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Energy Recovery, Inc. (NASDAQ:ERII) Q2 2021 Earnings Conference Call August 5, 2021 5:00 PM ET Company Participants Jim Siccardi - VP, IR Bob Mao - Chairman, President & CEO Joshua Ballard - CFO Conference Call Participants Pavel Molchanov - Raymond James Neil Tseng - Friendly Securities Operator Greetings and welcome to Energy Recovery Second Quarter 2021 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Ins ...

Part I - Financial Information [Financial Statements (Unaudited)](index=6&type=section&id=Item%201%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, and cash flows, with notes on segment reporting and revenue disaggregation [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) As of June 30, 2021, total assets were **$209.3 million**, a slight increase from **$204.3 million** at December 31, 2020, primarily reflecting growth in stockholders' equity to **$179.8 million** Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | **Total Current Assets** | $147.8 | $143.2 | | **Total Assets** | $209.3 | $204.3 | | **Total Current Liabilities** | $13.3 | $15.7 | | **Total Liabilities** | $29.5 | $32.7 | | **Total Stockholders' Equity** | $179.8 | $171.6 | [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) For the six months ended June 30, 2021, the company reported net income of **$7.9 million**, a significant decrease from **$17.5 million** in 2020, primarily due to the absence of license revenue Statement of Operations Summary (in millions, except per share data) | Metric | Q2 2021 | Q2 2020 | Six Months 2021 | Six Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Product Revenue | $20.6 | $19.3 | $49.5 | $38.3 | | License and Development Revenue | $0 | $24.4 | $0 | $26.9 | | **Total Revenue** | **$20.6** | **$43.6** | **$49.5** | **$65.2** | | Income from Operations | $0.3 | $21.3 | $6.4 | $21.4 | | **Net Income** | **$1.1** | **$16.9** | **$7.9** | **$17.5** | | Diluted EPS | $0.02 | $0.30 | $0.13 | $0.31 | [Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Net cash provided by operating activities significantly improved to **$11.5 million** for the six months ended June 30, 2021, while investing and financing activities saw substantial changes Cash Flow Summary (in millions) | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $11.5 | $(0.3) | | Net cash provided by investing activities | $0.4 | $35.8 | | Net cash (used in) provided by financing activities | $(2.9) | $1.1 | | **Net change in cash** | **$9.0** | **$36.6** | [Notes to Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) The notes detail accounting policies, revenue disaggregation by geography, segment realignment into Water and Emerging Technologies, and the impact of the VorTeq License Agreement termination - In Q1 2021, the company realigned its segment reporting into two segments: Water (desalination and industrial wastewater products) and Emerging Technologies (VorTeq, ISOBoost, PX G1300, etc.). Prior year amounts were recast for comparability[96](index=96&type=chunk)[97](index=97&type=chunk) - The termination of the VorTeq License Agreement with Schlumberger, effective June 1, 2020, led to the full recognition of the remaining **$24.4 million** deferred revenue balance in Q2 2020. No further license revenue was recognized from this agreement[47](index=47&type=chunk)[102](index=102&type=chunk)[124](index=124&type=chunk) Revenue by Geography (Six Months Ended June 30, 2021, in millions) | Region | Revenue | % of Total | | :--- | :--- | :--- | | Middle East and Africa | $37.4 | 75.5% | | Asia | $9.5 | 19.2% | | Americas | $1.4 | 2.8% | | Europe | $1.3 | 2.5% | | **Total** | **$49.5** | **100%** | - In March 2021, the Board authorized a stock repurchase program of up to **$50.0 million**. As of June 30, 2021, **656,938 shares** had been repurchased for **$11.6 million**[94](index=94&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=35&type=section&id=Item%202%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a **24% decrease** in total revenue for H1 2021 due to the VorTeq agreement termination, offset by **30% product revenue growth**, and segment realignment [Results of Operations](index=38&type=section&id=Results%20of%20Operations) Total revenue for H1 2021 decreased **24%** to **$49.5 million** due to the absence of license revenue, while product revenue increased **30%** driven by the Megaproject channel Total Revenue Comparison (in millions) | Revenue Type | Six Months 2021 | Six Months 2020 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Product revenue | $49.5 | $38.3 | $11.3 | 30% | | License and development revenue | $0 | $26.9 | $(26.9) | (100%) | | **Total revenue** | **$49.5** | **$65.2** | **$(15.6) | **(24%)** | Product Revenue by Channel (Six Months Ended June 30, in millions) | Channel | 2021 | 2020 | Change $ | Change % | | :--- | :--- | :--- | :--- | :--- | | Megaproject | $37.0 | $26.4 | $10.6 | 40% | | Original equipment manufacturer | $7.1 | $7.6 | $(0.5) | (7%) | | Aftermarket | $5.5 | $4.2 | $1.2 | 29% | | **Total product revenue** | **$49.5** | **$38.3** | **$11.3** | **30%** | - Product gross margin for the first six months of 2021 decreased to **67.4%** from **68.0%** in 2020. This was attributed to rising labor and overhead costs, lower average PX selling prices, and a change in product mix, which offset gains from operational efficiencies[128](index=128&type=chunk) - R&D expenses for the first six months of 2021 decreased by **32%** to **$8.9 million**, primarily due to lower testing supplies expenditures related to reduced development of the VorTeq technology[137](index=137&type=chunk)[139](index=139&type=chunk) [Liquidity and Capital Resources](index=47&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintains strong liquidity with **$103.3 million** in cash and **$17.4 million** in investments, sufficient to meet future capital requirements, and initiated a **$50.0 million** stock repurchase program - Principal sources of liquidity as of June 30, 2021, consisted of **$103.3 million** in cash and cash equivalents, **$17.4 million** in short-term investments, and **$7.6 million** in net