruments and related hedged
items are accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging
Activities (SFAS 133), and how the instruments
and related hedged items affect the Companys financial
position, results of operations, and cash flows. SFAS 161
became effective on January 1, 2009. The adoption of
SFAS 161 is not expected to have a material impact on the
Companys consolidated financial statements.
In April 2008, the FASB has issued FASB Staff Position
142-3
(FSP 142-3),
Determination of the Useful Life of Intangible Assets.
FSP 142-3
amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Asset. The
intent of
FSP 142-3
is to improve the consistency between the useful life of a
recognized intangible asset under FASB Statement No. 142
and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R), and other
U.S. generally accepted accounting principles.
FSP 142-3
is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods
within those fiscal years. The adoption of
FSP 142-3
is not expected to have a material impact on the Companys
consolidated financial statements.
|
|
Note 3.
|
Balance
Sheet Information
|
Accounts
Receivable:
Accounts receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accounts receivable
|
|
$
|
20,674
|
|
|
$
|
13,893
|
|
Less: allowance for doubtful accounts
|
|
|
(59
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20,615
|
|
|
$
|
13,772
|
|
|
|
|
|
|
|
|
|
|
Unbilled
Receivables
The Company has unbilled receivables pertaining to customer
contractual holdback provisions, whereby the Company invoices
the final retention payment(s) due under its sales contracts in
periods generally ranging from 12 to 24 months after the
product has been shipped to the customer and revenue has been
recognized.
Long-term unbilled receivables as of December 31, 2008 and
2007 consisted of unbilled receivables from customers due more
than one year subsequent to period end. The customer holdbacks
represent amounts intended to provide a form of security for the
customer rather than a form of long-term financing; accordingly,
these receivables have not been discounted to present value. At
December 31, 2008, the expected payment schedule for these
accounts was as follows (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
$
|
|
|
2010
|
|
|
1,929
|
|
|
|
|
|
|
|
|
$
|
1,929
|
|
|
|
|
|
|
53
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Inventories
Inventories consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Raw materials
|
|
$
|
2,894
|
|
|
$
|
3,450
|
|
Work in process
|
|
|
139
|
|
|
|
102
|
|
Finished goods
|
|
|
5,460
|
|
|
|
1,239
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,493
|
|
|
$
|
4,791
|
|
|
|
|
|
|
|
|
|
|
Excess and obsolete reserves included in inventory at
December 31, 2008 and 2007 were $128,000 and $102,000,
respectively.
Property
and Equipment
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Machinery and equipment
|
|
$
|
2,434
|
|
|
$
|
2,209
|
|
Office equipment, furniture, and fixtures
|
|
|
772
|
|
|
|
368
|
|
Automobiles
|
|
|
22
|
|
|
|
22
|
|
Software
|
|
|
208
|
|
|
|
166
|
|
Leasehold improvements
|
|
|
466
|
|
|
|
301
|
|
Construction in progress
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,902
|
|
|
|
3,235
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,057
|
)
|
|
|
(1,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,845
|
|
|
$
|
1,671
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense was approximately
$493,000, $304,000, and $212,000 for the years ended
December 31, 2008, 2007, and 2006, respectively. Included
in these amounts was depreciation expense related to equipment
under capital leases of approximately $35,000, $37,000, and
$39,000 for the years ended December 31, 2008, 2007, and
2006, respectively.
Intangible
Assets
Intangible assets consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Patents at cost
|
|
$
|
578
|
|
|
$
|
573
|
|
Less: accumulated amortization
|
|
|
(226
|
)
|
|
|
(197
|
)
|
Less: impairment reserve
|
|
|
(31
|
)
|
|
|
(31
|
)
|
|
|
|
|
|
|
|
|
|
Net carrying amount
|
|
$
|
321
|
|
|
$
|
345
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangibles was approximately $29,000, $19,000
and $19,000 for the years ended December 31, 2008, 2007 and
2006, respectively.
54
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Future estimated amortization expense on intangible assets is as
follows (in thousands):
|
|
|
|
|
|
|
December 31, 2008
|
|
|
2009
|
|
$
|
25
|
|
2010
|
|
|
25
|
|
2011
|
|
|
25
|
|
2012
|
|
|
25
|
|
2013
|
|
|
25
|
|
Thereafter
|
|
|
196
|
|
|
|
|
|
|
|
|
$
|
321
|
|
|
|
|
|
|
The weighted average remaining life at December 31, 2008
and December 31, 2007 was 13.6 and 14.6 years,
respectively.
Accrued
Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Accrued payroll and commission expenses
|
|
$
|
2,929
|
|
|
$
|
1,014
|
|
Accrued collaboration fees
|
|
|
916
|
|
|
|
|
|
Inventory in transit
|
|
|
251
|
|
|
|
393
|
|
Professional fees
|
|
|
193
|
|
|
|
180
|
|
Other accrued expenses and current liabilities
|
|
|
498
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,787
|
|
|
$
|
1,868
|
|
|
|
|
|
|
|
|
|
|
Long-term debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Promissory notes payable
|
|
$
|
557
|
|
|
$
|
729
|
|
Less: current portion
|
|
|
(172
|
)
|
|
|
(172
|
)
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
385
|
|
|
$
|
557
|
|
|
|
|
|
|
|
|
|
|
Future minimum principal payments due under long-term debt
arrangements consist of the following (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
$
|
172
|
|
2010
|
|
|
172
|
|
2011
|
|
|
128
|
|
2012
|
|
|
85
|
|
|
|
|
|
|
|
|
$
|
557
|
|
|
|
|
|
|
55
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Revolving
Notes Payable and Promissory Note Payable
On December 1, 2005, the Company entered into an agreement
with a financial institution for a $2.0 million revolving
note (revolving note) and a $222,000 fixed
rate-installment note (fixed promissory note) with
maturity dates of December 1, 2006, subsequently extended
to March 1, 2007 and December 15, 2010, respectively.
The revolving note bears interest at a base rate or LIBOR-based
rate as elected by the Company. The interest rate was amended on
April 26, 2006 to modify the definition of base rate and
increase the rate to base rate plus 1% or LIBOR plus 2.5%. The
fixed promissory note bears an annual interest rate of 10%.
These notes are secured by the Companys accounts
receivable, inventories, property, equipment and other general
intangibles except for intellectual property.
On April 26, 2006, the Company entered into a loan and
security agreement (loan and security agreement)
with the financial institution for an additional
$2.0 million credit facility (credit facility)
with a maturity date of December 1, 2006, subsequently
extended to March 1, 2007. The credit facility advances
bear interest rates of base rate plus 1% or LIBOR plus 2.5%. The
credit facility is secured by the Companys cash and cash
equivalents, accounts receivable, inventory, property and other
general intangibles except for intellectual property.
On December 7, 2006, the revolving note was amended to
increase the face amount of the note to $3.5 million.
On March 1, 2007, the Company renewed the revolving note
and the loan and security agreement (the first
modification) to a maturity date of March 31, 2008.
Additional amended terms under the first modification were an
interest rate change to base rate or LIBOR plus 2.5%, limitation
of advances to a borrowing base, and various reporting
requirements and satisfaction of certain financial ratios and
covenants by the Company.
On March 28, 2007, the Company modified the loan and
security agreement (the second modification) to add
a $1.0 million equipment promissory note (equipment
promissory note). The equipment promissory note bears an
interest rate of cost of funds plus 2.75% and matures
September 30, 2012. Additional amended terms under the
second modification were changes to the financial ratios and
covenants that were to be maintained by the Company.
