Energy Recovery, Inc. (NASDAQ:ERII) Q1 2020 Earnings Conference Call April 30, 2020 5:00 PM ET Company Participants Jim Siccardi - VP, IR Bob Mao - President and CEO Joshua Ballard - CFO Conference Call Participants Pavel Molchanov - Raymond James Operator Greetings and welcome to the Energy Recovery Quarter One Fiscal Year 2020 Earnings Call. At this time all participants are in a listen only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, t ...

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, 2019 or ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ | --- | --- | --- | |---------------------------------------------------------------------|---------------------------------------------------------- ...

Financial Data and Key Metrics Changes - The company reported total revenue of $19.5 million for Q4 2019, representing a 10% year-over-year growth, and total revenues of $86.9 million for the full fiscal year, a 17% increase over 2018 [25] - The GAAP net loss for Q4 was $0.6 million or $0.01 per diluted share, primarily due to a one-time expense related to the resignation of the CEO, while the diluted EPS for the year was $0.19, a decrease of $0.02 from 2018 [29] - Product gross margin ended the year at 72.1%, an increase of 60 basis points year-over-year, although it decreased by 300 basis points in Q4 compared to Q4 2018 due to a larger percentage of non-PX sales [30] Business Line Data and Key Metrics Changes - The Water business generated $16 million in revenue during Q4 2019, a 14% year-over-year growth, and $73 million for the full fiscal year, a 20% increase over 2018 [25] - The mega-project channel led annual growth, increasing by 40% in 2019, contributing to 52% of water sales, up from 45% in 2018 [26] - The Oil & Gas business recognized $3.7 million in revenue for Q4, returning to normalized levels after a decline in Q3, with total license revenue for 2019 at $14.1 million [27][28] Market Data and Key Metrics Changes - The majority of water growth occurred in the Middle East, with over 20% of the 2019 increase coming from Latin America, driven by increased project activity in industrial sectors [26] - The company expects to recognize between $12 million to $14 million in license revenue for 2020, with a focus on live well testing in the first half of the year [28] Company Strategy and Development Direction - The company aims for 20% to 25% revenue growth in 2020, with an additional 10% to 15% in 2021, driven by the mega-project channel and the transition of thermal desalination capacity to seawater reverse osmosis [9][10] - A reorganization of the team has been completed to strengthen business unit execution and enable a disciplined approach to long-term growth, focusing on new Water products and advancing the VorTeq towards commercialization [21][22] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the ability to generate significant revenue growth despite the challenges posed by the coronavirus, noting no significant effects on revenue outlook or supplies as of the call date [14] - The company ended 2019 with strong momentum and is excited about the growth opportunities in 2020, emphasizing the importance of their technology and market position [23] Other Important Information - The company completed the second phase of manufacturing capacity expansion in 2019, with a new facility in Tracy, California, expected to produce about 20% of Pressure Exchangers in its first year [13] - The overall operating expenditures grew by 21% in 2019, primarily due to R&D spending related to VorTeq and new product developments [32] Q&A Session Summary Question: Water revenue guidance and its cadence - The company anticipates a revenue weighting of approximately 40% in the first half and 60% in the second half of 2020 [37] Question: VorTeq testing progress and milestones - Management confirmed commitment to reach at least step M1 before the end of 2020, citing successful testing results [38] Question: Live well testing and partnerships - The product partner for VorTeq is Liberty, and live testing will occur at a customer site, with both live testing and M1 completion expected this year [42]

PART I — FINANCIAL INFORMATION Presents the unaudited condensed consolidated financial statements and related notes for the reporting period [Item 1 — Financial Statements (Unaudited)](index=3&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., including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining accounting policies, revenue disaggregation, earnings per share, balance sheet items, investments, intangible assets, credit facilities, commitments, income taxes, stock-based compensation, segment information, and concentrations [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets%20as%20of%20September%2030%2C%202019%20and%20December%2031%2C%202018) Presents the company's financial position, including assets, liabilities, and equity, at specific reporting dates Condensed Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2019 (in thousands) | Dec 31, 2018 (in thousands) | Change (2019 vs 2018) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | **Assets** | | | | | Cash and cash equivalents | $29,696 | $22,052 | +$7,644 | | Short-term investments | $59,905 | $73,338 | -$13,433 | | Accounts receivable, net | $20,848 | $10,212 | +$10,636 | | Inventories, net | $8,977 | $7,138 | +$1,839 | | Total current assets | $123,664 | $119,648 | +$4,016 | | Total assets | $190,587 | $179,841 | +$10,746 | | **Liabilities & Equity** | | | | | Accounts payable | $1,559 | $1,439 | +$120 | | Accrued expenses and other current liabilities | $8,519 | $8,497 | +$22 | | Total current liabilities | $28,604 | $27,132 | +$1,472 | | Total liabilities | $55,833 | $66,463 | -$10,630 | | Total stockholders' equity | $134,754 | $113,378 | +$21,376 | | Total liabilities and stockholders' equity | $190,587 | $179,841 | +$10,746 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations%20for%20the%20Three%20and%20Nine%20Months%20Ended%20September%2030%2C%202019%20and%202018) Details the company's revenues, expenses, and net income over specific periods Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Product revenue | $21,752 | $18,578 | +$3,174 | $57,050 | $47,042 | +$10,008 | | License and development revenue | $3,098 | $3,661 | -$563 | $10,391 | $9,768 | +$623 | | Total revenue | $24,850 | $22,239 | +$2,611 | $67,441 | $56,810 | +$10,631 | | Product gross profit | $16,327 | $13,556 | +$2,771 | $41,207 | $32,730 | +$8,477 | | Income from operations | $4,571 | $5,650 | -$1,079 | $11,275 | $8,559 | +$2,716 | | Net income | $5,149 | $4,658 | +$491 | $11,522 | $19,675 | -$8,153 | | Basic EPS | $0.09 | $0.09 | $0.00 | $0.21 | $0.37 | -$0.16 | | Diluted EPS | $0.09 | $0.08 | +$0.01 | $0.21 | $0.36 | -$0.15 | [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20for%20the%20Three%20and%20Nine%20Months%20Ended%20September%2030%2C%202019%20and%202018) Reports net income and other comprehensive income items, such as foreign currency adjustments and unrealized gains/losses on investments Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Net income | $5,149 | $4,658 | +$491 | $11,522 | $19,675 | -$8,153 | | Foreign currency translation adjustments | ($19) | $5 | -$24 | ($20) | ($7) | -$13 | | Unrealized gain (loss) on investments | ($5) | $88 | -$93 | $127 | $31 | +$96 | | Other comprehensive income (loss), net of tax | ($24) | $93 | -$117 | $107 | $24 | +$83 | | Comprehensive income | $5,125 | $4,751 | +$374 | $11,629 | $19,699 | -$8,070 | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders%27%20Equity%20for%20the%20Three%20and%20Nine%20Months%20Ended%20September%2030%2C%202019%20and%202018) Outlines changes in the company's equity accounts, including common stock, retained earnings, and treasury stock Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Sep 30, 2019 (9 Months) | Sep 30, 2018 (9 Months) | YoY Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Common stock, beginning balance | $59 | $58 | +$1 | | Additional paid-in capital, beginning balance | $158,404 | $149,006 | +$9,398 | | Accumulated other comprehensive loss, beginning balance | ($133) | ($125) | -$8 | | Treasury stock, beginning balance | ($30,486) | ($20,486) | -$10,000 | | Accumulated deficit, beginning balance | ($14,466) | ($36,559) | +$22,093 | | Net income | $11,522 | $19,674 | -$8,152 | | Total stockholders' equity, end of period | $134,754 | $109,595 | +$25,159 | [Condensed Consolidated Statements of Cash Flows](index=9&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows%20for%20the%20Nine%20Months%20Ended%20September%2030%2C%202019%20and%202018) Summarizes cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Net cash provided by operating activities | $503 | $9,749 | -$9,246 | | Net cash provided by (used in) investing activities | $1,821 | ($150) | +$1,971 | | Net cash provided by (used in) financing activities | $5,335 | ($6,250) | +$11,585 | | Net change in cash, cash equivalents and restricted cash | $7,659 | $3,363 | +$4,296 | | Cash, cash equivalents and restricted cash, end of period | $29,797 | $33,989 | -$4,192 | [Notes to Condensed Consolidated Financial Statements](index=10&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering significant accounting policies, revenue recognition, earnings per share calculations, balance sheet components, investment classifications, intangible assets, credit facilities, commitments, income taxes, stock-based compensation, segment information, and concentrations [Note 1 — Description of Business and Significant Accounting Policies](index=10&type=section&id=Note%201%20%E2%80%94%20Description%20of%20Business%20and%20Significant%20Accounting%20Policies) Describes the company's business operations and outlines its key accounting principles and policies - Energy Recovery, Inc. is an energy solutions provider focusing on industrial fluid flow markets globally, utilizing fluid dynamics and advanced material science to offer products that enhance operational and capital expenditure efficiency by converting wasted pressure energy or preserving pumping technology in harsh environments. Key trademarks include ERI®, PX®, Pressure Exchanger®, VorTeq™, MTeq™, IsoBoost®, IsoGen®, AT™ and AquaBold™[25](index=25&type=chunk) - The Company early adopted ASU 2018-15 in Q2 2019, prospectively deferring **$0.6 million** in implementation costs for cloud computing arrangements, with an additional **$0.3 million** expected in Q4 2019[32](index=32&type=chunk) [Note 2 — Revenue](index=11&type=section&id=Note%202%20%E2%80%94%20Revenue) Provides detailed information on revenue recognition, including disaggregation by geography and product/service line Total Revenue by Primary Geographical Market (in thousands) | Region | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Middle East and Africa | $16,691 | $12,284 | $36,297 | $27,975 | | Americas | $5,325 | $4,858 | $18,369 | $13,670 | | Asia | $2,188 | $2,711 | $9,364 | $10,041 | | Europe | $646 | $2,386 | $3,411 | $5,124 | | **Total Revenue** | **$24,850** | **$22,239** | **$67,441** | **$56,810** | Total Revenue by Major Product/Service Line (in thousands) | Product/Service Line | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | PX, pumps and turbo devices | $21,752 | $18,578 | $57,050 | $47,042 | | License and development | $3,098 | $3,661 | $10,391 | $9,768 | | **Total Revenue** | **$24,850** | **$22,239** | **$67,441** | **$56,810** | Transaction Price Allocated to Remaining Performance Obligation (in thousands) | Year | September 30, 2019 | | :-------------------- | :-------------------------- | | 2019 (remaining 3 months) | $4,337 | | 2020 | $19,998 | | 2021 | $5,715 | | 2022 | $661 | | 2023 and thereafter | $5,031 | | **Total performance obligation** | **$35,742** | [Note 3 — Earnings per Share](index=13&type=section&id=Note%203%20%E2%80%94%20Earnings%20per%20Share) Explains the calculation of basic and diluted earnings per share and related share counts Earnings Per Share (EPS) Data | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (in thousands) | $5,149 | $4,658 | $11,522 | $19,675 | | Basic common shares outstanding (in thousands) | 54,975 | 53,665 | 54,594 | 53,719 | | Diluted common shares outstanding (in thousands) | 56,384 | 55,295 | 55,971 | 55,382 | | Basic EPS | $0.09 | $0.09 | $0.21 | $0.37 | | Diluted EPS | $0.09 | $0.08 | +$0.01 | $0.21 | $0.36 | - Anti-dilutive stock awards excluded from EPS calculation were **1,610 thousand** for the three months ended September 30, 2019, and **1,964 thousand** for the nine months ended September 30, 2019[46](index=46&type=chunk) [Note 4 — Balance Sheet Information](index=15&type=section&id=Note%204%20%E2%80%94%20Balance%20Sheet%20Information) Offers additional details and breakdowns for specific balance sheet accounts Cash, Cash Equivalents and Restricted Cash (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $29,696 | $21,955 | | Restricted cash, current | $0 | $97 | | Restricted cash, non-current | $101 | $86 | | **Total cash, cash equivalents and restricted cash** | **$29,797** | **$22,138** | Inventories by Category (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | | Raw materials | $3,947 | $2,238 | | Work in process | $2,135 | $2,689 | | Finished goods | $2,895 | $2,211 | | **Inventories, net** | **$8,977** | **$7,138** | Accrued Expenses and Other Current Liabilities (in thousands) | Category | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Payroll and commissions payable | $5,273 | $5,843 | | Accrued warranty reserve | $633 | $478 | | Other accrued expenses and current liabilities | $2,613 | $2,176 | | **Total accrued expenses and other current liabilities** | **$8,519** | **$8,497** | [Note 5 — Investments and Fair Value Measurements](index=16&type=section&id=Note%205%20%E2%80%94%20Investments%20and%20Fair%20Value%20Measurements) Details the company's investment portfolio and fair value measurement methodologies Total Cash, Cash Equivalents and Marketable Securities (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $29,696 | $21,955 | | Short-term investments | $59,905 | $73,338 | | Long-term investments | $7,549 | $1,269 | | **Total** | **$97,150** | **$96,562** | - The Company's available-for-sale investments, primarily corporate notes and bonds and U.S. Treasury securities, are classified as Level 2 fair value measurements. Sales of