Energy Recovery Inc

Inventories

Inventories are stated at the lower of cost (using the first-in, first-out “FIFO” method) or net realizable value. The Company calculates

inventory valuation adjustments for excess and obsolete inventory based on current inventory levels, movement, expected useful lives, and

estimated future demand of the products and spare parts.

Property and Equipment

Property and equipment is recorded at cost and reduced by accumulated depreciation. Depreciation expense is recognized over the

estimated useful lives of the assets using the straight-line method. The following table presents the estimated useful life, or range of useful

lives, of the Company’s property and equipment. Maintenance and repairs are charged directly to expense as incurred.

(1)Leasehold improvements represent remodeling and retrofitting costs for leased office and manufacturing space and are depreciated over the shorter of

either the estimated useful lives or the term of the lease. See Note 7, Commitments and Contingencies-Operating Lease Obligations, for further

discussion of lease terms.

(2)Software purchased for internal use consists primarily of amounts paid for perpetual licenses to third-party software providers and implementation

costs.

Estimated useful lives are periodically reviewed, and when appropriate, changes are made prospectively. When certain events or

changes in operating conditions occur, asset lives may be adjusted and an impairment assessment may be performed on the recoverability of

the carrying amounts. The Company evaluates the recoverability of long-lived assets by comparing the carrying amount of an asset to

estimated future net undiscounted cash flows generated by the asset (asset group). If such assets are considered to be impaired, the

impairment recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets. The

evaluation of recoverability involves estimates of future operating cash flows based upon certain forecasted assumptions, including, but not

limited to, revenue growth rates, gross profit margins, and operating expenses.

Leases

The Company determines if an arrangement is a lease, or contains a lease, at the inception of the arrangement and evaluates

whether the lease is an operating or a finance lease at the commencement date. The Company recognizes right-of-use (“ROU”) assets and

lease liabilities for operating leases with terms greater than 1 year. ROU assets represent the Company’s right to use an asset for the lease

term, while lease liabilities represent the Company’s obligation to make lease payments. Operating lease ROU assets and liabilities are

recognized based on the present value of lease payments over the lease term at the lease commencement date. The Company uses the

implicit interest rate or, if not readily determinable, its incremental borrowing rate as of the lease commencement date to determine the

present value of lease payments. The incremental borrowing rate is based on the Company’s unsecured borrowing rate, adjusted for the

effects of collateral. Operating lease ROU assets are recognized net of any lease prepayments and incentives. Based on materiality, the

Company accounts for both the non-lease components and related lease components as a single lease component. Lease terms may

include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating lease

expense is recognized on a straight-line basis over the lease term.

The Company applies lease modifications that change the contractual terms and conditions of a lease, that were not part of the

original lease, and grants additional right of use with a price consistent with the market, as a new lease. These modifications will be

assessed in compliance with the above parameters. For other types of lease modification, the modified lease is reassessed and all new

assumptions are applied in the calculation of the updated lease liability and the ROU asset.

Our goodwill represents the excess of the purchase price of a business combination over the fair value of the net assets acquired.

Goodwill is not amortized but is evaluated annually (July 1) for impairment at the reporting unit level or when indicators of a potential

impairment are present. Goodwill impairment testing requires significant judgment and management estimates, including, but not limited to,

the determination of (i) the number of reporting units, (ii) the goodwill and other assets and liabilities to be allocated to the reporting units and

(iii) the fair values of the reporting units. The estimates and assumptions described above, along with other factors such as discount rates,

will significantly affect the outcome of the impairment tests and the amounts of any resulting impairment losses. We perform a quantitative

assessment of goodwill for impairment on an annual basis during the third quarter of each year, which would consist primarily of a discounted

cash flow (“DCF”) analysis to determine the fair value of the reporting unit’s goodwill. The forecast of future cash flows, which is based on the

Company’s best estimate of future net sales and operating expenses, is based primarily on expected category expansion, pricing, market

segment, and general economic conditions. In addition, the Company incorporates other significant inputs to its fair value calculations,

including discount rate and market multiples, to reflect current market conditions. Between annual tests, a qualitative assessment whenever

events or changes in circumstances indicate that the carrying amount may not be recoverable. If these interim qualitative factors were to

indicate that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying value, we would then perform a

quantitative assessment. To the extent the carrying amount of the reporting unit’s allocated goodwill exceeds the unit’s fair value, we

recognize an impairment of goodwill for the excess up to the amount of goodwill of that reporting unit.

Fair Value of Financial Instruments

The Company’s financial instruments include cash and cash equivalents, restricted cash, investments in marketable securities,

accounts receivable, and accounts payable. The carrying amounts for these financial instruments reported in the Consolidated Balance

Sheets approximate their fair values. See Note 5, “Investments and Fair Value Measurements,” for further discussion related to fair value.

Revenue Recognition

Revenues are recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount

that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Performance obligations are

identified and the total transaction price is allocated to the performance obligations at execution of the contract.

The Company’s payment terms vary based on the credit risk of its customer. For certain customer types, the Company requires

payment before the products or services are delivered to the customer. The Company performs an evaluation of customer credit worthiness

on an individual contract basis to assess whether collectability is reasonably assured at the inception of the contract. As part of this

evaluation, the Company considers many factors about the individual customer, including the underlying financial strength of the customer

and/or partnership consortium and the Company’s prior history or industry-specific knowledge about the customer and its supplier

relationships. For smaller projects, the Company requires the customer to remit payment generally within 30 to 60 days after product

delivery. In some cases, if credit worthiness cannot be determined, prepayment or other security is required.

