ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion in this item and in other items of this Form 10-Q contains 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 that represent our current expectations about future events 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.
Words such as
“
expects,
”
“
anticipates,
”
“
believes,
”
“
estimates,
”
variations of such words, and similar expressions are also intended to identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties
,
and assumptions that are difficult to predict
; t
herefore, actual results may differ materially and adversely from those expressed in any forward-looking statements.
Forward-looking statements in this report include, without limitation,
statements about the following:
|
•
|
our expectation that sales outside of the United States will remain a
significant portion of our product revenue;
|
|
•
|
our expectation that we will meet the two key milestones associated with our VorTeq
TM
licensing agreement with Schlumberger Technology Corporation and will receive annual royalties under said agreement;
|
|
•
|
our expectation that oil price fluctuations may impact the acceptance or rate of adoption of our oil & gas and hydraulic fracturing products;
|
|
•
|
our belief that levels of gross profit margin for our Water Segment are sustainable to the extent that volume grows, we experience a favorable product mix, pricing remains stable, and we continue to realize cost savings through production efficiencies and enhanced yields;
|
|
•
|
our expectation that, as we expand our international sales, a portion of our revenue could continue to be denominated in foreign currencies;
|
|
•
|
our expectation that our expenses for research and development
and sales and marketing
may increase as a result of the diversification into markets outside of water and hydraulic fracturing; and
|
|
•
|
our belief that our existing cash balances and cash generated from our operations will be sufficient to meet our anticipated liquidity needs for the foreseeable future, with the exception of a decision to enter into an acquisition and/or fund investments in newly developed technologies or product offerings arising from rapid market adoption that could require us to seek additional equity or debt financing.
|
You should not place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of the filing of this
Quarterly
Report on Form 10-
Q
.
All forward-looking statements included in this document are subject to certain
risks and uncertainties, which could cause actual results to differ materially from those projected in the forward-looking statements, as disclosed from time to time in our reports on Forms 10-K, 10-Q, and 8-K as well as in our Annual Reports to Stockholders and, if necessary, updated in “Part II, Item 1A: Risk Factors.” 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.
Overview
We are an energy solutions provider to industrial fluid flow markets worldwide. We make industrial processes more operating and capital expenditure efficient. Our solutions convert wasted pressure energy into a reusable asset and preserve or eliminate pumping technology in hostile processing environments. Our core competencies are fluid dynamics and advanced material science. Our company was founded in 1992, and we introduced the initial version of our Pressure Exchanger
®
energy recovery device in early 1997 for sea water reverse osmosis desalination. In December 2009, we acquired Pump Engineering, LLC, which manufactured centrifugal energy recovery devices known as turbochargers as well as high-pressure pumps. In 2012, we introduced the IsoBoost and IsoGen branded products for use in the oil & gas industry. In 2015, we conducted field trials for the VorTeq hydraulic pumping solution also for use in the oil & gas industry for oil field hydraulic fracturing operations and entered into a fifteen year license agreement with Schlumberger Technology Corporation.
Following the appointment of a new Chief Executive Officer in April 2015, new internal reporting was developed for making operating decisions and assessing financial performance. Beginning July 1, 2015, a new internal organizational and reporting structure was implemented and we began reporting segment information on a basis reflecting this new structure. Prior period segment results have been adjusted retrospectively to reflect this new internal reporting structure.
Our reportable operating segments consist of the Water Segment and the Oil & Gas Segment. These segments are based on the industries in which the products are sold, the type of energy recovery device sold, and the related solution and services.
Water Segment
The Water Segment consists of revenue associated with products sold for use in reverse osmosis water desalination, as well as the related identifiable expenses. Our Water Segment revenue is principally derived from the sale of our energy recovery devices for use in water desalination plants worldwide. We also derive product revenue from the sale of our high-pressure and circulation pumps which we manufacture and sell both separately and in connection with our energy recovery devices for use in water desalination plants. Additionally, we receive product revenue from the sale of spare parts and services, including start-up and commissioning services that we provide to our customers.
