10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2013
OR
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ____________ to __________

Commission File Number: 001-34112

Energy Recovery, Inc.

(Exact name of registrant as specified in its charter)

Delaware	01-0616867
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)
1717 Doolittle Drive, San Leandro, CA	94577
(Address of Principal Executive Offices)	(Zip Code)

(510) 483-7370

(Registrant’s Telephone Number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  

Yes ☑ No ☐

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    ☐		Accelerated filer                           ☑
Non-accelerated filer      ☐	(Do not check if a smaller reporting company)	Smaller reporting company         ☐

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

As of July 31, 2013, there were 51,032,566 shares of the registrant’s common stock outstanding.

1

ENERGY RECOVERY, INC.

QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2013

TABLE OF CONTENTS

		Page No.
	PART I.   FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012	3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2013 and 2012	5
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28
Item 4.	Controls and Procedures	29
	PART II.   OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 6.	Exhibits	30
	Signatures	31

2

PART I — FINANCIAL INFORMATION

Item 1. — Financial Statements (unaudited)

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data and par value)

(unaudited)

	June 30, 2013			December 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	11,350		$	16,642
Restricted cash		5,385			5,235
Short-term investments		7,286			9,497
Accounts receivable, net of allowance for doubtful accounts of $241 and $217 at June 30, 2013 and December 31, 2012, respectively		10,486			13,240
Unbilled receivables		2,183			5,020
Inventories		7,364			5,135
Deferred tax assets, net		500			500
Land and building held for sale		1,301			1,345
Prepaid expenses and other current assets		4,203			4,245
Total current assets		50,058			60,859
Restricted cash, non-current		4,097			4,366
Unbilled receivables, non-current		113			868
Long-term investments		8,898			4,773
Property and equipment, net of accumulated depreciation of $10,657 and $9,306 at June 30, 2013 and December 31, 2012, respectively		15,208			15,967
Goodwill		12,790			12,790
Other intangible assets, net		4,468			4,929
Other assets, non-current		2			2
Total assets	$	95,634		$	104,554
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	1,189		$	2,154
Accrued expenses and other current liabilities		5,521			8,555
Income taxes payable		48			39
Accrued warranty reserve		1,027			1,172
Deferred revenue		827			918
Current portion of capital lease obligations		—			18
Total current liabilities		8,612			12,856
Deferred tax liabilities, non-current, net		1,817			1,706
Deferred revenue, non-current		272			411
Other non-current liabilities		2,142			2,200
Total liabilities		12,843			17,173
Commitments and Contingencies (Note 9)
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; 52,814,752 and 51,032,149 shares issued and outstanding at June 30, 2013, respectively; and 52,685,129 and 50,902,526 shares issued and outstanding at December 31, 2012, respectively		53			53
Additional paid-in capital		118,674			117,264
Accumulated other comprehensive loss		(112	)		(79	)
Treasury stock, at cost, 1,782,603 shares repurchased at June 30, 2013 and December 31, 2012		(4,000	)		(4,000	)
Accumulated deficit		(31,824	)		(25,857	)
Total stockholders’ equity		82,791			87,381
Total liabilities and stockholders’ equity	$	95,634		$	104,554

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

3

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net revenue	$	8,569		$	12,296		$	14,942		$	17,052
Cost of revenue		3,293			5,636			6,649			9,140
Gross profit		5,276			6,660			8,293			7,912
Operating expenses:
General and administrative		3,326			3,606			7,496			7,074
Sales and marketing		1,859			1,772			3,870			3,254
Research and development		1,137			866			2,219			1,560
Amortization of intangible assets		231			261			461			523
Restructuring charges		44			79			44			110
Total operating expenses		6,597			6,584			14,090			12,521
(Loss) income from operations		(1,321	)		76			(5,797	)		(4,609	)
Interest expense		—			(1	)		—			(5	)
Other non-operating income (expense), net		25			(9	)		52			63
(Loss) income before income taxes		(1,296	)		66			(5,745	)		(4,551	)
Provision (benefit) for income taxes		161			(373	)		222			(307	)
Net (loss) income	$	(1,457	)	$	439		$	(5,967	)	$	(4,244	)
(Loss) earnings per share:
Basic	$	(0.03	)	$	0.01		$	(0.12	)	$	(0.08	)
Diluted	$	(0.03	)	$	0.01		$	(0.12	)	$	(0.08	)
Number of shares used in per share calculation:
Basic		51,026			51,432			51,004			52,025
Diluted		51,026			52,070			51,004			52,025

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

4

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net (loss) income	$	(1,457	)	$	439		$	(5,967	)	$	(4,244	)
Other comprehensive (loss) income net of tax:
Foreign currency translation adjustments		(3	)		13			2			7
Unrealized (loss) gain on investments		(24	)		(16	)		(35	)		32
Other comprehensive (loss) income		(27	)		(3	)		(33	)		39
Comprehensive (loss) income	$	(1,484	)	$	436		$	(6,000	)	$	(4,205	)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

5

ENERGY RECOVERY, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2013			2012
Cash Flows From Operating Activities
Net loss	$	(5,967	)	$	(4,244	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		1,829			1,976
Loss on disposal of fixed assets		19			—
Non-cash restructuring charges		44			79
Amortization of premiums/discounts on investments		171			287
Interest accrued on notes receivables from stockholders		—			(1	)
Share-based compensation		1,187			1,508
Loss on foreign currency transactions		31			7
Deferred income taxes		111			118
Provision for doubtful accounts		134			108
Provision for warranty claims		138			174
Valuation adjustments for inventory reserves		(60	)		4
Other non-cash adjustments		(58	)		65
Changes in operating assets and liabilities:
Accounts receivable		2,629			(2,804	)
Unbilled receivables		3,591			(192	)
Inventories		(2,253	)		800
Prepaid and other assets		41			639
Accounts payable		(781	)		(128	)
Accrued expenses and other liabilities		(3,190	)		(941	)
Income taxes payable		10			10
Deferred revenue		(230	)		674
Net cash used in operating activities		(2,604	)		(1,861	)
Cash Flows From Investing Activities
Capital expenditures		(866	)		(1,479	)
Purchase of marketable securities		(8,570	)		(861	)
Maturities of marketable securities		6,450			7,011
Restricted cash		119			1,646
Net cash (used in) provided by investing activities		(2,867	)		6,317
Cash Flows From Financing Activities
Repayment of long-term debt		—			(64	)
Repayment of capital lease obligation		(18	)		(63	)
Net proceeds from issuance of common stock		230			5
Repurchase of common stock		—			(4,000	)
Net cash provided by (used in) financing activities		212			(4,122	)
Effect of exchange rate differences on cash and cash equivalents		(33	)		(12	)
Net change in cash and cash equivalents		(5,292	)		322
Cash and cash equivalents, beginning of period		16,642			18,507
Cash and cash equivalents, end of period	$	11,350		$	18,829

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

6

ENERGY RECOVERY, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

Energy Recovery, Inc. (the “Company”, “Energy Recovery”, “we”, “our”, or “us”) designs, develops, manufactures, and sells energy recovery devices that harness the reusable energy from industrial fluid flows and pressure cycles. Our products are marketed and sold in fluid flow markets under the trademarks ERI^®, PX^®, Pressure Exchanger^®, and PX Pressure Exchanger^®. Our products are developed and manufactured in the United States of America (“U.S.”) at our headquarters in San Leandro, California. We also have sales offices in Madrid, Spain; Dubai, United Arab Emirates; and Shanghai, Peoples Republic of China.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires our management to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our most significant estimates and judgments involve the determination of 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; valuation of fair value of assets held for sale; useful lives for depreciation and amortization; valuation adjustments for excess and obsolete inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies, including contingent consideration. Actual results could differ materially from those estimates.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The accompanying condensed consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The December 31, 2012 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP; however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC on March 12, 2013.

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

Recent Accounting Pronouncements

In April 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-07, Liquidation Basis Accounting. The amendment requires (1) an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent; (2) that financial statements prepared using the liquidation basis of accounting present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation; and (3) disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. This update is effective prospectively for entities that determine liquidation is imminent during the annual reporting periods beginning after December 15, 2013 and interim reporting periods therein. Adoption of this guidance is not expected to have an impact on our financial statements absent any indication that liquidation is imminent.

7

In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendment is to resolve the diversity in practice of which subtopic applies to the release of the cumulative translation adjustment into net income when a parent company either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. This update is effective prospectively for reporting periods after December 15, 2013. Adoption of this guidance is not expected to have a material impact on our financial statements.

In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The standard provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. This update is effective for reporting periods after December 15, 2013. Adoption of this guidance is not expected to have a material impact on our financial statements.

Also in February 2013, the FASB issued ASU No. 2013-02, Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income. The standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and present significant amounts reclassified by the respective line items of net income, but only if the reclassified amount is required to be reclassified by U.S. GAAP. Amounts not required to be reclassified by U.S. GAAP must be cross-referenced to other disclosures required by U.S. GAAP that provide additional detail about those amounts. This update is effective prospectively for reporting periods after December 15, 2012, with early adoption permitted. Adoption of this guidance required additional disclosure, but did not have a material impact on our financial statements.

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The update was issued to address implementation issues about the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendment affects entities that have derivatives, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing, and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and liabilities subject to a master netting arrangement or similar agreement are also affected because this amendment makes them no longer subject to the disclosure requirements of ASU No. 2011-11. This amendment is applicable for periods beginning on or after January 1, 2013. Adoption of this guidance did not have a material impact on our financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other, Testing Indefinite-Lived Assets for Impairment. The standard provides entities an option to perform a qualitative assessment to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes, as a result of its qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, then the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. Adoption of this guidance did not have a material impact on our financial statements.

Note 2 — Goodwill and Other Intangible Assets

Goodwill of $12.8 million at June 30, 2013 and December 31, 2012 was the result of our acquisition of Pump Engineering, LLC in December 2009. During the three and six months ended June 30, 2013, there were no changes in the recognized amount of goodwill.

8

The components of identifiable other intangible assets, all of which are finite-lived, as of June 30, 2013 and December 31, 2012, respectively, were as follows (in thousands):

	June 30, 2013
	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses			Net Carrying Amount
Developed technology	$	6,100	$	(2,186	)	$	—		$	3,914
Non-compete agreements		1,310		(1,092	)		—			218
Backlog		1,300		(1,300	)		—			—
Trademarks		1,200		(180	)		(1,020	)		—
Customer relationships		990		(858	)		—			132
Patents		585		(339	)		(42	)		204
Total	$	11,485	$	(5,955	)	$	(1,062	)	$	4,468

	December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses			Net Carrying Amount
Developed technology	$	6,100	$	(1,881	)	$	—		$	4,219
Non-compete agreements		1,310		(1,015	)		—			295
Backlog		1,300		(1,300	)		—			—
Trademarks		1,200		(180	)		(1,020	)		—
Customer relationships		990		(792	)		—			198
Patents		585		(326	)		(42	)		217
Total	$	11,485	$	(5,494	)	$	(1,062	)	$	4,929

In 2012, we determined that the capitalized cost associated with our acquired trademark intangibles was impaired with the launch of the Company’s new branding strategy and the discontinuation of the use of the trademarks “PEI” and “Pump Engineering” in the fourth quarter of 2012. Accordingly, we recorded an impairment charge of $1.0 million for the year ended December 31, 2012 and have not recorded any amortization expense in 2013 related to this intangible asset.

Note 3 — Earnings per Share

Basic and diluted earnings per share are based on the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the calculation of earnings per share, as their inclusion would be anti-dilutive.

The following table shows the computation of basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
Numerator:
Net (loss) income	$	(1,457	)	$	439	$	(5,967	)	$	(4,244	)
Denominator:
Basic weighted average common shares outstanding		51,026			51,432		51,004			52,025
Effect of dilutive securities:
Stock options		—			57		—			—
Warrants		—			581		—			—
Diluted weighted average common shares outstanding		51,026			52,070		51,004			52,025
Basic (loss) earnings per share	$	(0.03	)	$	0.01	$	(0.12	)	$	(0.08	)
Diluted (loss) earnings per share	$	(0.03	)	$	0.01	$	(0.12	)	$	(0.08	)

9

The following potential common shares were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Stock options		7,273		6,317		7,273		6,374
Warrants		900		389		900		970
Restricted awards*		—		7		—		7

*           Includes restricted stock and restricted stock units.

Note 4 — Other Financial Information

Restricted Cash

We have pledged cash in connection with contingent payments resulting from a business acquisition, stand-by letters of credit, and credit cards. We have deposited corresponding amounts into money market and non-interest bearing accounts at three financial institutions for these items as follows (in thousands):

	June 30, 2013		December 31, 2012
Contingent and other consideration for acquisition	$	2,504	$	2,504
Collateral for stand-by letters of credit		2,567		2,416
Collateral for credit cards		314		315
Current restricted cash	$	5,385	$	5,235
Contingent and other consideration for acquisition	$	1,000	$	1,000
Collateral for stand-by letters of credit		3,097		3,366
Non-current restricted cash	$	4,097	$	4,366
Total restricted cash	$	9,482	$	9,601

Inventories

Our inventories consisted of the following (in thousands):

	June 30, 2013		December 31, 2012
Raw materials	$	3,226	$	3,406
Work in process		2,129		1,489
Finished goods		2,009		240
Inventories	$	7,364	$	5,135

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

	June 30, 2013		December 31, 2012
Payroll and commissions payable	$	2,919	$	4,687
Contingent consideration (current portion) and legal expenses		1,590		1,506
Other accrued expenses and current liabilities		1,012		2,362
Accrued expenses and other current liabilities	$	5,521	$	8,555

10

Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income for the six months ended June 30, 2013 by component were as follows (in thousands):

	Foreign Currency Translation Adjustments			Unrealized Gains (Losses) on Investments			Total Accumulated Other Comprehensive Loss
Balance, December 31, 2012	$	(94	)	$	15		$	(79	)
Net other comprehensive income (loss)		2			(35	)		(33	)
Balance, June 30, 2013	$	(92	)	$	(20	)	$	(112	)

There were no reclassifications of amounts out of accumulated other comprehensive loss for the six months ended June 30, 2013 as there were no sales of securities or translation adjustments that impacted other comprehensive loss.

Note 5 — Investments

Our short-term and long-term investments are all classified as available-for-sale.