Sales commissions are expensed as incurred when product revenue is earned. These costs are recorded within sales and marketing

expenses.

Arrangements with Multiple Performance Obligations and Termination for Convenience

The Company’s contracts with customers may include multiple performance obligations. For such arrangements, the Company

allocates revenue to each performance obligation based on its relative stand-alone selling price. The Company generally determines stand-

alone selling prices based on stand-alone observable sales to customers.

With respect to termination, the Company does not have the ability to cancel the contract for convenience. In general, customers can

cancel for convenience upon the payment of a termination fee that covers costs and profit.

Practical Expedients and Exemptions

The time period between when the Company transfers control of products to the customer and the payment for the products is, in

general, less than one year and, therefore, the practical expedient with respect to a financing component has been adopted by the Company.

With respect to taxes, the Company has made the policy election to exclude taxes from the measurement of the transaction price.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of

one year or less; and (ii) contracts for which the Company recognizes revenue at the amount to which the Company has the right to invoice

for services performed.

Contract Costs

The Company recognizes the incremental cost of obtaining contracts as an expense when incurred if the amortization period of the

assets that the Company otherwise would have recognized is one year or less. The costs of obtaining contracts are included in sales and

marketing expenses.

Product and Service Revenue Recognition

A contract is established by a written agreement (executed sales order, executed purchase order or stand-alone contract) with the

customer with fixed pricing, and a credit risk assessment is completed prior to the signing of the agreement to ensure that collectability is

reasonably assured.

The Company adheres to consistent pricing in the stand-alone sale of products and services. Performance obligations consist of

delivery of products, such as the Company’s PXs, hydraulic turbochargers, pumps and spare parts. Service obligations, such as

commissioning, which are not material, are deferred as contract liabilities until the services are performed.

The transfer of control for the Company’s products follows transfer of title which typically occurs upon shipment or delivery of the

equipment in accordance with International Commercial Terms (commonly referred to as “incoterms”). The specified product performance

criteria for the Company’s products pertain to the ability of the Company’s product to meet its published performance specifications and

warranty provisions, which the Company’s products have demonstrated on a consistent basis. This factor, combined with historical

performance metrics, provides the Company’s management with a reasonable basis to conclude that the products will perform satisfactorily

upon commissioning of the plant. Installation is relatively simple, requires no customization, and is performed by the customer under the

supervision of the Company’s personnel. Based on these factors, the Company concluded that performance has been completed upon

shipment or delivery when title transfers based on the shipping terms, and that product revenue is recognized at a point in time.

The Company does not provide its customers with a right of product return; however, the Company will accept returns of products that

are deemed to be damaged or defective when delivered that are covered by the terms and conditions of the product warranty. Product

warranty is provided consistent with the industry and is considered to be an assurance warranty, not a separate performance obligation.

Product returns and warranty charges have not been material.

For large projects, stand-alone contracts are utilized. For these contracts, consistent with industry practice, the Company’s customers

typically require their suppliers, including the Company, to accept contractual holdback provisions (also referred to as a retention payment)

whereby the final amounts due under the sales contract are remitted over extended periods of time or alternatively, stand-by letters of credit

are issued. These retention payments are generally 10% or less of the total contract amount and are due and payable based upon the

contractual milestone billing, generally between 24 to 36 months from the date of product delivery. These retention payments with

performance conditions are recorded as contract assets and align with the product warranty period. Given that they are not material in the

context of the contract, they are not considered to be a financing component.

Shipping and handling charges billed to customers are pass-through from the freight forwarder to the customer and are included in

product revenue. The cost of shipping to customers is included in product cost of revenue.

Contracts are sometimes modified for a change in scope or other requirements. The Company considers contract modifications to

exist when the modification either creates new or changes the existing enforceable rights and obligations. Any subsequent contract

modifications are analyzed to determine the treatment of the contract modification as a separate contract, prospectively or through a

cumulative catch-up adjustment.

Warranty Costs

The Company sells products with a limited warranty for a period ranging from 18 months tofive years. The Company accrues for

warranty costs based on estimated product failure rates, historical activity, and expectations of future costs. Periodically, the Company

evaluates and adjusts the warranty costs to the extent that actual warranty costs vary from the original estimates.

Stock-based Compensation

The Company measures and recognizes stock-based compensation expense based on the fair value measurement for all stock-

based awards made to its employees, non-employee consultants and directors, including restricted stock units (“RSUs”), and incentive stock

options over the requisite service period (typically the vesting period of the awards). The fair value of RSUs is based on the Company’s

common stock price on the date of grant. The fair value of stock options is calculated on the date of grant using a Black-Scholes (also

referred to as the “Black-Scholes-Merton”) model, which requires a number of complex assumptions including the expected life to exercise a

vested award based upon the Company’s exercise history, expected volatility based upon the Company’s historical stock prices, risk-free

interest rate based upon the U.S. Treasury rates, and the Company’s dividend yield. The estimation of awards that will ultimately vest

requires judgment, and to the extent that actual results or updated estimates differ from the Company’s current estimates, such amounts are

recorded as a cumulative adjustment in the period in which the estimates are revised. See Note 12, “Stock-based Compensation,” for further

discussion of stock-based compensation.