With respect to product revenue from our energy recovery devices in our Water Segment, a significant portion of our revenue typically has been generated from sales to a limited number of large engineering, procurement, and construction, or EPC, firms that are involved with the design and construction of large desalination plants. Sales to these firms often involve a long sales cycle that can range from 16 to 36 months. A single large desalination project can generate an order for numerous energy recovery devices and generally represents a significant revenue opportunity. We also sell our devices to many small- to medium-sized original equipment manufacturers, or OEMs, which commission smaller desalination plants, order fewer energy recovery devices per plant, and have shorter sales cycles.
We often experience substantial fluctuations in our Water Segment net revenue from quarter to quarter and from year to year because a single order for our energy recovery devices by a large EPC firm for a particular plant may represent significant revenue. In addition, historically our EPC 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. This historical trend was reflected in the fourth quarter of the last several years. Normal seasonality trends also generally show our lowest revenue in the first quarter of the year.
A limited number of our customers account for a substantial portion of our product revenue and of our accounts receivable and unbilled receivables. Product revenue from customers representing 10% or more of product revenue varies from period to period. For the three months ended March 31, 2016, one customer accounted for 41% of our product revenue. For the three months ended March 31, 2015, two customers accounted for 12% each of our product revenue.
No other customer accounted for more than 10% of our product revenue during any of these periods.
At March 31, 2016, one customer accounted for 48% of our accounts receivable and unbilled receivables balance. At December 31, 2015, two customers accounted for 26% and 18%, respectively, of our accounts receivable and unbilled receivables balance.
At March 31, 2016, one vendor accounted for 14% of our accounts payable balance. At December 31, 2015, no customer accounted for more than 10% of our accounts payable balance.
During the three months ended March 31, 2016 and 2015, most of our product revenue and accounts receivable were attributable to sales outside of the United States. We expect sales and accounts receivable outside of the United States to remain a significant portion of our Water Segment product revenue and accounts receivable for the next few years.
Oil &Gas
Segment
The Oil & Gas Segment consists of revenue associated with products sold or licensed for use in gas processing, chemical processing, and hydraulic fracturing, as well as related identifiable expenses. In the past several years, we have invested significant research and development costs to expand our business into pressurized fluid flow industries within the oil & gas industry. In 2014, we announced a new product for the hydraulic fracturing industry, the VorTeq hydraulic fracturing system. Field trials were initiated for the VorTeq in the second quarter of 2015 and successfully completed in December 2015.
No oil & gas product revenue was recognized during the three months ended March 31, 2016. In the first quarter of 2015, we recognized oil & gas product revenue of $0.1 million from oil & gas commissioning services and fees related to the cancellation of a ConocoPhillips sales order.
On October 14, 2015, the Company, through our subsidiary ERI Energy Recovery Ireland Ltd., entered into a Licensing Agreement (the “Agreement”) with Schlumberger Technology Corporation, a subsidiary of Schlumberger Limited (NYSE:SLB). The Agreement has a term of fifteen (15) years for the exclusive right to use certain intellectual property related to our VorTeq Hydraulic Fracturing System technology. The Agreement provided for a $75 million exclusivity payment in connection with the execution of the Agreement, two separate $25 million payments upon the meeting of two milestones, and recurring royalty payments throughout the term of the Agreement. License and development revenue related to the exclusivity payment is recognized over the term of the agreement with $1.3 million of license and development revenue recognized in the three months ended March 31, 2016.
Our condensed 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 condensed 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 that 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; allowance for doubtful accounts; allowance for product warranty; valuation of stock options; valuation and impairment of goodwill, long-lived assets, and acquired intangible assets; useful lives for depreciation and amortization; valuation adjustments for excess and obsolete inventory; and deferred taxes and valuation allowances on deferred tax assets.
