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 world-

class energy-saving technology for critical infrastructure that communities rely on every day, driving a more resilient and sustainable future.

Leveraging the Company’spressure exchanger technology, which generates little to no emissions when operating, the Company believes its

solutions 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 its

customers 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 High-Pressure 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, 2025 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 June 30, 2026 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, 2025 included in the Company’s Annual

Report on Form 10-K filed with the SEC on February 25, 2026 (the “2025 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.

Reclassifications

Certain prior period amounts have been reclassified in certain notes to the Condensed Consolidated Financial Statements to conform

to the current period presentation.

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; 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 August 5, 2026, 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 2025 Annual Report.

Recently Adopted Accounting Pronouncement

In July 2025, the Financial Accounting Standards Board (“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. The Company adopted ASU 2025-05 on January 1, 2026 and the adoption did not have a material

impact on the Company’s results of operations, cash flows, or financial condition.

Recently Issued Accounting Pronouncements Not Yet Adopted

There have been no issued accounting pronouncements that have not yet been adopted during thesix months ended June 30, 2026

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

Recently Issued Accounting Pronouncements Not Yet Adopted,” of the Notes to Consolidated Financial Statements included in Item 8,

“Financial Statements and Supplementary Data,” of the 2025 Annual Report.

Note 2 —Revenue

Disaggregation of Revenue

The following tables present the 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 Corporate and Other includes amounts not allocated to segments, which includes revenue associated with what was previously the

Emerging Technologies segment.

1 Corporate and Other includes amounts not allocated to segments, which includes revenue associated with what was previously the

Emerging Technologies segment.

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 the change in contract liability balances during the reported

periods.

Remaining Performance Obligations

As of June 30, 2026, the following table presents the revenue that is expected to be recognized related to performance obligations

that are unsatisfied or partially unsatisfied. These amounts exclude the value of remaining performance obligations for contracts with an

original expected delivery date of one year or less.

Note 3 —Income (Loss) Per Share

Net income (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 diluted income (loss) per share, respectively. Outstanding stock options to purchase

common shares, unvested restricted stock units (“RSUs”), and unvested performance restricted stock units (“PRSUs”) are collectively

referred to as “equity awards.”

•Basic income (loss) per share is computed using the weighted average number of common shares outstanding during the period.

•Diluted income (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 diluted income (loss) per share.

The following tables present the computation of basic and diluted income (loss) per share.

The following tables present the equity awards that are excluded from diluted income (loss) 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 June 30, 2026.

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. The following table presents a reconciliation of cash, cash equivalents and restricted cash, such as cash amounts deposited in

restricted cash accounts in connection with the Company’s credit cards, 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.

Inventories, net

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

Goodwill

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.

In February 2026, the Company wound down operations of the CO2 retail grocery business within its Emerging Technologies

segment due to a fundamental change in the outlook of the business. The Company considered the wind down to be an indicator of

impairment and performed a quantitative impairment test using the discounted cash flow approach and market approach. Based on the

results of the analysis, the Company determined that the carrying value of the reporting unit exceeded its fair value and recorded an

impairment charge of$1.7 million during thesix months ended June 30, 2026. No impairment charges were recorded during the three

months ended June 30, 2026.

Accrued Expenses and Other Liabilities

Restructuring

2024 Restructuring Plan

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, ofwhich$0.5 million was recorded during thesix months ended June

30, 2025. No restructuring charges were recorded during the three months ended June 30, 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 was complete as of December 31, 2025. All expenses associated with the Company’s

restructuring plan are included in “Restructuring charges” in the Condensed Consolidated Statements of Operations.

2026 Restructuring Plan

During the first quarter of fiscal year 2026, the Company wound down operations of the CO 2 retail grocery business within its

Emerging Technologies segment due to a fundamental change in the outlook of the business. The Company recorded a restructuring charge

of approxim ately$2.4 million during thesix months ended June 30, 2026, of which$0.9 million was recorded during the three months ended

June 30, 2026. The restructuring charge recorded relates to severance and benefits, including reemployment assistance, for 23 terminated

employees. In addition, during thesix months ended June 30, 2026, the Company incurred other related charges associated with the wind

down of the CO 2 retail grocery business, including excess and obsolescence reserves taken on CO 2 inventory of approximately$1.6 million

and impairment of goodwill of approximately$1.7 million, whichare included in “Restructuring - inventory reserve” and “Impairment of

goodwill” in the Condensed Consolidated Statements of Operations, respectively. The Company didnot incur any excess and obsolescence

reserves or impairments of goodwill during the three months ended June 30, 2026. Refer to section Goodwill within this footnote for additional

information. The restr ucturing plan was substantially complete by the end of the second quarter of fiscal year 2026 and the Company does

not expect to incur significant additional expenses related to the restructuring.

The following table presents the change in the Company’s restructuring accrual balances, which is included within Accrued expenses

and other liabilities on the Condensed Consolidated Balance Sheets, during thesix months ended June 30, 2026:

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 and fair value. Gross unrealized gains and losses were not material for the periods presented. As of June 30, 2026

and December 31, 2025, the Company hadno financial liabilities andno Level 3 financial assets.

Note 6 —Lines of Credit

Credit Agreement

The Company entered into a credit agreement with JPMorgan Chase Bank, N.A. on December 22, 2021 (as amended, the “Credit

Agreement”). The Credit Agreement was amended on January 21, 2026 to extend the expiration date from December 21, 2026 to

January 21, 2031. The Credit Agreement 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 June 30, 2026, there wereno revolving loans outstanding. In addition, under the LCs component,

as of June 30, 2026 and December 31, 2025, the Company utilized $20.0 million and $20.4 million, respectively, 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”).