Foreign Currency

The Company’s reporting currency is the U.S. dollar. The functional currency of the Company’s foreign subsidiaries is their respective

local currencies. The asset and liability accounts of the Company’s foreign subsidiaries are translated from their local currencies at the rates

in effect on the balance sheet date. Revenue and expenses are translated at average rates of exchange prevailing during the period. Gains

and losses resulting from the translation of the Company’s subsidiary balance sheets are recorded as a component of accumulated other

comprehensive income (loss). Gains and losses from foreign currency transactions are recorded in other income (expense) in the

Consolidated Statements of Operations.

Current and non-current tax assets and liabilities are based upon an estimate of taxes refundable or payable for each of the

jurisdictions in which the Company is subject to tax. In the ordinary course of business, there is inherent uncertainty in quantifying income tax

positions. The Company assesses income tax positions and records tax benefits for all years subject to examination based upon the

Company’s evaluation of the facts, circumstances, and information available at the reporting dates. For those tax positions where it is more

likely than not that a tax benefit will be sustained, the Company records the largest amount of tax benefit with a greater than 50% likelihood of

being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax

positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit is recognized in the financial statements.

When applicable, associated interest and penalties are recognized as a component of income tax expense. Accrued interest and penalties

are included within the related tax asset or liability on the Consolidated Balance Sheets.

Deferred income taxes are provided for temporary differences arising from differences in bases of assets and liabilities for tax and

financial reporting purposes. Deferred income taxes are recorded on temporary differences using enacted tax rates in effect for the year in

which the temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is

recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the

opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Significant judgment

is required in determining whether and to what extent any valuation allowance is needed on the Company’s deferred tax assets. In making

such a determination, the Company considers all available positive and negative evidence including recent results of operations, scheduled

reversals of deferred tax liabilities, projected future income, and available tax planning strategies. See Note 8, “Income Taxes,” for further

discussion of tax valuation allowances.

The Company’s operations are subject to income and transaction taxes in the U.S. and in foreign jurisdictions. Significant estimates

and judgments are required in determining the Company’s worldwide provision for income taxes. Some of these estimates are based on

interpretations of existing tax laws or regulations. The ultimate amount of tax liability may be uncertain as a result.

Recently Issued Accounting Pronouncement Not Yet Adopted

In October 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-06,

Disclosure Agreements - Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative

(“ASU 2023-06”). The amendments in ASU 2023-06 will impact various disclosure areas, including the statement of cash flows, accounting

changes and error corrections, earnings per share, debt, equity, derivatives, and transfers of financial assets. The amendments in

ASU 2023-06 will be effective on the date the related disclosures are removed from Regulation S-X or Regulation S-K by the Securities and

Exchange Commission (the “SEC”), and will no longer be effective if the SEC has not removed the applicable disclosure requirement by

June 30, 2027. Early adoption is prohibited. The Company does not believe the amendments in ASU 2023-06 will materially impact any of

the Company’s current disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment

Disclosures (“ASU 2023-07”). ASU 2023-07 expands public entities’ segment disclosures by requiring disclosure of significant segment

expenses that are regularly provided to the Chief Operating Decision-Maker (“CODM”) and included within each reported measure of

segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable

segment’s profit or loss and assets. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 (i.e., the Company’s 2024

Annual Report) and interim periods within fiscal years beginning after December 15, 2024 (i.e., the Company’s first quarter of fiscal 2025).

Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2023-07 on its consolidated financial

statements and disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvement to Income Tax Disclosures

(“ASU 2023-09”). ASU 2023-09 was issued to enhance the transparency and decision usefulness of income tax disclosures. ASU 2023-09

is effective for annual periods beginning after December 15, 2024 (i.e., the Company’s 2025 Annual Report) on a prospective basis; however,

retrospective application is permitted. In addition, early adoption is permitted. The Company is currently evaluating the impact of the

adoption of ASU 2023-09 on its consolidated financial statements and disclosures.

Note 2 —Revenue

Disaggregation of Revenue

The Company classifies itschannel customers as follows:

•Megaproject (“MPD”). MPD customers are major firms that develop, design, build, own and/or operate large-scale desalination

plants or projects. Revenues from projects generally exceed$1.0 million and the MPD project timeline between project tender

and shipment generally ranges from 16 to 36 months; however, from time-to-time, may exceed 36 months.

•Original Equipment Manufacturer (“OEM”). In addition to the type of customers listed below, revenues from projects generally

are$1.0 million or less and the OEM project timeline from project tender to shipment generally ranges fromone to 16 months;

however, from time-to-time, may exceed 16 months.

◦Water: OEM customers are companies that supply equipment, packaged systems, and various operating and

maintenance solutions for small to medium-sized desalination plants, utilized by commercial and industrial

entities, as well as national, state and local municipalities worldwide.

◦Emerging Technologies: OEM customers include direct sales to commercial or industrial customers, such as

supermarket chains, cold storage facilities, and other industrial users. Also, included are sales to

intermediaries, such as refrigeration system installers or refrigeration original equipment manufacturers.

•Aftermarket (“AM”). AM customers are desalination plant owners and/or operators who can utilize our technology to upgrade or

keep their plant running. AM revenue includes sales of spare parts, repair services, field services and various commissioning

activities.