As of December 31, 2008 and 2007 there were no borrowings
under the revolving note and the credit facility. The amounts
outstanding on the fixed promissory note and the equipment
promissory note were $89,000 and $468,000, respectively, at
December 31, 2008 and $133,000 and $596,000, respectively,
at December 31, 2007. The interest rate for the equipment
promissory note at December 31, 2008 and 2007 was 7.81%.
The Company was in compliance with all covenants under the loan
and security agreement. In February 2009, the Company paid the
remaining balance of the fixed promissory note for a total of
$83,000, including accrued interest.
On March 27, 2008 the Company entered into a new credit
agreement (credit agreement) with its existing
financial institution that replaces the $2.0 million credit
facility and the $3.5 million revolving note. The new
credit agreement, as amended in September 2008 and December
2008, allows borrowings of up to $12.0 million on a
revolving basis at LIBOR plus 2.75% and expires on
March 31, 2009. The credit agreement is secured by the
Companys accounts receivable, inventories, property,
equipment and other intangibles except intellectual property.
The Company is subject to certain financial and administrative
covenants under the new credit agreement. As of
December 31, 2008, the Company was non-compliant with
certain financial reporting covenants under this credit
agreement. Subsequent to December 31, 2008, the lender
granted a waiver for this non-compliance.
During the periods presented, the Company provided certain
customers with irrevocable standby letters of credit to secure
its obligations for the delivery of products, performance
guarantees and warranty commitments in accordance with sales
arrangements. These letters of credit were issued under the
Companys revolving note
56
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
credit facility up to March 2008 and under the Companys
credit agreement beginning in March 2008. The letters of credit
generally terminate within 12 to 36 months but, in some
instances, up to 65 months from issuance. At
December 31, 2008 and December 31, 2007, the amounts
outstanding on these letters of credit totaled approximately
$8.4 million and $2.2 million, respectively.
In February 2009, the Company terminated the March 2008 credit
agreement. As a result, the Company transferred
$9.1 million in cash to a restricted cash account as
collateral for outstanding irrevocable standby letters of credit
that were collateralized by the credit agreement as of the date
of termination.
In January 2009, the Company entered into a new loan and
security agreement with another financial institution which
became effective in February 2009 and provides a total available
credit line of $15.0 million. Under this new agreement, the
Company is allowed to draw advances up to $10.0 million on
a revolving line of credit or utilize up to $14.8 million
as collateral for irrevocable standby letters of credit,
provided that the aggregate of the advances and the collateral
do not exceed $15.0 million. Advances under the revolving
line of credit incur interest based on either a prime rate index
or LIBOR plus 1.375%. The new loan and security agreement
expires on December 31, 2009 and is collateralized by
substantially all of the Companys assets. The Company is
subject to certain financial and administrative covenants under
this new agreement.
The Company leases certain equipment under agreements classified
as capital leases. The terms of the lease agreements generally
range up to five years. Costs and accumulated depreciation of
equipment under capital leases were $175,000 and $115,000 as of
December 31, 2008, respectively. As of December 31,
2007, costs and accumulated depreciation of equipment under
capital leases were $175,000 and $80,000, respectively.
Future minimum payments under capital leases consist of the
following (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
$
|
43
|
|
2010
|
|
|
29
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
|
72
|
|
Less: amount representing interest
|
|
|
(8
|
)
|
|
|
|
|
|
Present value of net minimum capital lease payments
|
|
|
64
|
|
Less: current portion
|
|
|
(37
|
)
|
|
|
|
|
|
Long-term portion
|
|
$
|
27
|
|
|
|
|
|
|
57
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The components of the provision for income taxes consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,817
|
|
|
$
|
3,466
|
|
|
$
|
1,654
|
|
State
|
|
|
803
|
|
|
|
806
|
|
|
|
442
|
|
Foreign
|
|
|
86
|
|
|
|
16
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,706
|
|
|
$
|
4,288
|
|
|
$
|
2,098
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(612
|
)
|
|
|
(327
|
)
|
|
|
(775
|
)
|
State
|
|
|
(62
|
)
|
|
|
(14
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(674
|
)
|
|
$
|
(341
|
)
|
|
$
|
(859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
5,032
|
|
|
$
|
3,947
|
|
|
$
|
1,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of income taxes computed at the statutory
federal income tax rate to the provision for income taxes
included in the accompanying statements of income is as follows
(in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
U.S. federal taxes at statutory rate
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
34
|
%
|
State income taxes, net of federal benefit
|
|
|
3
|
|
|
|
5
|
|
|
|
5
|
|
Stock-based compensation
|
|
|
2
|
|
|
|
3
|
|
|
|
11
|
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
(13
|
)
|
Extraterritorial income exclusion
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
Other
|
|
|
(3
|
)
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
37
|
%
|
|
|
42
|
%
|
|
|
33
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
Total deferred tax assets and liabilities consist of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
$
|
206
|
|
|
$
|
220
|
|
Accruals and reserves
|
|
|
1,941
|
|
|
|
1,210
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
2,147
|
|
|
$
|
1,430
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation on property and equipment
|
|
$
|
(207
|
)
|
|
$
|
(90
|
)
|
Unrecognized gain on translation of foreign currency receivables
|
|
|
(7
|
)
|
|
|
(140
|
)
|
§481(a) Adjustment - Unicap
|
|
|
(59
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
$
|
(273
|
)
|
|
$
|
(230
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,874
|
|
|
$
|
1,200
|
|
|
|
|
|
|
|
|
|
|
As reported on the balance sheet:
|
|
|
|
|
|
|
|
|
Current assets, net
|
|
$
|
1,755
|
|
|
$
|
1,052
|
|
Non-current assets, net
|
|
|
119
|
|
|
|
148
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,874
|
|
|
$
|
1,200
|
|
|
|
|
|
|
|
|
|
|
In assessing the recoverability of deferred tax assets,
management considers whether it is more likely than not that the
assets will be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable
income during the periods in which those temporary differences
become deductible.
Management considers, among other things, projected future
taxable income in making this assessment. Based upon the
projections for future taxable income over the periods in which
the deferred tax items are recognizable for tax reporting
purposes, management has determined it is more likely than not
that the Company will realize the benefits of these differences
at December 31, 2008 and 2007.
At December 31, 2008 and 2007, the Company had net
operating loss carry-forwards of approximately $546,000 and
$588,000, respectively, for federal and $252,000 for California.
The net operating loss carry-forwards, if not utilized, will
expire in 2021 for federal and 2015 for California purposes.
Utilization of the net operating loss carry-forwards is subject
to a substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar
state provisions. The annual limitation will result in the
expiration of the net operating loss carry-forwards before
utilization. Management has estimated the amount which may
ultimately be realized and recorded deferred tax assets
accordingly.
The Company adopted the provisions of FIN 48 on
January 1, 2007. Measurement under FIN 48 is based on
judgment regarding the largest amount that is greater than 50%
likely of being realized upon ultimate settlement with a taxing
authority. The total amount of unrecognized tax benefits as of
the date of adoption was immaterial. As a result of the
implementation of FIN 48, the Company recognized no
increase in the liability for unrecognized tax benefits, and
there were no unrecognized income tax benefits during the tax
year ended December 31, 2008.
The Company adopted the accounting policy that interest
recognized in accordance with Paragraph 15 of FIN 48
and penalty recognized in accordance with Paragraph 16 of
FIN 48 are classified as part of its income taxes. The
amounts of interest and penalty recognized in the statements of
income and statements of financial position for the years ended
December 31, 2008 and 2007 were insignificant.