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 3.5 years as of June 30, 2026. Sublease income wasimmaterial during thesix months ended June 30, 2026 and 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 during thesix months ended June 30, 2025, of which$0.2 million and$0.2 million was recorded against the right-of-

use asset and the associated leasehold improvements, respectively. No impairment charges were incurred during the three months ended

June 30, 2025. 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 June 30, 2026, 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 estimable and accordingly, the Company didnot record a provision for

litigation as of June 30, 2026 and December 31, 2025.

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 and six months ended June 30, 2026, the recognized benefit from income taxes resulted from the tax projection based

on the full year forecast and included benefits related to the U.S. federal research and development (“R&D”) tax credit, reduced bycertain

permanent differences, such as non-deductible stock-based compensation as well as an increase in the California valuation allowance for

California R&D tax credits.

For the three and six months ended June 30, 2025, the recognized provision for and (benefit from) income taxes, respectively,

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 R&D tax credit, certain permanent differences, such as stock-based compensation shortfalls, and partial

release of California valuation allowance.

Theeffective tax rate excluding discrete items for the three months ended June 30, 2026, as compared to the prior year, differed

primarily due to a change in the full year forecast for 2026, with the projection that the Company will not generate any tax incentives from the

U.S. federal foreign-derived intangible income (“FDDEI”), previously called “FDII”, in 2026, combined with non-deductible expenses, most of

which relates to non-deductible stock-based compensation and an increase in the state valuation allowance as a result of the change in

forecast.

The effective tax rate excluding discrete items for thesix months ended June 30, 2026, as compared to the prior year, differed

primarily dueto the projection that the Company will not generate the FDDEI deduction in 2026 due to the Company’sforecasted loss in

On July 4,2025, the One Big Beautiful Bill (“OBBBA”) Act, which includes a broad range of tax reform provisions, was signed into law

in the United States. During thethree and six months ended June 30, 2026, the Company recorded its best estimate of the impact of the

OBBBA on the income tax provision. The Company will continue to evaluate the elections available within the OBBBA, which may impact the

timing of permanent and temporary differences within the Company’s tax provision.

Note 9 —Segment Reporting

The Company’s Chief Operating Decision-Maker (“CODM”) is its Interim President and 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.

During thesix months ended June 30, 2026, the Company changed the composition of its reportable segments to better reflect how

the CODM manages the business. During the first quarter of fiscal 2026, the Water segment was separated into two segments, the

Desalination segment and the Wastewater segment, as both met the criteria of a reportable segment. During the first quarter of fiscal 2026,

the CO 2 retail grocery business within the Emerging Technologies segment was wound-down, which resulted in the Emerging Technologies

segment no longer meeting the criteria of a reportable segment as of the second quarter of fiscal 2026. As a result, revenue and expenses

associated with the former Emerging Technologies segment have been included within Corporate and Other. Prior periods have been recast

to conform to the current year presentation. The recast of prior year information had no impact on the Company’s Condensed Consolidated

Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Comprehensive Income (Loss)

and Condensed Consolidated Statements of Cash Flows.

Segment Definition

Income and type of expense activities that are included in the Desalination, Wastewater and Corporate and Other are as follows:

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

seawater desalination treatment facilities.

Wastewater segment: The continued development, sales and support of the PX, hydraulic turbochargers and pumps used in

wastewater treatment facilities.

Corporate and Other: The Corporate and Other include certain unallocated expenses outside of the operating segments, such

as audit and accounting services, legal services, board of director fees and expenses, human resources activities, information

systems activities and other separately managed general expenses not related to the identified segments. In addition,

Corporate and Other includes the development costs, sales and support of activities related to Emerging Technologies as this

segment no longer met the criteria of a reportable segment as of June 30, 2026.

Thefollowing tables present a summary of the Company’s financial information bysegment, including significant segment expenses,

and corporate operating expenses.

Note 10 —Concentrations

Revenue by Country

The following tables present the Company’s product revenue by country.

**Zero or less than 10%.

(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 tables present 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 Programs

The Company’s Board, from time-to-time, has authorized share repurchase programs 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 programs 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 June 30, 2026, the Company has repurchased

15,917,012 shares of its common stock at an aggregate cost of$186.8 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 includes

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

Authorization”). On August 19, 2025, the Company concluded all share repurchases under the February 2025 Authorization. Under the

February 2025 Authorization, the Company repurchased 2,183,648 shares at an aggregate cost of$30.0 million.

August 2025 Authorization

On August 6, 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$25.0 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 “August 2025

Authorization”). The August 2025 Authorization expired in May 2026. Under the August 2025 Authorization, the Company repurchased

2,179,419 shares at an aggregate cost of$25.0 million.

The following table presents the share repurchase activities under the August 2025 Authorization as of June 30, 2026.

(1)Excluding commissions

Of the 2,179,419 shares purchased,832,550 and 1,792,853 were purchased during thethree and six months ended June 30, 2026

for$8.7 million and$19.3 million, respectively.

May 2026 Authorization

On May 6, 2026, 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$25.0 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 “May 2026

Authorization”). The May 2026 Authorization will expire in April 2027. The Company began to purchase under the May 2026 Authorization in

May 2026.

The following table presents the share repurchase activities under the May 2026 Authorization as of June 30, 2026.

(1)Excluding commissions

All 156,900 shares were purchased during thethree and six months ended June 30, 2026 for$1.3 million.

Note 12 — Subsequent Events

In July 2026, the Company entered into a lease agreement for a manufacturing facility in Saudi Arabia with a noncancellable lease

term of approximately five years. The lease commenced in July 2026.