First Quarter of 2016 Compared to First Quarter of 2015
Results of Operations
Total Revenu
e
|
|
Three Months Ended March 31,
|
|
|
|
20
16
|
|
|
2015
|
|
|
Change
Increase / (Decrease)
|
|
Product revenue
|
|
$
|
10,051
|
|
|
|
89
|
%
|
|
$
|
5,864
|
|
|
|
100
|
%
|
|
$
|
4,187
|
|
|
|
71
|
%
|
License and development revenue
|
|
|
1,250
|
|
|
|
11
|
%
|
|
|
—
|
|
|
|
—
|
|
|
|
1,250
|
|
|
|
100
|
%
|
Total revenue
|
|
$
|
11,301
|
|
|
|
100
|
%
|
|
$
|
5,864
|
|
|
|
100
|
%
|
|
$
|
5,437
|
|
|
|
93
|
%
|
Product
Revenue
|
|
Three Months Ended
March 31,
|
|
S
egment
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Water
|
|
$
|
10,051
|
|
|
$
|
5,723
|
|
|
$
|
4,328
|
|
|
|
76
|
%
|
Oil & Gas
|
|
|
—
|
|
|
|
141
|
|
|
|
(141
|
)
|
|
|
(100
|
%)
|
Product revenue
|
|
$
|
10,051
|
|
|
$
|
5,864
|
|
|
$
|
4,187
|
|
|
|
71
|
%
|
Product revenue in the Water Segment increased by $4.3 million, or 76%, to $10.1 million for the three months ended March 31, 2016 from $5.7 million for the three months ended March 31, 2015. The increase was primarily due to increased mega project (“MPD”) shipments of $3.9 million compared to no MPD shipments in the three months ended March 31, 2015. Also contributing to the increase were higher OEM shipments of $0.3 million and higher aftermarket shipments of $0.1 million.
Product revenue in the Oil & Gas Segment decreased by $0.1 million, or 100%, to zero for the three months ended March 31, 2016 from $0.1 million for the three months ended March 31, 2015.
The following table reflects product revenue by category and as a percentage of total product revenue (in thousands, except percentages):
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
PX devices and related products
|
|
$
|
7,987
|
|
|
|
80
|
%
|
|
$
|
4,076
|
|
|
|
70
|
%
|
Turbochargers, pumps, and related products
|
|
|
2,064
|
|
|
|
20
|
%
|
|
|
1,647
|
|
|
|
28
|
%
|
Oil & gas product operating lease
|
|
|
—
|
|
|
|
—
|
|
|
|
141
|
|
|
|
2
|
%
|
Product revenue
|
|
$
|
10,051
|
|
|
|
100
|
%
|
|
$
|
5,864
|
|
|
|
100
|
%
|
During the three months ended March 31, 2016 and 2015, a significant portion of our product revenue was attributable to sales outside of the United States. Product revenue attributable to domestic and international sales as a percentage of product revenue was as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Domestic revenue
|
|
|
2
|
%
|
|
|
5
|
%
|
International revenue
|
|
|
98
|
%
|
|
|
95
|
%
|
Product revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
License and Development R
evenue
|
|
Three Months Ended
March 31,
|
|
S
egment
|
|
2016
|
|
|
2015
|
|
|
$ Change
|
|
|
% Change
|
|
Water
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Oil & Gas
|
|
|
1,250
|
|
|
|
—
|
|
|
|
1,250
|
|
|
|
100
|
%
|
License and development revenue
|
|
$
|
1,250
|
|
|
$
|
—
|
|
|
$
|
1,250
|
|
|
|
100
|
%
|
The increase in license and development revenue during the three months ended March 31, 2016 was due to the recognition of $1.3 million in revenue associated with the licensing agreement with Schlumberger. The $1.3 million is representative of the straight-line basis of revenue recognition of the $75 million initial payment over the fifteen-year term of the agreement.
License and development revenue attributable to domestic and international sales as a percentage of license and development revenue was as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
Domestic revenue
|
|
|
—
|
|
|
|
—
|
|
International revenue
|
|
|
100
|
%
|
|
|
—
|
|
License and development revenue
|
|
|
100
|
%
|
|
|
—
|
|
Product
Gross Profit
|
|
Three Months Ended
March 31
, 201
6
|
|
|
Three months Ended
March 31
, 201
5
|
|
|
|
Water
|
|
|
Oil &Gas
|
|
|
Total
|
|
|
Water
|
|
|
Oil &Gas
|
|
|
Total
|
|
Product gross profit
|
|
$
|
6,377
|
|
|
$
|
—
|
|
|
$
|
6,377
|
|
|
$
|
3,220
|
|
|
$
|
113
|
|
|
$
|
3,333
|
|
Product gross margin
|
|
|
63
|
%
|
|
|
—
|
|
|
|
63
|
%
|
|
|
56
|
%
|
|
|
80
|
%
|
|
|
57
|
%
|
Product gross profit represents our product revenue less our product cost of revenue. Our product cost of revenue consists primarily of raw materials, personnel costs (including share-based compensation), manufacturing overhead, warranty costs, depreciation expense, and manufactured components. For the three months ended March 31, 2016, product gross profit as a percentage of product revenue was 63% compared to 57% for the three months ended March 31, 2015.