available-for-sale investments totaled **$3.5 million** for the nine months ended September 30, 2019, compared to none in the prior year period[55](index=55&type=chunk)[61](index=61&type=chunk)[63](index=63&type=chunk) Available-for-Sale Investments with Unrealized Loss Positions (in thousands) | Investment Type | Sep 30, 2019 Fair Value | Sep 30, 2019 Gross Unrealized Losses | Dec 31, 2018 Fair Value | Dec 31, 2018 Gross Unrealized Losses | | :-------------------------------- | :-------------------------- | :----------------------------------- | :-------------------------- | :----------------------------------- | | U.S. Treasury securities | $449 | ($1) | $8,101 | ($2) | | Corporate notes and bonds | $9,096 | ($15) | $61,809 | ($88) | | **Total** | **$9,545** | **($16)** | **$69,910** | **($90)** | [Note 6 — Goodwill and Intangible Assets](index=19&type=section&id=Note%206%20%E2%80%94%20Goodwill%20and%20Intangible%20Assets) Presents information on goodwill and other intangible assets, including amortization and impairment assessments - The net carrying amount of goodwill remained stable at **$12.8 million** as of September 30, 2019, and December 31, 2018, with no impairment recorded[67](index=67&type=chunk) Intangible Assets, Net (in thousands) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | | Finite-lived intangible assets | $6,643 | $6,643 | | Accumulated amortization | ($6,472) | ($6,003) | | **Intangible assets, net** | **$171** | **$640** | [Note 7 — Lines of Credit](index=19&type=section&id=Note%207%20%E2%80%94%20Lines%20of%20Credit) Describes the company's credit facilities and any outstanding debt or commitments - The Company's Loan and Pledge Agreement provides a committed revolving credit line of **$16.0 million** and an uncommitted line of **$4.0 million**, extended to June 30, 2022. No debt was outstanding as of September 30, 2019, and December 31, 2018[70](index=70&type=chunk)[74](index=74&type=chunk)[75](index=75&type=chunk) - Outstanding Stand-By Letters of Credit (SBLCs) increased to **$11.2 million** at September 30, 2019, from **$8.8 million** at December 31, 2018[76](index=76&type=chunk) [Note 8 — Commitments and Contingencies](index=20&type=section&id=Note%208%20%E2%80%94%20Commitments%20and%20Contingencies) Outlines the company's contractual obligations, lease liabilities, warranty reserves, and potential legal contingencies Maturities of Lease Liabilities (in thousands) | Year | Amount | | :-------------------- | :-------------------------- | | 2019 (remaining 3 months) | $460 | | 2020 | $1,855 | | 2021 | $1,653 | | 2022 | $1,812 | | 2023 | $1,714 | | 2024 and thereafter | $10,042 | | **Total lease liabilities** | **$12,796** | - The Company entered into a new industrial lease agreement in January 2019 for a commercial development center in Katy, Texas, with a **120-month** initial term and monthly base rent of approximately **$0.3 million**, commencing in Q4 2019[78](index=78&type=chunk) Accrued Product Warranty Reserve (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Beginning balance | $599 | $389 | $478 | $366 | | Warranty costs charged to cost of revenue | $97 | $78 | $339 | $213 | | Utilization charges against reserve | ($15) | ($8) | ($53) | ($36) | | Release of accrual related to expired warranties | ($48) | ($50) | ($131) | ($134) | | **Ending balance** | **$633** | **$409** | **$633** | **$409** | - The Company had approximately **$8.6 million** in open cancellable purchase order arrangements as of September 30, 2019[84](index=84&type=chunk) [Note 9 — Income Taxes](index=22&type=section&id=Note%209%20%E2%80%94%20Income%20Taxes) Provides details on income tax expense, effective tax rates, and significant tax adjustments - For the nine months ended September 30, 2019, the Company recognized an income tax expense of **$1.2 million**, with an effective tax rate of **9.6%**. This included a **$1.0 million** discrete tax benefit from increased U.S. federal R&D credits and a **$0.4 million** benefit from stock-based compensation deductions, partially offset by a **$0.4 million** deferred tax expense due to state effective tax rate remeasurement[90](index=90&type=chunk)[92](index=92&type=chunk) - In contrast, the nine months ended September 30, 2018, saw an income tax benefit of **$10.1 million**, with an effective tax rate of **(106.3%)**, largely due to a **$12.4 million** discrete tax benefit from a change in international tax structure in Ireland and the full valuation allowance related to Irish operations losses[91](index=91&type=chunk)[92](index=92&type=chunk) [Note 10 — Stock-based Compensation](index=22&type=section&id=Note%2010%20%E2%80%94%20Stock-based%20Compensation) Explains the company's stock-based compensation plans and related expenses Stock-based Compensation Expense (in thousands) | Expense Category | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cost of revenue | $33 | $24 | $99 | $64 | | General and administrative | $661 | $564 | $2,435 | $2,695 | | Sales and marketing | $229 | $156 | $606 | $575 | | Research and development | $431 | $298 | $1,285 | $892 | | **Total stock-based compensation expense** | **$1,354** | **$1,042** | **$4,425** | **$4,226** | - Additional stock-based compensation expense of **$0.3 million** was recorded in the nine months ended September 30, 2019, due to the modification of equity awards related to the former Chairman's retirement. This is lower than the **$0.9 million** recorded in the prior year for the former President and CEO's resignation[97](index=97&type=chunk)[98](index=98&type=chunk) Unamortized Stock-Based Compensation Costs (in thousands) | Award Type | Unamortized Compensation Costs | Weighted Average Service Period (In years) | | :-------------------------------- | :-------------------------- | :----------------------------------- | | Stock options | $5,181 | 2.3 | | RSUs | $3,356 | 2.8 | | **Total** | **$8,537** | | Total Grant Date Fair Value of Vested Stock Options and RSUs (in thousands) | Award Type | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock options | $794 | $554 | $3,287 | $3,071 | | RSUs | $575 | $108 | $1,574 | $733 | | **Total** | **$1,369** | **$662** | **$4,861** | **$3,804** | [Note 11 — Business Segment and Geographic Information](index=24&type=section&id=Note%2011%20%E2%80%94%20Business%20Segment%20and%20Geographic%20Information) Presents financial data disaggregated by business segment and geographic region - The Company operates in two reportable segments: Water (reverse osmosis desalination) and Oil & Gas (hydraulic fracturing, gas/chemical processing). The CEO acts as the chief operating decision-maker, allocating resources and assessing performance based on revenue and operating income/loss for each segment[107](index=107&type=chunk)[108](index=108&type=chunk) Segment Operating Income (Loss) (in thousands) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Water Segment Operating Income | $13,076 | $11,005 | $31,514 | $25,732 | | Oil & Gas Segment Operating Loss | ($3,092) | ($817) | ($4,909) | ($3,556) | | Corporate operating expenses | $5,413 | $4,538 | $15,330 | $13,617 | | **Income from operations** | **$4,571** | **$5,650** | **$11,275** | **$8,559** | Product Revenue by Geographic Location | Location | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | United States | 2% | 2% | 2% | 3% | | International | 98% | 98% | 98% | 97% | | **Total product revenue** | **100%** | **100%** | **100%** | **100%** | Product Revenue by Country (Countries >10%) | Country | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Saudi Arabia | 38% | 52% | 27% | 38% | | United Arab Emirates | ** | ** | 12% | ** | | Egypt | ** | ** | ** | 14% | | China | ** | 11% | ** | 10% | [Note 12 — Concentrations](index=28&type=section&id=Note%2012%20%E2%80%94%20Concentrations) Identifies significant concentrations of revenue, customers, and accounts receivable Product Revenue Concentration by Customer (Customers >10%) | Customer | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | | :-------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Customer B | Water | 26% | ** | 10% | ** | | Customer C | Water | ** | 49% | ** | 19% | | Customer D | Water | 11% | ** | ** | 14% | | Customer A | Water | ** | ** | 17% | ** | | Customer E | Water | ** | ** | ** | 12% | - One international Oil & Gas Segment customer accounted for **100%** of the Company's license and development revenue for both the three and nine months ended September 30, 2019 and 2018[117](index=117&type=chunk) Accounts Receivable and Contract Asset Concentration by Customer (Customers >10%) | Customer | Segment | Sep 30, 2019 | Dec 31, 2018 | | :-------------------- | :-------------------- | :-------------------------- | :-------------------------- | | Customer A | Water | 26% | ** | | Customer B | Water | 25% | ** | | Customer D | Water | 11% | ** | | Customer F | Oil & Gas | ** | 26% | | Customer G | Water | ** | 20% | | Customer H | Water | ** | 11% | [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%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the Company's financial performance and condition for the three and nine months ended September 30, 2019, compared to the prior year. It covers revenue trends by segment, gross profit and margin changes, operating expense drivers, income taxes, and a detailed analysis of liquidity and cash flows from operating, investing, and financing activities, along with future capital requirements [Overview](index=31&type=section&id=Overview) Provides a general introduction to the company's business and operational context - Energy Recovery, Inc. is an engineering-driven technology company providing solutions for industrial fluid flow processes, focusing on converting wasted pressure energy and preserving pumps in hostile environments across water and oil & gas markets. The company was incorporated in Virginia in 1992, reincorporated in Delaware in 2001, and maintains its headquarters in California, with a new commercial development center for oil and gas field testing and training opening in Texas in Q4 2019[130](index=130&type=chunk)[131](index=131&type=chunk) [Water Segment](index=31&type=section&id=Water%20Segment) Describes the revenue sources and sales channels for the company's Water Segment - The Water Segment's revenue primarily comes from selling energy recovery devices (ERDs) and high-pressure/circulation pumps for seawater, brackish, and wastewater reverse osmosis desalination. Sales channels include mega-project (MPD) firms (typically **$1 million-$10 million** per project), original equipment manufacturers (OEMs) for small-to-medium plants (up to **$1 million** per project), and the aftermarket (AM) for spare parts and service contracts[133](index=133&type=chunk) [Oil & Gas Segment](index=31&type=section&id=Oil%20%26%20Gas%20Segment) Details the revenue streams and strategic focus of the company's Oil & Gas Segment - The Oil & Gas Segment's revenue is mainly derived from license and development activities related to solutions for hydraulic fracturing, gas processing, and chemical processing, reflecting significant R&D and S&M investments in expanding into these pressurized fluid flow industries[134](index=134&type=chunk) [Total Revenue](index=31&type=section&id=Total%20Revenue) Analyzes the company's total revenue performance, disaggregated by segment and product line Total Revenue by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Water Product Revenue | $21,752 | $18,464 | +$3,288 (18%) | $56,946 | $46,628 | +$10,318 (22%) | | Oil & Gas Product Revenue | $0 | $114 | -$114 (-100%) | $104 | $414 | -$310 (-75%) | | License and Development Revenue | $3,098 | $3,661 | -$563 (-15%) | $10,391 | $9,768 | +$623 (6%) | | **Total Revenue** | **$24,850** | **$22,239** | **+$2,611 (12%)** | **$67,441** | **$56,810** | **+$10,631 (19%)** | - Water Segment product revenue increased by **18%** (**$3.3 million**) for the three months and **22%** (**$10.3 million**) for the nine months ended September 30, 2019, driven by higher shipments across all channels (AM, MPD, OEM). Oil & Gas Segment product revenue decreased significantly due to no product sales in Q3 2019, while license and development revenue decreased by **15%** in Q3 but increased by **6%** for the nine-month period, primarily due to changes in estimated project costs[137](index=137&type=chunk)[139](index=139&type=chunk)[141](index=141&type=chunk)[142](index=142&type=chunk) [Product Gross Profit and Gross Margin](index=32&type=section&id=Product%20Gross%20Profit%20and%20Gross%20Margin) Examines the trends in product gross profit and gross margin across business segments Product Gross Profit and Gross Margin by Segment (in thousands) | Segment | 3 Months Ended Sep 30, 2019 Gross Profit | 3 Months Ended Sep 30, 2019 Gross Margin | 3 Months Ended Sep 30, 2018 Gross Profit | 3 Months Ended Sep 30, 2018 Gross Margin | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Water | $16,327 | 75.1% | $13,613 | 73.7% | | Oil & Gas | $0 | 0% | ($57) | (50.0)% | | **Total Product Gross Profit** | **$16,327** | **75.1%** | **$13,556** | **73.0%** | - Product gross profit increased by **20.4%** (**$2.8 million**) for the three months and **25.9%** (**$8.5 million**) for the nine months ended September 30, 2019, primarily due to higher Water Segment volumes, especially PX sales, and favorable price/product mix. Gross margin improved by **210 basis points** to **75.1%** (three months) and **260 basis points** to **72.2%** (nine months) due to these factors and manufacturing efficiencies[144](index=144&type=chunk)[145](index=145&type=chunk)[146](index=146&type=chunk)[147](index=147&type=chunk) [Operating Expenses](index=33&type=section&id=Operating%20Expenses) Reviews the components and changes in the company's operating expenses, including R&D and S&M Total Operating Expenses (in thousands) | Expense Category | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | General and administrative | $5,711 | $5,266 | +$445 (8%) | $16,790 | $16,030 | +$760 (5%) | | Sales and marketing | $2,367 | $1,873 | +$494 (26%) | $6,710 | $5,643 | +$1,067 (19%) | | Research and development | $6,620 | $4,270 | +$2,350 (55%) | $16,354 | $11,792 | +$4,562 (39%) | | Amortization of intangible assets | $156 | $158 | -$2 (-1%) | $469 | $474 | -$5 (-1%) | | **Total Operating Expenses** | **$14,854** | **$11,567** | **+$3,287 (28%)** | **$40,323** | **$33,939** | **+$6,384 (19%)** | - Total operating expenses increased by **28%** (**$3.3 million**) for the three months and **19%** (**$6.4 million**) for the nine months ended September 30, 2019. This was primarily driven by a **55%** increase in R&D expenses for the three months (due to higher testing supplies, depreciation, and personnel costs) and a **39%** increase for the nine months (due to testing supplies, personnel, and equipment depreciation)[151](index=151&type=chunk)[154](index=154&type=chunk)[160](index=160&type=chunk)[163](index=163&type=chunk) - Water Segment operating expenses increased by **25%** (**$0.6 million**) for the three months and **36%** (**$2.6 million**) for the nine months, mainly due to higher S&M and R&D. Oil & Gas Segment operating expenses increased by **40%** (**$1.8 million**) for the three months and **16%** (**$2.1 million**) for the nine months, primarily due to increased R&D for new technology commercialization[148](index=148&type=chunk)[149](index=149&type=chunk)[157](index=157&type=chunk)[158](index=158&type=chunk) [Other Income, Net](index=35&type=section&id=Other%20Income%2C%20Net) Reports on non-operating income and expenses, primarily interest income Total Other Income, Net (in thousands) | Metric | 3 Months Ended Sep 30, 2019 | 3 Months Ended Sep 30, 2018 | YoY Change (3 Months) | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 | YoY Change (9 Months) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Interest income | $500 | $369 | +$131 | $1,551 | $1,043 | +$508 | | Other non-operating expense, net | ($5) | ($22) | +$17 | ($77) | ($66) | -$11 | | **Total other income, net** | **$495** | **$347** | **+$148** | **$1,474** | **$976** | **+$498** | - Total other income, net, increased by **$0.1 million** for the three months and **$0.5 million** for the nine months ended September 30, 2019, primarily driven by an increase in interest income[165](index=165&type=chunk)[166](index=166&type=chunk) [Income Taxes](index=36&type=section&id=Income%20Taxes) Discusses the company's income tax expense, benefits, and effective tax rates - For the nine months ended September 30, 2019, the Company recognized an income tax expense of **$1.2 million**, with an effective tax rate of **9.6%**. This included a **$1.0 million** discrete tax benefit from increased U.S. federal R&D credits and a **$0.4 million** benefit from stock-based compensation deductions, partially offset by a **$0.4 million** deferred tax expense due to state effective tax rate remeasurement[168](index=168&type=chunk)[170](index=170&type=chunk) - In contrast, the nine months ended September 30, 2018, saw an income tax benefit of **$10.1 million**, with an effective tax rate of **(106.3%)**, largely due to a **$12.4 million** discrete tax benefit from a change in international tax structure in Ireland and the full valuation allowance related to Irish operations losses[169](index=169&type=chunk)[170](index=170&type=chunk) [Liquidity and Capital Resources](index=36&type=section&id=Liquidity%20and%20Capital%20Resources) This section details the Company's financial resources, including cash, investments, and receivables, and analyzes cash flow activities. It also outlines the terms of the Loan and Pledge Agreement, the status of Stand-By Letters of Credit, and management's outlook on future capital requirements and potential financing needs [Overview](index=36&type=section&id=Overview%20(Liquidity)) Summarizes the company's primary sources of liquidity and working capital components - Primary liquidity sources as of September 30, 2019, included **$29.7 million** in unrestricted cash and cash equivalents, **$59.9 million** in short-term investments (marketable debt instruments), and **$20.8 million** in net accounts receivable[172](index=172&type=chunk) - Short-term contract assets (unbilled receivables) decreased to **$1.1 million** at September 30, 2019, from **$4.1 million** at December 31, 2018, primarily due to Water Segment customer contractual holdback provisions[173](index=173&type=chunk) [Loan Agreements](index=36&type=section&id=Loan%20Agreements) Details the terms and status of the company's revolving credit facilities - The Loan and Pledge Agreement provides a **$16.0 million** committed and **$4.0 million** uncommitted revolving credit line, extended to June 30, 2022. No debt was outstanding as of September 30, 2019, or December 31, 2018[174](index=174&type=chunk)[178](index=178&type=chunk)[179](index=179&type=chunk) [Stand-By Letters of Credit](index=37&type=section&id=Stand-By%20Letters%20of%20Credit) Explains the company's outstanding Stand-By Letters of Credit and their impact on liquidity - As of September 30, 2019, the Company had **$11.2 million** in SBLCs, requiring a corresponding U.S. investment balance, an increase from **$8.8 million** at December 31, 2018[180](index=180&type=chunk) [Cash Flows from Operating Activities](index=37&type=section&id=Cash%20Flows%20from%20Operating%20Activities) Analyzes cash generated or used by the company's core business operations - Net cash provided by operating activities significantly decreased to **$0.5 million** for the nine months ended September 30, 2019, from **$9.7 million** in the prior year. This was primarily due to **$12.7 million** in cash used for operating assets and liabilities, driven by changes in accounts receivable, inventory, and contract liabilities[181](index=181&type=chunk)[183](index=183&type=chunk) - Operating cash flow can fluctuate significantly quarter-to-quarter due to the project-driven, non-cyclical nature of the business and the timing of large project orders, making individual quarterly comparisons not necessarily indicative of long-term trends[184](index=184&type=chunk) [Cash Flows from Investing Activities](index=38&type=section&id=Cash%20Flows%20from%20Investing%20Activities) Details cash flows related to the acquisition and disposal of investments and property, plant, and equipment - Net cash provided by investing activities increased by **$2.0 million**, shifting from a **$0.15 million** use in 2018 to a **$1.8 million** provision in 2019 for the nine months ended September 30. This was mainly due to higher net sales and maturities of investments (**$5.4 million** increase), partially offset by a **$3.5 million** increase in capital expenditures[181](index=181&type=chunk)[189](index=189&type=chunk) [Cash Flows from Financing Activities](index=38&type=section&id=Cash%20Flows%20from%20Financing%20Activities) Summarizes cash flows from debt, equity transactions, and share repurchases - Net cash provided by financing activities increased by **$11.6 million**, moving from a **$6.25 million** use in 2018 to a **$5.3 million** provision in 2019 for the nine months ended September 30. This significant change was primarily due to the absence of common stock repurchases in 2019 (which totaled **$10.0 million** in 2018) and a **$1.6 million** increase in cash from common stock issuance under employee programs[181](index=181&type=chunk)[191](index=191&type=chunk) [Liquidity and Capital Resource Requirements](index=38&type=section&id=Liquidity%20and%20Capital%20Resource%20Requirements) Discusses management's assessment of future capital needs and funding strategies - Management believes existing resources and operating cash flow will cover anticipated capital requirements for the next **12 months**. However, additional capital or debt financing may be needed for future acquisitions or investments in new technology due to rapid market adoption[192](index=192&type=chunk) [Off-Balance Sheet Arrangements](index=38&type=section&id=Off-Balance%20Sheet%20Arrangements) Reports on any significant off-balance sheet financial commitments or obligations - The Company did not have any off-balance sheet arrangements with unconsolidated entities or financial partnerships during the reported periods[193](index=193&type=chunk) [Recent Accounting Pronouncements](index=38&type=section&id=Recent%20Accounting%20Pronouncements%20(MD%26A)) Refers to disclosures on new accounting standards and their impact - Refer to Note 1, 'Description of Business and Significant Accounting Policies,' for details on recent accounting pronouncements[194](index=194&type=chunk) [Item 3 — Quantitative and Qualitative Disclosures About Market Risk](index=38&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 focusing on foreign currency fluctuations and interest rate changes, and outlines strategies to mitigate these risks [Foreign Currency Risk](index=38&type=section&id=Foreign%20Currency%20Risk) Analyzes the company's exposure to foreign currency exchange rate fluctuations - The Company is exposed to foreign currency fluctuations against the USD, including the British Pound, Saudi Riyal, UAE Dirham, Euro, Chinese Yuan, Indian Rupee, and Canadian Dollar. While revenue contracts are USD-denominated, international sales expansion could lead to foreign currency-denominated revenue, increasing exchange rate impact on cash and operating results[196](index=196&type=chunk)[197](index=197&type=chunk) - The Company has not hedged foreign currency exposure due to historically insignificant foreign currency expenses and minimal impact on operating results and cash flows[199](index=199&type=chunk) [Interest Rate Risk and Credit Risk](index=39&type=section&id=Interest%20Rate%20Risk%20and%20Credit%20Risk) Examines the company's exposure to interest rate changes and credit risk in its investment portfolio - The Company's investment portfolio of **$67.5 million** (as of September 30, 2019) consists of fixed-income marketable debt securities, primarily investment-grade corporate and U.S. government instruments. These investments are subject to interest rate risk, with a hypothetical **1%** interest rate increase estimated to decrease fair value by approximately **$0.4 million**[200](index=200&type=chunk)[201](index=201&type=chunk) - To mitigate interest rate risk, the Company maintains investments with an average maturity of less than seven months and adheres to an investment policy with high credit rating requirements and concentration limits to minimize counter-party credit risk[200](index=200&type=chunk)[201](index=201&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 during the period [Evaluation of Disclosure Controls and Procedures](index=39&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) Assesses the effectiveness of the company's disclosure controls and procedures - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2019[203](index=203&type=chunk) [Changes in Internal Controls](index=39&type=section&id=Changes%20in%20Internal%20Controls) Reports on any material changes to the company's internal control over financial reporting - There were no material changes in internal control over financial reporting during the period covered by the report[204](index=204&type=chunk) PART II — OTHER INFORMATION Contains additional information not included in the financial statements, such as legal proceedings and risk factors [Item 1 — Legal Proceedings](index=40&type=section&id=Item%201%20%E2%80%94%20Legal%20Proceedings) Refers to disclosures on legal proceedings and claims - Information on legal proceedings is incorporated by reference from Note 8, 'Commitments and Contingencies – Litigation,' of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q, and the Annual Report on Form 10-K filed March 7, 2019[206](index=206&type=chunk)[207](index=207&type=chunk) [Item 1A — Risk Factors](index=40&type=section&id=Item%201A%20%E2%80%94%20Risk%20Factors) States that there have been no material changes to previously disclosed risk factors - No material changes to risk factors have occurred since those disclosed in the Annual Report on Form 10-K filed on March 7, 2019[208](index=208&type=chunk) [Item 2 — Unregistered Sales of Equity Securities and Use of Proceeds](index=40&type=section&id=Item%202%20%E2%80%94%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) Indicates no unregistered sales of equity securities or use of proceeds to report - None[209](index=209&type=chunk) [Item 3 — Defaults Upon Senior Securities](index=40&type=section&id=Item%203%20%E2%80%94%20Defaults%20Upon%20Senior%20Securities) Reports no defaults upon senior securities - None[210](index=210&type=chunk) [Item 4 — Mine Safety Disclosures](index=40&type=section&id=Item%204%20%E2%80%94%20Mine%20Safety%20Disclosures) States that mine safety disclosures are not applicable to the Company - Not applicable[211](index=211&type=chunk) [Item 5 — Other Information](index=40&type=section&id=Item%205%20%E2%80%94%20Other%20Information) Indicates no other information to report - None[212](index=212&type=chunk) [Item 6 — Exhibits](index=41&type=section&id=Item%206%20%E2%80%94%20Exhibits) Lists exhibits filed or furnished with the report, including certifications and XBRL documents - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1*) and XBRL Instance, Schema, Calculation, Definition, Label, and Presentation Documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE)[214](index=214&type=chunk) [SIGNATURES](index=42&type=section&id=Signatures) Contains the signatures of the Company's authorized officers certifying the report - The report was signed on November 1, 2019, by Chris Gannon, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer[218](index=218&type=chunk)

Energy Recovery, Inc. (NASDAQ:ERII) Q3 2019 Earnings Conference Call October 31, 2019 5:00 PM ET Company Participants James Siccardi - Vice President of Investor Relations Chris Gannon - President, Chief Executive Officer and Director Joshua Ballard - Chief Financial Officer Conference Call Participants Pavel Molchanov - Raymond James. Joseph Osha - JMP Securities Ryan Pfingst - B. Riley Operator Greetings. Welcome to the Energy Recovery Third Quarter 2019 Earnings Call. At this time, all participants are i ...

| --- | --- | --- | --- | --- | --- | --- | --- | --- | |-------|---------------------|----------------------------------------|-------|-------|-------|-------|------------------|--------------| | | | | | | | | | | | | | (16) | | | | | | | | | 10 | | | | | | energy recovery® | (3) | | | (1) (2) August 2019 | Energy Recovery Investor Presentation | | | | 3 | | ( | | | | | | | | | | NASDAQ: ERII | FORWARD LOOKING STATEMENT This presentation contains forward-looking statements within the "Safe Harbor" provisio ...