accounts receivable[154](index=154&type=chunk) - A stock repurchase program of up to **$50.0 million** was authorized on March 9, 2021. By June 30, 2021, the company had repurchased **656,938 shares** for **$11.6 million**[157](index=157&type=chunk) Cash Flow Summary (Six Months Ended June 30, in millions) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $11.5 | $(0.3) | | Net cash provided by investing activities | $0.4 | $35.8 | | Net cash (used in) provided by financing activities | $(2.9) | $1.1 | [Quantitative and Qualitative Disclosures About Market Risk](index=50&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's market risks are minimal, primarily foreign currency and interest rates, with foreign currency exposure being insignificant and interest rate risk managed through short-term investments - Foreign currency exposure is considered insignificant as revenue contracts are denominated in USD, and the company does not currently hedge this risk[173](index=173&type=chunk)[174](index=174&type=chunk)[176](index=176&type=chunk) - Interest rate risk is managed by investing in a portfolio with a weighted average maturity of **less than seven months**. A hypothetical **1% interest rate increase** would decrease the fair value of its **$17.4 million** debt securities portfolio by **less than $0.1 million**[178](index=178&type=chunk) [Controls and Procedures](index=50&type=section&id=Item%204%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal controls - The President and Chief Executive Officer and the Chief Financial Officer concluded that as of June 30, 2021, the company's disclosure controls and procedures are effective[180](index=180&type=chunk) - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[181](index=181&type=chunk) Part II - Other Information [Legal Proceedings](index=52&type=section&id=Item%201%20Legal%20Proceedings) As of June 30, 2021, the company reported no material losses from legal proceedings that were considered probable or reasonably possible - As of June 30, 2021, the company determined there were no material losses from litigation that were probable or reasonably possible to accrue for[89](index=89&type=chunk)[185](index=185&type=chunk) [Risk Factors](index=52&type=section&id=Item%201A%20Risk%20Factors) The company reports no material changes to its risk factors from those previously disclosed in its 2020 Annual Report and Q1 2021 10-Q filing - There have been no material changes in risk factors from those disclosed in the 2020 Annual Report and the Q1 2021 10-Q[186](index=186&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=52&type=section&id=Item%202%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased **656,938 shares** for **$11.6 million** during Q2 2021 under its **$50.0 million** stock repurchase program, with **$38.4 million** remaining Issuer Purchases of Equity Securities (Q2 2021, in millions) | Period | Total Shares Purchased | Average Price Paid per Share | Approx. Dollar Value Remaining in Program | | :--- | :--- | :--- | :--- | | April 1 – April 30, 2021 | 1,770 | $17.90 | $49.97 | | May 1 – May 31, 2021 | 655,168 | $17.57 | $38.45 | | June 1 – June 30, 2021 | 0 | N/A | $38.45 | | **Total** | **656,938** | **-** | **$38.45** | [Other Items](index=52&type=section&id=Item%203-6) This section covers standard disclosures, reporting no defaults on senior securities, no mine safety disclosures, and no other material information - Item 3: No defaults upon senior securities were reported[189](index=189&type=chunk) - Item 4: Mine Safety Disclosures are not applicable[190](index=190&type=chunk) - Item 5: No other information was reported[191](index=191&type=chunk)

Financial Data and Key Metrics Changes - The company reported a record quarterly product revenue of $28.9 million, which is 52% higher than the previous year [8] - Gross margin for Q1 was 69%, within the guidance range of 68% to 70% for the year [20] - Operating expenditures decreased by 12% compared to Q1 last year [21] Business Line Data and Key Metrics Changes - The desalination business continues to show strong growth, with a projected growth outlook of 10% for 2021 and up to 25% for 2022 [8] - Initial sales of the Ultra PX energy recovery device are expected to reduce energy consumption in industrial wastewater applications [10] Market Data and Key Metrics Changes - The company is seeing strong demand for large-scale desalination projects due to the global need for more water [8] - The company has successfully integrated the VorTeq technology in live frac conditions, demonstrating its effectiveness [11] Company Strategy and Development Direction - The company aims to diversify its revenue streams while protecting its strong position in desalination [32] - There is a focus on sustainability and reducing energy costs across various industries, including oil and gas and refrigeration [32] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the growth in the desalination market and the potential for increased infrastructure spending in the U.S. [40] - The company plans to provide updates on the VorTeq commercialization decision by June 10 [12] Other Important Information - The company has launched a share buyback program with a commitment to utilize the entire $50 million for repurchases [27] - The U.S. Environmental Protection Agency's announcement to phase down hydrofluorocarbons is expected to create significant demand for CO2 refrigeration systems [25] Q&A Session Summary Question: Discuss the company's vision for diversification while protecting its desalination position - Management emphasized the importance of investing in the desalination business while also diversifying to reduce revenue concentration [32] Question: Are there opportunities in the aftermarket business? - Management confirmed that the aftermarket business has bounced back and is included in current guidance [34] Question: How will the company educate the market about Ultra PX capabilities? - Management indicated that securing initial commercial projects will be key to demonstrating the value of Ultra PX [36] Question: Will field tests occur outside the Permian Basin? - Management acknowledged the potential for future tests outside the Permian but emphasized the current focus on sufficient data collection in the region [39] Question: Anticipation of desalination projects in the U.S. infrastructure program? - Management expressed hope for increased desalination initiatives due to the infrastructure push but noted state-level requirements will play a significant role [40] Question: What drives the high gross margins? - Management highlighted the significant energy savings and low lifecycle costs of their products as key factors for high margins [43] Question: Can the company sustain margins as it grows into adjacent markets? - Management is confident that similar margins can be achieved in industrial wastewater and refrigeration if value is maintained [44]

