Energy Recovery Inc

Note 1 — Description of Business and Significant Accounting Policies

Energy Recovery, Inc. and its wholly-owned subsidiaries (the “Company” or “Energy Recovery”) designs and manufactures reliable,

high-performance solutions that provide cost savings through improved energy efficiency in commercial and industrial processes, with

applications across several industries. Leveraging the Company’s pressure exchanger technology, which generates little to no emissions

when operating, the Company’s solutions lowers costs, saves energy, reduces waste, and minimizes emissions for companies across a

variety of industrial processes. As the world coalesces around the urgent need to address climate change and its impacts, the Company is

helping companies reduce their energy consumption in their industrial processes, which in turn, reduces their carbon footprint. The Company

believes that its customers do not have to sacrifice quality and cost savings for sustainability and is committed to developing solutions that

drive long-term value – both financial and environmental. The Company’s solutions are marketed, sold in, or developed for, the fluid-flow and

gas markets, such as seawater and wastewater desalination, natural gas, chemical processing and CO 2-based refrigeration systems, under

the trademarks ERI®, PX®, Pressure Exchanger®, PX® Pressure Exchanger® (“PX”), Ultra PX™, PX G™, PX G1300™, PX PowerTrain™, AT™,

and Aquabold™. The Company owns, manufactures and/or develops its solutions, in whole or in part, inthe United States of America (the

“U.S.”).

Basis of Presentation

The Consolidated Financial Statements include the accounts of Energy Recovery, Inc. and its wholly-owned subsidiaries. All

intercompany accounts and transactions have been eliminated in consolidation.

Reclassifications

Certain prior period amounts have been reclassified in certain notes to the Consolidated Financial Statements to conform to the

current period presentation.

Use of Estimates

The preparation of Consolidated Financial Statements, in conformity with U.S. generally accepted accounting principles (“GAAP”),

requires the Company’s management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated

Financial Statements and accompanying notes.

The accounting policies that reflect the Company’s significant estimates and judgments and that the Company believes are the most

critical to aid in fully understanding and evaluating its reported financial results arerevenue recognition; valuation of stock options; useful life

and valuation of equipment; valuation and impairment of goodwill; deferred taxes and valuation allowances on deferred tax assets; and

evaluation and measurement of contingencies. Those estimates could change, and as a result, actual results could differ materially from

those estimates.

The Company is not aware of any specific event or circumstance that would require an update to its estimates or judgments or a

revision of the carrying value of its assets or liabilities as of February 21, 2024, the date of issuance of this Annual Report on Form 10-K.

These estimates may change, as new events occur and additional information is obtained. Actual results could differ materially from these

estimates under different assumptions or conditions. The Company undertakes no obligation to update publicly these estimates for any

reason after the date of this Annual Report on Form 10-K, except as required by law.

Significant Accounting Policies

Cash and Cash Equivalents

The Company considers all highly liquid investments with anoriginal or remaining contractual maturity on date of purchase of less

than or equal to three months to beclassified and presented as cash equivalents on the Consolidated Balance Sheets. Cash equivalents are

stated at cost, which approximates fair value. The Company’s cash and cash equivalents may include demand deposit accounts with large

financial institutions, institutional money market funds, U.S. treasury securities, corporate notes and bonds, and municipal and agency notes

and bonds. The Company monitors the creditworthiness of the financial institutions, institutional money market funds, and corporations in

which the Company invests its surplus funds. The Company has experienced no credit losses from its cash investments.

Short-term and Long-term Investments

The Company’s short-term and long-term investments consist primarily of investment-grade debt securities, such as U.S. treasury

securities, corporate notes and bonds, and municipal and agency notes and bonds, all of which are classified as available-for-sale.

Available-for-sale securities are carried at fair value. Amortization or accretion of premium or discount is included in other income (expense)

on the Consolidated Statements of Operations. Changes in the fair value of available-for-sale securities are reported as a component of

accumulated other comprehensive loss within stockholders’ equity on the Consolidated Balance Sheets. Realized gains and losses on the

sale of available-for-sale securities are determined by specific identification of the cost basis of each security.

The Company categorizes and classifies short-term and long-term available-for-sale investments on the Company’s Consolidated

Balance Sheets as follows:

•Short-term investments: Investments purchased with an original or remaining maturity at time of purchase greater than three

months and that are expected to mature within 12 months from the balance sheet date are classified as short-term investments

and are presented in current assets.

•Long-term investments: Investments purchased with an original or remaining maturity at time of purchase greater than three

months and that are expected to mature more than 12 months from the balance sheet date are classified as long-term

investments and are presented in non-current assets.

Allowance for Doubtful Accounts

The Company records a provision for doubtful accounts based on historical experience and an estimate of the expected credit losses.

In estimating the allowance for doubtful accounts, the Company considers, among other factors, the aging of the accounts receivable, its

historical write-offs, the credit worthiness of each customer, and general economic conditions. Account balances are charged off against the

allowance when the Company believes that it is probable that the receivable will not be recovered. Actual write-offs may be in excess of the

Company’s estimated allowance.