The increase in product gross profit as a percentage of product revenue in the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was primarily due to a shift in product mix toward PX devices, increased sales volume, and pricing.
Future product gross profit is highly dependent on the product and customer mix of our product revenue, overall market demand and competition, and the volume of production in our manufacturing plant that determines our operating leverage. Accordingly, we are not able to predict our future product gross profit levels with certainty. We believe that the current levels of product gross profit margin are sustainable to the extent that volume remains healthy, our product mix favors PX
devices, and we continue to realize cost savings through production efficiencies and enhanced yields.
Manufacturing headcount increased to 42 in the first quarter of 2016 from 37 in the first quarter of 2015.
Share-based compensation expense included in cost of revenue was $38,000 and $35,000 for the three months ended March 31, 2016 and 2015, respectively.
Operating Expenses
|
|
Three Months Ended March 31,
|
|
|
|
20
16
|
|
|
2015
|
|
|
Change
Increase / (Decrease)
|
|
Total revenue
|
|
$
|
11,301
|
|
|
|
100
|
%
|
|
$
|
5,864
|
|
|
|
100
|
%
|
|
$
|
5,437
|
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
4,884
|
|
|
|
43
|
%
|
|
|
6,278
|
|
|
|
107
|
%
|
|
|
(1,394
|
)
|
|
|
(22
|
%)
|
Sales and marketing
|
|
|
2,070
|
|
|
|
18
|
%
|
|
|
2,433
|
|
|
|
41
|
%
|
|
|
(363
|
)
|
|
|
(15
|
%)
|
Research and development
|
|
|
2,665
|
|
|
|
24
|
%
|
|
|
2,533
|
|
|
|
43
|
%
|
|
|
132
|
|
|
|
5
|
%
|
Amortization of intangible assets
|
|
|
157
|
|
|
|
1
|
%
|
|
|
159
|
|
|
|
3
|
%
|
|
|
(2
|
)
|
|
|
(1
|
%)
|
Total operating expenses
|
|
$
|
9,776
|
|
|
|
87
|
%
|
|
$
|
11,403
|
|
|
|
194
|
%
|
|
$
|
(1,627
|
)
|
|
|
(14
|
%)
|
General and Administrative Expense
General and administrative expense
decreased by $1.4 million, or 22%, to $4.9 million for the three months ended March 31, 2016 from $6.3 million for the three months ended March 31, 2015. As a percentage of total revenue, general and administrative expense
decreased to 43% for the three months ended March 31, 2016 from 107% for the three months ended March 31, 2015.
General and administrative headcount increased to 27 in the first quarter of 2016 from 23 in the first quarter of 2015.
Of the $1.4 million decrease in general and administrative expense for the three months ended March 31, 2016 compared to the same quarter of 2015, $1.1 million related to professional, legal and other administrative costs; $0.1 million related to compensation and employee related benefits; and $0.3 million related to other administrative costs. These decreases were offset by an increase of $0.1 million related to occupancy and other costs.
Share-based compensation expense included in general and administrative expense was $0.9 million for both the three months ended March 31, 2016 and 2015. Share-based compensation expense included charges as a result of modification of options associated with the resignation of officers in both periods of $0.5 million and $0.3 million, respectively.
Sales and Marketing Expense
Sales and marketing expense decreased by $0.3 million, or 15%, to $2.1 million for the three months ended March 31, 2016 from $2.4 million for the three months ended March 31, 2015. As a percentage of total revenue, sales and marketing expense decreased to 18% for the three months ended March 31, 2016 from 41% for the three months ended March 31, 2015.
Sales and marketing headcount decreased to 28
in the first quarter of 2016 from 33 in the first quarter of 2015.
Of the $0.3 million decrease in sales and marketing expense for the three months ended March 31, 2016 compared to the same quarter of 2015, $0.2 million related to commissions and incentive bonus accruals; $0.1 million related to compensation and employee related benefits; and $0.1 million related to professional and other sales and marketing services. The decreases were offset by $0.1 million related to stock-based compensation expense.
