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 generate cost savings by increasing energy efficiency and reducing carbon emissions 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 iscommitted 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, 2024 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, 2025 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, 2024 included in the Company’s Annual

Report on Form 10-K filed with the SEC on February 26, 2025 (the “2024 Annual Report”).

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 arer evenue recognition; stock-based compensation expense;

equipment useful life and valuation; goodwill valuation and impairment; inventory valuation and allowances, 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 7, 2025, 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 beenno material changes to the Company’s significant accounting policies in Note 1, “Description of Business and

Significant Accounting Policies -Significant Accounting Policies,” of the Notes to Consolidated Financial Statements included in Item 8,

“Financial Statements and Supplementary Data,” of the 2024 Annual Report. See Note 12, “Stock-Based Compensation - Performance

Restricted Stock Units” for further discussion regarding the Company’s Performance Restricted Stock Units (“PRSUs”) issued during the

three months ended March 31, 2025.

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,

2025 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 Notes to Consolidated Financial Statements included in Item

8, “Financial Statements and Supplementary Data,” of the 2024 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.

1 Within the Asia market, India represented revenue of$1,456, or 18% of total revenue during thethree months ended March 31, 2025.

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 thechange in contract liability balances during the reported

periods.

Remaining Performance Obligations

As of March 31, 2025, 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 share, respectively. Outstanding stock options to purchase common

shares, unvested restricted stock units (“RSUs”), andunvested performance restricted stock units (“PRSUs”) are collectively referred to as

“equity awards.”

•Basicnet loss per share is computed using the weighted average number of common shares outstanding during the period.

•Dilutednet loss per share is computed using the weighted average number of common and potentially dilutive shares

outstanding during the period, using the treasury stock method. Any anti-dilutive effect of equity awards outstanding is not

included in the computation of dilutednet loss per share.

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

Restructuring

During the fourth quarter of fiscal year 2024, the Company implemented a restructuring plan which included reductions in its

workforce in all functions of the organization, primarily in its San Leandro location, in order to lower the Company’soperating cost structure,

and to position the Companyfor profitable growth. The Company recorded a restructuring charge of approximately$3.0 million. This charge

relates to severance and benefits, including reemployment assistance, for 38 terminated employees, which was approximately 15% of the

Company’sworkforce. The implementation of the restructuring plan was substantially complete by the end of the first quarter of fiscal year

2025 and the Company does not expect to incur significant additional expenses related to the restructuring. All expenses associated with the

Company’srestructuring plan are included in “Restructuring charges” in the Condensed Consolidated Statements of Operations.

The following table presents the change in the Company’s restructuring accrual balances during the reported period:

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 March 31, 2025 and December 31, 2024, 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, 2025, there wereno revolving loans outstanding. In addition, under the LCs

component, the Company utilized$15.7 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”).

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

Sublease

On March 10, 2025, the Company entered into an agreement to sublease its Katy, Texas operating lease. The sublease commenced

on March 10, 2025 and will expire on December 31, 2029. The sublease is classified as an operating lease and has a remaining lease term

of 4.75 years as of March 31, 2025. Sublease income was immaterial during thethree months ended March 31, 2025 and is recorded as a

reduction of lease expense in general and administrative within the Company’s Condensed Consolidated Statements of Operations.

The Company considered the sublease to be an indicator of impairment of the original lease. The Company compared the

undiscounted cash flows from the sublease to the carrying value of the Katy, Texas operating lease, which included the associated right-of-

use asset and leasehold improvements. The Company concluded that the carrying value was not recoverable as it exceeded the estimated

undiscounted cash flows.

The Company calculated the impairment charge by comparing the carrying value of the Katy, Texas operating lease to its fair value,

which was calculated based on the net discounted cash flows associated with the sublease. The Company recorded a total impairment

charge of$0.4 million, ofwhich$0.2 million and$0.2 million was recorded against the right-of-use asset and the associated leasehold

improvements, respectively. The allocation of the impairment charge was based on the relative carrying value of the assets. The impairment

charge was recorded in general and administrative within the Company’s Condensed Consolidated Statements of Operations.

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, 2025, 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, the applicability of special tax regimes, and changes in

how the Company does business.

For thethree months ended March 31, 2025, the recognized benefit from income taxes resulted from the tax projection based on the

full year forecasted profit and included benefits related to the U.S. federal foreign-derived intangible income (“FDII”), federal research and

development (“R&D”)tax credit, certain permanent differences, such as stock-based compensation shortfalls, and partial release of California

valuation allowance.

For the three 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. FDII and federal R&D tax credit, partially offset by certain permanent differences, such as share-based

compensation.

The effective tax rate excluding discrete items for thethree months ended March 31, 2025, as compared to the prior year, differed

primarily due tolower projected R&D tax credits, increased non-deductible officer stock-based compensation, and lower projected U.S. FDII

benefits.

Note 9 —Segment Reporting

The Company’s Chief Operating Decision-Maker (“CODM”) is its President and Chief Executive Officer. The Company continues to

monitor and review itssegment reporting structure in accordance with authoritative guidance to determine whether any changes have

occurred that would impact itsreportable segments.

The following table presents a summary of the Company’s financial information by segment, including significant segment expenses,

and corporate operating expenses.

Note 10 —Concentrations

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.

**Zero or less than 10%.

Note 11 —Stockholders’ Equity

Share Repurchase Program

The Company’s 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. As of March 31, 2025, the Company has

repurchased 11.7 million shares of its common stock at an aggregate cost of$135.0 million under all share repurchase programs.

February 2025 Authorization

On February 26, 2025, the Company announced that the Board authorized a share repurchase program under which the Company

may repurchase its outstanding common stock, at the discretion of management, for up to$30.0 million in aggregate cost, which included

both the share value of the acquired common stock and the fees charged in connection with acquiring the common stock (the “February 2025

Authorization”). The February 2025 Authorization will expire in February 2026.

The following table presents the share repurchase activities under the February 2025 Authorization as of March 31, 2025.

(1)Excluding commissions

Note 12 —Stock-based Compensation

Performance Restricted Stock Units

On January 23, 2025, the Compensation Committee of the Board adopted a new form of PRSU award agreement under the 2020

Equity Incentive Plan (the “2020 Plan”), to among other things, define the terms of the performance metrics and performance period for such

PRSUs. During thethree months ended March 31, 2025, the Company granted 287,298 PRSUs.

PRSUs outstanding at March 31, 2025 generally vest over 3 years and are dependent upon continued employment and meeting

certain cumulative revenue and cumulative adjusted EBITDA targets. Adjusted EBITDA is a non-GAAP financial measure that the Company

defines asnet loss which excludes i) depreciation and amortization; ii)stock-based compensation; iii)executive transition costs; iv)

restructuring charges; v) impairment of long-lived assets; vi)other income, net, such asinterest income and other non-operating income

(expense), net; and vii)benefit from income taxes. As PRSUs vest, the units will be settled in shares of common stock. The number of

potential shares issued based on PRSUs granted during thethree months ended March 31, 2025 is dependent on the level of achievement of

the performance targets discussed above, which ranges from 0 shares to up to 863,298 shares of common stock. The units are valued

based on the Company’s market price on the date of grant. As of March 31, 2025, no expense has been recognized in relation to the PRSUs

as the performance conditions are not considered probable.