Disaggregation of Revenue

The following table presentsthe disaggregated revenues by segment, and within each segment, bygeographical market based on the

customer “shipped to” address, and bychannel customers. Sales and usage-based taxes are excluded from revenues. See Note 9,

“Segment Reporting,” for further discussion related to the Company’s segments.

Contract Balances

The following table presents contract balances by category.

Contract Liabilities

The Company records contract liabilities, which consist of customer deposits and deferred revenue, when cash payments are

received in advance of the Company’s performance. The following table presents significant changes in contract liabilities during the period.

Future Performance Obligations

As of December 31, 2023, the following table presents the future estimated revenue by year expected to be recognized related to

performance obligations that are unsatisfied or partially unsatisfied.

Note 3 —Net Income Per Share

Net income for the reported period is divided by theweighted average number of common shares outstanding during the reported

period to calculate basicnet income per common share.

•Basicnet income per common share excludes any dilutive effect of stock options and RSUs.

•Dilutednet income per common share reflects the potential dilution that would occur if outstanding stock options to purchase

common stock were exercised for shares of common stock, using the treasury stock method, and if the shares of common stock

underlying each unvested RSU were issued.

Outstanding stock options to purchase common stock and unvested RSUs are collectively referred to as “stock awards.”

The following table presents the computation of basic and dilutednet income per common share.

Certain shares of common stock issuable under stock awards have been omitted from the dilutednet income per common share

calculations because their inclusion is considered anti-dilutive. The following table presents the weighted potential common shares issuable

under stock awards that were excluded from the computation of dilutednet income per common share.

Note 4 —Other Financial Information

Cash, Cash Equivalents and Restricted Cash

The Consolidated Statements of Cash Flows explain the changes in the total of cash, cash equivalents and restricted cash, such as

cash amounts deposited in restricted cash accounts in connection with the Company’s credit cards. The following table presents a

reconciliation of cash, cash equivalents and restricted cash, reported within the Consolidated Balance Sheets that sum to the total of such

amounts presented for each period presented on the Consolidated Statements of Cash Flows.

Accounts Receivable, net

Allowance for Doubtful Accounts

The following table presentsthe allowance for doubtful accounts activities.

(1)General and specific reserves charged to expense.

Inventories, net

Prepaid Expenses and Other Assets

Property and Equipment

Goodwill is tested for impairment annually in the third quarter of the Company’s fiscal year or more frequently if indicators of potential

impairment exist. The Company monitors the industries in which it operates, and reviews its business performance for indicators of potential

impairment. The recoverability of goodwill is measured at the reporting unit level, which represents the operating segment. The carrying

amount of goodwill as of December 31, 2023 and December 31, 2022 was$12.8 million.

On July 1, 2023, the Company estimated the fair value of its reporting units using both the discounted cash flow and market

approaches. The forecast of future cash flows, which is based on the Company’s best estimate of future net sales and operating expenses,

is based primarily on expected category expansion, pricing, market segment, and general economic conditions. The Company incorporates

other significant inputs to its fair value calculations, including discount rate and market multiples, to reflect current market conditions. The

analysis performed indicated that the fair value of each reporting unit that is allocated goodwill significantly exceeds its carrying value. There

wasno impairment charge recorded for the year ended December 31, 2023.

Accrued Expenses and Other Liabilities

Accumulated Other Comprehensive Loss

For the year ended December 31, 2023, there was$3.0 million of securities sold andthe reclassificationto other comprehensive

income (loss) was immaterial. There wereno reclassifications of amounts out ofaccumulated other comprehensive loss for theyears ended

December 31, 2022 and 2021, as there have beenno salesof securities or translation adjustments that impacted other comprehensive

income (loss) during these periods.

The tax impact of the changes inaccumulated other comprehensive loss for theyears ended December 31, 2023,2022 and 2021,

wasnot material.

Advertising Expense

Advertising expense is charged to operations during the year in which it is incurred. Total advertising expense wasnot material for

the years ended December 31, 2023,2022 and 2021.

Note 5 —Investments and Fair Value Measurements

Available-for-Sale Investments

The Company’s investments in investment-grade short-term and long-term marketable debt instruments, such as U.S. treasury

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

investments are classified on the Consolidated Balance Sheets as either short-term and/or long-term investments.

The classification of available-for-sale investments on the Consolidated Balance Sheets and definition of each of these classifications

are presented in Note 1, “Description of Business and Significant Accounting Policies -Significant Accounting Policies,” subsections “Cash

and Cash Equivalents” and “Short-term and Long-term Investments.”

Expected maturities can differ from contractual maturities because borrowers may have the right to prepay obligations without

prepayment penalties. The Company generally holds available-for-sale investments until maturity; however, from time-to-time, the Company

may elect to sell certain available-for-sale investments prior to contractual maturity.

Fair Value of Financial Instruments

The Company follows the authoritative guidance for fair value measurements and disclosures that, among other things, defines fair

value, establishes a consistent framework for measuring fair value, and expands disclosure for each major asset and liability category

measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as an exit price that would be received to sell an

asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement

that should be determined based on assumptions that market participants would use in pricing an asset or liability.

All of the Company’s financial assets and liabilities are remeasured and reported at fair value at each reporting period, and are

classified and disclosed in one of the following three pricing category levels:

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

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

Level 3—Unobservable inputs in which little or no market activity exists, thereby requiring an entity to develop its own

assumptions that market participants would use in pricing.