PART I — FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for the first quarter of 2021 [Item 1 — Financial Statements (Unaudited)](index=6&type=section&id=Item%201%20%E2%80%94%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements for Energy Recovery, Inc. for the three months ended March 31, 2021, and comparative periods [Condensed Consolidated Balance Sheets](index=6&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The Condensed Consolidated Balance Sheets show the company's financial position as of March 31, 2021, compared to December 31, 2020, highlighting changes in assets, liabilities, and stockholders' equity | Metric | March 31, 2021 (in thousands) | December 31, 2020 (in thousands) | |:-----------------------------|:------------------------------|:---------------------------------| | Total Assets | $215,218 | $204,314 | | Total Liabilities | $28,878 | $32,690 | | Total Stockholders' Equity | $186,340 | $171,624 | - Total assets increased by **$10.9 million**, primarily driven by an increase in cash and cash equivalents and accounts receivable[20](index=20&type=chunk) - Total liabilities decreased by **$3.8 million**, mainly due to a reduction in accrued expenses and other current liabilities[20](index=20&type=chunk) [Condensed Consolidated Statements of Operations](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The Condensed Consolidated Statements of Operations detail the company's revenues, costs, and expenses, leading to net income for the three months ended March 31, 2021, compared to the same period in 2020 | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:-----------------------------|:----------------------------------|:----------------------------------| | Product revenue | $28,940 | $19,001 | | Product gross profit | $19,959 | $13,317 | | License and development revenue | $— | $2,543 | | Total operating expenses | $13,815 | $15,732 | | Income from operations | $6,144 | $128 | | Net income | $6,866 | $621 | | Basic EPS | $0.12 | $0.01 | | Diluted EPS | $0.12 | $0.01 | - Product revenue increased by **52.3%** year-over-year, while license and development revenue ceased due to the termination of the VorTeq License Agreement[22](index=22&type=chunk) - Net income significantly increased to **$6.866 million** in Q1 2021 from **$0.621 million** in Q1 2020[22](index=22&type=chunk) [Condensed Consolidated Statements of Comprehensive Income](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This statement presents the net income and other comprehensive income (loss) components, leading to total comprehensive income for the three months ended March 31, 2021 and 2020 | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:-----------------------------------|:----------------------------------|:----------------------------------| | Net income | $6,866 | $621 | | Foreign currency translation adjustments | $(25) | $(25) | | Unrealized loss on investments | $(48) | $(270) | | Total other comprehensive loss, net of tax | $(73) | $(295) | | Comprehensive income | $6,793 | $326 | - Comprehensive income saw a substantial increase to **$6.793 million** in Q1 2021 from **$0.326 million** in Q1 2020[23](index=23&type=chunk) [Consolidated Statements of Stockholders' Equity](index=9&type=section&id=Consolidated%20Statements%20of%20Stockholders'%20Equity) The Consolidated Statements of Stockholders' Equity show the changes in equity components, including common stock, additional paid-in capital, accumulated other comprehensive loss, treasury stock, and retained earnings, for the three months ended March 31, 2021 and 2020 | Metric (in thousands, except shares) | March 31, 2021 | March 31, 2020 | |:-------------------------------------|:---------------|:---------------| | Total stockholders' equity | $186,340 | $138,265 | | Retained earnings (ending balance) | $29,700 | $(2,932) | | Common stock issued (shares) | 62,877,567 | 60,999,233 | | Total common stock outstanding (shares) | 57,421,632 | 55,543,298 | - Total stockholders' equity increased significantly, driven by net income and issuance of common stock[24](index=24&type=chunk) - Retained earnings turned positive to **$29.7 million** in Q1 2021 from a deficit of **$(2.932) million** in Q1 2020[24](index=24&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This statement outlines the cash flows from operating, investing, and financing activities for the three months ended March 31, 2021, and 2020 | Metric (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:-----------------------------------------------------|:----------------------------------|:----------------------------------| | Net cash provided by (used in) operating activities | $54 | $(5,872) | | Net cash provided by investing activities | $5,088 | $11,934 | | Net cash provided by financing activities | $6,059 | $418 | | Net change in cash, cash equivalents and restricted cash | $11,176 | $6,455 | | Cash, cash equivalents and restricted cash, end of period | $105,534 | $32,943 | - Operating activities generated positive cash flow of **$54 thousand** in Q1 2021, a significant improvement from a cash outflow of **$(5.872) million** in Q1 2020[25](index=25&type=chunk) - Cash, cash equivalents, and restricted cash at the end of the period increased substantially to **$105.534 million** from **$32.943 million** year-over-year[25](index=25&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=11&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) These