Available-for-sale securities at June 30, 2013 consisted of the following (in thousands):

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Certificates of deposit	$	250	$	—	$	—		$	250
State and local government obligations		3,441		4		—			3,445
Corporate notes and bonds		3,585		7		(1	)		3,591
Short-term investments	$	7,276	$	11	$	(1	)	$	7,286
State and local government obligations		1,003		2		(1	)		1,004
Corporate notes and bonds		7,925		—		(31	)		7,894
Long-term investments	$	8,928	$	2	$	(32	)	$	8,898
Total available-for-sale securities	$	16,204	$	13	$	(33	)	$	16,184

Available-for-sale securities at December 31, 2012 consisted of the following (in thousands):

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Certificates of deposit	$	250	$	—	$	—		$	250
State and local government obligations		2,444		3		(1	)		2,446
Corporate notes and bonds		6,799		3		(1	)		6,801
Short-term investments	$	9,493	$	6	$	(2	)	$	9,497
State and local government obligations		1,381		6		(2	)		1,385
Corporate notes and bonds		3,381		13		(6	)		3,388
Long-term investments	$	4,762	$	19	$	(8	)	$	4,773
Total available-for-sale securities	$	14,255	$	25	$	(10	)	$	14,270

Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. The amortized cost and fair value of available-for-sale securities that had stated maturities as of June 30, 2013 are shown below by contractual maturity (in thousands):

	June 30, 2013
	Amortized Cost		Fair Value
Due in one year or less	$	2,384	$	2,384
Due after one year through three years		13,820		13,800
Total available-for-sale securities	$	16,204	$	16,184

11

Note 6 — Debt

Lines of Credit

In June 2012, we entered into a loan agreement (the “2012 Agreement”) with a financial institution. The 2012 Agreement 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 plus 0% or a Eurodollar loan that bears interest equal to the adjusted LIBO 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 facility fee in an amount equal to 0.25% per annum of the average unused portion of the revolving line. The 2012 Agreement 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 matures on June 5, 2015 and is collateralized by substantially all of our assets. At December 31, 2012, the amount of outstanding stand-by letters of credit collateralized under the 2012 Agreement totaled $1.4 million. As of June 30, 2013, there were no advances drawn and $1.5 million in stand-by letters of credit collateralized under the 2012 Agreement. Total restricted cash related to these stand-by letters of credit totaled $1.5 million as of June 30, 2013.

We are subject to certain financial and administrative covenants under the 2012 Agreement. As of June 30, 2013, we were in compliance with these covenants.

In 2009, we entered into a loan and security agreement (the “2009 Agreement”) with another financial institution. The 2009 Agreement, as amended, provided a total available credit line of $16.0 million. Under the 2009 Agreement, we were allowed to draw advances of up $10.0 million on a revolving line of credit or utilize up to $15.9 million as collateral for stand-by letters of credit, provided that the aggregate of the outstanding advances and collateral did not exceed the total available credit line of $16.0 million. Advances under the revolving line of credit incurred interest based on a prime rate index or LIBOR plus 1.375%. The 2009 Agreement, as amended, also required us to maintain cash collateral balances equal to at least 101% of the face amount of all outstanding stand-by letters of credit collateralized by the line of credit and 100% of the amount of all outstanding advances. The amended 2009 Agreement expired on May 30, 2012. There were no advances drawn under the 2009 Agreement’s credit line at the time it expired. At December 31, 2012, the amount of remaining outstanding stand-by letters of credit issued under the 2009 Agreement totaled $4.3 million. As of June 30, 2013, remaining stand-by letters of credit issued under the 2009 Agreement totaled $4.1 million. Total restricted cash related to these stand-by letters of credit totaled $4.1 million as of June 30, 2013.

Note 7 — Equity

Share-Based Compensation Expense

For the three and six months ended June 30, 2013 and 2012, we recognized share-based compensation expense related to employees and consultants as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of revenue	$	18	$	39	$	39	$	65
General and administrative		307		479		814		1,024
Sales and marketing		120		171		235		340
Research and development		53		36		99		79
Total share-based compensation expense	$	498	$	725	$	1,187	$	1,508

As of June 30, 2013, total unrecognized compensation cost related to non-vested share-based awards, net of estimated forfeitures, was $3.5 million, which is expected to be recognized as expense over a weighted average period of approximately 2.7 years.

12

In January 2013, we granted 100,000 stock options to an employee in connection with the offer letter of employment in July 2011. The options vest over a four-year period beginning on the first day of employment, have an exercise price of $3.42 per share based on the date of grant, and expire 10 years from the grant date.

In March 2013, we granted 843,600 stock options to certain officers and other employees. The options vest over a four-year period, have an exercise price of $3.92 per share, and expire 10 years from the grant date.

Note 8 — Income Taxes

The effective tax rate for the six months ended June 30, 2013 and 2012 was (3.9%) and 6.7%, respectively. The tax expense for the six months ended June 30, 2013 primarily relates to the amortization of the deferred tax liability for the temporary difference regarding the tax basis of goodwill recognized during the period and the truing up of tax refunds receivable. The net loss for the six months ended June 30, 2013 did not yield an income tax benefit as we continue to provide a full valuation allowance on our deferred tax assets. The tax benefit recognized for the six months ended June 30, 2012 primarily related to the recognition of state tax refunds from prior-year returns.

Note 9 — Commitments and Contingencies

Operating Lease Obligations

We lease facilities under fixed non-cancellable operating leases that expire on various dates through November 2019. Future minimum lease payments consist of the following (in thousands):

	June 30, 2013
2013 (remaining six months)	$	782
2014		1,627
2015		1,544
2016		1,581
2017		1,569
Thereafter		2,924
Total future minimum lease payments	$	10,027

Product Warranty

The following table summarizes the activity related to the product warranty liability during the three and six months ended June 30, 2013 and 2012 (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Balance, beginning of period	$	1,256		$	864		$	1,172		$	852
Warranty costs charged to cost of revenue		41			133			138			174
Change in estimate		(132	)		—			(132	)		—
Utilization of warranty		(138	)		(54	)		(151	)		(83	)
Balance, end of period	$	1,027		$	943		$	1,027		$	943

Based on management’s analysis of warranty liability experience, we recorded a change in estimate of our warranty reserve of $132,000 during the three months ended June 30, 2013.

Purchase Obligations

We enter into purchase order arrangements with our vendors. As of June 30, 2013, there are open purchase orders for which we have not yet received the related goods or services. These arrangements are subject to change based on our sales demand forecasts, and we have the right to cancel the arrangements prior to the date of delivery. As of June 30, 2013, we had approximately $1.6 million of cancellable open purchase order arrangements related primarily to materials and parts.

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Guarantees 

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with customers. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities, generally limited to personal injury and property damage caused by our employees at a customer’s desalination plant in proportion to the employee’s percentage of fault for the accident. Damages incurred for these indemnifications would be covered by our general liability insurance to the extent provided by the policy limitations. We have 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, we have no liabilities recorded for these agreements as of June 30, 2013 and December 31, 2012.

In certain cases, we issue warranty and product performance guarantees to our 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. These guarantees, generally in the form of stand-by letters of credit or bank guarantees secured by stand-by letters of credit, typically remain in place for periods ranging from 12 to 36 months and relate to the underlying product warranty period. The stand-by letters of credit are collateralized by restricted cash and our credit facility. Of the $5.6 million in outstanding stand-by letters of credit at June 30, 2013, $4.1 million was issued under the 2009 Agreement and $1.5 million was issued under the 2012 Agreement. The stand-by letters of credit outstanding at June 30, 2013 were collateralized by restricted cash of $5.7 million.

Litigation

Note 9 – Commitments and Contingencies, under the caption “Litigation” of our Annual Report on Form 10-K filed with the SEC on March 12, 2013, provides information on certain litigation in which we are involved. Unfavorable rulings, judgments, or settlement terms regarding these litigation matters could have a material adverse impact on our business, financial condition, results of operations, and cash flows. Although none of the litigation matters can be quantified with absolute certainty, we have established accruals covering exposure and relating to contingencies to the extent that they are reasonably estimable and probable based on available facts. There have been no material developments to these matters from what was disclosed in our Form 10-K; therefore, we have made no changes to our accruals in the first six months of 2013.

Note 10 — Business Segment and Geographic Information

We manufacture and sell high-efficiency energy recovery devices and pumps as well as related services under one reportable segment. Our chief operating decision-maker is the chief executive officer (“CEO”). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly, we have concluded that we have one reportable segment.

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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, rather than the delivery location, is reflected in the table below (in thousands, except percentages):

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Domestic revenue	$	468		$	1,200		$	1,763		$	1,788
International revenue		8,101			11,096			13,179			15,264
Total revenue	$	8,569		$	12,296		$	14,942		$	17,052
Revenue by country:
India		15	%		*	%		14	%		*	%
Spain		15			*			10			3
Ghana		10			0			6			0
China		10			8			7			8
United States		5			10			12			10
Israel		*			14			*			10
Australia		*			32			*			23
Others **		45			36			51			46
Total		100	%		100	%		100	%		100	%

*       Less than 1%.

**     Includes remaining countries not separately disclosed. No country in this line item accounted for more than 10% of our net revenue during the periods presented.

Substantially all of our long-lived assets were located in the United States at June 30, 2013 and December 31, 2012.

Note 11 — Concentrations

Customers accounting for 10% or more of our accounts receivable and unbilled receivables were as follows:

	June 30, 2013			December 31, 2012
I.V.M. Minrav Sadyt (a consortium of Minrav Holdings, Ltd and Sadyt, a Valoriza Agua company)		21	%		26	%
Via Maris Desalination (a Global Environmental Solutions (GES) company)		*			13	%

*     Less than 10%.

Revenue from customers representing 10% or more of net revenue varies from period to period. For the three and six months ended June 30, 2013, no customer accounted for 10% or more of our net revenue. For the three and six months ended June 30, 2012, Southern Seawater JV (a joint venture of Tecnicas Reunidas Australia Pty Ltd, Valoriza Water Australia Pty Ltd, A.J. Lucas Operations Pty Ltd, and Worley Parsons Services Pty Ltd) accounted for 30% and 22%, respectively, of our net revenue. No other customer accounted for more than 10% of our net revenue during any of these periods.

Note 12 — Fair Value Measurements

The authoritative guidance for measuring fair value prioritizes the inputs used into the following hierarchy:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and

Level 3 — Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions that market participants would use in pricing.

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The carrying values of cash and cash equivalents, restricted cash, accounts receivable, unbilled receivables, accounts payable, and other accrued expenses approximate fair value due to the short-term maturity of those instruments. For our investments in available-for-sale securities, if quoted prices in active markets for identical investments are not available to determine fair value (Level 1), then we use quoted prices for similar assets or inputs other than quoted prices that are observable either directly or indirectly (Level 2). The investments included in Level 2 consist primarily of certificates of deposits; commercial paper; and municipal, corporate, and agency obligations. The carrying amount of the contingent consideration arising from our acquisition of Pump Engineering, LLC is measured at fair value on a recurring basis using unobservable inputs in which little or no market activity exists (Level 3). The estimated fair value of the contingent consideration is determined based entirely on management’s assessment of the weighted probability of payment under various scenarios.

The fair value of financial assets and liabilities measured on a recurring basis for the indicated periods was as follows (in thousands):

	June 30, 2013		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets:
Short-term available-for-sale securities	$	7,286	$	—	$	7,286	$	—
Long-term available-for-sale securities		8,898		—		8,898		—
Total assets	$	16,184	$	—	$	16,184	$	—
Liabilities:
Contingent consideration*	$	1,524	$	—	$	—	$	1,524
Total liabilities	$	1,524	$	—	$	—	$	1,524

	December 31, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets:
Short-term available-for-sale securities	$	9,497	$	—	$	9,497	$	—
Long-term available-for-sale securities		4,773		—		4,773		—
Total assets	$	14,270	$	—	$	14,270	$	—
Liabilities:
Contingent consideration*	$	1,524	$	—	$	—	$	1,524
Total liabilities	$	1,524	$	—	$	—	$	1,524

*Included in Accrued Expenses and Other Current Liabilities and Other Non-Current Liabilities.

The reconciliation of the beginning and ending balances for assets and liabilities measured on a recurring basis using significant unobservable inputs (Level 3) for the period ended June 30, 2013 was as follows (in thousands):

	Contingent Consideration
Balance, December 31, 2012	$	1,524
Change in value		—
Balance, June 30, 2013	$	1,524

As of June 30, 2013, we had assets held for sale of $1.3 million related to our Michigan manufacturing facility. The assets included a building and land that was classified as held for sale at December 31, 2011 in connection with our restructuring plan to consolidate our North American operations and transfer all manufacturing operations to San Leandro, California. The fair value of these assets was determined based on Level 2 inputs, primarily sales date for similar properties in the area. During the three and six months ended June 30, 2013 we recognized an impairment loss of $44,000.

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The fair value of assets held for sale, measured on a non-recurring basis for the indicated periods, was as follows (in thousands):

	June 30, 2013		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets held for sale	$	1,301	$	—	$	1,301	$	—

	December 31, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets held for sale	$	1,345	$	—	$	1,345	$	—

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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; therefore, 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 belief that the current levels of gross profit margin are sustainable to the extent that volume remains healthy, we experience a favorable product mix, and we continue to realize cost savings through production efficiencies and enhanced yields; 

•  our expectation that a significant volume of mega-project shipments will occur during the fourth quarter; 

•  our expectation that our expenses for research and development and sales and marketing will continue to increase as a result of the diversification into markets outside of desalination; 

•  our expectation that our manufacturing operations will be able to meet the overall demand for our products; 

•  our expectation that sales outside of the United States will remain a significant portion of our net revenue; 

•  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; 

•  our expectation that, as we expand our international sales, a portion of our revenue could continue to be denominated in foreign currencies; and 

•  our expectations concerning our new enterprise resource planning system implemented effective July 1, 2013, referred to in Part I, Item 4, and Part II, Item 1A of this report. 

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.

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Overview

We are in the business of designing, developing, and manufacturing energy recovery devices that harness the reusable energy from industrial fluid flows and pressure cycles. Our company was founded in 1992, and we introduced the initial version of our Pressure Exchanger^® energy recovery device in early 1997. In December 2009, we acquired Pump Engineering, LLC, which manufactured centrifugal energy recovery devices known as turbochargers as well as high-pressure pumps.

Our revenue is principally derived from the sale of our energy recovery devices. We also derive revenue from the sale of our high-pressure and circulation pumps that we manufacture and sell in connection with our energy recovery devices for use in desalination plants. Additionally, we receive incidental revenue from the sale of spare parts and services, including start-up and commissioning services that we provide to our customers.

A significant portion of our net 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 nine to 16 months, and in some cases, up to 24 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. In the oil and gas market, we have installed devices as part of pilot projects, and new devices are pending installation with major oil and gas customers worldwide. We have not recognized any revenue from shipments of energy recovery devices for oil and gas customers.

Due to the fact that a single order for our energy recovery devices by a large EPC firm for a particular plant may represent significant revenue, we often experience substantial fluctuations in net revenue from quarter to quarter and from year to year. Historically, our EPC customers tended to order a significant amount of equipment for delivery in the fourth quarter, and as a result, a significant portion of our annual sales occurred during that quarter. During the fourth quarter of 2012, five large mega-project shipments contributed to a significant increase in net revenue. Normal seasonality trends generally show our lowest revenue in the first quarter, with the first quarter of 2013 seemingly following that trend.

A limited number of our customers account for a substantial portion of our net revenue and accounts receivable. Revenue from customers representing 10% or more of net revenue varies from period to period. For the three and six months ended June 30, 2013, no customer accounted for 10% or more of our net revenue. For the three and six months ended June 30, 2012, Southern Seawater JV (a joint venture of Tecnicas Reunidas Australia Pty Ltd, Valoriza Water Australia Pty Ltd, A.J. Lucas Operations Pty Ltd, and Worley Parsons Services Pty Ltd) accounted for 30% and 22%, respectively, of our net revenue. No other customer accounted for more than 10% of our net revenue during any of these periods.

