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.

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 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 Company performs 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 analysis to determine the fair value of the

reporting unit’s goodwill. 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, the Company 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, the Company

recognizes 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

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”), performance

restricted stock units (“PRSUs”) and incentive stock options over the requisite service period (typically the vesting period of the awards). The

fair value of RSUs and PRSUs 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 –Fair Value Assumptions,” for further discussion of fair value measurements of stock-

based awards.

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 Adopted Accounting Pronouncement

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. On December 31, 2025, the Company adopted ASU 2023-09

prospectively and has applied the disclosure requirements to the period ended December 31, 2025 presented in the consolidated financial

statements. The Company has evaluated the impact of the adoption of ASU 2023-09 on its consolidated financial statements and

disclosures, and has determined that the adoption of this guidance will only impact disclosures, with no material impact on the Company’s

results of operations, cash flows, or financial condition. See Note 8, “Income Taxes,”for further discussion of the Company’s income taxes.

Recently Issued Accounting Pronouncements Not Yet Adopted

In October 2023, the FASB issued 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 has evaluated the impact of the adoption of

ASU 2023-06 on its consolidated financial statements and disclosures, and has determined that the adoption of this guidance will not

materially impact the Company’s current disclosures. In addition, the Company believes the adoption of ASU 2023-06 will not have a

material impact on results of operations, cash flows, or financial condition.

In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income - Expense

Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses” (“ASU 2024-03”). ASU 2024-03 is intended

to require more detailed disclosures about specified categories of expenses (including employee compensation, depreciation, and

amortization) included in certain expense captions presented on the face of the income statement. ASU 2024-03 is effective for fiscal years

beginning after December 15, 2026 (i.e., the Company’s 2027 Annual Report), and for interim periods within fiscal years beginning after

December 15, 2027. Early adoption is permitted. The amendments may be applied either (1) prospectively to financial statements issued for

reporting periods after the effective date of ASU 2024-03 or (2) retrospectively to all prior periods presented in the financial statements. The

Company is evaluating the potential impact of this adoption on the consolidated financial statements and related disclosures.

In July 2025, the FASB issued Accounting Standards Update 2025-05, Measurement of Credit Losses for Accounts Receivable and

Contract Assets (“ASU 2025-05”). ASU 2025-05 provides a practical expedient for measuring expected credit losses on current accounts

receivables and contract assets by assuming that conditions at the balance sheet date remain unchanged over the life of the asset. ASU

2025-05 is effective for annual reporting periods beginning after December 15, 2025 (i.e. the Company’s 2026 Annual Report), and interim

periods within those years, with early adoption permitted. The Company believes the adoption of ASU-2025-05 will not have a material

impact on results of operations, cash flows, or financial condition.

In December 2025, the FASB issued Accounting Standards Update 2025-11, Interim Reporting (Topic 270): Narrow-Scope

Improvements (“ASU 2025-11”), which clarifies the guidance in Topic 270 to improve the consistency of interim financial reporting. ASU

2025-11 provides a comprehensive list of required interim disclosures and introduces a disclosure principle requiring entities to disclose

events subsequent to the end of the last annual reporting period that have a material impact on the entity. ASU 2025-11 is effective for fiscal

years beginning after December 15, 2027 (i.e. the Company’s 2028 Annual Report), including interim periods within those fiscal years, with

early adoption permitted. The Company is evaluating the potential impact of this adoption on the consolidated financial statements and

related 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 are generally up 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 the Company’s technology to

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

commissioning activities.

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’ssegments.

Contract Assets

The Company records unbilled receivables as contract assets, which are included in prepaid expenses and other assets on the

Consolidated Balance Sheets. The following table presents the change in contract asset balances during the reported periods.

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 the change in contract liability balances during the reported

periods.

Remaining Performance Obligations

As of December 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 Income Per Share

Net income 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 income per share, respectively. Outstanding stock options to purchase

common shares, unvested RSUs, and unvested performance restricted stock units (“PRSUs”) are collectively referred to as “equity awards.”

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

•Dilutednet income 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 income per share.

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

Thefollowing table presents the equity awards that are excluded from dilutednet income per share because (i) their effect would have

been anti-dilutive, or (ii) the equity awards were contingent upon conditions for issuance which were not satisfied as of December 31, 2025.

See Note 12, “Stock-based Compensation” for additional information.

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 for each period within the Consolidated Balance Sheets and the

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

Allowance for Doubtful Accounts

The following table presentsthe allowance for doubtful accounts activities.

(1)General and specific reserves charged to expense.

Inventories, net

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, 2025 and 2024 was$12.8 million.

On July 1, 2025, the Company estimated the fair value of its reporting units using the discounted cash flow approach and market

approach. 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. As a

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

value, and therefore, no impairment charges were recorded.

Accrued Expenses and Other Liabilities

Restructuring

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

the G&A function, in order to lower the Company’soperating cost structure, and to position the Companyfor profitable growth. The Company

recorded a restructuring charge of approximately$2.8 million in total, of which $0.3 million was recorded during theyear ended December 31,

2025. The total restructuring charge recorded relates to severance and benefits, including reemployment assistance, for 38 terminated

employees, which was approximately 15% of the Company’sworkforce. The restructuring plan wascomplete as of December 31, 2025. All

expenses associated with the Company’srestructuring plan are included in “Restructuring charges” in the Consolidated Statements of

Operations.

The following table presents the change in the Company’s restructuring accrual balances during theyear ended December 31, 2025:

Accumulated Other Comprehensive (Loss) Income

There wereno reclassifications of amounts out ofaccumulated other comprehensive (loss) income for theyears ended December 31,

2025 and 2024, as there have beenno sales of securities or translation adjustments that impacted other comprehensive income (loss) during

these periods. For the year ended December 31, 2023, there was $3.0 million of securities sold and the reclassification toother

comprehensive income (loss) wasimmaterial.

The tax impact of the changes inaccumulated other comprehensive (loss) income for theyears ended December 31, 2025, 2024 and

2023, 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, 2025,2024 and 2023.