notes provide detailed explanations and disclosures for the condensed consolidated financial statements, covering business description, accounting policies, revenue recognition, net income per share, and other financial information [Note 1 — Description of Business and Significant Accounting Policies](index=11&type=section&id=Note%201%20%E2%80%94%20Description%20of%20Business%20and%20Significant%20Accounting%20Policies) This note describes Energy Recovery, Inc.'s business of creating technologies for industrial fluid-flow markets, primarily based on its pressure exchanger technology, and outlines the significant accounting policies used in preparing the financial statements - Energy Recovery, Inc. develops technologies for industrial fluid-flow markets, leveraging its pressure exchanger technology platform to improve operational efficiency and reduce waste, energy consumption, and costs[26](index=26&type=chunk) - The company's solutions are marketed under trademarks such as ERI®, Ultra PX™, PX®, Pressure Exchanger®, PX Pressure Exchanger™, PX PowerTrain™, VorTeq™, IsoBoost®, AT™ and AquaBold™[26](index=26&type=chunk) - The adoption of ASU 2019-12 (Income Taxes) on January 1, 2021, did not have a material impact on the company's financial condition, results of operations, and cash flows[37](index=37&type=chunk) [Note 2 — Revenue](index=14&type=section&id=Note%202%20%E2%80%94%20Revenue) This note disaggregates revenue by product and service line, geography, channel, and segment, and provides details on contract balances and remaining performance obligations | Revenue Category (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:--------------------------------|:----------------------------------|:----------------------------------| | Product revenue | $28,940 | $19,001 | | License and development revenue | $— | $2,543 | | Total revenue | $28,940 | $21,544 | | Product Revenue by Channel (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:------------------------------------------|:----------------------------------|:----------------------------------| | Megaproject | $23,757 | $14,457 | | Original equipment manufacturer | $2,791 | $3,556 | | Aftermarket | $2,392 | $988 | - Middle East and Africa was the largest geographical market for product revenue in Q1 2021 (**$20.960 million**), followed by Asia (**$7.178 million**)[41](index=41&type=chunk) - The VorTeq License Agreement was terminated in June 2020, resulting in no future license and development revenue[41](index=41&type=chunk) | Contract Balances (in thousands) | March 31, 2021 | December 31, 2020 | |:---------------------------------|:---------------|:------------------| | Accounts receivable, net | $16,397 | $11,792 | | Total contract assets | $2,075 | $1,892 | | Total contract liabilities | $1,232 | $1,640 | [Note 3 — Net Income Per Share](index=16&type=section&id=Note%203%20%E2%80%94%20Net%20Income%20Per%20Share) This note provides the computation of basic and diluted net income per common share for the three months ended March 31, 2021 and 2020 | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:-------------------------------------|:----------------------------------|:----------------------------------| | Net income | $6,866 | $621 | | Basic common shares outstanding | 56,877 | 55,412 | | Diluted common shares outstanding | 58,597 | 56,542 | | Basic net income per share | $0.12 | $0.01 | | Diluted net income per share | $0.12 | $0.01 | - Both basic and diluted EPS increased significantly from **$0.01** in Q1 2020 to **$0.12** in Q1 2021[48](index=48&type=chunk) [Note 4 — Other Financial Information](index=16&type=section&id=Note%204%20%E2%80%94%20Other%20Financial%20Information) This note details components of cash, cash equivalents and restricted cash, accounts receivable, inventories, prepaid and other current assets, goodwill and other intangible assets, and accrued expenses and other current liabilities | Metric (in thousands) | March 31, 2021 | December 31, 2020 | |:-----------------------------------------------------|:---------------|:------------------| | Total cash, cash equivalents and restricted cash | $105,534 | $94,358 | | Accounts receivable, net | $16,397 | $11,792 | | Inventories, net | $11,925 | $11,748 | | Total prepaid and other current assets | $4,470 | $4,950 | | Total accrued expenses and other current liabilities | $7,756 | $11,816 | - Cash, cash equivalents and restricted cash increased by over **$11 million** from December 31, 2020, to March 31, 2021[49](index=49&type=chunk) - Accounts receivable, net, increased by **$4.605 million**, while accrued expenses and other current liabilities decreased by **$4.060 million**[53](index=53&type=chunk)[57](index=57&type=chunk) [Note 5 — Investments and Fair Value Measurements](index=20&type=section&id=Note%205%20%E2%80%94%20Investments%20and%20Fair%20Value%20Measurements) This note provides information on the company's available-for-sale investments, their fair value measurements categorized by pricing levels, and sales of such investments | Investment Type (in thousands) | Pricing Category | March 31, 2021 Fair Value | December 31, 2020 Fair Value | |:-------------------------------|:-----------------|:--------------------------|:-----------------------------| | Money market securities | Level 1 | $49,989 | $59,132 | | U.S. treasury securities | Level 2 | $15,802 | $1,621 | | Corporate notes and bonds | Level 2 | $13,815 | $18,825 | | Total | | $79,606 | $79,578 | - The company had no Level 3 financial assets or liabilities as of March 31, 2021, and December 31, 2020[63](index=63&type=chunk) - No sales of available-for-sale investments occurred in Q1 2021, compared to **$4.974 million** in corporate notes and bonds sold in Q1 2020[67](index=67&type=chunk) [Note 6 — Lines of Credit](index=22&type=section&id=Note%206%20%E2%80%94%20Lines%20of%20Credit) This note details the company's Loan and Pledge Agreement, which allows for the issuance of stand-by letters of credit (SBLCs) - The company has a Loan and Pledge Agreement allowing SBLCs up to **$5.1 million** with other financial