During the three and six months ended June 30, 2013 and 2012, most of our net 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 net revenue for the foreseeable future.

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; valuation of fair value of assets held for sale; useful lives for depreciation and amortization; valuation adjustments for excess and obsolete inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies, including contingent consideration.

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Second Quarter of 2013 Compared to Second Quarter of 2012

Results of Operations

The following table sets forth certain data from our operating results as a percentage of net revenue for the periods indicated (in thousands, except percentages):

	Three Months Ended June 30,
	2013					2012					Change Increase / (Decrease)
Results of Operations:*
Net revenue	$	8,569		100	%	$	12,296		100	%	$	(3,727	)	(30	%)
Cost of revenue		3,293		38	%		5,636		46	%		(2,343	)	(42	%)
Gross profit		5,276		62	%		6,660		54	%		(1,384	)	(21	%)
Operating expenses:
General and administrative		3,326		39	%		3,606		29	%		(280	)	(8	%)
Sales and marketing		1,859		22	%		1,772		14	%		87		5	%
Research and development		1,137		13	%		866		7	%		271		31	%
Amortization of intangible assets		231		3	%		261		2	%		(30	)	(11	%)
Restructuring charges		44		1	%		79		1	%		(35	)	(44	%)
Total operating expenses		6,597		77	%		6,584		53	%		13		0	%
(Loss) income from operations		(1,321	)	(15	%)		76		1	%		(1,397	)	**
Interest expense		—		—			(1	)	(0	%)		1		100	%
Other non-operating income (expense), net		25		(0	%)		(9	)	(0	%)		34		(378	%)
(Loss) income before income taxes		(1,296	)	(15	%)		66		1	%		(1,362	)	**
Provision (benefit) for income taxes		161		2	%		(373	)	(3	%)		534		143	%
Net loss	$	(1,457	)	(17	%)	$	439		4	%	$	(1,896	)	(432	%)

*     Percentages may not add up to 100% due to rounding

**     Not meaningful

Net Revenue

Our net revenue decreased $3.7 million for the three months ended June 30, 2013 compared to the three months ended June 30, 2012. The decrease was primarily due to three modestly sized mega-project shipments totaling $1.5 million in the second quarter of 2013 compared to four larger sized mega-project shipments totaling $5.9 million in the second quarter of 2012. Offsetting the decline in mega-project shipments were increases in OEM and aftermarket sales. We anticipate revenue from mega-project shipments to increase significantly in the fourth quarter.

Although we operate under one segment, we categorize revenue based on the type of energy recovery device and its related products and services. The following table reflects revenue by product category and as a percentage of total net revenue (in thousands, except percentages):

	Three Months Ended June 30,
	2013				2012
PX devices and related products and services	$	6,760	79	%	$	10,397	85	%
Turbochargers, pumps, and related products and services		1,809	21	%		1,899	15	%
Net revenue	$	8,569	100	%	$	12,296	100	%

During the three months ended June 30, 2013 and 2012, a significant portion of our net revenue was attributable to sales outside of the United States. Revenue attributable to domestic and international sales as a percentage of net revenue was as follows:

	Three Months Ended June 30,
	2013			2012
Domestic revenue		5	%		10	%
International revenue		95	%		90	%
Net revenue		100	%		100	%

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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 share-based compensation), manufacturing overhead, warranty costs, depreciation expense, and manufactured components. Despite a product mix that favored turbochargers and pumps over PX devices, gross profit as a percentage of net revenue increased to 62% for the three months ended June 30, 2013 compared to 54% for the three months ended June 30, 2012.

The increase in gross profit as a percentage of net revenue for the three months ended June 30, 2013 as compared to the same period of last year was primarily due to the continuing effects of plant consolidation, vertical integration of ceramic processing, manufacturing efficiencies, and enhanced production yields. The increases were slightly offset by a product mix shift that favored turbochargers and pumps over PX devices. The unfavorable product mix shift caused a drag on total gross profit as turbochargers and pumps have a lower gross profit margin compared to PX devices.

Future gross profit is highly dependent on the product and customer mix of our net 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 gross profit levels with certainty. We do believe, however, that the current levels of gross profit margin are sustainable to the extent that volume remains healthy, our product mix favors PXdevices, and we continue to realize cost savings through production efficiencies and enhanced yields.

Share-based compensation expense included in cost of revenue was $18,000 and $39,000 for the three months ended June 30, 2013 and 2012, respectively.

General and Administrative Expense

General and administrative (“G&A”) expense decreased by $280,000, or 8%, to $3.3 million for the three months ended June 30, 2013 from $3.6 million for the three months ended June 30, 2012. As a percentage of net revenue, G&A expense increased to 39% for the three months ended June 30, 2013 from 29% for the three months ended June 30, 2012 primarily due to lower net revenue offset by lower G&A expense for the current period.

G&A average headcount increased to 28 in the second quarter of 2013 from 25 in the second quarter of 2012.

Of the $280,000 decrease in G&A expense, $231,000 related to professional fees and other services, $49,000 related to property and other taxes, $37,000 related to occupancy costs, and $33,000 related to compensation and employee-related benefits. These decreases were offset by an increase of $70,000 related to bad debt expense.

Share-based compensation expense included in G&A expense was $307,000 and $479,000 for the three months ended June 30, 2013 and 2012, respectively.

We anticipate that our G&A expense will remain relatively flat over the remainder of the year, as transition costs incurred in the first quarter for personnel changes in the IT and accounting functions are not expected to recur.

Sales and Marketing Expense

Sales and marketing (“S&M”) expense increased by $87,000, or 5%, to $1.9 million for the three months ended June 30, 2013 from $1.8 million for the three months ended June 30, 2012. As a percentage of net revenue, S&M expense increased to 22% for the three months ended June 30, 2013 from 14% for the three months ended June 30, 2012 primarily due to lower net revenue and slightly higher S&M expense in the current period.

S&M average headcount increased to 27 in the second quarter of 2013 from 25 in the second quarter of 2012.

Of the $87,000 increase in S&M expense, $161,000 related to marketing costs associated with the Company’s rebranding initiative and market research and $55,000 related to compensation and employee-related benefits. The increases were offset by decreases of $123,000 related to commissions for sales representatives and $6,000 related to occupancy costs.

Share-based compensation expense included in S&M expense was $120,000 and $171,000 for the three months ended June 30, 2013 and 2012, respectively.

We anticipate that our S&M expenses will increase in the future as we continue to market and sell new technologies for industries outside of seawater desalination.

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Research and Development Expense

Research and development (“R&D”) expense increased by $271,000, or 31%, to $1.1 million for the three months ended June 30, 2013 from $866,000 for the three months ended June 30, 2012. As a percentage of net revenue, R&D expense increased to 13% for the three months ended June 30, 2013 from 7% for the three months ended June 30, 2012 primarily due to lower net revenue and higher R&D expense in the current period.

R&D average headcount increased to 18 in the second quarter of 2013 compared to 15 in the second quarter of 2012.

Of the $271,000 increase in R&D expense for the three months ended June 30, 2013, $255,000 related to compensation and employee-related benefits, $57,000 related to R&D costs associated with the Company’s investment in product development for oil and gas applications, and $11,000 related to occupancy costs. These increases were offset by a decrease of $52,000 related to outside consulting and professional fees.

Share-based compensation expense included in R&D expense was $53,000 and $36,000 for the three months ended June 30, 2013 and 2012, respectively.

We anticipate that our R&D expense will increase in the future as we continue to advance our existing technologies and develop new energy recovery and efficiency-enhancing solutions for markets outside of seawater desalination.

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 by $30,000, or 11%, to $231,000 for the three months ended June 30, 2013 from $261,000 for the three months ended June 30, 2012. The decrease was due to the impairment of the trademark intangible at December 31, 2012, for which no amortization expense was recorded during the three months ended June 30, 2013, and a change in the amortization amount for customer relationships related to the sum-of-the-years-digit amortization calculation.

Restructuring Charges

In 2011, we initiated a restructuring plan to consolidate our North American operations and transfer our Michigan-based operations to our manufacturing center and headquarters in San Leandro, California. In connection with this restructuring plan, we classified the land and building located in Michigan as assets held for sale at December 31, 2011. During the three months ended June 30, 2013, we recognized an impairment loss of $44,000. During the three months ended June 30, 2012, we recorded impairment costs of $79,000 to reflect the net proceeds expected from a signed purchase agreement for the sale of the assets that did not finalize in August 2012 as planned.

Non-Operating Income (Expense), Net

Non-operating income (expense), net, increased by $35,000 to income of $25,000 in the three months ended June 30, 2013 from expense of $10,000 in the three months ended June 30, 2012. The increase was primarily due to $3,000 in net foreign currency losses recorded during the second quarter of 2013 compared to $82,000 in net foreign currency losses recorded during the second quarter of 2012. The $79,000 favorable impact of net foreign currency losses and lower interest expense of $1,000 were offset by lower other income of $45,000.

Income Taxes

The income tax provision was $161,000 in the three months ended June 30, 2013 compared to a benefit of $373,000 in the three months ended June 30, 2012. As of December 31, 2012, a valuation allowance of approximately $12.7 million was established to reduce our deferred income tax assets to the amount expected to be realized. As such, no tax benefit related to our pre-tax loss was recognized for the three months ended June 30, 2013, as there was no change in our assessment of the amount of deferred income tax assets expected to be realized. For the three months ended June 30, 2012, the tax benefit recognized primarily related to the recognition of state tax refunds from prior-year returns.

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Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Results of Operations

The following table sets forth certain data from our operating results as a percentage of net revenue for the periods indicated (in thousands, except percentages):

	Six Months Ended June 30,
	2013					2012					Change Increase / (Decrease)
Results of Operations:*
Net revenue	$	14,942		100	%	$	17,052		100	%	$	(2,110	)	(12%	)
Cost of revenue		6,649		44	%		9,140		54	%		(2,491	)	(27%	)
Gross profit		8,293		56	%		7,912		46	%		381		5	%
Operating expenses:
General and administrative		7,496		50	%		7,074		41	%		422		6	%
Sales and marketing		3,870		26	%		3,254		19	%		616		19	%
Research and development		2,219		15	%		1,560		9	%		659		42	%
Amortization of intangible assets		461		3	%		523		3	%		(62	)	(12%	)
Restructuring charges		44		0	%		110		0	%		(66	)	(60%	)
Total operating expenses		14,090		94	%		12,521		73	%		1,569		13	%
Loss from operations		(5,797	)	(39%	)		(4,609	)	(27%	)		(1,188	)	(26%	)
Interest expense		—		—			(5	)	(0%	)		5		100	%
Other non-operating income (expense), net		52		0	%		63		0	%		(11	)	(17%	)
Loss before income taxes		(5,745	)	(38%	)		(4,551	)	(27%	)		(1,194	)	(26%	)
Provision (benefit) for income taxes		222		1	%		(307	)	(2%	)		529		172	%
Net loss	$	(5,967	)	(40%	)	$	(4,244	)	(25%	)	$	(1,723	)	(41%	)

*     Percentages may not add up to 100% due to rounding

Net Revenue

Our net revenue decreased $2.1 million for the six months ended June 30, 2013 compared to the six months ended June 30, 2012. The decrease was primarily due to three modestly sized mega-project shipments totaling $1.5 million in the first half of 2013 compared to four larger sized mega-project shipments totaling $5.9 million in the first half of 2012. Offsetting the decline in mega-project shipments were increases in OEM and aftermarket sales. We anticipate revenue from mega-project shipments to increase significantly in the fourth quarter.

Although we operate under one segment, we categorize revenue based on the type of energy recovery device and its related products and services. The following table reflects revenue by product category and as a percentage of total net revenue for the six months ended June 30, 2013 and 2012 (thousands, except percentages):

	Six Months ended June 30,
	2013				2012
PX devices and related products and services	$	10,699	72	%	$	13,475	79	%
Turbochargers, pumps, and related products and services		4,243	28	%		3,577	21	%
Net revenue	$	14,942	100	%	$	17,052	100	%

During the six months ended June 30, 2013 and 2012, a significant portion of our net revenue was attributable to sales outside of the United States. Revenue attributable to domestic and international sales as a percentage of net revenue was as follows:

	Six Months Ended June 30,
	2013			2012
Domestic revenue		12	%		10	%
International revenue		88	%		90	%
Net revenue		100	%		100	%

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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 share-based compensation), manufacturing overhead, warranty costs, depreciation expense, and manufactured components. Despite a product mix that favored turbochargers and pumps over PX devices, gross profit as a percentage of net revenue increased to 56% for the six months ended June 30, 2013 compared to 46% for the six months ended June 30, 2012.

The increase in gross profit as a percentage of net revenue for the six months ended June 30, 2013 as compared to the same period of last year was primarily due to the continuing effects of plant consolidation, vertical integration of ceramic processing, manufacturing efficiencies, and enhanced production yields. The increases were slightly offset by a product mix shift that favored turbochargers and pumps over PX devices. The unfavorable product mix shift caused a drag on total gross profit as turbochargers and pumps have a lower gross profit margin compared to PX devices.

Future gross profit is highly dependent on the product and customer mix of our net revenues, 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 gross profit levels with certainty. We do believe, however, that the current levels of gross profit margin are sustainable to the extent that volume remains healthy, our product mix favors PXdevices, and we continue to realize cost savings through production efficiencies and enhanced yields.

Share-based compensation expense included in cost of revenue was $39,000 and $65,000 for the six months ended June 30, 2013 and 2012, respectively.

General and Administrative Expense

General and administrative (“G&A”) expense increased by $422,000, or 6%, to $7.5 million for the six months ended June 30, 2013 from $7.1 million for the six months ended June 30, 2012. As a percentage of net revenue, G&A expense increased to 50% for the six months ended June 30, 2013 from 41% for the six months ended June 30, 2012 primarily due to lower net revenue and slightly higher G&A expense for the current period.

G&A average headcount increased to 28 in the first half of 2013 from 26 in the first half of 2012.

Of the $422,000 increase in G&A expense, $263,000 related to compensation and employee-related benefits, $148,000 related to professional fees and other services, $95,000 related to bad debt expense, and $43,000 related to other administrative costs. These increases were offset by decreases of $96,000 in occupancy costs and $31,000 related to property and other taxes.

Share-based compensation expense included in G&A expense was $814,000 and $1.0 million for the six months ended June 30, 2013 and 2012, respectively.

We anticipate that our G&A expense will flatten over the remainder of the year, as transition costs incurred in the first quarter for personnel changes in the IT and accounting functions are not expected to recur.

Sales and Marketing Expense

Sales and marketing (“S&M”) expense increased by $616,000, or 19%, to $3.9 million for the six months ended June 30, 2013 from $3.3 million for the six months ended June 30, 2012. As a percentage of net revenue, S&M expense increased to 26% for the six months ended June 30, 2013 from 19% for the six months ended June 30, 2012 primarily due to higher S&M expense and lower net revenue in the current period.

S&M average headcount increased to 26 in the first six half of 2013 from 25 in the first half of 2012.