The Company is subject to taxation in the U.S. and various
states and foreign jurisdictions. There are no ongoing
examinations by taxing authorities at this time. The
Companys various tax years from 1995 to 2008 remain open
in various taxing jurisdictions.
59
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
Note 7.
|
Commitments
and Contingencies
|
Lease
Obligations
The Company leases facilities under fixed non-cancelable
operating leases that expire on various dates through July 2019.
Future minimum lease payments consist of the following (in
thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
$
|
1,050
|
|
2010
|
|
|
1,342
|
|
2011
|
|
|
1,159
|
|
2012
|
|
|
1,127
|
|
2013
|
|
|
1,155
|
|
Thereafter
|
|
|
6,995
|
|
|
|
|
|
|
|
|
$
|
12,828
|
|
|
|
|
|
|
Total rent and lease expense $651,000, $462,000, and $287,000
for the years ended December 31, 2008, 2007, and 2006,
respectively.
The Company is obligated under an operating lease to pay for
certain tenant improvement costs in excess of a construction
allowance. The Company believes that a reasonable estimate of
its obligation under this agreement ranges from $2 million
to $3 million and expects to incur the costs in 2009.
Warranty
Changes in the Companys accrued warranty reserve and the
expenses incurred under its warranties were as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
Balance, beginning of period
|
|
$
|
868
|
|
|
$
|
85
|
|
Warranty costs charged to cost of revenue, including extended
warranty costs
|
|
|
193
|
|
|
|
850
|
|
Utilization of warranty
|
|
|
(103
|
)
|
|
|
(67
|
)
|
Reduction of extended warranty reserve
|
|
|
(688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period
|
|
$
|
270
|
|
|
$
|
868
|
|
|
|
|
|
|
|
|
|
|
Warranty costs during 2007 included costs attributable to
estimated service costs under extended service contracts. During
2008, the Company reduced the accrued warranty reserve by
$688,000 to reflect the cancellation of an extended product
warranty contract and the related elimination of the estimated
warranty liability.
Purchase
Obligations
In 2008, the Company entered into a supply agreement with a
vendor. Under this agreement, the Company is obligated to pay a
fee of up to $250,000 if the Company does not meet minimum
purchase requirements by 2012. The Company did not have any
other non-cancelable contractual purchase obligations with its
vendors at December 31, 2008 or December 31, 2007.
The Company had purchase order arrangements with its vendors for
which it had not received the related goods or services at
December 31, 2008 and at December 31, 2007. These
arrangements are subject to change
60
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
based on the Companys 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 key raw materials and
components parts. As of December 31, 2008 and
December 31, 2007, the Company had approximately
$7.1 million and $8.1 million, respectively, of open
cancelable purchase order arrangements.
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 Companys activities, generally limited
to personal injury and property damage caused by the
Companys employees at a customers desalination plant
in proportion to the employees percentage of fault for the
accident. Damages incurred for these indemnifications would be
covered by the Companys 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 has no liabilities recorded for these
agreements as of December 31, 2008 and December 31,
2007.
In certain cases, the Company issues warranty and product
performance guarantees to its customers for amounts ranging from
10% to 30% of the total sales agreement to endorse the execution
of product delivery and the warranty of design work, fabrication
and operating performance of the PX device. These guarantees are
issued under the Companys credit facility (see
Note 4) or collateralized by restricted cash (see
Note 2). These guarantees typically remain in place for
periods ranging from 24 to 36 months and, in some cases, up
to 65 months, which relate to the underlying product
warranty period.
Employee
Agreements
The Company had agreements with certain executives governing the
terms of their employment for certain periods. All but one of
these agreements expired on December 31, 2008. The
remaining agreement with the Companys chief executive
officer will expire in December 2009.
Litigation
The Company is not party to any material litigation, and the
Company is not aware of any pending or threatened litigation
against it that the Company believes would adversely affect its
business, operating results, financial condition or cash flows.
However, in the future, the Company may be subject to legal
proceedings in the ordinary course of business.
|
|
Note 8.
|
Defined
Contribution Plan
|
The Company has a 401(k) defined contribution plan for all
employees over age 18. Generally, employees can defer up to
20% of their compensation through payroll withholdings into the
plan. The Company can make discretionary matching contributions.
The Company made contributions $105,000, $100,000, and $68,000
during the years ended December 31, 2008, 2007 and 2006,
respectively.
|
|
Note 9.
|
Stockholders
Equity
|
Preferred
Stock
The Company has the authority to issue 10,000,000 shares of
$0.001 par value preferred stock. The Companys board
of directors has the authority, without action by the
Companys stockholders, to designate and issue shares of
preferred stock in one or more series. The board of directors is
also authorized to designate the rights, preferences, and voting
powers of each series of preferred stock, any or all of which
may be greater
61
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
than the rights of the common stock including restrictions of
dividends on the common stock, dilution of the voting power of
the common stock, reduction of the liquidation rights of the
common stock, and delaying or preventing a change in control of
the Company without further action by the stockholders. To date,
the board of directors has not designated any rights, preference
or powers of any preferred stock and as of December 31,
2008 and 2007, none was issued or outstanding.
Common
Stock
The Company has the authority to issue 200,000,000 shares
of $0.001 par value common stock. Subject to the preferred
rights of the holders of shares of any class or series of
preferred stock as provided by the board of directors with
respect to any such class or series of preferred stock, the
holders of the common stock shall be entitled to receive
dividends, as and when declared by the board of directors. In
the event of any liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary, after the
distribution or payment to the holders of shares of any class or
series of preferred stock as provided by the board of directors
with respect to any such class or series of preferred stock, the
remaining assets of the Company available for distribution to
stockholders shall be distributed among and paid to the holders
of common stock ratably in proportion to the number of shares of
common stock held by them respectively. As of December 31,
2008 and 2007, 50,015,718 and 39,777,446 shares were issued
and outstanding, respectively.
On July 2, 2008, the Company sold 14,000,000 shares of
its common stock in its initial public offering
(IPO) at $8.50 per share, before underwriting
discounts and commissions. Of the 14,000,000 shares sold in
the offering, 8,078,566 shares were sold by the Company and
5,921,434 shares were sold by stockholders at an offering
price of $8.50 per share. On July 9, 2008, the underwriters
exercised their option to purchase an additional
2,100,000 shares from the Company at the IPO price to cover
overallotments. The Company received net proceeds of
approximately $76.7 million from these transactions, after
deducting underwriting discounts and commissions of
$6.1 million and additional offering-related expenses of
approximately $3.7 million.
Private
Placement
In June 2007, the Company issued 1,000,000 shares of common
stock with an issuance price of $5.00 per share. Net proceeds
from the issuance were $5.0 million, less $41,000 in fees.
Stock
Option Plans
In April 2001, the Company adopted the 2001 Stock Option Plan
under which 2,500,000 shares of the Companys common
stock were reserved for issuance to employees, directors and
consultants. In April 2002, the Company adopted the 2002 Stock
Option/Stock Issuance Plan under which 1,509,375 shares of
the Companys common stock were reserved for issuance to
employees, directors and consultants. In January 2004, the
Company adopted the 2004 Stock Option/Stock Issuance Plan under
which 850,000 shares of the Companys common stock
were reserved for issuance to employees, directors and
consultants. In May 2006, the Company adopted the 2006 Stock
Option/Stock Issuance Plan under which 800,000 shares of
the Companys common stock were reserved for issuance to
employees, directors and consultants. During the first quarter
of 2008, an additional 60,000 shares of common stock were
reserved for issuance under the 2006 plan, resulting in a total
of 860,000 shares reserved for issuance under this plan. In
2008, the Companys board of directors passed a resolution
that, upon the effectiveness of the IPO in July 2008, no further
options would be issued under the 2001 Stock Option Plan and the
2002, 2004, and 2006 Stock Option/Stock Issuance Plans.
