Commitments and Contingencies

12 Months Ended

Dec. 31, 2019

Operating Lease Obligations

The Company leases office facilities and equipment under operating leases that expire on various dates through 2028.

On January 10, 2019, the Company entered into an industrial lease agreement, which commenced on January 1, 2020. This new lease for a commercial development center for oil & gas field testing, manufacturing, and training, located in Katy, Texas (the “Katy Lease”), includes an office and warehouse space of approximately 25,200 square feet (“sq.ft.”) and land of approximately 4.5 acres. The Company’s annual base rent obligation, paid monthly, will be approximately $0.3 million with an increase of approximately 3% annually thereafter, totaling $3.6 million, over the term of the lease. The initial term of the Katy Lease is 120 months after the commencement date, and the Company has two options to extend the lease by an additional five-year term per option, which must be exercised by written notice at least six months prior to the end of the relevant term.

On February 10, 2020, the Company entered into a lease agreement, that commenced on March 1, 2020, for an additional office and warehouse space of approximately 54,429 sq.ft., located in Tracy, California (the “Tracy Lease”). The new lease will supplement the existing manufacturing, warehouse and distribution of the Company’s energy recovery devices (“ERDs”). The Company’s annual base rent obligation, paid monthly, will be approximately $0.4 million, with an increase of approximately 3% annually thereafter, totaling $5.0 million, over the term of the lease. The initial term of the Tracy Lease is 122 months after the commencement date, and the Company has one option to extend the lease by an additional five-year term, which must be exercised by written notice at least nine months prior to the end of the original lease term.

The following table presents operating lease expense related to all of the Company’s leased property.



	Years Ended December 31,
	2019		2018		2017
	(In thousands)
Operating lease cost	$	1,894	$	1,888	$	1,699

The following table presents other information related to the operating leases.



	Years Ended December 31,
	2019		2018		2017
	(In thousands)
Cash payments	$	1,824	$	964	$	1,395

The following table presents the weighted average remaining lease term and discount rate related to the operating leases.



	Years Ended December 31,
	2019		2018
Weighted average remaining lease term	8.9 years		9.8 years
Weighted average discount rate	6.97	%	6.95	%

The following table presents the minimum lease payments under noncancelable operating leases, exclusive of executory costs as of December 31, 2019.



	Lease Amounts⁽¹⁾
	(In thousands)
Year:
2020	$	1,855
2021	1,653
2022	1,812
2023	1,714
2024	1,922
2025 and thereafter	8,121
Total	17,077
Less imputed lease interest	(4,521		)
Total lease liabilities	$	12,556

⁽¹⁾

Excluded from the above table are the aforementioned executed Katy Lease and Tracy Lease.

Warranty

The following table presents the changes in the Company’s accrued product warranty reserve.



	Years Ended December 31,
	2019			2018			2017
	(In thousands)
Warranty reserve balance, beginning of year	$	478		$	366		$	406
Warranty costs charged to cost of revenue	402			340			246
Utilization charges against reserve	(56		)	(48		)	(86		)
Release of accrual related to expired warranties	(193		)	(180		)	(200		)
Warranty reserve balance, end of year	$	631		$	478		$	366

Purchase Obligations

The Company has purchase order arrangements with its vendors for which the Company has not received the related goods or services as of December 31, 2019. These arrangements are subject to change based on the Company’s sales demand forecasts. The Company has the right to cancel the arrangements prior to the date of delivery. The purchase order arrangements are related to various raw materials and components parts, as well as for capital equipment. As of December 31, 2019, the Company had approximately $10.4 million of such open cancellable purchase order arrangements.

Guarantees

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with its customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company’s activities, generally limited to personal injury and property damage caused by the Company’s employees at a customer’s plant, and in proportion to the employee’s percentage of fault for the accident. Damages incurred for these indemnifications would be covered by the Company’s general liability insurance to the extent provided by the policy limitations. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the estimated valuation of the potential liability arising from these agreements is not material. Accordingly, the Company recorded no liabilities for these agreements as of December 31, 2019 and 2018.

In certain cases, the Company issues warranty and product performance guarantees to its customers for amounts generally equal to 10% or less of the total sales agreement to endorse the execution of product delivery and to the warranty of design work, fabrication and operating performance of our devices. These guarantees are generally SBLCs that typically remain in place for periods of 24 to 36 months. See Note 7, “Lines of Credit – Stand-By Letters of Credit,” for information related to SBLCs.

Litigation

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

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

On September 10, 2014, the Company terminated the employment of its Senior Vice President, Sales, Borja Blanco, on the basis of breach of duty of trust and conduct leading to conflict of interest. On October 24, 2014, Mr. Blanco filed a labor claim against ERI Iberia in Madrid, Spain, challenging the fairness of his dismissal and seeking compensation (“Case 1”). A hearing was held on November 13, 2015, after which the labor court ruled that it did not have jurisdiction over the matter. Mr. Blanco appealed and the appeals court reversed the labor court’s finding and instructed the labor court to make a ruling on the merits on November 21, 2017. On February 14, 2018, the Company received notice that the labor court issued a ruling in favor of Mr. Blanco declaring the termination to be an unjustified dismissal and ordered the Company to pay a dismissed severance. The Company appealed the decision on February 21, 2018 and received notice on March 18, 2019 that the appeals court had partially reversed the labor court’s order. The Company further appealed the decision on March 25, 2019. The Company denies any allegations of wrongdoing and intends to continue to vigorously defend against this lawsuit. Based on currently available information and review with outside counsel, the Company has estimated and accrued a potential loss.

On November 24, 2014, Mr. Blanco filed a second action based on breach of contract theories in the same court as Case 1 (“Case 2”), but the cases are separate. In Case 2, Mr. Blanco seeks payment of an unpaid bonus, stock options, and non-compete compensation. The court closed Case 2 in June 2018, and the 1-year period to reinitiate the case elapsed in June 2019.