Of the $616,000 increase in S&M expense for the six months ended June 30, 2013, $527,000 related to marketing costs associated with the Company’s rebranding initiative and market research; $153,000 related to compensation and employee-related benefits; and $35,000 related to occupancy and other costs. These increases were offset by $99,000 related to commissions for sales representatives.

Share-based compensation expense included in S&M expense was $235,000 and $340,000 for the six months ended June 30, 2013 and 2012, respectively.

We anticipate that our S&M expenses will increase in the future as we continue to market and sell new technologies for industries outside of seawater desalination.

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Research and Development Expense

Research and development (“R&D”) expense increased by $659,000, or 42%, to $2.2 million for the six months ended June 30, 2013 from $1.6 million for the six months ended June 30, 2012. As a percentage of net revenue, R&D expense increased to 15% for the six months ended June 30, 2013 from 9% for the six months ended June 30, 2012 primarily due to higher R&D expense and lower net revenue in the current period.

R&D average headcount increased to 18 in the first half of 2013 compared to 14 in the first half of 2012.

Of the $659,000 increase in R&D expense for the six months ended June 30, 2013, $576,000 related to compensation and employee-related benefits, $103,000 related to R&D costs associated with the Company’s investment in product development for oil and gas applications, and $40,000 related to occupancy costs. The increases were offset by a decrease of $60,000 related to outside consulting and professional fees.

Share-based compensation expense included in R&D expense was $99,000 and $79,000 for the six months ended June 30, 2013 and 2012, respectively.

We anticipate that our R&D expenses will increase in the future as we continue to advance our existing technologies and develop new energy recovery and efficiency-enhancing solutions for markets outside of seawater desalination.

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 by $62,000, or 12%, to $461,000 for the six months ended June 30, 2013 from $523,000 for the six months ended June 30, 2012. The decrease was due to the impairment of the trademark intangible at December 31, 2012, for which no amortization expense was recorded during the first half of 2013, and a change in the amortization amount for customer relationships related to the sum-of-the-years-digit amortization calculation.

Restructuring Charges

In 2011, we initiated a restructuring plan to consolidate our North American operations and transfer our Michigan-based operations to our manufacturing center and headquarters in San Leandro, California. In connection with this restructuring plan, we classified the land and building located in Michigan as assets held for sale at December 31, 2011. During the six months ended June 30, 2013, we recognized an impairment loss of $44,000. During the six months ended June 30, 2012, we incurred additional non-recurring expenses of $110,000 related to the restructuring plan. Of the $110,000 recorded in the first half of 2012, $79,000 related to the impairment of the land and building to reflect the net proceeds expected from a signed purchase agreement for the sale of the assets that did not finalize as planned in August 2012 and $31,000 related to other non-recurring charges.

Non-Operating Income (Expense), Net

Non-operating income (expense), net, decreased by $6,000 to income of $52,000 in the six months ended June 30, 2013 from income of $58,000 in the six months ended June 30, 2012. The decrease was due to lower other income, primarily interest income, of $61,000. This decrease was offset by a $50,000 favorable impact of net foreign currency losses compared to the prior period and lower interest expense of $5,000.

Income Taxes

The income tax provision was $222,000 in the six months ended June 30, 2013 compared to a benefit of $307,000 in the six months ended June 30, 2012. As of December 31, 2012, a valuation allowance of approximately $12.7 million was established to reduce our deferred income tax assets to the amount expected to be realized. As such, no tax benefit related to our pre-tax loss was recognized for the six months ended June 30, 2013, as there was no change in our assessment of the amount of deferred income tax assets expected to be realized. For the six months ended June 30, 2012, the tax benefit recognized primarily related to the recognition of state tax refunds from prior-year returns.

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Liquidity and Capital Resources

Overview

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 June 30, 2013, we issued common stock for aggregate net proceeds of $84.0 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 June 30, 2013, our principal sources of liquidity consisted of unrestricted cash and cash equivalents of $11.4 million that are invested primarily in money market funds and short- and long-term investments of $16.2 million that are primarily invested in marketable debt securities. 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 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. The customer holdbacks represent amounts intended to provide a form of security to the customer rather than a form of long-term financing. Accordingly, these receivables have not been discounted to present value. At June 30, 2013 and December 31, 2012, we had $2.3 million and $5.9 million of current and non-current unbilled receivables, respectively.

In 2009, we entered into a loan and security agreement (the “2009 Agreement”) with a financial institution. The 2009 Agreement, as amended, provided a total available credit line of $16.0 million. Under the 2009 Agreement, we were allowed to draw advances of up to $10.0 million on a revolving line of credit or utilize up to $15.9 million as collateral for stand-by letters of credit, provided that the aggregate of the outstanding advances and collateral did not exceed the total available credit line of $16.0 million. Advances under the revolving line of credit incurred interest based on a prime rate index or on LIBOR plus 1.375%. The amended 2009 Agreement also required us to maintain a cash collateral balance equal to at least 101% of the face amount of all outstanding stand-by letters of credit collateralized by the line of credit and 100% of the amount of all outstanding advances

During the periods presented, we provided certain customers with stand-by letters of credit to secure our obligations for the delivery and performance of products in accordance with sales arrangements. Some of these stand-by letters of credit were issued under our 2009 Agreement. The stand-by letters of credit generally terminate within 12 to 48 months from issuance. As of June 30, 2013, the amounts outstanding on stand-by letters of credit collateralized under our 2009 Agreement totaled approximately $4.1 million, and restricted cash related to the stand-by letters of credit issued under the 2009 Agreement was approximately $4.1 million. The 2009 Agreement expired at the end of May 2012.

In June 2012, we entered into a loan agreement (the “2012 Agreement”) with another financial institution. The 2012 Agreement 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 plus 0% or a Eurodollar loan that bears interest equal to the adjusted LIBO 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.

The 2012 Agreement 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 matures on June 5, 2015 and is collateralized by substantially all of our assets. As of June 30, 2013 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 $1.5 million, and restricted cash related to the stand-by letters of credit issued under the 2012 Agreement was approximately $1.5 million as of June 30, 2013.

In 2012, our credit card vendor required us to restrict cash for outstanding credit card balances. Accordingly, we have restricted $314,000 of cash for credit card balances as of June 30, 2013.

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Cash Flows from Operating Activities

Net cash used in operating activities was $(2.6) million and $(1.9) million for the six months ended June 30, 2013 and 2012, respectively. For the six months ended June 30, 2013, a net loss of $(6.0) million was adjusted to $(2.4) million by non-cash items totaling $3.6 million. For the six months ended June 30, 2012, a net loss of $(4.2) million was adjusted to $81,000 by non-cash items totaling $4.3 million. Non-cash adjustments primarily include depreciation and amortization, share-based compensation expense, provisions for doubtful accounts and warranty reserves, amortization of premiums/discounts on investments, and adjustments to inventory reserves.

The net cash impact from changes in assets and liabilities was approximately $(183,000) and $(1.9) million for the six months ended June 30, 2013 and 2012, respectively. Net changes in assets and liabilities are primarily attributable to changes in inventory as a result of the timing of order processing and product shipments; changes in accounts receivable, deferred revenue, and unbilled receivables as a result of the timing of invoices and collections for large projects; and changes in accrued liabilities, prepaid expenses, and accounts payable as a result of the timing of payments to employees, vendors, and other third parties.

Cash Flows from Investing Activities

Cash flows (used in) provided by investing activities primarily relate to maturities and purchases of investments in marketable securities; the release of or the increase in restricted cash to collateralize our stand-by letters of credit; and capital expenditures to support our growth.

Net cash (used in) provided by investing activities was $(2.9) million and $6.3 million for the six months ended June 30, 2013 and 2012, respectively. The decrease of $9.2 million in cash flows from investing activities for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 was primarily due to an increase in the purchase of marketable securities of $7.7 million, a $1.5 million decrease in the amount of restricted cash released due to expiring stand-by letters of credit, and a decrease of $0.5 million of maturities of marketable securities. These items were offset by a decrease in capital expenditures of $0.6 million.

Cash Flows from Financing Activities

Net cash provided by (used in) financing activities was $212,000 and $(4.1) million for the six months ended June 30, 2013 and 2012, respectively. The $4.3 million increase in net cash provided by financing activities was primarily due to a $4.0 million decrease of cash used to repurchase common stock for treasury, a $225,000 increase in cash received for the issuance of common stock due to option and warrant exercises, and a $109,000 decrease in debt and capital lease payments as a result of paying off two capital leases and an equipment promissory note in 2012 and our last capital lease in 2013.

Liquidity and Capital Resource Requirements

We may enter into potential material investments in, or acquisitions of, complementary businesses, services, or technologies, which could require us to seek additional equity or debt financing. However, if we do not invest in, or make any acquisitions of, complementary businesses, services or technologies, 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. We may need to raise additional capital or incur additional indebtedness to continue to fund our operations in the future. Our future long-term capital requirements will depend on many factors, including our rate of revenue growth, if any, the expansion of sales and marketing and research and development activities, the timing and extent of our expansion into new geographic territories, the timing of new product introductions, the continuing market acceptance of our products, and any possible acquisitions that we might complete to advance our strategy. Additional funds may not be available on terms favorable to us or at all.

Contractual Obligations

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 June 30, 2013 was $10.0 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 June 30, 2013, we had approximately $1.6 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 June 30, 2013, we believe that our exposure related to these guarantees and indemnities was not material.

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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.

Item 3. — Quantitative and Qualitative Disclosure About Market Risk

The information in this section should be read in connection with the information on financial market risk related to changes in currency exchange rates and interest rates in Part II, Item 7A, “Quantitative and Qualitative Disclosure About Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2012.

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.

As we expand our international sales, we expect that a portion of our net 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 expenses that are denominated in foreign currencies. These expenses 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. 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 and cash balances 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 have an investment portfolio of fixed income marketable debt securities, including amounts classified as cash equivalents, short-term investments, and long-term investments. At June 30, 2013, our short- and long-term investments totaled $16.2 million. The primary objective of our investment activities is to preserve principal and liquidity while at the same time maximizing yields without significantly increasing risk. We invest primarily in high-quality, short- and long-term debt instruments of the U.S. government and its agencies as well as high-quality corporate and municipal issuers. These investments are subject to interest rate fluctuations and will decrease in market value if interest rates increase. To minimize the exposure due to adverse shifts in interest rates, we maintain investments with an average maturity of less than three years. A hypothetical 1% increase in interest rates would have resulted in an approximately $196,000 decrease in the fair value of our fixed-income debt securities as of June 30, 2013.

Concentration of Credit Rate Risk

Our investments in marketable debt securities are subject to potential loss of value due to counterparty credit risk. To minimize this risk, we invest pursuant to a Board-approved investment policy. The policy mandates high-credit-rating requirements and restricts our exposure to any single corporate issuer or sector by imposing concentration limits.

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Item 4. — Controls and Procedures.

(a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of our management, including the President and Chief Executive Officer and the Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 as of the end of the period covered by this report.

Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that these disclosure controls and procedures are effective.

(b) Changes in internal controls. There were no changes in our internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We implemented a new enterprise resource planning (“ERP”) system effective July 1, 2013. We believe that the new ERP system will simplify and strengthen our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. — Legal Proceedings

Note 9 – Commitments and Contingencies, under the caption “Litigation” of our Annual Report on Form 10-K filed with the SEC on March 12, 2013, provides information on certain litigation in which we are involved. There have been no material developments to these matters from what was disclosed in our Form 10-K.

Item 1A. — Risk Factors

With the exception of the following update, there have been no material changes in our risk factors from those disclosed in Part I, Item 1A, in our Annual Report on Form 10-K filed on March 12, 2013.

We may experience difficulties implementing our enterprise resource planning system.

In 2012, we initiated a project to upgrade our enterprise resource planning (“ERP”) system to streamline our business processes and allow for cost-efficient scalability, flexibility, and improved management reporting and analysis. On July 1, 2013, we implemented our new ERP system. We anticipate that our new ERP system will accommodate our future needs as we continue to evolve our business in a changing marketplace. Our new ERP system is critical to our ability to accurately maintain books and records, record transactions, provide important information to our management, and prepare our financial statements. The design and implementation of the new ERP system has required the investment of significant financial and human resources. While we have not experienced insurmountable difficulties thus far during the stabilization period, which we expect to last for the remainder of the year, we may encounter difficulties, and we cannot guarantee that the new ERP system will support our business operations. Any disruptions, delays, or deficiencies in the design and stabilization of the new ERP system could adversely affect our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations, or otherwise operate our business, which could, in turn, adversely affect our results of operations, financial condition, and cash flows as well as our internal control over financial reporting.

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Item 6. — Exhibits

Exhibit No.	Description
10.1	Energy Recovery, Inc. Annual Incentive Plan, filed as Exhibit 10.1 to the Company’s Form 8-K, filed on April 8, 2013, and incorporated herein by reference
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	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

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SIGNATURES

Pursuant to the requirements 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.

Registrant: Energy Recovery, Inc.

By:	/s/ THOMAS S. ROONEY, JR.                          Thomas S. Rooney, Jr.	President and Chief Executive Officer (Principal Executive Officer)	August 6, 2013
	/s/ ALEXANDER J. BUEHLER                         Alexander J. Buehler	Chief Financial Officer (Principal Financial Officer)	August 6, 2013

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Exhibit List

Exhibit No.	Description
10.1	Energy Recovery, Inc. Annual Incentive Plan, filed as Exhibit 10.1 to the Company’s Form 8-K, filed on April 8, 2013, and incorporated herein by reference
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	Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document

*XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.

32 

EX-31

Exhibit 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

I, Thomas S. Rooney, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Energy Recovery, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:      August 6, 2013	/s/ THOMAS S. ROONEY, JR.
	Name:     Thomas S. Rooney, Jr.
	Title:       President and Chief Executive Officer
	(Principal Executive Officer)

EX-31

Exhibit 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

I, Alexander J Buehler, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Energy Recovery, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date:      August 6, 2013	/s/ Alexander J. Buehler
	Name:     Alexander J. Buehler
	Title:       Chief Financial Officer
	(Principal Financial Officer)

EX-32

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER,

PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE

SARBANES-OXLEY ACT OF 2002*

Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of Chapter 63 of Title 18 of the United States Code, Thomas S. Rooney, Jr., President and Chief Executive Officer of Energy Recovery, Inc. (the “Company”), and Alexander J. Buehler, Chief Financial Officer of the Company, each hereby certify that, to the best of their knowledge:

1.     The Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2013, to which this Certification is attached as Exhibit 32.1 (the “Quarterly Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and

2.     The information contained in the Quarterly Report fairly presents, in all material respects, the financial condition of the Company at the end of the period covered by the Quarterly Report and results of operations of the Company for the period covered by the Quarterly Report.

/s/ THOMAS S. ROONEY, JR.	/s/ Alexander J. Buehler
President and Chief Executive Officer	Chief Financial Officer
Dated: August 6, 2013	Dated: August 6, 2013

____________

* This certification accompanies the Form 10-Q to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be incorporated by reference into any filing of Energy Recovery, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (whether made before or after the date of the Form 10-Q), irrespective of any general incorporation language contained in such filing.