In connection with the IPO in July 2008, the Companys
board of directors adopted the 2008 Equity Incentive Plan
(2008 Plan) which became effective immediately
preceding the effectiveness of the IPO. The 2008 Plan permits
the grant of stock options, stock appreciation rights,
restricted stock, restricted stock units, performance units,
performance shares and other stock-based awards. Under this
plan, 1,400,000 shares of
62
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
common stock were reserved for issuance in 2008, of which
146,449 shares remain available for issuance as of December
31, 2008. In February 2009, the Companys board of
directors approved an additional 2,500,000 shares to
reserve for issuance under this plan, as provided for in the
plan agreement.
The option plans provide for the issuance of common stock and
the granting of incentive stock options and other share-based
awards to employees, officers and directors and the granting of
non-statutory stock options and other share-based awards to
employees, officers and directors or consultants of the Company.
The Company has granted stock options under these plans. The
Company grants incentive stock options with exercise prices of
not less than the estimated fair value of the stock on the date
of grant (85% of the estimated fair value for non-statutory
stock options). If, at the time the Company grants an option,
the optionee directly owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the
Company, the option price must be at least 110% of the estimated
fair value and are not exercisable for more than five years
after the date of grant. Options granted under the plans vest
generally over four years and generally expire no more than ten
years after the date of grant or earlier if employment is
terminated.
Early
Exercise of Employee Options
Options issued under the 2001 Stock Option Plan and the 2002,
2004, and 2006 Stock Option/Stock Issuance Plans may be
exercised prior to vesting, with the underlying shares subject
to the Companys right of repurchase, which lapses over the
vesting term. The 2008 Plan does not allow options to be
exercised prior to vesting. In accordance with EITF Issue
No. 23, Issues Related to the Accounting for Stock
Compensation under APB 25 and FIN 44, shares purchased by
employees pursuant to the early exercise of stock options are
not deemed to be issued until all restrictions on such shares
lapse (i.e., the employee is vested in the award). Therefore,
consideration received in exchange for exercised and restricted
shares related to the early exercise of stock options is
recorded as a liability for early exercise of stock options in
the accompanying consolidated balance sheets and will be
transferred into common stock and additional paid-in capital as
the restrictions on such shares lapse.
In February 2005, both vested and unvested options to purchase
4,293,958 shares of common stock were exercised by the
signing of full recourse promissory notes totaling $948,000. The
notes bear interest at 3.76% and are due in February 2010. The
interest rate on the notes was deemed to be a below market rate
of interest resulting in a deemed modification in exercise price
of the options. As a result, the Company accounted for these
options as variable option awards until the employees were
vested in the award. For the years ended December 31, 2008,
2007 and 2006, the Company recorded $155,000, $783,000, and
$1.1 million, respectively, of stock-based compensation
related to the options exercised with promissory notes.
As of December 31, 2008, there were no shares outstanding
subject to the Companys right of repurchase as a result of
the early exercise of options. As of December 31, 2007,
56,879 shares of common stock were outstanding subject to
the Companys right of repurchase at prices ranging from
$0.20 to $1.00, totaling $20,000 and classified in current
liabilities.
The promissory notes related to the exercise of the unvested
shares and the corresponding aggregate exercise price for these
shares were recorded as notes receivable from stockholders. Of
the $948,000 of promissory notes, notes in an aggregate amount
of $552,000 were issued by executive officers and directors. As
of December 31, 2008, all notes issued by executive
officers and directors were paid in full. The remaining
outstanding balances of the full recourse promissory notes at
December 31, 2008 were $296,000 and were related entirely
to vested shares. There were no outstanding balances related to
unvested shares at December 31, 2008. The outstanding
balances of the full recourse promissory notes at
December 31, 2007 were $855,000, of which $835,000 related
to vested shares and $20,000 related to unvested shares.
For the years ended December 31, 2008, 2007 and 2006, the
Company adopted SFAS 123R and recognized stock-based
compensation under SFAS 123R and
EITF 96-18
related to employees and consultants of $879,000, $253,000 and
$13,000, respectively. See Note 2 Summary of
Significant Accounting Policies.
63
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table summarizes the stock option activity under
the Companys stock option plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value (in
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (in years)
|
|
|
thousands)(2)
|
|
|
Balance 12/31/05
|
|
|
556,042
|
|
|
$
|
1.00
|
|
|
|
9.8
|
|
|
|
|
|
Granted
|
|
|
642,000
|
|
|
$
|
2.65
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(5,000
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(25,730
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance 12/31/06
|
|
|
1,167,312
|
|
|
$
|
1.91
|
|
|
|
9.4
|
|
|
|
|
|
Granted
|
|
|
181,900
|
|
|
$
|
5.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(17,083
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(51,521
|
)
|
|
$
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance 12/31/07
|
|
|
1,280,608
|
|
|
$
|
2.38
|
|
|
|
8.6
|
|
|
$
|
3,355
|
|
Granted
|
|
|
1,367,078
|
|
|
$
|
8.27
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(26,511
|
)
|
|
$
|
1.96
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(89,189
|
)
|
|
$
|
4.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance 12/31/08
|
|
|
2,531,986
|
|
|
$
|
5.48
|
|
|
|
8.6
|
|
|
$
|
6,593
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of December 31, 2008
|
|
|
693,964
|
|
|
$
|
1.99
|
|
|
|
7.4
|
|
|
$
|
3,879
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and exercisable as of December 31, 2008
and expected to vest thereafter(1)
|
|
|
1,896,470
|
|
|
$
|
5.20
|
|
|
|
8.5
|
|
|
$
|
5,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Options that are expected to vest are net of estimated future
option forfeitures in accordance with the provisions of
SFAS 123R. |
|
(2) |
|
The aggregate intrinsic value is calculated as the difference
between the exercise price of the underlying options and the
fair value of the Companys stock as of December 31,
2008 of $7.58 per share. |
Shares available for grant under the option plans at
December 31, 2008 and 2007 were 146,449 and 53,351,
respectively.
The weighted average per share fair value of options granted to
employees for the years ended December 31, 2008, 2007 and
2006 was $3.87, $2.41 and $1.30, respectively. The aggregate
intrinsic value of options exercised for the years ended
December 31, 2008, 2007, and 2006 was $108,000, $62,000,
and $8,000, respectively. As of December 31, 2008, total
unrecognized compensation cost, net of forfeitures, related to
non-vested options was $3.3 million, which is expected to
be recognized as expense over a weighted-average period of
approximately 3.4 years.
64
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
The following table summarizes options outstanding after
exercises and cancellations as of December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
and
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Vested and
|
|
|
Exercise
|
|
Range of Exercise
Prices
|
|
Exercisable
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$1.00 $2.65
|
|
|
1,039,281
|
|
|
|
7.4
|
|
|
$
|
1.95
|
|
|
|
643,472
|
|
|
$
|
1.75
|
|
$5.00 $7.94
|
|
|
334,854
|
|
|
|
9.1
|
|
|
$
|
5.39
|
|
|
|
50,492
|
|
|
$
|
5.00
|
|
$8.50 $11.05
|
|
|
1,157,851
|
|
|
|
9.5
|
|
|
$
|
8.68
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,531,986
|
|
|
|
|
|
|
|
|
|
|
|
693,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
As of December 31, 2008, the Company had outstanding
warrants to purchase an aggregate of 2,074,122 shares of
the Companys common stock at prices ranging from $0.20 to
$1.00 per share. The warrants, issued in 2002 through 2005, are
fully exercisable over a 10 year term, expiring in 2012
through 2015. The outstanding warrants include a warrant issued
in November 2005 to an executive officer of the Company to
purchase 150,000 shares of common stock at $1.00 per share.