PART I — FINANCIAL INFORMATION [Item 1 — Financial Statements (Unaudited)](index=3&type=section&id=Item%201%20Financial%20Statements%20(Unaudited)) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, comprehensive income, stockholders' equity, cash flows, and related explanatory notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) The condensed consolidated balance sheets provide a snapshot of the company's financial position as of June 30, 2019, and December 31, 2018, detailing assets, liabilities, and stockholders' equity Condensed Consolidated Balance Sheets (in thousands) | Metric | June 30, 2019 (in thousands) | December 31, 2018 (in thousands) | | :---------------------- | :--------------------------- | :------------------------------- | | Total Assets | $183,465 | $179,841 | | Total Liabilities | $56,005 | $66,463 | | Total Stockholders' Equity | $127,460 | $113,378 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) The condensed consolidated statements of operations report the company's financial performance for the three and six months ended June 30, 2019, and 2018, showing revenue, cost of revenue, operating expenses, and net income Condensed Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Product Revenue | $19,226 | $17,406 | $35,298 | $28,464 | | License & Dev Revenue | $3,570 | $3,358 | $7,293 | $6,107 | | Net Income | $3,719 | $15,743 | $6,373 | $15,017 | | Basic EPS | $0.07 | $0.29 | $0.12 | $0.28 | | Diluted EPS | $0.07 | $0.28 | $0.11 | $0.27 | [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This statement details the components of comprehensive income, including net income and other comprehensive income (loss) items such as foreign currency translation adjustments and unrealized gains/losses on investments Condensed Consolidated Statements of Comprehensive Income (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net Income | $3,719 | $15,743 | $6,373 | $15,017 | | Foreign Currency Translation Adjustments | $7 | $(33) | $(1) | $(12) | | Unrealized Gain (Loss) on Investments | $64 | $7 | $132 | $(57) | | Comprehensive Income | $3,790 | $15,717 | $6,504 | $14,948 | [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) The condensed consolidated statements of stockholders' equity show changes in common stock, additional paid-in capital, accumulated other comprehensive loss, treasury stock, and accumulated deficit for the three and six months ended June 30, 2019, and 2018 Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Stockholders' Equity | $127,460 | $102,361 | $127,460 | $102,361 | | Common Stock Issued (shares) | 60,360 | 58,951 | 60,360 | 58,951 | | Treasury Stock (shares) | (5,456) | (5,456) | (5,456) | (5,456) | [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) The condensed consolidated statements of cash flows present cash generated from or used in operating, investing, and financing activities for the six months ended June 30, 2019, and 2018 Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :----------------------------- | :----------------------------- | | Net Cash from Operating Activities | $3 | $(1,670) | | Net Cash Used in Investing Activities | $(3,241) | $(4,015) | | Net Cash from Financing Activities | $4,519 | $(7,691) | | Net Change in Cash, Cash Equivalents and Restricted Cash | $1,281 | $(13,354) | [Notes to Condensed Consolidated Financial Statements](index=9&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, earnings per share, balance sheet items, investments, goodwill, lines of credit, commitments, income taxes, stock-based compensation, segment information, and concentrations [Note 1 — Description of Business and Significant Accounting Policies](index=9&type=section&id=Note%201%20%E2%80%94%20Description%20of%20Business%20and%20Significant%20Accounting%20Policies) Energy Recovery, Inc. is an energy solutions provider for industrial fluid flow markets, specializing in water, oil & gas, and chemical processing, and early adopted ASU 2018-15 - Energy Recovery, Inc. is an energy solutions provider for industrial fluid flow markets worldwide, focusing on water, oil & gas, and chemical processing, utilizing fluid dynamics and advanced material science[26](index=26&type=chunk) - The Company early adopted ASU 2018-15 in the second quarter of 2019, aligning capitalization requirements for cloud computing implementation costs with internal-use software, which is expected to defer approximately **$0.6 million to $0.9 million** in related costs for the remainder of 2019[30](index=30&type=chunk) [Note 2 — Revenue](index=10&type=section&id=Note%202%20%E2%80%94%20Revenue) Revenue is disaggregated by geography and product/service line, showing significant contributions from the Middle East and Africa, and the Americas, primarily from PX, pumps, and turbo devices, and license and development, with contract assets and liabilities decreasing Revenue Disaggregation (Three Months Ended June 30, 2019, in thousands) | Category | Water | Oil and Gas | Total | | :------------------------ | :----- | :---------- | :------ | | Primary Geographical Market | | | | | Middle East and Africa | $10,805 | $— | $10,805 | | Americas | $1,728 | $3,570 | $5,298 | | Asia | $5,042 | $— | $5,042 | | Europe | $1,651 | $— | $1,651 | | **Total Revenue** | **$19,226** | **$3,570** | **$22,796** | | Major Product/Service Line | | | | | PX, pumps and turbo devices | $19,226 | $— | $19,226 | | License and development | $— | $3,570 | $3,570 | Contract Assets and Liabilities (in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :------------------------- | :------------ | :---------------- | | Contract assets balance, end of period | $1,936 | $4,083 | | Contract liabilities balance, end of period | $35,079 | $42,809 | Estimated Revenue from Remaining Performance Obligation (June 30, 2019, in thousands) | Year | Amount | | :------------------ | :-------- | | 2019 (remaining six months) | $7,304 | | 2020 | $14,558 | | 2021 | $6,770 | | 2022 | $661 | | 2023 and thereafter | $5,031 | | **Total** | **$34,324** | [Note 3 — Earnings per Share](index=11&type=section&id=Note%203%20%E2%80%94%20Earnings%20per%20Share) This note details the calculation of basic and diluted earnings per share, including weighted average common shares outstanding and the effect of dilutive stock awards, and identifies anti-dilutive shares Earnings Per Share (EPS) Summary | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic EPS | $0.07 | $0.29 | $0.12 | $0.28 | | Diluted EPS | $0.07 | $0.28 | $0.11 | $0.27 | | Basic Weighted Average Common Shares Outstanding (thousands) | 54,681 | 53,747 | 54,400 | 53,747 | | Diluted Weighted Average Common Shares Outstanding (thousands) | 56,110 | 55,406 | 55,764 | 55,437 | Anti-Dilutive Shares Excluded from EPS Calculation (in thousands) | Period | Anti-dilutive shares excluded | | :-------------------- | :---------------------------- | | Three Months Ended June 30, 2019 | 1,650 | | Three Months Ended June 30, 2018 | 1,990 | | Six Months Ended June 30, 2019 | 2,197 | | Six Months Ended June 30, 2018 | 2,015 | [Note 4 — Balance Sheet Information](index=12&type=section&id=Note%204%20%E2%80%94%20Balance%20Sheet%20Information) This note provides a breakdown of inventories by category and details accrued expenses and other current liabilities Inventories, Net (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------- | :------------ | :---------------- | | Raw materials | $3,175 | $2,238 | | Work in process | $2,157 | $2,689 | | Finished goods | $2,431 | $2,211 | | **Total** | **$7,763** | **$7,138** | Accrued Expenses and Other Current Liabilities (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :------------------------------------- | :------------ | :---------------- | | Payroll and commissions payable | $4,000 | $5,843 | | Accrued legal expenses | $142 | $574 | | Other accrued expenses and current liabilities | $1,383 | $1,602 | | **Total** | **$5,525** | **$8,019** | [Note 5 — Investments and Fair Value Measurements](index=14&type=section&id=Note%205%20%E2%80%94%20Investments%20and%20Fair%20Value%20Measurements) The company's cash, cash equivalents, and marketable securities totaled **$96.692 million** as of June 30, 2019, primarily invested in available-for-sale debt instruments, with fair value measurements classified into Level 1 and Level 2 Total Cash, Cash Equivalents and Marketable Securities (in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :--------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $23,331 | $21,955 | | Short-term investments | $71,854 | $73,338 | | Long-term investments | $1,507 | $1,269 | | **Total** | **$96,692** | **$96,562** | Fair Value of Financial Assets (June 30, 2019, in thousands) | Category | Total | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | | :----------------------- | :------ | :------------- | :------------- | :------------- | | Cash equivalents | $5,004 | $5,004 | $— | $— | | Short-term investments | $71,854 | $— | $71,854 | $— | | Long-term investments | $1,507 | $— | $1,507 | $— | | **Total Fair Value** | **$78,365** | **$5,004** | **$73,361** | **$—** | Available-for-Sale Investments with Unrealized Loss Positions (in thousands) | Category | June 30, 2019 Fair Value | June 30, 2019 Gross Unrealized Losses | December 31, 2018 Fair Value | December 31, 2018 Gross Unrealized Losses | | :------------------------ | :----------------------- | :------------------------------------ | :--------------------------- | :---------------------------------------- | | U.S. Treasury securities | $802 | $— | $8,101 | $(2) | | Corporate notes and bonds | $10,213 | $(6) | $61,809 | $(88) | | **Total** | **$11,015** | **$(6)** | **$69,910** | **$(90)** | [Note 6 — Goodwill and Intangible Assets](index=17&type=section&id=Note%206%20%E2%80%94%20Goodwill%20and%20Intangible%20Assets) The net carrying amount of goodwill remained stable at **$12.8 million**, with no impairment recorded, and finite-lived intangible assets, net, were **$0.327 million** as of June 30, 2019 - The net carrying amount of goodwill was **$12.8 million** as of June 30, 2019, with no impairment recorded[68](index=68&type=chunk) Other Intangible Assets, Net (in thousands) | Metric | June 30, 2019 | December 31, 2018 | | :------------------------- | :------------ | :---------------- | | Finite-lived intangible assets | $6,643 | $6,643 | | Accumulated amortization | $(6,316) | $(6,003) | | **Intangible assets, net** | **$327** | **$640** | [Note 7 — Lines of Credit](index=17&type=section&id=Note%207%20%E2%80%94%20Lines%20of%20Credit) The company has a **$16.0 million** committed revolving credit line, extended to June 30, 2022, with no outstanding debt but **$9.2 million** in stand-by letters of credit deducted - The Loan and Pledge Agreement provides a committed revolving credit line of **$16.0 million** and an uncommitted line of **$4.0 million**, with no outstanding debt as of June 30, 2019[71](index=71&type=chunk)[74](index=74&type=chunk) - The agreement was amended on June 17, 2019, to extend the termination date to June 30, 2022, and limit SBLC terms to three years[74](index=74&type=chunk) - Outstanding stand-by letters of credit totaled **$9.2 million** at June 30, 2019, up from **$8.8 million** at December 31, 2018[75](index=75&type=chunk) [Note 8 — Commitments and Contingencies](index=18&type=section&id=Note%208%20%E2%80%94%20Commitments%20and%20Contingencies) The company has operating lease liabilities totaling **$13.033 million**, an accrued product warranty reserve of **$0.599 million**, **$8.6 million** in cancellable purchase obligations, and **$9.2 million** in stand-by letters of credit, and is involved in legal proceedings Lease Liabilities Maturities (June 30, 2019, in thousands) | Year | Amount | | :------------------ | :-------- | | 2019 (remaining six months) | $918 | | 2020 | $1,856 | | 2021 | $1,653 | | 2022 | $1,812 | | 2023 | $1,714 | | 2024 and thereafter | $10,043 | | Total | $17,996 | | Less imputed lease interest | $(4,963) | | **Total Lease Liabilities** | **$13,033** | Accrued Product Warranty Reserve (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Beginning Balance | $571 | $359 | $478 | $366 | | Warranty costs charged to cost of revenue | $89 | $87 | $242 | $135 | | Utilization charges against reserve | $(25) | $(23) | $(38) | $(28) | | Release of accrual related to expired warranties | $(36) | $(34) | $(83) | $(84) | | **Ending Balance** | **$599** | **$389** | **$599** | **$389** | - The company had approximately **$8.6 million** of open cancellable purchase order arrangements as of June 30, 2019[84](index=84&type=chunk) - Stand-by letters of credit for warranty and product performance guarantees totaled **$9.2 million** at June 30, 2019[85](index=85&type=chunk) [Note 9 — Income Taxes](index=20&type=section&id=Note%209%20%E2%80%94%20Income%20Taxes) For the six months ended June 30, 2019, the company recognized an income tax expense of **$1.3 million** (effective rate of **17.1%**), contrasting with a **$11.5 million** benefit in 2018 due to international restructuring - For the six months ended June 30, 2019, the company recognized an income tax expense of **$1.3 million**, including a **$0.4 million** discrete tax benefit from stock-based compensation[89](index=89&type=chunk) - The effective tax rate for the six months ended June 30, 2019, was **17.1%** (**21.6%** excluding discrete tax items)[89](index=89&type=chunk) - For the six months ended June 30, 2018, the company recognized an income tax benefit of **$11.5 million** (effective rate of **-324.4%**), primarily due to an **$11.9 million** tax benefit from changing the tax status of Irish subsidiaries as part of international restructuring under the 2017 U.S. Tax Cuts and Jobs Act[89](index=89&type=chunk) [Note 10 — Stock-based Compensation](index=20&type=section&id=Note%2010%20%E2%80%94%20Stock-based%20Compensation) Total stock-based compensation expense for the six months ended June 30, 2019, was **$3.071 million**, with unamortized costs totaling **$9.629 million** and vested awards having a fair value of **$3.492 million** Stock-based Compensation Expense (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total Stock-based Compensation Expense | $1,393 | $941 | $3,071 | $3,184 | | By Type of Award: | | | | | | Options | $1,003 | $680 | $2,136 | $2,344 | | RSUs | $390 | $261 | $935 | $840 | - During the six months ended June 30, 2019, the Company recorded an additional **$0.3 million** in stock-based compensation expense due to modifications of equity awards for its former Chairman of the Board[94](index=94&type=chunk) Unamortized Stock-Based Compensation Costs (June 30, 2019, in thousands) | Award Type | Unamortized Compensation Costs | Weighted Average Service Period (years) | | :--------- | :----------------------------- | :-------------------------------------- | | Stock options | $5,896 | 2.53 | | RSUs | $3,733 | 2.92 | | **Total** | **$9,629** | | Total Grant Date Fair Value of Vested Stock Options and RSUs (in thousands) | Period | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $1,126 | $1,256 | $2,493 | $2,517 | | RSUs | $75 | $116 | $999 | $625 | | **Total Vested Fair Value** | **$1,201** | **$1,372** | **$3,492** | **$3,142** | [Note 11 — Business Segment and Geographic Information](index=22&type=section&id=Note%2011%20%E2%80%94%20Business%20Segment%20and%20Geographic%20Information) The company operates in two reportable segments: Water and Oil & Gas, with the Water Segment generating **$35.194 million** in product revenue and **$18.438 million** in operating income, and international customers accounting for **98%** of product revenue - The company's reportable segments are Water and Oil & Gas, based on industries, product types, and related solutions/services[107](index=107&type=chunk) Segment Financial Information (Six Months Ended June 30, 2019, in thousands) | Metric | Water Segment | Oil & Gas Segment | Total | | :---------------------- | :------------ | :---------------- | :-------- | | Product Revenue | $35,194 | $104 | $35,298 | | License and Development Revenue | $— | $7,293 | $7,293 | | Operating Income (Loss) - Segment | $18,438 | $(1,817) | $16,621 | Product Revenue by Geographic Location (Six Months Ended June 30, 2019) | Location | Percent of Total Revenue | | :------------ | :----------------------- | | United States | 2% | | International | 98% | | **Total** | **100%** | | By Country: | | | United Arab Emirates | 15% | | Chile | 12% | | Saudi Arabia | 21% | | Others | 52% | [Note 12 — Concentrations](index=26&type=section&id=Note%2012%20%E2%80%94%20Concentrations) The company has significant customer concentrations, with Customer A accounting for **28%** of Water Segment product revenue and **33%** of combined accounts receivable and contract assets, and one international Oil & Gas customer accounting for **100%** of license and development revenue Product Revenue Concentration by Customer (Six Months Ended June 30, 2019) | Customer | Segment | Percent of Total Revenue | | :--------- | :------ | :----------------------- | | Customer A | Water | 28% | | Customer B | Water | 12% | - One international Oil and Gas Segment