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Note 11 - Concentrations

6 Months Ended

Jun. 30, 2013

Concentration Risk Disclosure [Text Block]

Concentration Risk Disclosure [Text Block]

Note 11 — Concentrations

Customers accounting for 10% or more of our accounts receivable and unbilled receivables were as follows:

	June 30, 2013			December 31, 2012
I.V.M. Minrav Sadyt (a consortium of Minrav Holdings, Ltd and Sadyt, a Valoriza Agua company)		21	%		26	%
Via Maris Desalination (a Global Environmental Solutions (GES) company)		*			13	%

*     Less than 10%.

Revenue from customers representing 10% or more of net revenue varies from period to period. For the three and six months ended June 30, 2013, no customer accounted for 10% or more of our net revenue. For the three and six months ended June 30, 2012, Southern Seawater JV (a joint venture of Tecnicas Reunidas Australia Pty Ltd, Valoriza Water Australia Pty Ltd, A.J. Lucas Operations Pty Ltd, and Worley Parsons Services Pty Ltd) accounted for 30% and 22%, respectively, of our net revenue. No other customer accounted for more than 10% of our net revenue during any of these periods.

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Condensed Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net revenue	$ 8,569	$ 12,296	$ 14,942	$ 17,052
Cost of revenue	3,293	5,636	6,649	9,140
Gross profit	5,276	6,660	8,293	7,912
Operating expenses:
General and administrative	3,326	3,606	7,496	7,074
Sales and marketing	1,859	1,772	3,870	3,254
Research and development	1,137	866	2,219	1,560
Amortization of intangible assets	231	261	461	523
Restructuring charges	44	79	44	110
Total operating expenses	6,597	6,584	14,090	12,521
(Loss) income from operations	(1,321)	76	(5,797)	(4,609)
Interest expense		(1)		(5)
Other non-operating income (expense), net	25	(9)	52	63
(Loss) income before income taxes	(1,296)	66	(5,745)	(4,551)
Provision (benefit) for income taxes	161	(373)	222	(307)
Net (loss) income	$ (1,457)	$ 439	$ (5,967)	$ (4,244)
(Loss) earnings per share:
Basic (in Dollars per share)	$ (0.03)	$ 0.01	$ (0.12)	$ (0.08)
Diluted (in Dollars per share)	$ (0.03)	$ 0.01	$ (0.12)	$ (0.08)
Number of shares used in per share calculation:
Basic (in Shares)	51,026	51,432	51,004	52,025
Diluted (in Shares)	51,026	52,070	51,004	52,025

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Note 4 - Other Financial Information

6 Months Ended

Jun. 30, 2013

Additional Financial Information Disclosure [Text Block]

Additional Financial Information Disclosure [Text Block]

Note 4 — Other Financial Information

Restricted Cash

We have pledged cash in connection with contingent payments resulting from a business acquisition, stand-by letters of credit, and credit cards. We have deposited corresponding amounts into money market and non-interest bearing accounts at three financial institutions for these items as follows (in thousands):

	June 30, 2013		December 31, 2012
Contingent and other consideration for acquisition	$	2,504	$	2,504
Collateral for stand-by letters of credit		2,567		2,416
Collateral for credit cards		314		315
Current restricted cash	$	5,385	$	5,235
Contingent and other consideration for acquisition	$	1,000	$	1,000
Collateral for stand-by letters of credit		3,097		3,366
Non-current restricted cash	$	4,097	$	4,366
Total restricted cash	$	9,482	$	9,601

Inventories

Our inventories consisted of the following (in thousands):

	June 30, 2013		December 31, 2012
Raw materials	$	3,226	$	3,406
Work in process		2,129		1,489
Finished goods		2,009		240
Inventories	$	7,364	$	5,135

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consisted of the following (in thousands):

	June 30, 2013		December 31, 2012
Payroll and commissions payable	$	2,919	$	4,687
Contingent consideration (current portion) and legal expenses		1,590		1,506
Other accrued expenses and current liabilities		1,012		2,362
Accrued expenses and other current liabilities	$	5,521	$	8,555

Accumulated Other Comprehensive Income

Changes in accumulated other comprehensive income for the six months ended June 30, 2013 by component were as follows (in thousands):

	Foreign Currency Translation Adjustments			Unrealized Gains (Losses) on Investments			Total Accumulated Other Comprehensive Loss
Balance, December 31, 2012	$	(94	)	$	15		$	(79	)
Net other comprehensive income (loss)		2			(35	)		(33	)
Balance, June 30, 2013	$	(92	)	$	(20	)	$	(112	)

There were no reclassifications of amounts out of accumulated other comprehensive loss for the six months ended June 30, 2013 as there were no sales of securities or translation adjustments that impacted other comprehensive loss.

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Note 7 - Equity (Tables)

6 Months Ended

Jun. 30, 2013

Shareholders' Equity and Share-based Payments [Text Block]

Schedule of Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Table Text Block]

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of revenue	$	18	$	39	$	39	$	65
General and administrative		307		479		814		1,024
Sales and marketing		120		171		235		340
Research and development		53		36		99		79
Total share-based compensation expense	$	498	$	725	$	1,187	$	1,508

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Note 12 - Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Text Block]

Fair Value Disclosures [Text Block]

Note 12 — Fair Value Measurements

The authoritative guidance for measuring fair value prioritizes the inputs used into the following hierarchy:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and

Level 3 — Unobservable inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions that market participants would use in pricing.

The carrying values of cash and cash equivalents, restricted cash, accounts receivable, unbilled receivables, accounts payable, and other accrued expenses approximate fair value due to the short-term maturity of those instruments. For our investments in available-for-sale securities, if quoted prices in active markets for identical investments are not available to determine fair value (Level 1), then we use quoted prices for similar assets or inputs other than quoted prices that are observable either directly or indirectly (Level 2). The investments included in Level 2 consist primarily of certificates of deposits; commercial paper; and municipal, corporate, and agency obligations. The carrying amount of the contingent consideration arising from our acquisition of Pump Engineering, LLC is measured at fair value on a recurring basis using unobservable inputs in which little or no market activity exists (Level 3). The estimated fair value of the contingent consideration is determined based entirely on management’s assessment of the weighted probability of payment under various scenarios.

The fair value of financial assets and liabilities measured on a recurring basis for the indicated periods was as follows (in thousands):

	June 30, 2013		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets:
Short-term available-for-sale securities	$	7,286	$	—	$	7,286	$	—
Long-term available-for-sale securities		8,898		—		8,898		—
Total assets	$	16,184	$	—	$	16,184	$	—
Liabilities:
Contingent consideration*	$	1,524	$	—	$	—	$	1,524
Total liabilities	$	1,524	$	—	$	—	$	1,524

	December 31, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets:
Short-term available-for-sale securities	$	9,497	$	—	$	9,497	$	—
Long-term available-for-sale securities		4,773		—		4,773		—
Total assets	$	14,270	$	—	$	14,270	$	—
Liabilities:
Contingent consideration*	$	1,524	$	—	$	—	$	1,524
Total liabilities	$	1,524	$	—	$	—	$	1,524

*Included in Accrued Expenses and Other Current Liabilities and Other Non-Current Liabilities.

The reconciliation of the beginning and ending balances for assets and liabilities measured on a recurring basis using significant unobservable inputs (Level 3) for the period ended June 30, 2013 was as follows (in thousands):

	Contingent Consideration
Balance, December 31, 2012	$	1,524
Change in value		—
Balance, June 30, 2013	$	1,524

As of June 30, 2013, we had assets held for sale of $1.3 million related to our Michigan manufacturing facility. The assets included a building and land that was classified as held for sale at December 31, 2011 in connection with our restructuring plan to consolidate our North American operations and transfer all manufacturing operations to San Leandro, California. The fair value of these assets was determined based on Level 2 inputs, primarily sales date for similar properties in the area. During the three and six months ended June 30, 2013 we recognized an impairment loss of $44,000.

The fair value of assets held for sale, measured on a non-recurring basis for the indicated periods, was as follows (in thousands):

	June 30, 2013		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets held for sale	$	1,301	$	—	$	1,301	$	—

	December 31, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets held for sale	$	1,345	$	—	$	1,345	$	—

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Note 11 - Concentrations (Details) - Accounts Receivable Concentrations	Jun. 30, 2013		Dec. 31, 2012
I.V.M. Minrav Sadyt [Member]
Concentration Risk [Line Items]
Accounts receivable concentration	21.00%		26.00%
Via Maris Desalination [Member]
Concentration Risk [Line Items]
Accounts receivable concentration		[1]	13.00%

[1] Less than 10%.

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Note 5 - Investments (Details) - Amortized Cost and Fair Value of Available-For-Sale Securities (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Amortized Cost and Fair Value of Available-For-Sale Securities [Abstract]
Due in one year or less	$ 2,384
Due in one year or less	2,384
Due after one year through three years	13,820
Due after one year through three years	13,800
Total available-for-sale securities	16,204
Total available-for-sale securities	$ 16,184	$ 14,270

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Note 11 - Concentrations (Tables) (Accounts Receivable [Member])

6 Months Ended

Jun. 30, 2013

Accounts Receivable [Member]

Note 11 - Concentrations (Tables) [Line Items]

Schedules of Concentration of Risk, by Risk Factor [Table Text Block]

	June 30, 2013			December 31, 2012
I.V.M. Minrav Sadyt (a consortium of Minrav Holdings, Ltd and Sadyt, a Valoriza Agua company)		21	%		26	%
Via Maris Desalination (a Global Environmental Solutions (GES) company)		*			13	%

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Note 10 - Business Segment and Geographic Information (Tables)

6 Months Ended

Jun. 30, 2013

Segment Reporting Disclosure [Text Block]

Schedule of Revenue from External Customers Attributed to Foreign Countries by Geographic Area [Table Text Block]

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Domestic revenue	$	468		$	1,200		$	1,763		$	1,788
International revenue		8,101			11,096			13,179			15,264
Total revenue	$	8,569		$	12,296		$	14,942		$	17,052
Revenue by country:
India		15	%		*	%		14	%		*	%
Spain		15			*			10			3
Ghana		10			0			6			0
China		10			8			7			8
United States		5			10			12			10
Israel		*			14			*			10
Australia		*			32			*			23
Others **		45			36			51			46
Total		100	%		100	%		100	%		100	%

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Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area (USD $) In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012		Jun. 30, 2013		Jun. 30, 2012
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Revenue (in Dollars) (in Dollars)	$ 8,569		$ 12,296		$ 14,942		$ 17,052
Percentage Revenue	100.00%		100.00%		100.00%		100.00%
Domestic [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Revenue (in Dollars) (in Dollars)	468		1,200		1,763		1,788
International [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Revenue (in Dollars) (in Dollars)	$ 8,101		$ 11,096		$ 13,179		$ 15,264
India [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue	15.00%			[1]	14.00%			[1]
Spain [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue	15.00%			[1]	10.00%		3.00%
Ghana [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue	10.00%		0.00%		6.00%		0.00%
China [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue	10.00%		8.00%		7.00%		8.00%
United States [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue	5.00%		10.00%		12.00%		10.00%
Israel [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue		[1]	14.00%			[1]	10.00%
Austrailia [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue		[1]	32.00%			[1]	23.00%
Others [Member]
Note 10 - Business Segment and Geographic Information (Details) - Revenues by Geographic Area [Line Items]
Percentage Revenue	45.00%	[2]	36.00%	[2]	51.00%	[2]	46.00%	[2]

[1] Less than 1%.

[2] Includes remaining countries not separately disclosed. No country in this line item accounted for more than 10% of our net revenue during the periods presented.

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Note 4 - Other Financial Information (Details) - Inventories (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Inventories [Abstract]
Raw materials	$ 3,226	$ 3,406
Work in process	2,129	1,489
Finished goods	2,009	240
Inventories	$ 7,364	$ 5,135

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Note 7 - Equity (Details) (USD $) In Millions, except Share data, unless otherwise specified	1 Months Ended		6 Months Ended
	Mar. 31, 2013	Jan. 31, 2013	Jun. 30, 2013
Shareholders' Equity and Share-based Payments [Text Block]
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized (in Dollars)			$ 3.5
Employee Service Share-based Compensation, Nonvested Awards, Compensation Cost Not yet Recognized, Period for Recognition			2 years 255 days
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants in Period, Net of Forfeitures (in Shares)	843,600	100,000
Share-based Compensation Arrangement by Share-based Payment Award, Award Vesting Period	4 years	4 years
Share-based Compensation Arrangements by Share-based Payment Award, Options, Grants in Period, Weighted Average Exercise Price (in Dollars per share)	$ 3.92	$ 3.42
Share-based Compensation Arrangement by Share-based Payment Award, Options, Grants In Period, Expiration Period	10 years	10 years

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Note 12 - Fair Value Measurements (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2013	Dec. 31, 2012
Fair Value Disclosures [Text Block]
Real Estate Held-for-sale	$ 1,301,000	$ 1,301,000	$ 1,345,000
Impairment of Long-Lived Assets to be Disposed of	$ 44,000	$ 44,000

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Note 3 - Earnings Per Share (Details) - Computation of Basic and Diluted Earnings Per Share (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Numerator:
Net (loss) income (in Dollars)	$ (1,457)	$ 439	$ (5,967)	$ (4,244)
Denominator:
Basic weighted average common shares outstanding	51,026	51,432	51,004	52,025
Effect of dilutive securities:
Diluted weighted average common shares outstanding	51,026	52,070	51,004	52,025
Basic (loss) earnings per share (in Dollars per share)	$ (0.03)	$ 0.01	$ (0.12)	$ (0.08)
Diluted (loss) earnings per share (in Dollars per share)	$ (0.03)	$ 0.01	$ (0.12)	$ (0.08)
Employee Stock Option [Member]
Effect of dilutive securities:
Dilutive securities		57
Warrant [Member]
Effect of dilutive securities:
Dilutive securities		581

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Note 9 - Commitments and Contingencies (Details) (USD $)	3 Months Ended	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2013
Note 9 - Commitments and Contingencies (Details) [Line Items]
Standard Product Warranty Accrual, Preexisting, Increase (Decrease)	$ 132,000	$ 132,000
Cancellable Open Purchase Order Arrangements	1,600,000	1,600,000
Letters of Credit Outstanding, Amount	5,600,000	5,600,000
Restricted Cash Used to Collateralize Irrevocable Standby Letters of Credit	5,700,000	5,700,000
The 2009 Agreement [Member]
Note 9 - Commitments and Contingencies (Details) [Line Items]
Letters of Credit Outstanding, Amount	4,100,000	4,100,000
The 2012 Agreement [Member]
Note 9 - Commitments and Contingencies (Details) [Line Items]
Letters of Credit Outstanding, Amount	$ 1,500,000	$ 1,500,000
Minimum [Member]
Note 9 - Commitments and Contingencies (Details) [Line Items]
Warranty and Product Performance Guarantees as Percentage of Total Sales Agreement	10.00%	10.00%
Warranty and Product Performance Guarantees Period		12 months
Maximum [Member]
Note 9 - Commitments and Contingencies (Details) [Line Items]
Warranty and Product Performance Guarantees as Percentage of Total Sales Agreement	30.00%	30.00%
Warranty and Product Performance Guarantees Period		36 months

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Note 9 - Commitments and Contingencies (Tables)

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Text Block]