The following table presents the Company’s financial assets measured on a recurring basis by contractual maturity, including pricing

category, amortized cost, gross unrealized gains and losses, and fair value. As of the dates reported in the table, the Company hadno

financial liabilities andno Level 3 financial assets.

The Company monitors its investments for impairment. It was determined that unrealized gains and losses included inaccumulated

other comprehensive loss at December 31, 2023 and 2022, were temporary in nature, because the changes in market value for these

securities resulted from fluctuating interest rates, rather than a deterioration of the credit worthiness of the issuers.

The following table presents a summary of the fair value and gross unrealized losses on the available-for-sale securities that have

been in a continuous unrealized loss position, aggregated by type of investment instrument. The available-for-sale securities that were in an

unrealized gain position have been excluded from the table.

Sales of Available-for-Sale Investments

The following table presents the sales of available-for-sale investments.

Realized losses on sales of securities were immaterial during the year ended December 31, 2023.

Note 6 —Lines of Credit

Credit Agreement

The Company entered into a credit agreement with JPMorgan Chase Bank, N.A. (“JPMC”) on December 22, 2021 (“Credit

Agreement”). The Credit Agreement, which will expire on December 21, 2026, provides a committed revolving credit line of$50.0 million.

The Credit Agreement requires the Company to comply with various covenants, including among other things, financial covenants to

1. maintain a leverage ratio of consolidated net debt to adjusted EBITDA, not to exceed 3.0 to 1; and 2) limit annual capital expenditures.

The Credit Agreement allows the Company to, among other things, make distributions to shareholders, repurchase its stock, incur other debt

or liens, or acquire or dispose of assets provided that the Company complies with certain requirements and limitations set forth in the Credit

Agreement. The unused portion of the credit line is subject to a fee equal to 0.20% per annum multiplied by the amount of such unused

portion.

On July 15, 2022, the Company and JPMC agreed to a modification of the Credit Agreement (“First Amendment”) to change the

indicated reference rate from LIBOR to SOFR. Changes in the Credit Agreement reference rate to SOFR did not materially change the

provisions defined in the original Credit Agreement nor did this change materially affect the Company’s financial statements. During

September 2023, the Company and JPMC amended the Credit Agreement (the “Second Amendment”) to only increase the maximum

allowable letters of credit (“LCs”) credit line component from$25.0 million to$30.0 million. No other components or features under the Credit

Agreement (including the First Amendment dated July 15, 2022) were amended.

Revolving Loans

Revolving loans under the Credit Agreement may be in the form of 1) a base rate loan that bears interest equal to (a) the greater of

the Wall Street Journal prime rate and (b) the sum of (i) one-month reserve adjusted Secured Overnight Financing Rate (“SOFR”) and

(ii)2.50%, plus an applicable margin of 0.25% or 0.50%, subject to the Company’s total leverage ratio, or 2) a Eurodollar loan that bears

interest equal to the sum of the reserved adjusted SOFR rate for an interest period elected by the Company, plus an applicable margin of

1.25% or 1.50%, based upon the Company’s total leverage ratio. The Company may request loans up to the lower of a maximum exposure

of$50.0 million or the amounts of unused credit under the Credit Agreement. The unused portion of the credit facility is subject to a facility

fee in an amount equal to 0.20% per annum of the average unused portion of the revolving line. At the election of the lender following an

event of default, the loans shall bear the aforementioned interest rate plus an additional 2%. As of December 31, 2023, there wereno

revolving loans outstanding under the Credit Agreement.

Letters of Credit

Under the Credit Agreement, the Company is allowed to request LCs up to the lower of a maximum exposure of$30.0 million or the

amounts of unused credit under the Credit Agreement. The Credit Agreement does not require any cash collateral when LCs are issued;

however, at the election of the lender following a default, the lender may require the Company to deposit cash in an amount equal to 103% of

the LCs exposure. LCs are subject to customary fees and expenses for issuance or renewal, and all disbursements are subject to the same

interest rate provision as noted directly above under Revolving Loans. LCs are limited to a term ofone year, unless extended. Under the

LCs component, the Company utilized$21.8 million of the maximum allowable credit line of$30.0 million, which includes newly issued LCs,

and previously issued and unexpired stand-by letters of credits (“SBLCs”) and certain non-expired commitments under the Company’s

previous Loan and Pledge Agreement with Citibank, N.A. which are guaranteed under the Credit Agreement.

The following table presents the total outstanding LCs and SBLCs issued by the Company to our customers related toproduct

warranty and performance guarantees.

See Note 7, “Commitments and Contingencies – Guarantees,” for further discussion on product warranty and performance

guarantees.

Note 7 —Commitments and Contingencies

Operating Lease Obligations

The Company leases office, warehouse and manufacturing facilities under operating leases in San Leandro, CA, Tracy, CA and Katy,

TX that expire on various dates through fiscal year 2030. The following table presents a summary of operating lease, right of use assets and

lease liabilities.

The following table presents certain facts regarding the Company’s material property leases.

(1)Month-Year of original lease expiration

(2)Number of renewal option(s) / Number of year(s) per renewal option

The following table presents operating lease activities related to all leased properties.

The following table presents other information related to outstanding operating leases as of December 31, 2023.

As of December 31, 2023, the following table presents the minimum lease payments by year under noncancelable operating leases,

exclusive of execution costs.