customer accounts for **100%** of the Company's license and development revenue for the six months ended June 30, 2019 and 2018[121](index=121&type=chunk) Accounts Receivable and Contract Assets Concentration by Customer (June 30, 2019) | Customer | Segment | Percent of Total Accounts Receivable and Contract Assets | | :--------- | :-------- | :------------------------------------------------------- | | Customer A | Water | 33% | | Customer G | Oil & Gas | 17% | | Customer H | Water | 14% | [Item 2 — Management's Discussion and Analysis of Financial Condition and Results of Operations](index=27&type=section&id=Item%202%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, including an overview of its business segments, detailed analysis of revenue, gross profit, operating expenses, other income, income taxes, liquidity, capital resources, and forward-looking statements [Overview](index=29&type=section&id=Overview) Energy Recovery, Inc. is an engineering-driven technology company providing solutions for industrial fluid flow processes in water and oil & gas markets, with the Water Segment focusing on desalination and the Oil & Gas Segment on license and development revenue - Energy Recovery, Inc. is an engineering-driven technology company that designs, manufactures, and supplies solutions for industrial fluid flow processes, operating in the water and oil & gas markets[131](index=131&type=chunk) - The Water Segment generates revenue from energy recovery devices (ERDs) and pumps for seawater, brackish, and wastewater reverse osmosis desalination, serving mega-project, OEM, and after-market channels[132](index=132&type=chunk) - The Oil & Gas Segment primarily derives revenue from license and development activities for hydraulic fracturing, gas processing, and chemical processing solutions[133](index=133&type=chunk) [Results of Operations](index=29&type=section&id=Results%20of%20Operations) The company experienced a **10%** increase in total revenue for the three months ended June 30, 2019, driven by the Water Segment, with improved product gross profit and margin, but significantly increased operating expenses, and a shift from tax benefit to expense [Total Revenue](index=29&type=section&id=Total%20Revenue) Total revenue increased by **10%** to **$22.8 million** for the three months ended June 30, 2019, and by **23%** to **$42.6 million** for the six months, primarily driven by a **$2.1 million (12%)** increase in Water Segment product revenue for the three-month period and a **$7.0 million (25%)** increase for the six-month period, largely due to MPD and OEM shipments Total Revenue (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Change ($) | Change (%) | | :-------------- | :------------------------------- | :------------------------------- | :--------- | :--------- | | Water | $19,226 | $17,116 | $2,110 | 12% | | Oil & Gas | $0 | $290 | $(290) | (100)% | | Product Revenue | $19,226 | $17,406 | $1,820 | 10% | | License & Dev Revenue | $3,570 | $3,358 | $212 | 6% | | **Total Revenue** | **$22,796** | **$20,764** | **$2,032** | **10%** | Total Revenue (Six Months Ended June 30, in thousands) | Metric | 2019 | 2018 | Change ($) | Change (%) | | :-------------- | :-------- | :-------- | :--------- | :--------- | | Water | $35,194 | $28,164 | $7,030 | 25% | | Oil & Gas | $104 | $300 | $(196) | (65)% | | Product Revenue | $35,298 | $28,464 | $6,834 | 24% | | License & Dev Revenue | $7,293 | $6,107 | $1,186 | 19% | | **Total Revenue** | **$42,591** | **$34,571** | **$8,020** | **23%** | - Water Segment product revenue increased by **$2.1 million (12%)** for the three months and **$7.0 million (25%)** for the six months, primarily due to higher MPD and OEM shipments[137](index=137&type=chunk)[138](index=138&type=chunk) [Product Gross Profit and Gross Margin](index=30&type=section&id=Product%20Gross%20Profit%20and%20Gross%20Margin) Product gross profit increased by **20.2%** to **$13.7 million** for the three months ended June 30, 2019, and by **29.8%** to **$24.9 million** for the six months, with gross margin improving by **580 basis points** to **71.5%** for the three months and by **310 basis points** to **70.5%** for the six months, driven by favorable mix and efficiencies Product Gross Profit and Gross Margin (Three Months Ended June 30, in thousands) | Segment | 2019 Gross Profit | 2019 Gross Margin | 2018 Gross Profit | 2018 Gross Margin | Change in Gross Profit ($) | | :-------- | :---------------- | :---------------- | :---------------- | :---------------- | :------------------------- | | Water | $13,743 | 71.5% | $11,476 | 67.0% | $2,267 | | Oil & Gas | $0 | 0% | $(46) | (15.9)% | $46 | | **Total** | **$13,743** | **71.5%** | **$11,430** | **65.7%** | **$2,313** | Product Gross Profit and Gross Margin (Six Months Ended June 30, in thousands) | Segment | 2019 Gross Profit | 2019 Gross Margin | 2018 Gross Profit | 2018 Gross Margin | Change in Gross Profit ($) | | :-------- | :---------------- | :---------------- | :---------------- | :---------------- | :------------------------- | | Water | $24,964 | 70.9% | $19,296 | 68.5% | $5,668 | | Oil & Gas | $(84) | (80.8)% | $(122) | (40.7)% | $38 | | **Total** | **$24,880** | **70.5%** | **$19,174** | **67.4%** | **$5,706** | - Product gross margin increased by **580 basis points** (to **71.5%**) for the three months and **310 basis points** (to **70.5%**) for the six months, driven by favorable price/product mix, manufacturing efficiencies, and higher production in the Water Segment[140](index=140&type=chunk)[141](index=141&type=chunk) [Operating Expenses](index=31&type=section&id=Operating%20Expenses) Total operating expenses increased by **26%** to **$13.3 million** for the three months ended June 30, 2019, and by **14%** to **$25.5 million** for the six months, primarily due to a **$1.9 million (52%)** increase in R&D expenses and higher corporate G&A Total Operating Expenses (Three Months Ended June 30, in thousands) | Category | 2019 | 2018 | | :------------------------- | :------ | :------ | | Total Operating Expenses - Segment | $8,418 | $6,481 | | Corporate Operating Expenses | $4,900 | $4,067 | | **Total Operating Expenses** | **$13,318** | **$10,548** | Total Operating Expenses (Six Months Ended June 30, in thousands) | Category | 2019 | 2018 | | :------------------------- | :------ | :------ | | Total Operating Expenses - Segment | $15,552 | $13,293 | | Corporate Operating Expenses | $9,917 | $9,079 | | **Total Operating Expenses** | **$25,469** | **$22,372** | - Research and development expense increased by **$1.9 million (52%)** for the three months and **$2.2 million (29%)** for the six months, driven by higher employee-related expenses, depreciation, and investment in supplies and equipment for new technologies and existing product improvements[147](index=147&type=chunk)[152](index=152&type=chunk) - Corporate operating expenses increased by **$0.8 million (20%)** for the three months and **$0.8 million (9%)** for the six months, primarily due to higher employee headcount and related general and administrative expenses[146](index=146&type=chunk)[151](index=151&type=chunk) [Other Income, Net](index=33&type=section&id=Other%20Income,%20Net) Total other income, net, increased by **$0.1 million** to **$0.480 million** for the three months ended June 30, 2019, and by **$0.4 million** to **$0.979 million** for the six months, primarily due to higher interest income from increased investment balances Total Other Income, Net (in thousands) | Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Interest Income | $528 | $373 | $1,051 | $674 | | Interest Expense | $0 | $(1) | $0 | $(1) | | Other Non-Operating (Expense) Income, Net | $(48) | $9 | $(72) | $(44) | | **Total Other Income, Net** | **$480** | **$381** | **$979** | **$629** | - The increase in total other income, net, was primarily due to higher interest income on increased investment balances[153](index=153&type=chunk)[154](index=154&type=chunk) [Income Taxes](index=33&type=section&id=Income%20Taxes) For the six months ended June 30, 2019, the company recognized an income tax expense of **$1.3 million** (effective rate of **17.1%**), contrasting with a significant income tax benefit of **$11.5 million** (effective rate of **-324.4%**) in the prior year due to international restructuring - For the six months ended June 30, 2019, the company recognized an income tax expense of **$1.3 million**, including a **$0.4 million** discrete tax benefit[155](index=155&type=chunk) - The effective tax rate for the six months ended June 30, 2019, was **17.1%** (**21.6%** excluding discrete items)[156](index=156&type=chunk) - For the six months ended June 30, 2018, the company recognized an income tax benefit of **$11.5 million** (effective rate of **-324.4%**), which included an **$11.9 million** tax benefit from changing the tax status of its Irish subsidiaries due to international restructuring under the 2017 U.S. Tax Cuts and Jobs Act[156](index=156&type=chunk) [Liquidity and Capital Resources](index=34&type=section&id=Liquidity%20and%20Capital%20Resources) The company's primary liquidity sources include **$23.3 million** in cash, **$71.9 million** in short-term investments, and a **$16.0 million** revolving credit line, with cash from operating activities improving and financing activities providing **$4.5 million** due to no share repurchases in 2019 [Overview](index=34&type=section&id=Overview) The company's main liquidity sources are customer payments, common stock issuance, and a strong balance of cash, cash equivalents (**$23.3 million**), and short-term investments (**$71.9 million**), with cash not needed for current operations invested in high-quality debt instruments - Principal liquidity sources as of June 30, 2019, included **$23.3 million** in unrestricted cash and cash equivalents, **$71.9 million** in short-term investments, and **$15.2 million** in net accounts receivable[157](index=157&type=chunk) - Cash not needed for current operations is invested predominantly in high-quality, investment-grade, marketable debt instruments to preserve principal and liquidity[157](index=157&type=chunk) [Loan Agreements](index=34&type=section&id=Loan%20Agreements) The company maintains a Loan and Pledge Agreement providing a **$16.0 million** committed revolving credit line, amended to extend the termination date to June 30, 2022, with no outstanding debt as of June 30, 2019 - The company has a Loan and Pledge Agreement with a committed revolving credit line of **$16.0 million** and an uncommitted line of **$4.0 million**[158](index=158&type=chunk) - The agreement was amended on June 17, 2019, to extend the termination date to June 30, 2022, and limit the term of any Stand-By Letter of Credit (SBLC) to three years[160](index=160&type=chunk) - As of June 30, 2019, no debt was outstanding under the Loan and Pledge Agreement, though SBLCs are deducted from the total revolving credit line[160](index=160&type=chunk) [Stand-By Letters of Credit](index=35&type=section&id=Stand-By%20Letters%20of%20Credit) As of June 30, 2019, the company had **$9.2 million** in outstanding stand-by letters of credit (SBLCs) with various financial institutions, requiring a corresponding U.S. investment balance - Outstanding stand-by letters of credit totaled **$9.2 million** as of June 30, 2019, requiring a matching U.S. investment balance[161](index=161&type=chunk) [Share Repurchase Programs](index=35&type=section&id=Share%20Repurchase%20Programs) The company's Board of Directors authorized a **$10.0 million** share repurchase program in March 2018, under which **1.2 million** shares were repurchased for **$10.0 million**, with no other program in place as of June 30, 2019 - Under the March 2018 Authorization, the company repurchased **1.2 million** shares for **$10.0 million**, and this authorization expired in September 2018, with no new program in place as of June 30, 2019[162](index=162&type=chunk) [Cash Flows](index=35&type=section&id=Cash%20Flows) Net cash provided by operating activities improved by **$1.7 million** for the six months ended June 30, 2019, despite lower net income, driven by positive changes in deferred income taxes and prepaid assets, and financing activities provided **$4.5 million** due to no share repurchases in 2019 Cash Flows Summary (Six Months Ended June 30, in thousands) | Metric | 2019 | 2018 | | :--------------------------------------- | :-------- | :-------- | | Net cash provided by (used in) operating activities | $3 | $(1,670) | | Net cash used in investing activities | $(3,241) | $(4,015) | | Net cash provided by (used in) financing activities | $4,519 | $(7,691) | | Net change in cash, cash equivalents and restricted cash | $1,281 | $(13,354) | | Cash, cash equivalents and restricted cash, end of period | $23,419 | $17,272 | - Cash provided by operating activities improved by **$1.7 million** for the six months ended June 30, 2019, driven by positive effects from changes in deferred income taxes (**$12.8 million**) and prepaid assets (**$11.5 million**)[166](index=166&type=chunk) - Net cash provided by financing activities increased by **$12.2 million**, primarily due to no common stock repurchases in 2019 (compared to **$10.0 million** in 2018) and higher proceeds from common stock issuance (**$2.2 million**)[170](index=170&type=chunk) [Liquidity and Capital Resource Requirements](index=36&type=section&id=Liquidity%20and%20Capital%20Resource%20Requirements) Management believes current resources and cash from operations will meet anticipated capital requirements for the next 12 months, but additional capital may be needed for future growth, acquisitions, or rapid market adoption of new technologies - Existing resources and cash generated from operations are believed to be sufficient to meet anticipated liquidity needs for at least the next 12 months[171](index=171&type=chunk) - Additional capital may be required for future growth, acquisitions, or funding investments in latest technology due to rapid market adoption, potentially necessitating equity or debt financing[171](index=171&type=chunk) [Off-Balance Sheet Arrangements](index=36&type=section&id=Off-Balance%20Sheet%20Arrangements) The company did not have any off-balance sheet arrangements with unconsolidated entities or financial partnerships during the reported periods - The company did not have any off-balance sheet arrangements during the periods presented[172](index=172&type=chunk) [Recent Accounting Pronouncements](index=36&type=section&id=Recent%20Accounting%20Pronouncements) This section refers to Note 1, 'Description of Business and Significant Accounting Policies,' for information regarding recent accounting pronouncements - Refer to Note 1, 'Description of Business and Significant Accounting Policies,' for details on recent accounting pronouncements[173](index=173&type=chunk) [Item 3 — Quantitative and Qualitative Disclosures About Market Risk](index=36&type=section&id=Item%203%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's market risk exposure primarily stems from foreign currency fluctuations and interest rate changes, with a hypothetical **1%** interest rate increase estimated to decrease fair value by **$0.3 million**, and credit risk mitigated through investment policy [Foreign Currency Risk](index=36&type=section&id=Foreign%20Currency%20Risk) The company is exposed to foreign currency fluctuations, particularly between the USD and various other currencies, potentially impacting international revenue and expenses, though it has not hedged this exposure due to historical insignificance - The company's foreign currency exposures are due to fluctuations in exchange rates for USD versus the British Pound, Saudi Riyal, United Arab Emirates Dirham, Euro, Chinese Yuan, Indian Rupee, and Canadian Dollar[175](index=175&type=chunk) - As international sales expand, a portion of revenue could be denominated in foreign currencies, increasing the impact of exchange rate changes on cash, cash equivalents, and operating results[175](index=175&type=chunk) - The company has not hedged its foreign currency exposure because foreign currency expenses have been insignificant, and exchange rate fluctuations have had minimal impact on operating results and cash flows to date[175](index=175&type=chunk) [Interest Rate Risk and Credit Risk](index=37&type=section&id=Interest%20Rate%20Risk%20and%20Credit%20Risk) The company's investment portfolio of **$73.4 million** in fixed-income marketable debt securities is subject to interest rate fluctuations; a hypothetical **1%** increase in interest rates would decrease its fair value by approximately **$0.3 million**, and credit risk is minimized through an investment policy - The company's investment portfolio of approximately **$73.4 million** in fixed-income marketable debt securities is subject to interest rate fluctuations[177](index=177&type=chunk) - A hypothetical **1%** increase in interest rates would result in an approximately **$0.3 million** decrease in the fair value of fixed-income debt securities as of June 30, 2019[177](index=177&type=chunk) - Credit risk is minimized through an investment policy that mandates high credit rating requirements and restricts exposure to any single corporate issuer by imposing concentration limits[177](index=177&type=chunk) [Item 4. — Controls and Procedures](index=37&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2019, with no material changes in internal control over financial reporting during the period [Evaluation of Disclosure Controls and Procedures](index=37&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) The President and Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of the company's disclosure controls and procedures and concluded they were effective as of June 30, 2019 - Management concluded that disclosure controls and procedures were effective as of June 30, 2019[178](index=178&type=chunk) [Changes in Internal Controls](index=37&type=section&id=Changes%20in%20Internal%20Controls) There were no material changes in internal control over financial reporting during the period covered by this report that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting - No material changes in internal control over financial reporting occurred during the period[179](index=179&type=chunk) PART II — OTHER INFORMATION [Item 1. — Legal Proceedings](index=38&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to Note 8, 'Commitments and Contingencies – Litigation,' in the Notes to Condensed Consolidated Financial Statements for an update on legal proceedings - For an update on litigation matters, refer to Note 8, 'Commitments and Contingencies – Litigation,' in the Notes to Condensed Consolidated Financial Statements[182](index=182&type=chunk) [Item 1A. — Risk Factors](index=38&type=section&id=Item%201A.