Operating Leases of Lessee Disclosure [Table Text Block]

	June 30, 2013
2013 (remaining six months)	$	782
2014		1,627
2015		1,544
2016		1,581
2017		1,569
Thereafter		2,924
Total future minimum lease payments	$	10,027

Schedule of Product Warranty Liability [Table Text Block]

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Balance, beginning of period	$	1,256		$	864		$	1,172		$	852
Warranty costs charged to cost of revenue		41			133			138			174
Change in estimate		(132	)		—			(132	)		—
Utilization of warranty		(138	)		(54	)		(151	)		(83	)
Balance, end of period	$	1,027		$	943		$	1,027		$	943

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Condensed Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash Flows From Operating Activities
Net loss	$ (5,967)	$ (4,244)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	1,829	1,976
Loss on disposal of fixed assets	19
Non-cash restructuring charges	44	79
Amortization of premiums/discounts on investments	171	287
Interest accrued on notes receivables from stockholders		(1)
Share-based compensation	1,187	1,508
Loss on foreign currency transactions	31	7
Deferred income taxes	111	118
Provision for doubtful accounts	134	108
Provision for warranty claims	138	174
Valuation adjustments for inventory reserves	(60)	4
Other non-cash adjustments	(58)	65
Changes in operating assets and liabilities:
Accounts receivable	2,629	(2,804)
Unbilled receivables	3,591	(192)
Inventories	(2,253)	800
Prepaid and other assets	41	639
Accounts payable	(781)	(128)
Accrued expenses and other liabilities	(3,190)	(941)
Income taxes payable	10	10
Deferred revenue	(230)	674
Net cash used in operating activities	(2,604)	(1,861)
Cash Flows From Investing Activities
Capital expenditures	(866)	(1,479)
Purchase of marketable securities	(8,570)	(861)
Maturities of marketable securities	6,450	7,011
Restricted cash	119	1,646
Net cash (used in) provided by investing activities	(2,867)	6,317
Cash Flows From Financing Activities
Repayment of long-term debt		(64)
Repayment of capital lease obligation	(18)	(63)
Net proceeds from issuance of common stock	230	5
Repurchase of common stock		(4,000)
Net cash provided by (used in) financing activities	212	(4,122)
Effect of exchange rate differences on cash and cash equivalents	(33)	(12)
Net change in cash and cash equivalents	(5,292)	322
Cash and cash equivalents, beginning of period	16,642	18,507
Cash and cash equivalents, end of period	$ 11,350	$ 18,829

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Note 2 - Goodwill and Other Intangible Assets

6 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Text Block]

Goodwill and Intangible Assets Disclosure [Text Block]

Note 2 — Goodwill and Other Intangible Assets

Goodwill of $12.8 million at June 30, 2013 and December 31, 2012 was the result of our acquisition of Pump Engineering, LLC in December 2009. During the three and six months ended June 30, 2013, there were no changes in the recognized amount of goodwill.

The components of identifiable other intangible assets, all of which are finite-lived, as of June 30, 2013 and December 31, 2012, respectively, were as follows (in thousands):

	June 30, 2013
	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses			Net Carrying Amount
Developed technology	$	6,100	$	(2,186	)	$	—		$	3,914
Non-compete agreements		1,310		(1,092	)		—			218
Backlog		1,300		(1,300	)		—			—
Trademarks		1,200		(180	)		(1,020	)		—
Customer relationships		990		(858	)		—			132
Patents		585		(339	)		(42	)		204
Total	$	11,485	$	(5,955	)	$	(1,062	)	$	4,468

	December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses			Net Carrying Amount
Developed technology	$	6,100	$	(1,881	)	$	—		$	4,219
Non-compete agreements		1,310		(1,015	)		—			295
Backlog		1,300		(1,300	)		—			—
Trademarks		1,200		(180	)		(1,020	)		—
Customer relationships		990		(792	)		—			198
Patents		585		(326	)		(42	)		217
Total	$	11,485	$	(5,494	)	$	(1,062	)	$	4,929

In 2012, we determined that the capitalized cost associated with our acquired trademark intangibles was impaired with the launch of the Company’s new branding strategy and the discontinuation of the use of the trademarks “PEI” and “Pump Engineering” in the fourth quarter of 2012. Accordingly, we recorded an impairment charge of $1.0 million for the year ended December 31, 2012 and have not recorded any amortization expense in 2013 related to this intangible asset.

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Note 5 - Investments

6 Months Ended

Jun. 30, 2013

Table Text Block [Abstract]

Marketable Securities [Table Text Block]

Note 5 — Investments

Our short-term and long-term investments are all classified as available-for-sale.

Available-for-sale securities at June 30, 2013 consisted of the following (in thousands):

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Certificates of deposit	$	250	$	—	$	—		$	250
State and local government obligations		3,441		4		—			3,445
Corporate notes and bonds		3,585		7		(1	)		3,591
Short-term investments	$	7,276	$	11	$	(1	)	$	7,286
State and local government obligations		1,003		2		(1	)		1,004
Corporate notes and bonds		7,925		—		(31	)		7,894
Long-term investments	$	8,928	$	2	$	(32	)	$	8,898
Total available-for-sale securities	$	16,204	$	13	$	(33	)	$	16,184

Available-for-sale securities at December 31, 2012 consisted of the following (in thousands):

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Certificates of deposit	$	250	$	—	$	—		$	250
State and local government obligations		2,444		3		(1	)		2,446
Corporate notes and bonds		6,799		3		(1	)		6,801
Short-term investments	$	9,493	$	6	$	(2	)	$	9,497
State and local government obligations		1,381		6		(2	)		1,385
Corporate notes and bonds		3,381		13		(6	)		3,388
Long-term investments	$	4,762	$	19	$	(8	)	$	4,773
Total available-for-sale securities	$	14,255	$	25	$	(10	)	$	14,270

Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties. The amortized cost and fair value of available-for-sale securities that had stated maturities as of June 30, 2013 are shown below by contractual maturity (in thousands):

	June 30, 2013
	Amortized Cost		Fair Value
Due in one year or less	$	2,384	$	2,384
Due after one year through three years		13,820		13,800
Total available-for-sale securities	$	16,204	$	16,184

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Note 3 - Earnings Per Share

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Text Block]

Earnings Per Share [Text Block]

Note 3 — Earnings per Share

Basic and diluted earnings per share are based on the weighted average number of common shares outstanding during the period. Potentially dilutive securities are excluded from the calculation of earnings per share, as their inclusion would be anti-dilutive.

The following table shows the computation of basic and diluted earnings per share (in thousands, except per share data):

	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
Numerator:
Net (loss) income	$	(1,457	)	$	439	$	(5,967	)	$	(4,244	)
Denominator:
Basic weighted average common shares outstanding		51,026			51,432		51,004			52,025
Effect of dilutive securities:
Stock options		—			57		—			—
Warrants		—			581		—			—
Diluted weighted average common shares outstanding		51,026			52,070		51,004			52,025
Basic (loss) earnings per share	$	(0.03	)	$	0.01	$	(0.12	)	$	(0.08	)
Diluted (loss) earnings per share	$	(0.03	)	$	0.01	$	(0.12	)	$	(0.08	)

The following potential common shares were excluded from the computation of diluted earnings per share because their effect would have been anti-dilutive (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Stock options		7,273		6,317		7,273		6,374
Warrants		900		389		900		970
Restricted awards*		—		7		—		7

*           Includes restricted stock and restricted stock units.

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Note 7 - Equity (Details) - Share-based Compensation Expense (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	$ 498	$ 725	$ 1,187	$ 1,508
Cost of Sales [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	18	39	39	65
General and Administrative Expense [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	307	479	814	1,024
Selling and Marketing Expense [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	120	171	235	340
Research and Development Expense [Member]
Employee Service Share-based Compensation, Allocation of Recognized Period Costs [Line Items]
Share-based compensation expense	$ 53	$ 36	$ 99	$ 79

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Note 12 - Fair Value Measurements (Tables)

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Text Block]

Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block]

	June 30, 2013		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets:
Short-term available-for-sale securities	$	7,286	$	—	$	7,286	$	—
Long-term available-for-sale securities		8,898		—		8,898		—
Total assets	$	16,184	$	—	$	16,184	$	—
Liabilities:
Contingent consideration*	$	1,524	$	—	$	—	$	1,524
Total liabilities	$	1,524	$	—	$	—	$	1,524

	December 31, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets:
Short-term available-for-sale securities	$	9,497	$	—	$	9,497	$	—
Long-term available-for-sale securities		4,773		—		4,773		—
Total assets	$	14,270	$	—	$	14,270	$	—
Liabilities:
Contingent consideration*	$	1,524	$	—	$	—	$	1,524
Total liabilities	$	1,524	$	—	$	—	$	1,524

Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Table Text Block]

	Contingent Consideration
Balance, December 31, 2012	$	1,524
Change in value		—
Balance, June 30, 2013	$	1,524

Fair Value Measurements, Nonrecurring [Table Text Block]

	June 30, 2013		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets held for sale	$	1,301	$	—	$	1,301	$	—

	December 31, 2012		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Assets held for sale	$	1,345	$	—	$	1,345	$	—

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Note 3 - Earnings Per Share (Details) - Antidilutive Securities Excluded from Computation of Diluted Earnings Per Share In Thousands, unless otherwise specified	3 Months Ended				6 Months Ended
	Jun. 30, 2013		Jun. 30, 2012		Jun. 30, 2013	Jun. 30, 2012
Equity Option [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities	7,273		6,317		7,273	6,374
Warrant [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities	900		389		900	970
Restricted Stock [Member]
Antidilutive Securities Excluded from Computation of Earnings Per Share [Line Items]
Antidilutive securities		[1]	7	[1]		7

[1] Includes restricted stock and restricted stock units.

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Note 5 - Investments (Details) - Available-For-Sale Securities (USD $) In Thousands, unless otherwise specified	6 Months Ended	12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	$ 16,204	$ 14,255
Gross Unrealized Holding Gains	13	25
Gross Unrealized Holding Losses	(33)	(10)
Fair Value	16,184	14,270
Certificates of Deposit [Member] | Short-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	250	250
Gross Unrealized Holding Gains	0	0
Gross Unrealized Holding Losses	0	0
Fair Value	250	250
State and Local Government Obligations [Member] | Short-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	3,441	2,444
Gross Unrealized Holding Gains	4	3
Gross Unrealized Holding Losses	0	(1)
Fair Value	3,445	2,446
State and Local Government Obligations [Member] | Other Long-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	1,003	1,381
Gross Unrealized Holding Gains	2	6
Gross Unrealized Holding Losses	(1)	(2)
Fair Value	1,004	1,385
Corporate Debt Securities [Member] | Short-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	3,585	6,799
Gross Unrealized Holding Gains	7	3
Gross Unrealized Holding Losses	(1)	(1)
Fair Value	3,591	6,801
Corporate Debt Securities [Member] | Other Long-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	7,925	3,381
Gross Unrealized Holding Gains	0	13
Gross Unrealized Holding Losses	(31)	(6)
Fair Value	7,894	3,388
Short-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	7,276	9,493
Gross Unrealized Holding Gains	11	6
Gross Unrealized Holding Losses	(1)	(2)
Fair Value	7,286	9,497
Other Long-term Investments [Member]
Schedule of Available-for-sale Securities [Line Items]
Amortized Cost	8,928	4,762
Gross Unrealized Holding Gains	2	19
Gross Unrealized Holding Losses	(32)	(8)
Fair Value	$ 8,898	$ 4,773

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Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013		Dec. 31, 2012
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Available-for-sale securities	$ 16,184		$ 14,270
Total assets	16,184		14,270
Contingent consideration	1,524	[1]	1,524	[1]
Total liabilities	1,524		1,524
Fair Value, Inputs, Level 1 [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Contingent consideration		[1]		[1]
Fair Value, Inputs, Level 2 [Member] | Short-term Investments [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Available-for-sale securities	7,286		9,497
Fair Value, Inputs, Level 2 [Member] | Other Long-term Investments [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Available-for-sale securities	8,898		4,773
Fair Value, Inputs, Level 2 [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Total assets	16,184		14,270
Contingent consideration		[1]		[1]
Fair Value, Inputs, Level 3 [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Contingent consideration	1,524	[1]	1,524	[1]
Total liabilities	1,524		1,524
Short-term Investments [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Available-for-sale securities	7,286		9,497
Other Long-term Investments [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis [Line Items]
Available-for-sale securities	$ 8,898		$ 4,773

[1] Included in Accrued Expenses and Other Current Liabilities and Other Non-Current Liabilities.

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Note 9 - Commitments and Contingencies (Details) - Product Warranty Liability (USD $)	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Product Warranty Liability [Abstract]
Balance, beginning of period	$ 1,256,000	$ 864,000	$ 1,172,000	$ 852,000
Warranty costs charged to cost of revenue	41,000	133,000	138,000	174,000
Change in estimate	(132,000)		(132,000)
Utilization of warranty	(138,000)	(54,000)	(151,000)	(83,000)
Balance, end of period	$ 1,027,000	$ 943,000	$ 1,027,000	$ 943,000

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Condensed Consolidated Balance Sheets (Unaudited) (Parentheticals) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Allowance for doubtful accounts (in Dollars)	$ 241	$ 217
Property and equipment, accumulated depreciation (in Dollars)	$ 10,657	$ 9,306
Preferred stock, par value (in Dollars per share)	$ 0.001	$ 0.001
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, par value (in Dollars per share)	$ 0.001	$ 0.001
Common stock, shares authorized	200,000,000	200,000,000
Common stock, shares issued	52,814,752	52,685,129
Common stock, shares outstanding	51,032,149	50,902,526
Treasury stock, shares repurchased	1,782,603	1,782,603

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Note 8 - Income Taxes

6 Months Ended

Jun. 30, 2013

Income Tax Disclosure [Text Block]

Income Tax Disclosure [Text Block]

Note 8 — Income Taxes

The effective tax rate for the six months ended June 30, 2013 and 2012 was (3.9%) and 6.7%, respectively. The tax expense for the six months ended June 30, 2013 primarily relates to the amortization of the deferred tax liability for the temporary difference regarding the tax basis of goodwill recognized during the period and the truing up of tax refunds receivable. The net loss for the six months ended June 30, 2013 did not yield an income tax benefit as we continue to provide a full valuation allowance on our deferred tax assets. The tax benefit recognized for the six months ended June 30, 2012 primarily related to the recognition of state tax refunds from prior-year returns.