Share-based compensation expense included in sales and marketing expense was $0.2 million and $0.1 million for the three months ended March 31, 2016 and 2015, respectively.
Research and Development Expense
Research and development expense increased by $0.1 million, or 5%, to $2.7 million for the three months ended March 31, 2016 from $2.5 million for the three months ended March 31, 2015. As a percentage of total revenue, research and development expense decreased to 24% for the three months ended March 31, 2016 from 43% for the three months ended March 31, 2015.
Research and development headcount remained the same at 19 for both the first quarter of 2016 and the first quarter of 2015.
Of the $0.1 million increase in research and development expense for the three months ended March 31, 2016 compared to the same quarter of 2015, $0.1 million related to costs associated with the Company’s investment in product development for oil & gas applications and $0.1 million related to outside consulting and professional fees. The increases were offset by a $0.1 million decrease related to compensation and employee-related benefits.
Share-based compensation expense included in research and development expense was $0.1 million for both the three months ended March 31, 2016 and 2015.
As we continue to advance our existing technologies and develop new energy recovery and efficiency-enhancing solutions for markets outside of seawater desalination, we anticipate that our research and development expenses may increase in the future.
Amortization of Intangible Assets
Amortization of intangible assets is primarily related to finite-lived intangible assets acquired as a result of our purchase of Pump Engineering, LLC in December 2009. Amortization expense decreased slightly for the three months ended March 31, 2016 compared to the three months ended March 31, 2015. As a percentage of total revenue, amortization of intangible assets decreased to 1% for the three months ended March 31, 2016 from 3% for the three months ended March 31, 2015.
Other income and expenses
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
Increase / (Decrease)
|
|
Total revenue
|
|
$
|
11,301
|
|
|
|
100
|
%
|
|
$
|
5,864
|
|
|
|
100
|
%
|
|
$
|
5,437
|
|
|
|
93
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
**
|
|
|
|
(40
|
)
|
|
|
(1
|
%)
|
|
|
39
|
|
|
|
98
|
%
|
Other non-operating expense
|
|
|
(21
|
)
|
|
|
**
|
|
|
|
(102
|
)
|
|
|
(2
|
%)
|
|
|
81
|
|
|
|
79
|
%
|
Total other income and expenses
|
|
$
|
(22
|
)
|
|
|
**
|
|
|
|
(142
|
)
|
|
|
(2
|
%)
|
|
$
|
120
|
|
|
|
85
|
%
|
** Not meaningful
Non-operating income (expense), net, including interest expense, decreased by $0.1 million to an expense of $22,000 in the three months ended March 31, 2016 from expense of $142,000 in the three months ended March 31, 2015. The decrease was primarily due to a decrease in interest income related to interest receivable on investments, foreign currency losses recorded during the first quarter of 2016 compared to the same period last year, and to lower interest expense.
Income Taxes
The income tax benefit was $(205,000) in the three months ended March 31, 2016 compared to a tax expense of $71,000 in the three months ended March 31, 2015. The tax benefit for the three months ended March 31, 2016 was primarily related to losses in our Ireland subsidiary. The tax expense for the three months ended March 31, 2015 primarily related to the tax basis amortization of goodwill and state and other taxes.
Liquidity and Capital Resources
Overview
Our primary source of cash historically has been proceeds from the issuance of common stock and customer payments for our products and services. In October 2015, under the terms of the licensing agreement described above, we received a $75 million exclusivity payment from Schlumberger. The licensing agreement with Schlumberger also provides for two separate $25 million payments upon the meeting of two milestones and recurring royalty payments throughout the term of the Agreement.
As of March 31, 2016, we have issued common stock for aggregate net proceeds of $89.7 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.
In March 2015, we entered into a loan agreement with a financial institution for a $55,000 fixed-rate installment loan carrying an annual interest rate of 6.35%. The loan is payable in monthly installments and matures on April 2, 2020.