institutions, secured by pledged U.S. investments[68](index=68&type=chunk) - Outstanding SBLCs totaled **$12.9 million** as of March 31, 2021, down from **$13.3 million** as of December 31, 2020[69](index=69&type=chunk) [Note 7 — Commitments and Contingencies](index=22&type=section&id=Note%207%20%E2%80%94%20Commitments%20and%20Contingencies) This note outlines the company's operating lease obligations, product warranty reserve, purchase obligations, and litigation status | Lease Metric (in thousands) | March 31, 2021 | December 31, 2020 | |:------------------------------------|:---------------|:------------------| | Operating lease, right of use asset | $15,739 | $16,090 | | Total lease liability | $17,502 | $17,686 | | Warranty Reserve (in thousands) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:--------------------------------|:----------------------------------|:----------------------------------| | Beginning balance | $760 | $631 | | Costs charged to revenue | $127 | $98 | | Ending balance | $811 | $665 | - As of March 31, 2021, the company had approximately **$6.7 million** in open cancellable purchase order arrangements[78](index=78&type=chunk) - No material losses from litigation were considered probable or reasonably possible as of March 31, 2021[81](index=81&type=chunk) [Note 8 — Income Taxes](index=25&type=section&id=Note%208%20%E2%80%94%20Income%20Taxes) This note details the benefit from income taxes and effective tax rates for the three months ended March 31, 2021 and 2020 | Income Tax Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:-----------------------------------|:----------------------------------|:----------------------------------| | Benefit from income taxes | $(640) | $(85) | | Effective tax rate | (10.3%) | (15.9%) | | Effective tax rate, excluding discrete items | 15.8% | 19.5% | - The recognized income tax benefit for Q1 2021 included a discrete tax benefit of **$1.6 million**, primarily due to stock-based compensation windfalls[83](index=83&type=chunk) [Note 9 — Stockholders' Equity](index=25&type=section&id=Note%209%20%E2%80%94%20Stockholders'%20Equity) This note describes the company's stock repurchase program authorized by the Board of Directors - On March 9, 2021, the Board authorized a stock repurchase program for up to **$50.0 million** of outstanding common stock[84](index=84&type=chunk) - As of March 31, 2021, no shares had been repurchased under the March 2021 Authorization[84](index=84&type=chunk) [Note 10 — Segment Reporting](index=26&type=section&id=Note%2010%20%E2%80%94%20Segment%20Reporting) This note details the company's realigned segment reporting structure, effective Q1 2021, which now includes Water and Emerging Technologies segments, along with corporate operating expenses - The company realigned its segment reporting in Q1 2021 into two segments: Water and Emerging Technologies, with prior year amounts recast for comparability[86](index=86&type=chunk) - The Water segment includes seawater desalination, industrial wastewater, and other water treatment applications, while the Emerging Technologies segment focuses on VorTeq, IsoBoost in natural gas processing, and new product development like industrial and commercial refrigeration[86](index=86&type=chunk) | Segment Financials (in thousands) | Water Segment (Q1 2021) | Emerging Technologies Segment (Q1 2021) | Corporate Operating Expenses (Q1 2021) | Total (Q1 2021) | |:----------------------------------|:------------------------|:----------------------------------------|:---------------------------------------|:----------------| | Product revenue | $28,940 | $— | — | $28,940 | | Operating income (loss) | $15,733 | $(5,346) | — | $10,387 | | Less: Corporate operating expenses| — | — | $4,243 | $4,243 | | Income from operations | — | — | — | $6,144 | [Note 11 — Concentrations](index=28&type=section&id=Note%2011%20%E2%80%94%20Concentrations) This note identifies customers accounting for 10% or more of product revenue and discusses license and development revenue concentrations | Customer | Segment | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | |:-----------|:--------|:----------------------------------|:----------------------------------| | Customer A | Water | 18% | 20% | | Customer B | Water | 17% | <10% | | Customer C | Water | 16% | 25% | | Customer D | Water | 15% | 10% | - No Emerging Technologies segment customer accounted for license and development revenue in Q1 2021, compared to one international customer accounting for **100%** in Q1 2020[93](index=93&type=chunk) [Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations](index=29&type=section&id=Item%202%20%E2%80%94%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and results of operations for the three months ended March 31, 2021, compared to the prior year [Overview](index=29&type=section&id=Overview) The company creates technologies for industrial fluid-flow markets, leveraging its pressure exchanger technology to improve efficiency and reduce costs, with a focus on desalination and diversification into new applications - Energy Recovery's core technology is the pressure exchanger, which efficiently transfers energy in high-pressure and low-pressure fluid flows, operating between **1,000 psi** and **10,000 psi**[97](index=97&type=chunk) - The PX Pressure Exchanger is considered the industry standard for energy recovery in seawater reverse osmosis desalination (SWRO)[97](index=97&type=chunk) - The company is actively diversifying its technology into new critical industries such as industrial wastewater treatment, natural gas processing, and hydraulic fracturing[97](index=97&type=chunk) [Segments](index=29&type=section&id=Segments) The company realigned its segment reporting in Q1 2021 into Water and Emerging Technologies, reflecting the evolution of products and R&D efforts - The Water segment's revenue is primarily from sales of ERDs and pumps to megaproject (MPD), original equipment manufacturer (OEM), and aftermarket (AM) channels[99](index=99&type=chunk) - MPD projects represent revenue opportunities from **$1 million** to **$18 million**, while OEM projects are up to **$1 