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Condensed Consolidated Statements of Comprehensive (Loss) Income (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Net (loss) income	$ (1,457)	$ 439	$ (5,967)	$ (4,244)
Other comprehensive (loss) income net of tax:
Foreign currency translation adjustments	(3)	13	2	7
Unrealized (loss) gain on investments	(24)	(16)	(35)	32
Other comprehensive (loss) income	(27)	(3)	(33)	39
Comprehensive (loss) income	$ (1,484)	$ 436	$ (6,000)	$ (4,205)

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Condensed Consolidated Balance Sheets (Unaudited) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Current assets:
Cash and cash equivalents	$ 11,350	$ 16,642
Restricted cash	5,385	5,235
Short-term investments	7,286	9,497
Accounts receivable, net of allowance for doubtful accounts of $241 and $217 at June 30, 2013 and December 31, 2012, respectively	10,486	13,240
Unbilled receivables	2,183	5,020
Inventories	7,364	5,135
Deferred tax assets, net	500	500
Land and building held for sale	1,301	1,345
Prepaid expenses and other current assets	4,203	4,245
Total current assets	50,058	60,859
Restricted cash, non-current	4,097	4,366
Unbilled receivables, non-current	113	868
Long-term investments	8,898	4,773
Property and equipment, net of accumulated depreciation of $10,657 and $9,306 at June 30, 2013 and December 31, 2012, respectively	15,208	15,967
Goodwill	12,790	12,790
Other intangible assets, net	4,468	4,929
Other assets, non-current	2	2
Total assets	95,634	104,554
Current liabilities:
Accounts payable	1,189	2,154
Accrued expenses and other current liabilities	5,521	8,555
Income taxes payable	48	39
Accrued warranty reserve	1,027	1,172
Deferred revenue	827	918
Current portion of capital lease obligations		18
Total current liabilities	8,612	12,856
Deferred tax liabilities, non-current, net	1,817	1,706
Deferred revenue, non-current	272	411
Other non-current liabilities	2,142	2,200
Total liabilities	12,843	17,173
Commitments and Contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.001 par value; 10,000,000 shares authorized; no shares issued or outstanding	0	0
Common stock, $0.001 par value; 200,000,000 shares authorized; 52,814,752 and 51,032,149 shares issued and outstanding at June 30, 2013, respectively; and 52,685,129 and 50,902,526 shares issued and outstanding at December 31, 2012, respectively	53	53
Additional paid-in capital	118,674	117,264
Accumulated other comprehensive loss	(112)	(79)
Treasury stock, at cost, 1,782,603 shares repurchased at June 30, 2013 and December 31, 2012	(4,000)	(4,000)
Accumulated deficit	(31,824)	(25,857)
Total stockholders’ equity	82,791	87,381
Total liabilities and stockholders’ equity	$ 95,634	$ 104,554

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Note 12 - Fair Value Measurements (Details) - Reconciliation of Assets and Liabilities Measured on a Recurring Basis Using Significant Unobservable Inputs (Contingent Consideration [Member], USD $) In Thousands, unless otherwise specified	6 Months Ended
	Jun. 30, 2013
Contingent Consideration [Member]
Fair Value, Liabilities Measured on Recurring Basis, Unobservable Input Reconciliation [Line Items]
Balance, December 31, 2012	$ 1,524
Change in value	0
Balance, June 30, 2013	$ 1,524

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Note 2 - Goodwill and Other Intangible Assets (Details) (USD $)	12 Months Ended
	Dec. 31, 2012	Jun. 30, 2013
Goodwill and Intangible Assets Disclosure [Text Block]
Goodwill	$ 12,790,000	$ 12,790,000
Impairment of Intangible Assets, Finite-lived	$ 1,000,000

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Note 5 - Investments (Tables)

6 Months Ended

Jun. 30, 2013

Table Text Block [Abstract]

Available-for-sale Securities [Table Text Block]

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Certificates of deposit	$	250	$	—	$	—		$	250
State and local government obligations		3,441		4		—			3,445
Corporate notes and bonds		3,585		7		(1	)		3,591
Short-term investments	$	7,276	$	11	$	(1	)	$	7,286
State and local government obligations		1,003		2		(1	)		1,004
Corporate notes and bonds		7,925		—		(31	)		7,894
Long-term investments	$	8,928	$	2	$	(32	)	$	8,898
Total available-for-sale securities	$	16,204	$	13	$	(33	)	$	16,184

	Amortized Cost		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
Certificates of deposit	$	250	$	—	$	—		$	250
State and local government obligations		2,444		3		(1	)		2,446
Corporate notes and bonds		6,799		3		(1	)		6,801
Short-term investments	$	9,493	$	6	$	(2	)	$	9,497
State and local government obligations		1,381		6		(2	)		1,385
Corporate notes and bonds		3,381		13		(6	)		3,388
Long-term investments	$	4,762	$	19	$	(8	)	$	4,773
Total available-for-sale securities	$	14,255	$	25	$	(10	)	$	14,270

Schedule of Available-for-sale Securities Reconciliation [Table Text Block]

	June 30, 2013
	Amortized Cost		Fair Value
Due in one year or less	$	2,384	$	2,384
Due after one year through three years		13,820		13,800
Total available-for-sale securities	$	16,204	$	16,184

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Note 9 - Commitments and Contingencies (Details) - Operating Lease Obligations (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Operating Lease Obligations [Abstract]
2013 (remaining six months)	$ 782
2014	1,627
2015	1,544
2016	1,581
2017	1,569
Thereafter	2,924
Total future minimum lease payments	$ 10,027

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Note 6 - Debt (Details) (USD $)						0 Months Ended					12 Months Ended
	Jun. 30, 2013	Dec. 31, 2012	Jun. 05, 2012 All Outstanding Advances and All Outstanding Letters of Credit [Member] The 2012 Agreement [Member]	Dec. 31, 2009 All Outstanding Letters of Credit [Member] The 2009 Agreement [Member]	Dec. 31, 2009 All Outstanding Advances [Member] The 2009 Agreement [Member]	Jun. 05, 2012 Prime Rate [Member] The 2012 Agreement [Member]	Jun. 05, 2012 London Interbank Offered Rate (LIBOR) [Member] The 2012 Agreement [Member]	Jun. 05, 2012 The 2012 Agreement [Member]	Jun. 30, 2013 The 2012 Agreement [Member]	Dec. 31, 2012 The 2012 Agreement [Member]	Dec. 31, 2009 The 2009 Agreement [Member]	Jun. 30, 2013 The 2009 Agreement [Member]	Dec. 31, 2012 The 2009 Agreement [Member]
Note 6 - Debt (Details) [Line Items]
Line of Credit Facility, Maximum Borrowing Capacity								$ 16,000,000			$ 16,000,000
Line of Credit Facility, Capacity Available for Trade Purchases								10,000,000			10,000,000
Debt Instrument, Basis Spread on Variable Rate						0.00%	1.25%				1.375%
Line of Credit Facility, Unused Capacity, Commitment Fee Percentage								0.25%
Cash Collateral Balance Required by Credit Agreement			101.00%	101.00%	100.00%
Letters of Credit Outstanding, Amount	5,600,000								1,500,000	1,400,000		4,100,000	4,300,000
Restricted Cash and Cash Equivalents	9,482,000	9,601,000							1,500,000
Line of Credit Facility, Capacity Available for Specific Purpose Other than for Trade Purchases											15,900,000
Restricted Cash and Cash Equivalents, Noncurrent	$ 4,097,000	$ 4,366,000										$ 4,100,000

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Note 4 - Other Financial Information (Details) - Accrued Expenses and Other Current Liabilities (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Accrued Expenses and Other Current Liabilities [Abstract]
Payroll and commissions payable	$ 2,919	$ 4,687
Contingent consideration (current portion) and legal expenses	1,590	1,506
Other accrued expenses and current liabilities	1,012	2,362
Accrued expenses and other current liabilities	$ 5,521	$ 8,555

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Note 4 - Other Financial Information (Details) - Changes in Accumulated Other Comprehensive Income (USD $) In Thousands, unless otherwise specified	3 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2013	Jun. 30, 2012
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance			$ (79)
Net other comprehensive income (loss)	(27)	(3)	(33)	39
Balance	(112)		(112)
Accumulated Translation Adjustment [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance			(94)
Net other comprehensive income (loss)			2
Balance	(92)		(92)
Accumulated Net Unrealized Investment Gain (Loss) [Member]
Accumulated Other Comprehensive Income (Loss) [Line Items]
Balance			15
Net other comprehensive income (loss)			(35)
Balance	$ (20)		$ (20)

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Note 7 - Equity

6 Months Ended

Jun. 30, 2013

Shareholders' Equity and Share-based Payments [Text Block]

Shareholders' Equity and Share-based Payments [Text Block]

Note 7 — Equity

Share-Based Compensation Expense

For the three and six months ended June 30, 2013 and 2012, we recognized share-based compensation expense related to employees and consultants as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Cost of revenue	$	18	$	39	$	39	$	65
General and administrative		307		479		814		1,024
Sales and marketing		120		171		235		340
Research and development		53		36		99		79
Total share-based compensation expense	$	498	$	725	$	1,187	$	1,508

As of June 30, 2013, total unrecognized compensation cost related to non-vested share-based awards, net of estimated forfeitures, was $3.5 million, which is expected to be recognized as expense over a weighted average period of approximately 2.7 years.

In January 2013, we granted 100,000 stock options to an employee in connection with the offer letter of employment in July 2011. The options vest over a four-year period beginning on the first day of employment, have an exercise price of $3.42 per share based on the date of grant, and expire 10 years from the grant date.

In March 2013, we granted 843,600 stock options to certain officers and other employees. The options vest over a four-year period, have an exercise price of $3.92 per share, and expire 10 years from the grant date.

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Note 2 - Goodwill and Other Intangible Assets (Details) - Identifiable Intangible Assets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	$ 11,485	$ 11,485
Accumulated Amortization	(5,955)	(5,494)
Accumulated Impairment Losses	(1,062)	(1,062)
Net Carrying Amount	4,468	4,929
Developed Technology Rights [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	6,100	6,100
Accumulated Amortization	(2,186)	(1,881)
Net Carrying Amount	3,914	4,219
Noncompete Agreements [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	1,310	1,310
Accumulated Amortization	(1,092)	(1,015)
Net Carrying Amount	218	295
Order or Production Backlog [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	1,300	1,300
Accumulated Amortization	(1,300)	(1,300)
Trademarks [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	1,200	1,200
Accumulated Amortization	(180)	(180)
Accumulated Impairment Losses	(1,020)	(1,020)
Customer Relationships [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	990	990
Accumulated Amortization	(858)	(792)
Net Carrying Amount	132	198
Patents [Member]
Finite-Lived Intangible Assets [Line Items]
Gross Carrying Amount	585	585
Accumulated Amortization	(339)	(326)
Accumulated Impairment Losses	(42)	(42)
Net Carrying Amount	$ 204	$ 217

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Note 8 - Income Taxes (Details)	6 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Income Tax Disclosure [Text Block]
Effective Income Tax Rate Reconciliation, Percent	3.90%	6.70%

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Note 10 - Business Segment and Geographic Information

6 Months Ended

Jun. 30, 2013

Segment Reporting Disclosure [Text Block]

Segment Reporting Disclosure [Text Block]

Note 10 — Business Segment and Geographic Information

We manufacture and sell high-efficiency energy recovery devices and pumps as well as related services under one reportable segment. Our chief operating decision-maker is the chief executive officer (“CEO”). The CEO reviews financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance. Accordingly, we have concluded that we have one reportable segment.

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, rather than the delivery location, is reflected in the table below (in thousands, except percentages):

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Domestic revenue	$	468		$	1,200		$	1,763		$	1,788
International revenue		8,101			11,096			13,179			15,264
Total revenue	$	8,569		$	12,296		$	14,942		$	17,052
Revenue by country:
India		15	%		*	%		14	%		*	%
Spain		15			*			10			3
Ghana		10			0			6			0
China		10			8			7			8
United States		5			10			12			10
Israel		*			14			*			10
Australia		*			32			*			23
Others **		45			36			51			46
Total		100	%		100	%		100	%		100	%

*       Less than 1%.

**     Includes remaining countries not separately disclosed. No country in this line item accounted for more than 10% of our net revenue during the periods presented.

Substantially all of our long-lived assets were located in the United States at June 30, 2013 and December 31, 2012.

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Note 6 - Debt

6 Months Ended

Jun. 30, 2013

Debt and Capital Leases Disclosures [Text Block]

Debt and Capital Leases Disclosures [Text Block]

Note 6 — Debt

Lines of Credit

In June 2012, we entered into a loan agreement (the “2012 Agreement”) with a financial institution. The 2012 Agreement 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 plus 0% or a Eurodollar loan that bears interest equal to the adjusted LIBO 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 facility fee in an amount equal to 0.25% per annum of the average unused portion of the revolving line. The 2012 Agreement 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 matures on June 5, 2015 and is collateralized by substantially all of our assets. At December 31, 2012, the amount of outstanding stand-by letters of credit collateralized under the 2012 Agreement totaled $1.4 million. As of June 30, 2013, there were no advances drawn and $1.5 million in stand-by letters of credit collateralized under the 2012 Agreement. Total restricted cash related to these stand-by letters of credit totaled $1.5 million as of June 30, 2013.

We are subject to certain financial and administrative covenants under the 2012 Agreement. As of June 30, 2013, we were in compliance with these covenants.

In 2009, we entered into a loan and security agreement (the “2009 Agreement”) with another financial institution. The 2009 Agreement, as amended, provided a total available credit line of $16.0 million. Under the 2009 Agreement, we were allowed to draw advances of up $10.0 million on a revolving line of credit or utilize up to $15.9 million as collateral for stand-by letters of credit, provided that the aggregate of the outstanding advances and collateral did not exceed the total available credit line of $16.0 million. Advances under the revolving line of credit incurred interest based on a prime rate index or LIBOR plus 1.375%. The 2009 Agreement, as amended, also required us to maintain cash collateral balances equal to at least 101% of the face amount of all outstanding stand-by letters of credit collateralized by the line of credit and 100% of the amount of all outstanding advances. The amended 2009 Agreement expired on May 30, 2012. There were no advances drawn under the 2009 Agreement’s credit line at the time it expired. At December 31, 2012, the amount of remaining outstanding stand-by letters of credit issued under the 2009 Agreement totaled $4.3 million. As of June 30, 2013, remaining stand-by letters of credit issued under the 2009 Agreement totaled $4.1 million. Total restricted cash related to these stand-by letters of credit totaled $4.1 million as of June 30, 2013.

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Note 1 - The Company and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2013

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

Energy Recovery, Inc. (the “Company”, “Energy Recovery”, “we”, “our”, or “us”) designs, develops, manufactures, and sells energy recovery devices that harness the reusable energy from industrial fluid flows and pressure cycles. Our products are marketed and sold in fluid flow markets under the trademarks ERI^®, PX^®, Pressure Exchanger^®, and PX Pressure Exchanger^®. Our products are developed and manufactured in the United States of America (“U.S.”) at our headquarters in San Leandro, California. We also have sales offices in Madrid, Spain; Dubai, United Arab Emirates; and Shanghai, Peoples Republic of China.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires our management to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our most significant estimates and judgments involve the determination of 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; valuation of fair value of assets held for sale; useful lives for depreciation and amortization; valuation adjustments for excess and obsolete inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies, including contingent consideration. Actual results could differ materially from those estimates.

Basis of Presentation

The condensed consolidated financial statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The accompanying condensed consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The December 31, 2012 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP; however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC on March 12, 2013.

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

Recent Accounting Pronouncements

In April 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-07, Liquidation Basis Accounting. The amendment requires (1) an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent; (2) that financial statements prepared using the liquidation basis of accounting present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation; and (3) disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. This update is effective prospectively for entities that determine liquidation is imminent during the annual reporting periods beginning after December 15, 2013 and interim reporting periods therein. Adoption of this guidance is not expected to have an impact on our financial statements absent any indication that liquidation is imminent.

