Energy Recovery Inc

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 (“SARS”), restricted stock, restricted stock awards (“RSA”), performance restricted stock units

(“PRSU”), 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, 2024 were 3,179,045 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 SARS outstanding at December 31, 2024 and to be granted subsequently to December 31, 2024,

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, 2024, 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 Company’s market price on

the date of grant.

Restricted Stock Awards

There wereno RSAs outstanding as of December 31, 2024.

Fair Value Assumptions

Stock Options and Stock Appreciation Rights

The fair value of stock options and SARS 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 at grant date as follows:

•Expected Term:

◦Employees: Based on historical exercise data.

◦Board: Based on the simplified method.

◦SARS: Based on historical exercise data. Post-grant date expected term is 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 1) assumptions used in the Black-Scholes option pricing model to determine the estimated grant date fair

values of stock options and SARS granted to employees; and 2) options and SARS granted and weighted average grant date fair value.

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 and SARS activities under the Equity Incentive Plans.

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

SARS and the fair value of the Company’s common stock at the time of exercise. The aggregate intrinsic value at December 31, 2024 is calculated as

the difference between the exercise price of the underlying outstanding options and SARS and the fair value of the Company’s common stock as of

December 31, 2024 or the last trading day prior to December 31, 2024.

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, 2024.