As of March 31, 2016, our principal sources of liquidity consisted of unrestricted cash and cash equivalents of $96.5 million that are invested primarily in money market funds; short-term investments of $0.3 million that are primarily invested in marketable debt securities; and accounts receivable of $7.7 million. We invest cash not needed for current operations predominantly in high-quality, investment-grade, marketable debt instruments with the intent to make such funds available for operating purposes as needed.
We currently have unbilled receivables pertaining to customer contractual holdback provisions, whereby we will invoice the final installment due under a sales contract six to 24 months after the product has been shipped to the customer and revenue has been recognized. The customer holdbacks represent amounts intended to provide a form of security to the customer during the warranty period; accordingly, these receivables have not been discounted to present value. At March 31, 2016 we had $1.8 million of short-term unbilled receivables.
In June 2012, we entered into a loan agreement (the “2012 Agreement”) with a financial institution. The 2012 Agreement matured in and was amended in June 2015. The 2012 Agreement, as amended,
provides for a total available credit line of $16.0 million. Under the 2012 Agreement, we are allowed to draw advances not to exceed, at any time, $10.0 million as revolving loans. The total stand-by letters of credit issued under the 2012 Agreement may not exceed the lesser of the $16.0 million credit line or the credit line minus all outstanding revolving loans. At no time may the aggregate of the revolving loans and stand-by letters of credit exceed the total available credit line of $16.0 million. Revolving loans may be in the form of a base rate loan that bears interest equal to the prime rate or a Eurodollar loan that bears interest equal to the adjusted LIBOR rate plus 1.25%. Stand-by letters of credit are subject to customary fees and expenses for issuance or renewal. The unused portion of the credit facility is subject to a fee in an amount equal to 0.25% per annum of the average unused portion of the revolving line.
We are subject to certain financial and administrative covenants under the 2012 Agreement. As of March 31, 2016, we were in compliance with these covenants.
The 2012 Agreement, as amended, also requires us to maintain a cash collateral balance equal to 101% of all outstanding advances and all outstanding stand-by letters of credit collateralized by the line of credit. The 2012 Agreement, as amended, matures in June 2018 and is collateralized by substantially all of our assets.
As of March 31, 2016 there were no advances drawn under the 2012 Agreement’s line of credit. The amounts outstanding on stand-by letters of credit collateralized under the 2012 Agreement totaled approximately $4.1 million, and restricted cash related to these stand-by letters of credit issued under the 2012 Agreement was approximately $4.1 million as of March 31, 2016. Of this $4.1 million of restricted cash, $1.2 million was classified as current and $2.9 million was classified as non-current.
Cash Flows from Operating Activities
Net cash used in operating activities was $(0.3) million and $(1.0) million for the three months ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016, a net loss of $(2.0) million was adjusted to $0 by non-cash items totaling $2.0 million. For the three months ended March 31, 2015, a net loss of $(8.3) million was adjusted to $(5.5) million by non-cash items totaling $2.8 million. Non-cash adjustments during the three months ended March 31, 2016, primarily include share-based compensation of $1.2 million and depreciation and amortization of $0.9 million.
Non-cash adjustments during the three months ended March 31, 2015, primarily include share-based compensation of $1.1 million; depreciation and amortization of $1.0 million; and unrealized losses on foreign currency transactions, amortization of premiums/discounts on investments, deferred income taxes, and other non-cash items of $0.7 million.
The net cash impact from changes in assets and liabilities was approximately $(0.2) million and $4.5 million for the three months ended March 31, 2016 and 2015, respectively. Net changes in assets and liabilities during the three months ended March 31, 2016 are primarily attributable to a decrease of $4.0 million in accounts receivable and unbilled receivables as a result of the collections and the timing of invoices for projects shipped previously and an increase of $0.7 million in accounts payable due to the timing of payments to vendors. These changes were offset by a $2.8 million decrease in accrued expenses and other current liabilities due to the timing of payments to employees and other third parties; a $1.3 million decrease in non-current deferred revenue related to the recognition of revenue related to the Schlumberger exclusive license; a $0.6 million increase in prepaid expenses, other current assets, and inventory; and a decrease of $0.2 million in current deferred revenue due to the timing of invoices
Net changes in assets and liabilities during the three months ended March 31, 2015 are primarily attributable to a decrease of $5.8 million in accounts receivable and unbilled receivables as a result of the collections and the timing of invoices for projects shipped previously, an increase of $0.6 million in deferred revenue due to the timing of invoices. These changes were offset by an increase of $1.0 million in accounts payable, accrued expense, and other liabilities due to the timing of payments to employees, vendors, and other third parties and an increase of $1.1 million in inventories due to the delay in a shipment scheduled for the first quarter.