In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendment is to resolve the diversity in practice of which subtopic applies to the release of the cumulative translation adjustment into net income when a parent company either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. This update is effective prospectively for reporting periods after December 15, 2013. Adoption of this guidance is not expected to have a material impact on our financial statements.

In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The standard provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. This update is effective for reporting periods after December 15, 2013. Adoption of this guidance is not expected to have a material impact on our financial statements.

Also in February 2013, the FASB issued ASU No. 2013-02, Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income. The standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and present significant amounts reclassified by the respective line items of net income, but only if the reclassified amount is required to be reclassified by U.S. GAAP. Amounts not required to be reclassified by U.S. GAAP must be cross-referenced to other disclosures required by U.S. GAAP that provide additional detail about those amounts. This update is effective prospectively for reporting periods after December 15, 2012, with early adoption permitted. Adoption of this guidance required additional disclosure, but did not have a material impact on our financial statements.

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The update was issued to address implementation issues about the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendment affects entities that have derivatives, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing, and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and liabilities subject to a master netting arrangement or similar agreement are also affected because this amendment makes them no longer subject to the disclosure requirements of ASU No. 2011-11. This amendment is applicable for periods beginning on or after January 1, 2013. Adoption of this guidance did not have a material impact on our financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other, Testing Indefinite-Lived Assets for Impairment. The standard provides entities an option to perform a qualitative assessment to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes, as a result of its qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, then the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. Adoption of this guidance did not have a material impact on our financial statements.

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Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Non-recurring Basis (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Non-recurring Basis [Line Items]
Assets held for sale	$ 1,301	$ 1,345
Fair Value, Inputs, Level 2 [Member]
Note 12 - Fair Value Measurements (Details) - Fair Value of Financial Assets and Liabilities Measured on a Non-recurring Basis [Line Items]
Assets held for sale	$ 1,301	$ 1,345

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Note 11 - Concentrations (Details)	3 Months Ended	6 Months Ended	3 Months Ended	6 Months Ended		6 Months Ended
	Jun. 30, 2013	Jun. 30, 2013	Jun. 30, 2012 Southern Seawater JV [Member] Sales Revenue, Goods, Net [Member]	Jun. 30, 2012 Southern Seawater JV [Member] Sales Revenue, Goods, Net [Member]	Jun. 30, 2013 Accounts Receivable [Member]	Jun. 30, 2013 Sales Revenue, Goods, Net [Member]
Note 11 - Concentrations (Details) [Line Items]
Concentration Risk Benchmark, Instant					10.00%
Concentration Risk Benchmark						10.00%
Number of Customers Accounted for 10% or More of Net Revenue	0	0
Concentration Risk, Percentage			30.00%	22.00%

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Note 4 - Other Financial Information (Details) - Restricted Cash (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Dec. 31, 2012
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted cash, current	$ 5,385	$ 5,235
Restricted cash, noncurrent	4,097	4,366
Total restricted cash	9,482	9,601
Contingent and Other Consideration for Acquisition [Member]
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted cash, current	2,504	2,504
Restricted cash, noncurrent	1,000	1,000
Collateral for Letters of Credit [Member]
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted cash, current	2,567	2,416
Restricted cash, noncurrent	3,097	3,366
Collateral for Credit Cards [Member]
Restricted Cash and Cash Equivalents Items [Line Items]
Restricted cash, current	$ 314	$ 315

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Accounting Policies, by Policy (Policies)

6 Months Ended

Jun. 30, 2013

Accounting Policies [Abstract]

Use of Estimates, Policy [Policy Text Block]

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”) requires our management to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Our most significant estimates and judgments involve the determination of 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; valuation of fair value of assets held for sale; useful lives for depreciation and amortization; valuation adjustments for excess and obsolete inventory; deferred taxes and valuation allowances on deferred tax assets; and evaluation and measurement of contingencies, including contingent consideration. Actual results could differ materially from those estimates.

Basis of Accounting, Policy [Policy Text Block]

Basis of Presentation

The condensed consolidated financial statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

The accompanying condensed consolidated financial statements have been prepared by us, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. The December 31, 2012 condensed consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP; however, we believe that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the fiscal year ended December 31, 2012 included in our Annual Report on Form 10-K filed with the SEC on March 12, 2013.

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

New Accounting Pronouncements, Policy [Policy Text Block]

Recent Accounting Pronouncements

In April 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2013-07, Liquidation Basis Accounting. The amendment requires (1) an entity to prepare its financial statements using the liquidation basis of accounting when liquidation is imminent; (2) that financial statements prepared using the liquidation basis of accounting present relevant information about an entity’s expected resources in liquidation by measuring and presenting assets at the amount of the expected cash proceeds from liquidation; and (3) disclosures about an entity’s plan for liquidation, the methods and significant assumptions used to measure assets and liabilities, the type and amount of costs and income accrued, and the expected duration of the liquidation process. This update is effective prospectively for entities that determine liquidation is imminent during the annual reporting periods beginning after December 15, 2013 and interim reporting periods therein. Adoption of this guidance is not expected to have an impact on our financial statements absent any indication that liquidation is imminent.

In March 2013, the FASB issued ASU No. 2013-05, Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. The amendment is to resolve the diversity in practice of which subtopic applies to the release of the cumulative translation adjustment into net income when a parent company either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. This update is effective prospectively for reporting periods after December 15, 2013. Adoption of this guidance is not expected to have a material impact on our financial statements.

In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date. The standard provides guidance on the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this update is fixed at the reporting date, except for obligations addressed within existing guidance in U.S. GAAP. This update is effective for reporting periods after December 15, 2013. Adoption of this guidance is not expected to have a material impact on our financial statements.

Also in February 2013, the FASB issued ASU No. 2013-02, Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income. The standard requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component and present significant amounts reclassified by the respective line items of net income, but only if the reclassified amount is required to be reclassified by U.S. GAAP. Amounts not required to be reclassified by U.S. GAAP must be cross-referenced to other disclosures required by U.S. GAAP that provide additional detail about those amounts. This update is effective prospectively for reporting periods after December 15, 2012, with early adoption permitted. Adoption of this guidance required additional disclosure, but did not have a material impact on our financial statements.

In January 2013, the FASB issued ASU No. 2013-01, Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities. The update was issued to address implementation issues about the scope of ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amendment affects entities that have derivatives, including bifurcated embedded derivatives, repurchase agreements, reverse repurchase agreements, securities borrowing, and securities lending transactions that are either offset or subject to an enforceable master netting arrangement or similar agreement. Entities with other types of financial assets and liabilities subject to a master netting arrangement or similar agreement are also affected because this amendment makes them no longer subject to the disclosure requirements of ASU No. 2011-11. This amendment is applicable for periods beginning on or after January 1, 2013. Adoption of this guidance did not have a material impact on our financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles-Goodwill and Other, Testing Indefinite-Lived Assets for Impairment. The standard provides entities an option to perform a qualitative assessment to determine whether the existence of events and circumstances indicate that it is more likely than not that the indefinite-lived intangible asset is impaired. If an entity concludes, as a result of its qualitative assessment, that it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying amount, then the quantitative impairment test is required. Otherwise, no further testing is required. This standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. Adoption of this guidance did not have a material impact on our financial statements.

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Note 9 - Commitments and Contingencies

6 Months Ended

Jun. 30, 2013

Commitments and Contingencies Disclosure [Text Block]

Commitments and Contingencies Disclosure [Text Block]

Note 9 — Commitments and Contingencies

Operating Lease Obligations

We lease facilities under fixed non-cancellable operating leases that expire on various dates through November 2019. Future minimum lease payments consist of the following (in thousands):

	June 30, 2013
2013 (remaining six months)	$	782
2014		1,627
2015		1,544
2016		1,581
2017		1,569
Thereafter		2,924
Total future minimum lease payments	$	10,027

Product Warranty

The following table summarizes the activity related to the product warranty liability during the three and six months ended June 30, 2013 and 2012 (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Balance, beginning of period	$	1,256		$	864		$	1,172		$	852
Warranty costs charged to cost of revenue		41			133			138			174
Change in estimate		(132	)		—			(132	)		—
Utilization of warranty		(138	)		(54	)		(151	)		(83	)
Balance, end of period	$	1,027		$	943		$	1,027		$	943

Based on management’s analysis of warranty liability experience, we recorded a change in estimate of our warranty reserve of $132,000 during the three months ended June 30, 2013.

Purchase Obligations

We enter into purchase order arrangements with our vendors. As of June 30, 2013, there are open purchase orders for which we have not yet received the related goods or services. These arrangements are subject to change based on our sales demand forecasts, and we have the right to cancel the arrangements prior to the date of delivery. As of June 30, 2013, we had approximately $1.6 million of cancellable open purchase order arrangements related primarily to materials and parts.

Guarantees 

We enter into indemnification provisions under our agreements with other companies in the ordinary course of business, typically with customers. Under these provisions, we generally indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of our activities, generally limited to personal injury and property damage caused by our employees at a customer’s desalination plant in proportion to the employee’s percentage of fault for the accident. Damages incurred for these indemnifications would be covered by our general liability insurance to the extent provided by the policy limitations. We have 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, we have no liabilities recorded for these agreements as of June 30, 2013 and December 31, 2012.

In certain cases, we issue warranty and product performance guarantees to our 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. These guarantees, generally in the form of stand-by letters of credit or bank guarantees secured by stand-by letters of credit, typically remain in place for periods ranging from 12 to 36 months and relate to the underlying product warranty period. The stand-by letters of credit are collateralized by restricted cash and our credit facility. Of the $5.6 million in outstanding stand-by letters of credit at June 30, 2013, $4.1 million was issued under the 2009 Agreement and $1.5 million was issued under the 2012 Agreement. The stand-by letters of credit outstanding at June 30, 2013 were collateralized by restricted cash of $5.7 million.

Litigation

Note 9 – Commitments and Contingencies, under the caption “Litigation” of our Annual Report on Form 10-K filed with the SEC on March 12, 2013, provides information on certain litigation in which we are involved. Unfavorable rulings, judgments, or settlement terms regarding these litigation matters could have a material adverse impact on our business, financial condition, results of operations, and cash flows. Although none of the litigation matters can be quantified with absolute certainty, we have established accruals covering exposure and relating to contingencies to the extent that they are reasonably estimable and probable based on available facts. There have been no material developments to these matters from what was disclosed in our Form 10-K; therefore, we have made no changes to our accruals in the first six months of 2013.

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Note 4 - Other Financial Information (Tables)

6 Months Ended

Jun. 30, 2013

Additional Financial Information Disclosure [Text Block]

Schedule of Restricted Cash and Cash Equivalents [Table Text Block]

	June 30, 2013		December 31, 2012
Contingent and other consideration for acquisition	$	2,504	$	2,504
Collateral for stand-by letters of credit		2,567		2,416
Collateral for credit cards		314		315
Current restricted cash	$	5,385	$	5,235
Contingent and other consideration for acquisition	$	1,000	$	1,000
Collateral for stand-by letters of credit		3,097		3,366
Non-current restricted cash	$	4,097	$	4,366
Total restricted cash	$	9,482	$	9,601

Schedule of Inventory, Current [Table Text Block]

	June 30, 2013		December 31, 2012
Raw materials	$	3,226	$	3,406
Work in process		2,129		1,489
Finished goods		2,009		240
Inventories	$	7,364	$	5,135

Schedule of Accrued Liabilities [Table Text Block]

	June 30, 2013		December 31, 2012
Payroll and commissions payable	$	2,919	$	4,687
Contingent consideration (current portion) and legal expenses		1,590		1,506
Other accrued expenses and current liabilities		1,012		2,362
Accrued expenses and other current liabilities	$	5,521	$	8,555

Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block]

	Foreign Currency Translation Adjustments			Unrealized Gains (Losses) on Investments			Total Accumulated Other Comprehensive Loss
Balance, December 31, 2012	$	(94	)	$	15		$	(79	)
Net other comprehensive income (loss)		2			(35	)		(33	)
Balance, June 30, 2013	$	(92	)	$	(20	)	$	(112	)

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Note 2 - Goodwill and Other Intangible Assets (Tables)

6 Months Ended

Jun. 30, 2013

Goodwill and Intangible Assets Disclosure [Text Block]

Schedule of Finite-Lived Intangible Assets [Table Text Block]

	June 30, 2013
	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses			Net Carrying Amount
Developed technology	$	6,100	$	(2,186	)	$	—		$	3,914
Non-compete agreements		1,310		(1,092	)		—			218
Backlog		1,300		(1,300	)		—			—
Trademarks		1,200		(180	)		(1,020	)		—
Customer relationships		990		(858	)		—			132
Patents		585		(339	)		(42	)		204
Total	$	11,485	$	(5,955	)	$	(1,062	)	$	4,468

	December 31, 2012
	Gross Carrying Amount		Accumulated Amortization			Accumulated Impairment Losses			Net Carrying Amount
Developed technology	$	6,100	$	(1,881	)	$	—		$	4,219
Non-compete agreements		1,310		(1,015	)		—			295
Backlog		1,300		(1,300	)		—			—
Trademarks		1,200		(180	)		(1,020	)		—
Customer relationships		990		(792	)		—			198
Patents		585		(326	)		(42	)		217
Total	$	11,485	$	(5,494	)	$	(1,062	)	$	4,929

XML

Document And Entity Information	6 Months Ended
	Jun. 30, 2013	Jul. 31, 2013
Document and Entity Information [Abstract]
Entity Registrant Name	Energy Recovery, Inc.
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Common Stock, Shares Outstanding		51,032,566
Amendment Flag	false
Entity Central Index Key	0001421517
Entity Current Reporting Status	Yes
Entity Voluntary Filers	No
Entity Filer Category	Accelerated Filer
Entity Well-known Seasoned Issuer	No
Document Period End Date	Jun. 30, 2013
Document Fiscal Year Focus	2013
Document Fiscal Period Focus	Q2

XML

Note 3 - Earnings Per Share (Tables)

6 Months Ended

Jun. 30, 2013

Earnings Per Share [Text Block]

Schedule of Earnings Per Share, Basic and Diluted [Table Text Block]

	Three Months Ended June 30,					Six Months Ended June 30,
	2013			2012		2013			2012
Numerator:
Net (loss) income	$	(1,457	)	$	439	$	(5,967	)	$	(4,244	)
Denominator:
Basic weighted average common shares outstanding		51,026			51,432		51,004			52,025
Effect of dilutive securities:
Stock options		—			57		—			—
Warrants		—			581		—			—
Diluted weighted average common shares outstanding		51,026			52,070		51,004			52,025
Basic (loss) earnings per share	$	(0.03	)	$	0.01	$	(0.12	)	$	(0.08	)
Diluted (loss) earnings per share	$	(0.03	)	$	0.01	$	(0.12	)	$	(0.08	)

Schedule of Antidilutive Securities Excluded from Computation of Earnings Per Share [Table Text Block]

	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Stock options		7,273		6,317		7,273		6,374
Warrants		900		389		900		970
Restricted awards*		—		7		—		7