Warranty

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

Purchase Obligations

The Company haspurchase order arrangements with itsvendors for which the Company hasnot received the related goods or

services as of December 31, 2023. These arrangements are subject to change based on the Company’ssales demand forecasts. The

Company hasthe right to cancel the arrangements prior to the date of delivery. The purchase order arrangements are related to various raw

materials and component parts, as well as capital equipment. As of December 31, 2023, the Company had approximately$1.5 million of

such open cancellable purchase order arrangements.

Guarantees

The Company enters into indemnification provisions under its agreements with other companies in the ordinary course of business,

typically with its customers. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses

suffered or incurred by the indemnified party as a result of the Company’s activities, generally limited to personal injury and property damage

caused by the Company’s employees at a customer’s plant, and in proportion to the employee’s percentage of fault for the accident.

Damages incurred for these indemnifications would be covered by the Company’s general liability insurance to the extent provided by the

policy limitations. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification

agreements. As a result, the estimated valuation of the potential liability arising from these agreements is not material. Accordingly, the

Company recorded no liabilities for these agreements as of December 31, 2023 and 2022.

In certain cases, the Company issues product warranty and performance guarantees to its customers for amounts generally equal to

10% or less of the total sales agreement to endorse the execution of product delivery and to the warranty of design work, fabrication and

operating performance of our devices. These guarantees are generally LCs that have a weighted average life at inception of 33 months.

See Note 6, “Lines of Credit –Letters of Credit,” for information related to LCs.

Litigation

From time-to-time, the Company has been named in and subject to various proceedings and claims in connection with its business.

The Company may in the future become involved in litigation in the ordinary course of business, including litigation that could be material to

its business. The Company considers all claims, if any, on a quarterly basis and, based on known facts, assesses whether potential losses

are considered reasonably possible, probable and estimable. Based upon this assessment, the Company then evaluates disclosure

requirements and whether to accrue for such claims in its consolidated financial statements. The Company records a provision for a liability

when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are

reviewed at least quarterly and are adjusted to reflect the impacts of negotiations, settlements, rulings, advice of legal counsel and other

information and events pertaining to a particular case. As of December 31, 2023, the Company was not involved in any lawsuits, legal

proceedings or claims that would have a material effect on the Company’s financial position, results of operations, or cash flows. Therefore,

there were no material losses which were probable or reasonably possible.

Note 8 —Income Taxes

The following table presents the Company’s U.S. and foreign components of consolidated income before income taxes and the

provision for (benefit from) income taxes.

The following table presents a reconciliation of income taxes computed at the statutory federal income tax rate to the effective tax rate

implied by the accompanying Consolidated Statements of Operations.

The following table presents the components of the Company’snet deferred tax asset, which is presented in other assets, non-current

on the Consolidated Balance Sheets.

In asserting the recoverability of deferred tax assets, the Company considers whether it is more likely than not that the assets will be

realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in

which those temporary differences become deductible.

The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated

to use the existing deferred tax assets. In making such a determination, the Company considers all available positive and negative evidence,

including recent results of operations, scheduled reversals of deferred tax liabilities, projected future income, and available tax planning

strategies. A significant piece of objective positive evidence evaluated was the cumulative profit incurred in the U.S.

On the basis of this evaluation, as of December 31, 2023, the Company recognized all of its U.S. federal and state deferred tax assets

with the exception that the Company continues to maintain a valuation allowance on its California research and development (“R&D”) credit

carryovers of$4.6 million. The Company will maintain a valuation allowance on its California R&D credit carryovers because it is more likely

than not that the Company will continue to annually generate more California R&D tax credits than it utilizes, resulting in no net reduction of

credits. The Company’s policy with respect to California R&D credits is that they are utilized on a last-in, first-out basis.

The Company continues to assert that the accumulated foreign earnings of its subsidiaries in Spain and Canada are permanently

reinvested. Due to the U.S. Tax Cuts and Jobs Act (“Tax Act”) enacted in 2017, any future repatriation of the earnings of its subsidiaries in

Spain and Canada would not be subject to U.S. federal income tax. The Company has estimated that the foreign withholding taxes and U.S.

state income taxes related to a potential future repatriation of these earnings would be immaterial. The Company has evaluated the impact of

the global intangible low taxed income (“GILTI”) and has concluded that the impact to the Company is immaterial.

The following table presents the Company’s California net operating loss carryforward.

Utilization of the California net operating loss carryforward may be subject to a substantial annual limitation due to the ownership

change limitations provided by the California Revenue and Taxation Code which could result in the expiration of the net operating loss

carryforward before utilization. As of December 31, 2023, there are no ownership change limits on the utilization of the California net

operating loss carryforward.

The following table presents the Company’s R&D credit by taxing authority, minimum tax credit and foreign tax credit carryforwards.

Utilization of the credit carryforwards may be subject to a substantial annual limitation due to the ownership change limitations

provided by the IRC and similar California provisions. As of December 31, 2023, there are no ownership change limits on the utilization of

these net tax credit carryforwards.

Accounting for uncertain tax positions is based on judgment regarding the largest amount that is greater than 50% likely of being

realized upon the ultimate settlement with a taxing authority. The following table presents the aggregate changes in the balance of the gross

unrecognized tax benefits.

As of December 31, 2023, the Company had unrecognized tax benefits of $1.7 million, of which $1.0 million, if recognized, would

affect the Company’s effective tax rate.