million**[99](index=99&type=chunk) - The Emerging Technologies segment focuses on R&D for VorTeq, IsoBoost in natural gas processing, and new applications like industrial and commercial refrigeration[101](index=101&type=chunk) - The company announced a second contract award for its Ultra PX energy recovery device for industrial wastewater treatment in China and a joint-marketing effort with DuPont Water Solutions[100](index=100&type=chunk) [Results of Operations](index=31&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance for Q1 2021 compared to Q1 2020, focusing on total revenue, product revenue by channel, gross profit, and operating expenses [Total Revenue](index=31&type=section&id=Total%20Revenue) Total revenue increased significantly year-over-year, driven by strong product revenue growth, despite the cessation of license and development revenue | Revenue Type (in thousands) | Q1 2021 Revenue | % of Total Revenue (Q1 2021) | Q1 2020 Revenue | % of Total Revenue (Q1 2020) | Change ($) | Change (%) | |:----------------------------|:----------------|:-----------------------------|:----------------|:-----------------------------|:-----------|:-----------| | Product revenue | $28,940 | 100% | $19,001 | 88% | $9,939 | 52% | | License and development revenue | $— | —% | $2,543 | 12% | $(2,543) | (100%) | | Total revenue | $28,940 | 100% | $21,544 | 100% | $7,396 | 34% | - Total revenue increased by **34%** to **$28.940 million** in Q1 2021, primarily due to a **52%** increase in product revenue[103](index=103&type=chunk) [Product Revenue](index=31&type=section&id=Product%20Revenue) Product revenue growth was primarily driven by the Megaproject (MPD) channel and a significant increase in the Aftermarket (AM) channel, while the OEM channel experienced a decline | Product Revenue by Channel (in thousands) | Q1 2021 Revenue | % of Product Revenue (Q1 2021) | Q1 2020 Revenue | % of Product Revenue (Q1 2020) | Change ($) | Change (%) | |:------------------------------------------|:----------------|:-------------------------------|:----------------|:-------------------------------|:-----------|:-----------| | Megaproject | $23,757 | 82% | $14,457 | 76% | $9,300 | 64% | | Original equipment manufacturer | $2,791 | 10% | $3,556 | 19% | $(765) | (22%) | | Aftermarket | $2,392 | 8% | $988 | 5% | $1,404 | 142% | | Total product revenue | $28,940 | 100% | $19,001 | 100% | $9,939 | 52% | - MPD channel revenue increased by **64%**, benefiting from long project cycles, while AM channel revenue surged by **142%** due to increased support and services[105](index=105&type=chunk) - OEM channel revenue decreased by **22%**, negatively impacted by economic conditions and delays in new installations and non-critical maintenance, particularly in industries affected by COVID-19[105](index=105&type=chunk) [License and Development Revenue](index=31&type=section&id=License%20and%20Development%20Revenue) License and development revenue ceased in Q1 2021 due to the termination of the VorTeq License Agreement in June 2020 - No license and development revenue was recognized in Q1 2021, a decrease of **$2.543 million** from Q1 2020, following the termination of the VorTeq License Agreement with Schlumberger[106](index=106&type=chunk) [Product Gross Profit and Gross Margin](index=32&type=section&id=Product%20Gross%20Profit%20and%20Gross%20Margin) Product gross profit increased due to higher revenues, though the gross margin slightly decreased due to product mix and higher manufacturing labor expenses | Metric (in thousands) | Q1 2021 Product Gross Profit | Q1 2021 Gross Margin | Q1 2020 Product Gross Profit | Q1 2020 Gross Margin | Change in Product Gross Profit ($) | Change in Product Gross Profit (%) | |:------------------------------|:-----------------------------|:---------------------|:-----------------------------|:---------------------|:-----------------------------------|:-----------------------------------| | Product gross profit and gross margin | $19,959 | 69.0% | $13,317 | 70.1% | $6,642 | 49.9% | - Product gross profit increased by **49.9%** to **$19.959 million**, while gross margin decreased from **70.1%** to **69.0%**[109](index=109&type=chunk) - The decrease in gross margin was primarily due to lower average selling prices from product mix and higher manufacturing labor expenses, partially offset by lower COVID-19 related charges[109](index=109&type=chunk) [Operating Expenses](index=33&type=section&id=Operating%20Expenses) Total operating expenses decreased year-over-year, primarily driven by reduced R&D expenses, partially offset by increased sales and marketing costs | Operating Expense (in thousands) | Q1 2021 Amount | % of Total Revenue (Q1 2021) | Q1 2020 Amount | % of Total Revenue (Q1 2020) | Change ($) | Change (%) | |:---------------------------------|:---------------|:-----------------------------|:---------------|:-----------------------------|:-----------|:-----------| | General and administrative | $6,606 | 23% | $6,881 | 32% | $(275) | (4%) | | Sales and marketing | $2,703 | 9% | $2,138 | 10% | $565 | 26% | | Research and development | $4,502 | 16% | $6,709 | 31% | $(2,207) | (33%) | | Total operating expenses | $13,815 | 48% | $15,732 | 73% | $(1,917) | (12%) | - R&D expenses decreased by **33%** (**$2.207 million**) due to lower testing supplies for VorTeq and a shift to refrigeration and other new initiatives[114](index=114&type=chunk) - Sales and marketing expenses increased by **26%** (**$0.565 million**) due to higher employee-related costs and marketing expenses[113](index=113&type=chunk) - Emerging Technologies segment operating expenses decreased due to reduced VorTeq-related expenses, partially offset by increased development for industrial and commercial refrigeration[118](index=118&type=chunk) [Other Income, Net](index=35&type=section&id=Other%20Income,%20Net) Total other income, net, decreased primarily due to a reduction in interest income | Other Income (in thousands) | Q1 2021 Amount | Q1 2020 Amount | Change ($) | |:----------------------------|:---------------|:---------------|:-----------| | Interest income | $92 | $420 | $(328) | | Total other income, net | $82 | $408 | $(326) | - The decrease in interest income was attributed to a shift from debt investments to money market funds[121](index=121&type=chunk) [Income Taxes](index=35&type=section&id=Income%20Taxes) The company recognized a higher income tax benefit in Q1 2021, primarily due to discrete tax benefits from stock-based compensation windfalls | Income Tax Metric | Q1 2021 Amount | Q1 2020 Amount | Change ($) | |:-----------------------------------|:---------------|:---------------|:-----------| | Benefit from income taxes | $(640) | $(85) | $(555) | | Effective tax rate | (10.3%) | (15.9%) | | | Effective tax rate, excluding discrete items | 15.8% | 19.5% | | - The Q1 2021 income tax benefit included a **$1.6 million** discrete tax benefit, mainly from stock-based compensation windfalls, compared to **$0.2 million** in Q1 2020[123](index=123&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's liquidity position, sources of capital, cash flow activities, and future capital requirements [Overview](index=36&type=section&id=Overview) The company's principal sources of liquidity include unrestricted cash, short-term investments, and accounts receivable, which are deemed sufficient to meet anticipated liquidity needs for the foreseeable future - As of March 31, 2021, principal liquidity sources included **$105.4 million** in unrestricted cash and cash equivalents, **$14.6 million** in short-term investments, and **$16.4 million** in accounts receivable, net[124](index=124&type=chunk) - The company believes existing cash balances and future cash inflows will meet liquidity needs for at least the next **12 months**[124](index=124&type=chunk) [Loan and Pledge Agreement - Stand-By Letters of Credit](index=36&type=section&id=Loan%20and%20Pledge%20Agreement%20-%20Stand-By%20Letters%20of%20Credit) The company maintains a Loan and Pledge Agreement allowing for stand-by letters of credit (SBLCs) to support its operations - The Loan and Pledge Agreement allows for SBLCs up to **$5.1 million** with other financial institutions, secured by pledged U.S. investments[126](index=126&type=chunk) - Outstanding SBLCs totaled **$12.9 million** as of March 31, 2021[126](index=126&type=chunk) [Share Repurchase Program](index=36&type=section&id=Share%20Repurchase%20Program) The Board of Directors authorized a new share repurchase program in March 2021 - On March 9, 2021, the Board authorized a share repurchase program for up to **$50.0 million** of common stock[127](index=127&type=chunk) - No shares were repurchased under this authorization as of March 31, 2021[127](index=127&type=chunk) [Cash Flows](index=37&type=section&id=Cash%20Flows) Cash flows from operating activities turned positive in Q1 2021, while investing activities provided less cash due to prior year's investment movements | Cash Flow Activity (in thousands) | Q1 2021 Amount | Q1 2020 Amount | Change ($) | |:----------------------------------|:---------------|:---------------|:-----------| | Net cash from operating activities| $54 | $(5,872) | $5,926 | | Net cash from investing activities| $5,088 | $11,934 | $(6,846) | | Net cash from financing activities| $6,059 | $418 | $5,641 | | Net change in cash | $11,176 | $6,455 | $4,721 | - Operating cash flow improved significantly, turning positive in Q1 2021 due to higher revenues, partially offset by timing of accounts receivable collection[131](index=131&type=chunk) - Lower cash from investing activities was primarily due to the movement of debt securities to cash and cash equivalents in fiscal year 2020 in response to the COVID-19 pandemic[132](index=132&type=chunk) [Liquidity and Capital Resource Requirements](index=38&type=section&id=Liquidity%20and%20Capital%20Resource%20Requirements) The company anticipates existing resources and cash from operations will meet capital requirements for the next 12 months, but may seek additional financing for future growth or acquisitions - Future capital requirements depend on market acceptance, revenue growth, new product introductions, R&D expansion, geographic expansion, and stock repurchases[135](index=135&type=chunk) - Potential material investments or acquisitions could necessitate additional equity or debt financing[135](index=135&type=chunk) [Contractual Obligations](index=38&type=section&id=Contractual%20Obligations) The company has contractual obligations related to operating leases and cancellable purchase order arrangements - The company leases facilities and equipment under noncancelable operating leases expiring through fiscal year 2030[136](index=136&type=chunk) - Purchase order arrangements for raw materials, components, and capital equipment are cancellable prior to delivery[137](index=137&type=chunk) [Off-Balance Sheet Arrangements](index=38&type=section&id=Off-Balance%20Sheet%20Arrangements) The company did not have any off-balance sheet arrangements during the reported periods - The company had no relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements[139](index=139&type=chunk) [Recent Accounting Pronouncements](index=38&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 1 for details on recent accounting pronouncements - Refer to Note 1, 'Description of Business and Significant Accounting Policies – Significant Accounting Policies,' for information on recent accounting pronouncements[140](index=140&type=chunk) [Item 3 — Quantitative and Qualitative Disclosures About Market Risk](index=39&type=section&id=Item%203%20%E2%80%94%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses the company's exposure to market risks, primarily foreign currency risk and interest rate and credit risks [Foreign Currency Risk](index=39&type=section&id=Foreign%20Currency%20Risk) The company is exposed to foreign currency fluctuations, particularly as international sales expand, but has not hedged this exposure due to its historical insignificance - Foreign currency exposures arise from fluctuations in USD against the British pound, Saudi riyal, Emirati dirham, European euro, Chinese yuan, Indian rupee, and Canadian dollar[143](index=143&type=chunk) - While revenue contracts are USD-denominated, expanding international sales could lead to a portion