During the year ended December 31, 2008, no warrants were
exercised.
During the year ended December 31, 2007, warrants to
purchase 314,950 shares of common stock were exercised for
cash and the proceeds received by the Company from these
exercises were $143,000.
During the year ended December 31, 2006, no warrants were
exercised.
In February 2005, warrants to purchase 315,974 shares of
common stock were exercised by the signing of full recourse
promissory notes totaling $63,000. The notes bear interest at
3.76% and are due February 2010. As of December 31, 2008,
all of the notes have been repaid and, as of December 31,
2007, $43,000 of the notes had been repaid.
A summary of the Companys warrant activity for the years
ended (in thousands, except exercise prices and contractual life
data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Outstanding, beginning of period
|
|
|
2,074
|
|
|
|
2,389
|
|
|
|
2,589
|
|
Exercised during the period
|
|
|
|
|
|
|
(315
|
)
|
|
|
|
|
Cancelled during the period
|
|
|
|
|
|
|
|
|
|
|
(200
|
)
|
Issued during the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, end of period
|
|
|
2,074
|
|
|
|
2,074
|
|
|
|
2,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average exercise price of warrants outstanding at end
of period
|
|
$
|
0.52
|
|
|
$
|
0.52
|
|
|
$
|
0.52
|
|
Weighted average remaining contractual life, in years, of
warrants outstanding at end of period
|
|
|
4.7
|
|
|
|
5.7
|
|
|
|
6.7
|
|
65
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
Note 10.
|
Business
Segment and Geographic Information
|
The Company manufactures and sells high efficiency energy
recovery products and related services and operates under one
segment. The Companys chief operating decision maker is
the chief executive officer (CEO). The CEO reviews
financial information presented on a consolidated basis,
accompanied by disaggregated information about revenue by
geographic region for purposes of making operating decisions and
assessing financial performance. Accordingly, the Company has
concluded that it has one reportable segment.
The following geographic information includes net revenue to the
Companys domestic and international customers based on the
customers requested delivery locations, except for certain
cases in which the customer directed the Company to deliver its
products to a location that differs from the known ultimate
location of use. In such cases, the ultimate location of use,
rather than the delivery location, is reflected in the table
below (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
Domestic revenue
|
|
$
|
3,517
|
|
|
$
|
2,125
|
|
|
$
|
1,003
|
|
International revenue
|
|
|
48,602
|
|
|
|
33,289
|
|
|
|
19,055
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
52,119
|
|
|
$
|
35,414
|
|
|
$
|
20,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by country:
|
|
|
|
|
|
|
|
|
|
|
|
|
Algeria
|
|
|
24
|
%
|
|
|
12
|
%
|
|
|
30
|
%
|
Spain
|
|
|
16
|
|
|
|
35
|
|
|
|
9
|
|
China
|
|
|
11
|
|
|
|
8
|
|
|
|
5
|
|
United Arab Emirates
|
|
|
7
|
|
|
|
2
|
|
|
|
10
|
|
Saudi Arabia
|
|
|
*
|
|
|
|
13
|
|
|
|
*
|
|
Others
|
|
|
42
|
|
|
|
30
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Less than 1%.
Approximately 100% of the Companys long-lived assets were
located in the United States at December 31, 2008 and 2007.
Concentration
of Credit Risk
Substantially all of the Companys cash and cash
equivalents are placed on deposit and in money market funds at
two major financial institutions in the U.S. Amounts
located in the U.S. are insured by the Federal Deposit
Insurance Corporation, or FDIC, generally up to $250,000. The
Companys deposits may be in excess of FDIC insured limits.
To date, the Company has not experienced any losses in such
accounts.
The Companys accounts receivable are derived from sales to
customers in the water desalination industry located around the
world. The Company generally does not require collateral to
support customer receivables, but frequently requires letters of
credit securing payment. The Company performs ongoing
evaluations of its customers financial condition and
periodically reviews credit risk associated with receivables.
For sales with customers outside the U.S. (see
Note 10 Business Segment and Geographic
Information), the Company may also obtain credit risk insurance
to minimize credit risk exposure. As of December 31, 2008,
approximately 50% of the Companys accounts receivable were
insured against credit risk. An allowance for doubtful accounts
is determined with respect to receivable amounts that the
Company has determined to be doubtful of
66
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
collection using specific identification of doubtful accounts
and an aging of receivables analysis based on invoice due dates.
Actual collection losses may differ from managements
estimates, and such differences could be material to the
financial position, results of operations and cash flows.
Uncollectible receivables are written off against the allowance
for doubtful accounts when all efforts to collect them have been
exhausted while recoveries are recognized when they are received.
Five customers accounted for approximately 81% of the
Companys accounts receivable at December 31, 2008. As
of December 31, 2007, three customers accounted for
approximately 74% of accounts receivable.
Revenue from customers representing 10% or more of total revenue
varies from year to year. For the year ended December 31,
2008, two customers, Hyflux Limited and Befesa Agua S.A. and
affiliated joint ventures, accounted for approximately 16% and
11% of the Companys net revenue, respectively. For the
year ended December 31, 2007, three customers represented
approximately 20%, 23% and 13% of the Companys net
revenue specifically Acciona Agua, Geida and its
member companies, and Doosan Heavy Industries, respectively. In
2006, two customers, GE Water and Process Technologies (formerly
GE Ionics) and Geida, including its member companies, accounted
for approximately 18% and 11% of the Companys net revenue,
respectively. No other customer accounted for more than 10% of
the Companys net revenue during any of these periods.
Geida is a consortium of Befesa Agua, a subsidiary of Abengoa
S.A; Cobra-Tedagua, a subsidiary of ACS Actividades de
Construcción y Servicios, S.A.; and Sadyt S.A., a
subsidiary of Sacyr Vallehermoso, S. A.
Supplier
Concentration
Certain of the raw materials and components used by the Company
in the manufacture of its products are available from a limited
number of suppliers. Shortages could occur in these essential
materials and components due to an interruption of supply or
increased demand in the industry. If the Company were unable to
procure certain of such materials or components, it would be
required to reduce its manufacturing operations, which could
have a material adverse effect on its results of operations.
For year ended December 31, 2008, four suppliers (of which
three were ceramics suppliers) represented approximately 72% of
the total purchases of the Company. For the years ended 2007 and
2006, three suppliers (of which two were ceramics suppliers)
represented approximately 66% and 71%, respectively, of the
total purchases of the Company. As of December 31, 2008 and
2007, approximately 68% and 60%, respectively, of the
Companys accounts payable were due to these suppliers.
|
|
Note 12.
|
Related
Party Transactions
|
The Company entered into a supply agreement with Piedmont
Pacific Corporation, a company owned by James Medanich, a former
director of the Company. Expenses incurred under this supply
agreement amounted to $14,000, $18,000 and $4,000 for the years
ending December 31, 2008, 2007 and 2006, respectively.
There were no payments outstanding to this vendor as of
December 31, 2008 and $1,000 was outstanding as of
December 31, 2007. The Company believes that the
transactions under the supply agreement were conducted as if
consummated on an arms-length basis between two
independent parties.