%20Risk%20Factors) This section outlines significant risks across the company's operations, including those specific to the Water and Oil & Gas segments, as well as broader business risks such as supply chain, regulations, and international trade [Risk Related to our Water Segment](index=38&type=section&id=Risk%20Related%20to%20our%20Water%20Segment) Risks in the Water Segment include dependence on new desalination plant construction, intense competition, challenges in collecting unbilled receivables, and reliance on a limited number of suppliers for critical components - The Water Segment's revenue depends on new desalination plant construction, leading to significant variability due to factors like capital spending, project financing, and government regulations[184](index=184&type=chunk) - The Water Segment faces intense competition, particularly on price, which could harm its competitive position and reduce profits if competitors offer superior technology or more cost-effective products[184](index=184&type=chunk) - Inability to collect unbilled receivables, often due to holdback provisions in contracts with large engineering, procurement, and construction firms, could adversely affect operating results[184](index=184&type=chunk) - Reliance on a limited number of suppliers for critical components (e.g., vessel housings, stainless steel parts) poses risks related to delivery schedules, quality assurance, production costs, and supply continuity[186](index=186&type=chunk) [Risk Related to our Oil & Gas Segment](index=39&type=section&id=Risk%20Related%20to%20our%20Oil%20%26%20Gas%20Segment) Risks in the Oil & Gas Segment include potential failure to commercialize VorTeq and MTeq technologies, dependence on the VorTeq Licensee, and the adverse impact of prolonged deflation in global oil prices on market penetration and profitability - The company may not successfully commercialize the VorTeq technology, potentially failing to meet milestones and receive royalty payments from the VorTeq Licensee due to technological challenges in hydraulic fracturing[187](index=187&type=chunk) - Failure to successfully complete early stage testing of the MTeq, secure a long-term licensing agreement, or overcome technological challenges in mud pumping could prevent its commercialization[187](index=187&type=chunk)[188](index=188&type=chunk) - Prolonged deflation in global oil prices could delay or cancel projects by Oil & Gas Segment customers, negatively affecting market penetration, revenue, and profitability[189](index=189&type=chunk) [Risk Related to our Entire Business](index=40&type=section&id=Risk%20Related%20to%20our%20Entire%20Business) Broader business risks include the uncertainty of successful diversification into new fluid flow markets, significant fluctuations in operating results due to long and unpredictable sales cycles, and the challenge of managing fixed costs against variable demand, along with risks related to inventory, R&D, product defects, business interruptions, intellectual property, global operations, IT security, international tax, capital, and acquisitions - Diversification into new fluid flow markets like oil and gas may not be successful, potentially damaging reputation, limiting growth, and negatively affecting operating results[190](index=190&type=chunk) - Operating results may fluctuate significantly due to long and unpredictable sales cycles, making future results difficult to predict and potentially causing them to fall below expectations[190](index=190&type=chunk) - The business entails significant fixed costs that are difficult to reduce in the short term, while demand for products is variable, potentially leading to higher relative costs, excess manufacturing capacity, and lower gross profit margins during downturns[190](index=190&type=chunk)[192](index=192&type=chunk) - The company is exposed to risks related to product defects, which could lead to warranty claims in excess of provisions or significant damages, especially with new product introductions[195](index=195&type=chunk) - Global operations expose the company to risks from geopolitical instability, changes in U.S. fiscal and trade policies (e.g., tariffs on Chinese imports), and compliance with international laws like the Foreign Corrupt Practices Act (FCPA)[199](index=199&type=chunk)[201](index=201&type=chunk)[202](index=202&type=chunk) - If additional capital is needed to fund future growth or acquisitions, it may not be available on favorable terms or at all, potentially limiting the company's ability to grow or respond to challenges[210](index=210&type=chunk) [Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds](index=47&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There was no activity in the share repurchase program during the six months ended June 30, 2019, but **1.2 million** shares were repurchased for **$10.0 million** under the March 2018 Authorization, which expired in September 2018 - No activity occurred in the share repurchase program during the six months ended June 30, 2019[218](index=218&type=chunk) - Under the March 2018 Authorization (expired September 2018), **1.2 million** shares were repurchased for an aggregate cost of **$10.0 million**[218](index=218&type=chunk) [Item 3. — Defaults Upon Senior Securities](index=47&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) The company reported no defaults upon senior securities - No defaults upon senior securities were reported[219](index=219&type=chunk) [Item 4. — Mine Safety Disclosures](index=48&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Mine Safety Disclosures are not applicable[221](index=221&type=chunk) [Item 5. — Other Information](index=48&type=section&id=Item%205.%20Other%20Information) The company reported no other information - No other information was reported[222](index=222&type=chunk) [Item 6. — Exhibits](index=48&type=section&id=Item%206.%20Exhibits) This section refers to the Exhibit Index for a comprehensive list of exhibits filed or furnished with this report - Refer to the Exhibit Index for a list of exhibits filed or furnished with this report[223](index=223&type=chunk) [Exhibit Index](index=49&type=section&id=Exhibit%20Index) The Exhibit Index lists all documents filed or furnished with the Form 10-Q, including the Sixth Amendment to Loan and Pledge Agreement, certifications from executive officers (302 and 906), and various XBRL taxonomy extension documents Key Exhibits Filed | Exhibit Number | Exhibit Description | | :------------- | :---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | | 10.1 | Sixth Amendment to Loan and Pledge Agreement between Energy Recovery, Inc. and Citibank, N.A. | | 31.1 | Certification of Principal Executive Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 31.2 | Certification of Principal Financial Officer, pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | | 32.1* | Certification of Principal Executive Officer and Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | [Signatures](index=50&type=section&id=Signatures) The report is duly signed on behalf of Energy Recovery, Inc. by Chris Gannon, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer, on August 2, 2019 - The report was signed by Chris Gannon, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer, on August 2, 2019[232](index=232&type=chunk)

Financial Data and Key Metrics Changes - Total revenue for Q2 2019 was $22.8 million, representing a 10% year-over-year growth. Year-to-date revenue reached $42.6 million, a 23% increase compared to the first half of 2018 [6] - Product gross margin was 71% and overall gross margin was 76% for the quarter, showing strength despite cost pressures [6] - GAAP net income for the quarter was $3.7 million, or $0.07 per diluted share [6] Business Line Data and Key Metrics Changes - The Water business generated $19.2 million in revenue during Q2, a 12% growth year-over-year, with year-to-date revenues of $35.2 million, a 25% increase [7] - The Oil & Gas business generated $3.6 million in revenue for Q2, a 6% increase year-over-year, primarily due to ASC 606 recognition of VorTeq license revenue [8] Market Data and Key Metrics Changes - The company noted a slowdown in growth in the Water business compared to the previous quarter, which had a 45% increase, but full-year revenue expectations remain in the low-teens percentage growth range compared to fiscal year 2018 [7] Company Strategy and Development Direction - The company is focused on growth and reinvestment in the Water business and on the commercialization of VorTeq in the Oil & Gas business [12] - There is a strong backlog and pipeline in the Water business, driven by macro demand trends such as population growth and climate change, leading to increased capital investment in desalination [13][14] - The company is investing in water infrastructure and expanding capacity to meet customer demand for the next three years [19] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the growth cycle in the Water business, which is expected to continue for the next 2 to 3 years due to increasing water scarcity [13][20] - In the Oil & Gas sector, the focus remains on advancing VorTeq technology and preparing for commercialization, with significant progress made in addressing technical challenges [21][28] Other Important Information - Operating expenditures grew 26% year-on-year to $13.3 million for the quarter, largely due to investments in R&D [9] - The company maintained a strong cash position, with cash and securities balance increasing from $91.5 million to $96.8 million [11] Q&A Session Summary Question: How does the company approach internal milestones for VorTeq? - Management highlighted material progress in VorTeq development and confidence in meeting technical requirements before year-end, emphasizing the importance of the Houston facility for testing [30][31] Question: How is the company scaling for commercialization? - The company is developing internal manufacturing capabilities and ensuring supplier capacity for key components, focusing on the anticipated demand for the first several years [32][33] Question: Are there potential applications for PX technology in wastewater treatment? - Management indicated that while they are exploring other industries, the current focus remains on SWRO and expanding the product offering [36][38] Question: Will the company build another missile for VorTeq testing? - Management stated that they do not see the need for another missile at this time and will finalize the design before making further investments [39][41] Question: What are the expected operating expenses for the Commercial Development Center pre-commercialization? - Management indicated that operating expenses would not significantly increase prior to commercialization, with fluctuations depending on testing activities [45] Question: What is the expected CapEx budget for the Water side in 2020? - Management suggested that CapEx for Water would likely remain flat compared to 2019, estimating around $10 million [47]

Financial Data and Key Metrics Changes - For Q1 2019, the company generated total revenue of $19.8 million, representing a 43% year-over-year increase [9] - The product gross margin was 69%, and the overall gross margin was 75% [9] - GAAP net income for the quarter was $2.7 million, or $0.05 per diluted share [9] - Operating cash flow was negative $6 million, consistent with historical trends [13] - Cash and securities balance decreased from $96.7 million at the end of 2018 to $91.5 million on March 31, 2019, while remaining debt-free [14] Business Line Data and Key Metrics Changes - The water business generated $16 million in revenues for Q1 2019, a growth of 45% year-over-year [10] - The oil and gas business generated total revenue of $3.8 million, with $3.7 million related to VorTeq license revenue recognition [11] - Mega-projects accounted for 60% of water revenue, OEM contributed 28%, and aftermarket made up 12% [46] Market Data and Key Metrics Changes - The company expects potable water demand to increase by roughly 30% by 2050, driven by factors such as population growth and climate change [18] - The transition from thermal desalination to seawater reverse osmosis (SWRO) is creating significant demand for new SWRO mega projects, estimated at 100 to 150 to maintain current water supply levels [21] - The company anticipates a potential growth forecast extension to the low-teens percentage range due to accelerating project activity [23] Company Strategy and Development Direction - The company is focused on growth and reinvestment in its water business and the commercialization of VorTeq in the oil and gas sector [15] - Plans to double manufacturing capacity over the next 12 to 18 months to meet anticipated future demand [25] - The company is actively pursuing water growth initiatives while maintaining a strong project backlog [26] Management's Comments on Operating Environment and Future Outlook - Management expressed confidence in the water business's growth potential, citing favorable industry demand trends and a strong project pipeline [17] - The company is addressing the growing supply-demand disconnect in water resources and is well-positioned to be part of the global supply solution [33] - Management indicated that the first quarter was a strong start to the year, with expectations for solid results moving forward [33] Other Important Information - The company is expanding its testing capabilities for VorTeq at its facility outside Houston, which is expected to accelerate the commercialization timeline [27][30] - The company is hiring additional personnel to support increased testing and operational needs [43] Q&A Session Summary Question: Discussion on VorTeq commercialization and relationship with Liberty - Management emphasized the focus on commercializing VorTeq technology for both product licensees and partners, ensuring progress is made for both parties [35] Question: Clarification on prioritization of M1 and Liberty deployment - Management confirmed that testing and development for both parties are not mutually exclusive, and they are making progress with the current VorTeq system [41] Question: Update on staffing for the new commercial development center - Management stated plans to double personnel over the next year, with hiring for field personnel and machinists already underway [43] Question: Breakdown of water revenues - Management provided a revenue breakdown: mega-projects at 60%, OEM at 28%, and aftermarket at 12% [46] Question: Scalability of manufacturing investments - Management indicated that the current facility is designed to easily double capacity, with plans to add necessary machinery to support growth [49] Question: Update on addressable market expansion efforts - Management noted an increase in the total addressable market due to thermal retrofits and plans to explore adjacent markets in the future [51]