of revenue being in foreign currencies, increasing exchange rate impact[144](index=144&type=chunk) - The company has not hedged foreign currency exposure as it has been insignificant to date[146](index=146&type=chunk) [Interest Rate and Credit Risks](index=39&type=section&id=Interest%20Rate%20and%20Credit%20Risks) The company's investment portfolio is subject to interest rate and counter-party credit risks, which are managed through investment policies and short average maturities - The investment portfolio consists of fixed-income marketable debt securities of the U.S. government and high-quality corporate issuers, subject to interest rate and counter-party credit risk[147](index=147&type=chunk) - To minimize interest rate exposure, investments are maintained with a weighted average maturity of less than **two months**[148](index=148&type=chunk) - A hypothetical **1%** increase in interest rates as of March 31, 2021, would result in a less than **$0.1 million** decrease in the fair value of fixed-income debt securities[148](index=148&type=chunk) [Item 4 — Controls and Procedures](index=39&type=section&id=Item%204%20%E2%80%94%20Controls%20and%20Procedures) This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=39&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of March 31, 2021 - The President and CEO and Chief Financial Officer concluded that disclosure controls and procedures were effective as of March 31, 2021[150](index=150&type=chunk) [Changes in Internal Controls](index=39&type=section&id=Changes%20in%20Internal%20Controls) There were no material changes in internal control over financial reporting during the period - No material changes in internal control over financial reporting occurred during the period covered by the report[151](index=151&type=chunk) PART II — OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits [Item 1 — Legal Proceedings](index=41&type=section&id=Item%201%20%E2%80%94%20Legal%20Proceedings) This section refers to the Notes to Condensed Consolidated Financial Statements for updates on legal proceedings - Information on legal proceedings is provided in Note 7, 'Commitments and Contingencies – Litigation,' of the Notes to Condensed Consolidated Financial Statements[155](index=155&type=chunk) [Item 1A — Risk Factors](index=41&type=section&id=Item%201A%20%E2%80%94%20Risk%20Factors) This section highlights new or materially changed risk factors, specifically concerning the success of diversification into new fluid flow markets and the commercialization of CO2 refrigeration technology - A new risk factor is the potential lack of success in diversification into new fluid flow markets like oil & gas, commercial refrigeration, and industrial wastewater, which could damage reputation and limit growth[156](index=156&type=chunk)[157](index=157&type=chunk) - Another risk is the inability to successfully complete development, launch, or commercialize the CO2 refrigeration technology, which is currently in the R&D phase and faces technological challenges and competition from established companies[158](index=158&type=chunk) [Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202%20%E2%80%94%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report - No unregistered sales of equity securities or use of proceeds occurred during the period[158](index=158&type=chunk) [Item 3 — Defaults Upon Senior Securities](index=41&type=section&id=Item%203%20%E2%80%94%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report - No defaults upon senior securities occurred during the period[159](index=159&type=chunk) [Item 4 — Mine Safety Disclosures](index=41&type=section&id=Item%204%20%E2%80%94%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Mine Safety Disclosures are not applicable to the registrant[160](index=160&type=chunk) [Item 5 — Other Information](index=43&type=section&id=Item%205%20%E2%80%94%20Other%20Information) There was no other information to report under this item - No other information was reported under this item[163](index=163&type=chunk) [Item 6 — Exhibits](index=43&type=section&id=Item%206%20%E2%80%94%20Exhibits) This section lists the exhibits filed or furnished with the report, including certifications and XBRL documents - Exhibits include certifications of the Principal Executive Officer and Principal Financial Officer, and Inline XBRL Document Sets for financial statements and the cover page[163](index=163&type=chunk) [Signatures](index=44&type=section&id=Signatures) The report is duly signed on behalf of Energy Recovery, Inc. by its President and Chief Executive Officer and Chief Financial Officer - The report was signed by Robert Yu Lang Mao, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer, on May 7, 2021[170](index=170&type=chunk)

Energy Recovery, Inc. (NASDAQ:ERII) Q4 2020 Earnings Conference Call March 11, 2021 5:00 PM ET Company Participants Jim Siccardi - Vice President of Investor Relations Bob Mao - Chairman, President and Chief Executive Officer Joshua Ballard - Chief Financial Officer Conference Call Participants Jason Bandel - Evercore ISI Pavel Molchanov - Raymond James Nils Thommesen - Fearnley Securities Tom Curran - B. Riley Securities Operator Greetings and welcome to Energy Recovery’s Q4 Earnings Conference Call. [Oper ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 Form 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 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 Ju ...

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 September 30, 2020 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 01-061686 ...

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, 2020 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 ( ...

Energy Recovery, Inc. (NASDAQ:ERII) Q2 2020 Earnings Conference Call July 30, 2020 5:00 PM ET Company Participants James Siccardi - Vice President of Investor Relations Bob Mao - Chairman, President and Chief Executive Officer Joshua Ballard - Chief Financial Officer Conference Call Participants Pavel Molchanov - Raymond James Ryan Pfingst - B. Riley Operator Greetings and welcome to the Energy Recovery Second Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A ...