The Company entered into a consulting agreement with Darby
Engineering, LLC (invoiced as Think Mechanical, LLC), a firm
owned by Peter Darby, a former director of the Company. Expenses
incurred under this consulting agreement amounted to $119,000
for the year ended December 31, 2008; $27,000 in payments
remained outstanding related to the agreement as of
December 31, 2008. There were no expenses or payments
related to the consulting agreement during the years ended
December 31, 2007 or 2006. The Company believes that the
transactions under the consulting agreement were conducted as if
consummated on an arms-length basis between two
independent parties.
67
ENERGY
RECOVERY, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS(Continued)
|
|
Note 13.
|
Supplementary
Data Quarterly Financial Data (unaudited)
|
The following table presents certain unaudited consolidated
quarterly financial information for each of the eight fiscal
quarters in the period ended December 31, 2008. This
quarterly information has been prepared on the same basis as the
audited Consolidated Financial Statements and includes all
adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of the information for the
periods presented. The results for these quarterly periods are
not necessarily indicative of the operating results for a full
year or any future period.
QUARTERLY
FINANCIAL DATA (unaudited)
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended,
|
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
Dec. 31,
|
|
|
Sept. 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
Quarterly Results of Operations*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
|
$
|
21,994
|
|
|
$
|
9,044
|
|
|
$
|
11,961
|
|
|
$
|
9,120
|
|
|
$
|
13,845
|
|
|
$
|
10,978
|
|
|
$
|
3,452
|
|
|
$
|
7,139
|
|
Gross profit
|
|
|
14,183
|
|
|
|
5,547
|
|
|
|
8,010
|
|
|
|
5,446
|
|
|
|
7,517
|
|
|
|
6,882
|
|
|
|
1,878
|
|
|
|
4,285
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General administrative
|
|
|
3,110
|
|
|
|
2,696
|
|
|
|
2,854
|
|
|
|
2,661
|
|
|
|
1,513
|
|
|
|
1,053
|
|
|
|
960
|
|
|
|
773
|
|
Sales and marketing
|
|
|
2,286
|
|
|
|
1,467
|
|
|
|
1,453
|
|
|
|
1,343
|
|
|
|
1,443
|
|
|
|
1,372
|
|
|
|
1,224
|
|
|
|
1,191
|
|
Research and development
|
|
|
692
|
|
|
|
678
|
|
|
|
536
|
|
|
|
509
|
|
|
|
484
|
|
|
|
392
|
|
|
|
440
|
|
|
|
389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
$
|
8,095
|
|
|
$
|
706
|
|
|
$
|
3,167
|
|
|
$
|
933
|
|
|
$
|
4,077
|
|
|
$
|
4,065
|
|
|
$
|
(746
|
)
|
|
$
|
1,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
5,264
|
|
|
$
|
623
|
|
|
$
|
1,829
|
|
|
$
|
947
|
|
|
$
|
2,701
|
|
|
$
|
2,397
|
|
|
$
|
(424
|
)
|
|
$
|
1,119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.11
|
|
|
$
|
0.01
|
|
|
$
|
0.05
|
|
|
$
|
0.02
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.10
|
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.02
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
(0.01
|
)
|
|
$
|
0.03
|
|
* Quarterly results may not add up to annual results due to
rounding.
68
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
None.
|
|
Item 9A(T).
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our chief executive
officer and chief financial officer, has evaluated the
effectiveness of our disclosure controls and procedures (as
defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, or Exchange
Act) pursuant to
Rules 13a-15(e)
and
15d-15(e)
under the Exchange Act as of the end of the period covered by
this Annual Report on
Form 10-K.
Based on this evaluation, our chief executive officer and chief
financial officer have concluded that, as of such date, our
disclosure controls and procedures were effective to ensure that
information we are required to disclose in reports that we file
or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to management
as appropriate to allow for timely decisions regarding required
disclosure.
Our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives and our chief
executive officer and chief financial officer have concluded
that these controls and procedures are effective at the
reasonable assurance level. Our management,
including the chief executive officer and chief financial
officer, believes that a control system, no matter how well
designed and operated, cannot provide absolute assurance that
the objectives of the control system are met, and that no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company
have been detected.
Managements
Annual Report on Internal Control Over Financial Reporting and
Attestation Report of the Registered Accounting Firm
This annual report does not include a report of
managements assessment regarding internal control over
financial reporting or an attestation report of the
companys registered public accounting firm due to a
transition period established by rules of the Securities and
Exchange Commission for newly public companies. We are required
to comply with the internal control reporting requirements of
Section 404 of the Sarbanes-Oxley Act of 2002 for our
fiscal year ending December 31, 2009. The management report and
auditor attestation on the effectiveness of the Companys
internal control over financial reporting must be included in
our annual report for the fiscal year ending December 31,
2009.
Changes
in Internal Control Over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
None.
69
PART III
|
|
Item 10.
|
Directors,
Executive Officers and Corporate Governance
|
The information required by this Item is incorporated by
reference from the Companys Definitive Proxy Statement
related to the Annual Meeting of Shareholders to be held
June 12, 2009, to be filed by the Company with the SEC (the
Proxy Statement).
|
|
Item 11.
|
Executive
Compensation
|
The information required by this Item is incorporated by
reference from the Proxy Statement.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
The information required by this Item is incorporated by
reference from the Proxy Statement.
|
|
Item 13.
|
Certain
Relationships and Related Transactions and Director
Independence
|
The information required by this Item is incorporated by
reference from the Proxy Statement.
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
The information required by this item is incorporated by
reference from the Proxy Statement.
PART IV
|
|
Item 15.
|
Exhibits
and Financial Statement Schedules
|
(a) The following documents are included as part of this
Annual Report on
Form 10-K.
(1) Financial Statements.
|
|
|
|
|
|
|
Page in
|
|
|
Form 10-K
|
|
|
|
|
38
|
|
|
|
|
39
|
|
|
|
|
40
|
|
|
|
|
41
|
|
|
|
|
42
|
|
|
|
|
43
|
|
(2) Financial Statement Schedules.
70
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
to Charged
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
|
|
|
Balance at
|
|
Description
|
|
Period
|
|
|
Expenses
|
|
|
Deductions
|
|
|
End of Period
|
|
|
Year Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
150
|
|
|
|
80
|
|
|
|
|
|
|
|
230
|
|
Reserve for obsolete inventory
|
|
|
97
|
|
|
|
30
|
|
|
|
(72
|
)
|
|
|
55
|
|
Warranty reserve
|
|
|
110
|
|
|
|
61
|
|
|
|
(86
|
)
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
230
|
|
|
|
(105
|
)
|
|
|
(4
|
)
|
|
|
121
|
|
Reserve for obsolete inventory
|
|
|
55
|
|
|
|
47
|
|
|
|
|
|
|
|
102
|
|
Warranty reserve
|
|
|
85
|
|
|
|
850
|
|
|
|
(67
|
)
|
|
|
868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
121
|
|
|
|
75
|
|
|
|
(137
|
)
|
|
|
59
|
|
Reserve for obsolete inventory
|
|
|
102
|
|
|
|
26
|
|
|
|
|
|
|
|
128
|
|
Warranty reserve
|
|
|
868
|
|
|
|
193
|
|
|
|
(791
|
)
|
|
|
270
|
|
All other schedules have been omitted because the information
required to be presented in them is not applicable or is shown
in the consolidated financial statements or related notes.