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (unaudited)](index=3&type=section&id=Item%201.%20Financial%20Statements%20(unaudited)) This section presents Energy Recovery, Inc.'s unaudited condensed consolidated financial statements for Q1 2019, including balance sheets, income, equity, cash flows, and related accounting notes [Condensed Consolidated Balance Sheets](index=3&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) Condensed Consolidated Balance Sheets (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total Assets | $179,841 | $180,022 | +$181 | | Total Liabilities | $66,463 | $60,102 | -$6,361 | | Total Stockholders' Equity | $113,378 | $119,920 | +$6,542 | | Cash and Cash Equivalents | $21,955 | $16,992 | -$4,963 | | Accounts Receivable, net | $10,212 | $17,408 | +$7,196 | | Contract Assets | $4,083 | $1,107 | -$2,976 | | Accrued Expenses and Other Current Liabilities | $8,019 | $5,112 | -$2,907 | | Contract Liabilities | $42,809 | $38,887 | -$3,922 | - Total assets increased slightly from **$179,841 thousand** at December 31, 2018, to **$180,022 thousand** at March 31, 2019, while total liabilities decreased by **$6,361 thousand**, leading to a **$6,542 thousand** increase in total stockholders' equity[9](index=9&type=chunk) [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) Condensed Consolidated Statements of Operations (in thousands, except EPS) | Metric (in thousands, except EPS) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Product Revenue | $16,072 | $11,058 | +$5,014 | +45.3% | | License and Development Revenue | $3,723 | $2,749 | +$974 | +35.4% | | Total Revenue | $19,795 | $13,807 | +$5,988 | +43.4% | | Product Gross Profit | $11,137 | $7,744 | +$3,393 | +43.8% | | Total Operating Expenses | $12,151 | $11,824 | +$327 | +2.8% | | Income (Loss) from Operations | $2,709 | $(1,331)| +$4,040 | N/A | | Net Income (Loss) | $2,654 | $(726) | +$3,380 | N/A | | Diluted EPS | $0.05 | $(0.01) | +$0.06 | N/A | - The company reported a net income of **$2,654 thousand** for Q1 2019, a significant improvement from a net loss of **$726 thousand** in Q1 2018, driven by a **43% increase in total revenue** and a shift to positive income from operations[13](index=13&type=chunk) [Condensed Consolidated Statements of Comprehensive Income (Loss)](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income%20(Loss)) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | Metric (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------- | :------ | :------ | :--------- | | Net Income (Loss) | $2,654 | $(726) | +$3,380 | | Other Comprehensive Income (Loss), net of tax: | | | | | Foreign currency translation adjustments | $(24) | $21 | -$45 | | Unrealized gain (loss) on investments | $84 | $(64) | +$148 | | Total Other Comprehensive Income (Loss) | $60 | $(43) | +$103 | | Comprehensive Income (Loss) | $2,714 | $(769) | +$3,483 | - Comprehensive income significantly improved to **$2,714 thousand** in Q1 2019 from a loss of **$769 thousand** in Q1 2018, primarily due to the positive net income and an unrealized gain on investments[15](index=15&type=chunk) [Condensed Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Stockholders'%20Equity) Condensed Consolidated Statements of Stockholders' Equity (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total Stockholders' Equity | $113,378 | $119,920 | +$6,542 | | Net Income | N/A | $2,654 | N/A | | Issuance of Common Stock | N/A | $2,157 | N/A | | Employee Stock-based Compensation | N/A | $1,671 | N/A | | Accumulated Deficit | $(14,466) | $(11,812) | +$2,654 | - Total stockholders' equity increased by **$6,542 thousand** to **$119,920 thousand** at March 31, 2019, primarily driven by net income, common stock issuance, and employee stock-based compensation[18](index=18&type=chunk) [Condensed Consolidated Statements of Cash Flows](index=8&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Condensed Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------- | :------ | :------ | :--------- | | Net Cash Used in Operating Activities | $(5,951) | $(6,333) | +$382 | | Net Cash (Used in) Provided by Investing Activities | $(1,165) | $11,062 | -$12,227 | | Net Cash Provided by (Used in) Financing Activities | $2,157 | $(1,898) | +$4,055 | | Net Change in Cash, Cash Equivalents and Restricted Cash | $(4,963) | $2,817 | -$7,780 | | Cash, Cash Equivalents and Restricted Cash, End of Period | $17,175 | $33,443 | -$16,268 | - Net cash used in operating activities decreased by **$0.4 million** in Q1 2019, while investing activities shifted from providing **$11.1 million** to using **$1.2 million**. Financing activities provided **$2.2 million**, a significant improvement from cash used in the prior year[21](index=21&type=chunk) [Notes to Condensed Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Condensed%20Consolidated%20Financial%20Statements) - The notes provide detailed explanations for the unaudited financial statements, prepared in accordance with SEC rules and GAAP, and should be read in conjunction with the 2018 Form 10-K[26](index=26&type=chunk) - Management's estimates and judgments are critical for revenue recognition, R&D asset capitalization, stock option valuation, goodwill impairment, inventory valuation, deferred taxes, and contingencies[29](index=29&type=chunk) - No material accounting pronouncements were adopted in Q1 2019, but ASU 2018-15 (Intangibles - Goodwill and Other - Internal-Use Software) is being evaluated for future impact[30](index=30&type=chunk)[34](index=34&type=chunk) [Note 1 — Description of Business and Significant Accounting Policies](index=9&type=section&id=Note%201%20%E2%80%94%20Description%20of%20Business%20and%20Significant%20Accounting%20Policies) - Energy Recovery, Inc. is an energy solutions provider for industrial fluid flow markets, specializing in fluid dynamics and advanced material science, with products converting wasted pressure energy and preserving pumping technology[24](index=24&type=chunk) - The financial statements are condensed and unaudited, prepared under SEC rules and GAAP, relying on management's judgments and estimates for key areas like revenue recognition and asset valuation[26](index=26&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) - No material accounting pronouncements were adopted in Q1 2019, and ASU 2018-15 regarding cloud computing implementation costs is under evaluation[30](index=30&type=chunk)[34](index=34&type=chunk) [Note 2 — Revenues](index=11&type=section&id=Note%202%20%E2%80%94%20Revenues) Revenue by Type and Segment (in thousands) | Revenue Type (in thousands) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :-------------------------- | :------ | :------ | :--------- | :--------- | | Total Revenue | $19,795 | $13,807 | +$5,988 | +43% | | Water Segment Revenue | $15,968 | $11,048 | +$4,920 | +45% | | Oil & Gas Segment Revenue | $3,827 | $2,759 | +$1,068 | +39% | | PX, pumps and turbo devices | $15,968 | $11,048 | +$4,920 | +45% | | License and development | $3,723 | $2,749 | +$974 | +35% | | Contract Assets (end of period) | $1,107 | $4,083 | -$2,976 | -73% | | Contract Liabilities (end of period) | $38,887 | $42,809 | -$3,922 | -9% | - Total revenue for Q1 2019 increased by **43% to $19,795 thousand**, with the Water segment contributing **81% of total revenue** and License and development revenue making up **19%**[40](index=40&type=chunk) - Contract assets decreased significantly from **$4,083 thousand to $1,107 thousand**, while contract liabilities also decreased from **$42,809 thousand to $38,887 thousand**[41](index=41&type=chunk)[42](index=42&type=chunk) - Estimated future revenue from unsatisfied performance obligations totals **$37,426 thousand**, with **$10,821 thousand** expected in the remaining nine months of 2019[47](index=47&type=chunk) [Note 3 — Income (Loss) Per Share](index=13&type=section&id=Note%203%20%E2%80%94%20Income%20(Loss)%20Per%20Share) Income (Loss) Per Share (in thousands, except per share) | Metric (in thousands, except per share) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------------------------- | :------ | :------ | :--------- | | Net income (loss) | $2,654 | $(726) | +$3,380 | | Basic weighted average common shares outstanding | 54,116 | 53,987 | +129 | | Diluted weighted average common shares outstanding | 55,368 | 53,987 | +1,381 | | Basic EPS | $0.05 | $(0.01) | +$0.06 | | Diluted EPS | $0.05 | $(0.01) | +$0.06 | | Anti-dilutive shares excluded | 2,461 | 5,414 | -2,953 | - Basic and diluted net income per share for Q1 2019 was **$0.05**, a significant improvement from a loss of **$(0.01)** in Q1 2018, with a decrease in anti-dilutive shares excluded from the calculation[54](index=54&type=chunk) [Note 4 — Other Financial Information](index=14&type=section&id=Note%204%20%E2%80%94%20Other%20Financial%20Information) Other Financial Information (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total cash, cash equivalents, and restricted cash | $22,138 | $17,175 | -$4,963 | | Inventories, net | $7,138 | $7,307 | +$169 | | Accrued expenses and other current liabilities | $8,019 | $5,112 | -$2,907 | | Accumulated other comprehensive loss | $(133) | $(73) | +$60 | - Total cash, cash equivalents, and restricted cash decreased by **$4,963 thousand**, while inventories slightly increased. Accrued expenses and other current liabilities decreased by **$2,907 thousand**, mainly due to lower payroll and commissions payable[59](index=59&type=chunk)[61](index=61&type=chunk)[63](index=63&type=chunk) - Accumulated other comprehensive loss improved from **$(133) thousand to $(73) thousand**, driven by unrealized gains on investments[68](index=68&type=chunk) [Note 5 — Investments and Fair Value Measurements](index=16&type=section&id=Note%205%20%E2%80%94%20Investments%20and%20Fair%20Value%20Measurements) Investments and Fair Value Measurements (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total cash, cash equivalents and marketable securities | $96,562 | $91,311 | -$5,251 | | Total available-for-sale investments | $74,607 | $74,319 | -$288 | | Gross Unrealized Losses (AFS) | $(90) | $(23) | +$67 | - Total cash, cash equivalents, and marketable securities decreased by **$5,251 thousand**. All investments are classified as available-for-sale, with no sales in Q1 2019 or Q1 2018[73](index=73&type=chunk)[74](index=74&type=chunk) - Fair value measurements are categorized into Level 1 and Level 2, with corporate notes and bonds and U.S. Treasury securities primarily in Level 2. Gross unrealized losses on available-for-sale investments decreased from **$(90) thousand to $(23) thousand**[80](index=80&type=chunk)[85](index=85&type=chunk)[86](index=86&type=chunk)[91](index=91&type=chunk) [Note 6 — Goodwill and Intangible Assets](index=20&type=section&id=Note%206%20%E2%80%94%20Goodwill%20and%20Intangible%20Assets) Goodwill and Intangible Assets (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Goodwill | $12,790 | $12,790 | $0 | | Intangible assets, net | $640 | $484 | -$156 | - The net carrying amount of goodwill remained stable at **$12.8 million**, with no impairment recorded. Net identifiable intangible assets decreased by **$156 thousand** due to accumulated amortization[95](index=95&type=chunk)[97](index=97&type=chunk) [Note 7 — Lines of Credit](index=21&type=section&id=Note%207%20%E2%80%94%20Lines%20of%20Credit) - The company has a Loan and Pledge Agreement with a committed revolving credit line of **$16.0 million** and an uncommitted line of **$4.0 million**, extended to March 31, 2020[101](index=101&type=chunk) - Amendments in April 2019 clarified terms and allowed Letters of Credit to extend up to two years and Standby Letters of Credit (SBLCs) up to one year past the loan agreement expiration[101](index=101&type=chunk) - No debt was outstanding under the agreement as of March 31, 2019, but **$10.7 million** in SBLCs were outstanding, which are deducted from the revolving credit line[102](index=102&type=chunk) [Note 8 — Commitments and Contingencies](index=22&type=section&id=Note%208%20%E2%80%94%20Commitments%20and%20Contingencies) Commitments and Contingencies (in thousands) | Metric (in thousands) | Dec 31, 2018 | Mar 31, 2019 | Change ($) | | :-------------------- | :----------- | :----------- | :--------- | | Total lease liabilities | N/A | $13,265 | N/A | | Accrued product warranty reserve | $478 | $571 | +$93 | | Open cancellable purchase order arrangements | N/A | $8,400 | N/A | | Stand-by letters of credit | $8,800 | $10,700 | +$1,900 | - The company has operating lease obligations totaling **$13,265 thousand** and is constructing a new commercial development center in Katy, Texas, with future lease payments detailed[107](index=107&type=chunk) - Accrued product warranty reserve increased to **$571 thousand**, and outstanding stand-by letters of credit for guarantees increased to **$10.7 million**[109](index=109&type=chunk)[115](index=115&type=chunk) - The company is involved in legal proceedings, including an appeal related to a former SVP's labor claim, for which a potential loss has been accrued and is not believed to be material in excess of amounts accrued[119](index=119&type=chunk)[121](index=121&type=chunk) [Note 9 — Income Taxes](index=25&type=section&id=Note%209%20%E2%80%94%20Income%20Taxes) Income Taxes | Metric | Q1 2019 | Q1 2018 | | :-------------- | :------ | :------ | | Effective tax rate | 17.3% | 33.0% | | Pretax book income (loss) | $3.2M | $(1.1)M | | Effective tax rate (excl. discrete benefits) | 21.3% | (3.5)% | - The effective tax rate for Q1 2019 was **17.3%** on pretax income of **$3.2 million**, significantly lower than **33.0%** on a pretax loss of **$1.1 million** in Q1 2018. This reduction is attributed to reporting losses in Q1 2018 in a jurisdiction where tax benefits could not be recognized[125](index=125&type=chunk) [Note 10 — Stock-based Compensation](index=26&type=section&id=Note%2010%20%E2%80%94%20Stock-based%20Compensation) Stock-based Compensation (in thousands) | Metric (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------- | :------ | :------ | :--------- | | Total stock-based compensation expense | $1,678 | $2,243 | -$565 | | Unamortized Compensation Costs | $11,621 | N/A | N/A | | Total grant date fair value of vested stock options and RSUs | $2,291 | $1,770 | +$521 | | Stock options outstanding (shares) | 4,670 | N/A | N/A | | RSUs outstanding (shares) | 675 | N/A | N/A | - Total stock-based compensation expense decreased by **$0.565 million** in Q1 2019, primarily due to a **$0.7 million** reduction from a non-recurring charge in Q1 2018 related to the former CEO's equity awards[129](index=129&type=chunk)[188](index=188&type=chunk) - Unamortized stock-based compensation costs totaled **$11,621 thousand**, and the total grant date fair value of vested stock options and RSUs increased to **$2,291 thousand**[132](index=132&type=chunk)[137](index=137&type=chunk) [Note 11 — Business Segment and Geographic Information](index=28&type=section&id=Note%2011%20%E2%80%94%20Business%20Segment%20and%20Geographic%20Information) Business Segment and Geographic Information (in thousands) | Metric (in thousands) | Q1 2019 Water | Q1 2019 Oil & Gas | Q1 2018 Water | Q1 2018 Oil & Gas | | :-------------------- | :------------ | :---------------- | :------------ | :---------------- | | Product revenue | $15,968 | $104 | $11,048 | $10 | | License and development revenue | $0 | $3,723 | $0 | $2,749 | | Operating income (loss) | $8,077 | $(351) | $5,668 | $(1,987) | - The company operates in Water and Oil & Gas segments. Water segment product revenue increased by **45% to $15,968 thousand**, and Oil & Gas product revenue increased by **940% to $104 thousand**[147](index=147&type=chunk)[148](index=148&type=chunk) - License and development revenue, primarily from Oil & Gas, increased by **35% to $3,723 thousand**. Operating income for Water was **$8,077 thousand**, while Oil & Gas had an operating loss of **$(351) thousand**[148](index=148&type=chunk) - International customers accounted for **98% of product revenue** in Q1 2019, with the United Arab Emirates (**30%**), Chile (**22%**), and Saudi Arabia (**12%**) being major contributors[151](index=151&type=chunk) [Note 12 — Concentrations](index=30&type=section&id=Note%2012%20%E2%80%94%20Concentrations) Customer and Vendor Concentrations | Customer/Vendor | Segment | Q1 2019 Product Revenue (%) | Dec 31, 2018 A/R & Contract Assets (%) | Mar 31, 2019 A/P (%) | | :---------------- | :-------- | :-------------------------- | :------------------------------------- | :------------------- | | Customer A | Water | 10% | N/A | N/A | | Customer C | Water | 29% | ** | N/A | | Customer D | Water | 14% | N/A | N/A | | Customer H | Water | 12% | N/A | N/A | | One Int'l O&G Customer | Oil & Gas | 100% (License & Dev) | N/A | N/A | | Customer E | Water | N/A | 20% | N/A | | Customer G | Oil & Gas | N/A | 26% | N/A | | Vendor A | Oil & Gas | N/A | N/A | 16% | | Vendor C | Oil & Gas | N/A | N/A | 11% | | Vendor D | Water | N/A | N/A | 11% | - In Q1 2019, Customer C, D, H, and A in the Water segment each accounted for **10% or more of product revenue**. One international Oil & Gas customer accounted for **100% of license and development revenue**[156](index=156&type=chunk) - Customer G (Oil & Gas) and Customer E (Water) were significant for accounts receivable and contract assets at Dec 31, 2018. Vendor A, C (Oil & Gas), and D (Water) were notable for accounts payable at Mar 31, 2019[158](index=158&type=chunk)[159](index=159&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=31&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses the company's Q1 2019 financial performance, highlighting