Cash Flows from Investing Activities
Net cash (used in) provided by investing activities was $(0.5) million and $5.6 million for the three months ended March 31, 2016 and 2015, respectively. Cash flows used in investing activities for the three months ended March 31, 2016 were due to an increase in restricted cash to collateralize stand-by letters of credit and cash used to purchase fixed assets.
Cash flows provided by investing activities for the three months ended March 31, 2015 was primarily due to the maturity of marketable securities of $4.7 million and a decrease of $1.1 million in restricted cash to collateralize stand-by letters of credit. These sources of cash were offset by the use of $0.2 million used to purchase fixed assets.
Cash Flows from Financing Activities
Net cash (used in) provided by financing activities was $(2.6) million and $0.3 million for the three months ended March 31, 2016 and 2015, respectively. Net cash used during the three months ended March 31, 2016 consisted of $4.1 million used to repurchase our common stock related to a repurchase program. The use of cash was offset by $1.5 million received for the issuance of common stock due to option exercises.
Net cash provided during the three months ended March 31, 2015 consisted of $0.3 million received for the issuance of common stock due to option exercises and $55,000 of borrowings.
Liquidity and Capital Resource Requirements
We believe that our existing cash balances and cash generated from operations will be sufficient to meet our anticipated capital requirements for at least the next twelve months. However, we may need to raise additional capital or incur additional indebtedness to continue to fund our operations or to support acquisitions 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 amount and timing of cash used for stock repurchases, the timing and extent of our expansion into new geographic territories, the timing of new product introductions, and the continuing market acceptance of our products. We may enter into potential material investments in, or acquisitions of, complementary businesses, services, or technologies 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
In March 2015, we entered into a loan agreement that matures in April 2020. The total of future minimum installment payment under this agreement as of March 31, 2016 was $46,000.
For additional information, see Note 6 — “Long-Term Debt and Lines of Credit” to the unaudited condensed consolidated financial statements.
We lease facilities under fixed non-cancellable operating leases that expire on various dates through 2019. The total of the future minimum lease payments under these leases as of March 31, 2016 was $5.8
million. For additional information, see Note 9 — “Commitments and Contingencies” to the unaudited condensed consolidated financial statements.
In the course of our normal operations, we also enter into purchase commitments with our suppliers for various raw materials and components parts. The purchase commitments covered by these arrangements are subject to change based on sales forecasts for future deliveries. As of March 31, 2016, we had approximately $2.0 million of cancellable open purchase order arrangements related primarily to materials and parts.
We have 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 March 31, 2016, we believe that our exposure related to these guarantees and indemnities was not material.
The following is a summary of our contractual obligations as of March 31, 2016 (in thousands):
|
|
Payments Due by Period
|
|
Payments Due During Year Ending December 31,
|
|
Operating
Leases
|
|
|
Purchase
Obligations
|
|
|
Loan
|
|
|
Total
|
|
2016 (remaining 9 months)
|
|
$
|
1,206
|
|
|
$
|
1,974
|
|
|
$
|
8
|
|
|
$
|
3,188
|
|
2017
|
|
|
1,577
|
|
|
|
—
|
|
|
|
11
|
|
|
|
1,588
|
|
2018
|
|
|
1,600
|
|
|
|
—
|
|
|
|
11
|
|
|
|
1,611
|
|
2019
|
|
|
1,402
|
|
|
|
—
|
|
|
|
12
|
|
|
|
1,414
|
|
2020
|
|
|
—
|
|
|
|
—
|
|
|
|
4
|
|
|
|
4
|
|
|
|
$
|
5,785
|
|
|
$
|
1,974
|
|
|
$
|
46
|
|
|
$
|
7,805
|
|
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 that would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Recent Accounting Pronouncements
See Note 1 — “The Company and Summary of Significant Accounting Policies” to the condensed consolidated financial statements regarding the impact of certain recent accounting pronouncements on our condensed consolidated financial statements.