(3) Exhibits:
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Description
|
3.1
|
|
|
*
|
|
|
Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on July 7, 2008.
|
|
3.2
|
|
|
*
|
|
|
Amended and Restated Bylaws, effective as of July 8, 2008.
|
|
10.1
|
|
|
(2)u
|
|
|
Form of Indemnification Agreement between the Company and its
directors and officers.
|
|
10.2
|
|
|
(1)u
|
|
|
2001 Stock Option Plan of the Company and form of Stock Option
Agreement thereunder.
|
|
10.3
|
|
|
(1)u
|
|
|
2002 Stock Option/Stock Issuance Plan of the Company and forms
of Stock Option and Stock Purchase Agreements thereunder.
|
|
10.4
|
|
|
(1)u
|
|
|
2004 Stock Option/Stock Issuance Plan of the Company and forms
of Stock Option and Stock Purchase Agreements thereunder.
|
|
10.5
|
|
|
(1)u
|
|
|
2006 Stock Option/Stock Issuance Plan of the Company and forms
of Stock Option and Stock Purchase Agreements thereunder.
|
|
10.5.1
|
|
|
(1)u
|
|
|
Amendment to 2006 Stock Option/Stock Issuance Plan of the
Company.
|
|
10.5.2
|
|
|
(1)u
|
|
|
Second Amendment to 2006 Stock Option/Stock Issuance Plan of the
Company.
|
|
10.6
|
|
|
(2)u
|
|
|
2008 Equity Incentive Plan of the Company and form of Stock
Option Agreement thereunder.
|
|
10.6.1
|
|
|
(4)u
|
|
|
Amendment to 2008 Equity Incentive Plan of the Company.
|
|
10.7
|
|
|
(1)u
|
|
|
Employment Agreement dated March 1, 2006, between the Company
and G.G. Pique.
|
|
10.7.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated January 1, 2008, between
the Company and G.G. Pique.
|
|
71
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Description
|
10.7.2
|
|
|
(3)u
|
|
|
Amendment to Employment Agreement dated May 28, 2008, between
the Company and G.G. Pique.
|
|
10.7.3
|
|
|
*u
|
|
|
Amendment to Employment Agreement dated December 31, 2008,
between the Company and G.G. Pique.
|
|
10.8
|
|
|
(1)u
|
|
|
Employment Agreement dated November 1, 2007, between the Company
and Tom Willardson.
|
|
10.8.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and Tom Willardson.
|
|
10.9
|
|
|
(1)u
|
|
|
Employment Agreement dated July 1, 2006, between the Company and
Richard Stover.
|
|
10.9.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and Richard Stover.
|
|
10.10
|
|
|
(1)u
|
|
|
Employment Agreement dated July 1, 2006, between the Company and
Terrill Sandlin.
|
|
10.10.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and Terrill Sandlin.
|
|
10.11
|
|
|
(1)u
|
|
|
Employment Agreement dated July 1, 2006, between the Company and
MariaElena Ross.
|
|
10.11.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and MariaElena Ross.
|
|
10.12
|
|
|
(1)
|
|
|
Independent Contractor Agreement dated January 23, 2008, between
the Company and Darby Engineering LLC.
|
|
10.13
|
|
|
(1)
|
|
|
Lease Agreement dated February 28, 2005, between the Company and
2101 Williams Associates, LLC.
|
|
10.13.1
|
|
|
(1)
|
|
|
Amendment to Lease Agreement dated October 3, 2005, between the
Company and 2101 Williams Associates, LLC.
|
|
10.13.2
|
|
|
(1)
|
|
|
Second Amendment to Lease Agreement dated January 4, 2006,
between the Company and 2101 Williams Associates, LLC.
|
|
10.13.3
|
|
|
(1)
|
|
|
Third Amendment to Lease Agreement dated September 26, 2006,
between the Company and 2101 Williams Associates, LLC.
|
|
10.14
|
|
|
(1)
|
|
|
Lease Agreement dated February 15, 2008, between the Company and
Beretta Investment Group.
|
|
10.15
|
|
|
(1)
|
|
|
Lease Agreement dated August 7, 2006, between Energy Recovery
Iberia, S.L. and REGUS Business Centre.
|
|
10.16
|
|
|
(2)
|
|
|
Loan and Security Agreement dated March 27, 2008, between the
Company and Comerica Bank.
|
|
10.16.1
|
|
|
(2)
|
|
|
First Modification to Loan and Security Agreement dated March
27, 2008, between the Company and Comerica Bank.
|
|
10.16.2
|
|
|
(3)
|
|
|
Second Modification to Loan and Security Agreement dated May 29,
2008, between the Company and Comerica Bank.
|
|
10.16.3
|
|
|
|
|
|
Third Modification to Loan and Security Agreement dated
September 18, 2008, between the Company and Comerica Bank,
incorporated by reference herein to Exhibit 10.16.3 previously
filed with the Companys Quarterly Report on Form 10-Q for
the quarter ended September 30, 2008.
|
|
10.16.4
|
|
|
*
|
|
|
Fourth Modification to Loan and Security Agreement dated
December 23, 2008, between the Company and Comerica Bank.
|
|
72
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Description
|
10.17
|
|
|
*
|
|
|
Lease Agreement dated November 25, 2008, between the Company and
Doolittle Williams, LLC.
|
|
10.18
|
|
|
*
|
|
|
Lease Agreement dated September 1, 2008, between Energy Recovery
Iberia, S.L. and Lambaesis, S.L.
|
|
14.1
|
|
|
*
|
|
|
Code of Ethics.
|
|
21.1
|
|
|
*
|
|
|
List of subsidiaries of the Company.
|
|
23.1
|
|
|
*
|
|
|
Consent of BDO Seidman, LLP, Independent Registered Public
Accounting Firm.
|
|
31.1
|
|
|
*
|
|
|
Certification of Principal Executive Officer pursuant to
Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
|
*
|
|
|
Certification of Principal Financial Officer pursuant to
Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
|
*
|
|
|
Certification of Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
(1)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on Form S-1, as amended (Registration No. 333-150007), filed
April 1, 2008.
|
|
(2)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on Form S-1, as amended (Registration No. 333-150007), filed May
12, 2008.
|
|
(3)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on Form S-1, as amended (Registration No. 333-150007), filed
June 9, 2008.
|
|
(4)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on Form S-1, as amended (Registration No. 333-150007), filed
June 27, 2008.
|
|
|
|
|
u |
|
Indicates management compensatory plan, contract or arrangement. |
|
* |
|
Filed or furnished herewith, as applicable. |
(b) Index to Exhibits.
See Exhibits listed under Item 15(a) (3).
(c) Financial Statement Schedules.
All financial statement schedules are omitted because they are
not applicable or not required or because the required
information is included in the financial statements, or notes
there to, or in the Exhibits listed under Item 15(a)(2).
73
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of San Leandro,
State of California, on the 26th day of March 2009.
ENERGY RECOVERY, INC.
G.G. Pique
President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act
of 1934, this Report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ G.G.
PIQUE
G.G.