revenue and operating income improvements, segment results, expense changes, and liquidity and capital resources [Overview](index=33&type=section&id=Overview) - Energy Recovery, Inc. is an engineering-driven technology company providing solutions for industrial fluid flow processes, focusing on cost savings and operational efficiencies[171](index=171&type=chunk) - The company operates in two markets: Water (seawater, brackish, and wastewater reverse osmosis desalination) and Oil & Gas (hydraulic fracturing, gas processing, and chemical processing)[171](index=171&type=chunk)[173](index=173&type=chunk) - The Water segment's revenue is primarily from ERDs and pumps sold to mega-project, OEM, and After-Market channels, with MPD sales typically ranging from **$1 million to $10 million**[174](index=174&type=chunk) - The Oil & Gas segment's Q1 2019 revenue is primarily from license and development, following significant R&D and sales & marketing investments to expand into the oil & gas industry[175](index=175&type=chunk) - A new commercial development center for Oil & Gas field testing and training is under construction in Texas, expected to be completed in 2019[172](index=172&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) - Total revenue increased by **$5.988 million (43%) to $19.795 million** in Q1 2019, driven by strong performance in both product and license/development revenue[177](index=177&type=chunk) - Product revenue grew by **$5.014 million (45%) to $16.072 million**, with the Water segment contributing **$4.9 million** of this increase due to higher MPD shipments[178](index=178&type=chunk)[179](index=179&type=chunk) - License and development revenue increased by **$0.974 million (35%) to $3.723 million**, primarily due to higher costs incurred based on input measure of progress[181](index=181&type=chunk) - Product gross profit increased by **$3.4 million (44%) to $11.137 million**, mainly from higher MPD volume, while product gross margin slightly decreased to **69.3%** from **70.0%**[183](index=183&type=chunk)[185](index=185&type=chunk) - Operating income significantly improved to **$7.726 million** in Q1 2019 from **$3.681 million** in Q1 2018, reflecting the revenue growth[187](index=187&type=chunk) [Total Revenue](index=34&type=section&id=Total%20Revenue) Total Revenue by Segment (in thousands) | Revenue Type (in thousands) | Q1 2019 | % of Total Revenue (2019) | Q1 2018 | % of Total Revenue (2018) | Change ($) | Change (%) | | :-------------------------- | :------ | :------------------------ | :------ | :------------------------ | :--------- | :--------- | | Water | $15,968 | 81% | $11,048 | 80% | +$4,920 | +45% | | Oil & Gas (Product) | $104 | 0% | $10 | 0% | +$94 | +940% | | Product Revenue Total | $16,072 | 81% | $11,058 | 80% | +$5,014 | +45% | | License & Development Revenue | $3,723 | 19% | $2,749 | 20% | +$974 | +35% | | Total Revenue | $19,795 | 100% | $13,807 | 100% | +$5,988 | +43% | - Total revenue for Q1 2019 increased by **43% to $19,795 thousand**, with the Water segment's product revenue growing by **45%** and Oil & Gas product revenue by **940%**[177](index=177&type=chunk) - License and development revenue also saw a **35% increase**, contributing **19% to total revenue**[177](index=177&type=chunk) [Product Gross Profit and Margin](index=34&type=section&id=Product%20Gross%20Profit%20and%20Margin) Product Gross Profit and Margin | Metric | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :-------------- | :------ | :------ | :--------- | :--------- | | Product Gross Profit | $11,137 | $7,744 | +$3,393 | +43.8% | | Product Gross Margin | 69.3% | 70.0% | -0.7% | N/A | - Product gross profit increased by **$3.4 million (44%)** in Q1 2019, primarily due to a **$4.8 million** impact from higher MPD volume, partially offset by lower OEM and AM volumes and an unfavorable price and mix impact[183](index=183&type=chunk) - Product gross margin slightly decreased to **69.3%** in Q1 2019 from **70.0%** in Q1 2018[182](index=182&type=chunk)[185](index=185&type=chunk) [Operating Expenses](index=36&type=section&id=Operating%20Expenses) Operating Expenses (in thousands) | Operating Expense (in thousands) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :------------------------------- | :------ | :------ | :--------- | :--------- | | General and Administrative | $5,579 | $5,837 | -$258 | -4.4% | | Sales and Marketing | $2,162 | $1,912 | +$250 | +13.1% | | Research and Development | $4,254 | $3,917 | +$337 | +8.6% | | Amortization of Intangible Assets | $156 | $158 | -$2 | -1.3% | | Total Operating Expenses | $12,151 | $11,824 | +$327 | +2.8% | - General and administrative expense decreased by **$0.3 million (4%)** due to a **$0.7 million** reduction in stock-based compensation from a non-recurring charge in Q1 2018[188](index=188&type=chunk) - Sales and marketing expense increased by **$0.2 million (13%)** due to higher sales incentives in the Water segment[189](index=189&type=chunk) - Research and development expense increased by **$0.3 million (9%)** due to higher employee-related expenses for water growth initiatives, partially offset by timing of VorTeq R&D testing[190](index=190&type=chunk) [Other Income (Expense), net](index=38&type=section&id=Other%20Income%20(Expense),%20net) Other Income (Expense), net (in thousands) | Other Income (Expense) (in thousands) | Q1 2019 | Q1 2018 | Change ($) | Change (%) | | :------------------------------------ | :------ | :------ | :--------- | :--------- | | Interest Income | $523 | $301 | +$222 | +74% | | Other Non-Operating Expense, net | $(24) | $(53) | +$29 | -55% | | Total Other Income, net | $499 | $248 | +$251 | +101% | - Total other income, net, increased by **$0.251 million (101%)** in Q1 2019, primarily driven by a **74% increase in interest income** due to higher investment balances[194](index=194&type=chunk) [Income Taxes](index=38&type=section&id=Income%20Taxes) Income Taxes | Metric | Q1 2019 | Q1 2018 | | :-------------- | :------ | :------ | | Effective tax rate | 17.3% | 33.0% | | Pretax book income (loss) | $3.2M | $(1.1)M | | Effective tax rate (excl. discrete benefits) | 21.3% | (3.5)% | - The effective tax rate for Q1 2019 was **17.3%** on pretax income of **$3.2 million**, significantly lower than **33.0%** on a pretax loss of **$1.1 million** in Q1 2018. This is due to reporting losses in Q1 2018 in a jurisdiction where tax benefits could not be recognized[195](index=195&type=chunk) [Liquidity and Capital Resources](index=39&type=section&id=Liquidity%20and%20Capital%20Resources) - Primary liquidity sources at March 31, 2019, included **$17.0 million** in unrestricted cash and cash equivalents, **$71.8 million** in short-term investments, and **$17.4 million** in accounts receivable[198](index=198&type=chunk) - The company has a **$16.0 million** committed and **$4.0 million** uncommitted revolving credit line, with no outstanding debt but **$10.7 million** in SBLCs deducted from the line[200](index=200&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk) - Cash used in operating activities decreased by **$0.4 million** to **$(5.951) million** in Q1 2019, primarily due to increased net income and timing of collections[208](index=208&type=chunk) - Cash used in investing activities was **$1.2 million** in Q1 2019, a shift from **$11.1 million** provided in Q1 2018, mainly due to higher purchases of marketable securities and capital expenditures[211](index=211&type=chunk)[212](index=212&type=chunk) - Cash provided by financing activities was **$2.2 million** in Q1 2019, driven by proceeds from common stock issuance through stock option exercises, compared to cash used in Q1 2018 due to share repurchases[213](index=213&type=chunk)[214](index=214&type=chunk) - Management believes existing resources and cash from operations will be sufficient for the next 12 months, but additional financing may be sought for future acquisitions or rapid market adoption of new technology[216](index=216&type=chunk) [Overview](index=39&type=section&id=Liquidity%20and%20Capital%20Resources%20-%20Overview) - The company's primary sources of cash are customer payments and common stock issuance[197](index=197&type=chunk) - As of March 31, 2019, principal liquidity sources included **$17.0 million** in unrestricted cash and cash equivalents, **$71.8 million** in short-term investments, and **$17.4 million** in net accounts receivable[198](index=198&type=chunk) - Short-term contract assets (unbilled receivables) were **$1.1 million** at March 31, 2019, down from **$4.1 million** at December 31, 2018[199](index=199&type=chunk) [Loan Agreements](index=39&type=section&id=Loan%20Agreements) - The company has a Loan and Pledge Agreement with a **$16.0 million** committed and **$4.0 million** uncommitted revolving credit line, extended to March 31, 2020[200](index=200&type=chunk)[201](index=201&type=chunk) - Amendments in April 2019 clarified terms and allowed Letters of Credit to extend up to two years and Standby Letters of Credit (SBLCs) up to one year past the loan agreement expiration[201](index=201&type=chunk) - As of March 31, 2019, no debt was outstanding, but **$10.7 million** in SBLCs were outstanding, deducted from the credit line, and the company was in compliance with loan covenants[202](index=202&type=chunk)[203](index=203&type=chunk) [Share Repurchase Programs](index=39&type=section&id=Share%20Repurchase%20Programs) - The March 2018 Authorization for share repurchases, allowing up to **$10.0 million**, expired in September 2018[204](index=204&type=chunk) - As of March 31, 2019, **1,193,102 shares** were repurchased for **$10.0 million** under this authorization[204](index=204&type=chunk) - Since initial authorization in 2012, the company has repurchased **5.5 million shares** for an aggregate of **$30.4 million**, with no other authorization currently in place[204](index=204&type=chunk) [Cash Flows](index=40&type=section&id=Cash%20Flows) Cash Flow Activity (in thousands) | Cash Flow Activity (in thousands) | Q1 2019 | Q1 2018 | Change ($) | | :-------------------------------- | :------ | :------ | :--------- | | Net cash used in operating activities | $(5,951) | $(6,333) | +$382 | | Net cash (used in) provided by investing activities | $(1,165) | $11,062 | -$12,227 | | Net cash provided by (used in) financing activities | $2,157 | $(1,898) | +$4,055 | | Net change in cash, cash equivalents and restricted cash | $(4,963) | $2,817 | -$7,780 | - Net cash used in operating activities decreased by **$0.4 million** in Q1 2019, primarily due to increased net income and timing of collections[208](index=208&type=chunk) - Net cash used in investing activities was **$1.2 million** in Q1 2019, a significant shift from **$11.1 million** provided in Q1 2018, mainly due to higher purchases of marketable securities and capital expenditures[211](index=211&type=chunk)[212](index=212&type=chunk) - Net cash provided by financing activities was **$2.2 million** in Q1 2019, driven by proceeds from common stock issuance through stock option exercises, contrasting with cash used in Q1 2018 due to share repurchases[213](index=213&type=chunk)[214](index=214&type=chunk) [Liquidity and Capital Resource Requirements](index=41&type=section&id=Liquidity%20and%20Capital%20Resource%20Requirements) - Management believes current resources and operating cash flow will cover capital requirements for at least the next 12 months[216](index=216&type=chunk) - Future capital needs depend on market acceptance, revenue growth, new product introductions, R&D expansion, market diversification, and potential acquisitions[216](index=216&type=chunk) - Additional equity or debt financing may be required for acquisitions or significant investments in new technology due to rapid market adoption[216](index=216&type=chunk) [Off-Balance Sheet Arrangements](index=42&type=section&id=Off-Balance%20Sheet%20Arrangements) - The company did not have any relationships with unconsolidated entities or financial partnerships for off-balance sheet arrangements during the periods presented[218](index=218&type=chunk) [Recent Accounting Pronouncements](index=42&type=section&id=Recent%20Accounting%20Pronouncements) - No material accounting pronouncements were adopted during the quarter ended March 31, 2019[219](index=219&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=43&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section discusses the company's exposure to market risks, primarily foreign currency risk and interest rate risk, noting potential impacts from exchange rate fluctuations and interest rate changes on its investment portfolio - Foreign currency risk exposures are due to fluctuations in USD versus the British Pound, Saudi Riyal, United Arab Emirates Dirham, Euro, Chinese Yuan, Indian Rupee, and Canadian Dollar[221](index=221&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[222](index=222&type=chunk) - The company has not hedged foreign currency exposure as its impact on operating results and cash flows has been insignificant to date[225](index=225&type=chunk) - The investment portfolio of **$74.3 million** (as of Mar 31, 2019) consists of fixed-income marketable debt securities, primarily investment-grade corporate and U.S. government instruments[226](index=226&type=chunk)[227](index=227&type=chunk) - A hypothetical **1% increase in interest rates** would result in an approximate **$0.3 million decrease** in the fair value of fixed-income debt securities[227](index=227&type=chunk) - Credit risk is minimized through a Board-approved investment policy mandating high credit ratings and concentration limits for single corporate issuers[226](index=226&type=chunk) [Item 4. Controls and Procedures](index=44&type=section&id=Item%204.%20Controls%20and%20Procedures) Management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures as of March 31, 2019, concluding they were effective with no material changes in internal control over financial reporting - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2019[230](index=230&type=chunk) - No material changes in internal control over financial reporting occurred during the period[230](index=230&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=45&type=section&id=Item%201.%20Legal%20Proceedings) This section refers to the litigation disclosures in the Annual Report on Form 10-K and provides an update on these matters by incorporating discussion from Note 8 of this quarterly report - Information on legal proceedings is provided in Note 16 of the Annual Report on Form 10-K and updated in Note 8 of this Form 10-Q[233](index=233&type=chunk)[234](index=234&type=chunk) [Item 1A. Risk Factors](index=45&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K filed on March 7, 2019 - No material changes in risk factors from those disclosed in the Annual Report on Form 10-K[235](index=235&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=45&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There was no activity related to the repurchase program for outstanding units during Q1 2019, and the March 2018 share repurchase authorization expired in September 2018 with no new authorization in place - No activity in the unit repurchase program during Q1 2019[236](index=236&type=chunk) - The March 2018 Authorization for share repurchases, totaling **$10.0 million** for **1,193,102 shares**, expired in September 2018[237](index=237&type=chunk) [Item 3. Defaults Upon Senior Securities](index=45&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities during the period - No defaults upon senior securities[238](index=238&type=chunk) [Item 4. Mine Safety Disclosures](index=45&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable to the company - Not applicable[239](index=239&type=chunk) [Item 5. Other Information](index=45&type=section&id=Item%205.%20Other%20Information) There is no other information to report under this item - None[240](index=240&type=chunk) [Item 6. Exhibits](index=45&type=section&id=Item%206.%20Exhibits) This section refers to the Exhibit Index for a list of documents filed or furnished with this report - See the Exhibit Index for a list of exhibits[241](index=241&type=chunk) [Signatures](index=46&type=section&id=Signatures) The report is duly signed on behalf of Energy Recovery, Inc. by Chris Gannon, President and Chief Executive Officer, and Joshua Ballard, Chief Financial Officer, on May 2, 2019 - Signed by Chris Gannon (President and CEO) and Joshua Ballard (CFO) on May 2, 2019[246](index=246&type=chunk) [Exhibit List](index=47&type=section&id=Exhibit%20List) This section provides a list of exhibits filed with the Form 10-Q, including amendments to the Loan and Pledge Agreement, certifications from executive officers, and XBRL documents - Includes Fourth and Fifth Amendments to Loan and Pledge Agreement[248](index=248&type=chunk) - Includes Certifications of Principal Executive Officer and Principal Financial Officer (pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a) and 18 U.S.C. Section 1350)[248](index=248&type=chunk) - Includes XBRL Instance Document and Taxonomy Extension Documents[248](index=248&type=chunk)