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’spressure exchanger technology, which generates little to no emissions

when operating, the Company believes itssolutions lower costs, save energy, reduce waste, and minimize emissions for companies across a

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

the Company ishelping companies reduce their energy consumption in their industrial processes, which in turn, reduces their carbon

footprint. The Company believes that itscustomers do not have to sacrifice quality and cost savings for sustainability and the Company is

committed to developing solutions that drive long-term value – both financial and environmental. The Company’s solutions are marketed,

sold in, and 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 Condensed 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.

The accompanying Condensed Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the

Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures normally included in the financial statements

prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to such rules

and regulations. The December 31, 2023 Condensed Consolidated Balance Sheet was derived from audited financial statements and may

not include all disclosures required by GAAP; however, the Company believes that the disclosures are adequate to make the information

presented not misleading.

The March 31, 2024 unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited

Consolidated Financial Statements and the notes thereto for the fiscal year ended December 31, 2023 included in the Company’s Annual

Report on Form 10-K filed with the SEC on February 21, 2024 (the “2023 Annual Report”).

All adjustments consisting of normal recurring adjustments that are necessary to present fairly the financial position, results of

operations and cash flows for the interim periods have been made. The results of operations for the interim periods are not necessarily

indicative of the operating results for the full fiscal year or any future periods.

Use of Estimates

The preparation of Condensed Consolidated Financial Statements, in conformity with GAAP, requires the Company’s management to

make judgments, assumptions and estimates that affect the amounts reported in the Condensed 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; granted equity award valuations;

equipment useful life and valuation; goodwill valuation and impairment; 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 May 1, 2024, the date of issuance of this Quarterly Report on Form 10-Q. 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 publicly update these estimates for any

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

Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies in Note 1, “Description of Business and

Significant Accounting Policies -Significant Accounting Policies,” of the 2023 Annual Report.

Recently Issued Accounting Pronouncement Not Yet Adopted

There have been no issued accounting pronouncements that have not yet been adopted during thethree months ended March 31,

2024 that apply to the Company other than the pronouncements disclosed in Note 1, “Description of Business and Significant Accounting

Policies -Recently Issued Accounting Pronouncement Not Yet Adopted,” of the 2023 Annual Report.

Note 2 —Revenue

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.

Remaining Performance Obligations

As of March 31, 2024, the following table presents the revenue that is expected to be recognized related to performance obligations

that are unsatisfied or partially unsatisfied.

Note 3 —Net Loss Per Share

Net loss for the reported period is divided by the weighted average number of basic and diluted common shares outstanding during

the reported period to calculate the basic and dilutednet loss per common share, respectively.

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

The following table presents the equity awards that are excluded from dilutednet loss per share because their effect would have been

anti-dilutive.

Note 4 —Other Financial Information

Cash, Cash Equivalents and Restricted Cash

The Condensed 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 for each period within the Condensed Consolidated Balance

Sheets and the Condensed Consolidated Statements of Cash Flows that sum to the total of such amounts.

Accounts Receivable, net

Inventories, net

Inventory amounts are stated at the lower of cost or net realizable value, using the first-in, first-out method.

Accrued Expenses and Other Liabilities

Note 5 —Investments and Fair Value Measurements

Fair Value of Financial Instruments

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 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.

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 (as amended, the

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

$50.0 million and includes both a revolving loan and a letters of credit (“LCs”) component.

Under the Credit Agreement, as of March 31, 2024, there wereno revolving loans outstanding. In addition, under the LCs

component, the Company utilized $20.3 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 credit (“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.

Letters of Credit

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

warranty and performance guarantees.

Note 7 —Commitments and Contingencies

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 March 31, 2024, 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 Company’s interim periodtax benefit from income taxes is determined using an estimate of itsannual effective tax rate, adjusted

for discrete items, if any, that arise during the period. Each quarter, the Company updates itsestimate of the annual effective tax rate, and if

the estimated annual effective tax rate changes, the Company makesa cumulative adjustment in such period. The Company’squarterly tax

provision and estimate of itsannual effective tax rate are subject to variation due to several factors, including variability in accurately

predicting itspre-tax income or loss and the mix of jurisdictions to which they relate, intercompany transactions, the applicability of special tax

regimes, and changes in how the Company does business.

For thethree months ended March 31, 2024, the recognized benefit from income taxes resulted from the loss for the quarter and

included benefits related to the U.S. federal foreign-derived intangible income (“FDII”) andfederal research and development (“R&D”)tax

credit, partially offset by certain permanent differences, such as share-based compensation.

For the three months ended March 31, 2023, the recognized benefit from income tax resulted from the loss for the quarter and

included benefits related to the U.S. FDII and federal R&D tax credit, along with a discrete tax benefit due primarily to share-based

compensation windfalls.

The effective tax rate excluding discrete items for thethree months ended March 31, 2024, as compared to the prior year, differed

primarily due to lower projected U.S. FDII and federal R&D tax creditsand higher book income, as well as non-deductible officer share-based

compensation and certain foreign-based employee share-based compensation.