Pique
|
|
President and Chief Executive Officer
(Principal Executive Officer) and Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ THOMAS
D. WILLARDSON
Thomas
D. Willardson
|
|
Chief Financial Officer (Principal
Financial Officer)
|
|
March 26, 2009
|
|
|
|
|
|
/s/ DENO
G. BOKAS
Deno
G. Bokas
|
|
Vice President Finance and Chief
Accounting Officer (Principal Accounting
Officer)
|
|
March 26, 2009
|
|
|
|
|
|
/s/ HANS
PETER MICHELET
Hans
Peter Michelet
|
|
Executive Chairman
|
|
March 26, 2009
|
|
|
|
|
|
/s/ ARVE
HANSTVEIT
Arve
Hanstveit
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ FRED
OLAV JOHANNESSEN
Fred
Olav Johannessen
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ DOMINIQUE
TREMPONT
Dominique
Trempont
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ PAUL
M. COOK
Paul
M. Cook
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
/s/ JACKALYNE
PFANNESTIEL
Jackalyne
Pfannestiel
|
|
Director
|
|
March 26, 2009
|
|
|
|
|
|
Marie-Elisabeth
Paté-Cornell
|
|
Director
|
|
|
74
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Description
|
3.1
|
|
|
*
|
|
|
Amended and Restated Certificate of Incorporation, as filed with
the Delaware Secretary of State on July 7, 2008.
|
|
3.2
|
|
|
*
|
|
|
Amended and Restated Bylaws, effective as of July 8, 2008.
|
|
10.1
|
|
|
(2)u
|
|
|
Form of Indemnification Agreement between the Company and its
directors and officers.
|
|
10.2
|
|
|
(1)u
|
|
|
2001 Stock Option Plan of the Company and form of Stock Option
Agreement thereunder.
|
|
10.3
|
|
|
(1)u
|
|
|
2002 Stock Option/Stock Issuance Plan of the Company and forms
of Stock Option and Stock Purchase Agreements thereunder.
|
|
10.4
|
|
|
(1)u
|
|
|
2004 Stock Option/Stock Issuance Plan of the Company and forms
of Stock Option and Stock Purchase Agreements thereunder.
|
|
10.5
|
|
|
(1)u
|
|
|
2006 Stock Option/Stock Issuance Plan of the Company and forms
of Stock Option and Stock Purchase Agreements thereunder.
|
|
10.5.1
|
|
|
(1)u
|
|
|
Amendment to 2006 Stock Option/Stock Issuance Plan of the
Company.
|
|
10.5.2
|
|
|
(1)u
|
|
|
Second Amendment to 2006 Stock Option/Stock Issuance Plan of the
Company.
|
|
10.6
|
|
|
(2)u
|
|
|
2008 Equity Incentive Plan of the Company and form of Stock
Option Agreement thereunder.
|
|
10.6.1
|
|
|
(4)u
|
|
|
Amendment to 2008 Equity Incentive Plan of the Company.
|
|
10.7
|
|
|
(1)u
|
|
|
Employment Agreement dated March 1, 2006, between the
Company and G.G. Pique.
|
|
10.7.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated January 1, 2008,
between the Company and G.G. Pique.
|
|
10.7.2
|
|
|
(3)u
|
|
|
Amendment to Employment Agreement dated May 28, 2008,
between the Company and G.G. Pique.
|
|
10.7.3
|
|
|
*u
|
|
|
Amendment to Employment Agreement dated December 31, 2008,
between the Company and G.G. Pique.
|
|
10.8
|
|
|
(1)u
|
|
|
Employment Agreement dated November 1, 2007, between the
Company and Tom Willardson.
|
|
10.8.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and Tom Willardson.
|
|
10.9
|
|
|
(1)u
|
|
|
Employment Agreement dated July 1, 2006, between the
Company and Richard Stover.
|
|
10.9.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and Richard Stover.
|
|
10.10
|
|
|
(1)u
|
|
|
Employment Agreement dated July 1, 2006, between the
Company and Terrill Sandlin.
|
|
10.10.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and Terrill Sandlin.
|
|
10.11
|
|
|
(1)u
|
|
|
Employment Agreement dated July 1, 2006, between the
Company and MariaElena Ross.
|
|
10.11.1
|
|
|
(1)u
|
|
|
Amendment to Employment Agreement dated February 25, 2008,
between the Company and MariaElena Ross.
|
|
10.12
|
|
|
(1)
|
|
|
Independent Contractor Agreement dated January 23, 2008,
between the Company and Darby Engineering LLC.
|
|
10.13
|
|
|
(1)
|
|
|
Lease Agreement dated February 28, 2005, between the
Company and 2101 Williams Associates, LLC.
|
|
75
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Description
|
10.13.1
|
|
|
(1)
|
|
|
Amendment to Lease Agreement dated October 3, 2005, between
the Company and 2101 Williams Associates, LLC.
|
|
10.13.2
|
|
|
(1)
|
|
|
Second Amendment to Lease Agreement dated January 4, 2006,
between the Company and 2101 Williams Associates, LLC.
|
|
10.13.3
|
|
|
(1)
|
|
|
Third Amendment to Lease Agreement dated September 26,
2006, between the Company and 2101 Williams Associates, LLC.
|
|
10.14
|
|
|
(1)
|
|
|
Lease Agreement dated February 15, 2008, between the
Company and Beretta Investment Group.
|
|
10.15
|
|
|
(1)
|
|
|
Lease Agreement dated August 7, 2006, between Energy
Recovery Iberia, S.L. and REGUS Business Centre.
|
|
10.16
|
|
|
(2)
|
|
|
Loan and Security Agreement dated March 27, 2008, between
the Company and Comerical Bank.
|
|
10.16.1
|
|
|
(2)
|
|
|
First Modification to Loan and Security Agreement dated
March 27, 2008, between the Company and Comerica Bank.
|
|
10.16.2
|
|
|
(3)
|
|
|
Second Modification to Loan and Security Agreement dated
May 29, 2008, between the Company and Comerica Bank.
|
|
10.16.3
|
|
|
|
|
|
Third Modification to Loan and Security Agreement dated
September 18, 2008, between the Company and Comerica Bank,
incorporated by reference herein to Exhibit 10.16.3
previously filed with the Companys Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2008.
|
|
10.16.4
|
|
|
*
|
|
|
Fourth Modification to Loan and Security Agreement dated
December 23, 2008, between the Company and Comerica Bank.
|
|
10.17
|
|
|
*
|
|
|
Lease Agreement dated November 25, 2008, between the
Company and Doolittle Williams, LLC.
|
|
10.18
|
|
|
*
|
|
|
Lease Agreement dated September 1, 2008, between Energy
Recovery Iberia, S.L. and Lambaesis, S.L.
|
|
14.1
|
|
|
*
|
|
|
Code of Ethics.
|
|
21.1
|
|
|
*
|
|
|
List of subsidiaries of the Company.
|
|
23.1
|
|
|
*
|
|
|
Consent of BDO Seidman, LLP, Independent Registered Public
Accounting Firm.
|
|
31.1
|
|
|
*
|
|
|
Certification of Principal Executive Officer pursuant to
Exchange Act
Rule 13a-14(a)
or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
31.2
|
|
|
*
|
|
|
Certification of Principal Financial Officer pursuant to
Exchange Act
Rule 13a-14(a)
or 15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
32.1
|
|
|
*
|
|
|
Certification of Principal Executive Officer and Principal
Financial Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
(1)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on
Form S-1,
as amended (Registration
No. 333-150007),
filed April 1, 2008.
|
|
(2)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on
Form S-1,
as amended (Registration
No. 333-150007),
filed May 12, 2008.
|
|
76
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
|
Description
|
(3)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on
Form S-1,
as amended (Registration
No. 333-150007),
filed June 9, 2008.
|
|
(4)
|
|
|
|
|
|
Incorporated by reference herein to the same numbered exhibit
previously filed with the Companys Registration Statement
on
Form S-1,
as amended (Registration
No. 333-150007),
filed June 27, 2008.
|
|
|
|
|
u |
|
Indicates management compensatory plan, contract or arrangement. |
|
* |
|
Filed or furnished herewith, as applicable. |
77