The Company adopted the accounting policy that interest and penalties are classified as part of its income taxes. As of December 31,

2023, there wasno accrued interest or penalties associated with any unrecognized tax benefits.

There are currently no examinations by Federal, state and foreign tax authorities. The Company believes that, as of December 31,

2023, the gross unrecognized tax benefits will not materially change in the next twelve months. The Company believes that it has adequately

provided for any reasonably foreseeable outcomes related to any tax audits and that any settlement will not have a material adverse effect on

the consolidated financial position or results of operations. However, there can be no assurances as to the possible outcomes.

Note 9 —Segment Reporting

The Company’s Chief Operating Decision-Maker (“CODM”) is its chief executive officer. The Company continues tomonitor and

review itssegment reporting structure in accordance with authoritative guidance to determine whether any changes have occurred that would

impact itsreportable segments.

Income and type of expense activities that are included in the Water and Emerging Technologies segments and corporate operating

expenses are as follows:

Water segment: Thecontinued development, sales and support of the PX, hydraulic turbochargers and pumps used in

seawater desalination and wastewater treatment activities.

Emerging Technologies segment: Thecontinued development, sales and support of activities related to emerging

technologies, such as the PX G1300 used in industrial and commercial refrigeration applications.

Corporate operating expenses: Corporate activities outside of the operating segments, such as audit and accounting

expenses, general legal costs, board of director fees and expenses, and other separately managed general expenses not

related to the identified segments.

Segment Financial Information

For each of the periods presented, operating income (loss) for each segment excludes other income and expenses, andcorporate

operating expenses not included in how the CODM assesses the performance of the operating segments, such asincome taxes and other

separately managed expenses not attributed to the operating segments. Assets and liabilities are reviewed at the consolidated level by the

CODM and are not attributed to the segments. The CODM allocates resources to, and assesses the performance of, each operating

segment using information about its revenue andoperating income.

The following table presents a summary of the Company’s financial information by segment and corporate operating expenses.

The following table presents a summary of the Company’s depreciation and amortization by segment and corporate operating

expenses.

Note 10 —Concentrations

Revenue by Geographic Location and Country

The following table presents the Company’s product revenue by geographic locations. The geographic information includes product

revenue from our domestic and international customers based on the customers’ requested delivery locations, except for certain cases in

which the customer directed the Company to deliver its products to a location that differs from the known ultimate location of use. In such

cases, the ultimate location of use rather than the delivery location is reflected in the table.

(1)Countries representing more than 10% of product revenues for the periods presented.

(2)Countries in the aggregate, individually representing less than 10% of product revenues for the periods presented.

Customer Revenue Concentration

The following table presents the customers that account for 10% or more of the Company’srevenue and their related segment for

each of the periods presented. Although certain customers might account for greater than 10% of the Company’srevenue at any one point in

time, the concentration ofrevenue between a limited number of customers shifts regularly, depending on when revenue is recognized. The

percentages by customer reflect specific relationships or contracts that would concentrate revenue for the periods presented and do not

indicate a trend specific to any one customer.

Long-lived Assets

All of the Company’s long-lived assets were located in the United States at December 31, 2023 and 2022.

Major Supply Vendors

The following table presents the major supply vendors accounting for 10% or more of the Company’s consolidated supply and

manufacturing costs purchases.

Note 11 —Stockholders’ Equity

Preferred Stock

The Company has the authority to issue 10,000,000 shares of preferred stock with a par value of$0.001 per share. The Board of

Directors has the authority, without action by the Company’s stockholders, to designate and issue shares of preferred stock in one or more

series. The Board of Directors is also authorized to designate the rights, preferences, and voting powers of each series of preferred stock,

any or all of which may be greater than the rights of the common stock including restrictions of dividends on the common stock, dilution of the

voting power of the common stock, reduction of the liquidation rights of the common stock, and delaying or preventing a change in control of

the Company without further action by the Company’s stockholders. To date, the Board of Directors has not designated any rights,

preferences, or powers of any preferred stock, and as of December 31, 2023 and 2022, no shares of preferred stock were issued or

outstanding.

Common Stock

The Company has the authority to issue 200,000,000 shares of common stock with a par value of$0.001 per share. Subject to the

preferred rights of the holders of shares of any class or series of preferred stock as provided by the Board of Directors with respect to any

such class or series of preferred stock, the holders of the common stock shall be entitled to receive dividends, as and when declared by the

Board of Directors. In the event of any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, after the

distribution or payment to the holders of shares of any class or series of preferred stock as provided by the Board of Directors with respect to

any such class or series of preferred stock, the remaining assets of the Company available for distribution to stockholders shall be distributed

among and paid to the holders of common stock ratably in proportion to the number of shares of common stock held by them.

Share Repurchase Program

The Company’s Board of Directors (the “Board”), from time-to-time, has authorized a share repurchase program under which the

Company may, at the discretion of management, repurchase its outstanding common stock in the open market, or in privately negotiated

transactions, in compliance with applicable state and federal securities laws. The timing and amounts of any purchase under the Company’s

share repurchase program is based on market conditions and other factors including price, regulatory requirements, and capital availability.

The Company accounts for stock repurchases under these programs using the cost method.

On March 9, 2021, the Board authorized a share repurchase program under which the Company may repurchase its outstanding

common stock, at the discretion of management, up to$50.0 million in aggregate cost, which includes both the share value of the acquired

common stock and the fees charged in connection with acquiring the common stock (the “March 2021 Authorization”). On July 1, 2022, the

Company concluded all share repurchases under the March 2021 Authorization.

As of December 31, 2023, the Company has repurchased 8.1 million shares of its common stock at an aggregate cost of$80.5 million

under the March 2021 Authorization and all previous share repurchase programs.

Note 12 —Stock-based Compensation

Stock Option Plans

In July 2020, the stockholders approved the 2020 Incentive Plan (the “2020 Plan”), that permits the grant of stock options, restricted

stock units (“RSU”), stock appreciation rights, restricted stock, restricted stock awards (“RSA”), performance units, performance shares, and

other stock-based awards to employees, officers, directors, and consultants. Prior to the approval of the 2020 Plan, the Company maintained

the 2016 Incentive Plan and the Amended and Restated 2008 Equity Incentive Plan (hereinafter referred to as the “Predecessor Plans”).

Subject to adjustments, as provided in the 2020 Plan, the number of shares of common stock initially authorized for issuance under the 2020

Plan was 5,894,727 shares (which consist of 4,500,000 new share awards plus 1,394,727 share awards that were authorized and unissued

under the Predecessor Plans) plus up to 4,850,630 shares that were set aside for awards granted under the Predecessor Plans that are

subsequently forfeited. The 2020 Plan supersedes all previously issued stock incentive plans (including the Predecessor Plans) and is

currently the only available plan from which awards may be granted. The Company’s 2020 Plan and Predecessor Plans are hereinafter

referred to as “Equity Incentive Plans.”

Shares available for grant under the 2020 Plan at December 31, 2023 were 4,098,928 shares. There wereno shares available for

grant under the Predecessor Plans after July 15, 2020.

Stock Options and Stock Appreciation Rights

Employee stock options and stock appreciation rights outstanding at December 31, 2023 and to be granted subsequently after

December 31, 2023, generally vest over four years and expire no more than 10 years after the date of grant. Non-employee board of director

grants generally vest one year after the date of grant or on the date of the annual stockholders’ meeting following the date of grant, whichever

date occurs first, and expire no more than 10 years after the date of grant.

Restricted Stock Units

RSUs outstanding at, and to be awarded subsequently after, December 31, 2023, generally vest 25% annually over thefour years

from date of grant and are dependent upon continued employment. Non-employee board of director grants generally vest one year after the

date of grant or on the date of the annual stockholders’ meeting following the date of grant, whichever date occurs first. As RSUs vest, the

units will be settled in shares of common stock based on aone-to-one ratio. The units are valued based on the market price on the date of

grant.

Restricted Stock Awards

There wereno RSAs outstanding as of December 31, 2023.

Fair Value Assumptions

Stock Options and Stock Appreciation Rights

The fair value of stock options granted to employees is based on the Black-Scholes option pricing model. To determine the inputs for

the Black-Scholes option pricing model, the Company is required to develop several assumptions, which are highly subjective. The Company

determines these inputs as follows:

•Expected Term:

◦Employees: Based on historical exercise data.

◦Board of Directors: Based on the simplified method.

◦Stock Appreciation Rights: Based upon the remaining grant life at each remeasurement date.

•Expected Volatility: Based on the Company’s historical data and the corresponding expected term.

•Risk-Free Interest Rate: Based on U.S. Treasury issues with terms similar to the expected term.

•Dividend Yield: Based on an expected dividend yield of zero.

The following table presents assumptions used in the Black-Scholes option pricing model to determine the estimated grant date fair

values of stock options andstock appreciation rights granted to employees.

Restricted Stock Units

The fair value of RSUs granted to employees is based on the Company’s common stock price on the date of grant.

Forfeitures

The Company estimates forfeitures at the time of grant and revises those estimates periodically in subsequent periods if actual

forfeitures differ from those estimates. The Company uses historical data to estimate pre-vesting option forfeitures and records stock-based

compensation expense only for those awards that are expected to vest. If the Company’s actual forfeiture rate is materially different from its

estimate, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

The following table presents the estimated weighted average forfeiture rates for all employees used in determining the expense in the

stock-based compensation expense table above.

Stock-based Compensation Expense

The following table presents the stock-based compensation expense related to the fair value measurement of awards granted to

employees by expense category and by type of award. All stock-based payment awards are amortized on a straight-line basis over the

requisite service periods of the awards, generally the vesting periods.

Stock Option and Stock Appreciation Rights Activities

The following table presents stock option activities under the Equity Incentive Plans.

(1)The aggregate intrinsic value of an exercised option is calculated as the difference between the exercise price of the underlying option and the fair

value of the Company’s common stock at the time of exercise. The aggregate intrinsic value at December 31, 2023 is calculated as the difference

between the exercise price of the underlying outstanding options and the fair value of the Company’s common stock as of December 31, 2023 or the

last trading day prior to December 31, 2023.

Restricted Stock Unit Activities

The following table presents RSU activities under the Equity Incentive Plans.

Vested Stock Options and RSUs

The following table presents the total grant date fair value of stock options and RSUs vested during the period.

Unamortized Stock-Based Compensation Costs

Stock-based compensation costs related to unvested stock options and RSUs will generally be amortized on a straight-line basis over

the remaining average service period of each award. The following table presents the unamortized compensation costs and weighted

average service period of all unvested outstanding awards as of December 31, 2023.